SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 29, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-9466
Lehman Brothers Holdings Inc.
(Exact Name of Registrant As Specified In Its Charter)
Delaware 13-3216325
(State or other jurisdiction (I.R.S. Employer Identification No.)
of 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 March 31, 2000, 120,843,134 shares of the Registrant's Common Stock, par
value $0.10 per share, were outstanding.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 29, 2000
INDEX
Part I. FINANCIAL INFORMATION Page
Number
Item 1. Financial Statements - (unaudited)
Consolidated Statement of Income -
Three Months Ended
February 29, 2000 and February 28, 1999...........3
Consolidated Statement of Financial Condition -
February 29, 2000 and November 30, 1999...........4
Consolidated Statement of Cash Flows -
Three Months Ended
February 29, 2000 and February 28, 1999...........6
Notes to Consolidated Financial Statements........8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.....17
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.................................34
Item 4. Submission of Matters to a Vote of Security.......35
Holders
Item 6. Exhibits and Reports on Form 8-K..................36
Signature ............................................................37
EXHIBIT INDEX 38
Exhibits
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of INCOME
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Three months ended
-------------------------------------
February 29 February 28
2000 1999
---------------- ----------------
Revenues
<S> <C> <C>
Principal transactions $ 1,114 $ 534
Investment banking 602 313
Commissions 229 146
Interest and dividends 4,313 3,581
Other 82 17
---------------- ----------------
Total revenues 6,340 4,591
Interest expense 4,138 3,473
---------------- ----------------
Net revenues 2,202 1,118
---------------- ----------------
Non-interest expenses
Compensation and benefits 1,145 567
Technology and communications 84 82
Brokerage and clearance 58 58
Business development 35 28
Professional fees 32 22
Occupancy 30 28
Other 24 24
---------------- ----------------
Total non-interest expenses 1,408 809
---------------- ----------------
Income before taxes and dividends on trust
preferred securities 794 309
Provision for income taxes 239 96
Dividends on trust preferred securities 14 2
---------------- ----------------
Net income $ 541 $ 211
================ ================
Net income applicable to common stock $ 482 $ 198
================ ================
Earnings per common share
Basic $ 3.92 $ 1.62
================ ================
Diluted $ 3.69 $ 1.57
================ ================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of FINANCIAL CONDITION
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
February 29 November 30
2000 1999
------------------ ------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 2,789 $ 5,186
Cash and securities segregated and on deposit for regulatory and other
purposes 3,177 1,989
Securities and other financial instruments owned:
Governments and agencies 26,293 29,959
Mortgages and mortgage-backed 24,385 22,643
Corporate equities 13,948 12,790
Derivatives and other contractual agreements 13,863 10,306
Corporate debt and other 13,414 11,096
Certificates of deposit and other money market instruments 665 2,265
------------------ ------------------
92,568 89,059
------------------ ------------------
Collateralized short-term agreements:
Securities purchased under agreements to resell 76,764 62,222
Securities borrowed 23,939 19,397
Receivables:
Brokers, dealers and clearing organizations 1,493 1,674
Customers 9,852 9,332
Others 1,304 1,354
Property, equipment and leasehold improvements (net of
accumulated depreciation and amortization of $906 in 2000
and $889 in 1999)
479 485
Other assets 1,388 1,408
Excess of cost over fair value of net assets acquired (net of accumulated
amortization of $131 in 2000 and $129 in 1999) 136 138
------------------ ------------------
Total Assets $ 213,889 $ 192,244
================== ==================
</TABLE>
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>
February 29 November 30
2000 1999
-------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Commercial paper and short-term debt $ 5,825 $ 5,476
Securities and other financial instruments sold but not yet purchased:
Governments and agencies 27,279 22,396
Corporate equities 16,929 12,344
Derivatives and other contractual agreements 10,382 9,582
Corporate debt and other 4,288 2,288
-------------- ----------------
58,878 46,610
-------------- ----------------
Collateralized short-term financing:
Securities sold under agreements to repurchase 84,308 81,083
Securities loaned 4,948 4,568
Payables:
Brokers, dealers and clearing organizations 1,654 1,184
Customers 12,781 10,971
Accrued liabilities and other payables 5,885 4,668
Long-term debt:
Senior notes 28,996 27,375
Subordinated indebtedness 3,318 3,316
-------------- ----------------
Total liabilities 206,593 185,251
-------------- ----------------
Commitments and contingencies
Trust preferred securities subject to mandatory redemption 710 710
STOCKHOLDERS' EQUITY
Preferred stock 600 688
Common stock, $0.10 par value; 300,000,000 shares authorized;
Shares issued: 122,642,213 in 2000 and 122,619,460 in 1999;
Shares outstanding: 120,150,218 in 2000 and 119,912,810 in 1999 12 12
Additional paid-in capital 3,350 3,387
Accumulated other comprehensive income (net of tax) (13) (2)
Retained earnings 2,563 2,094
Other stockholders' equity, net 232 254
Common stock in treasury, at cost: 2,491,995 shares in 2000 and 2,706,650 in 1999 (158) (150)
----------------
--------------
Total stockholders' equity 6,586 6,283
============== ================
Total liabilities and stockholders' equity $ 213,889 $ 192,244
============== ================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of CASH FLOWS
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Three months ended
--------------------------------------
February 29 February 28
2000 1999
----------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITES
<S> <C> <C>
Net income $ 541 $ 211
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 24 24
Provisions for losses and other reserves 9 9
Compensation payable in common stock 68 47
Other adjustments 12 33
Net change in:
Cash and securities segregated (1,188) (89)
Securities and other financial instruments owned (3,509) (12,459)
Securities borrowed (4,542) 1,483
Receivables from brokers, dealers and clearing organizations 181 404
Receivables from customers (520) 439
Securities and other financial instruments sold but not yet
purchased 12,268 4,756
Securities loaned 380 3,708
Payables to brokers, dealers and clearing organizations 470 698
Payables to customers 1,810 (958)
Accrued liabilities and other payables 1,208 (417)
Other operating assets and liabilities, net (213) 484
----------------- ----------------
Net cash provided by (used in) operating activities $ 6,999 $ (1,627)
----------------- ----------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of CASH FLOWS (Continued)
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Three months ended
-------------------------------------
February 29 February 28
2000 1999
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITES
<S> <C> <C>
Proceeds from issuances of senior notes $ 3,776 $ 1,222
Principal payments of senior notes (1,914) (1,845)
Net proceeds from commercial paper and short-term debt 349 511
Resale agreements net of repurchase agreements (11,317) 2,162
Payments for treasury stock purchases (112) (40)
Dividends paid (73) (71)
Issuances of common stock 7
Redemption of preferred stock (88)
Issuances of trust preferred securities, net of issuance costs 316
---------------- ----------------
Net cash provided by (used in) financing activities (9,379) 2,262
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold improvements (17) (20)
---------------- ----------------
Net cash used in investing activities (17) (20)
---------------- ----------------
Net change in cash and cash equivalents (2,397) 615
---------------- ----------------
Cash and cash equivalents, beginning of period 5,186 3,055
================ ================
Cash and cash equivalents, end of period $ 2,789 $ 3,670
================ ================
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)
Interest paid totaled $4,226 and $3,491 for the three months ended February 29,
2000 and February 28, 1999, respectively. Income taxes paid totaled $59 and $26
for the three months ended February 29, 2000 and February 28, 1999,
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, 1999 (the "Form 10-K"). The Consolidated
Statement of Financial Condition at November 30, 1999 was derived from the
audited financial statements.
