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, 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 Identification No.)
incorporation or organization)
3 World Financial Center
New York, New York 10285
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (212) 526-7000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No ______
As of September 30, 1995, 104,558,051 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 AUGUST 31, 1995
INDEX
Part I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements - (unaudited)
Consolidated Statement of Operations -
Three and Nine Months Ended August 31, 1995
and Three and Eight Months Ended
August 31, 1994 3
Consolidated Statement of Financial Condition -
August 31, 1995 and November 30, 1994 5
Consolidated Statement of Cash Flows -
Nine Months Ended August 31, 1995
and Eight Months Ended August 31, 1994 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
EXHIBIT INDEX 27
Exhibits
<TABLE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of OPERATIONS
(Unaudited)
(In millions, except per share data)
<CAPTION>
Three months ended
August 31,
1995 1994
<S> <C> <C>
Revenues
Principal transactions $ 245 $ 335
Investment banking 251 172
Commissions 116 113
Interest and dividends 2,830 1,901
Other 11 16
Total revenues 3,453 2,537
Interest expense 2,703 1,818
Net revenues 750 719
Non-interest expenses
Compensation and benefits 380 388
Brokerage, commissions and
clearance fees 59 58
Communications 43 51
Occupancy and equipment 44 45
Professional services 39 49
Business development 27 33
Depreciation and amortization 26 33
Other 23 29
Total non-interest expenses 641 686
Income before taxes 109 33
Provision for income taxes 38 11
Net income $ 71 $ 22
Net income applicable to common stock $ 60 $ 11
Number of shares used in earnings per
common share computation 116.2 109.1
Earnings per common share $0.52 $ 0.10
</TABLE>
See notes to consolidated financial statements.
<TABLE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of OPERATIONS
(Unaudited)
(In millions, except per share data)
<CAPTION>
Nine months ended Eight months ended
August 31, August 31,
1995 1994
<S> <C> <C>
Revenues
Principal transactions $ 959 $1,054
Investment banking 540 421
Commissions 342 333
Interest and dividends 7,986 4,547
Other 36 40
Total revenues 9,863 6,395
Interest expense 7,675 4,365
Net revenues 2,188 2,030
Non-interest expenses
Compensation and benefits 1,111 1,057
Brokerage, commissions and
clearance fees 183 179
Communications 137 136
Occupancy and equipment 134 114
Professional services 123 121
Business development 84 85
Depreciation and amortization 80 86
Other 67 76
Severance charge 33
Spin-off expenses 15
Total non-interest expenses 1,919 1,902
Income before taxes and cumulative
effect of change in accounting principle 269 128
Provision for income taxes 95 48
Income before cumulative effect of
change in accounting principle 174 80
Cumulative effect of change in
accounting principle, net of taxes (13)
Net income $ 174 $ 67
Net income applicable to common stock $ 142 $ 40
Number of shares used in earnings per
common share computation 112.2 107.0
Earnings per common share:
Income before cumulative effect
of change in accounting principle $ 1.27 $0.49
Cumulative effect of change in
accounting principle (0.12)
Net income $ 1.27 $0.37
</TABLE>
See notes to consolidated financial statements.
<TABLE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(Unaudited)
(In millions)
ASSETS
<CAPTION>
August 31, November 30,
1995 1994
<S> <C> <C>
Cash and cash equivalents $2,101 $ 964
Cash and securities segregated and on deposit
for regulatory and other purposes 766 1,420
Securities and other financial instruments owned:
Governments and agencies 24,162 24,840
Corporate obligations and other
contractual commitments 9,250 9,962
Mortgages and mortgage-backed 6,014 6,774
Corporate stocks and options 5,950 4,549
Certificates of deposit and other money market
instruments 2,799 1,348
48,175 47,473
Collateralized short-term agreements:
Securities purchased under agreements to resell 37,173 37,490
Securities borrowed 18,178 10,617
Receivables:
Brokers, dealers and clearing organizations 4,232 4,934
Customers 4,174 2,794
Others 1,318 2,762
Property, equipment and leasehold improvements
(net of accumulated depreciation and amortization
of $565 in 1995 and $520 in 1994) 558 619
Deferred expenses and other assets 661 686
Excess of cost over fair value of net assets
acquired (net of accumulated amortization
of $94 in 1995 and $88 in 1994) 182 188
Total assets $117,518 $109,947
</TABLE>
See notes to consolidated financial statements.
