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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-9466
Lehman Brothers Holdings Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3216325
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3 World Financial Center
New York, New York 10285
(Address of principal (Zip Code)
executive offices)
(212) 526-7000
(Registrant's telephone number, including area code)
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, 2001, 240,936,321 shares of the Registrant's Common Stock, par
value $0.10 per share, were outstanding.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MAY 31, 2001
INDEX
Page
Part I. FINANCIAL INFORMATION Number
Item 1. Financial Statements - (unaudited)
Consolidated Statement of Income -
Three and Six Months Ended
May 31, 2001 and May 31, 2000...................3
Consolidated Statement of Financial Condition -
May 31, 2001 and November 30, 2000..............5
Consolidated Statement of Cash Flows -
Six Months Ended
May 31, 2001 and May 31, 2000...................7
Notes to Consolidated Financial Statements......8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...15
Part II. OTHER INFORMATION
Item 1. Legal Proceedings...............................30
Item 6. Exhibits and Reports on Form 8-K................32
Signature .............................................................34
Exhibit Index .............................................................35
Exhibits
2
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of INCOME
(Unaudited)
(In millions, except per share data)
Three months ended
-------------------------------------
May 31 May 31
2001 2000
---------------- ----------------
Revenues
Principal transactions $ 984 $ 870
Investment banking 565 480
Commissions 295 226
Interest and dividends 4,433 4,738
Other 7 20
---------------- ----------------
Total revenues 6,284 6,334
Interest expense 4,262 4,579
---------------- ----------------
Net revenues 2,022 1,755
---------------- ----------------
Non-interest expenses
Compensation and benefits 1,032 912
Technology and communications 134 85
Brokerage and clearance 73 62
Business development 54 41
Professional fees 41 43
Occupancy 44 32
Other 19 22
---------------- ----------------
Total non-interest expenses 1,397 1,197
---------------- ----------------
Income from operations before taxes and
dividends on trust preferred securities 625 558
Provision for income taxes 181 166
Dividends on trust preferred securities 14 14
---------------- ----------------
Net income $ 430 $ 378
================ ================
Net income applicable to common stock $ 369 $ 366
================ ================
Earnings per common share
Basic $ 1.51 $ 1.49
================ ================
Diluted $ 1.38 $ 1.39
================ ================
See notes to consolidated financial statements.
3
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of INCOME
(Unaudited)
(In millions, except per share data)
Six months ended
-------------------------------------
May 31 May 31
2001 2000
---------------- ----------------
Revenues
Principal transactions $ 1,981 $ 1,984
Investment banking 1,048 1,082
Commissions 574 455
Interest and dividends 9,414 9,051
Other 19 102
---------------- ----------------
Total revenues 13,036 12,674
Interest expense 9,131 8,717
---------------- ----------------
Net revenues 3,905 3,957
---------------- ----------------
Non-interest expenses
Compensation and benefits 1,992 2,057
Technology and communications 245 169
Brokerage and clearance 150 120
Business development 104 75
Professional fees 88 75
Occupancy 85 62
Other 43 47
---------------- ----------------
Total non-interest expenses 2,707 2,605
---------------- ----------------
Income from operations before taxes and
dividends on trust preferred securities 1,198 1,352
Provision for income taxes 353 405
Dividends on trust preferred securities 28 28
---------------- ----------------
Net income $ 817 $ 919
================ ================
Net income applicable to common stock $ 744 $ 848
================ ================
Earnings per common share
Basic $ 3.04 $ 3.44
================ ================
Diluted $ 2.77 $ 3.23
================ ================
See notes to consolidated financial statements.
4
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of FINANCIAL CONDITION
(Unaudited)
(In millions)
May 31 November 30
2001 2000
------------------ ------------------
ASSETS
Cash and cash equivalents $ 2,427 $ 5,160
Cash and securities segregated and on deposit for regulatory and other
purposes 2,843 2,434
Securities and other financial instruments owned:
Governments and agencies 24,888 27,381
Mortgages and mortgage-backed 29,761 24,670
Corporate equities 19,306 24,042
Corporate debt and other 17,319 16,098
Derivatives and other contractual agreements 11,082 9,583
Certificates of deposit and other money market instruments 1,971 3,433
------------------ ------------------
104,327 105,207
------------------ ------------------
Collateralized short-term agreements:
Securities purchased under agreements to resell 83,046 81,242
Securities borrowed 29,040 17,618
Receivables:
Brokers, dealers and clearing organizations 1,878 1,662
Customers 8,390 7,585
Others 990 1,135
Property, equipment and leasehold improvements (net of
accumulated depreciation and amortization of $804 in 2001 and
$855 in 2000) 843 671
Other assets 1,978 1,826
Excess of cost over fair value of net assets acquired (net of
accumulated amortization of $145 in 2001 and $138 in 2000) 174 180
------------------ ------------------
Total assets $ 235,936 $ 224,720
================== ==================
See notes to consolidated financial statements.
5
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of FINANCIAL CONDITION - (Continued)
(Unaudited)
(In millions, except share data)
May 31 November 30
2001 2000
----------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper and short-term debt $ 5,684 $ 5,800
Securities and other financial instruments sold but not yet purchased:
Governments and agencies 16,952 14,998
Corporate equities 14,126 6,623
Derivatives and other contractual agreements 9,657 8,568
Corporate debt and other 6,238 5,096
----------------- ------------------
46,973 35,285
----------------- ------------------
Collateralized short-term financing:
Securities sold under agreements to repurchase 105,512 110,225
Securities loaned 8,685 7,242
Payables:
Brokers, dealers and clearing organizations 1,205 1,922
Customers 11,621 11,637
Accrued liabilities and other payables 9,831 8,735
Long-term debt:
Senior notes 34,797 32,106
Subordinated indebtedness 2,939 3,127
----------------- ------------------
Total liabilities 227,247 216,079
----------------- ------------------
Commitments and contingencies
Preferred securities subject to mandatory redemption 710 860
STOCKHOLDERS' EQUITY
Preferred stock 700 700
Common stock, $0.10 par value; 600,000,000 shares authorized;
Shares issued: 253,650,055 in 2001 and 251,629,126 in 2000;
Shares outstanding: 244,202,014 in 2001 and 236,395,332 in 2000 25 25
Additional paid-in capital 3,086 3,589
Accumulated other comprehensive income (net of tax) (11) (8)
Retained earnings 4,419 3,713
Other stockholders' equity, net 409 597
Common stock in treasury, at cost: 9,448,041 shares in 2001 and
15,233,794 shares in 2000 (649) (835)
----------------- ------------------
Total stockholders' equity 7,979 7,781
----------------- ------------------
Total liabilities and stockholders' equity $ 235,936 $ 224,720
================= ==================
See notes to consolidated financial statements.
