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 August 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 September 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 August 31, 2000
INDEX
Part I. FINANCIAL INFORMATION Page
Number
Item 1. Financial Statements - (unaudited)
Consolidated Statement of Income -
Three and Nine Months Ended
August 31, 2000 and August 31, 1999.............. 3
Consolidated Statement of Financial Condition -
August 31, 2000 and November 30, 1999............ 5
Consolidated Statement of Cash Flows -
Nine Months Ended
August 31, 2000 and August 31, 1999.............. 7
Notes to Consolidated Financial
Statements..........................................8
Item 2. Management's Analysis of Results of Operations.... 15
Part II. OTHER INFORMATION
Item 1. Legal Proceedings................................. 22
Item 6. Exhibits and Reports on Form 8-K.................. 25
Signature ............................................................ 26
EXHIBIT INDEX 27
Exhibits
2
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of INCOME
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Three months ended
-------------------------------------
August 31 August 31 1999
2000
---------------- ----------------
<S> <C> <C>
Revenues
Principal transactions $ 527 $ 297
Investment banking 446 350
Commissions 165 107
Interest and dividends 4,134 3,228
Other 10 3
---------------- ----------------
Total revenues 5,282 3,985
Interest expense 4,028 3,100
---------------- ----------------
Net revenues 1,254 885
---------------- ----------------
Non-interest expenses
Compensation and benefits 652 446
Brokerage and clearance 52 40
Technology and communications 46 41
Management fees (8) 86
Business development 29 22
Professional fees 21 18
Occupancy 16 10
Other 8 13
---------------- ----------------
Total non-interest expenses 816 676
---------------- ----------------
Income before taxes 438 209
Provision for income taxes 134 70
---------------- ----------------
Net income $ 304 $ 139
================ ================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of INCOME
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Nine months ended
-------------------------------------
August 31 August 31 1999
2000
---------------- ----------------
<S> <C> <C>
Revenues
Principal transactions $ 1,453 $ 878
Investment banking 1,244 906
Commissions 492 343
Interest and dividends 12,187 9,888
Other 37 12
---------------- ----------------
Total revenues 15,413 12,027
Interest expense 11,918 9,548
---------------- ----------------
Net revenues 3,495 2,479
---------------- ----------------
Non-interest expenses
Compensation and benefits 1,819 1,256
Brokerage and clearance 152 138
Technology and communications 137 120
Management fees 71 143
Business development 81 63
Professional fees 60 40
Occupancy 43 28
Other 32 40
---------------- ----------------
Total non-interest expenses 2,395 1,828
---------------- ----------------
Income before taxes 1,100 651
Provision for income taxes 362 199
---------------- ----------------
Net income $ 738 $ 452
================ ================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of FINANCIAL CONDITION
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
August 31 November 31 1999
2000
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 339 $ 1,384
Cash and securities segregated and on deposit for regulatory
and other purposes 2,389 1,434
Securities and other financial instruments owned:
Governments and agencies 24,111 21,603
Corporate equities 21,899 9,144
Mortgages and mortgage-backed 8,475 8,457
Derivatives and other contractual agreements 4,962 5,249
Corporate debt and other 5,815 5,331
Certificates of deposit and other money market instruments 2,281 2,123
------------------------------------
67,543 51,907
------------------------------------
Collateralized short-term agreements:
Securities purchased under agreements to resell 73,535 61,365
Securities borrowed 22,424 11,243
Receivables:
Brokers, dealers and clearing organizations 1,996 2,346
Customers 3,791 2,922
Others 7,592 5,920
Property, equipment and leasehold improvements (net of
accumulated depreciation and amortization of $537 in 2000
and $588 in 1999) 296 280
Other assets 276 261
Excess of cost over fair value of net assets acquired (net of
accumulated amortization of $120 in 2000 and $115 in 1999) 116 120
------------------------------------
Total Assets $ 180,297 $ 139,182
====================================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of FINANCIAL CONDITION - (Continued)
(Unaudited)
(In millions, except share data)
<TABLE>
<CAPTION>
August 31 November 31 1999
2000
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Commercial paper and short-term debt $ 836 $ 615
Securities and other financial instruments sold but not yet purchased:
Governments and agencies 16,411 10,237
Corporate equities 2,191 3,207
