<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 AUGUST 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 ____________
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.)
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) 526-7000
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
-------- -------
AS OF SEPTEMBER 30, 1994, 105,522,658 SHARES OF THE REGISTRANT'S COMMON STOCK,
PAR VALUE $.10 PER SHARE, WERE OUTSTANDING.
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<PAGE> 2
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED AUGUST 31, 1994
INDEX
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION Page Number
--------------------- -----------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Statement of Operations -
Three and Eight Months Ended
August 31, 1994 and Three and Nine
Months Ended September 30, 1993 . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheet -
August 31, 1994 and
December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statement of Cash Flows -
Eight Months Ended August 31, 1994 and
Nine Months Ended September 30, 1993 . . . . . . . . . . . . . . . . . . . . . 7
Notes to Consolidated
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
<TABLE>
<CAPTION>
Part II. OTHER INFORMATION
-----------------
<S> <C> <C>
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
</TABLE>
Exhibits
2
<PAGE> 3
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three months ended
--------------------------------------
August 31, September 30,
1994 1993
------------ --------------
<S> <C> <C>
Revenues
Market making and principal transactions $ 335 $ 484
Investment banking 172 233
Commissions 113 244
Interest and dividends 1,901 1,535
Other 16 88
------- -------
Total revenues 2,537 2,584
Interest expense 1,818 1,411
------- -------
Net revenues 719 1,173
------- -------
Non-interest expenses
Compensation and benefits 388 625
Brokerage, commissions and clearance fees 58 61
Communications 51 66
Professional services 49 52
Occupancy and equipment 45 49
Depreciation and amortization 33 35
Advertising and market development 33 40
Other 29 71
------- -------
Total non-interest expenses 686 999
------- -------
Income before taxes 33 174
Provision for income taxes 11 60
------- -------
Net income $ 22 $ 114
======= =======
Net income applicable to common stock $ 11 $ 102
======= =======
Number of shares used in per share
computation 109 .1 105.7
====== ======
Earnings per common share $ .10 $ .96
======= =======
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Eight months ended Nine months ended
August 31, September 30,
1994 1993
------------------ -----------------
<S> <C> <C>
Revenues
Market making and principal transactions $1,054 $1,673
Investment banking 421 727
Commissions 332 1,189
Interest and dividends 4,547 4,388
Other 41 472
------ ------
Total revenues 6,395 8,449
Interest expense 4,365 4,042
------ ------
Net revenues 2,030 4,407
------ ------
Non-interest expenses
Compensation and benefits 1,057 2,546
Brokerage, commissions and clearance fees 178 168
Communications 135 271
Professional services 122 158
Occupancy and equipment 115 215
Depreciation and amortization 86 124
Advertising and market development 85 128
Other 76 246
Severance charge 33
Spin-off expenses 15
Loss on sale of Shearson 535
Reserves for non-core businesses 152
------ ------
Total non-interest expenses 1,902 4,543
------ ------
Income (loss) from continuing operations before taxes
and cumulative effect of change in accounting principle 128 (136)
Provision for income taxes 48 269
------ ------
Income (loss) from continuing operations before
cumulative effect of change in accounting principle 80 (405)
Income from discontinued operations, net of taxes:
Income from operations 24
Gain on disposal 165
------ ------
Net income from discontinued operations 189
------ ------
Income (loss) before cumulative effect of change in
accounting principle 80 (216)
Cumulative effect of change in accounting principle (13)
------ ------
Net income (loss) $ 67 $ (216)
======= =======
Net income (loss) applicable to common stock $ 40 $ (252)
======= =======
Number of shares used in per share computation 107.0 105.7
======= =======
Earnings per common share:
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $ .49 $ (4.17)
Discontinued operations 1.79
Cumulative effect of change in accounting principle (.12)
------ ------
Net income (loss) $ .37 $ (2.38)
======= =======
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
August 31, December 31,
1994 1993
---------- ------------
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 847 $ 1,333
Cash and securities segregated and on deposit
for regulatory and other purposes 1,418 1,073
Securities and other financial instruments owned 51,749 35,699
Collateralized short-term agreements:
Securities purchased under agreements to resell 44,569 26,046
Securities borrowed 9,093 4,372
Receivables:
Brokers and dealers 6,330 5,059
Customers 3,050 2,646
Other 2,698 2,693
Property, equipment and leasehold
improvements (net of accumulated
depreciation and amortization of $494
in 1994 and $438 in 1993) 607 529
Deferred expenses and other assets 642 750
Excess of cost over fair value of net assets
acquired (net of accumulated amortization
of $114 in 1994 and $107 in 1993) 243 274
-------- --------
$121,246 $ 80,474
======== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONTINUED)
(IN MILLIONS, EXCEPT SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
August 31, December 31,
1994 1993
------------- ------------
(unaudited)
<S> <C> <C>
Commercial paper and short-term debt $ 13,000 $11,205
Securities and other financial instruments sold
but not yet purchased 15,893 8,313
Securities sold under agreements to repurchase 67,826 39,191
Securities loaned 1,988 1,116
Payables:
Brokers and dealers 2,488 1,385
Customers 3,264 4,130
Accrued liabilities and other payables 2,600 3,183
Senior notes 8,460 7,779
Subordinated indebtedness 2,367 2,120
-------- -------
Total liabilities 117,886 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
8.44% Cumulative Voting, 8,000,000 shares issued and
outstanding; $25.00 liquidation preference per share 200
Redeemable Voting, 1,000 shares issued and outstanding;
$1.00 liquidation preference per share
Common stock, $.10 par value; 300,000,000 shares authorized;
1994: 105,608,423 shares issued and 105,528,914 shares
outstanding; 1993: 53,470,443 shares issued and outstanding
(168,235,284 prior to the Reverse Stock Split) 11 17
Common stock issuable 77
Additional paid-in capital 3,173 1,871
Foreign currency translation adjustment 3 (12)
Accumulated deficit (610) (582)
Common stock in treasury, at cost: 1994, 79,509 shares (2)
-------- -------
Total stockholders' equity 3,360 2,052
-------- -------
$121,246 $ 80,474
======== ========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
Eight months Nine months
ended August 31, ended September 30,
1994 1993
---------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $ 80 $ (405)
Adjustments to reconcile income (loss) to net cash
used in operating activities:
Depreciation and amortization 86 124
Provisions for losses and other reserves 54 94
Loss on sale of Shearson 535
Non-core business reserve152
Deferred tax liability (benefit) 138 (153)
Other adjustments 70 124
Net change in:
Cash and securities segregated (345) 197
Receivables from brokers and dealers (1,271) (891)
Receivables from customers (404) (606)
Securities purchased under agreements to resell (18,523) (1,177)
Securities borrowed (4,721) 4,125
Loans originated or purchased for resale (62)
Securities and other financial instruments owned (16,050) (7,319)
Payables to brokers and dealers 1,103 (349)
Payables to customers (866) 7
Accrued liabilities and other payables (505) 1,045
Securities sold under agreements to repurchase 28,635 4,229
Securities loaned 872 (1,549)
Securities and other financial instruments sold
but not yet purchased 7,580 (1,607)
Other operating assets and liabilities, net (265) (721)
------- -------
(4,332) (4,207)
Net cash flows provided by operating activities of
discontinued operations 428
------- -------
NET CASH USED IN OPERATING ACTIVITIES $(4,332) $(3,779)
------- -------
</TABLE>
See notes to consolidated financial statements.