6
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of CASH FLOWS
(Unaudited)
(In millions)
Six months ended
--------------------------------------
May 31 May 31
2001 2000
------------------ ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 817 $ 919
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 80 48
Compensation payable in common stock 209 151
Other adjustments (1) 35
Net change in:
Cash and securities segregated (409) (774)
Securities and other financial instruments owned 933 (8,381)
Securities borrowed (11,422) (9,976)
Receivables from brokers, dealers and clearing organizations (216) (349)
Receivables from customers (805) (1,476)
Securities and other financial instruments sold but
not yet purchased 11,688 6,064
Securities loaned 1,443 2,890
Payables to brokers, dealers and clearing organizations (717) 2,177
Payables to customers (16) 2,724
Other operating assets and liabilities, net 1,138 882
---------------
------------------
Net cash provided by (used in) operating activities $ 2,722 $ (5,066)
------------------ ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes $ 6,544 $ 7,990
Principal payments of senior notes (3,934) (4,623)
Principal payments of subordinated indebtedness (194) -
Net proceeds from (payments for) commercial paper and short-term debt (116) 436
Resale agreements net of repurchase agreements (6,517) 414
Payments for treasury stock purchases (928) (435)
Dividends paid (46) (97)
Issuances of common stock 26 55
(Redemption) issuance of preferred stock (100) 162
------------------ ---------------
Net cash provided by (used in) financing activities (5,265) 3,902
------------------ ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold improvements (190) (54)
------------------ ---------------
Net cash used in investing activities (190) (54)
------------------ ---------------
Net change in cash and cash equivalents (2,733) (1,218)
------------------ ---------------
Cash and cash equivalents, beginning of period 5,160 5,186
------------------ ---------------
Cash and cash equivalents, end of period $ 2,427 $ 3,968
================== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)
Interest paid totaled $9,210 and $8,734 for the six months ended May 31,
2001 and May 31, 2000, respectively. Income taxes paid totaled $422 and $184 for
the six months ended May 31, 2001 and May 31, 2000, respectively.
See notes to consolidated financial statements.
7
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 incorporated by reference in the Company's Annual Report on
Form 10-K for the twelve months ended November 30, 2000 (the "Form 10-K"). The
Consolidated Statement of Financial Condition at November 30, 2000 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, 2001, the Company issued $6,544 million of
long-term debt (all of which were senior notes). Of the total issuances during
the period, $2,912 million were U.S. dollar fixed rate, $1,744 million were U.S.
dollar-floating rate, $692 million were foreign currency denominated fixed rate,
and $1,196 million were foreign currency denominated floating rate. These
issuances were primarily utilized to refinance current maturities of long-term
debt in 2001 and to increase total capital (stockholders' equity, long-term debt
and preferred securities subject to mandatory redemption).
The Company's floating rate new issuances contain contractual interest rates
based primarily on London Interbank Offered Rates ("LIBOR"). Of the fixed rate
new issuances totaling $3,604 million, $3,078 million were effectively converted
to floating rate obligations through the use of interest rate swaps. Of the
foreign denominated new issuances totaling $1,888 million, $838 million were
effectively swapped to U.S. Dollars, with the remainder match funding foreign
currency denominated capital needs.
The Company had $4,128 million of long-term debt mature during the six months
ended May 31, 2001. Long-term debt at May 31, 2001, scheduled to mature within
one year totaled $7,448 million.
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, 2001, LBI's regulatory net capital, as defined, of $1,886
million exceeded the minimum requirement by $1,753 million.
8
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, 2001, LBIE's financial resources of approximately $2,286
million exceeded the minimum requirement by approximately $638 million. Lehman
Brothers Japan Inc.'s Tokyo branch, a regulated broker-dealer, is subject to the
capital requirements of the Financial Services Agency and at May 31, 2001, had
net capital of approximately $393 million which was approximately $207 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, 2001, 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, 2001, LBFP and LBDP each had
capital which exceeded the requirement of the most stringent rating agency by
approximately $46 million and $26 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:
Effective December 1, 2000, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which requires that all
derivative instruments be reported on the consolidated statement of financial
condition at fair value and establishes criteria for designation and
effectiveness of hedging relationships. The adoption of SFAS No. 133, as of
December 1, 2000, did not have a material effect on the Company's consolidated
statement of financial condition or the results of operations.
Most of the Company's derivative transactions are entered into for
trading-related activities for which the adoption of SFAS No. 133 had no impact.
The Company's trading-related derivative activities are marked-to-market through
earnings as a component of Principal Transactions revenues. The Company also
utilizes derivatives for non-trading purposes as an end user to modify the
market risk exposures of certain assets and liabilities. In this regard, the
Company primarily enters into fair value hedges utilizing interest rate swaps to
convert a substantial portion of the Company's fixed rate long-term debt and
certain term fixed rate secured financing activities to a floating interest
rate. The ineffective portion of the fair value hedges were included in
"Interest Expense" on the Consolidated Statement of Income and were not material
to the Company's results for the three and six months ended May 31, 2001.
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). 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 represent estimates of expected losses which incorporate business
and economic conditions, historical experience, concentrations, and the
character, quality and performance of credit sensitive financial instruments.
9
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 of the Company's
trading-related derivative activities. Assets and liabilities represent net
unrealized gains (amounts receivable from counterparties) and net unrealized
losses (amounts payable to counterparties), respectively.
Fair Value* Fair Value*
May 31, 2001 November 30, 2000
--------------------------------- ----------------------------------
(in millions) Assets Liabilities Assets Liabilities
- -------------------------------------------------------- -------------- -- --------------- -------------- --- ---------------
Interest rate and currency swaps and options
(including caps, collars and floors) $ 5,658 $ 4,535 $ 4,349 $ 3,390
Foreign exchange forward contracts and options 851 1,472 902 1,361
Other fixed income securities contracts
(including options and TBAs) 379 315 496 418
Equity contracts (including equity swaps,
warrants and options) 4,194 3,335 3,836 3,399
-------------- -- --------------- -------------- --- ---------------
Total $ 11,082 $ 9,657 $ 9,583 $ 8,568
-------------- -- --------------- -------------- --- ---------------
* Amounts represent carrying value (exclusive of collateral) and do not
include receivables or payables related to exchange-traded futures
contracts.
Assets included in the table above represent the Company's net
receivable/payable for derivative financial instruments before consideration of
collateral. Included within the $11,082 million fair value of assets at May 31,
2001 was $9,691 million related to swaps and other OTC contracts and $1,391
million related to exchange-traded option and warrant contracts. Included within
the $9,583 million fair value of assets at November 30, 2000 was $8,643 million
related to swaps and other OTC contracts and $940 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 $6,551 million at May 31, 2001, 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, 2001 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.
Counterparty S&P/Moody's Net Credit
Risk Rating Equivalent Exposure
----------- ---------- --------
1 AAA/Aaa 15%
2 AA-/Aa3 or higher 26%
3 A-/A3 or higher 35%
4 BBB-/Baa3 or higher 18%
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, exchange clearinghouses require
counterparties to futures contracts to post margin upon the origination of all
contracts and for any changes in the market value of the contracts on a daily
basis (certain foreign exchanges provide for settlement within three days).
Therefore, the potential for
10
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, incorporated by reference in
the Form 10-K.
