-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, bvsY7Dp3WgpGMzQH7LM6svHPorc2rze+M5hgdsjgupTy/0/8+/NQG5G50JmgLxRt wlHHD4KOjkXjFO5Lk5HctQ== 0000950123-94-000883.txt : 19940519 0000950123-94-000883.hdr.sgml : 19940519 ACCESSION NUMBER: 0000950123-94-000883 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19940331 FILED AS OF DATE: 19940510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEHMAN BROTHERS HOLDINGS INC CENTRAL INDEX KEY: 0000806085 STANDARD INDUSTRIAL CLASSIFICATION: 6211 IRS NUMBER: 133216325 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09466 FILM NUMBER: 94526961 BUSINESS ADDRESS: STREET 1: AMERICAN EXPRESS TWR STREET 2: 3 WORLD FINANCIAL CNTR CITY: NEW YORK STATE: NY ZIP: 10048 BUSINESS PHONE: 2122982000 MAIL ADDRESS: STREET 1: AMERICAN EXPRESS TOWER STREET 2: WORLD FINANCIAL CENTER ATTN GEN COUNSEL CITY: NEW YORK STATE: NY ZIP: 10283 FORMER COMPANY: FORMER CONFORMED NAME: SHEARSON LEHMAN HUTTON HOLDINGS INC DATE OF NAME CHANGE: 19901017 10-Q 1 LEHMAN BROTHER HOLDINGS FORM 10-Q 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 MARCH 31, 1994 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ FOR THE QUARTER ENDED MARCH 31, 1994 COMMISSION FILE NUMBER 1-9466 LEHMAN BROTHERS HOLDINGS INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) 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) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 298-2000 INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ______ AS OF MAY 10, 1994, 168,235,284 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR VALUE $.10 PER SHARE, WERE ISSUED AND OUTSTANDING. - - - -------------------------------------------------------------------------------- - - - -------------------------------------------------------------------------------- 2 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1994 INDEX
Part I. FINANCIAL INFORMATION Page Number --------------------- ----------- Item 1. FINANCIAL STATEMENTS Consolidated Statement of Operations - Three Months Ended March 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . 3 Consolidated Balance Sheet - March 31, 1994 and December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Consolidated Statement of Cash Flows - Three Months Ended March 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . 6 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 PART II. OTHER INFORMATION ----------------- Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 28 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 EXHIBIT INDEX Exhibits
2 3 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (IN MILLIONS)
Three Months Ended March 31, ------------------------ 1994 1993 ---- ---- Revenues Market making and principal transactions $ 434 $ 588 Investment banking 175 228 Commissions 141 480 Interest and dividends 1,527 1,371 Other 17 190 ------- ----- Total revenues 2,294 2,857 Interest expense 1,453 1,270 ------- ----- Net revenues 841 1,587 ------- ----- Non-interest expenses Compensation and benefits 450 970 Communications 50 97 Brokerage, commissions and clearance fees 45 30 Occupancy and equipment 42 82 Professional services 42 52 Advertising and market development 31 47 Depreciation and amortization 31 44 Severance charge 33 Other 29 99 Loss on sale of Shearson 535 Reserves for non-core businesses 152 ------- ----- Total non-interest expenses 753 2,108 ------- ----- Income (loss) from continuing operations before taxes and cumulative effect of change in accounting principle 88 (521) Provision for income taxes 33 119 ------- ----- Income (loss) from continuing operations before cumulative effect of change in accounting principle 55 (640) Income from discontinued operations, net of taxes Income from operations 24 Gain on disposal 165 ------- ----- 189 ------- ----- Income (loss) before cumulative effect of change in accounting principle 55 (451) Cumulative effect of change in accounting principle (13) ------- ----- Net income (loss) 42 (451) Preferred stock dividends 12 12 ------- ----- Net income (loss) applicable to Common Stock $ 30 $(463) ======= =====
See notes to consolidated financial statements. 3 4 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN MILLIONS) ASSETS
March 31, December 31, 1994 1993 ------------ ---------------- (Unaudited) Cash and cash equivalents $ 1,385 $ 1,333 Cash and securities segregated and on deposit for regulatory and other purposes 1,360 1,073 Securities and other financial instruments owned 44,615 35,699 Collateralized short-term agreements: Securities purchased under agreements to resell 41,130 26,046 Securities borrowed 9,969 4,372 Receivables: Brokers and dealers 4,792 5,059 Customers 4,314 2,646 Other 3,103 2,693 Property, equipment and leasehold improvements (net of accumulated depreciation and amortization of $456 in 1994 and $438 in 1993) 535 529 Deferred expenses and other assets 803 750 Excess of cost over fair value of net assets acquired (net of accumulated amortization of $110 in 1994 and $107 in 1993) 271 274 -------- ------- $112,277 $80,474 ======== =======
See notes to consolidated financial statements. 4 5 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (CONTINUED) (IN MILLIONS, EXCEPT SHARE DATA) LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31, 1994 1993 ------------ ---------------- (Unaudited) Commercial paper and short-term debt $ 14,353 $11,205 Securities and other financial instruments sold but not yet purchased 16,724 8,313 Securities sold under agreements to repurchase 57,204 39,191 Securities loaned 965 1,116 Payables: Brokers and dealers 3,150 1,385 Customers 4,334 4,130 Accrued liabilities and other payables 2,939 3,183 Senior notes 8,516 7,779 Subordinated indebtedness 2,059 2,120 -------- ------- Total liabilities 110,244 78,422 -------- ------- Stockholders' equity: Preferred stock, $1 par value; 38,000,000 shares authorized: 5% Cumulative Convertible Voting, Series A, 13,000,000 shares authorized, issued and outstanding; $39.10 liquidation preference per share 508 508 Money Market Cumulative, 3,300 shares authorized; 250 shares issued and outstanding; $1,000,000 liquidation preference per share 250 250 Common stock, $.10 Par value; 300,000,000 shares authorized; 168,235,284 shares issued and outstanding 17 17 Additional paid-in capital 1,871 1,871 Foreign currency translation adjustment (9) (12) Accumulated deficit (604) (582) -------- ------- Total stockholders' equity 2,033 2,052 -------- ------- $112,277 $80,474 ======== =======
See notes to consolidated financial statements. 5 6 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (IN MILLIONS)
Three Months Ended March 31, -------------------------- 1994 1993 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Income (loss) from continuing operations before cumulative effect of change in accounting principle $ 55 $ (640) Adjustments to reconcile income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization 31 45 Provisions for losses and other reserves 47 33 Loss on sale of Shearson 535 Non-core business reserves 152 Other adjustments 24 14 Net change in: Cash and securities segregated (287) (179) Receivables from brokers and dealers 267 (340) Receivables from customers (1,668) (1,319) Securities purchased under agreements to resell (15,084) 603 Securities borrowed (5,597) 670 Loans originated or purchased for resale 51 Securities and other financial instruments owned (8,916) (5,708) Payables to brokers and dealers 1,765 277 Payables to customers 204 519 Accrued liabilities and other payables (290) (51) Securities sold under agreements to repurchase 18,013 5,886 Securities loaned (151) 503 Securities & other financial instruments sold but not yet purchased 8,411 147 Other operating assets and liabilities, net (480) 43 ------- ------- (3,656) 1,241 Net cash flows provided by operating activities of discontinued operations 428 ------- ------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (3,656) 1,669 ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of senior notes 993 410 Principal payments of senior notes (329) (280) Proceeds from issuance of subordinated indebtedness 39 53 Principal payments of subordinated indebtedness (100) (102) Issuance of other indebtedness 2,138 2,023 Principal payments of other indebtedness (1,717) (1,815) Increase (decrease) in commercial paper and short-term debt, net 2,776 (942) Dividends paid (63) (12) NET CASH FLOWS USED IN FINANCING ACTIVITIES OF DISCONTINUED OPERATIONS (301) ------- ------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES $ 3,737 $ (966) ------- -------
See notes to consolidated financial statements. 6 7 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) (UNAUDITED) (IN MILLIONS)