7
<PAGE> 8
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
Eight months Nine months
ended August 31, ended September 30,
1994 1993
---------------- -------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes $ 2,537 $ 2,920
Principal payments of senior notes (1,767) (887)
Proceeds from issuance of subordinated indebtedness 540 208
Principal payments of subordinated indebtedness (294) (502)
Issuance of other indebtedness 3,949 4,598
Principal payments of other indebtedness (4,151) (4,654)
Increase (decrease) in commercial paper and
short-term debt, net 2,046 (143)
Proceeds from spin-off 1,193
Dividends paid (82) (119)
Net cash flows used in financing activities of
discontinued operations (301)
------ ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,971 1,120
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, equipment and
leasehold improvements (137) (101)
Proceeds from the sale of The Boston Company 1,300
Proceeds from the sale of Shearson 1,200
Proceeds from sale of SLHMC 70
Other 729
Net cash flows used in investing activities
of discontinued operations (85)
------ ------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (137) 3,113
------ ------
Net change in cash and cash equivalents
of discontinued operations 42
------ ------
Effect of exchange rate changes on cash 12 (6)
------ ------
NET CHANGE IN CASH AND CASH EQUIVALENTS (486) 406
------ ------
Cash and cash equivalents at beginning of period 1,333 641
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 847 $ 1,047
====== ======
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN MILLIONS) (INCLUDING THE
BOSTON COMPANY)
Interest paid (net of amount capitalized) totaled $4,286 and $4,153
in the first eight months of 1994 and nine months of 1993, respectively.
Income taxes received totaled $43 and $40 in the first eight months of 1994 and
nine months of 1993, respectively.
See notes to consolidated financial statements.
8
<PAGE> 9
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. Prior to May 31,
1994, the American Express Company ("American Express") owned 100% of Holdings'
common stock, par value $.10 per share (the "Common Stock"), which represented
approximately 93% of Holdings' voting stock. Effective May 31, 1994, Holdings
became a widely held public company with its Common Stock traded on the New
York Stock Exchange, Inc. (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 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 4, 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 for the nine month period ended
September 30, 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 5 and 6 for definitions and
additional information concerning these sales.)
Certain amounts reflect reclassifications to conform to the current
period's presentation.
Earnings per common share was computed by dividing net income
applicable to common stock by the weighted average number of common stock and
common stock equivalents outstanding. Pursuant to the Commission requirements,
the number of shares used in the earnings per share calculation for all periods
presented includes Common Stock as of the Distribution. (See Note 2.)
2. EQUITY INVESTMENTS AND DISTRIBUTION OF COMMON STOCK:
On May 31, 1994 all of the shares of Common Stock of Holdings were
distributed (the "Distribution") to American Express common shareholders of
record on May 20, 1994 (the "Record Date") as the result of a special dividend
declared on April 29, 1994 by the Board of Directors of American Express.
9
<PAGE> 10
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to the Distribution, Holdings effected a 0.3178313 for 1
reverse stock split (the "Reverse Stock Split") which had the effect of
reducing the number of shares of Common Stock held by American Express from
168,235,284 to 53,470,443. The calculation of the ratio for the Reverse Stock
Split was based upon the number of American Express common shares outstanding
on the Record Date. Also prior to the Distribution:
(i) American Express sold 441,251 shares of Common Stock to certain
executive officers of Lehman Brothers for an aggregate purchase
price of approximately $11.3 million, or approximately $25.55 per
share (the "Offering");
(ii) Holdings sold:
(a) 35,379,920 shares of Common Stock to American Express for
an aggregate purchase price of approximately $903.8
million, or approximately $25.55 per share (the "American
Express Common Stock Purchase"),
(b) 3,490,094 shares of Common Stock to Nippon Life Insurance
Company ("Nippon Life") for approximately $89.2 million, or
approximately $25.55 per share (the "NL Common Stock
Purchase"),
(c) 8,000,000 shares of its Cumulative Voting Preferred Stock
(which stock has a dividend rate of 8.44% per annum) (the
"Cumulative Preferred Stock") to American Express for an
aggregate purchase price of $200 million and
(d) 928 and 72 shares of its Redeemable Voting Preferred Stock
("Redeemable Preferred Stock") for $1.00 per share to
American Express and Nippon Life, respectively (the
Cumulative Preferred Stock and the Redeemable Preferred
Stock collectively, the "Preferred Stock") (the sales of
such Preferred Stock, the "Preferred Stock Purchases").
(iii) Holdings issued:
(a) 3,366,677 shares of Common Stock, with an aggregate value
of approximately $57 million, upon conversion of all of the
outstanding phantom equity interests held by certain key
employees of Lehman Brothers pursuant to the terms of the
Lehman Brothers Inc. Employee Ownership Plan (the "Phantom
Shares Conversion") and
(b) 9,786,006 shares of Common Stock to American Express in
exchange for $250 million of Money Market Preferred Stock
of Holdings held by American Express (the "MMP Exchange").
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 charged
approximately $15 million ($12 million after-tax) to operating expenses in the
second quarter of 1994 related to costs
10
<PAGE> 11
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
incurred in connection with the Concurrent Transactions and other related
expenses. The Company and American Express entered into several agreements for
the purpose of giving effect to the Distribution and defining their ongoing
relationships.
Nippon Life Warrant Amendment
In connection with the Concurrent Transactions, the exercise price of
Nippon Life's warrant to purchase 3,304,880 shares of Common Stock (10,398,221
shares before adjusting for the Reverse Stock Split) was reduced from $47.19
per share ($15 per share before adjusting for the Reverse Stock Split) to
$35.05 per share.
3. INCENTIVE PLANS:
Prior to the Distribution, the Compensation and Benefits Committee
(the "Compensation Committee") of the Board of Directors of Holdings adopted,
effective as of the date of the Distribution, the Lehman Brothers Holdings Inc.
1994 Management Ownership Plan (the "1994 Plan") and the Lehman Brothers
Holdings Inc. 1994 Management Replacement Plan (the "Replacement Plan").
1994 Plan
The 1994 Plan provides for the Compensation Committee to grant stock
options, stock appreciation rights ("SARs"), restricted stock units ("RSUs"),
restricted stock, performance shares and performance units to eligible
employees. In addition, the 1994 Plan provides that non-employee Directors of
Holdings will 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 ten years. The 1994 Plan also allows the
Compensation Committee to grant certain stock awards to eligible employees,
with vesting and performance objective terms determined by such committee. The
1994 Plan expires in ten years. A total of 16,650,000 shares of Common Stock
may be subject to awards under the 1994 Plan which number includes 150,000
shares available as RSUs which may 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 of Common Stock.
Effective as of the Distribution, the Compensation Committee awarded
360,720 stock options with an exercise price of $18 per share of Common Stock
(the "May Options"), to the executive officers of Lehman Brothers. The May
Options, which have a term of ten years, become exercisable in one-third
increments on May 31, 1995, 1996 and 1997. Additionally, in accordance with
the terms of the 1994 Plan, 73,056 RSUs also were awarded, of which 11,667 of
such RSUs were awarded to the seven non-employee Directors of Holdings.