The nature of the Company's business is such that the results of any interim
period may vary significantly from quarter to quarter and may not be indicative
of the results to be expected for the fiscal year. Certain prior period amounts
reflect reclassifications to conform to the current period's presentation.
2. Long-Term Debt:
During the three months ended February 29, 2000, the Company issued $3,776
million of long-term debt (all of which were senior notes). Of the total
issuances during the period, $2,271 million were U.S. dollar fixed rate, $769
million were U.S. dollar floating rate, $684 million were foreign currency
denominated fixed rate, and $52 million were foreign currency denominated
floating rate. These issuances were primarily utilized to refinance current
maturities of long-term debt in 2000 and to increase total capital
(stockholders' equity, long-term debt and trust preferred securities).
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 denominated
new issuances totaling $736 million, $681 million were effectively swapped to
U.S. Dollars, with the remainder match funding foreign currency denominated
capital needs.
The Company had $1,914 million of long-term debt mature during the three months
ended February 29, 2000.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
3. 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 February 29, 2000, LBI's regulatory net capital, as defined, of
$1,656 million exceeded the minimum requirement by $1,524 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 February 29, 2000, LBIE's financial resources of approximately
$2,056 million exceeded the minimum requirement by approximately $575 million.
Lehman Brothers Japan Inc.'s Tokyo branch, a regulated broker-dealer, is subject
to the capital requirements of the Financial Supervisory Agency and, at February
29, 2000, had net capital of approximately $374 million which was approximately
$161 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 promulgated by the regulatory and
exchange authorities of the countries in which they operate. At February 29,
2000, these other subsidiaries were in compliance with their applicable local
capital adequacy requirements. In addition, the Company's "AAA" rated
derivatives subsidiaries, Lehman Brothers Financial Products Inc. ("LBFP") and
Lehman Brothers Derivative Products Inc. ("LBDP"), have established certain
capital and operating restrictions which are reviewed by various rating
agencies. At February 29, 2000, LBFP and LBDP each had capital which exceeded
the requirement of the most stringent rating agency by approximately $114
million and $30 million, respectively. Lehman Brothers Bank, FSB (the "Bank"),
the Company's thrift subsidiary, is regulated by the Office of Thrift
Supervision ("OTS"). The Bank exceeds all regulatory capital requirements and is
considered well capitalized by the OTS.
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.
4. Derivative Financial Instruments:
In the normal course of business, the Company enters into derivative
transactions to satisfy the needs of its clients and to manage the Company's own
exposure to market and credit risk resulting from its trading activities
(collectively, "Trading-Related Derivative Activities").
Derivative transactions entered into for Trading-Related Derivative Activities
are recorded at market or fair value with realized and unrealized gains and
losses recognized currently in Principal transactions in the Consolidated
Statement of Income. Market or fair value for trading-related instruments is
generally determined by either quoted market prices (for exchange-traded futures
and options) or pricing models (for over-the-counter swaps, forwards and
options).
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
Pricing models utilize a series of market inputs to determine the present value
of future cash flows, with adjustments, as required for credit risk and
liquidity risk. Further valuation adjustments may be recorded, as deemed
appropriate for new or complex products or for positions with significant
concentrations. These adjustments are integral components of the mark-to-market
process. Credit-related valuation adjustments incorporate business and economic
conditions, historical experience, concentrations, estimates of expected losses
and the character, quality and performance of credit sensitive financial
instruments.
Unrealized gains and losses on derivative contracts are recorded on a net basis
in the Consolidated Statement of Financial Condition for those transactions with
counterparties executed under a legally enforceable master netting agreement and
are netted across products when such provisions are stated in the master netting
agreement. Listed in the following table is the fair value and average fair
value of the Company's Trading-Related Derivative Activities. Average fair
values of these instruments were calculated based upon month-end statement of
financial condition values, which the Company believes do not vary significantly
from the average fair value calculated on a more frequent basis. Variances
between average fair values and period-end values are due to changes in the
volume of activities in these instruments and changes in the valuation of these
instruments due to variations in market and credit conditions.
<TABLE>
<CAPTION>
Average Fair Value*
Fair Value* Three Months Ended
February 29, 2000 February 29, 2000
--------------------------------- ----------------------------------
(in millions) Assets Liabilities Assets Liabilities
- -------------------------------------------------------- -------------- -- --------------- -------------- --- ---------------
<S> <C> <C> <C> <C>
Interest rate and currency swaps and options
(including caps, collars and floors) $ 4,928 $ 3,526 $ 4,251 $ 3,716
Foreign exchange forward contracts and options
712 1,095 2,147 1,805
Other fixed income securities contracts (including
options and TBAs) 186 224 392 270
Equity contracts (including equity swaps, warrants
and options) 8,037 5,537 5,452 3,808
-------------- -- --------------- -------------- --- ---------------
Total $ 13,863 $ 10,382 $ 12,242 $ 9,599
-------------- -- --------------- -------------- --- ---------------
</TABLE>
* Amounts represent carrying value (exclusive of collateral) and do not
include receivables or payables related to exchange-traded futures
contracts.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Average Fair Value*
Fair Value* Twelve Months Ended
November 30, 1999 November 30, 1999
---------------------------------- ---------------------------------
(in millions) Assets Liabilities Assets Liabilities
- -------------------------------------------------------- -------------- -- ---------------- --------------- - ---------------
Interest rate and currency swaps and options
<S> <C> <C> <C> <C>
(including caps, collars and floors) $4,807 $3,633 $4,406 $3,030
Foreign exchange forward contracts and
options 878 1,310 1,226 1,287
Other fixed income securities contracts
(including options and TBAs) 254 195 257 240
Equity contracts (including equity swaps,
warrants and options) 4,367 4,444 2,478 3,291
Commodity contracts (including swaps,
forwards and options) 15 5
-------------- -- ---------------- --------------- - ---------------
Total $10,306 $9,582 $8,382 $7,853
-------------- -- ---------------- --------------- - ---------------
</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 February 29, 2000 represents the Company's
net receivable/payable for derivative financial instruments before consideration
of collateral. Included within the $13,863 million fair value of assets at
February 29, 2000 was $11,613 million related to swaps and other OTC contracts
and $2,250 million related to exchange-traded option and warrant contracts.
