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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1996
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER 1-6817
LEHMAN BROTHERS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 13-2518466
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3 WORLD FINANCIAL CENTER 10285
NEW YORK, NEW YORK (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 526-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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7 5/8% Senior Subordinated Notes Due 2006 New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
As the registrant is a wholly-owned subsidiary of Lehman Brothers Holdings
Inc., none of the registrant's outstanding voting stock is held by
non-affiliates of the registrant. As of the date hereof, 1,006 shares of the
registrant's Common Stock. $.10 per share, were issued and outstanding.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
J(1)(a) AND (b) OF FORM 10-K AND THEREFORE IS FILING THIS FORM WITH A PORTION OF
THE REDUCED DISCLOSURE CONTEMPLATED THEREBY.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
As used herein, "LBI" or the "Registrant" means Lehman Brothers Inc., a
Delaware corporation, incorporated on January 21, 1965. LBI and its subsidiaries
are collectively referred to as the "Company" or "Lehman Brothers." LBI is a
wholly-owned subsidiary of Lehman Brothers Holdings Inc., a Delaware
corporation, which (together with its subsidiaries, as appropriate) is referred
to herein as "Holdings."
The Company is one of the leading global investment banks serving
institutional, corporate, government and high-net-worth individual clients and
customers. Its executive offices are located at 3 World Financial Center, New
York, New York 10285 and its telephone number is (212) 526-7000.
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 are complemented by
offices in additional locations in the United States, Europe, the Middle East,
Latin America and the Asia Pacific region. Holdings provides investment banking
and capital markets services in Europe and Asia. The Company is engaged
primarily in providing financial services. Other businesses in which the Company
is engaged represent less than 10 percent of consolidated assets, revenues or
pre-tax income.
The Company's business includes capital raising for clients through
securities underwriting and direct placements; corporate finance and strategic
advisory services; merchant banking; securities sales and trading; research; and
the trading of foreign exchange, derivative products and certain commodities.
The Company and its affiliates act as market-makers in all major equity and
fixed income products in both the domestic and international markets. Lehman
Brothers is a member of all principal securities and commodities exchanges in
the United States, as well as the National Association of Securities Dealers,
Inc. ("NASD"). Holdings holds memberships or associate memberships on several
principal international securities and commodities exchanges, including the
London, Tokyo, Hong Kong, Frankfurt and Milan stock exchanges.
Since 1990, Lehman Brothers has focused on a "client/customer-driven"
strategy. Under this strategy, Lehman Brothers concentrates on serving the needs
of major issuing and advisory clients and investing customers worldwide to build
an increasing "flow" of business that leverages the Company's research,
underwriting and distribution capabilities. Customer flow continues to be the
primary source of the Company's net revenues. Developing long-term relationships
with issuing clients and investing customers is a central premise of the
Company's client/customer-driven strategy. Based on management's belief that
each client and customer directs a majority of its financial transactions to a
limited number of investment banks, Lehman Brothers' investment banking and
institutional and private client sales professionals focus on a targeted group
of clients and customers worldwide to identify and develop lead relationships.
The Company believes that such relationships position Lehman Brothers to receive
a substantial portion of its clients' and customers' financial business and
lessen the volatility of revenues generally associated with the financial
services industry.
During 1996, Lehman Brothers and its affiliates sold a number of
non-strategic businesses, including the sale of its offshore mutual funds to
Legg Mason, the sale of its European branches to Prudential Securities and the
sale of its domestic money market funds to Federated Investors, none of which
individually or in the aggregate were material to the financial results of the
Company. In addition, the Company exited certain commodities businesses. See
Note 12 to the Consolidated Financial Statements.
LEHMAN BUSINESSES
Lehman Brothers is a leading underwriter of global fixed income and equity
securities in the public and private markets. The Company is also a prominent
advisor for corporations and governments around the world.
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INVESTMENT BANKING
Investment Banking professionals are responsible for developing and
maintaining relationships with issuing clients, gaining a thorough understanding
of their specific needs and bringing together the full resources of Lehman
Brothers and Holdings to accomplish their financial objectives. Investment
Banking is organized into industry, product and geographic coverage groups,
enabling individual bankers to develop specific expertise in particular
industries and markets. Industry coverage groups include Financial Services,
Financial Sponsors, Healthcare, Industrial, Media and Telecommunications,
Natural Resources and Power, Real Estate and Technology. Where appropriate,
specialized product groups are partnered with the industry and geographic groups
to provide tailor-made solutions for Lehman Brothers' clients. These groups
include Equity Capital Markets, which include equity and equity-related
securities and derivatives; Debt Capital Markets, which incorporates expertise
in syndicate, liability management, derivatives and private placements; Mergers
and Acquisitions; and Leveraged Finance, which includes high yield debt and bank
loan syndication.
Mergers and Acquisitions/Strategic Advisory. Lehman Brothers has a long
history of providing strategic advisory services to corporate, institutional and
government clients around the world on a wide range of financial matters,
including mergers and acquisitions, restructurings and spin-offs, targeted stock
transactions, share repurchase strategies, takeover defenses, corporate
governance issues and tax optimization strategies. Linkages between strategic
advisory services and the Firm's foreign exchange, derivatives and leveraged
financing products are widely utilized. The Company's Mergers and Acquisitions
group works closely with product, industry and geographic coverage bankers
around the world. Geographically, Lehman Brothers and Holdings maintain
investment banking offices in six cities within the U.S. and in sixteen cities
in Europe, the Middle East, Asia and Latin America.
Merchant Banking. The Company and its affiliates' merchant banking
activities include making principal investments in partnership with clients of
the Firm, raising capital from institutional investors and managing these
investments until they are realized. In 1996, as part of a strategic decision to
expand its merchant banking capabilities, the Firm created a separate Merchant
Banking group with 20 dedicated professionals based in New York, London and Hong
Kong.
Since 1989, the Company and its affiliates' principal method of making
merchant banking investments has been through a series of partnerships (the
"1989 Partnerships"), for which the Company and its affiliates act as general
partner, and in some cases as a limited partner. During the remaining life of
the 1989 Partnerships, the Company's merchant banking activities, with respect
to investments made by the 1989 Partnerships, will be directed toward selling or
otherwise monetizing such investments. The Company's current merchant banking
activities include investments in four partnerships, for which the Company acts
as general partner. These merchant banking investments include both publicly
traded and privately held companies diversified on a geographic and industry
basis. At November 30, 1996, the investment in merchant banking partnerships,
including the 1989 partnerships, was $99 million. The Company has no remaining
commitments to these merchant banking partnerships.
FIXED INCOME
Lehman Brothers actively participates in all key fixed income markets
worldwide and maintains a 24-hour trading presence in global fixed income
securities. The Company combines professionals from the distribution, research
and trading areas of Fixed Income, together with investment bankers, into teams
to serve the financial needs of the Company's clients and customers. The Company
is a leading underwriter of new issues, and also makes markets in these and
other fixed income securities. The Company's global presence facilitates client
and customer transactions and provides liquidity in marketable fixed and
floating rate debt securities.
Fixed Income businesses include the following:
Corporate Debt Securities. Lehman Brothers engages in the underwriting and
market making of fixed and floating rate investment grade debt worldwide.
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Emerging Market Securities. The Company is active in the trading,
structuring and underwriting of Latin American, Eastern European, and Asian
dollar and local currency instruments.
Financing. The Company's Financing unit engages in three primary
functions: managing the Company's matched book activities, supplying secured
financing to customers, and providing funding for the Company's activities.
Matched book funding involves lending cash on a short-term basis to
institutional customers collateralized by marketable securities, typically
government or government agency securities. The Company enters into these
agreements in various currencies and seeks to generate profits from the
difference between interest earned and interest paid. The Financing unit works
with the Company's institutional sales force to identify customers that have
cash to invest and/or securities to pledge to meet the financing and investment
objectives of the Company and its customers. Financing also coordinates with the
Company's treasury area to provide collateralized financing for a large portion
of the Company's securities and other financial instruments owned. In addition
to its activities on behalf of its U.S. clients and customers, the Company and
its affiliates are major participants in the European and Asian repurchase
agreement markets, providing secured financing for the Firm's customers in those
regions.
Fixed Income Derivatives. The Company offers a broad range of derivative
product services in all major currencies on a 24-hour per-day global basis.
Derivatives professionals are integrated into all of the Company's fixed income
areas in the response to the continued convergence of the cash and derivative
markets worldwide.
Foreign Exchange. Lehman Brothers' global foreign exchange operation
provides its customers with market access and liquidity in more than 20
currencies on a 24-hour-per-day basis. With six locations worldwide, the Company
and its affiliates offer its customers superior execution, market intelligence,
analysis and hedging capabilities, utilizing foreign exchange as well as foreign
exchange options and derivatives. In collaboration with the Firm's emerging
markets unit, the Firm's foreign exchange activities have increasingly
diversified into Latin America, Eastern Europe and Asian currencies. Lehman
Brothers also provides advisory services to central banks, corporations,
investors worldwide, structuring innovative products to fit their specific
needs. The Firm makes extensive use of its worldwide macroeconomics research to
advise clients on the appropriate strategies to minimize interest rate and
currency risk. In addition to the Company's traditional client/customer-driven
foreign exchange activities, Lehman Brothers also trades foreign exchange for
its own account.
Government and Agency Obligations. Lehman Brothers is one of the leaders
among the 37 primary dealers in U.S. government securities, as designated by the
Federal Reserve Bank of New York, participating in the underwriting and
market-making of U.S. Treasury bills, notes and bonds, and securities of federal
agencies.
High Yield Securities and Bank Loans. The Company also underwrites and
makes markets in non-investment grade debt securities and bank loans. The
Company now provides a "one-stop" leveraged finance solution for corporate and
financial acquirers and high yield issuers.
Money Market Products. Lehman Brothers holds dominant market positions in
the origination and distribution of medium-term notes and commercial paper.
Since 1982, the Company and its affiliates have received global medium-term note
mandates for 1,460 programs with a borrowing capacity of $2 trillion. The
Company and its affiliates are appointed dealers for over 600 active commercial
paper programs on behalf of companies and government agencies worldwide. The
Company is also a major participant in the preferred stock market, managing
numerous offerings of long-term and perpetual preferreds and auction rate
securities.
Mortgage and Asset-Backed Securities. The Company is a leading underwriter
of and market-maker in residential and commercial mortgage- and asset-backed
securities. Lehman Brothers underwrites and makes markets in the full range of
U.S. agency-backed mortgage products, mortgage-backed securities, asset-backed
securities and whole loan products. Internationally, the Firm has expanded its
capabilities in mortgage and asset-backed securities, leases, mortgages,
multi-family financing and commercial loans.
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Municipal and Tax-Exempt Securities. Lehman Brothers is a major dealer in
municipal and tax-exempt securities, including general obligation and revenue
bonds, notes issued by states, counties, cities, and state and local
governmental agencies, municipal leases, tax-exempt commercial paper and put
bonds. Lehman Brothers is also a leader in the structuring, underwriting and
sale of tax-exempt and taxable securities and derivative products for city,
state, not-for-profit and other public sector clients.
EQUITIES
Lehman Brothers combines professionals from the sales, trading, investment
banking and research areas of Equities, into teams to serve the financial needs
of the Company's equity clients and customers. The Company's equity expertise
and the integrated nature of the Company's global operations enable Lehman
Brothers and its affiliates to structure and execute global equity transactions
for clients worldwide. The Company is a leading underwriter of initial public
and secondary offerings of equity and equity-related securities. Lehman Brothers
also makes markets in these and other securities, and executes block trades on
behalf of clients and customers. The Company also actively participates in
assisting governments around the world in raising equity capital as part of
their privatization programs.
The Equities group is responsible for the Company's equity operations and
all dollar and non-dollar equity and equity-related products worldwide. These
products include listed and over-the-counter ("OTC") securities, American
Depositary Receipts, convertibles, options, warrants and derivatives. The
Company and its affiliates participate in the global equity and equity-related
markets in all major currencies through its worldwide presence and membership in
major stock exchanges, including among others, those in New York, London, Tokyo,
Hong Kong, Frankfurt, Milan and Stockholm.
Equity Derivatives. Lehman Brothers, in conjunction with affiliates,
offers equity derivative capabilities across a wide spectrum of products and
currencies, including domestic and international program trading, listed options
and futures and structured derivatives.
Equity Finance. Lehman Brothers maintains an extensive Equity Financing
and Prime Broker business to provide liquidity to its clients and customers and
supply a source of secured financing for the Firm. Margin lending for the
purchase of equities and other capital markets' products as well as securities
lending and short selling. The Prime Broker business engages in full operations,
clearing and processing services for that unit's customers.
GLOBAL DISTRIBUTION
Lehman Brothers' institutional and private client sales organizations
encompass distinct global sales forces that have been integrated into the fixed
income and equity businesses to provide investors with the full array of
products and research offered by the Firm.
Fixed Income Sales. The Firm's Fixed Income sales force is one of the
largest in the industry, with close to 300 professionals in 15 locations
worldwide, serving the investing and liquidity needs of major institutional
investors. Employing a relationship management approach that provides superior
information flow and product opportunities for the Firm's customers, the Fixed
Income sales organization covers the major share of the buying power in the
global fixed income markets. Further, the Firm's expertise in foreign exchange
and derivatives provides customers with comprehensive solutions to their global
risk management needs.
Equity Sales. Lehman Brothers' institutional Equity sales group of over
300 professionals provides an extensive range of services to institutional
investors through locations in the U.S., Europe and Asia. The Equity sales
organization focuses on developing long-term relationships though a
comprehensive understanding of customers' investment objectives, while providing
proficient execution and consistent liquidity in a wide range of global equity
securities and derivatives. For the world's largest and most active investors,
the Firm has appointed senior account managers to enhance the coordination
between Equity and Fixed Income sales coverage in serving these complex
investors' needs.
Private Client Sales. The Company's Private Client Services group serves
the investment needs of private investors with substantial assets as well as
over 1,000 mid-sized institutional accounts worldwide. The
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group has a global presence with investment representatives located in six
offices in North America and additional offices in major financial centers in
Latin America, Europe, the Middle East and Asia. Among other services,
investment professionals provide their clients with direct access to fixed
income, equity, foreign exchange and derivative products, as well as the Firm's
research and execution capabilities, thereby serving as a valuable extension of
the Firm's institutional sales force. The Private Client Services group also
enables the Company's issuing clients to access a diverse, high-net-worth
investor base throughout the world. The Firm also has established a
comprehensive array of onshore and offshore investment vehicles, managed by
multiple third parties, to broaden the range of the services and investment
strategies provided to its clients.
RESEARCH
Fixed Income Research. Fixed Income research at Lehman Brothers
encompasses the full range of research disciplines: quantitative, economic,
strategic, credit, portfolio and market-specific analysis. Fixed Income research
is integrated with and supports the Company's investment banking, sales and
trading activities. An important objective of Fixed Income research is to have
in place high quality research analysts covering industry, geographic and
economic sectors that support the activities of the Company's clients and
customers. The department's 235 specialists provide expertise in U.S., European
and Asian government and agency securities, derivatives, sovereign issues,
corporate securities, high yield, asset- and mortgage-backed securities,
commercial real estate, emerging market debt and municipal securities.
Equity Research. The Equity Research department is integrated with and
supports the Company's investment banking, sales and trading activities. To
ensure in-depth expertise within various markets, Equity Research has
established regional teams on a worldwide basis that are staffed with industry
and strategy specialists. The Equity Research department is comprised of 260
professionals covering 50 industry sectors and over 1,300 companies worldwide.
OTHER BUSINESS ACTIVITIES
While Lehman Brothers concentrates on its client/customer-driven strategy,
the Company also participates in business opportunities such as arbitrage and
proprietary trading that leverage the Company's expertise, infrastructure and
resources. These businesses may generate substantial revenues but generally
entail a higher degree of risk as the Company trades for its own account.
Arbitrage. Lehman Brothers engages in a variety of arbitrage activities.
In traditional or "riskless" arbitrage, the Company seeks to benefit from
temporary price discrepancies that occur when a security is traded in two or
more markets, or when a convertible or derivative security is trading at a price
disparate from its underlying security. The Company's "risk" arbitrage
activities involve the purchase of securities at discounts from the expected
values that would be realized if certain proposed or anticipated corporate
transactions (such as mergers, acquisitions, recapitalizations, exchange offers,
reorganizations, bankruptcies, liquidations or spin-offs) were to occur. To the
extent that these anticipated transactions do not materialize in a manner
consistent with the Company's expectations, the Company is subject to the risk
that the value of these investments will decline. Lehman Brothers' arbitrage
activities benefit from the Company's presence in the global capital markets,
access to advanced information technology, in-depth market research, proprietary
risk management tools and general experience in assessing rapidly changing
market conditions.
Asset Management. The Company and its affiliates plan to focus on
sponsoring and distributing sophisticated strategic funds attractive to
high-net-worth individuals and institutions.
Proprietary Trading. In addition to its customer-flow activities, Lehman
Brothers also takes proprietary positions in interest rate, foreign exchange,
various securities, derivatives and commodities for its own account. The
Company's proprietary trading activities bring together various research and
trading disciplines allowing it to take market positions, which at times may be
significant, consistent with the Company's expectations of future events (such
as movements in the level of interest rates, changes in the shape of yield
curves and changes in the value of currencies). The Company is subject to the
risk that actual market events will be different from the Company's
expectations, which may result in significant losses associated with such
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proprietary positions. The Company's proprietary trading activities are
generally carried out in consultation with personnel from the relevant major
product area (e.g., mortgages, derivatives and foreign exchange).
TRADING SERVICES AND CORPORATE
The Company's Trading Services and Corporate divisions provide support to
its businesses through the processing of certain securities and commodities
transactions; receipt, identification and delivery of funds and securities;
safeguarding of customers' securities; and compliance with regulatory and legal
requirements. In addition, this staff is responsible for technology
infrastructure and systems development, treasury operations, financial control
and analysis, tax planning and compliance, internal audit, expense management,
career development and recruiting and other support functions.
In 1996, the Company invested in a strategic global foundation for
information technology upon which all future investments in technology will be
leveraged. The Company also continued to make significant investments in its
employees through management training and career development initiatives.
RISK MANAGEMENT
As a leading global investment banking company, risk is an inherent part of
all of Lehman Brothers' businesses and activities. In its trading, market-making
and underwriting activities, Lehman Brothers is subject to risks relating to
fluctuations in market prices and liquidity of specific securities, instruments
and derivative products, as well as volatility in market conditions in general.
The markets for these securities and products are affected by many factors,
including the financial performance and prospects of specific companies and
industries, domestic and international economic conditions (including inflation,
interest and currency exchange rates and volatility), the availability of
capital and credit, political events (including proposed and enacted
legislation) and the perceptions of participants in these markets.
Lehman Brothers' exposure to credit risks in its trading activities arise
from the possibility that a counterparty to a transaction could fail to perform
under its contractual commitment, resulting in Lehman Brothers incurring losses
in liquidating or covering its position in the open market.
In connection with its investment banking and product origination
activities, Lehman Brothers is exposed to risks relating to the merits of
proposed transactions. These risks involve not only the market and credit risks
associated with underwriting securities and developing derivative products, but
also potential liabilities under applicable securities and other laws which may
result from Lehman Brothers' role in the transaction.
The Company aims to reduce risk through the diversification of its
products, counterparties and activities in geographic regions. The Company
accomplishes this objective by allocating the usage of capital to each of its
businesses, establishing trading limits for individual products and traders, and
setting credit limits for individual counterparties including regional
concentrations.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Risk Management" on pages 28-29 hereof.
NON-CORE ASSETS
Prior to 1990, the Company participated in a number of activities that are
not central to its current business as an institutional investment banking firm.
As a result of these activities, the Company carries on its balance sheet a
number of relatively illiquid assets (the "Non-Core Assets"), including a number
of individual real estate assets, limited partnership interests and a number of
smaller investments. Subsequent to their purchase, the values of certain of
these Non-Core Assets declined below the recorded values on the Company's
balance sheet, which necessitated the write-down of the carrying values of these
assets and corresponding charges to the Company's income statement. Certain of
these activities have resulted in various legal proceedings.
Since 1990, management has devoted substantial resources to reducing the
Company's Non-Core Assets. Between December 31, 1990 and November 30, 1996, the
Company's Non-Core Assets decreased from
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$1.1 billion in 1990 to a zero carrying value at November 30, 1996, after
consideration of applicable reserves. Management's intention with regard to
these Non-Core Assets is the prudent liquidation of these investments as and
when possible.
COMPETITION
All aspects of the Company's business are highly competitive. The Company
competes in domestic and international markets directly with numerous other
brokers and dealers in securities and commodities, investment banking firms,
investment advisors and certain commercial banks and, indirectly for investment
funds, with insurance companies and others.
The financial services industry has become considerably more concentrated
as numerous securities firms have either ceased operations or have been acquired
by or merged into other firms. In addition, several small and specialized
securities firms have been successful in raising significant amounts of capital
for their merger and acquisition activities and merchant banking investment
vehicles and for their own accounts. These developments have increased
competition from firms, many of whom have significantly greater equity capital
than the Company.
REGULATION
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. LBI and certain other subsidiaries
of Holdings are registered as broker-dealers and investment advisors with the
Commission and as such are subject to regulation by the Commission and by
self-regulatory organizations, principally the NASD and national securities
exchanges such as the NYSE, which has been designated by the Commission as LBI's
primary regulator, and the Municipal Securities Rulemaking Board. Securities
firms are also subject to regulation by state securities administrators in those
states in which they conduct business. LBI is a registered broker-dealer in all
50 states, the District of Columbia and the Commonwealth of Puerto Rico. The
Commission, self-regulatory organizations and state securities commissions may
conduct administrative proceedings, which may result in censure, fine, the
issuance of cease-and-desist orders or suspension or expulsion of a
broker-dealer or an investment advisor, its officers or employees.
LBI is registered with the CFTC as a futures commission merchant and is
subject to regulation as such by the CFTC and various domestic boards of trade
and other commodity exchanges. The Company's U.S. commodity futures and options
business is also regulated by the National Futures Association, a not-for-profit
membership corporation which has been designated as a registered futures
association by the CFTC.
Holdings and the Company do business in the international fixed income,
equity and commodity markets and undertake investment banking activities through
Holdings' subsidiaries. The U.K. Financial Services Act of 1986 (the "Financial
Services Act") governs all aspects of the United Kingdom investment business,
including regulatory capital, sales and trading practices, use and safekeeping
of customer funds and securities, record keeping, margin practices and
procedures, registration standards for individuals, periodic reporting and
settlement procedures. Pursuant to the Financial Services Act, Holdings and the
Company are subject to regulations administered by The Securities and Futures
Authority Limited, a self regulatory organization of financial services
companies (which regulates the Company's equity, fixed income, commodities and
investment banking activities) and the Bank of England (which regulates its
wholesale money market, bullion and foreign exchange businesses).
The Company believes that it is in material compliance with regulations
described herein.
The Company anticipates regulation of the securities and commodities
industries to increase at all levels and for compliance therewith to become more
difficult. Monetary penalties and restrictions on business activities by
regulators resulting from compliance deficiencies are also expected to become
more severe.
CAPITAL REQUIREMENTS
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Regulatory Capital" on page 24 hereof, and Footnote 5
of Notes to Consolidated Financial Statements.
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EMPLOYEES
As of November 30, 1996 the Company employed approximately 6,200 persons.
The Company considers its relationship with its employees to be good.
ITEM 2. PROPERTIES
The Company's headquarters occupy approximately 932,000 square feet of
space at 3 World Financial Center in New York, New York, which is owned by the
Company as tenants-in-common with American Express and various other American
Express subsidiaries. See Notes 10 and 12 to the Consolidated Financial
Statements.
Holdings entered into a lease for approximately 405,000 square feet for
offices located at 101 Hudson Street in Jersey City, New Jersey (the "Operations
Center"). The Operations Center is used by systems, operations, and certain
administrative personnel and contains certain back-up trading systems. The lease
term is approximately 16 years and commenced in August 1994. Approximately
63,000 square feet has been subleased in connection with a real estate
restructuring.
Facilities owned or occupied by the Company and its subsidiaries are
believed to be adequate for the purposes for which they are currently used and
are well maintained.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in a number of judicial, regulatory and arbitration
proceedings concerning matters arising in connection with the conduct of its
business. Such proceedings include actions brought against the Company and
others with respect to transactions in which the Company acted as an underwriter
or financial advisor, actions arising out of the Company's activities as a
broker or dealer in securities and commodities and actions brought on behalf of
various classes of claimants against many securities and commodities firms of
which the Company is one.
Although there can be no assurance as to the ultimate outcome, the Company
has denied, or believes it has a meritorious defense and will deny, liability in
all significant cases pending against it including the matters described below,
and intends to defend vigorously each such case. Although there can be no
assurance as to the ultimate outcome, based on information currently available
and established reserves, the Company believes that the eventual outcome of the
actions against it, including the matters described below, will not, in the
aggregate, have a material adverse effect on the consolidated financial
condition of the Company.
Bamaodah v. E.F. Hutton & Company Inc.
In April 1986, Ahmed and Saleh Bamaodah commenced an action against E.F.
Hutton & Company Inc., ("EFH") to recover all losses the Bamaodahs had incurred
since May 1981 in the trading of commodity futures contracts in a
nondiscretionary EFH trading account. The Dubai Civil Court ruled that the
trading of commodity futures contracts constituted illegal gambling under
Islamic law and that therefore the brokerage contract was void. In January 1987,
a judgment was rendered against EFH in the amount of $48,656,000. On January 5,
1991, the Dubai Court of Appeals affirmed the judgment. On March 22, 1992, the
Court of Cassation, Dubai's highest court, revoked and quashed the decision of
the Court of Appeals and ordered that the case be remanded to the Court of
Appeals for a further review. On April 26, 1994, the Dubai Court of Appeals
again affirmed the judgment of the Dubai Civil Court. The Company appealed the
judgment to the Court of Cassation, which reversed the Court of Appeals on
November 27, 1994 and ordered that a new expert be appointed to review the case.
A new expert has been appointed, with instructions to report back to the Court
of Cassation.
Actions Relating To First Capital Holdings Inc.
Concurrent with the bankruptcy filing of First Capital Holdings ("FCH") in
May, 1991 and the conservatorship and receivership of its two life insurance
subsidiaries, First Capital Life Insurance Company
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("First Capital Life") and Fidelity Bankers Life Insurance Company ("Fidelity
Bankers Life") (First Capital Life and Fidelity Bankers Life collectively, the
"Insurance Subsidiaries"), a number of lawsuits were commenced, naming one or
more of Holdings, Lehman Brothers and American Express as defendants
(individually or collectively, as the case may be, the "American Express
Defendants"). Some of these actions have been subsequently settled and/or
dismissed. Those matters still pending are described below.
Under the terms of an agreement between American Express and Holdings,
Holdings has agreed to indemnify American Express for liabilities which it may
incur in connection with any action (including any derivative action) relating
to FCH. In connection therewith, Holdings' indemnification obligation extends to
the below described actions.
FCH Shareholder and Agent Actions. Three actions were commenced in the
United States District Courts for the Southern District of New York and the
Central District of California allegedly as class actions on behalf of the
purchasers of FCH securities during certain specified periods, commencing no
earlier than May 4, 1988 and ending no later than May 31, 1991 (the "Shareholder
Class"). The complaints are captioned Larkin, et al. v. First Capital Holdings
Corp., et al., amended on May 15, 1991 to add American Express as a defendant,
Zachary v. American Express Company, et al., filed on May 20, 1991, and Morse v.
Weingarten, et al., filed on June 13, 1991 (the "Shareholder Class Actions").
The complaints raised claims under the federal securities laws and alleged that
the defendants concealed adverse material information regarding the finances,
financial condition and future prospects of FCH and made material misstatements
regarding these matters.
On November 14, 1991, the Judicial Panel on Multidistrict Litigation issued
an order transferring and coordinating for all pretrial purposes all related
actions concerning the sale of FCH securities, including the Shareholder Class
Action, and any future filed "tag-along" actions, to Judge John G. Davies of the
United States District Court for the Central District of California (the
"California District Court"). The cases are captioned In Re: First Capital
Holdings Corporation Financial Products Securities Litigation. MDL Docket
No.-901 (the "MDL Action").
On January 18, 1993, an amended consolidated class action complaint (the
"Third Complaint") was filed. The Third Complaint names as defendants American
Express, Holdings, Lehman Brothers, a former officer and director of FCH, Robert
Weingarten and his wife, Palomba Weingarten, other former FCH officers, Gerry
Ginsberg and Philip A. Fitzpatrick, the six current and former outside directors
of FCH, Peter Cohen, Richard Descnerer, William L. Mark, Jerome H. Miller,
Jeffrey B. Lane and Robert Druskin (collectively the "Outside Directors"), Fred
Buck (President of First Capital Life) and Peat Marwick. The complaint raises
claims under the federal securities law and the common law of fraud and
negligence. On March 10, 1993, the American Express defendants answered the
Third Amended Complaint, denying its material allegations.