<TABLE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Continued)
(Unaudited)
(In millions, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
August 31, November 30,
1995 1994
<S> <C> <C>
Short-term financings:
Securities sold under agreements to repurchase $ 57,887 $ 58,419
Commercial paper and short-term debt 5,742 9,807
Securities loaned 3,425 1,627
Securities and other financial instruments sold
but not yet purchased:
Governments and agencies 12,923 9,867
Corporate obligations and other contractual
commitments 3,930 3,432
Corporate stocks and options 3,591 3,731
20,444 17,030
Payables:
Brokers, dealers and clearing organizations 2,214 2,597
Customers 8,589 3,060
Accrued liabilities and other payables 2,689 2,691
Senior notes 10,635 9,107
Subordinated indebtedness 2,262 2,214
Total liabilities 113,887 106,552
Commitments and contingencies (Note 5)
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
preferenc 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:105,673,212 in 1995
and 105,608,423 in 1994;
shares outstanding: 104,558,121 in 1995
and 104,537,690 in 1994 11 11
Common Stock issuable 199 87
Additional paid-in capital 3,172 3,172
Foreign currency translation adjustment 6 6
Accumulated deficit (449) (574)
Common Stock in treasury at cost: 1,115,091
shares in 1995 and 1,070,733 shares in 1994 (16) (15)
Total stockholders' equity 3,631 3,395
Total liabilities and stockholders' equity $117,518 $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>
Nine months Eight months
ended ended
August 31, August 31,
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income before cumulative effect of change
in accounting principle 174 80
Adjustments to reconcile income to net
cash provided by
(used in) operating activities:
Depreciation and amortization 80 86
Provisions for losses and other reserves 28 54
Deferred tax liability 138
Other adjustments 150 70
Net change in:
Cash and securities segregated 654 (345)
Receivables from brokers, dealers and
clearing organizations 702 (1,271)
Receivables from customers (1,380) (404)
Securities purchased under agreements to resell 317 (18,523)
Securities borrowed (7,561) (4,721)
Securities and other financial
instruments owned (702) (16,050)
Payables to brokers, dealers and
clearing organizations (383) 1,103
Payables to customers 5,196 (866)
Accrued liabilities and other payables (25) (505)
Securities sold under agreements to repurchase (532) 28,635
Securities loaned 1,798 872
Securities and other financial
instruments sold but not yet purchased 3,414 7,580
Other operating assets and liabilities, net 1,492 (265)
Net cash provided by (used in)
operating activities $ 3,422 $(4,332)
</TABLE>
See notes to consolidated financial statements.
<TABLE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS--(Continued)
(Unaudited)
(In millions)
<CAPTION>
Nine months Eight months
ended ended
August 31, August 31,
1995 1994
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes $4,301 $2,537
Principal payments of senior notes (2,885) (1,767)
Proceeds from issuance of subordinated
indebtedness 258 540
Principal payments of subordinated indebtedness (214) (294)
Proceeds from issuance of other indebtedness 2,488 3,949
Principal payments of other indebtedness (3,893) (4,151)
Increase (decrease) in commercial paper and
short-term debt, net (2,252) 2,046
Proceeds from spin-off 1,193
Dividends paid (49) (82)
Net cash (used in) provided by
financing activities (2,246) 3,971
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, equipment and leasehold
improvements (39) (137)
Other
Net cash used in investing activities (39) (137)
Effect of exchange rate changes on cash 12
Net change in cash and cash equivalents 1,137 (486)
Cash and cash equivalents, beginning of period 964 1,333
Cash and cash equivalents, end of period $2,101 $ 847
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)
Interest paid totaled $7,611 and $4,286 for the nine months
ended August 31, 1995 and for the eight months ended August 31,
1994, respectively. Income taxes paid (received) totaled $65 and
($43) for the nine months ended August 31, 1995 and for the eight
months ended August 31, 1994, respectively.
See notes to consolidated financial statements.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
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. The consolidated statement of financial
condition at November 30, 1994 was derived from the audited financial
statements. It is recommended that these financial statements be read
in conjunction with the audited consolidated financial statements
included in the Company's Transition Report on Form 10-K for the
eleven months ended November 30, 1994.
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.
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 nine months ended August 31, 1995, the Company issued
$4,559 million of long-term debt (including $1,261 million of foreign
currency denominated notes), with maturities ranging from 1995 to
2015. These issuances were primarily utilized to refinance maturing
long-term debt and to replace senior notes redeemed by the Company
prior to final maturity during the nine months ended August 31, 1995.
Approximately $3,444 million of the Company's new issuances were
fixed rate. Of this amount, $2,320 million were U.S. dollar
denominated issuances with a contractual weighted average interest
rate of 8.0%, and $1,124 million were foreign currency denominated
notes with a contractual weighted average interest rate of 4.8%.
This rate is based on the contractual foreign interest rates of the notes.
