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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-9466
Lehman Brothers Holdings Inc.
(Exact Name of Registrant As Specified In Its Charter)
Delaware 13-3216325
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3 World Financial Center
New York, New York 10285
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (212) 526-7000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ______
As of September 30, 1997, 118,059,968 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, 1997
INDEX
Part I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements - (unaudited)
Consolidated Statement of Operations -
Three and Nine Months Ended
August 31, 1997 and 1996 ............................... 3
Consolidated Statement of Financial Condition -
August 31, 1997 and November 30, 1996 .................. 5
Consolidated Statement of Cash Flows -
Nine Months Ended
August 31, 1997 and 1996................................ 7
Notes to Consolidated Financial Statements................ 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 18
Part II. OTHER INFORMATION
Item 1. Legal Proceedings ....................................... 33
Item 6. Exhibits and Reports on Form 8-K ................... 34
Signatures.................................................................. 35
EXHIBIT INDEX ...................................................... 36
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
1997 1996
-------------- ----------
Revenues
Principal transactions $ 389 $ 303
Investment banking 396 237
Commissions 111 77
Interest and dividends 3,554 2,964
Other 19 4
------- --------
Total revenues 4,469 3,585
Interest expense 3,398 2,863
----- -----
Net revenues 1,071 722
----- ------
Non-interest expenses
Compensation and benefits 543 366
Brokerage, commissions and clearance fees 54 62
Professional services 43 38
Communications 35 35
Occupancy and equipment 35 37
Business development 25 23
Depreciation and amortization 22 22
Other 33 23
------- -------
Total non-interest expenses 790 606
------ ------
Income before taxes 281 116
Provision for income taxes 84 39
------- -------
Net income $ 197 $ 77
===== ======
Net income applicable to common stock $ 160 $ 71
===== ======
Average common and common equivalent shares
outstanding 122.4 117.2
===== ======
Earnings per common share $1.30 $0.60
===== ======
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
1997 1996
------------- ----------
Revenues
Principal transactions $1,061 $ 1,114
Investment banking 910 671
Commissions 299 267
Interest and dividends 9,931 8,369
Other 73 27
--------- ---------
Total revenues 12,274 10,448
Interest expense 9,424 8,072
------- -------
Net revenues 2,850 2,376
------- -------
Non-interest expenses
Compensation and benefits 1,445 1,205
Brokerage, commissions and clearance fees 172 176
Professional services 131 111
Communications 105 114
Occupancy and equipment 104 114
Business development 76 75
Depreciation and amortization 65 68
Other 80 71
------- -------
Total non-interest expenses 2,178 1,934
----- -----
Income before taxes 672 442
Provision for income taxes 210 153
------ ------
Net income $ 462 $ 289
===== =====
Net income applicable to common stock $ 412 $ 265
===== =====
Average common and common equivalent shares
outstanding 120.4 116.3
===== =====
Earnings per common share $3.42 $2.28
===== =====
See notes to consolidated financial statements.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(Unaudited)
(In millions)
August 31 November 30
ASSETS 1997 1996
----------- ----------
Cash and cash equivalents $ 1,300 $ 2,149
Cash and securities segregated and on deposit
for regulatory and other purposes 927 688
Securities and other financial instruments owned:
Governments and agencies 30,891 26,638
Corporate stocks 9,507 6,937
Corporate debt and other 10,049 8,821
Mortgages and mortgage-backed 11,159 8,314
Derivatives and other contractual agreements 7,780 6,909
Certificates of deposit and other money market
instruments 2,297 3,834
------- ---------
71,683 61,453
------ --------
Collateralized short-term agreements:
Securities purchased under agreements to resell 43,268 32,340
Securities borrowed 16,282 20,651
Receivables:
Brokers, dealers and clearing organizations 4,086 2,878
Customers 7,469 5,813
Others 1,465 1,253
Property, equipment and leasehold improvements
(net of accumulated depreciation and amortization
of $715 in 1997 and $668 in 1996) 468 477
Deferred expenses and other assets 780 722
Excess of cost over fair value of net assets
acquired (net of accumulated amortization
of $109 in 1997 and $103 in 1996) 166 172
----------- ------------
Total assets $147,894 $128,596
======== ========
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
1997 1996
Commercial paper and short-term debt $ 8,606 $ 8,202
Securities and other financial instruments sold
but not yet purchased:
Governments and agencies 17,545 13,202
Corporate stocks 6,248 4,971
Corporate debt and other 1,606 1,375
Derivatives and other contractual agreements 6,913 6,816
------- ------
32,312 26,364
------- ------
Collateralized short-term financings:
Securities sold under agreements to repurchase 57,802
56,119
Securities loaned 8,734 6,296
Payables:
Brokers, dealers and clearing organizations 3,653 1,004
Customers 9,945 7,582
Accrued liabilities and other payables 3,635 3,233
Long-term debt:
Senior notes 15,706 12,571
Subordinated indebtedness 3,198 3,351
------- -------
Total liabilities 143,591 124,722
------- -------
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 and issued in 1997 and 1996; shares outstanding:
33,050 in 1997 and 13,000,000 in 1996; $39.10 liquidation
preference per share 1 508
5%Cumulative Convertible Voting, Series B, 13,000,000 shares authorized;
12,966,950 shares issued and outstanding in 1997;
$39.10 liquidation preference per share 507
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: 108,287,381 in 1997 and 106,793,538 in 1996;
shares outstanding: 101,939,516 in 1997 and 100,449,144 in 1996 11 11
Common Stock issuable 359 326
Additional paid-in capital 3,226 3,198
Foreign currency translation adjustment (1) 20
Retained earnings (deficit) 346 (43)
Common Stock in treasury at cost: 6,347,865 shares in 1997
and 6,344,394 shares in 1996 (146) (146)
----------- ------------
Total stockholders' equity 4,303 3,874
----------- -----------
Total liabilities and stockholders' equity $147,894 $128,596
======== ========
See notes to consolidated financial statements.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
(Unaudited)
Nine months ended
August 31 August 31
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 462 $ 289
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 65 68
Provisions for losses and other reserves 41 32
Deferred tax benefit (33)
Other adjustments 61 151
Net change in:
Cash and securities segregated (239) 104
Securities and other financial instruments owned (10,230) (305)
Securities purchased under agreements to resell (10,928) 784
Securities borrowed 4,369 (8,060)
Receivables from brokers, dealers and clearing organizations (1,208) (861)
Receivables from customers (1,656) (1,321)
Securities and other financial instruments sold but
not yet purchased 5,948 2,247
Securities sold under agreements to repurchase 1,683 (1,620)
Securities loaned 2,438 4,716
Payables to brokers, dealers and clearing organizations 2,649 (787)
Payables to customers 2,363 3,375
Accrued liabilities and other payables 330 32
Other operating assets and liabilities, net (547) (108)
------- --------
Net cash used in operating activities $(4,432) $(1,264)
------- -------
See notes to consolidated financial statements.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(In millions)
(Unaudited)
Nine months ended
August 31 August 31
1997 1996
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes $5,503 $2,314
Principal payments of senior notes (2,071) (1,831)
Proceeds from issuance of subordinated indebtedness 395 1,175
Principal payments of subordinated indebtedness (550) (246)
Net proceeds from commercial paper and
short-term debt 404 909
Payment for repurchase of preferred stock (200)
Payments for treasury stock purchases (130)
Dividends paid (45) (43)
------- -------
Net cash provided by financing activities 3,636 1,948
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, equipment and leasehold
improvements (53) (49)
-------- -------
Net cash used in investing activities (53) (49)
-------- -------
Net change in cash and cash equivalents (849) 635
------ ------
Cash and cash equivalents, beginning of period 2,149 874
----- ------
Cash and cash equivalents, end of period $1,300 $1,509
====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)
Interest paid totaled $9,541 and $8,109 for the nine months ended
August 31, 1997 and 1996, respectively. Income taxes paid totaled $127 and $52
for the nine months ended August 31, 1997 and 1996, 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, 1996 was derived from the audited financial
statements. It is recommended that these consolidated financial statements be
read in conjunction with the audited consolidated financial statements included
in the Company's Annual Report on Form 10-K for the twelve months ended November
30, 1996 (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 prior
period amounts reflect reclassifications to conform to the current period's
presentation.
