-----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, GfVtRhc56Q687gG7PhqGo1aShs9PIdsA9mIoDtLXuRl88fQ1YE/ygk2vtQFQS6eq XFxnikOBHgKmkihvfHnKeA== 0000950123-94-001647.txt : 19941018 0000950123-94-001647.hdr.sgml : 19941018 ACCESSION NUMBER: 0000950123-94-001647 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19940831 FILED AS OF DATE: 19941017 SROS: NYSE 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: 94552905 BUSINESS ADDRESS: STREET 1: AMERICAN EXPRESS TWR STREET 2: 3 WORLD FINANCIAL CNTR CITY: NEW YORK STATE: NY ZIP: 10048 BUSINESS PHONE: 2125267000 MAIL ADDRESS: STREET 1: AMERICAN EXPRESS TOWER 15TH FL STREET 2: 2 WORLD TRADE CENTER CITY: NEW YORK STATE: NY ZIP: 10048 FORMER COMPANY: FORMER CONFORMED NAME: SHEARSON LEHMAN HUTTON HOLDINGS INC DATE OF NAME CHANGE: 19901017 10-Q 1 LEHMAN BROTHERS HOLDINGS, INC. 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 AUGUST 31, 1994 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ COMMISSION FILE NUMBER 1-9466 LEHMAN BROTHERS HOLDINGS INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) 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) 526-7000 INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO -------- ------- AS OF SEPTEMBER 30, 1994, 105,522,658 SHARES OF THE REGISTRANT'S COMMON STOCK, PAR VALUE $.10 PER SHARE, WERE OUTSTANDING. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED AUGUST 31, 1994 INDEX
Part I. FINANCIAL INFORMATION Page Number --------------------- ----------- Item 1. Financial Statements Consolidated Statement of Operations - Three and Eight Months Ended August 31, 1994 and Three and Nine Months Ended September 30, 1993 . . . . . . . . . . . . . . . . . . . . . . . . 3 Consolidated Balance Sheet - August 31, 1994 and December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Consolidated Statement of Cash Flows - Eight Months Ended August 31, 1994 and Nine Months Ended September 30, 1993 . . . . . . . . . . . . . . . . . . . . . 7 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Part II. OTHER INFORMATION ----------------- Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Exhibits 2 3 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE DATA)
Three months ended -------------------------------------- August 31, September 30, 1994 1993 ------------ -------------- Revenues Market making and principal transactions $ 335 $ 484 Investment banking 172 233 Commissions 113 244 Interest and dividends 1,901 1,535 Other 16 88 ------- ------- Total revenues 2,537 2,584 Interest expense 1,818 1,411 ------- ------- Net revenues 719 1,173 ------- ------- Non-interest expenses Compensation and benefits 388 625 Brokerage, commissions and clearance fees 58 61 Communications 51 66 Professional services 49 52 Occupancy and equipment 45 49 Depreciation and amortization 33 35 Advertising and market development 33 40 Other 29 71 ------- ------- Total non-interest expenses 686 999 ------- ------- Income before taxes 33 174 Provision for income taxes 11 60 ------- ------- Net income $ 22 $ 114 ======= ======= Net income applicable to common stock $ 11 $ 102 ======= ======= Number of shares used in per share computation 109 .1 105.7 ====== ====== Earnings per common share $ .10 $ .96 ======= =======
See notes to consolidated financial statements. 3 4 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE DATA)
Eight months ended Nine months ended August 31, September 30, 1994 1993 ------------------ ----------------- Revenues Market making and principal transactions $1,054 $1,673 Investment banking 421 727 Commissions 332 1,189 Interest and dividends 4,547 4,388 Other 41 472 ------ ------ Total revenues 6,395 8,449 Interest expense 4,365 4,042 ------ ------ Net revenues 2,030 4,407 ------ ------ Non-interest expenses Compensation and benefits 1,057 2,546 Brokerage, commissions and clearance fees 178 168 Communications 135 271 Professional services 122 158 Occupancy and equipment 115 215 Depreciation and amortization 86 124 Advertising and market development 85 128 Other 76 246 Severance charge 33 Spin-off expenses 15 Loss on sale of Shearson 535 Reserves for non-core businesses 152 ------ ------ Total non-interest expenses 1,902 4,543 ------ ------ Income (loss) from continuing operations before taxes and cumulative effect of change in accounting principle 128 (136) Provision for income taxes 48 269 ------ ------ Income (loss) from continuing operations before cumulative effect of change in accounting principle 80 (405) Income from discontinued operations, net of taxes: Income from operations 24 Gain on disposal 165 ------ ------ Net income from discontinued operations 189 ------ ------ Income (loss) before cumulative effect of change in accounting principle 80 (216) Cumulative effect of change in accounting principle (13) ------ ------ Net income (loss) $ 67 $ (216) ======= ======= Net income (loss) applicable to common stock $ 40 $ (252) ======= ======= Number of shares used in per share computation 107.0 105.7 ======= ======= Earnings per common share: Income (loss) from continuing operations before cumulative effect of change in accounting principle $ .49 $ (4.17) Discontinued operations 1.79 Cumulative effect of change in accounting principle (.12) ------ ------ Net income (loss) $ .37 $ (2.38) ======= =======
See notes to consolidated financial statements. 4 5 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN MILLIONS) ASSETS
August 31, December 31, 1994 1993 ---------- ------------ (unaudited) Cash and cash equivalents $ 847 $ 1,333 Cash and securities segregated and on deposit for regulatory and other purposes 1,418 1,073 Securities and other financial instruments owned 51,749 35,699 Collateralized short-term agreements: Securities purchased under agreements to resell 44,569 26,046 Securities borrowed 9,093 4,372 Receivables: Brokers and dealers 6,330 5,059 Customers 3,050 2,646 Other 2,698 2,693 Property, equipment and leasehold improvements (net of accumulated depreciation and amortization of $494 in 1994 and $438 in 1993) 607 529 Deferred expenses and other assets 642 750 Excess of cost over fair value of net assets acquired (net of accumulated amortization of $114 in 1994 and $107 in 1993) 243 274 -------- -------- $121,246 $ 80,474 ======== ========
See notes to consolidated financial statements. 5 6 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (CONTINUED) (IN MILLIONS, EXCEPT SHARE DATA) LIABILITIES AND STOCKHOLDERS' EQUITY
August 31, December 31, 1994 1993 ------------- ------------ (unaudited) Commercial paper and short-term debt $ 13,000 $11,205 Securities and other financial instruments sold but not yet purchased 15,893 8,313 Securities sold under agreements to repurchase 67,826 39,191 Securities loaned 1,988 1,116 Payables: Brokers and dealers 2,488 1,385 Customers 3,264 4,130 Accrued liabilities and other payables 2,600 3,183 Senior notes 8,460 7,779 Subordinated indebtedness 2,367 2,120 -------- ------- Total liabilities 117,886 78,422 -------- ------- Stockholders' equity: Preferred stock, $1 par value; 38,000,000 shares authorized: 5% Cumulative Convertible Voting, Series A, 13,000,000 shares authorized, issued and outstanding; $39.10 liquidation preference per share 508 508 Money Market Cumulative, 3,300 shares authorized; 250 shares issued and outstanding; $1,000,000 liquidation preference per share 250 8.44% Cumulative Voting, 8,000,000 shares issued and outstanding; $25.00 liquidation preference per share 200 Redeemable Voting, 1,000 shares issued and outstanding; $1.00 liquidation preference per share Common stock, $.10 par value; 300,000,000 shares authorized; 1994: 105,608,423 shares issued and 105,528,914 shares outstanding; 1993: 53,470,443 shares issued and outstanding (168,235,284 prior to the Reverse Stock Split) 11 17 Common stock issuable 77 Additional paid-in capital 3,173 1,871 Foreign currency translation adjustment 3 (12) Accumulated deficit (610) (582) Common stock in treasury, at cost: 1994, 79,509 shares (2) -------- ------- Total stockholders' equity 3,360 2,052 -------- ------- $121,246 $ 80,474 ======== ========
See notes to consolidated financial statements. 6 7 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (IN MILLIONS)
Eight months Nine months ended August 31, ended September 30, 1994 1993 ---------------- ------------------- CASH FLOWS FROM OPERATING ACTIVITIES Income (loss) from continuing operations before cumulative effect of change in accounting principle $ 80 $ (405) Adjustments to reconcile income (loss) to net cash used in operating activities: Depreciation and amortization 86 124 Provisions for losses and other reserves 54 94 Loss on sale of Shearson 535 Non-core business reserve152 Deferred tax liability (benefit) 138 (153) Other adjustments 70 124 Net change in: Cash and securities segregated (345) 197 Receivables from brokers and dealers (1,271) (891) Receivables from customers (404) (606) Securities purchased under agreements to resell (18,523) (1,177) Securities borrowed (4,721) 4,125 Loans originated or purchased for resale (62) Securities and other financial instruments owned (16,050) (7,319) Payables to brokers and dealers 1,103 (349) Payables to customers (866) 7 Accrued liabilities and other payables (505) 1,045 Securities sold under agreements to repurchase 28,635 4,229 Securities loaned 872 (1,549) Securities and other financial instruments sold but not yet purchased 7,580 (1,607) Other operating assets and liabilities, net (265) (721) ------- ------- (4,332) (4,207) Net cash flows provided by operating activities of discontinued operations 428 ------- ------- NET CASH USED IN OPERATING ACTIVITIES $(4,332) $(3,779) ------- -------
See notes to consolidated financial statements. 7 8 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) (UNAUDITED) (IN MILLIONS)