The remainder of the Company's new issuances were floating
rate, with contractual interest rates based primarily on the London
Interbank Offered Rate ("LIBOR").
Approximately $1,666 million of the Company's U.S. dollar fixed
rate issuances during the nine months ended August 31, 1995 have
effectively been converted to floating rate obligations through the
use of interest rate swaps. In addition to these interest rate swaps,
the Company entered into $654 million notional value of swaptions.
These swaptions, if exercised, would convert $654 million of the
Company's U.S. dollar fixed rate debt issuances during the nine months
ended August 31, 1995 to floating interest rates. Additionally,
virtually all of the Company's foreign currency denominated issuances
during the nine months ended August 31, 1995 have effectively been
converted to U.S. dollar obligations with U.S. dollar floating
interest rates based primarily on LIBOR through the use of cross
currency swaps.
The Company had approximately $3,099 million of long-term debt
mature during the nine months ended August 31, 1995, including notes
redeemed by the Company prior to final maturity.
3. Capital Requirements:
As a registered broker-dealer, LBI is subject to SEC Rule 15c3-1,
the Net Capital Rule, which requires LBI to maintain net capital of
not less than the greater of 2% of aggregate debit items arising from
customer transactions, as defined, or 4% of funds required to be
segregated for customers' regulated commodity accounts, as defined.
At August 31, 1995, LBI's regulatory net capital, as defined, of
$1,606 million exceeded the minimum requirement by $1,481 million. On
August 31, 1995, Lehman Government Securities Inc., a wholly owned
subsidiary of LBI and a registered broker-dealer, was merged into LBI.
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 August 31,
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 Holdings' obligation first
to make dividend payments on its preferred stock and the governing
provisions of the Delaware General Corporation Law.
4. Incentive Plans:
In June 1995, the Compensation and Benefits Committee of the
Board of Directors of Holdings (the "Compensation Committee") approved
the 1995 Stock Award Program, pursuant to the Lehman Brothers Holdings
Inc. 1994 Management Ownership Plan. Under the 1995 Stock Award
Program, eligible employees are to receive as a portion of their total
compensation approximately 6 million restricted stock units ("RSUs"),
subject to vesting provisions and transfer restrictions. In addition,
certain senior officers are eligible to receive RSUs based on the
achievement of 1995 performance goals, with 1 million RSUs expected to
be awarded. There were no costs to employees and senior officers
associated with these awards. These RSU awards will vest 80% on July
1, 1996 and 20% on July 1, 2000.
The Compensation Committee also determined to award RSUs (or
Restricted Stock) to certain senior officers of Lehman Brothers as
part of a three-year long term incentive plan. The number of RSUs (or
Restricted Stock) which may be awarded, if any, will be determined
upon the completion of a two year period; vesting would not occur
until the end of the third year.
The Company records compensation expense for all RSU programs
granted based on the market value of the common stock and the vesting
provisions.
5. 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.
6. 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.
7. Other Charges:
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.
Spin-Off Expenses. During the second quarter of 1994, the
Company recorded a charge of $15 million pretax ($12 million aftertax)
in connection with the spin-off from the American Express Company and
certain related expenses.
8. 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.
In conjunction with the decision to change its year-end, the Company
is reporting its third quarter 1994 results on the basis of its new
fiscal year.
9. Subsequent Events:
On September 9, 1995, the Company entered into an agreement to
sell its 8% interest in an Italian cellular telephone venture, Omnitel
Sistemi Radiocellulari S.p.A. ("Omnitel") to Ing. C. Olivetti & Co.
S.p.A ("Olivetti"), subject to the completion of Olivetti's announced
rights offering (the "Rights Offering"). The Company will receive
approximately $175 million of proceeds (at current exchange rates)
from the sale of Omnitel. In connection with this transaction, the
Company, under certain circumstances, may be required to purchase
and subscribe to rights for up to a total cost of $82.5 million
(at current exchange rates) during the Rights Offering. In addition,
the Company has an underwriting commitment relating to its role as
a co-lead manager in the Rights Offering. The Rights Offering will
be considered for final approval by the stockholders of Olivetti on
October 26, 1995 and, if approved, is expected to be launched on
November 16, 1995. Subject to the foregoing, the Company currently
anticipates recognizing an aftertax gain of approximately $50 million
in the fourth quarter related to the sale.
On September 6, 1995, the Company agreed to sell the net assets
of certain of its European branch operations as well as Lehman
Brothers Bank (Switzerland) to Prudential Securities. In August,
1995, the Company also agreed to sell certain of its domestic retail
brokerage accounts to Prudential Securities. These transactions are
expected to close in the fourth quarter. The Company does not expect
any material gain or loss on these transactions.