Included within the $10,306 million fair value of assets at November 30, 1999
was $9,002 million related to swaps and other OTC contracts and $1,304 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 $6,062 million at February 29, 2000, representing the fair value
of the Company's OTC contracts in an unrealized gain position, after
consideration of collateral. Presented below is an analysis of the Company's net
credit exposure at February 29, 2000 for OTC contracts based upon actual ratings
made by external rating agencies or by equivalent ratings established and
utilized by the Company's Credit Risk Management Department.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
Counterparty S&P/Moody's Net Credit
Risk Rating Equivalent Exposure
----------- ---------- --------
1 AAA/Aaa 10%
2 AA-/Aa3 or higher 24%
3 A-/A3 or higher 40%
4 BBB-/Baa3 or higher 19%
5 BB-/Ba3 or higher 3%
6 B+/B1 or lower 4%
The Company is also subject to credit risk related to its exchange-traded
derivative contracts. Exchange-traded contracts, including futures and certain
options, are transacted directly on the exchange. To protect against the
potential for a default, all exchange clearinghouses impose net capital
requirements for their membership. Additionally, the exchange clearinghouse
requires counterparties to futures contracts to post margin upon the origination
of the contract and for any changes in the market value of the contract on a
daily basis (certain foreign exchanges provide for settlement within three
days). Therefore, the potential for losses from exchange-traded products is
limited.
For a further discussion of the Company's derivative related activities, refer
to "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Off-Balance Sheet Financial Instruments and Derivatives" and Notes
1 and 12 to the Consolidated Financial Statements, included in the Form 10-K.
5. Other Commitments and Contingencies:
In connection with its financing activities, the Company had outstanding
commitments under certain lending arrangements of approximately $3.5 billion at
February 29, 2000 and $4.2 billion at November 30, 1999. These commitments
require borrowers to provide acceptable collateral, as defined in the
agreements, when amounts are drawn under the lending facilities. Advances made
under the above lending arrangements are typically at variable interest rates
and generally provide for over-collateralization based upon the borrowers'
creditworthiness.
The Company, through its high grade and high yield sales, trading and
underwriting activities, makes commitments to extend credit in loan syndication
transactions and then participates out a significant portion of these
commitments. The Company had lending commitments to high grade borrowers of $2.4
billion and $2.9 billion at February 29, 2000 and November 30, 1999,
respectively. In addition, lending commitments to high yield borrowers totaled
$1.5 billion and $1.4 billion at February 29, 2000 and November 30, 1999,
respectively. All of these commitments and any related draw-downs of these
facilities are typically secured against the borrowers' assets, have fixed
maturity dates and are generally contingent upon certain representations,
warranties and contractual conditions applicable to the borrower. Total
commitments are not indicative of actual risk or funding requirements as the
commitments may not be drawn or fully utilized, and the Company will continue to
syndicate and/or sell these commitments.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
At February 29, 2000 and November 30, 1999, the Company had commitments to
invest up to $522 million and $411 million, respectively, directly and through
partnerships, in private equity-related investments. These commitments will be
funded as required through the end of the respective investment periods,
principally expiring in 2004.
In addition to these specific commitments, the Company had various other
commitments of approximately $300 million at both February 29, 2000 and November
30, 1999.
In the normal course of its business, the Company has been named a defendant in
a number of lawsuits and other legal proceedings. After considering all relevant
facts, available insurance coverage and the advice of outside counsel, in the
opinion of the Company such litigation will not, in the aggregate, have a
material adverse effect on the Company's consolidated financial position or
results of operations.
As a leading global investment bank, risk is an inherent part of all of the
Company's businesses and activities. The extent to which the Company properly
and effectively identifies, assesses, monitors and manages each of the various
types of risks involved in its trading (including derivatives), brokerage, and
investment banking activities is critical to the success and profitability of
the Company. The principal types of risks involved in the Company's activities
are market risk, credit or counterparty risk and transaction risk. Management
has developed a control infrastructure throughout the Company to monitor and
manage these risks on a global basis. For further discussion of these matters,
refer to Note 14 to the Consolidated Financial Statements, in the Form 10-K.
6. Segments
Lehman Brothers operates in three business segments: Investment Banking, Capital
Markets, and Client Services.
The Investment Banking Division provides advice to corporate, institutional and
government clients throughout the world on mergers, acquisitions, and other
financial matters. The Division also raises capital for clients by underwriting
public and private offerings of debt and equity securities.
The Capital Markets Division includes the Company's institutional sales,
trading, research and financing activities in equity and fixed income cash and
derivatives products. Through the Division, the Company is a global market-maker
in numerous equity and fixed income products, including U.S., European and Asian
equities, government and agency securities, money market products, corporate
high grade, high yield and emerging market securities, mortgage- and
asset-backed securities, municipal securities, bank loans, foreign exchange and
derivatives products. The Division also includes the Company's risk arbitrage
and secured financing businesses. The financing business manages the Company's
equity and fixed income matched book activities, supplies secured financing to
institutional clients and customers, and provides secured funding for the
Company's inventory of equity and fixed income products.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
Client Services revenues reflect earnings from the Company's private client and
private equity businesses. Private client revenues reflect the Company's
high-net-worth retail customer flow activities as well as asset management fees
earned from these clients. Private equity net revenues include the management
and incentive fees earned in the Company's role as General Partner for fifteen
merchant banking and venture capital partnerships. In addition, these revenues
also include the appreciation of its general partnership interests.
The Company's segment information for the first quarter of 2000 and 1999 is
presented below and was developed consistent with the accounting policies used
to prepare the Company's consolidated financial statements.
<TABLE>
<CAPTION>
Investment Capital Client
Banking Markets Services Total
------------------ -------------- ----------------- ---------------------
February 29, 2000
<S> <C> <C> <C> <C>
Net revenue $ 593 $ 1,339 $ 270 $ 2,202
================== ============== ================= =====================
Earnings before taxes (1) $ 179 $ 506 $ 109 $ 794
================== ============== ================= =====================
Segment assets (billions) $1.9 $ 202.2 $ 9.8 $ 213.9
================== ============== ================= =====================
February 28, 1999
Net revenue $ 309 $ 687 $ 122 $ 1,118
================== ============== ================= =====================
Earnings before taxes (1) $ 84 $ 203 $ 22 $ 309
================== ============== ================= =====================
Segment assets (billions) $1.0 $ 172.6 $ 5.7 $ 179.3
================== ============== ================= =====================
</TABLE>
(1) And before dividends on trust preferred securities.
The following are net revenues by geographic region:
February 29 February 28
2000 1999
------------------ -------------------
Americas* $ 1,265 $ 640
Europe 704 373
Asia Pacific 233 105
------------------ -------------------
Total $ 2,202 $ 1,118
================== ===================
* Includes non-U.S. revenues of $20 million and $9 million in the first
quarter of 2000 and 1999, respectively.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
The following information describes the Company's methods of allocating
consolidated net revenues to geographic regions. Net revenues, if syndicated or
trading-related, have been distributed based upon the location where the primary
or secondary position was fundamentally risk managed; if fee-related, by the
location of the senior coverage banker; if commission-related, by the location
of the salespeople. In addition, certain revenues associated with domestic
products and services which resulted from relationships with international
clients and customers have been reclassified as international revenues using an
allocation consistent with the Company's internal reporting.
