SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-9466
Lehman Brothers Holdings Inc.
(Exact Name of Registrant As Specified In Its Charter)
Delaware 13-3216325
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
3 World Financial Center
New York, New York 10285
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (212) 526-7000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ______
As of September 30, 1996, 100,031,038 shares of the Registrant's Common Stock,
par value $.10 per share, were outstanding.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED AUGUST 31, 1996
INDEX
Part I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements - (unaudited)
Consolidated Statement of Operations -
Three and Nine Months Ended August 31, 1996
and 1995 .................................................. 3
Consolidated Statement of Financial Condition -
August 31, 1996 and November 30, 1995 ....................... 5
Consolidated Statement of Cash Flows -
Nine Months Ended August 31, 1996
and 1995 .................................................. 7
Notes to Consolidated Financial Statements..................... 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....... 14
Part II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................... 29
Item 4. Submission of Matters to a Vote of Security-Holders............. 30
Item 6. Exhibits and Reports on Form 8-K ................................ 31
Signatures................................................................ 32
EXHIBIT INDEX .................................................... 33
Exhibits
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of OPERATIONS
(Unaudited)
(In millions, except per share data)
Three months ended
August 31, August 31,
1996 1995
-------------- ---------
Revenues
Principal transactions $ 303 $ 245
Investment banking 237 251
Commissions 77 116
Interest and dividends 2,964 2,830
Other 4 11
-------- -------
Total revenues 3,585 3,453
Interest expense 2,863 2,703
----- -----
Net revenues 722 750
------ -----
Non-interest expenses
Compensation and benefits 366 380
Brokerage, commissions and clearance fees 62 59
Communications 35 43
Occupancy and equipment 37 44
Professional services 38 39
Business development 23 27
Depreciation and amortization 22 26
Other 23 23
------ ------
Total non-interest expenses 606 641
----- -----
Income before taxes 116 109
Provision for income taxes 39 38
------ ------
Net income $ 77 $ 71
===== ======
Net income applicable to common stock $ 71 $ 60
===== ======
Average common and common equivalent
shares outstanding 117.2 116.2
===== =====
Earnings per common share $0.60 $0.52
===== =====
See notes to consolidated financial statements.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of OPERATIONS
(Unaudited)
(In millions, except per share data)
Nine months ended
August 31, August 31,
1996 1995
--------- -------
Revenues
Principal transactions $1,114 $ 959
Investment banking 671 540
Commissions 267 342
Interest and dividends 8,369 7,986
Other 27 36
-------- -------
Total revenues 10,448 9,863
Interest expense 8,072 7,675
------ -----
Net revenues 2,376 2,188
----- -----
Non-interest expenses
Compensation and benefits 1,205 1,111
Brokerage, commissions and clearance fees 176 183
Communications 114 137
Occupancy and equipment 114 134
Professional services 111 123
Business development 75 84
Depreciation and amortization 68 80
Other 71 67
------ -------
Total non-interest expenses 1,934 1,919
----- -----
Income before taxes 442 269
Provision for income taxes 153 95
------ -------
Net income $ 289 $ 174
===== =====
Net income applicable to common stock $ 265 $ 142
===== =====
Average common and common equivalent shares
outstanding 116.3 112.2
===== =====
Earnings per common share $2.28 $1.27
===== =====
See notes to consolidated financial statements.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(Unaudited)
(In millions)
ASSETS
August 31, November 30,
1996 1995
Cash and cash equivalents $1,509 $ 874
Cash and securities segregated and on deposit
for regulatory and other purposes 841 945
Securities and other financial instruments owned:
Governments and agencies 24,533 22,849
Corporate obligations and other contractual
commitments 9,777 11,415
Corporate stocks and options 6,356 7,143
Mortgages and mortgage-backed 8,375 6,847
Certificates of deposit and other money market
instruments 2,586 3,068
------------ ---------
51,627 51,322
----------- --------
Collateralized short-term agreements:
Securities purchased under agreements to resell 35,450 36,234
Securities borrowed 24,350 16,290
Receivables:
Brokers, dealers and clearing organizations 3,706 2,845
Customers 5,212 3,891
Others 1,539 1,434
Property, equipment and leasehold improvements
(net of accumulated depreciation and amortization
of $639 in 1996 and $585 in 1995) 473 495
Deferred expenses and other assets 785 793
Excess of cost over fair value of net assets
acquired (net of accumulated amortization
of $101 in 1996 and $95 in 1995) 174 180
---------- ----------
Total assets $125,666 $115,303
======== ========
See notes to consolidated financial statements.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Continued)
(Unaudited)
(In millions, except share data)
August 31, November 30,
1996 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper and short-term debt $ 7,130 $ 6,235
Securities and other financial instruments sold but not
yet purchased:
Governments and agencies 13,261 11,665
Corporate stocks and options 5,549 4,393
Corporate obligations and other contractual commitments 3,291 3,796
--------- -------
22,101 19,854
-------- ------
Collateralized short-term financings:
Securities sold under agreements to repurchase 57,415 59,035
Securities loaned 6,682 1,966
Payables:
Brokers, dealers and clearing organizations 1,726 2,513
Customers 9,686 6,311
Accrued liabilities and other payables 2,971 2,926
Long-term debt:
Senior notes 11,020 10,505
Subordinated indebtedness 3,194 2,260
--------- ---------
Total liabilities 121,925 111,605
------- -------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred Stock, $1 par value; 38,000,000
shares authorized:
5% Cumulative Convertible Voting, Series A,
13,000,000 shares authorized, issued and
outstanding; $39.10 liquidation preference per share 508 508
8.44% Cumulative Voting, 8,000,000 shares issued and
outstanding;
$25.00 liquidation preference per share 200
Redeemable Voting, 1,000 shares issued and outstanding;
$1.00 liquidation preference per share
Common Stock, $.10 par value; 300,000,000 shares
authorized;
shares issued: 106,354,965 in 1996 and 105,684,565
in 1995; shares outstanding: 100,027,645 in 1996 and
104,565,875 in 1995 11 11
Common Stock issuable 327 211
Additional paid-in capital 3,183 3,172
Foreign currency translation adjustment 8 9
Accumulated deficit (150) (397)
Common Stock in treasury at cost:6,327,320 shares in 1996
and 1,118,690 shares in 1995 (146) (16)
--------- ----------
Total stockholders' equity 3,741 3,698
-------- ----------
Total liabilities and stockholders' equity $125,666 $115,303
======== ========
See notes to consolidated financial statements.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In millions)
Nine months ended
August 31, August 31,
1996 1995
------ -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 289 $ 174
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 68 80
Provisions for losses and other reserves 32 28
Other adjustments 151 150
Net change in:
Cash and securities segregated 104 654
Receivables from brokers, dealers and clearing
organizations (861) 702
Receivables from customers (1,321) (1,380)
Securities purchased under agreements to resell 784 317
Securities borrowed (8,060) (7,561)
Securities and other financial instruments owned (305) (702)
Payables to brokers, dealers and clearing organizations (787) (383)
Payables to customers 3,375 5,196
Accrued liabilities and other payables 32 (25)
Securities sold under agreements to repurchase (1,620) (532)
Securities loaned 4,716 1,798
Securities and other financial instruments sold but
not yet purchased 2,247 3,414
Other operating assets and liabilities, net (108) 1,492
------ ------
Net cash (used in) provided by operating activities (1,264) $3,422
------- ------
See notes to consolidated financial statements.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Unaudited)
(In millions)
Nine months ended
August 31, August 31,
1996 1995
------ --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes $2,314 $4,301
Principal payments of senior notes (1,831) (2,885)
Proceeds from issuance of subordinated indebtedness 1,175 258
Principal payments of subordinated indebtedness (246) (214)
Net proceeds from (payments for) commercial paper and
short-term debt 909 (3,657)
Payment for repurchase of preferred stock (200)
Payments for treasury stock purchases (130)
Dividends paid (43) (49)
-------- --------
Net cash provided by (used in) financing activities 1,948 (2,246)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property,equipment and leasehold
improvements (49) (39)
--------- -------
Net cash used in investing activities (49) (39)
-------- -------
Net change in cash and cash equivalents 635 1,137
------- ------
Cash and cash equivalents, beginning of period 874 964
------- -------
Cash and cash equivalents, end of period $1,509 $2,101
====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)
Interest paid totaled $8,109 and $7,611 for the nine months ended
August 31, 1996 and 1995, respectively. Income taxes paid totaled $52 and $65
for the nine months ended August 31, 1996 and 1995, respectively.
See notes to consolidated financial statements.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
The consolidated financial statements include the accounts of Lehman
Brothers Holdings Inc. ("Holdings") and subsidiaries (collectively, the
"Company" or "Lehman Brothers"). Lehman Brothers is one of the leading global
investment banks serving institutional, corporate, government and high-net-
worth individual clients and customers. The Company's worldwide headquarters in
New York and regional headquarters in London and Tokyo are complemented by
offices in additional locations in North America, Europe, the Middle East, Latin
and South America and the Asia Pacific region. The Company is engaged primarily
in providing financial services. The principal U.S. subsidiary of Holdings is
Lehman Brothers Inc. ("LBI"), a registered broker-dealer. All material
intercompany accounts and transactions have been eliminated in consolidation.
The Company's financial statements have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission (the "SEC") with
respect to the Form 10-Q and reflect all normal recurring adjustments which are,
in the opinion of management, necessary for a fair presentation of the results
for the interim periods presented. Pursuant to such rules and regulations,
certain footnote disclosures which are normally required under generally
accepted accounting principles have been omitted. The Consolidated Statement of
Financial Condition at November 30, 1995 was derived from the audited financial
statements. It is recommended that these financial statements be read in
conjunction with the audited consolidated financial statements included in the
Company's Annual Report on Form 10-K for the twelve months ended November 30,
1995 (the "Form 10-K").
The nature of the Company's business is such that the results of any
interim period may vary significantly from quarter to quarter and may not be
indicative of the results to be expected for the fiscal year. Certain amounts
reflect reclassifications to conform to the current period's presentation.
2. Long-Term Debt:
During the nine months ended August 31, 1996, the Company issued $3,489
million of long-term debt (comprised of $2,314 million of senior notes and
$1,175 million of subordinated debt). Of the total issuances for the first nine
months of 1996, $1,761 million were U.S. dollar fixed rate, $922 million were
U.S. dollar floating rate and $806 million were foreign currency denominated.
The U.S. dollar fixed rate issuances included $200 million 8.30% Quarterly
Income Capital Securities ("Series A QUICS"), which were issued to fund the
repurchase of the $200 million 8.44% Cumulative Preferred Stock from American
Express. The remaining issuances were used to refinance current and prefund
expected maturities of long-term debt for the remainder of 1996 as well as to
increase total capital (stockholders' equity plus long-term debt).
The Series A QUICS, issued on February 15, 1996, mature in 2035 and are
subject to early redemption by the Company on or after March 31, 2001. The
Company retains the right to defer interest payments on the Series A QUICS on
one or more occasions for a period of up to twenty consecutive quarters.
Interest payments may not be deferred beyond the maturity of the Series A QUICS.
The Series A QUICS are subordinated to all senior and subordinated debt of the
Company.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
The Company's floating rate new issuances contain contractual interest
rates based primarily on London Interbank Offered Rates ("LIBOR") and Prime. All
of the Company's U.S. dollar fixed rate new issuances, including the Series A
QUICS, were effectively converted to floating rate obligations through the use
of interest rate swaps. In addition, the majority of the Company's foreign
currency denominated new issuances were effectively converted to U.S. dollar
obligations with floating interest rates based primarily on LIBOR through the
use of currency swaps.
The Company had approximately $2,077 million of long-term debt
mature during the nine months ended August 31, 1996.
3. Capital Requirements:
As a registered broker-dealer, LBI is subject to SEC Rule 15c3-1, the
Net Capital Rule, which requires LBI to maintain net capital of not less than
the greater of 2% of aggregate debit items arising from customer transactions,
as defined, or 4% of funds required to be segregated for customers' regulated
commodity accounts, as defined. At August 31, 1996, LBI's regulatory net
capital, as defined, of $1,708 million exceeded the minimum requirement by
$1,616 million.
