SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1995
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 Holdings Inc.
(Exact Name of Registrant As Specified In Its Charter)
Delaware 13-3216325
(State or other jurisdiction of (I.R.S. Employer Indentification 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
As of March 31, 1995, 104,501,046 shares of the Registrant's Common
Stock, par value $.10 per share, were outstanding.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 28, 1995
INDEX
Part I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements - (unaudited)
Consolidated Statement of Operations -
Three Months Ended February 28, 1995
and March 31, 1994 3
Consolidated Statement of Financial Condition -
February 28, 1995 and November 30, 1994 4
Consolidated Statement of Cash Flows -
Three Months Ended February 28, 1995
and March 31, 1994 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
EXHIBIT INDEX 22
Exhibits
<TABLE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of OPERATIONS
(Unaudited)
(In millions, except per share data)
<CAPTION>
Three months ended
February 28, March 31,
1995 1994
<S> <C> <C>
Revenues
Principal transactions $ 359 $ 462
Investment banking 137 175
Commissions 105 141
Interest and dividends 2,501 1,527
Other 10 16
Total revenues 3,112 2,321
Interest expense 2,405 1,453
Net revenues 707 868
Non-interest expenses
Compensation and benefits 360 450
Brokerage, commissions and
clearance fees 64 74
Communications 47 50
Occupancy and equipment 45 42
Professional services 42 42
Business development 29 31
Depreciation and amortization 27 31
Other 23 27
Severance charge 33
Total non-interest expenses 637 780
Income before taxes and cumulative
effect of change in accounting principle 70 88
Provision for income taxes 25 33
Income before cumulative effect of
change in accounting principle 45 55
Cumulative effect of change in
accounting principle, net of taxes (13)
Net income $ 45 $ 42
Net income applicable to common stock $ 34 $ 30
Number of shares used in earnings per
common share computation 110.2 105.7
Earnings per common share:
Income before cumulative effect
of change in accounting principle $ 0.31 $ 0.41
Cumulative effect of change in
accounting principle (0.12)
Net income $ 0.31 $ 0.29
</TABLE>
See notes to consolidated financial statements.
<TABLE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(In millions)
ASSETS
<CAPTION>
February 28, November 30,
1995 1994
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 1,283 $ 964
Cash and securities segregated and on deposit
for regulatory and other purposes 1,257 1,420
Securities and other financial instruments owned:
Governments and agencies 26,259 24,840
Corporate obligations and other contractual
commitments 10,612 9,962
Mortgages and mortgage-backed 6,067 6,774
Corporate stocks and options 4,329 4,549
Certificates of deposit and other money
market instruments 2,855 1,348
50,122 47,473
Collateralized short-term agreements:
Securities purchased under agreements to resell 42,047 37,490
Securities borrowed 19,609 10,617
Receivables:
Brokers, dealers and clearing organizations 4,984 4,934
Customers 4,570 2,794
Others 1,986 2,762
Property, equipment and leasehold improvements
(net of accumulated depreciation and amortization
of $534 in 1995 and $520 in 1994) 606 619
Deferred expenses and other assets 654 686
Excess of cost over fair value of net assets
acquired (net of accumulated amortization
of $90 in 1995 and $88 in 1994) 186 188
Total assets $127,304 $109,947
</TABLE>
See notes to consolidated financial statements.
<TABLE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Continued)
(In millions, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
February 28, November 30,
1995 1994
<S> <C> <C> <C>
Short-term financings: (unaudited)
Securities sold under agreements to
repurchase $67,249 $58,419
Commercial paper and short-term debt 9,655 9,807
Securities loaned 5,314 1,627
Securities and other financial instruments sold
but not yet purchased:
Governments and agencies 12,266 9,867
Corporate stocks and options 2,899 3,731
Corporate obligations and other contractual
commitments 2,884 3,432
18,049 17,030
Payables:
Brokers, dealers and clearing organizations 3,498 2,597
Customers 6,577 3,060
Accrued liabilities and other payables 2,359 2,691
Senior notes 9,169 9,107
Subordinated indebtedness 2,008 2,214
Total liabilities 123,878 106,552
Commitments and contingencies (Note 4)
Stockholders' equity:
Preferred stock, $1 par value; 38,000,000 shares
authorized: 5% Cumulative Convertible Voting,
Series A, 13,000,000 shares authorized,
issued and outstanding; $39.10 liquidation
preference per share 508 508
8.44% Cumulative Voting, 8,000,000 shares
issued and outstanding; $25.00 liquidation
preference per share 200 200
Redeemable Voting, 1,000 shares issued and
outstanding; $1.00 liquidation preference per share
Common Stock, $.10 par value; 300,000,000
shares authorized; shares issued: 105,608,423
in 1995 and 1994; shares outstanding:
104,494,667 in 1995 and 104,537,690 in
1994 11 11
Common Stock issuable 84 87
Additional paid-in capital 3,172 3,172
Foreign currency translation adjustment 12 6
Accumulated deficit (545) (574)
Common Stock in treasury at cost: 1,113,756
shares in 1995 and 1,070,733 shares in 1994 (16) (15)
Total stockholders' equity 3,426 3,395
Total liabilities and stockholders' equity $127,304 $109,947
</TABLE>
See notes to consolidated financial statements.