5. Securitizations
The Company is a market leader in the mortgage- and asset-backed securitization
market. In connection with these activities, the Company securitizes commercial
and residential mortgages, home equity loans, government and corporate bonds,
and lease and trade receivables. Lehman Brothers may retain an interest in the
financial assets it securitizes ("Retained Interests") which may include assets
in the form of residual interests or one or more subordinate tranches. The
Company records its Securities and Other Financial Instruments Owned, including
Retained Interests, at fair value, with changes in fair value reported in
earnings. Fair value is determined based upon listed market prices, if
available. Where listed market prices are not available, fair value is
determined based on other relevant factors, including broker or dealer price
quotations and valuation pricing models which take into account time value and
volatility factors underlying the financial instruments, among other factors.
Retained interests in securitized assets were not material as of May 31, 2001.
During the second quarter of 2001, the Company securitized approximately $10.4
billion of financial assets.
6. Other Commitments and Contingencies:
In connection with its financing activities, the Company had outstanding
commitments under certain collateralized lending arrangements of approximately
$3.5 billion at May 31, 2001 and $3.2 billion at November 30, 2000. 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.
In addition, 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 $5.6 billion, $5.4 billion and $4.4 billion at May 31, 2001, February 28,
2001 and November 30, 2000, respectively. In addition, lending commitments to
high yield borrowers totaled $1.3 billion, $1.1 billion and $1.3 billion at May
31, 2001, February 28, 2001 and November 30, 2000, 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.
At May 31, 2001 and November 30, 2000, the Company had commitments to invest up
to $570 million and $357 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.
11
In the normal course of its business, the Company has been named a defendant in
a number of lawsuits and other legal proceedings. Although there can be no
assurances as to the ultimate outcome, the Company has denied, or believes it
has a meritorious defense and will deny, liability in all significant cases
pending against it, and intends to defend vigorously each such case, and based
on information currently available, the Company believes that the eventual
outcome of the actions against it will not, in the aggregate, have a material
adverse effect on the consolidated financial position or results of operations
of the Company.
At May 31, 2001, the net fair value of securities received as collateral that
have not been sold or repledged totaled approximately $10 billion. The gross
fair value of securities received as collateral where the Company was permitted
to sell or repledge the securities was approximately $225 billion. Of this
collateral, approximately $215 billion has been sold or repledged, generally as
collateral under repurchase agreements or to cover securities and other
financial instruments sold but not yet purchased.
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, incorporated by
reference in the Form 10-K.
7. Segments:
The Company operates in three 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. 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 derivative
products. The Capital Markets Division also includes the Company's risk
arbitrage and secured financing businesses, as well as realized and unrealized
gains and losses related to the Company's interests in private equity
investments. The financing businesses manage the Company's equity and fixed
income matched book activities, supply secured financing to institutional
clients and customers, and provide secured funding for the Company's inventory
of equity and fixed income products.
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 revenues include the management and
incentive fees earned in the Company's role as general partner for twenty-five
private equity partnerships.
12
The Company's segment information for the three and six months ended May 31,
2001 and May 31, 2000 is presented below and was developed consistent with the
accounting policies used to prepare the Company's consolidated financial
statements.
Three Months Ended Six Months Ended
---------------------------- -----------------------------
(in millions) May 31 May 31 May 31 May 31
2001 2000 2001 2000
Investment Banking:
Net Revenue $ 551 $ 471 $ 1,022 $ 1,064
============ ============ ============= ============
Earnings before taxes(1) $ 118 $ 80 $ 193 $ 238
============ ============ ============= ============
Segment assets (billions) $ 1.3 $ 0.7 $ 1.3 $ 0.7
============ ============ ============= ============
Capital Markets:
Net Revenue $ 1,274 $ 1,082 $ 2,482 $ 2,421
============ ============ ============= ============
Earnings before taxes(1) $ 465 $ 422 $ 916 $ 941
============ ============ ============= ============
Segment assets (billions) $ 229.6 $ 227.5 $ 229.6 $ 227.5
============ ============ ============= ============
Client Services:
Net Revenue $ 197 $ 202 $ 401 $ 472
============ ============ ============= ============
Earnings before taxes(1) $ 42 $ 56 $ 89 $ 173
============ =========== ============= ============
Segment assets (billions) $ 5.0 $ 5.2 $ 5.0 $ 5.2
============ ============ ============= ============
Total:
Net Revenue $ 2,022 $ 1,755 $ 3,905 $ 3,957
============ ============ ============= ============
Earnings before taxes(1) $ 625 $ 558 $ 1,198 $ 1,352
============ ============ ============= ============
Segment assets (billions) $ 235.9 $ 233.4 $ 235.9 $ 233.4
============ ============ ============= ============
(1) And before dividends on preferred securities.
The following are net revenues by geographic region:
Three Months Ended Six Months Ended
------------------------------------- --------------------------------------
(in millions) May 31 May 31 May 31 May 31
2001 2000 2001 2000
Americas $ 1,302 $ 897 $ 2,534 $ 2,142
Europe 549 566 1,068 1,270
Asia Pacific and other 171 292 303 545
---------------- ----------------- ----------------- -----------------
Total $ 2,022 $ 1,755 $ 3,905 $ 3,957
================ ================= ================= =================
The following information describes the Company's methods of allocating
consolidated net revenues to geographic regions. Net revenues, if syndicate,
trading or sales related, have been allocated based upon the location where the
primary or secondary position was fundamentally risk managed; if fee-related, by
the location of the senior coverage banker. In addition, certain revenues
associated with domestic products and services which resulted from relationships
with international clients and customers have been reclassified as international
revenues using an allocation consistent with the Company's internal reporting.
13
8.Common Stock:
In April 2001, the Company's shareholders' approved the adoption of an amendment
to the Company's Restricted Certificate of Incorporation to increase the
aggregate number of authorized shares of common stock from 300 million to 600
million.
9. Earnings Per Common Share:
Earnings per share was calculated as follows (in millions, except for per share
data):
Three Months Ended Six Months Ended
----------------------------- ---------------------------
May 31 May 31 May 31 May 31
2001 2000 2001 2000
Numerator:
Net income $ 430 $ 378 $ 817 $ 919
Preferred stock dividends (61) (12) (73) (71)
------------ ------------- ----------- ------------
Numerator for basic earnings per share-income
available to common stockholders 369 366 744 848
Convertible preferred stock dividends - 2 - 4
------------ ------------- ----------- ------------
Numerator for diluted earnings per share-income
available to common stockholders (adjusted for
assumed conversion of preferred stock) $ 369 $ 368 $ 744 $ 852
============ ============= =========== ============
Denominator:
Denominator for basic earnings per share - weighted-
average shares 243.9 246.3 245.0 246.4
Effect of dilutive securities:
Employee stock options 16.7 12.0 17.1 10.9
Employee restricted stock units 6.3 4.6 6.7 4.3
Preferred shares assumed converted into common - 2.4 - 2.4
------------ ------------- ----------- ------------
Dilutive potential common shares 23.0 19.0 23.8 17.6
------------ ------------- ----------- ------------
Denominator for diluted earnings per share - adjusted
weighted-average shares 266.9 265.3 268.8 264.0
============ ============= =========== ============
Basic earnings per share $ 1.51 $ 1.49 $ 3.04 $ 3.44
============ ============= =========== ============
Diluted earnings per share $ 1.38 $ 1.39 $ 2.77 $ 3.23
============ ============= =========== ============
For May 31, 2000, Convertible Voting Preferred outstanding shares were
convertible into common shares at a conversion price of approximately $61.50 per
share. For purposes of calculating diluted earnings per share, these preferred
shares were assumed to be converted into common shares since basic earnings per
share exceeded preferred dividends per share obtainable upon conversion ($0.77
on a quarterly basis). During December 2000, the Company redeemed all
outstanding Convertible Voting Preferred shares.
