SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-6817
Lehman Brothers Inc.
(Exact Name of Registrant As Specified In Its Charter)
Delaware 13-2518466
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3 World Financial Center
New York, New York 10285
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (212) 526-7000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ______
As of April 13, 1998, 1,006 shares of the Registrant's Common Stock, par value
$.10 per share, were outstanding.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 28, 1998
INDEX
Part I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements - (unaudited)
Consolidated Statement of Income -
Three Months Ended
February 28, 1998 and 1997 ............................3
Consolidated Statement of Financial Condition -
February 28, 1998 and November 30, 1997 ...............4
Consolidated Statement of Cash Flows -
Three Months Ended
February 28, 1998 and 1997.............................6
Notes to Consolidated Financial Statements...............8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......14
Part II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................27
Item 6. Exhibits and Reports on Form 8-K ....................28
Signatures..................................................................29
EXHIBIT INDEX ......................................................30
Exhibits
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of INCOME
(Unaudited)
(In millions, except per share data)
Three months ended
February 28 February 28
1998 1997
------------- ----------
Revenues
Principal transactions $ 282 $ 226
Investment banking 259 192
Commissions 95 83
Interest and dividends 3,460 2,931
Other 6 8
-------- --------
Total revenues 4,102 3,440
Interest expense 3,356 2,819
----- -----
Net revenues 746 621
------ ------
Non-interest expenses
Compensation and benefits 364 360
Brokerage, commissions and clearance fees 42 50
Professional services 20 21
Occupancy and equipment 16 16
Communications 23 22
Business development 19 17
Depreciation and amortization 13 13
Management fees 32 41
Other 15 12
------ ------
Total non-interest expenses 544 552
----- -----
Income before taxes 202 69
Provision for income taxes 76 22
------ ------
Net income $ 126 $ 47
===== ======
See notes to consolidated financial statements.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(Unaudited)
(In millions)
February 28 November 30
ASSETS 1998 1997
------------ ------------
Cash and cash equivalents $ 254 $ 220
Cash and securities segregated and on deposit
for regulatory and other purposes 1,122 1,128
Securities and other financial instruments owned:
Governments and agencies 19,313 17,467
Corporate equities 6,919 5,439
Corporate debt and other 7,708 5,544
Mortgages and mortgage-backed 4,059 2,751
Derivatives and other contractual agreements 5,435 5,528
Certificates of deposit and other money market
instruments 1,952 2,248
------- --------
45,386 38,977
------ --------
Collateralized short-term agreements:
Securities purchased under agreements to resell 56,526 49,610
Securities borrowed 17,599 13,661
Receivables:
Brokers, dealers and clearing organizations 2,381 3,148
Customers 3,327 3,874
Others 4,091 3,107
Property, equipment and leasehold improvements
(net of accumulated depreciation and amortization
of $540 in 1998 and $533 in 1997) 259 262
Other assets 187 146
Excess of cost over fair value of net assets
Acquired (net of accumulated amortization
of $103 in 1998 and $102 in 1997) 157 158
-------- --------
Total assets $131,289 $114,291
======== ========
See notes to consolidated financial statements.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Continued)
(Unaudited)
(In millions, except share data)
February 28 November 30
1998 1997
--------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Commercial paper and short-term debt $ 1,410 $ 740
Securities and other financial instruments sold
but not yet purchased:
Governments and agencies 11,497 8,556
Corporate equities 3,827 3,124
Corporate debt and other 1,611 1,664
Derivatives and other contractual agreements 3,189 3,685
------- -------
20,124 17,029
------ ------
Collateralized short-term financings:
Securities sold under agreements to repurchase 62,264
56,017
Securities loaned 9,756 7,764
Advances from Holdings and other affiliates 18,381 14,777
Payables:
Brokers, dealers and clearing organizations 4,682 3,127
Customers 6,273 6,118
Accrued liabilities and other payables 1,791 2,166
Long-term debt:
Senior notes 155 229
Subordinated indebtedness 4,316 4,313
--------- ---------
Total liabilities 129,152 112,280
------- -------
Commitments and contingencies
STOCKHOLDER'S EQUITY
Preferred stock, $0.10 par value;
10,000 shares authorized:
None outstanding
Common stock, $0.10 par value;
10,000 shares authorized;
1,006 shares issued and outstanding
Additional paid-in capital 1,756 1,756
Foreign currency translation adjustment 3 3
Retained earnings 378 252
-------- -----------
Total stockholder's equity 2,137 2,011
-------- ----------
Total liabilities and
stockholder's equity $131,289 $114,291
======== ========
See notes to consolidated financial statements.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Three months ended
February 28 February 28
1998 1997
---------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 126 $ 47
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 13 13
Provisions for losses and other reserves 13 9
Other adjustments 8 1
Net change in:
Cash and securities segregated 6 (372)
Securities and other financial instruments owned (6,409) (4,262)
Securities purchased under agreements to resell (6,916) (4,620)
Securities borrowed (3,938) (6,915)
Receivables from brokers, dealers and clearing organizations 767 1,485
Receivables from customers 547 (550)
Securities and other financial instruments sold but
not yet purchased 3,095 3,376
Securities sold under agreements to repurchase 6,247 9,780
Securities loaned 1,992 3,667
Payables to brokers, dealers and clearing organizations 1,555 (434)
Payables to customers 155 (1,325)
Accrued liabilities and other payables (388) (188)
Other operating assets and liabilities, net (1,030) 373
-------- --------
Net cash provided by (used in) operating activities $(4,157) $ 85
-------- --------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Three months ended
February 28 February 28
1998 1997
----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
<S> <C> <C>
Principal payments of senior notes $ (79)
Proceeds from issuance of subordinated indebtedness 300 $308
Principal payments of subordinated indebtedness (300) (9)
Net proceeds from commercial paper and
short-term debt 670 (670)
Increase in advances from Holdings and other affiliates 3,604 833
Capital contributions 36
Dividends and capital distributions paid (12)
----- -----
Net cash provided by financing activities 4,195 486
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, equipment and leasehold improvements (4) (2)
------- -------
Net cash used in investing activities (4) (2)
-------- -------
Net change in cash and cash equivalents 34 569
------ -----
Cash and cash equivalents, beginning of period 220 396
----- -----
Cash and cash equivalents, end of period $ 254 $965
===== ====
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)
Interest paid totaled $3,372 and $2,833 for the three months ended
February 28, 1998 and 1997, respectively. Income taxes paid totaled $139 and $27
for the three months ended February 28, 1998 and 1997, respectively.
