SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) June 10, 1994
-------------
The Travelers Inc.
- - ------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-9924 52-1568099
-------------- --------------- ----------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
65 East 55th Street, New York New York 10022
- - ---------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 891-8900
- - ---------------------------------------------------------------------------
(Registrant's telephone number, including area code)
<PAGE>
THE TRAVELERS INC.
Current Report on Form 8-K
Item 5. Other Events.
In connection with the proposed filing of a registration statement under
the Securities Act of 1933, The Travelers Inc. (the "Company") is re-
filing herewith the unaudited interim financial statements relating to
the Shearson Lehman Brothers and SLB Asset Management Divisions ("SLBD")
of Lehman Brothers Holdings Inc. (formerly Shearson Lehman Brothers
Holdings Inc.), which financial statements were previously included in
the Company's Quarterly Report on Form 10-Q dated June 30, 1993, and the
audited financial statements of SLBD which were included in the
Company's Current Report on Form 8-K dated April 28, 1993. Such
financial statements, and the related report of the Independent
Accountants, are included as Exhibits 99.01 and 99.02 hereto and are
incorporated by reference herein.
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
Exhibits:
Exhibit No. Description
----------- -----------
23.01 Consent of Ernst & Young, Independent
Auditors.
99.01 Unaudited combined statement of
assets acquired and liabilities
assumed of the Shearson Lehman
Brothers and SLB Asset Management
Divisions ("SLBD") of Lehman Brothers
Holdings Inc. (formerly Shearson
Lehman Brothers Holdings Inc.) at
June 30, 1993 and December 31, 1992,
the related unaudited combined
statement of operations for the three
months and six months ended June 30,
1993 and 1992 and the combined
unaudited statement of cash provided
by net income, as adjusted for non
cash expenses and changes in assets
acquired and liabilities assumed,
exclusive of investing and financing
activities for the six months ended
June 30, 1993 and 1992, together with
the notes thereto.
99.02 Combined statement of assets acquired
and liabilities assumed of SLBD as of
December 31, 1992 and 1991, the
related combined statement of
operations of SLBD for the years then
ended and the combined statement of
cash provided by net income, as
adjusted for non cash expenses and
changes in assets acquired and
liabilities assumed, exclusive of
investing and financing activities
for the year ended December 31, 1992,
together with the notes thereto and
the related report of Independent
Accountants.
<PAGE>
SIGNATURE
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 hereunto duly authorized.
Dated: June 10, 1994 THE TRAVELERS INC.
By:/s/ Firoz B. Tarapore
------------------------
Firoz B. Tarapore
Deputy Treasurer
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Filing Method
----------- ----------- -------------
23.01 Consent of Ernst & Young, Independent
Auditors. Electronic
99.01 Unaudited combined statement of
assets acquired and liabilities
assumed of the Shearson Lehman
Brothers and SLB Asset Management
Divisions ("SLBD") of Lehman Brothers
Holdings Inc. (formerly Shearson
Lehman Brothers Holdings Inc.) at
June 30, 1993 and December 31, 1992,
the related unaudited combined
statement of operations for the three
months and six months ended June 30,
1993 and 1992 and the combined
unaudited statement of cash provided
by net income, as adjusted for non
cash expenses and changes in assets
acquired and liabilities assumed,
exclusive of investing and financing
activities for the six months ended
June 30, 1993 and 1992, together with
the notes thereto. Electronic
99.02 Combined statement of assets acquired
and liabilities assumed of SLBD as of
December 31, 1992 and 1991, the
related combined statement of
operations of SLBD for the years then
ended and the combined statement of
cash provided by net income, as
adjusted for non cash expenses and
changes in assets acquired and
liabilities assumed, exclusive of
investing and financing activities
for the year ended December 31, 1992,
together with the notes thereto and
the related report of Independent
Accountants. Electronic
Exhibit 23.01
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
The Travelers Inc.:
We consent to the incorporation by reference in the Registration
Statements on:
- Form S-3 Nos. 33-49280, 33-55542, 33-56940, 33-68760,
33-51101 and 33-52281; and
- Form S-8 Nos. 33-32130, 33-43997, 33-59524, 33-37399,
33-28437, 33-7665, 33-28110, 33-43883, 33-21099, 33-29711,
33-47437, 33-39025, 33-40469, 33-38109, 33-50206,
33-39985, 33-51353, 33-51769, 33-51783,
33-52027 and 33-52029; and
- Form S-4 Nos. 33-37089, 33-25532 and 33-51201;
of The Travelers Inc. (the "Company"), of our report dated April
26, 1993, with respect to the combined statement of assets acquired
and liabilities assumed of the Shearson Lehman Brothers and SLB
Asset Management Divisions ("SLBD") of Lehman Brothers Holdings
Inc. (formerly Shearson Lehman Brothers Holdings Inc.), as of
December 31, 1992 and 1991, the related combined statement of
operations of SLBD for the years then ended and the combined
statement of cash provided by net income, as adjusted for non cash
expenses and changes in assets acquired and liabilities assumed,
exclusive of investing and financing activities for the year ended
December 31, 1992, together with the notes thereto, included in the
Company's Current Report on Form 8-K, dated June 10, 1994, filed
with the Securities and Exchange Commission.
