SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1996
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
incorporation or organization) Identification No.)
3 World Financial Center
New York, New York 10285
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (212) 526-7000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ______
As of June 30, 1996, 100,411,162 shares of the Registrant's Common Stock, par
value $.10 per share, were outstanding.
===============================================================================
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MAY 31, 1996
INDEX
Part I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements - (unaudited)
Consolidated Statement of Operations -
Three and Six Months Ended May 31, 1996
and 1995 ............................................ 3
Consolidated Statement of Financial Condition -
May 31, 1996 and November 30, 1995 ................... 5
Consolidated Statement of Cash Flows -
Six Months Ended May 31, 1996
and 1995 ........................................... 7
Notes to Consolidated Financial Statements.............. 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...... 14
Part II. OTHER INFORMATION
Item 1. Legal Proceedings......................................... 28
Item 6. Exhibits and Reports on Form 8-K ........................ 29
Signatures................................................................. 30
EXHIBIT INDEX ..................................................... 31
Exhibits
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of OPERATIONS
(Unaudited)
(In millions, except per share data)
Three months ended
May 31, May 31,
1996 1995
---------- ---------
Revenues
Principal transactions $ 398 $ 355
Investment banking 223 152
Commissions 94 121
Interest and dividends 2,749 2,655
Other 12 15
------- -------
Total revenues 3,476 3,298
Interest expense 2,643 2,567
----- -----
Net revenues 833 731
------- -----
Non-interest expenses
Compensation and benefits 422 371
Brokerage, commissions and clearance fees 58 60
Communications 38 47
Occupancy and equipment 37 45
Professional services 39 42
Business development 25 28
Depreciation and amortization 22 27
Other 23 21
------ ------
Total non-interest expenses 664 641
----- -----
Income before taxes 169 90
Provision for income taxes 61 32
------ ------
Net income $ 108 $ 58
======= ======
Net income applicable to common stock $ 102 $ 48
======== ======
Average common and common equivalent
shares outstanding 114.8 110.2
===== =====
Earnings per common share $0.89 $0.43
====== =====
See notes to consolidated financial statements.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of OPERATIONS
(Unaudited)
(In millions, except per share data)
Six months ended
May 31, May 31,
1996 1995
--------- -------
Revenues
Principal transactions $ 811 $ 714
Investment banking 433 289
Commissions 190 226
Interest and dividends 5,405 5,156
Other 23 25
------- -------
Total revenues 6,862 6,410
Interest expense 5,208 4,972
----- -----
Net revenues 1,654 1,438
----- -----
Non-interest expenses
Compensation and benefits 839 730
Brokerage, commissions and clearance fees 115 124
Communications 78 94
Occupancy and equipment 77 90
Professional services 73 84
Business development 52 57
Depreciation and amortization 46 54
Other 47 45
------- -------
Total non-interest expenses 1,327 1,278
----- -----
Income before taxes 327 160
Provision for income taxes 115 57
------ -------
Net income $ 212 $ 103
====== ======
Net income applicable to common stock $ 195 $ 82
====== =======
Average common and common equivalent shares
outstanding 115.9 110.2
===== =====
Earnings per common share $1.68 $0.74
===== =======
See notes to consolidated financial statements.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(Unaudited)
(In millions)
ASSETS
May November
31, 1996 30, 1995
-------- --------
Cash and cash equivalents ...................................$ 1,477 $ 874
Cash and securities segregated and on deposit
for regulatory and other purposes ......................... 617 945
Securities and other financial instruments owned:
Governments and agencies ................................. 25,791 22,849
Corporate obligations and other contractual commitments .. 10,704 11,415
Corporate stocks and options ............................. 7,916 7,143
Mortgages and mortgage-backed ............................ 7,825 6,847
Certificates of deposit and other money market instruments 3,048 3,068
-------- --------
55,284 51,322
-------- --------
Collateralized short-term agreements:
Securities purchased under agreements to resell .......... 43,861 36,234
Securities borrowed ...................................... 19,295 16,290
Receivables:
Brokers, dealers and clearing organizations .............. 2,948 2,845
Customers ................................................ 7,357 3,891
Others ................................................... 1,451 1,434
Property, equipment and leasehold improvements
(net of accumulated depreciation and amortization
of $618 in 1996 and $585 in 1995) ......................... 473 495
Deferred expenses and other assets .......................... 786 793
Excess of cost over fair value of net assets
acquired (net of accumulated amortization
of $99 in 1996 and $95 in 1995) ........................... 176 180
-------- --------
Total assets .........................................$133,725 $115,303
======== ========
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Continued)
(Unaudited)
(In millions, except share data)
May 31, November 30,
1996 1995
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper and short-term debt ......................................................... $ 8,004 $ 6,235
Securities and other financial instruments sold but not yet purchased:
Governments and agencies .................................................................. 14,476 11,665
Corporate stocks and options .............................................................. 7,562 4,393
Corporate obligations and other contractual commitments ................................... 3,674 3,796
--------- ---------
25,712 19,854
--------- ---------
Collateralized short-term financings:
Securities sold under agreements to repurchase ............................................ 65,332 59,035
Securities loaned ......................................................................... 4,250 1,966
Payables:
Brokers, dealers and clearing organizations ............................................... 2,728 2,513
Customers ................................................................................. 7,819 6,311
Accrued liabilities and other payables ....................................................... 2,745 2,926
Long-term debt:
Senior notes .............................................................................. 10,574 10,505
Subordinated indebtedness ................................................................. 2,995 2,260
--------- ---------
Total liabilities ................................................................. 130,159 111,605
--------- ---------
Commitments and contingencies
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
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: 106,197,088 in 1996 and 105,684,565 in 1995;
shares outstanding: 100,398,499 in 1996 and 104,565,875 in 1995 ....................... 11 11
Common Stock issuable ..................................................................... 209 211
Additional paid-in capital ................................................................ 3,180 3,172
Foreign currency translation adjustment ................................................... 6 9
Accumulated deficit ....................................................................... (214) (397)
Common Stock in treasury at cost: 5,798,589 shares in 1996
and 1,118,690 shares in 1995 .......................................................... (134) (16)
--------- ---------
Total stockholders' equity ....................................................... 3,566 3,698
--------- ---------
Total liabilities and stockholders' equity ....................................... $ 133,725 $ 115,303
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In millions)
Six months ended
May 31, May 31,
1996 1995
------ --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 212 $ 103
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 46 54
Provisions for losses and other reserves 22 16
Other adjustments 23 22
Net change in:
Cash and securities segregated 328 519
Receivables from brokers, dealers and clearing organizations (103) 1,073
Receivables from customers (3,466) (2,204)
Securities purchased under agreements to resell (7,627) (2,816)
Securities borrowed (3,005) (8,614)
Securities and other financial instruments owned (3,962) (1,560)
Payables to brokers, dealers and clearing organizations 215 1,009
Payables to customers 1,508 3,471
Accrued liabilities and other payables (186) (65)
Securities sold under agreements to repurchase 6,297 7,188
Securities loaned 2,284 3,298
Securities and other financial instruments sold but
not yet purchased 5,858 (1,392)
Other operating assets and liabilities, net (74) 863
------- ------
Net cash (used in) provided by operating activities $(1,630) $ 965
------- -------
See notes to consolidated financial statements.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS--(Continued)
(Unaudited)
(In millions)
Six months ended
May 31, May 31,
1996 1995
------ -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes $1,271 $3,445
Principal payments of senior notes (1,171) (2,093)
Proceeds from issuance of subordinated indebtedness 975 27
Principal payments of subordinated indebtedness (246) (213)
Net proceeds from (payments for) commercial paper and
short-term debt 1,773 (1,514)
Payment for repurchase of preferred stock (200)
Payments for treasury stock purchases (118)
Dividends paid (32) (32)
------ -------
Net cash provided by (used in) financing activities 2,252 (380)
----- ------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, equipment and leasehold improvements (19) (30)
------ ------
Net cash used in investing activities (19) (30)
------ ------
Net change in cash and cash equivalents 603 555
------ ------
Cash and cash equivalents, beginning of period 874 964
------ ------
Cash and cash equivalents, end of period $1,477 $1,519
====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)
Interest paid totaled $5,213 and $4,955 for the six months ended May
31, 1996 and 1995, respectively. Income taxes paid totaled $50 and $21 for the
six months ended May 31, 1996 and 1995, respectively.