14
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.
Marketplace uncertainties experienced in the second half of 2000 and the first
quarter of 2001 continued into the second quarter of 2001 as lower corporate
profits and a slower pace of economic growth resulted in generally weak market
conditions. In response to these conditions, the Federal Reserve lowered
interest rates three times during the quarter bringing the Federal Funds rate to
4%. Total reductions in the Federal Funds rate for the first six months of
fiscal 2001 have totaled 250 basis points. The Federal Funds rate was again
lowered an additional quarter of a percentage point on June 27, 2001.
During the quarter, all of the major U.S. equity indices reached new lows since
their 2000 peaks. The Dow Jones Industrial Average ("DJIA") finished the quarter
at 10,912, up 4% from the end of the first fiscal quarter. However, the DJIA
fluctuated from a low of 9,048 to a high of 11,413 during the quarter. The
NASDAQ, which was virtually unchanged for the quarter, experienced significant
volatility, decreasing 24% during March before gaining 40% later in the quarter.
The S&P 500 ended up 1% from the end of the first quarter and 16% from its low
in late March.
Globally, other world markets experienced the same slowing of economic growth.
Both the FTSE World Europe Index and the German Stock Exchange (DAX) have
decreased approximately 5% from the beginning of the year and approximately 15%
from their year-ago record highs. To offset this slowdown, the Bank of England
and the European Central Bank both cut interest rates 25 basis points during the
quarter. For the European Central Bank, this was its first reduction in two
years, while this was the second consecutive quarter the Bank of England cut
rates 25 basis points. The Bank of Japan also cut key interest rates on the last
day of the fiscal first quarter of 2001 in response to continued slow growth and
a declining stock market.
Global equity new issuance volume during the second quarter of 2001 was up 15%
versus a relatively slow first quarter of 2001, but down 28% compared to the
second quarter of 2000 due to the uncertain economic outlook. Market volume for
initial public offerings ("IPOs") was down over 70% when compared to the second
quarter of 2000. For the first six fiscal months of 2001 equity origination
market volume was down 31% and IPO market volumes were down 80% compared to the
first six months of 2000, according to Thomson Financial Securities Data Corp
("TFSD").
Fixed income markets, however, continued to benefit as lower interest rates,
yield curve steepening and tightening credit spreads led investors to increase
their exposure to interest rate-based and credit sensitive products. In the
U.S., yields on all treasury maturities, which move inversely to price, were at
or near two-year lows.
Global debt new issuance continued its strong pace into the second quarter of
2001. Activity was bolstered globally by interest rate cuts from numerous
central banks, and absolute rates continued to be very attractive for borrowing
companies. Reflecting this improving market, debt issuance and high yield
issuance for the quarter were up 44% and over 100%, respectively, over last
year's second quarter, and over 25% and 50% on a year-to-date basis,
respectively, according to TFSD.
15
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS
The value of merger and acquisition advisory activity slowed significantly
during the second quarter compared to the same period a year ago. Worldwide
completed mergers and acquisitions for the fiscal second quarter of 2001
decreased over 60% versus the fiscal second quarter of 2000, according to TFSD.
In addition, the volume of announced transactions industry-wide, although up
slightly from the fiscal first quarter of 2001, decreased over 40% when compared
to the fiscal second quarter of 2000.
- -------------------------------------------------------------------------------
Some of the statements contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, including those relating to the
Company's strategy and other statements that are predictive in nature, that
depend upon or refer to future events or conditions or that include words such
as "expects," "anticipates," "intends," "plans," "believes," "estimates" and
similar expressions, are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. These statements are not
historical facts but instead represent only the Company's expectations,
estimates and projections regarding future events. These statements are not
guarantees of future performance and involve certain risks and uncertainties
that are difficult to predict, which may include market, credit or counterparty,
liquidity, legal and operational risks. Market risks include changes in interest
and foreign exchange rates and securities valuations, global economic and
political trends and industry competition. The Company's actual results and
financial condition may differ, perhaps materially, from the anticipated results
and financial condition in any such forward-looking statements. The Company
undertakes no obligation to update any forward-looking statements, whether as a
result of new information, future events or otherwise.
16
Results of Operations
For the Three Months Ended May 31, 2001 and May 31, 2000
The Company reported net income of $430 million for the quarter ended May 31,
2001, representing an increase of 14% from the second quarter of 2000. Earnings
per common share (diluted) were $1.38 for the second quarter of 2001. During the
quarter, the Company accrued a $50 million special preferred dividend on its
Redeemable Voting Preferred Stock. Excluding the impact of this special
preferred dividend, earnings per common share (diluted) were $1.57. This
compares favorably with earnings per common share (diluted) of $1.39 for the
second quarter of 2000. Net revenues for the second quarter of 2001 were $2,022
million, 15% higher than the $1,755 million reported in the second quarter of
2000. The second quarter of 2001 represents the third best quarter in the
Company's history in the terms of net revenues and net income. These strong
results in a very difficult market environment demonstrate the growing breadth
and depth of the franchise.
The Company continues to maintain its discipline toward managing expenses, risk
and liquidity as well as capital deployment and utilization. For the quarter,
non-personnel expenses increased only 4% from the first quarter of 2001 versus a
7% increase in net revenues over the same period. Pre-tax operating margin for
the second quarter was 30.9% and return on equity was 23.4% (excluding the
impact of the special preferred dividend). The second quarter represents the
ninth straight quarter in which operating margin and return on equity exceeded
30% and 20%, respectively.
The Company is segregated into the following three business segments (each of
which is described below): 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 and high-net-worth retail clients which are recognized across the
different revenue categories contained in the Company's Consolidated Statement
of Income. (Net revenues by segment also contain certain internal allocations,
including funding costs, which are centrally managed.)
Three Months Ended May 31, 2001 and May 31, 2000
Net Revenues
(in millions) for the
Three Months Ended
----------------------------------
May 31 May 31
2001 2000
--------------- ---------------
Investment Banking $ 551 $ 471
Capital Markets 1,274 1,082
Client Services 197 202
--------------- ---------------
Total $ 2,022 $ 1,755
=============== ===============
17
The following discussion provides an analysis of the Company's net revenues.
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, and advising clients on merger and acquisition activities and other
services.
Investment Banking's net revenues increased 17% during the second quarter to
$551 million from $471 million in the second quarter of 2000, as record fixed
income underwriting activity more than offset a decrease in equity origination.
Merger and acquisition advisory fees were unchanged from last year's second
quarter.
