<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 1-9466
LEHMAN BROTHERS HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 13-3216325
(STATE OR OTHER JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
</TABLE>
3 WORLD FINANCIAL CENTER
NEW YORK, NEW YORK 10285
(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
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 ______
AS OF MAY 10, 1994, 168,235,284 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR
VALUE $.10 PER SHARE, WERE ISSUED AND OUTSTANDING.
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<PAGE> 2
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1994
INDEX
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION Page Number
--------------------- -----------
<S> <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 . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 28
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
EXHIBIT INDEX
Exhibits
</TABLE>
2
<PAGE> 3
LEHMAN BROTHERS HOLDINGS 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 $ 434 $ 588
Investment banking 175 228
Commissions 141 480
Interest and dividends 1,527 1,371
Other 17 190
------- -----
Total revenues 2,294 2,857
Interest expense 1,453 1,270
------- -----
Net revenues 841 1,587
------- -----
Non-interest expenses
Compensation and benefits 450 970
Communications 50 97
Brokerage, commissions and clearance fees 45 30
Occupancy and equipment 42 82
Professional services 42 52
Advertising and market development 31 47
Depreciation and amortization 31 44
Severance charge 33
Other 29 99
Loss on sale of Shearson 535
Reserves for non-core businesses 152
------- -----
Total non-interest expenses 753 2,108
------- -----
Income (loss) from continuing operations before taxes
and cumulative effect of change in accounting
principle 88 (521)
Provision for income taxes 33 119
------- -----
Income (loss) from continuing operations before cumulative
effect of change in accounting principle 55 (640)
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 55 (451)
Cumulative effect of change in accounting principle (13)
------- -----
Net income (loss) 42 (451)
Preferred stock dividends 12 12
------- -----
Net income (loss) applicable to Common Stock $ 30 $(463)
======= =====
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
LEHMAN BROTHERS HOLDINGS 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 $ 1,385 $ 1,333
Cash and securities segregated and on deposit
for regulatory and other purposes 1,360 1,073
Securities and other financial instruments owned 44,615 35,699
Collateralized short-term agreements:
Securities purchased under agreements to resell 41,130 26,046
Securities borrowed 9,969 4,372
Receivables:
Brokers and dealers 4,792 5,059
Customers 4,314 2,646
Other 3,103 2,693
Property, equipment and leasehold
improvements (net of accumulated
depreciation and amortization of $456
in 1994 and $438 in 1993) 535 529
Deferred expenses and other assets 803 750
Excess of cost over fair value of net assets
acquired (net of accumulated amortization
of $110 in 1994 and $107 in 1993) 271 274
-------- -------
$112,277 $80,474
======== =======
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
LEHMAN BROTHERS HOLDINGS 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 $ 14,353 $11,205
Securities and other financial instruments sold
but not yet purchased 16,724 8,313
Securities sold under agreements to repurchase 57,204 39,191
Securities loaned 965 1,116
Payables:
Brokers and dealers 3,150 1,385
Customers 4,334 4,130
Accrued liabilities and other payables 2,939 3,183
Senior notes 8,516 7,779
Subordinated indebtedness 2,059 2,120
-------- -------
Total liabilities 110,244 78,422
-------- -------
Stockholders' equity:
Preferred stock, $1 par value; 38,000,000 shares authorized:
5% Cumulative Convertible Voting, Series A, 13,000,000
shares authorized, issued and outstanding; $39.10
liquidation preference per share 508 508
Money Market Cumulative, 3,300 shares authorized; 250
shares issued and outstanding; $1,000,000 liquidation
preference per share 250 250
Common stock, $.10 Par value; 300,000,000 shares
authorized; 168,235,284 shares issued and outstanding 17 17
Additional paid-in capital 1,871 1,871
Foreign currency translation adjustment (9) (12)
Accumulated deficit (604) (582)
-------- -------
Total stockholders' equity 2,033 2,052
-------- -------
$112,277 $80,474
======== =======
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1994 1993
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $ 55 $ (640)
Adjustments to reconcile income (loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization 31 45
Provisions for losses and other reserves 47 33
Loss on sale of Shearson 535
Non-core business reserves 152
Other adjustments 24 14
Net change in:
Cash and securities segregated (287) (179)
Receivables from brokers and dealers 267 (340)
Receivables from customers (1,668) (1,319)
Securities purchased under agreements to resell (15,084) 603
Securities borrowed (5,597) 670
Loans originated or purchased for resale 51
Securities and other financial instruments owned (8,916) (5,708)
Payables to brokers and dealers 1,765 277
Payables to customers 204 519
Accrued liabilities and other payables (290) (51)
Securities sold under agreements to repurchase 18,013 5,886
Securities loaned (151) 503
Securities & other financial instruments sold but not yet purchased 8,411 147
Other operating assets and liabilities, net (480) 43
------- -------
(3,656) 1,241
Net cash flows provided by operating activities of discontinued operations 428
------- -------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (3,656) 1,669