See notes to consolidated financial statements.
<PAGE>
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 (collectively, the
"Company" or "Lehman Brothers"). Lehman Brothers is one of the leading global
investment banks serving institutional, corporate, government and high-net-
worth individual clients and customers. The Company's worldwide headquarters in
New York and regional headquarters in London and Tokyo are complemented by
offices in additional locations in North America, Europe, the Middle East, Latin
and South America and the Asia Pacific region. The Company is engaged primarily
in providing financial services. The principal U.S. 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, 1995 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 Annual Report on Form 10-K for the twelve months ended November 30,
1995 (the "Form 10-K").
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 amounts
reflect reclassifications to conform to the current period's presentation.
2. Long-Term Debt:
During the six months ended May 31, 1996, the Company issued $2,246
million of long-term debt (comprised of $1,271 million of senior notes and $975
million of subordinated debt). Of the total issuances for the first six months
of 1996, $1,203 million were U.S. dollar fixed rate, $630 million were U.S.
dollar floating rate and $413 million were foreign currency denominated. The
U.S. dollar fixed rate issuances included $200 million 8.30% Quarterly Income
Capital Securities ("Series A QUICS"), which were issued to fund the repurchase
of the $200 million 8.44% Cumulative Preferred Stock from American Express. The
remaining issuances were used to refinance current and prefund expected
maturities of long-term debt in 1996.
The Series A QUICS, issued on February 15, 1996, mature in 2035 and are
subject to early redemption by the Company on or after March 31, 2001. The
Company retains the right to defer interest payments on the Series A QUICS on
one or more occasions for a period of up to twenty consecutive quarters.
Interest payments may not be deferred beyond the maturity of the Series A QUICS.
The Series A QUICS are subordinated to all senior and subordinated debt of the
Company.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
The Company's floating rate new issuances contain contractual interest
rates based primarily on the London Interbank Offered Rates ("LIBOR") and Prime.
All of the Company's U.S. dollar fixed rate new issuances, including the Series
A QUICS, were effectively converted to floating rate obligations through the use
of interest rate swaps. In addition, all of the Company's foreign currency
denominated new issuances were effectively converted to U.S. dollar obligations
with floating interest rates based primarily on LIBOR through the use of
currency swaps.
The Company had approximately $1,417 million of long-term debt mature
during the six months ended May 31, 1996.
3. Capital Requirements:
As a registered broker-dealer, LBI is subject to SEC Rule 15c3-1, the
Net Capital Rule, which requires LBI to maintain net capital of not less than
the greater of 2% of aggregate debit items arising from customer transactions,
as defined, or 4% of funds required to be segregated for customers' regulated
commodity accounts, as defined. At May 31, 1996, LBI's regulatory net capital,
as defined, of $1,746 million exceeded the minimum requirement by $1,621
million.
Lehman Brothers International (Europe) ("LBIE"), Lehman Brothers Japan
Inc. ("LBJ") and other 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 May 31, 1996, LBIE's and LBJ's combined regulatory capital, as
defined, exceeded the minimum requirement by approximately $250 million. At May
31, 1996, other Holdings subsidiaries were in compliance with the applicable
local capital adequacy requirements. The Company's triple-A rated derivatives
subsidiary, Lehman Brothers Financial Products Inc., has established certain
capital and operating restrictions which are reviewed by various rating
agencies.
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. Derivative Financial Instruments:
In the normal course of business, the Company enters into derivative
transactions both in a trading capacity and as an end user. Acting in a trading
capacity, the Company enters into derivative transactions to satisfy the needs
of its clients and to manage the Company's own exposure to market and credit
risks resulting from its trading activities in cash instruments (collectively,
"Trading Related Derivative Activities"). For a further discussion of the
Company's derivative related activities, refer to "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Off-Balance Sheet
Financial Instruments and Derivatives" and Note 16 to the Consolidated Financial
Statements, included in the Form 10-K.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
Trading-Related Derivative Activities
The Company records its Trading-Related Derivative Activities on a
mark-to-market basis with realized and unrealized gains (losses) recognized in
principal transactions in the Consolidated Statement of Operations. The Company
records unrealized gains and losses on derivative contracts on a net basis in
the Consolidated Statement of Financial Condition for those transactions with
counterparties executed under a legally enforceable master netting agreement.
Listed in the following table is the fair value and average fair value of the
Company's Trading Related Derivative Activities (in millions):
<TABLE>
<CAPTION>
Average Fair Value*
Fair Value* Six Months Ended
May 31, 1996 May 31, 1996
------------ ------------
Assets Liabilities Assets Liabilities
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate and currency swaps and options
(including caps, collars and floors) $3,415 $1,574 $3,136 $1,667
Foreign exchange forward contracts and options 956 1,252 914 1,272
Options on other fixed income securities,
mortgage-backed securities forward contracts
and options 249 228 254 226
Equity contracts (including equity swaps, warrants
and options) 1,134 935 1,094 977
Commodity Contracts (including swaps, forwards,
and options) 652 637 703 676
------------------------------------------------------
Total $6,406 $4,626 $6,101 $4,818
-------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Average Fair Value*
Fair Value* Twelve Months Ended
November 30, 1995 November 30, 1995
-----------------
Assets Liabilities Assets Liabilities
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate and currency swaps and options
(including caps, collars and floors) $2,680 $2,260 $2,729 $2,102
Foreign exchange forward contracts and options 1,248 1,428 1,455 1,461
Options on other fixed income securities,
mortgage-backed securities forward contracts
and options 204 188 213 241
Equity contracts (including equity swaps, warrants
and options) 804 953 717 747
Commodity Contracts (including swaps, forwards,
and options) 339 434 405 487
--------------------------------------------------
Total $5,275 $5,263 $5,519 $5,038
-----------------------------------------------------
</TABLE>
* Amounts represent carrying value (exclusive of collateral) and do not include
receivables or payables related to exchange traded futures contracts.