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 that prevailed during the last
three quarters of 1994, which were characterized by rising interest
rates and depressed underwriting volumes, continued throughout most of
the first quarter of 1995.
In the second quarter of 1995, market conditions showed signs of
improvement as expectations for lower U.S. interest rates prompted
strong rallies in the stock and bond markets. Although customer
volumes increased in both the debt and equity markets, activity
continued to be volatile during this period. In general, investors
remained conservative and defensive due to uncertainties surrounding
the direction of U.S. interest rates and the value of the dollar.
Over the same period, derivative transaction volumes showed
improvement as customers and clients were looking for protection in a
declining interest rate and volatile currency environment.
The positive momentum established during the second quarter of
1995 continued into the third quarter of 1995. In early July 1995,
the U.S. Federal Reserve Banks reduced the federal funds rate by one-
quarter of a percentage point. Investors reacted favorably to this
long-awaited rate cut, leading to a rally in the bond market.
However, by the middle of July 1995, positive economic data caused
renewed investor concerns regarding inflation, the growth rate of the
economy, and the future direction of interest rates. Towards the end
of the third quarter, the market tone turned decidedly more positive
as investors concluded that further rate increases would be
unnecessary. In addition, the dollar continued to strengthen against
key currencies such as the yen and the deutschemark, providing further
support for a more stable interest rate environment.
The fixed income and equity markets rallied as a result of these
factors. Improved market conditions allowed for a continuing increase
in debt and equity origination activity. Driving the robust equity
markets were strong individual company and industry fundamentals, near
record levels of merger and acquisition activity and substantial cash
inflows into mutual funds.
The positive market conditions experienced during the third
quarter of 1995 continued into the early part of the fourth quarter.
LEHMAN BROTHERS HOLDINGS INC. and SUBIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
For the Three Months Ended August 31, 1995 and August 31, 1994
Summary. Net income increased to $71 million for the third
quarter ended August 31, 1995 from $22 million for the third quarter
ended August 31, 1994. Earnings per common share increased to $0.52
for the third quarter of 1995 from $0.10 per common share for the
third quarter of 1994 (as adjusted for the number of shares of common
stock outstanding on May 31, 1994).
Net revenues increased to $750 million in the third quarter of
1995 from $731 million in the second quarter of 1995 and $719 million
for the third quarter of 1994. The increase in net revenues reflected
the continuation of an improved market environment, as the U.S.
Federal Reserve Banks reduction of the federal funds rate and the
strengthening dollar led to stronger U.S. debt and equity markets
which benefitted the Company's customer flow business.
Compensation and benefits expense as a percentage of net revenues
was 50.7% for both the third and second quarters of 1995, down from
53.9% in the third quarter of 1994. Non-personnel expenses declined
for the fifth consecutive quarter to $261 million in the third quarter
of 1995 from $298 million in the third quarter of 1994. The increase
in net revenues and the corresponding reduction in non-interest
expenses caused an improvement in the Company's pretax operating
margin to 14.5% in the third quarter of 1995 from 4.6% in the third
quarter of 1994.
Principal Transactions. Principal transactions revenues include
the results of the Company's market making and trading activity
related to its customer business, 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 27% to $245 million for the third
quarter of 1995 from $335 million for the third quarter of 1994. This
decline in principal transactions revenues was primarily due to
decreased net revenues from foreign exchange and fixed income
derivatives.
Investment Banking. Investment banking revenues increased 46% to
$251 million for the third quarter of 1995 from $172 million for the
third quarter of 1994 and increased 65% from revenues of $152 million
in the second quarter of 1995. The increase in investment banking
revenues during the third quarter of 1995 versus the third quarter of
1994 and the second quarter of 1995 was primarily attributable to
higher levels of underwriting activity due predominantly to a
strengthened equity syndicate calendar. Revenues from strategic
advisory activities remained strong, with increased revenues in the
third quarter of 1995 compared to the third quarter of 1994 and the
second quarter of 1995. Merchant banking results increased primarily
as a result of net unrealized gains in the value of certain
publicly traded equity investments.
Commissions. Commission revenues were $116 million for the third
quarter of 1995, virtually unchanged from both the prior year period
and the second quarter of 1995, reflecting an improvement in the
Company's institutional trading volumes of listed securities offset by
the effects of restructuring the Company's 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 $2,830 million for the third quarter of 1995 from $1,901 million
for the third quarter of 1994. This increase is the result of higher
levels of interest rates in the third quarter of 1995 versus the third
quarter of 1994 and an increase in the Company's volume of matched
book transactions.