7. Incentive Plans:
In the first quarter of 2000, the Company transferred 2.0 million shares of its
common stock held in treasury into the RSU Trust. The RSU Trust is included in
the Consolidated Statement of Financial Condition as a component of other
stockholders' equity. The transfer had no impact on the total stockholders'
equity of the Company, as the decrease in treasury stock was offset by a
corresponding decrease in additional paid-in capital and other stockholders'
equity. At February 29, 2000 and November 30, 1999, 25.6 million and 24.8
million outstanding shares, respectively, were held in the RSU Trust.
In February 2000, the Company granted to senior officers options to acquire 7.1
million shares of its common stock that expire in approximately five years. No
compensation expense has been recognized for these stock options as they were
granted with an exercise price at the market price of the common stock on the
date of the grant.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
8. Earnings Per Common Share:
Earnings per share was calculated as follows (in millions, except for per share
data):
<TABLE>
<CAPTION>
Three Months
Ended
-------------------------------------
February 29 February 28
2000 1999
----------------- ----------------
Numerator:
<S> <C> <C>
Net income $541 $211
Preferred stock dividends (59) (13)
----------------- ----------------
Numerator for basic earnings per share-income available to common
stockholders 482 198
Convertible preferred stock dividends 2
----------------- ----------------
Numerator for diluted earnings per share-income available to common
stock-holders (adjusted for assumed conversion of preferred stock) $484 $198
================= ================
Denominator:
Denominator for basic earnings per share - weighted-average shares 123.0 121.9
Effect of dilutive securities:
Employee stock options 4.9 2.3
Employee restricted stock units 2.1 1.6
Preferred shares assumed converted
into common 1.2
----------------- ----------------
Dilutive potential common shares 8.2 3.9
================= ================
Denominator for diluted earnings per share - adjusted weighted-average
shares 131.2 125.8
================= ================
Basic earnings per share $3.92 $1.62
================= ================
Diluted earnings per share $3.69 $1.57
================= ================
</TABLE>
Preferred Shares are convertible into common shares at a conversion price of
approximately $123.00 per share. However, for purposes of calculating diluted
earnings per share, preferred shares are assumed to be converted into common
shares when basic earnings per share exceeds preferred dividends per share
obtainable upon conversion (approximately $1.54 on a quarterly basis).
<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 Lehman Brothers Holdings Inc. ("Holdings")
and subsidiaries (collectively, the "Company" or "Lehman Brothers") 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, revenues and earnings may vary significantly from
quarter to quarter and from year to year.
Financial Advisory activities on a global basis continued at record levels.
Industrywide, the volume of announced merger and acquisition transactions in the
first quarter soared to $1.1 trillion. The first quarter also reflected
continued activity involving European companies and cross-border mergers and
acquisitions. Merger and acquisition activities continued to reflect the trends
of consolidation, deregulation and globalization across industry sectors and
across borders. Equity new issuance this quarter was at record levels worldwide,
more than doubling as compared to the same period last year. In the U.S., new
equity issuance more than tripled as compared to the first quarter last year.
Fueling the domestic market was increased IPO activity and continued equity
raising in the technology, telecommunications and new media sectors. Debt
issuance was initially dampened by the outward shift in the yield curve in
January and later by the inversion of the yield curve and the anticipation of
future interest rate hikes by the Federal Reserve and the European Central Bank.
At the same time, economic growth in the United States remained very strong
during the first quarter of 2000, and equity trading volumes continued to be
healthy. New economy stocks, as measured by the NASDAQ rose 40% during the
quarter to a new high, but have since corrected. In anticipation of further rate
hikes, the price of old economy stocks, as measured by the Dow Jones Industrial
Index, declined by 7% over the quarter, through the 10,000 level, but later
recovered. In the fixed income markets, the 10-year U.S. Treasury bond yield
initially rose during the quarter, reaching 6.78% in mid-January. However, as
the Dow slid and the U.S. Treasury announced plans for the early retirement of
certain Treasury borrowings, bond yields fell-back to end the quarter at 6.4%,
just 20 basis points above where they had started. In response to the strength
of continued growth, the Fed, as expected, raised the Federal Funds rate on
February 2nd by 25 basis points to 5.75%, the fourth 25 basis point increase
since June 1999.
In February, while European business and consumer confidence had risen to new
cyclical and all-time highs, inflationary pressures also started to rise. Pushed
up by higher oil prices and a weaker euro, European inflation rose to 2% in
January from 1.5% in November, while core inflation also inched higher.
Responding to rising inflationary pressures and a weaker euro, the European
Central Bank raised its key two-week repo rate by 25 basis points on February
3rd. Although the rate hike by the ECB matched that by the Federal Reserve, the
euro continued to fall against the dollar, hitting a new low of $0.94/euro on
February 28th, but later stabilizing at around $0.97/euro. For the period as a
whole, European markets outperformed the broad U.S. index with a return of 8% in
local currency terms (FTSE World Europe), but all of this gain was achieved by
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
the end of December.
In Japan, the economy and financial markets gave out mixed
signals in the first quarter of the financial year. Recovery generally remained
hesitant and uneven. Even though concerns continued to mount about the
sustainability of public financing, the continued weakness of real activity and
residual evidence of deflation allowed long-term bond yields to remain below
2.0%. Evidence of corporate restructuring and accelerated diffusion of the
information technology revolution encouraged the continued rally of the stock
market. Notwithstanding increased foreign portfolio inflows, the yen declined
against the dollar, falling around 8% to (Y)/U.S.$110 by the end of the quarter.
Other Asian markets recorded modest returns in the three months ending February
in local currency terms, again with these gains being front-loaded into December
and dominated by the "New Economy" sectors.
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 February 29, 2000 and February 28, 1999
The Company reported record net income of $541 million for the first quarter
ended February 29, 2000, representing an increase of 156% from net income of
$211 million for the first quarter ended February 28, 1999. Earnings per common
share (diluted) increased to $3.69 for the first quarter of 2000 from $1.57 for
the first quarter of 1999 or an increase of 135%. Excluding the impact of the
special preferred dividend of $50 million, earnings per share rose 160%.
These results reflect the ongoing successful execution of the Company's strategy
to grow its high margin investment banking and equities businesses; increase its
presence in certain strategic businesses in Europe; and at the same time
maintain a strict discipline with regard to its expenses. The Company's strategy
is based on the belief that: (1) these businesses generate higher returns on
equity because they are less capital intensive; and (2) their rapid growth
accelerates the Company's overall rate of growth; and (3) they help reduce
earnings volatility by diversifying the Company's revenue base. The Company's
emphasis on these high margin businesses helped to increase the Company's
operating margin to 36.1% in the first quarter of 2000 from 27.6% in the first
quarter of 1999. Non-personnel expenses increased only 8.7% in the first quarter
of 2000, despite a 97% increase in net revenues from first quarter 1999. The
Company's compensation and benefits ratio increased to 52% of net revenues from
50.7%, as the Company stepped up its rate of investment to accelerate its
growth, and take advantage of rapidly expanding opportunities in a number of
businesses, particularly investment banking, equities, and Europe. The Company
also increased its investment in information technology and e-commerce
activities to support its growth strategy.
