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 May 31, 1999
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 June 30, 1999, 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 MAY 31, 1999
INDEX
Part I. FINANCIAL INFORMATION Page
Number
Item 1. Financial Statements - (unaudited)
Consolidated Statement of Income -
Three and Six Months Ended
May 31, 1999 and 1998 ........................................ 3
Consolidated Statement of Financial Condition -
May 31, 1999 and November 30, 1998 ........................... 5
Consolidated Statement of Cash Flows -
Six Months Ended
May 31, 1999 and 1998......................................... 7
Notes to Consolidated Financial Statements.................... 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 15
Part II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................ 35
Item 6. Exhibits and Reports on Form 8-K .................... 37
Signatures.................................................................. 38
EXHIBIT INDEX ........................................................ 39
Exhibits
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of INCOME
(Unaudited)
(In millions)
Three months ended
----------------------------------
May 31 May 31
1999 1998
---------------- -------------
Revenues
Principal transactions $ 217 $ 324
Investment banking 323 424
Commissions 125 97
Interest and dividends 3,425 3,943
Other 3 3
---------------- -------------
Total revenues 4,093 4,791
Interest expense 3,272 3,783
---------------- -------------
Net revenues 821 1,008
---------------- -------------
Non-interest expenses
Compensation and benefits 434 512
Brokerage and clearance 48 50
Technology and communications 45 43
Management fees 19 16
Business development 22 22
Professional fees 13 12
Occupancy 11 12
Other 11 11
---------------- -------------
Total non-interest expenses 603 678
---------------- -------------
Income before taxes 218 330
Provision for income taxes 62 130
---------------- -------------
Net income $ 156 $ 200
================ =============
See notes to consolidated financial statements.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of INCOME
(Unaudited)
(In millions)
Six months ended
---------------------------------
May 31 May 31
1999 1998
---------------- ------------
Revenues
Principal transactions $ 551 $ 607
Investment banking 586 682
Commissions 236 192
Interest and dividends 6,660 7,403
Other 9 9
---------------- ------------
Total revenues 8,042 8,893
Interest expense 6,448 7,139
---------------- ------------
Net revenues 1,594 1,754
---------------- ------------
Non-interest expenses
Compensation and benefits 810 876
Brokerage and clearance 98 94
Technology and communications 87 87
Management fees 51 48
Business development 41 41
Professional fees 22 27
Occupancy 22 25
Other 21 24
---------------- ------------
Total non-interest expenses 1,152 1,222
---------------- ------------
Income before taxes 442 532
Provision for income taxes 129 206
---------------- ------------
Net income $ 313 $ 326
================ ============
See notes to consolidated financial statements
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of FINANCIAL CONDITION
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
May 31 November 30
1999 1998
------------------ ------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 330 $ 460
Cash and securities segregated and on deposit for regulatory and other
purposes 792 909
Securities and other financial instruments owned:
Governments and agencies 23,146 15,931
Mortgages and mortgage-backed 7,424 10,524
Corporate equities 8,965 5,694
Corporate debt and other 5,476 6,824
Derivatives and other contractual agreements 5,041 5,580
Certificates of deposit and other money market instruments 2,131 1,392
------------------ ------------------
52,183 45,945
------------------ ------------------
Collateralized short-term agreements:
Securities purchased under agreements to resell 63,864 47,913
Securities borrowed 19,566 14,760
Receivables:
Broker, dealers and clearing organizations 1,483 2,154
Customers 3,256 3,148
Others 5,529 4,859
Property, equipment and leasehold improvements (net of accumulated depreciation
and amortization of $573 in 1999 and $559 in 1998)
272 272
Other assets 282 261
Excess of cost over fair value of net assets acquired (net of accumulated
amortization of $112 in 1999 and $108 in 1998) 123 152
------------------ ------------------
Total Assets $147,680 $120,833
================== ==================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of FINANCIAL CONDITION (Continued)
(Unaudited)
(In millions, except share data)
<TABLE>
<CAPTION>
May 31 November 30
1999 1998
-------------- ----------------
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C>
Commercial paper and short-term debt $ 570 $ 616
Securities and other financial instruments sold but not yet purchased:
Governments and agencies 14,055 12,028
Derivatives and other contractual agreements 3,752 3,816
Corporate equities 2,758 1,428
Corporate debt and other 1,085 1,761
-------------- ----------------
21,650 19,033
-------------- ----------------
Collateralized short-term financings:
Securities sold under agreements to repurchase 78,520 58,905
Securities loaned 16,613 5,474
Advances from Holdings and other affiliates 14,682 21,560
Payables:
Broker, dealers and clearing organizations 2,827 2,230
Customers 4,407 4,540
Accrued liabilities and other payables 1,516 1,668
Long-term debt:
Senior notes 177 168
Subordinated indebtedness 3,922 4,111
-------------- ----------------
Total liabilities 144,884 118,305
-------------- ----------------
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 1,759 1,759
Accumulated other comprehensive income 2 3
Retained earnings 1,035 766
--------------
----------------
Total stockholder's equity 2,796 2,528
-------------- ----------------
Total liabilities and stockholder's equity $147,680 $120,833
============== ================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of CASH FLOWS
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Six months ended
--------------------------------------
May 31 May 31
1999 1998
----------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITES
<S> <C> <C>
Net income $ 313 $ 326
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization 29 27
Provisions for losses and other reserves 16 24
Other adjustments 20 39
Net change in:
Cash and securities segregated 117 (131)
Securities and other financial instruments owned (6,238) (14,198)
Securities borrowed (4,806) (6,487)
Receivables from brokers, dealers and clearing organizations 671 (224)
Receivables from customers (108) 453
Securities and other financial instruments sold but not yet purchased
2,617 8,456
Securities loaned 11,139 4,246
Payables to brokers, dealers and clearing organizations 597 2,250
Payables to customers (133) 1,173
Accrued liabilities and other payables (168) (18)
Other operating assets and liabilities, net (678) (1,877)
----------------- ----------------
Net cash provided by (used in) operating activities $3,388 $(5,941)
----------------- ----------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of CASH FLOWS (Continued)
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Six months ended
-------------------------------------
May 31 May 31
1999 1998
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITES
<S> <C> <C>
Proceeds from issuance of senior notes $ (79)
Proceeds from issuance of subordinated indebtedness 600
Principal payments of subordinated indebtedness $ (199) (607)
Net proceeds from commercial paper and short-term debt (46) 814
Resale agreements net of repurchase agreements 3,664 (585)
Advances from Holdings and other affiliates (6,878) 6,104
Dividends and capital distributions paid (45) -
---------------- ----------------
Net cash provided by (used in) financing activities (3,504) 6,247
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold improvements (14) (14)
---------------- ----------------
Net cash used in investing activities (14) (14)
---------------- ----------------
Net change in cash and cash equivalents (130) 292
---------------- ----------------
Cash and cash equivalents, beginning of period 460 220
================ ================
Cash and cash equivalents, end of period $ 330 $ 512
================ ================
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)
Interest paid totaled $6,443 and $7,139 for the six months ended May 31, 1999
and 1998, respectively. Income taxes (received)/paid totaled ($3) and $298 for
the six months ended May 31, 1999 and 1998, 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., a registered broker-dealer ("LBI") and subsidiaries (collectively, the
"Company"). LBI 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. 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, 1998 (the "Form 10-K"). The Consolidated Statement of Financial Condition at
November 30, 1998 was derived from the audited financial statements.