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes 993 410
Principal payments of senior notes (329) (280)
Proceeds from issuance of subordinated indebtedness 39 53
Principal payments of subordinated indebtedness (100) (102)
Issuance of other indebtedness 2,138 2,023
Principal payments of other indebtedness (1,717) (1,815)
Increase (decrease) in commercial paper and short-term debt, net 2,776 (942)
Dividends paid (63) (12)
NET CASH FLOWS USED IN FINANCING ACTIVITIES OF DISCONTINUED OPERATIONS (301)
------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES $ 3,737 $ (966)
------- -------
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
LEHMAN BROTHERS HOLDINGS 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 $ (30) $ (32)
Other (6) 166
Net cash flows used in investing activities of
discontinued operations (85)
------ ------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (36) 49
------ ------
Net change in cash and cash equivalents
of discontinued operations 42
------ ------
Effect of exchange rate changes on cash 7
------ ------
NET CHANGE IN CASH AND CASH EQUIVALENTS 52 710
------ ------
Cash and cash equivalents at beginning of period 1,333 641
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,385 $1,351
====== ======
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN MILLIONS) (INCLUDING THE
BOSTON COMPANY)
Interest paid (net of amount capitalized) totaled $1,395 and $1,415
in the first quarter of 1994 and 1993, respectively. Income taxes paid
(received) totaled $24 in 1994 and $(66) in 1993, respectively.
See notes to consolidated financial statements.
7
<PAGE> 8
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") (Holdings together with its subsidiaries,
the "Company" or "Lehman Brothers"). The principal subsidiary of Holdings is
Lehman Brothers Inc. ("LBI"), a registered broker-dealer. American Express
Company ("American Express") owns 100% of Holdings' common stock, par value
$.10 per share (the "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 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:
Equity Investments and Distribution of Common Stock
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, the following series of transactions which affect
the capital structure of Holdings will occur.
- The shares of Common Stock presently outstanding will be subject to a
reverse stock split of approximately .3179723 for 1 (the "Reverse
Stock Split") prior to the offerings of Common Stock and preferred
stock discussed below. The calculation of the reverse split ratio
is based on the number of American Express common shares expected to
be outstanding as of the Record Date for the Distribution; however,
the final reverse split ratio will be based on the number of American
Express common shares actually outstanding as of the Record Date for
the Distribution.
- Holdings will sell 35,407,931 shares of Common Stock to American
Express for an aggregate purchase price of approximately $903.8
million (the "American Express Common Stock Purchase") and 3,492,858
shares of Common Stock to Nippon Life for an aggregate purchase price
of approximately $89.2 million (the "NL Common Stock Purchase").
8
<PAGE> 9
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- Holdings will issue up to 3,387,963 shares of Common Stock, having an
aggregate purchase price of approximately $57 million, upon
conversion of all outstanding phantom equity interests issued
pursuant to the Lehman Brothers Inc. Employee Ownership Plan (the
"Phantom Share Conversion") and American Express will offer 441,600
shares of Common Stock to executive officers of the Company for an
aggregate purchase price of $11.3 million (the "Offering").
- American Express will purchase 8,000,000 shares of Cumulative Voting
Preferred Stock of Holdings (the "Cumulative Preferred Stock") for an
aggregate purchase price of $200 million and 928 shares of Redeemable
Voting Preferred Stock of Holdings (the "Redeemable Preferred Stock")
for $1 per share and Nippon Life will purchase 72 shares of
Redeemable Preferred Stock for $1 per share, (collectively, the
"Preferred Stock Purchases"). Holders of the Redeemable Preferred
Stock will be entitled to receive, in the aggregate, 50% of the
Company's net income in excess of $400 million per year, with a
maximum dividend of $50 million per year, for each of the next eight
years commencing on or about the date of the Distribution.
- In exchange for $250 million of Money Market Preferred Stock of
Holdings held by American Express, Holdings will issue to American
Express 9,793,754 shares of Common Stock (the "MMP Exchange").
- Under the Lehman Brothers Holdings Inc. 1994 Management Replacement
Plan, as described below, Holdings will issue approximately 200,000
shares of restricted Common Stock to employees in replacement of
restricted stock awards of American Express.
The American Express Common Stock Purchase, the NL Common Stock Purchase
and the Preferred Stock Purchases are collectively referred to herein as the
"Equity Investment." The Equity Investment, the Offering, the Phantom Share
Conversion, the MMP Exchange and the Distribution are collectively referred to
herein as the "Concurrent Transactions." The Company will incur costs in
connection with the Concurrent Transactions and certain other related expenses
estimated to be approximately $20 million, which will be charged primarily to
operating expenses in the second quarter of 1994. The Company and American
Express are entering into several agreements for the purpose of giving effect
to the Distribution and defining their ongoing relationships.