Three Months Ended March 31, --------------------------- 1994 1993 ---- ---- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of buildings, furnishings, equipment and leasehold improvements $ (30) $ (32) Other (6) 166 Net cash flows used in investing activities of discontinued operations (85) ------ ------ NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (36) 49 ------ ------ Net change in cash and cash equivalents of discontinued operations 42 ------ ------ Effect of exchange rate changes on cash 7 ------ ------ NET CHANGE IN CASH AND CASH EQUIVALENTS 52 710 ------ ------ Cash and cash equivalents at beginning of period 1,333 641 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,385 $1,351 ====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN MILLIONS) (INCLUDING THE BOSTON COMPANY) Interest paid (net of amount capitalized) totaled $1,395 and $1,415 in the first quarter of 1994 and 1993, respectively. Income taxes paid (received) totaled $24 in 1994 and $(66) in 1993, respectively. See notes to consolidated financial statements. 7 8 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION: The consolidated financial statements include the accounts of Lehman Brothers Holdings Inc. ("Holdings") (Holdings together with its subsidiaries, the "Company" or "Lehman Brothers"). The principal subsidiary of Holdings is Lehman Brothers Inc. ("LBI"), a registered broker-dealer. American Express Company ("American Express") owns 100% of Holdings' common stock, par value $.10 per share (the "Common Stock"), which represents approximately 93% of Holdings' voting stock. The remainder of Holdings' voting stock is owned by Nippon Life Insurance Company ("Nippon Life"). (See Note 2.) The Company's financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the "Commission") with respect to Form 10-Q and reflect all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Pursuant to such rules and regulations, certain footnote disclosures which are normally required under generally accepted accounting principles have been omitted. It is recommended that these consolidated financial statements be read in conjunction with the Company's most recent Annual Report on Form 10-K. As described in Note 3, the Company completed the sale of The Boston Company, Inc. ("The Boston Company"), on May 21, 1993. The accompanying consolidated financial statements and notes to consolidated financial statements reflect The Boston Company as a discontinued operation at and for the three month period ended March 31, 1993. The 1993 Consolidated Statement of Operations includes the results of operations of Shearson and SLHMC, which were sold on July 31, 1993 and August 31, 1993, respectively. (See Notes 4 and 5 for definitions and additional information concerning these sales.) 2. SUBSEQUENT EVENTS: Equity Investments and Distribution of Common Stock On April 29, 1994, the Board of Directors of American Express declared a special dividend to its common shareholders, subject to certain conditions, of all of Holdings Common Stock held by American Express on the date of distribution. The special dividend is effective on May 31, 1994 (the "Distribution"), to shareholders of record on May 20, 1994 (the "Record Date"). Prior to the Distribution, the following series of transactions which affect the capital structure of Holdings will occur. - The shares of Common Stock presently outstanding will be subject to a reverse stock split of approximately .3179723 for 1 (the "Reverse Stock Split") prior to the offerings of Common Stock and preferred stock discussed below. The calculation of the reverse split ratio is based on the number of American Express common shares expected to be outstanding as of the Record Date for the Distribution; however, the final reverse split ratio will be based on the number of American Express common shares actually outstanding as of the Record Date for the Distribution. - Holdings will sell 35,407,931 shares of Common Stock to American Express for an aggregate purchase price of approximately $903.8 million (the "American Express Common Stock Purchase") and 3,492,858 shares of Common Stock to Nippon Life for an aggregate purchase price of approximately $89.2 million (the "NL Common Stock Purchase"). 8 9 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Holdings will issue up to 3,387,963 shares of Common Stock, having an aggregate purchase price of approximately $57 million, upon conversion of all outstanding phantom equity interests issued pursuant to the Lehman Brothers Inc. Employee Ownership Plan (the "Phantom Share Conversion") and American Express will offer 441,600 shares of Common Stock to executive officers of the Company for an aggregate purchase price of $11.3 million (the "Offering"). - American Express will purchase 8,000,000 shares of Cumulative Voting Preferred Stock of Holdings (the "Cumulative Preferred Stock") for an aggregate purchase price of $200 million and 928 shares of Redeemable Voting Preferred Stock of Holdings (the "Redeemable Preferred Stock") for $1 per share and Nippon Life will purchase 72 shares of Redeemable Preferred Stock for $1 per share, (collectively, the "Preferred Stock Purchases"). Holders of the Redeemable Preferred Stock will be entitled to receive, in the aggregate, 50% of the Company's net income in excess of $400 million per year, with a maximum dividend of $50 million per year, for each of the next eight years commencing on or about the date of the Distribution. - In exchange for $250 million of Money Market Preferred Stock of Holdings held by American Express, Holdings will issue to American Express 9,793,754 shares of Common Stock (the "MMP Exchange"). - Under the Lehman Brothers Holdings Inc. 1994 Management Replacement Plan, as described below, Holdings will issue approximately 200,000 shares of restricted Common Stock to employees in replacement of restricted stock awards of American Express. The American Express Common Stock Purchase, the NL Common Stock Purchase and the Preferred Stock Purchases are collectively referred to herein as the "Equity Investment." The Equity Investment, the Offering, the Phantom Share Conversion, the MMP Exchange and the Distribution are collectively referred to herein as the "Concurrent Transactions." The Company will incur costs in connection with the Concurrent Transactions and certain other related expenses estimated to be approximately $20 million, which will be charged primarily to operating expenses in the second quarter of 1994. The Company and American Express are entering into several agreements for the purpose of giving effect to the Distribution and defining their ongoing relationships. Following the Concurrent Transactions, American Express and Nippon Life will be entitled to receive 92.8% and 7.2%, respectively, of certain revenue and profit participation rights received in connection with the sale of Shearson. (See Note 4.) Nippon Life Warrant Amendment In connection with the Concurrent Transactions, the exercise price of Nippon Life's warrant to purchase approximately 3,306,346 shares of Common Stock (10,398,221 shares before adjusting for the Reverse Stock Split) will be reduced from $47.17 per share ($15 per share before adjusting for the Reverse Stock Split) to $35.03 per share. 9 10 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Establishment of Long-Term Incentive Plans Prior and subject to the Distribution, Holdings adopted the Lehman Brothers Holdings Inc. 1994 Management Ownership Plan (the "1994 Plan"), the Lehman Brothers Holdings Inc. 1994 Management Replacement Plan (the "Replacement Plan"), and the Lehman Brothers Holdings Inc. Employee Stock Purchase Plan (the "ESPP"). The 1994 Plan provides for the Compensation and Benefits Committee (the "Compensation Committee") of the Board of Directors to grant stock options, stock appreciation rights ("SARs"), restricted stock units ("RSUs"), restricted stock, performance related shares and performance units to eligible employees. In addition, the 1994 Plan provides for non-employee directors to receive on an annual basis RSUs representing $30,000 of Common Stock, which vest ratably over a three-year period. Stock options may be awarded as either incentive stock options or non-qualified stock options. The exercise price for any stock option shall not be less than the market price of Common Stock on the day of the grant. SARs may be awarded as a single award or in conjunction with a stock option. Vesting provisions for stock options and SARs are at the discretion of the Compensation Committee, but in no case may the term of the award exceed 10 years. The 1994 Plan also allows the Compensation Committee to grant restricted stock, performance related shares and performance units to eligible employees, with vesting and performance objective terms at the discretion of the Compensation Committee. The 1994 Plan expires in ten years. A total of 16,500,000 shares of Common Stock may be subject to awards under the 1994 Plan and an additional 150,000 shares may be subject to RSUs to be issued to non-employee directors. No individual may receive options or SARs over the life of the 1994 Plan attributable to more than 1,650,000 shares. The Replacement Plan allows the Compensation Committee to grant stock options and restricted stock awards to eligible employees. The primary purpose of the Replacement Plan is to replace awards relating to American Express common shares granted to Company employees which will be cancelled as of the date of the Distribution. A maximum of 3,200,000 shares of Common Stock will be subject to awards under the Replacement Plan. The number and terms of awards currently outstanding to individuals, as well as the then current stock prices of American Express and the Company, will determine the actual number of shares awarded under the Replacement Plan. Awards made under the Replacement Plan will generally contain the same vesting conditions that apply to the cancelled awards. The Compensation Committee adopted, effective June 1, 1994, or such later date as the Compensation Committee shall designate, and subject to the Distribution, the ESPP, under which 6,000,000 shares of Common Stock were reserved for issuance. The ESPP will allow employees to purchase Common Stock at a 15% discount to market value, with a maximum of $15,000 in annual aggregate purchases by any one individual. 3. SALE OF THE BOSTON COMPANY: On May 21, 1993, pursuant to a stock purchase agreement (the "Mellon Agreement") between Lehman Brothers and Mellon Bank Corporation ("Mellon Bank"), LBI sold to Mellon Bank (the "Mellon Transaction") The Boston Company, which through subsidiaries is engaged in the private banking, trust and custody, institutional investment management and mutual fund administration businesses. Under the 10 11 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS terms of the Mellon Agreement, LBI received approximately $1.3 billion in cash, 2,500,000 shares of Mellon Bank common stock and ten-year warrants to purchase an additional 3,000,000 shares of Mellon Bank's common stock at an exercise price of $50 per share. In June 1993, such shares and warrants were sold by LBI to American Express for an aggregate purchase price of $169 million. After accounting for transaction costs and certain adjustments, the Company recognized a 1993 first quarter after-tax gain of $165 million for the Mellon Transaction. As a result of the Mellon Transaction, the Company treated The Boston Company as a discontinued operation. Accordingly, the Company's financial statements segregate the operating results of The Boston Company for the three month period ended March 31, 1993. Presented below are the results of operations and the gain on disposal of The Boston Company included in income from discontinued operations (in millions):