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. Long-Term Debt:
The Company did not issue any long-term debt during the six months ended May 31,
1999, while $199 million of long-term debt matured.
3. 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 May 31, 1999, LBI's regulatory net capital,
as defined, of $1,247 million exceeded the minimum requirement by $1,149
million.
The Company's "AAA" rated derivatives subsidiaries, Lehman Brothers Financial
Products Inc. ("LBFP") and Lehman Brothers Derivative Products Inc. ("LBDP"),
have established certain capital and operating restrictions which are reviewed
by various rating agencies. At May 31, 1999, LBFP and LBDP each had capital
which exceeded the requirement of the most stringent rating agency by
approximately $137 million and $30 million, respectively.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
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 investments governing the indebtedness
of LBI contractually limit its ability to pay dividends.
4. 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 risk resulting from its trading activities
(collectively, "Trading-Related Derivative Activities").
Derivative transactions entered into for Trading-Related Derivative Activities
are recorded at market or fair value with realized and unrealized gains and
losses recognized currently in Principal transactions in the Consolidated
Statement of Income. Market or fair value for trading-related instruments is
generally determined by either quoted market prices (for exchange-traded futures
and options) or pricing models (for over-the-counter swaps, forwards and
options).
Pricing models utilize a series of market inputs to determine the present value
of future cash flows, with adjustments, as required for credit risk and
liquidity risk. Further valuation adjustments may be recorded, as deemed
appropriate for new or complex products or for positions with significant
concentrations. These adjustments are integral components of the mark-to-market
process. Credit-related valuation adjustments incorporate business and economic
conditions, historical experience, concentrations, estimates of expected losses
and the character, quality and performance of credit sensitive financial
instruments.
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 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.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Average Fair Value*
Fair Value* Six Months Ended
May 31, 1999 May 31, 1999
--------------------------------- -- ---------------------------------
(in millions) Assets Liabilities Assets Liabilities
- -------------------------------------------------------- -------------- -- --------------- -- -------------- --- --------------
Interest rate and currency swaps and options
<S> <C> <C> <C> <C>
(including caps, collars and floors) $3,583 $2,333 $3,968 $2,280
Foreign exchange forward contracts and options
393 445 696 551
Options on other fixed income securities,
mortgage-backed securities forward contracts and
options 448 411 294 283
Equity contracts (including equity swaps, warrants
and options) 617 563 556 522
Commodity contracts (including swaps, forwards
and options)
-------------- -- --------------- -- -------------- --- --------------
Total $5,041 $3,752 $5,514 $3,636
-------------- -- --------------- -- -------------- --- --------------
</TABLE>
<TABLE>
<CAPTION>
Average Fair Value*
Fair Value* Twelve Months Ended
November 30, 1998 November 30, 1998
---------------------------------- -- --------------------------------
(in millions) Assets Liabilities Assets Liabilities
- -------------------------------------------------------- -------------- -- ---------------- -- -------------- -- --------------
Interest rate and currency swaps and options
<S> <C> <C> <C> <C>
(including caps, collars and floors) $4,491 $2,371 $4,298 $2,283
Foreign exchange forward contracts and options
476 752 652 593
Options on other fixed income securities,
mortgage-backed securities forward contracts and
options 217 211 281 256
Equity contracts (including equity swaps, warrants
and options) 385 473 188 246
Commodity contracts (including swaps, forwards
and options) 11 9 24 7
-------------- -- ---------------- -- -------------- -- --------------
Total $5,580 $3,816 $5,443 $3,385
-------------- -- ---------------- -- -------------- -- --------------
</TABLE>
* Amounts represent carrying value (exclusive of non-cash 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
Assets included in the tables 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 May 31, 1999 represents the Company's net
receivable/payable for derivative financial instruments before consideration of
collateral. Included within the $5,041 million fair value of assets at May 31,
1999 was $4,620 million related to swaps and other OTC contracts and $421
million related to exchange-traded option and warrant contracts. Included within
the $5,580 million fair value of assets at November 30, 1998 was $5,333 million
related to swaps and other OTC contracts and $247 million related to
exchange-traded option and warrant contracts.
With respect to OTC contracts, including swaps, the Company views its third
party net credit exposure to be $3,717 million at May 31, 1999, representing the
fair value of the Company's OTC contracts in an unrealized gain position, after
consideration of amounts due from affiliates of $34 million and collateral of
$869 million. Presented below is an analysis of the Company's third party net
credit exposure at May 31, 1999 for OTC contracts based upon actual ratings made
by external rating agencies or by equivalent ratings established and utilized by
the Company's Credit Risk Management Department.
Counterparty S&P/Moody's Net Credit
Risk Rating Equivalent Exposure
- ----------- ---------- --------
1 AAA/Aaa 12%
2 AA-/Aa3 or higher 23%
3 A-/A3 or higher 43%
4 BBB-/Baa3 or higher 21%
5 BB-/Ba3 or higher 1%
6 B+/B1 or lower 0%
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 clearinghouses impose net capital
requirements for their membership. Additionally, the exchange clearinghouse
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 Notes
1 and 9 to the Consolidated Financial Statements, included in the Form 10-K.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
5. Other Commitments and Contingencies:
In connection with its financing activities, the Company had outstanding
commitments under certain lending arrangements of approximately $3.8 billion at
May 31, 1999 and $3.0 billion at November 30, 1998. 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, trading and underwriting activities,
makes commitments to extend credit principally to below investment grade
borrowers and then sells a significant portion of these commitments through
syndication. These commitments, net of syndications and participations, totaled
$1.2 billion and $1.5 billion at May 31, 1999 and November 30, 1998,
respectively, and 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. Total commitments are not indicative of actual risk or funding
requirements as the commitments may not be drawn or fully utilized and the
Company will continue to syndicate and/or sell these commitments.