New York, New York /s/ Ernst & Young
June 10, 1994
EXHIBIT 99.01
SHEARSON LEHMAN BROTHERS and SLB ASSET MANAGEMENT DIVISIONS of
SHEARSON LEHMAN BROTHERS HOLDINGS INC.
<PAGE>
SHEARSON LEHMAN BROTHERS and SLB ASSET MANAGEMENT DIVISIONS of
LEHMAN BROTHERS HOLDINGS INC.
COMBINED STATEMENT OF ASSETS ACQUIRED AND LIABILITIES ASSUMED
<TABLE> <CAPTION>
(In millions)
June 30 December 31,
1993 1992
------------- -------------
<S> <C> <C>
ASSETS ACQUIRED (unaudited)
Cash and cash equivalents $ 28 $ 18
Receivables:
Brokers and dealers 192 257
Customers 3,716 3,548
Other 151 121
Securities borrowed 47 53
Securities owned 85 143
Buildings, furnishings, equipment and leasehold
improvements, at cost (net of accumulated
depreciation and amortization of $281 in 1993
and $335 in 1992) 113 614
Deferred expenses and other assets 135 125
--------- --------
$ 4,467 $ 4,879
========= =========
LIABILITIES ASSUMED
Payables:
Brokers and dealers $ 266 $ 265
Customers 1,418 1,883
Bank 121
Accrued liabilities and other payables 439 340
Securities loaned 1,019 620
Securities sold but not yet purchased 46 24
--------- --------
$ 3,309 $ 3,132
========= =========
See notes to combined financial statements.
</TABLE>
2
<PAGE>
SHEARSON LEHMAN BROTHERS and SLB ASSET MANAGEMENT DIVISIONS of
LEHMAN BROTHERS HOLDINGS INC.
COMBINED STATEMENT OF OPERATIONS
(Unaudited)
(In millions)
<TABLE> <CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
--------------------- -------------------
<S> <C> <C> <C> <C>
1993 1992 1993 1992
---- ---- ---- ----
REVENUES
Commissions $ 346 $ 281 $ 710 $ 631
Investment advisory and custodial 156 125 306 252
Market making and principal transactions 131 134 283 292
Investment banking 59 66 122 121
Interest and dividends 64 61 126 119
Other 5 5 10 9
------- ------ ------ ------
Total Revenues 761 672 1,557 1,424
Interest expense 63 60 124 123
------- ------ ------ ------
Net Revenues 698 612 1,433 1,301
------- ------ ------ ------
NON-INTEREST EXPENSE
Compensation and benefits 473 415 978 879
Communications 57 49 107 94
Occupancy and equipment 37 40 77 81
Depreciation and amortization 22 23 43 46
Advertising and market development 17 24 30 45
Professional services 17 20 37 40
Brokerage, commissions and clearance fees 11 9 19 19
Other, net 14 11 30 29
Loss on sale of SLBD 535
------- ------ ------ ------
Total Non-interest Expense 648 591 1,856 1,233
------- ------ ------ ------
Income (loss) before taxes 50 21 (423) 68
Provision for income taxes 24 13 146 35
------- ------ ------ ------
Net income (loss) $ 26 $ 8 $ (569) $ 33
======= ====== ======= ======
See notes to combined financial statements.
</TABLE>
3
<PAGE>
SHEARSON LEHMAN BROTHERS and SLB ASSET MANAGEMENT DIVISIONS of
LEHMAN BROTHERS HOLDINGS INC.
COMBINED STATEMENT OF CASH PROVIDED BY NET (LOSS) INCOME, AS ADJUSTED
FOR NON CASH EXPENSES AND CHANGES IN ASSETS ACQUIRED AND
LIABILITIES ASSUMED, EXCLUSIVE OF INVESTING AND
FINANCING ACTIVITIES
(unaudited)
(in millions)
<TABLE> <CAPTION>
Six Months Ended
June 30,
-----------------------------
1993 1992
---- ----
<S> <C> <C>
Net (loss) income $ (569) $ 33
Adjustments to reconcile net (loss) income
to net cash:
Loss on sale of SLBD 630
Depreciation and amortization 43 46
Provisions for losses and other reserves 30 28
--------- --------
Net (loss) income adjusted for
non cash expenses 134 107
Net change in assets acquired and
liabilities assumed:
Receivables from brokers and dealers 65 276
Receivables from customers and other (198) (356)
Securities borrowed 6 44
Deferred expenses and other assets (10) (1)
Securities owned 58 (2)
Payables to brokers and dealers 1 (30)
Payables to customers (465) (39)
Accrued liabilities and other payables 190 (74)
Securities loaned 399 332
Securities sold but not yet purchased 22 (19)
--------- --------
Net cash provided by net (loss) income,
as adjusted for non cash expenses and changes
in assets acquired and liabilities assumed,
exclusive of investing and financing activities $ 202 $ 238
========= ========
See notes to combined financial statements.