2. Accounting Policies:
Derivatives, typically defined as instruments whose value is "derived"
from an underlying instrument, index or rate, include futures, forwards, swaps
and options and other similar instruments. A derivative contract generally
represents future commitments to exchange interest payment streams based on the
contract or notional amount or to purchase or sell financial instruments at
specified terms and future dates. 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"). The
Company's accounting methodology for derivatives depends on both the type and
purpose of the derivative instrument.
Derivative transactions entered into for Trading-Related Derivative
Activities are recorded at market or fair value with realized gains and losses
reflected currently in principal transactions in the Consolidated Statement of
Operations. Market or fair value for trading related instruments is generally
determined by either quoted market prices (for exchange-traded futures and
options) or pricing models (for over-the-counter swaps, forwards and options).
Pricing models utilize a series of market inputs to determine the present value
of future cash flows, with adjustments, as required for credit risk, liquidity
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
risk, and ongoing costs. Further valuation adjustments may be recorded, as
deemed appropriate for new or complex products or for significant positions.
These adjustments are integral components of the mark-to-market process.
The market or fair value associated with derivatives utilized for
trading purposes is recorded in the Consolidated Statement of Financial
Condition on a net by counterparty basis where a legal right of set-off exists
and is netted across products and against cash collateral when such provisions
are stated in the master netting agreement. The market or fair value of swap
agreements, caps and floors, and forward contracts in an unrealized gain
position, as well as options owned and warrants held, are reported in the
Consolidated Statement of Financial Condition as assets in derivatives and other
contractual agreements. Similarly, swap agreements, caps and floors, and forward
contracts in an unrealized loss position, as well as options written and
warrants issued, are reported as liabilities in derivatives and other
contractual agreements. Margin on futures contracts is included in receivables
and payables, as applicable.
In addition to Trading-Related Derivative Activities, the Company
enters into various derivative instruments for non-trading purposes as an
end-user to modify the interest rate exposure of certain assets and liabilities.
In this regard, the Company utilizes interest rate and currency swaps, caps,
collars and floors to manage the interest rate exposure associated with its
long-term debt obligations and secured financing activities, including
securities purchased under agreements to resell, securities borrowed, securities
sold under agreements to repurchase and securities loaned.
In addition to modifying the interest rate exposure of existing assets
and liabilities, the Company utilizes derivative instruments as an end user to
modify the interest rate characteristics of certain anticipated transactions
related to its secured financing activities, where there is a high degree of
certainty that the Company will enter into such contracts. These derivative
instruments are designated against existing secured financing transactions based
upon their applicable maturity. The remaining term of the derivative instruments
is designated against anticipated secured financing transactions which will
replace the existing secured financing transactions upon maturity. The Company
continuously monitors the level of secured financing transactions to ensure that
there is a high degree of certainty that it will enter into the anticipated
secured financing transactions at a level in excess of the designated derivative
product transactions.
Derivatives that have been designated as non-trading related positions
and are effective in modifying the interest rate characteristics of existing
assets and liabilities or anticipated transactions are accounted for on an
accrual basis, with the exception of written swaptions which are accounted for
on a mark-to-market basis. Under the accrual basis, interest is accrued into
income or expense over the life of the contract, resulting in the net interest
impact of the derivative and the underlying hedged item being recognized in
income throughout the hedge period.
The Company monitors the effectiveness of its end user hedging
activities by periodically comparing the change in the value of the hedge
instrument to the underlying item being hedged, and reassessing the likelihood
of the occurrence of anticipated transactions. In the event that the Company
determines that a hedge is no longer effective, such as upon extinguishment of
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
the underlying asset or liability or a change in circumstances whereby there is
not a high degree of certainty that the anticipated transaction will occur, the
derivative transaction is no longer accounted for as a hedge. Instead, the
Company immediately records the market or fair value of the derivative
instrument on the Statement of Financial Condition. Changes in the fair value of
the derivative contract would then be accounted for as a derivative used for
trading purposes as discussed above. In the event that a derivative designated
as a hedge is terminated early, any unrealized gain or loss on the termination
would be deferred and amortized to interest income or interest expense over the
original period of the hedge as long as the underlying hedged item is still
outstanding.
3. Long-Term Debt:
During the nine months ended August 31, 1997, the Company issued $5,898
million of long-term debt (comprised of $5,503 million of senior notes and $395
million of subordinated debt). Of the total issuances for the nine months of
1997, $2,606 million were U.S. dollar fixed rate, $1,872 million were U.S.
dollar floating rate, $634 million were foreign currency denominated fixed rate,
and $786 million were foreign currency denominated floating rate. The issuances
were primarily utilized to refinance current and prefund the remaining
maturities of long-term debt in 1997 and to increase total capital
(stockholders' equity plus long-term debt).
The Company's floating rate new issuances contain contractual interest
rates based primarily on London Interbank Offered Rates ("LIBOR"). All of the
Company's fixed rate new issuances were effectively converted to floating rate
obligations through the use of interest rate swaps.
The Company had $2,621 million of long-term debt mature during the nine
months ended August 31, 1997.
4. Capital Requirements:
The Company operates globally through a network of subsidiaries with
several being subject to regulatory requirements. In the United States, LBI, as
a registered broker-dealer, is subject to SEC Rule 15c3-1, the Net Capital Rule,
which requires LBI to maintain net capital of not less than the greater of 2% of
aggregate debit items arising from customer transactions, as defined, or 4% of
funds required to be segregated for customers' regulated commodity accounts, as
defined. At August 31, 1997, LBI's regulatory net capital, as defined, of $1,364
million exceeded the minimum requirement by $1,262 million.
Lehman Brothers International (Europe) ("LBIE"), a United Kingdom
registered broker-dealer and subsidiary of Holdings, is subject to the capital
requirements of the Securities and Futures Authority ("SFA") of the United
Kingdom. Financial resources, as defined, must exceed the total financial
resources requirement of the SFA. At August 31, 1997, LBIE's financial resources
were $269 million in excess of regulatory requirements. Lehman Brothers Japan
Inc.'s Tokyo branch, a regulated broker-dealer, is subject to the capital
requirements of the Japanese Ministry of Finance and, at August 31, 1997, had
net capital of $141 million in excess of the specified levels required. Certain
other non-U.S. subsidiaries are subject to various securities, commodities and
banking regulations and capital adequacy requirements promulgated by the
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
regulatory and exchange authorities of the countries in which they operate. At
August 31, 1997, these other subsidiaries were in compliance with their
applicable local capital adequacy requirements. The Company's triple-A rated
derivatives subsidiary, Lehman Brothers Financial Products Inc. ("LBFP"), has
established certain capital and operating restrictions which are reviewed by
various rating agencies. At August 31, 1997, LBFP had capital which exceeded the
requirement of the most stringent rating agency by $90 million.
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.