The Company also had lending commitments to high-grade borrowers of $1.1 billion
and $610 million at May 31, 1999 and November 30, 1998, respectively. These
commitments also are typically secured against the borrower's assets, have fixed
maturity dates, and are generally contingent upon certain representations,
warranties and contractual conditions of the borrower. The company generally
sells a significant portion of these commitments through syndication
At May 31, 1999 and November 30, 1998, the Company had commitments to invest up
to $385 million and $238 million, respectively, directly and through
partnerships, which in turn will make merchant banking and venture capital
related investments. These commitments will be funded as required through the
end of the respective investment periods, principally expiring in 2004.
In addition to these specific commitments, the Company had various other
commitments of approximately $305 million at May 31, 1999 and November 30, 1998.
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.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
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 throughout the Company to monitor and
manage these risks on a global basis. For further discussion of these matters,
refer to Note 11 to the Consolidated Financial Statements, in the Form 10-K.
6. Related Parties:
In the normal course of business, the Company engages in various securities
trading, investment banking and financial 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.
During the six months ended May 31, 1999, the Company paid dividends to Holdings
of $45 million.
<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 Lehman Brothers Inc., a registered broker
dealer with the U.S. Securities and Exchange Commission ("LBI") and subsidiaries
(collectively, the "Company" or "Lehman Brothers") 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.
Revenues and earnings may vary significantly from quarter to quarter and from
year to year. 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 revenue base, stringent cost
controls, global presence, and risk management practices.
Increasing evidence that the U.S. economic growth remained very strong led to a
sharp rise in U.S. bond yields in early 1999. Gross domestic product growth of
6% in the fourth quarter of 1998 was followed by growth of 4.1% in the first
quarter of 1999. While wage and price inflation remained low, a larger-than
expected rise in core inflation in May and the shift in bias by the Federal
Reserve to tighten interest rates, led to a further sell-off in the U.S. bond
market and a general widening in credit spreads. As a result, U.S. ten-year bond
yields rose by approximately one percentage point to 5.6% over the six months
ended May 1999. Nevertheless, interest rates still remained in a relatively low
historical range.
Initially, the U.S. equity markets responded positively to stronger-than
expected growth: by late April the S&P 500 had risen 15% to around 1350.
Assessing that the global financial crisis had subsided considerably and that
global growth was on a firmer footing, performance broadened with smaller
capitalization and cyclical industry stocks outperforming the overall market
beginning in April. Reflecting good local and global growth, earnings for the
first calendar quarter were significantly ahead of expectations. However, a
further rise in U.S. bond yields in May and the heightened concerns that the
Federal Reserve would soon raise interest rates led to a decline through May,
with the S&P ending the month at around 1300.
On June 30, 1999, the Federal Reserve, as expected, raised the Federal funds
rate by 25 basis points to 5.0% and announced a change in its bias to a neutral
stance. These actions served to calm the U.S. markets and produced rallies in
both the U.S. debt and equity markets.
Corporate Finance Advisory activities continued at near record levels during the
first half of 1999. Industrywide, the volume of announced transactions soared to
roughly $1.5 trillion. The first six months of 1999 also reflected a steady
advance of merger and acquisition activity involving European companies and
cross-border mergers and acquisitions. Merger and acquisition activities
continued to reflect the trends of consolidation, deregulation and globalization
across industry sectors and across borders.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
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 May 31, 1999 and 1998
The Company reported net income of $156 million for the second quarter ended May
31, 1999, representing a decrease of 22% from net income of $200 million for the
second quarter ended May 31, 1998.
Net revenues decreased to $821 million for the second quarter of 1999 from
$1,008 million for the second quarter of 1998. Revenues in fixed income were
lower due to decreased activity in the high yield origination market partially
offset by record revenues in the equity business.
Compensation and benefits expense as a percentage of net revenues was 52.9% and
50.8% for the second quarter of 1999 and 1998, respectively. Nonpersonnel
expenses were $169 million in the second quarter of fiscal 1999, essentially
unchanged from the $166 million in the second quarter of fiscal 1998.
In the following table of net revenues, the Company has been segregated into
four major business units: equity, corporate finance advisory, fixed income and
merchant banking. Net revenues from the Company's market-making and trading
activities in equity and fixed income 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. 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.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended May 31, 1999
Principal
Transactions and
Net Interest Investment
Commissions Banking Other Total
- -------------------------------------- ------------------- ------------------ ------------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Equity $123 $115 $84 $ 1 $ 323
Corporate Finance Advisory (3) 82 79
Fixed Income 250 8 130 1 389
Merchant Banking (1) 27 26
Other 1 2 1 4
- -------------------------------------- ------------------- ------------------ ------------------ ------------ -----------
$370 $125 $323 $ 3 $ 821
- -------------------------------------- ------------------- ------------------ ------------------ ------------ -----------
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended May 31, 1998
Principal
Transactions and
Net Interest Investment
Commissions Banking Other Total
- -------------------------------------- ------------------- ------------------ ------------------ ----------- -----------
<S> <C> <C> <C> <C>
Equity $59 $86 $99 $ 244
Corporate Finance Advisory (5) 96 91
Fixed Income 424 7 212 $(1) 642
Merchant Banking 5 17 22
Other 1 4 4 9
- -------------------------------------- ------------------- ------------------ ------------------ ----------- -----------
$484 $97 $424 $ 3 $1,008
- -------------------------------------- ------------------- ------------------ ------------------ ----------- -----------
</TABLE>
Equity Equity net revenues reflect equity underwriting, customer flow activities
(both institutional and high-net-worth retail), secondary trading and derivative
and financing activities related to equity products. The Company's equity net
revenues increased 32% to $323 million for the second quarter of 1999 from $244
million for the second quarter of 1998. Higher revenues resulted from increased
customer flow activities in U.S. cash products as well as a strong performance
in equity arbitrage.