</TABLE>
4
<PAGE>
SHEARSON LEHMAN BROTHERS and SLB ASSET MANAGEMENT DIVISIONS of
SHEARSON LEHMAN BROTHERS HOLDINGS INC.
NOTES to COMBINED FINANCIAL STATEMENTS
1. Background and Basis of Presentation:
Pursuant to an Asset Purchase Agreement dated March 12,
1993, (the "Primerica Agreement"), Lehman Brothers Inc. (formerly
Shearson Lehman Brothers Inc., "Seller") and Lehman Brothers
Holdings Inc. (formerly Shearson Lehman Brothers Holdings Inc.,
"Holdings", Seller's Parent) agreed to sell certain of the
businesses and related assets and liabilities of the Seller's and
Holdings' Shearson Lehman Brothers and SLB Asset Management
Divisions (which are not legal entities) ("SLBD") to Smith Barney,
Harris Upham & Co. Incorporated ("Buyer") and Primerica Corporation
("Primerica", Buyer's Parent). SLBD includes the domestic retail
securities and commodities brokerage, commodities management and
asset management activities as well as related operations,
excluding such activities conducted under the Lehman Brothers name.
The Primerica Agreement closed on July 31, 1993 with proceeds based
on estimated net assets, subject to adjustment based upon a final
closing balance sheet.
The accompanying Combined Statement of Assets Acquired
and Liabilities Assumed reflects the assets to be transferred to
and liabilities to be assumed by the Buyer pursuant to the
Primerica Agreement. The Seller can elect to retain certain
liabilities which would otherwise have been assumed by the Buyer
which would result in a corresponding adjustment to the purchase
consideration. The acquired assets include the assets used by SLBD
other than: goodwill related to previous acquisitions;
substantially all of the Seller's proprietary positions; and
certain other Seller assets, including exchange memberships and net
deferred tax assets. In addition, since SLBD and the remaining
operations of the Seller utilize a common securities processing and
clearing function, the receivables and payables relating to
clearing functions have been allocated between SLBD and the
remaining operations of the Seller based on the customers or
businesses to which they relate. The Buyer has agreed to assume
the liabilities arising out of or relating to the conduct of the
businesses of SLBD other than: short-term and long-term debt;
liabilities relating to Holdings' post-retirement health plan and
vested deferred compensation plans; and certain other liabilities.
In connection with the closing of the SLBD sale and pursuant to the
terms of the Primerica Agreement, a third party purchased SLBD's
data processing center and adjacent office building (the "SLBD
Buildings"). The Buyer has subsequently leased the SLBD Buildings
from such third party.
The accompanying Combined Statement of Operations
reflects the revenues and expenses attributable to SLBD,
irrespective of whether the assets or liabilities giving rise to
such revenues and expenses are being transferred to or assumed by
the Buyer. Accordingly, the Combined Statement of Operations
reflects, among other things, depreciation and amortization expense
and related financing costs related to the SLBD Buildings,
amortization expense of the Seller's goodwill and the costs
associated with Holdings' post-retirement health plan. The
Seller's businesses share certain functions and facilities, jointly
market certain products and services, and are financed by the
Seller and Holdings. Accordingly, the financial statements include
the cost of shared services and facilities, revenue sharing and the
allocation of interest expense. In addition, an income tax
provision has been calculated on a separate return basis.
5
<PAGE>
SHEARSON LEHMAN BROTHERS and SLB ASSET MANAGEMENT DIVISIONS of
SHEARSON LEHMAN BROTHERS HOLDINGS INC.
NOTES to COMBINED FINANCIAL STATEMENTS
Since the combined financial statements do not present a
complete balance sheet of SLBD, the presentation of cash flow
information is limited to cash flows provided by net income, as
adjusted for non cash expenses and changes in assets acquired and
liabilities assumed, exclusive of investing and financing
activities. While this basis of presentation is appropriate in the
circumstances, it is not the comprehensive presentation of cash
flows normally reflected by Statement of Financial Accounting
Standards No. 95 "Cash Flows". Furthermore, Holdings and other
SLBD affiliates enter into transactions for the benefit of SLBD,
including the issuance of short-term and long-term debt to finance
net customer receivables, which are not reflected in the
accompanying Combined Statement of Assets Acquired and Liabilities
Assumed. Accordingly, the accompanying combined statement of cash
flows does not reflect all cash flows attributable to SLBD during
the periods presented for 1993 and 1992, and is exclusive of its
investing and financing activities.
