<PAGE> 1
________________________________________________________________________________
________________________________________________________________________________
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 JUNE 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
FOR THE QUARTER ENDED JUNE 30, 1994
COMMISSION FILE NUMBER 1-9466
LEHMAN BROTHERS HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 13-3216325
(STATE OR OTHER JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
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 JULY 31, 1994, 105,554,309 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR
VALUE $.10 PER SHARE, WERE OUTSTANDING.
________________________________________________________________________________
________________________________________________________________________________
<PAGE> 2
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1994
INDEX
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION Page Number
--------------------- -----------
<S> <C>
Item 1. Financial Statements
Consolidated Statement of Operations -
Three and Six Months Ended
June 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheet -
June 30, 1994 and
December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statement of
Cash Flows - Six Months Ended
June 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Notes to Consolidated
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Part II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Exhibits
</TABLE>
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
June 30,
----------------------
1994 1993
---- ----
<S> <C> <C>
Revenues
Market making and principal transactions $ 361 $ 560
Investment banking 151 266
Commissions 117 465
Interest and dividends 1,699 1,483
Other 13 193
------ -----
Total revenues 2,341 2,967
Interest expense 1,645 1,360
------ -----
Net revenues 696 1,607
------ -----
Non-interest expenses
Compensation and benefits 364 951
Communications 51 108
Brokerage, commissions and clearance fees 43 34
Professional services 47 54
Occupancy and equipment 43 84
Depreciation and amortization 34 46
Advertising and market development 32 41
Other 32 78
Spin-off expenses 15
------ -----
Total non-interest expenses 661 1,396
------ -----
Income before taxes 35 211
Provision for income taxes 15 90
------ -----
Net income $ 20 $ 121
====== =====
Net income applicable to common stock $ 12 $ 109
====== =====
Number of shares used in earnings
per share computation 105.7 105.7
------ -----
Earnings per common share $ .11 $ 1.04
====== =====
</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>
Six months ended
June 30,
---------------------
1994 1993
---- ----
<S> <C> <C>
Revenues
Market making and principal transactions $ 802 $1,152
Investment banking 326 494
Commissions 258 945
Interest and dividends 3,226 2,854
Other 30 383
----- -----
Total revenues 4,642 5,828
Interest expense 3,098 2,630
----- -----
Net revenues 1,544 3,198
----- -----
Non-interest expenses
Compensation and benefits 814 1,921
Communications 101 205
Brokerage, commissions and clearance fees 95 68
Professional services 89 106
Occupancy and equipment 85 166
Depreciation and amortization 65 90
Advertising and market development 63 88
Other 61 177
Severance charge 33
Spin-off expenses 15
Loss on sale of Shearson 535
Reserves for non-core businesses 152
----- -----
Total non-interest expenses 1,421 3,508
----- -----
Income (loss) from continuing operations before taxes and
cumulative effect of change in accounting principle 123 (310)
Provision for income taxes 48 209
----- -----
Income (loss) from continuing operations before cumulative
effect of change in accounting principle 75 (519)
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 75 (330)
Cumulative effect of change in accounting principle (13)
----- -----
Net income (loss) $ 62 $ (330)
===== =====
Net income (loss) applicable to common stock $ 42 $ (354)
===== =====
Number of shares used in earnings per share computation 105.7 105.7
----- -----
Earnings per common share:
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $ .52 $(5.14)
Discontinued operations 1.79
Cumulative effect of change in accounting principle (.12)
----- -----
Net income (loss) $ .40 $(3.35)
===== =====
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
----------- ------------
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 1,170 $ 1,333
Cash and securities segregated and on deposit
for regulatory and other purposes 1,562 1,073
Securities and other financial instruments owned 47,148 35,699
Collateralized short-term agreements:
Securities purchased under agreements to resell 44,136 26,046
Securities borrowed 10,167 4,372
Receivables:
Brokers and dealers 6,462 5,059
Customers 3,715 2,646
Other 2,689 2,693
Property, equipment and leasehold
improvements (net of accumulated
depreciation and amortization of $481
in 1994 and $438 in 1993) 559 529
Deferred expenses and other assets 651 750
Excess of cost over fair value of net assets
acquired (net of accumulated amortization
of $113 in 1994 and $107 in 1993) 252 274
-------- -------
$ 118,511 $ 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>
June 30, December 31,
1994 1993
---------- ------------
(unaudited)
<S> <C> <C>
Commercial paper and short-term debt $ 13,474 $ 11,205
Securities and other financial instruments sold
but not yet purchased 15,875 8,313
Securities sold under agreements to repurchase 63,809 39,191
Securities loaned 2,671 1,116
Payables:
Brokers and dealers 2,399 1,385
Customers 3,849 4,130
Accrued liabilities and other payables 2,557 3,183
Senior notes 8,449 7,779
Subordinated indebtedness 2,118 2,120
------- -------
Total liabilities 115,201 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 105,554,748 shares
outstanding; 1993: 53,470,443 shares issued and outstanding
(168,235,284 prior to the Reverse Stock Split) 11 17
Additional paid-in capital 3,173 1,871
Foreign currency translation adjustment 9 (12)
Accumulated deficit (590) (582)
Common stock in treasury, at cost: 1994, 53,675 shares (1)
------- -------
Total stockholders' equity 3,310 2,052
------- -------
$118,511 $ 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>
Six months ended
June 30,
---------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 1994 1993
---- ----
<S> <C> <C>
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $ 75 $ (519)
Adjustments to reconcile income (loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization 65 90
Provisions for losses and other reserves 56 65
Loss on sale of Shearson 535
Non-core business reserves 152
Deferred tax liability (benefit) 138 (77)
Other adjustments 36 29
Net change in:
Cash and securities segregated (489) (182)
Receivables from brokers and dealers (1,403) (1,617)
Receivables from customers (1,069) (109)
Securities purchased under agreements to resell (18,090) 1,500
Securities borrowed (5,795) 636
Loans originated or purchased for resale (92)
Securities and other financial instruments owned (11,449) (4,624)
Payables to brokers and dealers 1,014 172
Payables to customers (281) 748
Accrued liabilities and other payables (616) 918
Securities sold under agreements to repurchase 24,618 2,239
Securities loaned 1,555 65
Securities & other financial instruments sold but not yet purchased 7,562 (1,914)
Other operating assets and liabilities, net (217) (91)
-------- ------
(4,290) (2,076)
Net cash flows provided by operating activities of discontinued operations 428
-------- ------
NET CASH (USED IN) OPERATING ACTIVITIES (4,290) (1,648)
-------- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes 2,281 1,806
Principal payments of senior notes (1,506) (743)
Proceeds from issuance of subordinated indebtedness 240 206
Principal payments of subordinated indebtedness (244) (264)
Issuance of other indebtedness 3,774 2,958
Principal payments of other indebtedness (3,256) (2,824)
Increase in commercial paper and short-term debt, net 1,799 96
Proceeds from spin-off 1,193
Dividends paid (70) (56)
Net cash flows used in financing activities of discontinued operations (301)
-------- ------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 4,211 $ 878
-------- ------
</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>
Six months ended
June 30,
--------------------------
1994 1993
---- ----
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, equipment
and leasehold improvements $ (71) $ (63)
Proceeds from the sale of The Boston Company 1,300
Other (25) 144
Net cash flows used in investing activities of
discontinued operations (85)
------ ------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (96) 1,296
------ ------
Net change in cash and cash equivalents
of discontinued operations 42
------ ------
Effect of exchange rate changes on cash 12 (2)
------ ------
NET CHANGE IN CASH AND CASH EQUIVALENTS (163) 482
------ ------
Cash and cash equivalents at beginning of period 1,333 641
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,170 $ 1,123
====== ======
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN MILLIONS) (INCLUDING THE
BOSTON COMPANY IN 1993)
Interest paid (net of amount capitalized) totaled $3,158 and $2,769
in the first six months of 1994 and 1993, respectively. Income taxes received
totaled $28 and $54 in the first six months of 1994 and 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 an independent 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 at and for the six month period
ended June 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.)