Net interest and dividend revenues increased 53% to $127 million
in the third quarter of 1995 from $83 million in the third 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. In
the third quarter of 1995, the increase in net interest and dividend
revenue was due to a higher level of interest earning assets,
increased spreads on certain fixed income products as a result of the
lower interest rate environment and the benefit of the Company's
liability management activities. Such activities included the conversion
of a portion of the Company's existing long-term debt portfolio from fixed
to floating rate through the use of interest rate swaps.
Non-Interest Expenses. Non-interest expenses decreased 7% to
$641 million for the third quarter of 1995 from $686 million for the
third quarter of 1994. Compensation and benefits expense as a
percentage of net revenues was 50.7% for both the third and second
quarters of 1995 down from 53.9% in the third quarter of 1994.
Compensation and benefits expense decreased to $380 million for the
third quarter of 1995 from $388 million for the third quarter of 1994.
Nonpersonnel expenses were $261 million for the third quarter of
1995 down from $298 million for the third quarter of 1994 and $270
million for the second quarter of 1995.
Cost Reduction Effort. At year end 1994, the Company announced a
cost reduction target of $300 million on an annualized basis (pre-tax)
compared to the third quarter 1994 annualized expenses. The Company
has continued its progress in reducing costs concentrating on both
personnel and non-personnel expenses. During the third quarter of
1995, headcount was further reduced to 8,069 employees at August 31,
1995 from 8,195 at May 31, 1995. Such reductions were achieved
despite certain strategic hires by the Company in a number of business
units. The Company also continued to reduce nonpersonnel expenses
with annualized savings of approximately $37 million being achieved in
the third quarter when compared to the second quarter 1995 expense
level. The Company expects to achieve its remaining cost reduction
objectives by year end 1995.
In addition to the cost reduction efforts described above, the
Company continues to review its activities, realigning and
consolidating operations where possible. These realignments and
consolidations could result in the relocation of personnel and the
identification of excess operating facilities.
Income Taxes. The Company's income tax provision was $38 million
for the third quarter of 1995 as compared to $11 million for the third
quarter of 1994. The effective tax rate was 35% for the third quarter
of 1995 and the third quarter of 1994. The 1995 rate, although the
same as 1994, includes a decrease in the state and local tax rate and
an improvement in certain foreign operations, partially offset by a
decrease in tax benefits attributable to income subject to
preferential tax treatment.
Results of Operations
For the Nine Months Ended August 31, 1995 and Eight Months Ended
August 31, 1994
Summary. The Company reported net income of $174 million for the
nine months ended August 31, 1995 and $67 million for the eight months
ended August 31, 1994. The 1994 results included an $18 million
aftertax severance charge related to the Company's review of its
personnel needs, a $12 million aftertax charge in connection with the
spin-off from the American Express Company and certain related
expenses (the "Spin-off 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. Excluding these charges, net income was
$110 million for the eight months ended August 31, 1994.
Earnings per common share for the nine months ended August 31,
1995 were $1.27. Earnings per common share for the eight months ended
August 31, 1994 were $0.37 after the cumulative effect of a change in
accounting principle and were $0.49 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 $2,188 million for the nine months ended August
31, 1995 and $2,030 million for the eight months ended August 31,
1994. Although the first quarter of 1994 reflected the carryover of
the 1993 robust operating environment, net revenue levels for the
remainder of 1994 were adversely affected by significantly reduced
underwriting volumes and a less favorable mix of investor activity due
to increasing interest rates and volatile equity markets. The first
quarter of 1995 reflected a continuation of the difficult business
environment, due to further interest rate increases, reduced levels of
debt and equity underwritings and increased volatility in the
secondary markets. Although market conditions showed signs of
improvement during the second quarter of 1995 as a result of
expectations for lower U.S. interest rates, investors still remained
defensive. The third quarter of 1995 reflected the continuation of an
improved market environment, as the U.S. Federal Reserve Banks
reduction of the federal funds rate and the strengthening dollar led
to stronger U.S. debt and equity markets.
Principal Transactions. Principal transactions revenues were $959
million for the nine months ended August 31, 1995 and $1,054 million
for the eight months ended August 31, 1994. Principal transactions
revenues were adversely affected by lower customer flow activities,
particularly in fixed income derivatives.
Investment Banking. Investment banking revenues were $540
million for the nine months ended August 31, 1995 and $421 million for
the eight months ended August 31, 1994. During the first six months
of 1995, underwriting activity continued at low levels industrywide as
demand for debt and equity issuance remained below the comparable
levels present during 1994. Investment banking revenues in the third
quarter of 1995 were positively affected by higher levels of
underwriting activity due predominantly to a strengthened equity
syndicate calendar. Strong results from merchant banking and
strategic advisory activities continued to positively impact
investment banking revenues in 1995.