These combined financial statements reflect all
adjustments which are, in the opinion of Seller's management,
necessary for a fair presentation of the results of SLBD for the
interim periods presented (all such adjustments are normal
recurring adjustments). Pursuant to the rules and regulations of
the Securities and Exchange Commission applicable to such interim
financial statements, certain footnote disclosures which are
normally required under generally accepted accounting principles
have been omitted. It is recommended that these combined financial
statements be read in conjunction with SLBD's combined financial
statements as of December 31, 1992 and 1991 and for the two years
then ended which were included in a filing of Primerica on Form 8-K
dated April 28, 1993.
The Combined Statement of Operations for the six months
ended June 30, 1993 reflects an after-tax loss of $630 million
($535 million pretax) on the sale of SLBD. This loss considered
the $750 million of goodwill related to SLBD which, as explained
above, is not reflected in the Combined Statement of Assets
Acquired and Liabilities Assumed.
6
EXHIBIT 99.02
SHEARSON LEHMAN BROTHERS and SLB ASSET MANAGEMENT DIVISIONS of
SHEARSON LEHMAN BROTHERS HOLDINGS INC.
<PAGE>
SHEARSON LEHMAN BROTHERS and SLB ASSET MANAGEMENT DIVISIONS
of SHEARSON LEHMAN BROTHERS HOLDINGS INC.
INDEX TO COMBINED FINANCIAL STATEMENTS
Combined Financial Statements
-----------------------------
Page
----
Report of Independent Auditors . . . . . . . . . 1
Combined Statement of Assets Acquired
and Liabilities Assumed . . . . . . . . . . . . 2
Combined Statement of Operations . . . . . . . . 3
Combined Statement of Cash Provided by Net Income,
as Adjusted for Non Cash Expenses and Changes
in Assets Acquired and Liabilities Assumed,
Exclusive of Investing and Financing Activities 4
Notes to Combined Financial Statements . . . . . 5 to 11
<PAGE>
Report of Independent Auditors
To the Board of Directors and Stockholders of
Shearson Lehman Brothers Holdings Inc.
We have audited the accompanying combined statement of assets acquired and
liabilities assumed of the Shearson Lehman Brothers and Asset Management
Divisions ("SLBD") of Shearson Lehman Brothers Holdings Inc. ("Holdings") as
of December 31, 1992 and 1991, which as described in Note 1 is prepared
pursuant to a purchase agreement dated March 12, 1993, the related combined
statement of operations of SLBD for the years then ended and the combined
statement of cash provided by net income, as adjusted for non cash expenses
and changes in assets acquired and liabilities assumed, exclusive of
investing and financing activities ("cash flows") for the year ended December
31, 1992. These financial statements are the responsibility of the
management of Holdings. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined assets acquired and liabilities assumed
of SLBD at December 31, 1992 and 1991, the combined results of SLBD's
operations for the years then ended, and its combined cash flows for the year
ended December 31, 1992, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young
New York, New York
April 26, 1993
<PAGE>
SHEARSON LEHMAN BROTHERS and SLB ASSET MANAGEMENT DIVISIONS of
SHEARSON LEHMAN BROTHERS HOLDINGS INC.
COMBINED STATEMENT OF ASSETS ACQUIRED AND LIABILITIES ASSUMED
(In millions)
December 31,
------------------
ASSETS ACQUIRED 1992 1991
-------- -------
Cash and cash equivalents $ 18 $ 10
Receivables:
Brokers and dealers 257 458
Customers 3,548 2,906
Other 121 122
Securities borrowed 53 175
Securities owned 143 206
Buildings, furnishings, equipment and leasehold
improvements, at cost (net of accumulated
depreciation and amortization of $335 in 1992
and $303 in 1991) 614 638
Deferred expenses and other assets 125 77
-------- -------
$ 4,879 $ 4,592
======== =======
LIABILITIES ASSUMED
Payables:
Brokers and dealers $ 265 $ 203
Customers 1,883 1,627
Accrued liabilities and other payables 340 316
Securities loaned 620 308
Securities sold but not yet purchased 24 33
-------- -------
$ 3,132 $ 2,487
======== =======
See notes to combined financial statements.
2
<PAGE>
SHEARSON LEHMAN BROTHERS and SLB ASSET MANAGEMENT DIVISIONS of
SHEARSON LEHMAN BROTHERS HOLDINGS INC.