Following the Concurrent Transactions, American Express and Nippon Life
will be entitled to receive 92.8% and 7.2%, respectively, of certain revenue
and profit participation rights received in connection with the sale of
Shearson. (See Note 4.)
Nippon Life Warrant Amendment
In connection with the Concurrent Transactions, the exercise price of
Nippon Life's warrant to purchase approximately 3,306,346 shares of Common
Stock (10,398,221 shares before adjusting for the Reverse Stock Split) will be
reduced from $47.17 per share ($15 per share before adjusting for the Reverse
Stock Split) to $35.03 per share.
9
<PAGE> 10
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Establishment of Long-Term Incentive Plans
Prior and subject to the Distribution, Holdings adopted the Lehman
Brothers Holdings Inc. 1994 Management Ownership Plan (the "1994 Plan"), the
Lehman Brothers Holdings Inc. 1994 Management Replacement Plan (the
"Replacement Plan"), and the Lehman Brothers Holdings Inc. Employee Stock
Purchase Plan (the "ESPP").
The 1994 Plan provides for the Compensation and Benefits Committee (the
"Compensation Committee") of the Board of Directors to grant stock options,
stock appreciation rights ("SARs"), restricted stock units ("RSUs"), restricted
stock, performance related shares and performance units to eligible employees.
In addition, the 1994 Plan provides for non-employee directors to receive on an
annual basis RSUs representing $30,000 of Common Stock, which vest ratably
over a three-year period. Stock options may be awarded as either incentive
stock options or non-qualified stock options. The exercise price for any stock
option shall not be less than the market price of Common Stock on the day of
the grant. SARs may be awarded as a single award or in conjunction with a
stock option. Vesting provisions for stock options and SARs are at the
discretion of the Compensation Committee, but in no case may the term of the
award exceed 10 years. The 1994 Plan also allows the Compensation Committee to
grant restricted stock, performance related shares and performance units to
eligible employees, with vesting and performance objective terms at the
discretion of the Compensation Committee. The 1994 Plan expires in ten years.
A total of 16,500,000 shares of Common Stock may be subject to awards under the
1994 Plan and an additional 150,000 shares may be subject to RSUs to be issued
to non-employee directors. No individual may receive options or SARs over the
life of the 1994 Plan attributable to more than 1,650,000 shares.
The Replacement Plan allows the Compensation Committee to grant stock
options and restricted stock awards to eligible employees. The primary purpose
of the Replacement Plan is to replace awards relating to American Express
common shares granted to Company employees which will be cancelled as of the
date of the Distribution. A maximum of 3,200,000 shares of Common Stock will
be subject to awards under the Replacement Plan. The number and terms of
awards currently outstanding to individuals, as well as the then current stock
prices of American Express and the Company, will determine the actual number of
shares awarded under the Replacement Plan. Awards made under the Replacement
Plan will generally contain the same vesting conditions that apply to the
cancelled awards.
The Compensation Committee adopted, effective June 1, 1994, or such later
date as the Compensation Committee shall designate, and subject to the
Distribution, the ESPP, under which 6,000,000 shares of Common Stock were
reserved for issuance. The ESPP will allow employees to purchase Common Stock
at a 15% discount to market value, with a maximum of $15,000 in annual
aggregate purchases by any one individual.
3. SALE OF THE BOSTON COMPANY:
On May 21, 1993, pursuant to a stock purchase agreement (the "Mellon
Agreement") between Lehman Brothers 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
10
<PAGE> 11
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $165 million for the Mellon
Transaction.
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
11
<PAGE> 12
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
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>
Shearson operating results reflect allocated interest expense of $61
million.
5. SALE OF SHEARSON LEHMAN HUTTON MORTGAGE CORPORATION:
LBI 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 $152 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.
12
<PAGE> 13
LEHMAN BROTHERS HOLDINGS 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 $21,385 $15,065
Certificates of deposit and other money market instruments 1,579 2,051
Mortgage-backed 5,328 6,127
Corporate obligations and other contractual commitments 13,233 10,103
Corporate stocks and options 3,090 2,343
Spot commodities 10
------- -------
$44,615 $35,699
======= =======
Securities and other financial instruments sold but not yet purchased:
Government obligations $11,091 $ 5,861
Mortgage-backed 219 116
Corporate obligations and other contractual commitments 2,333 1,109
Corporate stocks and options 2,816 947
Spot commodities 265 280
------- -------
$16,724 $ 8,313
======= =======
</TABLE>
7. PROVISION FOR INCOME TAXES:
The Company reported a tax expense from continuing operations of $33
million for the first quarter of 1994 compared to $119 million a year ago. The
1994 effective tax rate of 38% 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
treatement. The first quarter 1993 tax provision included expenses of (i) $65
million related to the operating results of the Lehman Businesses and Shearson,
(ii) $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 and 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.