Eight months Nine months ended August 31, ended September 30, 1994 1993 ---------------- ------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of senior notes $ 2,537 $ 2,920 Principal payments of senior notes (1,767) (887) Proceeds from issuance of subordinated indebtedness 540 208 Principal payments of subordinated indebtedness (294) (502) Issuance of other indebtedness 3,949 4,598 Principal payments of other indebtedness (4,151) (4,654) Increase (decrease) in commercial paper and short-term debt, net 2,046 (143) Proceeds from spin-off 1,193 Dividends paid (82) (119) Net cash flows used in financing activities of discontinued operations (301) ------ ------ NET CASH PROVIDED BY FINANCING ACTIVITIES 3,971 1,120 ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, equipment and leasehold improvements (137) (101) Proceeds from the sale of The Boston Company 1,300 Proceeds from the sale of Shearson 1,200 Proceeds from sale of SLHMC 70 Other 729 Net cash flows used in investing activities of discontinued operations (85) ------ ------ NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (137) 3,113 ------ ------ Net change in cash and cash equivalents of discontinued operations 42 ------ ------ Effect of exchange rate changes on cash 12 (6) ------ ------ NET CHANGE IN CASH AND CASH EQUIVALENTS (486) 406 ------ ------ Cash and cash equivalents at beginning of period 1,333 641 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 847 $ 1,047 ====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN MILLIONS) (INCLUDING THE BOSTON COMPANY) Interest paid (net of amount capitalized) totaled $4,286 and $4,153 in the first eight months of 1994 and nine months of 1993, respectively. Income taxes received totaled $43 and $40 in the first eight months of 1994 and nine months of 1993, respectively. See notes to consolidated financial statements. 8 9 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION: The consolidated financial statements include the accounts of Lehman Brothers Holdings Inc. ("Holdings") (Holdings together with its subsidiaries, the "Company" or "Lehman Brothers"). The principal subsidiary of Holdings is Lehman Brothers Inc. ("LBI"), a registered broker-dealer. Prior to May 31, 1994, the American Express Company ("American Express") owned 100% of Holdings' common stock, par value $.10 per share (the "Common Stock"), which represented approximately 93% of Holdings' voting stock. Effective May 31, 1994, Holdings became a widely held public company with its Common Stock traded on the New York Stock Exchange, Inc. (See Note 2.) The Company's financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the "Commission") with respect to the Form 10-Q and reflect all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Pursuant to such rules and regulations, certain footnote disclosures which are normally required under generally accepted accounting principles have been omitted. It is recommended that these consolidated financial statements be read in conjunction with the Company's most recent Annual Report on Form 10-K. As described in Note 4, the Company completed the sale of The Boston Company, Inc. ("The Boston Company"), on May 21, 1993. The accompanying consolidated financial statements and notes to consolidated financial statements reflect The Boston Company as a discontinued operation for the nine month period ended September 30, 1993. The 1993 Consolidated Statement of Operations includes the results of operations of Shearson and SLHMC, which were sold on July 31, 1993 and August 31, 1993, respectively. (See Notes 5 and 6 for definitions and additional information concerning these sales.) Certain amounts reflect reclassifications to conform to the current period's presentation. Earnings per common share was computed by dividing net income applicable to common stock by the weighted average number of common stock and common stock equivalents outstanding. Pursuant to the Commission requirements, the number of shares used in the earnings per share calculation for all periods presented includes Common Stock as of the Distribution. (See Note 2.) 2. EQUITY INVESTMENTS AND DISTRIBUTION OF COMMON STOCK: On May 31, 1994 all of the shares of Common Stock of Holdings were distributed (the "Distribution") to American Express common shareholders of record on May 20, 1994 (the "Record Date") as the result of a special dividend declared on April 29, 1994 by the Board of Directors of American Express. 9 10 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Prior to the Distribution, Holdings effected a 0.3178313 for 1 reverse stock split (the "Reverse Stock Split") which had the effect of reducing the number of shares of Common Stock held by American Express from 168,235,284 to 53,470,443. The calculation of the ratio for the Reverse Stock Split was based upon the number of American Express common shares outstanding on the Record Date. Also prior to the Distribution: (i) American Express sold 441,251 shares of Common Stock to certain executive officers of Lehman Brothers for an aggregate purchase price of approximately $11.3 million, or approximately $25.55 per share (the "Offering"); (ii) Holdings sold: (a) 35,379,920 shares of Common Stock to American Express for an aggregate purchase price of approximately $903.8 million, or approximately $25.55 per share (the "American Express Common Stock Purchase"), (b) 3,490,094 shares of Common Stock to Nippon Life Insurance Company ("Nippon Life") for approximately $89.2 million, or approximately $25.55 per share (the "NL Common Stock Purchase"), (c) 8,000,000 shares of its Cumulative Voting Preferred Stock (which stock has a dividend rate of 8.44% per annum) (the "Cumulative Preferred Stock") to American Express for an aggregate purchase price of $200 million and (d) 928 and 72 shares of its Redeemable Voting Preferred Stock ("Redeemable Preferred Stock") for $1.00 per share to American Express and Nippon Life, respectively (the Cumulative Preferred Stock and the Redeemable Preferred Stock collectively, the "Preferred Stock") (the sales of such Preferred Stock, the "Preferred Stock Purchases"). (iii) Holdings issued: (a) 3,366,677 shares of Common Stock, with an aggregate value of approximately $57 million, upon conversion of all of the outstanding phantom equity interests held by certain key employees of Lehman Brothers pursuant to the terms of the Lehman Brothers Inc. Employee Ownership Plan (the "Phantom Shares Conversion") and (b) 9,786,006 shares of Common Stock to American Express in exchange for $250 million of Money Market Preferred Stock of Holdings held by American Express (the "MMP Exchange"). The American Express Common Stock Purchase, the NL Common Stock Purchase and the Preferred Stock Purchases are collectively referred to herein as the "Equity Investment." The Equity Investment, the Offering, the Phantom Share Conversion, the MMP Exchange and the Distribution are collectively referred to herein as the "Concurrent Transactions." The Company charged approximately $15 million ($12 million after-tax) to operating expenses in the second quarter of 1994 related to costs 10 11 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS incurred in connection with the Concurrent Transactions and other related expenses. The Company and American Express entered into several agreements for the purpose of giving effect to the Distribution and defining their ongoing relationships. Nippon Life Warrant Amendment In connection with the Concurrent Transactions, the exercise price of Nippon Life's warrant to purchase 3,304,880 shares of Common Stock (10,398,221 shares before adjusting for the Reverse Stock Split) was reduced from $47.19 per share ($15 per share before adjusting for the Reverse Stock Split) to $35.05 per share. 3. INCENTIVE PLANS: Prior to the Distribution, the Compensation and Benefits Committee (the "Compensation Committee") of the Board of Directors of Holdings adopted, effective as of the date of the Distribution, the Lehman Brothers Holdings Inc. 1994 Management Ownership Plan (the "1994 Plan") and the Lehman Brothers Holdings Inc. 1994 Management Replacement Plan (the "Replacement Plan"). 1994 Plan The 1994 Plan provides for the Compensation Committee to grant stock options, stock appreciation rights ("SARs"), restricted stock units ("RSUs"), restricted stock, performance shares and performance units to eligible employees. In addition, the 1994 Plan provides that non-employee Directors of Holdings will receive on an annual basis RSUs representing $30,000 of Common Stock, which vest ratably over a three-year period. Stock options may be awarded as either incentive stock options or non-qualified stock options. The exercise price for any stock option shall not be less than the market price of Common Stock on the day of the grant. SARs may be awarded as a single award or in conjunction with a stock option. Vesting provisions for stock options and SARs are at the discretion of the Compensation Committee, but in no case may the term of the award exceed ten years. The 1994 Plan also allows the Compensation Committee to grant certain stock awards to eligible employees, with vesting and performance objective terms determined by such committee. The 1994 Plan expires in ten years. A total of 16,650,000 shares of Common Stock may be subject to awards under the 1994 Plan which number includes 150,000 shares available as RSUs which may be issued to non-employee Directors. No individual may receive options or SARs over the life of the 1994 Plan attributable to more than 1,650,000 shares of Common Stock. Effective as of the Distribution, the Compensation Committee awarded 360,720 stock options with an exercise price of $18 per share of Common Stock (the "May Options"), to the executive officers of Lehman Brothers. The May Options, which have a term of ten years, become exercisable in one-third increments on May 31, 1995, 1996 and 1997. Additionally, in accordance with the terms of the 1994 Plan, 73,056 RSUs also were awarded, of which 11,667 of such RSUs were awarded to the seven non-employee Directors of Holdings. Under the 1994 Plan, the Compensation Committee approved a stock award program (the "Stock Award Program") pursuant to which, effective July 1, 1994, it awarded, subject to vesting provisions and 11 12 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS transfer restrictions, approximately 5,200,000 RSUs (the "Employee RSUs") to eligible employees. Of the Employee RSUs awarded, approximately 4,000,000 will vest July 1, 1995, 200,000 July 1, 1997 and 1,000,000 on July 1, 1999. The Compensation Committee also determined to award RSUs under the Stock Award Program to the executive officers of Lehman Brothers (the "Executive RSUs"), if certain performance goals are achieved during the period June 1, 1994 through December 31, 1994. The number of Executive RSUs which will be awarded, if any, will be determined upon completion of such performance period. The Executive RSUs will vest 80% on July 1, 1995 and 20% on July 1, 1999. Each Employee and Executive RSU outstanding on July 1, 1999 related to these grants will be exchanged for a share of Common Stock. Holdings will pay a dividend equivalent on each RSU outstanding based on dividends paid on the Common Stock. The Compensation Committee also awarded, effective July 1, 1994, 1,500,000 stock options (the "July Options") to the executive officers of Lehman Brothers. The July Options become exercisable at $18 per share in one-third increments on July 1, 1995, 1996 and 1997 and expire on July 1, 1999. Replacement Plan The Replacement Plan allows the Compensation Committee to grant stock options and restricted stock awards to eligible employees. The primary purpose of the Replacement Plan is to provide awards similar to the American Express common shares granted to Company employees which were cancelled as of the date of the Distribution. A maximum of 3,200,000 shares of Common Stock were available for awards under the Replacement Plan. The number and terms of American Express stock awards outstanding as of May 31, 1994, as well as the then current stock prices of American Express and the Company, were used, in part, to facilitate the determination of the number of shares of Lehman Brothers restricted stock and stock options awarded under the Replacement Plan. Awards made under the Replacement Plan generally contain the same vesting conditions that applied to the cancelled awards. Approximately 115,283 restricted shares were awarded under the Replacement Plan to eligible employees. Options relating to 1,827,343 shares of Common Stock exercisable at $18 per share also were granted under the Replacement Plan. These stock options expire at various dates from February 1995 to February 2004. Employee Stock Purchase Plan The Compensation Committee adopted, effective June 1, 1994, the Employee Stock Purchase Plan (the "ESPP") pursuant to which 6,000,000 shares of Common Stock are available for purchase by employees. The ESPP allows employees to purchase Common Stock at a 15% discount from market value, with a maximum of $15,000 in annual aggregate purchases by any one individual. The initial purchase under this plan occurred on August 31, 1994. The shares were purchased in the open market and thus did not increase the total shares outstanding. 