See notes to consolidated financial statements.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
The consolidated financial statements include the accounts of Lehman
Brothers Inc. ("LBI") and subsidiaries (collectively, the "Company"). The
Company is a wholly-owned subsidiary of Lehman Brothers Holdings Inc.
("Holdings"). LBI is one of the leading global investment banks serving
institutional, corporate, government and high-net-worth individual clients and
customers. The Company's worldwide headquarters in New York are complemented by
offices in additional locations in North America, Europe, the Middle East, Latin
America and the Asia Pacific Region. The Company is engaged in providing
financial services. All material intercompany accounts and transactions have
been eliminated in consolidation. The Company's financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission (the "SEC") with respect to the Form 10-Q and reflect all
normal recurring adjustments which are, in the opinion of management, necessary
for a fair presentation of the results for the interim periods presented.
Pursuant to such rules and regulations, certain footnote disclosures which are
normally required under generally accepted accounting principles have been
omitted. The Consolidated Statement of Financial Condition at November 30, 1997
was derived from the audited financial statements. It is recommended that these
consolidated financial statements be read in conjunction with the audited
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the twelve months ended November 30, 1997 (the "Form 10-K").
The nature of the Company's business is such that the results of any
interim period may vary significantly from quarter to quarter and may not be
indicative of the results to be expected for the fiscal year. Certain prior
period amounts reflect reclassifications to conform to the current period's
presentation.
2. Accounting Policies:
On January 1, 1998, SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" became fully
effective. Previously, the FASB had deferred until that date certain provisions
of SFAS No. 125 pertaining to repurchase agreements, securities lending and
similar financing transactions. As a result of adopting the deferred provisions
of SFAS No. 125, the Company recognized approximately $100 million of collateral
controlled on certain financing transactions and a corresponding obligation to
return such collateral at the termination of such transactions.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" (the "SOP"). The SOP requires that certain costs incurred in
connection with developing or obtaining software for internal use be
capitalized. The SOP requires prospective application as of the beginning of an
entity's fiscal year without adjustment for costs that would have been
capitalized had the SOP been in effect in prior periods. The Company has elected
early adoption of this accounting pronouncement effective as of the beginning of
its 1998 fiscal year and capitalized approximately $1 million of internal use
software costs during the first quarter of 1998.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
3. Long-Term Debt:
During the three months ended February 28, 1998, the Company issued
$300 million of subordinated indebtedness maturing 2008. This issuance has been
effectively converted to a floating rate obligation, based on the London
Interbank Offered Rate ("LIBOR") through the use of an interest rate swap. In
addition, $379 million of long-term debt matured during the three months ended
February 28, 1998.
4. Capital Requirements:
As a registered broker-dealer, LBI, is subject to SEC Rule 15c3-1, the
Net Capital Rule, which requires LBI to maintain net capital of not less than
the greater of 2% of aggregate debit items arising from customer transactions,
as defined, or 4% of funds required to be segregated for customers' regulated
commodity accounts, as defined. At February 28, 1998, LBI's regulatory net
capital, as defined, of $1,477 million exceeded the minimum requirement by
$1,348 million.
The Company's "AAA" rated derivatives subsidiary, Lehman Brothers
Financial Products Inc. ("LBFP"), has established certain capital and operating
restrictions which are reviewed by various rating agencies. At February 28,
1998, LBFP had capital which exceeded the requirement of the most stringent
rating agency by approximately $95 million.
Repayment of subordinated indebtedness and certain advances and
dividend payments by LBI are restricted by the regulations of the SEC and other
regulatory agencies. In addition, certain instruments governing the indebtedness
of LBI contractually limit its ability to pay dividends.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
5. Derivative Financial Instruments:
In the normal course of business, the Company enters into derivative
transactions to satisfy the needs of its clients and to manage the Company's own
exposure to market and credit risks resulting from its trading activities in
cash instruments (collectively, "Trading-Related Derivative Activities").
The Company records its Trading-Related Derivative Activities on a
mark-to-market basis with realized and unrealized gains and losses recognized
currently in Principal transactions in the Consolidated Statement of Income.
Unrealized gains and losses on derivative contracts are recorded on a net basis
in the Consolidated Statement of Financial Condition for those transactions with
counterparties executed under a legally enforceable master netting agreement and
are netted across products and against cash collateral when such provisions are
stated in the master netting agreement. Listed in the following table is the
fair value and average fair value of the Company's Trading-Related Derivative
Activities. Average fair values of these instruments were calculated based upon
month-end statement of financial condition values, which the Company believes do
not vary significantly from the average fair value calculated on a more frequent
basis. Variances between average fair values and period-end values are due to
changes in the volume of activities in these instruments and changes in the
valuation of these instruments due to variations in market and credit
conditions.