13
<PAGE> 14
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The cumulative effect of adopting SFAS No. 112 reduced net income for
first quarter 1994 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 $1 billion of senior notes and approximately $40 million of
subordinated indebtedness, with maturities ranging from 1995 to 2019.
Approximately $150 million of the total debt issued during the first quarter of
1994 (including the $40 million of subordinated indebtedness) was fixed rate,
with contractual interest rates ranging from 3.86% to 8.05%. The remainder of
the senior notes have floating rates of interest which are based on a variety
of indices. The holders of $50 million of fixed rate senior notes maturing in
2019 and $40 million of fixed rate subordinated notes maturing in 2003 have the
option to cause the Company to repurchase such notes in 1999 and 1996,
respectively.
The Company entered into interest rate swap contracts which effectively
converted the interest rates on approximately $720 million of its floating rate
senior notes issued during the first quarter of 1994 into new floating interest
rates based primarily on the London Interbank Offered Rate (LIBOR). The
Company also entered into interest rate swap contracts which effectively
converted approximately $60 million of its fixed rate senior notes issued
during the first quarter of 1994 to floating rates based primarily on LIBOR.
The proceeds of the Company's first quarter issuances were used to provide
additional liquidity and to refinance long-term debt maturing in 1994. During
the three months ended March 31, 1994, approximately $430 million of long-term
debt matured, including approximately $330 million of senior notes and $100
million of subordinated indebtedness.
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
the Company 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 ("Phantom Share") and the right to receive a certain amount in
cash with respect to a Phantom Share ("Cash Right"). The number of Phantom
Units which were available to each participant was determined by the Finance
Committee of Holdings' Board of Directors (the "Finance Committee").
Up to 6,000,000 Phantom Shares (3,566,277 shares as adjusted for the
Reverse Stock Split) were available for "purchase" through voluntary and
mandatory deferrals of 1993 compensation. The price of each Phantom Unit was
$10.00 per Phantom Share and $6.67 for each related Cash Right ($16.82 per
Phantom Share and $11.22 per related Cash Right, as adjusted for the Reverse
Stock Split) and was determined by the Finance Committee in July 1993 using an
assumed capital structure of Holdings for purposes of the program and taking
into account various factors, including market multiples for comparable
companies, the absence of a public market for
14
<PAGE> 15
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Holdings, vesting requirements, and the restrictions on transferability of the
Phantom Units. 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 Phantom Units representing voluntary deferrals are immediately
vested and non-forfeitable; however, there are restrictions on transferability
of such Phantom Units. There are also restrictions on transferability of the
Common Stock which employees will receive upon conversion of the Phantom
Shares. Generally, such restrictions will lapse ratably over a three year
period. The Phantom Units representing mandatory deferrals apply to selected
senior executives and vest in accordance with a schedule established by the
Company's Finance Committee and, together with the Common Stock into which they
convert, are also subject to transfer restrictions.
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.
11. CAPITAL REQUIREMENTS:
As registered broker-dealers, LBI and certain of Holdings' other
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.
15
<PAGE> 16
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $33 million pre-tax in the first quarter
of 1994.
Reserves for Non-Core Businesses
During the first quarter of 1993, the Company provided $152 million
pre-tax ($100 million after-tax) of non-core business reserves. Of this
amount, $32 million pre-tax ($21 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. Holdings 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, Holdings 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.
16
<PAGE> 17
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
During 1993, the Company completed the sale of three businesses: The
Boston Company, Shearson, and SLHMC which were completed on May 21, July 31,
and August 31, 1993 respectively. 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:
o 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).
o The Lehman Businesses: the results of the ongoing businesses of the
Company.
o 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 $ 434 $ 433 $ 155
Investment banking 175 164 64
Commissions 141 116 364
Interest and dividends 1,527 1,305 66
Other 17 19 171
------ ------ ------
Total revenues 2,294 2,037 820
Interest expense 1,453 1,208 62
------ ------ ------
Net revenues 841 829 758 $1,587
------ ------ ------ ------
Non-interest expenses:
Compensation and benefits 450 461 509
Other expenses 270 264 187
Loss on sale of Shearson 535
Reserves and other charges 33 32 120
------ ------ ------
Total non-interest expenses 753 757 1,351 2,108
------ ------ ------ ------
Income (loss) from continuing operations
before taxes and cumulative effect of
change in accounting principle 88 72 (593) (521)
Provision for income taxes 33 38 81 119
------ ------ ------ ------
Income (loss) from continuing operations
before cumulative effect of change in
accounting principle $ 55 $ 34 $ (674) $ (640)
====== ====== ====== ======
</TABLE>
17
<PAGE> 18
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 MARCH 31, 1994 AND 1993
The Company reported net income of $42 million for the first quarter of
1994 as compared to a net loss of $451 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 $451 million was comprised of
net income from the Lehman Businesses of $34 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
63% to $55 million for the first quarter of 1994 from $34 million in the first
quarter of 1993. Net income for 1994 included an $18 million ($33 million
pre-tax) severance charge while net income for 1993 included a $21 million ($32
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 33% to $73
million in the first quarter of 1994 from $55 million in the first quarter of
1993. Net revenues from the Lehman Businesses increased slightly to $841
million in the first quarter of 1994 from $829 million in the prior year
reflecting strong customer flow partially offset by less favorable trading
results. Excluding the Businesses Sold, total non-interest expenses decreased
slightly to $753 million in the first quarter of 1994 from $757 million in the
first quarter of 1993. The Company's effective tax rate was 38% for the first
quarter of 1994 compared to 53% for the Lehman Businesses in the first quarter
of 1993.
