Exhibit 13.2
LEHMAN BROTHERS 1995 ANNUAL REPORT
CONSOLIDATED STATEMENT OF OPERATIONS
TWELVE MONTHS ELEVEN MONTHS TWELVE MONTHS
ENDED NOVEMBER 30 ENDED NOVEMBER 30 ENDED DECEMBER 31
(IN MILLIONS, EXCEPT PER SHARE DATA) 1995 1994 1993
- --------------------------------------------------------------------------------------------------
Revenues
Principal transactions $1,393 $1,345 $2,055
Investment banking 801 572 972
Commissions 450 445 1,316
Interest and dividends 10,788 6,761 5,840
Other 44 67 491
- --------------------------------------------------------------------------------------------------
Total revenues 13,476 9,190 10,674
Interest expense 10,405 6,452 5,368
- --------------------------------------------------------------------------------------------------
Net revenues 3,071 2,738 5,306
- --------------------------------------------------------------------------------------------------
Non-interest expenses
Compensation and benefits 1,544 1,413 2,989
Brokerage, commissions and clearance fees 241 243 236
Communications 180 184 318
Occupancy and equipment 174 160 257
Professional services 159 166 203
Business development 110 116 161
Depreciation and amortization 105 116 157
Other 92 99 271
Restructuring charge 97
Severance charge 33
Spin-off expenses 15
Loss on sale of Shearson 535
Reserves for non-core businesses 152
- --------------------------------------------------------------------------------------------------
Total non-interest expenses 2,702 2,545 5,279
- --------------------------------------------------------------------------------------------------
Income from continuing operations before taxes and
cumulative effect of change in accounting
principle 369 193 27
Provision for income taxes 127 67 318
- --------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
cumulative effect of change in accounting
principle 242 126 (291)
- ---------------------------------------------------------------------------------------------------
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 242 126 (102)
Cumulative effect of change in accounting principle,
net of taxes (13)
- ---------------------------------------------------------------------------------------------------
Net income (loss) $ 242 $ 113 $ (102)
- ---------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ 200 $ 75 $ (150)
- ---------------------------------------------------------------------------------------------------
Number of shares used in earnings per
common share computation 113.4 108.0 105.7
- ---------------------------------------------------------------------------------------------------
Earnings (loss) per common share:
Income (loss) from continuing operations before
cumulative effect of change in accounting
principle $ 1.76 $ 0.81 $ (3.20)
Discontinued operations 1.79
Cumulative effect of change in accounting
principle (0.12)
- ---------------------------------------------------------------------------------------------------
Net income (loss) $ 1.76 $ 0.69 $ (1.41)
- ---------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
- FIFTY THREE -
LEHMAN BROTHERS 1995 ANNUAL REPORT
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
NOVEMBER 30 NOVEMBER 30
(IN MILLIONS) 1995 1994
- --------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 874 $ 964
Cash and securities segregated and on deposit for regulatory
and other purposes 945 1,420
Securities and other financial instruments owned:
Governments and agencies 22,849 24,840
Corporate obligations and other contractual commitments 11,415 9,962
Corporate stocks and options 7,143 4,549
Mortgages and mortgage-backed 6,847 6,774
Certificates of deposit and other money market instruments 3,068 1,348
- --------------------------------------------------------------------------------------------------------
51,322 47,473
- --------------------------------------------------------------------------------------------------------
Collateralized short-term agreements:
Securities purchased under agreements to resell 36,234 37,490
Securities borrowed 16,290 10,617
Receivables:
Brokers, dealers and clearing organizations 2,845 4,934
Customers 3,891 2,794
Others 1,434 2,762
Property, equipment and leasehold improvements
(net of accumulated depreciation and amortization
of $585 in 1995 and $520 in 1994) 495 619
Deferred expenses and other assets 793 686
Excess of cost over fair value of net assets
acquired (net of accumulated amortization
of $95 in 1995 and $87 in 1994) 180 188
- --------------------------------------------------------------------------------------------------------
Total assets $115,303 $109,947
- --------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
- FIFTY FOUR -
LEHMAN BROTHERS 1995 ANNUAL REPORT
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
NOVEMBER 30 NOVEMBER 30
(IN MILLIONS, EXCEPT SHARE DATA) 1995 1994
- --------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Commercial paper and short-term debt $ 6,235 $ 9,807
Securities and other financial instruments sold but not yet purchased:
Governments and agencies 11,665 9,867
Corporate stocks and options 4,393 3,731
Corporate obligations and other contractual commitments 3,796 3,432
- --------------------------------------------------------------------------------------------------------
19,854 17,030
- --------------------------------------------------------------------------------------------------------
Collateralized short-term financings:
Securities sold under agreements to repurchase 59,035 58,419
Securities loaned 1,966 1,627
Payables:
Brokers, dealers and clearing organizations 2,513 2,597
Customers 6,311 3,060
Accrued liabilities and other payables 2,926 2,691
Long-term debt:
Senior notes 10,505 9,107
Subordinated indebtedness 2,260 2,214
- --------------------------------------------------------------------------------------------------------
Total liabilities 111,605 106,552
- --------------------------------------------------------------------------------------------------------
Commitments and contingencies
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
8.44% Cumulative Voting, 8,000,000 shares issued and
outstanding; $25.00 liquidation preference per share 200 200
Redeemable Voting, 1,000 shares issued and outstanding;
$1.00 liquidation preference per share
Common Stock, $.10 par value; 300,000,000 shares
authorized; shares issued: 105,684,565 in 1995
and 105,608,423 in 1994; shares outstanding: 104,565,875
in 1995 and 104,537,690 in 1994 11 11
Common Stock issuable 211 87
Additional paid-in capital 3,172 3,172
Foreign currency translation adjustment 9 6
Accumulated deficit (397) (574)
Common Stock in treasury at cost: 1,118,690 shares in 1995
and 1,070,733 shares in 1994 (16) (15)
- ---------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,698 3,395
- --------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $115,303 $109,947
- --------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
- FIFTY FIVE -
LEHMAN BROTHERS 1995 ANNUAL REPORT
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
TWELVE MONTHS ELEVEN MONTHS TWELVE MONTHS
ENDED NOVEMBER 30 ENDED NOVEMBER 30 ENDED DECEMBER 31
(IN MILLIONS) 1995 1994 1993
- --------------------------------------------------------------------------------------------------
Preferred stock
5% Cumulative Convertible Voting, Series A:
Beginning and ending balance $ 508 $ 508 $ 508
- --------------------------------------------------------------------------------------------------
Money Market Cumulative:
Beginning balance 250 250
MMP Exchange (250)
- --------------------------------------------------------------------------------------------------
Ending balance 250
- --------------------------------------------------------------------------------------------------
8.44% Cumulative Voting:
Beginning balance 200
Shares issued to American Express 200
- --------------------------------------------------------------------------------------------------
Ending balance 200 200
- --------------------------------------------------------------------------------------------------
Redeemable Voting:
Beginning and ending balance
- --------------------------------------------------------------------------------------------------
Total Preferred Stock, ending balance 708 708 758
- --------------------------------------------------------------------------------------------------
Common Stock
Beginning balance 11 17 17
Reverse Stock Split (11)
American Express Common Stock purchase 4
MMP Exchange 1
- --------------------------------------------------------------------------------------------------
Ending balance 11 11 17
- --------------------------------------------------------------------------------------------------
Common stock issuable
Beginning balance 87
RSUs awarded, net of cancellations 124 87
- --------------------------------------------------------------------------------------------------
Ending balance 211 87
- --------------------------------------------------------------------------------------------------
Additional paid-in capital
Beginning balance 3,172 1,871 1,871
Exercise of stock options 1
Employee stock purchase plan (1)
Reverse Stock Split 11
American Express Common Stock purchase 900
MMP Exchange 249
Nippon Life Common Stock purchase 89
EOP conversion 57
Other, net (5)
- --------------------------------------------------------------------------------------------------
Ending balance 3,172 3,172 1,871
- --------------------------------------------------------------------------------------------------
Foreign currency translation adjustment
Beginning balance 6 (12) (5)
Translation adjustment, net (1) 3 18 (7)
- ---------------------------------------------------------------------------------------------------
Ending balance 9 6 (12)
- ---------------------------------------------------------------------------------------------------
Accumulated deficit
Beginning balance (574) (582) (267)
Net income (loss) 242 113 (102)
Cash dividends declared:
5% Cumulative Convertible Voting Preferred
Stock (25) (19) (25)
Money Market Cumulative Preferred Stock (6) (23)
8.44% Cumulative Voting Preferred Stock (17) (9)
Common Stock (23) (71) (165)
- ---------------------------------------------------------------------------------------------------
Ending balance (397) (574) (582)
- ---------------------------------------------------------------------------------------------------
Common stock in treasury
Beginning balance (15)
Purchases of treasury stock (1) (15)
- ---------------------------------------------------------------------------------------------------
Ending balance (16) (15)
- ---------------------------------------------------------------------------------------------------
Net unrealized securities losses
Beginning balance (13)
Change in unrealized securities losses, net 13
- --------------------------------------------------------------------------------------------------
Ending balance
- --------------------------------------------------------------------------------------------------
Total Stockholders' Equity $ 3,698 $ 3,395 $2,052
- --------------------------------------------------------------------------------------------------
(1) Net of income taxes of $(2) in 1995, $(15) in 1994 and $5 in 1993.
See Notes to Consolidated Financial Statements.
- FIFTY SIX -
LEHMAN BROTHERS 1995 ANNUAL REPORT
CONSOLIDATED STATEMENT OF CASH FLOWS
TWELVE MONTHS ELEVEN MONTHS TWELVE MONTHS
ENDED NOVEMBER 30 ENDED NOVEMBER 30 ENDED DECEMBER 31
(IN MILLIONS) 1995 1994 1993
- --------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Income (loss) from continuing operations before
cumulative effect of change in accounting
principle $ 242 $ 126 $ (291)
Adjustments to reconcile income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 105 116 157
Restructuring charge 80
Provisions for losses and other reserves 38 37 106
Loss on sale of Shearson 535
Non-core business reserves 152
Deferred tax provision (benefit) (195) 167 (108)
Other adjustments 169 193 100
Net change in:
Cash and securities segregated 475 (347) 180
Receivables from brokers, dealers and
clearing organizations 2,089 125 (2,313)
Receivables from customers (1,097) (148) (268)
Securities purchased under agreements to resell 1,256 (11,444) 320
Securities borrowed (5,673) (6,245) 3,251
Loans originated or purchased for resale (62)
Securities and other financial instruments owned (3,849) (11,774) (2,228)
Payables to brokers, dealers and clearing
organizations (84) 1,212 (361)
Payables to customers 2,918 (1,070) 430
Accrued liabilities and other payables 165 (506) 902
Securities sold under agreements to repurchase 616 19,228 1,754
Securities loaned 339 511 (881)
Securities and other financial instruments sold
but not yet purchased 2,824 8,717 (3,093)
Other operating assets and liabilities, net 1,437 (293) (71)
- ---------------------------------------------------------------------------------------------------
1,855 (1,395) (1,789)
Net cash flows provided by operating activities
of discontinued operations 428
- ---------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities $1,855 $(1,395) $(1,361)
- ---------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
- FIFTY SEVEN -
LEHMAN BROTHERS 1995 ANNUAL REPORT
CONSOLIDATED STATEMENT OF CASH FLOWS
TWELVE MONTHS ELEVEN MONTHS TWELVE MONTHS
ENDED NOVEMBER 30 ENDED NOVEMBER 30 ENDED DECEMBER 31
(IN MILLIONS) 1995 1994 1993
- --------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Proceeds from issuance of senior notes $ 5,033 $ 3,365 $ 3,609
Principal payments of senior notes (3,725) (1,982) (1,346)
Proceeds from issuance of subordinated indebtedness 258 540 568
Principal payments of subordinated indebtedness (214) (451) (602)
Proceeds from spin-off 1,193
Payments for commercial paper and short-term debt (3,180) (1,349) (2,087)
Payments for treasury stock purchases (1) (15)
Dividends paid (64) (99) (213)
Net cash flows used in financing activities of
discontinued operations (301)
- ---------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing
activities (1,893) 1,202 (372)
- ---------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Purchase of property, equipment and leasehold
improvements (52) (176) (129)
Proceeds from the sale of:
The Boston Company 1,300
Shearson 1,200
SLHMC 70
Other 111
Net cash flows used in investing activities of
discontinued operations (85)
- ---------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing
activities (52) (176) 2,467
- --------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents of discontinued
operations 42
- --------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (90) (369) 692
- --------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of period 964 1,333 641
- --------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 874 $ 964 $ 1,333
- --------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information (in millions) (including The
Boston Company)
Interest paid totaled $10,372 in 1995, $6,257 in 1994 and $5,591 in 1993.