Lehman Brothers International (Europe) ("LBIE"), Lehman Brothers Japan
Inc. ("LBJ") and other Holdings subsidiaries are subject to various securities,
commodities and banking regulations and capital adequacy requirements
promulgated by the regulatory and exchange authorities of the countries in which
they operate. At August 31, 1996, LBIE's and LBJ's combined regulatory capital,
as defined, exceeded the minimum requirement by approximately $379 million. At
August 31, 1996, other Holdings subsidiaries were in compliance with the
applicable local capital adequacy requirements. The Company's triple-A rated
derivatives subsidiary, Lehman Brothers Financial Products Inc., has established
certain capital and operating restrictions which are reviewed by various rating
agencies.
There are no restrictions on Holdings' present ability to pay dividends
on its common stock, other than Holdings' obligation first to make dividend
payments on its preferred stock and the governing provisions of the Delaware
General Corporation Law.
4. Derivative Financial Instruments:
In the normal course of business, the Company enters into derivative
transactions both in a trading capacity and as an end user. Acting in a trading
capacity, the Company enters into derivative transactions to satisfy the needs
of its clients and to manage the Company's own exposure to market and credit
risks resulting from its trading activities in cash instruments (collectively,
"Trading Related Derivative Activities"). For a further discussion of the
Company's derivative related activities, refer to "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Off-Balance Sheet
Financial Instruments and Derivatives" and Note 16 to the Consolidated Financial
Statements, included in the Form 10-K.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
Trading-Related Derivative Activities
The Company records its Trading-Related Derivative Activities on a
mark-to-market basis with realized and unrealized gains (losses) recognized in
principal transactions in the Consolidated Statement of Operations. The Company
records unrealized gains and losses on derivative contracts on a net basis in
the Consolidated Statement of Financial Condition for those transactions with
counterparties executed under a legally enforceable master netting agreement.
Listed in the following table is the fair value and average fair value of the
Company's Trading Related Derivative Activities (in millions):
Average Fair Value*
Fair Value* Nine Months Ended
August 31, 1996 August 31, 1996
--------------- ---------------
Assets Liabilities Assets Liabilities
- ---------------------------------------------------------------------------------------------------------------------------
Interest rate and currency swaps and options
(including caps, collars and floors) $3,589 $1,770 $3,324 $1,728
Foreign exchange forward contracts and options 782 1,102 942 1,385
Options on other fixed income securities,
mortgage-backed securities forward contracts
and options 333 284 244 227
Equity contracts (including equity swaps, warrants
and options) 607 793 661 661
Commodity contracts (including swaps, forwards,
and options) 563 560 549 458
-------------------------------------------------------
Total $5,874 $4,509 $5,720 $4,459
-----------------------------------------------------
Average Fair Value*
Fair Value* Twelve Months Ended
November 30, 1995 November 30, 1995
----------------- -----------------
Assets Liabilities Assets Liabilities
- ---------------------------------------------------------------------------------------------------------------------------
Interest rate and currency swaps and options
(including caps, collars and floors) $2,680 $2,260 $2,729 $2,102
Foreign exchange forward contracts and options 1,248 1,428 1,455 1,461
Options on other fixed income securities,
mortgage-backed securities forward contracts
and options 204 188 213 241
Equity contracts (including equity swaps, warrants
and options) 804 953 717 747
Commodity contracts (including swaps, forwards,
and options) 339 434 405 487
------------------------------------------------------
Total $5,275 $5,263 $5,519 $5,038
-----------------------------------------------------
* Amounts represent carrying value (exclusive of collateral) and do not include
receivables or payables related to exchange traded futures contracts.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
Assets included in the table above represent the Company's unrealized
gains, net of unrealized losses for which the Company has a master netting
agreement. Similarly, liabilities represent net amounts owed to counterparties.
Therefore, the fair value of assets related to derivative contracts at August
31, 1996 represents the Company's net receivable for derivative financial
instruments before consideration of collateral. Included within this amount was
$5,766 million and $108 million, respectively, related to OTC and
exchange-traded contracts.
With respect to OTC contracts, the Company views its net credit
exposure to be $4,005 million at August 31, 1996, representing the fair value of
the Company's OTC contracts in an unrealized gain position, after consideration
of collateral received on these contracts of $1,761 million. Presented below is
an analysis of the Company's net credit exposure for OTC contracts based upon
internal designations of counterparty credit quality.
Counterparty S&P/Moody's August 31, 1996
Risk Rating Equivalent Net Credit Exposure
- ------------ ------------------------- -------------------
1 AAA/Aaa 18%
2 AA-/Aa3 or higher 24%
3 A-/A3 or higher 38%
4 BBB-/Baa3 or higher 15%
5 BB-/Ba3 or higher 4%
6 B+/B1 or lower 1%
- --------------------------------------------------------------------------------
These designations are based on actual ratings made by external rating
agencies or by equivalent ratings established and utilized by the Company's
Corporate Credit Department.
The Company is also subject to credit risk related to its exchange
traded derivative contracts. Exchange traded contracts are transacted directly
on the exchange. To protect against the potential for a default, all exchange
clearing houses impose net capital requirements for their membership.
Additionally, the exchange clearing house requires counterparties to futures
contracts to post margin upon the origination of the contract and for any
changes in the market value of the contract on a daily basis (certain foreign
exchanges extend settlement to three days). Therefore, the potential for losses
from exchange-traded products is limited.
5. Other Commitments and Contingencies:
In the normal course of its business, the Company has been named a
defendant in a number of lawsuits and other legal proceedings. After considering
all relevant facts, available insurance coverage and the advice of outside
counsel, in the opinion of the Company such litigation will not, in the
aggregate, have a material adverse effect on the Company's consolidated
financial position or results of operations.
As a leading global investment bank, risk is an inherent part of all of
the Company's businesses and activities. The extent to which the Company
properly and effectively identifies, assesses, monitors and manages each of the
various types of risks involved in its trading (including derivatives),
brokerage, and investment banking activities is critical to the success and
profitability of the Company. The principal types of risks involved in the
Company's activities are market risk, credit or counterparty risk and
transaction risk. Management has developed a control infrastructure to monitor
and manage each type of risk on a global basis throughout the Company. For
further discussion of these matters, refer to Note 18 to the Consolidated
Financial Statements, in the Form 10-K.
6. Incentive Plans:
In June 1996, the Compensation and Benefits Committee of the Board of
Directors of Holdings (the "Compensation Committee") approved the 1996 Stock
Award Program (the "1996 Program"), pursuant to the Lehman Brothers Holdings
Inc. Employee Incentive Plan ("EIP"). Under the 1996 Program, eligible employees
are to receive, subject to vesting provisions and transfer restrictions,
approximately five million restricted stock units ("RSUs"). These RSUs will vest
80% on July 1, 1997 and 20% on July 1, 2001. A total of 20 million shares of
common stock may be subject to awards under the EIP. Through August 31, 1996,
approximately eleven million shares have been awarded, consisting of
approximately 7 million RSUs for both the 1996 Program and for new hires as part
of the Company's recruitment efforts, 1.4 million options granted in 1995 and
approximately 2.7 million options granted in 1996 to certain senior officers.
The Company controls the dilutive impact of these awards through open market
purchases.
In addition, members of the Corporate Management Committee ("CMC") and
certain senior officers are eligible to receive RSUs based on the achievement of
1996 performance goals, with approximately one million RSUs expected to be
awarded in total under the 1996 Management Ownership Plan (the "1996 Plan") and
the EIP. The 1996 Plan was approved by shareholders on April 10, 1996.
In the second quarter of 1996, the Company granted approximately 0.8
million options under the 1996 Plan to members of the CMC at an average market
price on the dates of grant of $24.06 (the "1996 Options"). The 1996 Options
become exercisable in four and one half years and expire five years after grant
date; exercisability is accelerated ratably in one-third increments at such time
as the closing price of the common stock meets, or exceeds, $28.00, $30.00 and
$32.00 for 30 consecutive trading days. If a minimum target price is not reached
and maintained for the specified period in the four and one half year period
following issuance, the award recipients may then exercise all of their options
thereafter. Also, in the second quarter, the Company granted approximately 2.7
million options under the EIP to certain senior officers (as previously
mentioned in the 1996 Program discussion above) at an average market price on
the dates of grant of $24.19, with provisions similar to the 1996 Options. No
compensation expense has been recognized for any of these stock options as all
have been issued at the market price of the common stock on the date of the
respective grant.
Also in the second quarter of 1996, the Company awarded performance
stock units ("PSUs") under the 1996 Plan to members of the CMC and under the EIP
to certain senior officers as part of a four-year long-term incentive award. The
number of PSUs which may be earned, if any, is dependent upon achievement of
certain performance levels within a two-year period. At the end of the
performance period, any PSUs earned will convert one-for-one to RSUs which then
vest at the end of the fourth year. The compensation cost for the estimated
number of RSUs that may eventually become payable in satisfaction of PSUs is
accrued over the combined performance and vesting period and added to common
stock issuable.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Business Environment
The Company's principal business activities, investment banking and
securities trading and sales, are by their nature subject to volatility,
primarily due to changes in interest and foreign exchange rates, global economic
and political trends and industry competition. As a result, revenues and
earnings may vary significantly from quarter to quarter and from year to year.
The favorable market environment experienced during the second half of
1995 continued into 1996. The U.S. bond market rallied, as expectations for
additional easing by the U.S. Federal Reserve Bank and the possibility of a
deficit reduction package positively impacted the industry as a whole.
Internationally, weakness in the major European economies produced a round of
interest rate cuts from a number of central banks in an effort to promote
stronger economic growth. These actions led to more positive market conditions
in Europe. The favorable worldwide trend in interest rates also supported strong
performance in global equity markets. All of these factors led to continued
strength in debt and equity underwriting volumes.
By mid February, 1996, investor concerns about stronger economic data,
raising the possibility of no further interest rate reductions by the U.S.
Federal Reserve Bank, caused a significant correction in the U.S. fixed income
market and a general increase in interest rates. Despite this change in interest
rates, the overall market environment in the second quarter remained reasonably
favorable. Investors were active in purchasing new issue products that offered a
spread to Treasuries, such as corporate, asset-backed and mortgage-backed bonds,
in order to achieve their performance benchmarks. The increase in investor
demand created a high level of customer volume in the U.S. debt market, while
strong customer demand and favorable spreads drove more issuers into the market,
resulting in an extremely high level of debt syndicate activity.
Late in the second quarter of 1996, the tone in the U.S. fixed income
market became decidedly more negative. Recent strength in the U.S. economy
created a more volatile market environment in terms of heightened inflationary
expectations and a general increase in interest rates. Investors reflected the
uncertainty of a possible Federal Reserve tightening by becoming less active in
general and more defensive. Fixed income underwriting continued at a reasonable
pace as issuers accelerated financing in anticipation of higher interest rates
later in the year. The equity market, meanwhile, continued to exhibit strength
as positive cash flows into mutual funds provided a strong underpinning for both
trading and syndicate activity. The second quarter realized record levels of
merger and acquisition activity, reflecting strategic purchases, restructurings,
spin-offs and growth in cross-border transactions.
Investor defensiveness continued into the third quarter of 1996,
particularly in the months of June and July. August experienced a more typical
seasonal slowdown in capital markets' activity. The U.S. market continued to
reflect concerns over higher inflation, tighter labor markets, possible wage
pressures and higher commodity prices. A series of indicators on employment,
price levels and growth in the economy provided mixed signals to the market
place, adding to the uncertainty with regard to the direction of interest rates.
Bond investors reacted to this volatility by becoming cautious and less active.
The equity markets were also impacted by the interest rate volatility, as the
stock market moved lower over concerns about weaker corporate earnings. Equity
trading volumes were lower as flows into mutual funds slowed; and the pace of
equity underwriting slowed as less liquidity in the marketplace caused issuers
to postpone transactions into the fourth quarter.
Early in the fourth quarter, market dynamics strengthened as concerns
over inflation and economic growth diminished. Customer activity in the bond
markets increased, and the enhanced liquidity encouraged higher underwriting
volumes. Similarly, in the U.S. equity markets, renewed strength in mutual fund
flows also produced higher customer trading activity, while improved valuations
prompted increased equity syndicate activity. In the major global markets,
prospects for lower interest rates to offset tighter fiscal policies and to
encourage stronger economic growth created a favorable market environment.
Note: Except for the historical information contained herein, the Business
Environment and Specific Business Activities and Transactions sections of
this Management's Discussion and Analysis of Financial Condition and
Results of Operations contain forward-looking statements that discuss the
risks and uncertainties involved in the Company's business.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
For the Three Months Ended August 31, 1996 and August 31, 1995
The Company reported net income of $77 million for the third quarter
ended August 31, 1996 representing an increase of 8% from net income of $71
million for the third quarter ended August 31, 1995. Earnings per common share
increased to $0.60 for the third quarter of 1996 from $0.52 for the third
quarter of 1995. The results for the quarter ended August 31, 1996 reflect the
continuing benefits of the Company's cost reduction program.