5. Derivative Financial Instruments:
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. Unrealized
gains and losses on derivative contracts are currently recorded on a net basis
in the Consolidated Statement of Financial Condition for those transactions with
counterparties executed under a legally enforceable master netting agreement and
are netted across products and against cash collateral when such provisions are
stated in the master netting agreement. Listed in the following table is the
fair value and average fair value of the Company's Trading-Related Derivative
Activities:
Average Fair Value*
Fair Value* Nine Months Ended
August 31, 1997 August 31, 1997
--------------- ---------------
(in millions) Assets Liabilities Assets Liabilities
- ---------------------------------------------------------------------------------------------------------------------------
Interest rate and currency swaps and options
(including caps, collars and floors) $4,355 $2,843 $4,376 $3,260
Foreign exchange forward contracts and options 1,421 1,496 1,132 1,474
Options on other fixed income securities,
mortgage-backed securities forward contracts
and options 174 157 244 216
Equity contracts (including equity swaps, warrants
and options) 1,573 2,125 1,693 1,901
Commodity contracts (including swaps, forwards,
and options) 257 292 343 542
-------------------------------------------------------
Total $7,780 $6,913 $7,788 $7,393
-------------------------------------------------------
* Amounts represent carrying value (exclusive of collateral) of contracts and do
not include receivables or payables related to exchange-traded futures
contracts.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
Average Fair Value*
Fair Value* Twelve Months Ended
November 30, 1996 November 30, 1996
----------------- -----------------
(in millions) Assets Liabilities Assets Liabilities
- ---------------------------------------------------------------------------------------------------------------------------
Interest rate and currency swaps and options
(including caps, collars and floors) $4,008 $3,185 $3,446 $1,945
Foreign exchange forward contracts and options 970 1,206 903 1,200
Options on other fixed income securities,
mortgage-backed securities forward contracts
and options 226 286 239 238
Equity contracts (including equity swaps, warrants
and options) 1,167 1,304 1,118 1,076
Commodity contracts (including swaps, forwards,
and options) 538 835 451 587
------------------------------------------------------
Total $6,909 $6,816 $6,157 $5,046
-----------------------------------------------------
* Amounts represent carrying value (exclusive of collateral) of contracts and do
not include receivables or payables related to exchange-traded futures
contracts.
Assets included in the table above and on the previous page represent
the Company's unrealized gains, net of unrealized losses for situations in which
the Company has a master netting agreement. Similarly, liabilities represent net
amounts owed to counterparties. Therefore, the fair value of assets related to
derivative contracts at August 31, 1997 represents the Company's net receivable
for derivative financial instruments before consideration of collateral.
Included within the $7,780 million fair value of assets at August 31, 1997 was
$7,425 million related to swaps and OTC contracts and $355 million related to
exchange-traded option and warrant contracts.
With respect to OTC contracts, including swaps, the Company views its
net credit exposure to be $4,473 million at August 31, 1997, representing the
fair value of the Company's OTC contracts in an unrealized gain position, after
consideration of collateral of $2,952 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, 1997
Risk Rating Equivalent Net Credit Exposure
- ------------ ------------------------- -------------------
1 AAA/Aaa 19%
2 AA-/Aa3 or higher 23%
3 A-/A3 or higher 34%
4 BBB-/Baa3 or higher 12%
5 BB-/Ba3 or higher 8%
6 B+/B1 or lower 4%
- -------------------------------------------------------------------------------
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.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
The Company is also subject to credit risk related to its
exchange-traded derivative contracts. Exchange-traded contracts, including
futures and certain options, are transacted directly on the exchange. To protect
against the potential for a default, all exchange clearing houses impose net
capital requirements for their membership. Additionally, the exchange clearing
house requires counterparties to futures contracts to post margin upon the
origination of the contract and for any changes in the market value of the
contract on a daily basis (certain foreign exchanges extend settlement to three
days). Therefore, the potential for losses from exchange-traded products is
limited.
For a further discussion of the Company's derivative related
activities, refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Off-Balance Sheet Financial Instruments
and Derivatives" and Note 12 to the Consolidated Financial Statements, included
in the Form 10-K.
6. Other Commitments and Contingencies:
In connection with its secured financing activities, the Company has
commitments under certain secured lending arrangements of approximately $4.6
billion at August 31, 1997. These commitments require borrowers to provide
acceptable collateral, as defined in the agreements, when amounts are drawn
under the lending facilities. Advances made under the above lending arrangements
are typically at variable interest rates and generally provide for
over-collateralization based upon the borrowers' creditworthiness.
In addition, the Company has commitments to extend credit in loan
syndication transactions of $1.3 billion at August 31, 1997. These commitments
are typically secured against the borrower's assets, have fixed maturity dates
and are contingent on certain contractual conditions that may require payment of
a fee by the counterparty and are drawn down at the discretion of the borrower.
The total commitment above may not be indicative of actual funding requirements
as the commitments may expire without being drawn upon by the borrower. The
Company frequently syndicates or participates a portion of these commitments.
In connection with its merchant banking activities, the Company has
commitments to invest up to $711 million in partnerships which in turn will make
direct merchant banking related investments. These commitments will be funded as
required through the end of the respective partnerships' investment periods,
principally expiring in 2002. It is expected that approximately $250 million of
these commitments will be made by employee capital contributions through
employee investment vehicles. Any amount contributed by employees would reduce
the Company's commitment.
The Company is also a co-sponsor of an interim acquisition funding
facility. In connection therewith, the Company is committed to provide up to
$150 million to be used by the facility to provide short-term bridge financing.
Any draw downs under the facility would be expected to be refinanced, and the
outstanding amounts repaid, within a short-term period.
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
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
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 14 to the Consolidated
Financial Statements, in the Form 10-K.
7. Incentive Plans:
In the first quarter of 1997, the Company granted approximately 2.3
million options (the "1997 Options") under the 1996 Management Ownership Plan to
members of the Corporate Management Committee and to certain senior officers. At
the grant date, the 1997 Options were to become exercisable in four and one-half
years and expire five years after grant date; exercisability was to be
accelerated ratably in one-third increments at such time as the closing price of
the Company's common stock met, or exceeded, $39, $42, and $45 for fifteen out
of twenty consecutive trading days. As of August 31, 1997, all of the 1997
Options were exercisable. No compensation expense has been recognized for these
stock options as they were issued with an exercise price above the market price
of the common stock on the date of the grant.
8. 1996 Severance Charge:
The Company recorded an $84 million severance charge ($50 million
aftertax) in the fourth quarter of 1996 related to certain strategic actions
taken to improve ongoing profitability. The severance charge reflected the
culmination of a worldwide business unit economic performance review that was
undertaken in the fourth quarter of 1996 to focus the Company on its core
investment banking, equity and fixed income sales and trading areas. This
formalized review resulted in personnel reductions of approximately 270 people
across a number of underperforming fixed income and equity businesses, including
exiting the precious metals business in the U.S., Europe and Asia; exiting
energy trading in the U.S. and Europe; consolidating Asian fixed income risk
management activities into one center in Tokyo; refocusing foreign exchange
trading activities, and combining the Company's New York Private Client Services
offices. Additionally, the charge reflects various other strategic personnel
reductions aimed at delayering management. The severance charge has led to
personnel cost savings of approximately $90 million annually. The charge also
resulted in a permanent decrease in nonpersonnel expenses of approximately $20
million annually. The Company intends to reinvest substantially all these
savings into certain businesses to expedite the Company's strategic initiatives;
these actions are expected to result in improved operating revenues.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
Cash outlays relating to the charge were approximately $19 million in
the fourth quarter of 1996 and approximately $58 million during the nine months
of 1997. The remaining residual payments will be paid as deferred payment
arrangements are completed.
9. New Accounting Pronouncements:
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share", which is effective for annual and
interim financial statements issued for periods ending after December 15, 1997.
SFAS No. 128 was issued to simplify the standards for calculating earnings per
share ("EPS") previously found in APB No. 15, "Earnings Per Share". SFAS No. 128
replaces the presentation of primary EPS with a presentation of basic EPS. The
new rules also require dual presentation of basic and diluted EPS on the face of
the statement of operations for companies with a complex capital structure. For
the Company, basic EPS will exclude the dilutive effects of stock options and
certain non-vested RSUs. Diluted EPS for the Company will reflect all potential
dilutive securities (similar to fully diluted EPS under APB No. 15). Under the
provisions of SFAS No. 128, basic EPS would have been $0.09 and $0.05 higher
than the amounts reported in the third quarter of 1997 and 1996, respectively.