INVESTMENT BANKING NET REVENUES
---------------------------------------------------------
(in millions) Three Months Ended
May 31 May 31
2001 2000
--------------------------------- ----------- -----------
Equity Underwriting $ 158 $ 227
Debt Underwriting 265 116
Merger and Acquisition Advisory 128 128
--------------------------------- ----------- -----------
$ 551 $ 471
--------------------------------- ----------- -----------
Equity origination revenues were down 30% compared to the year-ago period, as
industry-wide equity underwriting declined. However, during the quarter the
Company continued to grow its equity underwriting business. Global equity
origination volume share more than doubled to 7.3% through May 31, 2001
year-to-date versus full year 2000, according to TFSD.
Debt underwriting revenues totaled a record $265 million for the second quarter
of 2001, more than double last year's fees for the comparable quarter, as high
grade and high yield origination activity rose significantly. Fixed income
origination benefited this quarter as issuers moved to raise lower-coupon
long-term debt to replace short-term debt. This activity was prompted by low
interest rates, tightening credit and swap spreads and a steepening of the yield
curve to a more normal shape. Also, contributing to these results was an
increase in the Company's global market share for debt origination, particularly
in high yield underwriting, where the Company's share grew to 7.0% through May
31, 2001 from 5.0% for calendar year 2000, according to TFSD.
Capital Markets This segment's net revenues reflect institutional flow
activities and secondary trading and financing activities related to fixed
income and equity products. These products include a wide range of cash,
derivative, secured financing and structured instruments.
Capital Markets' net revenues were $1,274 million for the second quarter of
2001, up 18% from the second quarter of 2000. The increase is attributable to
strong institutional customer flow activity across a wide range of products.
This customer flow business provides the Company with a relatively stable form
of revenues as customers continually rebalance their portfolios across market
cycles with the full array of capital market products that are provided by the
Company.
CAPITAL MARKET NET REVENUES
---------------------------------------------------------
(in millions) Three Months Ended
May 31 May 31
2001 2000
--------------------------------- ----------- -----------
Equities $ 611 $ 707
Fixed Income 663 375
--------------------------------- ----------- -----------
$ 1,274 $ 1,082
--------------------------------- ----------- -----------
Net revenues from the fixed income component of Capital Markets increased 77%
from the second quarter of 2000, driven by a record levels of institutional
customer flow activity. Central bank easings prompted lower rates, a steeper
yield curve and tighter credit spreads, which led to higher volumes across
almost all fixed income products. Areas that benefited the most from the
strength in institutional customer flow included mortgages, governments,
high-grade debt, structured credit products and derivatives.
18
Net revenues from the equity component of Capital Markets were $611 million in
the second quarter of 2001, down 14% from the second quarter of 2000. This
decrease was driven by reduced volatility levels versus the same quarter last
year and spread compression resulting from NASDAQ decimalization, partially
offset by stronger results in convertible securities.
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 twenty-five private equity partnerships.
Client Services' net revenues were $197 million in the second quarter of 2001
compared to $202 million in the second quarter of 2000. Although retail market
activity declined significantly during the quarter, the high-net-worth sector in
which the Company operates was less affected. For the second quarter, high-net-
worth sales declined only 5% compared to both the first quarter of 2001 and the
second quarter of 2000, driven primarily by a weaker equity syndicate calendar.
Partially offsetting this decline was strong fixed income activity, as investors
adjusted their portfolios to compensate for the volatile equity market
environment.
CLIENT SERVICES NET REVENUES
- ---------------------------------------------------------
(in millions) Three Months Ended
May 31 May 31
2001 2000
- --------------------------------- ----------- -----------
Private Client $ 183 $ 192
Private Equity 14 10
- --------------------------------- ----------- -----------
$ 197 $ 202
- --------------------------------- ----------- -----------
Non-Interest Expenses Non-interest expenses were $1,397 million for the second
quarter of 2001 compared to $1,197 million for the second quarter of 2000.
Compensation and benefits expense as a percentage of net revenues was 51% for
the quarter. The compensation accrual percentage is consistent with the
Company's fiscal 2000 level and reflects the Company's continued expansion of
its investment banking, equities and European franchises. Non-personnel expenses
were $365 million for the second quarter of 2001 compared to $285 million for
the second quarter of 2000. The increase in non-personnel expenses is consistent
with the 33% increase in headcount from the second quarter of 2000 and also
reflects the Company's continued investment in technology. Compared to the
fiscal first quarter of 2001, non-personnel expenses grew by only 4%, while
revenues increased by 7%.
Income Taxes The Company's income tax provision was $181 million for the second
quarter of 2001 versus $166 million for the second quarter of 2000. The
effective tax rate was 29.0% for the second quarter of 2001, slightly lower than
the second quarter of 2000 tax rate of 29.7%.
19
Results of Operations
For the Six Months Ended May 31, 2001 and May 31, 2000
The Company reported net income of $817 million for the six months ended May 31,
2001, a decrease of 11% from the six months ended May 31, 2000. Earnings per
common share (diluted) were $2.77 million for the six months of 2001 compared to
$3.23 for the comparable period in 2000. Earnings per share computations for
both periods include the recognition of the $50 million special dividend on the
Company's Redeemable Voting Preferred Stock.
These results reflect 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, all during an
extremely difficult market environment. Net revenues were $3,905 million for the
first six months of 2001 compared to $3,957 million for the first six months of
2000. Pre-tax operating margin was 30.7% in the first half of 2001 and return on
equity (excluding the impact of the $50 million in dividends on the Company's
Redeemable Voting Preferred Stock) was 22.2%. Revenues in each of the Company's
three segments remained relatively flat when compared to the first six months of
2000. Non-interest expenses increased only 4% in the first half of 2001 compared
to the first half of 2000, and the Company's compensation and benefits ratio
decreased to 51% of net revenues from 52% for the comparable period a year ago.
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.)
Six Months Ended May 31, 2001 and May 31, 2000
(in millions) Net Revenues
for the
Six Months Ended
----------------------------------
May 31 May 31
2001 2000
--------------- ---------------
Investment Banking $ 1,022 $ 1,064
Capital Markets 2,482 2,421
Client Services 401 472
--------------- ---------------
Total $ 3,905 $ 3,957
=============== ===============
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 and advising clients on merger and acquisition activities and other
services. Investment Banking's net revenues of $1,022 million decreased 4% in
the first six months of 2001 when compared to $1,064 million for the first six
months of 2000. The decrease in investment banking revenues was primarily due to
a decrease in equity underwriting revenues, partially offset by strong results
in debt underwriting.
20
Equity underwriting revenues were $263 million in the first half of 2001
compared to $488 million for the first half of 2000. Although the Company's
market share volume for the first half of 2001 was up over 25% from the first
six months of 2000, according to TFSD, results decreased as industry-wide equity
underwriting activities were down.
Debt underwriting revenues increased 67% to $448 million in the first six months
of 2001 from $269 million for the first six months of 2000. The increase was
primarily due to an increase in fixed income issuances combined with a 36%
increase in the Company's market volume compared to the first six months of
2000, according to TFSD.
Financial advisory revenues increased slightly in the first six months of 2001
to $311 million when compared to the first half of 2000. Contributing to these
results were record European merger and acquisition advisory fees, which
reflects the success of the Company's growth initiatives in this region.