Net revenues decreased to $722 million for the third quarter of 1996
from $750 million for the third quarter of 1995 and $833 million for the second
quarter of 1996. The decrease in net revenues reflected reduced customer flow
activities in governments, NASDAQ and equity listed businesses partially offset
by more favorable results from fixed income derivatives and mortgages. The
decrease in investment banking revenues as compared to the third quarter of 1995
reflected a decline in merchant banking results partially offset by stronger
origination volumes and a higher level of advisory fees.
Compensation and benefits expense as a percentage of net revenues was
50.7% for both the third quarter of 1996 and 1995, reflecting the sixth
successive quarter of consistent compensation levels relative to net revenues.
Nonpersonnel expenses declined for the ninth consecutive quarter to $240 million
for the third quarter of 1996 from $261 million for the third quarter of 1995.
The reduction in nonpersonnel expenses led to an improvement in the Company's
pretax operating margin to 16.0% in the third quarter of 1996 from 14.5% for the
third quarter of 1995.
The Company, through its subsidiaries, is a market-maker in all major
equity and fixed income products in both the domestic and international markets.
As part of its market-making activities, the Company maintains inventory
positions of varying amounts across a broad range of financial instruments which
are marked-to-market on a daily basis and along with the Company's proprietary
trading positions, give rise to principal transactions revenues. The Company
utilizes various hedging strategies to minimize its exposure to significant
movements in interest and foreign exchange rates and the equity markets.
Net revenues from the Company's market-making and trading activities in
fixed income and equity products are recognized as either principal transactions
or net interest revenues depending upon the method of financing and/or hedging
related to specific inventory positions. The Company evaluates its trading
strategies on an overall profitability basis which includes both principal
transactions revenues and net interest. Therefore, changes in net interest
should not be viewed in isolation but should be viewed in conjunction with
revenues from principal transactions. Net interest revenues were $101 million
for the third quarter of 1996 compared to $127 million for the third quarter of
1995. This decrease was attributable to a change in the mix of the Company's
assets and reduced spreads on certain U.S. government matched book financing
transactions.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table of net revenues by business unit and the
accompanying discussion have been prepared in order to present the Company's net
revenues in a format that reflects the manner in which the Company manages its
businesses. For internal management purposes, the Company has been segregated
into five major business units: Fixed Income, Equity, Corporate Finance
Advisory, Merchant Banking and Asset Management. Each business unit represents a
grouping of financial activities and products with similar characteristics.
These business activities result in revenues that are recognized in multiple
revenue categories contained in the Company's Consolidated Statement of
Operations. Net revenues by business unit contain certain internal allocations,
including funding costs, which are centrally managed.
Three Months Ended August 31, 1996
Principal
Transactions and Investment
et Interest Commissions Banking Other Total
- --------------------------------------------------------------------------------
Fixed Income $388 $12 $ 72 $472
Equity 20 60 62 $1 143
Corporate Finance Advisory 62 62
Merchant Banking (5) 41 36
Asset Management 1 5 3 9
- --------------------------------------------------------------------------------
$404 $77 $237 $4 $722
- --------------------------------------------------------------------------------
Three Months Ended August 31, 1995
Principal
Transactions and Investment
Net Interest Commissions Banking Other Total
- --------------------------------------------------------------------------------
Fixed Income $271 $ 23 $ 55 $ 3 $352
Equity 102 86 71 1 260
Corporate Finance Advisory 2 53 55
Merchant Banking (5) 72 67
Asset Management 2 7 7 16
- --------------------------------------------------------------------------------
$372 $116 $251 $11 $750
- --------------------------------------------------------------------------------
Fixed Income. The Company's fixed income net revenues reflect customer
flow activities (both institutional and high-net-worth retail), secondary
trading, debt underwriting, syndicate and financing activities related to fixed
income products. Fixed income products include dollar- and non-dollar government
securities, mortgage- and asset-backed securities, money market products,
dollar- and non-dollar corporate debt securities, emerging market securities,
municipal securities, financing (global access to debt financing sources
including repurchase and reverse repurchase agreements), foreign exchange,
commodities and fixed income derivative products. Fixed income net revenues
increased 34% to $472 million for the third quarter of 1996 from $352 million
for the third quarter of 1995, and decreased 7% from $509 million in the second
quarter of 1996. The improvement in the third quarter results over the prior
year reflected the stronger syndicate calendar in 1996 and improved customer
flow and net trading results (principal transactions and net interest) from a
number of fixed income products including fixed income derivatives, mortgages,
emerging markets, high yield, firm financing and municipals. The decrease in
fixed income net revenues as compared to the trailing quarter reflected a
slowdown in customer flow activities due to the uncertainty surrounding a
potential increase in U.S. interest rates. Investment banking revenues, as a
component of fixed income revenues, increased to $72 million for the third
quarter of 1996 from $55 million for the third quarter of 1995 due to a
strengthening in origination volumes and an improved mix of underwriting
revenues.
Equity. Equity net revenues reflect customer flow activities (both
institutional and high-net-worth retail), secondary trading, equity
underwriting, equity finance, equity derivatives and arbitrage activities. The
Company's equity net revenues decreased 45% to $143 million for the third
quarter of 1996 from $260 million for the third quarter of 1995, and decreased
42% from the $245 million for the second quarter of 1996. This decrease was
caused by reduced customer flow activities and lower equity underwriting due to
concerns about earnings and interest rates. Declining valuations and less
liquidity in the marketplace prompted many issuers to postpone transactions that
had been planned for the third quarter.
Corporate Finance Advisory. Corporate finance advisory net revenues,
classified in the Consolidated Statement of Operations as a component of
investment banking revenues, result primarily from fees earned by the Company in
its role as strategic advisor to its clients. This role primarily consists of
advising clients on mergers and acquisitions, divestitures, leveraged buyouts,
financial restructurings, and a variety of cross-border transactions. Net
revenues from corporate finance advisory increased to $62 million for the third
quarter of 1996 reflecting a 13% increase from the $55 million recognized in the
third quarter of 1995. This increase reflected continued strength in the merger
and acquisition market environment.
Merchant Banking. The Company is the general partner for six merchant
banking partnerships, including three institutional funds and three employee
investment vehicles. In December 1995, the Company established the third of its
employee investment vehicles, Capital Partners III. Current merchant banking
investments held by the partnerships include both publicly traded and privately
held companies diversified on a geographic and industry basis. At August 31,
1996 the Company's investment in such merchant banking partnerships for which
the Company acts as a general partner, was $300 million. At August 31, 1996 the
Company had commitments to fund up to $200 million in Capital Partners III over
the commitment period ending June 30, 2000. There are no funding commitments to
the remaining five partnerships.
Merchant banking net revenues primarily represent the Company's
proportionate share of net realized and net unrealized gains and losses from the
sale and revaluation of investments held by the partnerships. Such amounts are
classified in the Consolidated Statement of Operations as a component of
investment banking revenues. Merchant banking net revenues also reflect the net
interest expense relating to the financing of the Company's investment in the
partnerships. Merchant banking net revenues of $36 million for the third quarter
of 1996, decreased 46% from the $67 million recognized in the third quarter of
1995, reflecting a reduction in the net gains recognized on the publicly traded
investments held by the partnerships.
Asset Management. Revenues from asset management activities decreased
to $9 million for the third quarter of 1996 from $16 million for the third
quarter of 1995, primarily due to the sale of the Company's offshore mutual fund
advisory business in February 1996 to Legg Mason. During the third quarter, the
Company agreed to sell its family of domestic money market funds to Federated
Investors. Historically, Asset Management revenues primarily consist of fees
from the management of various funds, commissions from the sale of funds to
customers and fees from the management of certain accounts for institutions and
high-net-worth individuals.
Non-Interest Expenses. Non-interest expenses were $606 million for the
third quarter of 1996 and $641 million for the third quarter of 1995.
Compensation and benefits expense as a percentage of net revenues remained
unchanged from the prior year quarter at 50.7%. Nonpersonnel expenses declined
for the ninth consecutive quarter to $240 million for the third quarter of 1996
from $261 million for the third quarter of 1995 and $242 million for the second
quarter of 1996, reflecting the Company's commitment to reducing costs.
The $300 million cost reduction program originally announced at
year-end 1994 was completed by year-end 1995. As a result, the Company's expense
base has been permanently lowered. The Company continued its focus on reducing
nonpersonnel costs during 1996, achieving additional annualized cost savings of
$56 million as of the third quarter of 1996 relative to the fourth quarter 1995
run rate. The Company's goal is to achieve total annualized nonpersonnel cost
savings in excess of $50 million by the end of 1996 relative to the fourth
quarter 1995 run rate.
In addition to the cost reduction efforts described above, the Company
continually reviews its business lines and activities in terms of profitability
and strategic fit. These reviews could result in the resizing or exiting of
certain business lines and activities, which could lead to the re-deployment or
reduction of Company resources.
Income Taxes. The Company's income tax provision was $39 million for
the third quarter of 1996 as compared to $38 million for the third quarter of
1995. The effective tax rate was 34% for the third quarter of 1996 as compared
to 35% for the third quarter of 1995. The lower rate in 1996 is primarily
attributable to continued benefits from the restructuring of certain legal
entities in 1995, partially offset by an increase in state and local taxes.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
For the Nine Months Ended August 31, 1996 and August 31, 1995
The Company reported net income of $289 million for the nine months
ended August 31, 1996 representing an increase of 66% from net income of $174
million for the nine months ended August 31, 1995. Earnings per common share
increased to $2.28 for the nine months of 1996 from $1.27 for the comparable
1995 period. The improved results for 1996 reflect stronger earnings and
enhanced margins, amid a period of generally improved market conditions.
Net revenues increased to $2,376 million for the nine months of 1996
from $2,188 million for the nine months of 1995. The increase in net revenues
reflected strengthening in customer flow and trading activities in a number of
fixed income and equity product areas and improved investment banking results.
The increase in revenues from investment banking in 1996 reflected a significant
strengthening in underwriting volumes and improved corporate finance advisory
revenues partially offset by reduced merchant banking revenues.
Compensation and benefits expense as a percentage of net revenues was
50.7% and 50.8% for the nine months ended August 31, 1996 and 1995,
respectively. Nonpersonnel expenses declined to $729 million for the nine months
ended August 31, 1996 from $808 million for the comparable 1995 period. The
increase in net revenues and the corresponding reduction in nonpersonnel
expenses led to an improvement in the Company's pretax operating margin to 18.6%
for the nine months of 1996 from 12.3% for the nine months of 1995.
Net interest revenues were $297 million for the nine months of 1996
compared to $311 million for the nine months of 1995. Changes in net interest
revenue should not be viewed in isolation, as the results of the Company's
trading activities can fluctuate between either principal transactions or net
interest revenues depending upon the method of financing and/or hedging related
to specific inventory positions. The decrease in net interest revenues is due to
a number of factors including reduced spreads on certain U.S. government matched
book financing transactions and increased interest expense resulting from the
issuance of the Series A QUICS (proceeds used to repurchase the Company's
Cumulative Preferred Stock), partially offset by a slight increase in total
interest earning assets for the period.
The following table of net revenues by business unit and the
accompanying discussion have been prepared in order to present the Company's net
revenues in a format that reflects the manner in which the Company manages its
businesses. Net revenues by business unit contain certain internal allocations,
including funding costs, which are centrally managed.
Nine Months Ended August 31, 1996
Principal
Transactions and Investment
Net Interest Commissions Banking Other Total
- --------------------------------------------------------------------------------
Fixed Income $1,244 $ 45 $218 $ 9 $1,516
Equity 181 206 187 5 579
Corporate Finance Advisory 169 169
Merchant Banking (16) 97 81
Asset Management 2 16 13 31
- --------------------------------------------------------------------------------
$1,411 $267 $671 $27 $2,376
- --------------------------------------------------------------------------------
Nine Months Ended August 31, 1995
Principal
Transactions and Investment
Net Interest Commissions Banking Other Total
- --------------------------------------------------------------------------------
Fixed Income $1,049 $73 $124 $14 $1,260
Equity 238 248 117 3 606
Corporate Finance Advisory 3 145 148
Merchant Banking (20) 154 134
Asset Management 21 19 40
- --------------------------------------------------------------------------------
$1,270 $342 $540 $36 $2,188
- --------------------------------------------------------------------------------
Fixed Income. Fixed income net revenues increased 20% to $1,516 million
for the nine months ended August 31, 1996 from $1,260 million in the prior year
period, reflecting the general strengthening of the business environment in
1996. Fixed income revenues for 1996 improved versus 1995 primarily as a result
of increased customer trading volumes reflecting a strengthening in the U.S.
economy with a reduced federal deficit and relatively low levels of inflation.