<TABLE>
<CAPTION>
Average Fair Value*
Fair Value* Three Months Ended
February 28, 1998 February 28, 1998
----------------- -----------------
(in millions) Assets Liabilities Assets Liabilities
- ---------------------------------------------------------------------------------------------------------------------------
Interest rate and currency swaps and options
<S> <C> <C> <C> <C>
(including caps, collars and floors) $4,327 $2,309 $4,500 $2,317
Foreign exchange forward contracts and options 688 459 863 681
Options on other fixed income securities,
mortgage-backed securities forward contracts
and options 228 198 231 240
Equity contracts (including equity swaps, warrants
and options) 171 213 185 196
Commodity contracts (including swaps, forwards,
and options) 21 10 34 9
-------------------------------------------------------
Total $5,435 $3,189 $5,813 $3,443
-------------------------------------------------------
</TABLE>
* Amounts represent carrying value (exclusive of collateral) and do not include
receivables or payables related to exchange-traded futures contracts.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Average Fair Value*
Fair Value* Twelve Months Ended
November 30, 1997 November 30, 1997
----------------- -------------------
(in millions) Assets Liabilities Assets Liabilities
- ---------------------------------------------------------------------------------------------------------------------------
Interest rate and currency swaps and options
<S> <C> <C> <C> <C>
(including caps, collars and floors) $4,123 $2,344 $4,227 $2,295
Foreign exchange forward contracts and options 1,066 1,072 847 1,120
Options on other fixed income securities,
mortgage-backed securities forward contracts
and options 200 200 244 221
Equity contracts (including equity swaps, warrants
and options) 87 63 102 50
Commodity contracts (including swaps, forwards,
and options) 52 6 34 19
------------------------------------------------------
Total $5,528 $3,685 $5,454 $3,705
-----------------------------------------------------
</TABLE>
* Amounts represent carrying value (exclusive of collateral) and do not include
receivables or payables related to exchange-traded futures contracts.
Assets included in the table above and on the previous page represent
the Company's unrealized gains, net of unrealized losses for situations in which
the Company has a master netting agreement. Similarly, liabilities represent net
amounts owed to counterparties. Therefore, the fair value of assets/liabilities
related to derivative contracts at February 28, 1998 represents the Company's
net receivable/payable for derivative financial instruments before consideration
of collateral. Included within the $5,435 million fair value of assets at
February 28, 1998 was $5,327 million related to swaps and OTC contracts and $108
million related to exchange-traded option and warrant contracts. Included within
the $5,528 million fair value of assets at November 30, 1997 was $5,444 million
related to swaps and OTC contracts and $84 million related to exchange-traded
option and warrant contracts.
With respect to OTC contracts, including swaps, the Company views its
net credit exposure to be $4,503 million at February 28, 1998 (including $611
million from affiliates), representing the fair value of the Company's OTC
contracts in an unrealized gain position, after consideration of collateral of
$824 million. Presented below is an analysis of the Company's net credit
exposure at February 28, 1998 for OTC contracts based upon internal designations
of counterparty credit quality.
Counterparty S&P/Moody's
Risk Rating Equivalent Net Credit Exposure
- ------------ ------------------------- -------------------
1 AAA/Aaa 23%
2 AA-/Aa3 or higher 16%
3 A-/A3 or higher 44%
4 BBB-/Baa3 or higher 8%
5 BB-/Ba3 or higher 8%
6 B+/B1 or lower 1%
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
These designations are based on actual ratings made by external rating
agencies or by equivalent ratings established and utilized by the Company's
Corporate Credit Department.
The Company is also subject to credit risk related to its
exchange-traded derivative contracts. Exchange-traded contracts, including
futures and certain options, are transacted directly on the exchange. To protect
against the potential for a default, all exchange clearing houses impose net
capital requirements for their membership. Additionally, the exchange clearing
house requires counterparties to futures contracts to post margin upon the
origination of the contract and for any changes in the market value of the
contract on a daily basis (certain foreign exchanges provide for settlement
within three days). Therefore, the potential for losses from exchange-traded
products is limited.
For a further discussion of the Company's derivative related
activities, refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Off-Balance Sheet Financial Instruments
and Derivatives" and Note 1 and 8 to the Consolidated Financial Statements,
included in the Form 10-K.
6. Other Commitments and Contingencies:
In connection with its financing activities, the Company has
outstanding commitments under certain lending arrangements of approximately $1.9
billion at February 28, 1998 and November 30, 1997. These commitments require
borrowers to provide acceptable collateral, as defined in the agreements, when
amounts are drawn under the lending facilities. Advances made under the above
lending arrangements are typically at variable interest rates and generally
provide for over-collateralization based upon the borrowers' creditworthiness.
The Company, through its high yield sales and trading activities, makes
commitments to extend credit in loan syndication transactions principally to
below investment grade borrowers and participates a significant portion of these
commitments. These commitments, which are net of syndications and participations
totaled $1.2 billion and $1.4 billion at February 28, 1998 and November 30,
1997, respectively, are typically secured against the borrower's assets and have
fixed maturity dates. The draw down of these facilities is generally contingent
upon certain representations, warranties and contractual conditions of the
borrower. The total commitments may not be indicative of actual funding
requirements as they may expire without being drawn upon and the Company may
participate additional amounts in the normal course of its business.
The Company has commitments to invest up to $280 million in
partnerships, which in turn will make direct merchant banking related
investments. These commitments will be funded as required through the end of the
respective partnerships' investment periods, principally expiring in 2004.
The Company is also a sponsor of a fund to provide interim acquisition
facilities. In connection therewith, the Company may provide up to $150 million
to be used by the fund to provide short-term acquisition financing. Any draw
downs under the facility are expected to be repaid within a short-term period.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
In the normal course of its business, the Company has been named a
defendant in a number of lawsuits and other legal proceedings. After considering
all relevant facts, available insurance coverage and the advice of outside
counsel, in the opinion of the Company such litigation will not, in the
aggregate, have a material adverse effect on the Company's consolidated
financial position or results of operations.
As a leading global investment bank, risk is an inherent part of all of
the Company's businesses and activities. The extent to which the Company
properly and effectively identifies, assesses, monitors and manages each of the
various types of risks involved in its trading (including derivatives),
brokerage, and investment banking activities is critical to the success and
profitability of the Company. The principal types of risks involved in the
Company's activities are market risk, credit or counterparty risk and
transaction risk. Management has developed a control infrastructure to monitor
and manage each type of risk on a global basis throughout the Company. For
further discussion of these matters, refer to Note 10 to the Consolidated
Financial Statements, in the Form 10-K.