Commissions. Commission revenues were $342 million for the nine
months ended August 31, 1995 and $333 million for the eight months
ended August 31, 1994. Commission revenues in 1995 reflect lower
volumes of customer trading in listed securities, primarily due to the
effects of restructuring the Company's 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 were
$7,986 million for the nine months ended August 31, 1995 and $4,547
million for the eight months ended August 31, 1994. Interest and
dividend revenues in 1995 reflects higher levels of interest rates and
an increase in the Company's volume of matched book transactions.
Net interest and dividend income was $311 million for the nine
months ended August 31, 1995 and $182 million for the eight months
ended August 31, 1994. Net interest and dividend revenue in 1995
reflected decreased financing costs due to the $1.2 billion infusion
of capital in connection with the May 31, 1994 spin-off from the
American Express Company, a higher level of interest earning
assets and the benefit of the Company's liability management activities.
These activities included the conversion of a portion of the Company's
existing long-term debt portfolio from fixed to floating rate through
the use of interest rate swaps.
Non-Interest Expenses. Non-interest expenses were $1,919 million
for the nine months ended August 31, 1995 and $1,902 million for the
eight months ended August 31, 1994. Compensation and benefits expense
was $1,111 million for the nine months ended August 31, 1995 and
$1,057 million for the eight months ended August 31, 1994.
Compensation and benefits expense as a percentage of net revenues was
50.8% for the nine months ended August 31, 1995 from 52.1% for the
eight months ended August 31, 1994.
Nonpersonnel expenses were $808 million for the nine months ended
August 31, 1995 and $845 million for the eight months ended August 31,
1994. Included in the 1994 results was a $33 million severance charge
and a $15 million Spin-off Charge. Excluding these charges,
nonpersonnel expenses were $797 million for the eight months ended
August 31, 1994.
Income Taxes. The Company's income tax provision was $95
million for the nine months ended August 31, 1995 and $48 million for
the eight months ended August 31, 1994. The effective tax rate was
35% for the nine months ended August 31, 1995 and 38% for the eight
months ended August 31, 1994. The 1994 results include a tax charge
related to the non-deductibility of a portion of the Spin-off Charge.
In addition, the lower tax rate for 1995 is a result of a decrease in
the state and local tax rate and an improvement in certain foreign
operations, partially offset by a decrease in tax benefits
attributable to income subject to preferential tax treatment.
Liquidity and Capital Resources
Total assets increased to $117.5 billion at August 31, 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. As a result of this arrangement, assets
increased by approximately $11 billion which were predominantly funded
with offsetting liabilities. The Company's consolidated statement of
financial condition now includes accounts previously cleared, settled
and carried 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.
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, property, equipment and
leasehold improvements, deferred expenses and other assets, and excess
of cost over fair value of net assets acquired. On June 22, 1995,
$700 million of a $945 million interest bearing receivable from the
American Express Company due in June 1996 was prepaid. The maturity
of the remaining $245 million interest bearing note was extended to
the year 2000. Portions of this note will be prepaid by American
Express prior to such date in proportion to the Company's payments and
prepayments on any indebtedness related to the World Financial Center.
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 August 31, 1995, 79% 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 $5.7 billion at August 31, 1995, compared to $9.8
billion at November 30, 1994. The decrease in unsecured short-term
funding is primarily due to an increase in long-term debt and
stockholders' equity, repayment of the $700 million of the American
Express receivable and increased usage of secured funding for the
Company's securities and other financial instruments owned. Of these
amounts, commercial paper outstanding totaled $1.0 billion at August
31, 1995 compared to $2.8 billion at November 30, 1994. At August 31,
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 August 31,
1995, the Company had $14.2 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.
The Company issued $4.6 billion in long-term debt for the nine
months ended August 31, 1995 and $3.1 billion for the eight months
ended August 31, 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 nine months ended August 31,
1995. The Company staggers the maturities of its long-term debt to
minimize refunding risk. At August 31, 1995, the Company had long-
term debt outstanding of $12.9 billion compared to $11.3 billion at
November 30, 1994.
At August 31, 1995, the Company had approximately $4.5 billion
available for issuance of debt securities under various shelf
registrations and debt programs.