Net Revenues. Net revenues increased slightly to $841 million for the
first quarter of 1994 from $829 million for the comparable period in 1993.
Commissions and investment banking revenue increases of 22% and 7%,
respectively, were partially offset by a decline in net interest revenue to $74
million for the first quarter of 1994 from $97 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
18
<PAGE> 19
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 of $434 million for
the first quarter of 1994 was virtually unchanged from the first quarter of
1993. The first quarter 1994 results were comprised of a substantial increase
in net revenues from both fixed income derivative products and equity
derivative products primarily due to increased volume in these products. The
1994 increase in revenues from derivative products was offset by reduced net
revenues from trading activities which were adversely affected by market
conditions.
Investment Banking. Investment banking revenues increased 7% to $175
million for the first quarter of 1994 from $164 million in the prior year
period, principally due to the increased merger and financial advisory fees.
Commissions. Commission revenues increased 22% to $141 million in the
first quarter of 1994 from $116 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
$1,527 million in the first quarter of 1994 from $1,305 million in the first
quarter of 1993. Net interest and dividend income decreased to $74 million in
the first quarter of 1994 from $97 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 an 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 to
$450 million in the first quarter of 1994 from $461 million in the first
quarter of 1993. Compensation and benefits expense as a percentage of net
revenues decreased to 53.5% in the first quarter of 1994 from 55.6% in the
first quarter of 1993.
Excluding compensation and benefits expense, non-interest expenses
increased 2% to $303 million in the first quarter of 1994 from $296 million in
1993. Included within the 1994 first quarter results was a severance charge of
$33 million ($18 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
$32 million charge ($21 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 $270
million and $264 million for the first quarter of 1994 and 1993, respectively.
This increase primarily was due to higher levels of professional services,
19
<PAGE> 20
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
depreciation and amortization, and brokerage, commissions and clearance fees in
the first quarter of 1994, partially offset by a lower level of bad debt
expenses in the first quarter of 1994.
The Company estimates that it will incur expenses in connection with the
Concurrent Transactions and certain related expenses of approximately $20
million which will be charged primarily to operating expense in the second
quarter of 1994. (See Note 2.) In addition, the Company will recognize
compensation expense associated with the Phantom Share Conversion in the second
quarter of 1994 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 $33 million as compared to $38 million a year ago.
The 1994 provision consists of a provision of $48 million related to continuing
operations before the cumulative effect of change in accounting principle
partially offset by a $15 million benefit related to the severance charge. The
1993 provision of $38 million consisted of a provision of $49 million for
continuing businesses and a tax benefit of $11 million related to non-core
business reserves. The effective tax rate for the Lehman Businesses was 38%
for the first quarter of 1994 as compared to 53% in the first quarter of 1993.
The lower 1994 effective tax rate reflects a reduction in state and local taxes
and taxes related to foreign operations.
As of March 31, 1994, the Company had approximately $175 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 $35 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 $200 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 $200 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 $33 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.
20
<PAGE> 21
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Total assets increased to $112.3 billion at March 31, 1994 from $80.5
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, which
include a $945 million interest bearing receivable from American Express due in
1996, property, equipment and leasehold improvements, deferred expenses and
other assets, and excess of cost over fair value of net assets acquired.
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
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 totaled
$14.4 billion at March 31, 1994, compared to $11.2 billion at December 31,
1993. Of these amounts, commercial paper outstanding totaled $4.6 billion at
March 31, 1994, compared to $2.6 billion at December 31, 1993. At March 31,
1994, the Company had $1.6 billion of unused committed bank credit lines to
support its commercial paper programs.
The Company's uncommitted lines of credit provide an additional source of
short-term financing. At March 31, 1994, the Company had $11.3 billion in
uncommitted lines of credit compared to $10.8 billion at December 31, 1993.
