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, 2000
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 1-9466
Lehman Brothers Inc.
(Exact Name of Registrant As Specified In Its Charter)
Delaware 13-2518466
State or other jurisdiction of incorporation I.R.S. Employer Identification No
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 ______
The Registrant meets the conditions set forth in General Instructions H(1) (a)
and (b) of Form 10-Q and therefore is filing this form with the reduced
disclosure format contemplated thereby.
As of June 30, 2000, 1,006 shares of the Registrant's Common Stock, par value
$0.10 per share, were outstanding.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MAY 31, 2000
INDEX
Part I. FINANCIAL INFORMATION Page
Number
Item 1. Financial Statements - (unaudited)
Consolidated Statement of Income -
Three and Six Months Ended
May 31, 2000 and May 31, 1999..........................3
Consolidated Statement of Financial Condition -
May 31, 2000 and November 30, 1999.....................5
Consolidated Statement of Cash Flows -
Six Months Ended
May 31, 2000 and May 31, 1999..........................7
Notes to Consolidated Financial Statements............ 8
Item 2. Management's Analysis of the Results of Operations... 15
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.................................... 22
Item 6. Exhibits and Reports on Form 8-K..................... 24
Signature ............................................................... 25
EXHIBIT INDEX 26
Exhibits
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of INCOME
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Three months ended
-------------------------------------
May 31 May 31
2000 1999
---------------- ----------------
Revenues
<S> <C> <C>
Principal transactions $ 274 $ 240
Investment banking 349 300
Commissions 160 125
Interest and dividends 4,288 3,425
Other 16 3
---------------- ----------------
Total revenues 5,087 4,093
Interest expense 4,185 3,272
---------------- ----------------
Net revenues 902 821
---------------- ----------------
Non-interest expenses
Compensation and benefits 471 434
Brokerage and clearance 50 48
Technology and communications 46 41
Management fees 29 23
Business development 30 22
Professional fees 21 13
Occupancy 14 9
Other 10 13
---------------- ----------------
Total non-interest expenses 671 603
---------------- ----------------
Income before taxes 231 218
Provision for income taxes 69 62
---------------- ----------------
Net income $ 162 $ 156
================ ================
</TABLE>
See notes to consolidated financial
statements.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of INCOME
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Six months ended
-------------------------------------
May 31 May 31
2000 1999
---------------- ----------------
Revenues
<S> <C> <C>
Principal transactions $ 926 $ 581
Investment banking 797 556
Commissions 327 236
Interest and dividends 8,053 6,660
Other 27 9
---------------- ----------------
Total revenues 10,130 8,042
Interest expense 7,889 6,448
---------------- ----------------
Net revenues 2,241 1,594
---------------- ----------------
Non-interest expenses
Compensation and benefits 1,167 810
Brokerage and clearance 100 98
Technology and communications 91 79
Management fees 79 57
Business development 52 41
Professional fees 40 22
Occupancy 27 18
Other 24 27
---------------- ----------------
Total non-interest expenses 1,580 1,152
---------------- ----------------
Income before taxes 661 442
Provision for income taxes 227 129
---------------- ----------------
Net income $ 434 $ 313
================ ================
</TABLE>
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
2000 1999
------------------ ------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 294 $ 1,384
Cash and securities segregated and on deposit for regulatory
and other purposes 2,215 1,434
Securities and other financial instruments owned:
Governments and agencies 20,355 21,603
Corporate equities 15,309 9,144
Mortgages and mortgage-backed 8,644 8,457
Derivatives and other contractual agreements 5,638 5,249
Corporate debt and other 5,216 5,331
Certificates of deposit and other money market instruments 2,311 2,123
------------------ ------------------
57,473 51,907
------------------ ------------------
Collateralized short-term agreements:
Securities purchased under agreements to resell 81,974 61,365
Securities borrowed 25,454 11,243
Receivables:
Brokers, dealers and clearing organizations 1,995 2,346
Customers 4,651 2,922
Others 5,538 5,920
Property, equipment and leasehold improvements (net of
accumulated depreciation and amortization of $601 in 2000
and $588 in 1999) 278 280
Other assets 320 261
Excess of cost over fair value of net assets acquired (net of accumulated
amortization of $118 in 2000 and $115 in 1999) 117 120
------------------ ------------------
Total Assets $ 180,309 $ 139,182
================== ==================
</TABLE>
See notes to consolidated financial
statements.