<TABLE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In millions)
<CAPTION>
Three months ended
February 28, March 31,
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income before cumulative effect of change in
accounting principle $ 45 $ 55
Adjustments to reconcile income to net cash
provided by (used in) operating activities:
Depreciation and amortization 27 31
Provisions for losses and other reserves 6 47
Other adjustments 13 24
Net change in:
Cash and securities segregated 163 (287)
Receivables from brokers, dealers and clearing
organizations (50) 267
Receivables from customers (1,776) (1,668)
Securities purchased under agreements to resell (4,557) (15,084)
Securities borrowed (8,992) (5,597)
Securities and other financial instruments owned (2,649) (8,916)
Payables to brokers, dealers and clearing
organizations 901 1,765
Payables to customers 3,184 204
Accrued liabilities and other payables (336) (290)
Securities sold under agreements to repurchase 8,830 18,013
Securities loaned 3,687 (151)
Securities and other financial instruments
sold but not yet purchased 1,019 8,411
Other operating assets and liabilities, net 813 (480)
Net cash provided by (used in) operating
activities $ 328 $(3,656)
</TABLE>
See notes to consolidated financial statements.
<TABLE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS--(Continued)
(Unaudited)
(in millions)
<CAPTION>
Three months ended
February 28, March 31,
1995 1994
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes $1,416 $ 993
Principal payments of senior notes (1,441) (329)
Proceeds from issuance of subordinated indebtedness 6 39
Principal payments of subordinated indebtedness (213) (100)
Proceeds from issuance of other indebtedness 754 2,138
Principal payments of other indebtedness (1,910) (1,717)
Increase in commercial paper and short-term debt, net 1,412 2,776
Dividends paid (12) (63)
Net cash provided by financing activities 12 3,737
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, equipment and leasehold
improvements (20) (30)
Other (6)
Net cash used in investing activities (20) (36)
Effect of exchange rate changes on cash (1) 7
Net change in cash and cash equivalents 319 52
Cash and cash equivalents, beginning of period 964 1,333
Cash and cash equivalents, end of period $ 1,283 $ 1,385
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)
Interest paid totaled $2,395 and $1,395 in the first quarter
of 1995 and 1994, respectively. Income taxes paid totaled $5 in
the first quarter of 1995 and $24 in the first quarter of 1994.
See notes to consolidated financial statements.
1. Basis of Presentation:
The consolidated financial statements include the accounts of
Lehman Brothers Holdings Inc. ("Holdings") and subsidiaries (Holdings
together with its subsidiaries, the "Company" or "Lehman Brothers").
The principal subsidiary of Holdings is Lehman Brothers Inc. ("LBI"),
a registered broker-dealer. 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
Company's most recent Transition Report on Form 10-K (filed for the
eleven months ended November 30, 1994).
Certain amounts reflect reclassifications to conform to the current
period's presentation.
Earnings per common share was computed by dividing net income
applicable to common stock by the weighted average number of shares of
common stock and common stock equivalents outstanding. Pursuant to
the SEC requirements, the number of shares used in the earnings per
share calculation for 1994 includes common stock as of May 31, 1994
(the date of the spin-off from the American Express Company).
2. Borrowings:
During the first quarter of 1995, the Company issued $1,416
million of senior notes (including $842 million of foreign currency
denominated notes), with maturities ranging from 1996 to 2005. These
issuances were utilized to refinance maturing long-term debt and to
replace senior notes redeemed by the Company prior to maturity during
the first quarter of 1995.
Approximately $1,119 million of the Company's first quarter
issuances were fixed rate. Of this amount, $367 million were U.S.
dollar denominated issuances with a contractual weighted average
interest rate of 8.71%, and $752 million were foreign currency
denominated notes. The remainder of the Company's first quarter of
1995 issuances were floating rate with contractual interest rates
based primarily on the London Interbank Offered Rate ("LIBOR").
The Company entered into interest rate and cross currency swaps
contracts which effectively converted $576 million of its fixed rate
notes issued during the first quarter of 1995 to floating rates based
on LIBOR. The Company also entered into basis swaps which effectively
converted the interest rates on $175 million of its U.S. dollar
floating rate new issuances to new floating rates based on LIBOR.
In addition to the interest rate swaps utilized by the Company to
convert the interest rate nature of its 1995 first quarter issuances,
the Company entered into $229 million notional value of swaptions.
These swaptions, if exercised in May 1995, would convert $229 million
of the Company's first quarter 1995 fixed rate issuances to floating
rates.
The Company had approximately $1,441 million of senior note
maturities including senior notes redeemed by the Company prior to
maturity and approximately $213 million of subordinated indebtedness
maturities during the first quarter of 1995.