4. SALE OF THE BOSTON COMPANY: On May 21, 1993, pursuant to a stock purchase agreement (the "Mellon Agreement") between LBI and Mellon Bank Corporation ("Mellon Bank"), LBI sold to Mellon Bank (the "Mellon 12 13 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Transaction") The Boston Company. Under the terms of the Mellon Agreement, LBI received approximately $1.3 billion in cash, 2,500,000 shares of Mellon Bank common stock and ten-year warrants to purchase an additional 3,000,000 shares of Mellon Bank's common stock at an exercise price of $50 per share. In June 1993, such shares and warrants were sold by LBI to American Express for an aggregate purchase price of $169 million. After accounting for transaction costs and certain adjustments, the Company recognized a 1993 first quarter after-tax gain of $165 million for the Mellon Transaction. As a result of the Mellon Transaction, the Company treated The Boston Company as a discontinued operation. Accordingly, the Company's financial statements segregate the operating results of The Boston Company for the nine month period ended September 30, 1993. Presented below are the results of operations and the gain on disposal of The Boston Company included in income from discontinued operations (in millions):
Nine months ended September 30, 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 ====
5. SALE OF SHEARSON: On July 31, 1993, pursuant to an asset purchase agreement (the "Primerica Agreement"), the Company completed the sale (the "Primerica Transaction") of LBI's domestic retail brokerage business (except for such business conducted under the Lehman Brothers name) and substantially all of its asset management business (collectively, "Shearson") to Primerica Corporation (now known as The Travelers Corporation, "Travelers") and its subsidiary Smith Barney, Harris Upham & Co. Incorporated ("Smith Barney"). Also included in the Primerica Transaction were the operations and data processing functions that support these businesses, as well as certain of the assets and liabilities related to these operations. LBI received approximately $1.2 billion in cash and a $586 million interest bearing note from Smith Barney which was repaid in January 1994 (the "Smith Barney Note"). The Smith Barney Note was issued as partial payment for certain Shearson assets in excess of $600 million which were sold to Smith Barney. The proceeds received at July 31, 1993, were based on the estimated net assets of Shearson, which exceeded the minimum net assets of $600 million prescribed in the Primerica Agreement. As further consideration for the sale of 13 14 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Shearson, Smith Barney agreed to pay future contingent amounts based upon the combined performance of Smith Barney and Shearson, consisting of up to $50 million per year for three years based on revenues, plus 10% of after-tax profits in excess of $250 million per year over a five-year period (the "Participation Rights"). All Participation Rights, including the first payment, were assigned to American Express prior to the Distribution. As further consideration for the sale of Shearson, LBI received 2,500,000 shares of 5.50% Convertible Preferred Stock, Series B, of Travelers and a warrant to purchase 3,749,466 shares of common stock of Travelers at an exercise price of $39 per share. In August 1993, American Express purchased such preferred stock and warrant from LBI for aggregate consideration of $150 million. The Company recognized a 1993 first quarter loss related to the Primerica Transaction of approximately $630 million after- tax ($535 million pre-tax), which amount includes a reduction in goodwill of $750 million and transaction-related costs such as relocation, systems and operations modifications and severance. Presented below are the results of operations and the loss on the sale of Shearson (in millions):
Three months ended Nine months ended September 30, 1993 September 30, 1993 ------------------ ------------------ Revenues $ 282 $1,825 Expenses 277 1,708 Loss on sale of Shearson 535 ------- ------ Income (loss) before taxes 5 (418) Provision for income taxes 3 149 -------- ------ Net income (loss) $ 2 $ (567) ======== =======
6. SALE OF SHEARSON LEHMAN HUTTON MORTGAGE CORPORATION: LBI completed the sale of its wholly owned subsidiary, Shearson Lehman Hutton Mortgage Corporation ("SLHMC") to GE Capital Corporation on August 31, 1993. The sales price, net of proceeds used to retire debt of SLHMC, was approximately $70 million. During the first quarter of 1993, the Company provided $120 million of pre-tax reserves in anticipation of the sale of SLHMC, which reserves are included in the $152 million of pre-tax reserves for non-core businesses on the Consolidated Statement of Operations. After accounting for these reserves, the sale did not have a material effect on the Company's results of operations. 7. SECURITIES AND OTHER FINANCIAL INSTRUMENTS: Securities and other financial instruments owned and Securities and other financial instruments sold but not yet purchased are summarized as follows (in millions):
August 31, December 31, 1994 1993 ----------- ------------ Securities and other financial instruments owned: Government and agency obligations $27,983 $15,065 Corporate obligations and other contractual commitments 9,405 10,103 Mortgage-backed 6,512 6,127 Corporate stocks and options 4,933 2,343 Certificates of deposit and other money market instruments 2,850 2,051 Spot commodities 66 10 ------- ------- $51,749 $35,699 ======= =======
14 15 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, December 31, 1994 1993 ------------ ------------- Securities and other financial instruments sold but not yet purchased: Government and agency obligations $9,201 $ 5,861 Corporate obligations and other contractual commitments 2,848 1,225 Corporate stocks and options 3,582 947 Spot commodities 262 280 ------ ------- $15,893 $ 8,313 ======= =======
8. PROVISION FOR INCOME TAXES: For the third quarter of 1994, the Company had an income tax provision of $11 million as compared to $60 million a year ago. The effective tax rate for the Company was 35% for the third quarter of 1994 as compared to 34% in the third quarter of 1993. The 1994 effective tax rate reflects state and local income taxes and the impact of certain non-deductible foreign losses partially offset by benefits attributable to income subject to preferential tax treatment. The 1993 effective tax rate reflects state and local income taxes offset by the impact of the tax rate change on the Company's net deferred tax assets and benefits attributable to foreign earnings and income subject to preferential tax treatment. For the first eight months of 1994, the Company reported a tax expense from continuing operations of $48 million and $269 million for the first nine months of 1993. The effective tax rate was 38% for the first eight months of 1994. The 1994 effective tax rate was greater than the statutory U.S. federal income tax rate principally due to state and local income taxes, the impact of certain non-deductible foreign losses, and the non-deductibility of certain expenses related to the Concurrent Transactions, partially offset by benefits attributable to income subject to preferential tax treatment. The tax provision for the first nine months of 1993 included expenses of (i) $215 million related to the operating results of Shearson and the businesses that now comprise Lehman Brothers, (ii) $95 million from the sale of Shearson (which resulted primarily from the write-off of $750 million of goodwill which was not deductible for tax purposes) and (iii) a benefit of $41 million related to the $120 million reserve for non- core businesses recorded in anticipation of the sale of SLHMC. 9. CHANGE IN ACCOUNTING PRINCIPLES: Postemployment Benefits. Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for Postemployment Benefits". SFAS No. 112 requires the accrual of obligations associated with services rendered to date for employee benefits accumulated or vested for which payment is probable and can be reasonably estimated. These benefits principally include the continuation of salary, health care and life insurance costs for employees on service disability leaves. The Company previously expensed the cost of these benefits as they were incurred. The cumulative effect of adopting SFAS No. 112 reduced net income for the first quarter of 1994 by $13 million after-tax ($23 million pre-tax). Excluding the cumulative effect of this accounting change, the effect of this change on the 1994 results of operations was not material. 15 16 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Offsetting of Certain Receivables and Payables. During the first quarter of 1994, the Company adopted Financial Accounting Standards Board Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts" ("FIN No. 39"). FIN No. 39 restricts the historical industry practice of offsetting certain receivables and payables. A substantial portion of the increase in the Company's gross assets and liabilities from December 31, 1993 to August 31, 1994 is due to the adoption of FIN No. 39. On September 30, 1994, the Financial Accounting Standards Board issued a draft modification to FIN No. 39 which, if enacted, will substantially mitigate the increase in the Company's gross assets and liabilities resulting from the implementation of FIN No. 39. 