Income taxes paid (received) totaled $149 in 1995, $(39) in 1994 and $28 in
1993.
Supplemental Schedule of Non-Cash Investing and Financing Activity
During 1993, the Company completed the sale of The Boston Company, Shearson and
SLHMC. The cash proceeds related to these sales have been separately reported in
the above statement. Excluded from the statement are the individual statement
of financial condition changes related to the net assets sold as well as the
non-cash proceeds related to these sales. (See Note 21.)
See Notes to Consolidated Financial Statements.
- FIFTY EIGHT -
LEHMAN BROTHERS 1995 ANNUAL REPORT
==============================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
NOTE 1 Summary of Significant Accounting Policies
- -------------------------------------------------
Basis of Presentation
- ---------------------
The consolidated financial statements include the accounts of Lehman Brothers
Holdings Inc. ("Holdings") and subsidiaries (collectively, the "Company" or
"Lehman Brothers"). Lehman Brothers is one of the leading global investment
banks serving institutional, corporate, government and high-net-worth individual
clients and customers. The Company's worldwide headquarters in New York and
regional headquarters in London and Tokyo are complemented by offices in
additional locations in North America, Europe, the Middle East, Latin and South
America and the Asia Pacific region. The Company is engaged primarily in
providing financial services. The principal subsidiary of Holdings is Lehman
Brothers Inc. ("LBI"), a registered broker-dealer. All material intercompany
accounts and transactions have been eliminated in consolidation. Prior to May
31, 1994, the American Express Company ("American Express") owned 100% of
Holdings' common stock (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. (See
Note 6.)
The 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 Note 21 for definitions and additional information concerning
these sales.)
The Company uses the trade date basis of accounting for recording principal
transactions.
Certain prior period amounts reflect reclassifications to conform to the current
period's presentation.
Discontinued Operations
- -----------------------
As described in Note 21, 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.
Translation of Foreign Currencies
- ---------------------------------
Assets and liabilities of foreign subsidiaries having non-U.S. dollar functional
currencies are translated at exchange rates at the statement of financial
condition date. Revenues and expenses are translated at average exchange rates
during the period. The gains or losses resulting from translating foreign
currency financial statements into U.S. dollars, net of hedging gains or losses
and related tax effects, are included in a separate component of stockholders'
equity, the foreign currency translation adjustment. Gains or losses resulting
from foreign currency transactions are included in the Consolidated Statement of
Operations.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Management believes that the estimates utilized in preparing its financial
statements are reasonable and prudent. Actual results could differ from these
estimates.
- FIFTY NINE -
LEHMAN BROTHERS 1995 ANNUAL REPORT
Securities and Other Financial Instruments
- ------------------------------------------
Securities and other financial instruments owned and securities and other
financial instruments sold but not yet purchased are valued at market or fair
value, as appropriate, with unrealized gains and losses reflected in principal
transactions in the Consolidated Statement of Operations. Market value is
generally based on listed market prices. If listed market prices are not
available, fair value is determined based on other relevant factors, including
broker or dealer price quotations and valuation pricing models which take into
account time value and volatility factors underlying the financial instruments.
Derivative Financial Instruments
- --------------------------------
Derivatives include futures, forwards, swaps and options and other similar
instruments. Derivative transactions entered into for market-making or
proprietary position taking or used as hedges of other trading instruments are
recorded at market or fair value with realized and unrealized gains and losses
reflected in principal transactions in the Consolidated Statement of Operations.
The market or fair value associated with derivatives utilized for trading
purposes is recorded on a net by counterparty basis where a legal right of
set-off exists in the Consolidated Statement of Financial Condition. Unrealized
gains and losses related to swaps and option contracts are recorded as
securities and other financial instruments owned and securities and other
financial instruments sold but not yet purchased, as applicable. Unrealized
gains and losses related to securities and foreign exchange forwards and
commodity contracts are recorded as receivables and payables with brokers,
dealers and clearing organizations and customers, as applicable.
In addition to trading and market-making activities, the Company enters into
various derivative products as an end user to modify the interest rate exposure
of certain assets and liabilities. In this regard, the Company utilizes interest
rate and currency swaps, caps, collars and floors to manage the interest rate
exposure associated with its long-term debt obligations and secured financing
activities, including securities purchased under agreements to resell,
securities borrowed, securities sold under agreements to repurchase and
securities loaned. In addition to modifying the interest rate exposure of
existing assets and liabilities, the Company utilizes derivative instruments as
an end user to modify the interest rate characteristics of certain anticipated
transactions related to its secured financing activities, where there is a high
degree of certainty that the Company will enter into such contracts. Derivatives
which have been designated and are effective in modifying the interest rate
characteristics of existing assets and liabilities or anticipated transactions
are accounted for on an accrual basis, with the exception of written swaptions
which are accounted for on a mark-to-market basis.
The Company monitors the effectiveness of its end user hedging activities by
periodically comparing the change in the value of the hedge instrument to the
underlying item being hedged and re-assessing the likelihood of the occurrence
of anticipated transactions. In the event that the Company determines that a
hedge is no longer effective, such as upon extinguishment of the underlying
asset or liability or a change in circumstances whereby there is not a high
degree of certainty that the anticipated transaction will occur, the derivative
transaction is accounted for at fair value, with changes in the fair value of
the derivative contract being recognized in the Consolidated Statement of
Operations. In the event that a derivative designated as a hedge is terminated
early, any realized gain or loss on termination would be deferred and amortized
over the original period of the hedge.
Repurchase and Resale Agreements
- --------------------------------
Securities purchased under agreements to resell and securities sold under
agreements to repurchase, which are treated as financing transactions for
financial reporting purposes, are collateralized primarily by government and
government agency securities and are carried net by counterparty, when
permitted, at the amounts at which the securities will be subsequently resold or
repurchased plus accrued interest. It is the policy of the Company to take
possession of securities purchased under agreements to resell. The Company
monitors the market value of the underlying positions on a
- SIXTY -
LEHMAN BROTHERS 1995 ANNUAL REPORT
daily basis as compared to the related receivable or payable balances, including
accrued interest. The Company requires counterparties to deposit additional
collateral or return collateral pledged as necessary, to ensure that the market
value of the underlying collateral remains sufficient. Securities and other
financial instruments owned which are sold under repurchase agreements are
carried at market value with changes in market value reflected in the
Consolidated Statement of Operations.
Securities purchased under agreements to resell and securities sold under
agreements to repurchase for which the resale/repurchase date corresponds to the
maturity date of the underlying securities are accounted for as purchases and
sales, respectively. At November 30, 1995, such resale and repurchase agreements
which have not yet matured aggregated $6.7 billion and $3.1 billion,
respectively.
Securities Borrowed and Loaned
- ------------------------------
Securities borrowed and securities loaned are carried at the amount of cash
collateral advanced or received plus accrued interest. It is the Company's
policy to value the securities borrowed and loaned on a daily basis and to
obtain additional cash as necessary to ensure such transactions are adequately
collateralized.
Income Taxes
- ------------
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
The Company recognizes the current and deferred tax consequences of all
transactions that have been recognized in the financial statements using the
provisions of the enacted tax laws. In this regard, deferred tax assets are
recognized for temporary differences that will result in deductible amounts in
future years and for tax loss carryforwards, if in the opinion of management, it
is more likely than not that the deferred tax asset will be realized. SFAS 109
requires companies to set up a valuation allowance for that component of net
deferred tax assets which does not meet the "more likely than not" criterion for
realization.
Fixed Assets and Intangibles
- ----------------------------
Property, equipment, and leasehold improvements are recorded at historical cost,
net of accumulated depreciation and amortization. Depreciation is recognized on
a straight-line basis over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the lesser of their economic useful
lives or the terms of the underlying leases. The Company capitalizes interest
costs during construction and amortizes the interest costs based on the useful
lives of the assets.
Excess of cost over fair value of net assets acquired (goodwill) is amortized
using the straight-line method over a period of 35 years. Goodwill is also
reduced upon the recognition of certain acquired net operating loss carryforward
benefits.
Statement of Cash Flows
- -----------------------
The Company defines cash equivalents as highly liquid investments with original
maturities of three months or less, other than those held for sale in the
ordinary course of business.
Earnings Per Common Share
- -------------------------
Earnings per common share was computed by dividing net income applicable to
common stock by the weighted average number of shares of common stock and common
stock equivalents outstanding. Pursuant to the Securities and Exchange
Commission ("SEC") requirements, the number of shares used in the 1994 and 1993
earnings per common share calculations includes Common Stock as of May 31, 1994.
(See Note 10.)
- SIXTY ONE -
LEHMAN BROTHERS 1995 ANNUAL REPORT
NOTE 2 Change of Year-End
- -------------------------
During 1994, the Company changed its year-end from December 31 to November 30.
Such a change to a non-calendar cycle shifts certain year-end administrative
activities to a time period that conflicts less with the business needs of the
Company's institutional customers.
The following is selected financial data for the eleven month transition period
ending November 30, 1994 and the comparable prior year period.
ELEVEN MONTHS ENDED
NOVEMBER 30
-------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 1994 1993
- -------------------------------------------------------------------------------
UNAUDITED
Total revenues $ 9,190 $ 9,918
Interest expense 6,452 4,932
- -------------------------------------------------------------------------------
Net revenues 2,738 4,986
Non-interest expenses 2,545 5,014
- -------------------------------------------------------------------------------
Income (loss) from continuing operations before taxes and
cumulative effect of change in accounting principle 193 (28)
Provision for income taxes 67 304
- -------------------------------------------------------------------------------
Income (loss) from continuing operations before cumulative
effect of change in accounting principle 126 (332)
- -------------------------------------------------------------------------------
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 126 (143)
Cumulative effect of change in accounting principle,
net of taxes (13)
- --------------------------------------------------------------------------------
Net income (loss) $ 113 $ (143)
- --------------------------------------------------------------------------------
Net income (loss) applicable to common stock $75 $ (187)
- --------------------------------------------------------------------------------
Number of shares used in earnings per common share
computation 108.0 105.7
- --------------------------------------------------------------------------------
Earnings (loss) per common share:
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $ 0.81 $(3.56)
Discontinued operations 1.79
Cumulative effect of change in accounting principle (0.12)
- --------------------------------------------------------------------------------
Net income (loss) $ 0.69 $(1.77)
- --------------------------------------------------------------------------------
The selected financial data for 1993 includes the results of operations of
Shearson and SLHMC, which were sold on July 31, 1993 and August 31, 1993,
respectively. The Company completed the sale of The Boston Company on May 21,
1993. The above selected financial data for 1993 reflects The Boston Company as
a discontinued operation. (See Note 21 for definitions and additional
information concerning these sales.)