In the following tables, the Company's results have been segregated into three
business segments: Investment Banking, Capital Markets and Client Services. Each
segment represents a group of activities and products with similar
characteristics. These business activities result in revenues from both
institutional clients as well as high-net-worth retail clients and are
recognized within the different revenue categories in the Company's Consolidated
Statement of Income. (Net revenues by segment contain certain internal
allocations, including funding costs, which are centrally managed.)
<PAGE>
Three Months Ended February 29, 2000 and February 28, 1999
- --------------------------------- --------------- -- --------------- --
(in millions)
Three Months Ended
----------------------------------
Feb 29 Feb 28
2000 1999
--------------- ---------------
Investment Banking $ 593 $ 309
Capital Markets 1,339 687
Client Services 270 122
=============== ===============
Total $ 2,202 $ 1,118
=============== ===============
- --------------------------------- --------------- -- --------------- --
The following discussion provides an analysis of the Company's net revenues for
the periods above.
Investment Banking This segment's net revenues result from fees earned by the
Company for underwriting public and private offerings of fixed income and equity
securities, raising capital and advising clients on merger and acquisition
activities and other services. Investment Banking's net revenues increased 92%
in the first quarter of 2000 to $593 million from $309 million in the first
quarter of 1999, principally as a result of an increase in equity underwriting
and financial advisory services. The increased net revenues are an outgrowth of
the Company's ongoing efforts to grow its Investment Banking franchise. The
record results in equity underwriting were driven by issuances in the
communications/media sector and a significant increase in convertible offerings.
European revenues continued to be strong. The Company improved its ranking for
European equity transactions, from #19 for the first quarter of 1999 to #4 in
the first quarter of 2000.
The Company also recorded record results in financial advisory services,
benefiting from a continued robust merger and acquisition environment. The
Company's ranking for global completed transactions increased to #4 for the
first quarter of 2000 from #8 for the first quarter of 1999.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
Debt underwriting revenues increased slightly from the first
quarter of 1999 despite challenging market conditions
resulting from yield curve volatility. Global debt
underwriting volume was down 25% versus the first quarter of
1999. Despite these difficult market conditions, the Company
was ranked #1 in high grade and #5 in high yield debt
underwriting.
Investment Banking Net Revenues
------------------------ ------------------------------
(in millions) Three Months Ended
February 29 February 28
2000 1999
------------------------ --------------- --------------
Equity Underwriting $ 261 $ 59
Debt Underwriting 153 150
Financial Advisory 179 100
------------------------ --------------- --------------
$ 593 $ 309
------------------------ --------------- --------------
Capital Markets This segment's net revenues reflect institutional flow
activities and secondary trading and financing activities related to a broad
spectrum of fixed income and equity products. These products include dollar and
non-dollar government securities, mortgages, mortgage- and asset-backed
securities, money market products, dollar and non-dollar corporate debt
securities, emerging market securities, municipal securities, foreign exchange,
fixed income and equity related derivatives, convertible securities and common
and preferred equity securities.
Capital Markets' net revenues were $1,339 million for the first quarter of 2000
and $687 million for the first quarter of 1999. Customer flow sales and trading
volumes continued to increase at healthy rates, significantly contributing to
this increase.
Net revenues from the equity component of Capital Markets increased 321% to $868
million in the first quarter of 2000 from $206 million in the first quarter of
1999. Revenues benefited in the first quarter of 2000 from significantly
increased institutional customer flow activity in cash and derivative products
as well as contributions from equity arbitrage. In addition, the Company
realized gains of approximately $150 million on a principal investment it had in
VerticalNet, Inc. Consistent with its overall strategy, the Company also
experienced continued growth and improved performance in its European franchise.
Capital Markets Net Revenues
---------------------- ---------------------------------
(in millions) Three Months Ended
February 29 February 28
2000 1999
- --------------------------------------------------------
Equities $ 868 $ 206
Fixed Income 471 481
---------------------- --------------- -----------------
$ 1,339 $ 687
---------------------- --------------- -----------------
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
Net revenues from the fixed income component of Capital Markets decreased
slightly to $471 million in the first quarter of 2000 from $481 million in the
first quarter of 1999. Strong customer flow trading in areas such as high grade
and high yield were offset by challenging market conditions overall and the Y2K
induced slowdown earlier in the quarter.
Client Services Client Services net revenues reflect earnings from the Company's
private client and private equity businesses. Private client net revenues
reflect the Company's high-net-worth retail customer flow activities as well as
asset management fees. Private equity net revenues include the management and
incentive fees earned in the Company's role as General Partner for fifteen
merchant banking and venture capital partnerships.
Client Services Net Revenues
---------------------- ---------------------------------
(in millions) Three Months Ended
February 29 February 28
1999 1998
---------------------- -------------- ------------------
Private Client $ 260 $ 119
Private Equity 10 3
---------------------- -------------- ------------------
$ 270 $ 122
---------------------- -------------- ------------------
Client Services' net revenues were $270 million in the first quarter of 2000 and
$122 million in the first quarter of 1999. The 121% increase was driven by
record customer activity due in part to the Company's active syndicate calendar,
as well as, performance fees resulting from high portfolio returns from the
Company's London-based managed assets.
Non-Interest Expenses Non-interest expenses were $1,408 million for the first
quarter of 2000 and $809 million for the first quarter of 1999. Compensation and
benefits expense as a percentage of net revenues increased to 52.0% for the
quarter compared to the prior year quarter of 50.7%. This increase reflects the
Company's continued expansion of its investment banking, equities and European
franchises as well as investment needs in technology and e-commerce
capabilities. Nonpersonnel expenses were $263 million for the first quarter of
2000 and $242 million for the first quarter of 1999, an increase of 8.7%,
reflecting the impact of increased investments in personnel and growth in net
revenues. However, nonpersonnel expenses declined as a percentage of net
revenues to 11.9% for the first quarter of 2000 from 21.7% for the first quarter
of 1999 as the Company's net revenues increased at a significantly faster rate.
Income Taxes The Company's income tax provision was $239 million for the first
quarter of 2000 compared to $96 million for the first quarter of 1999. The
effective tax rate was 30.1% for the first quarter of 2000 and 31.0% for the
first quarter of 1999. The decrease reflects a favorable change in the
geographic mix of earnings and an increase in income and transactions that are
subject to preferential tax treatment.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
Funding, Capital Resources and Liquidity
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. Members of
the Company's treasury department and business unit financing groups work with
the Finance Committee to ensure coordination of global funding efforts and
implementation of the funding and liquidity policies. Regional asset and
liability committees in the Company's principal funding centers 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 to meet the needs of the Company's
businesses. The key elements of these policies are to:
(1) Maintain a total capital structure that supports the business activities in
which the Company is engaged.