Three Months ended March 31, 1993 ------------------- 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 ====
4. SALE OF SHEARSON: On July 31, 1993, pursuant to an asset purchase agreement (the "Primerica Agreement"), the Company completed the sale (the "Primerica Transaction") of LBI's domestic retail brokerage business (except for such business conducted under the Lehman Brothers name) and substantially all of its asset management business (collectively, "Shearson") to Primerica Corporation (now known as Travelers Corporation, "Travelers") and its subsidiary Smith Barney, Harris Upham & Co. Incorporated ("Smith Barney"). Also included in the Primerica Transaction were the operations and data processing functions that support these businesses, as well as certain of the assets and liabilities related to these operations. LBI received approximately $1.2 billion in cash and a $586 million interest bearing note from Smith Barney which was repaid in January 1994 (the "Smith Barney Note"). The Smith Barney Note was issued as partial payment for certain Shearson assets in excess of $600 million which were sold to Smith Barney. The proceeds received at July 31, 1993, were based on the estimated net assets of Shearson, which exceeded the minimum net assets of $600 million prescribed in the Primerica Agreement. As 11 12 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS further consideration for the sale of Shearson, Smith Barney agreed to pay future contingent amounts based upon the combined performance of Smith Barney and Shearson, consisting of up to $50 million per year for three years based on revenues, plus 10% of after-tax profits in excess of $250 million per year over a five-year period (the "Participation Rights"). In contemplation of the Distribution, American Express received the first Participation Right payment in the first quarter of 1994. All Participation Rights will be assigned to American Express prior to the Distribution. As further consideration for the sale of Shearson, the Company received 2,500,000 shares of 5.50% Convertible Preferred Stock, Series B, of Travelers and a warrant to purchase 3,749,466 shares of common stock of Travelers at an exercise price of $39 per share. In August 1993, American Express purchased such preferred stock and warrant from LBI for aggregate consideration of $150 million. The Company recognized a 1993 first quarter loss related to the Primerica Transaction of approximately $630 million after-tax ($535 million pre-tax), which amount includes a reduction in goodwill of $750 million and transaction-related costs such as relocation, systems and operations modifications and severance. Presented below are the results of operations and the loss on the sale of Shearson (in millions):
Three Months ended March 31, 1993 ------------------- Revenues $ 795 Expenses 733 Loss on sale of Shearson 535 ----- Loss before taxes (473) Provision for income taxes 122 ----- Net loss $(595) =====
Shearson operating results reflect allocated interest expense of $61 million. 5. SALE OF SHEARSON LEHMAN HUTTON MORTGAGE CORPORATION: LBI completed the sale of its wholly-owned subsidiary, Shearson Lehman Hutton Mortgage Corporation ("SLHMC") to GE Capital Corporation on August 31, 1993. The sales price, net of proceeds used to retire debt of SLHMC, was approximately $70 million. During the first quarter of 1993, the Company provided $120 million of pre-tax reserves in anticipation of the sale of SLHMC, which reserves are included in the $152 million of pre-tax reserves for non-core businesses on the Consolidated Statement of Operations. After accounting for these reserves, the sale did not have a material effect on the Company's results of operations. 12 13 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. SECURITIES AND OTHER FINANCIAL INSTRUMENTS: Securities and other financial instruments owned and Securities and other financial instruments sold but not yet purchased are summarized as follows (in millions):
March 31, December 31, 1994 1993 --------- ----------- Securities and other financial instruments owned: Government obligations $21,385 $15,065 Certificates of deposit and other money market instruments 1,579 2,051 Mortgage-backed 5,328 6,127 Corporate obligations and other contractual commitments 13,233 10,103 Corporate stocks and options 3,090 2,343 Spot commodities 10 ------- ------- $44,615 $35,699 ======= ======= Securities and other financial instruments sold but not yet purchased: Government obligations $11,091 $ 5,861 Mortgage-backed 219 116 Corporate obligations and other contractual commitments 2,333 1,109 Corporate stocks and options 2,816 947 Spot commodities 265 280 ------- ------- $16,724 $ 8,313 ======= =======
7. PROVISION FOR INCOME TAXES: The Company reported a tax expense from continuing operations of $33 million for the first quarter of 1994 compared to $119 million a year ago. The 1994 effective tax rate of 38% was greater than the statutory U.S. federal income tax rate principally due to state and local income taxes partially offset by benefits attributable to income subject to preferential tax treatement. The first quarter 1993 tax provision included expenses of (i) $65 million related to the operating results of the Lehman Businesses and Shearson, (ii) $95 million from the sale of Shearson (which resulted primarily from the write-off of $750 million of goodwill which was not deductible for tax purposes) and (iii) a benefit of $41 million related to the $120 million reserve for non-core businesses recorded in anticipation of the sale of SLHMC. 8. CHANGE IN ACCOUNTING PRINCIPLES: Postemployment Benefits Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for Postemployment Benefits". SFAS No. 112 requires the accrual of obligations associated with services rendered to date for employee benefits accumulated or vested for which payment is probable and can be reasonably estimated. These benefits principally include the continuation of salary and health care and life insurance costs for employees on service disability leaves. The Company previously expensed the cost of these benefits as they were incurred. 13 14 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The cumulative effect of adopting SFAS No. 112 reduced net income for first quarter 1994 by approximately $13 million after-tax (approximately $23 million pre-tax). Excluding the cumulative effect of this accounting change, the effect of this change on the first quarter 1994 results of operations was not material. Offsetting of Certain Receivables and Payables During the first quarter of 1994, the Company adopted Financial Accounting Standards Board Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts" ("FIN No. 39"). FIN No. 39 restricts the historical industry practice of offsetting certain receivables and payables. The increase in the Company's gross assets and liabilities from December 31, 1993 to March 31, 1994 is primarily due to the adoption of FIN NO. 39. The Financial Accounting Standards Board has instructed its staff to explore modifying FIN No. 39 to create certain exceptions, which, if enacted, would substantially mitigate the increase in the Company's gross assets and liabilities resulting from the implementation of FIN No. 39. 9. BORROWINGS: For the three months ended March 31, 1994, the Company issued approximately $1 billion of senior notes and approximately $40 million of subordinated indebtedness, with maturities ranging from 1995 to 2019. Approximately $150 million of the total debt issued during the first quarter of 1994 (including the $40 million of subordinated indebtedness) was fixed rate, with contractual interest rates ranging from 3.86% to 8.05%. The remainder of the senior notes have floating rates of interest which are based on a variety of indices. The holders of $50 million of fixed rate senior notes maturing in 2019 and $40 million of fixed rate subordinated notes maturing in 2003 have the option to cause the Company to repurchase such notes in 1999 and 1996, respectively. The Company entered into interest rate swap contracts which effectively converted the interest rates on approximately $720 million of its floating rate senior notes issued during the first quarter of 1994 into new floating interest rates based primarily on the London Interbank Offered Rate (LIBOR). The Company also entered into interest rate swap contracts which effectively converted approximately $60 million of its fixed rate senior notes issued during the first quarter of 1994 to floating rates based primarily on LIBOR. The proceeds of the Company's first quarter issuances were used to provide additional liquidity and to refinance long-term debt maturing in 1994. During the three months ended March 31, 1994, approximately $430 million of long-term debt matured, including approximately $330 million of senior notes and $100 million of subordinated indebtedness. 