<PAGE> 1
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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 MARCH 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ----------- TO ------------
FOR THE QUARTER ENDED MARCH 31, 1994
COMMISSION FILE NUMBER 1-6817
LEHMAN BROTHERS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 13-2518466
(STATE OR OTHER JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
3 WORLD FINANCIAL CENTER
NEW YORK, NEW YORK 10285
(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 298-2000
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
------- ---------
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H 1 (a)
AND (b) OF FORM 10-Q AND THEREFORE IS FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT CONTEMPLATED THEREBY.
AS OF MAY 13, 1994, 1,005 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR VALUE
$.10 PER SHARE, WERE ISSUED AND OUTSTANDING.
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<PAGE> 2
LEHMAN BROTHERS INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1994
INDEX
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION Page Number
--------------------- -----------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Statement of
Operations - Three Months Ended
March 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheet -
March 31, 1994 and
December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statement of
Cash Flows - Three Months Ended
March 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Part II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . 25
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
EXHIBIT INDEX
Exhibits
</TABLE>
2
<PAGE> 3
LEHMAN BROTHERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1994 1993
---- ----
<S> <C> <C>
Revenues
Market making and principal transactions $ 276 $ 413
Investment banking 137 195
Commissions 121 470
Interest and dividends 1,353 1,226
Other 14 185
------ ------
Total revenues 1,901 2,489
Interest expense 1,254 1,117
------ ------
Net revenues 647 1,372
------- ------
Non-interest expenses
Compensation and benefits 336 872
Communications 37 87
Brokerage, commissions and clearance fees 36 23
Occupancy and equipment 25 66
Professional services 28 41
Advertising and market development 23 40
Depreciation and amortization 26 39
Severance charge 27
Other 44 75
Loss on sale of Shearson 535
Reserves for non-core businesses 141
----- ------
Total non-interest expenses 582 1,919
------ ------
Income (loss) from continuing operations before taxes
and cumulative effect of change in accounting
principle and preferred dividend of subsidiary 65 (547)
Provision for income taxes 24 102
----- ------
Income (loss) from continuing operations before cumulative
effect of change in accounting principle
and preferred dividend of subsidiary 41 (649)
Income from discontinued operations, net of taxes
Income from operations 24
Gain on disposal 165
----- ------
189
----- ------
Income (loss) before cumulative effect of change in accounting
principle and preferred dividend of subsidiary 41 (460)
Cumulative effect of change in accounting principle (13)
Preferred dividend of subsidiary (17) (17)
------ -----
Net income (loss) $ 11 $ (477)
======= =====
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
LEHMAN BROTHERS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
------------- ------------
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 818 $ 316
Cash and securities segregated and on deposit
for regulatory and other purposes 1,157 867
Securities and other financial instruments owned 25,819 20,557
Collateralized short-term agreements:
Securities purchased under agreements to resell 29,135 23,175
Securities borrowed 9,502 4,276
Receivables:
Brokers and dealers 4,888 4,102
Customers 1,024 1,391
Other 1,893 2,138
Property, equipment and leasehold improvements
(net of accumulated depreciation and amortization
of $377 in 1994 and $361 in 1993) 422 426
Deferred expenses and other assets 190 299
Excess of cost over fair value of net assets acquired
(net of accumulated amortization of $102 in 1994
and $99 in 1993) 265 267
--------- ---------
$75,113 $57,814
======= =======
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
LEHMAN BROTHERS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONTINUED)
(IN MILLIONS, EXCEPT SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
------------ ----------------
(unaudited)
<S> <C> <C>
Commercial paper and short-term debt $ 4,743 $ 2,635
Securities and other financial instruments sold
but not yet purchased 11,031 5,223
Advances from Holdings and other affiliates 5,438 5,063
Securities sold under agreements to repurchase 36,580 30,798
Securities loaned 2,457 772
Payables:
Brokers and dealers 3,594 2,021
Customers 2,464 2,322
Accrued liabilities and other payables 2,282 2,590
Senior notes 657 653
Subordinated indebtedness 3,194 3,053
------- -------
Total liabilities 72,440 55,130
------ ------
Preferred stock of subsidiary, $1 par value; 5,000 shares
authorized: 1,000 shares 9% Cumulative Preferred,
Series A, issued and outstanding 750 750
Less: Note receivable, Series A Preferred stock (750) (750)
Stockholders' equity:
Preferred stock, $.10 par value; 10,000 shares authorized;
none outstanding
Common stock, $.10 par value; 10,000 shares authorized;
1,005 shares issued and outstanding in 1994 and 1993
Additional paid-in capital 2,738 2,738
Foreign currency translation adjustment 2 2
Accumulated deficit (67) (56)
--------- ---------
Total stockholders' equity 2,673 2,684
-------- --------
$75,113 $57,814
======= =======
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
LEHMAN BROTHERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
CASH FLOWS FROM OPERATING ACTIVITIES 1994 1993
---- ----
<S> <C> <C>
Income (loss) from continuing operations before cumulative effect of
change in accounting principle and preferred dividend of subsidiary $ 41 $ (649)
Adjustments to reconcile income (loss) to net cash (used in) provided
by operating activities:
Depreciation and amortization 26 39
Provisions for losses and other reserves 35 9
Loss on sale of Shearson 535
Non-core business reserves 141
Other adjustments 4 2
Net change in:
Cash and securities segregated (290) (93)
Receivables from brokers and dealers (786) 403
Receivables from customers 367 208
Securities purchased under agreements to resell (5,960) 3,827
Securities borrowed (5,226) 889
Loans originated or purchased for resale 51
Securities and other financial instruments owned (5,262) (5,403)
Payables to brokers and dealers 1,573 402
Payables to customers 142 284
Accrued liabilities and other payables (343) 52
Securities sold under agreements to repurchase 5,782 1,852
Securities loaned 1,685 880
Securities & other financial instruments sold but not yet purchased 5,808 152
Other operating assets and liabilities, net 198 (5)
------ --------
(2,206) 3,576
Net cash flows provided by operating activities of discontinued operations 428
----- ---------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (2,206) 4,004
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of subordinated indebtedness 240 52
Principal payments of subordinated indebtedness (99) (152)
Proceeds from issuance of other indebtedness 375 578
Principal payments of other indebtedness (25) (347)
Increase (decrease) in commercial paper and short-term debt, net 2,133 (3,539)
Capital contributions 20
Proceeds from the issuance of common stock 430
Dividends and capital distributions paid (8)
Net cash flows used in financing activities of discontinued operations (301)
------ -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,616 (3,259)
------ -------
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
LEHMAN BROTHERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1994 1993
---- ----
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of buildings, furnishings, equipment
and leasehold improvements $ (14) $ (26)
Proceeds from the sale of other assets 20
Other 106 143
Net cash flows used in investing activities of
discontinued operations (85)
------- -------
NET CASH PROVIDED BY INVESTING ACTIVITIES 92 52
-------- --------
Net change in cash and cash equivalents
of discontinued operations 42
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 502 755
-------- --------
Cash and cash equivalents at beginning of period 316 295
------ --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 818 $ 1,050
======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN MILLIONS) (INCLUDING THE
BOSTON COMPANY)
Interest paid (net of amount capitalized) totaled $1,338 and $1,155
in the first quarter of 1994 and 1993, respectively. Income taxes paid totaled
$2 and $23 in the first quarter of 1994 and 1993, respectively.