Derivatives and other contractual agreements 3,505 3,985
Corporate debt and other 2,434 1,218
-------------- -------------------
24,541 18,647
-------------- -------------------
Collateralized short-term financing:
Securities sold under agreements to repurchase 92,487 76,587
Securities loaned 26,165 9,809
Advances from Holdings and other affiliates 17,666 16,118
Payables:
Brokers, dealers and clearing organizations 2,211 2,485
Customers 6,306 5,535
Accrued liabilities and other payables 2,328 2,324
Long-term debt:
Senior notes 202 186
Subordinated indebtedness 3,780 3,773
-------------- -------------------
Total liabilities 176,522 136,079
-------------- -------------------
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 1,684 1,684
Accumulated other comprehensive income (net of tax) 1 2
Retained earnings 2,090 1,417
-------------- -------------------
Total stockholder's equity 3,775 3,103
-------------- -------------------
Total liabilities and stockholder's equity $ 180,297 $ 139,182
============== ===================
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of CASH FLOWS
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Nine months ended
--------------------------------------
August 31 August 31
2000 1999
----------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 738 $ 452
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 28 43
Provisions for losses and other reserves 17 24
Other adjustments 23 30
Net change in:
Cash and securities segregated (955) (92)
Securities and other financial instruments owned (15,636) (6,310)
Securities borrowed (11,181) (7,103)
Receivables from brokers, dealers and clearing organizations 350 (239)
Receivables from customers (869) 161
Securities and other financial instruments sold but not yet purchased 5,894 4,581
Securities loaned 16,356 10,971
Payables to brokers, dealers and clearing organizations (274) 13
Payables to customers 771 75
Accrued liabilities and other payables (13) 76
Other operating assets and liabilities, net (1,688) (2,078)
----------------- ----------------
Net cash provided by (used in) operating activities $ (6,439) $ 604
----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments of subordinated indebtedness (202)
Net proceeds from commercial paper and short-term debt 221 (44)
Resale agreements net of repurchase agreements 3,730 4,840
Advances from Holdings and other affiliates 1,548 (4,834)
Dividends paid (65) (46)
---------------- ----------------
Net cash provided by (used in) financing activities 5,434 (286)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold improvements (40) (20)
---------------- ----------------
Net cash used in investing activities (40) (20)
---------------- ----------------
Net change in cash and cash equivalents (1,045) 298
---------------- ----------------
Cash and cash equivalents, beginning of period 1,384 460
---------------- ----------------
Cash and cash equivalents, end of period $ 339 $ 758
================ ================
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)
Interest paid totaled $11,926 and $9,558 for the nine months ended August 31,
2000 and August 31, 1999, respectively. Income taxes paid totaled $412 and $3
for the nine months ended August 31, 2000 and August 31, 1999, respectively.
See notes to consolidated financial statements.
7
<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 August 31, 2000, LBI's regulatory net capital, as defined, of $1,828
million exceeded the minimum requirement by $1,689 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 August 31, 2000, LBFP and LBDP each had
capital which exceeded the requirement of the most stringent rating agency by
approximately $63 million and $26 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.
8
<PAGE>
LEHMAN BROTHERS INC and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
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.
9
<PAGE>
LEHMAN BROTHERS INC and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Average Fair Value*
Fair Value* Nine Months Ended
August 31, 2000 August 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) $ 3,564 $ 2,193 $ 3,923 $ 2,767
Foreign exchange forward contracts and
options 407 342 445 294
Other fixed income securities contracts
(including options and TBAs) 221 165 816 666
Equity contracts (including equity swaps,
warrants and options) 770 805 784 527
-------------- -- --------------- -------------- --- ---------------
Total $ 4,962 $ 3,505 $ 5,968 $ 4,254
-------------- -- --------------- -------------- --- ---------------
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 August 31, 2000 represents the Company's net receivable/payable for
derivative financial instruments before consideration of collateral. Included
within the $4,962 million fair value of assets at August 31, 2000 was $4,245
million related to swaps and other OTC contracts and $717 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.
