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, 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 of incorporation (I.R.S.Employer Identification No.
or organization)
3 World Financial Center
New York, New York 10285
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (212) 526-7000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ______
As of June 30, 2000, 121,397,765 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 MAY 31, 2000
INDEX
Part I. FINANCIAL INFORMATION Page
Number
Item 1. Financial Statements - (unaudited)
Consolidated Statement of Income -
Three and Six Months Ended
May 31, 2000 and May 31, 1999....................... 3
Consolidated Statement of Financial Condition -
May 31, 2000 and November 30, 1999.................. 5
Consolidated Statement of Cash Flows -
Six Months Ended
May 31, 2000 and May 31, 1999....................... 7
Notes to Consolidated Financial Statements.......... 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....... 18
Part II. OTHER INFORMATION
Item 1. Legal Proceedings................................... 39
Item 6. Exhibits and Reports on Form 8-K.................... 41
Signature .............................................................. 42
EXHIBIT INDEX 43
Exhibits
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of INCOME
(Unaudited)
(In millions, except per share data)
<TABLE>
<CAPTION>
Three months ended
-------------------------------------
May 31 May 31
2000 1999
---------------- ----------------
Revenues
<S> <C> <C>
Principal transactions $ 870 $ 685
Investment banking 480 445
Commissions 226 168
Interest and dividends 4,738 3,627
Other 20 7
---------------- ----------------
Total revenues 6,334 4,932
Interest expense 4,579 3,477
---------------- ----------------
Net revenues 1,755 1,455
---------------- ----------------
Non-interest expenses
Compensation and benefits 912 738
Technology and communications 85 81
Brokerage and clearance 62 61
Business development 42 30
Professional fees 43 28
Occupancy 32 28
Other 21 23
---------------- ----------------
Total non-interest expenses 1,197 989
---------------- ----------------
Income before taxes and dividends on trust preferred
securities 558 466
Provision for income taxes 166 126
Dividends on trust preferred securities 14 10
---------------- ----------------
Net income $ 378 $ 330
================ ================
Net income applicable to common stock $ 366 $ 268
================ ================
Earnings per common share
Basic $ 2.97 $ 2.19
================ ================
Diluted $ 2.78 $ 2.09
</TABLE>
See notes to consolidated financial
statements.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of INCOME
(Unaudited)
(In millions, except per share data)
<TABLE>
<CAPTION>
Six months ended
-------------------------------------
May 31 May 31
2000 1999
---------------- ----------------
Revenues
<S> <C> <C>
Principal transactions $ 1,984 $ 1,219
Investment banking 1,082 758
Commissions 455 314
Interest and dividends 9,051 7,208
Other 102 24
---------------- ----------------
Total revenues 12,674 9,523
Interest expense 8,717 6,950
---------------- ----------------
Net revenues 3,957 2,573
---------------- ----------------
Non-interest expenses
Compensation and benefits 2,057 1,305
Technology and communications 169 163
Brokerage and clearance 120 119
Business development 77 58
Professional fees 75 50
Occupancy 62 56
Other 45 47
---------------- ----------------
Total non-interest expenses 2,605 1,798
---------------- ----------------
Income before taxes and dividends on trust preferred
securities 1,352 775
Provision for income taxes 405 222
Dividends on trust preferred securities 28 13
---------------- ----------------
Net income $ 919 $ 540
================ ================
Net income applicable to common stock $ 848 $ 466
================ ================
Earnings per common share
Basic $ 6.88 $ 3.82
================ ================
Diluted $ 6.46 $ 3.66
================ ================
</TABLE>
See notes to consolidated financial
statements.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of FINANCIAL CONDITION
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
May 31 November 30
2000 1999
------------------ ------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 3,968 $ 5,186
Cash and securities segregated and on deposit for regulatory and other
purposes 2,763 1,989
Securities and other financial instruments owned:
Governments and agencies 27,370 29,959
Mortgages and mortgage-backed 25,511 22,643
Corporate equities 18,061 12,790
Corporate debt and other 12,569 11,096
Derivatives and other contractual agreements 11,946 10,306
Certificates of deposit and other money market instruments 1,983 2,265
------------------ ------------------
97,440 89,059
------------------ ------------------
Collateralized short-term agreements:
Securities purchased under agreements to resell 83,742 62,222
Securities borrowed 29,373 19,397
Receivables:
Brokers, dealers and clearing organizations 2,023 1,674
Customers 10,808 9,332
Others 1,326 1,354
Property, equipment and leasehold improvements (net of accumulated
depreciation and amortization of $916 in 2000 and $889 in 1999)
491 485
Other assets 1,365 1,408
Excess of cost over fair value of net assets acquired (net of accumulated
amortization of $133 in 2000 and $129 in 1999) 134 138
------------------ ------------------
Total Assets $ 233,433 $ 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>
May 31 November 30
2000 1999
-------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Commercial paper and short-term debt $ 5,912 $ 5,476
Securities and other financial instruments sold but not yet purchased:
Governments and agencies 25,424 22,396
Corporate equities 13,876 12,344
Derivatives and other contractual agreements 9,737 9,582
Corporate debt and other 3,637 2,288
-------------- ----------------
52,674 46,610
-------------- ----------------
Collateralized short-term financing:
Securities sold under agreements to repurchase 103,017 81,083
Securities loaned 7,458 4,568
Payables:
Brokers, dealers and clearing organizations 3,361 1,184
Customers 13,695 10,971
Accrued liabilities and other payables 5,977 4,668
Long-term debt:
Senior notes 30,214 27,375