- SIXTY TWO -
LEHMAN BROTHERS 1995 ANNUAL REPORT
NOTE 3 Cash and Securities Segregated and on Deposit for Regulatory and Other
- -----------------------------------------------------------------------------
Purposes
- --------
In addition to amounts presented in the accompanying Consolidated Statement of
Financial Condition as cash and securities segregated and on deposit for
regulatory and other purposes, securities with a market value of approximately
$320 million and $941 million at November 30, 1995 and 1994, respectively,
primarily collateralizing securities purchased under agreements to resell, have
been segregated in a special reserve bank account for the exclusive benefit of
customers pursuant to the Reserve Formula requirements of SEC Rule 15c3-3.
NOTE 4 Short-Term Financings
- ----------------------------
The Company obtains short-term financing on both a secured and unsecured basis.
The secured financing is obtained through the use of repurchase agreements and
securities loaned agreements, which are primarily collateralized by government,
agency and equity securities. The unsecured financing is generally obtained
through short-term debt and the issuance of commercial paper.
The Company's commercial paper and short-term debt is comprised of the
following:
NOVEMBER 30 NOVEMBER 30
(IN MILLIONS) 1995 1994
- ------------------------------------------------------------------------------
Commercial paper $ 1,443 $ 2,788
Short-term debt
Bank loans 2,106 1,479
Master notes 1,753 4,081
Payables to banks 933 1,459
- ------------------------------------------------------------------------------
$ 6,235 $ 9,807
- ------------------------------------------------------------------------------
In October 1995, the Company established a $1 billion Secured Revolving Credit
Facility for Lehman Brothers International (Europe), the Company's major
operating entity in Europe. In addition, at November 30, 1995, Holdings
maintained a $2 billion Revolving Credit Agreement with a group of banks.
The Company's weighted average interest rates were as follows:
NOVEMBER 30 NOVEMBER 30
1995 1994
- ------------------------------------------------------------------------------
Commercial paper 6.0% 5.6%
Short-term debt(1) 5.3% 5.7%
Securities sold under agreements to repurchase 5.7% 5.3%
- ------------------------------------------------------------------------------
(1) Including weighted average interest rates of 6.1% and 3.9% as of November
30, 1995 related to U.S. dollar and non-U.S. dollar obligations, respectively.
- SIXTY THREE -
LEHMAN BROTHERS 1995 ANNUAL REPORT
NOTE 5 Long-Term Debt
- ---------------------
U.S. DOLLAR NON-U.S. DOLLAR NOVEMBER 30
--------------------- --------------------- ------------------
FIXED FLOATING FIXED FLOATING
(IN MILLIONS) RATE RATE RATE RATE 1995 1994
- ------------------------------------------------------------------------------------------------
Senior Notes
Maturing in Fiscal 1995 $ 2,859
Maturing in Fiscal 1996 $ 724 $ 1,424 $ 251 $ 104 $ 2,503 1,603
Maturing in Fiscal 1997 643 286 210 56 1,195 1,053
Maturing in Fiscal 1998 988 200 244 166 1,598 1,085
Maturing in Fiscal 1999 649 205 740 86 1,680 1,437
Maturing in Fiscal 2000 746 175 27 56 1,004 144
December 1, 2000 and
thereafter 2,015 130 380 2,525 926
- ------------------------------------------------------------------------------------------------
Senior Notes 5,765 2,420 1,852 468 10,505 9,107
- ------------------------------------------------------------------------------------------------
Subordinated Indebtedness
Maturing in Fiscal 1995 214
Maturing in Fiscal 1996 96 162 258 259
Maturing in Fiscal 1997 741 741 741
Maturing in Fiscal 1998 350 350 350
Maturing in Fiscal 1999 179 179 179
Maturing in Fiscal 2000 192 192 192
December 1, 2000 and
thereafter 415 121 4 540 279
- ------------------------------------------------------------------------------------------------
Subordinated
Indebtedness 1,973 283 4 2,260 2,214
- ------------------------------------------------------------------------------------------------
Long-Term Debt $7,738 $2,703 $1,856 $468 $12,765 $11,321
- ------------------------------------------------------------------------------------------------
Of the Company's long-term debt outstanding as of November 30, 1995, $1,096
million is repayable prior to maturity at the option of the holder, at par
value. These obligations are reflected in the above table as maturing at their
put dates, which range from fiscal 1996 to fiscal 2002, rather than at their
contractual maturities, which range from fiscal 1996 to fiscal 2023. In
addition, $376 million of the Company's long-term debt is redeemable at
par at the option of the Company upon specified dates from 1996 through 2010
or based upon the occurrence of specified events. These obligations are
reflected in the above table at their contractual maturity dates.
The Company's interest in 3 World Financial Center is financed with U.S.
dollar fixed rate senior notes totaling $308 million as of November 30, 1995.
These notes are unconditionally guaranteed by American Express with a portion
of these notes being collateralized by certain mortgage obligations.
As of November 30, 1995, the Company had $7.8 billion available for the
issuance of debt securities under various shelf registrations, which includes
$1.8 billion of issuance availability under the Company's Euro medium-term
note program.
As of November 30, 1995, the Company's fixed and floating rate debt portfolios
included approximately $235 million and $160 million, respectively, of debt for
which the interest rates and/or redemption values have been linked to various
indices including industry baskets of stocks or commodities. The interest rates
on such indexed notes have all been effectively converted to floating rates
based primarily on LIBOR through the use of interest rate and currency swaps.
End User Derivative Activities
- ------------------------------
The Company utilizes a variety of derivative products including interest rate
and currency swaps and swaptions as an end user to modify the interest rate
characteristics of its long-term debt portfolio. The Company actively manages
the interest rate exposure on its long-term debt portfolio to more closely
match the terms of its debt to the assets being funded and to minimize interest
rate risk. In addition, the Company utilizes cross currency swaps to hedge its
exposure to foreign currency risk as a result of its non-U.S. dollar debt
obligations, after consideration of non-U.S. dollar
- SIXTY FOUR -
LEHMAN BROTHERS 1995 ANNUAL REPORT
assets which are funded with long-term debt obligations in the same currency.
In certain instances, two or more derivative contracts may be utilized by the
Company to manage the interest rate nature and/or currency exposure of an
individual long-term debt issuance. In these cases, the notional value of the
derivative contracts may exceed the carrying value of the related long-term
debt issuance.
At November 30, 1995, the notional values of the Company's interest rate and
currency swaps related to its long-term debt obligations were approximately
$11 billion. In terms of notional amounts outstanding, these derivative products
mature as follows:
(IN MILLIONS) U.S. DOLLAR NON-U.S. DOLLAR CROSS CURRENCY TOTAL
- -----------------------------------------------------------------------------------------------------
Maturing in Fiscal 1996 $ 978 $ 66 $ 279 $ 1,323
Maturing in Fiscal 1997 2,324 126 140 2,590
Maturing in Fiscal 1998 1,368 17 319 1,704
Maturing in Fiscal 1999 825 14 788 1,627
Maturing in Fiscal 2000 974 52 1,026
December 1, 2000 and thereafter 2,285 325 91 2,701
- -----------------------------------------------------------------------------------------------------
Total $8,754 $548 $1,669 $10,971
- -----------------------------------------------------------------------------------------------------
Weighted average rate at November 30, 1995
Receive rate(1) 6.81% 5.24% 4.24% 6.34%
Pay rate(1) 6.14% 5.07% 6.48% 6.14%
(1) Weighted average interest rates were calculated utilizing non-U.S. dollar
interest rates, where applicable.
In addition, at November 30, 1995 and 1994, the Company had approximately $250
million and $1,259 million, respectively, of notional value of written swaptions
outstanding which if exercised would convert an equal amount of the Company's
long-term debt from a fixed rate to a floating rate. As of November 30, 1995,
the swaptions had exercise dates ranging from fiscal 1996 to fiscal 1998. The
Company accounts for these written swaptions on a mark-to-market basis.
During 1995, the Company terminated certain swaps which were utilized to modify
the interest rate characteristics of the Company's long-term debt issuances. At
November 30, 1995, the Company had deferred gains of approximately $16 million
related to such terminated contracts which will be amortized to reduce interest
expense through fiscal 1997. On an overall basis, the Company's long-term debt
related end user derivative activities resulted in reduced interest expense of
approximately $74 million, $30 million and $56 million in 1995, 1994 and 1993,
respectively. In addition, the Company's end user derivative activities
resulted in the following changes to the Company's mix of fixed and floating
rate debt and effective weighted average rates of interest.
NOVEMBER 30, 1995
------------------------------------------------------------ -----------------------
LONG-TERM DEBT WEIGHTED AVERAGE (1) LONG-TERM DEBT
------------------------ ------------------------------- -----------------------
BEFORE AFTER CONTRACTUAL EFFECTIVE BEFORE AFTER
END USER END USER INTEREST RATE AFTER END END USER END USER
(IN MILLIONS) ACTIVITIES ACTIVITIES RATE USER ACTIVITIES ACTIVITIES ACTIVITIES
- ----------------------------------------------------------------------------------------------------------------
USD Obligations
Fixed Rate $ 7,738 $ 1,198 8.20% 8.19% $ 5,783 $ 3,157
Floating Rate 2,703 10,912 6.76% 7.00% 4,482 7,846
------------------------------------------------------------------------------------------
10,441 12,110 7.83% 7.12% 10,265 11,003
------------------------------------------------------------------------------------------
Non-USD Obligations 2,324 655 4.41% 4.73% 1,056 318
------------------------------------------------------------------------------------------
Total $ 12,765 $ 12,765 7.21% 6.99% $11,321 $11,321
NOVEMBER 30, 1994
--------------------------------
WEIGHTED AVERAGE (1)
--------------------------------
CONTRACTUAL EFFECTIVE
INTEREST RATE AFTER END
(IN MILLIONS) RATE USER ACTIVITIES
- ---------------------------------------------------
USD Obligations
Fixed Rate 8.12% 8.28%
Floating Rate 5.69% 6.11%
------------------------
7.06% 6.73%
------------------------
Non-USD Obligations 3.92% 4.67%
------------------------
Total 6.77% 6.67%
------------------------
(1) Weighted average interest rates were calculated utilizing non-U.S. dollar
interest rates, where applicable.
- SIXTY FIVE -
LEHMAN BROTHERS 1995 ANNUAL REPORT
NOTE 6 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").
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 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").
II 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 "EOP 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 EOP Conversion, the MMP Exchange and the
Distribution are collectively referred to herein as the "Concurrent
Transactions." The Company charged approximately $15 million ($12 million
aftertax) to operating expenses in the second quarter of 1994 related to costs
incurred in connection with the Concurrent Transactions and other related
expenses. The Company and American Express entered into several agreements for
the purpose of giving effect to the Distribution and defining their ongoing
relationships.
- SIXTY SIX -
LEHMAN BROTHERS 1995 ANNUAL REPORT
NOTE 7 Preferred Stock
- ----------------------
Cumulative Convertible Voting, Series A
- ---------------------------------------
In 1987, Holdings issued to Nippon Life the Cumulative Convertible Voting
Preferred Stock, Series A ("Series A Preferred Stock"), for a cash purchase
price of $508 million, as adjusted, or $39.10 per share. The holder of the
Series A Preferred Stock is entitled to receive preferred dividends at an annual
rate of 5%, payable quarterly before any dividends are paid to the holders of
Common Stock.