On March 11, 1993, the California District Court entered an order granting
class certification to the Shareholder Class. The class consists of all persons,
except defendants, who purchased FCH common stock, preferred stock and
debentures during the period May 4, 1988 to and including May 10, 1991. On
September 4, 1996 the parties agreed to a settlement in principle, subject to
documentation and court approval.
The Virginia Commissioner of Insurance Action. On December 9, 1992, a
complaint was filed in the United States District Court for the Eastern District
of Virginia (the "Virginia Court") by Steven Foster, the Virginia Commissioner
of Insurance (the "Commissioner") as Deputy Receiver of Fidelity Bankers Life.
The Complaint names Holdings and Weingarten, Ginsberg and Leonard Gubar, a
former director of FCH and Fidelity Bankers Life, as defendants. The action was
subsequently transferred to California to be part of the MDL Action. The
Complaint alleges that Holdings acquiesced in and approved the continued
mismanagement of Fidelity Bankers Life and that it participated in directing the
investment of Fidelity Bankers Life assets. The complaint asserts claims under
the federal securities laws and asserts common law claims including fraud,
negligence and breach of fiduciary duty and alleges violations of the Virginia
Securities laws by Holdings. It allegedly seeks no less than $220 million in
damages to Fidelity Bankers Life and its present and former policyholders and
creditors and punitive damages. Holdings has answered the complaint, denying its
material allegations. As a result of Holdings' motion for summary judgment, the
court limited the damages
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the Commissioner may seek to less than approximately $30 million. In addition,
the court transferred the case back to the Virginia Court for trial.
Easton & Co. v. Mutual Benefit Life Insurance Co., et al.; Easton & Co. v.
Lehman Brothers Inc.
Lehman Brothers was named as a defendant in two consolidated class action
complaints pending in the United States District Court for the District of New
Jersey (the "N.J. District Court"). Easton & Co. v. Mutual Benefit Life
Insurance Co., et al. ("Easton I"), and Easton & Co. v. Lehman Brothers Inc.
("Easton II"). The plaintiff in both of these actions is Easton & Co., which is
a broker-dealer located in Fort Lee, New Jersey. Both of these actions allege
federal securities law claims and pendent common law claims in connection with
the sale of certain municipal bonds as to which Mutual Benefit Life Insurance
Company ("MBLI") has guaranteed the payment of principal and interest. MBLI is
an insurance company which was placed in rehabilitation proceedings under the
supervision of the New Jersey Insurance Department on or about July 16, 1991.
Easton I was commenced on or about September 17, 1991. The litigation was
purportedly brought on behalf of a class consisting of all persons and entities
who purchased DeKalb, Georgia Housing Authority MultiFamily Housing Revenue
Refunding Bonds (North Hill Ltd. Project), Series 1991, due November 30, 1994
(the "DeKalb Bonds") during the period from May 3, 1991 (when the DeKalb bonds
were issued) through July 16, 1991. Lehman Brothers acted as underwriter for
this bond issue, which was in the aggregate principal amount of $18.7 million.
The complaint alleged that Lehman Brothers violated Section 10(b) of the
Exchange Act and Rule 10b-5 promulgated thereunder, and sought damages in an
unspecified amount or rescission. The complaint also alleged a common law
negligent misrepresentation claim against Lehman Brothers and the other
defendants.
Easton II was commenced on or about May 18, 1992, and named Lehman Brothers
as the only defendant. Plaintiff purported to bring this second lawsuit on
behalf of a class composed of all persons who purchased "MBLI-backed Bonds" from
Lehman Brothers during the period April 19, 1991 through July 16, 1991. The
complaint alleged that Lehman Brothers violated Section 10(b) and Rule 10b-5,
and seeks monetary damages in an unspecified amount, or rescission pursuant to
Section 29(b) of the Exchange Act. The complaint also contained a common law
claim of alleged breach of duty and negligence. On or about February 9, 1993,
the N.J. District Court granted plaintiffs' motion for class certification in
Easton I. The parties agreed to certification of a class in Easton II for
purchases of certain fixed-rate MBLI-backed bonds during the class period. LBI,
together with the other defendants in Easton I and Easton II, has agreed to
settle both cases, subject to court approval.
Warren D. Chisum, et al. v. Lehman Brothers Inc. et al.
On February 28, 1994 a purported class action was filed in the United
States District Court for the Northern District of Texas. An amended complaint
was filed on December 15, 1994. The amended complaint names LBI and two former
EFH employees as defendants. The complaint alleges that defendants violated
Section 10(b) of the Exchange Act and RICO, breached their fiduciary duties and
the limited partners' contract and committed fraud in connection with the
origination, sale and operation of nine EFH net lease real estate limited
partnerships. Plaintiffs seek: (i) to certify a class of all persons who
purchased limited partnership interests in the nine partnerships at issue, (ii)
unspecified damages, plus interest or rescission, (iii) treble damages, (iv)
punitive damages and (v) accounting and attorneys' fees. On April 2, 1996 the
Court filed an opinion and order certifying the litigation as a class action,
consisting of all persons who purchased interests in the nine EFH net lease
limited partnerships. On July 11, 1996, the Court issued a memorandum and order
dismissing plaintiffs' RICO claim. Defendants have answered the complaint and
denied its material allegations.
Actions Relating to the Sales and Marketing of Limited Partnerships
Subsequent to a January 26, 1996 article in the Wall Street Journal
entitled "SEC, Brokers Study Pact on Partnerships," various putative class
actions were filed in different state courts relating to the sales and
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marketing of limited partnerships by E.F. Hutton & Co. and Shearson and their
affiliates during the 1980's. Thereafter all of these actions were consolidated
into the two actions described below, or were effectively stayed while these
actions proceed.
Under the terms of an agreement between American Express and Holdings,
American Express has agreed to indemnify Holdings for liabilities which it may
incur in connection with any action relating to any business conducted by The
Balcor Company, a former Lehman Brothers subsidiary ("Balcor") in which Holdings
is named as a parent company or control person of Balcor. Holdings believes that
some of the allegations in certain of the actions described below are covered by
this indemnity.
In re Lehman Brothers Limited Partnership Litigation. On October 18, 1996,
a purported class action was filed in the Court of Chancery of the State of
Delaware in and for New Castle County on behalf of all persons who purchased
units in the public, proprietary limited partnerships organized or operated by
Shearson or E.F. Hutton & Co. between 1981 and the present (with certain
exceptions). Defendants are LBI and 56 Lehman-affiliated general partners. The
complaint alleges that defendants breached their fiduciary duties or aided and
abetted such a breach by allegedly misrepresenting and or failing to disclose
the nature of the risks and the status and financial condition of the
partnerships; collecting excessive fees; failing to exercise due care in
selecting investments for the partnerships; and recommending and selling the
partnerships as suitable investments. The complaint seeks, among other things
(1) to certify the case as a class action; (2) to declare that defendants
breached their duties; (3) to enjoin defendants from operating the partnerships
for their own benefit; (4) to account for all profits and impose a constructive
trust on them; and (5) to award compensatory damages, costs and expenses and
attorneys' fees.
Klein, et al. v. Lehman Brothers, Inc., et al. On August 30, 1996 a
purported class action was filed in the Superior Court of New Jersey, Law
Division: Union County on behalf of investors in certain specified limited
partnerships offered by Shearson and Balcor. Named as defendants are LBI,
American Express Company, Smith Barney Holdings, Inc. and 17 Shearson limited
partnerships and a number of Balcor-originated limited partnerships. The
complaint alleges claims in connection with the marketing, sale, and operation
of the limited partnerships for common law fraud and deceit, equitable fraud,
negligent misrepresentation, breach of fiduciary duty and contract and violation
of certain New Jersey statutes relating to the sale of securities. The complaint
seeks compensatory damages for lost principal and interest, general damages and
punitive damages, treble damages under the New Jersey statutes, and costs and
attorneys' fees.
Maxwell Related Litigation
Certain of the Company's subsidiaries are defendants in several lawsuits
arising out of transactions entered into with the late Robert Maxwell or
entities controlled by Maxwell interests. These actions are described below.
Berlitz International Inc. v. Macmillan Inc. et al. This interpleader
action was commenced in Supreme Court, New York County (the "Court") on or about
January 2, 1992, by Berlitz International Inc. ("Berlitz") against Macmillan
Inc. ("Macmillan"), Lehman Brothers Holdings PLC ("PLC"), Lehman Brothers
International Limited (now known as Lehman Brothers International (Europe),
("LBIE") and seven other named defendants. The interpleader complaint seeks a
declaration of the rightful ownership of approximately 10.6 million shares of
Berlitz common stock, including 1.9 million shares then registered in PLC's
name, alleging that Macmillan claimed to be the beneficial owner of all 10.6
million shares, while the defendants did or might claim ownership to some or all
of the shares. As a result of its bankruptcy filing, MacMillan sought to remove
this case to the Bankruptcy Court for the Southern District of New York. On the
motion of LBIE and PLC, the case was remanded back to the Court. Following the
remand, the parties entered into a stipulation pursuant to which all proceedings
have been stayed pending the outcome of the appeal in Macmillan v. Bishopsgate
Investment Trust et al., referred to below.
Macmillan, Inc. v. Bishopsgate Investment Trust, Shearson Lehman Brothers
Holdings PLC et al. This action was commenced by issuance of a writ in the High
Court of Justice in London, England on or about
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December 9, 1991. In this action, Macmillan sought relief virtually identical to
that sought in the Berlitz action, described above. Specifically, Macmillan
sought a declaration that it is the legal and beneficial owner of the disputed
10.6 million shares of Berlitz common stock, including the 1.9 million shares
then held by PLC. After a trial, on December 10, 1993, the High Court of Justice
handed down a judgment finding for the Company on all aspect of its defense and
dismissing Macmillan's claims. On November 2, 1995, the Court of Appeal issued a
preliminary judgment dismissing Macmillan's appeal. Subsequently, the House of
Lords denied Macmillan's request for leave to appeal.
MCC Proceeds Inc. v. Lehman Brothers International (Europe) This action
was commenced by issuance of a writ in the High Court of Justice in London,
England on July 14, 1995. In this action, MCC Proceeds Inc., as successor to
Macmillan, Inc., seeks relief identical to that sought in the Berlitz action
described above, but based on a legal theory which was initially pleaded but
ultimately abandoned by the plaintiff in Berlitz. The High Court granted LBIE's
application to dismiss the proceeding and assessed costs against MCC Proceeds.
MCC Proceeds has appealed the dismissal, and LBIE has responded.
Lehman Brothers Commercial Corporation and Lehman Brothers Special Financing
Inc. v. Minmetals International Non-Ferrous Metals Trading Company
On November 15, 1994, two Lehman Brothers subsidiaries, Lehman Brothers
Commercial Corporation ("LBCC") and Lehman Brothers Special Financing Inc.
("LBSF"), commenced an action against Minmetals International Non-Ferrous Metals
Trading Company ("Minmetals") and China National Metals and Minerals Import and
Export Company ("CNM") in the United States District Court for the Southern
District of New York alleging breach of contract against Minmetals and breach of
guarantee against CNM. The litigation arose from the refusal by Minmetals and
CNM to honor their obligations with respect to certain foreign exchange and swap
transactions. LBCC and LBSF seek to recover approximately $52.5 million from
Minmetals and/or CNM. On June 26, 1995, the court granted CNM's motion to
dismiss the claims against it, but also granted LBCC and LBSF leave to replead.
Minmetals filed fourteen counterclaims against Lehman entities based on
violations of federal securities and commodities laws and rules, and theories of
fraud, breach of fiduciary duty and conversion. The court denied a motion by the
Lehman counterclaim defendants to dismiss the six fraud-based counterclaims. On
June 24, 1996, the court granted the motion of LBCC and LBSF to file an amended
complaint naming CNM as an additional defendant. Discovery is progressing.
Actions Relating to National Association of Securities Dealers Automated
Quotations System ("NASDAQ") Market Maker Antitrust and Securities Litigation.
Beginning in May, 1994, several class actions were filed in various state
and federal courts against various broker-dealers making markets in NASDAQ
securities. With respect to a number of those actions LBI was either
specifically named as a defendant or was not specifically named as a defendant
but could be deemed to be a member of the defendant class as defined in the
complaints. Plaintiffs in these cases have alleged violations of the antitrust
laws, securities laws and have pled a variety of other statutory and common law
claims. All of these actions are based on the theory that because odd-eighth
quotes occur less often than quarter quotes, NASDAQ market makers must be
colluding wrongfully to maintain a wider spread.
By Order filed October 14, 1994, the Judicial Panel on Multidistrict
Litigation consolidated these actions in the Southern District of New York and
ordered that all related actions be transferred and coordinated for all pretrial
purposes. The case is captioned In Re NASDAQ Market-Makers Antitrust Litigation,
MDL No. 1023.
On December 16, 1994, plaintiffs served a consolidated Amended Complaint
naming 33 defendants including LBI. Plaintiffs claim violations of the federal
antitrust laws including Section 1 of the Sherman Antitrust Act. Plaintiffs seek
unspecified compensatory damages trebled in accordance with the antitrust laws,
costs including attorneys' fees as well as injunctive relief. The court
dismissed the action with leave to replead, stating that the complaint failed to
identify the securities involved with sufficient specificity. The plaintiffs
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replied and the defendants answered the amended complaint on November 17, 1995.
Discovery has commenced.
LBI entered into a Stipulation and Order resolving a civil complaint filed
by the U.S. Department of Justice alleging that LBI and 23 other NASDAQ market
makers violated Section 1 of the Sherman Act in connection with certain market
making practices. In entering into the Stipulation and Order the parties agreed
that the defendants would not engage in certain types of market making
activities and the defendants undertook specified steps to assure compliance
with their agreement. The Stipulation and Order are subject to approval by the
United States District Court for the Southern District of New York following a
public hearing, and if the Court approves the Stipulation and Order, the
complaint will be dismissed with prejudice.
Leetate Smith, et al. v. Merrill Lynch, et al.
On September 28, 1995 a class action complaint was filed in the Superior
Court for the State of California in Orange County (the "Complaint"). The
Complaint was purportedly brought on behalf of purchasers of bonds, notes and
other securities during the period July 1, 1992 through December 6, 1994 (the
"Class Period") that were issued by Orange County or by other public entities
which had funds invested in Orange County's Investment Pool (collectively the
"County"). Also named as defendants are eight other broker-dealers who are, like
LBI, alleged to have acted as underwriters of the County's debt securities and
the five financial advisors who allegedly advised the County during the Class
Period. The Complaint alleges violations of various sections of the California
Corporations Code based on the alleged misstatements and omissions in the
Official Statements of the debt offerings by the County primarily relating to
the County's creditworthiness and ability to repay the debts. Certain of the
defendants, including LBI, entered into a settlement which was approved by the
state court on December 10, 1996. A parallel complaint filed in federal court
was voluntarily dismissed.
Sonnenfeld v. The City and County of Denver, Colorado, et al.
On August 4, 1995, a Consolidated Amended Class Action Complaint (the
"Complaint") was filed in the United States District Court for the District of
Colorado, consolidating and amending previously filed complaints and adding,
among other defendants, LBI. The Complaint is purportedly brought on behalf of
all persons, other than defendants, who purchased Denver Airport System Revenue
Bonds during the period February 27, 1992 through May 3, 1994 that were issued
by the City and County of Denver (the "Bonds") and who were damaged by their
investments. Also named as defendants are seven other broker-dealers who acted
as underwriters or financial advisors in connection with the issuances of the
Bonds and the City and County of Denver. The Complaint alleges violations of
Section 10b of the Exchange Act of 1934 and the Colorado Securities Act and
common law fraud based on alleged misstatements and omissions in the Official
Statements for the Bonds primarily relating to status of the design and
construction of the new Denver International Airport (the "Airport"), the amount
of revenues it would likely generate and the risks posed to the timely opening
of the Airport by the installation of an automated baggage system. The Complaint
seeks (i) to certify the action as a class action; (ii) unspecified damages; and
(iii) costs and attorneys fees.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pursuant to General Instruction J of Form 10-K, the information required by
Item 4 is omitted.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of the outstanding common stock of the Company is owned by Holdings.
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ITEM 6. SELECTED FINANCIAL DATA
Pursuant to General Instruction J of Form 10-K, the information required by
Item 6 is omitted.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Set forth on the following pages is Management's Discussion and Analysis of
Financial Condition and Results of Operations for the twelve months ended
November 30, 1996, the twelve months ended November 30, 1995 and the eleven
months ended November 30, 1994.
BUSINESS ENVIRONMENT
The principal business activities of Lehman Brothers Inc., a registered
broker dealer ("LBI") and subsidiaries (collectively, the "Company" or "Lehman
Brothers") are investment banking and securities trading and sales, which by
their nature are subject to volatility, primarily due to changes in interest and
foreign exchange rates and security valuations, global economic and political
trends and industry competition. As a result, revenues and earnings may vary
significantly from quarter to quarter and from year to year. LBI is a wholly
owned subsidiary of Lehman Brothers Holdings Inc. (together with its
subsidiaries, where appropriate, "Holdings").
The favorable market environment experienced during the second half of 1995
continued through 1996. The 1995 environment was characterized by declining
interest rates and improving investor demand as world markets rebounded from
higher 1994 interest rates and the Mexican peso crisis. The market environment
in 1996 reflected improved valuations and strong investor demand in worldwide
equity markets, record levels of corporate finance advisory activities, and near
record underwriting volumes.
The 1996 U.S. fixed income markets were more volatile than in 1995. The
U.S. bond market began 1996 with a strong rally, with the 30-year U.S. Treasury
trading just under 6%, as investors reacted favorably to the prospects of a
deficit reduction package and controlled inflation. In March the U.S. fixed
income market experienced a significant correction as market data suggested
unexpected strength in the U.S. economy leading to concern that the U.S. Federal
Reserve Board ("Fed") would increase short-term rates. Most U.S. interest rates
reached a peak in July of 1996, when a surprisingly strong unemployment report
was released. In the third quarter a series of conflicting data on economic
growth and inflation led to more volatile market conditions and weakened
investor activity, as investors were unsure of the future direction of interest
rates. In the fourth quarter investors became convinced by market data that the
economy was growing slowly and that the Fed would not raise rates, which
resulted in a strong rally in the U.S. bond market with heavy trading activity
and a decrease in interest rates. While absolute bond market returns were lower
in 1996 than 1995, customer trading activities were generally strong. The
strength in customer trading activities was fueled by the bond market rallies
experienced in the first and fourth quarter as well as higher trading activities
in emerging market bonds and high-yield corporate bonds. These asset classes
benefited from improved economic conditions in many emerging market economies
and heightened demand as investors sought sectors with higher potential returns.
The European bond markets performed particularly well in 1996. This
strength was most apparent in the peripheral European economies, as these
markets reacted favorably to the growing realization that European Monetary
Union would take place and the significant strides made by these countries in
cutting budget deficits and inflation. These factors led to a decreasing rate
environment and brisk trading in 1996. Additionally, the peripheral European
economies saw a significant convergence of the yields to core European markets.
In Japan, bond markets suffered in both 1996 and 1995 from weak investor
activity and declining yields as a result of continued slow economic growth. At
the outset of 1996, Asian fixed income markets (excluding Japan) were adversely
affected by relatively tight central bank stances on monetary policy in response
to concerns about economic overheating. These markets improved toward the end of
1996, as moderate economic growth and lower inflation buoyed customer trading
activities.
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The U.S. equity market saw all major stock indices reach record levels in
both 1995 and 1996. Over the two year period ended November 30, 1996, the Dow
Jones Industrial Average increased 74%, closing at 6,522. Listed U.S. equity
trading volumes were strong in both years, with the average daily trading volume
on the New York Stock Exchange reaching record levels in both 1996 and 1995.
While experiencing a brief correction in July in response to concerns over
increasing interest rates, the U.S. equity market, in 1996, was favorably
impacted by record flows of capital into equity funds, low inflation levels, and
favorable earnings prospects in the wake of the downsizing of many U.S.
corporations. In 1995, the U.S. equity markets posted significant returns as
valuations rebounded from the 1994 lows and investor demand strengthened in
response to favorable earnings prospects and the declining interest rate
environment.
The European equity markets, while underperforming the U.S. equity market,
were generally strong, with the Financial Times-Stock Exchange Eurotrack 100
Index returning 11% in 1996 and 19% in 1995. Equity trading remained brisk and
valuations increased due to the declining interest rate environment and
favorable prospects in light of the proposed European Monetary Union.
In Japan, the Nikkei 225 Index rose 12% in 1996 after declining slightly in
1995; however, trading volumes weakened from 1995 levels. The Japanese equity
markets benefited in the first half of 1996, as investors contributed
significant amounts of overseas capital into the Japanese equity markets on
expectations of stronger growth in both the economy and corporate profits.
However, in the second half of 1996, investor activity weakened as bullish
expectations failed to become realized and concerns grew regarding the
sustainability of Japan's economic recovery into 1997. In Asia (excluding
Japan), market performance was mixed: Hong Kong, Malaysia, the Philippines and
Indonesia produced high double digit returns, while markets in Thailand, Korea
and India were uncharacteristically bearish.
Latin American emerging market economies realized a broad recovery in 1996,
after experiencing a downturn in 1995 in the wake of the Mexican peso crisis.
Tighter monetary and fiscal policies adopted in 1995 led to a rebound in these
markets in 1996, with bond markets performing extremely well as evidenced by the
Lehman Brothers Emerging Americas Index returning over 36 percent in fiscal
1996.
Worldwide underwriting volumes in both fixed income and equities
strengthened significantly in 1996 from the mixed performance in 1995. Equity
underwriting volumes were positively impacted by a number of factors including
favorable equity valuations on worldwide exchanges, heightened investor demand
resulting from record flows of capital into equity mutual funds, and the
increased level of global issuers accessing the capital markets. Fixed income
underwriting volumes improved in 1996 as the robust merger and acquisition
environment made new issuers less interest sensitive, while capital was needed
to finance newly emerging companies. Additionally, 1996 saw a significant
increase in non-U.S. corporate and sovereign issuers accessing the U.S. fixed
income markets, to fund growth.
Corporate Finance Advisory activities reached record levels in 1996 after a
strong performance in 1995. The increase in merger and acquisition activities
reflected the continuing trend of increased consolidation and globalization
across industry sectors and the overall strength in the global capital markets.
In 1997, the pace of strategic merger and acquisition activity driven by global
competition is expected to continue at extremely strong levels.
While fiscal 1996 was characterized by strong financial markets,
nevertheless, the financial services industry is cyclical. As a result the
Company's businesses are evaluated across the market cycles for operating
profitability and their contribution to the Company's long-term strategic
objectives. The Company strives to minimize the effects of economic downturns
through its diversified product base, its global presence and its risk
management practices.
At the outset of 1997, U.S. bond markets have experienced a general rise in
the level of interest rates due to inflationary concerns; this environment has
encouraged heavier debt issuance in anticipation of higher rates, but somewhat
more difficult trading conditions. Equity valuation levels and trading volumes
on worldwide exchanges have remained generally favorable, due to strong
corporate earnings reports and positive investment flows. The strong level of
corporate finance advisory activities experienced in 1996 have continued into
1997.
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Note: Except for the historical information contained herein, this Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements that discuss the risks and
uncertainties involved in the Company's business. The Company undertakes
no obligation to update publicly any forward-looking statements, whether
as a result of new information, future events or otherwise.
RESULTS OF OPERATIONS
Summary
The Company's 1996 net income was $189 million, including a $14 million
aftertax severance charge. Excluding the charge, net income was $203 million for
1996. The Company's 1996 results reflect strong performances across all of the
Company's core businesses. Fixed income sales and trading and investment banking
business activities were responsible for the majority of the increased net
income and net revenues compared to 1995. The Company's results were positively
affected by favorable market conditions which led to near record underwriting
volumes, record highs in equity indices and a record year in merger and
acquisition activity. The Company reported net income of $69 million for 1995,
including a $26 million aftertax charge for occupancy-related real estate
expenses and severance. Excluding this special item, net income was $95 million
for 1995. The Company's 1995 results reflect improved performance in corporate
finance advisory activity and in fixed income and equity origination as well as
higher levels of customer activity in a number of businesses when compared to
1994. The Company benefited from the continuing increase in merger and
acquisition activity throughout 1995 and from a stronger market climate
beginning in the second quarter of the year.
For 1994, the Company reported a net loss of $29 million, including a $13
million aftertax charge for the cumulative effect of a change in accounting for
postemployment benefits, a $15 million aftertax severance charge recorded in the
first quarter of 1994 related to the Company's ongoing review of its personnel
needs and a $50 million preferred dividend of subsidiary. Excluding these
charges, net income from continuing operations before preferred dividend of
subsidiary was $49 million in 1994. The 1994 results reflected a difficult
market environment for many of the Company's principal businesses.
NET REVENUES
Net revenues were $2,376 million for 1996, $2,078 million for 1995 and
$1,969 million for 1994. The increase in net revenues in 1996 reflected a
general strengthening in customer flow and trading activities in a number of
fixed income product areas, increased levels of debt and equity underwriting and
improved corporate finance advisory results. During the fourth quarter of 1996,
the Company recorded net revenues of $711 million, its highest quarterly level
of net revenues in the post spin-off period. Revenues in 1995 were positively
affected by increased underwriting volumes and customer flow activity due to
strong rallies in the stock and bond markets during the last three quarters of
the year. The Company's revenues increased during each quarter of 1995. Although
1994 revenues on an annualized basis were comparable to 1995 levels, the
Company's 1994 revenues declined from a first quarter peak as increasing
interest rates and volatile equity markets served to depress underwriting
volumes and to reduce customer flow activity.
Since 1990, Lehman Brothers has focused on a "client/customer-driven"
strategy. Under this strategy, Lehman Brothers concentrates on serving the needs
of major issuing and advisory clients and investing customers worldwide to build
an increasing "flow" of business that leverages the Company's research,
underwriting and distribution capabilities. Customer flow continues to be the
primary source of the Company's net revenues. In addition to its customer flow
activities, the Company also takes proprietary positions based upon expected
movements in interest rate, foreign exchange, equity and commodity markets in
both the short-and long-term. The Company's success in this area is dependent
upon its ability to anticipate economic and market trends and to develop trading
strategies that capitalize on these anticipated changes. Consistent with the
Company's client/customer-driven strategy, proprietary trading activities
accounted for approximately 14% of net revenues in 1996, 9% in 1995 and 6% in
1994. Proprietary trading is not anticipated to grow significantly.
16
<PAGE> 18
As part of its market-making activities, the Company maintains inventory
positions of varying amounts across a broad range of financial instruments,
which are marked-to-market on a daily basis and, along with the Company's
proprietary trading positions, give rise to principal transactions revenues. The
Company utilizes various hedging strategies to minimize its exposure to
significant movements in interest and foreign exchange rates and the equity
markets. Net revenues from the Company's market making and trading activities in
fixed income and equity products are recognized as either principal transactions
or net interest revenues, depending upon the method of financing and/or hedging
related to specific inventory positions. The Company evaluates its trading
strategies on an overall profitability basis which includes both principal
transaction revenues and net interest. Therefore, changes in net interest should
not be viewed in isolation but should be viewed in conjunction with revenues
from principal transactions. In 1996, net interest revenues increased 3% to $344
million from $335 million in 1995. The increased net interest revenues in 1996
primarily resulted from a shift in the composition of the Company's fixed income
portfolio, improved spreads on certain higher margin matched book financing
transactions, partially offset by higher interest expenses resulting from the
Company's increased level of long-term debt outstanding.
During 1995, net interest revenues decreased from 1994 levels, due to
decreased net interest spreads in certain of the Company's fixed income and
equity financing portfolios. Additionally, net interest and dividend revenues in
1995 were adversely affected by increased financing costs due to the net
reduction in the Company's equity capital base, primarily as a result of
dividends and capital distributions to Holdings.
The following table of net revenues by business unit and the accompanying
discussion have been prepared in order to present the Company's net revenues in
a format that reflects the manner in which the Company manages its businesses.
For internal management purposes, the Company has been segregated into four
major business units: Fixed Income, Equity, Corporate Finance Advisory and
Merchant Banking. Each business unit represents a grouping of financial
activities and products with similar characteristics. These business activities
result in revenues that are recognized in multiple revenue categories contained
in the Company's Consolidated Statement of Operations. Net revenues by business
unit contain certain internal allocations, including funding costs, which are
centrally managed.