10
<PAGE>
LEHMAN BROTHERS INC and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
With respect to OTC contracts, including swaps, the Company views its net
credit exposure to be $2,895 million at August 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 $990 million and collateral of
$360 million. Presented below is an analysis of the Company's net credit
exposure at August 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 15%
2 AA-/Aa3 or higher 29%
3 A-/A3 or higher 31%
4 BBB-/Baa3 or higher 20%
5 BB-/Ba3 or higher 3%
6 B+/B1 or lower 2%
</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 $2.6 billion at
August 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 $3.4
billion and $2.8 billion at August 31, 2000 and November 30, 1999,
11
<PAGE>
LEHMAN BROTHERS INC and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
respectively and has established a facility for third parties to purchase a
majority of these commitments when they are funded. In addition, lending
commitments to high yield borrowers totaled $732 million and $903 million at
August 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 August 31, 2000 and November 30, 1999, the Company had commitments to invest
up to $355 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 August 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.
12
<PAGE>
LEHMAN BROTHERS INC and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
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 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 as well as realized
and unrealized gains and losses related to the Company's direct private equity
investments. 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 nine months ended
August 31, 2000 and August 31, 1999 is presented below.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------------- ------------------------------------
August 31 August 31 August 31 August 31
2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Investment Banking:
Net Revenue $ 445 $ 361 $ 1,241 $ 913
================ ================ ================ ================
Earnings before taxes $ 174 $ 123 $ 400 $ 315
================
================ ================ ================
Segment assets (billions) $ 0.4 $ 0.4 $ 0.4 $ 0.4
================ ================ ================ ================
Capital Markets:
Net Revenue $ 801 $ 531 $ 2,228 $ 1,565
================ ================ ================ ================
Earnings before taxes $ 270 $ 101 $ 710 $ 358
================
================ ================ ================
Segment assets (billions) $ 176.5 $ 147.5 $ 176.5 $ 147.5
================ ================ ================ ================
Other:
Net Revenue $ 8 $ (7) $ 26 $ 1
================ ================ ================ ================
Earnings before taxes $ (6) $ (15) $ (10) $ (22)
================ ================ ================ ================
Segment assets (billions) $ 3.4 $ 2.3 $ 3.4 $ 2.3
================ ================ ================ ================
Total:
Net Revenue $ 1,254 $ 885 $ 3,495 $ 2,479
================ ================ ================ ================
Earnings before taxes $ 438 $ 209 $ 1,100 $ 651
================ ================ ================ ================
Segment assets (billions) $ 180.3 $ 150.2 $ 180.3 $ 150.2
================ ================ ================ ================
</TABLE>
13
<PAGE>
LEHMAN BROTHERS INC and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
The following are net revenues by geographic region:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------------------ ------------------------------------------
August 31 August 31 August 31 August 31
2000 1999 2000 1999
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Americas* $ 1,190 $ 825 $ 3,166 $ 2,244
Europe 31 57 193 186
Asia Pacific 33 3 136 49
------------------- ------------------- ------------------- -------------------
Total $ 1,254 $ 885 $ 3,495 $ 2,479
=================== =================== =================== ===================
</TABLE>
* Includes non-U.S. revenues of $7.9 million and $6.6 million for the three
months ended August 31, 2000 and August 31, 1999 respectively, and includes
non-U.S. revenues of $27.4 million and $14.1 million for the nine months ended
August 31, 2000 and August 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 nine months ended August 31, 2000, the Company paid dividends to
Holdings of $65 million.
14
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S ANALYSIS of RESULTS of OPERATIONS
Results of Operations
For the Three Months Ended August 31, 2000 and August 31, 1999
The Company reported net income of $304 million for the third quarter ended
August 31, 2000, compared to $139 million for the third quarter ended August 31,
1999.
Net revenues increased 42% in the third quarter of 2000 to $1,254 million from
$885 million in the third quarter of 1999. The increase in net revenues reflects
the continued execution of the Company's growth strategy into higher margin
businesses such as investment banking and equities.