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 were $79 million for the second quarter of
1999, a decrease of 13% versus the $91 million recognized in the second quarter
of 1998. This decrease was due to the absence of several large transactions that
were present in the prior year's quarter, partially offset by continued strength
in the overall merger and acquisition market environment.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
Fixed Income. The Company's fixed income net revenues reflect debt underwriting,
customer flow activities (both institutional and high-net-worth retail),
secondary trading 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 decreased 39% to $389
million for the second quarter of 1999 from the $642 million recognized in the
second quarter of 1998. The decrease in the second quarter results from the
prior year's quarter was due to the absence of several sizable leveraged finance
transactions that were present in the prior year's quarter, and the effect of an
overall decline in the high yield origination market partially offset by higher
origination in the high grade corporate bond sector.
Merchant Banking. The Company is the general partner for seven active merchant
banking and venture capital partnerships and also invests directly in other
merchant banking and venture capital transactions. Current merchant banking
investments include both publicly traded and privately held companies. Merchant
banking net revenues represent net realized and unrealized gains and losses from
the revaluation of these investments. 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 related to
the financing of the Company's investment in the partnerships. Merchant banking
net revenues for the second quarter of 1999 were relatively flat versus the
second quarter of 1998.
Non-Interest Expenses. Non-interest expenses were $603 million for the second
quarter of 1999 and $678 million for the second quarter of 1998. This decrease
in non-interest expenses was primarily attributable to a reduction in
compensation and benefits, which decreased as a result of lower net revenues.
Income Taxes. The Company's income tax provision was $62 million for the second
quarter of 1999 compared to $130 million for the second quarter of 1998. The
effective tax rate was 28.4% for the second quarter of 1999 and 39.4% for the
second quarter of 1998. The lower effective tax rate is the result of a more
favorable mix of earnings, which reduced the state and local provision, and an
increase in tax benefits attributable to income and transactions subject to
preferential tax treatment.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
Results of Operations
For the Six Months Ended May 31, 1999 and 1998
The Company reported net income of $313 million for the six months ended May 31,
1999, representing a decrease of 4% from net income of $326 million for the six
months ended May 31, 1998.
Net revenues decreased to $1,594 million for the six months of 1999 from $1,754
million for the six months of 1998. Revenues decreased due to decreased activity
in the high yield origination market partially offset by record revenues in the
equities business.
Compensation and benefits expense as a percentage of net revenues was 50.8% and
49.9% for the first half of 1999 and 1998, respectively. Nonpersonnel expenses
were $342 million in the six months of fiscal 1999, essentially unchanged from
the $346 million in expenses for the six months of fiscal 1998.
In the following table of net revenues, the Company has been segregated into
four major business units: equity, corporate finance advisory, fixed income and
merchant banking. Net revenues from the Company's market-making and trading
activities in equity and fixed income 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. 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.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended May 31, 1999
Principal
Transactions and
Net Interest Investment
Commissions Banking Other Total
- -------------------------------------- ------------------- ------------------ ------------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Equity $ 153 $ 218 $ 130 $ 1 $ 502
Corporate Finance Advisory (6) 163 157
Fixed Income 621 14 260 2 897
Merchant Banking (6) 33 27
Other 1 4 6 11
- -------------------------------------- ------------------- ------------------ ------------------ ------------ -----------
$ 763 $ 236 $ 586 $ 9 $1,594
- -------------------------------------- ------------------- ------------------ ------------------ ------------ -----------
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended May 31, 1998
Principal
Transactions and
Net Interest Investment
Commissions Banking Other Total
- -------------------------------------- ------------------- ------------------ ------------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Equity $ 81 $ 173 $ 150 $ 1 $ 405
Corporate Finance Advisory (8) 169 161
Fixed Income 797 12 337 1 1,147
Merchant Banking (1) 26 25
Other 2 7 7 16
- -------------------------------------- ------------------- ------------------ ------------------ ----------- -----------
$ 871 $ 192 $ 682 $ 9 $1,754
- -------------------------------------- ------------------- ------------------ ------------------ ----------- -----------
</TABLE>
Equity. Equity net revenues reflect equity underwriting, customer flow
activities (both institutional and high-net-worth retail), secondary trading and
derivative and financing activities related to equity products. The Company's
equity net revenues increased 24% to $502 million for the six months of 1999
from $405 million for the six months of 1998. Higher revenues resulted from
strong customer flow activities and a strong performance in equity arbitrage.
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 were relatively unchanged at $157 million
for the six months of 1999, versus the $161 million recognized in the six months
of 1998.
Fixed Income. The Company's fixed income net revenues reflect debt underwriting,
customer flow activities (both institutional and high-net-worth retail),
secondary trading and financing activities related to fixed income products.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
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 decreased 22% to $897
million for the six months of 1999 from $1,147 million for the six months of
1998. The decrease in the first half results from the prior year's first half
reflected the absence of several sizable leveraged finance transactions that
were present in the prior year's second quarter, as well as a substantial
decline in the overall high yield origination market, partially offset by higher
origination in the high-grade corporate bond sector.
Merchant Banking. The Company is the general partner for seven active merchant
banking and venture capital partnerships and also invests directly in other
merchant banking and venture capital transactions. Current merchant banking and
venture capital investments include both publicly traded and privately held
companies. Merchant banking net revenues represent net realized and unrealized
gains and losses from the revaluation of these investments. 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 related to the financing of the Company's investment in the
partnerships. Merchant banking net revenues for the six months of 1999 were
relatively flat versus the six months of 1998.
Non-Interest Expenses. Non-interest expenses were $1,152 million for the six
months of 1999 and $1,222 million for the six months of 1998. This decrease in
non-interest expenses was primarily attributable to a reduction in compensation
and benefits, which decreased as a result of lower net revenues.
Income Taxes. The Company's income tax provision was $129 million for the six
months of 1999 compared to $206 million for the six months of 1998. The
effective tax rate was 29.2% for the six months of 1999 and 38.7% for the six
months of 1998. The lower effective tax rate is the result of a more favorable
mix of earnings, which reduced the state and local provision, and an increase in
tax benefits attributable to income and transactions subject to preferential tax
treatment.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
Funding, Capital Resources and Liquidity
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. Members of
the Company's treasury department and business unit financing groups work with
the Finance Committee to ensure coordination of global funding efforts and
implementation of the funding and liquidity policies. Regional asset and
liability committees in the Company's principal funding centers 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 to meet the needs of the Company's
businesses. The key elements of these policies are to:
(1) Maintain a total capital structure that supports the business activities
in which the Company is engaged.
(2) Finance the Company's assets, primarily on a secured basis. Together with
Total Capital, secured funding provides a stable funding base and enables
the Company to minimize its reliance on short-term unsecured debt.
(3) Maintain funding availability in excess of actual utilization and
diversify funding through a global investor base which increases liquidity
and reduces concentration risk.