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.
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");
9
<PAGE> 10
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 related
to costs 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. As a result of the Reverse Stock Split, the
Concurrent Transactions and certain other related transactions, American
Express holds stock which provides it with voting rights for approximately
2.9% of the voting securities of Holdings and Nippon Life holds securities of
Holdings which on a fully diluted basis provide it with voting rights for
approximately 11.2% of the voting securities of Holdings.
10
<PAGE> 11
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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
11
<PAGE> 12
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1,834,343 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 offering period under this plan commenced in July 1994.
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 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
12
<PAGE> 13
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 six
month period ended June 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>
Six months ended
June 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 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.
13
<PAGE> 14
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company recognized a 1993 first quarter loss related to the
Primerica Transaction of approximately $630 million after-tax ($535 million
pre-tax), which amount includes a reduction in goodwill of $750 million and
transaction-related costs such as relocation, systems and operations
modifications and severance.
Presented below are the results of operations and the loss on the sale
of Shearson (in millions):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, 1993 June 30, 1993
------------------ ----------------
<S> <C> <C>
Revenues $ 752 $ 1,544
Expenses 702 1,432
Loss on sale of Shearson 535
------- -------
Income (loss) before taxes 50 (423)
Provision for income taxes 24 146
------- -------
Net income (loss) $ 26 $ (569)
======= =======
</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>
June 30, December 31,
1994 1993
-------- -----------
<S> <C> <C>
Securities and other financial instruments owned:
Government and agency obligations $22,466 $15,065
Corporate obligations and other contractual commitments 10,602 10,103
Mortgage-backed 7,573 6,127
Corporate stocks and options 3,825 2,343
Certificates of deposit and other money market instruments 2,603 2,051
Spot commodities 79 10
------ ------
$47,148 $35,699
====== ======
</TABLE>
14
<PAGE> 15
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
-------- -----------
<S> <C> <C>
Securities and other financial instruments sold but not yet purchased:
Government and agency obligations $10,262 $ 5,861
Corporate obligations and other contractual commitments 3,028 1,225
Corporate stocks and options 2,309 947
Spot commodities 276 280
------ ------
$15,875 $ 8,313
====== ======
</TABLE>
8. PROVISION FOR INCOME TAXES:
The Company reported a tax expense of $15 million for the second
quarter of 1994 compared to $90 million a year ago. For the first six months
of 1994, the Company reported a tax expense from continuing operations of $48
million as compared to $209 million a year ago. The effective tax rate was 42%
and 39% for the second quarter and first six months of 1994, respectively. The
1994 effective tax rate was greater than the statutory U.S. federal income tax
rate principally due to state and local income taxes 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 six
months 1993 tax provision included expenses of (i) $155 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 approximately $13 million after-tax (approximately
$23 million pre-tax). Excluding the cumulative effect of this accounting
change, the effect of this change on the 1994 results of operations was not
material.
Offsetting of Certain Receivables and Payables. During the first
quarter of 1994, the Company adopted Financial Accounting Standards Board
Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts"
("FIN No. 39"). FIN No. 39 restricts the historical industry practice of
offsetting certain receivables and payables. The increase in the Company's
gross assets and liabilities from December 31, 1993 to June 30, 1994 is
primarily due to the adoption of FIN No. 39. The Financial
15
<PAGE> 16
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting Standards Board has instructed its staff to explore modifying FIN
No. 39 to create certain exceptions, which, if enacted, would substantially
mitigate the increase in the Company's gross assets and liabilities resulting
from the implementation of FIN No. 39.
10. BORROWINGS:
For the six months ended June 30, 1994, the Company issued
approximately $2,281 million of senior notes (including $282 million of foreign
currency denominated notes) and approximately $240 million of subordinated
indebtedness, with maturities ranging from 1995 to 2019. Approximately $487
million of the total debt issued during the first six months of 1994 was fixed
rate, with contractual interest rates ranging from 2.75% to 8.05%. The
remainder of the issuances have 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 approximately $140
million of debt issued during the first six months of 1994 have the option to
cause the Company to repurchase such notes on dates which range from 1995 to
1999. Of the Company's 1994 floating rate debt issuances $500 million of such
debt are redeemable at par at the option of the Company commencing in 1996.
The Company entered into interest rate swap contracts which
effectively converted the interest rates on approximately $1,028 million of its
floating rate debt issued during the first six months of 1994 into new floating
rates based primarily on LIBOR. The Company also entered into interest rate
swap contracts which effectively converted approximately $733 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 all of its
foreign currency denominated debt issued during the first six months of 1994 to
U.S. dollar denominated obligations.