Under the 1994 Plan, the Compensation Committee approved a stock award
program (the "Stock Award Program") pursuant to which, effective July 1, 1994,
it awarded, subject to vesting provisions and
11
<PAGE> 12
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
transfer restrictions, approximately 5,200,000 RSUs (the "Employee RSUs") to
eligible employees. Of the Employee RSUs awarded, approximately 4,000,000 will
vest July 1, 1995, 200,000 July 1, 1997 and 1,000,000 on July 1, 1999. The
Compensation Committee also determined to award RSUs under the Stock Award
Program to the executive officers of Lehman Brothers (the "Executive RSUs"), if
certain performance goals are achieved during the period June 1, 1994 through
December 31, 1994. The number of Executive RSUs which will be awarded, if any,
will be determined upon completion of such performance period. The Executive
RSUs will vest 80% on July 1, 1995 and 20% on July 1, 1999. Each Employee and
Executive RSU outstanding on July 1, 1999 related to these grants will be
exchanged for a share of Common Stock. Holdings will pay a dividend equivalent
on each RSU outstanding based on dividends paid on the Common Stock.
The Compensation Committee also awarded, effective July 1, 1994,
1,500,000 stock options (the "July Options") to the executive officers of
Lehman Brothers. The July Options become exercisable at $18 per share in
one-third increments on July 1, 1995, 1996 and 1997 and expire on July 1, 1999.
Replacement Plan
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 provide awards similar to the American Express
common shares granted to Company employees which were cancelled as of the date
of the Distribution. A maximum of 3,200,000 shares of Common Stock were
available for awards under the Replacement Plan. The number and terms of
American Express stock awards outstanding as of May 31, 1994, as well as the
then current stock prices of American Express and the Company, were used, in
part, to facilitate the determination of the number of shares of Lehman
Brothers restricted stock and stock options awarded under the Replacement Plan.
Awards made under the Replacement Plan generally contain the same vesting
conditions that applied to the cancelled awards.
Approximately 115,283 restricted shares were awarded under the
Replacement Plan to eligible employees. Options relating to 1,827,343 shares
of Common Stock exercisable at $18 per share also were granted under the
Replacement Plan. These stock options expire at various dates from February
1995 to February 2004.
Employee Stock Purchase Plan
The Compensation Committee adopted, effective June 1, 1994, the
Employee Stock Purchase Plan (the "ESPP") pursuant to which 6,000,000 shares of
Common Stock are available for purchase by employees. The ESPP allows
employees to purchase Common Stock at a 15% discount from market value, with a
maximum of $15,000 in annual aggregate purchases by any one individual. The
initial purchase under this plan occurred on August 31, 1994. The shares were
purchased in the open market and thus did not increase the total shares
outstanding.
4. SALE OF THE BOSTON COMPANY:
On May 21, 1993, pursuant to a stock purchase agreement (the "Mellon
Agreement") between LBI and Mellon Bank Corporation ("Mellon Bank"), LBI sold
to Mellon Bank (the "Mellon
12
<PAGE> 13
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Transaction") The Boston Company. 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 $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 nine
month period ended September 30, 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>
Nine months ended
September 30, 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>
5. 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 The 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
13
<PAGE> 14
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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"). All Participation Rights, including the first
payment, were assigned to American Express prior to the Distribution. As
further consideration for the sale of Shearson, LBI 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 Nine months ended
September 30, 1993 September 30, 1993
------------------ ------------------
<S> <C> <C>
Revenues $ 282 $1,825
Expenses 277 1,708
Loss on sale of Shearson 535
------- ------
Income (loss) before taxes 5 (418)
Provision for income taxes 3 149
-------- ------
Net income (loss) $ 2 $ (567)
======== =======
</TABLE>
6. 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.
7. 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>
August 31, December 31,
1994 1993
----------- ------------
<S> <C> <C>
Securities and other financial instruments owned:
Government and agency obligations $27,983 $15,065
Corporate obligations and other contractual commitments 9,405 10,103
Mortgage-backed 6,512 6,127
Corporate stocks and options 4,933 2,343
Certificates of deposit and other money market instruments 2,850 2,051
Spot commodities 66 10
------- -------
$51,749 $35,699
======= =======
</TABLE>
14
<PAGE> 15
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
August 31, December 31,
1994 1993
------------ -------------
<S> <C> <C>
Securities and other financial instruments sold but not yet purchased:
Government and agency obligations $9,201 $ 5,861
Corporate obligations and other contractual commitments 2,848 1,225
Corporate stocks and options 3,582 947
Spot commodities 262 280
------ -------
$15,893 $ 8,313
======= =======
</TABLE>
8. PROVISION FOR INCOME TAXES:
For the third quarter of 1994, the Company had an income tax provision
of $11 million as compared to $60 million a year ago. The effective tax rate
for the Company was 35% for the third quarter of 1994 as compared to 34% in the
third quarter of 1993. The 1994 effective tax rate reflects state and local
income taxes and the impact of certain non-deductible foreign losses partially
offset by benefits attributable to income subject to preferential tax
treatment. The 1993 effective tax rate reflects state and local income taxes
offset by the impact of the tax rate change on the Company's net deferred tax
assets and benefits attributable to foreign earnings and income subject to
preferential tax treatment.
For the first eight months of 1994, the Company reported a tax expense
from continuing operations of $48 million and $269 million for the first nine
months of 1993. The effective tax rate was 38% for the first eight months of
1994. The 1994 effective tax rate was greater than the statutory U.S. federal
income tax rate principally due to state and local income taxes, the impact of
certain non-deductible foreign losses, and the non-deductibility of certain
expenses related to the Concurrent Transactions, partially offset by benefits
attributable to income subject to preferential tax treatment. The tax
provision for the first nine months of 1993 included expenses of (i) $215
million related to the operating results of Shearson and the businesses that
now comprise Lehman Brothers, (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.
9. 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.
The cumulative effect of adopting SFAS No. 112 reduced net income for
the first quarter of 1994 by $13 million after-tax ($23 million pre-tax).
Excluding the cumulative effect of this accounting change, the effect of this
change on the 1994 results of operations was not material.
15
<PAGE> 16
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. A substantial portion of the
increase in the Company's gross assets and liabilities from December 31, 1993
to August 31, 1994 is due to the adoption of FIN No. 39. On September 30,
1994, the Financial Accounting Standards Board issued a draft modification to
FIN No. 39 which, if enacted, will substantially mitigate the increase in the
Company's gross assets and liabilities resulting from the implementation of FIN
No. 39.
10. BORROWINGS:
For the eight months ended August 31, 1994, the Company issued $2,537
million of senior notes (including $380 million of foreign currency denominated
notes) and $540 million of subordinated indebtedness, with maturities ranging
from 1995 to 2019. Of the total debt issued during the first eight months of
1994, $810 million were fixed rate with contractual interest rates ranging from
2.75% to 8.05%. The remainder of the issuances have contractual floating rates
of interest which are based on a variety of indices, with the majority based on
money market indices or the London Interbank Offered Rate (LIBOR). The holders
of $208 million of debt issued during the first eight months of 1994 have the
option to cause the Company to repurchase such debt on dates which range from
1994 to 1999, rather than at their contractual maturities which range from 1995
to 2019. Of the Company's 1994 floating rate issuances, $510 million are
redeemable at par at the option of the Company commencing in 1994.