(4) Maintain sufficient financial resources to enable the Company to meet its
obligations in periods of financial stress, defined as any event that
severely constrains the Company's access to unsecured funding sources.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
Total Capital. The Company's Total Capital base at May 31, 1999 increased to
$6.9 billion from $6.8 billion at November 30, 1998.
May 31 November 30
(in millions) 1999 1998
- --------------------------------------------------------------------------------
Long-term Debt
Senior Notes $177 $168
Subordinated Indebtedness 3,922 4,111
-------- -------
4,099 4,279
Stockholder's Equity 2,796 2,528
- --------------------------------------------------------------------------------
Total Capital $6,895 $6,807
- --------------------------------------------------------------------------------
During the first six months of 1999, the Company had no new issuances. Long-term
debt decreased to $4.1 billion at May 31, 1999 from $4.3 billion at November 30,
1998, with a weighted-average maturity of 4.3 years at May 31, 1999 and 4.6
years at November 30, 1998.
Secured Funding. The Company strives to maximize the portion of the Company's
balance sheet that is funded on a secured basis. Secured Funding includes
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 other investment grade types of
collateralized borrowings are less credit-sensitive and have historically been a
stable financing source irrespective of market conditions. At May 31, 1999 and
November 30, 1998, $113 billion and $80 billion, respectively, of the Company's
total balance sheet of $148 billion and $121 billion at May 31, 1999 and
November 30, 1998, respectively, were financed on a secured basis.
By maximizing its use of secured funding, the Company minimizes its reliance on
unsecured funding. As of May 31, 1999 and November 30, 1998, short-term debt
outstanding was $570 million and $616 million, respectively. There was no
commercial paper outstanding as of May 31, 1999 or November 30, 1998.
Balance Sheet. The Company's total assets increased to $147.7 billion at May 31,
1999 from $137.0 billion at February 28, 1999 and $120.8 billion at November 30,
1998. The Company's adjusted total assets, defined as total assets less the
lower of securities purchased under agreements to resell or securities sold
under agreements to repurchase were $83.8 billion at May 31, 1999 compared to
$79.0 billion at February 28, 1999 and $72.9 billion at November 30, 1998. The
Company believes adjusted total assets is a more effective measure of balance
sheet usage when comparing companies in the securities industry. The increases
in adjusted total assets reflect increases in government and agency inventory
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
levels associated with increased flow activities. The remaining increase in
total assets was driven by an increase in secured customer financing activities
during the second quarter.
The Company's balance sheet 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 majority of these
assets are funded on a secured basis through collateralized short-term financing
agreements with the remaining assets being funded through short-term unsecured
financing and Total Capital, defined as long-term debt and stockholder's equity.
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. On July 7, 1999, Moody's placed the long-term
ratings of LBI on review for possible upgrade. As of May 31, 1999 the short-and
long-term senior debt ratings of 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
Other
High Yield Securities and Lending Activities. 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 instruments 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 instruments 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 instruments at May 31,
1999, February 28, 1999 and November 30, 1998 included long positions with an
aggregate market value of approximately $1.2 billion, $1.6 billion and $1.2
billion, respectively, and short positions with an aggregate market value of
approximately $110 million, $108 million and $200 million, respectively. The
Company may, from time to time, mitigate its net exposure to any single issuer
through the use of derivatives and other financial instruments.
Additional information about the Company's High Yield Securities and Lending
Activities, including related commitments, can be found in Note 5 to the
Consolidated Financial Statements (Other Commitments and Contingencies).
Merchant Banking. At May 31, 1999, the Company's investment in merchant
banking and venture capital partnerships totaled $60 million and direct merchant
banking and venture capital investments totaled $209 million. The Company's
merchant banking and venture capital activities include investments in seven
partnerships, for which the Company acts as general partner, as well as direct
investments. 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. Additional information about the Company's merchant
banking activities, including related commitments, can be found in Note 5 to the
Consolidated Financial Statements (Other Commitments and Contingencies).
Excess of Cost over Fair Value of Net Assets acquired ("Goodwill"). During the
quarter, the Company reduced Goodwill as a result of recognizing the tax
benefits associated with net operating losses acquired in prior year
acquisitions.
<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 and technology.
The Company seeks to reduce risk through the diversification of its businesses,
counterparties and activities in geographic regions. The Company accomplishes
this objective by allocating the usage of capital to each of its businesses,
establishing trading limits for individual products and traders and setting
credit limits for individual counterparties, including regional concentrations.
The Company seeks to achieve adequate returns from each of its businesses
commensurate with the risks that they assume.
Overall risk management policy is established by a Risk Management Committee
(the "Committee") comprised of the Chief Executive Officer, the Global Risk
Manager, the Chief Financial and Administrative Officer, the Head of Equities,
the Head of Fixed Income, the Head of Global Sales and Research and the Co-Heads
of Investment Banking. The Committee brings together senior management with the
sole intent of discussing risk related issues and provides an effective forum
for managing risk at the highest levels within the Company. The Committee meets
on a monthly basis, or more frequently if required, to discuss, among other
matters, significant market exposures, concentrations of positions (e.g.,
counterparty, market risk), potential new transactions or positions and risk
limit exceptions.
The Global Risk Management Group (the "Group") supports the Committee, is
independent of the trading areas and reports directly to the Chief Executive
Officer. The Group combines two departments, credit risk management and market
risk management, into one unit. This facilitates the analysis of counterparty
credit and market risk exposures and leverages personnel and information
technology resources in a cost-efficient manner. The Group maintains staff in
each of the Company's regional trading centers and has daily contact with
trading staff at all levels within the Company. These discussions include a
review of trading positions and risk exposures.
Credit Risk. Credit risk represents the possibility that a counterparty will be
unable to honor its contractual obligations to the Company. Credit risk
management is therefore an integral component of the Company's overall risk
management framework. The Credit Risk Management Department ("CRM Department")
has global responsibility for implementing the Company's overall credit risk
management framework.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
The CRM Department manages the credit exposure related to trading activities by
giving initial credit approval for counterparties, establishing credit limits by
counterparty, country and industry group and by requiring collateral in
appropriate circumstances. In addition, the CRM Department strives to ensure
that master netting agreements are obtained whenever possible. The CRM
Department also considers the duration of transactions in making its credit
decisions, along with the potential credit exposure for complex derivative
transactions. The CRM Department is responsible for the continuous monitoring
and review of counterparty credit exposure and creditworthiness and
recommending, where appropriate, credit risk-related valuation adjustments.