The proceeds of the Company's 1994 issuances were used to provide
additional liquidity and to refinance long-term debt maturing in 1994. During
the six months ended June 30, 1994, approximately $1,750 million of long-term
debt matured, including approximately $1,506 million of senior notes and
approximately $244 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 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
16
<PAGE> 17
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 June 24, 1994, LBI's net
capital aggregated $1,233 million and was $1,175 million in excess of the
minimum requirement. At June 30, 1994, Lehman Government Securities Inc., a
wholly-owned subsidiary of LBI, had net capital which aggregated $346 million
and was $317 million in excess of the minimum requirement.
The Company is subject to other domestic and international regulatory
requirements. As of June 30, 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.
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.
17
<PAGE> 18
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. CHANGE OF FISCAL YEAR-END:
On March 28, 1994, the Board of Directors of Holdings approved,
subject to the Distribution, a change in the Company's fiscal year-end from
December 31 to November 30. Such a change to a non-calendar cycle will shift
certain year-end administrative activities to a time period that conflicts less
with the business needs of the Company's institutional customers. The Company
expects to file its third quarter Form 10-Q for the three month period ended
August 31, 1994. Also in conjunction with its decision to change its fiscal
year-end, the Company anticipates that its financial statements for the
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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
During 1993, the Company completed the sale of three businesses: The
Boston Company, Shearson, and SLHMC which were completed on May 21, July 31,
and August 31, 1993, respectively. The Company's 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.
<TABLE>
<CAPTION>
Three months ended June 30,
---------------------------------------------------------------
1994 1993
---------- ------------------------------------------
(UNAUDITED) Lehman Lehman Businesses
(IN MILLIONS) Businesses Businesses Sold Historical
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Revenues:
Market making and principal transactions $ 361 $ 433 $ 127
Investment banking 151 206 60
Commissions 117 119 346
Interest and dividends 1,699 1,413 70
Other 13 19 174
----- ----- -----
Total revenues 2,341 2,190 777
Interest expense 1,645 1,297 63
----- ----- -----
Net revenues 696 893 714 $1,607
----- ----- ----- -----
Non-interest expenses:
Compensation and benefits 364 476 475
Other expenses 282 256 189
Reserves and other charges 15
----- ----- -----
Total non-interest expenses 661 732 664 1,396
----- ----- ----- -----
Income before taxes 35 161 50 211
Provision for income taxes 15 66 24 90
----- ----- ----- -----
Net income $ 20 $ 95 $ 26 $ 121
===== ===== ===== =====
</TABLE>
19
<PAGE> 20
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------------------------------------------
1994 1993
---------- ------------------------------------------
(UNAUDITED) Lehman Lehman Businesses
(IN MILLIONS) Businesses Businesses Sold Historical
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Revenues:
Market making and principal transactions $ 802 $ 870 $ 282
Investment banking 326 370 124
Commissions 258 235 710
Interest and dividends 3,226 2,718 136
Other 30 38 345
----- ----- -----
Total revenues 4,642 4,231 1,597
Interest expense 3,098 2,505 125
----- ----- -----
Net revenues 1,544 1,726 1,472 $3,198
----- ----- ----- -----
Non-interest expenses:
Compensation and benefits 814 937 984
Other expenses 559 524 376
Loss on sale of Shearson 535
Reserves and other charges 48 32 120
----- ----- -----
Total non-interest expenses 1,421 1,493 2,015 3,508
----- ----- ----- -----
Income (loss) from continuing operations
before taxes and cumulative effect of
change in accounting principle 123 233 (543) (310)
Provision for income taxes 48 104 105 209
----- ----- ----- -----
Income (loss) from continuing operations
before cumulative effect of change in
accounting principle $ 75 $ 129 $ (648) $ (519)
===== ===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1994 AND 1993
The Company reported net income of $20 million for the second quarter
of 1994 after recognition of a $12 million after-tax charge ($15 million
pre-tax) in connection with the Concurrent Transactions and certain expenses
related to the May 31 divestiture from American Express (the "Spin-off
Charge"), as compared to net income of $121 million for the second quarter of
1993. The 1993 net income of $121 million was comprised of net income from the
Lehman Businesses of $95 million and net income from Businesses Sold of $26
million. Earnings per share in the second quarter of 1994 were $0.11 and, when
adjusted for the Spin-off Charge, $0.23. Earnings per share of $1.04 for the
second quarter of 1993 were comprised of $0.79 for the Lehman Businesses and
$0.25 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 JUNE 30, 1994 AND 1993
Summary. Net income for the Lehman Businesses decreased 79% to $20
million for the second quarter of 1994 from $95 million in the second quarter
of 1993. Net income for the second quarter of 1994 was $32 million excluding
the Spin-off Charge. The Company's second quarter results were affected by the
difficult market environment. Lower syndicate volumes in both equities and
fixed income had an adverse effect on the Company's business. Market
volatility also impaired the
20
<PAGE> 21
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
profitability of the Company's customer flow activity in certain areas,
resulting in a less favorable business mix. Partially offsetting these factors
was a higher level of revenues from derivatives, mortgage-backed and
financial advisory products and services, as well as the Company's non-U.S.
businesses. Net revenues from the Lehman Businesses decreased 22% to $696
million in the second quarter of 1994 from $893 million in the prior year.
Total non-interest expenses decreased 10% to $661 million in the second quarter
of 1994 from $732 million in the second quarter of 1993, primarily due to
decreased compensation and benefits expense. The Company's effective tax rate
was 42% for the second quarter of 1994 compared to 41% for the Lehman
Businesses in the second quarter of 1993.
Market Making and Principal Transactions. Market making and principal
transactions include the results of the Company's market making and trading
related to customer activities, as well as proprietary trading for the
Company's own account. Revenues from these activities encompass net realized
and mark-to-market gains and losses on securities and other financial
instruments owned, as well as securities and other financial instruments sold
but not yet purchased. The Company utilizes various hedging strategies as it
deems appropriate to minimize its exposure to significant movements in interest
and foreign exchange rates and the equity markets. Market making and principal
transactions revenues decreased 17% to $361 million for the second quarter of
1994 from $433 million in the second quarter of 1993. The second quarter 1994
results were adversely affected by market conditions, resulting in reduced
profitability from the Company's customer flow business in certain areas and
proprietary trading activities. Partially offsetting these factors were
stronger revenues from the derivatives, mortgage-backed and government
businesses.