Additionally, basic EPS would have been $0.27 and $0.19 higher than the amounts
reported for the nine months of 1997 and 1996, respectively. Diluted EPS would
have been the same as the fully diluted amounts.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." These statements are effective for fiscal years beginning
after December 15, 1997 and establish standards for the reporting and display of
comprehensive income and disclosure related to segments.
10. Preferred Stock
Cumulative Convertible Voting, Series A and Series B
The Cumulative Convertible Voting Preferred Stock, Series A and Series
B (together the "Convertible Voting Preferred") have a liquidation preference of
$39.10 per share. The Series A was issued in 1987. The Series B was issued in
exchange for the Series A, on July 11, 1997. As of August 31, 1997, 33,050
shares of Series A and 12,966,950 shares of Series B were outstanding.
The holders of the Convertible Voting Preferred are entitled to receive
preferred dividends at an annual rate of 5%, on the liquidation preference,
payable quarterly before any dividends are paid to the holders of Common Stock.
The Company has the right to redeem up to 10,400,000 shares of the
Convertible Voting Preferred up to and including June 15, 1998. On June 16,
1998, the Company will have the right to redeem up to 13,000,000 shares subject
to adjustment and restrictions on redemption when dividends are in arrears. Such
redemption will be at a price per preferred share equal to $39.10.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
Each share of the Convertible Voting Preferred is convertible, at any
time prior to the date of redemption, into 0.3178313 of a share of Common Stock.
The Series A is convertible provided that at least 250,000 shares (or such
lesser number of such shares then outstanding) are converted each time. Each
share of Series B is convertible without limitations. In each case, the
conversion rate at August 31, 1997 was $123.02.
Nippon Life currently holds 9,163,683 shares of Series B. The remaining
3,836,317 shares of the Convertible Voting Preferred are held by various
institutional investors.
Redeemable Voting
In 1994, Holdings issued the Redeemable Preferred Stock to American
Express and Nippon Life for $1,000. The holders of the Redeemable Preferred
Stock will be entitled to receive annual dividends through May 31, 2002 in an
amount equal to 50% of the amount, if any, by which the Company's net income for
the preceding year exceeds $400 million, up to a maximum of $50 million,
prorated in the case of the last dividend period, which runs from December 1,
2001 to May 31, 2002. For the nine months ended August 31, 1997, the Company's
net income of $462 million resulted in the recognition of a $31 million dividend
on the Redeemable Voting Preferred Stock, which has been reflected in the
Consolidated Statement of Operations.
11. Subsequent Event
The Company established a trust (the "RSU Trust") in order to provide
common stock voting rights to a substantial number of employees who hold
outstanding restricted stock units ("RSU"), in furtherance of the Company's
stated goal when RSU awards were initiated in June 1994, to encourage employees
to think and act like owners. The RSU Trust was initially funded with a total of
16 million shares consisting of 5 million treasury shares, for RSU awards under
the Employee Incentive Plan and 11 million new issue shares of Common Stock, for
RSU awards under the 1994 Management Ownership Plan. The establishment of the
RSU Trust did not impact the total number of shares used in the computation of
earnings per common share because the 16 million shares were included in common
stock issuable from the time the awards were accrued.
Accordingly, there was no effect on total equity and net income of the Company.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Business Environment
Market conditions in the first nine months of 1997 reflected record
corporate finance advisory activities, strong underwriting volumes in worldwide
fixed income products, and generally active trading in worldwide debt and equity
markets. These favorable conditions were mitigated in part by reduced global
equity underwriting volumes and increased volatility in the foreign exchange
markets, particularly in Europe and Asia.
Global fixed income markets were robust throughout most of 1997, with
heavy trading volumes in both the U.S. and Europe. Trading activity in the U.S.
continued to reflect investor optimism that the environment of sustained growth
and low inflation levels would continue. Additionally, U.S. trading activity
was bolstered by active purchases of U.S. securities by foreign investors due
to the favorable U.S. macroeconomic environment and the strong dollar.
In March 1997, the Federal Reserve raised the overnight lending rate by
0.25% to 5.50%. However, the deceleration of GDP growth and continued low
inflation indicators kept the Federal Reserve from raising interest rates for a
second time in 1997. The decline experienced in trading volumes and origination
activities in the U.S. fixed income market from the increase in the overnight
lending rate was short-lived. Towards the end of April, the U.S. fixed income
markets recovered as interest rates declined and trading volumes regained
strength. This trend continued through the beginning of October.
The interest rate on the 30-year U.S. Treasury, which peaked at 7.17%
on April 11th, declined to 6.28% on October 7, 1997. However, on October 8,
1997, investors again became concerned about a possible tightening in U.S.
interest rates based upon remarks by the Federal Reserve Board Chairman that it
would be difficult to maintain a balance between tight labor markets and low
growth. In addition he cautioned investors not to expect stock prices to
continue to rally indefinitely. As a result, the interest rate on the 30-year
U.S. Treasury rose to 6.43% on October 10, 1997
Trading activities in worldwide equity markets continued to show
strength in 1997. U.S. trading volumes improved over the prior year's record
levels, as investor demand remained strong and the equity markets benefited from
increasing capital flows. The U.S. equity markets continued to show strength
through October 1997, reaching new highs on most major indexes. A brief
correction in August and September was the result of several concerns: currency
turmoil in Southeast Asia, which investors believed would hurt profits of U.S.
companies; profit warnings; and, once again, fears that a strengthening economy
would induce the Federal Reserve to raise rates. As these concerns diminished,
the equity market resumed its upward trend. While intraday moves in the equity
market have become large and provide the appearance of a more volatile market,
the upward trend in prices and the lower volatility since August have benefited
the origination and trading activities of securities firms. European equity
markets saw improved trading volumes and valuations in 1997, despite an
adjustment in March, as the stronger U.S. dollar and declining European rate
environment contributed to a favorable equity environment.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Worldwide underwriting volumes in fixed income products remained strong
in the first nine months of 1997. U.S. underwriting volumes, while experiencing
a slowdown in March and April, strengthened over the prior year led by the
issuance of corporate, asset-backed, high yield, and emerging market bonds.
Issuers came to market to take advantage of the historically attractive yields,
as well as favorable pricing in the spread sectors. Equity and equity-related
underwriting volumes declined from the strong 1996 levels, as uncertainty
regarding both interest rates and prospective earnings performance of U.S.
companies contributed to U.S. equity market corrections. New issuance activity
was also negatively impacted by a lower volume of large international
privatizations over the period.
Corporate finance advisory activities outpaced the record 1996 levels,
reflecting increased consolidation and globalization across industry sectors as
well as the overall strength in the global capital markets. The pace of
strategic merger and acquisition activity is expected to remain strong
throughout the fourth quarter of 1997, resulting in a record year for worldwide
merger and acquisition activities.
While fiscal 1996 and 1997 have been characterized by favorable
financial markets, nevertheless, the financial services industry is cyclical. As
a result, the Company's businesses are evaluated across the market cycles for
operating profitability and their contribution to the Company's long-term
strategic product base, its global presence, and its risk management practices.
Note: Except for the historical information contained herein, this Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements that are based on current
expectations, estimates and projections about the industries in which the
Company operates. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions
which are difficult to predict. The Company undertakes no obligation to
update publicly any forward-looking statements, whether as a result of
new information, future events or otherwise.
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, 1997 and 1996
The Company reported net income of $197 million for the third quarter
ended August 31, 1997, representing an increase of 156% from net income of $77
million for the third quarter ended August 31, 1996. This increase reflected
across-the-board strength in the Company's equity, fixed income and investment
banking businesses. Earnings per common share increased to $1.30 for the third
quarter of 1997 from $0.60 for the third quarter of 1996. Included in the 1997
earnings per common share computation was the recognition of approximately $31
million in dividends on the Company's Redeemable Voting Preferred Stock.
American Express Company and Nippon Life Insurance Company are entitled to
receive an annual non-cumulative preferred dividend equal to 50 percent of the
amount by which the Company's net income for the full fiscal year exceeds $400
million, up to a maximum of $50 million per year, through 2002.