Assets included in the table above represent the Company's unrealized
gains, net of unrealized losses for which the Company has a master netting
agreement. Therefore, the fair value of assets related to derivative contracts
at May 31, 1996 represents the Company's net receivable for derivative financial
instruments before consideration of collateral. Included within this amount was
$6,305 million and $101 million, respectively, related to OTC and
exchange-traded contracts.
With respect to OTC contracts, the Company views its net credit
exposure to be $4,047 million at May 31, 1996, representing the fair value of
the Company's OTC contracts in an unrealized gain position, after consideration
of collateral of $2,258 million. Presented below is an analysis of the Company's
net credit exposure for OTC contracts based upon internal designations of
counterparty credit quality.
May 31, 1996
Counterparty S&P/Moody's Net Credit
Risk Rating Equivalent Exposure
1 AAA/Aaa 18%
2 AA-/Aa3 21%
3 A-/A3 or higher 39%
4 BBB-/Baa3 or higher 16%
5 BB-/Ba3 or higher 5%
6 B+/B1 or lower 1%
- --------------------------------------------------------------------------------
These designations are based on actual ratings made by external rating
agencies or by equivalent ratings established and utilized by the Company's
Corporate Credit Department.
The Company is also subject to credit risk related to its exchange
traded derivative contracts. Exchange traded contracts are transacted directly
on the exchange. To protect against the potential for a default, all exchange
clearing houses impose net capital requirements for their membership.
Additionally, the exchange clearing house requires counterparties to futures
contracts to post margin upon the origination of the contract and for any
changes in the market value of the contract on a daily basis (certain foreign
exchanges extend settlement to three days). Therefore, the potential for losses
from exchange-traded products is limited.
5. Other 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 the success and
profitability of the Company. The principal types of risks involved in the
Company's activities are market risk, credit or counterparty risk and
transaction risk. Management has developed a control infrastructure to monitor
and manage each type of risk on a global basis throughout the Company. For
further discussion of these matters, refer to Note 18 to the Consolidated
Financial Statements, in the Form 10-K.
6. Incentive Plans:
In June 1996, the Compensation and Benefits Committee of the Board of
Directors of Holdings (the "Compensation Committee") approved the 1996 Stock
Award Program (the "1996 Program"), pursuant to the Lehman Brothers Holdings
Inc. Employee Incentive Plan ("EIP"). Under the 1996 Program, eligible employees
are to receive, subject to vesting provisions and transfer restrictions,
approximately five million restricted stock units ("RSUs"). These RSUs will vest
80% on July 1, 1997 and 20% on July 1, 2001. Effective during the second quarter
of 1996, a total of 20 million shares of common stock may be subject to awards
under the EIP. Through July 15, 1996, approximately eleven million shares have
been awarded, consisting of approximately seven million RSUs for both the 1996
Program and for new hires as part of the Company's recruitment efforts, 1.4
million options granted in 1995 and approximately 2.7 million options granted in
1996 to certain senior officers. It is expected that the share requirements for
these awards will be met by repurchasing shares in the open market.
In addition, members of the Corporate Management Committee ("CMC") and
certain senior officers are eligible to receive RSUs based on the achievement of
1996 performance goals, with approximately one million RSUs expected to be
awarded in total under the 1996 Management Ownership Plan (the "1996 Plan") and
the EIP. The 1996 Plan was approved by shareholders on April 10, 1996.
In the second quarter of 1996, the Company granted approximately 0.8
million options under the 1996 Plan to members of the CMC at an average market
price on the dates of grant of $24.06 (the "1996 Options"). The 1996 Options
become exercisable in four and one half years and expire five years after grant
date; exercisability is accelerated ratably in one-third increments at such time
as the closing price of the common stock meets, or exceeds, $28.00, $30.00 and
$32.00 for 30 consecutive trading days. If a minimum target price is not reached
and maintained for the specified period in the four and one half year period
following issuance, the award recipients may then exercise all of their options
thereafter. Also, in the second quarter, the Company granted approximately 2.7
million options under the EIP to certain senior officers (which are included in
the eleven million referred to in the first paragraph of this footnote) at an
average market price on the dates of grant of $24.19, with provisions similar to
the 1996 Options. No compensation expense has been recognized for these stock
options as all have been issued at the market price of the common stock on the
date of the respective grant.
Also in the second quarter of 1996, the Company awarded performance
stock units ("PSUs") under the 1996 Plan to members of the CMC and under the EIP
to certain senior officers as part of a four-year long-term incentive award. The
number of PSUs which may be earned, if any, is dependent upon achievement of
certain performance levels within a two-year period. At the end of the
performance period, any PSUs earned will convert one-for-one to RSUs which then
vest at the end of the fourth year. The compensation cost for the estimated
number of RSUs that may eventually become payable in satisfaction of PSUs is
accrued over the combined performance and vesting period and added to common
stock issuable.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 favorable market environment experienced during the second half of
1995 continued into 1996. The U.S. bond market continued to rally as
expectations for additional easing by the U.S. Federal Reserve Bank and the
possibility of a deficit reduction package positively impacted the industry as a
whole. Internationally, weakness in the major European economies produced a
round of interest rate cuts from a number of central banks in an effort to
promote stronger economic growth. These actions led to more positive market
conditions in Europe. The favorable worldwide trend in interest rates also
supported strong performance in global equity markets. All of these factors led
to continued strength in debt and equity underwriting volumes.
By mid February, 1996, investor concerns about stronger economic data,
raising the possibility of no further interest rate reductions by the U.S.
Federal Reserve Bank, caused a significant correction in the U.S. fixed income
market and a general increase in interest rates. Despite this change in interest
rates, the overall market environment in the second quarter remained reasonably
favorable. Investors were active in purchasing new issue products that offered a
spread to Treasuries, such as corporate, asset-backed and mortgage-backed bonds,
in order to achieve their performance benchmarks. The increase in investor
demand created a high level of customer volume in the U.S. debt market, while
strong customer demand and favorable spreads drove more issuers into the market,
resulting in an extremely high level of debt syndicate activity.
Late in the second quarter of 1996, the tone in the U.S. fixed income
market became decidedly more negative. Investors reflected the uncertainty of a
possible Federal Reserve tightening by becoming less active in general and more
defensive. Fixed income underwriting continued at a reasonable pace as issuers
accelerated financing in anticipation of
higher interest rates later in the year. The equity market, meanwhile, continued
to exhibit strength as positive cash flows into mutual funds provided a strong
underpinning for both trading and syndicate activity. Recent strength in the
U.S. economy has created a more volatile market environment in terms of
heightening inflationary expectations and a general increase in interest rates;
these factors may impact equity market activity and valuations, going forward.
The second quarter's record levels of merger and acquisition activity,
reflecting strategic purchases, restructurings, spin-offs and growth in
cross-border transactions continued into the third quarter. Transaction volumes
are expected to remain strong for the remainder of the year.