Investment Banking. Investment banking revenues decreased 27% to $151
million for the second quarter of 1994 from $206 million in the prior year
period, principally due to decreased underwriting revenues. The decrease in
underwriting revenues was due to a significantly reduced syndicate calender in
both equities and fixed income. Partially offsetting this decrease were
increased revenues from merchant banking investments and increased financial
advisory fees as compared to the second quarter of 1993.
Commissions. Commission revenues decreased slightly to $117 million
in the second quarter of 1994 from $119 million in the second quarter of 1993,
with relatively sustained 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.
Interest and Dividends. Interest and dividend revenues increased 20%
to $1,699 million in the second quarter of 1994 from $1,413 million in the
second quarter of 1993. However, net interest and dividend income decreased to
$54 million in the second quarter of 1994 from $116 million in the second
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
21
<PAGE> 22
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
1994 decrease in net interest and dividend revenue was due in part to reduced
spreads on fixed income products, increased funding cost to the Company as a
result of the higher domestic interest rate environment and changes in
financial instruments used for hedging.
Non-interest Expenses. Compensation and benefits expense decreased
24% to $364 million in the second quarter of 1994 from $476 million in the
second quarter of 1993, consistent with the lower level of business activity in
the second quarter. Compensation and benefits expense as a percentage of net
revenues decreased to 52.3% in the second quarter of 1994 from 53.3% in the
second quarter of 1993.
Non-interest expenses were $661 million in the second quarter of 1994,
including the $15 million Spin-off Charge, as compared to $732 million in the
second quarter of 1993. Excluding compensation and benefits and the Spin-off
Charge, non-interest expenses increased 10% to $282 million in the second
quarter of 1994. The increase in such expenses, which are less sensitive to
business volumes, primarily are due to ongoing investments in the Company's
international franchise, as well as additional investments in systems and
technology.
The Company achieved its goal of reducing its costs by $200 million on
an annual basis. The Company's expense structure for the first half of 1993,
adjusted for changes in the volume and mix of revenues, as well as for
additional costs due to external factors such as inflation or new legislation,
was the basis against which these goals were measured. However, other factors
including the Company's ongoing investments in systems and its international
businesses have resulted in increased non-compensation expense levels year over
year. The Company remains committed to its expense reduction efforts and the
ongoing review of its expense structure in order to achieve greater operating
efficiencies while positioning the Company for future global growth.
Income Taxes. For the second quarter of 1994, the Lehman Businesses
had an income tax provision of $15 million as compared to $66 million a year
ago. The effective tax rate for the Lehman Businesses was 42% for the second
quarter of 1994 as compared to 41% in the second quarter of 1993. The 1994
effective tax rate reflects the statutory U.S. federal income tax rate,
increased by state and local income taxes and the non-deductibility of a
portion of the Spin-off Charge, partially offset by benefits attributable to
income subject to preferential tax treatment.
As of June 30, 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. Although the benefit related
to these NOLs does not currently meet the recognition criteria of SFAS No. 109,
strategies are being implemented to increase the likelihood of realization.
Approximately $35 million of NOLs were transferred to American Express during
the second quarter in connection with the Distribution.
22
<PAGE> 23
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1994 AND 1993
The Company reported net income of $62 million for the first six
months of 1994 as compared to a net loss of $330 million for first six months
of 1993. The 1994 results included a $13 million charge for the cumulative
effect of a change in accounting for postemployment benefits as a result of the
adoption of SFAS No. 112, an $18 million severance charge and a $12 million
Spin-off Charge. The 1993 net loss of $330 million was comprised of net income
from the Lehman Businesses of $129 million, net income of $189 million from the
discontinued operations of The Boston Company, including a $165 million
after-tax gain on the sale and after-tax earnings of $24 million, and a net
loss from the Businesses Sold of $648 million, which included an after-tax loss
on the sale of Shearson of $630 million, an after-tax charge of $79 million
related to a reserve for non-core businesses recognized in anticipation of the
sale of SLHMC, and operating earnings from Shearson of $61 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 share from continuing operations before the cumulative
effect of change in accounting principle were $0.52 for the first six months of
1994 as compared to a loss of $5.14 for the first six months of 1993. Earnings
per share for the first six months of 1994 were $0.40 as compared to a loss of
$3.35 for the comparable period in 1993. Earnings per share in 1993, as
adjusted for the number of shares of Common Stock outstanding on the
Distribution date, were comprised of $0.99 for the Lehman Businesses, a loss of
$6.13 for the Businesses Sold and earnings of $1.79 for the discontinued
operations of The Boston Company.
THE LEHMAN BUSINESSES
FOR THE SIX MONTHS ENDED JUNE 30, 1994 AND 1993
Summary. Net income from continuing operations before the cumulative
effect of change in accounting principle for the Lehman Businesses decreased
42% to $75 million for the first six months of 1994 from $129 million in the
first six months of 1993. Net income for 1994 included an $18 million ($33
million pre-tax) severance charge and a $12 million ($15 million pre-tax)
Spin-off Charge while net income for 1993 included a $21 million ($32 million
pre-tax) reserve for certain non-core partnership syndication activities in
which the Company is no longer actively engaged. Excluding these charges, net
income from continuing operations before the cumulative effect of change in
accounting principle for the Lehman Businesses was $105 million in the first
six months of 1994 as compared to $150 million in the first six months of 1993.
Net revenues from the Lehman Businesses decreased 11% to $1,544 million in the
first six months of 1994 from $1,726 million in the prior year reflecting a
difficult market environment. Total non-interest expenses decreased 5% to
$1,421 million in the first six months of 1994 from $1,493 million in the first
six months of 1993. The Company's effective tax rate was 39% for the first six
months of 1994 compared to 45% for the Lehman Businesses in the first six
months of 1993.
Market Making and Principal Transactions. Market making and principal
transactions revenues decreased 8% to $802 million for the first six months of
1994 from $870 million in the first six months of 1993. The Company's 1994
trading results were adversely affected by market conditions resulting in
23
<PAGE> 24
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
reduced profitability from fixed income and equity products partially offset by
increased net revenues from derivative products.