10. EMPLOYEE OWNERSHIP PLAN: During 1993, LBI established the Lehman Brothers Inc. Employee Ownership Plan (the "Employee Ownership Plan") pursuant to which certain key employees of the Company deferred a percentage of their 1993 salary and bonus for the purchase of certain Phantom Units of Holdings. Each Phantom Unit is comprised of a phantom equity interest representing a notional interest in a share of Common Stock ("Phantom Share") and the right to receive a certain amount in cash with respect to a Phantom Share ("Cash Right"). The number of Phantom Units which were available to each participant was determined by the Finance Committee of Holdings' Board of Directors (the "Finance Committee"). Up to 6,000,000 Phantom Shares (3,566,277 shares as adjusted for the Reverse Stock Split) were available for "purchase" through voluntary and mandatory deferrals of 1993 compensation. The price of each Phantom Unit was $10.00 per Phantom Share and $6.67 for each related Cash Right ($16.82 per Phantom Share and $11.22 per related Cash Right, as adjusted for the Reverse Stock Split) and was determined by the Finance Committee in July 1993 using an assumed capital structure of Holdings for purposes of the program and taking into account various factors, including market multiples for comparable companies, the absence of a public market for 14 15 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Holdings, vesting requirements, and the restrictions on transferability of the Phantom Units. In accordance with the terms of the Plan, Phantom Units will be converted to the Common Stock contemporaneously with the effectiveness of the Distribution. (See Note 2.) The Phantom Units representing voluntary deferrals are immediately vested and non-forfeitable; however, there are restrictions on transferability of such Phantom Units. There are also restrictions on transferability of the Common Stock which employees will receive upon conversion of the Phantom Shares. Generally, such restrictions will lapse ratably over a three year period. The Phantom Units representing mandatory deferrals apply to selected senior executives and vest in accordance with a schedule established by the Company's Finance Committee and, together with the Common Stock into which they convert, are also subject to transfer restrictions. The Company will recognize compensation expense in 1994 equal to (i) the increase in book value attributable to the Phantom Shares and (ii) the excess, if any, of the market value of the Common Stock issued pursuant to the Phantom Share conversion over the price paid by employees for the Phantom Shares. 11. CAPITAL REQUIREMENTS: As registered broker-dealers, LBI and certain of Holdings' other subsidiaries are subject to the Net Capital Rule (Rule 15c3-1, the "Rule") promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The New York Stock Exchange, Inc. and the National Association of Securities Dealers, Inc. monitor the application of the Rule by LBI and such subsidiaries, as the case may be. LBI and such subsidiaries compute net capital under the alternative method of the Rule which requires the maintenance of minimum net capital, as defined. A broker-dealer may be required to reduce its business if net capital is less than 4% of aggregate debit balances or 6% of the funds required to be segregated pursuant to the Commodity Exchange Act (the "Commodity Act") and the regulations thereunder, if greater. A broker-dealer may also be prohibited from expanding its business or paying cash dividends if resulting net capital would be less than 5% of aggregate debit balances or 7% of the funds required to be segregated pursuant to the Commodity Act and the regulations thereunder, if greater. In addition, the Rule does not allow withdrawal of subordinated capital if net capital would be less than 5% of such debit balances or 7% of the funds required to be segregated pursuant to the Commodity Act and the regulations, thereunder, if greater. The Rule also limits the ability of broker-dealers to transfer large amounts of capital to parent companies and other affiliates. Under the Rule, equity capital cannot be withdrawn from a broker-dealer without the prior approval of the Securities and Exchange Commission (the "Commission") when net capital after the withdrawal would be less than 25% of its securities positions haircuts (which are deductions from capital of certain specified percentages of the market value of securities to reflect the possibility of a market decline prior to disposition). In addition, the Rule requires broker-dealers to notify the Commission and the appropriate self-regulatory organization two business days before the withdrawal of excess net capital if the withdrawal would exceed the greater of $500,000 or 30% of the broker-dealer's excess net capital, and two business days after a withdrawal that exceeds the greater of $500,000 or 20% of excess net capital. 15 16 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Finally, the Rule authorizes the Commission to order a freeze on the transfer of capital if a broker-dealer plans a withdrawal of more than 30% of its excess net capital and the Commission believes that such a withdrawal would be detrimental to the financial integrity of the firm or would jeopardize the broker-dealer's ability to pay its customers. At March 25, 1994, LBI's net capital aggregated $860 million and was $803 million in excess of the minimum requirement. Also at March 25, 1994, Lehman Government Securities Inc., a wholly owned subsidiary of LBI, had net capital which aggregated $294 million and was $276 million in excess of the minimum requirement. The Company is subject to other domestic and international regulatory requirements. As of March 31, 1994, the Company believes it is in material compliance with all such requirements. 12. OTHER CHARGES: Reduction in Personnel During the first quarter of 1994, the Company completed a review of personnel needs, which resulted in the termination of certain personnel. The Company recorded a severance charge of $33 million pre-tax in the first quarter of 1994. Reserves for Non-Core Businesses During the first quarter of 1993, the Company provided $152 million pre-tax ($100 million after-tax) of non-core business reserves. Of this amount, $32 million pre-tax ($21 million after-tax) related to certain non-core partnership syndication activities in which the Company is no longer actively engaged. The remaining $120 million pre-tax ($79 million after-tax) related to reserves recorded in anticipation of the sale of SLHMC. Such sale was completed during the third quarter of 1993. 13. CHANGE OF FISCAL YEAR-END: On March 28, 1994, the Board of Directors of Holdings approved, subject to the Distribution, a change in the Company's fiscal year-end from December 31 to November 30. Such a change to a non-calendar cycle will shift certain year-end administrative activities to a time period that conflicts less with the business needs of the Company's institutional customers. Holdings expects to file a report for the period ending June 30, 1994 with the Commission on or about August 14, 1994; and, in conjunction with its decision to change its fiscal year, Holdings anticipates that its financial statements for the period ending August 31, 1994, will be contained in a report which it expects to file with the Commission on or about October 15, 1994. 16 17 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS During 1993, the Company completed the sale of three businesses: The Boston Company, Shearson, and SLHMC which were completed on May 21, July 31, and August 31, 1993 respectively. The Company's first quarter 1993 operating results reflect The Boston Company as a discontinued operation, while the operating results of Shearson and SLHMC are included in the Company's 1993 results from continuing operations. Because of the significant sale transactions completed during 1993, the Company's 1993 historical financial statements are not fully comparable with the first quarter results of 1994. To facilitate an understanding of the Company's results, the following table separates the Company's first quarter 1993 results into three categories. These categories are as follows: o Historical Results: the results of the Company's ongoing businesses; the results of Shearson and SLHMC through their respective sale dates; the loss on the sale of Shearson; the reserves for non-core businesses; and the results of The Boston Company (accounted for as a discontinued operation). o The Lehman Businesses: the results of the ongoing businesses of the Company. o Businesses Sold: the results of Shearson and SLHMC; the loss on the sale of Shearson; and the reserves for non-core businesses related to the sale of SLHMC.