7. Related Party Transactions:
In the normal course of business, the Company engages in various
securities trading, investment banking and financing activities with Holdings
and many of its subsidiaries (the "Related Parties"). Various charges, such as
compensation and benefits, occupancy, administration and computer processing are
allocated between the Related Parties, based upon specific identification and
allocation methods.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Business Environment
The principal business activities of the Company are investment banking
and securities trading and sales, which by their nature are subject to
volatility, primarily due to changes in interest and foreign exchange rates and
security valuations, global economic and political trends and industry
competition. As a result, the Company's revenues and earnings may vary
significantly from quarter to quarter and from year to year.
The generally favorable market and economic conditions that
characterized fiscal 1997 continued into the first three months of the Company's
fiscal year ("fiscal 1998"). During the first three months of fiscal 1998,
investor demand in the worldwide debt and equity markets remained strong led by
the U.S. economy and the favorable interest-rate environment. The pace of
underwriting for combined fixed income and equity securities accelerated to
record levels. The unabated pace of global merger and acquisition activity
fueled financing of all types. Investors continued to focus on worldwide market
conditions particularly with respect to the potential effects of the Asian
crisis which occurred during the latter half of 1997, as well as any signs of
weakening in the U.S. economy.
In the global fixed income markets, fiscal 1998 began with uncertainty
as investors focused on whether the U.S. Federal Reserve Board (the "Fed") would
change the overnight lending rate from 5.5% and whether the crisis which
occurred in the Asian region in 1997 would have a negative impact on the U.S.
economy. By the end of January, however, the bond markets rallied when the Fed
left rates unchanged. In fact, rates on the 30-year U.S. Treasury remained below
6% for most of the first quarter of 1998. In Europe, the economic environment
remained extremely favorable throughout the first quarter. Low levels of
inflation and the continued strength of the U.S. dollar propelled the European
bond markets, especially in some of the smaller markets (e.g., Italy and Spain).
In Japan, the weakening economy drove bond yields to new record lows not seen by
any modern, industrialized country.
U.S. equity markets continued to recover from the 1997 Asian
correction, and most equity indices posted successive record highs during the
quarter. Concerns about earnings weakness related to Asia and several corporate
profit warnings, prompted analysts to reduce their earnings expectations for the
beginning of 1998. Nevertheless, profit margins expanded early in fiscal 1998 to
6.5%, the highest since the 1960's, while inflation fell further during the
quarter, from a 1.8% annual rate to 1.4%, helped in part by lower oil prices.
These factors, combined with the maintenance of the 30-year U.S. treasury yield
below 6%, expanded the "price to earnings" multiple: the forward "price to
earnings" multiple on the U.S. stock market rose from 18.9 at the beginning of
the quarter to 20.6 in February. Thus, despite slowing profit growth, the S&P
500 returned almost 10% for the quarter. After a strong performance in 1997, the
European equity markets rose even more rapidly during fiscal 1998, with a
corresponding increase in trading volumes. The Financial Times - S&P European
Index recorded a 17% gain in dollar terms, fueled by the rally in bonds, with
smaller markets achieving the best performance. Elsewhere, the stock markets of
Southeast Asia rebounded from the lows reached in January 1998, but remained
well below levels of a year ago. In Japan, the equity market failed to make any
progress during fiscal 1998.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Worldwide underwriting volumes in fixed income products were
unprecedented during fiscal 1998. U.S. underwriting volumes, while experiencing
a slowdown in December 1997 and January 1998, strengthened over the prior year
led by the issuance of corporate, high yield and asset-backed bonds. Issuers
came to market to take advantage of the historically attractive yields, as well
as favorable pricing in the spread sectors. Equity and equity-related
underwriting volumes declined slightly during fiscal 1998 from the comparable
period in fiscal 1997. During fiscal 1998, companies reduced their reliance on
equity and equity-related underwriting as a result of the use of stock-for-stock
mergers and acquisitions activity and the favorable borrowing rate environment.
Although the average equity deal size in terms of dollar value increased during
fiscal 1998, the actual number of equity and equity-related deals was
overshadowed by the number of debt deals at a rate not seen since the fourth
quarter of 1990.
Corporate Finance Advisory activities continued unabated during the
first three months of fiscal 1998. Coming off a record year in 1997, the first
quarter of 1998 continued to reflect the continuing trend of consolidation and
globalization across industry sectors and the overall strength in the global
capital markets.
Strong financial markets characterized fiscal 1998; nevertheless, the
financial services industry is cyclical. As a result, the Company's businesses
are evaluated across market cycles for operating profitability and their
contribution to the Company's long-term strategic objectives. The Company
strives to minimize the effects of economic downturns through its diversified
product base; stringent cost controls, global presence and risk management
practices.
Note: Except for the historical information contained herein, this Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements that are based on current
expectations, estimates and projections about the industries in which the
Company operates. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions
which are difficult to predict. The Company undertakes no obligation to
update publicly any forward-looking statements, whether as a result of
new information, future events or otherwise.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
For the Three Months Ended February 28, 1998 and 1997
- -----------------------------------------------------
The Company reported net income of $126 million for the first quarter
ended February 28, 1998 representing an increase of 168% from net income of $47
million for the first quarter ended February 28, 1997. This increase reflected
across-the-board strength in the Company's fixed income and investment banking
businesses. The Company's earnings momentum and profitability increased
significantly throughout the first quarter of 1998.
Net revenues increased to $746 million for the first quarter of 1998
from $621 million for the first quarter of 1997. The increase in net revenues
from the first quarter of 1997 resulted from continued strong performance in a
number of higher-margin businesses including the global merger and acquisition
advisory business and high yield trading and origination.
As part of its market-making activities, the Company maintains
inventory positions of varying amounts across a broad range of financial
instruments that are marked-to-market on a daily basis and along with the
Company's proprietary trading positions, give rise to principal transactions
revenues. The Company utilizes various hedging strategies to minimize its
exposure to significant movements in interest and foreign exchange rates and the
equity markets.