The Company has the right to redeem the shares of Series A Preferred Stock on
any dividend payment date after June 15, 1994, in cumulative annual increments
of 2,600,000 shares, subject to adjustment, and subject to restrictions on
redemptions when dividends are in arrears. Such redemption will be at a price
per share equal to $39.10 and is permitted only if there is a public market for
the Common Stock and the average market price of shares of Common Stock exceeds
the conversion price on the date notice of redemption is given.
Each share of Series A Preferred Stock is convertible, at any time prior to the
date of redemption, into 0.3178313 of a share of Common Stock, provided that at
least 250,000 shares of Series A Preferred Stock (or such lesser number of such
shares then outstanding) are converted each time. The conversion rate at
November 30, 1995 was $123.02.
8.44% Cumulative Voting
- -----------------------
In 1994, Holdings issued the Cumulative Preferred Stock to American Express for
$200 million. The holder of the Cumulative Preferred Stock is entitled to
receive preferred dividends at an annual rate of 8.44%, payable quarterly before
any dividends are paid to the holders of Common Stock.
Holdings may not call the shares of the Cumulative Preferred Stock for
redemption prior to June 1, 2001. However, the holder of such preferred stock
may sell its shares at any time, subject to certain restrictions. These shares
are not convertible into Common Stock.
Redeemable Voting
- -----------------
In 1994, Holdings issued the Redeemable Preferred Stock to American Express and
Nippon Life for $1,000. The holders of the Redeemable Preferred Stock will be
entitled to receive preferred dividends for each of eight annual dividend
periods following the Distribution in an amount equal to 50% of the amount, if
any, by which the Company's net income for the applicable dividend period
exceeds $400 million, up to a maximum of $50 million for any such period.
Holdings may not redeem shares of the Redeemable Preferred Stock prior to the
final dividend payment date. However, in the event of a change of control of the
Company, holders of the Redeemable Preferred Stock will have the right to
require Holdings to redeem all of this stock for an aggregate redemption price
equal to $300 million if such change of control occurs prior to November 30,
1996, declining $50 million per year in each of the six years thereafter. If a
change of control is not approved by a majority of the Company's Board of
Directors, the funds for redemption must be raised by an offering of the
Company's equity securities which are not redeemable. These shares are not
convertible into Common Stock.
Money Market Cumulative
- -----------------------
As of the Distribution, the Money Market Cumulative Preferred Stock was
exchanged for Common Stock.
- SIXTY SEVEN -
LEHMAN BROTHERS 1995 ANNUAL REPORT
NOTE 8 Common Stock
- -------------------
Changes in shares of Common Stock outstanding are as follows:
TWELVE MONTHS ELEVEN MONTHS TWELVE MONTHS
ENDED ENDED ENDED
NOVEMBER 30 NOVEMBER 30 DECEMBER 31
1995 1994 1993
- ------------------------------------------------------------------------------------------
Shares outstanding, beginning of
period 104,537,690 168,235,284 168,235,284
- ------------------------------------------------------------------------------------------
Reverse Stock Split (114,764,841)
- ------------------------------------------------------------------------------------------
104,537,690 53,470,443 168,235,284
Concurrent transactions
Shares sold to American Express 35,379,920
Shares sold to Nippon Life 3,490,094
Shares issued in EOP conversion 3,366,677
Shares issued to American Express
in exchange for $250 million
Money Market Preferred Stock 9,786,006
Restricted shares granted under
the Replacement Plan 115,283
- -------------------------------------------------------------------------------------------
Outstanding Common Stock as of Spin-off date 105,608,423
Exercise of stock options and other share
issuances 76,142
Treasury stock purchases (47,957) (1,070,733)
- -------------------------------------------------------------------------------------------
Shares outstanding, end of period 104,565,875 104,537,690 168,235,284
- -------------------------------------------------------------------------------------------
The Company has reserved for issuance approximately 4.1 million shares of Common
Stock for conversion of the Series A Preferred Stock.
Nippon Life holds a non-transferable common stock purchase warrant pursuant to
which Nippon Life may purchase approximately 3.3 million shares of Common Stock
with an exercise price of $35.05 per share with an expiration date of
April 15, 1996.
There is a restriction on the transferability of the Common Stock received
under the Employee Ownership Plan. Generally, such restrictions will lapse
ratably over a three-year period.
Treasury stock purchases include approximately 973,000 shares in 1994 resulting
from the odd-lot buy back program.
NOTE 9 Incentive Plans
- ----------------------
1994 Replacement Plan
- ---------------------
The Lehman Brothers Holdings Inc. 1994 Management Replacement Plan (the
"Replacement Plan") allowed the Compensation and Benefits Committee (the
"Compensation Committee") to grant stock options and restricted stock awards
to eligible employees. The primary purpose of the Replacement Plan was to
provide awards similar to the American Express common shares granted to
Company employees which were canceled as of the date of the Distribution.
No further awards will be granted under this plan.
Employee Stock Purchase Plan
- ----------------------------
The Employee Stock Purchase Plan (the "ESPP") allows employees to purchase
Common Stock at a 15% discount from market value, with a maximum of $15,000
($25,000 effective on January 1, 1996) in annual aggregate purchases by any
- SIXTY EIGHT -
LEHMAN BROTHERS 1995 ANNUAL REPORT
one individual. The number of shares of Common Stock authorized for
purchase by eligible employees is 6,000,000. As of November 30, 1995 and
1994, 663,349 shares and 130,827 shares, respectively, of Common Stock were
purchased by eligible employees through the ESPP. The shares were purchased
in the open market and thus did not increase the Company's total shares
outstanding.
1994 Management Ownership Plan
The Lehman Brothers Holdings Inc. 1994 Management Ownership 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 stock units ("PSUs")
for a period of up to ten years to eligible employees. A total of
16,650,000 shares of Common Stock may be subject to awards under the 1994
Plan, including 150,000 shares available as RSUs which may be issued to
non-employee Directors. 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. 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. 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. 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 grant.
Under the 1994 Plan, eligible employees received RSUs in 1995 and 1994 as a
portion of their total compensation in lieu of cash. There was no further
cost to employees and senior officers associated with the RSU awards. In
addition, the Compensation Committee may, from time to time, award RSUs to
certain senior officers of Holdings and its subsidiaries (the "Firm"). The
Firm records compensation expense for RSUs based on the market value of
Common Stock and the applicable vesting provisions. All of the RSUs awarded
to employees vest 80% one year from the date of grant with the remaining
20% vesting five years from the date of grant. Each RSU outstanding on the
respective dates for which 100% vesting occurs will be exchanged for a
share of Common Stock. Holdings pays a dividend equivalent on each RSU
outstanding based on dividends paid on the Common Stock.
On October 25, 1995, the Company granted 1,125,000 options to members of
the Corporate Management Committee ("CMC") at the market price of the
Common Stock on that date ($20.875) (the "1995 Options"). The 1995 Options
become exercisable in four and one half years; exercisability is
accelerated ratably in one-third increments at such time as the closing
price of the Common Stock meets, or exceeds, $26.00, $28.00 and $30.00 for
30 consecutive trading days. If a minimum target price is not reached and
maintained for the specified period on or before April 24, 2000, the award
recipients may then exercise all of their options beginning April 25, 2000.
Other than the 1995 Options, all options awarded under the 1994 Plan become
exercisable in one-third increments ratably in the three years following
grant date. No compensation expense has been recognized for the Company's
stock options as all have been issued at the market price of the Common
Stock on the date of the respective grant.
The Compensation Committee also awarded PSUs to members of the CMC during
1995 as part of a three-year long term incentive award. The number of PSUs
which may be earned, if any, is dependent upon achievement of certain
performance levels within a two-year period. At the end of the performance
period, any PSUs earned will convert one-for-one to RSUs which then vest at
the end of the third year. The compensation cost for the estimated number
of RSUs that may eventually become payable in satisfaction of PSUs is
accrued over the three-year performance and vesting period and added to
common stock issuable.
Employee Incentive Plan
- -----------------------
During 1995, the Board of Directors adopted the Employee Incentive Plan
("EIP"), which has provisions similar to the 1994 Plan, and under which up
to 5 million shares may be awarded to eligible employees. During 1995,
approximately
- SIXTY NINE -
LEHMAN BROTHERS 1995 ANNUAL REPORT
2 million RSUs were awarded to new hires as part of the Company's
recruitment efforts. In addition, the Company granted PSUs and 1.4 million
options to certain senior officers which have provisions similar to the
PSUs and 1995 Options granted under the 1994 Plan. The Company will fund
these awards over time with purchases of Common Stock in the open market
and thus will not increase total shares outstanding.
The following is a summary of stock awards issued and outstanding under the
Company's stock based compensation plans:
RESTRICTED STOCK
REPLACEMENT
PLAN
Balance, January 1, 1994
Granted in connection with the spin-off 115,283
Exchanged for stock without restrictions (47,179)
Canceled (6,026)
Balance, November 30, 1994 62,078
Exchanged for stock without restrictions (5,690)
Canceled (11,560)
Balance, November 30, 1995 44,828
RESTRICTED STOCK UNITS
1994
PLAN EIP TOTAL
Balance, January 1, 1994
Granted 5,279,321 5,279,321
Canceled (674,216) (674,216)
Balance, November 30, 1994 4,605,105 4,605,105
Granted 8,021,784 2,039,220 10,061,004
Canceled (586,092) (586,092)
Balance, November 30, 1995 12,040,797 2,039,220 14,080,017
Of the RSUs issued and outstanding at November 30, 1995, approximately 4.2
million RSUs vested on July 1, 1995, approximately 5.6 million RSUs will
vest on July 1, 1996, and the remaining will vest July 1, 1997 to July 1,
2000.
STOCK OPTIONS
1994 REPLACEMENT EXERCISE EXPIRATION
PLAN PLAN EIP TOTAL PRICE DATES
Balance, January 1, 1994
Granted 1,960,720 1,849,769 3,810,489 $18.00 2/95-5/04
Canceled (60,000) (60,000) $18.00
Balance, November 30, 1994 1,960,720 1,789,769 3,750,489 $18.00 2/95-5/04
Granted 1,125,000 1,400,000 2,525,000 $20.875 10/00
Exercised (68,996) (68,996) $18.00
Canceled (7,040) (291,588) (298,628) $18.00
Balance, November 30, 1995 3,078,680 1,429,185 1,400,000 5,907,865 $18.00-$20.875 5/96-5/04
At November 30, 1995, approximately 2.1 million options are currently
exercisable at a price of $18.00.
- SEVENTY -
LEHMAN BROTHERS 1995 ANNUAL REPORT
As of December 31, 1995, the Compensation Committee awarded RSUs to members
of the CMC under the 1994 Plan based on performance goals satisfied for the
period from January 1, 1995 through December 31, 1995. An annual RSU award
also was made to employees in the Company's high-net-worth sales force.
Approximately 500,000 RSUs, not included in the preceding RSU summary, were
added to common stock issuable at November 30, 1995 for these awards.
NOTE 10 Earnings Per Common Share
- ----------------------------------
For all periods prior to May 31, 1994, the number of shares of common stock
and common stock equivalents used in the calculation is fixed at
105,681,479 (comprised of 105,608,423 shares of Common Stock and 73,056
RSUs).