The improved market conditions resulted in a significant increase in investment
banking results and greater contributions from customer flow and trading
activities in a number of fixed income products including mortgages, emerging
markets, fixed income derivatives and firm financing. Investment banking
revenues, as a component of fixed income revenues, increased 76% to $218 million
for the nine months ended August 31, 1996 from $124 million for the nine months
ended August 31, 1995 due to a strengthening in origination volumes and an
improved mix of underwriting revenues.
Equity. The Company's equity net revenues decreased 4% to $579 million
for the nine months ended August 31, 1996 from $606 million for the nine months
ended August 31, 1995. Equity revenues decreased in 1996 as significantly
improved underwriting results were more than offset by reduced profitability
from the Company's equity customer flow activities. The improved underwriting
volumes reflected the favorable economic environment in 1996 with generally
increased trading volumes on listed exchanges and record flows of capital into
equity mutual funds. For the nine months ended August 31, 1996, the Company also
recognized reduced revenues from its equity arbitrage and equity financing
businesses as compared to the prior year period, which were partially offset by
improved results from equity derivatives.
Corporate Finance Advisory. The net revenues for corporate finance
advisory were $169 million for the nine months ended August 31, 1996 reflecting
a 14% increase from the $148 million recognized in the nine months ended August
31, 1995. The environment for merger and acquisition activity during 1996 was
strong as a result of heightened industry and cross-border consolidation.
Merchant Banking. Merchant banking net revenues of $81 million for the
nine months ended August 31, 1996, decreased 40% from the $134 million
recognized in the nine months ended August 31, 1995, reflecting a reduction in
the net gains recognized on the publicly traded investments held by the
partnerships.
Asset Management. Revenues from asset management activities decreased
to $31 million for the nine months ended August 31, 1996 from $40 million for
the nine months ended August 31, 1995, primarily due to the sale of the
Company's offshore mutual fund advisory business in February 1996 to Legg Mason.
Non-Interest Expenses. Non-interest expenses were $1,934 million for
the nine months ended August 31, 1996 and $1,919 million for the nine months
ended August 31, 1995. Compensation and benefits expense increased to $1,205
million in 1996 from $1,111 million in 1995. Compensation and benefits expense
as a percentage of net revenues was 50.7% for nine months ended August 31, 1996
compared to 50.8% for the nine months ended August 31, 1995. Nonpersonnel
expenses declined to $729 million for the nine months ended August 31, 1996 from
$808 million for the nine months ended August 31, 1995, reflecting the effects
of the Company's cost reduction efforts.
Income Taxes. The Company's income tax provision was $153 million for
the nine months ended August 31, 1996 as compared to $95 million for the nine
months ended August 31, 1995. The effective tax rate was 35% for 1996 and 1995.
The 1996 effective tax rate, although the same as 1995, reflects continued
benefits from the restructuring of certain legal entities in 1995, partially
offset by an increase in state taxes.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company's total assets increased to $125.7 billion at August 31, 1996 from
$115.3 billion at November 30, 1995. The increase in total assets is primarily
attributable to an increase in fixed income and equity financing activities.
The Company's balance sheet is highly liquid and consists primarily of
cash and cash equivalents, securities and other financial instruments owned
which are marked-to-market daily and collateralized short-term financing
agreements. As the Company's primary activities are based on customer flow
transactions, the Company experiences a rapid asset turnover rate. In addition,
the highly liquid nature of these assets provides the Company with flexibility
in financing and managing its business. The overall size of the Company's total
assets and liabilities fluctuates from time to time, and at specific points in
time (such as calendar quarter ends) may be higher than fiscal quarter ends.
Balance sheet leverage ratios are one methodology to evaluate the
financial risk inherent in the balance sheet. The Company evaluates this risk by
monitoring its adjusted leverage, defined as total assets less the lower of
securities purchased under agreements to resell or securities sold under
agreements to repurchase, which represent short-term collateralized transactions
with high quality assets, divided by stockholders' equity. At August 31, 1996,
and November 30, 1995, the Company's adjusted leverage ratios were 24.1x and
21.4x, respectively, increasing primarily due to an increased level of adjusted
assets; however, the ratio continues to be in line with the period end leverage
ratios of the Company's peer group of competitor firms.
Funding and Capital Policies
The Company's Finance Committee, which includes senior officers from
key areas of the Company, is responsible for establishing and managing the
capital funding and liquidity policies of the Company. This includes
recommendations for balance sheet size as well as the allocation of balance
sheet to product areas as determined by internal profitability models including
cost of capital and return on equity targets. In addition, in coordination with
the Regional Asset and Liability Committees, the Finance Committee works to
ensure coordination of global funding efforts. The Regional Asset and Liability
Committees are aligned with the Company's geographic funding centers and are
responsible for implementing funding strategies consistent with the direction
set by the Finance Committee and to monitor and manage liquidity for each
region. The primary goal of the Company's funding principles as set by the
Finance Committee are to provide sufficient liquidity and availability of
funding sources across a wide range of all market environments.
As a policy, the Company attempts to maintain sufficient capital and
funding to finance itself on a fully secured basis. The Company attempts to meet
its funding requirements through a combination of collateralized short-term
financings and short-term secured debt and Total Capital, (long-term debt plus
stockholders' equity). In conjunction with this policy, the Company's overall
liquidity objectives include maintaining a combination of excess unencumbered
securities, unutilized bank lines and capital which would be available to fund
less liquid assets and meet current maturities of short- and long-term unsecured
borrowings.
The Company's liquidity contingency plans are continually reviewed and
updated as the Company's asset/liability mix and liquidity requirements change.
Additionally, the Company periodically tests its secured and unsecured credit
facilities to ensure availability and operational readiness. The Company's
liquidity and Total Capital policies are designed to ensure that the Company can
meet its funding needs over a wide range of economic, credit and market
environments.
Short-Term Funding
Each of the Company's businesses is required to fund its products
primarily through global collateralized financings. There are two principal
business areas which are responsible for these efforts, Lehman Brothers' Fixed
Income Financing ("Financing") and Equity Finance. Financing works in
conjunction with the institutional fixed income sales and trading professionals
to provide financing to customers and the Company through the repurchase
markets. Equity Finance provides a similar function in the equity markets
typically through securities loaned/securities borrowed transactions. The
ability of the Company to leverage its global market expertise and distribution
capabilities are key to a successful financing effort. The amount of the
Company's collateralized borrowing activities will vary reflecting changes in
the mix and overall levels of securities and other financial instruments owned
and global market conditions. However, at all times, the majority of the
Company's assets are funded with collateralized borrowing sources.
The Company's treasury area works closely with Financing and Equity
Finance to develop funding plans to support the business areas, as well as to
execute daily funding activities. On a daily basis, treasury is responsible for
meeting any funding needs not met through Financing and Equity Finance. Treasury
funding is managed globally through regional centers which have access to the
capital markets though the issuance of commercial paper, as well as, access to
bank credit lines and other short- and long-term debt instruments.
At August 31, 1996 and November 30, 1995, $86 billion and $81 billion,
respectively, of the Company's total balance sheet was financed using
collateralized borrowing sources. The remainder of the financing for the balance
sheet was comprised of commercial paper and short-term debt, payables and Total
Capital. As of August 31, 1996 and November 30, 1995, commercial paper and
short-term debt were $7.1 billion and $6.2 billion, respectively. Of these
amounts, commercial paper outstanding at August 31, 1996 was $2.6 billion with
an average maturity of 75 days, compared to $1.4 billion with an average
maturity of 78 days at November 30, 1995.
At August 31, 1996, Holdings maintained a Revolving Credit Agreement
with a group of banks. Under the terms of the credit agreement, the banks have
committed to provide up to $2 billion. The credit agreement contains restrictive
covenants which require, among other things that the Company maintain specified
levels of liquidity, consolidated capital and tangible net worth, as defined. At
August 31, there were no borrowings outstanding under this facility and the
Company was in compliance under all the covenant requirements of the agreement.
In addition, the Company maintained a $1 billion Secured Revolving
Credit Facility (the "Facility") for Lehman Brothers International (Europe)
("LBIE"), the Company's major operating entity in Europe. Under the terms of
this committed facility, the bank group has committed to provide up to $1
billion on a secured basis with a variety of financial instruments as
collateral. The bank group has further committed to provide loans under the
Facility for up to 6 months beyond the Facility maturity date. The loans
provided by the bank group are available in several currencies including U.S.
Dollar, British pound sterling, Deutsche mark, ECU, French franc, and Italian
lira, as well as many other currencies as required. There were no borrowings
outstanding under this Facility as of August 31, 1996. However, the Company
anticipates utilizing this Facility for general corporate purposes from time to
time.
In addition, the Company maintains uncommitted lines of credit with a
broad range of banks and financial institutions from which it draws funds in a
variety of currencies. Uncommitted lines consist of facilities that the Company
has been advised are available but for which no contractual lending obligation
exists.
Total Capital
Long-term assets are financed with Total Capital. The Company maintains
Total Capital in excess of its long-term assets to provide additional liquidity,
which the Company uses to meet its short-term funding requirements and to reduce
its reliance on commercial paper and short-term debt.
At August 31, 1996 and November 30, 1995, Total Capital consisted of the
following:
August 31, November 30,
Long-term debt: 1996 1995
----------- ----------
Senior notes $11,020 $10,505
Subordinated indebtedness 3,194 2,260
------- -------
14,214 12,765
------ ------
Stockholders' equity:
Preferred equity 508 708
Common equity 3,233 2,990
------- -------
3,741 3,698
------- -------
Total Capital $17,955 $16,463
======= =======
During the nine months ended August 31, 1996, the Company issued $3,489
million in long term-debt, which was $1,412 million in excess of its maturing
debt. As part of these issuances, the Company issued $200 million of Quarterly
Income Capital Securities ("Series A QUICS"). The Series A QUICS are
subordinated to all senior and subordinated debt of the Company. The Company
repurchased the $200 million 8.44% Cumulative Preferred Stock owned by American
Express ("Cumulative Preferred Stock") with the proceeds from the Series A
QUICS. The repurchase of the preferred stock included a premium of $2 million
over the par value which is included in preferred dividends in determining net
income applicable to common stock.
Excluding the Series A QUICS, these issuances were used to refinance
current and prefund expected maturities of long-term debt in 1996 as well as to
increase Total Capital. Additionally, these issuances were consistent with the
Company's intent to increase Total Capital and issue long-term debt when
opportunities in the market arise.
At October 10, 1996, the Company had approximately $4.9 billion
available for issuance of debt securities under various shelf registrations and
debt programs.
Preferred stockholders' equity decreased to $508 million at August 31,
1996 from $708 million at November 30, 1995 due to the repurchase of the
Cumulative Preferred Stock. Common stockholders' equity increased to $3,233
million at August 31, 1996 from $2,990 million at November 30, 1995 due to an
increase in common stock issuable resulting from the granting of restricted
stock units effective July 1, 1996 and the retention of earnings partially
offset by the repurchase of approximately 5.2 million shares of treasury stock
(approximately $130 million) and the payment of dividends. The repurchase of
these shares, as well as any additional share repurchases in 1996, will be
allocated to fund certain stock awards made under the Company's incentive plans.