Credit risk and related valuation adjustments are reviewed periodically to
ensure that they remain appropriate in light of market events or the
counterparty's financial condition.
Valuation adjustments for credit risk incorporate business and economic
conditions, historical experience, concentrations, estimates of expected losses
and the character, quality and performance of credit sensitive financial
instruments.
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 management also is an essential component of the
Company's overall risk management framework. The Market Risk Management
Department ("MRM Department") has global responsibility for implementing the
Company's overall market risk management framework. It is responsible for the
preparation and dissemination of risk reports, developing and implementing the
firmwide Risk Management Guidelines and evaluating adherence to these
guidelines. These guidelines provide a framework for risk management
decision-making. To that end, the MRM Department identifies and quantifies risk
exposures, develops limits, and reports and monitors these risks with respect to
the approved limits. The identification of material market risks inherent in
positions includes, but is not limited to, interest rate, equity, and foreign
exchange risk exposures. In addition to these risks, the MRM Department also
evaluates liquidity risks, credit and sovereign concentrations.
The MRM Department utilizes qualitative as well as quantitative information in
managing trading risk, believing that a combination of the two approaches
results in a more robust and complete approach to the management of trading
risk. Quantitative information is developed from a variety of risk methodologies
based upon established statistical principles. To ensure high standards of
qualitative analysis, the MRM Department has retained seasoned risk managers
with the requisite experience and academic and professional credentials.
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.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
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 Equities 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.
The Company incurs short-term interest rate risk when facilitating the orderly
flow of customer transactions through the maintenance of government and
high-grade corporate bond inventories. Market-making in high yield instruments
exposes the Company to additional risk due to potential variations in credit
spreads. Trading in international markets exposes the Company to spread risk
between the term structure of interest rates in differing countries.
Mortgage-related securities are subject to prepayment risk and changes in the
level of interest rates. Trading in derivatives and structured products exposes
the Company to changes in the level and volatility of interest rates. The
Company actively manages interest rate risk through the use of interest rate
futures, options, swaps, forwards, and offsetting cash market instruments.
Inventory holdings, concentrations, and agings are monitored closely and used by
management to selectively hedge or liquidate undesirable exposures.
The Company is a significant intermediary in the global equity markets by making
markets in U.S. and non-U.S. equity securities, including common stock,
convertible debt, exchange-traded and OTC equity options, equity swaps and
warrants. These activities expose the Company to market risk as a result of
price and volatility changes in its equity inventory. Inventory holdings are
also subject to market risk resulting from concentrations, aging and liquidity
that may adversely impact market valuation. Equity market risk is actively
managed through the use of index futures, exchange-traded and OTC options, swaps
and cash instruments. Equity risk exposures are aggregated and reported to
management on a regular basis.
The Company enters into foreign exchange transactions in order to facilitate the
purchase and sale of non-dollar instruments, including equity and interest rate
securities. The Company is exposed to foreign exchange risk on its holdings of
non-dollar assets and liabilities. The Company is active in many foreign
exchange markets and has exposure to the euro, Japanese yen, British pound,
Swiss franc, and Canadian dollar as well as a variety of developed and emerging
market currencies. The Company hedges its risk exposures primarily through the
use of currency forwards, swaps, futures, and options.
Value at Risk. For purposes of Securities and Exchange Commission ("SEC") risk
disclosure requirements, the Company has performed an entity-wide value at risk
calculation of virtually all of the Company's trading activities. The value at
risk calculation measures the potential loss in expected revenues with a 95%
confidence level. The methodology incorporates actual trading revenues over a
standardized 250-day historical period. A confidence level of 95% implies, on
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
average, that daily trading revenues or losses will exceed daily expected
trading revenues by an amount greater than value at risk one out of every 20
trading days. Average value at risk computed in this manner was $18.4 million
and $13.5 million for the periods ended May 31, 1999 and November 30, 1998,
respectively. Average value at risk increased in 1999 compared to 1998 because
of the extreme market volatility during the August-October 1998 period.
Excluding the effects of this volatility, average value at risk for the second
quarter ended May 31, 1999 was $12.7 million.
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.
As discussed throughout Management's Discussion and Analysis, the Company seeks
to reduce risk through the diversification of its businesses and a focus on
customer flow activities. This diversification and focus, combined with the
Company's risk management controls and processes, helps mitigate the net revenue
volatility inherent in the Company's trading activities. Although historical
performance is not necessarily indicative of future performance, the Company
believes its focus on business diversification and customer flow activities
should continue to help mitigate the volatility of future net trading revenues.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
Year 2000 Readiness Disclosure
The year 2000 issue originates from computer programs and imbedded chips using
two digits rather than four to define the calendar year. Computer programs that
have date-sensitive software may recognize a date using "00"as the year 1900
rather than the year 2000.
If not addressed and completed on a timely basis, failure of the Company's
computer systems to process year 2000 related data correctly could have a
material adverse effect on the Company's operations and financial condition.
Failures of this kind could, for example, lead to incomplete or inaccurate
accounting, settlement failures, trade processing or recording errors in
securities, currencies, commodities or other assets. It could also lead to
uncertainty regarding risk, exposures and liquidity. If not addressed, the
potential risks to the Company include financial loss, legal liability,
interruption of business and regulatory actions.
The Company established a team in 1996 to modify or replace and then test the
appropriate software and equipment to ensure that year 2000 issues were
addressed. The Company presently believes that, with modifications to existing
software and conversions to new software, the year 2000 issue will be resolved
for all the Company's own systems worldwide.
In its approach to the year 2000 problem, Lehman Brothers has been guided by a
three-step methodology. The steps are:
o Inventory and Assessment
o Remediation
o Testing
Inventory and assessment consisted of initial technical and functional analysis
across the Company's applications. Initial analysis identified systems and
applications. Each application was then reviewed and classified as highly
critical, critical or non-critical. This process is complete.
Remediation is divided into three phases. Applications specified as year 2000
non-compliant have been analyzed to determine business impact and those that
have been deemed critical were targeted for remediation. Selected Lehman
Brothers mainframe applications were sent to an outside vendor for remediation,
while the remaining applications have been repaired internally. Remediation of
critical applications were completed by the end of the second quarter of 1999.
All remediated applications are tested for non-year 2000 functionality to
confirm they still run correctly prior to year 2000 testing. At the time of
remediation, applications are logged into a change management system to further
ensure any additional changes are monitored and re-tested for year 2000
compliance.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
Testing for year 2000 compliance has also been organized into three phases.