INVESTMENT BANKING NET REVENUES
---------------------------------------------------------
(in millions) Six Months Ended
May 31 May 31
2001 2000
--------------------------------- ----------- -----------
Equity Underwriting $ 263 $ 488
Debt Underwriting 448 269
Merger and Acquisition Advisory 311 307
--------------------------------- ----------- -----------
$ 1,022 $ 1,064
--------------------------------- ----------- -----------
Capital Markets This segment's net revenues reflect institutional flow
activities and secondary trading and financing activities related to fixed
income and equity products. These products include a wide range of cash,
derivative, secured financing and structured instruments.
Capital Markets' net revenues were $2,482 million for the first six months of
2001, up slightly from the first six months of 2000, as convertible, municipal,
high grade credit and mortgage activity contributed to the increase.
Net revenues from the fixed income component of Capital Markets increased to
$1,186 million in the six months of 2001 from $846 million in the comparable
period last year. These record results were driven by strong institutional
customer flow activity as clients moved into interest-rate based products.
CAPITAL MARKET NET REVENUES
- ---------------------------------------------------------
(in millions) Six Months Ended
May 31 May 31
2001 2000
- --------------------------------- ----------- -----------
Equities $ 1,296 $ 1,575
Fixed Income 1,186 846
- --------------------------------- ----------- -----------
$ 2,482 $ 2,421
- --------------------------------- ----------- -----------
Net revenues from the equity component of Capital Markets decreased 18% to
$1,296 million in the first half of 2001 from $1,575 million in the comparable
2000 period. This decrease was driven by reduced volatility levels versus the
same period last year and spread compression resulting in the second quarter of
2001 from NASDAQ decimalization, partially offset by stronger results in
convertible securities.
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 in
its private equity partnerships.
21
Client Services' net revenues were $401 million in the first six months of 2001
compared to $472 million for the first six months of 2000. Excluding a special
performance-based asset management fee of $73 million in the year-ago period,
Client Services' results improved slightly as the Company's high-net-worth
retail sales force continued to produce strong results despite the weak equity
market environment.
CLIENT SERVICES NET REVENUES
---------------------------------------------------------
(in millions) Six Months Ended
May 31 May 31
2001 2000
--------------------------------- ----------- -----------
Private Client $ 375 $ 452
Private Equity 26 20
--------------------------------- ----------- -----------
$ 401 $ 472
--------------------------------- ----------- -----------
Non-Interest Expenses Non-interest expenses were $2,707 million for the first
six months of 2001 and $2,605 million for the comparable period of 2000.
Compensation and benefits expense as a percentage of net revenues decreased to
51%, which is consistent with the Company's fiscal 2000 level. Non-personnel
expenses were $715 million for the first six months of 2001 and $548 million for
the first six months of 2000, an increase of approximately 31% reflecting the
Company's strategic growth plan and the 33% increase in headcount.
Income Taxes The Company's income tax provision was $353 million for the six
months of 2001 compared to $405 million for the six months of 2000. The
effective tax rate was 29.5% for the first half of 2001, relatively consistent
with the Company's tax rate in the first half of 2000.
Liquidity, Funding and Capital Resources
Liquidity Risk Management Liquidity risk management is of critical importance to
the Company, providing a framework which seeks to ensure that the Company
maintains sufficient liquid financial resources to continually fund its balance
sheet and meet all of its funding obligations in all market environments. The
Company's liquidity framework has been structured so that even in a severe
liquidity event the balance sheet does not have to be reduced purely for
liquidity reasons (although we may choose to do so for risk reasons). This
allows the Company to continue to maintain its customer franchise and debt
ratings during a liquidity event.
The Company's liquidity management philosophy incorporates the following
principles:
o Liquidity providers are credit and market sensitive. Consequently, firms
must be in a state of constant liquidity readiness.
o Firms should not rely on asset sales to generate cash or believe that they
can increase unsecured borrowings or funding efficiencies in a liquidity
crisis.
o During a liquidity event, certain secured lenders may require higher
quality collateral. Firms must therefore not over-estimate the availability
of secured financing, and must fully integrate their secured and unsecured
funding strategies.
o A firm's legal entity structure may constrain liquidity. Regulatory
requirements can restrict the flow of funds between regulated and
unregulated group entities and this must be accounted for in liquidity
planning.
22
The Company's Funding Framework incorporates these principles and mitigates
liquidity risk whenever possible. This Framework comprises four major
components:
(1) The Cash Capital Model - which evaluates the amount of long-term
liabilities - with remaining maturities of over one year - that are
required to fund the Company.
(2) The Reliable Secured Funding Model - which forecasts the reliable sources
of overnight secured funding available to the Company.
(3) The Maximum Cumulative Outflow - which estimates the size of the added
liquidity requirement necessary to fund contingent cash outflows expected
from a stress environment.
(4) The Contingency Funding Plan - which represents a detailed action plan to
manage a stress liquidity event within the Company.
For further discussion of these principles refer to the Liquidity, Funding and
Capital Resources section of Management's Discussion and Analysis of Financial
Condition and Results of Operations incorporated by reference in the Form 10-K.
As a consequence of implementing its Funding Framework, the Company has
generally shifted to longer-term funding over the past several years. As a
result, the Company has reduced its reliance on short-term unsecured debt, which
represents only 4% of adjusted total assets and less than 15% of total debt.
Total Capital Total Capital (defined as long-term debt, preferred securities
subject to mandatory redemption and stockholders' equity) was $46.4 billion at
May 31, 2001 compared to $43.9 billion at November 30, 2000. The net increase in
Total Capital resulted from a net increase in long-term debt, the retention of
earnings and amortization associated with RSU awards. These were partially
offset by repurchases of common stock (to fund restricted stock units and option
awards) and the redemption of the Cumulative Convertible Voting Preferred Stock
for $150 million.
May 31 November 30
(in millions) 2001 2000
- ---------------------------------------- -------------------------------------- --------------------------------------
Long-term Debt
Senior Notes $ 34,797 $ 32,106
Subordinated Indebtedness 2,939 3,127
---------- ----------
37,736 35,233
Preferred Securities 710 860
Stockholders' Equity
Preferred Equity 700 700
Common Equity 7,279 7,081
---------- ----------
7,979 7,781
- ---------------------------------------- -------------------------------------- --------------------------------------
Total Capital $ 46,425 $ 43,874
- ---------------------------------------- -------------------------------------- --------------------------------------
As a result of the favorable interest rate and credit spread environment, the
Company issued $6.5 billion in long-term debt, which was $2.4 million in excess
of maturing debt, during the first six months of 2001.
23
Long-term debt increased to $37.7 billion at May 31, 2001 from $35.2 billion at
November 30, 2000, with a weighted-average maturity of 3.9 years at May 31, 2001
and 3.8 years at November 30, 2000.
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 $1 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 liquidity and tangible net worth. During the quarter, the
Company elected to reduce the committed amount under the Credit Agreement to $1
billion from $2 billion. The reduction reflects the Company's belief that its
liquidity position is stronger as a result of the implementation of the Funding
Framework, and the Company's desire to utilize its credit in forms that are more
suitable to its needs.