Net revenues increased to $1,071 million for the third quarter of 1997
from $722 million for the third quarter of 1996. The increase in net revenues
from the third quarter of 1996 resulted from particular strength in a number of
strategic, higher margin businesses on which the Company is focused, including
the global merger and acquisition advisory business, equity underwriting, high
yield, merchant banking and mortgage and real estate activities.
Compensation and benefits expense as a percentage of net revenues was
50.7% for both the third quarter of 1997 and 1996, reflecting the tenth
successive quarter of consistent compensation levels relative to net revenues.
Nonpersonnel expenses increased to $247 million in the third quarter of 1997
from $240 million in the third quarter of 1996; however, nonpersonnel expenses
as a percentage of net revenues decreased to 23.1% for the third quarter of 1997
from 33.2% for the third quarter of 1996. Increased net revenues led to an
improvement in the Company's pretax operating margin to 26.2% in the three
months of 1997 from 16.0% in the three months of 1996.
The Company, through its subsidiaries, is a market-maker of equity and
fixed income products in major domestic and international markets. As part of
its market-making activities, the Company maintains inventory positions of
varying amounts across a broad range of financial instruments that are
marked-to-market on a daily basis and along with the Company's proprietary
trading positions, give rise to principal transactions revenues. The Company
utilizes various hedging strategies to minimize its exposure to significant
movements in interest and foreign exchange rates and the equity markets.
Net revenues from the Company's market-making and trading activities in
fixed income and equity products are recognized as either principal transactions
or net interest revenues depending upon the method of financing and/or hedging
related to specific inventory positions. The Company evaluates its trading
strategies on an overall profitability basis which includes both principal
transactions revenues and net interest. Therefore, changes in net interest
should not be viewed in isolation but should be viewed in conjunction with
revenues from principal transactions. Principal transactions and net interest
revenues increased to $545 million for the third quarter of 1997 from $404
million for the third quarter of 1996. The increase in combined revenues from
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
principal transactions and net interest in the third quarter of 1997 was due to
increased revenues across almost all equity and fixed income product lines
partially offset by higher interest expenses resulting from the Company's
increased level of long-term debt.
The following table of net revenues by business unit and the
accompanying discussion have been prepared in order to present the Company's net
revenues in a format that reflects the manner in which the Company manages its
businesses. For internal management purposes, the Company has been segregated
into four major business units: Fixed Income, Equity, Corporate Finance
Advisory, and Merchant Banking. Each business unit represents a grouping of
financial activities and products with similar characteristics. These business
activities result in revenues that are recognized in multiple revenue categories
contained in the Company's Consolidated Statement of Operations. Net revenues by
business unit contain certain internal allocations, including funding costs,
which are centrally managed.
Three Months Ended August 31, 1997
Principal
Transactions and Investment
Net Interest Commissions Banking Other Total
- ------------------------------------------------------------------------------------------------------------------------
Fixed Income $400 $8 $97 $ 5 $510
Equity 141 99 101 1 342
Corporate Finance Advisory (1) 81 80
Merchant Banking 117 117
Other 5 4 13 22
- ------------------------------------------------------------------------------------------------------------------------
$545 $111 $396 $19 $1,071
- ------------------------------------------------------------------------------------------------------------------------
Three Months Ended August 31, 1996
Principal
Transactions and Investment
Net Interest Commissions Banking Other Total
- ---------------------------------------------------------------------------------------------------------------------------
Fixed Income $387 $12 $71 $470
Equity 21 60 61 $1 143
Corporate Finance Advisory 62 62
Merchant Banking (5) 41 36
Other 1 5 2 3 11
- ---------------------------------------------------------------------------------------------------------------------------
$404 $77 $237 $4 $722
- ---------------------------------------------------------------------------------------------------------------------------
Fixed Income. The Company's fixed income net revenues reflect customer
flow activities (both institutional and high-net-worth retail), secondary
trading, debt underwriting, syndicate and financing activities related to fixed
income products. Fixed income products include dollar- and non-dollar government
securities, mortgage- and asset-backed securities, money market products,
dollar- and non-dollar corporate debt securities, emerging market securities,
municipal securities, financing (global access to debt financing sources
including repurchase and reverse repurchase agreements), foreign exchange and
fixed income derivative products. Fixed income net revenues increased 9% to $510
million for the third quarter of 1997 from $470 million for the third quarter of
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
1996. The increase in the third quarter results versus the prior year quarter
reflected increased revenues from a number of fixed income products including
mortgages, high yield corporates and emerging markets partially offset by
decreased results in derivatives. Investment banking revenues, as a component of
fixed income revenues, increased to $97 million for the third quarter of 1997
from $71 million for the third quarter of 1996 due to increased underwriting
fees, particularly in high yield corporates.
Equity. Equity net revenues reflect customer flow activities (both
institutional and high-net-worth retail), secondary trading, equity
underwriting, equity finance, equity derivatives and equity arbitrage
activities. The Company's equity net revenues increased to $342 million for the
third quarter of 1997 from $143 million for the third quarter of 1996. Higher
revenues resulted from improved contributions from U.S. listed and international
(primarily Europe) equities, NASDAQ and equity finance partially offset by a
decline in derivatives. This improved performance was evident in secondary
customer flow, trading and origination activities. Investment banking revenues,
as a component of equity revenues, increased to $101 million for the third
quarter of 1997 from $61 million for the third quarter of 1996 due to increased
underwriting volumes as markets rebounded from the Fed tightening in the second
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 consists of advising
clients on mergers and acquisitions, divestitures, leveraged buyouts, financial
restructurings, and a variety of cross-border transactions. Net revenues from
corporate finance advisory activities increased to $80 million for the third
quarter of 1997, reflecting a 29% increase from the $62 million recognized in
the third quarter of 1996. This increase reflected the closing of several large
deals in the third quarter of 1997 and continued strength in the overall merger
and acquisition market environment.
Merchant Banking. The Company is the general partner for six active
merchant banking partnerships. Current merchant banking investments held by the
partnerships include both publicly traded and privately held companies
diversified on a geographic and industry basis. 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 were
$117 million for the third quarter of 1997 and $36 million in the third quarter
of 1996. This increase was principally due to realized gains on the sale of the
Company's remaining position in two publicly traded investments held by the
partnerships.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Non-Interest Expenses. Non-interest expenses were $790 million for the
third quarter of 1997 and $606 million for the third quarter of 1996.
Compensation and benefits expense as a percentage of net revenues remained
unchanged from the prior year quarter at 50.7%. Nonpersonnel expenses increased
to $247 million in the third quarter of 1997 from $240 million in the third
quarter of 1996; however, nonpersonnel expenses as a percentage of net revenues
decreased to 23.1% for 1997 compared to 33.2% for 1996. Increases in
non-interest expenses in the third quarter of 1997 were primarily due to
expenditures related to year 2000 technology costs.
Income Taxes. The Company's income tax provision was $84 million for
the third quarter of 1997 compared to $39 million for the third quarter of 1996.
The effective tax rate was 30% for the third quarter of 1997 and 34% for the
third quarter of 1996. The decrease in the effective tax rate reflects an
increase in tax benefits attributable to income subject to preferential tax
treatment and an increase in the Company's net deferred tax assets resulting
from a change in state and local tax laws, partially offset by a decrease in tax
benefits from foreign operations.
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, 1997 and 1996
The Company reported net income of $462 million for the nine months
ended August 31, 1997, representing an increase of 60% from net income of $289
million for the nine months ended August 31, 1996. Earnings per common share
increased to $3.42 for the nine months of 1997 from $2.28 for the nine months of
1996. Included in the 1997 earnings per common share computation was the
recognition of approximately $31 million in dividends on the Company's
Redeemable Voting Preferred Stock. American Express Company and Nippon Life
Insurance Company are entitled to receive an annual non-cumulative preferred
dividend equal to 50 percent of the amount by which the Company's net income for
the full fiscal year exceeds $400 million, up to a maximum of $50 million per
year, through 2002.