(2) Finance the Company's assets, primarily on a secured basis. Together with
Total Capital, secured funding provides a stable funding base and enables
the Company to minimize its reliance on short-term unsecured debt.
(3) Maintain funding availability in excess of actual utilization and obtain
diversified funding through a global investor base which increases
liquidity and reduces concentration risk.
(4) Maintain sufficient financial resources to enable the Company to meet its
obligations in periods of financial stress, defined as any event that
severely constrains the Company's access to unsecured funding sources.
Total Capital Total Capital (defined as long-term debt, trust preferred
securities and stockholders' equity) was $39.6 billion at February 29, 2000
compared to $37.7 billion at November 30, 1999. The net increase in Total
Capital resulted from a net increase in long-term debt of $1.6 billion, the
retention of earnings, and amortization associated with RSU awards. These were
offset by repurchases of common stock (to fund restricted stock units and option
awards) and $88 million (2.3 million shares) of convertible Series B Preferred
Stock.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
February 29 November 30
(in millions) 2000 1999
- -------------------------------------------------------------------------------
Long-term Debt
Senior Notes $ 28,996 $ 27,375
Subordinated Indebtedness 3,318 3,316
------- -------
32,314 30,691
Trust Preferred Securities 710 710
Stockholders' Equity
Preferred Equity 600 688
Common Equity 5,986 5,595
----- -----
6,586 6,283
- -------------------------------------------------------------------------------
Total Capital $ 39,610 $ 37,684
- -------------------------------------------------------------------------------
During the first three months of 2000, the Company issued $3.8 billion in
long-term debt, which was $1.9 billion in excess of its maturing debt. Long-term
debt increased to $32.3 billion at February 29, 2000 from $30.7 billion at
November 30, 1999 with a weighted-average maturity of 3.8 years at February 29,
2000 and 3.7 years at November 30, 1999.
Secured Funding The Company strives to maximize the portion of the Company's
balance sheet that is funded on a secured basis. Secured funding includes
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, repos have historically been a stable financing source
irrespective of market conditions. At February 29, 2000 and November 30, 1999,
$138 billion and $123 billion, respectively, of the Company's total balance
sheet of $214 billion and $192 billion at February 29, 2000 and November 30,
1999, respectively, was financed on a secured basis.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
By maximizing its use of secured funding, the Company minimizes its reliance on
unsecured financing. As of February 29, 2000 and November 30, 1999, commercial
paper and short-term debt outstanding totaled $5.8 billion and $5.5 billion,
respectively. Of these amounts, commercial paper outstanding as of February 29,
2000 and November 30, 1999, was $3.7 billion and $3.6 billion, respectively.
Back-Up Credit Facilities Holdings maintains 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
for up to an additional year at the option of Holdings. The Credit Agreement
contains covenants which require, among other things, that the Company maintain
a specified level of tangible net worth.
In July 1999, the Company entered into a $1 billion Committed Securities
Repurchase Facility (the "Facility") for LBIE, the Company's major operating
entity in Europe. The Facility provides secured multi-currency financing for a
broad range of collateral types. Under the terms of the Facility, the bank group
will agree to provide funding for up to one year on a secured basis. Any loans
outstanding on the commitment termination date may be extended for up to an
additional year at the option of LBIE. The Facility contains covenants which
require, among other things, that LBIE maintain specified levels of tangible net
worth.
There are no borrowings outstanding under either the Credit Agreement or the
Facility. The Company may use the Credit Agreement and the Facility for general
corporate purposes from time to time. The Company has maintained compliance with
the applicable covenants for both the Credit Agreement and the Facility at all
times.
Balance Sheet The Company's total assets increased to $213.9 billion at February
29, 2000 from $192.2 billion at November 30, 1999. The Company's adjusted total
assets, defined as total assets less the lower of securities purchased under
agreements to resell or securities sold under agreements to repurchase were
$137.1 billion at February 29, 2000 compared to $130.0 billion at November 30,
1999. The Company believes adjusted total assets is a more effective measure of
evaluating balance sheet usage when comparing companies in the securities
industry. The increase in adjusted total assets reflects higher levels of
securities owned and borrowed associated with increased customer flow
activities.
The Company's balance sheet 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 majority of these
assets are funded on a secured basis through collateralized short-term financing
agreements with the remaining assets being funded through short-term unsecured
financing and Total Capital
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
Financial Leverage 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 and trust preferred securities. The Company believes that
the adjusted leverage ratio is a more effective measure of financial risk when
comparing companies in the securities industry. The Company's adjusted leverage
ratio based on adjusted total assets at February 29, 2000 was 18.8x, relatively
unchanged from 18.6x at November 30, 1999. 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.
[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. As of February 29, 2000 the short- and long-term
debt ratings of Holdings and LBI were as follows:
<TABLE>
<CAPTION>
Holdings LBI
----------------------------------- -----------------------------------
Short-term Long-term Short-term Long-term**
- ------------------------------------------- ---------------- ------------------ --- --------------- -------------------
<S> <C> <C> <C> <C>
Duff & Phelps Credit Rating Co. D-1 A D-1 A/A-
Fitch IBCA, Inc. F-1 A F-1 A/A-
Moody's P-2 A3 P-1 A2*/A3
Standard & Poor's Corp. A-1 A A-1 A+*/A
Thomson BankWatch TBW-1 A TBW-1 A+/A
</TABLE>
* Provisional ratings on shelf registration
** Senior/subordinated
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
Other
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 instruments 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 instruments
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 instruments at February 29, 2000 and November 30, 1999
included long positions with an aggregate market value of approximately $3.4
billion and $3.0 billion, respectively, and short positions with an aggregate
market value of approximately $415 million and $290 million, respectively. The
Company may, from time to time, mitigate its net exposure to any single issuer
through the use of derivatives and other financial instruments.
Additional information about the Company's High Yield Securities and Lending
Activities, including related commitments, can be found in Note 5 to the
Consolidated Financial Statements (Other Commitments and Contingencies).
The Company has investments in fifteen merchant banking and venture
capital-related partnerships, for which the Company acts as general partner, as
well as related direct investments. At February 29, 2000, the Company's
investment in these partnerships totaled $127 million and related direct
investments totaled $531 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. Additional information about
the Company's private equity activities, including related commitments, can be
found in Note 5 to the Consolidated Financial Statements (Other Commitments and
Contingencies).
<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 and technology.
The Company seeks to reduce risk through the diversification of its businesses,
counterparties and activities in geographic regions. The Company accomplishes
this objective by allocating the usage of capital to each of its businesses,
establishing trading limits for individual products and traders and setting
credit limits for individual counterparties, including regional concentrations.
The Company seeks to achieve adequate returns from each of its businesses
commensurate with the risks that they assume.