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- subordina
term term term ted
debt
Duff & Phelps Credit
Rating Co D-1 A D-1 A-
Fitch Investors
Service Inc. F-1 A F-1 A-
IBCA A1 A- A1 A-
Moody's P2 Baa1 P2 Baa1
S&P A-1 A A-1 A
Thomson BankWatch TBW-1 A- TBW-1 A-
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 as BB+ or lower, or equivalent ratings by recognized credit
rating agencies, as well as non-rated securities or loans which, in
the opinion of management, are non-investment grade. Non-investment
grade securities generally involve greater risks than investment grade
securities due to the issuer's creditworthiness and the liquidity of
the market for such securities. In addition, these issuers have
higher levels of indebtedness, resulting in an increased sensitivity
to adverse economic conditions. The Company recognizes these risks
and aims to reduce market and credit risk through the diversification
of its products and counterparties. High yield debt securities are
carried at market value and unrealized gains or losses for these
securities are reflected in the Company's consolidated statement of
operations. The Company's portfolio of such securities at August 31,
1995 and November 30, 1994 included long positions with an aggregate
market value of approximately $957 million and $1.1 billion,
respectively, and short positions with an aggregate market value of
approximately $89 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
$100 million and $72 million at August 31, 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, asset sales and mortgage remittances. The
Company's original investment in the partnership was approximately
$136 million. The Company also advanced approximately $750 million of
financing to the partnership in 1993, which has subsequently been repaid
in its entirety from proceeds related to the disposition of the real
estate assets. In August 1995, the Company agreed to purchase the
partnership interests owned by Westinghouse. The Company also
entered into an agreement to sell a portion of its partnership
interests to an affiliate of Lennar Inc., a third party mortgage servicer,
so that the Company and Lennar Inc. would own 75% and 25%, respectively,
of the partnership. The Compay's net investment in the partnership at
August 31, 1995 is $179 million. As a result of its
increased ownership percentage, the Company's consolidated financial
statements at August 31, 1995 include the accounts of the partnership.
The Company expects to substantially liquidate the remaining loans by
the end of 1996.
Merchant Banking Partnerships. At August 31, 1995, the Company's
investment in merchant banking partnerships was $313 million. At
August 31, 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 August 31, 1995, the Company had $44 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. 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 reserves, the Company believes that it is
adequately reserved for its investments in real estate and commitments
and contingent liabilities.
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 $173 million at August 31, 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.
In re Computervision Securities Litigation (Reported in Holdings'
Annual Report on Form 10-K)
Plaintiffs dropped the remaining claim on their original
complaint and sought to amend the complaint. On September 20, 1995,
the Court denied plaintiffs' motion for leave to serve an amended
complaint and entered judgment for defendants.
Glynwil Investment, Ltd. v. Shearson Lehman Brothers Inc. (Reported in
Holdings' Annual Report on Form 10-K and First Quarter Report on Form
10-Q)
Subject to the execution of a definitive agreement, the parties have
agreed to a settlement of this action.
First Capital Holdings Inc. - Bankruptcy Court Action. (Reported in
Holdings' Annual Report on Form 10-K)
On August 9, 1995, the Bankruptcy Court approved the FCH
creditors' settlement.
Actions Relating to National Association of Securities Dealers
Automated Quotations System ("NASDAQ") Market Maker Antitrust and
Securities Litigation.
The Court dismissed the action, with leave to replead, stating
that the compliant failed to identify the securities involved with
sufficient specificity. The plaintiffs have repled and the defendants
will answer the amended complaint on November 17, 1995.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS (Continued)
Berlitz International Inc. v. Macmillan Inc. et al. (Reported in
Holdings' Annual Report on Form 10-K)
On the motion of LBIE and PLC, the case was remanded back to the
Court. Following the remand, the parties entered into a stipulation
pursuant to which all proceedings have been stayed pending the outcome
of the appeal in Macmillan v. Bishopsgate Investment Trust et al.,
referred to below.
Macmillan, Inc. v. Bishopsgate Investment Trust, Shearson Lehman
Brothers Holdings PLC et al. (Reported in Holdings' Annual Report on Form
10-K)
The Court of Appeal in London is expected to give judgment
shortly on Macmillan's contention that the High Court was wrong to
apply New York law to this dispute. No date has been fixed for the
revised Macmillan appeal.
MCC Proceeds Inc. v. Lehman Brothers International (Europe)
This action was commenced by issuance of a writ in the High Court
of Justice in London, England on 14 July 1995. In this action, MCC
Proceeds Inc., as successor to Macmillan, Inc., seeks relief identical
to that sought in the Berlitz action described above, but based on a
legal theory which was initially pleaded but ultimately abandoned by
the plaintiff in Berlitz. LBIE has issued an application to dismiss
the proceeding.
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 September 21, 1995, Items 5 and 7.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
LEHMAN BROTHERS HOLDINGS INC.
(Registrant)
Date: October 16, 1995 By /s/ Richard S. Fuld Jr.
Richard S. Fuld, Jr.