Net revenues from the Company's market-making and trading activities in
fixed income and equity products are recognized as either principal transactions
or net interest revenues depending upon the method of financing and/or hedging
related to specific inventory positions. The Company evaluates its trading
strategies on an overall profitability basis which includes both principal
transactions revenues and net interest. Therefore, changes in net interest
should not be viewed in isolation but should be viewed in conjunction with
revenues from principal transactions. Increased principal transactions revenues
across many of the Company's fixed income product lines were partially offset by
increased interest expenses resulting from a shift in the composition of the
Company's fixed income portfolio and an increase in financing costs associated
with higher equity inventory levels.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table of net revenues by business unit and the
accompanying discussion have been prepared in order to present the Company's net
revenues in a format that reflects the manner in which the Company manages its
businesses. For internal management purposes, the Company has been segregated
into four major business units: Fixed Income, Equity, Corporate Finance
Advisory, and Merchant Banking. Each business unit represents a grouping of
financial activities and products with similar characteristics. These business
activities result in revenues that are recognized in multiple revenue categories
contained in the Company's Consolidated Statement of Income. Net revenues by
business unit contain certain internal allocations, including funding costs,
which are centrally managed.
<TABLE>
<CAPTION>
Three Months Ended February 28, 1998
Principal
Transactions and Investment
Net Interest Commissions Banking Other Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed Income $374 $ 4 $125 $2 $505
Equity 22 87 52 161
Corporate Finance Advisory (3) 73 70
Merchant Banking (7) 9 2
Other 4 4 8
- ---------------------------------------------------------------------------------------------------------------------------
$386 $95 $259 $6 $746
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended February 28, 1997
Principal
Transactions and Investment
Net Interest Commissions Banking Other Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed Income $302 $ 9 $ 88 $1 $400
Equity 36 70 54 1 161
Corporate Finance Advisory 45 45
Merchant Banking (3) 3
Other 3 4 2 6 15
- ---------------------------------------------------------------------------------------------------------------------------
$338 $83 $192 $8 $621
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Fixed Income. The Company's fixed income net revenues reflect customer
flow activities (both institutional and high-net-worth retail), secondary
trading, debt underwriting, syndicate and financing activities related to fixed
income products. Fixed income products include dollar- and non-dollar government
securities, mortgage- and asset-backed securities, money market products,
dollar- and non-dollar corporate debt securities, emerging market securities,
municipal securities, financing (global access to debt financing sources
including repurchase and reverse repurchase agreements), foreign exchange and
fixed income derivative products. Fixed income net revenues increased 26% to
$505 million for the first quarter of 1998 from $400 million for the first
quarter of 1997. The increase in the first quarter results versus the prior year
quarter reflected increased revenues from a number of fixed income products
including improved performance in both sales and trading and syndicate
activities in high yield corporates as well as increased contributions from
municipals, governments and foreign exchange. Investment banking revenues, as a
component of fixed income revenues, increased to $125 million for the first
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
quarter of 1998 from $88 million for the first quarter of 1997 due to increased
underwriting fees, particularly in high yield corporates.
Equity. Equity net revenues reflect customer flow activities (both
institutional and high-net-worth retail), secondary trading, equity
underwriting, equity finance and equity arbitrage activities. The Company's
equity net revenues were $161 million for the first quarter of 1998, unchanged
from the first quarter of 1997.
Corporate Finance Advisory. Corporate finance advisory net revenues,
classified in the Consolidated Statement of Income as a component of investment
banking revenues, result primarily from fees earned by the Company in its role
as strategic advisor to its clients. This role consists of advising clients on
mergers and acquisitions, divestitures, leveraged buyouts, financial
restructurings, and a variety of cross-border transactions. Net revenues from
corporate finance advisory activities increased to $70 million for the first
quarter of 1998, reflecting a 56% increase from the $45 million recognized in
the first quarter of 1997. This increase reflected the closing of several large
transactions in the first quarter of 1998 and continued strength in the overall
merger and acquisition market environment. During the first calendar quarter,
the volume of announced domestic M&A transactions was $68 billion, earning the
Company a #1 ranking in this category. In addition, the volume of pending
domestic M&A transactions was $165 billion at March 31, 1998. Ranking and volume
information are based on data supplied by Securities Data Company.
Merchant Banking. The Company is the general partner for five active
merchant banking partnerships. Current merchant banking investments held by the
partnerships include both publicly traded and privately held companies. Merchant
banking net revenues primarily represent the Company's proportionate share of
net realized and unrealized gains and losses from the sale and revaluation of
investments held by the partnerships. Such amounts are classified in the
Consolidated Statement of Income as a component of investment banking revenues.
Merchant banking net revenues also reflect the net interest expense relating to
the financing of the Company's investment in the partnerships. Merchant banking
net revenues were $2 million for the first quarter of 1998 and less than $1
million in the first quarter of 1997.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Non-Interest Expenses. Non-interest expenses were $544 million for the
first quarter of 1998 and $552 million for the first quarter of 1997. Management
fees represent the allocation of various charges, such as compensation and
benefits, occupancy, administration and computer processing between the Company,
Holdings and other affiliates based upon certain allocation methods. During
fiscal 1998, the decrease in management fees was a result of reduced affiliate
activities on behalf of LBI as well as increased Company activities on behalf of
affiliates.
Income Taxes. The Company's income tax provision was $76 million for
the first quarter of 1998 compared to $22 million for the first quarter of 1997.
The effective tax rate was 38% for the first quarter of 1998 and 32% for the
first quarter of 1997. The 1998 effective tax rate reflects a significantly
higher level of pretax earnings, which resulted in an increase in income subject
to state and local taxes and decreased the effects of the benefits derived from
tax-exempt income.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Overview
As a leading global investment bank that actively participates in the global
capital markets, the Company has large and diverse capital requirements. Many of
the businesses in which the Company operates are capital intensive. Capital is
required to finance, among other things, the Company's securities inventories,
underwriting activities, principal investments, merchant banking activities and
investments in fixed assets.
