<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 5, 1994
REGISTRATION STATEMENT NO. 33-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
LEHMAN BROTHERS HOLDINGS INC.
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 6211 13-3216325
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
THOMAS A. RUSSO, ESQ.
3 WORLD FINANCIAL CENTER 3 WORLD FINANCIAL CENTER
NEW YORK, NEW YORK 10285 NEW YORK, NEW YORK 10285
(212) 298-2000 (212) 298-2000
(Address, including zip code, and telephone (Name, address, including zip code, and
number, including telephone
area code, of Registrant's principal executive number, including area code, of agent for
offices) service)
</TABLE>
------------------------
Copy to:
MATTHEW J. MALLOW, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM
919 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 735-3000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE AND DISTRIBUTION TO THE
PUBLIC: As soon as practicable after the Registration Statement becomes
effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
CALCULATION OF REGISTRATION FEE
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<TABLE>
<S> <C> <C> <C> <C>
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PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE(A) OFFERING PRICE(A) FEE
- -----------------------------------------------------------------------------------------------------------
Common Stock, $.10 par value per
share............................. 441,600 shares(b) $25.52649457 $11,272,500 $3,887.07
- -----------------------------------------------------------------------------------------------------------
Common Stock, $.10 par value per
share, to be distributed by
American Express Company to its
common shareholders............... 98,254,243 shares $ 0(c) $ 0(c) $ 0(c)
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Total............................... 98,695,843 shares $11,272,500 $315,555.92(d)
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</TABLE>
(a) Estimated solely for the purpose of computing the amount of the
registration fee.
(b) Consists of shares of Common Stock to be purchased from American Express
Company by executive officers of the Registrant and its subsidiaries.
(c) No separate consideration will be received for shares of Common Stock to
be distributed to the common shareholders of American Express Company.
(d) Includes an additional fee of $311,668.85.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
EXPLANATORY NOTE
This Registration Statement covers the registration of (a) the sale (the
"Offering") by American Express Company ("American Express") of 441,600 shares
of Common Stock of Lehman Brothers Holdings Inc. ("Holdings") to executive
officers of Holdings and its subsidiaries; and (b) 98,254,243 shares of Common
Stock of Holdings to be distributed by American Express to the common
shareholders of American Express as a special dividend (the "Distribution")
which is expected to occur following the Offering.
This Registration Statement contains two forms of prospectus: (i) a
prospectus to be used in connection with the Offering (the "Offering
Prospectus") and (ii) a prospectus to be used in connection with the
Distribution (the "Distribution Prospectus"). The Offering Prospectus and the
Distribution Prospectus will be identical, except for their respective front and
back cover pages. Following the front and back cover pages, respectively, of the
form of Offering Prospectus are alternate front and back cover pages of the form
of Distribution Prospectus, each of which is marked "ALTERNATE PAGE FOR
DISTRIBUTION PROSPECTUS."
<PAGE> 3
LEHMAN BROTHERS HOLDINGS INC.
------------------------
CROSS REFERENCE SHEET
Cross reference sheet pursuant to Item 501(b) of Regulation S-K between
Items in Part I of Registration Statement (Form S-1) and location in the
Prospectus.
<TABLE>
<CAPTION>
REGISTRATION ITEM LOCATION IN
AND HEADING PROSPECTUS
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<S> <C> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Inside Front Cover and Outside Back Cover
Pages
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges............. Prospectus Summary; The Company; Risk
Factors
4. Use of Proceeds............................ Not Applicable
5. Determination of Offering Price............ The Offering and the Distribution*
6. Dilution................................... Not Applicable
7. Selling Security Holders................... Principal Stockholders*
8. Plan of Distribution....................... Outside Front Cover Page; Prospectus
Summary; The Offering and the Distribution
9. Description of Securities to be
Registered............................... Description of Capital Stock; Certain
Corporate Governance Matters
10. Interests of Named Experts and Counsel..... Not Applicable
11. Information with Respect to the
Registrant............................... Outside Front Cover Page; Prospectus
Summary; The Company; The Offering and the
Distribution; Recent Developments; Risk
Factors; Use of Proceeds; Dividend
Policy; Capitalization; Condensed Pro
Forma Consolidated Financial Statements;
Selected Historical Consolidated
Financial Data; Management's Discussion
and Analysis of Financial Condition and
Results of Operations; Business;
Management; Certain Transactions and
Agreements Between the Company and
American Express; Certain Transactions
and Agreements Among Holdings, American
Express and Nippon Life; Principal
Stockholders; Description of Capital
Stock; Certain Corporate Governance
Matters; Historical and Pro Forma
Consolidated Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. Not Applicable
</TABLE>
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* Applicable only to the Offering.