TWELVE MONTHS ENDED NOVEMBER 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL
TRANSACTIONS AND INVESTMENT
NET INTEREST COMMISSIONS BANKING OTHER TOTAL
---------------- ----------- ---------- ----- ------
<S> <C> <C> <C> <C> <C>
Fixed Income........................ $1,236 $ 51 $279 $1,566
Equity.............................. 51 230 245 $ 2 528
Corporate Finance Advisory.......... 200 200
Merchant Banking.................... (15) 47 32
Other............................... 9 17 8 16 50
------ ---- ---- --- ------
$1,281 $ 298 $779 $18 $2,376
------ ---- ---- --- ------
</TABLE>
TWELVE MONTHS ENDED NOVEMBER 30, 1995
<TABLE>
<CAPTION>
PRINCIPAL
TRANSACTIONS AND INVESTMENT
NET INTEREST COMMISSIONS BANKING OTHER TOTAL
---------------- ----------- ---------- ----- ------
<S> <C> <C> <C> <C> <C>
Fixed Income........................ $ 963 $ 84 $158 $ 9 $1,214
Equity.............................. 96 286 196 578
Corporate Finance Advisory.......... 186 186
Merchant Banking.................... (36) 77 9 50
Other............................... 7 25 4 14 50
------ ---- ---- --- ------
$1,030 $ 395 $621 $32 $2,078
------ ---- ---- --- ------
</TABLE>
17
<PAGE> 19
ELEVEN MONTHS ENDED NOVEMBER 30, 1994
<TABLE>
<CAPTION>
PRINCIPAL
TRANSACTIONS AND INVESTMENT
NET INTEREST COMMISSIONS BANKING OTHER TOTAL
---------------- ----------- ---------- ----- ------
<S> <C> <C> <C> <C> <C>
Fixed Income........................ $ 922 $ 100 $ 77 $28 $1,127
Equity.............................. 196 264 150 5 615
Corporate Finance Advisory.......... 153 153
Merchant Banking.................... (8) 12 4
Other............................... 12 27 7 24 70
------ ---- ---- --- ------
$1,122 $ 391 $399 $57 $1,969
------ ---- ---- --- ------
</TABLE>
The following discussion provides an analysis of the Company's net revenues
based upon the various business units which generated these revenues.
Fixed Income. The Company's fixed income revenues reflect customer flow
activities (both institutional and high-net-worth retail), secondary trading,
debt underwriting, syndicate and financing activities related to fixed income
products. Fixed income products include government securities, mortgage- and
asset-backed securities, money market products, dollar and non-dollar corporate
debt securities, emerging market securities, municipal securities, financing
(global access to debt financing sources including repurchase and reverse
repurchase agreements), foreign exchange, commodities and fixed income
derivative products. Lehman Brothers is one of the leading 37 primary dealers in
U.S. government securities. The Company is also a dominant market-maker for a
broad range of fixed income products.
Fixed income revenues were $1,566 million for 1996, $1,214 million for 1995
and $1,127 million for 1994. During 1996, fixed income revenues increased from
1995 primarily as a result of stronger customer trading volumes reflecting a
strengthening in the U.S. economy, a reduced U.S. federal deficit and relatively
low levels of inflation. The improved market conditions in the U.S. led to a
significant increase in debt underwriting revenues and greater contributions
from customer flow and trading activities in a number of fixed income products
including mortgages, fixed income derivatives and high yield and high-grade
corporate bonds. The improved performance in the mortgage business was led by
the tightening in the residential, commercial and mezzanine product sectors. The
Company's high yield revenues increased during 1996, primarily as a result of
increased debt underwritings compared to 1995. Financing revenues increased in
1996, due to increased net interest spreads in certain of the matched book
portfolios. Holdings and its subsidiaries ranked #2 in lead-managed fixed income
offerings worldwide in 1996 and 1995 with underwritings of $104 billion and $77
billion in 1996 and 1995, respectively, based on Securities Data Company
information.
Reduced interest rates and a strengthening U.S. dollar contributed to a
favorable market environment in 1995, particularly during the second half of the
Company's year. The improved market environment contributed to a stronger debt
syndicate calendar and increased customer flow activities for many of the
Company's fixed income products, including high-grade corporates, municipals and
foreign exchange. The most significant component of the increase in fixed income
revenues was investment banking, due to a strengthening in origination volumes
and an improved mix of underwriting revenues compared to the depressed 1994
levels.
Equity. Equity net revenues reflect customer flow activities (both
institutional and high-net-worth retail), secondary trading, equity
underwriting, equity finance and arbitrage activities.
Equity net revenues were $528 million for 1996, $578 million for 1995 and
$615 million for 1994. Equity revenues decreased in 1996 as compared to 1995, as
improved underwriting results were more than offset by reduced trading revenues
(principal transactions, net interest and commissions). The increase in
underwriting revenues reflected the favorable economic environment with improved
underwriting volumes, increased trading volumes on domestic exchanges and record
flows of capital into U.S. equity mutual funds. During the second half of 1996,
Holdings' effort to reposition its equity business resulted in the realization
of stronger results as Holdings lead-managed transactions valued at over $5
billion, representing an 87% increase over the
18
<PAGE> 20
comparable amount for the first half of 1996. Holdings and its subsidiaries
ranked third in total NYSE listed trading volume throughout all of 1996 and
1995. The decrease in trading revenues reflected reduced profitability from
certain products in 1996, including financing and equity arbitrage.
Revenues in 1995 reflected a favorable syndicate calendar which contributed
to increased customer flow in the Company's secondary trading activities.
Commission revenues were up as trading volumes on domestic exchanges increased.
These increases were more than offset by reduced trading revenues in certain
products in 1995.
Corporate Finance Advisory. Corporate finance advisory net revenues,
classified in the Consolidated Statement of Operations as a component of
investment banking revenues, result primarily from fees earned by the Company in
its role as strategic advisor to its clients. This role primarily consists of
advising clients on mergers and acquisitions, divestitures, leveraged buyouts,
financial restructurings, and a variety of cross-border transactions. The net
revenues for corporate finance advisory increased in 1996 to $200 million from
$186 million in 1995 and from $153 million in 1994. The increased revenues
reflected a strong merger and acquisition environment throughout 1996 and 1995,
as companies concentrated on cost cutting and creating greater economies of
scale via acquisitions, asset sales, and corporate restructurings on a global
basis. During 1996, Holdings and its subsidiaries ranked sixth, based on the
value of completed merger and acquisition assignments worldwide, advising on 153
completed transactions valued at approximately $98 billion, based on Securities
Data Company information.
Merchant Banking. The Company is the general partner for four merchant
banking partnerships. Current merchant banking investments held by the
partnerships include both publicly traded and privately held companies
diversified on a geographic and industry basis. Merchant banking net revenues
primarily represent the Company's proportionate share of net realized and net
unrealized gains and losses from the sale and revaluation of investments held by
the partnerships. Such amounts are classified in the Consolidated Statement of
Operations as a component of investment banking revenues. Merchant banking net
revenues also reflect the net interest expense relating to the financing of the
Company's investment in the partnerships. Merchant banking net revenues were $32
million, $50 million and $4 million for 1996, 1995 and 1994, respectively.
For 1996, merchant banking revenues resulting from the participation in the
partnerships decreased 39% to $47 million from $77 million for 1995. This
decrease was principally due to a reduction in the net gains recognized on the
publicly traded investments held by the partnerships. During 1995, merchant
banking revenues increased to $77 million from $12 million for 1994, reflecting
the merger of certain subsidiaries of Holdings with merchant banking activities
into the Company in the fourth quarter of 1994.
NON-INTEREST EXPENSES
During 1996, the Company's non-interest expenses totaled $2,067 million,
including a severance charge of $23 million. Non-interest expenses were $2,000
million for 1995, including a restructuring charge of $43 million. Non-interest
expenses were $1,968 million for 1994, including a $27 million severance charge.
Compensation and benefits expense was $1,219 million for 1996, $1,106 million
for 1995 and $1,053 million for 1994. Excluding these special charges,
non-interest expenses were $2,044 million for 1996, $1,957 million for 1995 and
$1,941 million for 1994.
Cost Reduction Effort. At year-end 1994, Holdings announced a cost
reduction program to reduce expenses by $300 million on an annualized basis
(pretax) compared to Holdings' third quarter 1994 expense run rate. Holdings'
cost reduction efforts were targeted into three areas: personnel cost savings of
$100 million, nonpersonnel cost savings of $150 million and interest and tax
expense savings of $50 million. Through November 1995, Holdings achieved its
cost reduction goals in all the identified cost categories. In fact, through the
fourth quarter of 1995, Holdings reduced total expenses by approximately $326
million on an annualized basis compared to the third quarter of 1994.
Holdings implemented further cost reduction efforts in 1996, with the goal
of achieving additional nonpersonnel cost savings in excess of $50 million by
the end of 1996. Holdings achieved this objective by the
19
<PAGE> 21
third quarter of 1996. Holdings' nonpersonnel expenses decreased to $240 million
in the third quarter of 1996 as compared to $254 million in the fourth quarter
of 1995 (excluding the restructuring charge) which translated into annualized
savings of $56 million. These savings were achieved across numerous expense
categories as a result of the continuing systematic and comprehensive global
review of all major expense categories.
The Company's expense base was permanently lowered as a result of Holdings'
cost reduction efforts. However, the Company's cost structure differs from
Holdings in that the Company's management fees are subject to fluctuation due to
changes in the nature and levels of intercompany services provided.
The Company believes that while the absolute level of its expense base may
increase in response to related increases in revenue levels (due to the
variability of certain expenses), the cost savings achieved as a result of its
cost reduction efforts are permanent.
1996 Severance Charge. In the fourth quarter of 1996, Holdings recorded an
$84 million severance charge ($50 million aftertax) related to certain strategic
actions taken to improve on-going profitability. As a result, the Company
recorded a $23 million severance charge ($14 million aftertax) in the fourth
quarter of 1996 related to these actions. The 1996 severance charge reflected
the culmination of Holdings' worldwide business unit economic performance review
which was undertaken in the fourth quarter of 1996 to focus Holdings on its core
investment banking, equity and fixed income sales and trading areas. The charge
resulted from personnel reductions across a number of underperforming fixed
income and equities businesses, including exiting the precious metals business
in the U.S., Europe and Asia; exiting energy trading in the U.S. and Europe;
consolidating Asian fixed income risk management activities into one center in
Tokyo; refocusing foreign exchange trading activities and combining the Firm's
New York Private Client Services offices. Additionally, the charge reflects
various other strategic personnel reductions which were aimed at delayering
management. Holdings intends to redirect nonpersonnel expense and compensation
expense savings into certain core businesses to expedite Holdings' strategic
initiatives; and it is expected that these actions in the aggregate will result
in improved operating performance in future periods.
1995 Restructuring Charge. The restructuring charge in 1995 included a $26
million occupancy-related real estate charge and a $17 million severance charge.
The real estate component of the charge resulted from a complete review of the
Company's real estate requirements at current headcount levels and the
elimination of excess real estate, primarily in New York, London and Tokyo. This
charge included costs to write-down the carrying value of leasehold
improvements, as well as projected shortfalls of sublease rentals versus
expected operating costs related to the Company's excess capacity. The excess
real estate capacity resulted from headcount reductions associated with the
Company's cost reduction efforts. The severance component of the charge related
to payments made to terminated personnel arising from a formalized fourth
quarter business unit productivity review. The Company realized approximately
$11 million of reduced occupancy and depreciation expenses in 1996 as a result
of these actions.
INCOME TAXES
The Company had an income tax provision of $120 million for 1996 compared
to an income tax provision of $9 million for 1995, and an income tax benefit of
$33 million for 1994. The 1996 income tax provision reflects an increase in
state and local taxes, and a decrease in benefits attributable to preferential
tax treatment as compared to that of 1995 and 1994. The 1996 income tax
provision includes a provision of $130 million for continuing businesses and a
tax benefit of $10 million related to the 1996 severance charge. The 1995 income
tax provision includes a tax provision of $26 million for continuing businesses
and a tax benefit of $17 million related to the restructuring charge.
The Company's net deferred tax asset increased by $40 million to $79
million at November 30, 1996 from $39 million at November 30, 1995. It is
anticipated that the remaining deferred tax asset will be realized through
future earnings. The Company's net deferred tax asset increased by $25 million
to $39 million at November 30, 1995 from $14 million at November 30, 1994.
As of November 30, 1996, the Company had approximately $92 million of net
operating losses available to offset future taxable income.
20
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
Overview
As a leading global investment bank that actively participates in the
global capital markets, the Company has large and diverse capital requirements.
Many of the businesses in which the Company operates are capital intensive.
Capital is required to finance, among other things, the Company's securities
inventories, underwriting activities, principal investments, merchant banking
activities and investments in fixed assets.
The Company's total assets were $107.7 billion at November 30, 1996
compared to $82.6 billion at November 30, 1995. The Company's balance sheet is
highly liquid and consists primarily of cash and cash equivalents, securities
and other financial instruments owned which are marked-to-market daily and
collateralized short-term financing agreements. As the Company's primary
activities are based on customer flow transactions, the Company experiences a
rapid asset turnover rate. In addition, the highly liquid nature of these assets
provides the Company with flexibility in financing and managing its business.
The overall size of the Company's total assets and liabilities fluctuates from
time to time and at specific points in time (such as calendar quarter ends) may
be higher than fiscal quarter ends.
Funding and Capital Policies
The Company's Finance Committee, which includes senior officers from key
areas of the Company, is responsible for establishing and managing the funding
and liquidity policies of the Company. The Finance Committee's funding and
liquidity policies include recommendations for capital and balance sheet size as
well as the allocation of capital and balance sheet to product areas. In
addition, the Finance Committee works with the Regional Asset and Liability
Committees to ensure coordination of global funding efforts. The Regional Asset
and Liability Committees are aligned with the Company's geographic funding
centers and are responsible for implementing funding strategies consistent with
the direction set by the Finance Committee and for monitoring and managing
liquidity for the region.
The primary goal of the Company's funding policies is to provide sufficient
liquidity and availability of funding sources at all times and throughout all
market environments. There are five key elements to the Company's funding
strategy which are:
(1) To maintain an appropriate Total Capital structure to support the
business activities in which the Company is engaged.
The Company manages Total Capital, defined as long-term debt, preferred
stock and common stockholder's equity, on a business and product level. The
determination of the amount of Total Capital assigned to each business and
product is a function of asset quality, market risk, liquidity and regulatory
capital requirements. The Company reallocates its capital to businesses based
upon their ability to obtain targeted returns, perceived opportunities in the
marketplace and the Company's long-term strategy. The Company strives to have
sufficient Total Capital to meet its anticipated long-term capital needs which
include cash capital (liquidity), regulatory capital and market and credit risk
requirements, and continually monitors its Total Capital needs by using market,
credit and liquidity risk sensitivity analyses.
2) To minimize liquidity and refinancing risk by funding the Company's
assets on a global basis with liabilities which have maturities similar to
the anticipated holding period of the assets.
The Company continually reviews its mix of long- and short-term borrowings
as it relates to maturity matching and the availability of secured and unsecured
financing. In general, the Company finances its equity investments in its
subsidiaries with stockholder's equity and the subordinated capital of
subsidiaries are financed with a combination of subordinated debt and
longer-dated senior debt. Inventories and other short-term assets are financed
with a combination of short-term funding, floating rate long-term debt and
stockholder's equity. Fixed assets, property, plant and equipment are generally
financed with longer-dated fixed rate debt.
21
<PAGE> 23
Where the Company deems it to be appropriate and to minimize currency
risks, foreign currency denominated assets are financed with corresponding
foreign currency denominated liabilities.
(3) To maintain sufficient liquidity during a period of financial
stress through a combination of collateralized short-term financings and
Total Capital. Financial stress is defined as any event which severely
constrains the Company's access to unsecured funding sources.
To achieve this objective, the Company strives to maximize its use of
global collateralized borrowing sources and reduce its reliance upon short-term
unsecured borrowings. In addition, the Company's liquidity policies include
maintaining sufficient excess unencumbered securities to use as collateral, if
necessary, to obtain secured financing to meet maturities of short-term
unsecured liabilities as well as current maturities of long-term debt. Also, the
Company strives to maintain a sufficient amount of Total Capital to enable the
Company to support all assets not readily pledgeable to counterparties and to
meet secured borrowing haircut requirements as determined by reference to the
Company's bank lenders, should unsecured sources of borrowings no longer be
available. In this regard, the Company believes that increasing Total Capital
will provide additional liquidity to cover periods of financial stress and
further advance the Company's liquidity management objectives. Lastly, the
Company periodically tests its secured and unsecured credit facilities to ensure
availability and operational readiness. These policies position the Company to
meet its liquidity requirements in all periods including those of financial
stress.
Additionally, during 1996, the Company further expanded its contingency
funding strategy by providing a comprehensive one-year action plan in the event
of severe financial stress. The plan, which was approved by the Company's
Finance Committee in 1996, will be subject to updating, review and ratification
by the Finance Committee annually.
(4) To obtain diversified funding through a global investor base which
maximizes liquidity and reduces concentration risk.
The Company obtains global funding from both the banking community and
short- and long-term investors. In addition to maintaining geographic
diversification, the Company also utilizes a broad range of debt instruments,
which it issues in varying maturities and currencies.
The Company issues both commercial paper and other short-term debt
instruments, including master notes, corporate and retail deposits, and bank
borrowings under uncommitted lines of credit and other uncommitted arrangements.
To reduce liquidity and concentration risk, the Company carefully manages its
maturities to avoid large refinancings on any one given day, and limits its
exposure to any single investor or type of investor.
(5) Maintain funding availability well in excess of actual utilization.
The Company maintains sizable uncommitted lines of credit from a broad
range of banks and financial institutions from which it draws funds in a variety
of currencies and which provide an additional source of liquidity. Uncommitted
lines consist of facilities that the Company has been advised are available but
for which no contractual lending obligations exists.
Short-Term Funding
The Company strives to maximize the portion of the Company's balance sheet
that is funded through collateralized borrowing sources which in turn minimizes
the reliance placed upon unsecured short-term debt.
Collateralized borrowing sources include securities and other financial
instruments sold but not yet purchased, as well as collateralized short-term
financings, defined as securities sold under agreements to repurchase ("repos")
and securities loaned. Because of their secured nature, repos and other types of
collateralized borrowing sources are less credit sensitive and have historically
been a more stable financing source under adverse market conditions. Also,
collateralized borrowing sources generally provide the Company with access to
lower cost funding.
The amount of the Company's collateralized borrowing activities will vary
reflecting changes in the mix and overall levels of securities and other
financial instruments owned and global market conditions. However, at all times,
the vast majority of the Company's assets are funded with collateralized
borrowing sources. At
22
<PAGE> 24
November 30, 1996 and 1995, $80 billion and $57 billion, respectively, of the
Company's total balance sheet was financed using collateralized borrowing
sources.
Total Capital
In accordance with the Company's liquidity policies, the Company
strengthened its Total Capital base in 1996 to $5.9 billion at November 30, 1996
from $5.5 billion at November 30, 1995 and increased the average maturity of the
long-term debt portfolio. Total Capital increased due to an increase in
long-term debt.
TOTAL CAPITAL
<TABLE>
<CAPTION>
NOVEMBER 30
----------------------------
1996 1995 1994
------ ------ ------
(in millions)
<S> <C> <C> <C>
LONG-TERM DEBT
Senior Notes........................................... 215 $ 420 $ 511
Subordinated Indebtedness.............................. 3,950 3,077 2,885
------ ------ ------
4,165 3,497 3,396
STOCKHOLDER'S EQUITY..................................... 1,692 2,028 2,587
------ ------ ------
Total Capital.................................. $5,857 $5,525 $5,983
------ ------ ------
</TABLE>
During 1996, the Company issued $1,130 million in long-term debt, which was
$659 million in excess of its maturing debt. Long-term debt increased to $4.2
billion at November 30, 1996 from $3.5 billion at November 30, 1995 with the
weighted average maturity increasing to 4.5 years at November 30, 1996 from 3.1
years at November 30, 1995.
CHART
Stockholder's equity decreased to $1.7 billion at November 30, 1996 from
$2.0 billion at November 30, 1995. The net decrease in stockholder's equity was
primarily due to the payment of $538 million to Holdings as a return of capital,
partially offset by net income of $189 million.
At November 30, 1996, the Company had approximately $1.4 billion available
for the issuance of debt securities under various shelf registrations.
23
<PAGE> 25
Credit Ratings
The Company, like other companies in the securities industry, relies on
external sources to finance a significant portion of its day-to-day operations.
The Company's access and cost of funding is generally dependent upon its short-
and longterm debt ratings. As of November 30, 1996, the current short- and long-
term senior debt ratings of the Company are as follows:
<TABLE>
<CAPTION>
LBI
--------------------------
SHORT-TERM LONG-TERM**
---------- -----------
<S> <C> <C>
Duff & Phelps Credit Rating Co..................................... D-1 A/A-
Fitch Investors Service Inc........................................ F-1 A/A-
IBCA............................................................... A1 A/A-
Moody's............................................................ P2 A3*/Baa1
S&P***............................................................. A-1 A+*/A
Thomson BankWatch.................................................. TBW-1 A/A-
</TABLE>
- ---------------
* Provisional ratings on shelf registration
** Senior/subordinated
*** Long-term ratings outlook revised to negative on September 21, 1994
Regulatory Capital
As a registered broker dealer, LBI is required to maintain a sufficient
amount of capital as dictated by the Net Capital Rules. These rules require
specific amounts of capital to be maintained by LBI depending on the composition
of its assets and the related risk factors. At November 30, 1996, LBI's
regulatory net capital, as defined, of $1,634 million exceeded the minimum
requirement by $1,524 million. The Company's triple-A rated derivatives
subsidiary, Lehman Brothers Financial Products Inc., has established certain
capital and operating restrictions which are reviewed by various rating
agencies.
Cash Flows
Cash and cash equivalents increased $109 million in 1996 to $396 million,
as the net cash provided by financing activities exceeded the net cash used in
operating and investing activities. Net cash used in operating activities of
$1,442 million included income from continuing operations adjusted for non-cash
items of $176 million for 1996. Net cash provided by financing activities was
$1,558 million and net cash used in investing activities was $7 million.
Cash and cash equivalents decreased $74 million in 1995 to $287 million, as
the net cash used in financing and investing activities exceeded the net cash
provided by operating activities. Net cash provided by operating activities of
$2,037 million included income from continuing operations adjusted for non-cash
items of $219 million for 1995. Net cash used in financing and investing
activities was $2,090 million and $21 million, respectively.
Cash and cash equivalents increased $45 million in 1994 to $361 million, as
the net cash provided by financing activities exceeded the net cash used in
operating and investing activities. Net cash used in operating activities of
$2,422 million included income from continuing operations adjusted for non-cash
items of $159 million for 1994. Net cash provided by financing activities was
$2,518 million, and net cash used in investing activities was $51 million.
Incentive Plans
To broaden and increase the level of employee ownership in Holdings,
Holdings utilizes several stock-based compensation plans. Since 1994, Holdings
has made Restricted Stock Unit ("RSU") awards to its employees, including
employees of LBI, as a portion of total compensation in lieu of cash, subject to
vesting and transfer restrictions. Approximately 7.6 million, 10.1 million and
5.2 million RSUs were awarded to employees of Holdings in 1996, 1995, and 1994,
respectively.
24
<PAGE> 26
High Yield Securities
The Company underwrites, trades, invests and makes markets in high yield
corporate debt securities. The Company also syndicates, trades and invests in
loans to below investment grade-rated companies. For purposes of this
discussion, high yield debt securities are defined as securities or loans to
companies rated BB+ or lower, or equivalent ratings by recognized credit rating
agencies, as well as non-rated securities or loans which, in the opinion of
management, are noninvestment grade. Non-investment grade securities generally
involve greater risks than investment grade securities due to the issuer's
creditworthiness and the liquidity of the market for such securities. In
addition, these issuers have higher levels of indebtedness, resulting in an
increased sensitivity to adverse economic conditions. The Company recognizes
these risks and aims to reduce market and credit risk through the
diversification of its products and counterparties. High yield debt securities
are carried at market value and unrealized gains or losses for these securities
are reflected in the Company's consolidated statement of operations. The
Company's portfolio of such securities at November 30, 1996 and 1995 included
long positions with an aggregate market value of approximately $1,253 million
and $940 million, respectively, and short positions with an aggregate market
value of approximately $99 million and $72 million, respectively. The portfolio
may, from time to time, contain concentrated holdings of selected issues. The
Company's largest high yield position was $78 million at November 30, 1996, and
$47 million at November 30, 1995.
Merchant Banking Activities
The Company's merchant banking activities include investments in four
partnerships, for which the Company acts as general partner, as well as direct
investments. At November 30, 1996, the investment in merchant banking
partnerships was $99 million. There are no funding commitments to these
partnerships. The Company's policy is to carry its investments, including its
partnership interests, at fair value based upon the Company's assessment of the
underlying investments.
Non-Core Activities and Investments
In March 1990, the Company discontinued the origination of partnerships
(the assets of which are primarily real estate) and investments in real estate.
Currently, the Company acts as a general partner for approximately $3.9 billion
of partnership investment capital and manages the remaining real estate
investment portfolio. At November 30, 1996, the Company's investments in these
real estate activities, as well as commitments and contingent liabilities under
guarantees and credit enhancements, were fully reserved. In certain
circumstances, the Company provides financial and other support and assistance
to such investments to maintain investment values. There is no contractual
requirement that the Company continue to provide this support.
Management's intention with regard to non-core assets is the prudent
liquidation of these investments as and when possible.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS AND DERIVATIVES
Overview
Derivatives are financial instruments, which include swaps, options,
futures, forwards and warrants, whose value is based upon an underlying asset
(e.g., treasury bond), index (e.g., S&P 500) or reference rate (e.g., LIBOR). A
derivative contract may be traded on an exchange or negotiated in the
over-the-counter markets. Exchange-traded derivatives are standardized and
include futures, warrants and certain option contracts listed on an exchange.
Over-the-counter ("OTC") derivative contracts are individually negotiated
between contracting parties and include forwards, swaps and certain options,
including caps, collars and floors. The use of derivative financial instruments
has expanded significantly over the past decade. One reason for this expansion
is that derivatives provide a cost effective alternative for managing market
risk. In this regard, derivative contracts provide a reduced funding alternative
for managing market risk since derivatives are based upon notional values, which
are generally not exchanged, but rather are used merely as a basis for
exchanging cash flows during the duration of the contract. Derivatives are also
utilized extensively as highly effective tools
25
<PAGE> 27
that enable users to adjust risk profiles, such as interest rate, currency, or
other market risks, or to take proprietary trading positions, since OTC
derivative instruments can be tailored to meet individual client needs.
Additionally, derivatives provide users with access to market risk management
tools which are often unavailable in traditional cash instruments.
Derivatives are subject to various risks similar to non-derivative
financial instruments including market, credit and operational risk. Market risk
is the potential for a financial loss due to changes in the value of derivative
financial instruments due to market changes, including changes in interest
rates, foreign exchange rates and equity and commodity prices. Credit risk
results from the possibility that a counterparty to a derivative transaction may
fail to perform according to the terms of the contract. Therefore, the Company's
exposure to credit risk is represented by its net receivable from derivative
counterparties, after consideration of collateral. Operational risk is the
possibility of financial loss resulting from a deficiency in the Company's
systems for executing derivative transactions. In addition to these risks,
counterparties to derivative financial instruments may also be exposed to legal
risks related to 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.
As derivative products have continued to expand in volume, so has market
participation and competition. As a result, additional liquidity has been added
into the markets for conventional derivative products, such as interest rate
swaps. Competition has also contributed to the development of more complex
products structured for specific clients. It is this rapid growth and complexity
of certain derivative products which has led to the perception, by some, that
derivative products are unduly risky to users and the financial markets. In
order to remove the public perception that derivatives may be unduly risky and
to ensure ongoing liquidity of derivatives in the marketplace, the Company
supports the efforts of the regulators in striving for enhanced risk management
disclosures which consider the effects of both derivative products and cash
instruments. In addition, the Company supports the activities of regulators
which are designed to ensure that users of derivatives are fully aware of the
nature of risks inherent within derivative transactions. As evidence of this
support, the Company, is an active participant in the Derivative Policy Group
and has been actively involved with the various regulatory and accounting
authorities in the development of additional enhanced reporting requirements
related to derivatives. The Company strongly believes that derivatives provide
significant value to the financial markets and is committed to providing its
clients with innovative products to meet their financial needs.
Lehman Brothers' Use of Derivative Instruments
In the normal course of business, the Company enters into derivative
transactions both in a trading capacity and as an end user. As an end user, the
Company utilizes derivative products to adjust the interest rate nature of its
funding sources from fixed to floating interest 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"). For a further
discussion of the Company's End User Derivative Activities see Note 8 to the
Consolidated Financial Statements.
The Company utilizes derivative products in a trading capacity both as a
dealer to satisfy the financial needs of its clients and in each of its trading
businesses (collectively, "Trading-Related Derivative Activities"). The
Company's use of derivative products in its trading businesses is combined with
cash instruments to fully execute various trading strategies.
The Company conducts its fixed income derivative products business through
its special purpose subsidiary, Lehman Brothers Special Financing Inc., and a
separately capitalized triple-A rated subsidiary, Lehman Brothers Financial
Products Inc. In addition, as a global investment bank, the Company is also a
market-maker in a number of foreign currencies and actively trades in the global
commodity markets. Counterparties to the Company's derivative product
transactions are primarily financial intermediaries (U.S. and foreign banks),
securities firms, corporations, governments and their agencies, finance
companies, insurance companies, investment companies and pension funds.