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 August 31, 2000 and August 31, 1999
(in millions)
-----------------------------------------------------------------------------
Three Months Ended
----------------------------------
August 31 August 31
2000 1999
--------------- ---------------
Investment Banking $ 445 $ 361
Capital Markets 801 531
Other 8 (7)
--------------- ---------------
Total $ 1,254 $ 885
=============== ===============
15
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S ANALYSIS of RESULTS of OPERATIONS
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 23% to $445 million for the
third quarter of 2000 from $361
Investment Banking Net Revenues
---------------------- ------------------------------
(in millions) Three Months Ended
August 31 August 31
2000 1999
---------------------- --------------- --------------
Equity Underwriting $ 147 $ 71
Debt Underwriting 127 187
Financial Advisory 171 103
---------------------- --------------- --------------
$ 445 $ 361
---------------------- --------------- --------------
million in the prior period. This increase was principally as a result of an
increase in financial advisory and equity underwriting activities partially
offset by a decrease in debt underwriting activities.
Equity underwriting revenues increased 107% to $147 million in the third quarter
of 2000 from $71 million in the third quarter of 1999, as the markets recovered
from the April/May sell-off and deal flow remained strong through mid-August.
Debt underwriting revenues decreased 32% from the third quarter of 1999, as debt
underwriting volumes lagged 1999 levels due to continued nervousness surrounding
interest rates. High yield and mortgage backed products were particularly
impacted. However, debt underwriting revenue increased approximately 11% from
the second quarter of 2000, as market conditions started to become more
favorable.
Financial advisory revenues increased 66% in the third quarter of 2000 compared
to the third quarter of 1999. The Company's market share for completed M&A
transactions increased to 8.9% on a calendar year-to-date basis from 7.7% for
calendar year 1999.
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-
Capital Markets Net Revenues
------------------ ---------------------------------
(in millions) Three Months Ended
August 31 August 31
2000 1999
------------------ --------------- -----------------
Equities $ 471 $ 314
Fixed Income 330 217
------------------ --------------- -----------------
$ 801 $ 531
------------------ --------------- -----------------
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 increased 50% to $471
million in the third quarter of 2000 from $314 million in the third quarter of
1999 from continued strong institutional customer flow and trading volumes.
An unrealized gain of approximately $100
16
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S ANALYSIS of RESULTS of OPERATIONS
million from a direct investment in the Company's private equity portfolio
also significantly contributed to the increase.
Net revenues from the fixed income component of Capital Markets increased 52% to
$330 million in the third quarter of 2000 from $217 million in the third quarter
of 1999. Market conditions improved during the quarter as interest rate concerns
subsided and institutional flow increased across most fixed income products.
Other Other revenues reflect fees earned from the Company's asset management and
private equity businesses. Other revenues increased to $8 million in the third
quarter of 2000 from $(7) million in the third quarter of 1999.
Non-Interest Expenses Non-interest expenses were $816 million for the third
quarter of 2000 and $676 million for the third quarter of 1999. Compensation and
benefits expense as a percentage of net revenues increased to 52.0% for the
quarter compared to the prior year's ratio of 50.4%. Nonpersonnel expenses were
$164 million for the third quarter of 2000 and $230 million for the third
quarter of 1999, a decrease of 29%. The decrease was due to lower net management
fees paid from LBI to its affiliates. This reflects reduced affiliate activities
on behalf of LBI as well as increased Company activities on behalf of
affiliates, partially offset by the increased spending in LBI on personnel, real
estate and technology initiatives.
Income Taxes The Company's income tax provision was $134 million for the third
quarter of 2000 compared to $70 million for the third quarter of 1999. The
effective tax rate was 30.6% for the third quarter of 2000 and 33.5% for the
third quarter of 1999. 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.
17
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S ANALYSIS of RESULTS of OPERATIONS
Results of Operations
For the Nine Months Ended August 31, 2000 and August 31, 1999
The Company reported record net income of $738 million for the nine months ended
August 31, 2000, representing an increase of 63% from net income of $452 million
for the nine months ended August 31, 1999.
Net Revenues increased to $3,495 million or 41% for the nine months of 2000 from
$2,479 million for the nine months of 1999 reflecting the Company's continued
emphasis on high margin businesses.