COMBINED STATEMENT OF OPERATIONS
(In millions)
December 31,
--------------------
1992 1991
---- ----
REVENUES
Commissions $ 1,174 $ 1,083
Investment advisory and custodial 589 497
Sales credits and selling concessions 623 620
Investment banking and principal trading 154 122
Interest and dividends 225 261
Other 20 18
------- -------
2,785 2,601
-------- -------
EXPENSES
Compensation and benefits 1,713 1,519
Communications 190 182
Occupancy and equipment 159 165
Depreciation and amortization 101 101
Advertising and market development 77 65
Professional services 82 70
Brokerage, commissions and clearance fees 36 41
Interest 224 276
Other, net 91 116
-------- ---
2,673 2,535
-------- -----
Income before taxes 112 66
Provision for income taxes 57 37
-------- --
Net income $ 55 $ 29
======== ======
See notes to combined financial statements.
3
<PAGE>
SHEARSON LEHMAN BROTHERS and SLB ASSET MANAGEMENT DIVISIONS of
SHEARSON LEHMAN BROTHERS HOLDINGS INC.
COMBINED STATEMENT OF CASH PROVIDED BY NET INCOME, AS ADJUSTED
FOR NON CASH EXPENSES AND CHANGES IN ASSETS ACQUIRED AND
LIABILITIES ASSUMED, EXCLUSIVE OF INVESTING AND
FINANCING ACTIVITIES
FOR THE YEAR ENDED DECEMBER 31, 1992
(in millions)
Net income $ 55
Adjustments to reconcile net income to net
cash:
Depreciation and amortization 101
Provisions for losses and other reserves 78
--------
Net income adjusted for non cash expenses 234
Net change in assets acquired and
liabilities assumed:
Receivables from brokers and dealers 201
Receivables from customers and other (641)
Securities borrowed 122
Deferred expenses and other assets (48)
Securities owned 63
Payables to brokers and dealers 62
Payables to customers 256
Accrued liabilities and other payables (39)
Securities loaned 312
Securities sold but not yet purchased (9)
------
Net cash provided
by net income, as adjusted for non cash
expenses and changes in assets acquired
and liabilities assumed, exclusive of investing
and financing activities $ 513
======
See notes to combined financial statements.
4
<PAGE>
SHEARSON LEHMAN BROTHERS and SLB ASSET MANAGEMENT DIVISIONS of
SHEARSON LEHMAN BROTHERS HOLDINGS INC.
NOTES to COMBINED FINANCIAL STATEMENTS
1. Background and Basis of Presentation:
Pursuant to an Asset Purchase Agreement dated March 12, 1993, ("the
Primerica Agreement") Shearson Lehman Brothers Inc. ("Seller") and Shearson
Lehman Brothers Holdings Inc. ("Holdings", Seller's Parent) agreed to sell
certain of the businesses and related assets and liabilities of the Seller's
and Holdings' Shearson Lehman Brothers and SLB Asset Management Divisions
(which are not legal entities) ("SLBD") to Smith Barney, Harris Upham & Co.
Incorporated ("Buyer") and Primerica Corporation ("Primerica"). SLBD
includes all the domestic retail securities and commodities brokerage,
commodities management and asset management activities as well as related
operations, excluding such activities conducted under the Lehman Brothers
name.
The accompanying Combined Statement of Assets Acquired and
Liabilities Assumed reflects the assets to be transferred to and liabilities
to be assumed by the Buyer pursuant to the Primerica Agreement. The Seller
can elect to retain certain liabilities which would otherwise have been
assumed by the Buyer which would result in a corresponding adjustment to the
purchase consideration. The acquired assets include the assets used by SLBD
other than: goodwill related to previous acquisitions; substantially all of
the Seller's proprietary positions; and certain other Seller assets,
including exchange memberships and net deferred tax assets. In addition,
since SLBD and the remaining operations of the Seller utilize a common
securities processing and clearing function, the receivables and payables
relating to clearing functions have been allocated between SLBD and the
remaining operations of the Seller based on the customers or businesses to
which they relate. The Buyer has agreed to assume the liabilities arising
out of or relating to the conduct of the businesses of SLBD other than:
short-term and long-term debt; liabilities relating to Holdings' post-
retirement health plan and vested deferred compensation plans; and certain
other liabilities.
The accompanying Combined Statement of Operations reflects the
revenues and expenses attributable to SLBD, irrespective of whether the
assets or liabilities giving rise to such revenues and expenses are being
transferred to or assumed by the Buyer. Accordingly, the Combined Statement
of Operations reflects, among other things, amortization expense of the
Seller's goodwill and the costs associated with Holdings' post-retirement
health plan. The Seller's businesses share certain functions and facilities,
jointly market certain products and services, and are financed by the Seller
and Holdings. Accordingly, the financial statements include the cost of
shared services and facilities, revenue sharing and the allocation of
interest expense, which are more fully described in Note 9. In addition, an
income tax provision has been calculated on a separate return basis as
described in Note 5.