<PAGE> 4
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may
not be sold nor may offers to buy be accepted prior to the time the
registration statement becomes effective. This prospectus shall not
constitute an offer to sell or the solicitation of an offer
to buy nor shall there be any sale of these securities in any State in
which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED APRIL 5, 1994
PROSPECTUS
441,600 SHARES
LEHMAN BROTHERS HOLDINGS INC.
COMMON STOCK
---------------------------
The 441,600 shares of common stock, par value $.10 per share ("Common
Stock"), of Lehman Brothers Holdings Inc., a Delaware corporation ("Holdings"),
offered hereby will be sold by American Express Company, a New York corporation
("American Express"), to executive officers of Lehman Brothers for an aggregate
purchase price of approximately $11.3 million, or approximately $25.53 per share
(the "Offering"). Holdings will not receive any of the proceeds from the sale of
the shares of Common Stock by American Express in the Offering.
Prior to the Offering, American Express will own all of the issued and
outstanding shares of Common Stock. American Express has advised Lehman Brothers
that following the consummation of the Offering and the Equity Investment (as
defined herein), American Express will distribute all of the Common Stock then
held by it to its common shareholders as a special dividend (the
"Distribution").
Prior to the Distribution, the equity capital of Holdings will be increased
by approximately $1.25 billion through the issuance of common and/or preferred
stock of Holdings to American Express, Nippon Life Insurance Company ("Nippon
Life") and, pursuant to an employee ownership plan, employees of Lehman
Brothers. See "Prospectus Summary -- Concurrent Transactions."
Prior to the Offering, there has been no public market for the Common
Stock. Application is being made for listing of the Common Stock on the New York
Stock Exchange (the "NYSE") under the symbol "LEH." Although there is no current
trading market for the Common Stock, a "when issued" market is expected to
develop prior to the record date for the Distribution.
---------------------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING
AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS."
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------------
It is expected that delivery of the certificates for the shares of Common
Stock will be made at the offices of Lehman Brothers Holdings Inc., New York,
New York, on or about , 1994.
---------------------------
, 1994
<PAGE> 5
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may
not be sold nor may offers to buy be accepted prior to the time the
registration statement becomes effective. This prospectus shall not
constitute an offer to sell or the solicitation of an offer
to buy nor shall there be any sale of these securities in any State in
which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such State.
ALTERNATE PAGE FOR DISTRIBUTION PROSPECTUS
SUBJECT TO COMPLETION, DATED APRIL 5, 1994
PROSPECTUS
98,254,243 SHARES
LEHMAN BROTHERS HOLDINGS INC.
COMMON STOCK
---------------------------
This Prospectus is being furnished in connection with the distribution (the
"Distribution") to holders of common shares of American Express Company, a New
York corporation ("American Express"), of all outstanding shares of common
stock, par value $.10 per share ("Common Stock"), of Lehman Brothers Holdings
Inc., a Delaware corporation ("Holdings"), held by American Express. Prior to
the Distribution, American Express will sell to executive officers of Lehman
Brothers 441,600 shares of Common Stock for an aggregate purchase price of
approximately $11.3 million (the "Offering") or approximately $25.53 per share.
In addition, prior to the Distribution, the equity capital of Holdings will be
increased by approximately $1.25 billion through the issuance of common and/or
preferred stock of Holdings to American Express, Nippon Life Insurance Company
("Nippon Life") and, pursuant to an employee ownership plan, employees of Lehman
Brothers. See "Prospectus Summary -- Concurrent Transactions."
All of the shares of Common Stock held by American Express immediately
prior to the Distribution will be distributed to holders of record of American
Express common shares as of the close of business on , 1994 (the
"Record Date"). Each such holder will receive one-fifth of one share of Common
Stock for every American Express common share held on the Record Date. The
Distribution will occur at 12:00 midnight on , 1994. American
Express common shareholders will not be required to pay for the shares of Common
Stock received in the Distribution, or to surrender or exchange American Express
shares in order to receive Common Stock of Holdings in the Distribution.