3. Capital Requirements:
As registered broker-dealers, LBI and Lehman Government
Securities Inc. ("LGSI"), a wholly owned subsidiary of LBI, are
subject to SEC Rule 15c3-1, the Net Capital Rule, which requires LBI
and LGSI to maintain net capital of not less than 2% of aggregate
debit items arising from customer transactions, as defined, or 4% of
funds required to be segregated for customers' regulated commodity
accounts, as defined. At February 28, 1995, LBI's regulatory net
capital, as defined, of $1,077 million exceeded the minimum
requirement by $1,002 million. LGSI's regulatory net capital, as
defined, of $480 million exceeded the minimum requirement by $451
million at February 28, 1995.
Lehman Brothers International (Europe) ("LBIE"), Lehman Brothers
Japan Inc. ("LBJ"), and other of Holdings' subsidiaries are subject to
various securities, commodities and banking regulations and capital
adequacy requirements promulgated by the regulatory and exchange
authorities of the countries in which they operate. At February 28,
1995, LBIE, LBJ and the other subsidiaries were in compliance with the
applicable local capital adequacy requirements.
There are no restrictions on Holdings' present ability to pay
dividends on its common stock, other than a) Holdings' obligation
first to make dividend payments on its preferred stock and b) the
governing provisions of the Delaware General Corporation Law.
4. Commitments and Contingencies:
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 its success and profitability. The principal types of
risks involved in the Company's activities are market risk, credit or
counterparty risk, and transaction risk. Management has developed a
control infrastructure to monitor and manage each type of risk on a
global basis throughout the Company. For further discussion of these
matters, refer to Note 17 of the Consolidated Financial Statements in
the Company's Transition Report on Form 10-K for the eleven months
ended November 30, 1994.
5. Changes in Accounting Principles:
Postemployment Benefits. Effective January 1, 1994, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 112,
"Employers' Accounting for Postemployment Benefits". SFAS No. 112
requires the accrual of obligations associated with services rendered
to date for employee benefits accumulated or vested for which payment
is probable and can be reasonably estimated. These benefits
principally include the continuation of salary, health care and life
insurance costs for employees on service disability leaves. The
Company previously expensed the cost of these benefits as they were
incurred.
The cumulative effect of adopting SFAS No. 112 reduced net income
for the first quarter of 1994 by $13 million aftertax ($23 million
pretax). The effect of this change on the 1994 results of operations
was not material, excluding the cumulative effect.
Offsetting of Certain Receivables and Payables. In January 1995,
the Financial Accounting Standards Board issued Interpretation No. 41,
"Offsetting of Amounts Related to Certain Repurchase and Reverse
Repurchase Agreements" ("FIN No. 41"). FIN No. 41 is a modification
to Financial Accounting Standards Board No. 39 "Offsetting of Amounts
Related to Certain Contracts" ("FIN No. 39"), which permits certain
limited exceptions to the criteria established under FIN No. 39 for
offsetting certain repurchase and reverse repurchase agreements with
the same counterparty. The Company adopted this modification in
January 1995.
6. Severance Charge:
During the first quarter of 1994, the Company conducted a review
of personnel needs, which resulted in the termination of certain
personnel. The Company recorded a severance charge of $33 million
pretax ($18 million aftertax) in the first quarter of 1994.
7. Change in Year-End:
During 1994, the Company changed its year-end from December 31 to
November 30. Such a change to a non-calendar cycle shifts certain
year-end administrative activities to a time period that conflicts
less with the business needs of the Company's institutional customers.
As such, the first quarter ended February 28, 1995 has been reported
on the basis of the new fiscal year. The prior year quarter ended
March 31, 1994 was reported on the basis of the old calendar year
cycle.
Business Environment
The Company's principal business activities, investment banking
and securities trading and sales, are by their nature subject to
volatility, primarily due to changes in interest and foreign exchange
rates, global economic and political trends and industry competition.
As a result, revenues and earnings may vary significantly from quarter
to quarter and from year to year.
The adverse market conditions experienced during 1994, that were
prompted by rising interest rates, continued through most of the first
quarter of 1995. Additionally, in the first quarter of 1995 the
financial crisis in Mexico and the collapse of Barings Brothers PLC
had a negative impact on both emerging markets and derivative
transaction volumes. In general, these events caused investors to
shift capital from emerging market products and derivatives into U.S.
bond and equity investments. This change in investor sentiment drove
U.S. interest rates downward and the U.S. equity markets higher.
Equity and fixed income investors worldwide remain cautious with
regard to interest rates.
Underwriting levels remained weak during the first quarter of
1995 and appear unlikely to revive during the second quarter as a
major source of industry revenues. However, customer volumes began to
increase during the end of the first quarter as investors began
redirecting assets to longer-term investments. In addition, the
environment for merger and acquisition activity remained strong with
record levels of strategic acquisitions and cross-border transactions
and a substantial backlog of transactions in process.