1
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of FINANCIAL CONDITION - (Continued)
(Unaudited)
(In millions, except share data)
<TABLE>
<CAPTION>
May 31 November 30
2000 1999
-------------- ----------------
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C>
Commercial paper and short-term debt $ 1,014 $ 615
Securities and other financial instruments sold but not yet purchased:
Governments and agencies 16,484 10,237
Corporate equities 2,428 3,207
Derivatives and other contractual agreements 3,812 3,985
Corporate debt and other 2,087 1,218
-------------- ----------------
24,811 18,647
-------------- ----------------
Collateralized short-term financing:
Securities sold under agreements to repurchase 93,758 76,587
Securities loaned 27,350 9,809
Advances from Holdings and other affiliates 15,490 16,118
Payables:
Brokers, dealers and clearing organizations 3,666 2,485
Customers 4,998 5,535
Accrued liabilities and other payables 1,778 2,324
Long-term debt:
Senior notes 196 186
Subordinated indebtedness 3,777 3,773
-------------- ----------------
Total liabilities 176,838 136,079
</TABLE>
<TABLE>
<CAPTION>
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;
<S> <C> <C>
1,006 shares issued and outstanding
Additional paid-in capital 1,684 1,684
Accumulated other comprehensive income (net of tax) 1 2
Retained earnings 1,786 1,417
----------------
--------------
Total stockholder's equity 3,471 3,103
-------------- ----------------
Total liabilities and stockholder's equity $ 180,309 $ 139,182
</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
2000 1999
----------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 434 $ 313
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 19 17
Provisions for losses and other reserves 13 16
Other adjustments 14 20
Net change in:
Cash and securities segregated (781) 117
Securities and other financial instruments owned (5,566) (6,238)
Securities borrowed (14,211) (4,806)
Receivables from brokers, dealers and clearing organizations 351 671
Receivables from customers (1,729) (108)
Securities and other financial instruments sold but not yet purchased 6,164 2,617
Securities loaned 17,541 11,139
Payables to brokers, dealers and clearing organizations 1,181 597
Payables to customers (537) (133)
Accrued liabilities and other payables (559) (168)
Other operating assets and liabilities, net 321 (666)
----------------- ----------------
Net cash provided by operating activities $ 2,655 $ 3,388
----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments for subordinated indebtness (199)
Net proceeds from commercial paper and short-term debt 399 (46)
Resale agreements net of repurchase agreements (3,438) 3,664
Decrease in advances from Holdings and other affiliates (628) (6,878)
Dividends paid (65) (45)
---------------- ----------------
Net cash used in financing activities (3,732) (3,504)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold improvements (13) (14)
---------------- ----------------
Net cash used in investing activities (13) (14)
---------------- ----------------
Net change in cash and cash equivalents (1,090) (130)
---------------- ----------------
Cash and cash equivalents, beginning of period 1,384 460
---------------- ----------------
Cash and cash equivalents, end of period $ 294 $ 330
================ ================
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)
Interest paid totaled $7,883 and $6,443 for the six months ended May 31, 2000
and May 31, 1999, respectively. Income taxes paid/(received)totaled $413 and
$(3) for the six months ended May 31, 2000 and May 31, 1999, 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, 1999 (the "Form 10-K"). The Consolidated Statement of Financial Condition at
November 30, 1999 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. Capital Requirements:
The Company operates globally through a network of subsidiaries, with several
being subject to regulatory requirements. In the United States, LBI, as a
registered broker-dealer, 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, 2000, LBI's regulatory net capital, as defined, of $1,281
million exceeded the minimum requirement by $1,152 million.