Three Months Ended March 31, -------------------------------------------------------------- 1994 1993 ---------- --------------------------------------------- (UNAUDITED) Lehman Lehman Businesses (IN MILLIONS) Businesses Businesses Sold Historical ---------- ---------- ----------- ---------- Revenues: Market making and principal transactions $ 434 $ 433 $ 155 Investment banking 175 164 64 Commissions 141 116 364 Interest and dividends 1,527 1,305 66 Other 17 19 171 ------ ------ ------ Total revenues 2,294 2,037 820 Interest expense 1,453 1,208 62 ------ ------ ------ Net revenues 841 829 758 $1,587 ------ ------ ------ ------ Non-interest expenses: Compensation and benefits 450 461 509 Other expenses 270 264 187 Loss on sale of Shearson 535 Reserves and other charges 33 32 120 ------ ------ ------ Total non-interest expenses 753 757 1,351 2,108 ------ ------ ------ ------ Income (loss) from continuing operations before taxes and cumulative effect of change in accounting principle 88 72 (593) (521) Provision for income taxes 33 38 81 119 ------ ------ ------ ------ Income (loss) from continuing operations before cumulative effect of change in accounting principle $ 55 $ 34 $ (674) $ (640) ====== ====== ====== ======
17 18 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993 The Company reported net income of $42 million for the first quarter of 1994 as compared to a net loss of $451 million for first quarter of 1993. The first quarter 1994 results included a $13 million charge for the cumulative effect of a change in accounting for postemployment benefits as a result of the adoption of SFAS No. 112. The 1993 net loss of $451 million was comprised of net income from the Lehman Businesses of $34 million, net income of $189 million from the discontinued operations of The Boston Company, including a $165 million after-tax gain on the sale and after-tax earnings of $24 million, and a net loss from Businesses Sold of $674 million, which included a loss on the sale of Shearson of $630 million after-tax, a $79 million after-tax charge related to a reserve for non-core businesses recognized in anticipation of the sale of SLHMC, and operating earnings from Shearson of $35 million. The loss on the sale of Shearson included a reduction in goodwill of $750 million and transaction-related costs such as relocation, systems and operations modifications and severance. THE LEHMAN BUSINESSES FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993 Summary. Net income from continuing operations before the cumulative effect of change in accounting principle for the Lehman Businesses increased 63% to $55 million for the first quarter of 1994 from $34 million in the first quarter of 1993. Net income for 1994 included an $18 million ($33 million pre-tax) severance charge while net income for 1993 included a $21 million ($32 million pre- tax) reserve for certain non-core partnership syndication activities in which the Company is no longer actively engaged. Excluding these charges, net income from continuing operations before the cumulative effect of change in accounting principle for the Lehman Businesses increased 33% to $73 million in the first quarter of 1994 from $55 million in the first quarter of 1993. Net revenues from the Lehman Businesses increased slightly to $841 million in the first quarter of 1994 from $829 million in the prior year reflecting strong customer flow partially offset by less favorable trading results. Excluding the Businesses Sold, total non-interest expenses decreased slightly to $753 million in the first quarter of 1994 from $757 million in the first quarter of 1993. The Company's effective tax rate was 38% for the first quarter of 1994 compared to 53% for the Lehman Businesses in the first quarter of 1993. Net Revenues. Net revenues increased slightly to $841 million for the first quarter of 1994 from $829 million for the comparable period in 1993. Commissions and investment banking revenue increases of 22% and 7%, respectively, were partially offset by a decline in net interest revenue to $74 million for the first quarter of 1994 from $97 million in the first quarter of 1993. Market Making and Principal Transactions. Market making and principal transactions include the results of the Company's market making and trading related to customer activities, as well as proprietary trading for the Company's own account. Revenues from these activities encompass net realized and mark-to-market gains and losses on securities and other financial instruments owned as well as securities and other financial instruments sold but not yet purchased. The Company utilizes various 18 19 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS hedging strategies as it deems appropriate to minimize its exposure to significant movements in interest and foreign exchange rates and the equity markets. Market making and principal transactions revenue of $434 million for the first quarter of 1994 was virtually unchanged from the first quarter of 1993. The first quarter 1994 results were comprised of a substantial increase in net revenues from both fixed income derivative products and equity derivative products primarily due to increased volume in these products. The 1994 increase in revenues from derivative products was offset by reduced net revenues from trading activities which were adversely affected by market conditions. Investment Banking. Investment banking revenues increased 7% to $175 million for the first quarter of 1994 from $164 million in the prior year period, principally due to the increased merger and financial advisory fees. Commissions. Commission revenues increased 22% to $141 million in the first quarter of 1994 from $116 million in the first quarter of 1993, primarily as a result of higher volumes of customer trading of securities and commodities on exchanges. Commission revenues are generated from the Company's agency activities on behalf of corporations, institutions and high net worth individuals. Interest and Dividends. Interest and dividend revenues increased 17% to $1,527 million in the first quarter of 1994 from $1,305 million in the first quarter of 1993. Net interest and dividend income decreased to $74 million in the first quarter of 1994 from $97 million in the first quarter of 1993. Net interest and dividend revenue amounts are closely related to the Company's trading activities. The Company evaluates its trading strategies on an overall profitability basis which includes both trading and interest. Therefore, changes in net interest revenue from period to period should not be viewed in isolation but should be viewed in conjunction with revenues from market making and principal transactions. Non-interest Expenses. Compensation and benefits expense decreased to $450 million in the first quarter of 1994 from $461 million in the first quarter of 1993. Compensation and benefits expense as a percentage of net revenues decreased to 53.5% in the first quarter of 1994 from 55.6% in the first quarter of 1993. Excluding compensation and benefits expense, non-interest expenses increased 2% to $303 million in the first quarter of 1994 from $296 million in 1993. Included within the 1994 first quarter results was a severance charge of $33 million ($18 million after-tax) recognized as a result of a review of personnel needs and on-going cost reduction efforts, which resulted in the termination of certain personnel. The 1993 first quarter results included a $32 million charge ($21 million after-tax) related to certain non-core partnership syndication activities in which the Company is no longer actively engaged. Excluding these charges, other non-interest expenses were $270 million and $264 million for the first quarter of 1994 and 1993, respectively. This increase primarily was due to higher levels of professional services, 19 20 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS depreciation and amortization, and brokerage, commissions and clearance fees in the first quarter of 1994, partially offset by a lower level of bad debt expenses in the first quarter of 1994. The Company estimates that it will incur expenses in connection with the Concurrent Transactions and certain related expenses of approximately $20 million which will be charged primarily to operating expense in the second quarter of 1994. (See Note 2.) In addition, the Company will recognize compensation expense associated with the Phantom Share Conversion in the second quarter of 1994 equal to the excess, if any, of the market value of the Common Stock issued pursuant to the Phantom Share Conversion over the price paid by employees for the Phantom Shares. (See Note 10.) Income Taxes. For the first quarter of 1994, the Lehman Businesses had an income tax provision of $33 million as compared to $38 million a year ago. The 1994 provision consists of a provision of $48 million related to continuing operations before the cumulative effect of change in accounting principle partially offset by a $15 million benefit related to the severance charge. The 1993 provision of $38 million consisted of a provision of $49 million for continuing businesses and a tax benefit of $11 million related to non-core business reserves. The effective tax rate for the Lehman Businesses was 38% for the first quarter of 1994 as compared to 53% in the first quarter of 1993. The lower 1994 effective tax rate reflects a reduction in state and local taxes and taxes related to foreign operations. As of March 31, 1994, the Company had approximately $175 million of tax NOLs available to offset future taxable income, the benefits of which have not yet been reflected in the financial statements. Although the benefit related to these NOLs does not currently meet the recognition criteria of SFAS No. 109, strategies are being implemented to increase the likelihood of realization. It is anticipated that approximately $35 million of these NOLs will be transferred to American Express in connection with the Distribution. Cost Reduction Effort. In August 1993, the Company announced an expense reduction program with the objective of reducing costs by $200 million on an annualized basis by the end of the first quarter of 1994. The Company's expense structure for the first half of 1993, adjusted for changes in the volume and mix of revenues as well as for additional costs due to external factors such as inflation or new legislation, is the basis against which these goals are being measured. As of March 31, 1994, the Company had taken the following actions which it believes will result in $200 million of cost reductions on an annualized basis: (i) reduced certain purchased costs by lowering the volume of goods and services purchased, renegotiating rates with vendors and strengthening internal compliance with established policies and procedures, (ii) consolidated certain administrative and support functions; (iii) strengthened compliance and control functions; and (iv) completed its annual review of personnel, resulting in the termination of certain personnel the objective of which was to upgrade personnel and eliminate positions to improve the Company's overall productivity; as a result of this review process, the Company recorded a $33 million severance charge in the first quarter of 1994, as previously discussed. In addition to these actions, the Company has identified a variety of actions that are expected to reduce expenses further, such as (i) additional reductions in certain purchased expenses and (ii) the relocation in the summer of 1994 of certain administrative, operations and other support personnel to newly leased facilities in New Jersey. 