Investment Banking. Investment banking revenues decreased 12% to $326
million for the first six months of 1994 from $370 million in the prior year
period, due to decreased underwriting revenues resulting from a significantly
reduced syndicate calender in both equities and fixed income. Partially
offsetting this decrease was a higher level of revenues from merchant banking
investments as well as increased financial advisory fees.
Commissions. Commission revenues increased 10% to $258 million in the
first six months of 1994 from $235 million in the first six months of 1993,
primarily as a result of higher volumes of customer trading of securities and
commodities on exchanges. Commission revenues are generated from the Company's
agency activities on behalf of corporations, institutions and high net worth
individuals.
Interest and Dividends. Interest and dividend revenues increased 19%
to $3,226 million in the first six months of 1994 from $2,718 million in the
first six months of 1993. Net interest and dividend income decreased to $128
million in the first six months of 1994 from $213 million in the first six
months of 1993. The Company's net interest revenue was adversely impacted by
the combination of reduced spreads on fixed income products, higher funding
costs and changes in financial instruments used for hedging.
Non-interest Expenses. Compensation and benefits expense decreased to
$814 million in the first six months of 1994 from $937 million in the first six
months of 1993, reflecting reduced business activity in 1994. Compensation and
benefits expense as a percentage of net revenues decreased to 52.7% in the
first six months of 1994 from 54.3% in the first six months of 1993.
Non-interest expenses decreased 5% to $1,421 million for the first six
months of 1994 from $1,493 million in the first six months of 1993. Excluding
compensation and benefits expense, non-interest expenses increased 9% to $607
million in the first six months of 1994 from $556 million in the comparable
period in 1993. Included within the 1994 results was a severance charge of $33
million recognized as a result of a review of personnel needs and on-going cost
reduction efforts 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 $559 million and $524 million for the
first six months of 1994 and 1993, respectively. This increase was due to
higher levels of professional services, depreciation and amortization, and
brokerage, commissions and clearance fees in the first six months of 1994
primarily reflecting ongoing investments in the Company's international
franchise, systems and technology.
Income Taxes. For the first six months of 1994, the Lehman Businesses
had an income tax provision of $48 million as compared to $104 million a year
ago. The effective tax rate for the Lehman Businesses was 39% for the first
six months of 1994 as compared to 45% for the first six months of 1993. The
1994 effective tax rate reflects the statutory U.S. federal income tax rate,
increased by state and local income taxes and the non-deductibility of a
portion of the Spin-off Charge, partially offset by benefits attributable to
income subject to preferential tax treatment.
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 $118.5 billion at June 30, 1994 from $80.5
billion at December 31, 1993. The primary reason for this increase was the
adoption of FIN No. 39, which restricts the historical industry practice of
offsetting certain receivables and payables. (See Note 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 $13.5 billion at June 30, 1994, compared to $11.2 billion at December
31, 1993. Of these amounts, commercial paper outstanding totaled $3.8 billion
at June 30, 1994, compared to $2.6 billion at December 31, 1993. At June 30,
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 June 30, 1994, the Company had $11.7 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 six months ended June 30, 1994, the Company issued
approximately $2.3 billion in senior notes, of which approximately $247 million
were fixed rate and the remainder were variable rate. The Company also issued
approximately $240 million of fixed rate subordinated indebtedness during the
six months ended June 30, 1994. The proceeds of the Company's 1994 issuances
were used to provide additional liquidity and to refinance long-term debt
maturing in 1994. The Company entered into interest rate swap contracts which
effectively converted the interest rates on approximately $1.0 billion of its
floating rate debt issued during the first six months of 1994 into new floating
rates based primarily on
25
<PAGE> 26
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIBOR. The Company also entered into interest rate swap contracts which
effectively converted approximately $733 million of its fixed rate debt to
floating rates based primarily on LIBOR. Included in this amount are
approximately $360 million of interest rate swap contracts which effectively
converted fixed rate debt issued prior to 1994 to floating rates. At June 30,
1994, the Company had long-term debt outstanding of $10.6 billion compared to
$9.9 billion outstanding at December 31, 1993.
At June 30, 1994, the Company had approximately $2.8 billion available
for issuance of debt securities under various shelf registrations.
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. Lehman Brothers is currently negotiating an agreement
with another financial institution to take effect upon the expiration of the
Clearing Agrement. Under that agreement it is currently contemplated that such
financial institution would provide to Lehman Brothers transaction support
services to enable Lehman Brothers 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 Lehman Brothers books. Although no
definitive agreement has been reached, it is anticipated that this new
arrangement will take effect during the first half of 1995.
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 will increase by approximately
$78 million 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.
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 June 30, 1994, the Company's
investment in merchant banking partnerships was $406 million, which included
$158 million in one employee-related partnership in which the Company, as
general partner, is entitled to a priority return. At June 30, 1994, the
Company had commitments to make investments through merchant banking
partnerships of approximately $17 million. The Company's policy is to carry
its interests in merchant banking partnerships at fair value based upon the
Company's assessment of the underlying investments. The Company's merchant
banking investments, made primarily through a series of partnerships, (the
"1989 Partnerships") are, consistent with the terms of the 1989 Partnerships,
expected to be sold or otherwise monetized during the remaining term of the
Partnerships.
Westinghouse. In May 1993, the Company and Westinghouse Electric
Corporation ("Westinghouse") entered into a partnership to facilitate the
disposition of Westinghouse's commercial real estate portfolio valued at
approximately $1.1 billion, which will be accomplished substantially by
securitizations and asset sales. The Company invested approximately $154
million in the partnership, and also made collateralized loans to the
partnership of $752 million. During the third quarter of 1993, Lennar Inc. was
appointed portfolio servicer and purchased a 10% limited partnership interest
from the Company and Westinghouse.