10. BORROWINGS: For the eight months ended August 31, 1994, the Company issued $2,537 million of senior notes (including $380 million of foreign currency denominated notes) and $540 million of subordinated indebtedness, with maturities ranging from 1995 to 2019. Of the total debt issued during the first eight months of 1994, $810 million were fixed rate with contractual interest rates ranging from 2.75% to 8.05%. The remainder of the issuances have contractual floating rates of interest which are based on a variety of indices, with the majority based on money market indices or the London Interbank Offered Rate (LIBOR). The holders of $208 million of debt issued during the first eight months of 1994 have the option to cause the Company to repurchase such debt on dates which range from 1994 to 1999, rather than at their contractual maturities which range from 1995 to 2019. Of the Company's 1994 floating rate issuances, $510 million are redeemable at par at the option of the Company commencing in 1994. The Company entered into interest rate swap contracts which effectively converted the interest rates on $1,195 million of its floating rate debt issued during the first eight months of 1994 to new floating rates based primarily on LIBOR. The Company also entered into interest rate swap contracts which effectively converted $52 million of its floating rate debt issued during 1994 to fixed rates. In addition, the Company entered into interest rate swap contracts which effectively converted $1,011 million of its fixed rate debt to floating rates based primarily on LIBOR. Included in this amount are $360 million of interest rate swap contracts which effectively converted fixed rate debt issued prior to 1994 to floating rates. In addition, the Company entered into cross currency swaps to effectively convert virtually all of its foreign currency denominated debt issued during the first eight months of 1994 to U.S. dollar denominated obligations. The proceeds of the Company's 1994 issuances have been used to provide additional liquidity and to refinance long-term debt maturing in 1994. During the eight months ended August 31, 1994, $2,061 million of long-term debt matured, including $1,767 million of senior notes and $294 million of subordinated indebtedness. 11. CAPITAL REQUIREMENTS: As registered broker-dealers, LBI and certain of Holdings other subsidiaries are subject to the Net Capital Rule (Rule 15c3-1, the "Rule") promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The New York Stock Exchange, Inc. and the National Association of Securities Dealers, Inc. monitor the application of the Rule by LBI and such subsidiaries, as the case may be. LBI and such subsidiaries compute net capital under the alternative method of the Rule which 16 17 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS requires the maintenance of minimum net capital, as defined. A broker-dealer may be required to reduce its business if net capital is less than 4% of aggregate debit balances or 6% of the funds required to be segregated pursuant to the Commodity Exchange Act (the "Commodity Act") and the regulations thereunder, if greater. A broker-dealer may also be prohibited from expanding its business or paying cash dividends if resulting net capital would be less than 5% of aggregate debit balances or 7% of the funds required to be segregated pursuant to the Commodity Act and the regulations thereunder, if greater. In addition, the Rule does not allow withdrawal of subordinated capital if net capital would be less than 5% of such debit balances or 7% of the funds required to be segregated pursuant to the Commodity Act and the regulations, thereunder, if greater. The Rule also limits the ability of broker-dealers to transfer large amounts of capital to parent companies and other affiliates. Under the Rule, equity capital cannot be withdrawn from a broker-dealer without the prior approval of the Commission when net capital after the withdrawal would be less than 25% of its securities positions haircuts (which are deductions from capital of certain specified percentages of the market value of securities to reflect the possibility of a market decline prior to disposition). In addition, the Rule requires broker-dealers to notify the Commission and the appropriate self-regulatory organization two business days before the withdrawal of excess net capital if the withdrawal would exceed the greater of $500,000 or 30% of the broker-dealer's excess net capital, and two business days after a withdrawal that exceeds the greater of $500,000 or 20% of excess net capital. Finally, the Rule authorizes the Commission to order a freeze on the transfer of capital if a broker-dealer plans a withdrawal of more than 30% of its excess net capital and the Commission believes that such a withdrawal would be detrimental to the financial integrity of the firm or would jeopardize the broker-dealer's ability to pay its customers. At August 31, 1994, LBI's net capital aggregated $1,263 million and was $1,205 million in excess of the minimum requirement. At August 31, 1994, Lehman Government Securities Inc., a wholly owned subsidiary of LBI, had net capital which aggregated $364 million and was $345 million in excess of the minimum requirement. The Company is subject to other domestic and international regulatory requirements. As of August 31, 1994, the Company believes it is in material compliance with all such requirements. 12. OTHER CHARGES: Spin-off expenses During the second quarter of 1994, the Company recorded a charge of $15 million pre-tax ($12 million after-tax) in connection with the Concurrent Transactions and certain related expenses. Reduction in Personnel During the first quarter of 1994, the Company completed a review of personnel needs, which resulted in the termination of certain personnel. The Company recorded a severance charge of $33 million pre-tax ($18 million after-tax) in the first quarter of 1994. 17 18 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Reserves for Non-Core Businesses During the first quarter of 1993, the Company provided $152 million pre-tax ($100 million after-tax) of non-core business reserves. Of this amount, $32 million pre-tax ($21 million after-tax) related to certain non-core partnership syndication activities in which the Company is no longer actively engaged. The remaining $120 million pre-tax ($79 million after-tax) related to reserves recorded in anticipation of the sale of SLHMC. Such sale was completed during the third quarter of 1993. 13. CHANGE OF FISCAL YEAR-END: On March 28, 1994, the Board of Directors of Holdings approved, subject to the Distribution, a change in the Company's fiscal year-end from December 31 to November 30. Such a change to a non-calendar cycle will shift certain year-end administrative activities to a time period that conflicts less with the business needs of the Company's institutional customers. In conjunction with the decision to change its year-end, the Company is reporting its third quarter results on the basis of its new fiscal year for the three months ended August 31, 1994. As such, the results for the month of June have been reflected in both the second and third quarters of 1994. With the decision to change its year-end, the Company anticipates that its financial statements for the eleven month transition period ending November 30, 1994, will be contained in a report on Form 10-K which is expected to be filed with the Commission on or about February 28, 1995. 18 19 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BUSINESS ENVIRONMENT The Company's principal business activities, investment banking and securities trading and sales, are by their nature subject to volatility, primarily due to changes in interest and foreign exchange rates, global and economic political trends and industry competition. As a result, revenues and earnings may vary significantly from quarter to quarter and from year to year. Interest rate uncertainties and inflationary concerns continued to dampen the activities of both issuers and investors, contributing to an overall softness in net revenues in 1994. Interest rates continued to rise, creating an unfavorable climate for both debt and equity new issues. Concerns over increasing interest rates and anticipated Federal Reserve actions had a negative effect on customer activity. Customers concentrated on short-term, high quality products in the fixed income area which typically provide reduced profit margins. Equity investors were equally defensive in posture. During 1993, the Company's operating results were achieved in a more favorable environment which was characterized by declining interest rates. The 1993 environment resulted in record levels of debt and equity issuances industrywide, along with record operating profits for companies in the industry. The Company believes market conditions experienced during the first eight months of 1994 will continue throughout the fourth quarter, resulting in lower revenues, profit margins, and profits as compared to the prior year. RESULTS OF OPERATIONS During 1993, the Company completed the sale of three businesses: The Boston Company, Shearson, and SLHMC which were completed on May 21, July 31, and August 31, 1993, respectively. The Company's 1993 operating results reflect The Boston Company as a discontinued operation, while the operating results of Shearson and SLHMC are included in the Company's 1993 results from continuing operations. Because of the significant sale transactions completed during 1993, the Company's 1993 historical financial statements are not fully comparable with the results of 1994. To facilitate an understanding of the Company's results, the following table separates the Company's 1993 results into three categories. These categories are as follows: - Historical Results: the results of the businesses that now comprise Lehman Brothers; the results of Shearson and SLHMC through their respective sale dates; the loss on the sale of Shearson; the reserves for non-core businesses; and the results of The Boston Company (accounted for as a discontinued operation). - The Lehman Businesses: the results of the businesses that now comprise Lehman Brothers. - Businesses Sold: the results of Shearson and SLHMC; the loss on the sale of Shearson; and the reserves for non-core businesses related to the sale of SLHMC. 19 20 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three months ended ------------------------------------------------------------------------ August 31, 1994 September 30, 1993 --------------- ----------------------------------------------- (UNAUDITED) Lehman Lehman Businesses (IN MILLIONS) Businesses Businesses Sold Historical ---------- ---------- ---------- ---------- Revenues: Market making and principal transactions $ 335 $ 443 $ 41 Investment banking 172 186 47 Commissions 113 126 118 Interest and dividends 1,901 1,510 25 Other 16 21 67 ------ ------ ------ Total revenues 2,537 2,286 298 Interest expense 1,818 1,393 18 ------ ------ ------ Net revenues 719 893 280 $1,173 ------ ------ ------ ------ Non-interest expenses: Compensation and benefits 388 445 180 Other expenses 298 279 95 ------ ------ ------ Total non-interest expenses 686 724 275 999 ------ ------ ------ ------ Income before taxes 33 169 5 174 Provision for income taxes 11 57 3 60 ------ ------ ------ ------ Net income $ 22 $ 112 $ 2 $ 114 ====== ====== ====== ======