Note: Except for the historical information contained herein, the Business
Environment and Specific Business Activities and Transactions sections of
this Management's Discussion and Analysis of Financial Condition and
Results of Operations contain forward-looking statements that discuss the
risks and uncertainties involved in the Company's business.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
For the Three Months Ended May 31, 1996 and May 31, 1995
The Company reported net income of $108 million for the second quarter
ended May 31, 1996 representing an increase of 86% from net income of $58
million for the second quarter ended May 31, 1995. Earnings per common share
increased to $0.89 for the second quarter of 1996 from $0.43 per common share
for the second quarter of 1995. The improved results for 1996 reflect stronger
earnings and enhanced margins which resulted from the fifth consecutive quarter
of both higher revenues and reduced nonpersonnel expenses, amid a period of
generally improved market conditions.
Net revenues increased to $833 million for the second quarter of 1996
from $731 million for the second quarter of 1995 and $821 million for the first
quarter of 1996. The increase in net revenues reflected continued strengthening
in customer flow and trading activities in a number of fixed income and equity
product areas and improved investment banking results. The increase in
investment banking revenues over the second quarter of 1995 reflected a
significant strengthening in underwriting volumes and improved corporate finance
advisory revenues, partially offset by reduced merchant banking revenues.
Compensation and benefits expense as a percentage of net revenues was
50.7% for both the second quarter of 1996 and 1995, reflecting the fifth
successive quarter of consistent compensation levels relative to net revenues.
Nonpersonnel expenses declined for the eighth consecutive quarter to $242
million for the second quarter of 1996 from $270 million for the second quarter
of 1995. The increase in net revenues and the corresponding reduction in
nonpersonnel expenses led to an improvement in the Company's pretax operating
margin to 20.2% in the second quarter of 1996 from 12.3% for the second quarter
of 1995.
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 and along with the Company's proprietary
trading positions, give rise to principal transactions revenues. The Company
utilizes various hedging strategies to minimize its exposure to significant
movements in interest and foreign exchange rates and the equity markets.
Net revenues from the Company's market-making and trading activities in
fixed income and equity products are recognized as either principal transactions
or net interest revenues depending upon the method of financing and/or hedging
related to specific inventory positions. The Company evaluates its trading
strategies on an overall profitability basis which includes both principal
transactions revenues and net interest. Therefore, changes in net interest
should not be viewed in isolation but should be viewed in conjunction with
revenues from principal transactions. Net interest revenues were $106 million
for the second quarter of 1996 compared to $88 million for the second quarter of
1995. This increase was due to increased dividend revenue on structured equity
derivative products, a slight increase in total interest earning assets for the
quarter, and higher spreads on certain U.S. government matched book financing
transactions.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table of net revenues by business unit and the
accompanying discussion have been prepared in order to present the Company's net
revenues in a format that reflects the manner in which the Company manages its
businesses. For internal management purposes, the Company has been segregated
into five major business units: Fixed Income, Equity, Corporate Finance
Advisory, Merchant Banking and Asset Management. Each business unit represents a
grouping of financial activities and products with similar characteristics.
These business activities result in revenues that are recognized in multiple
revenue categories contained in the Company's Consolidated Statement of
Operations. Net revenues by business unit contain certain internal allocations,
including funding costs, which are centrally managed.
<TABLE>
<CAPTION>
Three Months Ended May 31, 1996
Principal
Transactions and Investment
Net Interest Commissions Banking Other Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed Income $417 $ 15 $ 74 $ 5 $511
Equity 94 74 72 3 243
Corporate Finance Advisory 57 57
Merchant Banking (7) 20 13
Asset Management 5 4 9
- ---------------------------------------------------------------------------------------------------------------------------
$504 $ 94 $223 $ 12 $833
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended May 31, 1995
Principal
Transactions and Investment
Net Interest Commissions Banking Other Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed Income $387 $ 26 $ 41 $ 8 $462
Equity 62 87 23 1 173
Corporate Finance Advisory 45 45
Merchant Banking (8) 43 35
Asset Management 2 8 6 16
- ---------------------------------------------------------------------------------------------------------------------------
$443 $121 $152 $ 15 $731
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Fixed Income. The Company's fixed income net revenues reflect customer
flow activities (both institutional and high-net-worth retail), secondary
trading, debt underwriting, syndicate and financing activities related to fixed
income products. Fixed income products include dollar- and non-dollar government
securities, mortgage- and asset-backed securities, money market products,
dollar- and non-dollar corporate debt securities, emerging market securities,
municipal securities, financing (global access to debt financing sources
including repurchase and reverse repurchase agreements), foreign exchange,
commodities and fixed income derivative products. Fixed income net revenues
increased 11% to $511 million for the second quarter of 1996 from $462 million
for the second quarter of 1995, and decreased 4% from the $535 million in the
first quarter of 1996. Fixed income revenues improved versus the prior year
quarter despite the volatility that affected the fixed income markets for much
of the current quarter and the significant rise in U.S. interest rates which saw
a 83 basis point rise in the two year treasury note and a 52 basis point rate
increase on the 30 year treasury bond. The improvement in the second quarter
results over the prior year reflected the stronger syndicate calendar in 1996
and improved customer flow and net trading results (principal transactions and
net interest) from a number of fixed income products including mortgages,
emerging markets, high yield, firm financing and foreign exchange. The slight
decrease in fixed income net revenues over the trailing quarter reflected
continued strength in underwriting volumes offset in part by a slowdown in
customer trading activity in the last few weeks of the quarter as investors
reflected the uncertainty of a U.S. Federal Reserve tightening. Investment
banking revenues, as a component of fixed income revenues, increased to $74
million for the second quarter of 1996 from $41 million for the second quarter
of 1995 due to a strengthening in origination volumes and an improved mix of
underwriting revenues.
Equity. Equity net revenues reflect customer flow activities (both
institutional and high-net-worth retail), secondary trading, equity
underwriting, equity finance, equity derivatives and arbitrage activities. The
Company's equity net revenues increased 40% to $243 million for the second
quarter of 1996 from $173 for the second quarter of 1995, and increased 27% from
the $192 million for the first quarter of 1996 reflecting the favorable equity
markets which saw record inflows of capital into mutual funds, generally
improved trading volumes on exchanges and favorable valuations which continued
to drive syndicate activities. Investment banking revenues, as a component of
equity revenues, increased to $72 million for the second quarter of 1996 from
$23 million for the second quarter of 1995 due to an increase in the number of
lead and co-managed equity related underwritings.
Corporate Finance Advisory. Corporate finance advisory net revenues,
classified in the Consolidated Statement of Operations as a component of
investment banking revenues, result primarily from fees earned by the Company in
its role as strategic advisor to its clients. This role primarily consists of
advising clients on mergers and acquisitions, divestitures, leveraged buyouts,
financial restructurings, and a variety of cross-border transactions. Net
revenues from corporate finance advisory increased to $57 million for the second
quarter of 1996 reflecting a 27% increase from the $45 million recognized in the
second quarter of 1995. This increase reflected continued strength in the merger
and acquisition market environment. The Company ended the second quarter with a
strong transaction pipeline, which stood at $50 billion in terms of total dollar
value.