26
<PAGE> 27
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
At June 30, 1994, the carrying value of the Company's investment in the
partnership was $170 million and the outstanding balance of the collateralized
loans, including accrued interest, was $191 million. The remaining loan
balance is expected to be repaid in 1994 through a combination of mortgage
remittances, securitizations, asset sales 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 Standard & Poor's
Corporation and below Baa3 by Moody's Investor Services, Inc., as well as
non-rated securities or loans which, in the opinion of management, are non-
investment grade. High yield debt securities are carried at market value and
unrealized gains or losses for these securities are reflected in the Company's
Consolidated Statement of Operations. The Company's portfolio of such
securities at June 30, 1994 and December 31, 1993 included long positions with
an aggregate market value of approximately $1.1 billion and $1.0 billion,
respectively, and short positions with an aggregate market value of
approximately $68 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 $60 million at
June 30, 1994 and $179 million and $82 million at December 31, 1993.
Change in Facilities. In 1993, the Company agreed to lease
approximately 392,000 square feet of office space located at 101 Hudson Street
in Jersey City, New Jersey (the "Operations Center"). The lease term will
commence in August 1994 and provides for minimum rental payments of
approximately $87 million over its 16-year term. Concurrently, the Company
announced it would relocate certain administrative employees to five additional
floors at 3 World Financial Center in New York, New York. Effective August 1,
1994, the Company purchased these floors from American Express for
approximately $44 million through an assumption of a portion of the existing
debt related to the World Financial Center. In connection with the relocation
to the Operations Center and the acquisition of additional space at the World
Financial Center, the Company anticipates remaining fixed asset additions of
approximately $78 million which is expected to be funded from the issuance of
long-term debt. The relocation is expected to be completed by the third
quarter of 1994.
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 a real estate investment portfolio with an aggregate
investment basis of approximately $316 million. At June 30, 1994, the Company
had remaining net exposure to these investments (defined as the remaining
unreserved investment balance plus outstanding commitments and contingent
liabilities under guarantees and credit enhancements) of $233 million. In
certain circumstances, the Company provides financial and other support and
assistance to such investments to maintain investment values. Except as
described above, there is no contractual requirement that the Company continue
to provide this support. Although a decline in the real estate market or the
economy in general or a change in the Company's disposition strategy could
result in additional real estate reserves, the Company believes that it is
adequately reserved.
27
<PAGE> 28
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 equity, partnership and debt investments unrelated to its
ongoing businesses. At June 30, 1994, the total carrying value of the AMI loan
and these other investments was $205 million. Certain non-core assets, including
the Company's remaining investment in Computervision Corporation, were sold
during the second quarter of 1994. The effect of these sales was not material
to the Company's second quarter results of opertaions. 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 public corporation with its Common Stock traded on the New
York Stock Exchange.
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.
BAMAODAH V. E.F. HUTTON & COMPANY INC. (Reported in Holdings' Annual Report on
Form 10-K and First Quarter Report on Form 10-Q)
The Company has appealed the judgment of the Dubai Court of Appeals to
the Court of Cassation.
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 Quarter Report on Form 10-Q)
The United States District Court for the Eastern District of Wisconsin
has set a trial date of October 4, 1994.
PAUL WILLIAMS AND BEVERLY KENNEDY, ET AL. V. BALCOR PENSION INVESTORS ET AL.
(Reported in Holdings' Annual Report on Form 10-K and First Quarter Report on
Form 10-Q)
The United States District Court for the Northern District of Illinois
granted plaintiffs' motion for class certification, but invited defendants to
move for reconsideration.
<PAGE> 30
GLYNWIL INVESTMENT, LTD. V. SHEARSON LEHMAN BROTHERS INC. (Reported in
Holdings' Annual Report on Form 10-K and First Quarter Report on Form 10-Q)
Discovery is expected to be completed by September 16, 1994.
CC&F MEDFORD III INVESTMENT COMPANY V. THE BOSTON COMPANY, INC. AND
WELLINGTON-MEDFORD III PROPERTIES, INC. (Reported in Holdings' Annual Report on
Form 10-K and First Quarter Report on Form 10-Q)
The parties have settled all disputes among them and a Stipulation of
Dismissal has been filed in the Superior Court of the Commonwealth of
Massachusetts.
ACTIONS RELATING TO NATIONAL ASSOCIATION OF SECURITIES DEALERS AUTOMATED
QUOTATIONS SYSTEM ("NASDAQ") MARKET MAKER ANTITRUST AND SECURITIES LITIGATION.
Since May 1994, at least 15 class actions have been filed in various
state and federal courts against various broker-dealers making markets in
NASDAQ securities. To date, LBI has been named specifically as a defendant
in ten of these actions. Plaintiffs in these cases have alleged violations of
the antitrust laws, securities laws and have pled a variety of other statutory
and common law claims. All of these actions are based on the theory that
because odd-eighth quotes occur less often than quarter quotes, NASDAQ market
makers must be colluding wrongfully to maintain a wider spread. At this time,
it is premature to express an opinion as to the ultimate outcome of these
actions, although LBI believes that it has meritorious defenses to these
claims, which it intends to pursue vigorously.
Actions In Which LBI Is Named As A Defendant
Federal Court Actions, During a period commencing on or about July
6, 1994 and ending on or about July 12, 1994, seven separate class actions
entitled SILVERMAN V. ALEX BROWN & SONS ET AL.; FRANGIOSA V. ALEX BROWN & SONS
ET AL.; KRUM V. ALEX BROWN & SONS ET AL.; SACHS V. ALEX BROWN & SONS ET AL.;
HENNESSEY V. ALEX BROWN & SONS ET AL.; LUTZ V. ALEX BROWN & SONS ET AL. AND
TOLCHIN V. ALEX BROWN & SONS ET AL., were instituted in the United States
District Court for the District of Columbia. On or about July 1, 1994, a class
action entitled DERDEL V. ALEX BROWN & SONS ET AL. was instituted in the United
States District Court for the District of Maryland. On or about July 29,
1994, a class action entitled JOHNSON V. ALEX BROWN & SONS ET AL. was
instituted in the United States District Court for the District of Minnesota.
All of the aforementioned complaints were filed on behalf of customers of any
defendant or any affiliate of any defendant who purchased or sold securities
through NASDAQ within four years of the filing of the respective complaints.
The
<PAGE> 31
complaints specifically name 24 broker-dealers as defendants, including LBI.
The allegations in these complaints are similar, and each alleges violations of
the antitrust laws and seeks treble damages, costs and attorneys' fees and
injunctive relief.