The weighted average number of shares of common stock and common stock
equivalents included in the calculations of earnings per common share
follows:
TWELVE MONTHS ELEVEN MONTHS TWELVE MONTHS
ENDED ENDED ENDED
NOVEMBER 30 NOVEMBER 30 DECEMBER 31
1995 1994 1993
Common stock 104,535,218 105,436,860 105,608,423
Common stock issuable 8,420,122 2,532,543
Other share equivalents 459,344 61,389 73,056
Total 113,414,684 108,030,792 105,681,479
NOTE 11 Capital Requirements
- -----------------------------
As a registered broker-dealer, LBI is subject to SEC Rule 15c3-1, the Net
Capital Rule, which requires LBI to maintain net capital of not less than
the greater of 2% of aggregate debit items arising from customer
transactions, as defined, or 4% of funds required to be segregated for
customers' regulated commodity accounts, as defined. At November 30, 1995,
LBI's regulatory net capital, as defined, of $1,402 million exceeded the
minimum requirement by $1,301 million. On August 31, 1995, Lehman
Government Securities Inc., a wholly owned subsidiary of LBI and a
registered broker-dealer, was merged into LBI.
Lehman Brothers International (Europe) ("LBIE"), Lehman Brothers Japan Inc.
("LBJ"), and other of Holdings' subsidiaries are subject to various
securities, commodities and banking regulations and capital adequacy
requirements promulgated by the regulatory and exchange authorities of the
countries in which they operate. At November 30, 1995, LBIE, LBJ and the
other subsidiaries were in compliance with the applicable local capital
adequacy requirements.
At November 30, 1995, $2,664 million of net assets of subsidiaries of
Holdings were restricted as to the payment of dividends to Holdings, as a
result of regulatory and other requirements.
There are no restrictions on Holdings' present ability to pay dividends on
its Common Stock, other than Holdings' obligation first to make dividend
payments on its preferred stock and the governing provisions of the
Delaware General Corporation Law.
- SEVENTY ONE -
LEHMAN BROTHERS 1995 ANNUAL REPORT
NOTE 12 Changes in Accounting Principles
- ---------------------------------------
Accounting for Postemployment Benefits
Effective January 1, 1994, the Company adopted 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 aftertax ($23 million pretax). The
effect of this accounting change on the 1994 results of operations was not
material, excluding the cumulative effect.
Offsetting of Certain Receivables and Payables
During the first quarter of 1994, the Company adopted the 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. In January
1995, the Financial Accounting Standards Board issued Interpretation No. 41,
"Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase
Agreements" ("FIN No. 41"). FIN No. 41 is a modification to FIN No. 39 to permit
certain limited exceptions to the criteria established under FIN No. 39 for
offsetting certain repurchase and reverse repurchase agreements with the same
counterparty. The Company has adopted this modification, effective January
1995, which partially mitigates the increase in the Company's gross assets
and liabilities resulting from the implementation of FIN No. 39.
NOTE 13 Pension Plans
- ----------------------
The Company sponsors several noncontributory defined benefit pension plans
which cover substantially all employees. The cost of pension benefits for
eligible employees, measured by length of service, compensation and other
factors, is currently being funded through trusts established under the
plans. Funding of retirement costs for the applicable plans complies with
the minimum funding requirements specified by the Employee Retirement
Income Security Act of 1974, as amended, and other statutory requirements.
Total expense related to pension benefits for 1995, 1994 and 1993 consisted
of the following components:
TWELVE MONTHS ELEVEN MONTHS TWELVE MONTHS
ENDED ENDED ENDED
NOVEMBER 30 NOVEMBER 30 DECEMBER 31
(IN MILLIONS) 1995 1994 1993
Service cost -- benefits earned during the period $ 13 $ 16 $ 32
Interest cost on projected benefit obligation 31 28 40
Actual return on plan assets (77) (4) (73)
Net amortization and deferral 36 (31) 25
Total expense $ 3 $ 9 $ 24
Plan assets within the trusts consist principally of equities and bonds.
The actual returns on plan assets for 1995 and 1993 reflect a favorable
market environment in those years. In addition, Company contributions
increased assets under investment in 1995. Adverse market conditions in
1994 were the principal reason for the lower return earned in that year.
- SEVENTY TWO -
LEHMAN BROTHERS 1995 ANNUAL REPORT
The following table sets forth the funded status of the Company's defined
benefit plans:
NOVEMBER 30 NOVEMBER 30
(IN MILLIONS) 1995 1994
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligations
Vested benefit obligation $ (428) $ (335)
- --------------------------------------------------------------------------------
Accumulated benefit obligation $ (433) $ (342)
Projected benefit obligation $ (452) $ (367)
Plan assets at fair value 564 446
- --------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 112 79
Unrecognized net loss 76 57
- --------------------------------------------------------------------------------
Pension asset recognized in the Consolidated
Statement of Financial Condition $ 188 $ 136
- --------------------------------------------------------------------------------
The weighted average assumed discount rate used in determining the
actuarial present value of the projected benefit obligation for the
Company's plans was 7.5% and 8.6% in 1995 and 1994, respectively. The
weighted average rate of increase in future compensation levels used was
5.2% and 5.7% in 1995 and 1994, respectively. The weighted average expected
long-term rate of return on assets was 9.8%, 9.6% and 9.8% in 1995, 1994
and 1993, respectively.
During 1993, the Company incurred a settlement and curtailment with respect
to its domestic pension plan in relation to the Primerica Transaction. The
net gain of approximately $26 million pretax was included in the loss on
the sale of Shearson. (See Note 21 for definitions and additional
information concerning this sale.)
NOTE 14 Postretirement Benefits
- -------------------------------
The Company sponsors several defined benefit health care plans that provide
health care, life insurance and other postretirement benefits to
substantially all eligible retired employees. The health care plans include
participant contributions, deductibles, co-insurance provisions and
service-related eligibility requirements. The Company funds the cost of
these benefits as they are incurred.
Net periodic postretirement benefits cost for 1995, 1994, and 1993
consisted of the following components:
TWELVE MONTHS ELEVEN MONTHS TWELVE MONTHS
ENDED ENDED ENDED
NOVEMBER 30 NOVEMBER 30 DECEMBER 31
(IN MILLIONS) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
Service cost $ 1 $ 1 $ 2
Interest cost 4 5 8
Amortization of unrecognized prior service cost (1) (1)
- -----------------------------------------------------------------------------------------------------------
Net periodic postretirement benefits cost $ 4 $ 5 $ 10
- -----------------------------------------------------------------------------------------------------------
During 1993, the Company incurred a curtailment with respect to its
postretirement plan, in relation to the Primerica Transaction. The net gain
of approximately $56 million pretax was included in the loss on the sale of
Shearson. (See Note 21 for definitions and additional information
concerning this sale.)
- SEVENTY THREE -
LEHMAN BROTHERS 1995 ANNUAL REPORT
The following table sets forth the amount recognized in the Consolidated
Statement of Financial Condition for the Company's postretirement benefit
plans (other than pension plans):
NOVEMBER 30 NOVEMBER 30
(IN MILLIONS) 1995 1994
- -------------------------------------------------------------------------------
Accumulated postretirement benefit obligation
Retirees $ 42 $ 45
Fully eligible active plan participants 4 5
Other active plan participants 6 6
- -------------------------------------------------------------------------------
52 56
- -------------------------------------------------------------------------------
Unrecognized net gain 17 12
Unrecognized net reduction in prior service cost 8 9
- -------------------------------------------------------------------------------
Accrued postretirement liability recognized in
the Consolidated Statement of Financial Condition $ 77 $ 77
- -------------------------------------------------------------------------------
The discount rate used in determining the accumulated postretirement
benefit obligation was 7.25% and 8.5% in 1995 and 1994, respectively.
The annual assumed health care cost trend rate is 11% for the year ended
November 30, 1996 and is assumed to decrease at the rate of 1% per year to
6% in the year ended November 30, 2001 and remain at that level thereafter.
An increase in the assumed health care cost trend rate by one percentage
point in each period would increase the accumulated postretirement benefit
obligation as of November 30, 1995 by approximately $1 million.
NOTE 15 Income Taxes
- ----------------------
For tax filings subsequent to the spin-off from American Express,
commencing with the period June 1, 1994 to December 31, 1994, the Company
will file a consolidated U.S. federal income tax return reflecting the
income of Holdings and its subsidiaries. For the period prior to the
spin-off, the income of the Company was included in the American Express
consolidated U.S. federal income tax return, as it had been since August of
1990.
With respect to the period in which the Company was included in the
American Express consolidated U.S. federal income tax return, intercompany
taxes are remitted to, or from, American Express when they are otherwise
due to or from the relevant taxing authority. The balances due from
American Express at November 30, 1995 and November 30, 1994 were $21
million and $47 million, respectively.
- SEVENTY FOUR -
LEHMAN BROTHERS 1995 ANNUAL REPORT
The provision for income taxes from continuing operations consists of the
following:
TWELVE MONTHS ELEVEN MONTHS TWELVE MONTHS
ENDED ENDED ENDED
NOVEMBER 30 NOVEMBER 30 DECEMBER 31
(IN MILLIONS) 1995 1994 1993
Current
Federal $ 170 $ (158) $ 246
State 80 (5) 130
Foreign 72 63 50
322 (100) 426
Deferred
Federal (144) 153 (85)
State (51) 14 (23)
$ 127 $ 67 $ 318
During the third quarter of 1993, the statutory U.S. federal income tax
rate was increased to 35% from 34%, effective January 1, 1993. The
Company's 1993 tax provision includes a one-time benefit of approximately
$10 million from the impact of the rate change on the Company's net
deferred tax assets as of January 1, 1993.
Income from continuing operations before taxes included $173 million, $105
million and $318 million that is subject to income taxes of foreign
jurisdictions for 1995, 1994 and 1993, respectively.
The income tax provision differs from that computed by using the statutory
federal income tax rate for the reasons shown below:
TWELVE MONTHS ELEVEN MONTHS TWELVE MONTHS
ENDED ENDED ENDED
NOVEMBER 30 NOVEMBER 30 DECEMBER 31
(IN MILLIONS) 1995 1994 1993
- -----------------------------------------------------------------------------------------------
Federal income taxes at statutory rate $ 129 $ 67 $ 9
State and local taxes 18 6 69
Tax-exempt interest and dividends (17) (21) (20)
Goodwill reduction related to the sale of Shearson 263
Amortization of goodwill 2 3 9
Foreign operations (1) 13
U.S. federal rate change (10)
Other (4) (1) (2)
- -----------------------------------------------------------------------------------------------
$ 127 $ 67 $ 318
- -----------------------------------------------------------------------------------------------
Deferred income tax assets and liabilities result from the recognition of
temporary differences. Temporary differences are differences between the
tax bases of assets and liabilities and their reported amounts in the
consolidated financial statements that will result in differences between
income for tax purposes and income for consolidated financial
statement purposes in future years. The Company provides deferred income
taxes on undistributed earnings of
foreign subsidiaries.