Merchant Banking. The Company is the general partner for six merchant
banking partnerships, including three institutional funds and three employee
investment vehicles. In December 1995, the Company established the third of its
employee investment vehicles, Capital Partners III. Current merchant banking
investments held by the partnerships include both publicly traded and privately
held companies diversified on a geographic and industry basis. At May 31, 1996
the Company's investment in such merchant banking partnerships, for which the
Company acts as a general partner, was $307 million. At May 31, 1996 the Company
had commitments to fund up to $200 million in Capital Partners III over the
commitment period ending June 30, 2000. There are no remaining commitments to
the remaining five partnerships.
Merchant banking net revenues primarily represent the Company's
proportionate share of net realized and net unrealized gains and losses from the
sale and revaluation of investments held by the partnerships. Such amounts are
classified in the Consolidated Statement of Operations as a component of
investment banking revenues. Merchant banking net revenues also reflect the net
interest expense relating to the financing of the Company's investment in the
partnerships. Merchant banking net revenues of $13 million for the second
quarter of 1996, decreased 63% from the $35 million recognized in the second
quarter of 1995, reflecting a reduction in the net gains recognized on the
publicly traded investments held by the partnerships.
Asset Management. Revenues from asset management activities decreased
to $9 million for the second quarter of 1996 from $16 million for the second
quarter of 1995, primarily due to the sale of the Company's offshore mutual fund
advisory business in February 1996 to Legg Mason. Asset Management revenues
primarily consist of fees from the management of various funds, commissions from
the sale of funds to customers and fees from the management of certain accounts
for institutions and high-net-worth individuals.
Non-Interest Expenses. Non-interest expenses were $664 million for the
second quarter of 1996 and $641 million for the second quarter of 1995; however,
compensation and benefits expense as a percentage of net revenues remained
unchanged from the prior year quarter at 50.7%. Nonpersonnel expenses declined
for the eighth consecutive quarter to $242 million for the second quarter of
1996 from $270 million for the second quarter of 1995 and $246 million for the
first quarter of 1996, reflecting the Company's commitment to reducing costs.
The $300 million cost reduction program originally announced at
year-end 1994 was completed by year-end 1995. As a result, the Company's expense
base has been permanently lowered. The Company continued its focus on reducing
nonpersonnel costs during 1996, achieving additional annualized cost savings of
$48 million as of the second quarter of 1996 relative to the fourth quarter 1995
run rate. The Company's goal is to achieve total annualized nonpersonnel cost
savings of $50 - $100 million by the end of 1996 relative to the fourth quarter
1995 run rate.
Income Taxes. The Company's income tax provision was $61 million for
the second quarter of 1996 as compared to $32 million for the second quarter of
1995. The effective tax rate was 36% for the second quarter of 1996 and 1995.
The 1996 effective tax rate, although the same as that of 1995, reflects
continued benefits from the restructuring of certain legal entities in 1995,
partially offset by an increase in state taxes and a decrease in tax benefits
attributable to income subject to preferential treatment.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
For the Six Months Ended May 31, 1996 and May 31, 1995
The Company reported net income of $212 million for the six months
ended May 31, 1996 representing an increase of 106% from net income of $103
million for the six months ended May 31, 1995. Earnings per common share
increased to $1.68 for the six months of 1996 from $0.74 per common share for
the comparable 1995 period. The improved results for 1996 reflect stronger
earnings and enhanced margins, amid a period of generally improved market
conditions.
Net revenues increased to $1,654 million for the six months of 1996
from $1,438 million for the six months of 1995. The increase in net revenues
reflected continued strengthening in customer flow and trading activities in a
number of fixed income and equity product areas and improved investment banking
results. The increase in revenues from investment banking in 1996 reflected a
significant strengthening in underwriting volumes and improved corporate finance
advisory revenues partially offset by reduced merchant banking revenues.
Compensation and benefits expense as a percentage of net revenues was
50.7% and 50.8% for the six months ended May 31, 1996 and 1995, respectively.
Nonpersonnel expenses declined to $488 million for the six months ended May 31,
1996 from $548 million for the comparable 1995 period. The increase in net
revenues and the corresponding reduction in nonpersonnel expenses led to an
improvement in the Company's pretax operating margin to 19.7% for the six months
of 1996 from 11.2% for the six months of 1995.
Net interest revenues were $197 million for the six months of 1996
compared to $184 million for the six months of 1995. This increase was
attributable to a change in the mix of the Company's assets, a slight increase
in total interest earning assets and higher spreads on certain U.S. government
matched book financing transactions.
<TABLE>
<CAPTION>
Six Months Ended May 31, 1996
Principal
Transactions and Investment
Net Interest Commissions Banking Other Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed Income $ 859 $ 33 $ 147 $ 9 $1,048
Equity 157 146 125 5 433
Corporate Finance Advisory 107 107
Merchant Banking (10) 54 44
Asset Management 2 11 9 22
- ---------------------------------------------------------------------------------------------------------------------------
$1,008 $ 190 $ 433 $ 23 $1,654
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended May 31, 1995
Principal
Transactions and Investment
Net Interest Commissions Banking Other Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed Income $ 778 $ 50 $ 69 $ 10 $ 907
Equity 138 162 45 2 347
Corporate Finance Advisory 93 93
Merchant Banking (16) 82 66
Asset Management (2) 14 13 25
- ---------------------------------------------------------------------------------------------------------------------------
$ 898 $ 226 $ 289 $ 25 $1,438
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Fixed Income. Fixed income net revenues increased 16% to $1,048 million
for the six months ended May 31, 1996 from $907 million for the six months ended
May 31, 1995. Fixed income revenues for 1996 improved versus 1995 primarily as a
result of favorable market conditions which lead to improved investment banking
results and greater contributions from customer flow and trading activities in a
number of fixed income products including mortgages, emerging markets, and high
yield corporate bonds. Investment banking revenues, as a component of fixed
income revenues, increased to $147 million for the six months ended May 31, 1996
from $69 million for the six months ended May 31, 1995 due to a strengthening in
origination volumes and an improved mix of underwriting revenues.
Equity. The Company's equity net revenues increased 25% to $433 million
for the six months ended May 31, 1996 from $347 for the six months ended May 31,
1995 primarily due to improved customer flow trading activities including the
equity derivatives and NASDAQ businesses. Investment banking revenues, as a
component of equity revenues, increased to $125 million for the six months ended
May 31, 1996 from $45 million for the six months ended May 31, 1995 due to a
stronger syndicate calendar which resulted in an increase in the number of lead
and co-managed equity related underwritings.
Corporate Finance Advisory. The net revenues for corporate finance
advisory were $107 million for the six months ended May 31, 1996 reflecting a
15% increase from the $93 million recognized in the six months ended May 31,
1995. The environment for merger and acquisition activity during 1996 was strong
as a result of heightened industry and cross-border consolidation.
Merchant Banking. Merchant banking net revenues of $44 million for the
six months ended May 31, 1996, decreased 33% from the $66 million recognized in
the six months ended May 31, 1995, reflecting a reduction in the net gains
recognized on the publicly traded investments held by the partnerships.