Dependence on Credit Ratings
The Company relies on external sources to finance a significant portion
of its day-to-day operations. Access to global capital markets for short-term
financing, such as commercial paper and short-term debt, senior notes and
subordinated indebtedness are dependent on the Company's short- and long-term
debt ratings. The current short- and long-term senior debt ratings of Holdings
and the current short- and long-term senior and subordinated ratings of the
Company's principal subsidiary, Lehman Brothers Inc. ("LBI") are as follows:
Holdings LBI
Short-term Long-term Short-term Long-term**
- --------------------------------------------------------------------------------
Duff & Phelps Credit Rating Co. D-1 A D-1 A/A-
Fitch Investors Service Inc. F-1 A F-1 A/A-
IBCA A1 A- A1 A/A-
Moody's P2 Baa1 P2 A3*/Baa1
S&P+ A-1 A A-1 A+*/A
Thomson BankWatch TBW-1 A- TBW-1 A/A-
- --------------------------------------------------------------------------------
* Provisional ratings on shelf registration
** Senior/subordinated
+ Long term ratings outlook revised to negative on September 21, 1994
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Specific Business Activities and Transactions
The following sections include information on specific business
activities of the Company which affect overall liquidity and capital resources:
High Yield Securities. The Company underwrites, trades, invests and
makes markets in high yield corporate debt securities. The Company also
syndicates, trades and invests in loans to companies rated below investment
grade. For purposes of this discussion, high yield debt securities are defined
as securities or loans to companies rated as BB+ or lower, or equivalent ratings
by recognized credit rating agencies, as well as non-rated securities or loans
which, in the opinion of management, are non-investment grade. Non-investment
grade securities generally involve greater risks than investment grade
securities due to the issuer's creditworthiness and the liquidity of the market
for such securities. In addition, these issuers have higher levels of
indebtedness, resulting in an increased sensitivity to adverse economic
conditions. The Company recognizes these risks and aims to reduce market and
credit risk through the diversification of its products and counterparties. High
yield debt securities are carried at market value and unrealized gains or losses
for these securities are reflected in the Company's consolidated statement of
operations. The Company's portfolio of such securities at August 31, 1996 and
November 30, 1995 included long positions with an aggregate market value of
approximately $1.1 billion and $1.2 billion, respectively, and short positions
with an aggregate market value of approximately $164 million and $172 million,
respectively. The portfolio may from time to time contain concentrated holdings
of selected issues. The Company's largest high yield position was $65 million
and $73 million at August 31, 1996 and November 30, 1995, respectively.
Westinghouse. In May 1993, the Company and Westinghouse Electric
Corporation ("Westinghouse") entered into a partnership to facilitate the
disposition of Westinghouse's commercial real estate portfolio, valued at
approximately $1.1 billion, to be accomplished substantially through
securitizations, asset sales and mortgage remittances. In 1995, the Company
purchased the partnership interest owned by Westinghouse and sold an additional
interest to an affiliate of Lennar Inc., ("Lennar"), a third party mortgage
servicer. Currently, the Company and Lennar hold 75% and 25% of the partnership,
respectively. Following the increase in ownership percentage, the partnership
has been consolidated in the Company's Statement of Financial Position. The
Company's net investment in the partnership at August 31, 1996 is $57 million.
The partnership expects to substantially liquidate the remaining real estate by
the end of 1996. The Company's original investment in the partnership was
approximately $136 million. The Company also advanced approximately $750 million
of financing to the partnership in 1993, which has subsequently been repaid in
its entirety from proceeds related to the disposition of the real estate assets.
Non-Core Activities and Investments. In March 1990, the Company
discontinued the origination of limited partnership syndications (the assets of
which are primarily real estate) and investments in real estate. Currently, the
Company acts as a general partner for approximately $4 billion of partnership
investment capital and manages the remaining real estate investment portfolio.
At August 31, 1996, the Company had $17 million of investments in these real
estate activities, as well as $61 million of commitments and contingent
liabilities under guarantees and credit enhancements, both net of applicable
reserves. In certain circumstances, the Company has elected to provide financial
and other support and assistance to such investments to maintain investment
values. There is no contractual requirement that the Company continue to provide
this support.
The Company also has equity, partnership and debt investments made in
previous years that are unrelated to its
ongoing businesses. These investments are awaiting disposition or the occurrence
of certain events which will ultimately lead to their liquidation. The Company
carries these equity, partnership and debt investments at their estimated net
realizable value, which approximates $80 million at August 31, 1996.
Non-core activities and investments have declined 33% since November
30, 1995. It is management's intention to prudently liquidate noncore assets
when possible.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings
Lehman Brothers is involved in a number of judicial, regulatory and
arbitration proceedings concerning matters arising in connection with the
conduct of its business. Such proceedings include actions brought against LBI
and others with respect to transactions in which LBI acted as an underwriter or
financial advisor, actions arising out of LBI's activities as a broker or dealer
in securities and commodities and actions brought on behalf of various classes
of claimants against many securities and commodities firms of which LBI is one.
Although there can be no assurance as to the ultimate outcome, Lehman
Brothers has denied, or believes it has meritorious defenses and will deny,
liability in all significant cases pending against it including the matters
described below, and intends to defend vigorously each such case. Although there
can be no assurance as to the ultimate outcome, based on information currently
available and established reserves, the Company believes that the eventual
outcome of the actions against it, including the matters described below, will
not, in the aggregate, have a material adverse effect on its business or
consolidated financial condition.
Actions Relating to First Capital Holdings Inc. (Reported in Holdings' Annual
Report on Form 10-K and First and Second Quarter Reports on Form 10-Q)
FCH Shareholder and Agent Actions. The parties to this action have
agreed to a settlement in principle, subject to documentation and court
approval.
American Express Shareholder Action and American Express Derivative
Action. On July 29 and August 5, 1996, the Court entered final judgments and
orders approving the settlements and dismissing the American Express Derivative
Action and the American Express Shareholder Action, respectively.
Warren D. Chisum, et al. v. Lehman Brothers Inc. et al.(Reported in Holdings'
First Quarter Report on Form 10-Q)
On July 11, 1996, the Court issued a memorandum opinion and order
dismissing plaintiffs' RICO claim.
Lehman Brothers Commercial Corporation and Lehman Brothers Special Financing
Inc. v. China International United Petroleum and Chemical Co., Ltd.
(Reported in Holdings' Annual Report on Form 10-K)
In September, 1996, the parties settled this action. The case has been
dismissed.
Actions relating to National Association of Securities Dealers
Automated Quotations System "(NASDAQ") Market Maker Antitrust and Securities
Litigation (Reported in Holdings' Annual Report on Form 10-K )
LBI entered into a Stipulation and Order resolving a civil complaint
filed by the U.S. Department of Justice alleging that LBI and 23 other Nasdaq
market makers violated Section 1 of the Sherman Act in connection with certain
market making practices. In entering into the Stipulation and Order the parties
agreed that the defendants would not engage in certain types of market making
activities and the defendants undertook specified steps to assure compliance
with their agreement. The Stipulation and Order are subject to approval by the
United States District Court for the Southern District of New York following a
public hearing, and if the Court approves the Stipulation and Order, the
complaint will be dismissed with prejudice.
Leetate Smith et al. v. Merrill Lynch at al. (Reported In Holdings'
Annual Report on Form 10-K and First Quarter Report on Form 10-Q)
On August 8, 1996, the State Court filed an order granting preliminary
approval of the settlement, subject to notice to the class and a hearing on
final approval.
MCC Proceeds Inc. v. Lehman Brothers International (Europe). (Reported In
Holdings' Annual Report on Form 10-K).
MCC Proceeds appealed the dismissal, and LBIE has responded.
ITEM 4 Submission of Matters to a Vote of Security-Holders
At the annual meeting of shareholders of the Company held on April 4,
1996, the following matters were submitted to a vote of security-holders:
A) A proposal was submitted for the election of all Class I Directors.
The results were 95,952,451 votes for all nominees, and 1,681,389 votes withheld
from all nominees.
B) A proposal was submitted for the ratification of the Company's selection of
Ernst & Young LLP as the Company's independent auditors for the 1996 fiscal
year. The results were 97,318,787 votes for, 149,962 against, and 165,090
abstained.
C) A proposal was submitted for approval of the Company's 1996 Management
Ownership Plan, under which the Company may compensate senior officers in part
with stock-based awards instead of cash. The results were 53,026,431 votes for,
28,601,940 against, and 16,005,469 non votes.
D) A proposal was submitted for approval of the Company's 1996 Short-Term
Executive Compensation Plan, which provides annual incentive awards to senior
officers of the Company. The results were 84,328,821 votes for, 13,305,018
against, and 1 non vote.
EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits and reports on Form 8-K are filed as part of this
Quarterly Report, or where indicated, were heretofore filed and are hereby
incorporated by reference:
(a) Exhibits:
10.1 Lehman Brothers Holdings Inc. 1996 Management Ownership Plan
10.2 Lehman Brothers Holdings Inc. 1996 Short-Term Executive
Compensation Plan
11. Computation of Per Share Earnings
12.A Computation in Support of Ratio of Earnings to Fixed Charges
12.B Computation in Support of Ratio of Earnings to Combined Fixed
Charges and Preferred Dividends
27. Financial Data Schedule
(b) Reports on Form 8-K:
1. Form 8-K dated September 26, 1996, Items 5 and 7.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEHMAN BROTHERS HOLDINGS INC.
(Registrant)
Date: October 15, 1996 By /s/ Richard S. Fuld Jr.
--------------------------------
Richard S. Fuld, Jr.
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: October 15, 1996 By /s/ Charles B. Hintz
-----------------------------
Charles B. Hintz
Chief Financial Officer
(Principal Financial Officer)
EXHIBIT INDEX
Exhibit No. Exhibit
Exhibit 10.1 Lehman Brothers Holdings Inc. 1996 Management Ownership Plan
Exhibit 10.2 Lehman Brothers Holdings Inc. 1996 Short-Term Executive
Compensation Plan
Exhibit 11 Computation of Per Share Earnings
Exhibit 12.A Computation in Support of Ratio of Earnings to Fixed Charges
Exhibit 12.B Computation in Support of Ratio of Earnings to Combined Fixed
Charges and Preferred Dividends
Exhibit 27 Financial Data Schedule
Exhibit 10.1
1996 MANAGEMENT OWNERSHIP PLAN
SECTION 1 -- PURPOSE
The purpose of the Lehman Brothers Holdings Inc. 1996 Management Ownership
Plan (the "Plan") is to strengthen Lehman Brothers Holdings Inc. (the "Company")
by providing selected employees of the Company with the opportunity to acquire a
proprietary and vested interest in the growth and performance of the Company,
thus generating an increased incentive to contribute to the Company's future
success and prosperity, enhancing the value of the Company for the benefit of
stockholders, and enhancing the Company's ability to attract and retain
individuals of exceptional talent.
The purposes of the Plan are to be achieved through the grant of various
types of stock-based awards.
SECTION 2 -- DEFINITIONS
For purposes of the Plan, the capitalized terms shall have the meanings
ascribed to them in Exhibit A hereof.
SECTION 3 -- SHARES SUBJECT TO THE PLAN
(a) Shares of Common Stock which may be issued under the Plan may be either
authorized and unissued shares of Common Stock or authorized and issued shares
of Common Stock held in the Company's treasury, or any combination thereof.
Subject to adjustment as provided in Section 14, the number of shares of Common
Stock with respect to which Awards (whether distributable in shares of Common
Stock or in cash) may be granted under the Plan shall be ten million shares. The
maximum number of shares of Common Stock available for stock options, stock
appreciation rights or Other Stock-based Awards that may be granted to a
Participant during a calendar year shall not exceed one million.
(b) Notwithstanding the last sentence of Section 3(a), to the extent that
the number of shares of Common Stock with respect to which Awards may be granted
under the Plan to an individual in any calendar year exceeds the number of
shares of Common Stock with respect to which Awards were granted under the Plan
during that calendar year, such excess shall be available for grant under the
Plan in succeeding calendar years.
(c) In the event that any other Award subject to repurchase or forfeiture
rights is reacquired by the Company or if any Award is canceled, terminates or
expires unexercised (except with respect to a stock option which terminates on
the exercise of a stock appreciation right) for any reason under the Plan, any
Common Stock allocated in connection with such Award, shall thereafter again be
available for grant pursuant to the Plan.
SECTION 4 -- ELIGIBILITY
Members of the Corporate Management Committee and the Operating Committee
(and successor entities of such committees) and all Managing Directors and
officers holding a title senior to Managing Director are eligible to be
Participants in the Plan.
SECTION 5 -- ADMINISTRATION
The Plan shall be administered by the Committee, which shall have the power
to select those Participants who shall receive Awards and to determine the terms
of such Awards. As to the selection of, and the terms of Awards granted to,
Participants who are not Executive Officers, the Committee may delegate any or
all of its responsibilities to officers or employees of the Company. With
respect to any "Covered Employee" (as such term is defined in Section 162(m) of
the Code), the Committee shall administer the Plan in such a manner as to comply
with the requirements for deductibility under Section 162(m) of the Code.