26
<PAGE> 28
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. For a further discussion of the Company's risk management
policies refer to Management's Discussion and Analysis pages 28-29.
The Company's Trading-Related Derivative Activities have increased during
the current year to a notional value of $1,406 billion at November 30, 1996 from
$1,139 billion at November 30, 1995, primarily as a result of growth in the
Company's activities as a dealer in fixed income derivative products. Notional
values are not recorded on the balance sheet and are not indicative of potential
risk, but rather they provide a measure of the Company's involvement with such
instruments.
As a result of the Company's Trading-Related Derivative activities, the
Company is subject to credit risk. With respect to OTC derivative contracts, the
Company's credit exposure is directly with its counterparties and extends
through the duration of the derivative contracts. The Company views its net
credit exposure to be $3,643 million at November 30, 1996, representing the fair
value of the Company's OTC contracts in an unrealized gain position, after
consideration of collateral. Collateral held related to OTC contracts generally
includes cash and U.S. government and federal agency securities. At November 30,
1996 approximately 90% of the Company's net credit risk exposure related to OTC
contracts was with counterparties rated single-A or better.
Additionally, the Company is exposed to credit risk related to its
exchange-traded derivative contracts. Exchange-traded derivative contracts
include futures contracts, warrants and certain options. Futures contracts and
options on futures are transacted on the respective exchange. The exchange
clearing house is a counterparty to the futures contracts and options. As a
clearing member firm, the Company is required by the exchange clearing house to
deposit cash or other securities as collateral for its obligation upon the
origination of the contract and for any daily changes in the market value of
open futures contracts. Unlike OTC derivatives which involve numerous
counterparties, the number of counterparties from exchange-traded derivatives
include only those exchange clearing houses of which the Company is a clearing
member firm or other member firms the Company utilizes as agents. Substantially
all of the Company's exchange-traded derivatives are transacted on exchanges of
which the Company is a clearing member firm. To protect against the potential
for a default, all exchange clearing houses impose net capital requirements for
their membership. Therefore, the potential for losses from exchange-traded
products is limited. As of November 30, 1996, the Company had approximately $448
million on deposit with futures exchanges consisting of cash and securities
(customer and proprietary), and had posted approximately $217 million of letters
of credit and bank guarantees to domestic exchanges. Included within these
amounts was $392 million and $56 million of cash and securities related to
domestic and foreign futures exchanges, respectively. In addition, the Company
had approximately $739 million of cash and securities (customer and proprietary)
on deposit with affiliates, acting as the Company's clearing broker related to
futures contracts. These deposits primarily relate to futures contracts on
foreign exchanges.
See Note 8 to the Consolidated Financial Statements for a further
discussion of the Company's Trading-Related Derivative Activities.
ACCOUNTING AND VALUATION
The Company's accounting methodology for derivatives depends on both the
type and purpose of the derivative instrument. The Company records its
Trading-Related Derivative Activities on a mark-to-market or fair value basis.
Under mark-to-market or fair value accounting, gains and losses are recognized
currently in Principal Transactions, and resulting assets and liabilities are
recorded in the Consolidated Statement of Financial Condition as Derivatives and
other Contractual Agreements, as applicable. Derivative assets and liabilities
are netted by counterparty, when permitted under a legally enforceable master
netting agreement. Derivatives utilized in conjunction with the Company's
End-User Derivative Activities are generally recorded on an accrual basis.
Interest is accrued into income or expense over the life of the contract,
resulting in the net interest impact of the derivative and the underlying hedged
item being recognized in income throughout the hedge period.
27
<PAGE> 29
Market or fair value for Trading-Related Derivative Activities is generally
determined by pricing models. Pricing models utilize a series of market inputs
to determine the present value of future cash flows, with adjustments, as
required, for credit, liquidity, and ongoing costs. Further valuation
adjustments may be recorded, as deemed appropriate, for new or complex products
or for significant positions. These adjustments are integral components of the
mark-to-market process.
RISK MANAGEMENT
As a leading global investment banking company, risk is an inherent part of
the Company's businesses. The Company has developed policies and procedures to
identify, measure and monitor each of the risks involved in its trading,
brokerage and investment banking activities on a global basis. The principal
risks of Lehman Brothers are market, credit, liquidity, legal and operational
risks. Risk Management is considered to be of paramount importance, and efforts
to further enhance this core competency are ongoing and will include a
significant investment in information technology infrastructure and systems over
the next two years.
The Company aims to reduce risk through the diversification of its
products, counterparties and activities in geographic regions. The Company
accomplishes this objective by allocating the usage of capital to each of its
businesses, establishing trading limits for individual products and traders and
setting credit limits for individual counterparties including regional
concentrations. The Company seeks to achieve adequate returns from each of its
businesses commensurate with the risks which they assume. The Company
periodically reallocates capital to its businesses based on their ability to
obtain returns consistent with the established guidelines, opportunities in the
marketplace and the Company's long-term strategy.
The Company's risk management strategy is headed by a Risk Management
Committee comprised of the Chief Executive Officer, Global Equity Division Head,
Global Fixed Income Division Head, London Senior Manager, Asian Senior Manager,
Chief Financial Officer, Chief Credit Officer and Global Risk Manager. This
committee reviews risk exposures, ratifies division risk limits and signs off on
Risk Management guidelines. The Risk Management Committee meets on a weekly
basis, or more frequently if required, to discuss, among other matters,
significant market exposures, concentrations of positions (e.g., counterparty,
market risk), potential new transactions or positions and risk limit exceptions.
Overall risk management is based on a multi-tiered approach which includes
many independent groups (i.e. the Risk Management committee, the Market and
Credit Risk Management Departments, Audit, Finance, Legal and Treasury) that
assist in the identification, assessment and control of risk. Senior
representatives from these groups meet formally on a biweekly basis and on an ad
hoc basis as necessary. Senior management plays a critical role in the ongoing
evaluation of risks and adjusts risk management policies when necessary.
Market Risk Management Department
The Market Risk Management Department ("MRM Department") is independent of
the trading areas and reports directly to the Chief Executive Officer. The group
functions as the executive branch of the Risk Management Committee. Staff is
located in New York, London and Tokyo. The international staff has a matrix
reporting responsibility to local senior non-trading management in addition to
the Global Risk Manager.
The MRM Department is responsible for the preparation and dissemination of
risk reports, developing and implementing the firm-wide Risk Management
Guidelines and evaluating adherence to these guidelines. The purpose of market
risk management guidelines is to address the review and approval of risk limits,
the monitoring and reporting of risks against such limits, the reporting of risk
limit exceptions, the review and approval of risk limit exceptions, as well as
identifying the requisite authorities governing these processes. These
guidelines provide a clear framework for risk management decision-making. To
that end, the MRM Department identifies and quantifies risk exposures, develops
limits, and reports and monitors these risks with respect to the approved
limits. The identification of material market risks inherent in positions
includes, but is not limited to, interest rate, equity, FX, and commodity risk
exposures. In addition to these risks, the MRM Department also evaluates
liquidity risks, credit and sovereign concentrations.
28
<PAGE> 30
The MRM Department is also responsible for the development of standards and
methodologies for the quantification and evaluation of market risk. Risk
quantification methodologies include Value-at-Risk (VAR) and quantitative
measures that take into consideration the portfolio effects of risk across
positions, as well as stress testing and scenario analysis based on historical
market data and potential market changes. As the development and evaluation of
these market risk measures requires personnel with specific industry,
technological and quantitative skills, the MRM Department has an analysis group
comprised of individuals with specific expertise in these areas. The Company is
committed to ensuring that individuals within the risk management area are
qualified with the skills necessary to assess Lehman's risk exposures.
The MRM Department establishes measurable risk limits for all significant
market risk exposures by exposure type (e.g., delta, gamma, vega) or based on
VAR; risk limits are set at varying levels of trading activity (e.g., strategy
and trader). Analysts in the MRM Department, in a joint effort with the Finance
Department, establish appropriate limits for the business units and communicate
these limits to senior risk management members ensuring that these limits are
appropriate on an aggregate basis and consistent with the Company's overall risk
management goals. To accomplish this objective the MRM Department also maintains
a reporting group, which works closely with the analysis group, that is
responsible for reporting the daily exposures from a singular to an aggregate
level.
In addition to independently monitoring and reporting market risks to the
businesses and to senior management, the MRM Department ensures that risk
reports adequately present the risks they are intended to report and that the
limitations of such reports are made known to the users of such reports. This is
achieved by the MRM Department's periodic review of the risk reporting
methodologies with risk report users. Risk Management documents the methods used
in the risk reports, which are available for user review.
Credit Risk Management Department
Credit risk management is an integral component of the Company's overall
risk management framework. The Credit Risk Management Department ("CRM
Department") has global responsibility for establishing credit risk standards
and defining the firm's overall credit risk management framework. The Firm
recognizes that the credit "risk appetite" is a finite resource and emphasizes
the importance of allocating this resource in such a way as to maximize the
Company's profitability.
The CRM Department is independent from the business units and reports
directly to the Global Risk Manager, who, in turn, reports to the Chief
Executive Officer. Corporate Credit is a global department centered in and
managed from New York, with credit officers operating in London, Tokyo, Hong
Kong and Singapore.
The CRM Department manages the credit exposure related to its trading
activities by giving initial credit approval for counterparties, establishing
credit limits by counterparty, country and industry group and by requiring
collateral in appropriate circumstances. In addition, the CRM Department strives
to ensure that master netting agreements are obtained whenever possible. The CRM
Department also considers the duration of transactions in making its credit
decisions, along with the potential credit exposure for complex derivative
transactions. The CRM Department is responsible for the continuous monitoring
and review of counterparty credit exposure and counterparty creditworthiness.
Credit limits are reviewed periodically to ensure that they remain appropriate
in the light of market events or the counterparty's financial condition.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"), which is effective for
transactions occurring after December 31, 1996. In December 1996, the FASB
issued SFAS No. 127, deferring the effective date for one year for certain
provisions of SFAS No. 125.
It is likely that when fully adopted SFAS No. 125 will require the Company
to recognize additional assets and liabilities on its Consolidated Statement of
Financial Condition from transactions where the Company is deemed to have
control over certain financial assets. This will have the effect of increasing
the amount of
29
<PAGE> 31
assets and liabilities recognized on the balance sheet but will have no material
effect on the equity or financial condition of the Company.
EFFECTS OF INFLATION
Because the Company's assets are, to a large extent, liquid in nature, they
are not significantly affected by inflation. However, the rate of inflation
affects the Company's expenses, such as employee compensation, office space
leasing costs and communications charges, which may not be readily recoverable
in the price of services offered by the Company. To the extent inflation results
in rising interest rates and has other adverse effects upon the securities
markets, it may adversely affect the Company's financial position and results of
operations in certain businesses.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information required
by this Item and included in this Report are listed in the Index to Financial
Statements and Schedules appearing on page F-1 and are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction J of Form 10-K, the information required by
Item 10 is omitted.
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to General Instruction J of Form 10-K, the information required by
Item 11 is omitted.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to General Instruction J of Form 10-K, the information required by
Item 12 is omitted.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction J of Form 10-K, the information required by
Item 13 is omitted.
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
See Index to Financial Statements and Schedules appearing on page F-1.
2. Financial Statement Schedules:
Schedules are omitted since they are not required or are not applicable.
30
<PAGE> 32
3. Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<C> <S>
3.1 Restated Certificate of Incorporation of the Registrant dated September 3, 1981
(incorporated by reference to Exhibit 3.1 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1987).
3.2 Certificate of Amendment to Restated Certificate of Incorporation of the Registrant
dated May 11, 1984 (incorporated by reference to Exhibit 3.2 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1988).
3.3 Certificate of Amendment to Restated Certificate of Incorporation of the Registrant,
dated March 6, 1985 (incorporated by reference to Exhibit 3.3 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1985).
3.4 Certificate of Amendment to Restated Certificate of Incorporation of the Registrant,
dated August 31, 1987 (incorporated by reference to Exhibit 3.4 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1987).
3.5 Certificate of Amendment to Restated Certificate of Incorporation of the Registrant,
dated January 28, 1988 (incorporated by reference to Exhibit 3.5 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1987).
3.6 Certificate of Amendment to Restated Certificate of Incorporation of the Registrant,
dated July 19, 1990. (Incorporated by reference to Exhibit 3.6 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1990).
3.7 Certificate of Amendment to Restated Certificate of Incorporation of the Registrant,
dated August 2, 1993 (incorporated by reference to Exhibit 3 of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1993).
3.8 Certificate of Designations of Floating Rate Preferred Stock, filed April 30, 1996*
3.9 By-Laws of the Registrant, amended as of January 30, 1997.*
4.1 The instruments defining the rights of holders of the long-term debt securities of
the Registrant and its subsidiaries are omitted pursuant to section (b)(4)(iii)(A) of
Item 601 of Regulation S-K. The Registrant hereby agrees to furnish copies of these
instruments to the Securities and Exchange Commission upon request.
10.1 Lease and Land Disposition Agreement, dated as of September 14, 1984, between
Shearson Lehman Construction Inc. and The City of New York (incorporated by reference
to Exhibit 10.16 of the Registrant's Registration Statement on Form S-1 (reg. No.
33-12976)).
10.2 Agreement of Tenants-In-Common by and among American Express Company, American
Express Bank Ltd., American Express Travel Related Services Company, Inc., Shearson
Lehman Brothers Inc., Shearson Lehman Government Securities, Inc. and Shearson Lehman
Commercial Paper Incorporated (incorporated by reference to Exhibit 10.1 of Lehman
Brothers Holdings Inc.'s Transition Report on Form 10-K for the eleven months ended
November 30, 1994.)
12. Computation in support of ratio of earnings to fixed charges.*
21. Pursuant to General Instruction J of Form 10-K, the list of the Registrant's
Subsidiaries is omitted.
23. Consent of Ernst & Young LLP.*
24. Powers of Attorney.*
27. Financial Data Schedule.*
</TABLE>
(b) Reports on Form 8-K.
None.
- ---------------
* Filed herewith.
31
<PAGE> 33
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
LEHMAN BROTHERS INC.
(Registrant)
February 28, 1997
By: /s/ KAREN M. MULLER
------------------------------------
Title: Managing Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------------- ------------------------------------ ------------------
<S> <C> <C>
* Chief Executive Officer and, February 28, 1997
- ------------------------------------- Chairman of the Board of
Richard S. Fuld, Jr. Directors
(principal executive officer)
* Chief Financial Officer February 28, 1997
- ------------------------------------- and Director
Charles B. Hintz (principal financial and accounting
officer)
* Director February 28, 1997
- -------------------------------------
Roger S. Berlind
* Director February 28, 1997
- -------------------------------------
Philip Caldwell
* Director February 28, 1997
- -------------------------------------
Howard L. Clark, Jr.
* Director February 28, 1997
- -------------------------------------
Frederick Frank
* Director February 28, 1997
- -------------------------------------
Bruce R. Lakefield
* Director February 28, 1997
- -------------------------------------
Sherman R. Lewis, Jr.
* Director February 28, 1997
- -------------------------------------
Mel A. Shaftel
</TABLE>
*By: /s/ KAREN M. MULLER
---------------------------------
Karen M. Muller
(Attorney-in-Fact)
February 28, 1997
32
<PAGE> 34
LEHMAN BROTHERS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS PAGE
- --------------------------------------------------------------------------------------- ----
<S> <C>
Report of Independent Auditors......................................................... F-2
Consolidated Statement of Operations for the Twelve Months Ended November 30, 1996, for
the Twelve Months Ended November 30, 1995, and for the Eleven Months Ended November
30, 1994............................................................................. F-3
Consolidated Statement of Financial Condition at November 30, 1996 and November 30,
1995................................................................................. F-4
Consolidated Statement of Changes in Stockholder's Equity for the Twelve Months Ended
November 30, 1996, for the Twelve Months Ended November 30, 1995, and for the Eleven
Months Ended November 30, 1994....................................................... F-6
Consolidated Statement of Cash Flows for the Twelve Months Ended November 30, 1996, for
the Twelve Months Ended November 30, 1995, and for the Eleven Months Ended November
30, 1994............................................................................. F-7
Notes to Consolidated Financial Statements............................................. F-8
</TABLE>
F-1
<PAGE> 35
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder of
Lehman Brothers Inc.
We have audited the accompanying consolidated statement of financial
condition of Lehman Brothers Inc. and Subsidiaries (the "Company") as of
November 30, 1996 and 1995, and the related consolidated statements of
operations, changes in stockholder's equity, and cash flows for each of the two
years in the period ended November 30, 1996 and for the eleven month period
ended November 30, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Lehman Brothers
Inc. and Subsidiaries at November 30, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the two years ended
November 30, 1996 and for the eleven month period ended November 30, 1994 in
conformity with generally accepted accounting principles.
As discussed in Note 13 to the consolidated financial statements, in 1994
the Company changed its method of accounting for postemployment benefits.
ERNST & YOUNG LLP
New York, New York
January 7, 1997
F-2
<PAGE> 36
LEHMAN BROTHERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED ELEVEN MONTHS
NOVEMBER 30, ENDED
------------------- NOVEMBER 30,
1996 1995 1994
------- ------- -------------
(IN MILLIONS)
<S> <C> <C> <C>
REVENUES
Principal transactions.................................. $ 937 $ 695 $ 732
Investment banking...................................... 779 621 399
Commissions............................................. 298 395 391
Interest and dividends.................................. 10,465 10,289 6,235
Other................................................... 18 32 57
------- ------- ------
Total revenues.................................. 12,497 12,032 7,814
Interest expense........................................ 10,121 9,954 5,845
------- ------- ------
Net revenues.................................... 2,376 2,078 1,969
------- ------- ------
NON-INTEREST EXPENSES
Compensation and benefits............................... 1,219 1,106 1,053
Brokerage, commissions and clearance fees............... 205 192 190
Communications.......................................... 94 120 135
Occupancy and equipment................................. 75 85 82
Business development.................................... 70 80 86
Professional services................................... 69 79 103
Depreciation and amortization........................... 53 63 89
Management fees......................................... 61 94 53
Other................................................... 198 138 150
Severance charge........................................ 23 27
Restructuring charge.................................... 43
------- ------- ------
Total non-interest expenses..................... 2,067 2,000 1,968
------- ------- ------
Income before taxes, cumulative effect of change in
accounting principle and preferred dividend of
subsidiary.............................................. 309 78 1
Provision for (benefit from) income taxes................. 120 9 (33)
------- ------- ------
Income before cumulative effect of change in accounting
principle and preferred dividend of subsidiary.......... 189 69 34
------- ------- ------
Cumulative effect of change in accounting principle, net
of taxes................................................ (13)
Preferred dividend of subsidiary.......................... (50)
------- ------- ------
Net income (loss)......................................... $ 189 $ 69 $ (29)
======= ======= ======
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 37
LEHMAN BROTHERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
NOVEMBER 30,
--------------------
1996 1995
-------- -------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Cash and cash equivalents............................................... $ 396 $ 287
Cash and securities segregated and on deposit for regulatory and other
purposes.............................................................. 663 785
Securities and other financial instruments owned:
Governments and agencies.............................................. 21,251 13,962
Corporate stocks...................................................... 3,164 2,759
Corporate debt and other.............................................. 4,739 5,403
Derivatives and other contractual agreements.......................... 5,298 3,929
Mortgages and mortgage-backed......................................... 2,055 3,182
Certificates of deposit and other money market instruments............ 3,819 2,958
-------- -------
40,326 32,193
-------- -------
Collateralized short-term agreements:
Securities purchased under agreements to resell....................... 33,145 25,982
Securities borrowed................................................... 19,035 16,562
Receivables:
Brokers, dealers and clearing organizations........................... 4,909 1,718
Customers............................................................. 3,956 2,176
Others................................................................ 4,611 2,175
Property, equipment and leasehold improvements (net of accumulated
depreciation and amortization of $502 in 1996 and $455 in 1995)....... 283 333
Deferred expenses and other assets...................................... 214 219
Excess of cost over fair value of net assets acquired (net of
accumulated amortization of $94 in 1996 and $86 in 1995).............. 166 174
-------- -------
Total assets.................................................. $107,704 $82,604
======== =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 38
LEHMAN BROTHERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
NOVEMBER 30,
--------------------
1996 1995
-------- -------
(IN MILLIONS EXCEPT
PER SHARE DATA)
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Commercial paper and short-term debt.................................... $ 2,299 $ 1,008
Securities and other financial instruments sold but not yet purchased:
Governments and agencies.............................................. 9,326 6,425
Corporate stocks...................................................... 1,143 1,190
Corporate debt and other.............................................. 2,735 1,125
Derivatives and other contractual agreements.......................... 4,662 3,657
-------- -------
17,866 12,397
-------- -------
Collateralized short-term financing:
Securities sold under agreements to repurchase........................ 52,200 41,900
Securities loaned..................................................... 10,085 2,649
Advances from Holdings and other affiliates............................. 8,552 8,418
Payables:
Brokers, dealers and clearing organizations........................... 2,200 3,222
Customers............................................................. 6,395 5,656
Accrued liabilities and other payables.................................. 2,250 1,829
Long-term debt:
Senior notes.......................................................... 215 420
Subordinated indebtedness............................................. 3,950 3,077
-------- -------
Total liabilities............................................. 106,012 80,576
-------- -------
Commitments and contingencies
STOCKHOLDER'S EQUITY
Preferred stock, $.10 par value; 10,000 shares authorized; none
outstanding
Common Stock, $.10 par value; 10,000 shares authorized; 1,006 shares
issued and outstanding in 1996 and 1995;
Additional paid-in capital............................................ 1,828 2,353
Foreign currency translation adjustment............................... 3 3
Accumulated deficit................................................... (139) (328)
-------- -------
Total stockholder's equity.................................... 1,692 2,028
-------- -------
Total liabilities and stockholder's equity.................... $107,704 $82,604
======== =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 39
LEHMAN BROTHERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED ELEVEN MONTHS
NOVEMBER 30, ENDED
----------------- NOVEMBER 30,
1996 1995 1994
------ ------ -------------
(IN MILLIONS)
<S> <C> <C> <C>
Additional paid-in capital
Beginning balance.......................................... $2,353 $2,905 $ 2,738
Merger of subsidiaries..................................... 467
Capital contributions...................................... 13 7
Capital distributions...................................... (538) (559) (300)
------ ------ ------
Ending balance............................................... 1,828 2,353 2,905
------ ------ ------
Foreign currency translation adjustment
Beginning balance.......................................... 3 3 2
Translation adjustment..................................... 1
------ ------ ------
Ending balance............................................... 3 3 3
------ ------ ------
Accumulated deficit
Beginning balance.......................................... (328) (321) (56)
Net income (loss).......................................... 189 69 (29)
Dividends.................................................. (76) (236)
------ ------ ------
Ending balance............................................... (139) (328) (321)
------ ------ ------
Total stockholder's equity................................... $1,692 $2,028 $ 2,587
------ ------ ------
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 40
LEHMAN BROTHERS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED ELEVEN MONTHS
NOVEMBER 30, ENDED
------------------- NOVEMBER 30,
1996 1995 1994
------- ------- -------------
(IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income before cumulative effect of change in accounting
principle and preferred dividend of subsidiary.......... $ 189 $ 69 $ 34
Adjustments to reconcile income to net cash (used in)
provided by operating activities:
Depreciation and amortization........................... 53 63 89
Severance charge........................................ 23
Restructuring charge.................................... 26
Provisions for losses and other reserves................ 40 37 32
Deferred tax provision (benefit)........................ (149) 5 (13)
Other adjustments....................................... 20 19 17
Net change in:
Cash and securities segregated.......................... 122 478 (396)
Receivables from brokers, dealers and clearing
organizations........................................ (3,191) 2,150 234
Receivables from customers.............................. (1,780) (770) (15)
Securities purchased under agreements to resell......... (7,163) 3,410 (6,217)
Securities borrowed..................................... (2,473) (7,352) (4,934)
Securities and other financial instruments owned........ (8,133) (3,064) (8,572)
Payables to brokers, dealers and clearing
organizations........................................ (1,022) 492 709
Payables to customers................................... 739 3,487 (263)
Accrued liabilities and other payables.................. 360 (1,636) 802
Securities sold under agreements to repurchase.......... 10,300 (2,274) 13,376
Securities loaned....................................... 7,436 2,334 (457)
Securities and other financial instruments sold but not
yet purchased........................................ 5,469 3,019 4,155
Other operating assets and liabilities, net............. (2,282) 1,544 (1,003)
------- ------- -------
Net cash (used in) provided by operating
activities.................................... (1,442) 2,037 (2,422)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments of senior notes........................ (210) (98) (155)
Proceeds from issuance of subordinated indebtedness....... 1,130 250 1,560
Principal payments of subordinated indebtedness........... (261) (64) (1,733)
Net proceeds from (payments for) commercial paper and
short-term debt......................................... 1,290 (1,161) (362)
Increase (decrease) in advances from Holdings and other
affiliates.............................................. 134 (389) 3,744
Capital contributions..................................... 13 7
Dividends and capital distributions paid.................. (538) (635) (536)
------- ------- -------
Net cash provided by (used in) financing
activities.................................... 1,558 (2,090) 2,518
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, equipment and leasehold
improvements............................................ (7) (21) (51)
------- ------- -------
Net cash used in investing activities........... (7) (21) (51)
------- ------- -------
Net change in cash and cash equivalents......... 109 (74) 45
------- ------- -------
Cash and cash equivalents, beginning of period............ 287 361 316
------- ------- -------
Cash and cash equivalents, end of period........ $ 396 $ 287 $ 361
======= ======= =======
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN MILLIONS)
Interest paid totaled $10,104 in 1996, $9,985 in 1995 and $5,818 in 1994.
Income taxes paid totaled $45 in 1996, $194 in 1995 and $33 in 1994.
See Notes to Consolidated Financial Statements.
F-7
<PAGE> 41
LEHMAN BROTHERS INC. AND SUBSIDIARIES
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 Inc., a registered broker-dealer ("LBI") and subsidiaries
(collectively, the "Company"). LBI is a wholly-owned subsidiary of Lehman
Brothers Holdings Inc. ("Holdings"). LBI 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 are
complemented by offices in additional locations in North America, Europe, the
Middle East, Latin and South America and the Asia Pacific Region. Holdings
provides investment banking and capital markets services in Europe and Asia. The
Company is engaged primarily in providing financial services. The Company also
operates a commodities trading and sales operation in London. 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.
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.
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
stockholder's 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.
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.
F-8
<PAGE> 42
LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The market or fair value associated with derivatives utilized for trading
purposes is recorded in the Consolidated Statement of Financial Condition on a
net by counterparty basis where a legal right of set-off exists. The market or
fair value of swap agreements, caps and floors, and forward contracts in an
unrealized gain position, as well as options owned and warrants held, are
reported in the Consolidated Statement of Financial Condition as assets in
derivatives and other contractual agreements. Similarly swap agreements, caps
and floors, and forward contracts in an unrealized loss position, as well as
options written and warrants issued, are reported as liabilities in derivatives
and other contractual agreements.
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 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
that 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.
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 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 that 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, 1996, such resale and repurchase agreements
that had not yet matured aggregated $1.5 billion and $4.3 billion, respectively.
F-9
<PAGE> 43
LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
STOCK BASED AWARDS
The Company's employees participate in Holdings' stock-based incentive
plans. The Company accounts for these awards in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
its related interpretations.
NOTE 2. 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.
F-10
<PAGE> 44
LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's commercial paper and short-term debt is comprised of the
following:
<TABLE>
<CAPTION>
NOVEMBER 30,
-----------------
1996 1995
------ ------
(IN MILLIONS)
<S> <C> <C>
Short-term debt
Master notes..................................................... $1,326 $ 381
Bank loans....................................................... 532 61
Payables to banks................................................ 441 566
------ ------
Total.................................................... $2,299 $1,008
====== ======
</TABLE>
The Company's weighted average interest rates were as follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------
1996 1995
---- ----
<S> <C> <C>
Short-term debt........................................................ 5.6% 5.7%
Securities sold under agreements to repurchase......................... 5.4% 5.7%
</TABLE>
NOTE 3. LONG-TERM DEBT
<TABLE>
<CAPTION>
NON-U.S.
U.S. DOLLAR DOLLAR
------------------- -------- NOVEMBER 30,
FIXED FLOATING FLOATING -----------------
RATE RATE RATE 1996 1995
------ -------- -------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
SENIOR NOTES
Maturing in Fiscal 1996...................... $ 222
Maturing in Fiscal 1997...................... $ 1 $9 $ 10 1
Maturing in Fiscal 1998...................... 1 1 1
Maturing in Fiscal 1999...................... 21 21 21
Maturing in Fiscal 2000...................... 23 23 24
Maturing in Fiscal 2001...................... 158 158 149
December 1, 2001 and thereafter.............. 2 2 2
------ -- ------ ------
Senior Notes............................ 206 9 215 420
------ -- ------ ------
SUBORDINATED INDEBTEDNESS
Maturing in Fiscal 1996...................... 258
Maturing in Fiscal 1997...................... 550 350 900 741
Maturing in Fiscal 1998...................... 350 465 815 1,170
Maturing in Fiscal 1999...................... 334 334 179
Maturing in Fiscal 2000...................... 192 192 192
Maturing in Fiscal 2001...................... 200 200
December 1, 2001 and thereafter.............. 1,382 127 1,509 537
------ ---- ------ ------
Subordinated Indebtedness............... 3,008 942 3,950 3,077
------ ---- -- ------ ------
Long-Term Debt............................... $3,214 $942 $9 $4,165 $3,497
====== ==== == ====== ======
</TABLE>
Of the Company's long-term debt outstanding as of November 30, 1996, $200
million is repayable prior to maturity at the option of the holder, at par
value.