Results of Operations
For the Three Months Ended February 28, 1995 and March 31, 1994
Summary. The Company reported net income of $45 million for the
first quarter ended February 28, 1995 as compared to net income of $42
million for the first quarter ended March 31, 1994. The 1994 results
include an $18 million aftertax severance charge related to the
Company's review of its personnel needs ("Severance Charge") and a $13
million aftertax charge for the cumulative effect of a change in
accounting for postemployment benefits as a result of the adoption of
Statement of Financial Accounting Standards No. 112.
Earnings per common share for the first quarter ended February
28, 1995 were $0.31. Earnings per common share for the first quarter
ended March 31, 1994 were $0.29 after the cumulative effect of a
change in accounting principle and were $0.41 before the cumulative
effect of a change in accounting principle (as adjusted for the number
of shares of common stock outstanding on May 31, 1994).
Net revenues were $707 million for the first quarter of 1995
compared to $708 million for the fourth quarter of 1994 and $868
million for the first quarter of 1994. The first quarter of 1994
reflected the carryover of the robust 1993 environment. This cycle
was characterized by lower interest rates, strong syndicate activity
and heavy customer volumes.
In February 1994, the Federal Reserve, in response to
inflationary concerns, increased interest rates in the first of seven
such actions. The Company's revenues, in the second, third and fourth
quarters of 1994 and the first quarter of 1995, reflected this more
difficult business environment. This new environment has adversely
impacted the entire industry and resulted in lower levels of debt and
equity underwritings and increased volatility in the secondary
markets.
Principal Transactions. Principal transactions include the
results of the Company's market making and trading related to customer
activities, as well as proprietary trading for the Company's own
account. The Company, through its subsidiaries, is a market maker in
all major equity and fixed income products in both the domestic and
international markets. As part of its market-making activities, the
Company maintains inventory positions of varying amounts across a
broad range of financial instruments which are marked-to-market on a
daily basis, along with the Company's proprietary trading positions.
The Company utilizes various hedging strategies to minimize its
exposure to significant movements in interest and foreign exchange
rates and the equity and commodity markets. Principal transactions
revenues decreased 22% to $359 million for the first quarter of 1995
from $462 million for the first quarter of 1994. The decline in
principal transactions revenues was principally caused by reduced
derivatives activity and decreases in the Company's customer flow
activities in certain fixed income and equity products, partially
offset by increased foreign exchange net revenues.
Investment Banking. Investment banking revenues decreased 22% to
$137 million for the first quarter of 1995 from $175 million for the
prior year period due to lower origination volumes, partially offset
by improved results from strategic advisory and merchant banking
activities.
Commissions. Commission revenues decreased 26% to $105 million
for the first quarter of 1995 from $141 million for the first quarter
of 1994, reflecting lower volumes of customer trading in listed
securities primarily due to the Company's restructuring of the high-
net-worth brokerage unit. Commission revenues are generated from the
Company's agency activities on behalf of corporations, institutions
and high-net-worth individuals.
Interest and Dividends. Interest and dividend revenues increased
to $2,501 million for the first quarter of 1995 from $1,527 million
for the first quarter of 1994. This increase is the result of higher
levels of interest rates in the first quarter of 1995 versus the first
quarter of 1994 and an increase in the Company's volume of matched
book transactions.
Net interest and dividend income increased 30% to $96 million in
the first quarter of 1995 from $74 million in the first quarter of
1994. Net interest and dividend revenue amounts are closely related
to the Company's trading activities. The Company evaluates its
trading strategies on an overall profitability basis which includes
both principal transactions revenues and net interest. Therefore,
changes in net interest and dividend revenue from period to period
should not be viewed in isolation but should be viewed in conjunction
with revenues from principal transactions. Net interest and dividend
revenue is impacted by the balance sheet size and mix of assets, the
amount and mix of short- and long-term funding sources, as well as the
prevailing level, term structure and volatility of interest rates.
The 1995 increase in net interest and dividend revenue was due to an
increase in interest earning assets and reduced funding costs due to
the $1.2 billion infusion of capital in connection with the May 31,
1994 spin-off from the American Express Company. The 1995 increase in
net interest revenue was partially offset by reduced spreads on fixed
income products as a result of the higher interest rate environment in
1995.
Non-Interest Expenses. Non-interest expenses were $637 million
for the first quarter of 1995 and $780 million for the first quarter
of 1994. Compensation and benefits expense was $360 million for the
first quarter of 1995 and $450 million for the first quarter of 1994.
Compensation and benefits expense as a percentage of net revenues was
50.9% for the first quarter of 1995 and 51.8% for the first quarter of
1994.
Excluding compensation and benefits expense, nonpersonnel
expenses were $277 million for the first quarter of 1995 and $330
million for the first quarter of 1994. Included in the 1994 results
was a $33 million Severance Charge. Excluding this charge,
nonpersonnel expenses were $277 million for the first quarter of 1995
and $297 million for the first quarter of 1994.