Net revenues increased to $2,850 million for the nine months of 1997
from $2,376 million for the nine months of 1996. The increase in net revenues
from the comparable nine months of 1996 resulted from particular strength in a
number of strategic, higher margin businesses on which the Company is focused,
including the global merger and acquisition advisory business, equity
underwriting, merchant banking and mortgage and real estate activities.
The Company ranked fourth in worldwide lead managed debt and equity
underwritings in 1997 up from its fifth place ranking in the comparable prior
year period. In equity and equity - related underwriting, the Company's ranking
improved significantly, rising to sixth place from its tenth place ranking in
1996. In worldwide lead managed fixed income underwriting, the Company
maintained its second place ranking. In worldwide mergers and acquisitions, the
Company ranked tenth for 1997 in completed transactions and ended the third
quarter of 1997 with a strong transaction pipeline which stood at $38 billion in
terms of total dollar value. These rankings are based on data compiled by
Securities Data Company for the nine month periods December through August in
both fiscal 1997 and 1996.
Compensation and benefits expense as a percentage of net revenues was
50.7% for both the nine months of 1997 and 1996. Nonpersonnel expenses declined
as a percentage of net revenues to 25.7% for the nine months of 1997 from 30.7%
for the comparable period in 1996. Increased net revenues led to an improvement
in the Company's pretax operating margin to 23.6% in the nine months of 1997
from 18.6% in the nine months of 1996.
Principal transactions and net interest revenues increased to $1,568
million for the nine months of 1997 from $1,411 million for the nine months of
1996. The increase in the combined revenues from principal transactions and net
interest in the nine months of 1997 was the result of increased revenues across
almost all equity and fixed income product lines partially offset by higher
interest expenses resulting from the Company's increased level of long-term debt
outstanding.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table of net revenues by business unit and the
accompanying discussion have been prepared in order to present the Company's net
revenues in a format that reflects the manner in which the Company manages its
businesses. Net revenues by business unit contain certain internal allocations,
including funding costs, which are centrally managed.
Nine Months Ended August 31, 1997
Principal
Transactions and Investment
Net Interest Commissions Banking Other Total
- ---------------------------------------------------------------------------------------------------------------------------
Fixed Income $ 1,226 $ 28 $270 $ 13 $1,537
Equity 346 259 207 4 816
Corporate Finance Advisory (4) 231 227
Merchant Banking (8) 200 192
Other 8 12 2 56 78
- ---------------------------------------------------------------------------------------------------------------------------
$1,568 $299 $910 $73 $2,850
- ---------------------------------------------------------------------------------------------------------------------------
Nine Months Ended August 31, 1996
Principal
Transactions and Investment
Net Interest Commissions Banking Other Total
- ---------------------------------------------------------------------------------------------------------------------------
Fixed Income $1,236 $ 45 $218 $ 5 $1,504
Equity 180 206 186 3 575
Corporate Finance Advisory 169 169
Merchant Banking (13) 95 82
Other 8 16 3 19 46
- ---------------------------------------------------------------------------------------------------------------------------
$1,411 $267 $671 $27 $2,376
- ---------------------------------------------------------------------------------------------------------------------------
Fixed Income. Fixed income net revenues increased to $1,537 million for
the nine months of 1997 from $1,504 million for the nine months of 1996. The
improved revenues in a number of fixed income products including mortgages,
emerging markets and high yield corporates partially offset by decreased results
in derivatives, foreign exchange and firm financing. Investment banking
revenues, as a component of fixed income revenues, increased to $270 million for
the nine months of 1997 from $218 million for the nine months of 1996 due to
increased underwriting fees on certain higher margin debt products. The Company
improved its ranking in high yield underwriting to seventh from ninth as well as
its market share to 5.4% from 4.4%.
Equity. The Company's equity net revenues increased to $816 million for
the nine months of 1997 from $575 million for the nine months of 1996. Higher
revenues for the nine months of 1997 resulted from improved contributions from
equity finance, as well as U.S. listed and European equities. Investment banking
revenues, as a component of equity revenues, increased to $207 million for the
nine months of 1997 from $186 million for the nine months of 1996 due to
increased underwriting volumes.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Corporate Finance Advisory. Net revenues from corporate finance
advisory activities increased to $227 million for the nine months of 1997
reflecting a 34% increase from the $169 million recognized in the nine months of
1996. This increase reflected continued strength in the overall merger and
acquisition market environment.
Merchant Banking. Merchant banking net revenues were $192 million for
the nine months of 1997 and $82 million in the nine months of 1996. This
increase was principally due to realized gains on the sale of the Company's
remaining position in two publicly traded investments held by the partnerships.
Other. Other net revenues for the nine months of 1997 include
approximately $53 million relating to the liquidation of certain non-core
assets.
Non-Interest Expenses. Non-interest expenses were $2,178 million for
the nine months of 1997 and $1,934 million for the nine months of 1996.
Compensation and benefits expense as a percentage of net revenues remained
unchanged from the comparable prior year period at 50.7%. Nonpersonnel expenses
declined as a percentage of net revenues to 25.7% for the nine months of 1997
from 30.7% for the comparable period in 1996. Increased net revenues led to an
improvement in the Company's pretax operating margin to 23.6% in the nine months
of 1997 from 18.6% in the nine months of 1996.
Income Taxes. The Company's income tax provision was $210 million for
the nine months of 1997 compared to $153 million for the nine months of 1996.
The effective tax rate was 31% for 1997 and 35% for 1996. The decrease in the
effective tax rate reflects an increase in tax benefits attributable to income
subject to preferential tax treatment and an increase in the Company's net
deferred tax assets resulting from a change in state and local tax laws,
partially offset by a decrease in tax benefits from foreign operations.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Overview
As a leading global investment bank that actively participates in the
global capital markets, the Company has large and diverse capital requirements.
Many of the businesses in which the Company operates are capital intensive.
Capital is required to finance, among other things, the Company's securities
inventory, underwriting activities, principal investments, merchant banking
activities and investments in fixed assets.
The Company's balance sheet is liquid and consists primarily of cash
and cash equivalents, securities and other financial instruments owned, and
collateralized short-term financing agreements. The highly liquid nature of
these assets provides the Company with flexibility in financing and managing its
business. The Company's primary activities are based on customer execution
transactions. This flow of customer business supports the rapid asset turnover
rate of the Company's inventory. Due to the nature of the Company's activities,
the overall size of the Company's assets and liabilities fluctuates from time to
time and at specific points in time may be higher than at fiscal quarter ends.
The Company's total assets increased to $147.9 billion at August 31,
1997 from $128.6 billion at November 30, 1996. The increase in total assets is
primarily attributable to an increase in the level of securities and other
financial instruments owned, primarily governments and agencies, mortgages and
mortgage-backed and equity securities as well as an increase in customer
financing activities.
Funding and Capital Policies
The Company's Finance Committee is responsible for establishing and
managing the funding and liquidity policies of the Company. The Finance
Committee's funding and liquidity policies include recommendations for capital
and balance sheet size as well as the allocation of capital and balance sheet
to product areas. Under the authority of the Finance Committee, members of the
Company's treasury work with Regional Asset and Liability Committees to ensure
coordination of global funding efforts and implementation of the funding and
liquidity policies. The Regional Asset and Liability Committees are aligned
with the Company's geographic funding centers and are responsible for
implementing funding strategies for their respective region.
The primary goal of the Company's funding policies is to provide
sufficient liquidity and availability of funding sources across a wide range of
market environments. There are five key elements of its funding strategy that
the Company attempts to achieve:
o To maintain an appropriate Total Capital structure to support the business
activities in which the Company is engaged.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
o To minimize liquidity and refinancing risk by funding the Company's assets
on a global basis with unsecured liabilities which have maturities similar
to the anticipated liquidation period of the assets.
o To maintain sufficient liquidity during a period of financial stress
through a combination of collateralized short-term financings, Total
Capital and a contingency funding plan. Financial stress is defined as any
event which severely constrains the Company's access to unsecured funding
sources.
o To obtain diversified funding through a global investor base which maximizes
liquidity and reduces concentration risk.
o To maintain funding availability in excess of actual utilization.