In July 2000, the Company entered into a $1 billion Committed Securities
Repurchase Facility (the "Facility") for LBIE, the Company's major operating
entity in Europe. The Facility provides secured multi-currency financing for a
broad range of collateral types. Under the terms of the Facility, the bank group
will agree to provide funding for up to one year on a secured basis. Any loans
outstanding on the commitment termination date may be extended for up to an
additional year at the option of LBIE. The Facility contains covenants which
require, among other things, that LBIE maintain specified levels of tangible net
worth.
There are no borrowings outstanding under either the Credit Agreement or the
Facility. The Company may use the Credit Agreement and the Facility for general
corporate purposes from time to time. The Company has maintained compliance with
the applicable covenants for both the Credit Agreement and the Facility at all
times.
Balance Sheet The Company's total assets increased to $235.9 billion at May 31,
2001 from $224.7 billion at November 30, 2000. 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
$152.9 billion at May 31, 2001 compared to $143.5 billion at November 30, 2000.
The Company believes adjusted total assets is a more effective measure of
evaluating balance sheet usage when comparing companies in the securities
industry. The increase in adjusted total assets reflects higher levels of
securities borrowed associated with increased customer flow activities within
the Capital Markets business.
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.
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 preferred securities subject to mandatory redemption.
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 was 17.6x,
18.4x and 16.6x as of May 31, 2001, February 28, 2001 and November 30, 2000,
respectively. Consistent with maintaining a single A credit rating, the Company
targets an adjusted leverage ratio of approximately 20.0x. The Company continued
to operate below this targeted level. Due to the nature of the Company's Capital
Markets sales and trading activities, the overall size of the Company's balance
sheet fluctuates from time to time, and at specific points in time may be higher
than the fiscal quarter ends or the quarterly average.
24
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.
On June 20, 2001, Fitch IBCA, Inc. upgraded Holdings long-term senior debt from
A to A+. Fitch also upgraded LBI's senior debt from A to A+ and its subordinated
debt from A- to A. As of May 31, 2001 the short- and long-term debt ratings of
Holdings and LBI were as follows:
Holdings LBI
----------------------------------- -----------------------------------
Short-term Long-term Short-term Long-term**
- ------------------------------------------- ---------------- ------------------ --- --------------- -------------------
Fitch IBCA, Inc. F-1 A+ F-1 A+/A
Moody's P-1 A2 P-1 A1*/A2
Standard & Poor's Corp. A-1 A A-1 A+*/A
Thomson BankWatch TBW-1 A TBW-1 A+/A
* Provisional ratings on shelf registration
** Senior/subordinated
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 for these securities
are recognized in the Company's Consolidated Statement of Income. Such
instruments at May 31, 2001 and November 30, 2000 included long positions with
an aggregate market value of approximately $3.6 billion and $3.5 billion,
respectively, and short positions with an aggregate market value of
approximately $886 million and $745 million, respectively. The Company mitigates
its aggregate and single-issuer net exposure through the use of derivatives,
sole-recourse securitization financing 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 twenty-five private equity partnerships, for
which the Company acts as general partner, as well as related direct
investments. At May 31, 2001, the Company's private equity related investments
were $747 million. The Company's policy is to carry its investments, including
the appreciation of its general 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).
25
For a discussion of the Company's use of derivative instruments and the risks
related thereto, see Note 4 to the Consolidated Financial Statements (Derivative
Financial Instruments) and the Off-Balance Sheet Financial Instruments and
Derivatives section of Management's Discussion and Analysis of Financial
Condition and Results of Operations incorporated by reference in the Form 10-K.
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, and the
Heads of Capital Markets and Investment Banking. 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.
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
26
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, 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-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.
27
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 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 for
virtually all of its trading activities. In general, value-at-risk measures the
potential loss of revenues at a given confidence level over a specified time
horizon. Value-at-risk over a one-day holding period measured at a 95%
confidence level implies that potential loss of daily trading revenue will be at
least as large as the value-at-risk amount on one out of every 20 trading days.
The Company's methodology estimates a reporting day value-at-risk using actual
daily trading revenues over the previous 250 trading days. This estimate is
measured as the loss, relative to the median daily trading revenue. The Company
also estimates an average value-at-risk measure over 250 rolling reporting days,
thus looking back a total 500 trading days.
The following table sets forth the daily value-at-risk for each component of
market risk and in total (in millions):
As of Three Months Ended May 2001
-------------------------------- --------------------------------------------
May 31, Nov. 30,
2001 2000 Average High Low
-------------- ------------- ----------- ------------ ------------
Interest rate risk $ 11.8 $ 12.6 $ 12.4 $ 13.8 $ 10.5
Equity price risk 15.9 15.1 14.2 16.8 10.7
Foreign exchange risk 1.7 1.5 1.8 2.2 1.5
Diversification benefit (6.7) (5.5) (5.6) (7.7) (2.3)
-------------- --- ------------- ----------- --- ------------ -- ------------
Total Company $ 22.7 $ 23.7 $ 22.8 $ 25.1 $ 20.4
-------------- --- ------------- ----------- --- ------------ -- ------------
Value-at-risk is one measurement of potential loss in trading revenues that may
result from adverse market movements over a specified period of time with a
selected likelihood of occurrence. As with all measures of value-at-risk, the
Company's estimate has substantial limitations due to its reliance on historical
performance, which is not necessarily a predictor of the future. Consequently,
this value-at-risk estimate is only one of a number of tools the Company
utilizes in its daily risk management activities.
28
Trading Net Revenues Distribution Substantially all of our inventory positions
are marked-to-market on a daily basis and changes are recorded in net revenues.
The following chart sets forth the frequency distribution for substantially all
of the Company's trading net revenues on a weekly basis for the three months
ended May 31, 2001:
[CHART OMITTED]
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.
New Accounting Developments
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities - a replacement
of FASB No. 125" ("SFAS 140"). SFAS 140 carries over the fundamental control
premise of SFAS No. 125, which requires an entity to recognize only assets it
controls and to derecognize assets only when control has been surrendered. SFAS
140 amends the control framework of SFAS 125 by revising the criteria to be used
for evaluating whether a financial asset is controlled and providing new
criteria necessary to meet the definition of a Qualifying Special Purpose Entity
("QSPE"). A QSPE is a limited-purpose vehicle often used for asset
securitizations.
SFAS 140 will also change the accounting for collateral. SFAS 140 will no longer
require entities to recognize controlled collateral as an asset on the balance
sheet. Rather, SFAS 140 will require entities to separately classify financial
assets owned and pledged. SFAS 140 also requires new disclosures for collateral
and retained interests in securitizations.
SFAS 140 has multiple effective dates. The accounting for new transfers of
financial assets began on March 31, 2001 and the collateral disclosure rules
began this quarter. The collateral accounting rules will be effective for the
Company's year-end financial statements. The adoption of SFAS 140 is not
expected to have a material impact to the Company's financial position or
results of operations.
29
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
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 a meritorious defense 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, 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 the consolidated financial position
or results of operations of the Company.
IPO Allocation Cases
Beginning in late March 2001 and continuing until the date of this report,
numerous purported class actions have been filed in the United States District
Court for the Southern District of New York on behalf of groups of investors
against numerous leading national and regional underwriters, as well as issuers
of initial public offerings ("IPOs") and the issuers' officers and/or directors.
