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, 1998
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 June 30, 1998, 118,294,083 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, 1998
INDEX
Part I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements - (unaudited)
Consolidated Statement of Income -
Three and Six Months Ended
May 31, 1998 and 1997 ...............................3
Consolidated Statement of Financial Condition -
May 31, 1998 and 1997 ...............................5
Consolidated Statement of Cash Flows -
Six Months Ended
May 31, 1998 and 1997................................7
Notes to Consolidated Financial Statements.............9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..........16
Part II. OTHER INFORMATION
Item 1. Legal Proceedings ......................................34
Item 6. Exhibits and Reports on Form 8-K ..................36
Signatures................................................................37
EXHIBIT INDEX ....................................................38
Exhibits
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of INCOME
(Unaudited)
(In millions, except per share data)
Three months ended
May 31 May 31
1998 1997
-------------- ------------
Revenues
Principal transactions $ 588 $ 326
Investment banking 495 274
Commissions 124 91
Interest and dividends 4,307 3,099
Other 40 16
------- -------
Total revenues 5,554 3,806
Interest expense 4,081 2,952
----- -----
Net revenues 1,473 854
----- ------
Non-interest expenses
Compensation and benefits 747 433
Brokerage, commissions and clearance fees 60 61
Professional services 43 47
Occupancy and equipment 38 36
Communications 32 34
Business development 29 26
Depreciation and amortization 22 21
Other 26 24
------ ------
Total non-interest expenses 997 682
----- -----
Income before taxes 476 172
Provision for income taxes 152 51
----- ------
Net income $ 324 $ 121
===== =====
Net income applicable to common stock $ 268 $ 114
===== =====
Weighted average shares
Basic 120.6 118.0
===== =====
Diluted 126.3 120.4
===== =====
Earnings per common share
Basic $2.22 $0.97
===== =====
Diluted $2.12 $0.95
===== =====
See notes to consolidated financial statements.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of INCOME
(Unaudited)
(In millions, except per share data)
Six months ended
May 31 May 31
1998 1997
--------------- -----------
Revenues
Principal transactions $1,011 $ 672
Investment banking 843 514
Commissions 241 188
Interest and dividends 7,981 6,377
Other 58 54
-------- --------
Total revenues 10,134 7,805
Interest expense 7,616 6,026
------ ------
Net revenues 2,518 1,779
------ ------
Non-interest expenses
Compensation and benefits 1,277 902
Brokerage, commissions and clearance fees 114 118
Professional services 85 88
Communications 74 70
Occupancy and equipment 68 69
Business development 55 51
Depreciation and amortization 44 43
Other 50 47
----- -----
Total non-interest expenses 1,767 1,388
----- -----
Income before taxes 751 391
Provision for income taxes 240 126
----- -----
Net income $ 511 $ 265
===== =====
Net income applicable to common stock $ 448 $ 252
===== =====
Weighted average shares
Basic 120.6 117.5
===== =====
Diluted 125.6 119.8
===== =====
Earnings per common share
Basic $3.71 $2.15
===== =====
Diluted $3.57 $2.11
===== =====
See notes to consolidated financial statements.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(Unaudited)
(In millions)
May 31 November 30
ASSETS 1998 1997
---------- -----------
Cash and cash equivalents $ 5,225 1,685
Cash and securities segregated and on deposit
for regulatory and other purposes 1,295 1,149
Securities and other financial instruments owned:
Governments and agencies 34,387 33,037
Corporate equities 13,034 10,877
Corporate debt and other 14,968 10,892
Mortgages and mortgage-backed 15,362 11,455
Derivatives and other contractual agreements 9,179 8,353
Certificates of deposit and other money market
instruments 2,835 2,248
------ ------
89,765 76,862
------ ------
Collateralized short-term agreements:
Securities purchased under agreements to resell 48,927 43,606
Securities borrowed 20,702 14,146
Receivables:
Brokers, dealers and clearing organizations 2,206 2,193
Customers 7,808 9,105
Others 1,637 1,540
Property, equipment and leasehold improvements
(net of accumulated depreciation and amortization
of $766 in 1998 and $735 in 1997) 465 468
Other assets 877 787
Excess of cost over fair value of net assets
acquired (net of accumulated amortization
of $115 in 1998 and $111 in 1997) 160 164
-------- --------
Total assets $179,067 $151,705
======== ========
See notes to consolidated financial statements.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Continued)
(Unaudited)
(In millions, except share data)
<TABLE>
<CAPTION>
May 31 November 30
1998 1997
--------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Commercial paper and short-term debt $ 11,148 $ 7,818
Securities and other financial instruments sold
but not yet purchased:
Governments and agencies 18,387 16,201
Corporate equities 7,849 4,293
Corporate debt and other 2,074 2,219
Derivatives and other contractual agreements 9,054 7,367
-------- --------
37,364 30,080
------- -------
Collateralized short-term financings:
Securities sold under agreements to repurchase 70,912 63,204
Securities loaned 7,627 7,846
Payables:
Brokers, dealers and clearing organizations 3,286 2,155
Customers 12,344 11,702
Accrued liabilities and other payables 4,457 4,116
Long-term debt:
Senior notes 23,029 17,049
Subordinated indebtedness 3,816 3,212
--------- ---------
Total liabilities 173,983 147,182
------- -------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value; 38,000,000 shares authorized:
5% Cumulative Convertible Voting, 13,000,000 shares
authorized; $39.10 liquidation preference per share
Series A - shares issued and outstanding: 32,100 in 1998 and 1 1
33,050 in 1997
Series B - shares issued and outstanding: 12,967,900 in 1998 507 507
and 12,966,950 in 1997
5.94% Cumulative, Series C - 500,000 shares issued and outstanding; 250
$500 liquidation preference per share
Redeemable Voting, 1,000 shares issued and outstanding;
$1.00 liquidation preference per share
Common stock, $0.10 par value; 300,000,000 shares authorized;
Shares issued: 120,251,742 in 1998 and 119,513,337 in 1997;
Shares outstanding: 117,114,203 in 1998 and 116,612,074 in 1997 12 12
Common stock issuable 126 155
Additional paid-in capital 3,462 3,436
Foreign currency translation adjustment (11) 12
Retained earnings 928 498
Common stock in treasury, at cost: 3,137,539 shares in 1998 and
2,901,263 shares in 1997 (191) (98)
------------ ------------
Total stockholders' equity 5,084 4,523
---------- ----------
Total liabilities and stockholders' equity $179,067 $151,705
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Six months ended
May 31 May 31
1998 1997
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 511 $ 265
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 44 43
Provisions for losses and other reserves 22 19
Deferred tax benefit (33)
Other adjustments 30 42
Net change in:
Cash and securities segregated (146) (660)
Securities and other financial instruments owned (12,903) (6,856)
Securities purchased under agreements to resell (5,321) (7,753)
Securities borrowed (6,556) (1,434)
Receivables from brokers, dealers and clearing organizations (13) 1,046
Receivables from customers 1,297 (781)
Securities and other financial instruments sold but
not yet purchased 7,284 7,927
Securities sold under agreements to repurchase 7,708 1,060
Securities loaned (219) 608
Payables to brokers, dealers and clearing organizations 1,131 226
Payables to customers 642 1,166
Accrued liabilities and other payables 269 342
Other operating assets and liabilities, net (219) (307)
------- -------
Net cash used in operating activities $(6,439) $(5,080)
-------- -------
</TABLE>
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
1998 1997
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes $7,566 $3,120
Principal payments of senior notes (1,534) (1,101)
Proceeds from issuance of subordinated indebtedness 600 395
Principal payments of subordinated indebtedness (209)
Net proceeds from commercial paper and
short-term debt 3,330 2,887
Payments for treasury stock purchases (187)
Dividends paid (28) (25)
-
Issuance of common stock 21 18
Issuance of preferred stock 248
-------
Net cash provided by financing activities 10,016 5,085
------ -----
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, equipment and leasehold improvements (37) (34)
------- -------
Net cash used in investing activities (37) (34)
------- -------
Net change in cash and cash equivalents 3,540 (29)
----- --------
Cash and cash equivalents, beginning of period 1,685 2,149
----- -----
Cash and cash equivalents, end of period $5,225 $2,120
====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)
Interest paid totaled $7,063 and $5,781 for the six months ended May
31, 1998 and 1997, respectively. Income taxes paid totaled $207 and $71 for the
six months ended May 31, 1998 and 1997, 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
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. It is recommended that these
consolidated financial statements be read in conjunction with the audited
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the twelve months ended November 30, 1997 (the "Form 10-K"). The
Consolidated Statement of Financial Condition at November 30, 1997 was derived
from the audited financial statements.