The Company entered into interest rate swap contracts which
effectively converted the interest rates on $1,195 million of its floating rate
debt issued during the first eight months of 1994 to new floating rates based
primarily on LIBOR. The Company also entered into interest rate swap contracts
which effectively converted $52 million of its floating rate debt issued during
1994 to fixed rates. In addition, the Company entered into interest rate swap
contracts which effectively converted $1,011 million of its fixed rate debt to
floating rates based primarily on LIBOR. Included in this amount are $360
million of interest rate swap contracts which effectively converted fixed rate
debt issued prior to 1994 to floating rates. In addition, the Company entered
into cross currency swaps to effectively convert virtually all of its foreign
currency denominated debt issued during the first eight months of 1994 to U.S.
dollar denominated obligations.
The proceeds of the Company's 1994 issuances have been used to provide
additional liquidity and to refinance long-term debt maturing in 1994. During
the eight months ended August 31, 1994, $2,061 million of long-term debt
matured, including $1,767 million of senior notes and $294 million of
subordinated indebtedness.
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
16
<PAGE> 17
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 August 31, 1994, LBI's net
capital aggregated $1,263 million and was $1,205 million in excess of the
minimum requirement. At August 31, 1994, Lehman Government Securities Inc., a
wholly owned subsidiary of LBI, had net capital which aggregated $364 million
and was $345 million in excess of the minimum requirement.
The Company is subject to other domestic and international regulatory
requirements. As of August 31, 1994, the Company believes it is in material
compliance with all such requirements.
12. OTHER CHARGES:
Spin-off expenses
During the second quarter of 1994, the Company recorded a charge of
$15 million pre-tax ($12 million after-tax) in connection with the Concurrent
Transactions and certain related expenses.
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 ($18 million
after-tax) in the first quarter of 1994.
17
<PAGE> 18
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. In
conjunction with the decision to change its year-end, the Company is reporting
its third quarter results on the basis of its new fiscal year for the three
months ended August 31, 1994. As such, the results for the month of June have
been reflected in both the second and third quarters of 1994. With the
decision to change its year-end, the Company anticipates that its financial
statements for the eleven month transition period ending November 30, 1994,
will be contained in a report on Form 10-K which is expected to be filed with
the Commission on or about February 28, 1995.
18
<PAGE> 19
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BUSINESS ENVIRONMENT
The Company's principal business activities, investment banking and
securities trading and sales, are by their nature subject to volatility,
primarily due to changes in interest and foreign exchange rates, global and
economic political trends and industry competition. As a result, revenues and
earnings may vary significantly from quarter to quarter and from year to year.
Interest rate uncertainties and inflationary concerns continued to
dampen the activities of both issuers and investors, contributing to an overall
softness in net revenues in 1994. Interest rates continued to rise, creating
an unfavorable climate for both debt and equity new issues. Concerns over
increasing interest rates and anticipated Federal Reserve actions had a
negative effect on customer activity. Customers concentrated on short-term,
high quality products in the fixed income area which typically provide reduced
profit margins. Equity investors were equally defensive in posture. During
1993, the Company's operating results were achieved in a more favorable
environment which was characterized by declining interest rates. The 1993
environment resulted in record levels of debt and equity issuances
industrywide, along with record operating profits for companies in the
industry.
The Company believes market conditions experienced during the first
eight months of 1994 will continue throughout the fourth quarter, resulting in
lower revenues, profit margins, and profits as compared to the prior year.
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 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 results of 1994. To facilitate an understanding of the
Company's results, the following table separates the Company's 1993 results
into three categories. These categories are as follows:
- Historical Results: the results of the businesses that now comprise
Lehman Brothers; 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).
- The Lehman Businesses: the results of the businesses that now
comprise Lehman Brothers.
- 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.
19
<PAGE> 20
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Three months ended
------------------------------------------------------------------------
August 31, 1994 September 30, 1993
--------------- -----------------------------------------------
(UNAUDITED) Lehman Lehman Businesses
(IN MILLIONS) Businesses Businesses Sold Historical
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Market making and principal transactions $ 335 $ 443 $ 41
Investment banking 172 186 47
Commissions 113 126 118
Interest and dividends 1,901 1,510 25
Other 16 21 67
------ ------ ------
Total revenues 2,537 2,286 298
Interest expense 1,818 1,393 18
------ ------ ------
Net revenues 719 893 280 $1,173
------ ------ ------ ------
Non-interest expenses:
Compensation and benefits 388 445 180
Other expenses 298 279 95
------ ------ ------
Total non-interest expenses 686 724 275 999
------ ------ ------ ------
Income before taxes 33 169 5 174
Provision for income taxes 11 57 3 60
------ ------ ------ ------
Net income $ 22 $ 112 $ 2 $ 114
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Eight months ended Nine months ended
August 31, 1994 September 30, 1993
------------------ --------------------------------------------------
(UNAUDITED) Lehman Lehman Businesses
(IN MILLIONS) Businesses Businesses Sold Historical
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Market making and principal transactions $1,054 $1,350 $ 323
Investment banking 421 556 171
Commissions 332 361 828
Interest and dividends 4,547 4,227 161
Other 41 60 412
------ ------ ------
Total revenues 6,395 6,554 1,895
Interest expense 4,365 3,899 143
------ ------ ------
Net revenues 2,030 2,655 1,752 $4,407
------ ------ ------ ------
Non-interest expenses:
Compensation and benefits 1,057 1,382 1,164
Other expenses 797 839 471
Loss on sale of Shearson 535
Reserves and other charges 48 32 120
------ ------ ------
Total non-interest expenses 1,902 2,253 2,290 4,543
------ ------ ------ ------
Income (loss) from continuing operations
before taxes and cumulative effect of
change in accounting principle 128 402 (538) (136)
Provision for income taxes 48 161 108 269
------ ------ ------ ------
Income (loss) from continuing operations
before cumulative effect of change in
accounting principle $ 80 $ 241 $(646) $(405)
======= ====== ===== =====
</TABLE>
20
<PAGE> 21
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED AUGUST 31, 1994 AND SEPTEMBER 30, 1993
- -----------------------------------------------------------------
The Company reported net income of $22 million for the third quarter
ended August 31, 1994, as compared to net income of $114 million for the third
quarter ended September 30, 1993. The 1993 net income of $114 million was
comprised of net income from the Lehman Businesses of $112 million and net
income from the Businesses Sold of $2 million. Earnings per share in the third
quarter of 1994 were $0.10. Earnings per share of $0.96 for the third quarter
of 1993 were comprised of $0.94 for the Lehman Businesses and $0.02 for the
Businesses Sold, as adjusted for the number of shares of Common Stock
outstanding on May 31, 1994.
THE LEHMAN BUSINESSES
FOR THE THREE MONTHS ENDED AUGUST 31, 1994 AND SEPTEMBER 30, 1993
- -----------------------------------------------------------------
Summary. Net income for the Lehman Businesses decreased 80% to $22
million for the third quarter of 1994 from $112 million in the third quarter of
1993. Net revenues from the Lehman Businesses decreased 19% to $719 million in
the third quarter of 1994 from $893 million in the prior year. Total
non-interest expenses decreased 5% to $686 million in the third quarter of 1994
from $724 million in the third quarter of 1993, primarily due to decreased
compensation and benefits expense. The Company's effective tax rate was 35%
for the third quarter of 1994 compared to 34% for the Lehman Businesses in the
third 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. Market making and principal transactions revenues
decreased 24% to $335 million for the third quarter of 1994 from $443 million
in the third quarter of 1993. The third quarter 1994 results were affected by
market uncertainties which reduced the levels of customer flow activity and, in
turn, resulted in lower revenues across most major product lines.