Eight months ended Nine months ended August 31, 1994 September 30, 1993 ------------------ -------------------------------------------------- (UNAUDITED) Lehman Lehman Businesses (IN MILLIONS) Businesses Businesses Sold Historical ---------- ---------- ---------- ---------- Revenues: Market making and principal transactions $1,054 $1,350 $ 323 Investment banking 421 556 171 Commissions 332 361 828 Interest and dividends 4,547 4,227 161 Other 41 60 412 ------ ------ ------ Total revenues 6,395 6,554 1,895 Interest expense 4,365 3,899 143 ------ ------ ------ Net revenues 2,030 2,655 1,752 $4,407 ------ ------ ------ ------ Non-interest expenses: Compensation and benefits 1,057 1,382 1,164 Other expenses 797 839 471 Loss on sale of Shearson 535 Reserves and other charges 48 32 120 ------ ------ ------ Total non-interest expenses 1,902 2,253 2,290 4,543 ------ ------ ------ ------ Income (loss) from continuing operations before taxes and cumulative effect of change in accounting principle 128 402 (538) (136) Provision for income taxes 48 161 108 269 ------ ------ ------ ------ Income (loss) from continuing operations before cumulative effect of change in accounting principle $ 80 $ 241 $(646) $(405) ======= ====== ===== =====
20 21 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED AUGUST 31, 1994 AND SEPTEMBER 30, 1993 - ----------------------------------------------------------------- The Company reported net income of $22 million for the third quarter ended August 31, 1994, as compared to net income of $114 million for the third quarter ended September 30, 1993. The 1993 net income of $114 million was comprised of net income from the Lehman Businesses of $112 million and net income from the Businesses Sold of $2 million. Earnings per share in the third quarter of 1994 were $0.10. Earnings per share of $0.96 for the third quarter of 1993 were comprised of $0.94 for the Lehman Businesses and $0.02 for the Businesses Sold, as adjusted for the number of shares of Common Stock outstanding on May 31, 1994. THE LEHMAN BUSINESSES FOR THE THREE MONTHS ENDED AUGUST 31, 1994 AND SEPTEMBER 30, 1993 - ----------------------------------------------------------------- Summary. Net income for the Lehman Businesses decreased 80% to $22 million for the third quarter of 1994 from $112 million in the third quarter of 1993. Net revenues from the Lehman Businesses decreased 19% to $719 million in the third quarter of 1994 from $893 million in the prior year. Total non-interest expenses decreased 5% to $686 million in the third quarter of 1994 from $724 million in the third quarter of 1993, primarily due to decreased compensation and benefits expense. The Company's effective tax rate was 35% for the third quarter of 1994 compared to 34% for the Lehman Businesses in the third quarter of 1993. Market Making and Principal Transactions. Market making and principal transactions include the results of the Company's market making and trading related to customer activities, as well as proprietary trading for the Company's own account. Revenues from these activities encompass net realized and mark-to-market gains and losses on securities and other financial instruments owned, as well as securities and other financial instruments sold but not yet purchased. The Company utilizes various hedging strategies as it deems appropriate to minimize its exposure to significant movements in interest and foreign exchange rates. Market making and principal transactions revenues decreased 24% to $335 million for the third quarter of 1994 from $443 million in the third quarter of 1993. The third quarter 1994 results were affected by market uncertainties which reduced the levels of customer flow activity and, in turn, resulted in lower revenues across most major product lines. Investment Banking. Investment banking revenues decreased 8% to $172 million for the third quarter of 1994 from $186 million in the prior year period, due to lower origination volumes partially offset by increased revenues associated with merchant banking activities and improved results from strategic advisory activities. Commissions. Commission revenues decreased 10% to $113 million in the third quarter of 1994 from $126 million in the third quarter of 1993, reflecting lower volumes of customer trading in listed securities. Commission revenues are generated from the Company's agency activities on behalf of corporations, institutions and high net worth individuals. 21 22 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Interest and Dividends. Interest and dividend revenues increased 26% to $1,901 million in the third quarter of 1994 from $1,510 million in the third quarter of 1993. However, net interest and dividend income decreased 29% to $83 million in the third quarter of 1994 from $117 million in the third quarter of 1993. Net interest and dividend revenue amounts are closely related to the Company's trading activities. The Company evaluates its trading strategies on an overall profitability basis which includes both market making and principal transactions and net interest. Therefore, changes in net interest and dividend revenue from period to period should not be viewed in isolation but should be viewed in conjunction with revenues from market making and principal transactions. Net interest and dividend revenue is impacted by the balance sheet size and mix of assets, the amount and mix of short and long-term funding sources, as well as the prevailing level, term structure and volatility of interest rates. The 1994 decrease in net interest and dividend revenue was due in part to reduced spreads on fixed income products and increased funding costs to the Company as a result of the higher interest rate environment. The 1994 decrease in net interest and dividend revenue was partially offset by reduced funding costs due to the $1.2 billion infusion of capital as a result of the Distribution. Non-Interest Expenses. Compensation and benefits expense decreased 13% to $388 million in the third quarter of 1994 from $445 million in the third quarter of 1993, consistent with the lower level of business activity in the third quarter. Compensation and benefits expense as a percentage of net revenues increased to 53.9% in the third quarter of 1994 from 49.9% in the third quarter of 1993. Non-interest expenses were $686 million in the third quarter of 1994, as compared to $724 million in the third quarter of 1993. Excluding compensation and benefits, non-interest expenses increased 7% to $298 million in the third quarter of 1994. The increase in such expenses, which are less sensitive to business volumes, are due to ongoing investments in the Company's international businesses. Income Taxes. For the third quarter of 1994, the Lehman Businesses had an income tax provision of $11 million as compared to $57 million for the third quarter of 1993. The effective tax rate for the Lehman Businesses was 35% for the third quarter of 1994 as compared to 34% in the third quarter of 1993. The 1994 effective tax rate reflects state and local income taxes and the impact of certain non-deductible foreign losses partially offset by benefits attributable to income subject to preferential tax treatment. The 1993 effective tax rate reflects state and local income taxes offset by the impact of the rate change on the Company's net deferred tax assets and benefits attributable to overseas earnings and income subject to preferential tax treatment. RESULTS OF OPERATIONS FOR THE EIGHT MONTHS ENDED AUGUST 31, 1994 AND THE NINE MONTHS - -------------------------------------------------------------- ENDED SEPTEMBER 30, 1993 - ------------------------ The Company reported net income of $67 million for the first eight months of 1994. The 1994 results included a $13 million after-tax charge for the cumulative effect of a change in accounting for postemployment benefits as a result of the adoption of SFAS No. 112, an $18 million after-tax severance charge and a $12 million after-tax charge in connection with the Concurrent Transactions and certain expenses related to the May 31, 1994 divestiture from American Express (the "Spin-off Charge"). In 1993, the Company reported a net loss of $216 million comprised of net income from the Lehman Businesses of $241 million, net income of $189 million from the discontinued operations of The Boston 22 23 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Company, including a $165 million after-tax gain on the sale and after-tax earnings of $24 million, and a net loss from the Businesses Sold of $646 million, which included an after-tax loss on the sale of Shearson of $630 million ($535 million pre-tax), an after-tax charge of $79 million ($120 million pre-tax) related to a reserve for non-core businesses recognized in anticipation of the sale of SLHMC, and operating earnings from Shearson of $63 million. The loss on the sale of Shearson included a reduction in goodwill of $750 million and transaction-related costs such as relocation, systems and operations modifications and severance. Earnings per common share for the first eight months of 1994 were $0.49 before the cumulative effect of change in accounting principle and were $0.37 after the cumulative effect of change in accounting principle. Earnings per common share for the first nine months of 1993, as adjusted for the number of shares of common stock outstanding on May 31, 1994, were a loss of $2.38 comprised of earnings of $1.94 for the Lehman businesses, a loss of $6.11 for the Businesses Sold and earnings of $1.79 for the discontinued operations of The Boston Company. THE LEHMAN BUSINESSES FOR THE EIGHT MONTHS ENDED AUGUST 31, 1994 AND NINE MONTHS - ---------------------------------------------------------- ENDED SEPTEMBER 30, 1993 - ------------------------ Summary. Net income for the Lehman Businesses was $67 million for the first eight months of 1994. Net income for 1994 included a $13 million ($23 million pre-tax) charge for the cumulative effect of a change in accounting principle, an $18 million ($33 million pre-tax) severance charge and a $12 million ($15 million pre-tax) Spin-off charge. Excluding these charges, net income before the cumulative effect of change in accounting principle for the Lehman Businesses was $110 million in the first eight months of 1994. Net income for the first nine months of 1993 was $241 million which included a $21 million ($32 million pre-tax) reserve for certain non-core partnership syndication activities in which the Company is no longer actively engaged. Excluding this charge, net income for the first nine months of 1993 was $262 million. Net revenues were $2,030 million for the first eight months of 1994 and $2,655 million for the first nine months of 1993. Market Making and Principal Transactions. Market making and principal transactions revenues were $1,054 million for the first eight months of 1994 and $1,350 million for the first nine months of 1993. Ongoing market uncertainties lowered the levels of customer flow activity resulting in lower revenues across most major product lines. Investment Banking. Investment banking revenues were $421 million for the first eight months of 1994 and $556 million for the first nine months of 1993. Investment banking revenues in 1994 were adversely affected by lower origination volumes and a significantly reduced syndicate calendar in both equities and fixed income, partially offset by increased revenues associated with merchant banking activities and improved results from strategic advisory activities. Commissions. Commission revenues were $332 million for the first eight months of 1994 and $361 million for the first nine months of 1993. Commission revenues are generated from the Company's agency activities on behalf of corporations, institutions and high net worth individuals. 