In addition, 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, 2000, LBFP and LBDP each had
capital which exceeded the requirement of the most stringent rating agency by
approximately $61 million and $25 million, respectively. 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 covenants governing the indebtedness of LBI contractually
limit its ability to pay dividends.
<PAGE>
3. 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>
<TABLE>
<CAPTION>
Average Fair Value*
Fair Value* Six Months Ended
May 31, 2000 May 31, 2000
--------------------------------- ----------------------------------
(in millions) Assets Liabilities Assets Liabilities
-------------------------------------------------------- -------------- -- --------------- -------------- --- ---------------
<S> <C> <C> <C> <C>
Interest rate and currency swaps and options
(including caps, collars and floors) $ 4,244 $ 2,557 $ 4,082 $ 2,697
Foreign exchange forward contracts and
options 517 289 490 310
Other fixed income securities contracts
(including options and TBAs) 337 344 610 503
Equity contracts (including equity swaps,
warrants and options) 540 622 798 646
-------------- -- --------------- -------------- --- ---------------
Total $ 5,638 $ 3,812 $ 5,980 $ 4,156
-------------- -- --------------- -------------- --- ---------------
Average Fair Value*
Fair Value* Twelve Months Ended
November 30, 1999 November 30, 1999
---------------------------------- ---------------------------------
(in millions) Assets Liabilities Assets Liabilities
-------------------------------------------------------- -------------- -- ---------------- --------------- - ---------------
Interest rate and currency swaps and options
(including caps, collars and floors) $ 3,409 $ 2,738 $ 3,620 $ 2,388
Foreign exchange forward contracts and
options 650 424 678 582
Other fixed income securities
contracts (including options and TBAs) 256 192 243 232
Equity contracts (including equity swaps,
warrants and options) 934 631 459 406
Commodity contracts (including swaps,
forwards and options) 3 1
-------------- -- ---------------- --------------- - ---------------
Total $ 5,249 $ 3,985 $ 5,003 $ 3,609
-------------- -- ---------------- --------------- - ---------------
</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 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, 2000 represents the Company's net receivable/payable for derivative
financial instruments before consideration of collateral. Included within the
$5,638 million fair value of assets at May 31, 2000 was $5,188 million related
to swaps and other OTC contracts and $450 million related to exchange-traded
option and warrant contracts. Included within the $5,249 million fair value of
assets at November 30, 1999 was $4,489 million related to swaps and other OTC
contracts and $760 million related to exchange-traded option and warrant
contracts.
<PAGE>
With respect to OTC contracts, including swaps, the Company views its net credit
exposure to be $3,152 million at May 31, 2000, representing the fair value of
the Company's OTC contracts in an unrealized gain position, after
consideration of amounts due from affiliates of $1,664 million and collateral of
$372 million.
Presented below is an analysis of the Company's net credit exposure at May
31, 2000 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.
<TABLE>
<CAPTION>
Counterparty S&P/Moody's Net Credit
Risk Rating Equivalent Exposure
----------- ---------- --------
<S> <C> <C> <C>
1 AAA/Aaa 14%
2 AA-/Aa3 or higher 29%
3 A-/A3 or higher 37%
4 BBB-/Baa3 or higher 16%
5 BB-/Ba3 or higher 3%
6 B+/B1 or lower 1%
</TABLE>
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 8 to the Consolidated Financial Statements, included in the Form 10-K.
4. Other Commitments and Contingencies:
In connection with its financing activities, the Company had outstanding
commitments under certain lending arrangements of approximately $2.0 billion at
May 31, 2000 and $4.2 billion at November 30, 1999. 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 grade and high yield sales, trading and
underwriting activities, makes commitments to extend credit in loan syndication
transactions and then participates out a significant portion of these
commitments. The Company had lending commitments to high grade borrowers of $3.2
billion and $2.8 billion at May 31, 2000 and November 30, 1999, respectively.