Subordinated indebtedness 3,319 3,316
-------------- ----------------
Total liabilities 225,627 185,251
-------------- ----------------
Commitments and contingencies
Trust preferred securities subject to mandatory redemption 710 710
STOCKHOLDERS' EQUITY
Preferred stock 850 688
Common stock, $0.10 par value; 300,000,000 shares authorized;
Shares issued: 124,383,837 in 2000 and 122,619,460 in 1999;
Shares outstanding: 121,708,431 in 2000 and 119,912,810 in 1999 12 12
Additional paid-in capital 3,377 3,387
Accumulated other comprehensive income (net of tax) (10) (2)
Retained earnings 2,916 2,094
Other stockholders' equity, net 167 254
Common stock in treasury, at cost: 2,675,406 shares in 2000 and 2,706,650 in 1999 (216) (150)
----------------
--------------
Total stockholders' equity 7,096 6,283
-------------- ----------------
Total liabilities and stockholders' equity $ 233,433 $ 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>
Six months ended
--------------------------------------
May 31 May 31
2000 1999
----------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITES
<S> <C> <C>
Net income $ 919 $ 540
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 48 48
Provisions for losses and other reserves 13 18
Compensation payable in common stock 151 98
Other adjustments 22 4
Net change in:
Cash and securities segregated (774) 268
Securities and other financial instruments owned (8,381) (9,874)
Securities borrowed (9,976) (5,974)
Receivables from brokers, dealers and clearing organizations (349) (683)
Receivables from customers (1,476) (705)
Securities and other financial instruments sold but not yet
purchased 6,064 12,391
Securities loaned 2,890 2,219
Payables to brokers, dealers and clearing organizations 2,177 192
Payables to customers 2,724 (2,524)
Accrued liabilities and other payables 1,296 (282)
Other operating assets and liabilities, net (414) 325
----------------- ----------------
Net cash used in operating activities $ (5,066) $ (3,939)
----------------- ----------------
</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>
Six months ended
-------------------------------------
May 31 May 31
2000 1999
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITES
<S> <C> <C>
Proceeds from issuances of senior notes $ 7,990 $ 5,295
Principal payments of senior notes (4,623) (3,686)
Principal payments for subordinated indebtness (179)
Net proceeds from commercial paper and short-term debt 436 509
Resale agreements net of repurchase agreements 414 2,629
Payments for treasury stock purchases (435) (146)
Dividends paid (97) (96)
Issuances of common stock 55 9
Issuance (redemption) of preferred stock 162 (100)
Issuances of trust preferred securities, net of issuance costs 690
---------------- ----------------
Net cash provided by (used in) financing activities 3,902 4,925
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold improvements (54) (36)
---------------- ----------------
Net cash used in investing activities (54) (36)
---------------- ----------------
Net change in cash and cash equivalents 1,218 950
---------------- ----------------
Cash and cash equivalents, beginning of period 5,186 3,055
---------------- ----------------
Cash and cash equivalents, end of period $ 3,968 $ 4,005
================ ================
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)
Interest paid totaled $8,734 and $6,984 for the six months ended May 31, 2000
and May 31, 1999, respectively. Income taxes paid/(received) totaled $184
and $(132) for the six months ended May 31,2000 and May 31, 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 six months ended May 31, 2000, the Company issued $7,990 million of
long-term debt (all of which were senior notes). Of the total issuances during
the period, $2,330 million were U.S. dollar fixed rate, $3,330 million were U.S.
dollar floating rate, $1,638 million were foreign currency denominated fixed
rate, and $692 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 $2,330 million, $705 million were effectively swapped to
U.S. Dollars, with the remainder match funding foreign currency denominated
capital needs.
The Company had $4,623 million of long-term debt mature during the six months
ended May 31, 2000.
<PAGE>
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 May 31, 2000, LBI's regulatory net capital, as defined, of $1,281
million exceeded the minimum requirement by $1,152 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, 2000, LBIE's financial resources of approximately $2,036
million exceeded the minimum requirement by approximately $475 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 May 31, 2000,
had net capital of approximately $385 million which was approximately $275
million in excess of the specified levels required. 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. 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 May 31, 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 May 31,
2000, LBFP and LBDP each had capital which exceeded the requirement of the most
stringent rating agency by approximately $61 million and $25 million,
respectively.
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>
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* Six Months Ended
May 31, 2000 May 31, 2000
--------------------------------- ----------------------------------
(in millions) Assets Liabilities Assets Liabilities
-------------------------------------------------------- -------------- -- --------------- -------------- --- ---------------
<S> <C> <C> <C> <C>
Interest rate and currency swaps and options
(including caps, collars and floors) $ 4,993 $ 3,138 $ 4,943 $ 4,010
Foreign exchange forward contracts and options 858 1,164 801 1,150
Other fixed income securities contracts (including
options and TBAs) 318 358 624 505
Equity contracts (including equity swaps, warrants
and options) 5,777 5,077 5,521 5,896
-------------- -- --------------- -------------- --- ---------------
Total $ 11,946 $ 9,737 $ 11,889 $ 11,561
-------------- -- --------------- -------------- --- ---------------
</TABLE>
* Amounts represent carrying value (exclusive of collateral) and do not
include receivables or payables related to exchange-traded futures
contracts.