23 24 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Interest and Dividends. Interest and dividend revenues were $4,547 million for the first eight months of 1994 and $4,227 million for the first nine months of 1993. Net interest and dividend income was $182 million for the first eight months of 1994 and $328 million for the first nine months of 1993. Net interest and dividend revenues for the current year were adversely affected by reduced spreads on fixed income products and increased funding costs to the Company as a result of the higher interest rate environment. Non-Interest Expenses. Compensation and benefits expense was $1,057 million for the eight months ended August 31, 1994 and $1,382 million for the nine months ended September 30, 1993. Compensation and benefits expense as a percentage of net revenues was 52.1% for 1994, unchanged from the prior year period. Non-interest expenses were $1,902 million for the first eight months of 1994 and $2,253 million for the first nine months of 1993. Excluding compensation and benefits expense, non-interest expenses were $845 million for the eight months ended August 31, 1994 and $871 million for the nine months ended September 30, 1993. Included in the 1994 results was a severance charge of $33 million and a $15 million Spin-off Charge. The 1993 results included a $32 million charge related to certain non-core partnership syndication activities in which the Company is no longer actively engaged. Excluding these charges, other non-interest expenses were $797 million for the first eight months of 1994 and $839 million_for the first nine months of 1993. The Company remains committed to its expense reduction efforts and the ongoing review of its expense structure. Throughout 1994, the Company has taken actions to reduce its headcount to approximately 8,900 as of August 31, 1994 from approximately 9,300 at December 31, 1993. Subsequent to these reductions, the Company has taken actions that will further reduce its headcount to approximately 8,500. The Company continues to review its expense base in order to be proactive in reducing costs in the current environment. Income Taxes. For the first eight months of 1994, the Lehman Businesses had an income tax provision of $48 million and $161 million for the first nine months of 1993. The effective tax rate for the Lehman Businesses was 38% for the first eight months of 1994 and 40% for the first nine months of 1993. The lower rate in 1994 reflects the reduction in pre-tax results, an increase in benefits attributable to income subject to preferential tax treatment, partially offset by the impact of certain non-deductible foreign losses and the non-deductibility of a portion of the Spin-off Charge. As of August 31, 1994, the Company had approximately $140 million of tax NOLs available to offset future taxable income, the benefits of which have not yet been reflected in the financial statements. It is anticipated that a portion of these benefits will be recognized in the fourth quarter of 1994. The benefits when recognized will be reflected as a reduction to goodwill. 24 25 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Total assets increased to $121.2 billion at August 31, 1994 from $80.5 billion at December 31, 1993. A substantial portion of this increase was due to the adoption of FIN No. 39, which restricts the historical industry practice of offsetting certain receivables and payables. (See Note 9.) The Company's asset base consists primarily of cash and cash equivalents and assets which can be sold within one year, including securities and other financial instruments owned, collateralized short-term agreements and receivables. Long-term assets consist primarily of other receivables, which include a $945 million interest bearing receivable from American Express due in 1996, property, equipment and leasehold improvements, deferred expenses and other assets, and excess of cost over fair value of net assets acquired. The Company finances its short-term assets primarily on a secured basis through the use of securities sold under agreements to repurchase, securities loaned, securities and other financial instruments sold but not yet purchased and other collateralized liability structures. The Company uses short-term unsecured borrowing sources to fund short-term assets not financed on a secured basis. The Company's primary sources of short-term, unsecured general purpose funding include commercial paper and short-term debt, including master notes and bank borrowings under uncommitted lines of credit. Commercial paper and short-term debt outstanding totaled $13.0 billion at August 31, 1994, compared to $11.2 billion at December 31, 1993. Of these amounts, commercial paper outstanding totaled $2.1 billion at August 31, 1994, compared to $2.6 billion at December 31, 1993. At August 31, 1994, Holdings had $2.5 billion of unused committed bank credit lines to support its commercial paper programs. The Company's uncommitted lines of credit provide an additional source of short-term financing. At August 31, 1994, the Company had $11.9 billion in uncommitted lines of credit compared to $10.8 billion at December 31, 1993. Uncommitted lines consist of facilities that the Company has been advised are available but for which no contractual lending obligation exists. Long-term assets are financed with a combination of long-term debt and equity. The Company's long-term unsecured funding sources are senior notes and subordinated indebtedness. The Company maintains long-term debt in excess of its long-term assets to provide additional liquidity, which the Company uses to meet its short-term funding requirements and to reduce its reliance on commercial paper and short-term debt. For the eight months ended August 31, 1994, the Company issued approximately $3.1 billion in long-term debt, of which $810 million was fixed rate and the remainder was variable rate. The proceeds of the Company's 1994 issuances have been used to provide additional liquidity and to refinance long-term debt maturing in 1994. The Company entered into interest rate swap contracts which effectively converted the interest rates on approximately $1.2 billion of its floating rate debt issued during the first eight months of 1994 into new floating rates based primarily on LIBOR. The Company also entered into interest rate swap contracts which effectively converted $52 million of 1994 floating rate issuances to 25 26 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS fixed rates. In addition, the Company entered into interest rate swap contracts which effectively converted approximately $1.0 billion of its fixed rate debt to floating rates based primarily on LIBOR. Included in this amount are $360 million of interest rate swap contracts which effectively converted fixed rate debt issued prior to 1994 to floating rates. At August 31, 1994, the Company had long-term debt outstanding of approximately $10.8 billion compared to approximately $9.9 billion outstanding at December 31, 1993. At August 31, 1994, the Company had approximately $2.2 billion available for issuance of debt securities under various shelf registrations. On September 21, 1994, Standard & Poor's (S&P) affirmed the short and long-term ratings of the Company. However, in light of weaker market conditions resulting from interest rate uncertainties and inflationary concerns, S&P has revised the long-term debt outlook of the Company from stable to negative. Furthermore, S&P indicated that weak or volatile earnings over the next few quarters could lead to a rating downgrade. Other rating agencies either took no action or affirmed the Company's existing ratings. In the event of a downgrade, there would be a negative impact on the Company's funding costs and a potential for reduced access to borrowings. Pursuant to a clearing agreement (the "Clearing Agreement"), Smith Barney carries and clears, on a fully disclosed basis, all accounts introduced to it by Lehman Brothers, and performs clearing and settlement functions for equities, municipal securities and corporate debt securities. The Clearing Agreement expires on December 31, 1994, but may be extended for up to an additional six months. On October 12, 1994, the Company and Bear Stearns Securities Corp. ("BSSC") entered into an agreement pursuant to which BSSC has agreed to provide to the Company transaction support services to enable the Company to clear the transactions currently cleared by Smith Barney in a manner which would result in the accounts currently carried by Smith Barney being carried on the Company's books (the "BSSC Agreement"). The BSSC Agreement is currently anticipated to take effect during the first half of 1995 and will run for a term of five years. At August 31, 1994 the balance sheet would have increased by approximately $12 billion had this arrangement been in effect. To broaden and increase the level of employee ownership in Holdings, the Compensation Committee approved the Stock Award Program pursuant to which it awarded, subject to vesting provisions and transfer restrictions, 5.2 million Employee RSUs and determined to award the Executive RSUs to the executive officers of Lehman Brothers if certain performance goals are achieved. The Employee RSUs and the Executive RSUs will comprise part of the bonuses awarded for 1994. Stockholders' equity increased by approximately $78 million (prior to forfeitures) with respect to the award of Employee RSUs; however, the number of Executive RSUs to be awarded, if any, will be determined upon completion of the performance period. Holdings will meet the share requirements for the Stock Award Program and other Common Stock based compensation and benefit plans by repurchasing shares in the open market or issuing common stock. On September 6, 1994, the Company announced an odd-lot buyback program for stockholders who own less than 100 shares on such date. Approximately 817,000 shares were tendered by the October 11, 1994 deadline. The Company extended this buyback program to November 15, 1994. 