The Company's interest in 3 World Financial Center is financed with U.S.
dollar fixed rate senior notes totaling $202 million as of November 30, 1996.
These notes are unconditionally guaranteed by American Express with a portion of
these notes being collateralized by certain mortgage obligations.
F-11
<PAGE> 45
LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of November 30, 1996, LBI had $1.4 billion available for the issuance of
debt securities under various shelf registrations.
END USER DERIVATIVE ACTIVITIES
The Company utilizes interest rate swaps 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. In certain instances, two or more derivative
contracts may be utilized by the Company to manage the interest rate nature 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, 1996 the notional values of the Company's interest rate
swaps related to its long-term debt obligations were approximately $3.7 billion.
In terms of notional amounts outstanding, these derivative products mature as
follows:
<TABLE>
<CAPTION>
TOTAL
-------------
(IN MILLIONS)
<S> <C>
Maturing in Fiscal 1997................................................ $ 1,451
Maturing in Fiscal 1998................................................ 350
Maturing in Fiscal 1999................................................ 355
Maturing in Fiscal 2000................................................ 215
Maturing in Fiscal 2001................................................ 225
December 1, 2001 and thereafter........................................ 1,119
------
Total........................................................ $ 3,715
======
Weighted average rate at November 30, 1996
Receive rate........................................................... 7.16%
Pay rate............................................................... 6.32%
</TABLE>
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, 1996, the Company had deferred gains of approximately $2 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 $20 million, $29 million and $40 million in 1996, 1995 and 1994,
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.
<TABLE>
<CAPTION>
NOVEMBER 30, 1996
--------------------------------------------------
LONG-TERM DEBT WEIGHTED AVERAGE(1)
------------------- ----------------------------
BEFORE AFTER CONTRACTUAL EFFECTIVE RATE
END USER END USER INTEREST AFTER END USER
ACTIVITIES ACTIVITIES RATE ACTIVITIES
-------- -------- ----------- --------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
USD Obligations
Fixed Rate................................ $3,214 $ 408 7.99% 8.88%
Floating Rate............................. 942 3,748 6.55% 6.66%
Non-USD Obligations......................... 9 9 0.88% 0.88%
------ ------ ---- ----
Total............................. $4,165 $4,165 7.65% 6.87%
====== ====== ==== ====
</TABLE>
F-12
<PAGE> 46
LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
NOVEMBER 30, 1995
--------------------------------------------------
LONG-TERM DEBT WEIGHTED AVERAGE(1)
------------------- ----------------------------
BEFORE AFTER CONTRACTUAL EFFECTIVE RATE
END USER END USER INTEREST AFTER END USER
ACTIVITIES ACTIVITIES RATE ACTIVITIES
-------- -------- ----------- --------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
USD Obligations
Fixed Rate................................ $2,384 $ 580 8.60% 7.51%
Floating Rate............................. 1,103 2,907 7.31% 7.55%
Non-USD Obligations......................... 10 10 0.94% 0.94%
------ ------ ---- ----
Total............................. $3,497 $3,497 8.17% 7.52%
====== ====== ==== ====
</TABLE>
- ---------------
(1) Weighted average interest rates were calculated utilizing non-US dollar
interest rates, where applicable.
NOTE 4. INCENTIVE PLANS
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 $25,000 in
annual aggregate purchases by any one individual. The number of shares of Common
Stock authorized for purchase by eligible employees is 6 million. As of November
30, 1996 and 1995, 1.2 million shares and 0.7 million shares, respectively, of
Common Stock had been purchased by eligible employees through the ESPP. Holdings
controls the dilutive impact of the ESPP through open market purchases.
1994 INCENTIVE PLANS
The 1994 Management Replacement Plan provided awards similar to the
American Express common shares granted to Company employees which were canceled
as of the date of the spin-off from American Express, May 31, 1994. Through
November 30, 1996, a total of 2.0 million awards had been granted under the
Replacement Plan, including both stock options and restricted stock; 1.2 million
were outstanding at November 30, 1996. No future awards will be granted under
this plan.
The Lehman Brothers Holdings Inc. 1994 Management Ownership Plan (the "1994
Plan") provides for the issuance of stock options, stock appreciation rights,
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 16.65 million shares of Common Stock may be subject to
awards under the 1994 Plan. At November 30, 1996, awards with respect to 14.1
million shares of common stock have been made under the 1994 Plan.
1996 MANAGEMENT OWNERSHIP PLAN
During 1996, Holding's shareholders approved the 1996 Management Ownership
Plan (the "1996 Plan") under which awards similar to those of the 1994 Plan may
be granted and under which, up to 10 million shares of common stock may be
subject to awards. At November 30, 1996, awards with respect to 0.8 million
shares of common stock have been made under the 1996 Plan.
EMPLOYEE INCENTIVE PLAN
During 1995, the Board of Directors of Holdings adopted the Employee
Incentive Plan ("EIP"), which has provisions similar to the 1994 Plan, and under
which up to 20 million shares of Common Stock may be subject to awards. The
Company controls the dilutive impact of these awards through open market
purchases.
F-13
<PAGE> 47
LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At November 30, 1996, awards with respect to 12.0 million shares of common stock
have been made under the EIP.
The following is a summary of Restricted Stock Units awarded under
Holdings' stock based compensation plans:
RESTRICTED STOCK UNITS
<TABLE>
<CAPTION>
1994
PLAN EIP TOTAL
---------- --------- ----------
<S> <C> <C> <C>
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
---------- --------- ----------
Granted............................................... 419,614 7,130,720 7,550,334
Canceled.............................................. (801,614) (405,575) (1,207,189)
Exchanged for stock without restrictions.............. (474,222) (474,222)
---------- --------- ----------
Balance, November 30, 1996.............................. 11,184,575 8,764,365 19,948,940
========== ========= ==========
</TABLE>
Eligible employees receive RSUs as a portion of their total compensation in
lieu of cash. There is no further cost to employees and senior officers of
Holdings and its subsidiaries (the "Firm") associated with the RSU awards. The
Firm records compensation expense for RSUs based on the market value of Common
Stock and the applicable vesting provisions. Generally, RSUs awarded to
employees vest 80% one year from the date of the grant with the remaining 20%
vesting five years from the date of grant. In addition, approximately 1.1
million RSUs were awarded to Holdings' managing directors in November 1996 which
vest and convert to common stock in five years from the grant date. Each RSU
outstanding on the respective dates for which 100% vesting occurs will be
exchanged for a share of freely transferable Common Stock. Holdings pays a
dividend equivalent on each RSU outstanding based on dividends paid on the
Common Stock.
Of the RSUs issued and outstanding at November 30, 1996, approximately 9.3
million RSUs were vested, approximately 4.7 million RSUs will vest on July 1,
1997, and the remaining will vest subsequent to July 1, 1997.
In addition to the RSUs included in the above RSU summary, as of December
31, 1996, Holdings has awarded RSUs and PSUs under the 1996 Plan to members of
Holdings' Corporate Management Committee ("CMC") and under the EIP to certain
senior officers. The number of PSUs which may be earned is dependent upon the
achievement of certain performance levels within predetermined performance
periods. At the end of a performance period, any PSUs earned will convert
one-for-one to RSUs which then vest in five years. Approximately 0.7 million
RSUs awarded to members of the CMC as of December 31, 1996, were based on
performance goals satisfied for the period from January 1, 1996 through December
31, 1996.
F-14
<PAGE> 48
LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1996, approximately 1.8 million PSUs were earned,
subject to vesting and transfer restrictions. The compensation cost for the RSUs
payable in satisfaction of PSUs is accrued over the combined performance and
vesting periods.
STOCK OPTIONS
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
1994 REPLACEMENT 1996 EXERCISE EXPIRATION
PLAN PLAN PLAN EIP TOTAL PRICE DATES
--------- ----------- ------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
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 $18.68 5/96-5/04
--------- --------- ------- --------- --------- ------ ---------
Granted..................... 825,000 2,650,000 3,475,000 $24.16 3/01-5/01
Exercised................... (93,333) (251,909) (345,242) $18.00
Canceled.................... (116,667) (22,247) (850,000) (988,914) $22.83
--------- --------- ------- --------- --------- ------ ---------
Balance, November 30, 1996.... 2,868,680 1,155,029 825,000 3,200,000 8,048,709 $20.58 2/97-5/04
========= ========= ======= ========= ========= ====== =========
</TABLE>
At November 30, 1996 and 1995, approximately 2.6 million and 2.1 million
options, respectively, were exercisable at a weighted-average price of $18.00.
The exercise price for all stock options awarded has been equal to 100% of the
market price of Common Stock on the day of grant. All options awarded in 1994
become exercisable in one-third increments ratably in the three years following
grant date. The options granted in 1995 and 1996 become exercisable in four and
one half years following grant date; exercisability is accelerated ratably in
one-third increments as Holdings' Common Stock meets, or exceeds, specific
target prices.
NOTE 5. 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, 1996, LBI's regulatory net
capital, as defined, of $1,634 million exceeded the minimum requirement by
$1,524 million. The Company's triple-A rated derivatives subsidiary, Lehman
Brothers Financial Products Inc., has established certain capital and operating
restrictions which are reviewed by various rating agencies.
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
$345 million and $320 million at November 30, 1996 and 1995, 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.
Repayment of subordinated indebtedness and certain advances and dividend
payments by LBI are restricted by the regulations of the SEC and other
regulatory agencies. In addition, certain instruments governing the indebtedness
of LBI contractually limit its ability to pay dividends. At November 30, 1996
$1,427 million of net assets of the Company were restricted as to the payment of
dividends.
F-15
<PAGE> 49
LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. EMPLOYEE BENEFIT PLANS
Holdings provides various pension plans for the majority of its employees
worldwide. In addition, Holdings provides certain other postretirement benefits,
primarily health care and life insurance to eligible employees. The following
summarizes these plans:
PENSION PLANS
The Company participates in several noncontributory defined benefit pension
plans, sponsored by Holdings, 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 (income) expense related to pension benefits for 1996, 1995 and 1994
consisted of the following components:
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED ELEVEN MONTHS
NOVEMBER 30, ENDED
------------- NOVEMBER 30,
1996 1995 1994
---- ---- -------------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost -- benefits earned during the period............... $ 7 $ 5 $ 8
Interest cost on projected benefit obligation................... 28 26 23
Actual return on plan assets.................................... (93) (72) 2
Net amortization and deferral................................... 48 37 (30)
---- ---- ----
Total (income) expense................................ $(10) $ (4) $ 3
==== ==== ====
</TABLE>
Plan assets within the trust consist principally of equities and bonds. The
actual return on plan assets for 1996 and 1995 reflects the favorable market
environments in those years. In addition, Company contributions increased assets
under investment in 1996 and 1995. Adverse market conditions in 1994 were the
principal reason for the lower return earned in that year.
The following table sets forth the funded status of Holdings' domestic
defined benefit plan:
<TABLE>
<CAPTION>
NOVEMBER 30,
---------------
1996 1995
----- -----
(IN MILLIONS)
<S> <C> <C>
Actuarial present value of benefit obligations
Vested benefit obligation......................................... $(389) $(375)
----- -----
Accumulated benefit obligation.................................... $(391) $(378)
----- -----
Projected benefit obligation........................................ $(399) $(387)
Plan assets at fair value........................................... 560 481
----- -----
Plan assets in excess of projected benefit obligation............... 161 94
Unrecognized net loss............................................... 38 95
Unrecognized prior service cost..................................... (3) (4)
Unrecognized net asset.............................................. (1) (2)
----- -----
Prepaid pension asset recognized in Holdings' Consolidated Statement
of Financial Condition............................................ $ 195 $ 183
===== =====
</TABLE>
F-16
<PAGE> 50
LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average assumed discount rate used in determining the
actuarial present value of the projected benefit obligation for the plan was
7.5% and 7.25% in 1996 and 1995, respectively. The weighted average rate of
increase in future compensation levels used was 5.0% for 1996 and 1995. The
weighted average expected long-term rate of return on assets was 9.5% in 1996
and 9.75% for 1995 and 1994.
POSTRETIREMENT BENEFITS
The Company participates in several defined benefit health care plans
sponsored by Holdings 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 1996, 1995, and 1994
consisted of the following components:
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED ELEVEN MONTHS
NOVEMBER 30, ENDED
----------------- NOVEMBER 30,
1996 1995 1994
------ ------ -------------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost.......................................... $ 1 $ 1 $ 1
Interest cost......................................... 3 4 5
Amortization of unrecognized net reduction in prior
service cost and unrecognized gain.................. (1) (1) (1)
--- --- ---
Net periodic postretirement benefits cost............. $ 3 $ 4 $ 5
=== === ===
</TABLE>
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):
<TABLE>
<CAPTION>
NOVEMBER 30,
-----------------
1996 1995
------ ------
(IN MILLIONS)
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees.......................................................... $ 36 $ 42
Fully eligible active plan participants........................... 3 4
Other active plan participants.................................... 10 6
--- ---
49 52
--- ---
Unrecognized net gain............................................... 21 17
Unrecognized net reduction in prior service cost.................... 8 8
--- ---
Accrued postretirement liability recognized in the Consolidated
Statement of Financial Condition.................................. $ 78 $ 77
=== ===
</TABLE>
The discount rate used in determining the accumulated postretirement
benefit obligation was 7.5% and 7.25% in 1996 and 1995, respectively.
The annual assumed health care cost trend rate is 10% for the year ended
November 30, 1997 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, 1996 by approximately $3 million.
F-17
<PAGE> 51
LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. INCOME TAXES
The Company's income is included in the consolidated U.S. federal income
tax return of Holdings and its subsidiaries. For the period prior to the
spin-off from American Express on May 31, 1994, 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. The income tax provision for the Company is
computed in accordance with the tax sharing agreement between Holdings and its
Subsidiaries.
With respect to the period in which the Company was included in the
American Express consolidated U.S. federal income tax return, intercompany taxes
were remitted to, or from, American Express when they were otherwise due to or
from the relevant taxing authority. The balances due to Holdings at November 30,
1996 and 1995 were $169 million and $9 million, respectively.
The provision for (benefit from) income taxes from continuing operations
consists of the following:
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED ELEVEN MONTHS
NOVEMBER 30, ENDED
----------------- NOVEMBER 30,
1996 1995 1994
------ ------ -------------
(IN MILLIONS)
<S> <C> <C> <C>
Current
Federal............................................... $ 177 $ 15 $ (1)
State................................................. 86 (15) (21)
Foreign............................................... 6 4 2
----- ---- ----
269 4 (20)
----- ---- ----
Deferred
Federal............................................... (101) (11) (16)
State................................................. (48) 16 3
----- ---- ----
$ 120 $ 9 $ (33)
===== ==== ====
</TABLE>
Income from continuing operations before taxes included $22 million, $24
million, and $1 million that is subject to income taxes of foreign jurisdictions
for 1996, 1995 and 1994, respectively.
The income tax provision (benefit) differs from that computed by using the
statutory federal income tax rate for the reasons shown below:
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED ELEVEN MONTHS
NOVEMBER 30, ENDED
----------------- NOVEMBER 30,
1996 1995 1994
------ ------ -------------
(IN MILLIONS)
<S> <C> <C> <C>
Federal income taxes at statutory rate.................. $ 108 $ 27 $ 1
State and local taxes................................... 24 1 (12)
Tax-exempt interest and dividends....................... (10) (17) (21)
Amortization of goodwill................................ 3 2 3
Other(net).............................................. (5) (4) (4)
----- ---- ----
$ 120 $ 9 $ (33)
===== ==== ====
</TABLE>
Deferred income taxes are provided for the differences between the tax
bases of assets and liabilities and their reported amounts in the consolidated
financial statements. These temporary differences will result in future income
or deductions for income tax purposes and are measured using the enacted tax
rates that will be in effect when such items are expected to reverse. The
Company provides deferred income taxes on undistributed earnings of foreign
subsidiaries.
F-18
<PAGE> 52
LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At November 30, 1996 and 1995 the deferred tax assets and liabilities
consisted of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------
1996 1995
---- ----
(IN MILLIONS)
<S> <C> <C>
DEFERRED TAX ASSETS
Reserve not currently deductible...................................... $ 32 $ 30
Unrealized trading and investment activity............................ 78 33
Other................................................................. 3 4
---- ----
113 67
Less: Valuation Allowance............................................. 32 26
---- ----
Total assets net of valuation allowance............................... $ 81 $ 41
---- ----
DEFERRED TAX LIABILITIES.............................................. (2) (2)
---- ----
Net deferred tax asset................................................ $ 79 $ 39
==== ====
</TABLE>
In accordance with the tax sharing agreement with Holdings, the Company was
reimbursed for $341 million and $238 million of net deferred tax assets as of
November 30, 1996 and November 30, 1995, respectively.
The net deferred tax assets are included in deferred expenses and other
assets in the accompanying Consolidated Statement of Financial Condition. At
November 30, 1996, the valuation allowance recorded against deferred tax assets
from continuing operations was $32 million compared to $26 million at November
30, 1995. The increase in the valuation allowance had no impact on the Company's
Consolidated Statement of Operations since it was associated with a
corresponding increase in the Company's net deferred tax assets.
For tax return purposes, the Company has approximately $92 million of NOL
carryforwards, substantially all of which are attributable to the 1988
acquisition of E.F. Hutton Group, Inc., (now known as LBI Group Inc.). The net
deferred tax asset associated with the NOL carryforward has been transferred to
Holdings in accordance with the tax sharing agreement. Substantially, all of the
NOLs are scheduled to expire in the years 1999 through 2009.
NOTE 8. 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
risk 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
F-19
<PAGE> 53
LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
involving the aggregation of the risk characteristics of a number of derivative
product types including swap products, options and forwards. Listed below are
examples of various derivative products 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 payments streams are based (i.e.,
Party A pays 3 times the 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 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
F-20
<PAGE> 54
LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. TBAs are forward contracts which give the
purchaser/seller an obligation to obtain/deliver mortgage securities in the
future. Therefore, TBAs 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.
The following table reflects the notional/contract value of the Company's
Trading-Related Derivative Activities.
TRADING-RELATED DERIVATIVE FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
NOTIONAL/CONTRACT VALUE
----------------------------- 1996
NOVEMBER 30, NOVEMBER 30, WEIGHTED
1996 1995 AVERAGE
------------ ------------ MATURITY
----------
(IN MILLIONS) (IN YEARS)
<S> <C> <C> <C>
Interest rate and currency swaps and options (including
caps, collars and floors)............................. $ 722,123 $ 552,877 3.96
Foreign exchange forward and future contracts and
options............................................... 331,366 326,274 .22
Other fixed income securities contracts (including
futures contracts and options), mortgage-backed
securities forward contracts and options.............. 342,859 245,962 .80
Equity contracts (including equity swaps, futures,
warrants and options)................................. 4,060 5,074 .65
Commodity contracts (including swaps, futures, forwards
and options).......................................... 6,043 8,544 .45
---------- ---------- ----
Total......................................... $1,406,451 $1,138,731 2.28
========== ========== ====
</TABLE>
Of the total notional value at November 30, 1996 and 1995 approximately
$1,118 billion and $936 billion are over the counter and $288 billion and $203
billion are exchange traded, respectively. The total weighted average maturity
at November 30, 1996, for over the counter and exchange traded contracts was
2.63 years and 0.94 years, respectively. Approximately $731 billion of the
notional/contract value of the Company's Trading-Related Derivative Activities
mature within the year ended November 30, 1997, of which approximately 45% have
maturities of less than one month.
F-21
<PAGE> 55
LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 derivative products business, foreign exchange derivatives and metals.
Principal transactions and net interest revenues related to the Company's fixed
income derivative products business were $319 million for 1996, $185 million for
1995 and $305 million for 1994. Principal transactions and net interest revenues
related to foreign exchange derivatives and metals were $61 million for 1996,
$55 million for 1995 and $52 million for 1994.
Listed in the following table is the fair value of the Company's
Trading-Related Derivative Activities as of November 30, 1996 and 1995 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.
FAIR VALUE OF TRADING-RELATED DERIVATIVE FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
AVERAGE FAIR VALUE*
FAIR VALUE* TWELVE MONTHS ENDED
NOVEMBER 30, 1996 NOVEMBER 30, 1996
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Interest rate and currency swaps and options
(including caps, collars and floors)............... $3,943 $ 3,159 $3,336 $ 1,917
Foreign exchange forward contracts and options....... 834 1,089 668 1,118
Options on other fixed income securities,
mortgage-backed securities forward contracts and
options............................................ 221 248 236 237
Equity contracts (including equity swaps, warrants
and options)....................................... 254 127 233 74
Commodity contracts (including swaps, forwards, and
options)........................................... 46 39 51 50
------ ------ ------ ------
Total...................................... $5,298 $ 4,662 $4,524 $ 3,396
====== ====== ====== ======
</TABLE>
- ---------------
* Amounts represent carrying value (exclusive of collateral) and do not include
receivables or payables related to exchange traded futures contracts.
F-22
<PAGE> 56
LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AVERAGE FAIR VALUE*
FAIR VALUE* TWELVE MONTHS ENDED
NOVEMBER 30, 1995 NOVEMBER 30, 1995
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Interest rate and currency swaps and options
(including caps, collars and floors)............... $2,672 $ 2,248 $2,692 $ 2,060
Foreign exchange forward contracts and options....... 893 1,171 1,173 1,226
Options on other fixed income securities,
mortgage-backed securities forward contracts and
options............................................ 188 151 182 172
Equity contracts (including equity swaps, warrants
and options)....................................... 137 36 139 22
Commodity contracts (including swaps, forwards, and
options)........................................... 39 51 67 60
------ ------ ------ ------
Total...................................... $3,929 $ 3,657 $4,253 $ 3,540
====== ====== ====== ======
</TABLE>
- ---------------
* Amounts represent carrying value (exclusive of collateral) and do not include
receivables or payables related to exchange traded 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, 1996 represents the Company's net receivable for
derivative financial instruments before consideration of collateral. Included
within this amount was $5,044 million and $254 million, related to OTC contracts
and exchange-traded contracts, respectively.
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.
With respect to OTC instruments, the Company views its net credit exposure
to be $3,643 million at November 30, 1996, representing the fair value of the
Company's OTC contracts in an unrealized gain position, after consideration of
collateral of $1,401 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
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.
<TABLE>
<CAPTION>
1996
COUNTERPARTY S&P/MOODY'S NET CREDIT
RISK RATING EQUIVALENT EXPOSURE
--------------------------------------------------- -------------------- ----------
<S> <C> <C>
1............................................. AAA/Aaa 26%
2............................................. AA-/Aa3 or higher 23%
3............................................. A-/A3 or higher 41%
4............................................. BBB-/Baa3 or higher 6%
5............................................. BB-/Ba3 or higher 3%
6............................................. B+/B1 or lower 1%
</TABLE>
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.
F-23
<PAGE> 57
LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is also subject to credit risk related to its exchange traded
derivative contracts. Exchange traded contracts, including futures and certain
options, are transacted directly on the exchange. To protect against the
potential for a default, all exchange clearing houses impose net capital
requirements for their membership. Additionally, the exchange clearing house
requires counterparties to futures contracts 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).
Therefore, the potential for losses from exchange-traded products is limited.
END USER DERIVATIVE ACTIVITIES
The Company utilizes interest rate swap agreements 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, 1996 and November 30, 1995
the notional value of the Company's end user activities related to its long-term
debt obligations were approximately $3.7 billion and $2.7 billion, respectively.
(For a further discussion of the Company's long-term debt-related end user
activities see Note 3.)
The Company also utilizes derivative products 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, 1996 and 1995, the Company had $114 billion and $87 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, 1996
and November 30, 1995, the Company, as an end user, utilized derivative
financial instruments with an aggregate notional amount of $47.6 billion and
$21.5 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 0.5 years and 1.1 years as of November 30, 1996 and
November 30, 1995, respectively.
The Company terminated certain swaps designated as hedges of the Company's
secured financing activities. At November 30, 1996, a loss of approximately $32
million from these terminated contracts was deferred and will be amortized to
interest expense over the original period of the hedge. On an overall basis, the
Company's secured financing end user activities increased net interest income by
approximately $16 million, $39 million and $6 million for 1996, 1995 and 1994,
respectively.
NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 "Disclosures about Fair Value of Financial Instruments"
requires the Company to report the fair value of financial instruments, as
defined. Assets and liabilities which are carried at fair value include all of
the Company's trading assets and liabilities including derivative financial
instruments used for trading purposes as described in Note 1, which are recorded
as securities and other financial instruments owned and securities and other
financial instruments sold but not yet purchased.
F-24
<PAGE> 58
LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 market value of such items are not materially
sensitive to shifts in market interest rates because of the limited term to
maturity of these instruments and their variable interest rates.
Financial instruments which are recorded at amounts that do not necessarily
approximate market or fair value, include 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 exposures. The
Company's long-term debt is recorded at contractual or historical amounts. The
following table provides a summary of the fair value of the Company's long-term
debt and related end user activities. The fair value of the Company's long-term
debt was 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 unrecognized net gain/(loss) related to the
Company's end user activities reflects the estimated amounts the Company would
receive/(pay) if the agreements were terminated based on market rates at
November 30, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
NOVEMBER 30,
-----------------
1996 1995
------ ------
(IN MILLIONS)
<S> <C> <C>
Carrying value of long-term debt................................... $4,165 $3,497
Fair value of long-term debt....................................... 4,352 3,647
------ ------
Unrecognized net gain (loss) on long-term debt..................... (187) (150)
------ ------
Unrecognized net gain (loss) on long-term debt end user
activities....................................................... 60 56
====== ======
</TABLE>
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, 1996 and 1995, the
Company had $114 billion and $87 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, 1996 and 1995, the Company, as an end user, utilized
derivative financial instruments with an aggregate notional amount of $47.6
billion and $21.5 billion, respectively, to modify the interest rate
characteristics of its secured financing activities. The unrecognized net losses
related to these derivative financial instruments of $10 million and $36 million
at November 30, 1996 and 1995, respectively, were offset by unrecognized net
gains arising from the Company's secured financing activities.
NOTE 10. OTHER COMMITMENTS AND CONTINGENCIES
As of November 30, 1996 and 1995, the Company was contingently liable for
$2,036 million and $721 million, 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.
At November 30, 1996, the Company has commitments under certain secured
lending arrangements of approximately $2.7 billion. 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, 1996 and 1995, the Company had pledged or otherwise
transferred securities, primarily fixed income, having a market value of
approximately $28.2 billion and $23.2 billion, respectively, as
F-25
<PAGE> 59
LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
collateral for securities borrowed or otherwise received having a market value
of approximately $27.6 billion and $23.1 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 the normal course of business the Company is exposed to off-balance
sheet credit and market risk 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.
In addition, the Company is also exposed to off-balance sheet risk as a
result of entering into commitments to extend credit in connection with certain
merchant banking, investment banking and loan syndication transactions. The
Company also provides and will continue to provide margin lending and other
extensions of credit to clients.
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.
Securities and other financial instruments owned by the Company include
U.S. government and agency securities, and securities issued by non-U.S.
governments which, in the aggregate, represented 20% of the Company's total
assets at November 30, 1996. In addition, substantially all of the collateral
held by the Company for resale agreements or securities borrowed, which together
represented 48% of total assets at November 30, 1996, 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.
F-26
<PAGE> 60
LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1996, 1995 and 1994 was $21 million, $31 million and $34 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 $501 million) are as follows:
<TABLE>
<CAPTION>
AMOUNT
-------------
(IN MILLIONS)
<S> <C>
Fiscal 1997...................................... $ 25
Fiscal 1998...................................... 18
Fiscal 1999...................................... 15
Fiscal 2000...................................... 13
Fiscal 2001...................................... 12
December 1, 2001 and thereafter.................. 202
----
$ 285
====
</TABLE>
NOTE 11. RELATED PARTY TRANSACTIONS
In the normal course of business, the Company engages in various securities
trading, investment banking and financing activities with Holdings and many of
its subsidiaries (the "Related Parties"). Various charges, such as compensation,
occupancy, administration and computer processing are allocated between the
Related Parties, based upon specific identification and allocation methods.
In addition, Holdings and subsidiaries of Holdings raise money through
short- and long-term funding in the capital markets, which is used to fund the
operations of certain of the Company's wholly owned subsidiaries. Advances from
Holdings and other affiliates were $8,552 million and $8,418 million at November
30, 1996 and 1995, respectively.