Nine Months Ended August 31, 2000 and August 31, 1999
(in millions)
Nine Months Ended
---------------------------------
August 31 August 31
2000 1999
--------------- ---------------
Investment Banking $ 1,241 $ 913
Capital Markets 2,228 1,565
Other 26 1
--------------- ---------------
Total $ 3,495 $ 2,479
=============== ===============
-------------------------------------------------------------------------------
The following discussion provides an analysis of the Company's net revenues for
the periods above.
Investment Banking Investment Banking's net revenues increased 36% to $1,241
million in the nine months of 2000 from $913 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 140% to $479 Investment Banking Net Revenues million in the nine
months of 2000 from $200 million in the prior year. The results in equity
underwriting were driven by increased issuances in the communications/media
and technology sector and an increase in convertible
offerings.
Investment Banking Net Revenues
---------------------- -------------------------------
(in millions) Nine Months Ended
August 31 August 31
2000 1999
---------------------- --------------- ---------------
Equity Underwriting $ 479 $ 200
Debt Underwriting 361 447
Financial Advisory 401 266
---------------------- --------------- ---------------
$ 1,241 $ 913
---------------------- --------------- ---------------
Debt underwriting revenues decreased 19% to $361 million in the nine months of
2000 from $447 million in the nine months of 1999. The decrease resulted from
challenging market conditions as rising interest rates led to decreased
underwriting volume. Financial advisory revenues increased 51% to $401 million
in the nine months of 2000 from $266 million in the prior year's period as the
Company continued its expansion in the investment banking segment and the
overall M&A market remained robust.
18
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S ANALYSIS of RESULTS of OPERATIONS
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
Capital Markets Net Revenues
-------- ---------------------------------
(in millions) Nine Months Ended
August 31 August 31
2000 1999
----------------- --------------- -----------------
Equities $ 1,274 $ 715
Fixed Income 954 850
----------------- --------------- -----------------
$ 2,228 $ 1,565
----------------- --------------- -----------------
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 increased to $1,274
million in the nine months of 2000 from $714 million in the comparable 1999
period. Customer flow sales and trading volumes continued to increase at healthy
rates, significantly contributing to this increase.
Net revenues from the fixed income component of Capital Markets increased to
$954 million in the nine months of 2000 from $850 million in the comparable
period last year. This was a result of increased institutional flow across most
fixed income products.
Other Other revenues reflect fees earned from the Company's asset management and
private equity businesses.
Non-Interest Expenses Non-interest expenses were $2,395 million for the nine
months of 2000 and $1,828 million for the comparable period in 1999.
Compensation and benefits expense as a percentage of net revenues increased to
52.0% for the nine months of 2000 compared to 50.7% in the nine 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 increased to $576 million for the
nine months of 2000 from $572 million for the nine months of 1999.
Income Taxes The Company's income tax provision was $362 million for the nine
months of 2000 compared to $199 million for the nine months of 1999. The
effective tax rate was 32.9% for the nine months of 2000 and 30.6% for the 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.
19
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S ANALYSIS of RESULTS of OPERATIONS
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 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 in the first quarter of 2001.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), 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 133 by one year. In June 2000, the FASB
issued SFAS No. 138, which amended SFAS 133. The Company will adopt SFAS 133 as
amended on December 1, 2000 (Fiscal Year 2001).
SFAS 133 will not affect the accounting for Lehman's Trading-Related Derivative
Activities as such derivatives are already recognized on a mark-to-market basis
through earnings. Rather, SFAS 133 will affect the accounting for derivatives
utilized as hedging instruments as part of Lehman's end user activities. As an
end user, Lehman primarily utilizes derivatives to modify the interest rate
characteristics of its long-term debt and secured financing activities ("End
User Derivative Activities"). The Company currently accounts for its End-User
Derivative activities on an accrual basis provided that the derivative is deemed
a highly effective hedge. SFAS 133 generally will require Lehman to recognize
its end user derivatives at fair value through earnings, with an offset
recognized through earnings for changes in the fair value of the hedged item.