Asset Management. Revenues from asset management activities decreased
to $22 million for the six months ended May 31, 1996 from $25 million for the
six months ended May 31, 1995, primarily due to the sale of the Company's
offshore mutual fund advisory business in February 1996 to Legg Mason.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Non-Interest Expenses. Non-interest expenses were $1,327 million for
the six months ended May 31, 1996 and $1,278 million for the six months ended
May 31, 1995. Compensation and benefits expense increased to $839 million in
1996 from $730 million in 1995. Compensation and benefits expense as a
percentage of net revenues was 50.7% for six months ended May 31, 1996 compared
to 50.8% for the six months ended May 31, 1995. Nonpersonnel expenses declined
to $488 million for the six months ended May 31, 1996 from $548 million for the
six months ended May 31, 1995, reflecting the effects of the Company's cost
reduction efforts.
Income Taxes. The Company's income tax provision was $115 million for
the six months ended May 31, 1996 as compared to $57 million for the six months
ended May 31, 1995. The effective tax rate was 35% for 1996 and 36% for 1995.
The 1996 effective tax rate is lower than that of 1995 due to continued benefits
from the restructuring of certain legal entities in 1995, partially offset by an
increase in state taxes and a decrease in tax benefits attributable to income
subject to preferential treatment.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company's total assets increased to $133.7 billion at May 31, 1996 from
$115.3 billion at November 30, 1995. The increase in total assets is primarily
attributable to an increase in financing activities in both fixed income and
equity, as well as an increase in government and agency positions.
The Company's balance sheet is highly liquid and consists primarily of
cash and cash equivalents, securities and other financial instruments owned
which are marked-to-market daily and collateralized short-term financing
agreements. As the Company's primary activities are based on customer flow
transactions, the Company experiences a rapid asset turnover rate. In addition,
the highly liquid nature of these assets provides the Company with flexibility
in financing and managing its business. The overall size of the Company's total
assets and liabilities fluctuates from time to time, and at specific points in
time (such as calendar quarter ends) may be higher than fiscal quarter ends.
Balance sheet leverage ratios are one methodology to evaluate the
financial risk inherent in the balance sheet. The Company evaluates this risk by
monitoring its adjusted leverage, defined as total assets less the lower of
securities purchased under agreements to resell or securities sold under
agreements to repurchase, [which represent short-term collateralized
transactions with high quality assets,] divided by stockholders' equity. At May
31, 1996, and November 30, 1995, the Company's adjusted leverage ratios were
25.2x and 21.4x, respectively, increasing due to the redemption of preferred
stock owned by American Express, (see "Total Capital"); however, the ratio
continues to be in line with the period end leverage ratios of the Company's
peer group of competitor firms.
Funding and Capital Policies
The Company's Finance Committee, which includes senior officers from
key areas of the Company, is responsible for establishing and managing the
funding and liquidity policies of the Company. This includes recommendations for
balance sheet size as well as the allocation of balance sheet to product areas
as determined by internal profitability models and return on equity targets. In
addition, in coordination with the Regional Asset and Liability Committees, the
Finance Committee works to ensure coordination of global funding efforts. The
Regional Asset and Liability Committees are aligned with the Company's
geographic funding centers and are responsible for implementing funding
strategies consistent with the direction set by the Finance Committee and to
monitor and manage liquidity for each region. The primary goal of the Company's
funding principles as set by the Finance Committee are to provide sufficient
liquidity and availability of funding sources throughout all market
environments.
As a policy, the Company attempts to maintain sufficient capital and
funding to finance itself on a fully secured basis, through its liquidity
contingency plan. This liquidity contingency plan meets the Company's funding
requirements through a combination of collateralized short-term financings and
short-term secured debt, as well as Total Capital, defined as long-term debt,
including both senior notes and subordinated indebtedness, plus stockholders'
equity. To achieve this objective, the Company's liquidity policies include
maintaining sufficient excess unencumbered securities to use as collateral to
obtain secured financing, if necessary, to meet maturities of short-term
unsecured liabilities as well as current maturities of long-term debt. Also, the
Company maintains a sufficient amount of Total Capital to enable the Company to
fund those assets which are less liquid.
The Company's liquidity contingency plans are continually reviewed and
updated as the Company's asset/liability mix and liquidity requirements change.
Additionally, the Company periodically tests its secured and unsecured credit
facilities to ensure availability and operational readiness. The Company's
liquidity and Total Capital policies are designed to ensure that the Company can
meet its funding needs over a wide range of economic, credit and market
environments. The Company met all liquidity and Total Capital policy
requirements at May 31, 1996.
Short-Term Funding
Each of the Company's businesses is required to fund its products
primarily through global collateralized financings. There are two principal
business areas which are responsible for these efforts, Lehman Brothers' Fixed
Income Financing ("Financing") and Equity Finance. Financing works in
conjunction with the institutional fixed income sales and trading professionals
to provide financing to customers and the Company through the repurchase
markets. Equity Finance provides a similar function in the equity markets
typically through securities loaned/securities borrowed transactions. The
ability of the Company to leverage its global market expertise and distribution
capabilities are key to a successful financing effort. The amount of the
Company's collateralized borrowing activities will vary reflecting changes in
the mix and overall levels of securities and other financial instruments owned
and global market conditions. However, at all times, the majority of the
Company's assets are funded with collateralized borrowing sources.
The Company's treasury area works closely with Financing and Equity
Finance to develop funding plans to support the business areas, as well as to
execute daily funding activities. On a daily basis, treasury is responsible for
meeting any funding needs not met through Financing and Equity Finance. Treasury
funding is managed globally through regional centers which have access to the
capital markets though the issuance of commercial paper as well as bank lines of
credit and other short- and long-term debt instruments.
At May 31, 1996 and November 30, 1995, $95 billion and $81 billion,
respectively, of the Company's total balance sheet was financed using
collateralized borrowing sources. The remainder of the financing for the balance
sheet was comprised of commercial paper and short-term debt, payables and Total
Capital. As of May 31, 1996 and November 30, 1995, commercial paper and
short-term debt were $8.0 billion and $6.2 billion, respectively. Of these
amounts, commercial paper outstanding at May 31, 1996 was $2.9 billion with an
average maturity of 66 days, compared to $1.4 billion with an average maturity
of 78 days at November 30, 1995.
At May 31, 1996, Holdings maintained a Revolving Credit Agreement with
a group of banks. Under the terms of the credit agreement, the banks have
committed to provide up to $2 billion. The credit agreement contains restrictive
covenants which require, among other things that the Company maintain specified
levels of liquidity, consolidated stockholders' equity and tangible net worth,
as defined. The Company has been in compliance with these terms at all times.
There were no borrowings outstanding under this agreement as of May 31, 1996.
In addition, the Company maintained a $1 billion Secured Revolving
Credit Facility (the "Facility") for Lehman Brothers International (Europe)
("LBIE"), the Company's major operating entity in Europe. Under the terms of
this committed facility, the bank group has committed to provide up to $1
billion on a secured basis with a variety of financial instruments as
collateral. The bank group has further committed to provide loans under the
Facility for up to 6 months beyond the Facility maturity date. The loans
provided by the bank group are available in several currencies including U.S.