<PAGE>
<TABLE>
<CAPTION>
Average Fair Value*
Fair Value* Twelve Months Ended
November 30, 1999 November 30, 1999
---------------------------------- ---------------------------------
(in millions) Assets Liabilities Assets Liabilities
-------------------------------------------------------- -------------- -- ---------------- --------------- - ---------------
<S> <C> <C> <C> <C>
Interest rate and currency swaps and options
(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 May 31, 2000 represents the Company's net
receivable/payable for derivative financial instruments before consideration of
collateral. Included within the $11,946 million fair value of assets at May 31,
2000 was $10,503 million related to swaps and other OTC contracts and $1,443
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 $6,314 million at May 31, 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 May 31, 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>
Counterparty S&P/Moody's Net Credit
Risk Rating Equivalent Exposure
----------- ---------- --------
1 AAA/Aaa 10%
2 AA-/Aa3 or higher 43%
3 A-/A3 or higher 27%
4 BBB-/Baa3 or higher 14%
5 BB-/Ba3 or higher 4%
6 B+/B1 or lower 2%
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 $2.5 billion at
May 31, 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 $3.3
billion and $2.9 billion at May 31, 2000 and November 30, 1999, respectively.
The Company has since arranged for third parties to purchase a majority of these
commitments in the event they are funded. In addition, lending commitments to
high yield borrowers totaled $1.1 billion and $1.4 billion at May 31, 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>
At May 31, 2000 and November 30, 1999, the Company had commitments to invest up
to $484 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 May 31, 2000 and November 30,
1999, respectively.
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>
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 sixteen
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 three months and six months ended May
31, 2000 and May 31, 1999 is presented below.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------------- ------------------------------------
May 31 May 31 May 31 May 31
2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Investment Banking:
Net Revenue $ 471 $ 435 $ 1,064 $ 744
================ ================ ================ ================
Earnings before taxes(1) $ 80 $ 152 $ 238 $ 236
================ ================ ================ ================
Segment assets (billions) $ .2 $ .2 $ .2 $ .2
================ ================ ================ ================
Capital Markets:
Net Revenue $ 1,082 $ 878 $ 2,421 $ 1,565
================ ================ ================ ================
Earnings before taxes(1) $ 422 $ 275 $ 942 $ 478
================ ================ ================ ================
Segment assets (billions) $ 221.3 $ 183.0 $ 221.3 $ 183.0
================ ================ ================ ================
Client Services:
Net Revenue $ 202 $ 142 $ 472 $ 264
================ ================ ================ ================
Earnings before taxes(1) $ 56 $ 39 $ 172 $ 61
================ ================ ================ ================
Segment assets (billions) $ 11.9 $ 8.3 $ 11.9 $ 8.3
================ ================ ================ ================
Total:
Net Revenue $ 1,755 $ 1,455 $ 3,957 $ 2,573
================ ================ ================ ================
Earnings before taxes(1) $ 558 $ 466 $ 1,352 $ 775
================ ================ ================ ================
Segment assets (billions) $ 233.4 $ 191.5 $ 233.4 $ 191.5
================ ================ ================ ================
</TABLE>
(1) And before dividends on trust preferred securities.
<PAGE>
The following are net revenues by geographic region:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------------ ------------------------------------------
May 31 May 31 May 31 May 31
2000 1999 2000 1999
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Americas* $ 916 $ 930 $ 2,181 $ 1,570
Europe 566 379 1,270 752
Asia Pacific 273 146 506 251
------------------- ------------------- ------------------- -------------------
Total $ 1,755 $ 1,455 $ 3,957 $ 2,573
=================== =================== =================== ===================
</TABLE>
* Includes non-U.S. revenues of $19 million and $11 million for the three months
ended May 31, 2000 and May 31, 1999 respectively, and includes non-U.S. revenues
of $39 million and $20 million for the six months ended May 31, 2000 and May 31,
1999, respectively.
7. Preferred Stock:
On March 28, 2000, the Company issued 5,000,000 Depository Shares (each
representing 1/100th of a share) of Fixed/Adjustable Rate Cumulative Preferred
Stock, Series E ("Series E Preferred Stock"), $1.00 par value. The initial
cumulative dividend rate on the Series E Preferred Stock is 7.115% per annum
through May 31, 2005; thereafter the rate will be the highest of either the
three-month U.S. Treasury Bill rate, the 10-year U.S. Treasury constant maturity
rate or the 30-year U.S. Treasury constant maturity rate, in each case plus
1.15%, but in any event not less than 7.615% nor greater than 13.615%. The
Series E Preferred Stock has a redemption price of $5,000 per share, together
with accrued and unpaid dividends. The Company may redeem any or all of the
Series E Preferred Stock at its option after May 31, 2005. The $250 million
aggregate redemption value at May 31, 2000 is classified on the Company's
Consolidated Statement of Financial Condition as part of Preferred Stock.
8. Incentive Plans:
In the second quarter of 2000, the Company transferred 3.9 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 May 31, 2000 and November 30, 1999, 27.5 million and 24.8 million
outstanding shares, respectively, were held in the RSU Trust.