In connection therewith, advances from Holdings aggregating approximately
$6.6 billion and $7.4 billion at November 30, 1996 and 1995, respectively, are
generally payable on demand. The average interest rate charged on these advances
is primarily based on Holdings' average daily cost of funds, which was 5.8% for
the twelve months ended November 30, 1996 and 6.5% for the twelve months ended
November 30, 1995. In addition, the Company had borrowings from subsidiaries of
Holdings comprised of approximately $806 million and $821 million in
subordinated indebtedness at November 30, 1996 and 1995, respectively. Interest
charges incurred during the twelve months ended November 30, 1996, the twelve
months ended November 30, 1995 and the eleven months ended November 30, 1994
from Holdings, including interest charges on subordinated and senior debt issued
to Holdings, amounted to $492 million, $483 million, $277 million, respectively.
In addition, the Company has advances from other subsidiaries of Holdings
aggregating approximately $2.0 billion and $1.0 billion, at November 30, 1996
and 1995, respectively, with various repayment terms. The Company had notes and
other receivables due from Holdings and subsidiaries of Holdings aggregating
approximately $4.5 billion and $2.1 billion at November 30, 1996 and 1995,
respectively, with various repayment terms.
During the third quarter of 1994, Holdings acquired additional space in the
World Financial Center and also began occupying its leased facility at 101
Hudson Street in Jersey City, New Jersey. In addition, certain employees of the
Company who perform administrative and corporate functions were transferred to
Holdings. Accordingly, Holdings has allocated the cost of these new facilities
and services provided by employees
F-27
<PAGE> 61
LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
transferred to its appropriate subsidiaries. These charges, which are classified
in the Consolidated Statement of Operations as management fees, are primarily
comprised of occupancy and computer processing. The result of these allocations
was to reduce expenses incurred directly by the Company with an offsetting
increase in management fees.
The Company believes that amounts arising through related party
transactions, including those allocated expenses referred to above, are
reasonable and approximate the amounts that would have been recorded if the
Company operated as an unaffiliated entity.
LB I Group ("Group"), a wholly owned subsidiary of the Company had
outstanding 1,000 shares of its 9% Cumulative Preferred Stock, Series A (the
"Preferred Stock"), which it issued for an aggregate purchase price of
$750,000,000 to LB Funding Corp. ("Funding"), a wholly owned subsidiary of
Holdings for $1,000 in cash and a promissory note of $749,999,000 bearing
interest at a rate equal to the holder's cost of funds (the "Note"). In the
fourth quarter of 1994, the Preferred Stock and Note were canceled. Interest
income for the eleven months ended November 30, 1994 includes $25 million, from
the Note. The dividend requirement on the Preferred Stock, as reflected on the
Company's Consolidated Statement of Operations was $50 million for the eleven
months ended November 30, 1994.
Effective June 10, 1994, Lehman Special Securities Inc., a wholly owned
subsidiary of Holdings, was merged into a subsidiary of the Company resulting in
an increase in Stockholder's equity of approximately $149 million. In addition,
in the fourth quarter of 1994, Funding and certain other wholly owned
subsidiaries of Holdings were merged into the Company. As a result,
Stockholder's equity increased by $318 million. The effect of these mergers on
the results of operations to this and prior periods was not material.
During 1996, the Company paid $538 million to Holdings, as a return of
capital. During 1995, the Company paid $635 million to Holdings, $559 million as
a return of capital and $76 million as dividends.
NOTE 12. OTHER CHARGES
1996 SEVERANCE CHARGE
In the fourth quarter of 1996, Holdings recorded an $84 million severance
charge ($50 million aftertax) related to certain strategic actions taken to
improve on-going profitability. The 1996 severance charge reflected the
culmination of Holdings' worldwide business unit economic performance review
which was undertaken in the fourth quarter of 1996 to focus Holdings on its core
investment banking, equity and fixed income, sales and trading areas. The charge
resulted from personnel reductions across a number of underperforming fixed
income and equities businesses, including exiting the precious metals business
in the U.S., Europe and Asia; exiting energy trading in the U.S. and Europe,
consolidating Asian fixed income risk management activities into one center in
Tokyo; refocusing foreign exchange trading activities and combining the Firm's
New York Private Client Services offices. Additionally, the charge reflects
various other strategic personnel reductions which were aimed at delayering
management. The Company recorded a $23 million severance charge ($14 million
aftertax) in the fourth quarter of 1996 related to these actions.
1995 RESTRUCTURING CHARGE
During the fourth quarter of 1995, the Company recorded a charge of $43
million pretax ($26 million aftertax) for occupancy-related real estate and
severance expenses. The occupancy-related real estate component of the charge,
$26 million pretax ($16 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 its 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
F-28
<PAGE> 62
LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the charge relates to payments made to terminated personnel arising from a
fourth quarter formalized business unit productivity review.
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 $27 million pretax ($15 million aftertax)
in the first quarter of 1994.
NOTE 13. CHANGES IN ACCOUNTING PRINCIPLES
ACCOUNTING FOR TRANSFERS OF FINANCIAL ASSETS
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"), which is effective for
transactions occurring after December 31, 1996. SFAS No. 125 provides new
accounting guidance for the transfer of financial assets, including
securitizations, repurchase agreements and securities lending transactions. SFAS
No. 125 outlines specific conditions which must be met for financial asset
transfers to obtain either sale or financing treatment. Sale treatment is
generally obtained if the seller meets the specified conditions to demonstrate
that it has surrendered control over the assets; consequently the counterparty
to the sale must recognize the related financial assets received. Financing
treatment is generally obtained if the borrower agrees to repurchase
substantially the same securities prior to maturity of the agreement while
maintaining adequate collateral levels, provided that control of the securities
is retained by the borrower (i.e. the owner of the securities has the ability to
redeem the collateral on short notice).
In December 1996, the FASB issued SFAS No. 127 deferring the effective date
one year for certain provisions of SFAS No. 125 dealing with repurchase
agreements, dollar repurchase agreements, securities lending and similar
financing transactions.
It is likely that the adoption of SFAS No. 125 will require the Company to
recognize additional assets and liabilities on its Consolidated Statement of
Financial Condition from transactions where the Company is deemed to have
control over certain financial assets. This will have the effect of increasing
the amount of assets and liabilities recognized on the balance sheet but will
have no material effect on the equity or financial condition of the Company.
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
F-29
<PAGE> 63
LEHMAN BROTHERS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 14. QUARTERLY INFORMATION (UNAUDITED)
The following information represents the Company's unaudited quarterly
results of operations for 1996 and 1995. 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.
<TABLE>
<CAPTION>
1996 1995
------------------------------------ ------------------------------------
NOV. 30 AUG. 31 MAY 31 FEB. 29 NOV. 30 AUG. 31 MAY 31 FEB. 28
------- ------- ------ ------- ------- ------- ------ -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues................ $ 3,265 $ 3,057 $3,107 $ 3,068 $ 3,175 $ 3,086 $2,991 $ 2,780
Interest expense.............. 2,554 2,614 2,492 2,461 2,596 2,525 2,504 2,329
------ ------ ------ ------ ------ ------ ------ ------
Net revenues.................. 711 443 615 607 579 561 487 451
Non-interest expenses
Compensation and benefits... 335 267 303 314 302 306 293 205
Other expenses.............. 207 186 217 215 207 194 206 244
Severance and other
charges.................. 23 43
------ ------ ------ ------ ------ ------ ------ ------
Total non-interest expenses... 565 453 520 529 552 500 499 449
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before taxes.... 146 (10) 95 78 27 61 (12) 2
Provision for (benefit from)
income taxes................ 57 (10) 40 33 2 22 (12) (3)
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)............. $ 89 $ 0 $ 55 $ 45 $ 25 $ 39 $ 0 $ 5
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
F-30
<PAGE> 64
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ------------------------------------------------------------------------ ------------
<C> <S> <C>
3.1 Restated Certificate of Incorporation of the Registrant dated September
3, 1981 (incorporated by reference to Exhibit 3.1 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1987).
3.2 Certificate of Amendment to Restated Certificate of Incorporation of the
Registrant dated May 11, 1984 (incorporated by reference to Exhibit 3.2
of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1988).
3.3 Certificate of Amendment to Restated Certificate of Incorporation of the
Registrant, dated March 6, 1985 (incorporated by reference to Exhibit
3.3 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1985).
3.4 Certificate of Amendment to Restated Certificate of Incorporation of the
Registrant, dated August 31, 1987 (incorporated by reference to Exhibit
3.4 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1987).
3.5 Certificate of Amendment to Restated Certificate of Incorporation of the
Registrant, dated January 28, 1988 (incorporated by reference to Exhibit
3.5 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1987).
3.6 Certificate of Amendment to Restated Certificate of Incorporation of the
Registrant, dated July 19, 1990. (Incorporated by reference to Exhibit
3.6 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1990).
3.7 Certificate of Amendment to Restated Certificate of Incorporation of the
Registrant, dated August 2, 1993 (incorporated by reference to Exhibit 3
of the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1993).
3.8 Certificate of Designations of Floating Rate Preferred Stock, filed
April 30, 1996*
3.9 By-Laws of the Registrant, amended as of January 30, 1997.*
4.1 The instruments defining the rights of holders of the long-term debt
securities of the Registrant and its subsidiaries are omitted pursuant
to section (b)(4)(iii)(A) of Item 601 of Regulation S-K. The Registrant
hereby agrees to furnish copies of these instruments to the Securities
and Exchange Commission upon request.
10.1 Lease and Land Disposition Agreement, dated as of September 14, 1984,
between Shearson Lehman Construction Inc. and The City of New York
(incorporated by reference to Exhibit 10.16 of the Registrant's
Registration Statement on Form S-1 (reg. No. 33-12976)).
10.2 Agreement of Tenants-In-Common by and among American Express Company,
American Express Bank Ltd., American Express Travel Related Services
Company, Inc., Shearson Lehman Brothers Inc., Shearson Lehman Government
Securities, Inc. and Shearson Lehman Commercial Paper Incorporated
(incorporated by reference to Exhibit 10.1 of Lehman Brothers Holdings
Inc.'s Transition Report on Form 10-K for the eleven months ended
November 30, 1994.)
12. Computation in support of ratio of earnings to fixed charges.*
21. Pursuant to General Instruction J of Form 10-K, the list of the
Registrant's Subsidiaries is omitted.
23. Consent of Ernst & Young LLP.*
24. Powers of Attorney.*
27. Financial Data Schedule.*
</TABLE>
(b) Reports on Form 8-K.
None.
- ---------------
* Filed herewith.
<PAGE> 1
EXHIBIT 3.8
CERTIFICATE OF DESIGNATIONS, POWERS,
PREFERENCES AND RIGHTS
OF THE
FLOATING RATE PREFERRED STOCK
($10,000 liquidation preference per share)
OF
LEHMAN BROTHERS INC.
----------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
LEHMAN BROTHERS INC., a Delaware corporation having its registered
office at 1209 Orange Street, in the City of Wilmington, in the County of New
Castle (the "Corporation"). HEREBY CERTIFIES that resolutions were duly adopted
by the Board of Directors of the Corporation pursuant to the authority
conferred upon the Board of Directors of the Corporation by the provisions of
the Restated Certificate of Incorporation of the Corporation, as follows:
RESOLVED, that the Corporation be, and it hereby is, authorized
to offer, issue and sell a series of Preferred Stock of the Corporation
and the Board of Directors hereby fixes the designation, number of
shares, voting powers and the other powers, preferences and relative,
participating, optional or other special rights, and the qualifications,
limitations and restrictions thereof (in addition to those set forth in
the Certificate of Incorporation of the Corporation which may be
applicable to such series) as follows:
1. Designation and Number of Shares. The designation of such
series shall be the Floating Rate Preferred Stock (the "Floating Rate Preferred
Stock") and the authorized number of shares constituting such series shall be
one hundred (100). The Board reserves the right by from time to time to increase
or decrease the number of shares that constitute the Floating Rate Preferred
Stock (but not below the number of shares thereof then outstanding) within the
limitations provided by law, this resolution and the Restated Certificate of
Incorporation.
2. Dividends. Dividends on each share of Floating Rate Preferred
Stock shall be cumulative from the date of mutual issuance of such share and
shall be payable annually, when and as declared by the Board of Directors or a
duly authorized committee thereof out of funds legally available therefor, in
cash on April 15 of each year, commencing April 15, 1997 (each a "Dividend
Payment Date"), to holders of record on such record date, not exceeding 30 days
preceding the payment thereof, as shall be fixed by the Board of Directors or
a duly authorized committee thereof, at a rate equal to the Federal Funds Daily
Rate in effect on the record date less 0.25% per annum per share on the
liquidation preference of $10,000 per share. If any date on which dividends
would otherwise be payable shall be or be declared a national or New York
State holiday, or if banking institutions in the State of New York shall be
closed because of a banking moratorium or otherwise on such date, then the
Dividend Payment Date shall be the next succeeding day on which such banks
shall be open. Accumulated and unpaid dividends shall not bear interest.
If there shall be outstanding shares of any other class or series of
preferred stock of the Corporation ranking on a parity as to dividends with the
Floating Rate Preferred Stock, the Corporation, in making any dividend payment
on account of arrears on the Floating Rate Preferred Stock or such other class
or series of preferred stock, shall make payments ratably upon all outstanding
shares of Floating Rate Preferred Stock and such other class or series of
preferred stock in proportion to the respective amounts of dividends in arrears
upon all such outstanding shares of Floating Rate Preferred Stock and such other
class or series of preferred stock to the date of such dividend payment.
<PAGE> 2
3. LIQUIDATION PREFERENCE. In the event of any liquidation,
dissolution or winding up of the Corporation, voluntary or involuntary, the
holders of the Floating Rate Preferred Stock shall be entitled to receive out
of the assets of the Corporation available for distribution to its
stockholders, before any distribution of assets is made to the holders of the
common stock or any other shares of stock of the Corporation ranking as to such
distribution junior to the Floating Rate Preferred Stock, an amount equal to
$10,000 per share (the "Liquidation Preference") plus an amount equal to any
accrued and accumulated but unpaid dividends thereon to the date of final
distribution. The holders of the Floating Rate Preferred Stock shall not be
entitled to receive the Liquidation Preference and such accrued dividends,
however, until the liquidation preference of any other class of stock of the
Corporation ranking senior to the Floating Rate Preferred Stock as to the
rights upon liquidation, dissolution or winding up shall have been paid (or a
sum set aside therefor sufficient to provide for payment) in full.
After payment of the full amount of the Liquidation Preference and such
dividends, the holders of shares of Floating Rate Preferred Stock will not be
entitled to any further participation in any distribution of assets by the
Corporation. If upon any voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, the assets available for distribution shall be
insufficient to pay in full the amounts payable with respect to the Floating
Rate Preferred Stock and any other shares, shall share ratably in accordance
with the respective amounts which would be payable on such shares if all
amounts payable thereon were paid in full. Consolidation or merger of the
Corporation with or into one or more other corporations, or a sale, whether
for cash, shares of stock, securities or properties, of all or any part of the
Corporation's assets shall not be considered a liquidation, dissolution or
winding up of the Corporation within the meaning of this Section 3 if the
preferences of the holders of shares of Floating Rate Preferred Stock are not
impaired thereby.
4. CONVERSION. The Floating Rate Preferred Stock is not
convertible into, or exchangeable for, other securities or property.
5. VOTING RIGHTS. The Floating Rate Preferred Stock shall have no
voting rights except as otherwise required by law.
6. REDEMPTION. The shares of Floating Rate Preferred Stock owned
by any holder of record may be redeemed by the Corporation, at any time at its
option and subject to New York Stock Exchange approval at an amount equal to
$10,000 per shares plus, in each case, an amount equal to all and accumulated
and unpaid dividends to, but excluding, the date fixed for redemption, upon
the occurrence of any of the following events: (i) without the prior written
consent of the Corporation the holder of such shares ceases to clear all of its
securities transactions through the Corporation, (ii) dissolution, bankruptcy
or insolvency of such holder, (iii) any violation by such holder of any
agreement made by such holder with the Corporation or if the holder has been
determined by any of the exchanges or associations or other institutions with
which the Corporation has or may have membership privileges or other
privileges to have violated any agreement made by such holder therewith, (iv)
the holder shall have been suspended or expelled from any of the exchanges or
associations or other institutions with which the Corporation has membership
privileges, (v) such holder ceases to be considered a "creditor" as defined in
Regulation T promulgated by the Board of Governors of the Federal Reserve
System pursuant to the Securities Exchange Act of 1934, or (vi) the Corporation
shall determine in good faith that it is necessary or desirable for the welfare
of the Corporation or the attainment of a corporate objective that such holder
shall cease to be such a holder.
The holders of shares of Floating Rate Preferred Stock at the close of
business on a Dividend Payment Record Date shall be entitled to receive the
dividend payable on such shares on the corresponding Dividend Payment Date
notwithstanding the call for redemption thereof (except that holders of shares
called for redemption on a date occurring between such Record Date and the
Dividend Payment Date shall not be entitled to receive such dividend on such
Dividend Payment Date) or the Corporation's default in payment of the dividend
due on such Dividend Payment Date.
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<PAGE> 3
In the event the Corporation shall redeem shares of Floating Rate
Preferred Stock, written notice of such redemption shall be given by first
class mail, postage prepaid, mailed not less than 30 days nor more than 60 days
prior to the redemption date, to each holder of record of the shares to be
redeemed at such holder's address as the same appears on the stock books of the
Corporation; provided, however, that no failure to give such notice nor any
defect therein shall affect the validity of the proceeding for the redemption
of any shares of Floating Rate Preferred Stock to be redeemed except as to the
holder to whom the Corporation has failed to mail said notice or except as to
the holder whose notice was defective. Each such notice shall state: (a) the
redemption date; (b) the number of shares of Floating Rate Preferred Stock to
be redeemed and, if less than all the shares held by such holder are to be
redeemed from such holder, the number of shares to be redeemed from such
holder, (c) the redemption price and any accumulated and unpaid dividends to
the redemption date; (d) the place or places where certificates for such
shares are to be surrendered for payment of the redemption price; and (e) that
dividends on the shares to be redeemed will cease to accrue on such redemption
date (unless the Corporation shall default in providing funds for the payment
of the redemption price of the shares called for redemption at the time and
place specified in such notice).
7. Rights of First Refusal. If at any time after the date hereof
a holder of shares of Preferred Stock (the "Seller") desires to cease clearing
operations through the Corporation and receives an offer to purchase any or all
of its shares of Preferred Stock (the "Offered Shares") from an entity (the
"Prospective Purchaser") that desires to begin or increase its clearing
operations through the Corporation, and if the Seller desires to accept such
offer, the Seller shall give prompt written notice (a "Notice of Offer") to the
Corporation which Notice of Offer shall include the terms of the sale and the
name of the Prospective Purchaser. The Notice of Offer shall be deemed to be an
irrevocable offer to sell the Offered Shares to the Corporation, and the
Corporation shall have the irrevocable and exclusive option, as hereinafter
provided, to buy all but not less than all of the Offered Shares at a price
equal to the liquidation value plus accumulated dividends, if any.
Within ninety (90) days following the date on which the Corporation
receives the Notice of Offer (the "Notice Date"), the Corporation shall notify
the Seller whether the Corporation elects to purchase the Offered Shares (a
"Corporation Acceptance"). If the Seller does not receive a Corporation
Acceptance within such 90-day period, the Corporation shall be deemed to have
declined to purchase any of the Offered Shares and within 10 days of the
expiration of such 90-day period shall furnish the Seller with a written
consent approving the sale of the Offered Shares to the Prospective Purchaser.
A Corporation Acceptance shall be deemed to be an irrevocable commitment to
purchase the Offered Shares from the Seller.
Upon the exercise by the Corporation of its right of first refusal in
accordance with this paragraph 7, the Corporation shall be legally obligated to
consummate the purchase and sale contemplated thereby and shall use its best
efforts to secure any approvals required in connection therewith. If the
Corporation does not exercise its right of first refusal with respect to all of
the Offered Shares within the time specified for such exercise, the Seller
shall be free upon the receipt of a written consent from the Corporation,
during a period of ninety (90) days following the expiration of the last day
for such exercise, to sell the Offered Shares, but only to the Prospective
Purchaser specified in the Notice of Offer.
The closing of the purchase of any Shares by the Corporation pursuant
to this paragraph 7 shall take place on such date within 30 days after the
expiration of the 90-day period following the Notice Date. The Corporation
shall deliver to the Seller, in full payment of the purchase price for the
shares of Preferred Stock purchased by the Corporation, cash or other
immediately available funds in the full amount of the purchase price.
8. Designation by Corporation of Other Purchasers. Whenever the
Corporation shall be entitled to purchase any shares of Preferred Stock upon
the exercise of any right or option arising pursuant hereto, the Corporation
may designate such other person or persons as purchasers of all or any part of
such shares.
9. Restrictions on Transfer. The shares of Preferred Stock shall
be issued only in the name of the beneficial owner, and no transfer of such
shares shall be effected except on the stock books of the Corporation upon
surrender of the stock certificates duly endorsed, and all shares of the
Preferred Stock shall at all times be held subject to all agreements and
restrictions set forth in this Certificate of Designations and in the Restated
Certificate
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<PAGE> 4
of Incorporation, as amended from time to time, the provisions of which shall at
all times apply equally both as to an original holder of shares and to each and
every subsequent holder thereof, and each holder of shares of the Preferred
Stock, by the acceptance of a stock certificate representing shares of the
Corporation's Preferred Stock, agrees with the Corporation and with each other
holder of shared of Preferred Stock, in consideration of such agreement of each
such other holder of shares of Preferred Stock, to such agreements, conditions
and restrictions as contained in this Certificate of Designations and in the
restated Certificate of Incorporation.
10. Reissuance of Shares Shares of Floating Rate Preferred Stock
that have been issued and reacquired in any manner, including shares purchased
or redeemed, shall (upon compliance with any applicable provisions of the laws
of the State of Delaware) have the status of authorized and unissued shares of
the class of Preferred Stock undesignated as to Floating Rate and may be
redesignated and reissued as part of any series of the preferred stock.
IN WITNESS WHEREOF, Lehman Brothers Inc. has caused this certificate to be
signed by Jennifer Marre, Vice President, and attested by Karen C. Manson, its
Secretary, this 30th day of April, 1996.
/s/ Jennifer Marre
------------------------------
Jennifer Marre, Vice President
ATTEST:
/s/ Karen C. Manson
- ----------------------------
Karen C. Manson, Secretary
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<PAGE> 1
EXHIBIT 3.9
EFFECTIVE AS OF 1/30/97
BY-LAWS OF
LEHMAN BROTHERS INC.
(A DELAWARE CORPORATION)
ARTICLE I
MEETINGS OF SHAREHOLDERS
SECTION 1. ANNUAL MEETING. The annual meeting of the shareholders of Lehman
Brothers Inc. (hereinafter referred to as the "Corporation") for the election of
directors and for the transaction of such other business as may come before the
meeting shall be held on the fourth Thursday in September in each year, if not a
legal or recognized religious holiday, and if a legal or recognized religious
holiday, then on the next succeeding day not a legal or recognized religious
holiday, at such time as shall be designated by the Board of Directors
(hereinafter referred to as the "Board"), the Chairman of the Board or the
President. The Board may, in its absolute discretion, direct that the annual
meeting be held on such day other than the fourth Thursday in September (but
within thirty days prior thereto or sixty days subsequent thereto) as shall be
designated in the Board resolution calling such meeting. If the annual meeting
shall not be held as hereinabove provided for, the Board shall call a special
meeting for the election of directors, which meeting shall be held within two
months after said day.
SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders, unless
otherwise prescribed by statute, may be called at any time by the Board, the
Chairman of the Board or the President.
SECTION 3. NOTICE OF MEETINGS. Notice of the place, date and time of the holding
of each annual and special meeting of the shareholders and, in the case of a
special meeting, the purpose or purposes thereof, shall be given personally or
by mail in a postage prepaid envelope, not less than ten nor more than sixty
days before the date of such meeting, to each shareholder entitled to vote at
such meeting, and, if mailed, it shall be directed to such shareholder at his
address as it appears on the record of shareholders, unless he shall have filed
with the Secretary of the Corporation a written request that notices to him be
mailed to some other address. Any such notice for any meeting other than the
annual meeting shall indicate that it is being issued at the direction of the
Board or officer who shall have called the meeting. Notice of any meeting of
shareholders shall not be required to be given to any shareholder who shall
attend such meeting in person or by proxy and who does not, prior to the
conclusion of such meeting, protest the lack of notice thereof, or who shall,
either before or after the meeting, submit a signed waiver of notice, in person
or by proxy. Unless the Board shall fix after the adjournment a new record date
for an adjourned
<PAGE> 2
meeting, notice of such adjourned meeting need not be given if the time and
place to which the meeting shall be adjourned were announced at the meeting at
which the adjournment is taken. Any action required to be taken at any annual or
special meeting of shareholders of this Corporation or any action which may be
taken at any such annual or special meeting of such shareholders, may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing setting forth the action so taken shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those shareholders who have not consented in writing.
SECTION 4. PLACE OF MEETINGS. Meetings of the shareholders may be held at such
place, within or without the State of New York, as the Board or the officer
calling the same shall specify in the notice of such meeting.
SECTION 5. QUORUM. At all meetings of the shareholders the holders of a majority
of the shares of stock of the Corporation issued and outstanding and entitled to
vote shall be present in person or by proxy to constitute a quorum for the
transaction of any business, except as otherwise provided by statute. In the
absence of a quorum, the holders of a majority of the shares of stock present in
person or by proxy and entitled to vote may adjourn the meeting from time to
time. At any such adjourned meeting at which a quorum may be present any
business may be transacted which might have been transacted at the meeting as
originally called.
SECTION 6. ORGANIZATION. At each meeting of the shareholders the Chairman of the
Board, or in his absence or inability to act, the Co-Chairman of the Board, or
in his absence or inability to act, a Vice Chairman of the Board, or in the
absence or inability to act of the Chairman of the Board, the Co-Chairman of the
Board and the Vice Chairmen of the Board, the Chief Executive Officer, or in his
absence, the Chief Operating Officer, or in the absence of any of the foregoing,
the President shall act as chairman of the meeting. The Secretary, or, in his
absence or inability to act, any person appointed by the chairman of the
meeting, shall act as secretary of the meeting and keep the minutes thereof.
SECTION 7. ORDER OF BUSINESS. The order of business at all meetings of the
shareholders shall be as determined by the chairman of the meeting.
SECTION 8. VOTING. Except as otherwise provided by statute or the Certificate of
Incorporation, each holder of record of shares of stock of the Corporation
having voting power shall be entitled at each meeting of the shareholders to one
vote for every share of such stock standing in his name on the record of
shareholders of the Corporation:
a. on the date fixed pursuant to the provisions of Section 5 of
Article VI of these By-Laws as the record date for the
determination of the shareholders who shall be entitled to
notice of and to vote at such meeting; or
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<PAGE> 3
b. if such record date should not have been so fixed, then at the
close of business on the day next preceding the day on which
notice thereof shall be given.
Each shareholder entitled to vote at any meeting of shareholders may authorize
another person or persons to act for him by a proxy signed by such shareholder
or his attorney-in-fact. Any such proxy shall be delivered to the secretary of
such meeting at or prior to the time designated in the order of business for so
delivering such proxies. A proxy shall not be valid after the expiration of
eleven months from the date thereof, unless otherwise provided in the proxy.
Every proxy shall be revocable at the pleasure of the shareholder executing it,
except in those cases where an irrevocable proxy is permitted by law. Except as
otherwise provided by statute or the Certificate of Incorporation, any corporate
action to be taken by vote of the shareholders shall be authorized by a majority
of the votes cast at a meeting of shareholders by the holders of shares present
in person or represented by proxy and entitled to vote on such action. Unless
required by statute, or determined by the chairman of the meeting to be
advisable, the vote on any question need not be by ballot. On a vote by ballot,
each ballot shall be signed by the shareholder voting, or by his proxy, if there
be such proxy, and shall state the number of shares voted.
SECTION 9. LIST OF SHAREHOLDERS. A list of shareholders as of the record date,
certified by the Secretary of the Corporation or by the transfer agent for the
Corporation, shall be produced at any meeting of the shareholders upon the
request of any shareholder made at or prior to such meeting.
SECTION 10. INSPECTORS. The Board may, in advance of any meeting of
shareholders, appoint one or more inspectors to act at such meeting or any
adjournment thereof. If the inspectors should not be so appointed or if any of
them should fail to appear or act, the chairman of the meeting may, and on the
request of any shareholder entitled to vote thereat shall, appoint inspectors.