See notes to consolidated financial statements.
7
<PAGE> 8
LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of Lehman
Brothers Inc., a registered broker-dealer ("LBI") and subsidiaries (LBI
together with its subsidiaries, the "Company"). LBI is a wholly owned
subsidiary of Lehman Brothers Holdings Inc. ("Holdings"). American Express
Company ("American Express") owns 100% of Holdings' common stock, which
represents approximately 93% of Holdings' voting stock. The remainder of
Holdings' voting stock is owned by Nippon Life Insurance Company ("Nippon
Life"). (See Note 2.)
The Company's financial statements have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission (the
"Commission") with respect to the report on Form 10-Q and reflect all normal
recurring adjustments which are, in the opinion of management, necessary for a
fair presentation of the results for the interim periods presented. Pursuant
to such rules and regulations, certain footnote disclosures which are normally
required under generally accepted accounting principles have been omitted. It
is recommended that these consolidated financial statements be read in
conjunction with the Company's most recent Annual Report on Form 10-K. As
described in Note 3, the Company completed the sale of The Boston Company, Inc.
("The Boston Company"), on May 21, 1993. The accompanying consolidated
financial statements and notes to consolidated financial statements reflect The
Boston Company as a discontinued operation at and for the three month period
ended March 31, 1993. The 1993 Consolidated Statement of Operations includes
the results of operations of Shearson and SLHMC, which were sold on July 31,
1993 and August 31, 1993, respectively. (See Notes 4 and 5 for definitions and
additional information concerning these sales.)
2. SUBSEQUENT EVENTS:
The Distribution
On April 29, 1994, the Board of Directors of American Express declared
a special dividend to its common shareholders, subject to certain conditions,
of all of Holdings' common stock held by American Express on the date of
distribution. The special dividend is effective on May 31, 1994 (the
"Distribution"), to shareholders of record on May 20, 1994 (the "Record Date").
Prior to the Distribution, an additional equity investment of approximately
$1.25 billion will be made in Holdings, most significantly by American Express.
3. SALE OF THE BOSTON COMPANY:
On May 21, 1993, pursuant to a stock purchase agreement (the "Mellon
Agreement") between the Company and Mellon Bank Corporation ("Mellon Bank"),
LBI sold to Mellon Bank (the "Mellon Transaction") The Boston Company, which
through subsidiaries is engaged in the private banking, trust and custody,
institutional investment management and mutual fund administration businesses.
Under the terms of the Mellon Agreement, LBI received approximately $1.3
billion in cash, 2,500,000 shares of Mellon Bank common stock and ten-year
warrants to purchase an additional 3,000,000 shares of Mellon Bank's common
stock at an exercise price of $50 per share. In June 1993, such shares and
warrants were sold by LBI to American Express for an aggregate purchase price
of $169 million. After accounting for transaction costs and certain
adjustments, the Company recognized a 1993 first quarter after-tax gain of
8
<PAGE> 9
LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$165 million for the Mellon Transaction. In connection with the completion of
the Mellon Transaction, the Company paid a $300 million dividend to Holdings.
As a result of the Mellon Transaction, the Company treated The Boston
Company as a discontinued operation. Accordingly, the Company's financial
statements segregate the operating results of The Boston Company for the three
month period ended March 31, 1993.
Presented below are the results of operations and the gain on disposal
of The Boston Company included in income from discontinued operations (in
millions):
<TABLE>
<CAPTION>
Three Months ended
March 31, 1993
------------------
<S> <C>
Discontinued operations:
Revenues $201
Expenses 159
-----
Income before taxes 42
Provision for income taxes 18
------
Income from operations 24
Gain on disposal, net of taxes of $37 165
-----
Income from discontinued operations, net of taxes $189
====
</TABLE>
4. SALE OF SHEARSON:
On July 31, 1993, pursuant to an asset purchase agreement (the
"Primerica Agreement"), the Company completed the sale (the "Primerica
Transaction") of LBI's domestic retail brokerage business (except for such
business conducted under the Lehman Brothers name) and substantially all of its
asset management business (collectively, "Shearson") to Primerica Corporation
(now known as Travelers Corporation, "Travelers") and its subsidiary Smith
Barney, Harris Upham & Co. Incorporated ("Smith Barney"). Also included in the
Primerica Transaction were the operations and data processing functions that
support these businesses, as well as certain of the assets and liabilities
related to these operations.