The Company has since arranged for third parties to purchase a majority of these
commitments in the event they are funded. In addition, lending commitments to
high yield borrowers
<PAGE>
totaled $821 million and $903 million at May 31, 2000 and November 30, 1999,
respectively. All of these commitments and any related draw-downs of these
facilities are typically secured against the borrowers'assets, have fixed
maturity dates and are generally contingent upon certain representations,
warranties and contractual conditions applicable to 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.
At May 31, 2000 and November 30, 1999, the Company had commitments to invest up
to $375 million and $302 million, respectively, directly and through
partnerships, in private equity-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 $300 million at both May 31, 2000 and November 30,
1999, respectively.
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 throughout the Company to monitor and
manage these risks on a global basis. For further discussion of these matters,
refer to Note 10 to the Consolidated Financial Statements, in the Form 10-K.
5. Segments:
The Company operates in three business segments: Investment Banking, Capital
Markets, and Other.
The Investment Banking Division provides advice to corporate, institutional and
government clients throughout the world on mergers, acquisitions, and other
financial matters. The Division also raises capital for clients by underwriting
public and private offerings of debt and equity securities.
The Capital Markets Division includes the Company's sales, trading, research and
financing activities in equity and fixed income cash and derivatives products.
Through the Division, the
<PAGE>
Company is a global market-maker in numerous equity and fixed income products,
including U.S. and European equities, government and agency securities, money
market products, corporate high grade, high yield securities, mortgage- and
asset-backed securities, municipal securities, bank loans, foreign exchange and
derivatives products. The Division also includes the Company's risk arbitrage
and secured financing businesses. The financing business manages the Company's
equity and fixed income matched book activities, supplies secured financing to
institutional and high-net-worth clients and customers, and provides secured
funding for the Company's inventory of equity and fixed income products.
Other consists of the Company's asset management and private equity businesses,
neither of which represents more than 10% of the Company's consolidated net
revenues, earnings before taxes or assets.
The Company's segment information for the three months and six months ended May
31, 2000 and May 31, 1999 is presented below.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------------- ------------------------------------
May 31 May 31 May 31 May 31
2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Investment Banking:
Net Revenue $ 348 $ 296 $ 796 $ 553
================ ================ ================ ================
Earnings before taxes $ 100 $ 115 $ 225 $ 193
================ ================ ================ ================
Segment assets (billions) $ .2 $ .1 $ .2 $ .1
================ ================ ================ ================
Capital Markets:
Net Revenue $ 544 $ 519 $ 1,427 $ 1,033
================ ================ ================ ================
Earnings before taxes $ 132 $ 105 $ 441 $ 253
================ ================ ================ ================
Segment assets (billions) $ 176.9 $ 145.8 $ 176.9 $ 145.8
================ ================ ================ ================
Other:
Net Revenue $ 10 $ 6 $ 18 $ 8
================ ================ ================ ================
Earnings before taxes $ (1) $ (2) $ (5) $ (4)
================ ================ ================ ================
Segment assets (billions) $ 3.2 $ 1.8 $ 3.2 $ 1.8
================ ================ ================ ================
Total:
Net Revenue $ 902 $ 821 $ 2,241 $ 1,594
================ ================ ================ ================
Earnings before taxes $ 231 $ 218 $ 661 $ 442
================ ================ ================ ================
Segment assets (billions) $ 180.3 $ 147.7 $ 180.3 $ 147.7
================ ================ ================ ================
</TABLE>
<PAGE>
The following are net revenues by geographic region:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------------ ------------------------------------------
May 31 May 31 May 31 May 31
2000 1999 2000 1999
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Americas* $ 779 $ 754 $ 1,977 $ 1,418
Europe 66 33 162 130
Asia Pacific 57 34 102 46
------------------- ------------------- ------------------- -------------------
Total $ 902 $ 821 $ 2,241 $ 1,594
=================== =================== =================== ===================
</TABLE>
* Includes non-U.S. revenues of $6.8 million and $3.7 million for the three
months ended May 31, 2000 and May 31, 1999 respectively, and includes non-U.S.
revenues of $19.5 million and $7.5 million for the six months ended May 31, 2000
and May 31, 1999, respectively.