Short-Term Funding
The Company strives to maximize the portion of the Company's balance
sheet that is funded through collateralized borrowing sources, which in turn
minimizes the reliance placed upon unsecured short-term debt.
Collateralized borrowing sources include securities and other financial
instruments sold but not yet purchased, as well as collateralized short-term
financings, defined as securities sold under agreements to repurchase ("repos")
and securities loaned. Because of their secured nature, OECD government repos
and certain other types of collateralized borrowing sources are less
credit-sensitive and have historically been a more stable financing source under
adverse market conditions.
The amount of the Company's collateralized borrowing activities will
vary reflecting changes in the mix and overall levels of securities and other
financial instruments owned and global market conditions. The majority of the
Company's assets are funded with collateralized borrowing sources. At August 31,
1997 and November 30, 1996, $99 billion and $89 billion, respectively, of the
Company's total balance sheet was financed using collateralized borrowing
sources.
As of August 31, 1997 and November 30, 1996, commercial paper and
short-term debt outstanding was $8.6 billion and $8.2 billion, respectively. Of
these amounts, commercial paper outstanding as of August 31, 1997 was $4.6
billion with an average maturity of 88 days, compared to $3.1 billion with an
average maturity of 64 days as of November 30, 1996.
At August 31, 1997, Holdings maintained a Revolving Credit Agreement
with a syndicate of banks. Under the terms of the credit agreement, the banks
have committed to provide up to $2 billion for up to 364 days. Any loans
outstanding on the commitment termination date may mature on the first
anniversary of the commitment termination date at the option of Holdings. The
credit agreement contains covenants which require, among other things, that the
Company maintain specified levels of liquidity and tangible net worth, as
defined.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 the
committed Facility, the bank group has committed to provide up to $1 billion for
up to 364 days on a secured basis. 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. The credit agreement
contains covenants which require, among other things, that LBIE maintain
specified levels of tangible net worth, and regulatory capital, and that the
Company maintain specified levels of consolidated stockholders' equity and
tangible net worth, as defined.
There were no borrowings outstanding under the Facility or the
Revolving Credit Agreement as of August 31, 1997. The Company uses the Facility
for general corporate purposes from time to time. The Company maintained
compliance with the applicable covenants for both the Revolving Credit Agreement
and the Facility at all times.
Total Capital
In accordance with the Company's liquidity plan, the Company increased
its Total Capital base in 1997 to $23.2 billion at August 31, 1997 from $19.8
billion at November 30, 1996. Total Capital increased primarily due to an
increase in long-term debt and the retention of earnings.
August 31 November 30
(in millions) 1997 1996
- ---------------------------------------------------------------------------
Long-Term Debt
Senior Notes $15,706 $12,571
Subordinated Indebtedness 3,198 3,351
------- -------
18,904 15,922
Stockholders' Equity
Preferred Equity 508 508
Common Equity 3,795 3,366
------- -------
4,303 3,874
- ---------------------------------------------------------------------------
Total Capital $23,207 $19,796
- ---------------------------------------------------------------------------
During the nine months of 1997, the Company issued $5.9 billion in
long-term debt, which was $3.3 billion in excess of its maturing debt. Long-term
debt increased to $18.9 billion at August 31, 1997 from $15.9 billion at
November 30, 1996 with a weighted average maturity of 4.3 years at August 31,
1997 and 4.1 years at November 30, 1996.
The increase in Total Capital also reflects an increase in
stockholders' equity to $4.3 billion at August 31, 1997 from $3.9 billion at
November 30, 1996. The net increase in stockholders' equity was primarily due to
the retention of earnings partially offset by the payment of dividends.
At August 31, 1997, the Company had approximately $4.8 billion
available for the issuance of debt securities under various shelf registrations
and debt programs.
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Capital Resources and Capital Adequacy
Balance sheet leverage ratios are one methodology utilized to evaluate
the capital adequacy of a company relative to financial risk inherent in its
balance sheet. Leverage ratios are commonly calculated using either total assets
or adjusted total assets divided by total stockholder's equity. The Company's
leverage ratios, based on total assets, were 34.4x and 33.2x at August 31, 1997
and November 30, 1996, respectively. The increase in period-end gross leverage
is primarily attributable to an increase in the level of securities and other
financial instruments owned, primarily governments and agencies as well as an
increase in customer financing activities.
Adjusted total assets represent total assets less the lower of
securities purchased under agreements to resell or securities sold under
agreements to repurchase. The Company, most of the major rating agencies, and
many credit analysts believe that the adjusted leverage ratio is a more
effective measure of risk when comparing companies in the securities industry
than the gross leverage ratio. The Company's adjusted leverage ratios were 24.3x
and 24.8x at August 31, 1997 and November 30, 1996, respectively.
Credit Ratings
The Company, like other companies in the securities industry, relies on
external sources to finance a significant portion of its day-to-day operations.
The Company's access to and cost of funding is generally dependent upon its
short-and long-term debt ratings. As of August 31, 1997, the current short- and
long-term senior debt ratings of Holdings and Lehman Brothers Inc. ("LBI") were
as follows:
Holdings LBI
Short-term Long-term Short-term Long-term**
- ---------------------------------------------------------------------------------------------------------------------------
Duff & Phelps Credit Rating Co. D-1 A D-1 A/A-
Fitch 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
High Yield Securities
The Company underwrites, trades, invests and makes markets in high
yield corporate debt securities. The Company also syndicates, trades and invests
in loans to below investment grade rated companies. For purposes of this
discussion, high yield debt securities are defined as securities or loans to
companies rated BB+ or lower, or equivalent ratings by recognized credit rating
agencies, as well as non-rated securities or loans which, in the opinion of
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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, 1997 and November 30, 1996
included long positions with an aggregate market value of approximately $2.7
billion and $1.7 billion, respectively, and short positions with an aggregate
market value of approximately $247 million and $127 million, respectively. The
portfolio may, from time to time, contain concentrated holdings of selected
issues. The Company's largest high yield position was $140 million and $80
million at August 31, 1997 and November 30, 1996, respectively.
Lending Activities
The Company has commitments to extend credit in loan syndication
transactions of $1.3 billion at August 31, 1997. These commitments are primarily
to below investment grade borrowers and, if drawn upon, would represent
additional high yield debt securities as defined above. These commitments are
typically secured against the borrower's assets, have fixed maturity dates, and
are contingent on certain contractual conditions that may require payment of a
fee by the counterparty and are drawn down at the discretion of the borrower.
The total commitment may not be indicative of actual funding requirements as the
commitments may expire without being drawn upon by the borrower. The Company
frequently syndicates or participates a portion of these commitments.
Merchant Banking and Bridge Lending Activities
The Company's merchant banking activities include investments in six
partnerships, for which the Company acts as general partner, as well as direct
investments. At August 31, 1997, the investments in merchant banking
partnerships were $158 million and direct investments were $46 million. The
Company's policy is to carry its investments, including its partnership
interests, at fair value based upon the Company's assessment of the underlying
investments.
In September 1997, the Company established a $2.0 billion fund for
which the Company will act as general partner.
In connection with its merchant banking activities, the Company has
commitments to invest up to an additional $711 million in the above
partnerships, which in turn will make direct merchant banking related
investments. It is expected that approximately $250 million of these commitments
will be made by employee capital contributions through employee investment
vehicles. Any amount contributed by employees would reduce the Company's
commitment.
The Company is also a co-sponsor of an interim acquisition funding
facility. In connection therewith, the Company is committed to provide up to
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
$150 million to be used by the facility to provide short-term bridge financing.