Investment Banking. Investment banking revenues decreased 8% to $172
million for the third quarter of 1994 from $186 million in the prior year
period, due to lower origination volumes partially offset by increased revenues
associated with merchant banking activities and improved results from strategic
advisory activities.
Commissions. Commission revenues decreased 10% to $113 million in the
third quarter of 1994 from $126 million in the third quarter of 1993,
reflecting lower volumes of customer trading in listed securities. Commission
revenues are generated from the Company's agency activities on behalf of
corporations, institutions and high net worth individuals.
21
<PAGE> 22
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Interest and Dividends. Interest and dividend revenues increased 26%
to $1,901 million in the third quarter of 1994 from $1,510 million in the third
quarter of 1993. However, net interest and dividend income decreased 29% to
$83 million in the third quarter of 1994 from $117 million in the third 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 market making and principal
transactions and net interest. Therefore, changes in net interest and dividend
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. Net interest and dividend revenue is impacted by the balance
sheet size and mix of assets, the amount and mix of short and long-term funding
sources, as well as the prevailing level, term structure and volatility of
interest rates. The 1994 decrease in net interest and dividend revenue was due
in part to reduced spreads on fixed income products and increased funding costs
to the Company as a result of the higher interest rate environment. The 1994
decrease in net interest and dividend revenue was partially offset by reduced
funding costs due to the $1.2 billion infusion of capital as a result of the
Distribution.
Non-Interest Expenses. Compensation and benefits expense decreased
13% to $388 million in the third quarter of 1994 from $445 million in the third
quarter of 1993, consistent with the lower level of business activity in the
third quarter. Compensation and benefits expense as a percentage of net
revenues increased to 53.9% in the third quarter of 1994 from 49.9% in the
third quarter of 1993.
Non-interest expenses were $686 million in the third quarter of 1994,
as compared to $724 million in the third quarter of 1993. Excluding
compensation and benefits, non-interest expenses increased 7% to $298 million
in the third quarter of 1994. The increase in such expenses, which are less
sensitive to business volumes, are due to ongoing investments in the Company's
international businesses.
Income Taxes. For the third quarter of 1994, the Lehman Businesses had
an income tax provision of $11 million as compared to $57 million for the third
quarter of 1993. The effective tax rate for the Lehman Businesses was 35% for
the third quarter of 1994 as compared to 34% in the third quarter of 1993. The
1994 effective tax rate reflects state and local income taxes and the impact of
certain non-deductible foreign losses partially offset by benefits attributable
to income subject to preferential tax treatment. The 1993 effective tax rate
reflects state and local income taxes offset by the impact of the rate change
on the Company's net deferred tax assets and benefits attributable to overseas
earnings and income subject to preferential tax treatment.
RESULTS OF OPERATIONS
FOR THE EIGHT MONTHS ENDED AUGUST 31, 1994 AND THE NINE MONTHS
- --------------------------------------------------------------
ENDED SEPTEMBER 30, 1993
- ------------------------
The Company reported net income of $67 million for the first eight
months of 1994. The 1994 results included a $13 million after-tax charge for
the cumulative effect of a change in accounting for postemployment benefits as
a result of the adoption of SFAS No. 112, an $18 million after-tax severance
charge and a $12 million after-tax charge in connection with the Concurrent
Transactions and certain expenses related to the May 31, 1994 divestiture from
American Express (the "Spin-off Charge"). In 1993, the Company reported a net
loss of $216 million comprised of net income from the Lehman Businesses of $241
million, net income of $189 million from the discontinued operations of The
Boston
22
<PAGE> 23
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Company, including a $165 million after-tax gain on the sale and after-tax
earnings of $24 million, and a net loss from the Businesses Sold of $646
million, which included an after-tax loss on the sale of Shearson of $630
million ($535 million pre-tax), an after-tax charge of $79 million ($120
million pre-tax) related to a reserve for non-core businesses recognized in
anticipation of the sale of SLHMC, and operating earnings from Shearson of $63
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.
Earnings per common share for the first eight months of 1994 were
$0.49 before the cumulative effect of change in accounting principle and were
$0.37 after the cumulative effect of change in accounting principle. Earnings
per common share for the first nine months of 1993, as adjusted for the number
of shares of common stock outstanding on May 31, 1994, were a loss of $2.38
comprised of earnings of $1.94 for the Lehman businesses, a loss of $6.11 for
the Businesses Sold and earnings of $1.79 for the discontinued operations of
The Boston Company.
THE LEHMAN BUSINESSES
FOR THE EIGHT MONTHS ENDED AUGUST 31, 1994 AND NINE MONTHS
- ----------------------------------------------------------
ENDED SEPTEMBER 30, 1993
- ------------------------
Summary. Net income for the Lehman Businesses was $67 million for the
first eight months of 1994. Net income for 1994 included a $13 million ($23
million pre-tax) charge for the cumulative effect of a change in accounting
principle, an $18 million ($33 million pre-tax) severance charge and a $12
million ($15 million pre-tax) Spin-off charge. Excluding these charges, net
income before the cumulative effect of change in accounting principle for the
Lehman Businesses was $110 million in the first eight months of 1994. Net
income for the first nine months of 1993 was $241 million which 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 this charge, net income for the first nine months of 1993 was $262
million. Net revenues were $2,030 million for the first eight months of 1994
and $2,655 million for the first nine months of 1993.
Market Making and Principal Transactions. Market making and principal
transactions revenues were $1,054 million for the first eight months of 1994
and $1,350 million for the first nine months of 1993. Ongoing market
uncertainties lowered the levels of customer flow activity resulting in lower
revenues across most major product lines.
Investment Banking. Investment banking revenues were $421 million for
the first eight months of 1994 and $556 million for the first nine months of
1993. Investment banking revenues in 1994 were adversely affected by lower
origination volumes and a significantly reduced syndicate calendar in both
equities and fixed income, partially offset by increased revenues associated
with merchant banking activities and improved results from strategic advisory
activities.
Commissions. Commission revenues were $332 million for the first
eight months of 1994 and $361 million for the first nine months of 1993.
Commission revenues are generated from the Company's agency activities on
behalf of corporations, institutions and high net worth individuals.
23
<PAGE> 24
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Interest and Dividends. Interest and dividend revenues were $4,547
million for the first eight months of 1994 and $4,227 million for the first
nine months of 1993. Net interest and dividend income was $182 million for the
first eight months of 1994 and $328 million for the first nine months of 1993.
Net interest and dividend revenues for the current year were adversely affected
by reduced spreads on fixed income products and increased funding costs to the
Company as a result of the higher interest rate environment.
Non-Interest Expenses. Compensation and benefits expense was $1,057
million for the eight months ended August 31, 1994 and $1,382 million for the
nine months ended September 30, 1993. Compensation and benefits expense as a
percentage of net revenues was 52.1% for 1994, unchanged from the prior year
period.