Cost Reduction Effort. At year end 1994, the Company announced a
cost reduction target of $300 million on an annualized basis (pretax)
compared to the third quarter 1994 annualized expenses. During the
first quarter of 1995, the Company continued its progress in reducing
costs, concentrating on both personnel and nonpersonnel expenses. In
the first quarter of 1995, personnel expenses were further reduced as
a result of the headcount reduction from 8,512 at November 30, 1994 to
8,428 at February 28, 1995. The process to reduce nonpersonnel
expenses consists of a highly detailed review of expense categories,
with steady progress expected to be made in this area throughout
fiscal 1995. During the first quarter of 1995, a $40 million
reduction on an annualized basis was realized as nonpersonnel expenses
decreased to $277 million.
Commencing in the fourth quarter of 1994 through the first
quarter of 1995, annualized savings of $183 million have been
realized. The Company expects to achieve its cost reduction
objectives by year end.
Income Taxes. For the first quarter of 1995, the Company's
income tax provision was $25 million as compared to $33 million for
the first quarter of 1994. The effective tax rate was 36% for the
first quarter of 1995 as compared to 38% in the first quarter of 1994.
The 1995 effective tax rate is lower than the 1994 rate primarily due
to a reduction in state and local taxes.
Liquidity and Capital Resources
Total assets increased to $127.3 billion at February 28, 1995 from
$109.9 billion at November 30, 1994. The increase in total assets is
primarily the result of the change in the Company's clearing
arrangements. After the close of business on February 17, 1995, the
Company became self-clearing for equities, municipal securities and
corporate debt securities. Previously all clearing and settlement for
these products was performed by Smith Barney Inc. The Company has
entered into an agreement, for a term of five years, with the Bear
Stearns Securities Corp. ("BSSC") pursuant to which BSSC has agreed
to process the transactions previously cleared by Smith Barney Inc.
As of result of this arrangement, assets increased by approximately
$11 billion which were predominantly funded with offsetting
liabilities.
The Company's asset base consists primarily of cash and cash
equivalents and assets which can be converted to cash within one year,
including securities and other financial instruments owned,
collateralized short-term agreements and receivables. Long-term
assets consist primarily of other receivables, which include a $945
million interest bearing receivable from the American Express Company
due in June 1996, property, equipment and leasehold improvements;
deferred expenses and other assets; and excess of cost over fair value
of net assets acquired.
On a daily basis the Company reviews its mix of long- and short-
term borrowings as it relates to maturity matching and the
availability of secured and unsecured financing. In addition, the
Company periodically tests its secured and unsecured credit facilities
to ensure availability and monitors its unencumbered collateral
positions to ensure maximum availability of secured borrowing
facilities.
Short-Term Secured Funding. The Company finances its short-term
assets primarily on a secured basis. At February 28, 1995, 81% of the
Company's securities and other financial instruments owned, securities
purchased under agreements to resell and securities borrowed are
financed by securities and other financial instruments sold but not
yet purchased, securities sold under agreements to repurchase and
securities loaned.
Short-Term Unsecured Funding. The Company uses short-term
unsecured borrowing sources to fund short-term assets not financed on
a secured basis. The Company's primary sources of short-term,
unsecured general purpose funding include commercial paper and short-
term debt, including master notes and bank borrowings under
uncommitted lines of credit. Commercial paper and short-term debt
outstanding totaled $9.7 billion at February 28, 1995, compared to
$9.8 billion at November 30, 1994. Of these amounts, commercial paper
outstanding totaled $2.6 billion at February 28, 1995 compared to $2.8
billion at November 30, 1994. At February 28, 1995, Holdings had $2.5
billion of unused committed bank credit lines to support its
commercial paper programs.
The Company's uncommitted lines of credit provide an additional
source of secured and unsecured short-term financing. At February 28,
1995, the Company had $13.2 billion in uncommitted lines of credit
compared to $12.5 billion at November 30, 1994. Uncommitted lines
consist of facilities that the Company has been advised are available
but for which no contractual lending obligation exists.
Total Capital. Long-term assets are financed with a combination
of long-term debt and stockholders' equity (collectively, "Total
Capital"). The Company's long-term unsecured funding sources are
senior notes and subordinated indebtedness. The Company maintains
long-term debt in excess of its long-term assets to provide additional
liquidity, which the Company uses to meet its short-term funding
requirements and to reduce its reliance on commercial paper and short-
term debt.
During the first quarter of 1995, the Company issued $1.4 billion
in long-term debt compared to $1.0 billion in the first quarter of
1994. These issuances were primarily utilized to refinance long-term
debt and to replace long-term debt redeemed by the Company prior to
maturity during the first quarter of 1995. The Company staggers the
maturities of its long-term debt to minimize refunding risk. At
February 28, 1995, the Company had long-term debt outstanding of $11.2
billion compared to $11.3 billion outstanding at November 30, 1994.
At February 28, 1995, the Company had approximately $5.0 billion
available for issuance of debt securities under various shelf
registrations.
Credit Ratings. The current short-term and long-term senior debt
ratings of Holdings and the current short-term and subordinated debt
ratings of the Company's principal subsidiary, Lehman Brothers Inc.