The Committee's authority hereunder shall include, without limitation, the
establishment of vesting schedules or exercisability in installments with
respect to Awards. The Committee may, in its sole discretion, accelerate or
waive vesting or exercise periods or the lapse of restrictions on all or any
portion of any Award, or extend the exercisability (including to extend or
provide for post-termination exercisability) of stock options or stock
appreciation rights; provided that such exercisability shall not extend past ten
years from the date of grant of any incentive stock options.
Subject to the provisions of the Plan, the Committee shall be authorized to
interpret the Plan, to establish, amend, and rescind any rules and regulations
relating to the Plan, to determine the terms and provisions of any agreements
entered into hereunder, and to make all other determinations necessary or
advisable for the administration of the Plan. The Committee may correct any
defect, supply any omission or reconcile any inconsistency in the Plan or in any
Award in the manner and to the extent it shall deem desirable to carry the Plan
or any such Award into effect. The determinations of the Committee in the
administration of the Plan, as described herein, shall be final and conclusive.
The validity, construction and effect of the Plan and any rules and
regulations relating to the Plan shall be determined in accordance with the laws
of the State of Delaware and applicable Federal law.
SECTION 6 -- STOCK OPTIONS
(a) Any stock options granted under the Plan shall be in such form as the
Committee may from time to time approve and shall be subject to the terms and
conditions provided herein and such additional terms and conditions not
inconsistent with the terms of the Plan, as the Committee shall deem desirable.
(b) Stock options may be granted to any Participant. Each grant of stock
options shall specify whether the underlying options are intended to be
incentive stock options or non-incentive stock options. In the case of incentive
stock options, the terms and conditions of such grants shall be subject to and
comply with such requirements as may be prescribed by Section 422(b) of the
Code, as from time to time amended, and any implementing regulations, including,
but not limited to, the requirement that such stock options are exercisable
during the Participant's lifetime, only by such Participant. The Committee shall
establish the option price at the time each stock option is granted, which price
shall not be less than 100 percent of the Fair Market Value of the Common Stock
on the date of grant.
(c) No stock options may be exercisable later than ten years after their
date of grant. The option price of each share of Common Stock as to which a
stock option is exercised shall be paid in full at the time of such exercise.
Such payment may be made at the sole discretion of the Committee, pursuant to
and in accordance with criteria and guidelines established by the Committee
(which criteria and guidelines may be different for executive officers and for
other Participants), as the same may be modified from time to time, (i) in cash,
(ii) by tender of shares of Common Stock already owned by the Participant,
valued at Fair Market Value as of the date of exercise, (iii) if authorized by
the Committee, by withholding pursuant to the election of the Participant, which
election is subject to the disapproval of the Committee, from those shares that
would otherwise be obtained upon exercise of the option a number of shares
having a Fair Market Value equal to the option price, (iv) if authorized by the
Committee, and in combination with services rendered by the exercising
Participant, by delivery of a properly executed exercise notice together with
irrevocable instructions to a securities broker (or, in the case of pledges,
lender) approved by the Company to, (a) sell shares of Common Stock subject to
the option and to deliver promptly to the Company a portion of the proceeds of
such sale transaction on behalf of the exercising Participant to pay the option
price, or (b) pledge shares of Common Stock subject to the option to a margin
account maintained with such broker or lender, as security for a loan, and such
broker or lender, pursuant to irrevocable instructions, delivers to the Company
the loan proceeds, at the time of exercise to pay the option price, (v) by any
combination of (i), (ii), (iii) or (iv) above or (vi) by other means that the
Committee deems appropriate.
(d) A stock option holder may, in the discretion of the Committee, have the
right to surrender a stock option or any portion thereof to the Company within
30 days following a Change in Control and to receive from the Company in
exchange therefor a cash payment in an amount equal to (a) the number of
unexercised shares of Common Stock under the option which are being surrendered
multiplied by (b) the excess of (i) the greater of (A) the highest price per
share of Common Stock paid in connection with the Change in Control or (B) the
highest Fair Market Value per share of Common Stock in the 90 day period
preceding such Change in Control, over (ii) the purchase price of the option as
set forth in the underlying option agreement.
SECTION 7 -- STOCK APPRECIATION RIGHTS
(a) Stock appreciation rights may be granted independent of any stock option
or in conjunction with all or any part of any stock option granted under the
Plan, either at the same time as the stock option is granted or at any later
time during the term of the option. Stock appreciation rights shall be subject
to such terms and conditions as determined by the Committee, not inconsistent
with the provisions of the Plan.
(b) Upon exercise, a stock appreciation right shall entitle the Participant
to receive from the Company an amount equal to the excess of the Fair Market
Value of a share of Common Stock on the date of exercise of the stock
appreciation right over the per share grant or option price, as applicable (or
such lesser amount as the Committee may determine at the time of grant),
multiplied by the number of shares of Common Stock with respect to which the
stock appreciation right is exercised. Upon the exercise of a stock appreciation
right granted in connection with a stock option, the stock option shall be
canceled to the extent of the number of shares as to which the stock
appreciation right is exercised, and upon the exercise of a stock option granted
in connection with a stock appreciation right or the surrender of such stock
option, the stock appreciation right shall be canceled to the extent of the
number of shares as to which the stock option is exercised or surrendered. The
Committee shall determine whether the stock appreciation right shall be settled
in cash, Common Stock or a combination of cash and Common Stock.
(c) A holder of a stock appreciation right may, in the discretion of the
Committee, have the right to surrender the stock appreciation right or any
portion thereof to the Company within 30 days following a Change in Control and
to receive from the Company in exchange therefor a cash payment in an amount
equal to (a) the number of shares of Common Stock under the stock appreciation
right which are being exercised, multiplied by (b) the excess of (i) the greater
of (A) the highest price per share of Common Stock paid in connection with the
Change in Control or (B) the highest Fair Market Value per share of Common Stock
in the 90 day period preceding such Change in Control, over (ii) the per share
grant price of the stock appreciation right as set forth in the underlying
agreement.
SECTION 8 -- OTHER STOCK-BASED AWARDS
(a) Other Awards of Common Stock and Awards that are valued in whole or in
part by reference to, or otherwise based on, the Fair Market Value of Common
Stock (all such Awards being referred to herein as "Other Stock-based Awards"),
may be granted under the Plan in the discretion of the Committee. Other
Stock-based Awards shall be in such form as the Committee shall determine,
including without limitation, (i) the right to purchase shares of Common Stock,
(ii) shares of Common Stock subject to restrictions on transfer until the
completion of a specified period of service, the occurrence of an event or the
attainment of performance objectives, each as specified by the Committee, and
(iii) shares of Common Stock issuable upon the completion of a specified period
of service, the occurrence of an event or the attainment of performance
objectives, each as specified by the Committee. Other Stock-based Awards may be
granted alone or in addition to any other Awards made under the Plan. All
references in the preceding sentence to "specified period of service", in the
case of Other Stock-based Awards which (i) are not in lieu of cash compensation
to employees generally, (ii) are not paid to recruit a new employee in an amount
of less than 5% of the total awards available for grant under the Plan or (iii)
are not subject to the attainment of performance objectives, shall provide that
vesting, restrictions on transfer or some other comparable restriction which
incents continued performance of the recipient, will be for a period of not less
than three years (although vesting or lapsing may occur in tranches over the
three years), unless there is a Change in Control or the recipient retires,
becomes disabled or dies. Subject to the provisions of the Plan, the Committee
shall have sole and absolute discretion to determine to whom and when such Other
Stock-based Awards will be made, the number of shares of Common Stock to be
awarded under (or otherwise related to) such Other Stock-based Awards and all
other terms and conditions of such Awards. The Committee shall determine whether
Other Stock-based Awards shall be settled in cash, Common Stock or a combination
of cash and Common Stock.
(b) With respect to any restricted stock units granted under the Plan, the
obligations of the Company or any Subsidiary are limited solely to the delivery
of shares of Common Stock on the date when such shares of Common Stock are due
to be delivered under each Agreement, and in no event shall the Company or any
Subsidiary become obligated to pay cash in respect of such obligation (except
that the Company or any Subsidiary may pay to Participants amounts in cash in
respect of a restricted stock unit equal to cash dividends paid to a holder of
shares of Common Stock, for fractional shares or for any amounts payable in cash
upon the occurrence of a Change in Control).
(c) The Committee shall establish the performance objective that must be
attained in order for the Company to grant other Other Stock-based awards.
Accordingly, unless the Committee determines at the time of grant not to qualify
the award as performance based compensation under Section 162(m), the
performance objectives for awards made under the Plan will be based upon one or
more of the following criteria: (i) before or after tax net income; (ii)
earnings per share; (iii) book value per share; (iv) stock price; (v) return on
Stockholders' equity; (vi) the relative performance of peer group companies;
(vii) expense management; (viii) return on investment; (ix) improvements in
capital structure, (x) profitability of an identifiable business unit or
product; (xi) profit margins; (xii) budget comparison; and (xiii) total return
to Stockholders. Participants who have primary responsibility for a business
unit of the Company may be measured on business unit operating profit, business
unit operating profit as a percent of revenue, and/or measures related to
business unit profitability above its cost of capital, in place of some or all
of the corporate performance measures. The Committee must certify as to the
attainment of the applicable performance goals prior to payment of any Other
Stock-based awards and may reduce the amount of any Other Stock-based award.
SECTION 9 -- DIVIDENDS, EQUIVALENTS AND VOTING RIGHTS
Awards other than stock options and stock appreciation rights may, at the
discretion of the Committee, provide the Participant with dividends or dividend
equivalents and voting rights prior to either vesting or earnout.
SECTION 10 -- AWARD AGREEMENTS
Each Award under the Plan shall be evidenced by an agreement setting forth
the terms and conditions, not inconsistent with the provisions of the Plan, as
determined by the Committee, which shall apply to such Award.
SECTION 11 -- WITHHOLDING
The Company shall have the right to deduct from all amounts paid to any
Participant in cash (whether under this Plan or otherwise) any taxes required by
law to be withheld therefrom. In the case of payments of Awards in the form of
Common Stock, at the Committee's discretion, the Participant may be required to
pay to the Company the amount of any taxes required to be withheld with respect
to such Common Stock, or, in lieu thereof, the Company shall have the right to
retain the number of shares of Common Stock the Fair Market Value of which
equals the amount required to be withheld. Without limiting the foregoing, the
Committee may, in its discretion and subject to such conditions as it shall
impose, permit share withholding to be done at the Participant's election.
SECTION 12 -- NON-TRANSFERABILITY
No Award shall be assignable or transferable, and no right or interest of
any Participant in any Award shall be subject to any lien, obligation or
liability of the Participant, except by will, the laws of descent and
distribution, or as otherwise set forth in the Award agreement.
SECTION 13--NO RIGHT TO EMPLOYMENT OR CONTINUED PARTICIPATION IN AS STOCKHOLDERS
(a) No person shall have any claim or right to the grant of an Award, and
the grant of an Award shall not be construed as giving a Participant the right
to be retained in the employ of the Company or to be eligible for any subsequent
Awards. Further, the Company expressly reserves the right at any time to dismiss
a Participant free from any liability, or any claim under the Plan, except as
provided herein or in any agreement entered into hereunder.
(b) The grant of an Award shall not be construed as giving a Participant the
rights of a stockholder of Common Stock unless and until shares of Common Stock
have been issued to Participants pursuant to Awards hereunder.
SECTION 14 -- ADJUSTMENT OF AND CHANGES IN COMMON STOCK
In the event of any change in the outstanding shares of Common Stock by
reason of any Common Stock dividend or split, recapitalization, merger,
consolidation, spin-off, combination or exchange of shares or other corporate
exchange, or any distribution to stockholders of Common Stock other than regular
cash dividends, the Committee shall make a substitution or adjustment, to the
number or kind of shares of Common Stock or other securities issued or reserved
for issuance pursuant to the Plan, and to outstanding Awards, as well as the
option price or other affected terms of such Awards as in its judgment shall be
necessary to preserve the Participant's rights substantially proportionate to
the rights existing prior to such event.
Unless otherwise provided in an award agreement, after a merger of one or
more corporations into the Company or after a consolidation of the Company and
one or more corporations (a "Merger Event") in which the Company shall be the
surviving or resulting corporation, an Award holder shall, where applicable, at
the same cost, be entitled upon the exercise of an Award, to receive (subject to
any action required by Stockholders) such securities of the surviving or
resulting corporation as shall be equivalent to the shares underlying such Award
as nearly as practicable to the nearest whole number and class of shares of
stock or other securities.