LBI received approximately $1.2 billion in cash and a $586 million
interest bearing note from Smith Barney which was repaid in January 1994 (the
"Smith Barney Note"). The Smith Barney Note was issued as partial payment for
certain Shearson assets in excess of $600 million which were sold to Smith
Barney. The proceeds received at July 31, 1993, were based on the estimated
net assets of Shearson, which exceeded the minimum net assets of $600 million
prescribed in the Primerica Agreement. As further consideration for the sale
of Shearson, Smith Barney agreed to pay future contingent amounts based upon
the combined performance of Smith Barney and Shearson, consisting of up to $50
million per year for three years based on revenues, plus 10% of after-tax
profits in excess of $250 million per year over a five-year period (the
"Participation Rights"). In contemplation of the Distribution, American
Express received the first Participation Right payment in the first quarter of
1994. All Participation Rights will be assigned to American Express prior to
the Distribution. As further consideration for the sale of Shearson, the
Company received 2,500,000 shares of 5.50% Convertible Preferred Stock, Series
B, of Travelers and a warrant to purchase 3,749,466 shares of common stock of
Travelers at an exercise price of $39 per share. In August 1993, American
Express purchased such preferred stock and warrant from LBI for aggregate
consideration of $150 million.
9
<PAGE> 10
LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company recognized a 1993 first quarter loss related to the
Primerica Transaction of approximately $630 million after-tax ($535 million
pre-tax), which amount includes a reduction in goodwill of $750 million and
transaction-related costs such as relocation, systems and operations
modifications and severance. Shearson operating results reflect allocated
interest expense of $61 million.
Presented below are the results of operations and the loss on the sale
of Shearson (in millions):
<TABLE>
<CAPTION>
Three Months ended
March 31, 1993
------------------
<S> <C>
Revenues $ 795
Expenses 733
Loss on sale of Shearson 535
------
Loss before taxes (473)
Provision for income taxes 122
------
Net loss $ (595)
=======
</TABLE>
5. SALE OF SHEARSON LEHMAN HUTTON MORTGAGE CORPORATION:
The Company completed the sale of its wholly-owned subsidiary,
Shearson Lehman Hutton Mortgage Corporation ("SLHMC") to GE Capital Corporation
on August 31, 1993. The sales price, net of proceeds used to retire debt of
SLHMC, was approximately $70 million. During the first quarter of 1993, the
Company provided $120 million of pre-tax reserves in anticipation of the sale
of SLHMC, which reserves are included in the $141 million of pre-tax reserves
for non-core businesses on the Consolidated Statement of Operations. After
accounting for these reserves, the sale did not have a material effect on the
Company's results of operations.
10
<PAGE> 11
LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. SECURITIES AND OTHER FINANCIAL INSTRUMENTS:
Securities and other financial instruments owned and Securities and
other financial instruments sold but not yet purchased are summarized as
follows (in millions):
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
---------- ------------
<S> <C> <C>
Securities and other financial instruments owned:
Government obligations $15,298 $12,579
Certificates of deposit and other money market instruments 1,140 1,849
Mortgage-backed 700 1,071
Corporate obligations and other contractual commitments 7,171 3,780
Corporate stocks and options 1,510 1,247
Spot commodities 31
------ ---------
$25,819 $20,557
======= =======
Securities and other financial instruments sold but not yet purchased:
Government obligations $ 7,499 $ 3,898
Corporate obligations and other contractual commitments 2,158 433
Corporate stocks and options 1,109 694
Spot commodities 265 198
-------- --------
$11,031 $ 5,223
======= ========
</TABLE>
7. PROVISION FOR INCOME TAXES:
The Company reported a tax expense from continuing operations of $24
million for the first quarter of 1994 compared to $102 million a year ago. The
1994 effective tax rate of 37% was greater than the statutory U.S. federal
income tax rate principally due to state and local income taxes partially
offset by benefits attributable to income subject to preferential tax
treatment. The first quarter 1993 tax provision included (i) an expense of $48
million related to the operating results of the Lehman Businesses and Shearson,
(ii) an expense of $95 million from the sale of Shearson (which resulted
primarily from the write-off of $750 million of goodwill which was not
deductible for tax purposes) and (iii) a benefit of $41 million related to the
$120 million reserve for non-core businesses recorded in anticipation of the
sale of SLHMC.
8. CHANGE IN ACCOUNTING PRINCIPLES:
Postemployment Benefits. Effective January 1, 1994, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 112,
"Employers' Accounting for Postemployment Benefits". SFAS No. 112 requires the
accrual of obligations associated with services rendered to date for employee
benefits accumulated or vested for which payment is probable and can be
reasonably estimated. These benefits principally include the continuation of
salary, health care and life insurance costs for employees on service
disability leaves. The Company previously expensed the cost of these benefits
as they were incurred.
11
<PAGE> 12
LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The cumulative effect of adopting SFAS No. 112 reduced net income for
the first quarter by approximately $13 million after-tax (approximately $23
million pre-tax). Excluding the cumulative effect of this accounting change,
the effect of this change on the first quarter 1994 results of operations was
not material.
Offsetting of Certain Receivables and Payables. During the first
quarter of 1994, the Company adopted Financial Accounting Standards Board
Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts"
("FIN No. 39"). FIN No. 39 restricts the historical industry practice of
offsetting certain receivables and payables. The increase in the Company's
gross assets and liabilities from December 31, 1993 to March 31, 1994 is
primarily due to the adoption of FIN No. 39. The Financial Accounting
Standards Board has instructed its staff to explore modifying FIN No. 39 to
create certain exceptions, which, if enacted, would substantially mitigate the
increase in the Company's gross assets and liabilities resulting from the
implementation of FIN No. 39.
9. BORROWINGS:
For the three months ended March 31, 1994, the Company issued
approximately $240 million of fixed rate subordinated indebtedness. Of this
amount, $200 million is a note issued to Holdings which has a 6.21% interest
rate and matures in 1998. The remaining $40 million of subordinated
indebtedness has an interest rate of 7.36% and the holder of such debt has
the option to cause LBI to repurchase the debt at par in 1996, rather than at
its maturity in 2003.
The proceeds of the Company's first quarter issuances were primarily
used to provide additional liquidity and to refinance long-term debt maturing
in 1994. During the three months ended March 31, 1994 approximately $100
million of subordinated indebtedness matured.