The nature of the Company's business is such that the results of any
interim period may vary significantly from quarter to quarter and may not be
indicative of the results to be expected for the fiscal year. Certain prior
period amounts reflect reclassifications to conform to the current period's
presentation.
2. Accounting Policies:
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," which is effective for fiscal periods ending after December 15, 1997.
SFAS No. 128 replaced the presentation of primary and fully diluted earnings per
common share ("EPS") with basic and diluted EPS. The Company adopted SFAS No.
128 during the first quarter of 1998 and restated EPS data for the prior periods
to conform with the provisions of the Statement.
On January 1, 1998, SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" became fully
effective. Previously, the FASB had deferred until that date certain provisions
of SFAS No. 125 pertaining to repurchase agreements, securities lending and
similar financing transactions. As a result of adopting the deferred provisions
of SFAS No. 125, the Company recognized approximately $1.0 billion of collateral
controlled on certain financing transactions and a corresponding obligation to
return such collateral at the termination of such transactions.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" (the "SOP"). The SOP requires that certain costs incurred in
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
connection with developing or obtaining software for internal use be
capitalized. The SOP requires prospective application as of the beginning of an
entity's fiscal year without adjustment for costs that would have been
capitalized had the SOP been in effect in prior periods. The Company has elected
early adoption of this accounting pronouncement effective as of the beginning of
its 1998 fiscal year and capitalized approximately $5.6 million of internal use
software costs during the first half of 1998.
3. Long-Term Debt:
During the six months ended May 31, 1998, the Company issued $8,166
million of long-term debt (comprised of $7,566 million of senior notes and $600
million of subordinated debt). Of the total issuances during the period, $3,027
million were U.S. dollar fixed rate, $4,114 million were U.S. dollar floating
rate, $459 million were foreign currency denominated fixed rate, and $566
million were foreign currency denominated floating rate. These issuances were
primarily utilized to refinance current and prefund the remaining maturities of
long-term debt in 1998 and to increase total capital (stockholders' equity plus
long-term debt).
The Company's floating rate new issuances contain contractual interest
rates based primarily on London Interbank Offered Rates ("LIBOR"). All of the
Company's fixed rate new issuances were effectively converted to floating rate
obligations through the use of interest rate swaps. Of the foreign currency
denominated new issuances totaling $1,025 million, $858 million were effectively
swapped to U.S. dollars with the remainder match funding foreign currency
denominated capital needs.
The Company had $1,534 million of long-term debt mature during the six
months ended May 31, 1998.
4. Capital Requirements:
The Company operates globally through a network of subsidiaries with
several being subject to regulatory requirements. In the United States, LBI, as
a registered broker-dealer, is subject to SEC Rule 15c3-1, the Net Capital Rule,
which requires LBI to maintain net capital of not less than the greater of 2% of
aggregate debit items arising from customer transactions, as defined, or 4% of
funds required to be segregated for customers' regulated commodity accounts, as
defined. At May 31, 1998, LBI's regulatory net capital, as defined, of $1,435
million exceeded the minimum requirement by $1,307 million.
Lehman Brothers International (Europe) ("LBIE"), a United Kingdom
registered broker-dealer and subsidiary of Holdings, is subject to the capital
requirements of the Securities and Futures Authority ("SFA") of the United
Kingdom. Financial resources, as defined, must exceed the total financial
resources requirement of the SFA. At May 31, 1998, LBIE's financial resources of
approximately $2.3 billion exceeded the minimum requirement by approximately
$500 million. Lehman Brothers Japan Inc.'s Tokyo branch, a regulated
broker-dealer, is subject to the capital requirements of the Japanese Ministry
of Finance and, at May 31, 1998, had net capital of approximately $470 million
which was approximately $135 million in excess of the specified levels required.
Certain other non-U.S. subsidiaries are subject to various securities,
commodities and banking regulations and capital adequacy requirements
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
promulgated by the regulatory and exchange authorities of the countries in which
they operate. At May 31, 1998, these other subsidiaries were in compliance with
their applicable local capital adequacy requirements. The Company's "AAA" rated
derivatives subsidiary, Lehman Brothers Financial Products Inc. ("LBFP"), has
established certain capital and operating restrictions which are reviewed by
various rating agencies. At May 31, 1998, LBFP had capital which exceeded the
requirement of the most stringent rating agency by approximately $95 million.
The regulatory rules referred to above, and certain covenants contained
in various debt agreements may restrict Holdings' ability to withdraw capital
from its regulated subsidiaries, which in turn could limit its ability to pay
dividends to shareholders.
5. Derivative Financial Instruments:
In the normal course of business, the Company enters into derivative
transactions to satisfy the needs of its clients and to manage the Company's own
exposure to market and credit risks resulting from its trading activities in
cash instruments (collectively, "Trading-Related Derivative Activities").
The Company records its Trading-Related Derivative Activities on a
mark-to-market basis with realized and unrealized gains and losses recognized
currently in Principal transactions in the Consolidated Statement of Income.
Unrealized gains and losses on derivative contracts are recorded on a net basis
in the Consolidated Statement of Financial Condition for those transactions with
counterparties executed under a legally enforceable master netting agreement and
are netted across products and against cash collateral when such provisions are
stated in the master netting agreement. Listed in the following table is the
fair value and average fair value of the Company's Trading-Related Derivative
Activities. Average fair values of these instruments were calculated based upon
month-end statement of financial condition values, which the Company believes do
not vary significantly from the average fair value calculated on a more frequent
basis. Variances between average fair values and period-end values are due to
changes in the volume of activities in these instruments and changes in the
valuation of these instruments due to variations in market and credit
conditions.
<TABLE>
<CAPTION>
Average Fair Value*
Fair Value* Six Months Ended
May 31, 1998 May 31, 1998
------------------------ --------------------------
(in millions) Assets Liabilities Assets Liabilities
- ---------------------------------------------------------------------------------------------------------------------------
Interest rate and currency swaps and options
<S> <C> <C> <C> <C>
(including caps, collars and floors) $4,999 $2,999 $4,685 $2,872
Foreign exchange forward contracts and options 1,620 2,011 1,509 1,658
Options on other fixed income securities,
mortgage-backed securities forward contracts
and options 244 206 239 221
Equity contracts (including equity swaps, warrants
and options) 2,103 3,649 2,379 2,823
Commodity contracts (including swaps, forwards,
and options) 213 189 192 178
-------------------------------------------------------
Total $9,179 $9,054 $9,004 $7,752
-------------------------------------------------------
</TABLE>
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Average Fair Value*
Fair Value* Twelve Months Ended
November 30, 1997 November 30, 1997
------------------------- ------------------------
(in millions) Assets Liabilities Assets Liabilities
- ---------------------------------------------------------------------------------------------------------------------------
Interest rate and currency swaps and options
<S> <C> <C> <C> <C>
(including caps, collars and floors) $4,704 $3,303 $4,306 $3,224
Foreign exchange forward contracts and options 1,840 1,885 1,236 1,532
Options on other fixed income securities,
mortgage-backed securities forward contracts
and options 310 297 275 246
Equity contracts (including equity swaps, warrants
and options) 1,304 1,696 2,134 1,681
Commodity contracts (including swaps, forwards,
and options) 195 186 304 465
------------------------------------------------------
Total $8,353 $7,367 $8,255 $7,148
-----------------------------------------------------
</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 and on the previous page represent
the Company's unrealized gains, net of unrealized losses for situations in which
the Company has a master netting agreement. Similarly, liabilities represent net
amounts owed to counterparties. Therefore, the fair value of assets/liabilities
related to derivative contracts at May 31, 1998 represents the Company's net
receivable/payable for derivative financial instruments before consideration of
collateral. Included within the $9,179 million fair value of assets at May 31,
1998 was $8,659 million related to swaps and OTC contracts and $520 million
related to exchange-traded option and warrant contracts. Included within the
$8,353 million fair value of assets at November 30, 1997 was $8,016 million
related to swaps and OTC contracts and $337 million related to exchange-traded
option and warrant contracts.