Non-interest expenses were $1,902 million for the first eight months
of 1994 and $2,253 million for the first nine months of 1993. Excluding
compensation and benefits expense, non-interest expenses were $845 million for
the eight months ended August 31, 1994 and $871 million for the nine months
ended September 30, 1993. Included in the 1994 results was a severance charge
of $33 million and a $15 million Spin-off Charge. The 1993 results included a
$32 million charge 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 $797 million for the first eight
months of 1994 and $839 million_for the first nine months of 1993.
The Company remains committed to its expense reduction efforts and the
ongoing review of its expense structure. Throughout 1994, the Company has
taken actions to reduce its headcount to approximately 8,900 as of August 31,
1994 from approximately 9,300 at December 31, 1993. Subsequent to these
reductions, the Company has taken actions that will further reduce its
headcount to approximately 8,500. The Company continues to review its expense
base in order to be proactive in reducing costs in the current environment.
Income Taxes. For the first eight months of 1994, the Lehman
Businesses had an income tax provision of $48 million and $161 million for the
first nine months of 1993. The effective tax rate for the Lehman Businesses
was 38% for the first eight months of 1994 and 40% for the first nine months of
1993. The lower rate in 1994 reflects the reduction in pre-tax results, an
increase in benefits attributable to income subject to preferential tax
treatment, partially offset by the impact of certain non-deductible foreign
losses and the non-deductibility of a portion of the Spin-off Charge.
As of August 31, 1994, the Company had approximately $140 million of
tax NOLs available to offset future taxable income, the benefits of which have
not yet been reflected in the financial statements. It is anticipated that a
portion of these benefits will be recognized in the fourth quarter of 1994.
The benefits when recognized will be reflected as a reduction to goodwill.
24
<PAGE> 25
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 $121.2 billion at August 31, 1994 from $80.5
billion at December 31, 1993. A substantial portion of this increase was due
to the adoption of FIN No. 39, which restricts the historical industry practice
of offsetting certain receivables and payables. (See Note 9.)
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 $13.0 billion at August 31, 1994, compared to $11.2 billion at December
31, 1993. Of these amounts, commercial paper outstanding totaled $2.1 billion
at August 31, 1994, compared to $2.6 billion at December 31, 1993. At August
31, 1994, Holdings had $2.5 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 August 31, 1994, the Company had $11.9 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 eight months ended August 31, 1994, the Company issued
approximately $3.1 billion in long-term debt, of which $810 million was fixed
rate and the remainder was variable rate. The proceeds of the Company's 1994
issuances have been 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 $1.2
billion of its floating rate debt issued during the first eight months of 1994
into new floating rates based primarily on LIBOR. The Company also entered
into interest rate swap contracts which effectively converted $52 million of
1994 floating rate issuances to
25
<PAGE> 26
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
fixed rates. In addition, the Company entered into interest rate swap
contracts which effectively converted approximately $1.0 billion of its fixed
rate debt to floating rates based primarily on LIBOR. Included in this amount
are $360 million of interest rate swap contracts which effectively converted
fixed rate debt issued prior to 1994 to floating rates. At August 31, 1994,
the Company had long-term debt outstanding of approximately $10.8 billion
compared to approximately $9.9 billion outstanding at December 31, 1993.
At August 31, 1994, the Company had approximately $2.2 billion
available for issuance of debt securities under various shelf registrations.
On September 21, 1994, Standard & Poor's (S&P) affirmed the short and
long-term ratings of the Company. However, in light of weaker market
conditions resulting from interest rate uncertainties and inflationary
concerns, S&P has revised the long-term debt outlook of the Company from stable
to negative. Furthermore, S&P indicated that weak or volatile earnings over
the next few quarters could lead to a rating downgrade. Other rating agencies
either took no action or affirmed the Company's existing ratings. In the event
of a downgrade, there would be a negative impact on the Company's funding costs
and a potential for reduced access to borrowings.
Pursuant to a clearing agreement (the "Clearing Agreement"), Smith
Barney carries and clears, on a fully disclosed basis, all accounts introduced
to it by Lehman Brothers, and performs clearing and settlement functions for
equities, municipal securities and corporate debt securities. The Clearing
Agreement expires on December 31, 1994, but may be extended for up to an
additional six months. On October 12, 1994, the Company and Bear Stearns
Securities Corp. ("BSSC") entered into an agreement pursuant to which BSSC has
agreed to provide to the Company transaction support services to enable the
Company to clear the transactions currently cleared by Smith Barney in a manner
which would result in the accounts currently carried by Smith Barney being
carried on the Company's books (the "BSSC Agreement"). The BSSC Agreement is
currently anticipated to take effect during the first half of 1995 and will run
for a term of five years. At August 31, 1994 the balance sheet would have
increased by approximately $12 billion had this arrangement been in effect.
To broaden and increase the level of employee ownership in Holdings,
the Compensation Committee approved the Stock Award Program pursuant to which
it awarded, subject to vesting provisions and transfer restrictions, 5.2
million Employee RSUs and determined to award the Executive RSUs to the
executive officers of Lehman Brothers if certain performance goals are
achieved. The Employee RSUs and the Executive RSUs will comprise part of the
bonuses awarded for 1994. Stockholders' equity increased by approximately $78
million (prior to forfeitures) with respect to the award of Employee RSUs;
however, the number of Executive RSUs to be awarded, if any, will be determined
upon completion of the performance period. Holdings will meet the share
requirements for the Stock Award Program and other Common Stock based
compensation and benefit plans by repurchasing shares in the open market or
issuing common stock.
On September 6, 1994, the Company announced an odd-lot buyback program
for stockholders who own less than 100 shares on such date. Approximately
817,000 shares were tendered by the October 11, 1994 deadline. The Company
extended this buyback program to November 15, 1994.
26
<PAGE> 27
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SPECIFIC BUSINESS ACTIVITIES AND TRANSACTIONS
The following sections include information on specific business
activities of the Company which affect overall liquidity and capital resources:
Merchant Banking Partnerships. At August 31, 1994, the Company's
investment in merchant banking partnerships was $409 million, which included
$134 million in one employee-related partnership in which the Company, as
general partner, is entitled to a priority return. At August 31, 1994, the
Company had commitments to make investments through merchant banking
partnerships of approximately $11 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 are
consistent with the terms of those 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, to be accomplished substantially through
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 August 31, 1994, the carrying value of the Company's investment in
the partnership was $172 million and the outstanding balance of the
collateralized loans, including accrued interest, was $175 million. The
remaining loan balance is expected to be recovered during the fourth quarter of
1994 and the related investment should be fully recovered by the second half of
1995 through a combination of securitizations, asset sales, mortgage
remittances and refinancings by third parties.
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 S&P 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 August 31, 1994 and December 31,
1993 included long positions with an aggregate market value of approximately
$1.2 billion and $1.0 billion, respectively, and short positions with an
aggregate market value of approximately $82 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 $232 million and $36 million at August 31, 1994 and $179 million and $82
million at December 31, 1993.
27
<PAGE> 28
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 commenced
in August 1994 and provides for minimum rental payments of approximately $87
million over its 16-year term. Concurrently, the Company relocated certain
administrative employees to five additional floors at 3 World Financial Center
in New York, New York. These floors were purchased from American Express for
approximately $44 million through an assumption of a portion of the existing
debt related to the World Financial Center.