Since the combined financial statements do not present a complete
balance sheet of SLBD, the presentation of cash flow information is limited
to cash flows provided by net income, as adjusted for non cash expenses and
changes in assets acquired and liabilities assumed, exclusive of investing
and financing activities. While this basis of presentation is appropriate in
the circumstances, it is not the comprehensive presentation of cash flows
normally reflected by Statement of Financial Accounting Standards ("SFAS")
No. 95 "Cash Flows". Furthermore, Holdings and other SLBD affiliates enter
into transactions for the benefit of SLBD, including the issuance of short-
term and long-term debt to finance net customer receivables, which are not
reflected in
5
<PAGE>
SHEARSON LEHMAN BROTHERS and SLB ASSET MANAGEMENT DIVISIONS of
SHEARSON LEHMAN BROTHERS HOLDINGS INC.
NOTES to COMBINED FINANCIAL STATEMENTS
the accompanying Combined Statement of Assets Acquired and Liabilities
Assumed. Accordingly, the accompanying combined statement of cash flows does
not reflect all cash flows attributable to SLBD during 1992, and is exclusive
of its investing and financing activities.
Holdings and the Seller will recognize a 1993 first quarter after
tax loss related to the sale of SLBD of $630 million which includes a
reduction in SLBD related goodwill of $750 million.
The proposed transaction, which is subject to regulatory approval
and other conditions, is expected to close in the third quarter of 1993.
2. Summary of Significant Accounting Policies:
Securities owned and securities sold but not yet purchased are
valued at market or fair value, as appropriate, with unrealized gains and
losses reflected in the Combined Statement of Operations.
SLBD primarily uses the trade date basis of accounting for
recording principal transactions. SLBD records customer transactions on a
settlement date basis.
Investment advisory fees are principally assessed based on the
market value of assets under management and are recorded on the accrual basis
as the income is earned.
Securities borrowed and securities loaned are carried at the amount
of cash collateral advanced or received plus accrued interest. It is the
Seller's policy to value the securities borrowed and loaned on a daily basis
and to obtain additional collateral as necessary.
Depreciation and amortization is determined using the straight-line
method. Buildings and building improvements are depreciated over 5 to 50
years, equipment and furnishing are depreciated over 3 to 10 years and
leasehold improvements are amortized over the lesser of their economic useful
lives or the terms of the underlying leases. SLBD capitalizes interest cost
during construction and amortizes the interest cost based upon the useful
lives of the assets.
The Financial Accounting Standards Board ("FASB") issued SFAS No.
109, "Accounting for Income Taxes" in February 1992. The accompanying
Combined Statement of Operations for 1992 and 1991 include income tax
provisions calculated pursuant to SFAS No. 109.
The FASB issued SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions", in December 1990. SFAS No. 106
requires the accrual method of accounting for retiree health and welfare
benefits, instead of the "pay-as-you-go" basis previously followed by the
Seller. The accompanying Combined Statement of Operations for 1992 and 1991
reflects this accrual method of accounting for retiree health benefits.
6
<PAGE>
SHEARSON LEHMAN BROTHERS and SLB ASSET MANAGEMENT DIVISIONS of
SHEARSON LEHMAN BROTHERS HOLDINGS INC.
NOTES to COMBINED FINANCIAL STATEMENTS
The cost of internally developed software is expensed as incurred.
Excess of cost over fair value of net assets acquired is amortized
using the straight-line method primarily over 35 years.
3. Buildings, Furnishings, Equipment and Leasehold Improvements:
SLBD's fixed assets as of December 31, 1992 and 1991, were as
follows (in millions):
1992 1991
---- ----
Buildings $ 336 $ 336
Furnishings and equipment 326 311
Leasehold and building
improvements 287 294
------ -----
949 941
Accumulated depreciation (335) (303)
----- -----
$ 614 $ 638
===== ======
4. Retirement Plan:
SLBD employees participate in a noncontributory, defined benefit
retirement plan of Holdings', which covers substantially all SLBD employees.
Retirement plan costs allocated for SLBD employees were $15.4 million and
$18.4 million for 1992 and 1991, respectively. Pension costs are allocated
to SLBD based upon the number of employees participating. Pursuant to the
provisions of the Primerica Agreement, the accrued pension benefits of SLBD
employees transferring to the Buyer and an amount of retirement plan assets
will be transferred from Holdings' retirement plan to a pension plan of the
Buyer. The calculation of the accrued benefits and plan assets to be
transferred will be determined as of the closing date.