("LBI") are as follows:
Holdings LBI
Short- Long- Short- Subordinated
term term term debt
Duff & Phelps Credit D-1 A D-1 A-
Rating Co
Fitch Investors F-1 A F-1 A-
Service Inc.
IBCA A1 A- A1 -
Moody's P2 Baa1 P2 Baa1
S&P A-1 A A-1 A
Thomson BankWatch TBW-1 A- TBW-1 A-
On March 21, 1995, Moody's Investors Service Inc. ("Moody's")
lowered the ratings of Holdings and its subsidiaries after having
affirmed such ratings on February 16, 1995. The Company currently
estimates that the Moody's action could increase interest expense
before the effect of compensation and taxes by approximately $50
million on an annual basis. In terms of the Company's business, the
action is expected to have only a nominal impact on customer flow
activity. Management remains comfortable with the Company's current
liquidity position, which was strengthened throughout 1994 and the
first quarter of 1995.
On March 28, 1995, Standard & Poor's ("S&P") reaffirmed the short-
and long-term ratings of the Company. On the same date, S&P revised
the long-term debt outlook on six of the Company's competitors in the
securities industry from stable to negative. The Company's long-term
debt outlook from S&P was revised to negative in September 1994, and
remains negative.
Duff & Phelps Credit Rating Co. and Fitch Investors Service Inc.
have affirmed the Company's ratings. IBCA and Thomson BankWatch have
maintained the Company's existing ratings.
Specific Business Activities and Transactions
The following sections include information on specific business
activities of the Company which affect overall liquidity and capital
resources:
High Yield Securities. The Company underwrites, trades, invests
and makes markets in high yield corporate debt securities. The
Company also syndicates, trades and invests in loans to below
investment grade companies. For purposes of this discussion, high
yield debt securities are defined as securities or loans to companies
rated below BBB- by S&P and below Baa3 by Moody's, as well as non-
rated securities or loans which, in the opinion of management, are non-
investment grade. High yield debt securities are carried at market
value and unrealized gains or losses for these securities are
reflected in the Company's consolidated statement of operations. The
Company's portfolio of such securities at February 28, 1995 and
November 30, 1994 included long positions with an aggregate market
value of approximately $1.2 billion and $1.1 billion, respectively,
and short positions with an aggregate market value of approximately
$105 million and $94 million, respectively. The portfolio may from
time to time contain concentrated holdings of selected issues. The
Company's two largest high yield positions were $252 million and $113
million at February 28, 1995 and $252 million and $89 million at
November 30, 1994.
Westinghouse. In May 1993, the Company and Westinghouse Electric
Corporation ("Westinghouse") entered into a partnership to facilitate
the disposition of Westinghouse's commercial real estate portfolio,
valued at approximately $1.1 billion, to be accomplished substantially
through securitizations and asset sales. The Company's original
investment in the partnership was approximately $136 million, after
consideration of a 10% limited partnership interest purchased by
Lennar Inc. In addition, the Company made collateralized loans to the
partnership of $752 million.
At February 28, 1995, the carrying value of the Company's
investment in the partnership was $147 million. The outstanding
balance of the loan to the partnership was fully paid in the first
quarter of 1995. The remaining investment is expected to be fully
recovered by the second half of 1995 through a combination of
securitizations, asset sales, mortgage remittances and refinancings by
third parties.
Merchant Banking Partnerships. At February 28, 1995, the
Company's investment in merchant banking partnerships was $282
million, which included $25 million in one employee-related
partnership in which the Company, as general partner, is entitled to a
priority return. At February 28, 1995, the Company had no remaining
commitments to make investments through these partnerships. The
Company's policy is to carry its interests in merchant banking
partnerships at fair value based upon the Company's assessment of the
underlying investments. The Company's merchant banking investments,
made primarily through a series of partnerships are consistent with
the terms of those partnerships, and are expected to be sold or
otherwise monetized during the remaining term of the partnerships.
Noncore Activities and Investments. In March 1990, the Company
discontinued the origination of partnerships (the assets of which are
primarily real estate) and investments in real estate. Currently, the
Company acts as a general partner for approximately $4.1 billion of
partnership investment capital and manages the remaining real estate
investment portfolio. At February 28, 1995, the Company had net
exposure to these investments of $181 million. This amount includes
$46 million of investments in these real estate activities, as well as
$135 million of commitments and contingent liabilities under
guarantees and credit enhancements, both net of applicable reserves.
The Company believes any exposure under these commitments and
contingent liabilities has been adequately reserved. In certain
circumstances, the Company provides financial and other support and
assistance to such investments to maintain investment values. There
is no contractual requirement that the Company continue to provide
this support. Although a decline in the real estate market or the
economy in general or a change in the Company's disposition strategy
could result in additional real estate reserves, the Company believes
that it is adequately reserved.
The Company has equity, partnership and debt investments made in
previous years that are unrelated to its ongoing businesses. The Company
holds $98 million of long-term subordinated indebtedness and equity
securities of American Marketing Industries Holdings Inc. ("AMI").