20 21 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources Total assets increased to $112.3 billion at March 31, 1994 from $80.5 billion at December 31, 1993. The primary reason for this increase was the adoption of FIN No. 39, which restricts the historical industry practice of offsetting certain receivables and payables. (See Note 8.) The Company's asset base consists primarily of cash and cash equivalents, and assets which can be sold within one year, including securities and other financial instruments owned, collateralized short-term agreements and receivables. Long-term assets consist primarily of other receivables, which include a $945 million interest bearing receivable from American Express due in 1996, property, equipment and leasehold improvements, deferred expenses and other assets, and excess of cost over fair value of net assets acquired. The Company finances its short-term assets primarily on a secured basis through the use of securities sold under agreements to repurchase, securities loaned, securities and other financial instruments sold but not yet purchased and other collateralized liability structures. The Company uses short-term unsecured borrowing sources to fund short-term assets not financed on a secured basis. The Company's primary sources of short-term, unsecured general purpose funding include commercial paper and short-term debt, including master notes and bank borrowings under uncommitted lines of credit. Commercial paper and short-term debt outstanding totaled $14.4 billion at March 31, 1994, compared to $11.2 billion at December 31, 1993. Of these amounts, commercial paper outstanding totaled $4.6 billion at March 31, 1994, compared to $2.6 billion at December 31, 1993. At March 31, 1994, the Company had $1.6 billion of unused committed bank credit lines to support its commercial paper programs. The Company's uncommitted lines of credit provide an additional source of short-term financing. At March 31, 1994, the Company had $11.3 billion in uncommitted lines of credit compared to $10.8 billion at December 31, 1993. Uncommitted lines consist of facilities that the Company has been advised are available but for which no contractual lending obligation exists. Long-term assets are financed with a combination of long-term debt and equity. The Company's long-term unsecured funding sources are senior notes and subordinated indebtedness. The Company maintains long-term debt in excess of its long-term assets to provide additional liquidity, which the Company uses to meet its short-term funding requirements and to reduce its reliance on commercial paper and short-term debt. For the three months ended March 31, 1994, the Company issued approximately $1 billion in senior notes, of which approximately $110 million were fixed rate and the remainder were variable rate. The Company also issued approximately $40 million of fixed rate subordinated indebtedness during the first quarter of 1994. The proceeds of the Company's first quarter issuances were used to provide additional liquidity and to refinance long-term debt maturing in 1994. The Company entered into interest rate swap contracts which effectively converted the interest rates on approximately $720 million of its floating rate senior notes issued during the first quarter of 1994 into new floating interest rates based primarily on LIBOR. The Company also entered into interest rate swap contracts which effectively converted approximately $60 million of its fixed rate senior notes issued during the first quarter of 1994 to a floating rate based primarily on LIBOR. At March 31, 1994, the Company had long-term debt outstanding of $10.6 billion compared to $9.9 billion outstanding at December 31, 1993. 21 22 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS At March 31, 1994, the Company had $2.3 billion available for issuance of debt securities under various shelf registrations. In addition, the Company initiated a $1 billion Euro medium-term note program in July 1993, which is not registered under the Securities Act of 1933. At March 31, 1994, $495 million of issuance availability remained under this program. SPECIFIC BUSINESS ACTIVITIES AND TRANSACTIONS The following sections include information on specific business activities of the Company which affect overall liquidity and capital resources: Merchant Banking Partnerships. At March 31, 1994, the Company's investment in merchant banking partnerships was $401 million, which included $171 million in one employee-related partnership in which the Company, as general partner, is entitled to a priority return. At March 31, 1994, the Company had commitments to make investments through merchant banking partnerships of approximately $54 million. The Company's policy is to carry its interests in merchant banking partnerships at fair value based upon the Company's assessment of the underlying investments. The Company's merchant banking investments, made primarily through a series of partnerships (the "1989 Partnerships") are, consistent with the terms of the 1989 Partnerships, expected to be sold or otherwise monetized during the remaining term of the Partnerships. Westinghouse. In May 1993, the Company and Westinghouse Electric Corporation ("Westinghouse") entered into a partnership to facilitate the disposition of Westinghouse's commercial real estate portfolio valued at approximately $1.1 billion, which will be accomplished substantially by securitizations and asset sales. The Company invested approximately $154 million in the partnership, and also made collateralized loans to the partnership of $752 million. During the third quarter of 1993, Lennar Inc. was appointed portfolio servicer and purchased a 10% limited partnership interest from the Company and Westinghouse. At March 31, 1994, the carrying value of the Company's investment in the partnership was $166 million and the outstanding balance of the collateralized loans, including accrued interest, was $455 million. The remaining loan balances are expected to be repaid in 1994 through a combination of mortgage remittances, securitizations, asset sales and refinancings by third parties. In April 1994, the Company received an additional loan repayment of approximately $240 million, principally from the proceeds of an asset securitization. High Yield Securities. The Company underwrites, trades, invests and makes markets in high yield corporate debt securities. The Company also syndicates, trades and invests in loans to below investment grade companies. For purposes of this discussion, high yield debt securities are defined as securities or loans to companies rated below BBB- by Standard & Poor's Corporation and below Baa3 by Moody's Investor Services, Inc., as well as non-rated securities or loans which, in the opinion of management, are non-investment grade. High yield debt securities are carried at market value and unrealized gains or losses for these securities are reflected in the Company's Consolidated Statement of Operations. The Company's portfolio of such securities at March 31, 1994 and December 31, 1993 included long positions with an aggregate market value of approximately $1.4 billion and $1 billion, respectively, and short positions with an aggregate market value 22 23 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS of approximately $240 million and $75 million, respectively. The portfolio may from time to time contain concentrated holdings of selected issues. The Company's two largest high yield positions were $179 million and $56 million at March 31, 1994 and $179 million and $82 million at December 31, 1993. Change in Facilities. In 1993, the Company agreed to lease approximately 392,000 square feet of office space located at 101 Hudson Street in Jersey City, New Jersey (the "Operations Center"). The lease term will commence in August 1994 and provides for minimum rental payments of approximately $87 million over its 16-year term. Concurrently, the Company announced it would relocate certain administrative employees to five additional floors at 3 World Financial Center in New York, New York. These floors will be purchased from American Express for approximately $44 million, with the Company financing the purchase through the issuance of notes to American Express. In connection with the relocation of the Operations Center and the additional space at the World Financial Center, the Company anticipates incremental fixed asset additions of approximately $112 million which is expected to be funded from the issuance of long-term debt. The relocation is expected to be completed in the summer of 1994. Non-Core Activities