The Company's balance sheet is liquid and consists primarily of cash and cash
equivalents, securities and other financial instruments owned, and
collateralized short-term financing agreements. The liquid nature of these
assets provides the Company with flexibility in financing and managing its
business. The Company's primary activities are based on the execution of
customer-related transactions. This flow of customer business supports the rapid
asset turnover rate of the Company's inventory.
The Company's total assets increased to $131.3 billion at February 28, 1998 from
$114.3 billion at November 30, 1997 reflecting the strategic expansion of
certain business lines. This continued focus on growing higher margin businesses
resulted in increased levels of mortgages, corporate bonds and equities at
February 28, 1998 compared to November 30, 1997. The Company also positioned
itself to benefit from favorable conditions in the worldwide fixed income
markets by increasing its secured customer financing activities.
Funding and Capital Policies
The Company's Finance Committee is responsible for establishing and managing the
funding and liquidity policies of the Company. These policies include
recommendations for capital and balance sheet size as well as the allocation of
capital and balance sheet to product areas. Under the authority of the Finance
Committee, members of the Company's treasury department work with Regional Asset
and Liability Committees to ensure coordination of global funding efforts and
implementation of the funding and liquidity policies. The Regional Asset and
Liability Committees are aligned with the Company's geographic funding centers
and are responsible for implementing funding strategies for their respective
regions.
The primary goal of the Company's funding policies is to provide sufficient
liquidity and availability of funding sources across a wide range of market
environments. There are five key elements of its funding strategy that the
Company attempts to achieve:
(1) Maintain an appropriate Total Capital structure to support the business
activities in which the Company is engaged. Total Capital is defined as
long-term debt, preferred stock and common stockholder's equity.
(2) Minimize liquidity and refinancing risk by funding the Company's assets on a
global basis with secured and unsecured liabilities, which have maturities equal
to or exceeding the anticipated liquidation period of the assets.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(3) Maintain sufficient financial resources to enable the Company to meet its
obligations in a period of financial stress through a combination of
collateralized short-term financings and Total Capital, as well as the
implementation of a contingency funding plan. Financial stress is defined as any
event which severely constrains the Company's access to unsecured funding
sources.
(4) Obtain diversified funding through a global investor base which maximizes
liquidity and reduces concentration risk.
(5) Maintain funding availability in excess of actual utilization.
Short-Term Funding
The Company strives to maximize the portion of the Company's balance sheet that
is funded through collateralized borrowing sources, which in turn minimizes the
reliance placed upon unsecured short-term debt. Collateralized borrowing sources
include cash market securities and other financial instruments sold but not yet
purchased, as well as collateralized short-term financings, defined as
securities sold under agreements to repurchase ("repos") and securities loaned.
Because of their secured nature, OECD government repos and certain other types
of collateralized borrowing sources are less credit-sensitive and have
historically been a more stable financing source under adverse market
conditions.
The amount of the Company's collateralized borrowing activities will vary
reflecting changes in the mix and overall levels of securities and other
financial instruments owned and global market conditions. The majority of the
Company's assets are funded with collateralized borrowing sources. At February
28, 1998 and November 30, 1997, $89 billion and $77 billion, respectively, of
the Company's total balance sheet was financed using collateralized borrowing
sources.
As of February 28, 1998 and November 30, 1997, short-term debt was $1.4 billion
and $740 million, respectively. There was no commercial paper outstanding at
February 28, 1998 or November 30, 1997.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Total Capital
In accordance with the Company's liquidity plan, the Company increased its Total
Capital base in 1998 to $6.61 billion at February 28, 1998 from $6.55 billion at
November 30, 1997. Total Capital increased due to the retention of earnings.
February 28 November 30
(in millions) 1998 1997
- ---------------------------------------------------------------------------
Long-term Debt
Senior Notes $ 155 $ 229
Subordinated Indebtedness 4,316 4,313
------- -------
4,471 4,542
Stockholder's Equity 2,137 2,011
- ---------------------------------------------------------------------------
Total Capital $6,608 $6,553
- ---------------------------------------------------------------------------
During the first quarter of 1998, the Company issued $300 million in long-term
debt and approximately $379 million of long-term debt matured. Long-term debt
decreased to $4.47 billion at February 28, 1998 from $4.54 billion at November
30, 1997 with a weighted average maturity of 4.7 years at February 28, 1998 and
4.5 years at November 30, 1997.
At February 28, 1998, the Company had approximately $795 million available for
the issuance of debt securities under various shelf registrations.
Credit Ratings
The Company, like other companies in the securities industry, relies on external
sources to finance a significant portion of its day-to-day operations. The
Company's access to and cost of funding is generally dependent upon its short-
and long-term debt ratings. As of February 28, 1998, the short- and long-term
senior debt ratings of Lehman Brothers Inc. ("LBI") were as follows:
LBI
---
Short-term Long-term**
- --------------------------------------------------------------------------------
Duff & Phelps Credit Rating Co. D-1 A/A-
Fitch IBCA, Inc. F-1 A/A-
Moody's P2 A3*/Baa1
S&P A-1 A+*/A
Thomson BankWatch TBW-1 A/A-
* Provisional ratings on shelf registration
** Senior/subordinated
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
High Yield Securities
The Company underwrites, trades, invests and makes markets in high yield
corporate debt securities. The Company also syndicates, trades and invests in
loans to below investment grade-rated companies. For purposes of this
discussion, high yield debt securities are defined as securities or loans to
companies rated BB+ or lower, or equivalent ratings by recognized credit rating
agencies, as well as non-rated securities or loans which, in the opinion of
management, are non-investment grade. Non-investment grade securities generally
involve greater risks than investment grade securities due to the issuer's
creditworthiness and the liquidity of the market for such securities. In
addition, these issuers have higher levels of indebtedness, resulting in an
increased sensitivity to adverse economic conditions. The Company recognizes
these risks and aims to reduce market and credit risk through the
diversification of its products and counterparties. High yield debt securities
are carried at market value and unrealized gains or losses for these securities
are reflected in the Company's Consolidated Statement of Income. The Company's
portfolio of such securities at February 28, 1998 and November 30, 1997 included
long positions with an aggregate market value of approximately $2.7 billion and
$2.6 billion, respectively, and short positions with an aggregate market value
of approximately $111 million and $151 million, respectively. The portfolio may,
from time to time, contain concentrated holdings of selected issues. The
Company's largest high yield position was $155 million at February 28, 1998.