The subordinated debt, as amended, matures in 1997, and includes
certain provisions which limit cash interest payments and provides for
payment-in-kind securities above such cash interest payments.
The AMI loan is current in payment in accordance with its terms.
The Company has other investments that are also awaiting their disposition
or the occurrence of certain events which will ultimately lead to their
liquidation. The Company carries these equity, partnership and debt
investments, including AMI, at their estimated net realizable value, which
approximates $174 million at February 28, 1995.
Management's intention with regard to noncore assets is the
prudent liquidation of these investments as and when possible.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
Lehman Brothers 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 LBI and others with respect to transactions in which
LBI acted as an underwriter or financial advisor, actions arising out
of LBI's activities as a broker or dealer in securities and
commodities and actions brought on behalf of various classes of
claimants against many securities and commodities firms of which LBI
is one.
Although there can be no assurance as to the ultimate outcome,
Lehman Brothers has denied, or believes it has meritorious defenses
and will deny, liability in all significant cases pending against it
including the matters described below, and intends to defend
vigorously each such case. Although there can be no assurance as to
the ultimate outcome, based on information currently available and
established reserves, the Company believes that the eventual outcome
of the actions against it, including the matters described below, will
not, in the aggregate, have a material adverse effect on its business
or consolidated financial condition.
Bishopsgate Investment Management Limited (in liquidation) v. Lehman
Brothers International (Europe) and Lehman Brothers Holdings Plc
(Reported in Holdings' Annual Report on Form 10-K)
On March 31, 1995, the parties settled all remaining claims.
Lehman Brothers Commercial Corporation and Lehman Brothers Special
Financing Inc. v. China International United Petroleum and Chemical Co.,
Ltd. (Reported in Holdings' Annual Report on Form 10-K)
On March 13, 1995, Unipec filed an answer with counterclaims
seeking $8 million in compensatory damages.
Lehman Brothers Commercial Corporation and Lehman Brothers Special
Financing Inc. v. Minmetals International Non-Ferrous Metals Trading
Company (Reported in Holdings' Annual Report on Form 10-K)
On March 9, 1995, Minmetals filed an answer with counterclaims
seeking $28 million in compensatory damages and CNM moved to dismiss the
complaint.
Glynwill Investment, Ltd. v. Shearson Lehman Brothers Inc. (Reported
in Holdings' Annual Report on Form 10-K) Glynwill's appeal was
argued during the March 1995 term of the Appellate Division, First
Department, and a decision is expected within the next several months.
Actions Relating to National Association of Securities Dealers Automated
Quotations Systems ("NASDAQ") Market Maker Antitrust and Securities
Litigation. (Report in Holdings' Annual Report on Form 10-K.
State Court Action. On consent of all parties this action is being
dismissed without prejudice to refiling upon conclusion of the federal
action.
Leetate Smith. et al. v. Merrill Lynch . et al.
On February 28, 1995 a First Amended Consolidated Class Action
Complaint for Violations of the Federal Securities Laws and the
California Corporations Code (the "Complaint") was filed in the United
States District Court for the Central District of California amending a
previously filed complaint and adding, among other defendants, Lehman
Brothers Inc. The Complaint is purportedly brought on behalf of
purchasers of bonds, notes and other securities during the period July
1, 1992 through December 6, 1994 (the "Class Period") that were issued
by Orange County or by other public entities which had funds invested in
Orange County's Investment Pool (collectively "the County"). Also named
as defendants are eight other broker-dealers who like LBI, are alleged
to have acted as underwriters of the County's debt securities and the
five financial advisors who allegedly advised the County during the
Class Period. The Complaint alleges violations of Section 10b of the
Exchange Act of 1934 and various sections of the California Corporations
Code based on alleged misstatements and omissions in the Official
Statements of the debt offerings by the County primarily relating to the
County's creditworthiness and ability to repay the debts. The Complaint
seeks (i) to certify the action as a class action; (ii) unspecified
damages plus interest; and (iii) attorneys' fees.
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:
11. Computation of Per Share Earnings
12. Computation in Support of Ratio of Earnings to Fixed
Charges
27. Financial Data Schedule
(b) Reports on Form 8-K:
1. Form 8-K filed March 24, 1995, Items 5 and 7.
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 HOLDINGS INC.
(Registrant)
Date: April 13, 1995 By /s/ Richard S.Fuld Jr.
Richard S. Fuld, Jr.
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: April 13, 1995 By /s/ Robert Matza
Robert Matza
Chief Financial Officer
(Principal Financial Officer)
EXHIBIT INDEX
Exhibit No. Exhibit Page No.