With respect to OTC contracts, including swaps, the Company views its
net credit exposure to be $6,014 million at May 31, 1998, representing the fair
value of the Company's OTC contracts in an unrealized gain position, after
consideration of collateral of $2,645 million. Presented below is an analysis of
the Company's net credit exposure at May 31, 1998 for OTC contracts based upon
internal designations of counterparty credit quality.
Counterparty S&P/Moody's
Risk Rating Equivalent Net Credit Exposure
- ------------ ------------------------- -------------------
1 AAA/Aaa 15%
2 AA-/Aa3 or higher 25%
3 A-/A3 or higher 34%
4 BBB-/Baa3 or higher 13%
5 BB-/Ba3 or higher 8%
6 B+/B1 or lower 5%
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.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
The Company is also subject to credit risk related to its
exchange-traded derivative contracts. Exchange-traded contracts, including
futures and certain options, are transacted directly on the exchange. To protect
against the potential for a default, all exchange 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 provide for settlement
within three days). Therefore, the potential for losses from exchange-traded
products is limited.
For a further discussion of the Company's derivative related
activities, refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Off-Balance Sheet Financial Instruments
and Derivatives" and Notes 1 and 11 to the Consolidated Financial Statements,
included in the Form 10-K.
6. Other Commitments and Contingencies:
In connection with its financing activities, the Company has
outstanding commitments under certain lending arrangements of approximately $3.5
billion at May 31, 1998 and $2.4 billion at November 30, 1997. These commitments
require borrowers to provide acceptable collateral, as defined in the
agreements, when amounts are drawn under the lending facilities. Advances made
under the above lending arrangements are typically at variable interest rates
and generally provide for over-collateralization based upon the borrowers'
creditworthiness.
The Company, through its high yield sales and trading activities, makes
commitments to extend credit in loan syndication transactions principally to
below investment grade borrowers and then participates a significant portion of
these commitments. These commitments, net of syndications and participations,
totaled $1.9 billion and $1.4 billion at May 31, 1998 and November 30, 1997,
respectively, are typically secured against the borrower's assets and have fixed
maturity dates. The draw down of these facilities is generally contingent upon
certain representations, warranties and contractual conditions of the borrower.
Total commitments may not be indicative of actual funding requirements as the
Company intends to continue syndicating, selling, and/or participating these
commitments.
The Company has commitments to invest up to $351 million in
partnerships, which in turn will make direct merchant banking related
investments. These commitments will be funded as required through the end of the
respective partnerships' investment periods, principally expiring in 2004.
In June 1998, the Company sponsored a $5 billion interim loan fund,
designed to extend financing to clients in connection with a wide range of
domestic and international leveraged transactions, including acquisitions,
corporate recapitalization and refinancing of existing debt. In connection
therewith, the Company intends to provide up to $400 million to be used by the
fund. Any draw downs under the facility are expected to be repaid within a
short-term period.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
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 13 to the Consolidated
Financial Statements, in the Form 10-K.
7. Preferred Stock:
On May 11, 1998 the Company issued 5,000,000 Depository Shares (each
representing 1/10th of a share) of 5.94% Cumulative Preferred Stock, Series C
("Series C Preferred Stock"), $1.00 par value. These shares have a redemption
price of $500 per share, together with accrued and unpaid dividends. Redemption
of the Series C Preferred Stock is at the option of the Company for any or all
of the outstanding shares after May 31, 2008. The $250 million redemption value
of the shares outstanding at May 31, 1998 is classified on the Company's balance
sheet as 5.94% Cumulative, Series C Preferred Stock.
In 1994, Holdings issued the Redeemable Preferred Stock to American
Express and Nippon Life for $1,000. The holders of the Redeemable Preferred
Stock are entitled to receive annual dividends through May 31, 2002 in an amount
equal to 50% of the amount, if any, by which the Company's net income for the
preceding year exceeds $400 million, up to a maximum of $50 million, prorated in
the case of the last dividend period, which runs from December 1, 2001 to May
31, 2002. For the six months ended May 31, 1998, the Company's net income of
$511 million resulted in the recognition of a $50 million dividend on the
Redeemable Voting Preferred Stock, which has been reflected in the Consolidated
Statement of Income.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
8. Earnings Per Share
Earnings per share was calculated as follows (in millions, except for
per share data):
Three months Six months
ended ended
May 31 May 31
----------------- ----------------
Numerator: 1998 1997 1998 1997
------- ------ ------ --------
Net income $324 $121 $511 $265
Preferred stock dividends (56) (7) (63) (13)
----- ----- ----- -----
Numerator for basic and diluted earnings
per share - income available to common
stockholders $268 $114 $448 $252
===== ==== ==== ====
Denominator:
Denominator for basic earnings
per share - weighted-average shares 121 118 121 118
Effect of dilutive securities:
Employee stock options 3 1 3 1
Common stock equivalents 2 1 2 1
------ ----- ------ ------
Dilutive potential common shares 5 2 5 2
------ ----- ------ ------
Denominator for diluted
Earnings per share - adjusted
Weighted-average shares 126 120 126 120
===== ===== ===== =====
Basic earnings per share $2.22 $0.97 $3.71 $2.15
===== ===== ===== =====
Diluted earnings per share $2.12 $0.95 $3.57 $2.11
===== ===== ===== =====
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Business Environment
The principal business activities of the Company are investment banking
and securities trading and sales, which by their nature are subject to
volatility, primarily due to changes in interest and foreign exchange rates and
security valuations, global economic and political trends and industry
competition. As a result, the Company's revenues and earnings may vary
significantly from quarter to quarter and from year to year.
The generally favorable market and economic conditions that
characterized fiscal 1997 continued into the first six months of the Company's
fiscal year ("fiscal 1998"). During the first six months of fiscal 1998,
investor demand in the worldwide debt and equity markets remained strong led by
continued growth in the U.S. economy and the favorable interest-rate
environment. The pace of underwriting for combined fixed income and equity
securities accelerated to record levels. The unabated pace of global merger and
acquisition activity fueled financing of all types. Investors continued to focus
on worldwide market conditions, particularly with respect to the potential
effects of the Asian crisis, as well as any signs of potential weakening in the
U.S. economy.
In the global fixed income markets, fiscal 1998 began with uncertainty
as investors focused on whether the U.S. Federal Reserve Board (the "Fed") would
raise the overnight lending rate from 5.5% and whether the crisis which began in
the Asian region in the latter half of 1997 would have a negative impact on the
U.S. economy. By the end of January, however, the bond markets rallied when the
Fed left rates unchanged: interest rates on the 30-year U.S. Treasury bond
remained below 6% for most of the first half of fiscal 1998. In Europe, the
economic environment remained extremely favorable throughout this period. Low
levels of inflation, the continued strength of the U.S. dollar and the prospects
of European Monetary Union propelled the European bond markets, especially in
some of the smaller markets (e.g., Italy and Spain). In Japan, the weakening
economy drove bond yields to historic lows not seen by any modern,
industrialized country. In the six months ending May 31, 1998, Japanese 10 year
yields fell 50bp to 1.45% as the Yen fell 8% to Y/$ 138.8.