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, 2000, the Company paid dividends to Holdings
of $65 million.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S ANALYSIS of RESULTS of OPERATIONS
Results of Operations
For the Three Months Ended May 31, 2000 and May 31, 1999
The Company reported net income of $162 million for the second quarter ended May
31, 2000, compared to $156 million for the second quarter ended May 31, 1999.
Net revenues increased 10% in the second quarter of 2000 to $902 million from
$821 million in the second quarter of 1999. The increase in net revenues was
achieved despite challenging market conditions in the second quarter of 2000
compared to the prior period.
The Company's results have been segregated into three business segments:
Investment Banking, Capital Markets and Other. Each segment represents a group
of activities and products with similar characteristics. These business
activities result in revenues from both institutional clients as well as
high-net worth retail clients and are recognized within the different revenue
categories in the Company's Consolidated Statement of Income. Net revenues by
segment contain certain internal allocations, including funding costs, which are
centrally managed.
Three Months Ended May 31, 2000 and May 31, 1999
(in millions)
Three Months Ended
----------------------------------
May 31 May 31
2000 1999
--------------- ---------------
Investment Banking $ 348 $ 296
Capital Markets 544 519
Other 10 6
--------------- ---------------
Total $ 902 $ 821
=============== ===============
---------------------------------------------------- -- --------------- --
The following discussion provides an analysis of the Company's net revenues for
the periods above.
Investment Banking This segment's net revenues result from fees earned by the
Company for underwriting public and private offerings of fixed income and equity
securities, raising capital and advising clients on merger and acquisition
activities and other services. Investment Banking's net revenues increased 18%
to $348 million for the second quarter of 2000 from $296 million in the prior
period. This increase was principally as a result of an increase in equity
underwriting activities partially offset by a decrease in debt underwriting
revenues.
Equity underwriting revenues increased 70% to $143 million in the second quarter
of 2000 from $84 million in the second quarter of 1999, despite a slowdown in
the latter half of the quarter resulting from the market corrections in
mid-April. The increase was attributed to significant issuances in the
communications/media and technology sectors. Debt underwriting revenues
decreased 12% from the second quarter of 1999. Wider credit spreads, higher
interest rates and
<PAGE>
an uneasiness over the future direction of interest rates
forced fixed income investors and issuers to the sidelines
and led to lower new issue volume in the fixed income
sector. Financial advisory revenues increased 11% in
the second quarter of 2000 compared to the second quarter of
1999 as a result of increased merger and acquisition activity earlier
in the quarter.
Investment Banking Net Revenues
(in millions) Three Months Ended
May 31 May 31
2000 1999
---------------------- --------------- --------------
Equity Underwriting $ 143 $ 84
Debt Underwriting 114 130
Financial Advisory 91 82
---------------------- --------------- --------------
$ 348 $ 296
---------------------- --------------- --------------
Capital Markets This segment's net revenues reflect institutional and private
client flow activities and secondary trading and financing activities related to
a broad spectrum of fixed income and equity products. These products include
dollar and non-dollar government securities, mortgages, mortgage- and
asset-backed securities, money market products, dollar and non-dollar corporate
debt securities, municipal securities, foreign exchange, fixed income and equity
related derivatives, convertible securities and common and preferred equity
securities.
Net revenues from the equity component of Capital Markets decreased 28% to $187
million in the second quarter of 2000 from $261 million in the second quarter of
1999 primarily as a result of lower risk arbitrage revenues compared to a very
strong 1999 second quarter and marked-to-market losses on certain private equity
investments.