Phase one involves testing individual applications or groups of applications on
mainframe or on distributed platforms. Consultants were engaged to assist with
the testing of distributed applications classified as highly critical. Phase two
involves real-time testing across platforms (integration testing). Phase three
involves testing applications between firms (external testing).
Each of these phases has been pursued in a worldwide effort coordinated in New
York, London and Tokyo where project teams and segregated lab environments have
been established.
External testing itself is being performed in three steps. "Point-to-point"
testing confirms that application interfaces between the Company and individual
services and utilities function correctly. Point-to-point testing began in
February 1998. "Beta" testing for a product follows Point-to-point testing and
is a dress rehearsal for industrywide testing. Beta testing is only performed in
the U.S. Many of the markets are not providing Industrywide testing, but they
are providing some amount of end-to-end testing, where data is passed to more
than one exchange or utility. Industrywide testing follows beta testing as the
final external testing step.
In 1998, the Company participated in two Beta tests in the U.S., for the SIA and
for the Futures Industry Association (FIA). The Company has also participated in
the SIA Money Market Beta Test, the Mortgage-Backed Securities Clearing
Corporation Test, the Participant Trust Company Mortgage Test and the Government
Securities Clearing Corporation Test, the SIA Market Data Beta Test. Overseas
tests in which the Company has participated include the Central Gilts Office
(CGO) and CREST in the United Kingdom and the Singapore International Monetary
Exchange (SIMEX) test in Singapore.
In March and April of 1999, the Company participated in the SIA Industrywide
Test, as well as the Stock Loan Test and SIA Market Data Test in May. The
Company has participated in a variety of point-to-point oversees tests in Hong
Kong and Tokyo. We are currently participating in Industrywide testing in Japan
with a June 27 completion. The Company has participated in testing in Germany,
Italy, U.K., Sweden, and France. The Company is also participating in a
cooperative test with Euroclear. The Company is also participating in Custody
2000 testing of cash and securities settlement systems with banks in Italy and
Poland. Additional European tests are scheduled to October, 1999. All tests to
date have been successful.
The Company has taken a leading role in the industry's efforts to deal with the
year 2000 issue by actively participating and in some cases, leading,
industrywide testing efforts. Lehman Brothers chaired the Participants'
Industrywide Testing Subcommittee of the Securities Industry Association (SIA)
which, with partners such as exchanges, depositories, market data vendors and
buy-side firms, set up, refined and coordinated industrywide testing in the
United States. Industrywide testing is the forum in which firms within the
financial industry test the applications that transfer data between them. These
tests started in March 1999 and are expected to be completed in July, 1999.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
In addition to its leadership in U.S. testing efforts, through membership in the
Executive Committee of Global 2000, a group of international financial firms,
the Company is participating in the coordination of global year 2000 readiness
in the financial community. The Company is also pursuing separate point-to-
point testing with firms not participating in industrywide testing. Lehman
Brothers also serves as a member of the Custody 2000 Working Group whose goal is
to assist the financial community in the assessment of year 2000 readiness of
custodians in a variety of global markets. The Custody 2000 Working Group will
also conduct proxy testing of selected sub-custodians in a number of markets
globally.
Year 2000 also affects building and infrastructure systems. The Company is
engaged in a global effort to address facilities issues. Critical areas include
facilities components such as building management systems, elevators, heating
systems, security and fire alarm systems, electrical and other building
services. Facilities staff has surveyed and continues to test equipment and
components and, with the Third Party Vendor team, is working to ensure that
vendors and suppliers are year 2000 ready.
However, even if these changes are successful, the Company remains at risk from
year 2000 failures caused by third parties. Externally, the Company is an active
participant in the SIA Third Party Vendor Committee. Internally, the Company is
evaluating efforts of key counterparties, banks, exchanges, agencies, utilities
and suppliers, among others, to assess and remediate their year 2000 issues. As
part of this effort, the Third Party Vendor team has inventoried and has sent
surveys to vendors whose software and hardware products the Company uses and
whose services the Company employs to determine their year 2000 readiness. The
team is also testing critical software and hardware products to ensure year 2000
readiness. To date the Company has received information from 99% of its vendors,
including overseas vendors whose year 2000 awareness seems to be less advanced
than in the United States.
Examples of problems that could result from the failure by third parties with
whom the Company interacts to remediate year 2000 bugs include: (i) in the case
of exchanges and clearing agents, funding disruptions, failure to trade in
certain markets and settlement failures; (ii) in the case of counterparties and
clients, accounting and financial difficulties to those parties that may expose
the Company to increased credit risk and lost business; (iii) in the case of
vendors, service failures such as power, telecommunications, elevator operations
and loss of security access control; (iv) in the case of banks and other
lenders, the potential for liquidity stress due to disruptions to funding flows;
and, (v) in the case of data providers, inaccurate or out of date information
that would impair the Company's ability to perform critical functions such as
pricing securities and currencies.
Additionally, general uncertainty regarding the success of remediation may cause
many market participants to reduce their market activities temporarily as they
address and assess their year 2000 efforts in 1999. This could result in a
general reduction in market activities and revenue opportunities in late 1999
and early 2000. Management cannot predict the magnitude of any such reduction or
its impact on the Company 's financial results. However, the Company's Risk
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
Management Department continues to evaluate third party and credit risks posed
by year 2000. Recognizing the uncertainty of external dependencies, the Company
is also preparing a contingency plan that identifies potential problems, actions
to minimize the likelihood of them occurring and action plans to be invoked
should they occur. The plan includes backup processes that do not rely on
computer systems, where appropriate. The base contingency plan was finalized at
the end of April 1999. The Company's business units continue to review and fine
tune the contingency plan and to respond to new information about year 2000
risks as such information becomes available.
However, as stated above, there can be no guarantee or assurance that the
systems of other companies on which the Company's systems rely will be
remediated in a timely manner. This or a failure to remediate by another company
or a remediation that is incompatible with the Company's systems could have a
material adverse effect on the Company.
The Company has established an internal auditing plan to ensure ongoing
compliance of tested applications.
The Company's total year 2000 project cost is based on presently available
information. The total remaining cost of the year 2000 project is estimated at
approximately $3 million, which will be funded through operating cash flow and
expensed as incurred over the next one year. The Company has incurred and
expensed approximately $2 million in 1997, $4 million in 1998, and $2 million
through May 31, 1999, related to the year 2000 project.