U.S. equity markets continued to recover from the 1997 Asian
correction, with most equity indices posting successive record highs during this
period. However, concerns about earnings weakness related to Asia and an
increase in corporate profit warnings, prompted analysts to reduce their
earnings expectations. Earnings growth slowed considerably with the turmoil in
Asia ; indeed, most of the markets' rise came from an increase in the "price to
earnings" multiple for the equity market as a whole. The forward "price to
earnings" multiple on the U.S. stock market (measured by the S&P 500) rose from
19 times at the beginning of the fiscal year to above 21 times now. This
increase was facilitated by moderate inflation and the 30 year U.S. Treasury
bond yield staying below 6% for almost the entire period. Thus, despite slowing
profit growth, the S&P 500 returned almost 14% for the first half of 1998.
Supported by a favorable bond market environment, together with increasing
evidence of a recovery in domestic demand, European equity markets performed
very strongly. The FT/S&P European Index gained 28.5% in dollar terms over the
period, while trading volumes remained buoyant. By contrast, in late spring,
increasing pessimism over Japan's ability to resolve its bad debt and structural
problems and the associated weakness in the yen sparked off a wave of negative
sentiment towards markets across the Far East and throughout emerging markets
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
globally. In the six months ending May, the FT/S&P Pacific Basin Index fell
11.6% in U.S. dollar terms, and Latin American equities (IFC Investable Index)
declined 11.4%.
Worldwide underwriting volumes in fixed income products were
unprecedented during the first six months of fiscal 1998. U.S. underwriting
volumes, while experiencing a slowdown in December 1997 and January 1998,
strengthened over the prior year, with heavy issuance of corporate, high yield
and asset-backed bonds. Issuers came to market to take advantage of the
historically attractive yields as well as favorable pricing in the spread
sectors. Equity and equity-related underwriting volumes also increased during
fiscal 1998 from the comparable period in fiscal 1997 as increased stock prices
and favorable valuations induced capital raising by issuers. However, the actual
number of equity and equity-related deals was overshadowed by the significant
number of debt transactions, where issuance proceeded at a rate not seen since
the fourth quarter of 1990.
Corporate Finance Advisory activities continued at record levels during
the first six months of fiscal 1998. Coming off a strong pace in 1997, the
volume of announced transactions in the first half of 1998 continued to reflect
the trend of consolidation, deregulation and globalization across industry
sectors as well as the overall strength in the global capital markets.
Strong financial markets have characterized fiscal 1998; nevertheless,
the financial services industry is cyclical. As a result, the Company's
businesses are evaluated across market cycles for operating profitability and
their contribution to the Company's long-term strategic objectives. The Company
strives to minimize the effects of economic downturns through its diversified
product base; stringent cost controls, global presence and risk management
practices.
Note: Except for the historical information contained herein, this Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements that are based on current
expectations, estimates and projections about the industries in which the
Company operates. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions
which are difficult to predict. The Company undertakes no obligation to
update publicly any forward-looking statements, whether as a result of
new information, future events or otherwise.
<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, 1998 and 1997
The Company reported net income of $324 million for the second quarter
ended May 31, 1998 representing an increase of 168% from net income of $121
million for the second quarter ended May 31, 1997. This increase reflected
across-the-board strength in the Company's fixed income, equity and investment
banking businesses. The Company's earnings momentum and profitability increased
significantly throughout the second quarter of 1998. Earnings per common share
(diluted) increased to $2.12 for the second quarter of 1998 from $0.95 for the
second quarter of 1997. Included in the 1998 earnings per common share
computation was the recognition of $50 million in dividends on the Company's
Redeemable Voting Preferred Stock. American Express Company and Nippon Life
Insurance Company are entitled to receive an annual non-cumulative preferred
dividend equal to 50 percent of the amount by which the company's net income for
the full fiscal year exceeds $400 million, up to a maximum of $50 million per
year, through 2002. In 1997, the Redeemable Voting Preferred Stock dividend was
not recognized until the third and fourth quarter, when the Company's year to
date net income exceeded the $400 million threshold.
Net revenues increased to $1,473 million for the second quarter of 1998
from $854 million for the second quarter of 1997. The increase in net revenues
from the second quarter of 1997 resulted from continued strong performance in
the global merger and acquisition advisory business, fixed income and equity
derivatives, leveraged lending and high yield origination, and real estate and
mortgage activities.
Compensation and benefits expense as a percentage of net revenues was
50.7% for both 1998 and 1997, reflecting the thirteenth successive quarter of
consistent compensation levels relative to net revenues. Nonpersonnel expenses
were $250 million in the second quarter of 1998, essentially unchanged from the
$249 million in the second quarter of 1997; however, nonpersonnel expenses as a
percentage of net revenues decreased to 17.0% in the second quarter of 1998 from
29.2% in the second quarter of 1997. Increased net revenues and unchanged
expense levels led to an improvement in the Company's pretax operating margin to
32.4% in the second quarter of 1998 from 20.2% in the second quarter of 1997.
The Company, through its subsidiaries, is a market-maker of equity and
fixed income products in major 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 that 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
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
should not be viewed in isolation but should be viewed in conjunction with
revenues from principal transactions. Principal transactions and net interest
revenues increased 72% to $814 million in the second quarter of 1998 from $473
million in the second quarter of 1997. Principal transactions revenues increased
as favorable market conditions characterized by low interest rates and low
inflation supported debt markets and helped to spur growth in the equity markets
in both the U.S. and Europe. Growth in fixed income revenues was paced by
mortgages, foreign exchange, derivatives and high yield, while growth in
equities revenue was driven by equity cash trading, derivatives and equity
arbitrage. Net interest revenues increased as a result of an increase in
inventory and a shift in the composition of the Company's fixed income
portfolio.
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 four major business units: Fixed Income, Equity, Corporate Finance
Advisory, and Merchant Banking. 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 Income. Net revenues by
business unit contain certain internal allocations, including funding costs,
which are centrally managed.
Three Months Ended May 31, 1998
Principal
Transactions and Investment
Net Interest Commissions Banking Other Total
- --------------------------------------------------------------------------------
Fixed Income $671 $9 $220 $2 $902
Equity 145 111 122 2 380
Corporate Finance
Advisory 104 104
Merchant Banking (3) 49 46
Other 1 4 36 41
- --------------------------------------------------------------------------------
$814 $124 $495 $40 $1,473
- --------------------------------------------------------------------------------
Three Months Ended May 31, 1997
Principal
Transactions and Investment
Net Interest Commissions Banking Other Total
- --------------------------------------------------------------------------------
Fixed Income $358 $11 $ 71 $5 $445
Equity 122 76 41 2 241
Corporate Finance
Advisory (3) 83 80
Merchant Banking (4) 80 76
Other 4 (1) 9 12
- --------------------------------------------------------------------------------
$473 $91 $274 $16 $854
- --------------------------------------------------------------------------------
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 and
fixed income derivative products. Fixed income net revenues increased 103% to
$902 million for the second quarter of 1998 from $445 million for the second
quarter of 1997. The increase in the second quarter results versus the prior
year quarter reflected increased revenues from a number of fixed income products
including improved performance in both sales and trading and syndicate
activities in high yield corporates as well as increased contributions from
mortgages, foreign exchange and fixed income derivative products, partially
offset by decreased results in government and municipal investments. Investment
banking revenues, as a component of fixed income revenues, increased to $220
million for the second quarter of 1998 from $71 million for the second quarter
of 1997 due to increased underwriting fees, particularly in high yield
corporates.