Some of these actions name LBI as a defendant. The class of investors on whose
behalf the actions are purportedly brought is those individuals and entities who
purchased securities after an IPO made during the period of March 1997 through
December 2000. In certain cases, the class period may be narrower because it is
limited to investors in particular IPOs.
The actions all essentially allege that the underwriter defendants
conspired to require customers who wanted large allocations of IPO shares to pay
undisclosed, excessive commissions in the form of rebates of up to one-third of
their profits from the resale of the shares. The underwriter defendants also
allegedly required customers to agree to buy shares offered in the IPOs after
the IPOs were completed at prices higher than the IPO price as a condition to
receiving their requested IPO allocation and to make such purchases at specified
escalating price levels designed to increase stock prices in the secondary
market, in a practice referred to as "laddering a stock."
The actions assert claims based on federal securities law violations,
federal antitrust violations and/or state antitrust violations. In general, the
actions are either for federal securities law violations (in which case they
tend to name the underwriters of the IPO(s) at issue, along with the issuer and
its officers and/or directors) or federal antitrust violations (in which case
they tend to name only the underwriter defendants). However, certain actions
have been filed which combine those theories of recovery, and some other actions
have been filed which substitute state antitrust claims for federal antitrust
claims. In addition, one case has been brought as a purported derivative action
for the benefit of Holdings and its shareholders, based on the alleged improper
IPO allocation practices. (See the Kaufman case below.) The alleged damage to
the class is that investors paid more for securities than they otherwise would
have in the absence of the alleged conspiracy regarding IPO allocations. The
actions seek unspecified compensatory damages and injunctive relief.
30
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings (continured)
Fred Kaufman v. Roger S. Berlind, et al.
In June 2001 a shareholder of Holdings filed a derivative action in the
United States District Court for the Southern District of New York against
Holdings and Holdings' board of directors for the purported benefit of Holdings
and its shareholders. The action alleges that the board members breached their
fiduciary duties of loyalty and good faith and failed to exercise their duties
of due care and due diligence by failing to maintain systems to alert them to
the alleged improper IPO allocation practices challenged in the IPO Allocation
Cases (see above) and by failing to become informed of the alleged practices.
The action seeks unspecified compensatory damages based on the alleged damages
that Holdings may suffer if it is found liable in the pending IPO Allocation
Cases.
In Re Issuer Plaintiff Initial Public Offering Fee Antitrust Litigation
By order dated April 10, 2001, the United States District Court for the
Southern District of New York consolidated four actions pending before the court
brought by bankrupt issuers of IPO securities against more than 20 underwriter
defendants (including LBI): (1) CHS Electronics, Inc. v. Credit Suisse First
Boston Corp., et al. (reported in Holdings' 2000 Annual Report on Form 10-K);
(2) Equalnet Communications Corp. v. Goldman Sachs Group, Inc., et al. (reported
in Holdings' First Quarter 2001 Quarterly Report on Form 10-Q); (3) MDCM
Holdings, Inc. f/k/a Mortgage.Com, Inc. by Lewis B. Freeman, Assignee for the
Benefit of Creditors; and (4) Jeffrey A. Weinman, as Trustee of the Bankruptcy
Estate of Western Pacific Airlines v. Salomon Smith Barney Inc., et al.
(reported in Holdings' 2000 Annual Report on Form 10-K). On July 6, 2001, the
plaintiffs filed a consolidated class action complaint seeking unspecified
compensatory damages and injunctive relief for alleged violations of the
antitrust laws based on the theory that the defendant underwriters fixed and
maintained fees for underwriting certain IPO securities at super-competitive
levels.
Lehman Brothers Commercial Corporation and Lehman Brother Special Financing Inc.
v. Minmetals International Non-Ferrous Metals Trading Company (Reported in
Holdings' 2000 Annual Report on Form 10-K)
A trial date of October 29, 2001, has been set.
Mexpo, S.A. v. Lehman Brothers Inc., et al. (Reported in Holdings' 2000 Annual
Report on Form 10-K)
The parties settled the case on June 22, 2001.
31
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits:
The following exhibits are filed as part of this Quarterly Report, or
where indicated, were heretofore filed and are hereby incorporated by
reference:
3.1 Restated Certificate of Incorporation of the Registrant dated
May 27, 1994 (Incorporated by reference to Exhibit 3.1 to the
Registrant's Transition Report on Form 10-K for the eleven
months ended November 30, 1994)
3.2 Certificate of Designations with respect to the Registrant's
5.94% Cumulative Preferred Stock, Series C (Incorporated by
reference to Exhibit 4.1 to the Registrant's Current Report on
Form 8-K filed with the Commission on May 13, 1998)
3.3 Certificate of Designations with respect to the Registrant's
5.67% Cumulative Preferred Stock, Series D (Incorporated by
reference to Exhibit 4.2 to the Registrant's Current Report on
Form 8-K filed with the Commission on July 23, 1998)
3.4 Certificate of Designations with respect to the Registrant's
Fixed/Adjustable Rate Cumulative Preferred Stock, Series E
(Incorporated by reference to Exhibit 4.2 to the Registrant's
Current Report on Form 8-K filed with the Commission on March
30, 2000)
3.5 Certificate of Amendment of the Restated Certificate of
Incorporation of the Registrant, dated April 9, 2001
(Incorporated by reference to Exhibit 3.5 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended February
28, 2001)
3.6 By-Laws of the Registrant, amended as of March 26, 1997
(Incorporated by reference to Exhibit 3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended February
28, 1997)
11.1 Computation of Per Share Earnings (Omitted in accordance with
section (b)(11) of Item 601 of Regulation S-K. The calculation
of per share earnings is set forth in Part I, Item 1, in Note
9 to the Consolidated Financial Statements (Earnings Per
Common Share).)
12.1 Computation of Ratios of Earnings to Fixed Charges and to
Combined Fixed Charges and Preferred Stock Dividends
(Filed herewith)
32
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
PART II - OTHER INFORMATION
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the quarter for
which this Quarterly Report is filed:
1. Form 8-K dated May 22, 2001, Item 7.
2. Form 8-K dated May 2, 2001, Item 7.
3. Form 8-K dated April 26, 2001, Item 7.
4. Form 8-K dated April 26, 2001, Item 7.
5. Form 8-K dated March 21, 2001, Items 5 and 7.
Financial Statements:
Exhibit 99.2 Consolidated Statement of Income
(Three Months Ended February 28, 2001)
(Preliminary and Unaudited)
Exhibit 99.3 Segment Net Revenue Information
(Three Months Ended February 28, 2001)
(Preliminary and Unaudited)
Exhibit 99.4 Selected Statistical Information
(Preliminary and Unaudited)
6. Form 8-K dated March 13, 2001, Item 7.
33
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 16, 2001 By: /s/ David Goldfarb
------------------------------------------
Chief Financial Officer and
Senior Vice President
(principal financial and accounting officer)
34
EXHIBIT INDEX
Exhibit No. Exhibit
Exhibit 12.1 Computation of Ratios of Earnings to Fixed Charges
and to Combined Fixed Charges and Preferred Stock
Dividends
35