Dollar, British pound sterling, Deutsche mark, ECU, French franc, and Italian
lira, as well as many other currencies as required. There were no borrowings
outstanding under this Facility as of May 31, 1996. However, the Company
anticipates utilizing this Facility for general corporate purposes from time to
time.
In addition, the Company maintains uncommitted lines of credit with a
broad range of banks and financial institutions from which it draws funds in a
variety of currencies. 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 Total Capital. The Company maintains
Total Capital 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.
At May 31, 1996 and November 30, 1995, Total Capital consisted of the following:
May 31, November 30,
Long-term debt: 1996 1995
----------- ----------
Senior notes $10,574 $10,505
Subordinated indebtedness 2,995 2,260
------- ------
13,569 12,765
------ ------
Stockholders' equity:
Preferred equity 508 708
Common equity 3,058 2,990
------- -----
3,566 3,698
------- ------
Total Capital $17,135 $16,463
======= =======
During the six months ended May 31, 1996, the Company issued $2,246
million in long term-debt, which was $829 million in excess of its maturing
debt. As part of these issuances, the Company issued $200 million of Quarterly
Income Capital Securities ("Series A QUICS"). The Series A QUICS are
subordinated to all senior and subordinated debt of the Company. The Company
repurchased the $200 million 8.44% Cumulative Preferred Stock owned by American
Express ("Cumulative Preferred Stock") with the proceeds from the Series A
QUICS. The repurchase of the preferred stock included a premium of $2 million
over the par value which is included in preferred dividends in determining net
income applicable to common stock. Because of the repayment of the Cumulative
Preferred Stock, total stockholders' equity decreased by $200 million; however,
with the issuance of the Series A QUICS, Total Capital remained unchanged.
Excluding the Series A QUICS, these issuances were used to refinance
current and prefund expected maturities of long-term debt in 1996. Additionally,
these issuances were consistent with the Company's intent to increase Total
Capital and issue long-term debt when opportunities in the market arise.
At May 31, 1996, the Company had approximately $5.6 billion available
for issuance of debt securities under various shelf registrations and debt
programs.
Preferred stockholders' equity decreased to $508 million at May 31,
1996 from $708 million at November 30, 1995 due to the repurchase of the
Cumulative Preferred Stock. Common stockholders' equity increased to $3,058
million at May 31, 1996 from $2,990 million at November 30, 1995 due to the
retention of earnings partially offset by the repurchase of approximately 4.7
million shares of treasury stock and the payment of dividends. The repurchase of
these shares, as well as any additional share repurchases in 1996, will be
allocated to fund certain stock awards made under the Company's incentive plans.
On May 29, 1996, the Company announced an odd-lot buyback program for
stockholders who own less than 100 shares as of May 15, 1996. Approximately
200,000 shares were tendered by the July 9, 1996 deadline. The Company extended
this buyback program to August 2, 1996.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Dependence on Credit Ratings
The Company, like other companies in the securities industry, relies on
external sources to finance a significant portion of its day-to-day operations.
Access to global capital markets for short-term financing, such as commercial
paper and short-term debt, senior notes and subordinated indebtedness are
dependent on the Company's short- and long-term debt ratings. The current short-
and long-term senior debt ratings of Holdings and the current short- and
long-term senior and subordinated ratings of the Company's principal subsidiary,
Lehman Brothers Inc. ("LBI") are as follows:
Holdings LBI
-------- ---
Short-term Long-term Short-term Long-term**
- --------------------------------------------------------------------------------
Duff & Phelps Credit Rating Co. D-1 A D-1 A/A-
Fitch Investors Service Inc. F-1 A F-1 A/A-
IBCA A1 A- A1 A/A-
Moody's P2 Baa1 P2 A3*/Baa1
S&P + A-1 A A-1 A+*/A
Thomson BankWatch TBW-1 A- TBW-1 A/A-
- --------------------------------------------------------------------------------
* Provisional ratings on shelf registration
** Senior/subordinated
+ Long term ratings outlook revised to negative on September 21, 1994
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 May 31, 1996 and
November 30, 1995 included long positions with an aggregate market value of
approximately $1.3 billion and $1.2 billion, respectively, and short positions
with an aggregate market value of approximately $236 million and $172 million,
respectively. The portfolio may from time to time contain concentrated holdings
of selected issues. The Company's largest high yield position was $100 million
and $73 million at May 31, 1996 and November 30, 1995, respectively.
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. In 1995, the Company
purchased the partnership interest owned by Westinghouse and sold an additional
interest to an affiliate of Lennar Inc., (Lennar), a third party mortgage
servicer. Currently, the Company and Lennar hold 75% and 25% of the partnership,
respectively. Following the increase in ownership percentage, the partnership
has been consolidated in the Company's Statement of Financial Position. The
Company's net investment in the partnership at May 31, 1996 is $78 million. The
partnership expects to substantially liquidate the remaining real estate by the
end of 1996. 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.
Non-core Activities and Investments. In March 1990, the Company
discontinued the origination of limited partnership syndications (the assets of
which are primarily real estate) and investments in real estate. Currently, the
Company acts as a general partner for approximately $4 billion of partnership
investment capital and manages the remaining real estate investment portfolio.
At May 31, 1996, the Company had $16 million of investments in these real estate
activities, as well as $101 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.
The Company also has equity, partnership and debt investments made in
previous years that are unrelated to its
ongoing businesses. These investments are awaiting disposition or the occurrence
of certain events which will ultimately lead to their liquidation. The Company
carries these equity, partnership and debt investments at their estimated net
realizable value, which approximates $81 million at May 31, 1996.
Non-core activities and investments have declined 16% since November
30, 1995. Management's intention with regard to noncore assets is the prudent
liquidation of these investments if and when possible.
<PAGE>
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.
Actions Relating to First Capital Holdings Inc. (Reported in Holdings'
Annual Report on Form 10-K and First Quarter Report on Form 10-Q)
At a hearing on June 24, 1996, the Court orally gave final approval to
the settlement of the American Express Shareholder Action and the American
Express Derivative Action.
Easton & Co. v. Mutual Benefit Life Insurance Co., et al.; Easton & Co. v.
Lehman Brothers Inc. (Reported in Holdings' Annual Report on Form 10-K and First
Quarter Report on Form 10-Q)
LBI, together with the other defendants in Easton I and Easton II, has
agreed to settle both cases, subject to court approval.
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 June 24, 1996, the court granted the motion of LBCC and LBSF to file
an amended complaint naming CNM as an additional defendant.
<PAGE>
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.A Computation in Support of Ratio of Earnings to Fixed Charges
12.B Computation in Support of Ratio of Earnings to Combined Fixed
Charges and Preferred Dividends
27. Financial Data Schedule
(b) Reports on Form 8-K:
1. Form 8-K dated June 20, 1996, Items 5 and 7.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEHMAN BROTHERS HOLDINGS INC.
(Registrant)
Date: July 15, 1996 By /s/ Richard S. Fuld Jr.
--------------------------------
Richard S. Fuld, Jr.