Overall risk management policy is established by a Risk Management Committee
(the "Committee") comprised of the Chief Executive Officer, the Global Risk
Manager, the Chief Financial and Administrative Officer, the Head of Equities,
the Head of Fixed Income, the Head of Global Sales and Research, the Head of
Investment Banking and the Head of Private Equity. The Committee brings together
senior management with the sole intent of discussing risk-related issues and
provides an effective forum for managing risk at the highest levels within the
Company. The Committee meets on a monthly basis, or more frequently if required,
to discuss, among other matters, significant market exposures, concentrations of
positions (e.g., counterparty, market risk), potential new transactions or
positions and risk limit exceptions.
The Global Risk Management Group (the "Group") supports the Committee, is
independent of the trading areas and reports directly to the Chief Executive
Officer. The Group combines two departments, credit risk management and market
risk management, into one unit. This facilitates the analysis of counterparty
credit and market risk exposures and leverages personnel and information
technology resources in a cost-efficient manner. The Group maintains staff in
each of the Company's regional trading centers and has daily contact with
trading staff at all levels within the Company. These discussions include a
review of trading positions and risk exposures.
Credit Risk Credit risk represents the possibility that a counterparty will be
unable to honor its contractual obligations to the Company. Credit risk
management is therefore an integral component of the Company's overall risk
management framework. The Credit Risk Management Department ("CRM Department")
has global responsibility for implementing the Company's overall credit risk
management framework.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
The CRM Department manages the credit exposure related to trading activities by
giving initial credit approval for counterparties, establishing credit limits by
counterparty, country and industry group and by requiring collateral in
appropriate circumstances. In addition, the CRM Department strives to ensure
that master netting agreements are obtained whenever possible. The CRM
Department also considers the duration of transactions in making its credit
decisions, along with the potential credit exposure for complex derivative
transactions. The CRM Department is responsible for the continuous monitoring
and review of counterparty credit exposure and creditworthiness and
recommending, where appropriate, valuation adjustments to the market value of
derivative related contracts. Credit limits are reviewed periodically to ensure
that they remain appropriate in light of market events or the counterparty's
financial condition.
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 management also is an essential component of the
Company's overall risk management framework. The Market Risk Management
Department ("MRM Department") has global responsibility for implementing the
Company's overall market risk management framework. It is responsible for the
preparation and dissemination of risk reports, developing and implementing the
firmwide Risk Management Guidelines and evaluating adherence to these
guidelines. These guidelines provide a clear framework for risk management
decision-making. To that end the MRM Department identifies and quantifies risk
exposures, develops limits, and reports and monitors these risks with respect to
the approved limits. The identification of material market risks inherent in
positions includes, but is not limited to, interest rate, equity, and foreign
exchange risk exposures. In addition to these risks, the MRM Department also
evaluates liquidity risks, credit and sovereign concentrations.
The MRM Department utilizes qualitative as well as quantitative information in
managing trading risk, believing that a combination of the two approaches
results in a more robust and complete approach to the management of trading
risk. Quantitative information is developed from a variety of risk methodologies
based upon established statistical principles. To ensure high standards of
qualitative analysis, the MRM Department has retained seasoned risk managers
with the requisite experience and academic and professional credentials.
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.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
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 Equities 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.
The Company incurs short-term interest rate risk when facilitating the orderly
flow of customer transactions through the maintenance of government and high
grade corporate bond inventories. Market-making in high yield instruments
exposes the Company to additional risk due to potential variations in credit
spreads. Trading in international markets exposes the Company to spread risk
between the term structure of interest rates in differing countries. Mortgages
and mortgage-related securities are subject to prepayment risk and changes in
the level of interest rates. Trading in derivatives and structured products
exposes the Company to changes in the level and volatility of interest rates.
The Company actively manages interest rate risk through the use of interest rate
futures, options, swaps, forwards, and offsetting cash market instruments.
Inventory holdings, concentrations and agings are monitored closely and used by
management to selectively hedge or liquidate undesirable exposures.
The Company is a significant intermediary in the global equity markets through
its market-making in U.S. and non-U.S. equity securities, including common
stock, convertible debt, exchange-traded and OTC equity options, equity swaps
and warrants. These activities expose the Company to market risk as a result of
price and volatility changes in its equity inventory. Inventory holdings are
also subject to market risk resulting from concentrations, aging and liquidity
that may adversely impact market valuation. Equity market risk is actively
managed through the use of index futures, exchange-traded and OTC options, swaps
and cash instruments. Equity risk exposures are aggregated and reported to
management on a regular basis.
The Company enters into foreign exchange transactions in order to facilitate the
purchase and sale of non-dollar instruments, including equity and interest rate
securities. The Company is exposed to foreign exchange risk on its holdings of
non-dollar assets and liabilities. The Company is active in many foreign
exchange markets and has exposure to the euro, Japanese yen, British pound,
Swiss franc, and Canadian dollar as well as a variety of developed and emerging
market currencies. The Company hedges its risk exposures primarily through the
use of currency forwards, swaps, futures, and options.
Value at Risk For purposes of Securities and Exchange Commission ("SEC") risk
disclosure requirements, the Company discloses an entity-wide value at risk
analysis of virtually all of the Company's trading activities. The value at risk
calculation measures the potential loss in expected revenues with a 95%
confidence level. The methodology incorporates actual trading revenues over a
standardized 250-day historical period. A confidence level of 95% implies, on
average, that daily trading revenues or losses will exceed daily expected
trading revenues by an amount greater than value at risk one out of every 20
trading days.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
Average value at risk computed in this manner was $27.5 million and $30.9
million for the periods ended February 29, 2000 and November 30, 1999,
respectively. Value at risk at February 29, 2000 and November 30, 1999 was $18.8
million and $19.2 million, respectively.
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.
As discussed throughout Management's Discussion and Analysis, the Company seeks
to reduce risk through the diversification of its businesses and a focus on
customer flow activities. This diversification and focus, combined with the
Company's risk management controls and processes, helps mitigate the net revenue
volatility inherent in the Company's trading activities. Although historical
performance is not necessarily indicative of future performance, the Company
believes its focus on business diversification and customer flow activities
should continue to help mitigate the volatility of future net trading revenues.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
New Accounting Developments
In September 1999, the FASB issued an Exposure Draft, "Business Combinations and
Intangible Assets." The proposal would eliminate the use of the
pooling-of-interests method and require that all business combinations be
accounted for using the purchase method. The Exposure Draft would also require
goodwill arising from the application of the purchase method to be written off
over a maximum 20-year amortization period, which is shorter than the current
40-year period. The provisions of the Exposure Draft related to business
combinations are expected to be applied only for those business combinations
initiated after the issuance of a final statement, projected to be late in 2000.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which requires all derivatives to be
recorded on the balance sheet at fair value. In June 1999, the FASB extended the
implementation date of SFAS No. 133 by one year. As a result, SFAS No. 133 will
now be effective for the Company on December 1, 2000 (Fiscal Year 2001). The
expected impact of adoption on the Company's results of operations has not yet
been determined, however it is not likely to be material since most of the
Company's derivatives are carried at fair value.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUSBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings
The Company is involved in a number of judicial, regulatory and arbitration
proceedings concerning matters arising in connection with the conduct of its
business. Such proceedings include actions brought against the Company and
others with respect to transactions in which the Company acted as an underwriter
or financial advisor, actions arising out of the Company's activities as a
broker or dealer in securities and commodities and actions brought on behalf of
various classes of claimants against many securities and commodities firms,
including the Company.