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: October 16, 1995 By /s/ Robert Matza
Robert Matza
Chief Financial Officer
(Principal Financial Officer)
EXHIBIT INDEX
Exhibit No. Exhibit
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 Three Nine Eight
months months months months
ended ended ended ended
August 31, August 31, August 31, August 31,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Primary:
Weighted average shares
outstanding:
Common stock 104,549,710 105,555,348 104,526,430 105,588,233
Common stock issuable 10,984,492 3,497,819 7,348,161 1,331,527
Common stock equivalents 623,663 61,389 319,000 61,389
Total common stock and
common stock equivalents 116,157,865 109,114,556 112,193,591 106,981,149
Income before cumulative
effect of change
inaccounting principle $ 70.7 $ 22.0 $173.9 $ 79.7
Cumulative effect of change in
accounting principle (12.7)
Net income 70.7 22.0 173.9 67.0
Preferred dividends (10.6) (11.0) (31.8) (27.0)
Net income applicable to
common stock $ 60.1 $ 11.0 $142.1 $ 40.0
Earnings Per Share:
Income before cumulative
effect of change in
accounting principle $ 0.52 $ 0.10 $ 1.27 $ 0.49
Cumulative effect of change
in accounting principle (0.12)
Earnings per common share $ 0.52 $ 0.10 $ 1.27 $ 0.37
Fully diluted:
Weighted average shares
outstanding:
Common stock 104,549,710 105,555,348 104,526,430 105,588,233
Common stock issuable 10,984,492 3,497,819 7,348,161 1,331,527
Common stock equivalents 872,012 61,389 442,456 61,389
Total common stock and
common stock equivalents 116,406,214 109,114,556 112,317,047 106,981,149
Income before cumulative
effect of change in
accounting principle $ 70.7 $ 22.0 $173.9 $ 79.7
Cumulative effect of
change in accounting
principle (12.7)
Net income 70.7 22.0 173.9 67.0
Preferred dividends (10.6) (11.0) (31.8) (27.0)
Net income applicable
to common stock $ 60.1 $ 11.0 $142.1 $ 40.0
Earnings Per Share:
Income before cumulative
effect of change in
accounting principle $ 0.52 $ 0.10 $ 1.27 $ 0.49
Cumulative effect of
change in accounting
principle (0.12)
Earnings per common share $ 0.52 $ 0.10 $ 1.27 $ 0.37
</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 Nine
Months Months
Ended Ended
For the Year Ended December 31, November 30 August 31
1990 1991 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C> <C>
Fixed charges:
Interest expense:
Subordinated
indebtedness 203 170 150 144 158 152
Bank loans and other
borrowings* 4,531 4,755 5,035 5,224 6,294 7,523
Interest component
of rentals
of office and
equipment 62 70 74 76 42 34
Other adjustments** 8 2 2 7 4 22
TOTAL (A) $4,804 $4,997 $5,261 $5,451 $6,498 $7,731
Earnings:
Pretax income (loss)
from continuing
operati (749) 150 (247) 27 193 269
Fixed charges 4,804 4,997 5,261 5,451 6,498 7,731
Other adjustments*** (17) 7 (6) (4) (21)
TOTAL (B) $4,038 $5,154 $5,014 $5,472 $6,687 $7,979
(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.
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
This schedule contains summary financial information extracted from the
Statement of Financial Condition at August 31, 1995 (Unaudited) and the
Consolidated Statement of Operations for the nine months ended August 31, 1995
(Unaudited) and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000806085
<NAME> LEHMAN BROTHERS HOLDINGS INC.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> DEC-01-1994
<PERIOD-END> AUG-31-1995
<CASH> 2,867
<RECEIVABLES> 9,724
<SECURITIES-RESALE> 37,173
<SECURITIES-BORROWED> 18,178
<INSTRUMENTS-OWNED> 48,175
<PP&E> 558
<TOTAL-ASSETS> 117,518
<SHORT-TERM> 5,742
<PAYABLES> 10,803
<REPOS-SOLD> 57,887
<SECURITIES-LOANED> 3,425
<INSTRUMENTS-SOLD> 20,444
<LONG-TERM> 12,897
<COMMON> 11
0
708
<OTHER-SE> 2,912
<TOTAL-LIABILITY-AND-EQUITY> 117,518
<TRADING-REVENUE> 959
<INTEREST-DIVIDENDS> 7,986
<COMMISSIONS> 342
<INVESTMENT-BANKING-REVENUES> 540
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 7,675
<COMPENSATION> 1,111
<INCOME-PRETAX> 269
<INCOME-PRE-EXTRAORDINARY> 174
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 174
<EPS-PRIMARY> $1.27
<EPS-DILUTED> $1.27
</TABLE>