The costs of year 2000 testing, modifications and/or replacements and the date
on which the Company plans to complete the project are based on management's
best estimates. These estimates were derived using numerous assumptions of
future events including the continued availability of certain resources, third
party modification plans and other factors.
Accounting Standards Not Yet Adopted by the Company
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131 "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 is effective
for the Company in Fiscal 1999 and establishes standards for related disclosures
about products and services, geographic areas and major customers. The Company
will adopt SFAS No. 131 in its 1999 Annual Report.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which requires all derivatives to be
recorded on the balance sheet at fair value. In June 1999, the FASB extended the
implementation date of SFAS No. 133 by one year. As a result, SFAS No. 133 will
now be effective for the Company on December 1, 2000 (Fiscal Year 2001). The
expected impact of adoption on the Company's results of operations has not yet
been determined, however it is not likely to be material since most of the
Company's derivatives are carried at fair value.
<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 LBI'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.
County of Orange et al. v. Bear Stearns & Co. et al. (Reported in LBI's Annual
Report on Form 10-K)
On June 29, 1999, the district court entered final orders approving the
settlement reached between the County and the remaining broker-dealer
defendants. This settlement finally resolves all of the County's claims against
the Company.
Bamaodah v. E.F. Hutton & Company Inc. (Reported in LBI's Annual Report on
Form 10-K)
The hearing scheduled for April, 1999 has been adjourned to October,
1999.
Actions Relating to National Association of Securities Dealers Automated
Quotations System ("NASDAQ") Market Maker Antitrust and Securities Litigation
(Reported in LBI's Annual Report on Form 10-K)
Two appeals from the Final Judgment and Order of Dismissal were filed.
One was withdrawn. The other was dismissed by the Second Circuit Court of
Appeals on July 8, 1999.
<PAGE>
Easton & Co. v. Mutual Benefit Life Insurance Co., et al., Easton & Co. v.
Lehman Brothers Inc. (Reported In LBI's Annual Report on Form 10-K)
On May 25, 1999, the Court signed an Order and Final Judgment approving
the settlements reached in these two consolidated class actions.
Corporacion Nacional del Cobre de Chile v. Lehman Brothers Inc., Lehman Brothers
Commercial Corp., Lehman Brothers Commodities Ltd. and Lehman Brothers Holdings
Inc.
On April 29, 1999, Corporacion Nacional del Cobre de Chile ("Codelco")
filed an Amended Statement of Claim against LBI and certain of its affiliates in
a proceeding before the American Arbitration Association. In connection with the
metals trading conducted by Codelco's chief metals trader, Juan Pablo Davila,
the Amended Statement of Claim asserts the following claims against Lehman
Brothers: common law fraud, aiding and abetting fraud, breach of fiduciary duty,
aiding and abetting a breach of fiduciary duty, breach of contract, and breach
of duty of good faith and fair dealing. The Amended Statement of Claim seeks
damages in the amount of $48 million for Codelco's alleged trading losses with
Lehman Brothers, additional amounts to be determined by the arbitrators for
Codelco's losses with other brokers allegedly caused by Lehman's misconduct,
plus punitive damages and attorneys' fees.
<PAGE>
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:
12.1 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: July 15, 1999 By: /s/ David Goldfarb
-----------------------------------
Chief Financial Officer
(Principal Financial Officer)
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
Exhibit 12.1 Computation in Support of Ratio of Earnings to Fixed Charges
Exhibit 27 Financial Data Schedule
<PAGE>
Exhibit 12.1
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 For the For the
Eleven Twelve Twelve Twelve Twelve Six
Months Months Ended Months Ended Months Ended Months Ended Months Ended
Ended November 30 November 30 November 30 November 30 May 31
November 30 1995 1996 1997 1998 1999
1994
------------ ------------- ------------- -------------- ------------- -------------
Fixed Charges:
Interest expense:
<S> <C> <C> <C> <C> <C> <C>
Subordinated indebtedness $ 184 $ 204 $ 221 $ 236 $ 239 $ 145
Bank loans and other
borrowings* 5,661 9,750 9,900 11,980 14,491 6,303
Interest component of rentals
of office and equipment 27 25 18 16 16 8
Other adjustments** 53 2 7 3 4
============ ============= ============= ============== ============= =============
TOTAL (A) $5,925 $9,981 $10,146 $12,235 $14,750 $6,456
============ ============= ============= ============== ============= =============
Earnings:
Pretax income (loss) from
continuing operations $ 1 $ 78 $ 309 $ 593 $ 847 $ 442
Fixed charges 5,925 9,981 10,146 12,235 14,750 6,456
Other adjustments*** (52) (1) (6) (2) (4)
============ ============= ============= ============== ============= =============
TOTAL (B) $5,874 $10,058 $10,449 $12,826 $15,593 $6,898
============ ============= ============= ============== ============= =============
(B/A) **** 1.01 1.03 1.05 1.06 1.07
</TABLE>
* Includes amortization of long-term debt discount.
** Other adjustments include capitalized interest and debt issuance costs
and amortization of capitalized interest.
*** 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 and debt issuance costs and
undistributed net income of affiliates accounted for at equity.
**** Earnings were inadequate to cover fixed charges and would have had to
increase approximately $51 million in 1994 in order to cover
deficiencies.
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Consolidated Statement of Financial Condition at May 31, 1999
(Unaudited) and the Consolidated Statement of Income for the six months ended
May 31, 1999 (Unaudited) and is qualified in its entirety by reference to such
financial statements. Amounts are in millions, except for e.p.s amounts.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> MAY-31-1999
<CASH> 1,222
<RECEIVABLES> 10,268
<SECURITIES-RESALE> 63,864
<SECURITIES-BORROWED> 19,566
<INSTRUMENTS-OWNED> 52,183
<PP&E> 272
<TOTAL-ASSETS> 147,680
<SHORT-TERM> 570
<PAYABLES> 8,750
<REPOS-SOLD> 78,520
<SECURITIES-LOANED> 16,613
<INSTRUMENTS-SOLD> 21,650
<LONG-TERM> 4,099
0
0
<COMMON> 0
<OTHER-SE> 2,796
<TOTAL-LIABILITY-AND-EQUITY> 147,680
<TRADING-REVENUE> 551
<INTEREST-DIVIDENDS> 6,660
<COMMISSIONS> 236
<INVESTMENT-BANKING-REVENUES> 586
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 6,448
<COMPENSATION> 810
<INCOME-PRETAX> 442
<INCOME-PRE-EXTRAORDINARY> 313
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 313
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