Equity. Equity net revenues reflect customer flow activities (both
institutional and high-net-worth retail), secondary trading, equity
underwriting, equity finance, equity derivatives and equity arbitrage
activities. The Company's equity net revenues increased to $380 million for the
second quarter of 1998 from $241 million for the second quarter of 1997. Higher
revenues resulted from higher levels of customer flow activities in U.S. and
European listed securities, increased underwriting volumes and improved
contributions from equity derivatives. Investment Banking revenues, as a
component of equity revenues, increased to $122 million for the second quarter
of 1998 from $41 million for the second quarter of 1997 due to increased
underwriting volumes in U.S. listed and convertible securities.
Corporate Finance Advisory. Corporate finance advisory net revenues,
classified in the Consolidated Statement of Income 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 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 activities increased to $104 million for the second
quarter of 1998, reflecting a 30% increase from the $80 million recognized in
the second quarter of 1997. This increase reflected the closing of several large
transactions in the second quarter of 1998 and continued strength in the overall
merger and acquisition market environment. The Company ended the second quarter
with a strong transaction pipeline which stood at $166 billion in terms of total
dollar value based on data supplied by Securities Data Company.
Merchant Banking. The Company is the general partner for nine active
merchant banking partnerships. Current merchant banking investments held by the
partnerships include both publicly traded and privately held companies. Merchant
banking net revenues primarily represent the Company's proportionate share of
net realized and unrealized gains and losses from the sale and revaluation of
investments held by the partnerships. Such amounts are classified in the
Consolidated Statement of Income 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 were $46 million for the second quarter of 1998 down from $76
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
million in the second quarter of 1997. The second quarter of 1997 reflects the
realized gain on the sale of a significant portion of a publicly traded
investment held by the partnerships.
Non-Interest Expenses. Non-interest expenses were $997 million for the
second quarter of 1998 and $682 million for the second quarter of 1997.
Compensation and benefits expense as a percentage of net revenues remained
unchanged from the prior year quarter at 50.7%. Nonpersonnel expenses were $250
million in the second quarter of 1998 compared to $249 million in the second
quarter of 1997; however, nonpersonnel expenses as a percentage of net revenues
decreased to 17.0% in the second quarter of 1998 from 29.2% in the second
quarter of 1997 despite planned investments in a number of key strategic
businesses and increased expense related to a higher volume of business
activity.
Income Taxes. The Company's income tax provision was $152 million for
the second quarter of 1998 compared to $51 million for the second quarter of
1997. The effective tax rate was 32% for the second quarter of 1998 and 30% for
the second quarter of 1997. The increase in the effective tax rate relates
primarily to a significantly higher level of pretax income (which reduces the
impact of permanent differences), and an increase in income subject to state and
local taxes, partially offset by an increase in tax benefits attributable to
income and transactions subject to preferential tax 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, 1998 and 1997
The Company reported net income of $511 million for the six months
ended May 31, 1998, representing an increase of 93% from net income of $265
million for the six months ended May 31, 1997. Earnings per common share
(diluted) increased to $3.57 for the six months of 1998 from $2.11 for the six
months of 1997. Included in the 1998 earnings per common share computation was
the recognition of $50 million in dividends on the Company's Redeemable Voting
Preferred Stock. American Express Company and Nippon Life Insurance Company are
entitled to receive an annual non-cumulative preferred dividend equal to 50
percent of the amount by which the company's net income for the full fiscal year
exceeds $400 million, up to a maximum of $50 million per year, through 2002. In
1997, the Redeemable Voting Preferred Stock dividend was not recognized until
the third and fourth quarter, when the Company's year to date net income
exceeded the $400 million threshold.
Net revenues increased to $2,518 million for the six months of 1998
from $1,779 million for the six months of 1997. The increase in net revenues
from the first half of 1997 resulted from continued strong performances in the
global merger and acquisition advisory, fixed income and equity businesses.
Compensation and benefits expense as a percentage of net revenues was
50.7% for both the first half of 1998 and 1997. Nonpersonnel expenses increased
slightly to $490 million in the six months of 1998 from $486 million in the six
months of 1997; however, nonpersonnel expenses declined as a percentage of net
revenues to 19.5% for the six months of 1998 from 27.3% for the comparable
period in 1997. Increased net revenues and unchanged expense levels led to an
improvement in the Company's pretax operating margin to 29.8% in the first half
of 1998 from 22.0% in the first half of 1997.
Principal transactions and net interest revenues increased to $1,376
million for the six months of 1998 from $1,023 million for the six months of
1997. Principal transactions revenues increased as favorable market conditions
characterized by low interest rates and low inflation supported debt markets and
helped to spur growth in the equity markets in both the U.S. and Europe. Growth
in Fixed Income revenue was paced by mortgages, foreign exchange, derivatives
and high yield, while growth in equities revenue was driven by equity cash
trading and derivatives. Net interest revenues increased as a result of an
increase in inventory and a shift in the composition of the Company's fixed
income portfolio.
<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. Net revenues by business unit contain certain internal allocations,
including funding costs, which are centrally managed.
Six Months Ended May 31, 1998
Principal
Transactions and Investment
Net Interest Commissions Banking Other Total
- -----------------------------------------------------------------------------
Fixed Income $1,120 $ 17 $376 $ 6 $1,519
Equity 263 216 182 4 665
Corporate Finance
Advisory (2) 199 197
Merchant Banking (6) 85 79
Other 1 8 1 48 58
- -----------------------------------------------------------------------------
$1,376 $241 $843 $58 $2,518
- -----------------------------------------------------------------------------
Six Months Ended May 31, 1997
Principal
Transactions and Investment
Net Interest Commissions Banking Other Total
- -----------------------------------------------------------------------------
Fixed Income $ 826 $ 21 $172 $ 8 $1,027
Equity 205 160 106 3 474
Corporate Finance
Advisory (3) 149 146
Merchant Banking (8) 84 76
Other 3 7 3 43 56
- -----------------------------------------------------------------------------
$1,023 $188 $514 $54 $1,779
- -----------------------------------------------------------------------------
Fixed Income. Fixed income net revenues increased to $1,519 million for
the six months of 1998 from $1,027 million for the six months of 1997. The
increase in the six months of 1998 versus the prior year six months reflected
increased revenues from a number of fixed income products including improved
performance in both sales and trading and syndicate activities in high yield
corporates as well as increased contributions from mortgages, foreign exchange
and fixed income derivative products partially offset by decreased results in
government and municipal investments. Investment banking revenues, as a
component of fixed income revenues, increased to $376 million for the six months
of 1998 from $172 million for the six months of 1997 due to increased
underwriting fees, particularly in high yield corporates.
Equity. The Company's equity net revenues increased to $665 million for
the six months of 1998 from $474 million for the six months of 1997. Higher
revenues resulted from higher levels of customer flow activities in U.S. listed
securities, increased underwriting volumes and improved contributions from
equity derivatives. Investment banking revenues, as a component of equity
revenues, increased to $182 million for the six months of 1998 from $106 million
for the six months of 1997 due to increased underwriting volumes in U.S. listed
and convertible securities.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Corporate Finance Advisory. Net revenues from corporate finance
advisory activities increased to $197 million for the six months of 1998
reflecting a 35% increase from the $146 million recognized in the six months of
1997. This increase reflected continued strength in the overall merger and
acquisition market environment. For completed M&A transactions, Lehman has
improved its worldwide ranking from number 10 to number 4, increasing its market
share from 6% to 15%, in part through participation in 5 of the 15 largest deals
in the first half of the 1998 calendar year.
Merchant Banking. Merchant banking net revenues were $79 million for
the six months of 1998 and $76 million in the six months of 1997. 1998 net
revenues reflect the realized gains on the sales of the partnerships' interest
in numerous investments as well as net unrealized gains recognized on the
publicly traded investments. 1997 net revenues reflect a realized gain on the
sale of a significant portion of a publicly traded investment held by the
partnerships which was completely divested in the third quarter of 1997.
Non-Interest Expenses. Non-interest expenses were $1,767 million for
the six months of 1998 and $1,388 million for the six months of 1997.