<PAGE>
9. Earnings Per Common Share:
Earnings per share was calculated as follows (in millions, except for per share
data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
May 31 May 31
------------------------------------- ---------------------------------
2000 1999 2000 1999
----------------- ---------------- --------------- --------------
Numerator:
<S> <C> <C> <C> <C>
Net income $ 378 $ 330 $ 919 $ 540
Preferred stock dividends (12) (62) (71) (74)
----------------- ----------------- --------------- --------------
Numerator for basic earnings
per share-income available
to common stockholders 366 268 848 466
Convertible preferred
stock dividends 2 4 4 10
----------------- ----------------- ----------------- -----------------
Numerator for diluted earnings
per share-income available
to common stock-holders
(adjusted for assumed conversion
of preferred stock) $ 368 $ 272 $ 852 $ 476
================= ================= =============== ==============
Denominator:
Denominator for basic earnings
per share - weighted-average shares 123.2 122.2 123.2 122.1
Effect of dilutive securities:
Employee stock options 5.9 3.1 5.4 2.7
Employee restricted stock units 2.3 2.2 2.2 1.9
Preferred shares assumed
converted into common 1.2 2.9 1.2 3.3
----------------- ----------------- ----------------- --------------
Dilutive potential common shares 9.4 8.2 8.8 7.9
----------------- ----------------- --------------- --------------
Denominator for diluted
earnings per share - adjusted
weighted-average shares 132.6 130.4 132.0 130.0
================= ================= =============== ==============
Basic earnings per share $ 2.97 $ 2.19 $ 6.88 $ 3.82
================= ================= =============== ==============
Diluted earnings per share $ 2.78 $ 2.09 $ 6.46 $ 3.66
================= ================= =============== ==============
</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.
The favorable market and economic conditions in the United States during 1999
continued through April 2000, but then turned choppy throughout the remaining
half of the second fiscal quarter. Boosted by a wealth effect stemming from
previous gains in the stock market, consumer spending soared. In response to
strong growth and rising inflation fears, the Federal Reserve raised the federal
funds rate by a total of 100 basis points to 6.50%, with the last increase
occurring on May 16, 2000 when the federal funds rate was raised by an
aggressive 50 basis points.
Despite rapid growth, there were relatively few signs of a significant increase
in underlying inflation, primarily because of impressive labor productivity
gains, which offset an increase in wages. Unit labor costs did not accelerate.
However, as the first half closed, investors became increasingly worried about
inflationary pressures. These worries proved short-lived: during the course of
June, evidence of moderating growth mounted and in late June the Federal Reserve
supported this view when it left rates unchanged.
As a result of mixed economic signals, the United States equity markets were
very volatile during the first-half of the year. By the middle of January 2000,
in anticipation of further rate hikes, the price of old-economy stocks, as
measured by the Dow Jones Industrial Average, started to decline, falling
briefly through the 10,000 barrier before recovering to end the half year at
10,522, down just under 500 points or 4.5% from the start of the year. In
contrast, new-economy stocks, as measured by the NASDAQ Composite, experienced
significant volatility: rising 40% to new highs in early March, but later
falling back to end the half year where it started at 3,400. Broader indices,
such as the S&P 500 Index, moved sideways over the half-year. The bear market in
NASDAQ stocks and the correction in the broader markets led to a slowdown in the
number and amount of equity offerings in the latter half of the second quarter,
as well as a decrease in overall trading volumes.
The uncertainty of United States monetary policy as well as inverted yield
curves in the U.S. and Europe fixed income markets resulted in corporate debt
spreads widening over 50 basis points and high yield spreads widening 120 basis
points since the beginning of the year. These conditions, together with net
redemptions in bond funds and uncertainty about interest rates forced investors
to the sidelines. The combination of wider spreads and weaker investor demand
also affected debt issuances, leading to a 27% reduction in global debt
offerings. Long-term treasuries moved in tandem with NASDAQ, rising at first but
falling into early April. However, a
<PAGE>
rise in core inflation data caused the 10-year yield to rise again, despite
stock market weakness. Over the complete half-year, 10-year yields rose just
7bp to end the period at 6.27%.
Financial advisory activities on a global basis continued at record levels.
Industrywide, the volume of announced merger and acquisition transactions in the
first-half of the fiscal year soared to $1.8 trillion, albeit influenced by the
announcement of a few large transactions. The first half of the year also
reflected continued activity involving European companies and cross-border
mergers and acquisitions. The forces of consolidation, deregulation and
globalization across industry sectors continued to drive strategic combinations.
Equity new issuance during the first half of the year was at record levels
worldwide, with volumes more than doubling over the same period last year.
However, the second quarter did begin to reflect some slowing of activity in
those industry sectors impacted by the downturn in the stock market,
particularly technology, media and telecommunications. In the U.S., new equity
issuance more than tripled year-over-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.
With European business and consumer confidence rising to all-time highs, the
unemployment rate fell sharply, and inflationary pressures started to increase.
Responding to rising inflationary pressures and a weaker euro, the European
Central Bank raised its key two-week repo rate by 25 basis points each on each
of three occasions, February 3rd, March 16th and April 27th, to end the period
with a repo rate of 3.75%. In May, as expectations of another and more
aggressive rate hike by the European Central Bank grew, the euro staged a small
rally, rising to $0.94/euro. However, since the beginning of the year, the euro
has fallen approximately 6.5% against the U.S. dollar. In local currency terms
the European markets outperformed the S&P 500 Index with a return of 10.6% (FTSE
World Europe).
In Japan, the economy and financial markets were very unstable. Recovery
generally remained hesitant and uneven. Even though concerns continued to mount
about the sustainability of public financing, the continued weakness of real
economic activity and residual evidence of deflation allowed long-term bond
yields to remain below 2.0%. In the equity markets, the Nikkei 225 index ended
the half-year at 16,332, down approximately 12% from the beginning of the year.