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 $1 billion in senior notes, of which approximately $110 million
were fixed rate and the remainder were variable rate. The Company also issued
approximately $40 million of fixed rate subordinated indebtedness during the
first quarter of 1994. The proceeds of the Company's first quarter issuances
were used to provide additional liquidity and to refinance long-term debt
maturing in 1994. The Company entered into interest rate swap contracts which
effectively converted the interest rates on approximately $720 million of its
floating rate senior notes issued during the first quarter of 1994 into new
floating interest rates based primarily on LIBOR. The Company also entered
into interest rate swap contracts which effectively converted approximately $60
million of its fixed rate senior notes issued during the first quarter of 1994
to a floating rate based primarily on LIBOR. At March 31, 1994, the Company
had long-term debt outstanding of $10.6 billion compared to $9.9 billion
outstanding at December 31, 1993.
21
<PAGE> 22
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
At March 31, 1994, the Company had $2.3 billion available for issuance of
debt securities under various shelf registrations. In addition, the Company
initiated a $1 billion Euro medium-term note program in July 1993, which is not
registered under the Securities Act of 1933. At March 31, 1994, $495 million
of issuance availability remained under this program.
SPECIFIC BUSINESS ACTIVITIES AND TRANSACTIONS
The following sections include information on specific business activities
of the Company which affect overall liquidity and capital resources:
Merchant Banking Partnerships. At March 31, 1994, the Company's
investment in merchant banking partnerships was $401 million, which included
$171 million in one employee-related partnership in which the Company, as
general partner, is entitled to a priority return. At March 31, 1994, the
Company had commitments to make investments through merchant banking
partnerships of approximately $54 million. The Company's policy is to carry
its interests in merchant banking partnerships at fair value based upon the
Company's assessment of the underlying investments. The Company's merchant
banking investments, made primarily through a series of partnerships (the "1989
Partnerships") are, consistent with the terms of the 1989 Partnerships, expected
to be sold or otherwise monetized during the remaining term of the
Partnerships.
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 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 $1.4 billion and $1 billion, respectively, and short
positions with an aggregate market value
22
<PAGE> 23
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
of approximately $240 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 $179 million and $56 million at
March 31, 1994 and $179 million and $82 million at December 31, 1993.
Change in Facilities. In 1993, the Company 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, the Company 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 from
American Express for approximately $44 million, with the Company financing the
purchase through the issuance of notes to American Express. In connection with
the relocation of the Operations Center and the additional space at the World
Financial Center, the Company anticipates incremental fixed asset additions of
approximately $112 million which is expected to be funded from the issuance of
long-term debt. The relocation is expected to be completed in the summer of
1994.
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 $316 million. During the first quarter of
1993, the Company recorded a $32 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 $235
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.
The Company holds $98 million of long-term subordinated indebtedness and
equity securities of American Marketing Industries Holding Inc. ("AMI"). The
subordinated debt, as amended, matures in 1997, and includes certain provisions
which limit cash interest payments and provides for payment-in-kind securities
above such cash interest payments. The AMI loan is current in payment in
accordance with its terms.
The Company has other equity, partnership and debt investments
unrelated to its ongoing businesses. At March 31, 1994, the total carrying
value of the AMI loan and these other investments was $231 million.
Management's intention with regard to non-core assets is the prudent
liquidation of these investments as and when possible.
23
<PAGE> 24
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SPIN-OFF OF LEHMAN BROTHERS
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, the
Company will be an independent public company which will be traded on the New
York Stock Exchange under the symbol LEH.
24
<PAGE> 25
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
Lehman Brothers and others with respect to transactions in which Lehman
Brothers acted as an underwriter or financial advisor, actions arising out of
Lehman Brothers' 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 Lehman Brothers is one.
Although there can be no assurance as to the ultimate outcome, Lehman
Brothers 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, Lehman Brothers believes that the
eventual outcome of the actions against it, including the matters described
below, will not, in the aggregate, have a material adverse effect on the
business or consolidated financial condition of the Company.
Bamaodah v. E.F Hutton & Company Inc. (Reported in Holdings' 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 Holdings'
Annual Report on Form 10-K)
Under the terms of an agreement between American Express and Holdings,
American Express has agreed to indemnify Lehman Brothers for liabilities which
it may incur in connection with this action.
25
<PAGE> 26
Paul Williams and Beverly Kennedy, et al. v. Balcor Pension Investors et al.
(Reported in Holdings' Annual Report on Form 10-K)
Under the terms of an agreement between American Express and Holdings,
American Express has agreed to indemnify Lehman Brothers for liabilities which
it may incur in connection with this action.
Glynwil Investment, Ltd. v. Shearson Lehman Brothers Inc. (Reported in
Holdings' 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 Holdings' 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 Holdings' 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 Holdings' 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.
26
<PAGE> 27
Maxwell Related Litigation (Reported in Holdings' 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 Company 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.
27
<PAGE> 28
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.
99. Pro Forma Consolidated Financial Statements for the quarter ended
March 31, 1994.