By a series of motions, all of the above mentioned federal actions are
before the Judicial Panel on Multidistrict Litigation (the "Judicial Panel")
for transfer and coordination or consolidation in a single district court. LBI
has taken the position before the Judicial Panel that all of these cases should
be transferred to the Southern District of New York. LBI anticipates that the
Judicial Panel will issue a ruling in the early fall. Pending that ruling, the
plaintiffs have agreed that LBI need not respond to any of the complaints.
State Court Action. On or about May 27, 1994, a class action entitled
ABEL ET AL. V. MERRILL LYNCH ET AL. was instituted in the Superior Court of the
State of California, County of San Diego. This complaint was filed on behalf
of all residents of California who, within the last four years, purchased or
sold any security listed on the NASDAQ. The complaint specifically named
13 broker-dealers as defendants, including LBI. The complaint generally
alleges violations of the California Business and Professions Code - -
specifically the Cartwright Act and the Unfair Competition Act - - and seeks
treble damages, costs and attorneys' fees, restitution and injunctive relief.
Actions In Which LBI Is Not Specifically Named As A Defendant
To date, LBI is aware of five actions with allegations similar to
those in the above mentioned cases, but in which LBI is not specifically named
as a defendant: three actions commenced in the Southern District of New York
(ROBINSON V. HERZOG, HEINE, GEDULD ET AL.; KAYE AND DESAI V. HERZOG, HEINE,
GEDULD ET AL.; and DAMPF V. HERZOG, HEINE, GEDULD ET AL.); one action in the
Southern District of California (PERLMAN V. HERZOG, HEINE, GEDULD ET AL.); and
one action in the Northern District of Illinois (DOLINAR V. SHERWOOD SECURITIES
CORP. ET AL.). It is possible that LBI could be deemed to be a member of the
defendant classes, as defined in such actions; however, as with the above
described federal court suits in which LBI has been named, motions are pending
to consolidate the matters.
<PAGE> 32
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.
99. Pro Forma Consolidated Statements of Operations for the year
ended December 31, 1993 and for the six months ended June 30,
1994.
(b) Reports on Form 8-K:
1. Form 8-K dated June 7, 1994, Item 5.
2. Form 8-K dated June 15, 1994, Item 8.
3. Form 8-K dated July 29, 1994, Items 5 and 7.
<PAGE> 33
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: August 15, 1994 By /s/ Richard S. Fuld, Jr.
--------------------------
Richard S. Fuld, Jr.
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: August 15, 1994 By /s/ Robert Matza
--------------------------
Robert Matza
Chief Financial Officer
(Principal Financial Officer)
<PAGE> 34
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT
- - - ----------- -------
Exhibit 11 Computation of Per Share Earnings.
Exhibit 12 Computation in Support of Ratio of Earnings to Fixed Charges.
Exhibit 99 Pro Forma Consolidated Statements of Operations year ended
December 31, 1993 and for the for the six months ended
June 30, 1994
<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 Ended Six Months Ended
----------------------------- -----------------------------
June 30, June 30, June 30, June 30,
1994 1993 1994 1993
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PRIMARY:
Weighted average shares outstanding:
Common stock 105,594,043 105,608,423 105,601,193 105,608,423
Common stock equivalents:
Restricted stock units 73,056 73,056 73,056 73,056
----------- ----------- ----------- -----------
Total common stock and common stock equivalents 105,667,099 105,681,479 105,674,249 105,681,479
=========== =========== =========== ===========
Income (loss) from continuing operations before
cumulative effect of change in accounting
principle $ 20.1 $ 121.4 $ 75.0 $ (519.2)
Net income from discontinued operations 189.0
Cumulative effect of change in accounting
principle (12.7)
----------- ----------- ----------- -----------
Net Income (loss) $ 20.1 $ 121.4 $ 62.3 $ (330.2)
----------- ----------- ------------ -----------
Preferred dividends (8.0) (12.0) (20.0) (24.0)
Net income (loss) applicable to common stock $ 12.1 $ 109.4 $ 42.3 $ (354.2)
=========== =========== =========== ============
EARNINGS PER SHARE:
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $ .11 $ 1.04 $ .52 $ (5.14)
Discontinued operations 1.79
Cumulative effect of change in accounting principle (.12)
----------- ----------- ----------- -----------
Earnings per common share $ .11 $ 1.04 $ .40 $ (3.35)
=========== =========== =========== ===========
FULLY DILUTED:
Weighted average shares outstanding:
Common stock 105,594,043 105,608,423 105,601,193 105,608,423
Common stock equivalents:
Restricted stock units 73,056 73,056 73,056 73,056
----------- ----------- ----------- -----------
Total common stock and common stock equivalents 105,667,099 105,681,479 105,674,249 105,681,479
=========== =========== =========== ===========
Income (loss) from continuing operations before
cumulative effect of change in accounting
principle $ 20.1 $ 121.4 $ 75.0 $ (519.2)
Net income from discontinued operations 189.0
Cumulative effect of change in accounting
principle (12.7)
----------- ----------- ----------- -----------
Net Income (loss) $ 20.1 $ 121.4 $ 62.3 $ (330.2)
----------- ----------- ----------- -----------
Preferred dividends (8.0) (12.0) (20.0) (24.0)
Net income (loss) applicable to common stock $ 12.1 $ 109.4 $ 42.3 $ (354.2)
=========== =========== =========== ===========
EARNINGS PER SHARE:
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $ .11 $ 1.04 $ .52 $ (5.14)
Discontinued operations 1.79
Cumulative effect of change in accounting principle (.12)
----------- ----------- ----------- -----------
Earnings per common share $ .11 $ 1.04 $ .40 $ (3.35)
=========== =========== =========== ===========
</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
Six Months
Ended
For the Year Ended December 31, June 30,
-------------------------------------------------------- -----------
1989 1990 1991 1992 1993 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Fixed charges:
Interest expense:
Subordinated indebtedness $ 259 $ 203 $ 170 $ 150 $ 144 $ 73
Bank loans and other
borrowings* 5,625 4,531 4,755 5,035 5,224 3,025
Interest component of rentals
of office and equipment 68 62 70 74 76 23
Other adjustments** 25 8 2 2 7 1
------ ------ ------ ------ ------ ------
TOTAL (A) $ 5,977 $ 4,804 $ 4,997 $ 5,261 $ 5,451 $ 3,122
====== ====== ====== ====== ====== ======
Earnings:
Pre-tax income (loss) from
continuing operations $ 107 $ (749) $ 150 $ (247) $ 27 $ 123
Fixed charges 5,977 4,804 4,997 5,261 5,451 3,122
Other adjustments*** (39) (17) 7 (6) (1)
------ ------ ------ ------ ------ ------
TOTAL (B) $ 6,045 $ 4,038 $ 5,154 $ 5,014 $ 5,472 $ 3,244
====== ====== ====== ====== ====== ======
(B / A) 1.01 **** 1.03 **** 1.00 1.04
</TABLE>
* Includes amortization of long-term debt discount.