10. EMPLOYEE OWNERSHIP PLAN:
During 1993, LBI established the Lehman Brothers Inc. Employee
Ownership Plan (the "Employee Ownership Plan") pursuant to which certain key
employees of LBI and its affiliates deferred a percentage of their 1993 salary
and bonus for the purchase of certain Phantom Units of Holdings. Each Phantom
Unit is comprised of a phantom equity interest representing a notional interest
in a share of common stock, $.10 par value per share ("Common Stock"), of
Holdings ("Phantom Share") and the right to receive a certain amount in cash
with respect to a Phantom Share ("Cash Right"). Phantom Shares were available
for "purchase" through voluntary and mandatory deferral of 1993 compensation.
In accordance with the terms of the Plan, Phantom Units will be converted to
the Common Stock contemporaneously with the effectiveness of the Distribution.
(See Note 2.)
The Company will recognize compensation expense in 1994 equal to (i)
the increase in book value attributable to the Phantom Shares and (ii) the
excess, if any, of the market value of the Common Stock issued pursuant to the
Phantom Share conversion over the price paid by employees for the Phantom
Shares.
12
<PAGE> 13
LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. CAPITAL REQUIREMENTS:
As registered broker-dealers, LBI and certain of its subsidiaries are
subject to the Net Capital Rule (Rule 15c3-1, the "Rule") promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The New
York Stock Exchange, Inc. and the National Association of Securities Dealers,
Inc. monitor the application of the Rule by LBI and such subsidiaries, as the
case may be. LBI and such subsidiaries compute net capital under the
alternative method of the Rule which requires the maintenance of minimum net
capital, as defined. A broker-dealer may be required to reduce its business if
net capital is less than 4% of aggregate debit balances or 6% of the funds
required to be segregated pursuant to the Commodity Exchange Act (the
"Commodity Act") and the regulations thereunder, if greater. A broker-dealer
may also be prohibited from expanding its business or paying cash dividends if
resulting net capital would be less than 5% of aggregate debit balances or 7%
of the funds required to be segregated pursuant to the Commodity Act and the
regulations thereunder, if greater. In addition, the Rule does not allow
withdrawal of subordinated capital if net capital would be less than 5% of such
debit balances or 7% of the funds required to be segregated pursuant to the
Commodity Act and the regulations, thereunder, if greater.
The Rule also limits the ability of broker-dealers to transfer large
amounts of capital to parent companies and other affiliates. Under the Rule,
equity capital cannot be withdrawn from a broker-dealer without the prior
approval of the Securities and Exchange Commission (the "Commission") when net
capital after the withdrawal would be less than 25% of its securities positions
haircuts (which are deductions from capital of certain specified percentages of
the market value of securities to reflect the possibility of a market decline
prior to disposition). In addition, the Rule requires broker-dealers to notify
the Commission and the appropriate self-regulatory organization two business
days before the withdrawal of excess net capital if the withdrawal would exceed
the greater of $500,000 or 30% of the broker-dealer's excess net capital, and
two business days after a withdrawal that exceeds the greater of $500,000 or
20% of excess net capital.
Finally, the Rule authorizes the Commission to order a freeze on the
transfer of capital if a broker-dealer plans a withdrawal of more than 30% of
its excess net capital and the Commission believes that such a withdrawal would
be detrimental to the financial integrity of the firm or would jeopardize the
broker-dealer's ability to pay its customers. At March 25, 1994, LBI's net
capital aggregated $860 million and was $803 million in excess of the minimum
requirement. Also at March 25, 1994, Lehman Government Securities Inc., a
wholly owned subsidiary of LBI, had net capital which aggregated $294 million
and was $276 million in excess of the minimum requirement.
The Company is subject to other domestic and international regulatory
requirements. As of March 31, 1994, the Company believes it is in material
compliance with all such requirements.
12. OTHER CHARGES:
Reduction in Personnel
During the first quarter of 1994, the Company completed a review of
personnel needs, which resulted in the termination of certain personnel. The
Company recorded a severance charge of $27 million pre-tax in the first quarter
of 1994.
13
<PAGE> 14
LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reserves for Non-Core Businesses
During the first quarter of 1993, the Company provided $141 million
pre-tax ($93 million after-tax) of non-core business reserves. Of this amount,
$21 million pre-tax ($13 million after-tax) related to certain non-core
partnership syndication activities in which the Company is no longer actively
engaged. The remaining $120 million pre-tax ($79 million after-tax) related
to reserves recorded in anticipation of the sale of SLHMC. Such sale was
completed during the third quarter of 1993.
13. CHANGE OF FISCAL YEAR-END:
On March 28, 1994, the Board of Directors of Holdings approved,
subject to the Distribution, a change in the Company's fiscal year-end from
December 31 to November 30. Such a change to a non-calendar cycle will shift
certain year-end administrative activities to a time period that conflicts less
with the business needs of the Company's institutional customers. The Company
expects to file a report for the period ending June 30, 1994 with the
Commission on or about August 14, 1994; and, in conjunction with its decision
to change its fiscal year, the Company anticipates that its financial
statements for the period ending August 31, 1994, will be contained in a report
which it expects to file with the Commission on or about October 15, 1994.
14
<PAGE> 15
LEHMAN BROTHERS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
During 1993, the Company completed the sales of three businesses: The
Boston Company on May 21; Shearson on July 31; and SLHMC on August 31. The
Company's first quarter 1993 operating results reflect The Boston Company as a
discontinued operation, while the operating results of Shearson and SLHMC are
included in the Company's 1993 results from continuing operations. Because of
the significant sale transactions completed during 1993, the Company's 1993
historical financial statements are not fully comparable with the first quarter
results of 1994. To facilitate an understanding of the Company's results, the
following table separates the Company's first quarter 1993 results into three
categories. These categories are as follows:
* Historical Results: the results of the Company's ongoing businesses; the
results of Shearson and SLHMC through their respective sale dates; the loss
on the sale of Shearson; the reserves for non-core businesses; and the
results of The Boston Company (accounted for as a discontinued operation).
* Lehman Businesses: the results of the ongoing businesses of the Company.
* Businesses Sold: the results of Shearson and SLHMC; the loss on the sale of
Shearson; and the reserves for non-core businesses related to the sale of
SLHMC.