Compensation and benefits expense as a percentage of net revenues remained
unchanged from the comparable prior year period at 50.7%. Nonpersonnel expenses
increased slightly to $490 million in the six months of 1998 from $486 million
in the six months of 1997, however, nonpersonnel expenses declined as a
percentage of net revenues to 19.5% for the six months of 1998 from 27.3% for
the comparable period in 1997.
Income Taxes. The Company's income tax provision was $240 million for
the six months of 1998 compared to $126 million for the six months of 1997. The
effective tax rate was 32% for the six months of 1998 and 1997. The 1998
effective tax rate, although the same as that of 1997, reflects an increase in
tax benefits attributable to income and transactions subject to preferential tax
treatment offset by a significantly higher level of pretax income and an
increase in income subject to state and local taxes.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Overview
As a leading global investment bank that actively participates in the global
capital markets, the Company has large and diverse capital requirements. Many of
the businesses in which the Company operates are capital intensive. Capital is
required to finance, among other things, the Company's securities inventories,
underwriting activities, principal investments, merchant banking activities and
investments in fixed assets.
The Company's balance sheet is liquid and consists primarily of cash and cash
equivalents, securities and other financial instruments owned, and
collateralized short-term financing agreements. The liquid nature of these
assets provides the Company with flexibility in financing and managing its
business. The Company's primary activities are based on the execution of
customer-related transactions. This flow of customer business supports the rapid
asset turnover rate of the Company's inventory.
The Company's total assets increased to $179.1 billion at May 31, 1998 from
$151.7 billion at November 30, 1997, reflecting the strategic expansion of
certain business lines. The Company's continued focus on growing higher margin
businesses resulted in across the board increases in inventory positions at May
31, 1998 compared to November 30, 1997. The Company also positioned itself to
benefit from favorable conditions in the worldwide fixed income markets by
increasing its secured customer financing activities.
Funding and Capital Policies
The Company's Finance Committee is responsible for establishing and managing the
funding and liquidity policies of the Company. These policies include
recommendations for capital and balance sheet size as well as the allocation of
capital and balance sheet to product areas. Under the authority of the Finance
Committee, members of the Company's treasury department work with Regional Asset
and Liability Committees to ensure coordination of global funding efforts and
implementation of the funding and liquidity policies. The Regional Asset and
Liability Committees are aligned with the Company's geographic funding centers
and are responsible for implementing funding strategies for their respective
regions.
The primary goal of the Company's funding policies is to provide sufficient
liquidity and availability of funding sources across a wide range of market
environments. There are five key elements of its funding strategy that the
Company attempts to achieve:
(1) Maintain an appropriate Total Capital structure to support the business
activities in which the Company is engaged. Total Capital is defined as
long-term debt, preferred stock and common stockholders' equity.
(2) Minimize liquidity and refinancing risk by funding the Company's assets on a
global basis with secured and unsecured liabilities, which have maturities equal
to or exceeding the anticipated liquidation period of the assets.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(3) Maintain sufficient financial resources to enable the Company to meet its
obligations in a period of financial stress through a combination of
collateralized short-term financings and Total Capital, as well as the
implementation of a contingency funding plan. Financial stress is defined as any
event which severely constrains the Company's access to unsecured funding
sources.
(4) Obtain diversified funding through a global investor base which maximizes
liquidity and reduces concentration risk.
(5) Maintain funding availability in excess of actual utilization.
Short-Term Funding
The Company strives to maximize the portion of the Company's balance sheet that
is funded through collateralized borrowing sources, which in turn minimizes the
reliance placed upon unsecured short-term debt. Collateralized borrowing sources
include cash market securities and other financial instruments sold but not yet
purchased, as well as collateralized short-term financings, defined as
securities sold under agreements to repurchase ("repos") and securities loaned.
Because of their secured nature, OECD government repos and certain other types
of collateralized borrowing sources are less credit-sensitive and have
historically been a more stable financing source under adverse market
conditions.
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. The majority of the
Company's assets are funded with collateralized borrowing sources. At May 31,
1998 and November 30, 1997, $107 billion and $94 billion, respectively, of the
Company's total balance sheet was financed using collateralized borrowing
sources.
As of May 31, 1998 and November 30, 1997, commercial paper and short-term debt
outstanding were $11.1 billion and $7.8 billion, respectively. Of these amounts,
commercial paper outstanding as of May 31, 1998 was $5.9 billion with an average
maturity of 74 days, compared to $3.9 billion with an average maturity of 73
days as of November 30, 1997.
At May 31, 1998, Holdings maintained a Revolving Credit Agreement (the "Credit
Agreement") with a syndicate of banks. Under the terms of the Credit Agreement,
the banks have committed to provide up to $2 billion for up to 364 days. Any
loans outstanding on the commitment termination date may be extended to the
first anniversary of the commitment termination date at the option of Holdings.
The Credit Agreement contains covenants which require, among other things, that
the Company maintain specified levels of liquidity and tangible net worth, as
defined.
There were no borrowings outstanding under the Credit Agreement at May 31, 1998.
The Company may use the Credit Agreement for general corporate purposes from
time to time. The Company has maintained compliance with the applicable
covenants of the Credit Agreement at all times.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company is currently negotiating a new $1 billion Committed Securities
Repurchase Facility (the "Facility") for LBIE, the Company's major operating
entity in Europe. The Facility is expected to provide secured multi-currency
financing for a broader range of collateral types than LBIE's previous committed
secured credit facility. Under the terms of the Facility, the bank group will
agree to provide funding for up to one year on a secured basis.
Total Capital
In accordance with the Company's liquidity plan, the Company increased its Total
Capital base in 1998 to $31.9 billion at May 31, 1998 from $24.8 billion at
November 30, 1997. Total Capital increased primarily due to an increase in
long-term debt and the retention of earnings.
May 31 November 30
(in millions) 1998 1997
- --------------------------------------------------------------------------------
Long-term Debt
Senior Notes $23,029 $17,049
Subordinated Indebtedness 3,816 3,212
------- -------
26,845 20,261
Stockholders' Equity
Preferred Equity 758 508
Common Equity 4,326 4,015
------- -------
5,084 4,523
- --------------------------------------------------------------------------------
Total Capital $31,929 $24,784
- --------------------------------------------------------------------------------
During the six months of 1998, the Company issued $8.2 billion in long-term
debt, which was $6.6 billion in excess of its maturing debt. Long-term debt
increased to $26.8 billion at May 31, 1998 from $20.3 billion at November 30,
1997 with a weighted average maturity of 3.7 years at May 31, 1998 and 4.1 years
at November 30, 1997.
At May 31, 1998, the Company had approximately $10.1 billion available for the
issuance of debt securities under various shelf registrations and debt programs.
Capital Resources and Capital Adequacy
Balance sheet leverage ratios are one measure used to evaluate the capital
adequacy of a company. Leverage ratios are commonly calculated using either
total assets or adjusted total assets divided by total stockholders' equity. The
Company believes that the adjusted leverage ratio, rather than the gross
leverage ratio, is a more effective measure of financial risk when comparing
companies in the securities industry. Adjusted total assets represent total
assets less the lower of securities purchased under agreements to resell or
securities sold under agreements to repurchase.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Due to the nature of the Company's sales and trading activities, the overall
size of the Company's assets and liabilities fluctuates from time to time and at
specific points in time may be higher than the fiscal quarter ends or the
quarterly average. The Company's average gross leverage ratio and average
adjusted leverage ratio for the quarter ended May 31, 1998 were 39.6x and 26.9x,
respectively and for the year ended November 30, 1997 were 41.3x and 28.9x,
respectively.
In early 1997, the Company implemented a business performance measurement
system. This system is a management reporting tool which charges for capital
utilization across the Company's products. It provides detailed profitability
and return on equity information for each of the Company's lines of business.