Non-Core Activities and Investments. In March 1990, the Company
discontinued the origination of partnerships (the assets of which are primarily
real estate) and investments in real estate. Currently, the Company acts as a
general partner for approximately $4.2 billion of partnership investment
capital and manages the remaining real estate investment portfolio. At August
31, 1994, the Company had net exposure to these investments (defined as the
remaining unreserved investment balance plus outstanding commitments and
contingent liabilities under guarantees and credit enhancements) of $221
million. In certain circumstances, the Company provides financial and other
support and assistance to such investments to maintain investment values.
There is no contractual requirement that the Company continue to provide this
support. 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 has equity, partnership and debt investments made in
previous years that are unrelated to its ongoing businesses. The Company holds
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 investments that are also awaiting their disposition or the occurrence of
certain events which will ultimately lead to their liquidation. The Company
carries these equity, partnership and debt investments at their estimated net
realizable value, which approximates $195 million at August 31, 1994. Certain
non-core assets, including the Company's remaining investment in Computervision
Corporation, were sold during the second quarter of 1994.
Management's intention with regard to non-core assets is the prudent
liquidation of these investments as and when possible.
SPIN-OFF OF LEHMAN BROTHERS
- ---------------------------
On May 31, 1994, American Express effected a special dividend to its
common shareholders of record on May 20, 1994, of approximately 98.3 million
shares of Common Stock. (See Note 2.) As a result of the Distribution,
Holdings became a widely held public corporation with its Common Stock traded
on the New York Stock Exchange Inc.
28
<PAGE> 29
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
- --------------------------
Lehman Brothers is involved in a number of judicial, regulatory and
arbitration proceedings concerning matters arising in connection with the
conduct of its business. Such proceedings include actions brought against LBI
and others with respect to transactions in which LBI acted as an underwriter or
financial advisor, actions arising out of LBI's activities as a broker or
dealer in securities and commodities and actions brought on behalf of various
classes of claimants against many securities and commodities firms of which LBI
is one.
Although there can be no assurance as to the ultimate outcome, Lehman
Brothers has denied, or believes it has meritorious defenses and will deny,
liability in all significant cases pending against it including the matters
described below, and intends to defend vigorously each such case. Although
there can be no assurance as to the ultimate outcome, based on information
currently available and established reserves, the Company believes that the
eventual outcome of the actions against it, including the matters described
below, will not, in the aggregate, have a material adverse effect on its
business or consolidated financial condition.
General Acquisition, Inc. et al. v. GenCorp, Inc. et al. (Reported in Holdings'
Annual Report on Form 10-K and First and Second Quarter Reports on Form 10-Q)
The parties have settled all actions among them.
Bamaodah v. E.F. Hutton & Company Inc. (Reported in Holdings' Annual Report on
Form 10-K and First and Second Quarter Reports on Form 10-Q)
The Company has appealed the judgment of the Dubai Court of Appeals to
the Court of Cassation. The appeal is expected to be argued on October 23,
1994.
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 and First and Second Quarter Reports on Form 10-Q)
On August 31, 1994, the Wisconsin District Court granted the
defendants' motions for summary judgment and dismissed both the Majeski and
Eckstein cases with prejudice.
Paul Williams and Beverly Kennedy, et al. v. Balcor Pension Investors et al.
(Reported in Holdings' Annual Report on Form 10-K and First and Second Quarter
Reports on Form 10-Q)
The United States District Court for the Northern District of Illinois
granted plaintiffs' motion for class certification and defendants moved for
reconsideration.
Glynwil Investment, Ltd. v. Shearson Lehman Brothers Inc. (Reported in
Holdings' Annual Report on Form 10-K and First and Second Quarter Reports on
Form 10-Q)
29
<PAGE> 30
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS (CONTINUED)
-----------------
LBI has moved for summary judgment. The New York court has set a
trial date of October 31, 1994.
Actions Relating to First Capital Holdings Inc. (Reported in Holdings' Annual
Report on Form 10-K)
The Bankruptcy Court Action. A trial of limited issues specified by
the court commenced September 22, 1994 and is continuing.
30
<PAGE> 31
EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------
The following exhibits and reports on Form 8-K are filed as part of this
Quarterly Report, or where indicated, were heretofore filed and are hereby
incorporated by reference:
(a) Exhibits:
11. Computation of Per Share Earnings.
12. Computation in Support of Ratio of Earnings to Fixed Charges.
27. Financial Data Schedule BD.
99. Pro Forma Consolidated Statement of Operations for the eight
months ended August 31, 1994.
(b) Reports on Form 8-K:
1. Form 8-K filed September 2, 1994, Items 5 and 7.
2. Form 8-K filed September 22, 1994, Items 5 and 7.
31
<PAGE> 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEHMAN BROTHERS HOLDINGS INC.
----------------------------
(Registrant)
Date: October 17, 1994 By /s/ Richard S. Fuld, Jr.
---------------------------
Richard S. Fuld, Jr.
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: October 17, 1994 By /s/ Robert Matza
---------------------------
Robert Matza
Chief Financial Officer
(Principal Financial Officer)
32
<PAGE> 33
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT PAGE NO.
- ----------- ------- --------
<S> <C>
Exhibit 11 Computation of Per Share Earnings.
Exhibit 12 Computation in Support of Ratio of Earnings to Fixed Charges.
Exhibit 27. Financial Data Schedule BD.
Exhibit 99 Pro Forma Consolidated Statement of Operations for the eight months
ended August 31, 1994.
</TABLE>
33
<PAGE> 1
Exhibit 11
<PAGE> 2
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Three months Three months Eight months Nine months
ended ended ended ended
August 31, September 30, August 31, September 30,
1994 1993 1994 1993
-------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
PRIMARY:
Weighted average shares outstanding:
Common stock 105,555,348 105,608,423 105,588,233 105,608,423
Common stock equivalents:
Restricted stock units 3,559,208 73,056 1,392,916 73,056
----------- ----------- ----------- -----------
Total common stock and common stock equivalents 109,114,556 105,681,479 106,981,149 105,681,479
=========== =========== =========== ===========
Income (loss) from continuing operations before
before cumulative effect of change in accounting
principle $22.0 $113.8 $79.7 $(405.4)
Net income from discontinued operations 189.4
Cumulative effect of change in accounting principle (12.7)
----------- ----------- ----------- -----------
Net income (loss) 22.0 113.8 67.0 (216.0)
Preferred dividends (11.0) (12.0) (27.0) (36.0)
----------- ----------- ----------- -----------
Net income (loss) applicable to common stock $11.0 $101.8 $40.0 $(252.0)
=========== =========== =========== ===========
EARNINGS PER SHARE:
Income (loss) from continuing operations before
cumulative effect of change in accounting
principle $.10 $.96 $.49 $(4.17)
Discontinued operations 1.79
Cumulative effect of change in accounting principle (.12)
----------- ----------- ----------- -----------
Earnings per common share $.10 $.96 $.37 $(2.38)
=========== =========== =========== ===========
FULLY DILUTED:
Weighted average shares outstanding:
Common stock 105,555,348 105,608,423 105,588,233 105,608,423
Common stock equivalents:
Restricted stock units 3,559,208 73,056 1,392,916 73,056
----------- ----------- ----------- -----------
Total common stock and common stock equivalents 109,114,556 105,681,479 106,981,149 105,681,479
=========== =========== =========== ===========
Income (loss) from continuing operations before
before cumulative effect of change in accounting
principle $22.0 $113.8 $79.7 $(405.4)
Net income from discontinued operations 189.4
Cumulative effect of change in accounting principle (12.7)
----------- ----------- ----------- -----------
Net income (loss) 22.0 113.8 67.0 (216.0)
Preferred dividends (11.0) (12.0) (27.0) (36.0)
----------- ----------- ----------- -----------
Net income (loss) applicable to common stock $11.0 $101.8 $40.0 $(252.0)
=========== =========== =========== ===========
EARNINGS PER SHARE:
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $.10 $.96 $.49 $(4.17)
Discontinued operations 1.79
Cumulative effect of change in accounting principle (.12)
----------- ----------- ----------- -----------
Earnings per common share $.10 $.96 $.37 $(2.38)
=========== =========== =========== ===========
</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
Eight Months
Ended
For the Year Ended December 31, August 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 $ 102
Bank loans and other
borrowings* 5,625 4,531 4,755 5,035 5,224 4,263
Interest component of rentals
of office and equipment 68 62 70 74 76 30
Other adjustments** 25 8 2 2 7 1
------ ------ ------ ------ ------ -------
TOTAL (A) $5,977 $4,804 $4,997 $5,261 $5,451 $4,396
====== ====== ====== ====== ====== ======
Earnings:
Pre-tax income (loss) from
continuing operations $ 107 $ (749) $ 150 $ (247) $ 27 $ 128
Fixed charges 5,977 4,804 4,997 5,261 5,451 4,396
Other adjustments*** (39) (17) 7 (6) (1)
------ ------ ------ ------ ------ -------
TOTAL (B) $6,045 $4,038 $5,154 $5,014 $5,472 $4,523
====== ====== ====== ====== ====== ======
(B / A) 1.01 **** 1.03 **** 1.00 1.03
</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.