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------------------------------
1994 1993
---------- -------------------------------------------
(UNAUDITED) Lehman Lehman Businesses
(IN MILLIONS) Businesses Businesses Sold Historical
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Market making and principal transactions $ 276 $ 258 $ 155
Investment banking 137 131 64
Commissions 121 106 364
Interest and dividends 1,353 1,160 66
Other 14 14 171
------- ------- ------
Total revenues 1,901 1,669 820
Interest expense 1,254 1,055 62
----- ----- -------
Net revenues 647 614 758 $1,372
------ ------ ------ ------
Non-interest expenses:
Compensation and benefits 336 363 509
Other expenses 219 184 187
Loss on sale of Shearson 535
Reserves and other charges 27 21 120
------- ------- ------
Total non-interest expenses 582 568 1,351 1,919
------ ------ ----- -----
Income (loss) from continuing operations
before taxes and cumulative effect of
change in accounting principle 65 46 (593) (547)
Provision for income taxes 24 21 81 102
------- ------- ------- ------
Income (loss) from continuing operations
before cumulative effect of change in
accounting principle 41 25 (674) (649)
------- ------- ------ ------
Income from discontinued operations, net of
taxes 189 189
------- ------- ------ ------
Income (loss) before cumulative effect of
change in accounting principle 41 25 (485) (460)
Cumulative effect of change in accounting
principle (13)
Preferred dividend of subsidiary (17) (17) (17)
------- ------- ------- -------
Net income (loss) $ 11 $ 8 $ (485) $ (477)
======= ======== ======= =======
</TABLE>
15
<PAGE> 16
LEHMAN BROTHERS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993
The Company reported net income of $11 million for the first quarter
of 1994 as compared to a net loss of $477 million for first quarter of 1993.
The first quarter 1994 results included a $13 million charge for the cumulative
effect of a change in accounting for postemployment benefits as a result of the
adoption of SFAS No. 112. The 1993 net loss of $477 million was comprised of
net income from the Lehman Businesses of $8 million, net income of $189 million
from the discontinued operations of The Boston Company, including a $165
million after-tax gain on the sale and after-tax earnings of $24 million, and a
net loss from Businesses Sold of $674 million, which included a loss on the
sale of Shearson of $630 million after-tax, a $79 million after-tax charge
related to a reserve for non-core businesses recognized in anticipation of the
sale of SLHMC, and operating earnings from Shearson of $35 million. The loss
on the sale of Shearson included a reduction in goodwill of $750 million and
transaction-related costs such as relocation, systems and operations
modifications and severance.
THE LEHMAN BUSINESSES
FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993
Summary. Net income from continuing operations before the cumulative
effect of change in accounting principle for the Lehman Businesses increased
64% to $41 million for the first quarter of 1994 from $25 million in the first
quarter of 1993. Net income for 1994 included a $15 million ($27 million
pre-tax) severance charge while net income for 1993 included a $13 million ($21
million pre-tax) reserve for certain non-core partnership syndication
activities in which the Company is no longer actively engaged. Excluding these
charges, net income from continuing operations before the cumulative effect of
change in accounting principle for the Lehman Businesses increased 47% to $56
million in the first quarter of 1994 from $38 million in the first quarter of
1993. Net revenues from the Lehman Businesses increased slightly to $647
million in the first quarter of 1994 from $614 million in the prior year
reflecting strong customer flow partially offset by less favorable trading
results. Excluding the Businesses Sold, total non-interest expenses increased
slightly to $582 million in the first quarter of 1994 from $568 million in the
first quarter of 1993. The Company's effective tax rate was 37% for the first
quarter of 1994 compared to 46% for the Lehman Businesses in the first quarter
of 1993.
Net Revenues. Net revenues increased slightly to $647 million for the
first quarter of 1994 from $614 million for the comparable period in 1993.
Increases in revenues from commissions and market making and principal
transactions of 14% and 7%, respectively, were partially offset by a decline
in net interest revenue to $99 million for the first quarter of 1994 from $105
million in the first quarter of 1993.
Market Making and Principal Transactions. Market making and principal
transactions include the results of the Company's market making and trading
related to customer activities, as well as proprietary trading for the
Company's own account. Revenues from these activities encompass net realized
and mark-to-market gains and losses on securities and other financial
instruments owned as well as securities and other financial instruments sold
but not yet purchased. The Company utilizes various hedging strategies as it
deems appropriate to minimize its exposure to significant movements in interest
and foreign exchange rates and the equity markets. Market making and principal
transactions revenue increased 7% to $276 million for the first quarter of 1994
from $258 million in the first quarter of 1993.
16
<PAGE> 17
LEHMAN BROTHERS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The first quarter 1994 results were comprised of a substantial increase in net
revenues from fixed income derivative products which were partially offset by
reduced net revenues from trading activities which were adversely affected by
market conditions.
Investment Banking. Investment banking revenues increased 5% to $137
million for the first quarter of 1994 from $131 million in the prior year
period, principally due to increased merger and financial advisory fees.
Commissions. Commission revenues increased 14% to $121 million in the
first quarter of 1994 from $106 million in the first quarter of 1993, primarily
as a result of higher volumes of customer trading of securities and commodities
on exchanges. Commission revenues are generated from the Company's agency
activities on behalf of corporations, institutions and high net worth
individuals.
Interest and Dividends. Interest and dividend revenues increased 17%
to $1,353 million in the first quarter of 1994 from $1,160 million in the first
quarter of 1993. Net interest and dividend income decreased to $99 million in
the first quarter of 1994 from $105 million in the first quarter of 1993. Net
interest and dividend revenue amounts are closely related to the Company's
trading activities. The Company evaluates its trading strategies on a overall
profitability basis which includes both trading and interest. Therefore,
changes in net interest revenue from period to period should not be viewed in
isolation but should be viewed in conjunction with revenues from market making
and principal transactions.
Non-interest Expenses. Compensation and benefits expense decreased 7%
to $336 million in the first quarter of 1994 from $363 million in the first
quarter of 1993. Compensation and benefits expense as a percentage of net
revenues decreased to 51.9% in the first quarter of 1994 from 59.1% in the
first quarter of 1993.