Any ineffectiveness in a hedging relationship generally will require immediate
earnings recognition. In addition to these changes, SFAS 133, will result in
certain derivatives no longer qualifying for hedge accounting, requiring such
derivatives to be marked to market through earnings without offset. Derivatives
not likely to qualify for hedge accounting under SFAS 133 include U.S. dollar
and foreign currency basis swaps.
The Company has devoted significant resources preparing for the adoption of SFAS
133. While the impact of adopting SFAS 133 will be ultimately dependent upon the
fair value of the end user derivatives portfolio at December 1, 2000 and their
related hedge designations, the Company expects adoption will not materially
impact the Company's stockholders' equity, results of operations, or statement
of financial condition.
20
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings
The Company is involved in a number of judicial, regulatory and arbitration
proceedings concerning matters arising in connection with the conduct of its
business. Such proceedings include actions brought against the Company and
others with respect to transactions in which the Company acted as an underwriter
or financial advisor, actions arising out of the Company's activities as a
broker or dealer in securities and commodities and actions brought on behalf of
various classes of claimants against many securities and commodities firms,
including the Company.
Although there can be no assurance as to the ultimate outcome, the Company
has denied, or believes it has meritorious defenses and will deny, liability in
all significant cases pending against it, including the matters described below,
and intends to defend vigorously each such case, 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.
Lehman Brothers Commercial Corporation and Lehman Brothers Special Financing
Inc. v. Minmetals International Non-Ferrous Metals Trading Company (Reported in
LBI's 1999 Annual Report on Form 10-K)
On August 10, 2000, the Court denied both parties' motions for summary
judgment. A trial date has not yet been scheduled.
AIA Holdings SA et al. v. Lehman Brothers Inc. and Bear Stearns & Co., Inc.
(Reported in LBI's 1999 Annual Report on Form 10-K)
The first trial is now scheduled to commence in mid-2001.
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 and Quarterly Report on Form 10-Q for the quarter ended May
31, 2000)
On July 14, 2000, LBI moved to dismiss the Fourth Amended Complaint.
21
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings - continued
Harold Gillet, et al. v. Goldman Sachs & Co, et al. (Reported in LBI's 1999
Annual Report on Form 10-K)
On April 29, 1999, LBI and the other defendants moved to dismiss the
Consolidated Amended Complaint. On July 21, 2000, plaintiffs moved for leave to
file a Second Amended Complaint that added a new plaintiff and new factual
allegations. LBI and the other defendants have jointly opposed the plaintiffs'
motion to amend the complaint. Both the defendants' motion to dismiss and the
plaintiffs' motion to amend are pending before the Court.
CHS Electronics, Inc. v. Credit Suisse First Boston Corp., et al.
On August 3, 2000, a class action was filed in the United States District
Court for the Southern District of Florida against 18 underwriters of IPO
securities, including LBI. Plaintiffs seek compensatory and injunctive relief
for alleged violations of the antitrust laws based on the theory that the
defendant underwriters fixed and maintained fees for underwriting certain IPO
securities at supra-competitive levels. On October 2, 2000, LBI and the other
defendants jointly moved to transfer this action to the Southern District of New
York, where the Gillet case (see above) is pending, and to stay all proceedings
in the Southern District of Florida pending the Court's resolution of the motion
to transfer.
Corporacion Nacional del Cobre de Chile v. Lehman Brothers Inc., Lehman Brothers
Commercial Corp., Lehman Brothers Commodities Ltd. and Lehman Brothers Holdings
Inc. (Reported in LBI's 1999 Annual Report on Form 10-K)
On August 31, 2000, the parties settled the matter and dismissed the
arbitration.
Pamahi Investment Corp., et al. v. Lehman Brothers Inc., et al. (Reported in
LBI's 1999 Annual Report on Form 10-K and Quarterly Report on Form 10-Q for the
quarter ended February 29, 2000)
On August 7, 2000, the parties settled the matter and dismissed the
arbitration.