Capital Markets Net Revenues
------------------ ---------------------------------
(in millions) Three Months Ended
May 31 May 31
2000 1999
------------------ --------------- -----------------
Equities $ 187 $ 261
Fixed Income 357 258
------------------ --------------- -----------------
$ 544 $ 519
------------------ --------------- -----------------
Net revenues from the fixed income component of Capital Markets increased 38% to
$357 million in the second quarter of 2000 from $258 million in the first
quarter of 1999. This increase is primarily attributable to strong performances
in governments and foreign exchange products.
Other Other revenues reflect earnings from the Company's asset management and
private equity businesses. Other revenues were $10 million in the second quarter
of 2000 from $6 million in the second quarter of 1999.
Non-Interest Expenses Non-interest expenses were $671 million for the second
quarter of 2000 and $603 million for the second quarter of 1999. Compensation
and benefits expense as a percentage of net revenues increased to 52.2% for the
quarter compared to the prior year's ratio of 52.9%. Nonpersonnel expenses
were $200 million for the second quarter of 2000 and $169 million for the second
quarter of 1999, an increase of 18% that reflected the impact of the Company's
growth plan. Increases in recruiting (professional fees), business
development and technology spending were consistent with the Company's planned
growth and also supported the continued build-out of the Company's
technology and e-commerce platforms.
<PAGE>
Income Taxes The Company's income tax provision was $69 million for the second
quarter of 2000 compared to $62 million for the second quarter of 1999. The
effective tax rate was 29.9% for the second quarter of 2000 and 28.4% for the
second quarter of 1999. The higher tax rate reflected the overall increase in
the level of pre-tax income, which lessened the relative impact of certain tax
preference revenues, partially offset by a more favorable geographic mix of
earnings.
<PAGE>
Results of Operations
For the Six Months Ended May 31, 2000 and May 31, 1999
The Company reported record net income of $434 million for the six months ended
May 31, 2000, representing an increase of 39% from net income of $313 million
for the six months ended May 31, 1999.
Net Revenues increased to $2,241 million or 41% for the six months of 2000 from
$1,594 million for the six months of 1999. The Company's emphasis on high margin
businesses supported an increase in the Company's operating margin to 29.5% in
the first half of 2000 from 27.7% in the prior period.
Revenues in each of the Company's three segments grew by over 38% over the first
six months of the prior year. Non-personnel expenses increased only 21% in the
first half of 2000, despite a 41% increase in net revenues from first half of
1999.
Six Months Ended May 31, 2000 and May 31, 1999
-------------------------------------------------------------------------------
(in millions)
Six Months Ended
--------------------------------
May 31 May 31
2000 1999
-------------- ---------------
Investment Banking $ 796 $ 553
Capital Markets 1,427 1,033
Other 18 8
-------------- ---------------
Total $ 2,241 $ 1,594
============== ===============
-------------------------------------------- - --------------- ---
The following discussion provides an analysis of the Company's net revenues for
the periods above.
Investment Banking Investment Banking's net revenues increased 44% to $796
million in the six months of 2000 from $553 million in the prior period. The
increase was principally a result of a significant increase in equity
underwriting and financial advisory revenues partially offset by difficult
conditions in the debt underwriting market. Equity underwriting revenues
increased 153% to $327 million in the six months of 2000 from $129 million in
the prior year. The results in equity underwriting were driven by issuances in
the communications/media and technology sector and a significant increase in
convertible offerings.
<PAGE>
Debt underwriting revenues decreased 7% to $242 million in
the six months of 2000 from $260 million in the six months of
1999. The decrease resulted from challenging market
conditions as rising interest rates led to decreased underwriting
volume. Financial advisory revenues increased 38% to $227
million in the six months of 2000 from $164 million in the
prior year's period. This increase was primarily attributable
to a robust merger and acquisition environment earlier in the
year.