Other Asian equity markets fell 6%, hurt by the effect of higher U.S. interest
rates and increasing risk aversion among international investors.
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, 2000 and May 31, 1999
The Company reported net income of $378 million for the second quarter ended May
31, 2000, representing an increase of 15% from the second quarter ended May 31,
1999. Earnings per common share (diluted) rose to $2.78 for the second quarter
of 2000 from $2.09 for the second quarter of 1999, an increase of 33%. Excluding
the impact of the special preferred dividend of $50 million in the second
quarter of 1999, earnings per share in the second quarter of 2000 rose 12%.
The quarter represented the second highest quarterly earnings ever posted by the
Company. These results reflected the Company's continued ability to execute its
strategy of growing its high margin investment banking and equities businesses;
increasing its presence in certain strategic businesses in Europe; and, at the
same time, maintaining a 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; (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 generated operating
margins of approximately 32% in the second quarters of both 2000 and 1999. Net
revenues increased 21% in the second quarter of 2000 to $1,755 million from
$1,455 million in the second quarter of 1999. The increase in net revenues was
achieved despite challenging market conditions in the second quarter of 2000
compared to the prior period. Non-personnel expenses as a percentage of net
revenues decreased to 16.2% compared to 17.3% in the second quarter of 1999, but
rose 13.5% reflecting the Company's growth plan. The Company's compensation and
benefits ratio increased to 52% of net revenues from 50.7%, although unchanged
from the first quarter of 2000, reflecting the Company's continued expansion of
its investment banking, equities, and European franchises as well as its
investments in technology and e-commerce capabilities.
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 May 31, 2000 and May 31, 1999
(in millions)
Three Months Ended
----------------------------------
May 31 May 31
2000 1999
--------------- ---------------
Investment Banking $ 471 $ 435
Capital Markets 1,082 878
Client Services 202 142
--------------- ---------------
Total $ 1,755 $ 1,455
=============== ===============
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 8% in
the second quarter of 2000 to $471 million from $435 million in the second
quarter of 1999, principally as a result of an increase in equity underwriting
activities partially offset by a decrease in debt underwriting revenues.
Equity underwriting revenues increased 80% to $227 million in the second quarter
of 2000 from $126 million in the second quarter of 1999, despite a slowdown in
the latter half of the quarter resulting from the market corrections in
mid-April. The Firm's global equity market share and league table rankings
improved to 4.2% and #8 on a year-to-date basis from 3.8% and #9 for calendar
year 1999. The increase was attributed to significant issuances in the
communications/media and technology sectors.
Debt underwriting revenues decreased 33% from the second
quarter of 1999. Wider credit spreads, higher interest rates
and an uneasiness over the future direction of interest rates
forced investors and issuers to the sidelines and led to
lower new issue volume. Global debt underwriting volume was
down 27% versus the second quarter of 1999 and high yield
issuance was down 70% on the same basis.
Investment Banking Net Revenues
---------------------- ------------------------------
(in millions) Three Months Ended
May 31 May 31
2000 1999
-------------------- ---------------
Equity Underwriting $ 227 $ 126
Debt Underwriting 116 174
Financial Advisory 128 135
---------------------- --------------- --------------
$ 471 $ 435
--------------------- --------------- --------------
Financial advisory revenues were essentially flat compared to last year;
however, the Company's pipeline of announced deals remained strong at $270
billion at May 31, 2000, compared to $118 billion at May 31, 1999.
<PAGE>
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 $1,082 million for the second quarter of 2000
compared to $878 million for the second quarter of 1999, an increase of 23%.
Net revenues from the equity component of Capital Markets increased 63% to $707
million in the second quarter of 2000 from $433 million in the second quarter of
1999. Revenues benefited in the second quarter of 2000 from significantly
increased institutional customer flow and trading volumes primarily in U.S. and
European cash products and global derivatives.
Capital Markets Net Revenues
------------------ ---------------------------------
(in millions) Three Months Ended
May 31 May 31
2000 1999
------------------ --------------- -----------------
Equities $ 707 $ 433
Fixed Income 375 445
------------------ --------------- -----------------
$ 1,082 $ 878
------------------ --------------- -----------------
Net revenues from the fixed income component of Capital Markets decreased to
$375 million in the second quarter of 2000 from $445 million in the first
quarter of 1999. This decrease is primarily attributable to the difficult market
conditions during the second quarter of 2000, as rising interest rates and
spread widening led to decreased customer trading volumes 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 sixteen
merchant banking and venture capital partnerships.
Client Services Net Revenues
--------------------- ---------------------------------
(in millions) Three Months Ended
May 31 May 31
2000 1999
--------------------- -------------- ------------------
Private Client $ 192 $ 136
Private Equity 10 6
--------------------- -------------- ------------------
$ 202 $ 142
--------------------- -------------- ------------------
Client Services' net revenues were $202 million in the second quarter of 2000
and $142 million in the second quarter of 1999. The 42% increase reflected
continued strength in retail trading volume, particularly in equities, which was
in part driven by the heavy syndicate calendar in the first half of the quarter.