Bowser v. First Alliance Mortgage Company, et al. (Reported in LBI's Quarterly
Report on Form 10-Q for the quarter ended May 31, 2000)
On August 15, 2000, the United States Bankruptcy Court for the Central
District of California entered an order dismissing with prejudice plaintiffs'
claims against Holdings.
22
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings - continued
Island Venture Corporation, et al. v. Lehman Brothers Inc. and Lehman Brothers
Securities Asia, Ltd.
On August 3, 2000, Island Venture Corporation, Continental Resources
Corporation, Recola Investment Corporation, Grand Concord Corporation, Goodwell
Industrial Corporation, and Capital Pacific Corporation filed a lawsuit in the
United States District Court for the District of New Jersey against LBI and
Lehman Brothers Securities Asia, Ltd. The complaint arises in connection with
the plaintiffs' purchase of various promissory notes issued by Indonesian
companies in 1997 and upon which the issuers have defaulted. It also asserts
claims relating to an alleged unauthorized liquidation for $8.5 million of a $10
million Asia Investment Grade Default Note ("Basket Note") issued by Lehman
Brothers Holdings PLC. The complaint seeks rescission and damages under various
common law theories of mutual mistake, breach of fiduciary duty, negligence and
constructive fraud, as well as asserting claims under the New Jersey Blue Sky
Laws and Section 10(b) of the Securities Exchange Act of 1934. The plaintiffs
seek to recover damages in the face amount of approximately $66 million on all
the notes they purchased and difference between the liquidation price and the
face value of the Basket Note plus lost coupon payments. The plaintiffs have not
yet served the complaint.
23
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
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
24
<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: October 16, 2000 By: /s/ David Goldfarb
----------------------------------------
Chief Financial Officer
25
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
Exhibit 12 Computation in Support of Ratio of Earnings to Fixed Charges
Exhibit 27 Financial Data Schedule
26
<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 Nine
Months Months Months Months Months Months Ended
Ended Ended Ended Ended Ended August 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 $ 1,100
Add: Fixed charges (excluding
capitalized interest) 9,980 10,140 12,233 14,746 12,552 11,931
------------- ------------- ------------- -------------- ------------- --------------
Pre-tax earnings before fixed
charges 10,058 10,449 12,826 15,593 13,565 13,031
============= ============= ============= ============== ============= ==============
Fixed charges:
Interest 9,954 10,121 12,216 14,730 12,535 11,917
Other(a) 27 25 19 20 17 13
------------- ------------- ------------- -------------- ------------- --------------
Total fixed charges $ 9,981 $ 10,146 $ 12,235 $ 14,750 $ 12,552 $ 11,930
============= ============= ============= ============== ============= ==============
RATIO OF EARNINGS TO FIXED
CHARGES 1.01 1.03 1.05 1.06 1.08 1.09
</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 August 31, 2000
(Unaudited) and the Consolidated Statement of Income for the nine months ended
August 31, 2000 (Unaudited) and is qualified in its entirety by reference to
such financial statements.
1,000,000
PERIOD TYPE 9 MOS
FISCAL YEAR END NOV-30-2000
PERIOD START DEC-01-1999
PERIOD END AUGUST-31-2000
CASH 2,728
RECEIVABLES 13,379
SECURITIES-RESALE 73,535
SECURITIES BORROWED 22,424
INSTRUMENTS OWNED 67,543
PP&E 296
TOTAL ASSETS 180,297
SHORT TERM 836
PAYABLES 8,517
REPOS SOLD 92,487
SECURITIES LOANED 26,165
INSTRUMENTS SOLD 24,541
LONG-TERM 3,982
PREFERRED-MANDATORY 0
PREFERRED 0
COMMON 0
OTHER SE 3,775
TOTAL LIABILITY AND EQUITY 180,297
TRADING REVENUE 1,453
INTEREST AND DIVIDENDS 12,187
COMMISSIONS 492
INVESTMENT BANKING 1,244
FEE REVENUE 0
INTEREST EXPENSE 11,918
COMPENSATION 1,819
INCOME-PRETAX 1,100
INCOME PRE-EXTRAORDINARY 738
EXTRAORDINARY 0
CHANGES 0
NET INCOME 738
EPS-BASIC 0
EPS-DILUTED 0