The results of charging each of the respective businesses for its capital
utilization are that businesses have begun to optimize their use of balance
sheet and capital resources, resulting in an improved return on assets and
overall decreased levels of both quarterly average gross and adjusted leverage.
[GRAPHIC OMITTED]
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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. The
Company's access to and cost of funding is generally dependent upon its short-
and long- term debt ratings. In April 1998, Moody's Investors Services upgraded
its ratings outlook on the Company to "positive" from "stable". Additionally,
during May 1998, Thomson Bank Watch, upgraded its long-term debt ratings of the
Company to "A" from "A-" and the long-term senior and subordinated debt ratings
of Lehman Brothers Inc. ("LBI") to "A+" from "A" and "A" from "A-",
respectively. As of May 31, 1998, the short- and long-term senior debt ratings
of Holdings and LBI were 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 IBCA, Inc. F-1 A F-1 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
Insurance Subsidiary
The Company has established a new subsidiary to underwrite and accumulate
insurance and reinsurance risks. The new subsidiary, Lehman Re Ltd., is a
Bermuda licensed Class 4 and Long-Term insurance company and was capitalized in
June 1998 at $500 million. Lehman Re Ltd. intends to underwrite property and
casualty, as well as life and annuity insurance risks. It expects to focus its
business initially in four areas: finite and structured financial products;
political risk and trade credit insurance; property catastrophe reinsurance; and
life and annuity reinsurance.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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-rated companies. For purposes of this
discussion, high yield debt securities are defined as securities or loans to
companies rated 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 Income. The Company's
portfolio of such securities at May 31, 1998 and November 30, 1997 included long
positions with an aggregate market value of approximately $3.7 billion and $3.2
billion, respectively, and short positions with an aggregate market value of
approximately $479 million and $172 million, respectively. The portfolio may,
from time to time, contain concentrated holdings of selected issues. The Company
may also, from time to time, mitigate its net exposure to any single issuer
through the use of derivatives and other financial instruments. At May 31, 1998,
the Company had no single exposure to an issuer of high yield securities greater
than $100 million.
Lending Activities
The Company, through its high yield sales and trading activities, makes
commitments to extend credit in loan syndication transactions principally to
below investment grade borrowers and participates a significant portion of these
commitments. These commitments, which are net of syndications and participations
totaled $1.9 billion at May 31, 1998, are typically secured against the
borrower's assets and have fixed maturity dates. The utilization of these
facilities is generally contingent upon certain representations, warranties and
contractual conditions of the borrower. Total commitments may not be indicative
of actual funding requirements as the Company intends to continue syndicating,
selling, and/or participating these commitments. .
Merchant Banking and Related Lending Activities
The Company's merchant banking activities include investments in nine
partnerships, for which the Company acts as general partner, as well as direct
investments. At May 31, 1998, the investment in merchant banking partnerships
was $154 million and direct investments were $204 million. The Company's policy
is to carry its investments, including its partnership interests, at fair value
based upon the Company's assessment of the underlying investments.
The Company has commitments to invest up to $351 million in the partnerships,
which in turn will make direct merchant banking related investments. These
commitments will be funded as required through the end of the respective
partnerships' investment periods, principally expiring in 2004.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In June 1998, the Company sponsored a $5 billion interim loan fund, designed to
extend financing to clients in connection with a wide range of domestic and
international leveraged transactions, including acquisitions, corporate
recapitalization and refinancing of existing debt. In connection therewith, the
Company intends to provide up to $400 million to be used by the fund. Any draw
downs under the facility are expected to be repaid within a short-term period.
In addition, at May 31, 1998, the Company had $727 million direct bridge
financings outstanding. Subsequent to May 31, 1998, the Company syndicated a
significant portion of these financings.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Risk Management
As a leading global investment banking company, risk is an inherent part of the
Company's businesses. Global markets, by their nature, are prone to uncertainty
and subject participants to a variety of risks. The Company has developed
policies and procedures to identify, measure and monitor each of the risks
involved in its trading, brokerage and investment banking activities on a global
basis. The principal risks of Lehman Brothers are market, credit, liquidity,
legal and operational risks. Risk management is considered to be of paramount
importance. The Company devotes significant resources across all of its
worldwide trading operations to the measurement, management and analysis of
risk, including investments in personnel, information technology infrastructure
and systems.
Market Risk
Market risk represents the potential change in value of a portfolio of financial
instruments due to changes in market rates, prices, and volatilities. Market
risk is present in cash products, derivatives, and contingent claim structures
that exhibit linear as well as non-linear profit and loss sensitivity. The
Company's exposure to market risk varies in accordance with the volume of client
driven market-making transactions, the size of the Company's proprietary and
arbitrage positions, and the volatility of financial instruments traded. The
Company seeks to mitigate, whenever possible, excess market risk exposures
through the use of futures and option contracts and offsetting cash market
instruments.
The Company participates globally in interest rate, equity, and foreign exchange
markets. The Company's fixed income division has a broadly diversified market
presence in U.S. and foreign government bond trading, emerging market
securities, corporate debt (investment and non-investment grade), money market
instruments, mortgages and mortgage-backed securities, asset-backed securities,
municipal bonds, and interest rate derivatives. The Company's equity division
facilitates domestic and foreign trading in equity instruments, indices, and
related derivatives. The Company's foreign exchange businesses are involved in
trading currencies on a spot and forward basis as well as through derivative
products and contracts.
Value at Risk
For purposes of Securities and Exchange Commission disclosure requirements, the
Company has elected to disclose an entity-wide value at risk analysis of
virtually all of the Company's trading activities. The value at risk related to
non-trading financial instruments has been excluded from this analysis and not
reported separately because the amounts were not material. The value at risk
calculation measures potential losses in expected revenues and is based on a
methodology which uses a one-day holding period and a 95% confidence level.
Value at risk as of each date presented below was measured by analyzing the
distribution of actual trading revenues during the preceding one year period and
assumed a relatively consistent portfolio mix.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Value at risk is one measurement of potential losses in revenues that may result
from adverse market movements over a specified period of time with a selected
likelihood of occurrence. Value at risk has substantial limitations, including
its reliance on historical performance and data as valid predictors of the
future. Consequently, value at risk is only one of a number of tools the Company
utilizes in its daily risk management activities.
The Company's value at risk for each component of market risk, and in total was
as follows (in millions):
May 31, 1998 November 30, 1997
------------ -----------------
Interest rate risk $12.5 $12.2
Equity price risk 10.0 7.1
Foreign exchange risk 2.4 4.5
Diversification benefit (10.5) (9.0)
----- ----
Total Company $14.4 $14.8
===== =====
The Company utilizes a wide variety of market risk management methods,
including: limits for each trading activity; marking all positions to market on
a daily basis; daily profit and loss analyses; position reports; aged inventory
position analyses; and independent verification of all inventory pricing. The
Company believes that these procedures, which stress timely communication
between risk, trading and senior management, are critical elements of the risk
management process.
Other
Recent Development
On April 17, 1998, the United States District Court for the Northern District of
Texas approved the settlement of a class action captioned Warren Chisum, et al.
v. Lehman Brothers Inc., et al. The class action alleged violations of the
federal securities laws and breaches of fiduciary duty by defendants in
connection with the origination, sale and operation of nine E.F. Hutton net
lease real estate limited partnerships sold in the early 1980's. The settlement
cost of $75 million was charged against existing reserves.
<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)
The Virginia Commissioner of Insurance. On May 21, 1988 after trial,
the Court entered a Judgment Order in accord with the jury verdict, ordering
that the plaintiffs recover nothing from the defendants and dismissing the
complaint.
Warren D. Chisum, et al. v. Lehman Brothers Inc. et al. (Reported in
Holdings' Annual Report on Form 10-K and First Quarter Report on Form 10-Q)
On April 17, 1988, the Court entered a final order approving the
settlement of this action.