Unless otherwise provided in an award agreement, if the Company enters into
any agreement with respect to any transaction which would, if consummated,
result in a Merger Event in which the Company will not be the surviving
corporation, the Committee in its sole discretion and without liability to any
person shall determine what actions shall be taken with respect to outstanding
Awards, if any, including, without limitation, the payment of a cash amount in
exchange for the cancellation of an Award or the requiring of the issuance of
substitute Awards that will substantially preserve the value, rights and
benefits of any affected Awards previously granted hereunder as of the date of
the consummation of the Merger Event.
SECTION 15 -- AMENDMENT
The Committee or the Board may amend, suspend or terminate the Plan or any
portion hereof at any time, provided that no amendment shall be made without
approval of the stockholders of the Company which shall (i) increase (except as
provided in Section 14 hereof) the total number of shares or the percentage of
shares reserved for issuance pursuant to the Plan; (ii) change the class of
Employees eligible to be Participants; or (iii) extend the date after which
Awards cannot be granted under the Plan.
SECTION 16 -- UNFUNDED STATUS OF PLAN
The Plan is intended to constitute an "unfunded" plan for long-term
incentive compensation. With respect to any payments not yet made to a
Participant, including any Participant optionee, by the Company, nothing herein
contained shall give any Participant any rights that are greater than those of a
general creditor of the Company. In its sole discretion, the Committee may
authorize the creation of trusts or other arrangements to meet the obligations
created under the Plan to deliver Common Stock or payments in lieu thereof or
with respect to options, stock appreciation rights and other Awards under the
Plan; provided, however, that the existence of such trusts or other arrangements
is consistent with the unfunded status of the Plan.
SECTION 17 -- EFFECTIVE DATE
Subject to approval of the Stockholders of the Company, in accordance with
Rule 16b-3 under the Securities Exchange Act of 1934, and Code Sections 162(m)
and 422, this Plan shall be effective on April 10, 1996. No Awards may be
granted under the Plan on or after January 10, 2006.
EXHIBIT A
(a) "Award" shall mean any type of stock-based award granted pursuant to the
Plan.
(b) "Board" shall mean the Board of Directors of the Company; provided,
however, that any action taken by a duly authorized committee of the Board
within the scope of authority delegated to such committee by the Board shall be
considered an action of the Board for purposes of this Plan.
(c) "Change in Control" shall mean the occurrence during the term of the
Plan of:
a) The commencement (within the meaning of Rule 14d-2 under the
Securities Exchange Act of 1934 (the "Exchange Act")) of a tender offer for
more than 20% of the Company's outstanding shares of capital stock having
ordinary voting power in the election of directors (the "Voting
Securities").
b) An acquisition (other than directly from the Company) of any voting
securities of the Company by any "Person" (as the term person is used for
purposes of Section 13(d) or 14(d) of the Exchange Act) immediately after
which such Person has "Beneficial Ownership" (within, the meaning of Rule
13d-3 promulgated under the Exchange Act) of 20% or more of the combined
voting power of the Company's then outstanding Voting Securities; provided,
however, in determining whether a Change in Control has occurred, Voting
Securities which are acquired in a "Non-Control Acquisition" (as hereinafter
defined) shall not constitute an acquisition which would cause a Change in
Control. A "Non-Control Acquisition" shall mean an acquisition by (i) an
employee benefit plan (or a trust forming a part thereof or a trustee
thereof acting solely in its capacity as trustee) maintained by (A) the
Company or (B) any corporation or other Person of which a majority of its
voting power or its voting equity securities or equity interest is owned,
directly or indirectly, by the Company (for purposes of this definition, a
"Subsidiary"), (ii) the Company or its Subsidiaries, or (iii) any Person who
files in connection with such acquisition a Schedule 13D which expressly
disclaims any intention to seek control of the Company and does not
expressly reserve the right to seek such control; provided, however, that
any amendment to such statement of intent which either indicates an
intention or reserves the right to seek control shall be deemed an
"acquisition" of the securities of the Company reported in such filing as
beneficially owned by such Person for purposes of this paragraph (b).
c) The individuals who, as of the effective date of the 1994 initial
public trading in Company shares, are members of the Board (the "Incumbent
Board"), ceasing for any reason to constitute at least a majority of the
members of the Board; provided, however, that if the election, or nomination
for election by the Company's common Stockholders, of any new director was
approved by a vote of at least two-thirds of the Incumbent Board, such new
director shall, for purposes of this Plan, be considered as a member of the
Incumbent Board; provided further, however, that no individual shall be
considered a member of the Incumbent Board if such individual initially
assumed office as a result of either an actual or threatened "Election
Contest" (as described in Rule 14a-11 promulgated under the 1934 Act or
other
actual or threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board (a "Proxy Contest") including by reason of
any agreement intended to avoid or settle any Election Contest or Proxy
Contest; or
d) Approval by Stockholders of the Company of:
(i) A merger, consolidation or reorganization involving the Company,
unless such merger, consolidation or reorganization is a "Non-Control
Transaction;" i.e., meets each of the requirements described in (A), (B),
and (C) below:
(A) the Stockholders of the Company, immediately before such
merger, consolidation or reorganization, own, directly or indirectly
immediately following such merger, consolidation or reorganization, at
least eighty percent (80%) of the combined voting power of the
outstanding voting securities of the corporation resulting from such
merger or consolidation or reorganization (the "Surviving
Corporation") in substantially the same proportion as their ownership
of the Voting Securities immediately before such merger, consolidation
or reorganization;
(B) the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement providing for such
merger, consolidation or reorganization consti- tute at least
two-thirds of the members of the board of directors of the Surviving
Corporation immediately following the consummation of such merger,
consolidation or reorganization; and
(C) no Person other than the Company, any Subsidiary, any employee
benefit plan (or any trust forming a part thereof or a trustee thereof
acting solely in its capacity as trustee) maintained by the Company,
the Surviving Corporation, or any Subsidiary, or any Person who,
immediately prior to such merger, consolidation or reorganization had
Beneficial Ownership of 20% or more of the then outstanding Voting
Securities has Beneficial Ownership of 20% or more of the combined
voting power of the Surviving Corporation's then outstanding voting
securities immediately following the consummation of such merger,
consolidation or reorganization.
(ii) A complete liquidation or dissolution of the Company; or
(iii) An agreement for the sale or other disposition of all or
substantially all of the assets of the Company to any Person (other than
a transfer to a Subsidiary).
Notwithstanding the foregoing, a Change in Control shall not be deemed
to occur solely because any Person (the "Subject Person") acquired
Beneficial Ownership of more than the permitted amount of the outstanding
Voting Securities as a result of the acquisition of Voting Securities by the
Company which, by reducing the number of Voting Securities outstanding,
increases the proportional number of shares Beneficially Owned by the
Subject Persons, provided that if a Change in Control would occur (but for
the operation of this sentence) as a result of the acquisition of Voting
Securities by the Company, and after such Beneficial Owner of any additional
Voting Securities which increases the percentage of the then outstanding
Voting Securities Beneficially Owned by the Subject Person, then a Change in
Control shall occur.
(d) "Code" shall mean the Internal Revenue Code of 1986, as from time to
time amended.
(e) "Committee" shall mean the Compensation and Benefits Committee of the
Company.
(f) "Common Stock" shall mean the common stock of the Company, $.10 par
value.
(g) "Company" shall mean Lehman Brothers Holdings Inc. and, except as
otherwise specified in this Plan in a particular context, any
successor thereto, whether by merger, consolidation, purchase of
substantially all its assets or otherwise.
(h) "Executive Officer" shall mean a Participant who is subject to the
requirements of Sections 16(a) and 16(b) of the Securities Exchange
Act of 1934.
(i) "Fair Market Value" on any date means the closing price of the shares on
such date on the principal national securities exchange on which such shares are
listed or admitted to trading (or, if such exchange is not open on such date,
the immediately preceding date on which such exchange is open), the arithmetic
mean of the per share closing bid price and per share closing asked price on
such date as quoted on the National Association of Securities Dealers Automated
Quotation System, or such other market in which such prices are regularly
quoted, or, if there have been no published bid or asked quotations with respect
to share on such date, the Fair Market Value shall be the value established by
the Committee in good faith and, in the case of an incentive stock option, in
accordance with Section 422 of the Code.
(j) "Other Stock-based Award" shall mean any of those Awards described in
Section 8 hereof.
(k) "Participant" shall mean a member of the Corporate Management Committee,
the Operating Committee or a Managing Director who is selected by the Committee
to receive an Award under the Plan.
(l) "Subsidiary" shall mean any corporation which at the time qualifies as a
subsidiary of the Company under the definition of "subsidiary corporation" in
Section 424(f) of the Code, as amended from time to time.
(m) "Total Disability" shall mean a physical or mental incapacity, which
would entitle the individual to benefits under the long-term disability program
sponsored by the Company employing such individual; provided, however, that if
an individual is not covered under the applicable program, the Committee shall
determine whether the individual has incurred a Total Disability by utilizing
the criteria of such program and provided further that for incentive stock
options the definition of Total Disability shall be as set forth in Section
22(e)(3) of the Code.
Exhibit 10.2
LEHMAN BROTHERS HOLDINGS INC.
1996 Short Term Executive Compensation Plan
1. Purpose. The purpose of the 1996 Short Term Executive Compensation Plan
(the "Plan") is to advance the interests of Lehman Brothers Holdings Inc., a
Delaware corporation (the "Company"), and its stockholders by providing
incentives in the form of periodic bonus awards to certain employees of the
Company and any of its subsidiaries or other related business units or entities
("Affiliates") including those who contribute significantly to the strategic and
long-term performance objectives and growth of the Company and its Affiliates.
2. Administration. The Plan shall be administered by the Compensation and
Benefits Committee of the Board of Directors (the "Committee"), as such
committee is from time to time constituted. The Committee may delegate its
duties and powers in whole or in part (i) to any subcommittee thereof consisting
solely of at least two "outside directors," as defined under Section 162(m) of
the Internal Revenue Code of 1986, as amended (the "Code"), or (ii) to the
extent consistent with Section 162(m) of the Code, to any other individual or
individuals.
The Committee has all the powers vested in it by the terms of the Plan set
forth herein, such powers to include the exclusive authority to select the
employees to be granted bonus awards ("Bonuses") under the Plan, to determine
the size and terms of the Bonus to be made to each individual selected (subject
to the limitation imposed on "Special Bonuses", as defined below), to modify the
terms of any Bonus that has been granted (except with respect to any
modification which would increase the amount of compensation payable to a
"Covered Employee," as such term is defined in Section 162(m) of the Code), to
determine the time when Bonuses will be awarded, to establish performance
objectives in respect to Bonuses and to certify that such performance objectives
were attained. The Committee is authorized to interpret the Plan, to establish,
amend and rescind any rules and regulations relating to the Plan, and to make
any other determinations which it deems necessary or desirable for the
administration of the Plan. The Committee may correct any defect or supply any
omission or reconcile any inconsistency in the Plan in the manner and to the
extent the Committee deems necessary or desirable to carry it into effect. Any
decision of the Committee in the interpretation and administration of the Plan,
as described herein, shall lie within its sole and absolute discretion and shall
be final, conclusive and binding on all parties concerned. No member of the
Committee and no officer of the Company shall be liable for anything done or
omitted to be done by him or her, by any other member of the Committee or by any
officer of the Company in connection with the performance of duties under the
Plan, except for his or her own willful misconduct or as expressly provided by
statute.
3. Participation. The Committee shall have exclusive power (except as may
be delegated as permitted herein) to select the employees of the Company and its
Affiliates who may participate in the Plan and be granted Bonuses under the Plan
("Participants"); provided, however, that Special Bonuses (as defined below) may
only be granted to members of the Company's Operating Committee and Corporate
Management Committee (or any successor entities of such committees in accordance
with subsection (c) below) and Managing Directors and officers holding a title
senior to Managing Director.
4. Bonuses under the Plan.
(a) In General. The Committee shall determine the amount of a Bonus to be
granted to each Participant in accordance with subsections (b) and (c)
below.
(b) Standard Bonuses. The Committee may in its discretion grant to a
Participant a cash Bonus (a "Standard Bonus") in the amount, and payable at the
time, determined by the Committee or its delegate in its discretion. The amount
of a Participant's Standard Bonus may be based upon any criteria the Committee
wishes to consider, including but not limited to the objective or subjective
performance of the Participant, the Company or any subsidiary or division
thereof.