Although there can be no assurance as to the ultimate outcome, the Company has
denied, or believes it has meritorious defenses and will deny, liability in all
significant cases pending against it including the matters described below, and
intends to defend vigorously each such case, and based on information currently
available and established reserves, the Company believes that the eventual
outcome of the actions against it, including the matters described below, will
not, in the aggregate, have a material adverse effect on its business or
consolidated financial condition.
In re Mobilemedia Securities Litigation (Reported in Holdings' 1999 Annual
Report on Form 10-K)
On February 24, 2000, the Court entered an Order and Final Judgment finally
approving a settlement and dismissing the action.
Pamahi Investment Corp., et al. v. Lehman Brothers Inc., et al. (Reported in
Holdings' 1999 Annual Report on Form 10-K)
On March 17, 2000, the motion of LBI and its former branch manager to sever
the arbitration into a separate case for each set of claimants was granted,
and all claims other than those of the lead claimant, Pamahi Investment
Corp., were dismissed without prejudice to renewal in a separate
proceeding. Pamahi claims damages of $5.96 million; no other Claimants
assert claims for damages in excess of that amount.
<PAGE>
ITEM 4 Submission of Matters to a Vote of Security - Holders
-----------------------------------------------------
At the annual meeting of shareholders of the Company held on April 4, 2000, the
following matters were submitted to a vote of security holders:
A) A proposal was submitted for the election of all Class III Directors. The
results for the nominees were: Thomas H. Cruikshank - 107,810,771 votes
for, 2,089,680 votes withheld; Henry Kaufman - 107,143,974 votes for,
2,756,477 votes withheld; John D. Macomber - 107,772,421 votes for,
2,128,030 votes withheld. Messrs. Cruikshank, Kaufman, and Macomber were
elected to serve until the Annual Meeting in 2003 or until a successor is
elected and qualified.
B) A proposal was submitted for the ratification of the Company's selection of
Ernst & Young LLP as the Company's independent auditors for the 2000 fiscal
year. The results were 109,169,222 votes for, 265,208 against and 466,021
abstaining, and the proposal was adopted.
C) A proposal was submitted for approval of an amendment to Holdings' 1996
Management Ownership Plan to increase the number of shares of Common Stock
with respect to which awards may be granted under the Plan from 15.5
million to 21 million shares. The results were 69,219,693 votes for,
40,046,371 against and 634,387 abstaining, and the proposal was adopted.
<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:
12 Computation in Support of Ratio of Earnings to Fixed Charges
and Combined Fixed Charges and Preferred Dividends
27 Financial Data Schedule
(b) Reports on Form 8-K:
1. Form 8-K dated January 6, 2000, Items 5 and 7.
Financial Statements:
Exhibit 99.2 Consolidated Statement of Income (Three
Months Ended November 30, 1999)
(Preliminary and Unaudited)
Exhibit 99.3 Consolidated Statement of Income
(Twelve Months ended November 30, 1999)
(Preliminary and Unadudited).
2. Form 8-K dated February 24, 2000, Item 7.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEHMAN BROTHERS HOLDINGS INC.
(Registrant)
Date: April 14, 2000 By:/s/ David Goldfarb
--------------------------
Chief Accounting Officer
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
Exhibit 12 Computation in Support of Ratio of Earnings to Fixed Charges
and Combined Fixed Charges and Preferred Dividends
Exhibit 27 Financial Data Schedule
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
COMPUTATION of RATIOS of EARNINGS to FIXED CHARGES and
COMBINED FIXED CHARGES and PREFERRED STOCK DIVIDENDS
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
For the For the For the For the For the For the
Twelve Twelve Twelve Twelve Twelve Three Months
Months Months Months Months Months Ended
Ended Ended Ended Ended Ended February 29
November 30 November 30 November 30 November 30 November 30 2000
1995 1996 1997 1998 1999
------------- ------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Pre-tax earnings from continuing
operations $ 369 $ 637 $ 937 $ 1,052 $ 1,631 $ 794
Add: Fixed charges (excluding
capitalized interest) 10,449 10,852 13,043 15,813 13,681 4,147
------------- ------------- ------------- -------------- ------------- -------------
Pre-tax earnings before fixed
charges 10,818 11,489 13,980 16,865 15,312 4,941
============= ============= ============= ============== ============= =============
Fixed charges:
Interest 10,405 10,816 13,010 15,781 13,649 4,138
Other(a) 72 50 41 47 71 17
------------- ------------- ------------- -------------- ------------- -------------
Total fixed charges 10,477 10,866 13,051 15,828 13,720 4,155
------------- ------------- ------------- -------------- ------------- -------------
Preferred stock dividend
requirements 64 58 109 124 174 99
------------- ------------- ------------- -------------- ------------- -------------
Total combined fixed charges and
preferred stock dividends $ 10,541 $ 10,924 $ 13,160 $ 15,952 $ 13,894 $ 4,254
============= ============= ============= ============== ============= =============
RATIO OF EARNINGS TO FIXED
CHARGES 1.03 1.06 1.07 1.07 1.12 1.19
RATIO OF EARNINGS TO
COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS 1.03 1.05 1.06 1.06 1.10 1.16
</TABLE>
(a) Other fixed charges consist of the interest factor in rentals and
capitalized interest.
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Consolidated Statement of Financial Condition at February 29, 2000
(Unaudited) and the Consolidated Statement of Income for the three months ended
February 29, 2000 (Unaudited) and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-2000
<PERIOD-START> DEC-01-1999
<PERIOD-END> FEB-29-2000
<CASH> 5,966
<RECEIVABLES> 12,649
<SECURITIES-RESALE> 76,764
<SECURITIES-BORROWED> 23,939
<INSTRUMENTS-OWNED> 92,568
<PP&E> 479
<TOTAL-ASSETS> 213,889
<SHORT-TERM> 5,825
<PAYABLES> 14,435
<REPOS-SOLD> 84,308
<SECURITIES-LOANED> 4,948
<INSTRUMENTS-SOLD> 58,878
<LONG-TERM> 32,314
710
600
<COMMON> 12
<OTHER-SE> 5,974
<TOTAL-LIABILITY-AND-EQUITY> 213,889
<TRADING-REVENUE> 1,114
<INTEREST-DIVIDENDS> 4,313
<COMMISSIONS> 229
<INVESTMENT-BANKING-REVENUES> 602
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 4,138
<COMPENSATION> 1,145
<INCOME-PRETAX> 794
<INCOME-PRE-EXTRAORDINARY> 541
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 541
<EPS-BASIC> 3.92
<EPS-DILUTED> 3.69
</TABLE>