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: July 15, 1996 By /s/ Charles B. Hintz
-----------------------------
Charles B. Hintz
Chief Financial Officer
(Principal Financial Officer)
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Exhibit
Exhibit 11 Computation of Per Share Earnings
Exhibit 12A Computation in Support of Ratio of Earnings to Fixed Charges
Exhibit 12B Computation in Support of Ratio of Earnings to Combined Fixed
Charges and Preferred Dividends
Exhibit 27 Financial Data Schedule
<PAGE>
Exhibit 11
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
COMPUTATION of PER SHARE EARNINGS
(Unaudited)
(In millions, except share data)
<TABLE>
<CAPTION>
Three months Three months Six months Six months
ended ended ended ended
May 31, May 31, May 31, May 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Primary:
Weighted average shares outstanding:
Common stock 101,692,508 104,510,057 102,883,293 104,514,659
Common stock issuable 11,594,020 5,466,763 11,693,861 5,510,020
Common stock equivalents 1,502,160 271,927 1,276,455 166,658
------------- -------------- -------------- --------------
Total 114,788,688 110,248,747 115,853,609 110,191,337
=========== =========== =========== ===========
Net income $108.0 $ 58.2 $212.1 $103.2
Preferred dividends (1) (6.4) (10.6) (17.6) (21.2)
------- ------- ------- ------
Net income applicable to common stock $101.6 $ 47.6 $194.5 $ 82.0
====== ====== ====== ======
Earnings per common share $ 0.89 $ 0.43 $ 1.68 $ 0.74
====== ====== ====== ======
Fully diluted:
Weighted average shares outstanding:
Common stock 101,692,508 104,510,057 102,883,293 104,514,659
Common stock issuable 11,594,020 5,466,763 11,693,861 5,510,020
Common stock equivalents 1,502,160 369,522 1,423,471 227,668
------------- -------------- ------------- --------------
Total 114,788,688 110,346,342 116,000,625 110,252,347
=========== =========== =========== ===========
Net income $108.0 $ 58.2 $212.1 $103.2
Preferred dividends (1) (6.4) (10.6) (17.6) (21.2)
------- ------- ------- ------
Net income applicable to common stock $101.6 $ 47.6 $194.5 $ 82.0
====== ====== ====== ======
Earnings per common share $ 0.89 $ 0.43 $ 1.68 $ 0.74
====== ====== ====== ======
</TABLE>
(1) Amount for the six months ended May 31, 1996 includes the $2 million premium
paid over par value to repurchase the $200 million 8.44% cumulative preferred
stock owned by the American Express Company.
<PAGE>
Exhibit 12.A
<PAGE>
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
COMPUTATION in SUPPORT of RATIO of EARNINGS to FIXED CHARGES
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
For the For the For the
Eleven Months Twelve Months Six Months
For the Year Ended Ended Ended Ended
December 31 November 30 November 30 May 31
-------------------------------- ----------- ----------- ------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Fixed Charges:
Interest expense:
Subordinated indebtedness $ 170 $ 150 $ 144 $ 158 $ 206 $ 104
Bank loans and other
borrowings* 4,755 5,035 5,224 6,294 10,199 5,104
Interest component of rentals
of office and equipment 70 74 76 42 44 18
Other adjustments** 2 2 7 4 28 10
---------- ---------- --------- --------- --------- --------
TOTAL (A) $4,997 $5,261 $5,451 $6,498 $10,477 $5,236
======= ======= ====== ========= ======== ======
Earnings:
Pretax income (loss) from
continuing operations $ 150 $ (247) $ 27 $ 193 $ 369 $ 327
Fixed charges 4,997 5,261 5,451 6,498 10,477 5,236
Other adjustments*** 7 _____ (6) (4) (28) (10)
--------- -------- --------- -------- --------
TOTAL (B) $5,154 $5,014 $5,472 $6,687 $10,818 $5,553
====== ====== ====== ====== ======= ======
(B / A) 1.03 **** 1.00 1.03 1.03 1.06
</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 $247 million in 1992 in order to cover the deficiencies.
<PAGE>
Exhibit 12.B
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
COMPUTATION in SUPPORT of RATIO of EARNINGS to COMBINED
FIXED CHARGES and PREFERRED DIVIDENDS
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
For the For the For the
Eleven Months Twelve Months Six Months
For the Year Ended Ended Ended Ended
December 31 November 30 November 30 May 31
-------------------------------- ----------- ----------- ------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Combined Fixed Charges
and Preferred Dividends:
Interest expense:
Subordinated indebtedness $ 170 $ 150 $ 144 $ 158 $ 206 $ 104
Bank loans and other
borrowings* 4,755 5,035 5,224 6,294 10,199 5,104
Interest component of rentals
of office and equipment 70 74 76 42 44 18
Other adjustments** 2 2 7 4 28 10
---------- ---------- --------- --------- --------- --------
Total fixed charges 4,997 5,261 5,451 6,498 10,477 5,236
Preferred dividends (tax
equivalent basis) 48 48 48 58 64 28
-------- -------- -------- -------- --------- --------
TOTAL (A) $5,045 $5,309 $5,499 $6,556 $10,541 $5,264
====== ====== ====== ====== ======= ======
Earnings:
Pretax income (loss) from
continuing operations $ 150 $ (247) $ 27 $ 193 $ 369 $ 327
Fixed charges 4,997 5,261 5,451 6,498 10,477 5,236
Other adjustments*** 7 _____ (6) (4) (28) (10)
--------- -------- --------- -------- --------
TOTAL (B) $5,154 $5,014 $5,472 $6,687 $10,818 $5,553
====== ====== ====== ====== ======= ======
(B / A) 1.02 **** **** 1.02 1.03 1.05
</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 preferred dividends
and would have had to increase $295 million in 1992 and $27 million in
1993 in order to cover the deficiencies.
<PAGE>
Exhibit 27
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
This schedule contains summary financial information extracted from the
Company's Consolidated Statement of Financial Condition at May 31, 1996
(Unaudited) and the Consolidated Statement of Operations for the six months
ended May 31, 1996 (Unaudited) and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> MAY-31-1996
<CASH> 2,094
<RECEIVABLES> 11,756
<SECURITIES-RESALE> 43,861
<SECURITIES-BORROWED> 19,295
<INSTRUMENTS-OWNED> 55,284
<PP&E> 473
<TOTAL-ASSETS> 133,725
<SHORT-TERM> 8,004
<PAYABLES> 10,547
<REPOS-SOLD> 65,332
<SECURITIES-LOANED> 4,250
<INSTRUMENTS-SOLD> 25,712
<LONG-TERM> 13,569
<COMMON> 11
0
508
<OTHER-SE> 3,047
<TOTAL-LIABILITY-AND-EQUITY> 133,725
<TRADING-REVENUE> 811
<INTEREST-DIVIDENDS> 5,405
<COMMISSIONS> 190
<INVESTMENT-BANKING-REVENUES> 433
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 5,208
<COMPENSATION> 839
<INCOME-PRETAX> 327
<INCOME-PRE-EXTRAORDINARY> 212
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 212
<EPS-PRIMARY> $1.68
<EPS-DILUTED> $1.68
</TABLE>