Non-Interest Expenses Non-interest expenses were $1,197 million for the second
quarter of 2000 and $989 million for the second quarter of 1999. Compensation
and benefits expense as a percentage of net revenues increased to 52% for the
quarter compared to the prior year's ratio of
<PAGE>
50.7%. This increase reflects the Company's continued expansion of its
investment banking, equities and European franchises as well as investment
spending in technology and e-commerce capabilities. Nonpersonnel expenses
were $285 million for the second quarter of 2000 and $251 million for the second
quarter of 1999, an increase of 13.5% that reflected the impact of the Company's
growth plan. Nonpersonnel expenses as a percentage of net revenues declined to
16.2% for the second quarter of 2000 from 17.3% for the second quarter of 1999
as the Company's net revenues increased at a faster rate than spending.
Increases in recruiting (professional fees), business development and
technology spending were consistent with the Company's planned growth and also
supported the continued build-out of the Company's technology and e-commerce
platforms.
Income Taxes The Company's income tax provision was $166 million for the second
quarter of 2000 compared to $126 million for the second quarter of 1999. The
effective tax rate was 29.7% for the second quarter of 2000 and 27.0% for the
second quarter of 1999. This higher tax rate reflected the overall increase in
the level of pre-tax income, which lessened the relative impact of certain tax
preference revenues, partially offset by a more favorable geographic mix of
earnings.
<PAGE>
Results of Operations
For the Six Months Ended May 31, 2000 and May 31, 1999
The Company reported record net income of $919 million for the six months ended
May 31, 2000, representing an increase of 70% from net income of $540 million
for the six months ended May 31, 1999. Earnings per common share (diluted) rose
to $6.46 for the six months of 2000 from $3.66 for the comparable period in
1999, an increase of 77%. Earnings per share computations for both periods
include the recognition of $50 million in dividends on the Company's Redeemable
Voting Preferred Stock.
These results reflected the Company's continued ability to execute its strategy
of growing its high margin investment banking and equities businesses;
increasing its presence in certain strategic businesses in Europe; and, at the
same time, maintaining a strict discipline with regard to its expenses. Net
revenues increased to a record $3,957 million for the six months of 2000 from
$2,573 million for the six months of 1999. The Company's emphasis on these high
margin businesses supported an increase in the Company's operating margin to
34.2% in the first half of 2000 from 30.1% in the first half of 1999. Return on
equity (excluding the impact of the $50 million in dividends on the Company's
Redeemable Voting Preferred Stock) increased to 30.2% from 21.8% for the
comparable period. Revenues in each of the Company's three segments grew by over
40% compared to the first six months of the prior year. Non-personnel expenses
increased only 11% in the first half of 2000, despite an overall 54% increase in
net revenues from the first half of 1999. The Company's compensation and
benefits ratio increased to 52% of net revenues from 50.7% as the Company
continued to increase headcount, making significant additions in areas where the
Company is focusing its growth.
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>
Six Months Ended May 31, 2000 and May 31, 1999
-------------------------------------------------------------------------------
(in millions)
Six Months Ended
---------------------------------
May 31 May 31
2000 1999
--------------- ---------------
Investment Banking $ 1,064 $ 744
Capital Markets 2,421 1,565
Client Services 472 264
--------------- ---------------
Total $ 3,957 $ 2,573
=============== ===============
-------------------------------------------------------------------------------
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 43%
in the six months of 2000 to $1,064 million from $744 million in the prior year,
principally as a result of a significant increase in equity underwriting
partially offset by difficult conditions in the debt underwriting market. The
increased net revenues reflect the Company's ongoing efforts to grow its
Investment Banking franchise. Equity underwriting revenues increased 164% to
$488 million in the first half of 2000 from $185 million for the prior year's
period. The Company's equity underwriting revenues for the first six months of
2000 already exceed full year 1999 amounts. The results in equity underwriting
were driven by issuances in the communications/media and technology sector, a
significant increase in convertible offerings and strong growth in the European
banking franchise.
Debt underwriting revenues decreased 17% to $269 million in the six months of
2000 from $324 million in the six months of 1999. The decrease resulted from
challenging market conditions as rising interest rates led to decreased
underwriting volume most prominently in the high yield market. Global debt
underwriting volume was down 25% versus the first half of 1999 and high yield
issuance was down 53% on the same basis.
Financial advisory revenues increased 31% to $307 million in
the six months of 2000 from $235 million in the prior year's
period. This increase was primarily attributable to a robust
merger and acquisition environment in the early part of the
year. At May 31, 2000, the Company's pipeline of announced
deals remained strong at $270 billion, more than double the
level of last year at this time.
Investment Banking Net Revenues
---------------------- -------------------------------
(in millions) Six Months Ended
May 31 May 31
2000 1999
---------------------- --------------- ---------------
Equity Underwriting $ 488 $ 185
Debt Underwriting 269 324
Financial Advisory 307 235
---------------------- --------------- ---------------
$ 1,064 $ 744
---------------------- --------------- ---------------
<PAGE>
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 $2,421 million for the six months of 2000 and
$1,565 million for the six months 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 146% to
$1,575 million in the first half of 2000 from $639 million in the comparable
1999 period. Revenues benefited from significantly increased institutional
customer flow activity in cash and derivative products. In addition, commission
levels grew 45% from the same period last year.
Net revenues from the fixed income component of Capital Markets decreased to
$846 million in the six months of 2000 from $926 million in the comparable
period last year. This was a result of difficult market conditions that
persisted throughout the second quarter of 2000 due to rising interest rates and
spread widening as well as the Y2K slowdown early in the first quarter of 2000.