(b) Reports on Form 8-K:
1. Form 8-K dated February 24, 1994, Items 5 and 7.
2. Form 8-K dated April 14, 1994, Items 5 and 7.
3. Form 8-K dated April 26, 1994, Items 5 and 7.
28
<PAGE> 29
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: May 10, 1994 By /s/ Richard S. Fuld, Jr.
----------------------------
Richard S. Fuld, Jr.
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: May 10, 1994 By /s/ Robert Matza
----------------------------
Robert Matza
Chief Financial Officer
(Principal Financial Officer)
29
<PAGE> 30
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit Page No.
- - - ----------- ------- --------
<S> <C>
Exhibit 12 Computation in Support of Ratio of Earnings to
Fixed Charges.
Exhibit 99 Pro Forma Consolidated Financial Statements for
the quarter ended March 31, 1994.
</TABLE>
<PAGE> 1
Exhibit 12
<PAGE> 2
LEHMAN BROTHERS HOLDINGS 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 $ 259 $ 203 $ 170 $ 150 $ 144 $ 35
Bank loans and other
borrowings* 5,625 4,531 4,755 5,035 5,224 1,418
Interest component of rentals
of office and equipment 68 62 70 74 76 11
Other adjustments** 25 8 2 2 7
------ ------- ------- ------ ------ ------
TOTAL (A) $5,977 $ 4,804 $ 4,997 $5,261 $5,451 $1,464
====== ======= ======= ====== ====== ======
Earnings:
Pre-tax income (loss) from
continuing operations $ 107 $ (749) $ 150 $ (247) $ 27 $ 88
Fixed charges 5,977 4,804 4,997 5,261 5,451 1,464
Other adjustments*** (39) (17) 7 (6)
------ ------- ------- ------ ------ ------
TOTAL (B) $6,045 $ 4,038 $ 5,154 $5,014 $5,472 $1,552
====== ======= ======= ====== ====== ======
(B / A) 1.01 **** 1.03 **** 1.00 1.06
</TABLE>
* 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 approximately $766 million in 1990 and $247 million in 1992 in
order to cover the deficiency.
<PAGE> 1
Exhibit 99
<PAGE> 2
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
(IN MILLIONS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
Quarter Ended March 31, 1994
-----------------------------------------
Actual Pro Forma
------ --------------------------
Adjustments Total
----------- -----
<S> <C> <C> <C>
Cash and cash equivalents $ 1,385 $ 1,385
Cash and securities segregated and on deposit
for regulatory and other purposes 1,360 1,360
Securities and other financial instruments owned 44,615 44,615
Collateralized short-term agreements:
Securities purchased under agreements to resell 41,130 41,130
Securities borrowed 9,969 9,969
Receivables:
Brokers and dealers 4,792 4,792
Customers 4,314 4,314
Other 3,103 3,103
Property, equipment and leasehold
improvements (net of accumulated
depreciation and amortization of $456
in 1994) 535 535
Deferred expenses and other assets 803 803
Excess of cost over fair value of net assets
acquired (net of accumulated amortization
of $110 in 1994) 271 271
-------- -------- --------
$112,277 $ $112,277
======== ======== ========
</TABLE>
See notes to pro forma consolidated financial statements.
1
<PAGE> 3
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET (CONTINUED)
(IN MILLIONS, EXCEPT SHARE DATA)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Quarter Ended March 31, 1994
--------------------------------------------------
Actual Pro Forma
------ ------------------------------
Adjustments Total
----------- -----
<S> <C> <C> <C>
Commercial paper and short-term debt $ 14,353 $ (1,193) (a) $ 13,160
Securities and other financial instruments sold
but not yet purchased 16,724 16,724
Securities sold under agreements to repurchase 57,204 57,204
Securities loaned 965 965
Payables:
Brokers and dealers 3,150 3,150
Customers 4,334 4,334
Accrued liabilities and other payables 2,939 (57) (b) 2,882
Senior notes 8,516 8,516
Subordinated indebtedness 2,059 2,059
-------- -------- ---------
Total liabilities 110,244 (1,250) 108,994
-------- -------- ---------
Stockholders' equity:
Preferred stock, $1 par value; 38,000,000 shares authorized:
5% Cumulative Convertible Voting, Series A, 13,000,000
shares authorized, issued and outstanding; $39.10
liquidation preference per share 508 508
Money Market Cumulative, 3,300 shares authorized; 250
shares issued and outstanding; $1,000,000 liquidation
preference per share 250 (250) (c)
Cumulative Voting, 8,000,000 shares issued and
outstanding pro forma; $25.00 liquidation preference
per share 200 (d) 200
Redeemable Voting, 1,000 shares issued and outstanding
pro forma; $1.00 liquidation preference per share -- (d) --
Common stock, $.10 par value; 300,000,000 shares
authorized; 168,235,284 shares (53,494,158 as adjusted
for the Reverse Stock Split) issued and outstanding;
105,776,664 shares issued and outstanding pro forma 17 (6) (e) 11
Additional paid-in capital 1,871 904 (f) 3,177
250 (c)
89 (g)
57 (b)
6 (e)
Foreign currency translation adjustment (9) (9)
Accumulated deficit (604) (604)
-------- -------- ---------
Total stockholders' equity 2,033 1,250 3,283
-------- -------- ---------
$112,277 $ $ 112,277
======== ======== =========
</TABLE>
See notes to pro forma consolidated financial statements.