Excluding compensation and benefits expense, non-interest expenses
increased 20% to $246 million in the first quarter of 1994 from $205 million in
1993. Included within the 1994 first quarter results was a severance charge of
$27 million ($15 million after-tax) recognized as a result of a review of
personnel needs and on-going cost reduction efforts, which resulted in the
termination of certain personnel. The 1993 first quarter results included a
$21 million charge ($13 million after-tax) related to certain non-core
partnership syndication activities in which the Company is no longer actively
engaged. Excluding these charges, other non-interest expenses were $219
million and $184 million for the first quarter of 1994 and 1993, respectively.
This increase was due to higher levels of depreciation and amortization,
brokerage, commissions and clearance fees and certain other expenses in the
first quarter of 1994.
In connection with the Phantom Share Conversion in the second quarter
of 1994, the Company will recognize compensation expense equal to the excess,
if any, of the market value of the Common Stock issued pursuant to the Phantom
Share Conversion over the price paid by employees for the Phantom Shares. (See
Note 10.)
Income Taxes. For the first quarter of 1994, the Lehman Businesses
had an income tax provision of $24 million as compared to $21 million a year
ago. The 1994 provision consists of a provision of $36
17
<PAGE> 18
LEHMAN BROTHERS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
million related to continuing operations before the cumulative effect of change
in accounting principle partially offset by a $12 million benefit related to
the severance charge. The 1993 provision of $21 million consisted of a
provision of $29 million for continuing businesses and a tax benefit of $8
million related to non-core business reserves. The effective tax rate for the
Lehman Businesses was 37% for the first quarter of 1994 as compared to 46% in
the first quarter of 1993. The lower 1994 effective tax rate reflects a
reduction in state and local taxes.
As of March 31, 1994, the Company had approximately $145 million of
tax NOLs available to offset future taxable income, the benefits of which have
not yet been reflected in the financial statements. Although the benefit
related to these NOLs does not currently meet the recognition criteria of SFAS
No. 109, strategies are being implemented to increase the likelihood of
realization. It is anticipated that approximately $15 million of these NOLs
will be transferred to American Express in connection with the Distribution.
Cost Reduction Effort. In August 1993, the Company announced an
expense reduction program with the objective of reducing costs by $170 million
on an annualized basis by the end of the first quarter of 1994. The Company's
expense structure for the first half of 1993, adjusted for changes in the
volume and mix of revenues as well as for additional costs due to external
factors such as inflation or new legislation, is the basis against which these
goals are being measured. As of March 31, 1994, the Company had taken the
following actions which it believes will result in $170 million of cost
reductions on an annualized basis: (i) reduced certain purchased costs by
lowering the volume of goods and services purchased, renegotiating rates with
vendors and strengthening internal compliance with established policies and
procedures, (ii) consolidated certain administrative and support functions;
(iii) strengthened compliance and control functions; and (iv) completed its
annual review of personnel, resulting in the termination of certain personnel
the objective of which was to upgrade personnel and eliminate positions to
improve the Company's overall productivity; as a result of this review process,
the Company recorded a $27 million severance charge in the first quarter of
1994, as previously discussed.
In addition to these actions, the Company has identified a variety of
actions that are expected to reduce expenses further, such as (i) additional
reductions in certain purchased expenses and (ii) the relocation in the summer
of 1994 of certain administrative, operations and other support personnel to
newly leased facilities in New Jersey.
LIQUIDITY AND CAPITAL RESOURCES
Total assets increased to $75.1 billion at March 31, 1994 from $57.8
billion at December 31, 1993. The primary reason for this increase was the
adoption of FIN No. 39, which restricts the historical industry practice of
offsetting certain receivables and payables. (See Note 8.)
The Company's asset base consists primarily of cash and cash
equivalents, and assets which can be sold within one year, including securities
and other financial instruments owned, collateralized short-term agreements and
receivables. Long-term assets consist primarily of other receivables, property,
equipment and leasehold improvements, deferred expenses and other assets, and
excess of cost over fair value of net assets acquired.
18
<PAGE> 19
LEHMAN BROTHERS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company finances its short-term assets primarily on a secured basis
through the use of securities sold under agreements to repurchase, securities
loaned, securities and other financial instruments sold but not yet purchased,
advances from Holdings and other affiliates and other collateralized liability
structures.
The Company uses short-term unsecured borrowing sources to fund
short-term assets not financed on a secured basis. The Company's primary
sources of short-term, unsecured general purpose funding include commercial
paper and short-term debt, including master notes and bank borrowings under
uncommitted lines of credit. Commercial paper and short-term debt outstanding
totalled $4.7 billion at March 31, 1994, compared to $2.6 billion at December
31, 1993. Of these amounts, commercial paper outstanding totalled $0.9 billion
at March 31, 1994, compared to $0.4 billion at December 31, 1993.
The Company's uncommitted lines of credit provide an additional source
of short-term financing. At March 31, 1994 and December 31, 1993, the Company
had $5.7 billion in uncommitted lines of credit. Uncommitted lines consist of
facilities that the Company has been advised are available but for which no
contractual lending obligation exists.
Long-term assets are financed with a combination of long-term debt and
equity. The Company's long-term unsecured funding sources are senior notes and
subordinated indebtedness. The Company maintains long-term debt in excess of
its long-term assets to provide additional liquidity, which the Company uses to
meet its short-term funding requirements and to reduce its reliance on
commercial paper and short-term debt.
For the three months ended March 31, 1994, the Company issued
approximately $240 million of fixed rate subordinated indebtedness. Of this
amount, $200 million represented a subordinated debt to Holdings. The proceeds
of the Company's first quarter issuances were used to provide additional
liquidity and to refinance long-term debt maturing in 1994. At March 31, 1994,
the Company had long-term debt outstanding of $3.9 billion compared to $3.7
billion outstanding at December 31, 1993.