SLBD employees participate in a defined benefit health plan
sponsored by Holdings that provides health care benefits to retired U.S.
employees. The plan includes participant contributions, deductibles, co-
insurance provisions and service related eligibility requirements, and is
funded as costs are incurred. SLBD expense recognized for SFAS 106 was $5.4
million and $4.2 million in 1992 and 1991, respectively. SLBD is allocated
its proportionate cost of the plan based upon the number of employees
participating.
5. Income Taxes:
SLBD's taxable income is included in the consolidated Federal
income tax return of American Express Company, Holdings' parent. The income
tax provision is computed on a separate return basis in accordance with an
income tax sharing agreement.
7
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SHEARSON LEHMAN BROTHERS and SLB ASSET MANAGEMENT DIVISIONS of
SHEARSON LEHMAN BROTHERS HOLDINGS INC.
NOTES to COMBINED FINANCIAL STATEMENTS
The provision for income taxes consists of the following:
Amounts
--------------
(in millions)
1992 1991
---- ----
Federal $ 45 $ 29
State and local 12 8
--- ---
$ 57 $ 37
===== =====
The provision for income taxes combines the current and deferred
tax provisions since deferred tax assets are not to be transferred nor are
deferred tax liabilities to be assumed pursuant to the Primerica Agreement.
For the years ended December 31, 1992 and 1991, the effective
income tax rate differs from the statutory federal income tax rate for the
reasons shown below:
1992 1991
---- ----
Federal income tax at statutory rate 34% 34%
State and local income taxes,
net of federal tax benefit 7 8
Goodwill amortization not deductible
for tax purposes 7 11
Other 3 3
--- ---
Effective income tax rate 51% 56%
===== ====
6. Net Capital and Other Regulatory Requirements:
Since SLBD is not a legal entity, it is the Seller, as a registered
broker-dealer which is subject to the Net Capital Rule (Rule 15c3-1, the
"Rule") promulgated under the Securities Exchange Act of 1934, as amended
("Exchange Act"). At December 31, 1992, the Seller's net capital was in
compliance with the minimum capital required by the Rule; however, the net
capital requirements for SLBD have not been separately determined.
The Robinson Humphrey Company, Inc. ("RH"), a broker-dealer
subsidiary of the Seller which is among the businesses to be sold, is a
registered broker-dealer with the Securities and Exchange Commission, a
member of the New York Stock Exchange, Inc. (the "Exchange") and a registered
futures commission merchant with the Commodities Futures Trading Commission
and is subject to the
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SHEARSON LEHMAN BROTHERS and SLB ASSET MANAGEMENT DIVISIONS of
SHEARSON LEHMAN BROTHERS HOLDINGS INC.
NOTES to COMBINED FINANCIAL STATEMENTS
Rule. RH has elected to compute its net capital under the alternative method
provided in the Rule and as a block positioner, pursuant to Rule 97 of the
Exchange, is required to maintain a minimum net capital of $1 million. As of
December 31, 1992, RH's net capital, as defined, aggregated $17 million and
was $16 million in excess of the minimum net capital required.
The Seller's funds segregated for customers as a result of trades
or contracts subject to the Commodity Exchange Act and funds deposited for
the exclusive benefit of customers in accordance with the Securities and
Exchange Commission Rule 15c3-3 are not included in the assets of SLBD to be
transferred. As of the sale closing date, the Buyer will be required to
segregate and deposit funds in accordance with these requirements.
7. Commitments and Contingencies:
The Seller, to support the businesses conducted by SLBD, leases
office space and equipment. The rights under such leases and the related
obligations are to be assumed by the Buyer. Total rent expense for each of
the years ended December 31, 1992 and 1991 was $162 million and $164 million,
respectively. Minimum future rental commitments under noncancellable
operating leases (net of subleases of $9 million) are as follows (in
millions):
Year Amount
---- ------
1993 $ 132
1994 105
1995 69
1996 38
1997 24
1998 and thereafter 40
----
$ 408
====
Certain leases on office space contain escalation clauses providing for
additional rentals based upon maintenance, utility and tax increases.
In the normal course of its business, the Seller has been named a
defendant in a number of lawsuits and other legal proceedings relating to the
businesses conducted by SLBD. After considering all relevant facts,
available insurance coverage and the opinions of outside counsel, in the
opinion of the Seller's management, such litigation will not, in the
aggregate, have a material adverse effect on SLBD.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET
RISK AND CONCENTRATION OF CREDIT RISK
In the normal course of business, SLBD enters into financial instrument
transactions to conduct its activities to satisfy the financial needs of its
9
<PAGE>
SHEARSON LEHMAN BROTHERS and SLB ASSET MANAGEMENT DIVISIONS of
SHEARSON LEHMAN BROTHERS HOLDINGS INC.