(c) Special Bonuses. (i) The Committee may in its discretion award a Bonus
to a Participant who it reasonably believes may be a Covered Employee (a
"Special Bonus") for the taxable year of the Company in which such Bonus would
be deductible, under the terms and conditions of this subsection (c). Subject to
clause (iii) of this Section 4(c), the amount of a Participant's Special Bonus
shall be an amount determinable from written performance goals approved by the
Committee while the outcome is substantially uncertain and no more than 90 days
after the commencement of the period to which the performance goal relates or,
if less, the number of days which is equal to 25 percent of the relevant
performance period. The maximum Special Bonus that may be granted in respect of
a (calendar year) shall be 2.0% of the consolidated pre-tax net income of the
Company.
(ii) The amount of any Special Bonus will be based on objective performance
goals established by the Committee. The performance criteria for Special Bonuses
made under the Plan will be based upon one or more of the following criteria:
(A) before or after tax net income; (B) earnings per share; (C) book value per
share; (D) stock price; (E) return on Stockholders' equity; (F) the relative
performance of peer group companies; (G) expense management; (H) return on
investment; (I) improvements in capital structure; (J) profitability of an
identifiable business unit or product; (K) profit margins; (L) budget
comparisons; and (M) total return to Stockholders. Participants who have primary
responsibility for a business unit of the Company may be measured on business
unit operating profit, business unit operating profit as a percent of revenue
and/or measures related to business unit profitability above its cost of
capital, in place of some or all of the corporate performance measures.
(iii) The Committee shall determine whether the performance goals
have been met with respect to any affected Participant and, if they have, so
certify and ascertain the amount of the applicable Special Bonus. No Special
Bonuses will be paid until such certification is made by the Committee.
(iv) The provisions of this Section 4(c) shall be administered and
interpreted in accordance with Section 162(m) of the Code to ensure the
deductibility by the Company or its affiliates of the payment of Special
Bonuses.
5. Designation of Beneficiary by Participant. The Committee or its delegate
shall create a procedure whereby a Participant may file, on a form to be
provided by the Committee, a written election designating one or more
beneficiaries with respect to the amount, if any, payable in the event of the
Participant's death. The Participant may amend such beneficiary designation in
writing at any time prior to the Participant's death, without the consent of any
previously designated beneficiary. Such designation or amended designation, as
the case may be, shall not be effective unless and until received by the duly
authorized representatives of the Committee or its delegate prior to the
Participant's death. In the absence of any such designation, the amount payable,
if any, shall be delivered to the legal representative of such Participant's
estate.
6. Miscellaneous Provisions.
(a) No employee or other person shall have any claim or right to be paid a
Bonus under the Plan. Determinations made by the Committee under the Plan need
not be uniform and may be made selectively among eligible individuals under the
Plan, whether or not such eligible individuals are similarly situated. Neither
the Plan nor any action taken hereunder shall be construed as giving any
employee or other person any right to continue to be employed by or perform
services for the Company or any Affiliate, and the right to terminate the
employment of or performance of services by any Participant at any time and for
any reason is specifically reserved to the Company and its Affiliates.
(b) Except as may be approved by the Committee, a Participant's rights and
interest under the Plan may not be assigned or transferred, hypothecated or
encumbered in whole or in part either directly or by operation by law or
otherwise (except in the event of a Participant's death) including, but not by
way of limitation, execution, levy, garnishment, attachment, pledge, bankruptcy
or in any other manner; provided, however, that, subject to applicable law, any
amounts payable to any Participant hereunder are subject to reduction to satisfy
any liabilities owed to the Company or any of its Affiliates by the Participant.
(c) The Committee shall have the authority to determine in its sole
discretion the applicable performance period relating to any Bonus; provided,
however, that any such determination with respect to a Special Bonus shall be
subject to any applicable restrictions imposed by Section 162(m) of the Code.
(d) The Company and its Affiliates shall have the right to deduct from any
payment made under the Plan any federal, state, local or foreign income or other
taxes required by law to be withheld with respect to such payment.
(e) The Company is the sponsor and legal obligor under the Plan, and shall
make all payments hereunder, other than any payments to be made by any of the
Affiliates, which shall be made by such Affiliate, as appropriate. Nothing
herein is intended to restrict the Company from charging an Affiliate that
employs a Participant for all or a portion of the payments made by the Company
hereunder. The Company shall not be required to establish any special or
separate fund or to make any other segregation of assets to assure the payment
of any amounts under the Plan, and rights to the payment hereunder shall be no
greater than the rights of the Company's unsecured, subordinated creditors, and
shall be subordinated to the claims of the customers and clients of the Company.
All expenses involved in administering the Plan shall be borne by the Company.
(f) The validity, construction, interpretation, administration and effect
of the Plan and rights relating to the Plan and to Bonuses granted under the
Plan, shall be governed by the substantive laws, but not the choice of law
rules, of the State of Delaware.
(g) Any controversy or dispute arising in connection with the Plan shall
be resolved by arbitration pursuant to the Constitution and rules of the New
York Stock Exchange, Inc. or the National Association of Securities Dealers,Inc.
(h) The Plan shall be effective as of April 10, 1996, subject to the
affirmative vote of the holders of a majority of all shares of Common Stock of
the Company present in person or by proxy at the Annual Meeting of the Company
to be held on April 10, 1996.
7. Plan Amendment or Suspension. The Plan may be amended or suspended
in whole or in part at any time and from time to time by the Committee.
8. Plan Termination. This Plan shall terminate upon the adoption of a
resolution of the Committee terminating the Plan.
9. Actions and Decision Regarding the Business or Operations of the
Company and/or its Affiliates. Notwithstanding anything in the Plan to the
contrary, neither the Company nor any of its Affiliates nor their respective
officers, directors, employees or agents shall have any liability to any
Participant (or his or her beneficiaries or heirs) under the Plan or otherwise
on account of any action taken, or not taken, in good faith by any of the
foregoing persons with respect to the business or operations of the Company or
any Affiliates.
10. Subordinated Capital Status. Notwithstanding any other provision of
this Plan, any amounts due to Participants hereunder may be treated, in the
Committee's sole discretion, to the extent that the Company accrues a liability
in respect thereof, as subordinated capital of the Company in calculating the
Company's net capital for regulatory purposes, and the terms of the Plan
applicable to such amounts shall include (and, may be amended to add) such
provisions as the Committee determines are necessary or appropriate in order to
secure such treatment, including without limitation, provisions for the
suspension of any payment obligation under the Plan under certain prescribed
circumstances.
Exhibit 11
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
COMPUTATION of PER SHARE EARNINGS
(Unaudited)
(In millions, except share data)
Three months Three months Nine months Nine months
ended ended ended ended
August 31, August 31, August 31, August 31,
1996 1995 1996 1995
Primary:
Weighted average shares outstanding:
Common stock 100,360,184 104,549,710 102,039,193 104,526,430
Common stock issuable 16,236,616 10,984,492 13,213,616 7,348,161
Common stock equivalents 608,975 623,663 1,053,961 319,000
------------- -------------- ----------- -------------
Total 117,205,775 116,157,865 116,306,770 112,193,591
=========== =========== =========== ===========
Net income $ 76.9 $ 70.7 $289.0 $173.9
Preferred dividends (1) (6.4) (10.6) (24.0) (31.8)
------- ------- ------- ------
Net income applicable to common stock $ 70.5 $ 60.1 $265.0 $142.1
====== ====== ====== ======
Earnings per common share $ 0.60 $ 0.52 $2.28 $1.27
====== ====== ===== =====
Fully diluted:
Weighted average shares outstanding:
Common stock 100,360,184 104,549,710 102,039,193 104,526,430
Common stock issuable 16,236,616 10,984,492 13,213,616 7,348,161
Common stock equivalents 608,975 872,012 1,151,972 442,456
-------------- -------------- ------------ --------------
Total 117,205,775 116,406,214 116,404,781 112,317,047
=========== =========== =========== ===========
Net income $ 76.9 $ 70.7 $289.0 $173.9
Preferred dividends (1) (6.4) (10.6) (24.0) (31.8)
------- ------- ------ ------
Net income applicable to common stock $70.5 $ 60.1 $265.0 $142.1
===== ====== ====== ======
Earnings per common share $0.60 $ 0.52 $ 2.28 $ 1.27
===== ====== ====== =======
(1) Amount for the nine months ended August 31, 1996 includes the $2 million
premium paid over par value to repurchase the $200 million 8.44% cumulative
preferred stock owned by the American Express Company.
Exhibit 12.A
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
COMPUTATION in SUPPORT of RATIO of EARNINGS to FIXED CHARGES
(Dollars in millions)
(Unaudited)
For the For the For the
Eleven Months Twelve Months Nine Months
For the Year Ended Ended Ended Ended
December 31 November 30 November 30 August 31
-------------------------------- ----------- ----------- ---------
1991 1992 1993 1994 1995 1996
Fixed Charges:
Interest expense:
Subordinated indebtedness $ 170 $ 150 $ 144 $ 158 $ 206 $ 160
Bank loans and other
borrowings* 4,755 5,035 5,224 6,294 10,199 7,912
Interest component of rentals
of office and equipment 70 74 76 42 44 26
Other adjustments** 2 2 7 4 28 11
---------- ---------- --------- --------- --------- --------
TOTAL (A) $4,997 $5,261 $5,451 $6,498 $10,477 $8,109
======= ======= ====== ========= ======== ======
Earnings:
Pretax income (loss) from
continuing operations $ 150 $ (247) $ 27 $ 193 $ 369 $ 442
Fixed charges 4,997 5,261 5,451 6,498 10,477 8,109
Other adjustments*** 7 _____ (6) (4) (28) (11)
--------- -------- --------- -------- -------
TOTAL (B) $5,154 $5,014 $5,472 $6,687 $10,818 $8,540
====== ====== ====== ====== ======= ======
(B / A) 1.03 **** 1.00 1.03 1.03 1.05
* Includes amortization of long-term debt discount.
** Other adjustments include capitalized interest and debt issuance costs
and amortization of capitalized interest.
*** Other adjustments include adding the net loss of affiliates accounted
for at equity whose debt is not guaranteed by the Company and
subtracting capitalized interest and debt issuance costs and
undistributed net income of affiliates accounted for at equity.
**** Earnings were inadequate to cover fixed charges and would have had
to increase $247 million in 1992 in order to cover the deficiencies.
Exhibit 12.B
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
COMPUTATION in SUPPORT of RATIO of EARNINGS to COMBINED
FIXED CHARGES and PREFERRED DIVIDENDS
(Dollars in millions)
(Unaudited)
For the For the For the
Eleven Months Twelve Months Nine Months
For the Year Ended Ended Ended Ended
December 31 November 30 November 30 August 31
-------------------------------- ----------- ----------- ---------
1991 1992 1993 1994 1995 1996
Combined Fixed Charges
and Preferred Dividends:
Interest expense:
Subordinated indebtedness $ 170 $ 150 $ 144 $ 158 $ 206 $ 160
Bank loans and other
borrowings* 4,755 5,035 5,224 6,294 10,199 7,912
Interest component of rentals
of office and equipment 70 74 76 42 44 26
Other adjustments** 2 2 7 4 28 11
---------- ---------- --------- --------- --------- -------
Total fixed charges 4,997 5,261 5,451 6,498 10,477 8,109
Preferred dividends (tax
equivalent basis) 48 48 48 58 64 37
-------- -------- -------- -------- --------- -------
TOTAL (A) $5,045 $5,309 $5,499 $6,556 $10,541 $8,146
====== ====== ====== ====== ======= ======
Earnings:
Pretax income (loss) from
continuing operations $ 150 $ (247) $ 27 $ 193 $ 369 $ 442
Fixed charges 4,997 5,261 5,451 6,498 10,477 8,109
Other adjustments*** 7 _____ (6) (4) (28) (11)
--------- -------- --------- -------- --------
TOTAL (B) $5,154 $5,014 $5,472 $6,687 $10,818 $8,540
====== ====== ====== ====== ======= ======
(B / A) 1.02 **** **** 1.02 1.03 1.05
* Includes amortization of long-term debt discount.
** Other adjustments include capitalized interest and debt issuance costs
and amortization of capitalized interest.
*** Other adjustments include adding the net loss of affiliates accounted
for at equity whose debt is not guaranteed by the Company and
subtracting capitalized interest and debt issuance costs and
undistributed net income of affiliates accounted for at equity.
**** Earnings were inadequate to cover fixed charges and preferred dividends
and would have had to increase $295 million in 1992 and $27 million in
1993 in order to cover the deficiencies.
Exhibit 27