Lending Activities
The Company, through its high yield sales and trading activities, makes
commitments to extend credit in loan syndication transactions principally to
below investment grade borrowers and participates a significant portion of these
commitments. These commitments, which are net of syndications and participations
totaled $1.2 billion at February 28, 1998, are typically secured against the
borrower's assets and have fixed maturity dates. The draw down of these
facilities is generally contingent upon certain representations, warranties and
contractual conditions of the borrower. The total commitments may not be
indicative of actual funding requirements as they may expire without being drawn
upon and the Company may participate additional amounts in the normal course of
its business.
Merchant Banking and Related Lending Activities
The Company's merchant banking activities include investments in five
partnerships, for which the Company acts as general partner, as well as direct
investments. At February 28, 1998, the investment in merchant banking
partnerships was $22 million and direct investments were $19 million. The
Company's policy is to carry its investments, including its partnership
interests, at fair value based upon the Company's assessment of the underlying
investments.
In September 1997, Holdings established a $2.0 billion fund for which the
Company will act as general partner. The Company has commitments to invest up to
an additional $280 million in the partnerships, which in turn will make direct
merchant banking related investments. These commitments will be funded as
required through the end of the respective partnerships' investment periods,
principally expiring in 2004.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company is also a sponsor of a fund to provide interim acquisition
facilities. In connection therewith, the Company may provide up to $150 million
to be used by the fund to provide short-term acquisition financing. Any draw
downs under the facility are expected to be repaid within a short-term period.
In addition, at February 28, 1998, the Company had $1.5 billion direct bridge
financings outstanding. Subsequent to February 28, 1998, the Company syndicated
a substantial portion of these financings.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Risk Management
As a leading global investment banking company, risk is an inherent part of the
Company's businesses. Global markets, by their nature, are prone to uncertainty
and subject participants to a variety of risks. The Company has developed
policies and procedures to identify, measure and monitor each of the risks
involved in its trading, brokerage and investment banking activities on a global
basis. The principal risks of Lehman Brothers are market, credit, liquidity,
legal and operational risks. Risk management is considered to be of paramount
importance. The Company devotes significant resources across all of its
worldwide trading operations to the measurement, management and analysis of
risk, including investments in personnel, information technology infrastructure
and systems.
Market Risk
Market risk represents the potential change in value of a portfolio of financial
instruments due to changes in market rates, prices, and volatilities. Market
risk is present in cash products, derivatives, and contingent claim structures
that exhibit linear as well as non-linear profit and loss sensitivity. The
Company's exposure to market risk varies in accordance with the volume of client
driven market-making transactions, the size of the Company's proprietary and
arbitrage positions, and the volatility of financial instruments traded. The
Company seeks to mitigate, whenever possible, excess market risk exposures
through the use of futures and option contracts and offsetting cash market
instruments.
The Company participates globally in interest rate, equity, and foreign exchange
markets. The Company's fixed income division has a broadly diversified market
presence in U.S. and foreign government bond trading, emerging market
securities, corporate debt (investment and non-investment grade), money market
instruments, mortgages and mortgage-backed securities, asset-backed securities,
municipal bonds, and interest rate derivatives. The Company's equity division
facilitates domestic and foreign trading in equity instruments, indices, and
related derivatives. The Company's foreign exchange businesses are involved in
trading currencies on a spot and forward basis as well as through derivative
products and contracts.
Value at Risk
For purposes of Securities and Exchange Commission disclosure requirements, the
Company has elected to disclose an entity-wide value at risk analysis of
virtually all of the Company's trading activities. The value at risk related to
non-trading financial instruments has been excluded from this analysis and not
reported separately because the amounts were not material. The value at risk
calculation measures potential losses in expected revenues and is based on a
methodology which uses a one-day holding period and a 95% confidence level.
Value at risk as of each date presented below was measured by analyzing the
distribution of actual trading revenues during the preceding one year period and
assumed a relatively consistent portfolio mix.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Value at risk is one measurement of potential losses in revenues that may result
from adverse market movements over a specified period of time with a selected
likelihood of occurrence. Value at risk has substantial limitations, including
its reliance on historical performance and data as valid predictors of the
future. Consequently, value at risk is only one of a number of tools the Company
utilizes in its daily risk management activities.
At February 28, 1998 and November 30, 1997, the Company's value at risk for each
component of market risk, and in total was as follows (in millions):
February 28, 1998 November 30, 1997
--------------- -----------------
Interest rate risk $9.4 $9.8
Equity price risk 5.6 4.7
Foreign exchange risk 1.2 1.3
Diversification benefit (5.1) (4.8)
---- ----
Total Company $11.1 $11.0
===== =====
The Company utilizes a wide variety of market risk management methods,
including: limits for each trading activity; marking all positions to market on
a daily basis; daily profit and loss statements; position reports; aged
inventory position reports; and independent verification of all inventory
pricing. The Company believes that these procedures, which stress timely
communication between risk, trading and senior management, are critical elements
of the risk management process.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings
The Company is involved in a number of judicial, regulatory and
arbitration proceedings concerning matters arising in connection with the
conduct of its business. Such proceedings include actions brought against the
Company and others with respect to transactions in which the Company acted as
an underwriter or financial advisor, actions arising out of the Company's
activities as a broker or dealer in securities and commodities and actions
brought on behalf of various classes of claimants against many securities and
commodities firms, including the Company.