Exhibit 11. Computation of Per Share Earnings
Exhibit 12. Computation in Support of Ratio of Earnings to Fixed
Charges
Exhibit 27. Financial Data Schedule
Exhibit 11
<TABLE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
COMPUTATION of PER SHARE EARNINGS
(Unaudited)
(In millions, except share data)
<CAPTION>
Three months Three months
ended ended
February 28, March 31,
1995 1994
<S> <C> <C>
Primary:
Weighted average shares outstanding:
Common stock 104,519,365 105,608,423
Common stock equivalents:
Restricted stock units 5,671,304 73,056
Total common stock and common stock
equivalents 110,190,669 105,681,479
Income before cumulative effect of change
in accounting principle $45.0 $54.8
Cumulative effect of change in accounting
principle (12.7)
Net income 45.0 42.1
Preferred dividends (10.6) (12.0)
Net income applicable to common stock $34.4 $30.1
Earnings Per Share:
Income before cumulative effect of change
in accounting principle $0.31 $0.41
Cumulative effect of change in accounting
principle (0.12)
Earnings per common share
$0.31 $0.29
Fully diluted:
Weighted average shares outstanding:
Common stock 104,519,365 105,608,423
Common stock equivalents:
Restricted stock units 5,671,304 73,056
Total common stock and common stock
equivalents 110,190,669 105,681,479
Income before cumulative effect of change
in accounting principle $45.0 $54.8
Cumulative effect of change in accounting
principle (12.7)
Net income 45.0 42.1
Preferred dividends (10.6) (12.0)
Net income applicable to common stock $34.4 $30.1
Earnings Per Share:
Income before cumulative effect of change
in accounting principle $0.31 $0.41
Cumulative effect of change in accounting
principle (0.12)
Earnings per common share $0.31 $0.29
</TABLE>
Exhibit 12
<TABLE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
COMPUTATION in SUPPORT of RATIO of EARNINGS to FIXED CHARGES
(Dollars in millions)
(Unaudited)
<CAPTION>
For the For the
Eleven Months Three Months
Ended Ended
For the Year Ended December 31, November 30, February 28,
1990 1991 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed charges:
Interest expense:
Subordinated
indebtedness $ 203 $ 170 $ 150 $ 144 $ 158 $ 51
Bank loans and
other borrowings* 4,531 4,755 5,035 5,224 6,294 2,354
Interest component
of rentals of office
and equipment 62 70 74 76 42 11
Other adjustments** 8 2 2 7 4 1
TOTAL (A) $4,804 $4,997 $5,261 $5,451 $6,498 $2,417
Earnings:
Pretax income (loss)
from continuing
operations $ (749) $ 150 $ (247) $ 27 $ 193 $ 70
Fixed charges 4,804 4,997 5,261 5,451 6,498 2,417
Other adjustments** (17) 7 (6) (4) (1)
TOTAL (B) $4,038 $5,154 $5,014 $5,472 $6,687 $2,486
(B/A) 1.03 1.00 1.03 1.03
</TABLE>
* Includes amortization of long-term debt discount.
** Other adjustments include capitalized interest and debt issuance
costs and amortization of capitalized interest.
*** Other adjustments include adding the net loss of affiliates
accounted for at equity whose debt is not guaranteed by the
Company and subtracting capitalized interest and debt issuance
costs and undistributed net income of affiliates accounted for at
equity.
**** Earnings were inadequate to cover fixed charges and would have
had to increase approximately $766 million in 1990 and $247
million in 1992 in order to cover the deficiency.
Exhibit 27
LEHMAN BROTHERS HOLDINGS INC. and Subsidiaries
This schedule contains summary financial information extracted from
the Statement of Financial Condition at February 28, 1995 (Unaudited)
and the Consolidated Statement of Operations for the three months
ended February 28, 1995 (Unaudited) and is qualified in its entirety
by reference to such financial statements.
1,000,000
PERIOD TYPE 3 MOS
FISCAL YEAR END NOV-30-1995
PERIOD START DEC-01-1994
PERIOD END FEB-28-1995
CASH $ 2,540
RECEIVABLES $ 11,540
SECURITIES-RESALE $ 42,047
SECURITIES BORROWED $ 19,609
INSTRUMENTS OWNED $ 50,122
PP&E $ 606
TOTAL ASSETS $127,304
SHORT TERM $ 9,655
PAYABLES $ 10,075
REPOS SOLD $ 67,249
SECURITIES LOANED $ 5,314
INSTRUMENTS SOLD $ 18,049
LONG-TERM $ 11,177
PREFERRED-MANDATORY $ 0
PREFERRED $ 708
COMMON $ 11
OTHER SE $ 2,707
TOTAL LIABILITY AND EQUITY $127,304
TRADING REVENUE $ 359
INTEREST AND DIVIDENDS $ 2,501
COMMISSIONS $ 105
INVESTMENT BANKING REVENUES $ 137
FEE REVENUE $ 0
INTEREST EXPENSE $ 2,405
COMPENSATION $ 360
INCOME-PRETAX $ 70
INCOME PRE-EXTRAORDINARY $ 45
EXTRAORDINARY $ 0
CHANGES $ 0
NET INCOME $ 45
EPS-PRIMARY $ 0.31
EPS-DILUTED $ 0.31