Investment Banking Net Revenues
(in millions) Six Months Ended
May 31 May 31
2000 1999
---------------------- --------------- ---------------
Equity Underwriting $ 327 $ 129
Debt Underwriting 242 260
Financial Advisory 227 164
---------------------- --------------- ---------------
$ 796 $ 553
---------------------- --------------- ---------------
Capital Markets This segment's net revenues reflect institutional and private
client flow activities and secondary trading and financing activities related to
a broad spectrum of fixed income and equity products. These products include
dollar and non-dollar government securities, mortgages, mortgage- and
asset-backed securities, money market products, dollar and non-dollar corporate
debt securities, municipal securities, foreign exchange, fixed income and equity
related derivatives, convertible securities and common and preferred equity
securities.
Net revenues from the equity component of Capital Markets doubled to $803
million in the first half of 2000 from $400 million in the comparable 1999
period. Revenues benefited from significantly increased institutional customer
flow activity in cash products where commission levels grew approximately 40%
from the same period last year.
Net revenues from the fixed income component of Capital Markets decreased
slightly to $624 million in the first half of 2000 from $633 million in the
comparable period last year. This was a result of challenging market conditions
overall and the Y2K induced slowdown in the first quarter of 2000, offset by
strong performances in government and foreign exchange products in the second
quarter of 2000.
Capital Markets Net Revenues
----------------- ---------------------------------
(in millions) Six Months Ended
May 31 May 31
2000 1999
----------------- --------------- -----------------
Equities $ 803 $ 400
Fixed Income 624 633
----------------- --------------- -----------------
$ 1,427 $ 1,033
----------------- --------------- -----------------
Other Other revenues reflect earnings from the Company's asset management and
private equity businesses. Other revenues were $18 million in the second quarter
of 2000 from $8 million in the second quarter of 1999.
Non-Interest Expenses Non-interest expenses were $1,580 million for the six
months of 2000 and $1,152 million for the comparable period in 1999.
Compensation and benefits expense as a percentage of net revenues increased to
52.1% for the six months of 2000 compared to 50.8% in the six months of 1999.
This increase reflects the Company's continued expansion of its investment
banking and equities franchise as well as its investments in technology and
e-commerce capabilities. Nonpersonnel expenses were $413 million for the six
months of 2000
<PAGE>
and $342 million for the six months of 1999, an increase of 21% that reflected
the impact of the Company's strategic growth plan.
Income Taxes The Company's income tax provision was $227 million for the six
months of 2000 compared to $129 million for the six months of 1999. The
effective tax rate was 34.3% for the first half of 2000 and 29.2% for prior
year's period. The increase reflected the overall increase in the level of
pre-tax income, which lessened the relative impact of certain tax preference
revenues, partially offset by more favorable geographic mix of earnings.
<PAGE>
New Accounting Developments
In September 1999, the FASB issued an Exposure Draft, "Business Combinations and
Intangible Assets." The proposal would eliminate the use of the
pooling-of-interests method and require that all business combinations be
accounted for using the purchase method. The Exposure Draft would also require
goodwill arising from the application of the purchase method to be written off
over a maximum 20-year amortization period, which is shorter than the current
40-year period. The provisions of the Exposure Draft related to business
combinations are expected to be applied only for those business combinations
initiated after the issuance of a final statement, projected to be late in 2000.
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 result 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 SUSBSIDIARIES
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, and 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.
Bamaodah v. E.F. Hutton & Company Inc. (Reported in LBI's 1999 Annual Report on
Form 10-K)
On April 23, 2000, the Court of Cassation issued its final
judgment awarding the Bamaodahs $2,923,000 plus interest.
Actions Relating to First Capital Holdings Inc.
The Virginia Commissioner of Insurance Action. (Reported in LBI's 1999
Annual Report on Form 10-K)
On June 30, 2000, the United States Court of Appeals for the
Fourth Circuit affirmed the Judgment Order entered by the Virginia
Court dismissing the complaint.
Actions Relating to Bre-X Minerals Ltd.