Each inspector, before entering upon the discharge of his duties, shall take and
sign an oath faithfully to execute the duties of inspector at such meeting with
strict impartiality and according to the best of his ability. The inspectors
shall determine the number of shares outstanding and the voting power of each,
the number of shares represented at the meeting, the existence of a quorum, the
validity and effect of proxies, and shall receive votes, ballots or consents,
hear and determine all challenges and questions arising in connection with the
right to vote, count and tabulate all votes, ballots or consents, determine the
result, and do such acts as are proper to conduct the election or vote with
fairness to all shareholders. On request of the chairman of the meeting or any
shareholder entitled to vote thereat, the inspectors shall make a report in
writing of any challenge, request or matter determined by them and shall execute
a certificate of any fact found by them. No director or candidate for the office
of director shall act as an inspector of an election of directors. Inspectors
need not be shareholders.
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<PAGE> 4
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS. The business and affairs of the Corporation shall be
managed by the Board. The Board may exercise all such authority and powers of
the Corporation and do all such lawful acts and things as are not by statute,
the Constitution of the New York Stock Exchange, Inc., the Rules of the Board of
Directors of the New York Stock Exchange, Inc., or the Certificate of
Incorporation directed or required to be exercised or done by the shareholders.
SECTION 2. NUMBER, QUALIFICATIONS, ELECTION AND TERM OF OFFICE. The number of
directors which this Corporation shall have shall be not less than three and
shall consist of such number as may be fixed from time to time by resolution of
the Board. Any decrease in the number of directors shall be effective at the
time of the next succeeding annual meeting of the shareholders unless there
shall be vacancies in the Board, in which case such decrease may become
effective at any time prior to the next succeeding annual meeting to the extent
of the number of such vacancies. All the directors shall be of full age.
Directors need not be shareholders. Except as otherwise provided by statute or
these By-Laws, the directors shall be elected at the annual meeting of the
shareholders and at each meeting of the shareholders for the election of
directors at which a quorum is present the persons receiving a plurality of the
votes cast at such election shall be elected. Each director shall hold office
until the next annual meeting of the shareholders and until his successor shall
have been duly elected and qualified, or until his death, or until he shall have
resigned or have been removed, as hereinafter provided in these By-Laws.
SECTION 3. PLACE OF MEETINGS. Meetings of the Board may be held at such place,
within or without the State of New York, as the Board may from to time determine
or as shall be specified in the notice of such meeting.
SECTION 4. FIRST MEETING. The Board shall meet for the purpose of organization,
the election of officers and the transaction of other business, as soon as
practicable after each annual meeting of the shareholders, on the same day and
at the same place where such annual meeting shall be held. Notice of such
meeting need not be given. Such meeting may be held at any other time or place
(within or without the State of New York) which shall be specified in a notice
thereof given as hereinafter provided in Section 7 of this Article II.
SECTION 5. REGULAR MEETINGS. Regular meetings of the Board shall be held at such
time as the Board may fix. If any day fixed for a regular meeting should be a
legal or recognized religious holiday at the place where the meeting is to be
held, then the meeting which would otherwise be held on that day shall be held
at the same hour on the next succeeding business day. Notice of regular meetings
of the Board need not be given except as otherwise required by statute or these
By-Laws.
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<PAGE> 5
SECTION 6. SPECIAL MEETINGS. Special meetings of the Board may be called by two
or more directors of the Corporation or by the Chairman of the Board or the
President.
SECTION 7. NOTICE OF MEETINGS. Notice of each special meeting of the Board (and
of each regular meeting for which notice shall be required) shall be given by
the Secretary or the Chairman of the Board as hereinafter provided in this
Section 7, in which notice shall be stated the time and place (within or without
the State of New York) of the meeting. Notice of each such meeting shall be
delivered to each director either personally or by telephone, telegraph, cable
or wireless, at least twenty-four hours before the time at which such meeting is
to be held or by first class mail, postage prepaid, addressed to him at his
residence or usual place of business, at least two days before the day on which
such meeting is to be held. Notice of any such meeting need not be given to any
director who shall, either before or after the meeting, submit a signed waiver
of notice or who shall attend such meeting without protesting, prior to or at
its commencement, the lack of notice to him. Except as otherwise specifically
required by these By-Laws, a notice or waiver of notice of any regular or
special meeting need not state the purposes of such meeting. Any action required
or permitted to be taken at any meeting of the Board of Directors or any
committee thereof may be taken without a meeting if all members of the Board of
Directors or such committee, as the case may be, consent thereto in writing, and
the writing is filed with the minutes of proceedings of the Board or such
committee.
SECTION 8. QUORUM AND MANNER OF ACTING. A majority of the entire Board shall be
present in person at any meeting of the Board in order to constitute a quorum
for the transaction of business at such meeting, and, except as otherwise
expressly required by statute or the Certificate of Incorporation, the act of a
majority of the directors present at any meeting at which a quorum is present
shall be the act of the Board. In the absence of a quorum at any meeting of the
Board, a majority of the directors present thereat may adjourn such meeting to
another time and place. Notice of the time and place of any such adjourned
meeting shall be given to the directors who were not present at the time of the
adjournment and, unless such time and place were announced at the meeting at
which the adjournment was taken, to the other directors. At any adjourned
meeting at which a quorum is present, any business may be transacted which might
have been transacted at the meeting as originally called. The directors shall
act only as a Board and the individual directors shall have no power as such.
SECTION 9. ORGANIZATION. At each meeting of the Board, the officer specified in
Article IV hereof (or, in the absence or inability to act of all officers
designated in Article IV hereof so to act, another director chosen by a majority
of the directors present) shall act as chairman of the meeting and preside
thereat. The Secretary (or, in his absence or inability to act, any person
appointed by the Chairman) shall act as secretary of the meeting and keep the
minutes thereof.
SECTION 10. RESIGNATIONS. Any director of the Corporation may resign at any time
by giving written notice of his resignation to the Board, the Chairman of the
Board or the Secretary. Any such resignation shall take effect at the time
specified therein or, if the time when it shall
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<PAGE> 6
become effective shall not be specified therein, immediately upon its receipt;
and, unless otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective.
SECTION 11. VACANCIES. Any vacancy in the Board, whether arising from death,
resignation, removal (with or without cause), an increase in the number of
directors or any other cause, may be filled by the vote of a majority of the
directors then in office, though less than a quorum, or by the shareholders at
the next annual meeting thereof or at a special meeting thereof; and each
director so elected shall hold office for the unexpired term of his predecessor.
SECTION 12. REMOVAL OF DIRECTORS. Any director may be removed, either with or
without cause, at any time, by the shareholders at a special meeting thereof.
Any director may be removed for cause by the Board at a special meeting thereof.
SECTION 13. COMPENSATION. The Board shall have authority to fix the
compensation, including fees and reimbursement of expenses, of directors for
services to the Corporation in any capacity.
SECTION 14. MEETINGS BY CONFERENCE TELEPHONE. Notwithstanding anything to the
contrary contained in these By-Laws, the Board of Directors of this Corporation,
and any committee (including but not limited to the Executive Committee)
designated by such Board pursuant to Article III hereof, may participate in a
meeting of said Board of Directors or committee by means of conference telephone
or similar communications equipment by means of which all persons participating
in the meeting can hear each other, and participation in a meeting pursuant to
this Section 14 shall constitute presence in person at such meeting.
ARTICLE III
EXECUTIVE AND OTHER COMMITTEES
SECTION 1. EXECUTIVE COMMITTEE. The Board may, by resolution adopted by a
majority of the entire Board, designate an Executive Committee consisting of one
or more of the directors of the Corporation, which Committee shall have and may
exercise all the authority of the Board as permitted pursuant to the Delaware
General Corporation Law including but not limited to declaration of dividends,
authorization for the issuance of stock, adoption of a certificate of ownership
and merger pursuant to Section 253 of the said Delaware Law, except that it
shall not have authority with respect to:
a. the submission to shareholders of any action requiring
authorization of shareholders pursuant to statute or the
Certificate of Incorporation;
b. the filling of vacancies on the Board or in any committee of
the Board, including the Executive Committee;
c. the amendment or repeal of these By-Laws or the adoption of
new By-Laws; and
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<PAGE> 7
d. the amendment or repeal of any resolution of the Board which
by its terms may be amended or repealed only by the Board.
The Board shall have the power at any time to change the membership of the
Executive Committee, to fill all vacancies in it, or to dissolve it.
The Executive Committee shall keep written minutes of its proceedings and shall
report such minutes to the Board upon the request of a majority of the members
of the Board of Directors. All such proceedings shall be subject to revision or
alteration by the Board; provided, however, that third parties shall not be
prejudiced by such revision or alteration.
SECTION 2. OTHER COMMITTEES. The Board may, by resolution adopted by a majority
of the entire Board, designate other committees, each consisting of one or more
of the directors of the Corporation, which committees, except as otherwise
prescribed by statute, shall have and may exercise the authority of the Board to
the extent that such authority shall be conferred by the resolutions designating
such committees.
SECTION 3. GENERAL. A majority of any committee may determine its action and fix
the time and place of its meetings, unless the Board shall otherwise provide.
The Board shall have power at any time to fill vacancies in, to change the
membership of, or to dissolve any such committee. Nothing herein shall be deemed
to prevent the Board from appointing one or more committees consisting in whole
or in part of persons who are not directors of the Corporation; provided,
however, that any such committee shall not have nor exercise any authority of
the Board.
ARTICLE IV
OFFICERS
SECTION 1. NUMBER AND QUALIFICATIONS. The officers of the Corporation shall
include the Chairman of the Board of Directors, the Co-Chairman of the Board,
one or more Vice Chairmen of the Board, the Chief Executive Officer, the Chief
Operating Officer, the Chief Administrative Officer, the Co-Chief Administrative
Officers, the Chief Financial Officer, the President, one or more Senior
Managing Directors and Managing Directors of the Corporation, one or more Vice
Presidents (one or more of whom may be designated by the Board of Directors as
Senior Executive Vice Presidents, Executive Vice Presidents, Executive Vice
President--Finance, Senior Vice Presidents or First Vice Presidents), the
Controller, the Treasurer, the Secretary, and one or more Assistant Treasurers
and Assistant Secretaries. The Board may also from time to time by resolution
establish Divisions of the Corporation, and may elect officers of any such
Division, including a Chairman, Vice Chairman, President, one or more Senior
Managing Directors and one or more Managing Directors, and one or more Senior
Vice Presidents, First Vice Presidents and Vice Presidents, who shall be
Officers of the Corporation. Any two or more offices may be held by the same
person, except the offices of President and Secretary. The Chairman of the
Board, the
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<PAGE> 8
Co-Chairman of the Board, the Vice Chairman of the Board, the Chief Executive
Officer, the Chief Operating Officer and the President shall be chosen from
among the Board of Directors. All of the officers mentioned hereinbefore in this
Article shall be elected from time to time by the Board, each to hold office
until the meeting of the Board following the next annual meeting of the
shareholders, or until his successor shall have been duly elected and shall have
qualified, or until his death, or until he shall have resigned, or shall have
been removed as hereinafter provided in these By-Laws. The Board may from time
to time elect, or delegate to any one or more officers the power to appoint,
such other noncorporate titleholders and Davis, Skaggs Divisional Noncorporate
Titleholders (including Chief Financial Officer of the Lehman Brothers Division,
President of the Private Client Group of the Shearson Lehman Brothers Division,
Managing Partner of the Lehman Brothers Division, Chief Administrative Officer
of the Lehman Brothers Division, Chief Administrative Officer of the Shearson
Lehman Brothers Division, Chief Financial Officer of the Shearson Lehman
Brothers Division, Chief Technology and Operations Officer of the Lehman
Brothers Division, President of the Asset Management Group of the Shearson
Lehman Brothers Division, one or more Advisory Directors, Assistant Vice
Presidents, Controllers--Commodities, Senior Vice Presidents--Administration,
Vice Presidents--Administration, Second Vice Presidents--Administrative Manager,
Senior Vice Presidents--Arbitrage, First Vice Presidents--Arbitrage, Vice
Presidents--Arbitrage, Vice Presidents--Assistant Manager, Vice
Presidents--Associate Manager, Senior Vice Presidents--Commodities, First Vice
Presidents--Commodities, Vice Presidents-- Commodities, Assistant Vice
Presidents--Commodities, Second Vice Presidents-- Commodities, Assistant Vice
Presidents--Commodity Meteorologist, First Vice Presidents--Commodity Research,
Vice Presidents--Commodity Research, Assistant Vice Presidents--Commodity
Research, Vice Presidents--Communications Planning and Technology, Vice
Presidents--Control Administrator, Senior Vice Presidents--Convertible
Arbitrage, First Vice Presidents--Convertible Arbitrage, Vice
Presidents--Convertible Arbitrage, Assistant Vice Presidents--Convertible
Arbitrage, Senior Vice Presidents-- Corporate Bonds, Vice Presidents--Corporate
Bonds, Assistant Vice Presidents--Corporate Bonds, Second Vice
Presidents--Corporate Bonds, Assistant Vice Presidents--Corporate Bond
Administration, First Vice Presidents--Corporate Bond Liaison, Vice Presidents--
Corporate Bond Liaison, Assistant Vice Presidents--Corporate Bond Liaison,
Senior Vice Presidents--Corporate Bond Sales, Assistant Vice
Presidents--Corporate Planning & Development, Senior Vice Presidents--Derivative
Marketing, Senior Vice Presidents-- Derivative Products, First Vice
Presidents--Derivative Products, Vice Presidents--Direct Marketing, First Vice
Presidents--Equity Arbitrage Group, Vice Presidents--Equity Arbitrage Group,
Assistant Vice Presidents--Equity Arbitrage Group, President--Shearson Equity
Management, Vice Presidents--Shearson Equity Management, Assistant Vice
Presidents--Shearson Equity Management, Vice Presidents--Executive Compensation
Planning, Managing Directors/Financial Consultant, Executive Vice
Presidents/Financial Consultant, Senior Vice Presidents/Financial Consultants,
First Vice Presidents/Financial Consultants, Vice Presidents/Financial
Consultants, Assistant Vice Presidents/Financial Consultants, Second Vice
Presidents/Financial Consultants, Senior Vice Presidents/Financial
Consultants--Commodities, First Vice Presidents/Financial
Consultants--Commodities, Vice Presidents/Financial Consultants--Commodities,
Second Vice Presidents/Financial Consultants--Commodities, Senior Vice
Presidents--Financial Futures and Options, First Vice Presidents--Financial
Futures and Options, Vice Presidents--Financial Planning,
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<PAGE> 9
Vice Presidents--Financial Reporting, Senior Vice Presidents--Fixed Income, Vice
Presidents--Fixed Income, Assistant Vice Presidents--Fixed Income, Second Vice
Presidents--Fixed Income, Vice Presidents--Fixed Income International, Vice
Presidents-- Fixed Income Research, Assistant Vice Presidents--Fixed Income
Research, Second Vice Presidents--Fixed Income Research, Vice Presidents--Fixed
Income Systems, Senior Vice Presidents--Foreign Currency Trading and Sales,
First Vice Presidents--Foreign Currency Trading and Sales, Vice
Presidents--Foreign Currency Trading and Sales, Assistant Vice
Presidents--Foreign Currency Trading and Sales, Vice Presidents--Foreign
Exchange, Senior Vice Presidents--Futures, First Vice Presidents--Futures, Vice
Presidents--Futures, Assistant Vice Presidents--Futures, Vice
Presidents--Government Bonds, Vice Presidents-- Government Securities, Second
Vice Presidents--Government Securities, Vice Presidents-- High Yield, Vice
Presidents--Institutional Administration, Assistant Vice Presidents--
Institutional Administration, Senior Vice Presidents-- Institutional Equity
Services, First Vice Presidents--Institutional Equity Services, Vice
Presidents--Institutional Equity Services, Assistant Vice
Presidents--Institutional Equity Services, First Vice Presidents-- Institutional
Funds, Vice Presidents--Institutional Investor Services, First Vice Presidents--
Institutional Options, Vice Presidents--Institutional Options, Assistant Vice
Presidents-- Institutional Options, Vice Presidents--Institutional Options &
Futures, Assistant Vice Presidents--Institutional Options & Futures, Senior Vice
Presidents--Institutional Sales, First Vice Presidents--Institutional Sales,
Vice Presidents--Institutional Sales, Second Vice Presidents--Institutional
Sales, Senior Vice Presidents--International, First Vice Presidents-
- -International, Vice Presidents--International, Assistant Vice
Presidents--International, Second Vice Presidents--International, Vice
Presidents--International Operations, Senior Vice Presidents--Investments, First
Vice Presidents--Investments, Vice Presidents-- Investments, Second Vice
Presidents--Investments, Assistant Vice Presidents--Investment Banking, Vice
President--Investment Strategy-Research, Vice Presidents--Latin America, First
Vice Presidents--Leasing, First Vice Presidents--Loan Transaction, Vice
Presidents-- Loan Transaction, Assistant Vice Presidents--Loan Transaction,
Senior Vice Presidents-- Metals, Vice Presidents--Metals, Vice Presidents--Money
Market, Senior Vice Presidents-- Municipals, Vice Presidents--Municipals,
Assistant Vice Presidents--Municipals, Second Vice Presidents--Municipals, Vice
Presidents--Mutual Funds, Vice Presidents--OTC Trading, Second Vice
Presidents--OTC Trading, First Vice Presidents--Operations, Vice
Presidents--Operations, Assistant Vice Presidents--Operations, Second Vice
Presidents-- Operations, First Vice Presidents--Options Arbitrage, Vice
Presidents--Options Arbitrage, Overseas Director, Vice Presidents--Personal
Financial Planning, Vice Presidents--Public Finance, Vice Presidents--Real
Estate, Assistant Vice Presidents--Regulatory Reporting, Senior Vice
Presidents--Research, First Vice Presidents--Research, Vice Presidents--
Research, Assistant Vice Presidents--Research, Second Vice Presidents--Research,
Vice Presidents--Research High Yield, Assistant Vice Presidents--Research
Liaison, Senior Vice Presidents--Resident Manager, Vice Presidents--Resident
Manager, Senior Vice Presidents--Risk Arbitrage, Vice Presidents--Risk
Arbitrage, Assistant Vice Presidents-- Risk Arbitrage, Vice
Presidents--Securities International, Vice Presidents--Senior Economist, Vice
Presidents--Senior Financial Planning, First Vice Presidents--Stock Loan, Vice
Presidents--Stock Loan, Assistant Vice Presidents--Taxable Fixed Income
Research, Senior Vice Presidents--Trading, First Vice Presidents--Trading, Vice
Presidents--Trading, Assistant Vice Presidents--Trading, Second Vice
Presidents--Trading, Vice Presidents-- Trading Floor Technology, Vice
Presidents--
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<PAGE> 10
Unit Trust, Second Vice Presidents--Unit Trust) and such agents, as may be
necessary or desirable for the business of the Corporation. Such other officers
and agents shall have such duties and shall hold their offices for such terms as
may be prescribed by the Board or by the appointing authority. However, absent
specific affirmative action by the Board of Directors, holders of the
noncorporate titles (including Davis, Skaggs Divisional Noncorporate Titles) of
Chief Financial Officer of the Lehman Brothers Division, President of the
Private Client Group of the Shearson Lehman Brothers Division, Managing Partner
of the Lehman Brothers Division, Chief Administrative Officer of the Lehman
Brothers Division, Chief Administrative Officer of the Shearson Lehman Brothers
Division, Chief Financial Officer of the Shearson Lehman Brothers Division,
Chief Technology and Operations Officer of the Lehman Brothers Division,
President of the Asset Management Group of the Shearson Lehman Brothers
Division, Advisory Director, Assistant Vice President, Controller--Commodities,
Senior Vice President-- Administration, Vice President--Administration, Second
Vice President--Administrative Manager, Senior Vice President--Arbitrage, First
Vice President--Arbitrage, Vice President--Arbitrage, Vice President--Assistant
Manager, Vice President--Associate Manager, Senior Vice President--Commodities,
First Vice President--Commodities, Vice President--Commodities, Assistant Vice
President--Commodities, Second Vice President-- Commodities, Assistant Vice
President--Commodity Meteorologist, First Vice President-- Commodity Research,
Vice President--Commodity Research, Assistant Vice President-- Commodity
Research, Vice President--Communications Planning and Technology, Vice
President--Control Administrator, Senior Vice President--Convertible Arbitrage,
First Vice President--Convertible Arbitrage, Vice President--Convertible
Arbitrage, Assistant Vice President--Convertible Arbitrage, Senior Vice
President--Corporate Bonds, Vice President--Corporate Bonds, Assistant Vice
President--Corporate Bonds, Second Vice President--Corporate Bonds, Assistant
Vice President--Corporate Bond Administration, First Vice President--Corporate
Bond Liaison, Vice President--Corporate Bond Liaison, Assistant Vice
President--Corporate Bond Liaison, Senior Vice President--Corporate Bond Sales,
Assistant Vice President--Corporate Planning & Development, Senior Vice
President--Derivative Marketing, Senior Vice President--Derivative Products,
First Vice President--Derivative Products, Vice President--Direct Marketing,
First Vice President-- Equity Arbitrage Group, Vice President--Equity Arbitrage
Group, Assistant Vice President--Equity Arbitrage Group, President--Shearson
Equity Management, Vice President--Shearson Equity Management, Assistant Vice
President--Shearson Equity Management, Vice President--Executive Compensation
Planning, Managing Director/Financial Consultant, Executive Vice
President/Financial Consultant, Senior Vice President/Financial Consultant,
First Vice President/Financial Consultant, Vice President/Financial Consultant,
Assistant Vice President/Financial Consultant, Second Vice President Financial/
Consultant, Senior Vice President/Financial Consultant-- Commodities, First Vice
President/Financial Consultant--Commodities, Vice President/Financial
Consultant--Commodities, Second Vice President/Financial
Consultant--Commodities, Senior Vice President--Financial Futures and Options,
First Vice President--Financial Futures and Options, Vice President--Financial
Planning, Vice President--Financial Reporting, Senior Vice President--Fixed
Income, Vice President-- Fixed Income, Assistant Vice President--Fixed Income,
Second Vice President--Fixed Income, Vice President--Fixed Income International,
Vice President--Fixed Income Research, Assistant Vice President--Fixed Income
Research, Second Vice President--Fixed Income Research, Vice President--Fixed
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<PAGE> 11
Income Systems, Senior Vice President--Foreign Currency Trading and Sales, First
Vice President--Foreign Currency Trading and Sales, Vice President--Foreign
Currency Trading and Sales, Assistant Vice President--Foreign Currency Trading
and Sales, Vice President--Foreign Exchange, Senior Vice President--Futures,
First Vice President-- Futures, Vice President--Futures, Assistant Vice
President--Futures, Vice President-- Government Bonds, Vice
President--Government Securities, Second Vice President-- Government Securities,
Vice President--High Yield, Vice President--Institutional Administration,
Assistant Vice President--Institutional Administration, Senior Vice
President--Institutional Equity Services, First Vice President--Institutional
Equity Services, Vice President--Institutional Equity Services, Assistant Vice
President--Institutional Equity Services, First Vice President--Institutional
Funds, Vice President--Institutional Investor Services, First Vice
President--Institutional Options, Vice President--Institutional Options,
Assistant Vice President--Institutional Options, Vice President--Institutional
Options & Futures, Assistant Vice President--Institutional Options & Futures,
Senior Vice President--Institutional Sales, First Vice President--Institutional
Sales, Vice President-- Institutional Sales, Second Vice
President--Institutional Sales, Senior Vice President-- International, First
Vice President--International, Vice President--International, Assistant Vice
President--International, Second Vice President--International, Vice President--
International Operations, Senior Vice President--Investments, First Vice
President-- Investments, Vice President--Investments, Second Vice
President--Investments, Assistant Vice President-- Investment Banking, Vice
President--Investment Strategy-Research, Vice President--Latin America, First
Vice President--Leasing, First Vice President--Loan Transaction, Vice
President--Loan Transaction, Assistant Vice President--Loan Transaction, Senior
Vice President--Metals, Vice President--Metals, Vice President-- Money Market,
Senior Vice President--Municipals, Vice President--Municipals, Assistant Vice
President--Municipals, Second Vice President--Municipals, Vice President--Mutual
Funds, Vice President--OTC Trading, Second Vice President--OTC Trading, First
Vice President--Operations, Vice President--Operations, Assistant Vice
President--Operations, Second Vice President--Operations, First Vice
President--Options Arbitrage, Vice President-- Options Arbitrage, Overseas
Director, Vice President--Personal Financial Planning, Vice President--Public
Finance, Vice President--Real Estate, Assistant Vice President--Regulatory
Reporting, Senior Vice President--Research, First Vice President-- Research,
Vice President--Research, Assistant Vice President--Research, Second Vice
President--Research, Vice President--Research High Yield, Assistant Vice
President-- Research Liaison, Senior Vice President-- Resident Manager, Vice
President--Resident Manager, Senior Vice President--Risk Arbitrage, Vice
President--Risk Arbitrage, Assistant Vice President--Risk Arbitrage, Vice
President--Securities International, Vice President-- Senior Economist, Vice
President--Senior Financial Planning, First Vice President--Stock Loan, Vice
President--Stock Loan, Assistant Vice President--Taxable Fixed Income Research,
Senior Vice President--Trading, First Vice President-- Trading, Vice President--
Trading, Assistant Vice President--Trading, Second Vice President--Trading, Vice
President--Trading Floor Technology, Vice President--Unit Trust, and Second Vice
President--Unit Trust shall not be deemed to be corporate officers and shall not
have authority to bind the Corporation to substantial obligations, and in the
case of holders of departmental titles, shall not have the authority to bind the
Corporation to any obligations outside their respective departments.
Accordingly, the holders of such noncorporate titles (including Davis, Skaggs
Divisional Noncorporate Titles) as Chief Financial Officer of the Lehman
Brothers Division,
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<PAGE> 12
President of the Private Client Group of the Shearson Lehman Brothers Division,
Managing Partner of the Lehman Brothers Division, Chief Administrative Officer
of the Lehman Brothers Division, Chief Administrative Officer of the Shearson
Lehman Brothers Division, Chief Financial Officer of the Shearson Lehman
Brothers Division, Chief Technology and Operations Officer of the Lehman
Brothers Division, President of the Asset Management Group of the Shearson
Lehman Brothers Division, Advisory Director, Assistant Vice President,
Controller--Commodities, Senior Vice President-- Administration, Vice
President--Administration, Second Vice President--Administrative Manager, Senior
Vice President--Arbitrage, First Vice President--Arbitrage, Vice
President--Arbitrage Vice President--Assistant Manager, Vice
President--Associate Manager Senior Vice President--Commodities, First Vice
President--Commodities, Vice President--Commodities, Assistant Vice
President--Commodities, Second Vice President-- Commodities, Assistant Vice
President--Commodity Meteorologist, First Vice President-- Commodity Research,
Vice President--Commodity Research, Assistant Vice President-- Commodity
Research, Vice President--Communications Planning and Technology, Vice
President--Control Administrator, Senior Vice President--Convertible Arbitrage,
First Vice President--Convertible Arbitrage, Vice President--Convertible
Arbitrage, Assistant Vice President--Convertible Arbitrage, Senior Vice
President--Corporate Bonds, Vice President--Corporate Bonds, Assistant Vice
President--Corporate Bonds, Second Vice President--Corporate Bonds, Assistant
Vice President--Corporate Bonds Administration, First Vice President--Corporate
Bond Liaison, Vice President--Corporate Bond Liaison, Assistant Vice
President--Corporate Bond Liaison, Senior Vice President--Corporate Bond Sales,
Assistant Vice President--Corporate Planning & Development, Senior Vice
President--Derivative Marketing, Senior Vice President--Derivative Products,
First Vice President--Derivative Products, Vice President--Direct Marketing,
First Vice President-- Equity Arbitrage Group, Vice President--Equity Arbitrage
Group, Assistant Vice President--Equity Arbitrage Group, President--Shearson
Equity Management, Vice President--Shearson Equity Management, Assistant Vice
President--Shearson Equity Management, Vice President--Executive Compensation
Planning, Managing Director/Financial Consultant, Executive Vice
President/Financial Consultant, Senior Vice President/Financial Consultant,
First Vice President/Financial Consultant, Vice President/Financial Consultant,
Assistant Vice President/Financial Consultant, Second Vice President/Financial
Consultant, Senior Vice President /Financial Consultant-- Commodities, First
Vice President/Financial Consultant--Commodities, Vice President/Financial
Consultant--Commodities, Second Vice President/Financial
Consultant--Commodities, Senior Vice President--Financial Futures and Options,
First Vice President--Financial Futures and Options, Vice President--Financial
Planning, Vice President--Financial Reporting, Senior Vice President--Fixed
Income, Vice President-- Fixed Income, Assistant Vice President--Fixed Income,
Second Vice President--Fixed Income, Vice President--Fixed Income International,
Vice President--Fixed Income Research, Assistant Vice President--Fixed Income
Research, Second Vice President--Fixed Income Research, Vice President--Fixed
Income Systems, Senior Vice President--Foreign Currency Trading and Sales, First
Vice President--Foreign Currency Trading and Sales,
Vice President--Foreign Currency Trading and Sales, Assistant Vice
President--Foreign Currency Trading and Sales, Vice President--Foreign Exchange,
Senior Vice President-- Futures, First Vice President--Futures, Vice
President--Futures, Assistant Vice President-- Futures, Vice
President--Government Bonds, Vice President--Government Securities, Second Vice
President--Government Securities,
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<PAGE> 13
Vice President--High Yield, Vice President--Institutional Administration,
Assistant Vice President--Institutional Administration, Senior Vice
President--Institutional Equity Services, First Vice President-- Institutional
Equity Services, Vice President--Institutional Equity Services, Assistant Vice
President--Institutional Equity Services, First Vice President--Institutional
Funds, Vice President--Institutional Investor Services, First Vice
President--Institutional Options, Vice President--Institutional Options,
Assistant Vice President--Institutional Options, Vice President--Institutional
Options & Futures, Assistant Vice President--Institutional Options & Futures,
Senior Vice President--Institutional Sales, First Vice President--Institutional
Sales, Vice President--Institutional Sales, Second Vice President--Institutional
Sales, Senior Vice President--International, First Vice
President--International, Vice President-- International, Assistant Vice
President--International, Second Vice President-- International, Vice
President--International Operations, Senior Vice President-- Investments, First
Vice President--Investments, Vice President--Investments, Second Vice
President--Investment, Assistant Vice President--Investment Banking, Vice
President-- Investments Strategy-Research, Vice President--Latin America, First
Vice President-- Leasing, First Vice President--Loan Transaction, Vice
President--Loan Transaction, Assistant Vice President--Loan Transaction, Senior
Vice President--Metals, Vice President- -Metals, Vice President--Money Market,
Senior Vice President--Municipals, Vice President--Municipals, Assistant Vice
President--Municipals, Second Vice President-- Municipals, Vice
President--Mutual Funds, Vice President--OTC Trading, Second Vice President--OTC
Trading, First Vice President--Operations, Vice President--Operations, Assistant
Vice President--Operations, Second Vice President--Operations, First Vice
President--Options Arbitrage, Vice President--Options Arbitrage, Overseas
Director, Vice President--Personal Financial Planning, Vice President--Public
Finance, Vice President-- Real Estate, Assistant Vice President--Regulatory
Reporting, Senior Vice President-- Research, First Vice President--Research,
Vice President--Research, Assistant Vice President--Research, Second Vice
President--Research, Vice President--Research High Yield, Assistant Vice
President--Research Liaison, Senior Vice President--Resident Manager, Vice
President--Resident Manager, Senior Vice President--Risk Arbitrage, Vice
President--Risk Arbitrage, Assistant Vice President--Risk Arbitrage, Vice
President-- Securities International, Vice President--Senior Economist, Vice
President--Senior Financial Planning, First Vice President--Stock Loan, Vice
President--Stock Loan, Assistant Vice President--Taxable Fixed Income Research,
Senior Vice President--Trading, First Vice President--Trading, Vice
President--Trading, Assistant Vice President--Trading, Second Vice
President--Trading, Vice President-Trading Floor Technology, Vice
President--Unit Trust, and Second Vice President--Unit Trust shall not be
reportable as officers of the Corporation to any regulatory or self-regulatory
authority, exchange, clearing corporation or the like.