** Other adjustments include capitalized interest and debt issuance costs
and amortization of capitalized interest.
*** Other adjustments include adding the net loss of affiliates accounted
for at equity whose debt is not guaranteed by the Company and
subtracting capitalized interest and debt issuance costs and
undistributed net income of affiliates accounted for at equity.
**** Earnings were inadequate to cover fixed charges and would have had to
increase approximately $766 million in 1990 and $247 million in 1992
in order to cover the deficiency.
<PAGE> 1
Exhibit 99
<PAGE> 2
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year ended December 31, 1993
--------------------------------------------------------------------------
Adjustments
-----------------------------------------
Concurrent
Revenues Historical Shearson SLHMC Transactions Pro forma
---------- -------- ----- ------------ ---------
<S> <C> <C> <C> <C> <C>
Market making and principal
transactions $ 1,967 $ (323) (a) $1,644
Investment banking 972 (170) (a) 802
Commissions 1,316 (828) (a) 488
Interest and dividends 5,840 (148) (a) $ (13) (d) 5,679
Other 491 (356) (a) (56) (d) 79
------ ------ ----- ----- -----
Total revenues 10,586 (1,825) (69) 8,692
Interest expense 5,368 (116) (a),(b) (7) (d) $ (42) (f) 5,203
------ ------ ----- ----- -----
Net revenues 5,218 (1,709) (62) 42 3,489
------ ------ ----- ----- -----
Non-interest expenses
Compensation and benefits 2,989 (1,147) (a) (17) (d) 1,825
Communications 318 (126) (a) (4) (d) 188
Occupancy and equipment 254 (104) (a) (3) (d) 147
Professional services 203 (40) (a) (2) (d) 161
Advertising and market
development 161 (33) (a) (1) (d) 127
Depreciation and amortization 157 (44) (a) 113
Brokerage, commissions and
clearance fees 140 32 (a) 172
Other 282 (110) (a) (35) (d) 137
Loss on sale of Shearson 535 (535) (a)
Reserves for non-core businesses 152 (120) (e) 32
------ ------ ----- ----- -----
Total non-interest expenses 5,191 (2,107) (182) 2,902
------ ------ ----- ----- -----
Income from continuing operations
before taxes 27 398 120 42 587
Provision for (benefit from)
income taxes 318 (157) (a),(c) 41 (e) 17 (c) 219
------ ------ ----- ----- -----
Income (loss) from continuing
operations (291) 555 79 25 368
------ ------ ----- ----- -----
Preferred stock dividends 48 (6) (g) 42
------ ------ ----- ----- -----
Income (loss) from continuing
operations applicable to
Common Stock $ (339) $ 555 $ 79 $ 31 $ 326
====== ====== ===== ===== =====
Number of shares used in earnings
per share computation (h) 110.9
=====
Pro forma earnings per common share $ 2.94
=====
</TABLE>
See notes to pro forma consolidated financial statements.
<PAGE> 3
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Six months ended June 30, 1994
---------------------------------------------------------
Pro Forma
----------------------------------
Actual Adjustments Total
------ ----------- -------
<S> <C> <C> <C>
Revenues
Market making and principal
transactions $ 802 $ $ 802
Investment banking 326 326
Commissions 258 258
Interest and dividends 3,226 3,226
Other 30 30
----- ----- -----
Total revenues 4,642 4,642
Interest expense 3,098 (18)(f) 3,080
----- ----- -----
Net revenues 1,544 18 1,562
----- ----- -----
Non-interest expenses
Compensation and benefits 814 814
Communications 101 101
Brokerage, commissions and
clearance fees 95 95
Occupancy and equipment 85 85
Professional services 89 89
Advertising and market
development 63 63
Depreciation and amortization 65 65
Other 61 61
Severance charge 33 33
Spin-off expenses 15 (15)(i)
----- ----- -----
Total non-interest expenses 1,421 (15) 1,406
----- ----- -----
Income before taxes and cumulative
effect of change in accounting principle 123 33 156
Provision for income taxes 48 10 (c) 58
----- ----- -----
Income before cumulative effect of
change in accounting principle 75 23 98
----- ----- -----
Preferred stock dividends 19 2 (g) 21
----- ----- -----
Income before cumulative effect of change
in accounting principle applicable to
common stock $ 56 $ 21 $ 77
===== ===== =====
Number of shares used in earnings
per share computation (h) 110.9
=====
Pro forma earnings per common share $ .69
=====
</TABLE>
See notes to pro forma consolidated financial statements.
<PAGE> 4
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 statements of operations reflect adjustments for Shearson, SLHMC,
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 Shearson, SLHMC, 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 will increase by approximately
$78 million 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) The elimination of revenues and expenses of Shearson and the
loss on the sale of Shearson in 1993. Also eliminated is the
income tax expense of $149 million related to these items.
(b) Elimination of interest expense of approximately $52 million resulting
from the utilization of cash proceeds from the sales of The Boston
Company, Shearson and SLHMC to reduce the Company's commercial paper,
short-term debt and senior notes, offset by additional interest
expense of $72 million allocated to Shearson and SLHMC for the
carrying costs of buildings, improvements and equipment and certain
acquisition-related debt, which is not directly eliminated by the
Primerica Transaction or the sale of SLHMC other than through the
utilization of available sales proceeds.
(c) Adjustment (b) above and (f) below, tax effected at an assumed rate
of 40% plus the actual tax expense on (i) below.
(d) The elimination of the revenues and expenses of SLHMC.
(e) The elimination of the reserves related to the sale of SLHMC and the
related income tax benefit of $41 million.