Bamaodah v. E.F. Hutton & Company Inc. (Reported in Holdings' Annual Report
on Form 10-K and First Quarter Report on Form 10-Q)
The Court has ordered the experts to conduct a review of certain
additional documents and has set October 25, 1998 as the next hearing date.
<PAGE>
AIA Holding SA et al. V. Lehman Brothers Inc. and Bear Stearns & Co., Inc.
(Reported in Holdings' Annual Report on Form 10-K and First Quarter Report on
Form 10-Q)
On July 3, 1998 the Plaintiffs served their First Amended Complaint
which contains eighteen causes of action against Lehman Brothers and/or Bear
Stearns.
In re MobileMedia Securities Litigation.
LBI was named as a defendant in several purported class actions filed
in December, 1996 in the United States District Court for the District of New
Jersey in connection with (i) a November 7, 1995 offering of common stock of
MobileMedia Corporation; and (ii) a November 7, 1995 offering of 9-3/8% senior
subordinated notes of MobileMedia Communications Inc due in 2007. On November 3,
1997 a consolidated amended class action complaint was filed naming certain of
MobileMedia Corporation's officers and directors and the four co-lead
underwriters of these offerings, including LBI. MobileMedia filed for Chapter 11
bankruptcy protection on January 30, 1997, and therefore, is not named as a
defendant. The complaint alleges that the underwriters violated Sections 11 and
12 of the 1933 Securities Act. Plaintiffs seek rescission and unspecified
compensatory damages.
<PAGE>
ITEM 6 Exhibits and Reports on Form 8-K
The following exhibits and reports on Form 8-K are filed as part of this
Quarterly Report, or where indicated, were heretofore filed and are hereby
incorporated by reference:
(a) Exhibits:
11 Computation of Per Share Earnings
12.1 Computation in Support of Ratio of Earnings to Fixed Charges
12.2 Computation in Support of Ratio of Earnings to Combined Fixed
Charges and Preferred Dividends
27 Financial Data Schedule
(b) Reports on Form 8-K:
Form 8-K dated May 13, 1998, Item 7. Form 8-K dated June 18,
1998, 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, 1998 By /s/ Richard S. Fuld Jr.
--------------------------
Richard S. Fuld, Jr.
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: July 15, 1998 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 12.1 Computation in Support of Ratio of Earnings to
Fixed Charges
Exhibit 12.2 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 Six months
ended Ended
May 31 May 31
------------------------------------- --------------------------------------
1998 1997 1998 1997
---------------- ----------------- ----------------- -----------------
Numerator:
<S> <C> <C> <C> <C>
Net income $324 $121 $511 $265
Preferred stock dividends (56) (7) (63) (13)
---------------- ----------------- ----------------- -----------------
Numerator for basic and diluted
earnings per share - income
available to common stockholders $268 $114 $448 $252
================ ================= ================= =================
Denominator:
Denominator for basic earnings
per share - weighted-average
shares 120,633,663 118,009,833 120,638,259 117,510,139
Effect of dilutive securities:
Employee stock options 3,343,693 1,543,642 3,017,385 1,435,395
Common stock equivalents 2,323,903 867,258 1,896,015 811,550
----------------
----------------- ----------------- -----------------
Dilutive potential common shares 5,667,596 2,410,900 4,913,400 2,246,945
---------------- ----------------- ----------------- -----------------
Denominator for diluted
earnings per share - adjusted
weighted-average shares 126,301,259 120,420,733 25,551,659 119,757,084
================ ================= ================= =================
Basic earnings per share $2.22 $0.97 $3.71 $2.15
================ ================= ================= =================
Diluted earnings per share $2.12 $0.95 $3.57 $2.11
================ ================= ================= =================
</TABLE>
<PAGE>
Exhibit 12.1
<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 For the For the For the
Twelve Months Eleven Months Twelve Months Twelve Months Twelve Months Six Months
Ended Ended Ended Ended Ended Ended
December 31 November 30 November 30 November 30 November 30 May 31
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
Fixed Charges:
Interest expense:
<S> <C> <C> <C> <C> <C> <C>
Subordinated indebtedness $ 144 $ 158 $ 206 $ 220 $ 240 $ 118
Bank loans and other
borrowings* 5,224 6,294 10,199 10,596 12,770 7,498
Interest component of rentals
of office and equipment 76 42 44 34 32 16
Other adjustments** 7 4 28 16 9 11
------ --------- -------- ------- -------- -------
TOTAL (A) $5,451 $6,498 $10,477 $10,866 $13,051 $7,643
====== ========= ======== ======= ======== ======
Earnings:
Pretax income (loss) from
continuing operations $ 27 $ 193 $ 369 $ 637 $ 937 $ 751
Fixed charges 5,451 6,498 10,477 10,866 13,051 7,643
Other adjustments*** (6) (4) (28) (14) (8) (11)
------- ------- ------- ------- ------- -----
TOTAL (B) $5,472 $6,687 $10,818 $11,489 $13,980 $8,383
====== ====== ======= ======= ======= ======
(B / A) 1.00 1.03 1.03 1.06 1.07 1.10
</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.
<PAGE>
Exhibit 12.2
<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 For the For the For the
Twelve Months Eleven Months Twelve Months Twelve Months Twelve Months Six Months
Ended Ended Ended Ended Ended Ended
December 31 November 30 November 30 November 30 November 30 May 31
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
Combined Fixed Charges
and Preferred Dividends:
Interest expense:
<S> <C> <C> <C> <C> <C> <C>
Subordinated indebtedness $ 144 $ 158 $ 206 $ 220 $ 240 $ 118
Bank loans and other
borrowings* 5,224 6,294 10,199 10,596 12,770 7,498
Interest component of rentals
of office and equipment 76 42 44 34 32 16
Other adjustments** 7 4 28 16 9 11
--------- --------- --------- --------- ----------- -------
Total fixed charges 5,451 6,498 10,477 10,866 13,051 7,643
Preferred dividends (tax
equivalent basis) 48 58 64 58 109 92
-------- -------- --------- --------- -------- -------
TOTAL (A) $5,499 $6,556 $10,541 $10,924 $13,160 $7,735
====== ====== ======= ======= ======= ======
Earnings:
Pretax income (loss) from
continuing operations $ 27 $ 193 $ 369 $ 637 $ 937 $ 751
Fixed charges 5,451 6,498 10,477 10,866 13,051 7,643
Other adjustments*** (6) (4) (28) (14) (8) (11)
-------- ------- ------- ------- -------- ------
TOTAL (B) $5,472 $6,687 $10,818 $11,489 $13,980 $8,383
====== ====== ======= ======= ======= ======
(B / A) **** 1.02 1.03 1.05 1.06 1.08
</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 $27 million in 1993 in order to cover
the deficiency.
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Consolidated Statement of Financial Condition at May 31, 1998
(Unaudited) and the Consolidated Statement of Income for the six months ended
May 31, 1998 (Unaudited) and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 6,520
<RECEIVABLES> 11,651
<SECURITIES-RESALE> 48,927
<SECURITIES-BORROWED> 20,702
<INSTRUMENTS-OWNED> 89,765
<PP&E> 465
<TOTAL-ASSETS> 179,067
<SHORT-TERM> 11,148
<PAYABLES> 15,630
<REPOS-SOLD> 70,912
<SECURITIES-LOANED> 7,627
<INSTRUMENTS-SOLD> 37,364
<LONG-TERM> 26,845
0
758
<COMMON> 12
<OTHER-SE> 4,314
<TOTAL-LIABILITY-AND-EQUITY> 179,067
<TRADING-REVENUE> 1,011
<INTEREST-DIVIDENDS> 7,981
<COMMISSIONS> 241
<INVESTMENT-BANKING-REVENUES> 843
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 7,616
<COMPENSATION> 1,277
<INCOME-PRETAX> 751
<INCOME-PRE-EXTRAORDINARY> 511
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 511
<EPS-PRIMARY> 3.71
<EPS-DILUTED> 3.57
</TABLE>