SECTION 2. RESIGNATIONS. Any officer of the Corporation may resign at any time
by giving written notice of his resignation to the Board, the Chairman of the
Board or the Secretary. Any such resignation shall take effect at the time
specified therein or, if the time when it shall become effective shall not be
specified therein, immediately upon its receipt; and, unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make it
effective.
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<PAGE> 14
SECTION 3. REMOVAL. Any officer or agent of the Corporation may be removed,
either with or without cause and without prejudice to any rights existing under
any contract, at any time, by the Board at any meeting of the Board, or except
in the case of an officer or agent elected or appointed by the Board, by any
officer to whom the Board shall have delegated the power to appoint such officer
being removed.
SECTION 4. VACANCIES. A vacancy in any office, whether arising from death,
resignation, removal or any other cause, may be filled for the unexpired portion
of the term of the office which shall be vacant, in the manner prescribed in
these By-Laws for the regular election or appointment to such office.
SECTION 5. THE CHAIRMAN OF THE BOARD. The Chairman of the Board shall, if
present, preside at each meeting of the shareholders and of the Board. He shall
perform all duties incident to the office of Chairman of the Board and such
other duties as may from time to time be assigned to him by the Board.
SECTION 6. THE CO-CHAIRMAN OF THE BOARD. The Co-Chairman of the Board shall, in
the absence of the Chairman of the Board, preside at each meeting of the
shareholders and the Board. He shall perform all duties incident to the office
of Co- Chairman of the Board and such other duties as may from time to time be
assigned to him by the Board.
SECTION 7. THE VICE CHAIRMAN OF THE BOARD. One of the Vice Chairmen of the Board
shall, in the absence of the Chairman of the Board and the Co-Chairman of the
Board, preside at each meeting of the shareholders and the Board. They shall
perform all duties incident to the office of Vice Chairman of the Board and such
other duties as may from time to time be assigned to them by the Board.
SECTION 8. THE CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall be the
chief executive officer of the Corporation and shall have the general and active
management of and supervision and direction over the business and affairs of the
Corporation and over its several officers, subject, however, to the control of
the Board. He shall, in the absence of the Chairman of the Board, the
Co-Chairman of the Board and the Vice Chairmen of the Board, preside at each
meeting of the shareholders and of the Board and shall be an ex officio member
of all committees of the Board. He shall see that all orders and directions of
the shareholders and the Board are carried into effect. He may sign, execute and
deliver, in the name of the Corporation, all certificates, deeds, mortgages,
bonds, contracts and other instruments authorized by the Board, except in cases
where the signing, execution and delivery thereof shall be expressly delegated
by the Board or by these By-Laws to some other officer or agent of the
Corporation or except as otherwise provided by statute. He may affix the seal of
the Corporation to any instrument which shall require it. In general, he shall
perform all duties incident to the office of Chief Executive Officer and such
other duties as from time to time may be assigned to him by the Board, or by
these By-Laws.
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<PAGE> 15
SECTION 9. THE CHIEF OPERATING OFFICER. The Chief Operating Officer shall be the
chief operating officer of the Corporation, and shall assist the Chief Executive
Officer in the active management of and supervision and direction over the
business and affairs of the Corporation and over its several officers, subject,
however, to the control of the Board. He shall, in the absence of the Chairman
of the Board, the Co-Chairman of the Board, the Vice Chairmen of the Board and
the Chief Executive Officer, preside at each meeting of the shareholders and of
the Board. He shall see that all orders and directions of the shareholders and
the Board are carried into effect. In general, he shall perform all duties
incident to the office of Chief Operating Officer and such other duties as from
time to time may be assigned to him by the Board, or by these By-Laws.
SECTION 10. PRESIDENT. The President shall, in the absence of the Chairman of
the Board, the Co-Chairman of the Board, the Vice Chairmen of the Board, the
Chief Executive Officer and the Chief Operating Officer, preside at each meeting
of the shareholders and of the Board. He shall perform all duties incident to
the office of President and such other duties as may from time to time be
assigned to him by the Board, or by these By-Laws.
SECTION 11. THE CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall be
the chief financial officer of the Corporation, and shall render to the Board,
whenever the Board may require, an account of the financial condition of the
Corporation; shall make, sign and execute financial, tax and similar reports to
any State, Federal or Municipal Government or Department; shall provide for the
continuous review of all accounts and reports; and shall perform such other
duties as may, from time to time, be assigned to him by the Board or the
Chairman of the Board.
SECTION 12. THE CHIEF ADMINISTRATIVE OFFICER OR CO-CHIEF ADMINISTRATIVE
OFFICERS. The Chief Administrative Officer or Co-Chief Administrative Officers
as the case may be shall be the chief administrative officer(s) of the
Corporation, and shall have responsibility for the various operational
facilities and personnel and related support services of the Corporation. In
general, they shall perform all duties incident to the office of the Chief
Administrative Officer or Co-Chief Administrative Officer and such other duties
as from time to time may be assigned to them by the Board or the Chairman of the
Board.
SECTION 13. SENIOR MANAGING DIRECTOR OF THE CORPORATION. Each Senior Managing
Director of the Corporation shall have such powers and perform such duties as
the Board or the Chairman of the Board may from time to time prescribe, and
shall perform such other duties as may be prescribed in these By-Laws. The
office of Senior Managing Director of the Corporation described in this section
shall be distinguished from the office of Senior Managing Director of a Division
described in Section 18 of these By-Laws.
SECTION 14. VICE PRESIDENTS. Each Senior Executive Vice President, Executive
Vice President, Senior Vice President, First Vice President and Vice President
shall have such powers and perform such duties as the Board or the Chairman of
the Board may from time to time prescribe, and shall perform such other duties
as may be prescribed in these By-Laws.
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<PAGE> 16
SECTION 15. THE CONTROLLER. The Controller shall be the Chief Accounting Officer
of the Corporation and shall cause to be maintained adequate records of all
assets, liabilities and transactions of the Corporation; shall keep full and
accurate accounts of receipts and disbursements in books belonging to the
Corporation and have control of all the books of account of the Corporation; and
shall perform such other duties as may, from time to time, be assigned to him by
the Board or the Chairman of the Board.
SECTION 16. THE TREASURER. The Treasurer shall:
a. have charge and custody of, and be responsible for, all the
funds and securities of the Corporation;
b. cause all monies and other valuables to be deposited to the
credit of the Corporation in such depositories as may be
designated by the Board;
c. be responsible for managing the funds of the Corporation and
arranging for short term financing to carry out the business
of the Corporation; and
d. in general, perform all the duties incident to the office of
Treasurer and Chief Money Manager of the Corporation and such
other duties as may from time to time be assigned to him by
the Board or the Chairman of the Board.
SECTION 17. THE SECRETARY. The Secretary shall:
a. keep or cause to be kept, in one or more books provided for
the purpose, the minutes of all meetings of the Board, the
committees of the Board and the shareholders;
b. see that all notices are duly given in accordance with the
provisions of these By-Laws and as required by law;
c. be custodian of the records and the seal of the Corporation
and affix and attest the seal to all stock certificates of the
Corporation (unless the seal of the Corporation on such
certificates shall be a facsimile, as hereinafter provided)
and affix and attest the seal to all other documents to be
executed on behalf of the Corporation under its seal;
d. see that the books, reports, statements, certificates and
other documents and records required by law to be kept and
filed are properly kept and filed; and
e. in general, perform all the duties incident to the office of
Secretary and such other duties as from time to time may be
assigned to him by the Board or the Chairman of the Board.
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<PAGE> 17
SECTION 18. DIVISIONS AND DIVISIONAL OFFICERS AND NONCORPORATE TITLEHOLDERS. The
Lehman Brothers Division shall carry on the investment banking, merchant
banking, capital markets and related activities of the Corporation. The
Chairman, Vice Chairman, President, Chief Executive Officer (or Co-Chief
Executive Officers as the case may be) each Senior Managing Director and each
Managing Director of the Lehman Brothers Division shall for all purposes be
corporate Officers of the Corporation with authority at least commensurate with
any Senior Vice President of the Corporation to enter into commitments on behalf
of the Corporation, and shall have such further duties as may from time to time
be assigned to each of them by the Board, the Chairman of the Board, or these
By-Laws.
The Shearson Lehman Brothers Division shall carry on the individual investor and
asset management and related activities of the Corporation. The Chairman, Vice
Chairman, President and Chief Executive Officer of the Shearson Lehman Brothers
Division shall for all purposes be a corporate Officer of the Corporation, and
shall have such duties as may from time to time be assigned to him by the Board,
the Chairman of the Board, or these By-Laws.
The Davis, Skaggs Division shall carry on business previously carried on by
Davis, Skaggs & Co., Inc. The Davis, Skaggs Division shall initially include the
noncorporate title of Vice President/Financial Consultant and shall from time to
time include such other noncorporate titles as shall be available at the
Corporation generally in accordance with Section 1 of this Article IV.
The Board may also from time to time by resolution establish other Divisions of
the Corporation for such purposes as shall be specified in the resolution
creating each such respective Division. The Chairman, each Senior Managing
Director and each Managing Director of each such other Division shall likewise
be corporate Officers of the Corporation and shall have such duties and such
authority as shall from time to time be assigned to each of them by the Board,
the Chairman of the Board, or these By-Laws.
The Chairman, the Senior Managing Directors and the Managing Directors of any
Division shall not, however, unless otherwise so elected, be members of the
Board of Directors of the Corporation.
SECTION 19. OFFICERS' BONDS OR OTHER SECURITY. If required by the Board, any
officer of the Corporation shall give a bond or other security for the faithful
performance of his duties, in such amount and with such surety or sureties as
the Board may require.
SECTION 20. COMPENSATION. The compensation of the officers of the Corporation
for their services as such officers may be fixed from time to time by the Board;
provided, however, that the Board may delegate to any officer the power to fix
the compensation of officers and agents appointed by such officer. An officer of
the Corporation shall not be prevented from receiving compensation by reason of
the fact that he is also a director of the Corporation, but any such officer
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<PAGE> 18
who shall also be a director shall not have any vote in the determination of the
amount of compensation paid to him.
SECTION 21. DIRECTORS AND OFFICERS OF SUBSIDIARIES. All directors and corporate
officers of subsidiaries of the Corporation must be approved by the Board of
Directors of this Corporation.
ARTICLE V
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
SECTION 1. EXECUTION OF CONTRACTS. Except as otherwise required by statute, the
Certificate of Incorporation or these By-Laws, any contracts or other
instruments may be executed and delivered in the name and on behalf of the
Corporation by such officer or officers (including any assistant officer or
officers) of the Corporation as the Board may from time to time direct. Such
authority may be general or confined to specific instances as the Board may
determine. Unless authorized by the Board or expressly permitted by these
By-Laws, an officer or agent or employee shall not have any power or authority
to bind the Corporation by any contract or engagement or to pledge its credit or
to render it pecuniarily liable for any purpose or to any amount.
Notwithstanding the foregoing, any officer of the Corporation of the rank of
Executive Vice President or above is authorized upon instruction from the Vice
Chairman of the Board of the Corporation to sign on behalf of the Corporation
the Memorandum of Agreement, dated May 13, 1982, among McLeod Young Weir
Limited, the Corporation and Shearson Loeb Rhoades (Canada) Inc., and any other
documents and agreements contemplated thereby which are required to be executed
by the Corporation.
SECTION 2. LOANS. Unless the Board shall otherwise determine, the Chairman of
the Board, the Co-Chairman of the Board, the Vice Chairmen of the Board, the
Chief Executive Officer, the Chief Operating Officer, the President, any
Executive Vice President, the Controller, the Treasurer or the Secretary may
effect loans and advances at any time for the Corporation from any bank, trust
company or other institution, or from any firm, corporation or individual, and
for such loans and advances may make, execute and deliver promissory notes,
bonds or other certificates or evidences of indebtedness of the Corporation, but
no officer or officers shall mortgage, pledge, hypothecate or transfer any
securities or other property of the Corporation, except when authorized by the
Board.
SECTION 3. CHECKS, DRAFTS, ETC. All checks, drafts, bills of exchange or other
orders for the payment of money out of the funds of the Corporation, and all
notes or other evidences of indebtedness of the Corporation, shall be signed in
the name and on behalf of the Corporation by such persons and in such manner as
shall from time to time be authorized by the Board or as may be designated by
any officer or officers of the Corporation to whom such power of designation may
from time to time be delegated by the Board.
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<PAGE> 19
SECTION 4. DEPOSITS. All funds of the Corporation not otherwise employed shall
be deposited from time to time to the credit of the Corporation in such banks,
trust companies or other depositories as the Board may from time to time
designate or as may be designated by any officer or officers of the Corporation
to whom such power of designation may from time to time be delegated by the
Board. For the purpose of deposit and for the purpose of collection for the
account of the Corporation, checks, drafts and other orders for the payment of
money which are payable to the order of the Corporation may be endorsed,
assigned and delivered by any officer or agent of the Corporation.
SECTION 5. GENERAL AND SPECIAL BANK ACCOUNTS. The Board may from time to time
authorize the opening and keeping of general and special bank accounts with such
banks, trust companies or other depositories as the Board may designate or as
may be designated by any officer or officers of the Corporation to whom such
power of designation may from time to time be delegated by the Board. The Board
may make such special rules and regulations with respect to such bank accounts,
not inconsistent with the provisions of these By-Laws, as it may deem expedient.
ARTICLE VI
SHARES, ETC.
SECTION 1. STOCK CERTIFICATES. Each owner of stock of the Corporation shall be
entitled to have a certificate, in such form as shall be approved by the Board,
certifying the number of shares of stock of the Corporation owned by him. The
certificates representing shares of stock shall be signed in the name of the
Corporation by the Chairman or a Vice Chairman of the Board of Directors, or the
President or a Vice President, and by the Secretary or an Assistant Secretary or
the Treasurer or an Assistant Treasurer and sealed with the seal of the
Corporation (which seal may be a facsimile, engraved or printed); provided,
however, that where any such certificate is countersigned by a transfer agent,
or is countersigned by a transfer clerk acting on behalf of the Corporation and
is registered by a registrar (which may be the same entity as the transfer
agent) (other than the Corporation or one of its employees), the signatures of
the Chairman of the Board, a Vice Chairman of the Board, President, Vice
President, Secretary, Assistant Secretary, Treasurer or Assistant Treasurer upon
such certificates may be facsimiles, engraved or printed. If any officer who has
signed such certificates shall cease to be such officer before such certificates
have been issued, they may nevertheless be issued by the Corporation with the
same effect as if such officer were still in office at the date of their issue.
SECTION 2. BOOKS OF ACCOUNT AND RECORD OF SHAREHOLDERS. There shall be kept
correct and complete books and records of account of all the business and
transactions of the Corporation. There shall also be kept, at the office of the
Corporation in the State of New York or at the office of its transfer agent
within or without said State, a record containing the names and addresses of all
shareholders of the Corporation, the number of shares of stock held by each, and
the dates when they became the owners of record thereof.
-19-
<PAGE> 20
SECTION 3. TRANSFERS OF SHARES. Transfers of shares of stock of the Corporation
shall be made on the stock records of the Corporation only upon authorization by
the registered holder thereof, or by his attorney thereunto authorized by power
of attorney duly executed and filed with the Secretary or with a transfer agent
or transfer clerk, and on surrender of the certificate or certificates for such
shares properly endorsed or accompanied by a duly executed stock transfer power
and the payment of all taxes thereon. Except as otherwise provided by law, the
Corporation shall be entitled to recognize the exclusive right of a person in
whose name any share or shares stand on the record of shareholders as the owner
of such share or shares for all purposes, including, without limitation, the
rights to receive dividends or other distributions, and to vote as such owner,
and the Corporation shall not be bound to recognize any equitable or legal claim
to or interest in any such share or shares on the part of any other person.
Whenever any transfers of shares shall be made for collateral security and not
absolutely and written notice thereof shall be given to the Secretary or to such
transfer agent or transfer clerk, such fact shall be stated in the entry of the
transfer.
SECTION 4. REGULATIONS. The Board may make such additional rules and
regulations, not inconsistent with these By-Laws, as it may deem expedient
concerning the issue, transfer and registration of certificates for shares of
stock of the Corporation. It may appoint, or authorize any officer or officers
to appoint, one or more transfer agents or one or more transfer clerks and one
or more registrars and may require all certificates for shares of stock to bear
the signature or signatures of any of them.
SECTION 5. FIXING OF RECORD DATE. The Board may fix, in advance, a date not more
than sixty nor less than ten days before the date then fixed for the holding of
any meeting of the shareholders or before the last day on which the consent or
dissent of the shareholders may be effectively expressed for any purpose without
a meeting, as the time as of which the shareholders entitled to notice of and to
vote at such meetings or whose consent or dissent is required or may be
expressed for any purpose, as the case may be, shall be determined, and all
persons who were holders of record of voting stock at such time, and no others,
shall be entitled to notice of and to vote at such meeting or to express
their consent or dissent, as the case may be. The Board may fix, in advance, a
date not more than sixty days preceding the date fixed for the payment of any
dividend or the making of any distribution or the allotment of rights to
subscribe for securities of the Corporation, or for the delivery of evidences of
rights or evidences of interests arising out of any change, conversion or
exchange of capital stock or other securities, as the record date for the
determination of the shareholders entitled to receive any such dividend,
distribution, allotment, rights or interests and in such case only the
shareholders of record at the time so fixed shall be entitled to receive such
dividend, distribution, allotment, rights or interests.
SECTION 6. LOST, DESTROYED OR MUTILATED CERTIFICATES. The holder of any
certificate representing shares of stock of the Corporation shall immediately
notify the Corporation of any loss, destruction or mutilation of such
certificate, and the Corporation may issue a new certificate of stock in the
place of any certificate theretofore issued by it which the owners thereof shall
allege to
-20-
<PAGE> 21
have been lost or destroyed or which shall have been mutilated, and
the Board may, in its discretion, require such owner or his legal
representatives to give to the Corporation a bond in such sum, limited or
unlimited, and in such form and with such surety or sureties as the Board in its
absolute discretion shall determine to indemnify the Corporation against any
claim that may be made against it on account of the alleged loss or destruction
of any such certificate, or the issuance of such new certificate. Anything
herein to the contrary notwithstanding, the Board, in its absolute discretion,
may refuse to issue any such new certificate, except pursuant to legal
proceedings under the laws of the State of New York.
SECTION 7. INFORMATION TO SHAREHOLDERS AND OTHERS. Any person who shall have
been a shareholder of record of the Corporation for at least six months
immediately preceding his demand, or any person holding, or thereunto authorized
by the holders of, at least 5 percent of the outstanding shares of stock of the
Corporation,
a. shall, upon at least five days' written demand to the Corporation,
have the right to examine in person or by agent or attorney, during
the usual business hours, its minutes of the proceedings of its
shareholders and its record of shareholders and to make extracts
therefrom, subject, however, to compliance by such person with such
rules and regulations, not inconsistent with statute, as the Board
may prescribe; and
b. shall, upon at least five days' written request to the Corporation,
be furnished by the Corporation with its balance sheet and profit
and loss statement for the Corporation's fiscal year last preceding
such request (or, if such balance sheet and profit and loss
statement shall not have been prepared at the date of such request,
the Corporation shall prepare them within a reasonable time
thereafter and shall furnish them to such shareholder), together
with the Corporation's most recent interim balance
sheet and profit and loss statement, if any, that shall have been
distributed to its shareholders or otherwise made available to the
public.
Within two business days after written demand to the Corporation by any
shareholder (or by any other person entitled to make such demand pursuant to
statute) to inspect a current list of the directors and officers of the
Corporation and their respective residence addresses, the Corporation shall,
within two business days after its receipt of such demand and for a period of
one week thereafter, make such a list available for such inspection at its
principal office during regular business hours.
ARTICLE VII
OFFICE
The principal office of the Corporation within the State of New York shall be
American Express Tower, World Financial Center, New York, New York, 10285 or at
such other address within the State of New York as may be fixed by the Board.
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<PAGE> 22
ARTICLE VIII
SEAL
The seal of the Corporation shall be circular in form and shall include the
words and numbers "Shearson Lehman Brothers Inc., Delaware, l965."
ARTICLE IX
AMENDMENTS
These By-Laws may be amended or repealed, or new By-Laws may be adopted, at any
annual or special meeting of the shareholders, by vote of the shareholders
entitled to vote in the election of directors; provided, however, that the
notice of such meeting shall have been given as provided in these By-Laws, which
notice shall mention that amendment or repeal of these By-Laws, or the adoption
of new By-Laws, is one of the purposes of such meeting. These By-Laws may also
be amended or repealed, or new By-Laws may be adopted, by the Board at any
meeting thereof; provided, however, that notice of such meeting shall have been
given as provided in these By-Laws, which notice shall mention that amendment or
repeal of the By-Laws, or the adoption of new By-Laws, is one of the purposes of
such meeting; and provided, further, that By-Laws adopted by the Board may be
amended or repealed by the shareholders as hereinabove provided.
ARTICLE X
MISCELLANEOUS
No dividend shall be declared or paid which shall impair the capital of the
Corporation nor shall any distribution of assets be made to any shareholder
unless the value of the assets of the Corporation remaining after such payment
or distribution is at least equal to the aggregate of its debts and liabilities,
including capital.
-22-
<PAGE> 1
EXHIBIT 12
LEHMAN BROTHERS INC. AND SUBSIDIARIES
COMPUTATION IN SUPPORT OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
FOR THE YEAR ELEVEN MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
------------------- ------------- ------------- -------------
1992 1993 1994 1995 1996
------ ------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Fixed charges:
Interest expense:
Subordinated
indebtedness...... $ 210 $ 192 $ 184 $ 204 $ 221
Bank loans and other
borrowings*....... 4,363 4,393 5,661 9,750 9,900
Interest component
of rentals of
office and
equipment......... 64 62 27 25 18
Other adjustments**.... 127 101 53 2 7
------ ------ ------ ------- -------
TOTAL (A)........... $4,764 $4,748 $ 5,925 $ 9,981 $10,146
====== ====== ====== ======= =======
Earnings:
Pre-tax income (loss)
from continuing
operations.......... $ 319 $ (146) $ 1 $ 78 $ 309
Fixed charges.......... 4,764 4,748 5,925 9,981 10,146
Other adjustments***... (68) (68) (52) (1) (6)
------ ------ ------ ------- -------
TOTAL (B)........... $5,015 $4,534 $ 5,874 $10,058 $10,449
====== ====== ====== ======= =======
(B/A).................... 1.05 **** **** 1.01 1.03
</TABLE>
- ---------------
* Includes amortization of long-term debt discount.
** Other adjustments include capitalized interest and debt issuance costs,
amortization of capitalized interest and preferred stock dividends of a
wholly owned subsidiary.
*** Other adjustments include adding the net loss of affiliates accounted for
at equity whose debt is not guaranteed by the Company and subtracting
capitalized interest costs and undistributed net income of affiliates
accounted for at equity and preferred stock dividends of a wholly owned
subsidiary.
**** Earnings were inadequate to cover fixed charges and would have had to
increase approximately $214 million in 1993 and $51 million in 1994 in
order to cover the deficiencies.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
and Post Effective Amendments on Form S-3 File Nos. 333-08319, 33-63613,
33-51837, 33-28381 and 33-9541 of Lehman Brothers Inc. and in the related
Prospectuses, of our report dated January 7, 1997, with respect to the
consolidated financial statements of Lehman Brothers Inc. included in this 1996
Annual Report on Form 10-K for the year ended November 30, 1996.
Ernst & Young LLP
New York, New York
February 28, 1997
<PAGE> 1
EXHIBIT 24
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thomas A. Russo, Michael R. Milversted and Karen
M. Muller and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign the Annual Report on Form
10-K of Lehman Brothers Inc., for the fiscal year ended November 30, 1996 and
any and all amendments thereto, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: As of February 28, 1997
<TABLE>
<CAPTION>
SIGNATURES TITLE
- ------------------------------------- ------------------------------------------------------
<S> <C>
/s/ RICHARD S. FULD, JR. Chief Executive Officer and,
- ------------------------------------- Chairman of the Board of
Richard S. Fuld, Jr. Directors
(principal executive officer)
/s/ CHARLES B. HINTZ Chief Financial Officer
- ------------------------------------- and Director
Charles B. Hintz (principal financial and
accounting officer)
/s/ ROGER S. BERLIND Director
- -------------------------------------
Roger S. Berlind
/s/ PHILIP CALDWELL Director
- -------------------------------------
Philip Caldwell
/s/ HOWARD L. CLARK, JR. Director
- -------------------------------------
Howard L. Clark, Jr.
/s/ FREDERICK FRANK Director
- -------------------------------------
Frederick Frank
/s/ BRUCE R. LAKEFIELD Director
- -------------------------------------
Bruce R. Lakefield
/s/ SHERMAN R. LEWIS, JR. Director
- -------------------------------------
Sherman R. Lewis, Jr.
/s/ MEL A. SHAFTEL Director
- -------------------------------------
Mel A. Shaftel
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Financial Condition at November 30, 1996 and the
Consolidated Statement of Operations for the twelve months ended November 30,
1996 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<CASH> 1,059
<RECEIVABLES> 13,476
<SECURITIES-RESALE> 33,145
<SECURITIES-BORROWED> 19,035
<INSTRUMENTS-OWNED> 40,326
<PP&E> 283
<TOTAL-ASSETS> 107,704
<SHORT-TERM> 2,299
<PAYABLES> 8,595
<REPOS-SOLD> 52,200
<SECURITIES-LOANED> 10,085
<INSTRUMENTS-SOLD> 17,866
<LONG-TERM> 4,165
0
0
<COMMON> 0
<OTHER-SE> 1,692
<TOTAL-LIABILITY-AND-EQUITY> 107,704
<TRADING-REVENUE> 937
<INTEREST-DIVIDENDS> 10,465
<COMMISSIONS> 298
<INVESTMENT-BANKING-REVENUES> 779
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 10,121
<COMPENSATION> 1,219
<INCOME-PRETAX> 309
<INCOME-PRE-EXTRAORDINARY> 189
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 189
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
