Past Quarterly Earnings

Second Quarter 1998
Lehman Brothers Reports Record Earnings of $324 Million in Second Quarter, Up 168 Percent from a Year Ago

Return on Equity Rises to 30% Level, Net Revenues Increase by 72%

NEW YORK, June 18, 1998 —
Lehman Brothers Holdings Inc. (NYSE: LEH) today reported net income of $324 million, or $2.12 per common share (diluted), for the second quarter ended May 31, 1998. Net income increased by 168 percent over the $121 million reported for the second quarter of fiscal 1997. Earnings per share increased by 123 percent from $0.95 (diluted) in the year-ago quarter. The quarter represented the highest quarterly earnings Lehman Brothers has ever posted, surpassing the $197 million earned in the fiscal 1997 third quarter by more than $125 million.

For the first six months of fiscal 1998, net income was a record $511 million, an increase of 93 percent from $265 million in net income for the first half of fiscal 1997.

"This was an outstanding quarter and first six months for Lehman Brothers," said Richard S. Fuld, Jr., Chairman and Chief Executive Officer. "For the quarter, our revenues, profits, operating margin and return on equity were all at record levels, while our costs remained firmly under control. The significant increases in revenues and earnings clearly reflected the continuing successful shift in the Firm's business mix to higher margin, high ROE activities, particularly M&A advisory, high yield, and equities."

Net revenues (total revenues less interest expense) for the second quarter were $1.473 billion, an increase of 72 percent from $854 million in the second quarter of fiscal 1997. Mr. Fuld noted that the increase in net revenues reflected across-the-board strength in Lehman Brothers' fixed income, equity and investment banking businesses. In particular, the Firm's global merger and acquisition advisory business, fixed income and equity derivatives, leveraged lending and high yield origination, and real estate and mortgage activities showed significant strength in the second quarter. He also noted that the Firm entered the fiscal 1998 third quarter with record totals in its calendar of upcoming lead-managed equity underwritings and in its pipeline of M&A advisory assignments.

For the first six months of fiscal 1998, net revenues were $2.518 billion, an increase of 42 percent from $1.779 billion in the fiscal 1997 first half.

Non-interest expenses for the second quarter were $997 million. Nonpersonnel expenses for the same period were $250 million, essentially the same as in the previous fiscal year's second quarter despite planned investments in a number of key strategic businesses and increased expense related to a higher volume of business activity. Also reflecting the Firm's continued successful focus on expense management, nonpersonnel expenses as a percentage of net revenues decreased to 17.0 percent from 29.2 percent a year ago. Compensation and benefits as a percentage of net revenues remained at 50.7 percent for the 13th successive quarter.

For the fiscal 1998 first half, non-interest expense was $1.767 billion. Nonpersonnel expenses were $490 million, compared with $486 million in the first six months of fiscal 1997.

For the fiscal 1998 second quarter, the Firm's pre-tax margin was 32.4 percent, up from 20.2 percent in the second quarter of fiscal 1997. Return on common equity was 29.9 percent for the quarter ended May 31, 1998, up from 12.8 percent for the second quarter of fiscal 1997, and 17.6 percent for the fiscal 1998 first quarter. For the first six months of fiscal 1998, the Firm's pre-tax margin was 29.8 percent, compared with 22.0 percent for the first six months of fiscal 1997; for the same period, return on common equity was 23.9 percent, compared with 14.4 percent in fiscal 1997. (Return on common equity for the current fiscal quarter and six months is calculated using net income before adjusting for a special preferred dividend.)

As of May 31, 1998, Lehman Brothers stockholders' equity was $5.1 billion and total capital (stockholders' equity and long-term debt) was $31.9 billion. Book value per common share was $35.93.

As a result of the level of earnings Lehman Brothers attained in the first six months of 1998, earnings per share calculations include the impact of a special preferred dividend of $50 million expected to be paid to American Express Company and to Nippon Life Insurance Company at year end. American Express and Nippon Life are entitled to receive an annual non-cumulative preferred dividend equal to 50 percent of the amount by which the Firm's net income for the full fiscal year exceeds $400 million, up to a maximum of $50 million per year, through mid-year 2002.

Lehman Brothers is a global investment bank with leadership positions in corporate finance, advisory services, municipal finance and fixed income and equity sales, trading and research. Lehman Brothers serves the financial needs of corporate, government and institutional clients, and high-net-worth individuals through offices in major financial centers worldwide.