and Investments. In March 1990, the Company discontinued the origination of partnerships (whose assets are primarily real estate) and investments in real estate. Currently, the Company acts as a general partner for approximately $4.2 billion of partnership investment capital and manages a real estate investment portfolio with an aggregate investment basis of approximately $316 million. During the first quarter of 1993, the Company recorded a $32 million charge related to a reserve provided for these non-core partnership syndication activities. At March 31, 1994, the Company had remaining net exposure to these investments (defined as the remaining unreserved investment balance plus outstanding commitments and contingent liabilities under guarantees and credit enhancements) of $235 million. In certain circumstances, the Company provides financial and other support and assistance to such investments to maintain investment values. Except as described above, there is no contractual requirement that the Company continue to provide this support. Although a decline in the real estate market or the economy in general or a change in the Company's disposition strategy could result in additional real estate reserves, the Company believes that it is adequately reserved. The Company holds $98 million of long-term subordinated indebtedness and equity securities of American Marketing Industries Holding Inc. ("AMI"). The subordinated debt, as amended, matures in 1997, and includes certain provisions which limit cash interest payments and provides for payment-in-kind securities above such cash interest payments. The AMI loan is current in payment in accordance with its terms. The Company has other equity, partnership and debt investments unrelated to its ongoing businesses. At March 31, 1994, the total carrying value of the AMI loan and these other investments was $231 million. Management's intention with regard to non-core assets is the prudent liquidation of these investments as and when possible. 23 24 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SPIN-OFF OF LEHMAN BROTHERS On April 29, 1994, the Board of Directors of American Express declared a dividend to its common shareholders, subject to certain conditions, of all of Holdings' common stock held by American Express on the dividend distribution date. The dividend is effective on May 31, 1994, to shareholders of record on May 20, 1994. (See Note 2.) As a result of this dividend distribution, the Company will be an independent public company which will be traded on the New York Stock Exchange under the symbol LEH. 24 25 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS Lehman Brothers is involved in a number of judicial, regulatory and arbitration proceedings concerning matters arising in connection with the conduct of its business. Such proceedings include actions brought against Lehman Brothers and others with respect to transactions in which Lehman Brothers acted as an underwriter or financial advisor, actions arising out of Lehman Brothers' activities as a broker or dealer in securities and commodities and actions brought on behalf of various classes of claimants against many securities and commodities firms of which Lehman Brothers is one. Although there can be no assurance as to the ultimate outcome, Lehman Brothers has denied, or believes it has a meritorious defense and will deny liability in all significant cases pending against it including the matters described below, and intends to defend vigorously each such case. Although there can be no assurance as to the ultimate outcome, based on information currently available and established reserves, Lehman Brothers believes that the eventual outcome of the actions against it, including the matters described below, will not, in the aggregate, have a material adverse effect on the business or consolidated financial condition of the Company. Bamaodah v. E.F Hutton & Company Inc. (Reported in Holdings' Annual Report on Form 10-K) On April 26,1994, the Dubai Court of Appeals again affirmed the judgment of the Dubai Civil Court. The Company intends to appeal such judgment. Ralph Majeski, et al. v. Balcor Entertainment Company, Ltd. et al.; Robert Eckstein, et al. v. Balcor Film Investors, et al. (Reported in Holdings' Annual Report on Form 10-K) Under the terms of an agreement between American Express and Holdings, American Express has agreed to indemnify Lehman Brothers for liabilities which it may incur in connection with this action. 25 26 Paul Williams and Beverly Kennedy, et al. v. Balcor Pension Investors et al. (Reported in Holdings' Annual Report on Form 10-K) Under the terms of an agreement between American Express and Holdings, American Express has agreed to indemnify Lehman Brothers for liabilities which it may incur in connection with this action. Glynwil Investment, Ltd. v. Shearson Lehman Brothers Inc. (Reported in Holdings' Annual Report on Form 10-K.) Discovery is expected to be completed by May 31, 1994, and a briefing schedule for motions and a trial date are expected to be set at a conference on June 7, 1994. Actions Related to First Capital Holdings Inc. (Reported in Holdings' Annual Report on Form 10-K) Under the terms of an agreement between American Express and Holdings, Holdings has agreed to indemnify American Express for liabilities which it may incur in connection with any action (including any derivative action) relating to First Capital Holdings Inc. ("FCH"). In connection therewith, Holdings' indemnification obligation extends to the below described action, in addition to those actions described in Holdings' Annual Report on Form 10-K. American Express Derivative Action. On June 6, 1991, a purported shareholder derivative action was filed in the United States District Court for the Eastern District of New York, entitled Rosenberg v. Robinson, et al., against all of the then-current directors of American Express. In January 1992, this action was transferred by stipulation to the United States District Court for the Central District of California for coordinated or consolidated proceedings with all other federal actions related to FCH. The complaint alleges that the Board of Directors of American Express should have required Holdings to divest its investment in FCH and to write down such investment sooner. In addition, the complaint alleges that the failure to act constituted a waste of corporate assets and caused damage to American Express' reputation. The complaint seeks a judgment declaring that the directors named as defendants breached their fiduciary duties and duties of loyalty and requiring the defendants to pay money damages to American Express and remit their compensation for the period in which the duties were breached, to pay attorneys' fees and costs and other relief. The defendants have answered the complaint, denying its material allegations. CC&F Medford III Investment Company v. The Boston Company, Inc. and Wellington-Medford III Properties, Inc. (Reported in Holdings' Annual Report on Form 10-K) The stay of proceedings for purposes of facilitating negotiations has been extended and now expires on June 17, 1994, with trial scheduled to commence on or after July 18, 1994. 26 27 Maxwell Related Litigation (Reported in Holdings' Annual Report on Form 10-K) MacMillan Inc. v. Bishopsgate Investment Trust, Shearson Lehman Brothers Holdings PLC et al. On April 12, 1994, MacMillian Inc. appealed the High Court of Justice judgment, which found for the Company on all aspects of its defense. In re Tiphook Securities Litigation On or about January 25, 1994, LBI was served with an Amended Complaint in an action captioned In re Tiphook Securities Litigation. The Amended Complaint purportedly is brought on behalf of all purchasers of American Depository Receipts of Tiphook, PLC ("Tiphook") and all purchasers of various Tiphook debt securities issued in offerings on November 2, 1992, March 8, 1993 and April 23, 1993, during the alleged class period of October 8, 1992 through November 15, 1993. The action is pending in the United States District Court for the District of New Jersey. Also named as defendants are Tiphook, Tiphook Finance and various officers and directors of Tiphook. The Amended Complaint alleges violations of Sections 11 and 15 of the Securities Act of 1933, as amended, by Lehman Brothers and the three other underwriters of the Tiphook note offerings. Such claims are based on alleged misstatements and omissions in the prospectuses for such note offerings. The plaintiffs seek an unspecified amount of damages resulting from the alleged misstatements and omissions. Currently, Tiphook is not honoring its indemnification obligation (set forth in the underwriting agreement among Tiphook, LBI and the other underwriters) to LBI and such other underwriters. The Company believes it has meritorius defenses to this action and intends to defend vigorously. 27 28 EXHIBITS AND REPORTS ON FORM 8-K The following exhibits and reports on Form 8-K are filed as part of this Quarterly Report, or where indicated, were heretofore filed and are hereby incorporated by reference: (a) Exhibits: 12. Computation in Support of Ratio of Earnings to Fixed Charges. 99. Pro Forma Consolidated Financial Statements for the quarter ended March 31, 1994. (b) Reports on Form 8-K: 1. Form 8-K dated February 24, 1994, Items 5 and 7. 2. Form 8-K dated April 14, 1994, Items 5 and 7. 3. Form 8-K dated April 26, 1994, Items 5 and 7. 28 29 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LEHMAN BROTHERS HOLDINGS INC. ------------------------------ (Registrant) Date: May 10, 1994 By /s/ Richard S. Fuld, Jr. ---------------------------- Richard S. Fuld, Jr. Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: May 10, 1994 By /s/ Robert Matza ---------------------------- Robert Matza Chief Financial Officer (Principal Financial Officer) 29 30 EXHIBIT INDEX
Exhibit No. Exhibit Page No. - - - ----------- ------- -------- Exhibit 12 Computation in Support of Ratio of Earnings to Fixed Charges. Exhibit 99 Pro Forma Consolidated Financial Statements for the quarter ended March 31, 1994.