2
<PAGE> 4
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Quarter Ended March 31, 1994
-------------------------------------------------
Actual Pro Forma
------ -------------------------------
Adjustments Total
----------- -----
<S> <C> <C> <C>
Revenues
Market making and principal transactions $ 434 $ 434
Investment banking 175 175
Commissions 141 141
Interest and dividends 1,527 1,527
Other 17 17
------ ----- ------
Total revenues 2,294 2,294
Interest expense 1,453 $ (11) (h) 1,442
------ ----- ------
Net revenues 841 11 852
------ ----- ------
Non-interest expenses
Compensation and benefits 450 450
Communications 50 50
Brokerage, commissions and clearance fees 45 45
Occupancy and equipment 42 42
Professional services 42 42
Advertising and market development 31 31
Depreciation and amortization 31 31
Severance charge 33 33
Other 29 29
------ ----- ------
Total non-interest expenses 753 753
------ ----- ------
Income from continuing operations before taxes 88 11 99
Provision for income taxes 33 5 (i) 38
------ ----- ------
Income from continuing operations 55 6 61
Preferred stock dividends 12 (1) (j) 11
------ ----- ------
Income from continuing operations
applicable to Common Stock $ 43 $ 7 $ 50
====== ===== ======
Income from continuing operations per share
of Common Stock (k) $ .41 $ .47
====== ======
</TABLE>
See notes to pro forma consolidated financial statements.
3
<PAGE> 5
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENT
1. Basis of Reporting
The pro forma financial data has been prepared by the Company based
on certain adjustments to the consolidated financial statements of the Company.
The pro forma statement of operations reflects adjustments for the Concurrent
Transactions as if such transactions had occurred as of January 1, 1994. The
pro forma balance sheet reflects adjustments for the Concurrent Transactions as
if such transactions had occurred as of March 31, 1994.
The pro forma financial data does not purport to present the
financial position and results of operations of the Company had the Concurrent
Transactions actually occurred as of such dates, nor is it necessarily
indicative of results of operations that may be achieved in the future.
The Company will incur certain costs in connection with the
Concurrent Transactions and certain other related expenses estimated to be $20
million which will be charged primarily to operating expenses in the second
quarter of 1994. In addition, 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.
PRO FORMA BALANCE SHEET ADJUSTMENTS:
The pro forma adjustments to the balance sheet give effect to the
items described below:
(a) Reflects the repayment of commercial paper and short-term
debt with gross proceeds from the Equity Investment.
(b) Reflects the Phantom Share Conversion.
(c) Reflects the MMP Exchange.
(d) Reflects the Preferred Stock Purchases.
(e) Reflects the decrease in the aggregate par value of Common
Stock outstanding and corresponding increase in additional
paid-in-capital from the Reverse Stock Split, partially
offset by the increase in the aggregate par value due to the
issuance of Common Stock.
(f) Reflects the American Express Common Stock Purchase.
(g) Reflects the NL Common Stock Purchase.
4
<PAGE> 6
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENT -- (CONTINUED)
PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS:
The pro forma adjustments to the statement of operations give effect
to the items described below:
(h) Reduced interest expense of approximately $11 million in
the first quarter of 1994 resulting from the utilization
of the cash proceeds to the Company from the Equity
Investment.
(i) Adjustment (h) above, tax effected at an assumed rate of
40%.
(j) Elimination of the dividend on the Money Market
Cumulative Preferred Stock partially offset by the
addition of the dividend on the Cumulative Preferred
Stock. An 8 1/2% dividend rate has been assumed on the
Cumulative Preferred Stock. However, this rate will be
based on prevailing market rates at the time of issuance
and is therefore subject to adjustment. A 1/4% change in
the dividend rate would increase or decrease the
Company's annual dividend payment by $0.5 million.
Holders of the Redeemable Preferred Stock will be
entitled to receive, in the aggregate, an annual dividend
equal to 50% of the Company's net income in excess of
$400 million per year, with a maximum dividend of $50
million per year, for each of the next eight years
commencing on or about the Distribution Date.
(k) Income (loss) from continuing operations per share of
Common Stock is calculated based on 105,776,664 pro forma
number of shares of Common Stock outstanding immediately
following the Concurrent Transactions.
5