Capital Markets Net Revenues
----------------- ---------------------------------
(in millions) Six Months Ended
May 31 May 31
2000 1999
----------------- --------------- -----------------
Equities $ 1,575 $ 639
Fixed Income 846 926
----------------- --------------- -----------------
$ 2,421 $ 1,565
----------------- --------------- -----------------
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 sixteen
merchant banking and venture capital partnerships.
Client Services Net Revenues
---------------------- -------------------------------
(in millions) Six Months Ended
May 31 May 31
2000 1999
---------------------- -------------- ----------------
Private Client $ 452 $ 255
Private Equity 20 9
---------------------- -------------- ----------------
$ 472 $ 264
---------------------- -------------- ----------------
Client Services' net revenues were $472 million in the six months of 2000 and
$264 million in the six months of 1999. The 79% increase was driven by record
customer activity due in part to the Company's active equity syndicate calendar
in the early part of the year, as well as performance fees resulting from higher
portfolio returns in the Company's London-based managed assets in the first
quarter of 2000.
<PAGE>
Non-Interest Expenses Non-interest expenses were $2,605 million for the six
months of 2000 and $1,798 million for the comparable period in 1999.
Compensation and benefits expense as a percentage of net revenues increased to
52.0% compared to 50.7% in 1999. This increase reflects the Company's continued
expansion of its investment banking, equities and European franchises as well as
its investments in technology and e-commerce capabilities. Nonpersonnel expenses
were $548 million for the six months of 2000 and $493 million for the six months
of 1999, an increase of 11.2% that reflected the impact of the Company's
strategic growth plan. However, nonpersonnel expenses declined as a percentage
of net revenues to 13.8% for the six months of 2000 from 19.2% in the prior
year's period, as the Company's net revenues increased at a significantly faster
rate than expenses.
Income Taxes The Company's income tax provision was $405 million for the six
months of 2000 compared to $222 million for the six months of 1999. The
effective tax rate was 30.0% for the first half of 2000 and 28.6% for prior
year's period. The higher rate reflected an overall increase in the level of
pre-tax income, which lessened the relative impact of certain tax preference
revenues, partially offset by a more favorable geographic mix of earnings.
<PAGE>
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 the Company's 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 $41.3 billion at May 31, 2000 compared
to $37.7 billion at November 30, 1999. The increase in Total Capital resulted
from a net increase in long-term debt of $2.8 billion, the retention of
earnings, amortization associated with RSU awards, the exercise of stock options
granted to employees, tax credits arising from stock-based employee awards, and
the issuance of $250 million of Series E Preferred Stock. These were offset by
repurchases of common stock (to fund RSUs and option awards) and of $88 million
(2.3 million shares) in convertible Series B Preferred Stock.
<PAGE>
May 31 November 30
(in millions) 2000 1999
----------------------------------------------------------------------------
Long-term Debt
Senior Notes $ 30,214 $ 27,375
Subordinated Indebtedness 3,319 3,316
-------- ---------
33,533 30,691
Trust Preferred Securities 710 710
Stockholders' Equity
Preferred Equity 850 688
Common Equity 6,246 5,595
-------- ---------
7,096 6,283
----------------------------------------------------------------------------
Total Capital $ 41,339 $ 37,684
----------------------------------------------------------------------------
During the first six months of 2000, the Company issued $8.0 billion in
long-term debt, which was $3.4 billion in excess of its maturing debt. Long-term
debt increased to $33.5 billion at May 31, 2000 from $30.7 billion at November
30, 1999 with a weighted-average maturity of 3.8 years at May 31, 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 May 31, 2000 and November 30, 1999, $153
billion and $123 billion, respectively, of the Company's total balance sheet of
$233 billion and $192 billion at May 31, 2000 and November 30, 1999,
respectively, was financed on a secured basis.
By maximizing its use of secured funding, the Company minimizes its reliance on
unsecured financing. As of May 31, 2000 and November 30, 1999, commercial paper
and short-term debt outstanding totaled $5.9 billion and $5.5 billion,
respectively. Of these amounts, commercial paper outstanding was $3.6 billion at
both May 31, 2000 and November 30, 1999.
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.
<PAGE>
The Company also maintains a $1 billion Committed Securities Repurchase Facility
(the "Facility") for LBIE, the Company's major operating entity in Europe, which
matures on July 27, 2000. Management expects that the Facility will be renewed.
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 $233.4 billion at May 31,
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
$149.7 billion at May 31, 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 primarily reflects higher levels
of equities securities owned as well as securities borrowed, both associated
with increased customer flow activities related to the growth of the Company's
equity franchise.
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>
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 May 31, 2000 was 19.2x compared to 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.
(GRAPH OMITTED)
<PAGE>
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 May 31, 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>
Fitch F-1 A F-1 A/A-
Moody's P-2 A3 P-1 A2*/A3
Standard & Poor's Corp. P-ZBaa1P-Z AA-1Baa1 A A-1 A+*/A
Thomson BankWatch TBW-1 A TBW-1 A+/A
</TABLE>
* Provisional ratings on shelf registration
** Senior/subordinated
<PAGE>
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 fair value, and unrealized gains or losses from these instruments
are recognized in the Company's Consolidated Statement of Income. The Company's
portfolio of such instruments at May 31, 2000 and November 30, 1999 included
long positions with an aggregate market value of approximately $3.1 billion and
$3.0 billion, respectively, and short positions with an aggregate market value
of approximately $321 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 sixteen merchant banking and venture
capital-related partnerships, for which the Company acts as general partner, as
well as related direct investments. At May 31, 2000, the Company's investment in
these partnerships totaled $137 million and related direct investments totaled
$479 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>
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. Consequently, 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 Officer, the Chief Administrative Officer, the
Co-Heads of Capital Markets, 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>
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
valuation adjustments where appropriate. 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, and 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.