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
LEHMAN BROTHERS HOLDINGS INC.
This schedule contains summary financial information extracted from the
Consoldiated Balance Sheet at August 31, 1994 (Unaudited) and the Consolidated
Statement of Operations for the eight months ended August 31, 1994 (Unaudited)
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 8-MOS
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> AUG-31-1994
<CASH> $2,265
<RECEIVABLES> $12,078
<SECURITIES-RESALE> $44,569
<SECURITIES-BORROWED> $9,093
<INSTRUMENTS-OWNED> $51,749
<PP&E> $607
<TOTAL-ASSETS> $121,246
<SHORT-TERM> $13,000
<PAYABLES> $5,752
<REPOS-SOLD> $67,826
<SECURITIES-LOANED> $1,988
<INSTRUMENTS-SOLD> $15,893
<LONG-TERM> $10,827
<COMMON> $11
$0
$708
<OTHER-SE> $2,641
<TOTAL-LIABILITY-AND-EQUITY> $121,246
<TRADING-REVENUE> $1,054
<INTEREST-DIVIDENDS> $4,547
<COMMISSIONS> $332
<INVESTMENT-BANKING-REVENUES> $421
<FEE-REVENUE> $0
<INTEREST-EXPENSE> $4,365
<COMPENSATION> $1,057
<INCOME-PRETAX> $128
<INCOME-PRE-EXTRAORDINARY> $80
<EXTRAORDINARY> $0
<CHANGES> $(13)
<NET-INCOME> $67
<EPS-PRIMARY> $0.37
<EPS-DILUTED> $0.37
</TABLE>
<PAGE> 1
Exhibit 99
<PAGE> 2
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Eight months ended August 31, 1994
---------------------------------------------------------
Pro Forma
----------------------------------
Actual Adjustments Total
------ ----------- ------
<S> <C> <C> <C>
Revenues
Market making and principal
transactions $ 1,054 $ $ 1,054
Investment banking 421 421
Commissions 332 332
Interest and dividends 4,547 4,547
Other 41 41
------- -------- -------
Total revenues 6,395 6,395
Interest expense 4,365 (18) (a) 4,347
------- -------- -------
Net revenues 2,030 18 2,048
------- -------- -------
Non-interest expenses
Compensation and benefits 1,057 1,057
Brokerage, commissions and
clearance fees 178 178
Communications 135 135
Professional services 122 122
Occupancy and equipment 115 115
Depreciation and amortization 86 86
Advertising and market development 85 85
Other 76 76
Severance charge 33 33
Spin-off expenses 15 (15) (b)
------- -------- -------
Total non-interest expenses 1,902 (15) 1,887
------- -------- -------
Income before taxes and cumulative
effect of change in accounting principle 128 33 161
Provision for income taxes 48 10 (c) 58
------- -------- -------
Income before cumulative effect of
change in accounting principle 80 23 103
------- -------- -------
Preferred stock dividends 27 1 (d) 28
------- -------- -------
Income before cumulative effect of change
in accounting principle applicable to
common stock $ 53 $ 22 $ 75
======= ======== =======
Number of shares used in earnings
per share computation (e) 110.9
=======
Pro forma earnings per common share $ .68
=======
</TABLE>
See notes to pro forma consolidated financial statements.
1
<PAGE> 3
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
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 and the Stock Award Program as if such transactions had occurred
on the first day of the period reported on.
The pro forma financial data does not purport to present the results
of operations of the Company had the Concurrent and Stock Award Program
Transactions actually occurred as of such dates, nor is it necessarily
indicative of results of operations that may be achieved in the future.
To broaden and increase the level of employee ownership in Holdings,
the Compensation Committee approved the Stock Award Program pursuant to which
it awarded, subject to vesting provisions and transfer restrictions, 5.2
million Employee RSUs and determined to award the Executive RSUs to the
executive officers of Lehman Brothers if certain performance goals are
achieved. The Employee RSUs and the Executive RSUs will comprise part of the
bonuses awarded for 1994. Stockholders' equity increased by approximately $78
million (prior to forfeitures) with an offsetting decrease in accrued
liabilities with respect to the award of the Employee RSUs; however, the number
of Executive RSUs to be awarded, if any, will be determined upon completion of
the performance period. Holdings will meet the share requirements for the
Stock Award Program and other Common Stock based compensation and benefit plans
by repurchasing shares in the open market or issuing such shares.
PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS:
The pro forma adjustments to the statement of operations give effect
to the items described below:
(a) Reduced interest expense of approximately $18 million in the
first eight months of 1994, resulting from the utilization of
the cash proceeds to the Company from the Equity Investment.
(b) The elimination of the charges which resulted from the
Concurrent Transactions and certain related expenses.
(c) Adjustment (a) above, tax effected at an assumed rate of 40%
plus the actual tax expense on (b) above.
2
<PAGE> 4
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED)
(d) Elimination of the dividend on the Money Market Cumulative
Preferred Stock partially offset by the addition of the
dividend on the Cumulative Preferred Stock. 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. On a pro
forma basis, no such dividends would have been payable in 1994.
(e) The number of shares used in the earnings per share
computation includes the weighted average common stock
outstanding for the eight months ended August 31, 1994, of
105,588,233, the 73,056 RSUs awarded as of the Distribution
(See Note 3) and the 5,200,000 Employee RSUs awarded
July 1, 1994. The Employee RSUs although not awarded until
July 1, 1994, are assumed outstanding from January 1, 1994 for
the pro forma statement of operations.
3