26 27 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SPECIFIC BUSINESS ACTIVITIES AND TRANSACTIONS The following sections include information on specific business activities of the Company which affect overall liquidity and capital resources: Merchant Banking Partnerships. At August 31, 1994, the Company's investment in merchant banking partnerships was $409 million, which included $134 million in one employee-related partnership in which the Company, as general partner, is entitled to a priority return. At August 31, 1994, the Company had commitments to make investments through merchant banking partnerships of approximately $11 million. The Company's policy is to carry its interests in merchant banking partnerships at fair value based upon the Company's assessment of the underlying investments. The Company's merchant banking investments, made primarily through a series of partnerships are consistent with the terms of those partnerships, expected to be sold or otherwise monetized during the remaining term of the partnerships. Westinghouse. In May 1993, the Company and Westinghouse Electric Corporation ("Westinghouse") entered into a partnership to facilitate the disposition of Westinghouse's commercial real estate portfolio valued at approximately $1.1 billion, to be accomplished substantially through securitizations and asset sales. The Company invested approximately $154 million in the partnership, and also made collateralized loans to the partnership of $752 million. During the third quarter of 1993, Lennar Inc. was appointed portfolio servicer and purchased a 10% limited partnership interest from the Company and Westinghouse. At August 31, 1994, the carrying value of the Company's investment in the partnership was $172 million and the outstanding balance of the collateralized loans, including accrued interest, was $175 million. The remaining loan balance is expected to be recovered during the fourth quarter of 1994 and the related investment should be fully recovered by the second half of 1995 through a combination of securitizations, asset sales, mortgage remittances and refinancings by third parties. High Yield Securities. The Company underwrites, trades, invests and makes markets in high yield corporate debt securities. The Company also syndicates, trades and invests in loans to below investment grade companies. For purposes of this discussion, high yield debt securities are defined as securities or loans to companies rated below BBB- by S&P and below Baa3 by Moody's Investor Services, Inc., as well as non-rated securities or loans which, in the opinion of management, are non-investment grade. High yield debt securities are carried at market value and unrealized gains or losses for these securities are reflected in the Company's Consolidated Statement of Operations. The Company's portfolio of such securities at August 31, 1994 and December 31, 1993 included long positions with an aggregate market value of approximately $1.2 billion and $1.0 billion, respectively, and short positions with an aggregate market value of approximately $82 million and $75 million, respectively. The portfolio may from time to time contain concentrated holdings of selected issues. The Company's two largest high yield positions were $232 million and $36 million at August 31, 1994 and $179 million and $82 million at December 31, 1993. 27 28 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Change in Facilities. In 1993, the Company agreed to lease approximately 392,000 square feet of office space located at 101 Hudson Street in Jersey City, New Jersey (the "Operations Center"). The lease term commenced in August 1994 and provides for minimum rental payments of approximately $87 million over its 16-year term. Concurrently, the Company relocated certain administrative employees to five additional floors at 3 World Financial Center in New York, New York. These floors were purchased from American Express for approximately $44 million through an assumption of a portion of the existing debt related to the World Financial Center. Non-Core Activities and Investments. In March 1990, the Company discontinued the origination of partnerships (the assets of which are primarily real estate) and investments in real estate. Currently, the Company acts as a general partner for approximately $4.2 billion of partnership investment capital and manages the remaining real estate investment portfolio. At August 31, 1994, the Company had net exposure to these investments (defined as the remaining unreserved investment balance plus outstanding commitments and contingent liabilities under guarantees and credit enhancements) of $221 million. In certain circumstances, the Company provides financial and other support and assistance to such investments to maintain investment values. There is no contractual requirement that the Company continue to provide this support. Although a decline in the real estate market or the economy in general or a change in the Company's disposition strategy could result in additional real estate reserves, the Company believes that it is adequately reserved. The Company has equity, partnership and debt investments made in previous years that are unrelated to its ongoing businesses. The Company holds long-term subordinated indebtedness and equity securities of American Marketing Industries Holding Inc. ("AMI"). The subordinated debt, as amended, matures in 1997, and includes certain provisions which limit cash interest payments and provides for payment-in-kind securities above such cash interest payments. The AMI loan is current in payment in accordance with its terms. The Company has other investments that are also awaiting their disposition or the occurrence of certain events which will ultimately lead to their liquidation. The Company carries these equity, partnership and debt investments at their estimated net realizable value, which approximates $195 million at August 31, 1994. Certain non-core assets, including the Company's remaining investment in Computervision Corporation, were sold during the second quarter of 1994. Management's intention with regard to non-core assets is the prudent liquidation of these investments as and when possible. SPIN-OFF OF LEHMAN BROTHERS - --------------------------- On May 31, 1994, American Express effected a special dividend to its common shareholders of record on May 20, 1994, of approximately 98.3 million shares of Common Stock. (See Note 2.) As a result of the Distribution, Holdings became a widely held public corporation with its Common Stock traded on the New York Stock Exchange Inc. 28 29 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS - -------------------------- Lehman Brothers is involved in a number of judicial, regulatory and arbitration proceedings concerning matters arising in connection with the conduct of its business. Such proceedings include actions brought against LBI and others with respect to transactions in which LBI acted as an underwriter or financial advisor, actions arising out of LBI's activities as a broker or dealer in securities and commodities and actions brought on behalf of various classes of claimants against many securities and commodities firms of which LBI is one. Although there can be no assurance as to the ultimate outcome, Lehman Brothers has denied, or believes it has meritorious defenses and will deny, liability in all significant cases pending against it including the matters described below, and intends to defend vigorously each such case. Although there can be no assurance as to the ultimate outcome, based on information currently available and established reserves, the Company believes that the eventual outcome of the actions against it, including the matters described below, will not, in the aggregate, have a material adverse effect on its business or consolidated financial condition. General Acquisition, Inc. et al. v. GenCorp, Inc. et al. (Reported in Holdings' Annual Report on Form 10-K and First and Second Quarter Reports on Form 10-Q) The parties have settled all actions among them. Bamaodah v. E.F. Hutton & Company Inc. (Reported in Holdings' Annual Report on Form 10-K and First and Second Quarter Reports on Form 10-Q) The Company has appealed the judgment of the Dubai Court of Appeals to the Court of Cassation. The appeal is expected to be argued on October 23, 1994. Ralph Majeski, et al. v. Balcor Entertainment Company, Ltd. et al.; Robert Eckstein, et al. v. Balcor Film Investors, et al. (Reported in Holdings' Annual Report on Form 10-K and First and Second Quarter Reports on Form 10-Q) On August 31, 1994, the Wisconsin District Court granted the defendants' motions for summary judgment and dismissed both the Majeski and Eckstein cases with prejudice. Paul Williams and Beverly Kennedy, et al. v. Balcor Pension Investors et al. (Reported in Holdings' Annual Report on Form 10-K and First and Second Quarter Reports on Form 10-Q) The United States District Court for the Northern District of Illinois granted plaintiffs' motion for class certification and defendants moved for reconsideration. Glynwil Investment, Ltd. v. Shearson Lehman Brothers Inc. (Reported in Holdings' Annual Report on Form 10-K and First and Second Quarter Reports on Form 10-Q) 29 30 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS (CONTINUED) ----------------- LBI has moved for summary judgment. The New York court has set a trial date of October 31, 1994. Actions Relating to First Capital Holdings Inc. (Reported in Holdings' Annual Report on Form 10-K) The Bankruptcy Court Action. A trial of limited issues specified by the court commenced September 22, 1994 and is continuing. 30 31 EXHIBITS AND REPORTS ON FORM 8-K - -------------------------------- The following exhibits and reports on Form 8-K are filed as part of this Quarterly Report, or where indicated, were heretofore filed and are hereby incorporated by reference: (a) Exhibits: 11. Computation of Per Share Earnings. 12. Computation in Support of Ratio of Earnings to Fixed Charges. 27. Financial Data Schedule BD. 99. Pro Forma Consolidated Statement of Operations for the eight months ended August 31, 1994. (b) Reports on Form 8-K: 1. Form 8-K filed September 2, 1994, Items 5 and 7. 2. Form 8-K filed September 22, 1994, Items 5 and 7. 31 32 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LEHMAN BROTHERS HOLDINGS INC. ---------------------------- (Registrant) Date: October 17, 1994 By /s/ Richard S. Fuld, Jr. --------------------------- Richard S. Fuld, Jr. Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: October 17, 1994 By /s/ Robert Matza --------------------------- Robert Matza Chief Financial Officer (Principal Financial Officer) 32 33 EXHIBIT INDEX
EXHIBIT NO. EXHIBIT PAGE NO. - ----------- ------- -------- Exhibit 11 Computation of Per Share Earnings. Exhibit 12 Computation in Support of Ratio of Earnings to Fixed Charges. Exhibit 27. Financial Data Schedule BD. Exhibit 99 Pro Forma Consolidated Statement of Operations for the eight months ended August 31, 1994.