Although there can be no assurance as to the ultimate outcome, the
Company has denied, or believes it has meritorious defenses and will deny,
liability in all significant cases pending against it including the matters
described below, and intends to defend vigorously each such case. Although there
can be no assurance as to the ultimate outcome, based on information currently
available and established reserves, the Company believes that the eventual
outcome of the actions against it, including the matters described below, will
not, in the aggregate, have a material adverse effect on its business or
consolidated financial condition.
Actions Relating to First Capital Holdings Inc. (Reported in LBI's Annual
Report on Form 10-K)
The Virginia Commissioner of Insurance Action. On April 1, 1998, the
trial court issued a decision and order reversing the earlier summary judgment
decision that had limited damages to under $30 million and reinstated the
Commissioner's claims for approximately $300 million. The defendants are
currently appealing that decision and seeking a stay of the trial scheduled for
April 24, 1998 to the United States Court of Appeals for the Fourth Circuit and
seeking to enjoin the Commissioner from seeking these damages based on a prior
settlement with the policyholders of Fidelity Bankers Life in the Central
District of California.
Bamaodah v. E.F. Hutton & Company Inc. (Reported in LBI's Annual Report on
Form 10-K)
The expert has filed its report which is favorable to EFH. After
comments to the report are filed, the Court of Cassation will close the hearings
and render judgment.
MCC Proceeds Inc. v. Lehman Brothers International (Europe). (Reported in
LBI's Annual Report on Form 10-K).
On March 9, 1998, the House of Lords refused MCC Proceeds' petition for
appeal, effectively ending the case.
AIA Holding SA et al. v. Lehman Brothers Inc. and Bear Stearns & Co., Inc.
(Reported in LBI's Annual Report on Form 10-K).
<PAGE>
By memorandum and order dated March 27, 1998, the District Court
dismissed without prejudice 18 of the 24 counts pleaded in the complaint.
Plaintiffs have until June 24, 1998 to replead. Defendants' answer to the
remaining counts is due May 8, 1998.
ITEM 6 Exhibits and Reports on Form 8-K
The following exhibits and reports on Form 8-K are filed as part of this
Quarterly Report, or where indicated, were heretofore filed and are hereby
incorporated by reference:
(a) Exhibits:
12 Computation in Support of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEHMAN BROTHERS INC.
(Registrant)
Date: April 14, 1998 By /s/ Richard S. Fuld Jr.
-------------------------
Richard S. Fuld, Jr.
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: April 14, 1998 By /s/ Charles B. Hintz
-----------------------------
Charles B. Hintz
Chief Financial Officer
(Principal Financial Officer)
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
Exhibit 12 Computation in Support of Ratio of Earnings to Fixed Charges
Exhibit 27 Financial Data Schedule
<PAGE>
Exhibit 12
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
COMPUTATION in SUPPORT of RATIO of EARNINGS to FIXED CHARGES
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
For the For the For the For the
Twelve Months Eleven Months Twelve Months Three Months
Ended Ended Ended Ended
December 31 November 30 November 30 February 28
---------------------------------------------------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
Fixed charges:
Interest expense:
<S> <C> <C> <C> <C> <C> <C>
Subordinated indebtedness $ 192 $ 184 $ 204 $ 221 $ 236 $ 55
Bank loans and other
borrowings* 4,393 5,661 9,750 9,900 11,980 3,301
Interest component of rentals
of office and equipment 62 27 25 18 16 4
Other adjustments** 101 53 2 7 3 3
------- -------- --------- ---------- ----------- ----------
TOTAL (A) $4,748 $5,925 $9,981 $10,146 $12,235 $3,363
====== ====== ====== ======= ======= ======
Earnings:
Pre-tax income (loss) from
continuing operations $ (146) $ 1 $ 78 $ 309 $ 593 $ 202
Fixed charges 4,748 5,925 9,981 10,146 12,235 3,363
Other adjustments*** (68) (52) (1) (6) (2) (3)
-------- -------- -------- ------- ------- -------
TOTAL (B) $4,534 $5,874 $10,058 $10,449 $12,826 $3,562
====== ====== ======= ======= ======= ======
(B / A) **** **** 1.01 1.03 1.05 1.06
</TABLE>
* Includes amortization of long-term debt discount.
** Other adjustments include capitalized interest and debt issuance costs,
amortization of capitalized interest and preferred stock dividends of a
wholly owned subsidiary.
*** Other adjustments include adding the net loss of affiliates accounted
for at equity whose debt is not guaranteed by the Company and
subtracting capitalized interest costs and undistributed net income of
affiliates accounted for at equity and preferred stock dividends of a
wholly owned subsidiary.
**** Earnings were inadequate to cover fixed charges and would have had to
increase approximately $214 million in 1993 and $51 million in 1994 in
order to cover the deficiencies.
<PAGE>
Exhibit 27
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from
the Company's Consolidated Statement of Financial Condition at February 28,
1998 (Unaudited) and the Consolidated Statement of Income for the three months
ended February 28, 1998 (Unaudited) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 1,376
<RECEIVABLES> 9,799
<SECURITIES-RESALE> 56,526
<SECURITIES-BORROWED> 17,599
<INSTRUMENTS-OWNED> 45,386
<PP&E> 259
<TOTAL-ASSETS> 131,289
<SHORT-TERM> 1,410
<PAYABLES> 10,955
<REPOS-SOLD> 62,264
<SECURITIES-LOANED> 9,756
<INSTRUMENTS-SOLD> 20,124
<LONG-TERM> 4,471
0
0
<COMMON> 0
<OTHER-SE> 2,137
<TOTAL-LIABILITY-AND-EQUITY> 131,289
<TRADING-REVENUE> 282
<INTEREST-DIVIDENDS> 3,460
<COMMISSIONS> 95
<INVESTMENT-BANKING-REVENUES> 259
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 3,356
<COMPENSATION> 364
<INCOME-PRETAX> 202
<INCOME-PRE-EXTRAORDINARY> 126
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 126
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