EX-12 2 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 Exhibit 12 2 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES COMPUTATION IN SUPPORT OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN MILLIONS) (UNAUDITED)
For the Three Months Ended For the Year Ended December 31, March 31, ---------------------------------------------------------------- ------------ 1989 1990 1991 1992 1993 1994 ---- ---- ---- ---- ---- ---- Fixed charges: Interest expense: Subordinated indebtedness $ 259 $ 203 $ 170 $ 150 $ 144 $ 35 Bank loans and other borrowings* 5,625 4,531 4,755 5,035 5,224 1,418 Interest component of rentals of office and equipment 68 62 70 74 76 11 Other adjustments** 25 8 2 2 7 ------ ------- ------- ------ ------ ------ TOTAL (A) $5,977 $ 4,804 $ 4,997 $5,261 $5,451 $1,464 ====== ======= ======= ====== ====== ====== Earnings: Pre-tax income (loss) from continuing operations $ 107 $ (749) $ 150 $ (247) $ 27 $ 88 Fixed charges 5,977 4,804 4,997 5,261 5,451 1,464 Other adjustments*** (39) (17) 7 (6) ------ ------- ------- ------ ------ ------ TOTAL (B) $6,045 $ 4,038 $ 5,154 $5,014 $5,472 $1,552 ====== ======= ======= ====== ====== ====== (B / A) 1.01 **** 1.03 **** 1.00 1.06
* 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. EX-99 3 PRO FORMA CONSOL. FINANCIAL STATEMENTS, 3/31/94 1 Exhibit 99 2 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED BALANCE SHEET (IN MILLIONS) (UNAUDITED) ASSETS
Quarter Ended March 31, 1994 ----------------------------------------- Actual Pro Forma ------ -------------------------- Adjustments Total ----------- ----- Cash and cash equivalents $ 1,385 $ 1,385 Cash and securities segregated and on deposit for regulatory and other purposes 1,360 1,360 Securities and other financial instruments owned 44,615 44,615 Collateralized short-term agreements: Securities purchased under agreements to resell 41,130 41,130 Securities borrowed 9,969 9,969 Receivables: Brokers and dealers 4,792 4,792 Customers 4,314 4,314 Other 3,103 3,103 Property, equipment and leasehold improvements (net of accumulated depreciation and amortization of $456 in 1994) 535 535 Deferred expenses and other assets 803 803 Excess of cost over fair value of net assets acquired (net of accumulated amortization of $110 in 1994) 271 271 -------- -------- -------- $112,277 $ $112,277 ======== ======== ========
See notes to pro forma consolidated financial statements. 1 3 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED BALANCE SHEET (CONTINUED) (IN MILLIONS, EXCEPT SHARE DATA) (UNAUDITED) LIABILITIES AND STOCKHOLDERS' EQUITY
Quarter Ended March 31, 1994 -------------------------------------------------- Actual Pro Forma ------ ------------------------------ Adjustments Total ----------- ----- Commercial paper and short-term debt $ 14,353 $ (1,193) (a) $ 13,160 Securities and other financial instruments sold but not yet purchased 16,724 16,724 Securities sold under agreements to repurchase 57,204 57,204 Securities loaned 965 965 Payables: Brokers and dealers 3,150 3,150 Customers 4,334 4,334 Accrued liabilities and other payables 2,939 (57) (b) 2,882 Senior notes 8,516 8,516 Subordinated indebtedness 2,059 2,059 -------- -------- --------- Total liabilities 110,244 (1,250) 108,994 -------- -------- --------- Stockholders' equity: Preferred stock, $1 par value; 38,000,000 shares authorized: 5% Cumulative Convertible Voting, Series A, 13,000,000 shares authorized, issued and outstanding; $39.10 liquidation preference per share 508 508 Money Market Cumulative, 3,300 shares authorized; 250 shares issued and outstanding; $1,000,000 liquidation preference per share 250 (250) (c) Cumulative Voting, 8,000,000 shares issued and outstanding pro forma; $25.00 liquidation preference per share 200 (d) 200 Redeemable Voting, 1,000 shares issued and outstanding pro forma; $1.00 liquidation preference per share -- (d) -- Common stock, $.10 par value; 300,000,000 shares authorized; 168,235,284 shares (53,494,158 as adjusted for the Reverse Stock Split) issued and outstanding; 105,776,664 shares issued and outstanding pro forma 17 (6) (e) 11 Additional paid-in capital 1,871 904 (f) 3,177 250 (c) 89 (g) 57 (b) 6 (e) Foreign currency translation adjustment (9) (9) Accumulated deficit (604) (604) -------- -------- --------- Total stockholders' equity 2,033 1,250 3,283 -------- -------- --------- $112,277 $ $ 112,277 ======== ======== =========
See notes to pro forma consolidated financial statements. 2 4 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE DATA)
Quarter Ended March 31, 1994 ------------------------------------------------- Actual Pro Forma ------ ------------------------------- Adjustments Total ----------- ----- Revenues Market making and principal transactions $ 434 $ 434 Investment banking 175 175 Commissions 141 141 Interest and dividends 1,527 1,527 Other 17 17 ------ ----- ------ Total revenues 2,294 2,294 Interest expense 1,453 $ (11) (h) 1,442 ------ ----- ------ Net revenues 841 11 852 ------ ----- ------ Non-interest expenses Compensation and benefits 450 450 Communications 50 50 Brokerage, commissions and clearance fees 45 45 Occupancy and equipment 42 42 Professional services 42 42 Advertising and market development 31 31 Depreciation and amortization 31 31 Severance charge 33 33 Other 29 29 ------ ----- ------ Total non-interest expenses 753 753 ------ ----- ------ Income from continuing operations before taxes 88 11 99 Provision for income taxes 33 5 (i) 38 ------ ----- ------ Income from continuing operations 55 6 61 Preferred stock dividends 12 (1) (j) 11 ------ ----- ------ Income from continuing operations applicable to Common Stock $ 43 $ 7 $ 50 ====== ===== ====== Income from continuing operations per share of Common Stock (k) $ .41 $ .47 ====== ======
See notes to pro forma consolidated financial statements. 3 5 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED STATEMENT 1. Basis of Reporting The pro forma financial data has been prepared by the Company based on certain adjustments to the consolidated financial statements of the Company. The pro forma statement of operations reflects adjustments for the Concurrent Transactions as if such transactions had occurred as of January 1, 1994. The pro forma balance sheet reflects adjustments for the Concurrent Transactions as if such transactions had occurred as of March 31, 1994. The pro forma financial data does not purport to present the financial position and results of operations of the Company had the Concurrent Transactions actually occurred as of such dates, nor is it necessarily indicative of results of operations that may be achieved in the future. The Company will incur certain costs in connection with the Concurrent Transactions and certain other related expenses estimated to be $20 million which will be charged primarily to operating expenses in the second quarter of 1994. In addition, the Company will recognize compensation expense in 1994 equal to (i) the increase in book value attributable to the Phantom Shares and (ii) the excess, if any, of the market value of the Common Stock issued pursuant to the Phantom Share Conversion over the price paid by employees for the Phantom Shares. PRO FORMA BALANCE SHEET ADJUSTMENTS: The pro forma adjustments to the balance sheet give effect to the items described below: (a) Reflects the repayment of commercial paper and short-term debt with gross proceeds from the Equity Investment. (b) Reflects the Phantom Share Conversion. (c) Reflects the MMP Exchange. (d) Reflects the Preferred Stock Purchases. (e) Reflects the decrease in the aggregate par value of Common Stock outstanding and corresponding increase in additional paid-in-capital from the Reverse Stock Split, partially offset by the increase in the aggregate par value due to the issuance of Common Stock. (f) Reflects the American Express Common Stock Purchase. (g) Reflects the NL Common Stock Purchase. 4 6 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED STATEMENT -- (CONTINUED) PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS: The pro forma adjustments to the statement of operations give effect to the items described below: (h) Reduced interest expense of approximately $11 million in the first quarter of 1994 resulting from the utilization of the cash proceeds to the Company from the Equity Investment. (i) Adjustment (h) above, tax effected at an assumed rate of 40%. (j) Elimination of the dividend on the Money Market Cumulative Preferred Stock partially offset by the addition of the dividend on the Cumulative Preferred Stock. An 8 1/2% dividend rate has been assumed on the Cumulative Preferred Stock. However, this rate will be based on prevailing market rates at the time of issuance and is therefore subject to adjustment. A 1/4% change in the dividend rate would increase or decrease the Company's annual dividend payment by $0.5 million. Holders of the Redeemable Preferred Stock will be entitled to receive, in the aggregate, an annual dividend equal to 50% of the Company's net income in excess of $400 million per year, with a maximum dividend of $50 million per year, for each of the next eight years commencing on or about the Distribution Date. (k) Income (loss) from continuing operations per share of Common Stock is calculated based on 105,776,664 pro forma number of shares of Common Stock outstanding immediately following the Concurrent Transactions. 5 -----END PRIVACY-ENHANCED MESSAGE-----