33 EX-11 2 COMPUTATION OF PER SHARE EARNINGS 1 Exhibit 11 2 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS (UNAUDITED) (IN MILLIONS, EXCEPT SHARE DATA)
Three months Three months Eight months Nine months ended ended ended ended August 31, September 30, August 31, September 30, 1994 1993 1994 1993 -------------- ---------------- --------------- --------------- PRIMARY: Weighted average shares outstanding: Common stock 105,555,348 105,608,423 105,588,233 105,608,423 Common stock equivalents: Restricted stock units 3,559,208 73,056 1,392,916 73,056 ----------- ----------- ----------- ----------- Total common stock and common stock equivalents 109,114,556 105,681,479 106,981,149 105,681,479 =========== =========== =========== =========== Income (loss) from continuing operations before before cumulative effect of change in accounting principle $22.0 $113.8 $79.7 $(405.4) Net income from discontinued operations 189.4 Cumulative effect of change in accounting principle (12.7) ----------- ----------- ----------- ----------- Net income (loss) 22.0 113.8 67.0 (216.0) Preferred dividends (11.0) (12.0) (27.0) (36.0) ----------- ----------- ----------- ----------- Net income (loss) applicable to common stock $11.0 $101.8 $40.0 $(252.0) =========== =========== =========== =========== EARNINGS PER SHARE: Income (loss) from continuing operations before cumulative effect of change in accounting principle $.10 $.96 $.49 $(4.17) Discontinued operations 1.79 Cumulative effect of change in accounting principle (.12) ----------- ----------- ----------- ----------- Earnings per common share $.10 $.96 $.37 $(2.38) =========== =========== =========== =========== FULLY DILUTED: Weighted average shares outstanding: Common stock 105,555,348 105,608,423 105,588,233 105,608,423 Common stock equivalents: Restricted stock units 3,559,208 73,056 1,392,916 73,056 ----------- ----------- ----------- ----------- Total common stock and common stock equivalents 109,114,556 105,681,479 106,981,149 105,681,479 =========== =========== =========== =========== Income (loss) from continuing operations before before cumulative effect of change in accounting principle $22.0 $113.8 $79.7 $(405.4) Net income from discontinued operations 189.4 Cumulative effect of change in accounting principle (12.7) ----------- ----------- ----------- ----------- Net income (loss) 22.0 113.8 67.0 (216.0) Preferred dividends (11.0) (12.0) (27.0) (36.0) ----------- ----------- ----------- ----------- Net income (loss) applicable to common stock $11.0 $101.8 $40.0 $(252.0) =========== =========== =========== =========== EARNINGS PER SHARE: Income (loss) from continuing operations before cumulative effect of change in accounting principle $.10 $.96 $.49 $(4.17) Discontinued operations 1.79 Cumulative effect of change in accounting principle (.12) ----------- ----------- ----------- ----------- Earnings per common share $.10 $.96 $.37 $(2.38) =========== =========== =========== ===========
EX-12 3 COMPUT. IN SUPPORT OF RATIO OF EARNINGS TO FC 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 Eight Months Ended For the Year Ended December 31, August 31, ----------------------------------------------------- ------------ 1989 1990 1991 1992 1993 1994 ---- ---- ---- ---- ---- ---- Fixed charges: Interest expense: Subordinated indebtedness $ 259 $ 203 $ 170 $ 150 $ 144 $ 102 Bank loans and other borrowings* 5,625 4,531 4,755 5,035 5,224 4,263 Interest component of rentals of office and equipment 68 62 70 74 76 30 Other adjustments** 25 8 2 2 7 1 ------ ------ ------ ------ ------ ------- TOTAL (A) $5,977 $4,804 $4,997 $5,261 $5,451 $4,396 ====== ====== ====== ====== ====== ====== Earnings: Pre-tax income (loss) from continuing operations $ 107 $ (749) $ 150 $ (247) $ 27 $ 128 Fixed charges 5,977 4,804 4,997 5,261 5,451 4,396 Other adjustments*** (39) (17) 7 (6) (1) ------ ------ ------ ------ ------ ------- TOTAL (B) $6,045 $4,038 $5,154 $5,014 $5,472 $4,523 ====== ====== ====== ====== ====== ====== (B / A) 1.01 **** 1.03 **** 1.00 1.03
* 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-27 4 FINANCIAL DATA SCHEDULE
BD LEHMAN BROTHERS HOLDINGS INC. This schedule contains summary financial information extracted from the Consoldiated Balance Sheet at August 31, 1994 (Unaudited) and the Consolidated Statement of Operations for the eight months ended August 31, 1994 (Unaudited) and is qualified in its entirety by reference to such financial statements. 1,000,000 8-MOS NOV-30-1994 JAN-01-1994 AUG-31-1994 $2,265 $12,078 $44,569 $9,093 $51,749 $607 $121,246 $13,000 $5,752 $67,826 $1,988 $15,893 $10,827 $11 $0 $708 $2,641 $121,246 $1,054 $4,547 $332 $421 $0 $4,365 $1,057 $128 $80 $0 $(13) $67 $0.37 $0.37
EX-99 5 PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS 1 Exhibit 99 2 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE DATA)
Eight months ended August 31, 1994 --------------------------------------------------------- Pro Forma ---------------------------------- Actual Adjustments Total ------ ----------- ------ Revenues Market making and principal transactions $ 1,054 $ $ 1,054 Investment banking 421 421 Commissions 332 332 Interest and dividends 4,547 4,547 Other 41 41 ------- -------- ------- Total revenues 6,395 6,395 Interest expense 4,365 (18) (a) 4,347 ------- -------- ------- Net revenues 2,030 18 2,048 ------- -------- ------- Non-interest expenses Compensation and benefits 1,057 1,057 Brokerage, commissions and clearance fees 178 178 Communications 135 135 Professional services 122 122 Occupancy and equipment 115 115 Depreciation and amortization 86 86 Advertising and market development 85 85 Other 76 76 Severance charge 33 33 Spin-off expenses 15 (15) (b) ------- -------- ------- Total non-interest expenses 1,902 (15) 1,887 ------- -------- ------- Income before taxes and cumulative effect of change in accounting principle 128 33 161 Provision for income taxes 48 10 (c) 58 ------- -------- ------- Income before cumulative effect of change in accounting principle 80 23 103 ------- -------- ------- Preferred stock dividends 27 1 (d) 28 ------- -------- ------- Income before cumulative effect of change in accounting principle applicable to common stock $ 53 $ 22 $ 75 ======= ======== ======= Number of shares used in earnings per share computation (e) 110.9 ======= Pro forma earnings per common share $ .68 =======
See notes to pro forma consolidated financial statements. 1 3 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS 1. Basis of Reporting The pro forma financial data has been prepared by the Company based on certain adjustments to the consolidated financial statements of the Company. The pro forma statement of operations reflects adjustments for the Concurrent Transactions and the Stock Award Program as if such transactions had occurred on the first day of the period reported on. The pro forma financial data does not purport to present the results of operations of the Company had the Concurrent and Stock Award Program Transactions actually occurred as of such dates, nor is it necessarily indicative of results of operations that may be achieved in the future. To broaden and increase the level of employee ownership in Holdings, the Compensation Committee approved the Stock Award Program pursuant to which it awarded, subject to vesting provisions and transfer restrictions, 5.2 million Employee RSUs and determined to award the Executive RSUs to the executive officers of Lehman Brothers if certain performance goals are achieved. The Employee RSUs and the Executive RSUs will comprise part of the bonuses awarded for 1994. Stockholders' equity increased by approximately $78 million (prior to forfeitures) with an offsetting decrease in accrued liabilities with respect to the award of the Employee RSUs; however, the number of Executive RSUs to be awarded, if any, will be determined upon completion of the performance period. Holdings will meet the share requirements for the Stock Award Program and other Common Stock based compensation and benefit plans by repurchasing shares in the open market or issuing such shares. PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS: The pro forma adjustments to the statement of operations give effect to the items described below: (a) Reduced interest expense of approximately $18 million in the first eight months of 1994, resulting from the utilization of the cash proceeds to the Company from the Equity Investment. (b) The elimination of the charges which resulted from the Concurrent Transactions and certain related expenses. (c) Adjustment (a) above, tax effected at an assumed rate of 40% plus the actual tax expense on (b) above. 2 4 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED) (d) Elimination of the dividend on the Money Market Cumulative Preferred Stock partially offset by the addition of the dividend on the Cumulative Preferred Stock. Holders of the Redeemable Preferred Stock will be entitled to receive, in the aggregate, an annual dividend equal to 50% of the Company's net income in excess of $400 million per year, with a maximum dividend of $50 million per year, for each of the next eight years commencing on or about the distribution Date. On a pro forma basis, no such dividends would have been payable in 1994. (e) The number of shares used in the earnings per share computation includes the weighted average common stock outstanding for the eight months ended August 31, 1994, of 105,588,233, the 73,056 RSUs awarded as of the Distribution (See Note 3) and the 5,200,000 Employee RSUs awarded July 1, 1994. The Employee RSUs although not awarded until July 1, 1994, are assumed outstanding from January 1, 1994 for the pro forma statement of operations. 3 -----END PRIVACY-ENHANCED MESSAGE-----