SPECIFIC BUSINESS ACTIVITIES AND TRANSACTIONS
The following sections include information on specific business
activities of the Company which affect overall liquidity and capital resources:
Westinghouse. In May 1993, the Company and Westinghouse Electric
Corporation ("Westinghouse") entered into a partnership to facilitate the
disposition of Westinghouse's commercial real estate portfolio valued at
approximately $1.1 billion, which will be accomplished substantially by
securitizations and asset sales. The Company invested approximately $154
million in the partnership, and also made collateralized loans to the
partnership of $752 million. During the third quarter of 1993, Lennar Inc. was
appointed portfolio servicer and purchased a 10% limited partnership interest
from the Company and Westinghouse.
At March 31, 1994, the carrying value of the Company's investment in
the partnership was $166 million and the outstanding balance of the
collateralized loans, including accrued interest, was $455 million. The
remaining loan balances are expected to be repaid in 1994 through a combination
of
19
<PAGE> 20
LEHMAN BROTHERS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
mortgage remittances, securitizations, asset sales and refinancings by third
parties. In April 1994, the Company received an additional loan repayment of
approximately $240 million principally from the proceeds of an asset
securitization.
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 companies.
For purposes of this discussion, high yield debt securities are defined as
securities or loans to companies rated below BBB- by Standard & Poor's
Corporation and below Baa3 by Moody's Investor Services, Inc., as well as
non-rated securities or loans which, in the opinion of management, are
non-investment grade. 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 March 31, 1994 and December 31, 1993 included long positions
with an aggregate market value of approximately $886 million and $661 million,
respectively, and short positions with an aggregate market value of
approximately $221 million and $75 million, respectively. The portfolio may
from time to time contain concentrated holdings of selected issues. The
Company's two largest high yield positions were $56 million and $55 million at
March 31, 1994 and $61 million and $56 million at December 31, 1993.
Change in Facilities. In 1993, Holdings agreed to lease approximately
392,000 square feet of office space located at 101 Hudson Street in Jersey
City, New Jersey (the "Operations Center"). The lease term will commence in
August 1994 and provides for minimum rental payments of approximately $87
million over its 16-year term. Concurrently, Holdings announced it would
relocate certain administrative employees to five additional floors at 3 World
Financial Center in New York, New York. These floors will be purchased by
Holdings from American Express for approximately $44 million. In connection
with the relocation of the Operations Center and the additional space at the
World Financial Center, Holdings anticipates incremental fixed asset additions
of approximately $112 million. The relocation is expected to be completed in
the summer of 1994. Upon commencement of the relocation, a substantial portion
of the lease and depreciation charges will be allocated to the Company based
upon Holdings' method of allocating certain intercompany charges.
Non-Core Activities and Investments. In March 1990, the Company
discontinued the origination of partnerships (whose assets are primarily real
estate) and investments in real estate. Currently, the Company acts as a
general partner for approximately $4.2 billion of partnership investment
capital and manages a real estate investment portfolio with an aggregate
investment basis of approximately $109 million. During the first quarter of
1993, the Company recorded a $21 million charge related to a reserve provided
for these non-core partnership syndication activities. At March 31, 1994, the
Company had remaining net exposure to these investments (defined as the
remaining unreserved investment balance plus outstanding commitments and
contingent liabilities under guarantees and credit enhancements) of $76
million. In certain circumstances, the Company provides financial and other
support and assistance to such investments to maintain investment values.
Except as described above, there is no contractual requirement that the Company
continue to provide this support. Although a decline in the real estate market
or the economy in general or a change in the Company's disposition strategy
could result in additional real estate reserves, the Company believes that it
is adequately reserved.
20
<PAGE> 21
LEHMAN BROTHERS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SPIN-OFF OF HOLDINGS
On April 29, 1994, the Board of Directors of American Express declared
a dividend to its common shareholders, subject to certain conditions, of all of
Holdings Common Stock held by American Express on the dividend distribution
date. The dividend is effective on May 31, 1994, to shareholders of record on
May 20, 1994. (See Note 2.) As a result of this dividend distribution,
Holdings will be an independent public company which will be traded on the New
York Stock Exchange under the symbol LEH.
21
<PAGE> 22
LEHMAN BROTHERS INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Company is involved in a number of judicial, regulatory and
arbitration proceedings concerning matters arising in connection with the
conduct of its business. Such proceedings include actions brought against
LBI and others with respect to transactions in which LBI acted as an
underwriter or financial advisor, actions arising out of 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, LBI has
denied, or believes it has a meritorious defense and will deny liability in all
significant cases pending against it including the matters described below, and
intends to defend vigorously each such case. 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.
General Acquisition, Inc. et al. v. GenCorp. Inc. et al. and Shearson Lehman
Brothers Inc. and Shearson Lehman Brothers Holdings Inc. (Reported in LBI's
Annual Report on Form 10-K)
On May 6, 1994, the United States Court of Appeals for the Sixth Circuit
dismissed the appeal of GenCorp. Inc. for lack of appellate jurisdiction, and
remanded the case back to the United States District Court for the Southern
District of Ohio for further proceedings.
Bamaodah v. E.F Hutton & Company Inc. (Reported in LBI's Annual Report on Form
10-K)
On April 26,1994, the Dubai Court of Appeals again affirmed the judgment
of the Dubai Civil Court. The Company intends to appeal such judgment.
Ralph Majeski, et al. v. Balcor Entertainment Company, Ltd. et al.; Robert
Eckstein, et al. v. Balcor Film Investors, et al. (Reported in LBI's Annual
Report on Form 10-K)
Under the terms of an agreement between American Express and Holdings,
American Express has agreed to indemnify the Company for liabilities which it
may incur in connection with this action.
22
<PAGE> 23
Paul Williams and Beverly Kennedy, et al. v. Balcor Pension Investors et al.
(Reported in LBI's Annual Report on Form 10-K)
Under the terms of an agreement between American Express and Holdings,
American Express has agreed to indemnify the Company for liabilities which it
may incur in connection with this action.
Glynwil Investment, Ltd. v. Shearson Lehman Brothers Inc. (Reported in
LBI's Annual Report on Form 10-K.)
Discovery is expected to be completed by May 31, 1994, and a briefing
schedule for motions and a trial date are expected to be set at a conference on
June 7, 1994.