- SEVENTY FIVE -
LEHMAN BROTHERS 1995 ANNUAL REPORT
At November 30, 1995 and 1994, the Company's net deferred tax assets from
continuing operations consisted of the following:
NOVEMBER 30 NOVEMBER 30
(IN MILLIONS) 1995 1994
- -------------------------------------------------------------------------------
Deferred tax assets $ 552 $ 834
Less: Valuation allowance 106 156
- -------------------------------------------------------------------------------
Deferred tax assets net of valuation allowance 446 678
Deferred tax liabilities (137) (458)
- -------------------------------------------------------------------------------
Net deferred tax assets from continuing operations $ 309 $ 220
The net deferred tax assets increased by $89 million to $309 million at
November 30, 1995. The net increase is primarily attributable to the
reversal of certain temporary differences. At November 30, 1995 and 1994
the deferred tax assets and liabilities consisted of the following:
NOVEMBER 30 NOVEMBER 30
(IN MILLIONS) 1995 1994
- -------------------------------------------------------------------------------
Deferred tax assets:
Reserves not currently deductible $ 289 $ 438
Deferred compensation 212 174
Tax return NOLs 44 213
Other 7 9
- -------------------------------------------------------------------------------
Total deferred tax assets $ 552 $ 834
- -------------------------------------------------------------------------------
NOVEMBER 30 NOVEMBER 30
(IN MILLIONS) 1995 1994
- -------------------------------------------------------------------------------
Deferred tax liabilities:
Undistributed earnings of foreign subsidiaries
(net of credits) $ 4 $ 17
Excess tax over financial depreciation 83 78
Unrealized trading and investment adjustments 4 310
Pension and retirement costs 35 18
Other 11 35
- -------------------------------------------------------------------------------
Total deferred tax liabilities $ 137 $ 458
- -------------------------------------------------------------------------------
The net deferred tax assets are included in deferred expenses and other
assets in the accompanying Consolidated Statement of Financial Condition.
At November 30, 1995, the valuation allowance recorded against deferred tax
assets from continuing operations was $106 million compared to $156 million
at November 30, 1994, of which approximately $56 million and $131 million,
respectively, will reduce goodwill if future circumstances permit
recognition. The decrease in the valuation allowance primarily relates to
the write-off of certain net operating losses ("NOLs") that no longer meet
the asset recognition criteria under SFAS 109. The decrease had no impact
in the Company's Consolidated Statement of Operations since it was
associated with a corresponding decrease in the Company's net deferred tax
assets.
For tax return purposes, the Company has approximately $25 million of NOL
carryforwards, substantially all of which are attributable to the 1988
acquisition of E.F. Hutton Group, Inc., (now known as LB I Group Inc.).
Substantially, all of the NOLs are scheduled to expire in the years 1999
through 2009.
- SEVENTY SIX -
LEHMAN BROTHERS 1995 ANNUAL REPORT
NOTE 16 Derivative Financial Instruments
- -----------------------------------------
Derivatives are financial instruments whose value is based upon an
underlying asset (e.g., treasury bond), index (e.g., S&P 500) or reference
rate (e.g., LIBOR). Over-the-counter ("OTC") derivative products are
privately negotiated contractual agreements that can be tailored to meet
individual client needs and include forwards, swaps and certain options
including caps, collars and floors. Exchange-traded derivative products are
standardized contracts transacted through regulated exchanges and include
futures and certain option contracts listed on an exchange.
In the normal course of business, the Company enters into derivative
transactions both in a trading capacity and as an end user. Acting in a
trading capacity, the Company enters into derivative transactions to
satisfy the needs of its clients and to manage the Company's own exposure
to market and credit risks resulting from its trading activities in cash
instruments (collectively, "Trading-Related Derivative Activities"). As an
end user, the Company primarily enters into interest rate swap and option
contracts to adjust the interest rate nature of its funding sources from
fixed to floating rates and vice versa, and to change the index upon which
floating interest rates are based (i.e., Prime to LIBOR) (collectively,
"End User Derivative Activities").
There is an extensive volume of derivative products available in the
marketplace which can vary from a simple forward foreign exchange contract
to a complex derivative instrument with multiple risk characteristics
involving the aggregation of the risk characteristics of a number of
derivative product types including swap products, options, futures and
forwards. Listed below are examples of various derivative product types
along with a brief discussion of the performance mechanics of certain
specific derivative instruments.
Swap Products
Interest rate swap products include interest rate and currency swaps,
leveraged swaps, swap options, and other interest rate option products
including caps, collars, and floors. An interest rate swap is a negotiated
OTC contract in which two parties agree to exchange periodic interest
payments for a defined period, calculated based upon a predetermined
notional amount. Interest payments are usually exchanged on a net basis
throughout the duration of the swap contract. A currency swap is an OTC
agreement to exchange a fixed amount of one currency for a specified amount
of a second currency at the outset and completion of the swap term.
Leveraged swaps involve the multiplication of the interest rate factor upon
which the interest payment streams are based (i.e., Party A pays 3 times
six month LIBOR). Caps are contractual commitments that require the writer
to pay the purchaser the amount by which an interest reference rate exceeds
a defined contractual rate, if any, at specified times during the contract.
Conversely, a floor is a contractual commitment that requires the writer to
pay the amount by which a defined contractual rate exceeds an interest
reference rate at specified times over the life of the contract, if any.
Equity swaps are contractual agreements whereby one party agrees to receive
the appreciation (or depreciation) value over a strike price on an equity
investment in return for paying another rate, which is usually based upon
equity index movements or interest rates. Commodity swaps are contractual
commitments to exchange the fixed price of a commodity for a floating price
(which is usually the prevailing spot price) throughout the swap term.
Options
Option contracts provide the option purchaser (holder) with the right but
not the obligation to buy or sell a financial instrument, commodity or
currency at a predetermined exercise price (strike price) during a defined
period (American Option) or at a specified date (European Option). The
option purchaser pays a premium to the option seller (writer) for the right
to exercise the option. The option seller is obligated to buy (call) or
sell (put) the item underlying the contract at a set price, if the option
purchaser chooses to exercise. Option contracts also exist for various
indices and are similar to options on a security or other instrument except
that, rather than settling physical with delivery of the
- SEVENTY SEVEN -
LEHMAN BROTHERS 1995 ANNUAL REPORT
underlying instrument, they are cash settled. As a purchaser of an option
contract, the Company is subject to credit risk but is not subject to
market risk, since the counterparty is obligated to make payments under the
terms of the option contract if the Company exercises the option. As the
writer of an option contract, the Company is not subject to credit risk but
is subject to market risk, since the Company is obligated to make payments
under the terms of the option contract if exercised.
Option contracts may be exchange-traded or OTC. Exchange-traded options are
the obligations of the exchange and generally have standardized terms and
performance mechanics. In contrast, all of the terms of an OTC option
including the method of settlement, term, strike price, premium and
security are determined by negotiation of the parties.
Futures and Forwards
Futures contracts are exchange-traded contractual commitments to either
receive (purchase) or deliver (sell) a standard amount or value of a
financial instrument or commodity at a specified future date and price.
Maintaining a futures contract requires the Company to deposit with the
exchange, as security for its obligation (original margin), an amount of
cash or other specified asset. Additionally, futures exchanges generally
require the daily cash settlement of unrealized gains/losses on open
contracts with the futures exchange. Therefore, futures contracts provide a
reduced funding alternative to purchasing the underlying cash position in
the marketplace. Futures contracts may be settled by physical delivery of
the underlying asset or cash settlement (for index futures) on the
settlement date or by entering into an offsetting futures contract with the
futures exchange prior to the settlement date.
Forwards are OTC contractual commitments to purchase or sell a specified
amount of a financial instrument, foreign currency or commodity at a future
date at a predetermined price. TBA's are forward contracts which give the
purchaser/seller an obligation to obtain/deliver mortgage securities in the
future. Therefore, TBA's subject the holder to both interest rate risk and
principal prepayment risk.
Trading-Related Derivative Activities
Derivatives are subject to various risks similar to other financial
instruments including market, credit and operational risk. In addition, the
Company may also be exposed to legal risks related to its derivative
activities including the possibility that a transaction may be
unenforceable under applicable law. The risks of derivatives should not be
viewed in isolation, but rather should be considered on an aggregate basis
along with the Company's other trading-related activities. The Company
manages the risks associated with derivatives on an aggregate basis along
with the risks associated with its proprietary trading and market-making
activities in cash instruments as part of its firmwide risk management
policies.
Derivatives are generally based upon notional values. Notional values are
not recorded on-balance-sheet, but rather are utilized solely as a basis
for determining future cash flows to be exchanged. Therefore, notional
amounts provide a measure of the Company's involvement with such
instruments, but are not indicative of potential risk.
- SEVENTY EIGHT -
LEHMAN BROTHERS 1995 ANNUAL REPORT
The following table reflects the notional/contract value of the Company's
Trading-Related Derivative Activities.
TRADING-RELATED DERIVATIVE FINANCIAL INSTRUMENTS
NOTIONAL/CONTRACT VALUE
NOVEMBER 30 NOVEMBER 30 1995
WEIGHTED AVERAGE
(IN MILLIONS) 1995 1994 MATURITY IN YEARS
- -----------------------------------------------------------------------------
Over-the-Counter
Swap products $ 541,776 $ 433,452 3.71
Options purchased 22,933 24,709 .43
Options written 24,964 23,374 .38
Forwards 378,300 291,930 .20
- -----------------------------------------------------------------------------
967,973 773,465 2.18
- -----------------------------------------------------------------------------
Exchange-Traded
Futures 185,635 274,905 .70
Options purchased 31,923 23,875 .19
Options written 23,462 31,640 .54
- -----------------------------------------------------------------------------
241,020 330,420 .62
- -----------------------------------------------------------------------------
$ 1,208,993 $ 1,103,885 1.86
- -----------------------------------------------------------------------------
Approximately $349 billion and $283 billion of these contracts relate to
foreign exchange transactions at November 30, 1995 and 1994, respectively.
Approximately $732 billion of the notional/contract value of the Company's
Trading-Related Derivative Activities mature within the year ended November
30, 1996, of which approximately 42% have maturities of less than one
month.
The Company records its Trading-Related Derivative Activities on a
mark-to-market basis with realized and unrealized gains (losses) recognized
currently in principal transactions. The Company currently records
unrealized gains and losses on derivative contracts on a net basis in the
Consolidated Statement of Financial Condition for those transactions with
counterparties executed under a legally enforceable master netting
agreement. While the Company may utilize derivative products in all its
businesses, the Company views its derivative product revenues as the
revenues earned from the Company's fixed income and equity derivative
products businesses, and foreign exchange and commodity derivatives.
Principal transactions revenues related to the Company's fixed income
derivative products business were $381 million for 1995, $461 million for
1994 and $330 million for 1993. Principal transactions revenues related to
the Company's equity derivative products business were $112 million for
1995, $80 million for 1994 and $82 million for 1993. Principal transactions
revenues related to foreign exchange and commodity derivatives were $66
million for 1995, $75 million for 1994 and $129 million for 1993.
Listed in the following table is the fair value of the Company's
Trading-Related Derivative Activities as of November 30, 1995 and 1994 as
well as the average fair value of these instruments. Average fair values of
these instruments were calculated based upon month-end statement of
financial condition values, which the Company believes does not vary
significantly from the average fair value calculated on a more frequent
basis. Variances between average fair values and period-end values are due
to changes in the volume of activities in these instruments and changes in
the valuation of these instruments due to variations in market and credit
conditions.
- SEVENTY NINE -
LEHMAN BROTHERS 1995 ANNUAL REPORT
FAIR VALUE OF TRADING-RELATED DERIVATIVE FINANCIAL INSTRUMENTS
FAIR VALUE AVERAGE FAIR VALUES
NOVEMBER 30, 1995 NOVEMBER 30, 1994 TWELVE MONTHS 1995 ELEVEN MONTHS 1994
(IN MILLIONS) ASSETS LIABILITIES ASSETS LIABILITIES ASSETS LIABILITIES ASSETS LIABILITIES
Swap products $2,730 $2,291 $3,752 $2,114 $2,871 $2,425 $2,998 $1,606
Options purchased 848 992 686 1,088
Options written 1,012 1,049 565 1,045
Forwards 1,358 1,526 823 887 1,557 1,561 1,128 1,048
Futures(1) 89 64 15 27 87 44 171 40
Commodities 339 434 155 128 405 487 155 128
$5,364 $5,327 $5,737 $4,205 $5,606 $5,082 $5,540 $3,867
(1) Fair values of futures contracts represent the unsettled net receivable
or payable amount due to/from various futures exchanges on open futures
contracts.