NOTES to COMBINED FINANCIAL STATEMENTS
clients and to manage its own exposure to credit and market risks. SLBD's
activities are principally with retail customers, brokers, dealers and
financial institutions.
Market risk arises from the possibility that market changes, including
interest movements, may make financial instruments less valuable. Credit
risk results from the possibility that a loss may occur from the failure of
another party to perform according to the terms of a contract. SLBD has
extensive control procedures regarding the extent of SLBD's transactions with
specific counterparties, the manner in which transactions are settled and the
ongoing assessment of counterparty creditworthiness.
Securities sold but not yet purchased represent obligations of SLBD to
purchase securities at prevailing rates. Therefore, the future satisfaction
of such obligations may be for an amount greater or less than the amount
recorded.
SLBD's customer activities may expose it to off-balance-sheet credit
risk. SLBD may have to purchase or sell financial instruments at prevailing
market prices in the event of the failure of a customer to settle a trade on
its original terms, or in the event cash and securities in customer accounts
are not sufficient to fully cover customer losses. SLBD seeks to control the
risks associated with customer activities through the use of systems and
procedures for financial instruments with off-balance-sheet risk.
8. Fair Value of Financial Instruments:
SLBD has adopted SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments", which requires disclosure of the fair values of most
on- and off-balance-sheet financial instruments for which it is practicable
to estimate such values. For SLBD's assets and liabilities which fall under
the scope of SFAS No. 107, book value approximates fair value.
9. Related Party Transactions:
As described in Note 1, SLBD and the remaining operations of the Seller
utilize various common systems and support functions, with the related costs
being charged to the respective units based on specific allocation methods.
These costs include, among others, securities processing and clearing;
centralized payroll, treasury, accounts payable and other administrative
functions; the sharing of certain facilities; and revenue sharing
arrangements between SLBD and other businesses of Holdings for securities
distribution services. These allocations would not necessarily represent the
amounts that would have been charged on a separate company basis. However,
management of the Seller and Holdings believes such allocations are
reasonable.
In addition to performing substantial securities clearing and
processing functions, SLBD maintains the centralized data processing and
communications systems which support certain of Holdings' businesses. The
costs related to these functions include primarily all of the costs for
personnel, equipment,
10
<PAGE>
SHEARSON LEHMAN BROTHERS and SLB ASSET MANAGEMENT DIVISIONS of
SHEARSON LEHMAN BROTHERS HOLDINGS INC.
NOTES to COMBINED FINANCIAL STATEMENTS
systems, communication and occupancy incurred to support these functions.
SLBD allocated approximately $97 million in 1992 and $94 million in 1991 of
such processing related costs to the other businesses conducted by Seller and
Holdings primarily based upon the usage of services or allocation surveys
which reflect best estimates of relative usage. Processing allocation
credits primarily have been netted against other expenses in the Combined
Statement of Operations.
SLBD allocates occupancy cost for shared facilities, including
occupied. During 1992 and 1991, approximately $40 million and $36 million
was allocated to the other Holdings' businesses for these shared facilities.
The Seller similarly allocates expenses of certain shared facilities to SLBD,
which totaled approximately $18 million and $20 million in 1992 and 1991,
respectively.
The Seller and Holdings finance the operations of all of their
businesses, including those of SLBD. Interest allocated to SLBD primarily
includes the carrying cost of net customer debits and buildings, improvements
and equipment, along with certain financing costs from previous acquisitions.
Interest expense is allocated for financing net customer debit balances based
upon actual amounts outstanding and a blended average of Seller's actual
short and long-term financing costs. Allocated interest expense for
financing long lived assets is generally based upon the actual cost of
longer-term financing.
The Seller and Holdings allocate expenses related to corporate
functions, such as legal, regulatory, compliance, finance and human
resources, and other general costs to SLBD based on surveys of the services
provided. The total amount allocated to SLBD, excluding interest discussed
above, was approximately $91 million and $94 million during 1992 and 1991.
In addition, the Seller has allocated goodwill amortization to SLBD of
approximately $25 million during 1992 and 1991. Certain expenses of the
Seller of approximately $38 million in 1992 and 1991 were allocated to SLBD
primarily for research and floor brokerage.
Revenues include sales credits and selling concessions primarily for
distributing securities owned or originated in an underwriting by the Seller
or its affiliates to customers of SLBD. These sales credits and selling
concessions are based upon arrangements between SLBD and the other businesses
of Holdings and were $623 million and $620 million for 1992 and 1991,
respectively.
The Primerica Agreement provides that these interrelationships
(exclusive of interest expense, corporate functions and goodwill) between
SLBD and Holdings' remaining businesses will continue for a period of time
from six to twenty four months after the closing, depending on the nature of
the function provided.
11