Actions Related to First Capital Holdings Inc. (Reported in LBI's Annual Report
on Form 10-K)
Under the terms of an agreement between American Express and Holdings,
Holdings has agreed to indemnify American Express for liabilities which it may
incur in connection with any action (including any derivative action) relating
to First Capital Holdings Inc. ("FCH"). In connection therewith, Holdings'
indemnification obligation extends to the below described action, in addition
to those actions described in LBI's Annual Report on Form 10-K.
American Express Derivative Action. On June 6, 1991, a purported shareholder
derivative action was filed in the United States District Court for the Eastern
District of New York, entitled Rosenberg v. Robinson, et al., against all of
the then-current directors of American Express. In January 1992, this action
was transferred by stipulation to the United States District Court for the
Central District of California for coordinated or consolidated proceedings with
all other federal actions related to FCH. The complaint alleges that the Board
of Directors of American Express should have required Holdings to divest its
investment in FCH and to write down such investment sooner. In addition, the
complaint alleges that the failure to act constituted a waste of corporate
assets and caused damage to American Express' reputation. The complaint seeks
a judgment declaring that the directors named as defendants breached their
fiduciary duties and duties of loyalty and requiring the defendants to pay
money damages to American Express and remit their compensation for the period
in which the duties were breached, to pay attorneys' fees and costs and other
relief. The defendants have answered the complaint, denying its material
allegations.
CC&F Medford III Investment Company v. The Boston Company, Inc. and
Wellington-Medford III Properties, Inc. (Reported in LBI's Annual Report on
Form 10-K)
The stay of proceedings for purposes of facilitating negotiations has been
extended and now expires on June 17, 1994, with trial scheduled to commence on
or after July 18, 1994.
23
<PAGE> 24
Maxwell Related Litigation (Reported in LBI's Annual Report on Form 10-K)
MacMillan Inc. v. Bishopsgate Investment Trust, Shearson Lehman Brothers
Holdings PLC et al.
On April 12, 1994, MacMillian Inc. appealed the High Court of Justice
judgment, which found for the defendants on all aspects of its defense.
In re Tiphook Securities Litigation
On or about January 25, 1994, LBI was served with an Amended Complaint in
an action captioned In re Tiphook Securities Litigation. The Amended Complaint
purportedly is brought on behalf of all purchasers of American Depository
Receipts of Tiphook, PLC ("Tiphook") and all purchasers of various Tiphook debt
securities issued in offerings on November 2, 1992, March 8, 1993 and April 23,
1993, during the alleged class period of October 8, 1992 through November 15,
1993. The action is pending in the United States District Court for the
District of New Jersey. Also named as defendants are Tiphook, Tiphook Finance
and various officers and directors of Tiphook. The Amended Complaint alleges
violations of Sections 11 and 15 of the Securities Act of 1933, as amended, by
Lehman Brothers and the three other underwriters of the Tiphook note offerings.
Such claims are based on alleged misstatements and omissions in the
prospectuses for such note offerings. The plaintiffs seek an unspecified
amount of damages resulting from the alleged misstatements and omissions.
Currently, Tiphook is not honoring its indemnification obligation (set forth in
the underwriting agreement among Tiphook, LBI and the other underwriters) to
LBI and such other underwriters. The Company believes it has meritorius
defenses to this action and intends to defend vigorously.
24
<PAGE> 25
EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits and reports on Form 8-K are filed as part of this
Quarterly Report, or where indicated, were heretofore filed and are hereby
incorporated by reference:
(a) Exhibits:
12. Computation in Support of Ratio of Earnings to Fixed Charges.
(b) Reports on Form 8-K:
1. Form 8-K dated February 24, 1994, Items 5 and 7.
2. Form 8-K dated May 3, 1994, Items 5 and 7.
25
<PAGE> 26
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 INC.
--------------------
(Registrant)
Date: May 13, 1994 By /s/ Richard S. Fuld, Jr.
----------------------------
Richard S. Fuld, Jr.
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: May 13, 1994 By /s/ Robert Matza
----------------------------
Robert Matza
Chief Financial Officer
(Principal Financial Officer)
26
<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit Page No.
- - ----------- ------- --------
<S> <C>
Exhibit 12 Computation in Support of Ratio of Earnings to
Fixed Charges.
</TABLE>
27
<PAGE> 1
Exhibit 12
<PAGE> 2
LEHMAN BROTHERS INC. AND SUBSIDIARIES
COMPUTATION IN SUPPORT OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the
Three Months
Ended
For the Year Ended December 31, March 31,
-------------------------------------------------------------- ------------
1989 1990 1991 1992 1993 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Fixed charges:
Interest expense:
Subordinated indebtedness $ 341 $ 277 $ 231 $ 210 $ 192 $ 46
Bank loans and other
borrowings* 4,325 3,753 4,068 4,363 4,393 1,208
Interest component of rentals
of office and equipment 63 57 64 64 62 7
Other adjustments** 152 73 88 127 101 107
------ ------ ------ ------ ------ ------
TOTAL (A) $4,881 $4,160 $4,451 $4,764 $4,748 $1,368
====== ====== ====== ====== ====== ======
Earnings:
Pre-tax income (loss) from
continuing operations $ 202 $ (501) $ 283 $ 319 $ (146) 65
Fixed charges 4,881 4,160 4,451 4,764 4,748 1,368
Other adjustments*** (95) (68) (69) (68) (68) (17)
------ ------ ------ ------ ------ ------
TOTAL (B) $4,988 $3,591 $4,665 $5,015 $4,534 $1,416
====== ====== ====== ====== ====== ======
(B / A) 1.02 **** 1.05 1.05 **** 1.04
</TABLE>
* Includes amortization of long-term debt discount.
** Other adjustments include capitalized interest costs and amortization of
capitalized interest and preferred stock dividends of a wholly owned
subsidiary.
*** 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 costs and undistributed net income of
affiliates accounted for at equity and preferred stock dividends of
wholly owned subsidiary.
**** Earnings were inadequate to cover fixed charges and would have had to
increase approximately $569 million in 1990 and $214 million in 1993 in
order to cover the deficiency.