Assets included in the table above represent the Company's unrealized
gains, net of unrealized losses for situations in which the Company has a
master netting agreement. Similarly, liabilities represent net amounts owed to
counterparties. Therefore, the fair value of assets related to derivative
contracts at November 30, 1995 represents the Company's net receivable for
derivative financial instruments before consideration of collateral. Included
within this amount was $5,202 million and $162 million, respectively, related to
OTC and exchange-traded contracts.
The primary difference in risks related to OTC and exchange-traded
contracts is credit risk. OTC contracts contain credit risk for unrealized
gains from various counterparties for the duration of the contract, net of
collateral. Exchange-traded contracts are transacted directly on the
respective exchanges. The exchange clearing house requires its
counterparties to post margin upon the origination of the contract and for
any changes in the market value of the contract on a daily basis (certain
foreign exchanges extend settlement to three days).
With respect to OTC instruments, the Company views its net credit exposure
to be $3,732 million at November 30, 1995, representing the fair value of
the Company's OTC contracts in an unrealized gain position, after
consideration of collateral of $1,470 million.
Counterparties to the Company's OTC derivative products are primarily
financial intermediaries (U.S. and foreign banks), securities firms,
corporations, governments and their agencies, finance companies, insurance
companies, investment companies, pension funds and consumers and producers
of energy and metals products. Collateral held related to OTC contracts
generally includes cash and U.S. government and federal agency securities.
Presented below is an analysis of the Company's net credit exposure for OTC
contracts based upon internal designations of counterparty credit quality.
1995
COUNTERPARTY S&P/MOODY'S NET CREDIT
RISK RATING EQUIVALENT EXPOSURE
1 AAA/Aaa 21%
2 AA-/Aa3 or higher 24%
3 A-/A3 or higher 36%
4 BBB-/Baa3 or higher 11%
5 BB-/Ba3 or higher 6%
6 B+/B1 or lower 2%
These designations are based on actual ratings made by external rating
agencies or by equivalent ratings established and utilized by the Company's
Corporate Credit Department.
- EIGHTY -
LEHMAN BROTHERS 1995 ANNUAL REPORT
With respect to exchange-traded derivative instruments, the fair value of
assets reflects the unsettled variation margin due from futures exchanges
as well as the fair value of exchange-listed purchased options. Foreign
futures exchanges, consistent with their domestic counterparts, require
cash or other securities to be deposited with the exchange as collateral
for open contracts.
End User Derivative Activities
The Company utilizes a variety of derivative products as an end user to
modify the interest rate characteristics of its long-term debt portfolio.
The Company actively manages the interest rate exposure on its long-term
debt portfolio to more closely match the terms of its debt portfolio to the
assets being funded and to minimize interest rate risk. At November 30,
1995 and November 30, 1994 the notional value of the Company's end user
activities related to its long-term debt obligations were approximately
$11.0 billion and $8.1 billion, respectively. (For a further discussion of
the Company's long-term debt-related end user activities see Note 5.)
The Company also enters into interest rate swap agreements as an end user
to modify its interest rate exposure associated with its secured financing
activities, including securities purchased under agreements to resell,
securities borrowed, securities sold under agreements to repurchase and
securities loaned. At November 30, 1995 and 1994, the Company had $114
billion and $108 billion, respectively, of such secured financing
activities. As with the Company's long-term debt, its secured financing
activities expose the Company to interest rate risk. The Company, as an end
user, manages the interest rate risk related to these activities by
entering into derivative financial instruments, including interest rate
swaps and purchased options. The Company designates certain specific
derivative transactions against specific assets and liabilities with
matching maturities. In addition, the Company manages the interest rate
risk of anticipated secured financing transactions with derivative
products. These derivative products are designated against the existing
secured financing transactions for their applicable maturity. The remaining
term of these transactions are designated against the anticipated secured
financing transactions which will replace the existing secured financing
transactions at their maturity. The Company continuously monitors the level
of secured financing transactions to ensure that there is a high degree of
certainty that the Company will enter into the anticipated secured
financing transactions at a level in excess of the designated derivative
product transactions. At November 30, 1995 and November 30, 1994, the
Company, as an end user, utilized derivative financial instruments with an
aggregate notional amount of $21.5 billion and $32.3 billion, respectively,
to modify the interest rate characteristics of its secured financing
activities. The total notional value of these agreements had a weighted
average maturity of 1.1 years and 1.2 years as of November 30, 1995 and
November 30, 1994, respectively.
During 1995, the Company terminated certain swaps designated as hedges of
the Company's secured financing activities. At November 30, 1995, a loss of
approximately $16 million from these terminated contracts was deferred and
will be amortized to interest expense in 1996. On an overall basis, the
Company's secured financing end user activities increased net interest
income by approximately $39 million and $6 million for 1995 and 1994,
respectively.
NOTE 17 Fair Value of Financial Instruments
SFAS No. 107 "Disclosures about Fair Value of Financial Instruments"
requires the disclosure of the fair value of on- and off-balance sheet
financial instruments, both assets and liabilities, for which it is
practicable to estimate fair value. Fair value is the amount at which a
financial instrument could be exchanged in a current transaction between
willing parties, other than in a forced sale or liquidation. The fair
values of financial instruments are estimates based upon market conditions
and perceived risks as of the statement of financial condition date and
require varying degrees of management judgment. Quoted market prices, when
available, are used as the measure of fair value. In cases where
- EIGHTY ONE -
LEHMAN BROTHERS 1995 ANNUAL REPORT
quoted market prices are not available, fair values are based on quotations
of similarly traded instruments and pricing models. Pricing models which
consider time value, volatility factors, the current market and contractual
prices of the underlying financial instrument are used to value derivatives
and other contractual agreements. The disclosure requirements of SFAS No.
107 exclude certain financial instruments such as employee benefit
obligations and all non-financial instruments such as fixed assets and
goodwill.
All of the Company's financial instruments are carried at fair value or
contractual values which approximate fair value, with the exception of
long-term debt, certain secured financing activities and the related
financial instruments utilized by the Company as an end user to manage the
interest rate risk of these portfolios. Assets and liabilities which are
carried at fair value include securities and other financial instruments
owned and securities and other financial instruments sold but not yet
purchased. Assets and liabilities, which are recorded at contractual
amounts that approximate market or fair value, include cash and cash
equivalents, cash and securities segregated and on deposit for regulatory
and other purposes, receivables, certain other assets and deferred
expenses, commercial paper and short-term debt, and payables.
The Company's long-term debt is recorded at contractual or historical
amounts that do not necessarily approximate market or fair value. For fair
value purposes, the carrying value of variable rate long-term debt that
reprices within one year and fixed rate long-term debt which matures in
less than six months is considered to approximate fair value. For the
remaining long-term debt portfolio, fair value is estimated using either
quoted market prices or discounted cash flow analyses based on the
Company's current borrowing rates for similar types of borrowing
arrangements. The Company utilizes derivative financial instruments as an
end user to convert the interest rate basis for its long-term debt from
fixed or floating to another basis. The unrecognized net gains/(losses)
related to these end user activities reflect the estimated amounts the
Company would receive/pay if the agreements were terminated based on market
rates at November 30, 1995 and 1994, respectively. The following is a
summary of the fair value of the Company's long-term debt and related end
user activities:
NOVEMBER 30 NOVEMBER 30
(IN MILLIONS) 1995 1994
- ----------------------------------------------------------------------------------------------
Carrying value of long-term debt $12,765 $11,321
Fair value of long-term debt 13,270 11,131
- ----------------------------------------------------------------------------------------------
Unrecognized net gain (loss) on long-term debt $ (505) $ 190
- ----------------------------------------------------------------------------------------------
Unrecognized net gain (loss) on long-term debt end user activities $ 236 $ (99)
- ----------------------------------------------------------------------------------------------
The Company carries its secured financing activities, including securities
purchased under agreements to resell, securities borrowed, securities sold
under agreements to repurchase and securities loaned, at their original
contract amount plus accrued interest, which for the majority of such
financing activities is an approximation of fair value. At November 30,
1995 and 1994, the Company had $114 billion and $108 billion, respectively,
of such secured financing activities. As with the Company's long-term debt,
its secured financing activities expose the Company to interest rate risk.
At November 30, 1995 and 1994, the Company, as an end user, utilized
derivative financial instruments with an aggregate notional amount of $21.5
billion and $32.3 billion, respectively, to modify the interest rate
characteristics of its secured financing activities. The unrecognized net
losses related to these derivative financial instruments of $36 million and
$110 million at November 30, 1995 and 1994, respectively, were offset by
unrecognized net gains arising from the Company's secured financing
activities.
- EIGHTY TWO -
LEHMAN BROTHERS 1995 ANNUAL REPORT
NOTE 18 Other Commitments and Contingencies
- -------------------------------------------
As of November 30, 1995 and 1994, the Company was contingently liable for
$2.0 billion and $1.5 billion, respectively, of letters of credit,
primarily used to provide collateral for securities and commodities
borrowed and to satisfy margin deposits at option and commodity exchanges,
and other guarantees.
The Company has commitments under certain secured lending arrangements of
approximately $1.8 billion at November 30, 1995. These commitments require
borrowers to provide acceptable collateral, as defined in the agreements,
when amounts are drawn under the lending facilities. Advances under the
above lending arrangements are typically at variable interest rates and
generally provide for over-collateralization based upon the borrowers'
creditworthiness.
As of November 30, 1995 and 1994, the Company had pledged or otherwise
transferred securities, primarily fixed income, having a market value of
$30.3 billion and $20.1 billion, respectively, as collateral for securities
borrowed or otherwise received having a market value of $30.1 billion and
$19.9 billion, respectively.
Securities and other financial instruments sold but not yet purchased
represent obligations of the Company to purchase the securities at
prevailing market prices. Therefore, the future satisfaction of such
obligations may be for an amount greater or less than the amount recorded.
The ultimate gain or loss is dependent upon the price at which the
underlying financial instrument is purchased to settle its obligation under
the sale commitment.
In addition, the Company's customer activities may expose it to
off-balance-sheet credit and market risk. These risks may arise in the
normal course of business as a result of executing, financing and settling
various customer security and commodity transactions. Off-balance-sheet
risk arises from the potential that customers or counterparties fail to
satisfy their obligations and that the collateral obtained is insufficient.
In such instances, the Company may be required to purchase or sell
financial instruments at unfavorable market prices. The Company seeks to
control these risks by obtaining margin balances and other collateral in
accordance with regulatory and internal guidelines.
Subsidiaries of the Company, as general partner, are contingently liable
for the obligations of certain public and private limited partnerships
organized as pooled investment funds or engaged primarily in real estate
activities. In the opinion of the Company, contingent liabilities, if any,
for the obligations of such partnerships will not in the aggregate have a
material adverse effect on the Company's consolidated financial position or
results of operations.
In the normal course of its business, the Company has been named a
defendant in a number of lawsuits and other legal proceedings. After
considering all relevant facts, available insurance coverage and the advice
of outside counsel, in the opinion of the Company such litigation will not,
in the aggregate, have a material adverse effect on the Company's
consolidated financial position or results of operations.
Concentrations of Credit Risk
As a major international securities firm, the Company is actively involved
in securities underwriting, brokerage, distribution and trading. These and
other related services are provided on a worldwide basis to a large and
diversified group of clients and customers, including multinational
corporations, governments, emerging growth companies, financial
institutions and individual investors.