Any draw downs against the facility would be expected to be refinanced, and the
outstanding amounts repaid, within a short-term period.
In addition, at August 31, 1997, the Company had direct short-term
bridge financings outstanding of $24 million.
Non-Core Activities and Investments
In March 1990, the Company discontinued the origination of partnerships
(the assets of which are primarily real estate) and investments in real estate.
Currently, the Company acts as a general partner or co-general partner for
approximately $3.0 billion of partnership investment capital and manages the
remaining real estate investment portfolio. At August 31, 1997, the Company had
$21 million of investments in these real estate activities, as well as $49
million of commitments and contingent liabilities under guarantees and credit
enhancements, both net of applicable reserves. The Company believes any exposure
under these commitments and contingent liabilities has been adequately reserved.
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. The Company has
other investments that are also awaiting their 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 fair value,
which approximates $80 million at August 31, 1997.
Management's intention with regard to non-core assets is the prudent
liquidation of these investments as and when possible. This is evidenced by the
liquidation of certain non-core assets during 1997 which resulted in the
recognition of $53 million of revenue.
Year 2000
The Company has developed a detailed plan to modify its computer
systems in anticipation of the year 2000. Many of the existing systems process
transactions based on storing two digits for the year of a transaction, rather
than the full four digits. If these systems are not identified and reconfigured,
year 2000 transactions would be processed as year "00", which would lead to
processing inaccuracies and potential inoperability. Costs incurred relating to
this project are expensed as technology maintenance costs in accordance with
generally accepted accounting principles.
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 National Association of Securities Dealers
Automated Quotations System ("NASDAQ") Market Maker Antitrust and Securities
Litigation (Reported in Holdings' Annual Report on Form 10-K)
The Stipulation and Order was approved by the United States District
Court for the Southern District of New York on April 22, 1997. The class action
plaintiffs intervened to appeal the Court's approval of the Stipulation and
Order to the United States Court of Appeals for the Second Circuit. That appeal
is pending.
AIA Holding SA et al. v. Lehman Brothers Inc. and Bear Stearns & Co.
Inc. (Reported in Holdings' Second Quarter Report on Form 10-Q)
On July 9, 1997, LBI was served with a complaint in the U.S. District
Court for the Southern District of New York in which 277 named plaintiffs assert
24 causes of action against LBI and Bear Stearns & Co., Inc. The amount of
damages claimed is unspecified. The claims arise from the activities of an
individual named Ahmad Daouk, who was employed by an introducing broker which
introduced accounts to Shearson Lehman Hutton between 1988 and 1992. Daouk
allegedly perpetrated a fraud upon the claimants, who are mostly investors of
Middle Eastern origin, and the complaint alleges that Shearson breached various
contractual and common law duties owed to the investors.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits and reports on Form 8-K are filed as part of this
Quarterly Report, or where indicated, were heretofore filed and are hereby
incorporated by reference:
(a) Exhibits:
11 Computation of Per Share Earnings
12.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 4, 1997, Item 7.
2. Form 8-K dated September 30, 1997, 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, 1997 By /s/ Richard S. Fuld Jr.
--------------------------------
Richard S. Fuld, Jr.
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: October 15, 1997 By /s/ Charles B. Hintz
-----------------------------
Charles B. Hintz
Chief Financial Officer
(Principal Financial Officer)
EXHIBIT INDEX
Exhibit No. Exhibit
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 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
1997 1996 1997 1996
-------------- -------------- ------------- -------
Primary:
Weighted average shares outstanding:
Common stock 101,779,299 100,360,184 101,277,622 102,039,193
Common stock issuable 18,125,532 16,236,616 17,274,171 13,213,616
Common stock equivalents 2,458,397 608,975 1,867,283 1,053,961
-------------- ----------- -------------- --------------
Total common stock and common stock equivalents 122,363,228 117,205,775 120,419,076 116,306,770
=========== =========== =========== ===========
Net income $ 197 $ 77 $ 462 $ 289
Preferred dividends (1) (37) (6) (50) (24)
------ ----- ----- ------
Net income applicable to common stock $ 160 $ 71 $ 412 $ 265
===== ====== ===== =====
Earnings Per Common Share $ 1.30 $ 0.60 $ 3.42 $ 2.28
======== ======== ======== ========
Fully diluted:
Weighted average shares outstanding:
Common stock 101,779,299 100,360,184 101,277,622 102,039,193
Common stock issuable 18,125,532 16,236,616 17,406,933 13,213,616
Common stock equivalents 2,458,397 608,975 2,113,483 1,151,972
----------- ----------- ------------- -------------
Total common stock and common stock equivalents 122,363,228 117,205,775 120,798,038 116,404,781
=========== =========== =========== ===========
Net income $ 197 $ 77 $ 462 $ 289
Preferred dividends (1) (37) (6) (50) (24)
------ ----- ----- ------
Net income applicable to common stock $ 160 $ 71 $ 412 $ 265
===== ====== ===== =====
Earnings Per Common Share $ 1.30 $ 0.60 $ 3.41 $ 2.28
======== ======= ======== =======
(1) Amounts for 1997 include approximately $31 million of dividends recognized
for the Company's redeemable voting preferred stock. Amount for the nine
months ended August 31, 1996 includes a $2 million premium paid over par
value to repurchase the Company's $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 For the For the
year eleven months year year nine months
ended ended ended ended ended
December 31 November 30 November 30 November 30 August 31
-------------------- ----------- ----------- ----------- ---------
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
Fixed Charges:
Interest expense:
Subordinated indebtedness $ 150 $ 144 $ 158 $ 206 $ 220 $ 186
Bank loans and other
borrowings* 5,035 5,224 6,294 10,199 10,596 9,238
Interest component of rentals
of office and equipment 74 76 42 44 34 23
Other adjustments** 2 7 4 28 16 8
---------- --------- --------- ---------- ---------- ----------
TOTAL (A) $5,261 $5,451 $6,498 $10,477 $10,866 $ 9,455
======= ====== ====== ======= ======= =======
Earnings:
Pretax income (loss) from
continuing operations $ (247) $ 27 $ 193 $ 369 $ 637 $ 672
Fixed charges 5,261 5,451 6,498 10,477 10,866 9,455
Other adjustments*** _____ (6) (4) (28) (14) (8)
------- ------- --------- --------- ----------
TOTAL (B) $5,014 $5,472 $6,687 $10,818 $11,489 $10,119
====== ====== ====== ======= ======= =======
(B / A) **** 1.00 1.03 1.03 1.06 1.07
* 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 For the For the
year eleven months year year nine months
ended ended ended ended ended
December 31 November 30 November 30 November 30 August 31
------------------ ----------- ----------- ----------- ---------
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
Combined Fixed Charges
and Preferred Dividends:
Interest expense:
Subordinated indebtedness $ 150 $ 144 $ 158 $ 206 $ 220 $ 186
Bank loans and other
borrowings* 5,035 5,224 6,294 10,199 10,596 9,238
Interest component of rentals
of office and equipment 74 76 42 44 34 23
Other adjustments** 2 7 4 28 16 8
---------- --------- --------- --------- --------- ---------
Total fixed charges 5,261 5,451 6,498 10,477 10,866 9,455
Preferred dividends (tax
equivalent basis) 48 48 58 64 58 72
-------- -------- -------- --------- --------- ---------
TOTAL (A) $5,309 $5,499 $6,556 $10,541 $10,924 $ 9,527
====== ====== ====== ======= ======= =======
Earnings:
Pretax income (loss) from
continuing operations $ (247) $ 27 $ 193 $ 369 $ 637 $ 672
Fixed charges 5,261 5,451 6,498 10,477 10,866 9,455
Other adjustments*** _____ (6) (4) (28) (14) (8)
------- ------- ------- -------- --------
TOTAL (B) $5,014 $5,472 $6,687 $10,818 $11,489 $10,119
====== ====== ====== ======= ======= =======
(B / A) **** **** 1.02 1.03 1.05 1.06
* 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