McNamara et al. v. Bre-X Minerals Ltd et al. (Reported in LBI's 1999
Annual Report on Form 10-K)
While defendants' motion to dismiss was pending, the plaintiffs
obtained leave from the Court to file a Fourth Amended Complaint, which
was filed on June 14, 2000.
<PAGE>
LEHMAN BROTHERS INC. and SUSBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings - continued
Klassen v. Lehman Brothers Inc. (Reported in LBI's 1999 Annual Report
on Form 10-K)
The action was dismissed without prejudice to plaintiffs'
right to refile it nunc pro tunc to the date of its dismissal on
January 12, 1999.
Bowser v. First Alliance Mortgage Company, et al.
On May 1, 2000, a purported class action complaint was filed in the
United States Bankruptcy Court in the Central District of California in the
bankruptcy of First Alliance Mortgage Company and its parent and affiliate
companies (the "Debtors"). The complaint names the Debtors and Holdings as
defendants. As to Holdings, the complaint alleges common law fraud. This claim
against Holdings and the other defendants is based on alleged misrepresentations
or omissions of material facts in connection with consumer loan transactions
entered into by all persons, during the four years prior to the filing of the
complaint, who entered into mortgage loans with Debtors. The complaint's stated
basis for naming Holdings is that its affiliates are alleged to have provided
financing to Debtors, to have underwritten the securitization of their mortgage
loans, to hold a warrant for one percent of First Alliance shares and to have
approved of or acquiesced in First Alliance's purported fraudulent lending
practices. The plaintiffs seek class certification and unspecified compensatory
and punitive damages as to the claims against Holdings.
<PAGE>
LEHMAN BROTHERS INC. and SUSBSIDIARIES
PART II - OTHER INFORMATION
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>
SIGNATURE
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 17, 2000 By: /s/ David Goldfarb
------------------------------------------------
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
Exhibit 12 Computation in Support of Ratio of Earnings to Fixed
Charges and Combined Fixed Charges
and Preferred Dividends
Exhibit 27 Financial Data Schedule
<PAGE>
Exhibit 12
LEHMAN BROTHERS INC. and SUBSIDIARIES
COMPUTATION of RATIOS of EARNINGS to FIXED CHARGES
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
For the For the For the For the For the For the
Twelve Twelve Twelve Twelve Twelve Six
Months Months Months Months Months Months Ended
Ended Ended Ended Ended Ended May 31
November 30 November 30 November 30 November 30 November 30 2000
1995 1996 1997 1998 1999
------------- ------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Pre-tax earnings from continuing
operations $ 78 $ 309 $ 593 $ 847 $ 1,013 $ 661
Add: Fixed charges (excluding
capitalized interest) 9,980 10,140 12,233 14,746 12,552 7,897
------------- ------------- ------------- -------------- ------------- -------------
Pre-tax earnings before fixed
charges 10,058 10,449 12,826 15,593 13,565 8,558
============= ============= ============= ============== ============= =============
Fixed charges:
Interest 9,954 10,121 12,216 14,730 12,535 7,889
Other(a) 27 25 19 20 17 8
------------- ------------- ------------- -------------- ------------- -------------
Total fixed charges $ 9,981 $ 10,146 $ 12,235 $ 14,750 $ 12,552 $ 7,897
============= ============= ============= ============== ============= =============
RATIO OF EARNINGS TO FIXED
CHARGES 1.01 1.03 1.05 1.06 1.08 1.08
</TABLE>
(a) Other fixed charges consist of the interest factor in rentals and
capitalized interest.
<PAGE>
Exhibit 27
LEHMAN BROTHERS INC. and SUBSIDIARIES
This schedule contains summary financial information extracted from the
Company's Consolidated Statement of Financial Condition at May 31, 2000
(Unaudited) and the Consolidated Statement of Income for the six months ended
May 31, 2000 (Unaudited) and is qualified in its entirety by reference to such
financial statements.
1,000,000