A substantial portion of the Company's securities and commodities
transactions is collateralized and is executed with, and on behalf of,
commercial banks and other institutional investors, including other brokers
and dealers. The Company's exposure to credit risk associated with the
non-performance of these customers and counterparties in fulfilling their
contractual obligations pursuant to securities transactions can be directly
impacted by volatile or illiquid trading markets, which may impair the
ability of customers and counterparties to satisfy their obligations to the
Company.
- EIGHTY THREE -
LEHMAN BROTHERS 1995 ANNUAL REPORT
Securities and other financial instruments owned by the Company include
U.S. government and agency securities, and securities issued by non-U.S.
governments (principally Japan, Germany and Italy) which, in the aggregate,
represented 20% of the Company's total assets at November 30, 1995. In
addition, substantially all of the collateral held by the Company for
resale agreements or securities borrowed, which together represented 46% of
total assets at November 30, 1995, consisted of securities issued by the
U.S. government, federal agencies or non-U.S. governments. In addition to
these specific exposures, the Company's most significant concentration is
financial institutions, which include other brokers and dealers, commercial
banks and institutional clients. This concentration arises in the normal
course of the Company's business.
Lease Commitments
The Company leases office space and equipment throughout the world and has
entered into a ground lease with the Battery Park City Authority covering
its headquarters at 3 World Financial Center which extends through 2069.
Total rent expense for 1995, 1994 and 1993 was $67 million, $59 million and
$109 million, respectively. Certain leases on office space contain
escalation clauses providing for additional rentals based upon maintenance,
utility and tax increases.
Minimum future rental commitments under noncancellable operating leases
(net of subleases of $587 million) are as follows:
(IN MILLIONS) AMOUNT
- ----------------------------------------------
Fiscal 1996 $ 54
Fiscal 1997 50
Fiscal 1998 43
Fiscal 1999 41
Fiscal 2000 36
December 1, 2000 and thereafter 527
- ----------------------------------------------
$ 751
- ----------------------------------------------
The minimum future rental commitments shown above include lease obligations
related to facilities which the Company intends to vacate and sublease in
future periods, before consideration of the Company's fourth quarter
restructuring charge. (See Note 20.)
NOTE 19 International Operations
- --------------------------------
Although the Company's business activities are highly integrated and
constitute a single industry segment for the purposes of SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," they can be
broadly categorized into the three major geographic areas in which it
conducts operations: North America, Europe and Asia Pacific.
The Company manages its businesses with the goal of maximizing worldwide
profitability by product line. Activities such as the global distribution
of underwritings and the twenty-four hour risk management of trading
positions render geographic profitability to be highly subjective as it is
the result of numerous estimates and assumptions.
The amounts presented in the following table provide a broad indication of
each region's contribution to the consolidated results. The method of
allocation is as follows: Gross and Net Revenues, if syndicate or
trading-related, have been distributed based upon the location where the
primary or secondary position was fundamentally risk managed; if
fee-related, by the location of the senior coverage banker; if commission
related, by the location of the salespeople. Income (Loss)
- EIGHTY FOUR -
LEHMAN BROTHERS 1995 ANNUAL REPORT
Before Taxes includes expenses associated with generating the revenues
reflected in each region. Identifiable Assets represent essentially those
recorded in the legal entities in which the Company does business within
the respective region.
INCOME
GROSS NET (LOSS) IDENTIFIABLE
(IN MILLIONS) REVENUES REVENUES BEFORE TAXES ASSETS
- -------------------------------------------------------------------------------------------------------
Twelve months ended December 31, 1993
International operations:
Europe $ 1,013 $ 660 $ 109 $ 17,949
Asia Pacific 276 224 31 1,944
- -------------------------------------------------------------------------------------------------------
Total international 1,289 884 140 19,893
Domestic operations 9,385 4,422 (113) 60,581
- -------------------------------------------------------------------------------------------------------
Total $ 10,674 $ 5,306 $ 27 $ 80,474
- -------------------------------------------------------------------------------------------------------
Eleven months ended November 30, 1994
International operations:
Europe $ 846 $ 542 $ (43) $ 25,199
Asia Pacific 324 269 11 4,860
- -------------------------------------------------------------------------------------------------------
Total international 1,170 811 (32) 30,059
Domestic operations 8,020 1,927 225 79,888
- -------------------------------------------------------------------------------------------------------
Total $ 9,190 $ 2,738 $ 193 $ 109,947
- -------------------------------------------------------------------------------------------------------
Twelve months ended November 30, 1995
International operations:
Europe $ 892 $ 575 $ (25) $ 27,844
Asia Pacific 375 355 84 5,513
- -------------------------------------------------------------------------------------------------------
Total international 1,267 930 59 33,357
Domestic operations 12,209* 2,141* 310 81,946
- -------------------------------------------------------------------------------------------------------
Total $ 13,476 $ 3,071 $ 369 $ 115,303
- -------------------------------------------------------------------------------------------------------
*Includes $129 million resulting from the Company's sale of its stake in
Omnitel.
NOTE 20 Other Charges
- --------------------
Restructuring Charge
- --------------------
During the fourth quarter of 1995, the Company recorded a charge of $97
million pretax ($58 million aftertax) for occupancy-related real estate and
severance expenses. The occupancy-related real estate expense component of
the charge, $80 million pretax ($48 million aftertax), resulted from a
complete global review of the Company's real estate requirements at current
headcount levels and the elimination of excess real estate, primarily in
its New York, London and Tokyo locations. The charge includes the cost to
write-down the carrying value of leasehold improvements as well as the
difference between expected operating costs and projected sublease
recoveries. In addition, the restructuring charge includes a $17 million
pretax ($10 million aftertax) component related to severance payments made
during the fourth quarter. The severance component of the charge relates to
payments made to terminated personnel arising from a fourth quarter
formalized business unit productivity review.
Spin-Off Expenses
- -----------------
During the second quarter of 1994, the Company recorded a charge of $15
million pretax ($12 million aftertax) in connection with the Concurrent
Transactions and certain related expenses.
- EIGHTY FIVE -
LEHMAN BROTHERS 1995 ANNUAL REPORT
Reduction in Personnel
During the first quarter of 1994, the Company conducted a review of
personnel needs, which resulted in the termination of certain personnel.
The Company recorded a severance charge of $33 million pretax ($18 million
aftertax) in the first quarter of 1994.
Reserves for Non-Core Businesses
During the first quarter of 1993, the Company provided $152 million pretax
($100 million aftertax) of non-core business reserves. Of this amount, $32
million pretax ($21 million aftertax) related to certain non-core
partnership syndication activities in which the Company is no longer
actively engaged. The remaining $120 million pretax ($79 million aftertax)
related to reserves recorded in anticipation of the sale of SLHMC. Such
sale was completed during the third quarter of 1993.
NOTE 21 Sale of Business Units
- -----------------------------
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 Inc., "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 supported 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"). 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 aftertax ($535 million pretax),
which included a reduction in goodwill of $750 million and
transaction-related costs such as relocation, systems and operations
modifications and severance.
- EIGHTY SIX -
LEHMAN BROTHERS 1995 ANNUAL REPORT
Presented below is the results of operations and the loss on the sale of
Shearson:
YEAR ENDED
DECEMBER 31
(IN MILLIONS) 1993
- -------------------------------------------
Revenues $ 1,825
Expenses 1,708
Loss on sale of Shearson 535
- -------------------------------------------
Income (loss) before taxes (418)
Provision for income taxes 149
- -------------------------------------------
Net income (loss) $ (567)
- -------------------------------------------
Shearson operating results reflect allocated interest expense of $72
million for the year ended December 31, 1993.
The Boston Company
On May 21, 1993, pursuant to a stock purchase agreement (the "Mellon
Agreement") between LBI and Mellon Bank Corporation ("Mellon Bank"), LBI
sold to Mellon Bank (the "Mellon Transaction") The Boston Company. Under
the terms of the Mellon Agreement, LBI received approximately $1.3 billion
in cash, 2,500,000 shares of Mellon Bank common stock and ten-year warrants
to purchase an additional 3,000,000 shares of Mellon Bank's common stock at
an exercise price of $50 per share. In June 1993, such shares and warrants
were sold by LBI to American Express for an aggregate purchase price of
$169 million. After accounting for transaction costs and certain
adjustments, the Company recognized a 1993 first quarter aftertax 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.
Presented below is the results of operations and the gain on disposal of
The Boston Company included in income from discontinued operations:
Year ended
December 31
(in millions) 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
- -------------------------------------------------------------
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 pretax reserves in anticipation of the
sale of SLHMC, which reserves are included in the $152 million of pretax
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.
- EIGHTY SEVEN -
LEHMAN BROTHERS 1995 ANNUAL REPORT
NOTE 22 Quarterly Information (Unaudited)
- ----------------------------------------
The following information represents the Company's unaudited quarterly
results of operations for 1995 and 1994. Certain amounts reflect
reclassifications to conform to the current period's presentation. These
quarterly results reflect all normal recurring adjustments which are, in
the opinion of management, necessary for a fair presentation of the
results. Revenues and earnings of the Company can vary significantly from
quarter to quarter due to the nature of the Company's business activities.
1995 1994
------------------------------------ -------------------------------------
(in millions, except per share amounts) Nov. 30 Aug. 31 May 31 Feb. 28 Nov. 30 Aug. 31 June 30 Mar. 31
Total revenues $3,613 $3,453 $3,298 $3,112 $2,795 $2,537 $2,364 $2,321
Interest expense 2,729 2,703 2,567 2,405 2,087 1,818 1,645 1,453
- ---------------------------------------------------------------------------------------------------------------------
Net revenues 884 750 731 707 708 719 719 868
Non-interest expenses:
Compensation and benefits 433 380 371 360 356 388 364 450
Other expenses 254 261 270 277 287 298 305 297
Reserves and other charges 97 15 33
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest expenses 784 641 641 637 643 686 684 780
- ---------------------------------------------------------------------------------------------------------------------
Income from
continuing operations
before taxes and
cumulative effect of
change in accounting principle 100 109 90 70 65 33 35 88
Provision for income taxes 31 38 32 25 19 11 15 33
- ---------------------------------------------------------------------------------------------------------------------
Income from
continuing operations
before cumulative
effect of change in
accounting principle 69 71 58 45 46 22 20 55
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 69 $ 71 $ 58 $ 45 $ 46 $ 22 $ 20 $ 42
- ---------------------------------------------------------------------------------------------------------------------
Net income
applicable to
common stock $ 58 $ 60 $ 48 $ 34 $ 35 $ 11 $ 12 $ 30
- ---------------------------------------------------------------------------------------------------------------------
Earnings per common share
before cumulative
effect of change in
accounting principle $ 0.49 $ 0.52 $ 0.43 $ 0.31 $ 0.32 $ 0.10 $ 0.11 $ 0.41
Dividends per
common share $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.125
Book value per common
share (at period end) $25.67 $25.23 $25.16 $24.69 $24.35 $23.97 $24.65
Number of shares used in
earnings per common
share computation 117.1 116.2 110.2 110.2 110.6 109.1 105.7 105.7
- ---------------------------------------------------------------------------------------------------------------------
In conjunction with the decision to change its year-end, the Company
reported its third quarter 1994 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 1994 have been reflected in both the second and third quarters
of 1994. Thus, the four quarters of 1994 are not additive.
Net income for the first quarter of 1994 includes a $13 million aftertax
charge for the cumulative effect of a change in accounting for
postemployment benefits as a result of the adoption of SFAS No. 112.
- EIGHTY EIGHT -