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-
<PAGE>
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.
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.
Average value at risk computed in this manner was $23.8 million and $30.9
million for the periods ended May 31, 2000 and November 30, 1999, respectively.
Value at risk at May 31, 2000 and November 30, 1999 was $21.3 million and $19.2
million, respectively.
<PAGE>
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>
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 result 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.
Bamaodah v. E.F. Hutton & Company Inc. (Reported in Holdings' 1999 Annual
Report on Form 10-K)
On April 23, 2000, the Court of Cassation issued its final
judgment awarding the Bamaodahs $2,923,000 plus interest.
Actions Relating to First Capital Holdings Inc.
The Virginia Commissioner of Insurance Action. (Reported in Holdings'
1999 Annual Report on Form 10-K)
On June 30, 2000, the United States Court of Appeals for the
Fourth Circuit affirmed the Judgment Order entered by the Virginia
Court dismissing the complaint.
Actions Relating to Bre-X Minerals Ltd.
McNamara et al. v. Bre-X Minerals Ltd et al. (Reported in Holdings'
1999 Annual Report on Form 10-K)
While defendants' motion to dismiss was pending, the plaintiffs
obtained leave from the Court to file a Fourth Amended Complaint, which
was filed on June 14, 2000.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUSBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings - continued
Klassen v. Lehman Brothers Inc. (Reported in Holdings' 1999 Annual
Report on Form 10-K)
The action was dismissed without prejudice to plaintiffs'
right to refile it nunc pro tunc to the date of its dismissal on
January 12, 1999.
Bowser v. First Alliance Mortgage Company, et al.
On May 1, 2000, a purported class action complaint was filed in the
United States Bankruptcy Court in the Central District of California in the
bankruptcy of First Alliance Mortgage Company and its parent and affiliate
companies (the "Debtors"). The complaint names the Debtors and Holdings as
defendants. As to Holdings, the complaint alleges common law fraud. This claim
against Holdings and the other defendants is based on alleged misrepresentations
or omissions of material facts in connection with consumer loan transactions
entered into by all persons, during the four years prior to the filing of the
complaint, who entered into mortgage loans with Debtors. The complaint's stated
basis for naming Holdings is that its affiliates are alleged to have provided
financing to Debtors, to have underwritten the securitization of their mortgage
loans, to hold a warrant for one percent of First Alliance shares and to have
approved of or acquiesced in First Alliance's purported fraudulent lending
practices. The plaintiffs seek class certification and unspecified compensatory
and punitive damages as to the claims against Holdings.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. and SUSBSIDIARIES
PART II - OTHER INFORMATION
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 March 20, 2000, Items 5 and 7.
Financial Statements:
Exhibit 99.2 Consolidated Statement of Income
(Three Months Ended February 29, 2000)
(Preliminary and Unaudited)
2. Form 8-K dated March 28, 2000, Item 7.
3. Form 8-K dated April 17, 2000, Items 5 and 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: July 17, 2000 By: /s/ David Goldfarb
--------------------------------------
Chief Financial 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
<PAGE>
Exhibit 12
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 Six
Months Months Months Months Months Months
Ended Ended Ended Ended Ended Ended
November 30 November 30 November 30 November 30 November 30 May 31
1995 1996 1997 1998 1999 2000
------------- ------------- ------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Pre-tax earnings from continuing
operations $ 369 $ 637 $ 937 $ 1,052 $ 1,631 $ 1,352
Add: Fixed charges (excluding
capitalized interest) 10,449 10,852 13,043 15,813 13,681 8,734
------------- ------------- ------------- -------------- ------------- ---------------
Pre-tax earnings before fixed
charges 10,818 11,489 13,980 16,865 15,312 10,086
============= ============= ============= ============== ============= ===============
Fixed charges:
Interest 10,405 10,816 13,010 15,781 13,649 8,717
Other(a) 72 50 41 47 71 26
------------- ------------- ------------- -------------- ------------- ---------------
Total fixed charges 10,477 10,866 13,051 15,828 13,720 8,743
------------- ------------- ------------- -------------- ------------- ---------------
Preferred stock dividend
requirements 64 58 109 124 174 131
------------- ------------- ------------- -------------- ------------- ---------------
Total combined fixed charges and
preferred stock dividends $ 10,541 $ 10,924 $ 13,160 $ 15,952 $ 13,894 $ 8,874
============= ============= ============= ============== ============= ===============
RATIO OF EARNINGS TO FIXED
CHARGES 1.03 1.06 1.07 1.07 1.12 1.15
RATIO OF EARNINGS TO
COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
1.03 1.05 1.06 1.06 1.10 1.14
</TABLE>
(a) Other fixed charges consist of the interest factor in rentals and
capitalized interest.
<PAGE>
Exhibit 27
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
This schedule contains summary financial information extracted from the
Company's Consolidated Statement of Financial Condition at May 31, 2000
(Unaudited) and the Consolidated Statement of Income for the six months ended
May 31, 2000 (Unaudited) and is qualified in its entirety by reference to such
financial statements.
1,000,000