Prior to the Distribution, there has been no public market for the Common
Stock. Application is being made for listing of the Common Stock on the New York
Stock Exchange (the "NYSE") under the symbol "LEH." Although there is no current
trading market for the Common Stock, a "when issued" market is expected to
develop prior to the Record Date.
---------------------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY RECIPIENTS
OF THE COMMON STOCK, SEE "RISK FACTORS."
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------------
Shareholders of American Express with inquiries related to the Distribution
should contact Stephen P. Norman, Secretary, American Express Company, at
212-640-5583 or the Distribution Agent, Chemical Bank, J.A.F. Building, P.O. Box
3068, New York, New York 10116-3068, telephone 800-463-5911.
---------------------------
, 1994
<PAGE> 6
As used in this Prospectus, "Holdings" means Lehman Brothers Holdings Inc.,
a Delaware corporation, the issuer of the Common Stock offered hereby. Holdings
and its subsidiaries are collectively referred to as "Lehman Brothers" or the
"Company." The principal subsidiary of Holdings, Lehman Brothers Inc., a
Delaware corporation, together with its subsidiaries, is referred to as "LBI."
------------------------
AVAILABLE INFORMATION
Holdings has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
and the rules and regulations thereunder for the registration of the Common
Stock being offered hereby. This Prospectus does not contain all the information
set forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information about Holdings and the securities offered hereby, reference is made
to the Registration Statement, including any exhibits or amendments thereto. The
Registration Statement, together with any exhibits or amendments thereto, may be
inspected without charge at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the following regional offices of the Commission: 7 World
Trade Center (13th Floor), New York, New York 10048 and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of all such materials or any part
thereof may be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 upon payment of the fees
prescribed by the Commission.
Holdings is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports and other information with the Commission. Such
information filed by Holdings with the Commission can be inspected without
charge at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
following regional offices of the Commission: 7 World Trade Center (13th Floor),
New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of all such materials or any part thereof may be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 upon payment of the fees prescribed by the Commission.
In addition, information concerning Holdings can be inspected at the
offices of the NYSE and the American Stock Exchange.
2
<PAGE> 7
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Capitalized terms used but not defined in this summary are defined elsewhere in
this Prospectus. Unless the context otherwise requires, the information
contained in this Prospectus, including numbers of shares, gives effect to a
0.3179723 for 1 reverse stock split (the "Reverse Stock Split") of the
outstanding Common Stock. The calculation of the reverse split ratio is based on
the number of American Express common shares outstanding as of February 28,
1994; however, the final reverse split ratio will be based on the number of
American Express common shares outstanding as of the record date for the
Distribution.
THE COMPANY
Lehman Brothers is one of the leading global investment banks serving
institutional, corporate, government and high net worth individual clients and
customers. The Company's worldwide headquarters in New York and regional
headquarters in London and Tokyo are complemented by offices in 19 additional
locations in the United States, 11 in Europe and the Middle East, four in Latin
and South America and seven in the Asia Pacific region.
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; institutional
asset management; research; and the trading of foreign exchange, derivative
products and certain commodities. The Company acts as a market maker 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"), and holds memberships or associate
memberships on several principal international securities and commodities
exchanges, including the London, Tokyo, Hong Kong, Frankfurt and Milan stock
exchanges.
Lehman Brothers is a leading underwriter of equity and equity-related
securities and taxable and tax-exempt fixed income securities and has an
institutional sales force of over 750 professionals and a sales force of over
500 professionals serving high net worth individuals and small and mid-sized
institutions. For 1993, according to Securities Data Company, Inc., Lehman
Brothers was the third ranked underwriter of equity and debt securities
worldwide and the fourth ranked advisor in global mergers and acquisitions.
Since 1990, the Company's equity and fixed income research departments have
ranked first or second in the annual research survey conducted by Institutional
Investor.
Since 1990, Lehman Brothers has followed a "client/customer-driven"
strategy. Under this strategy, Lehman Brothers concentrates on developing lead
relationships with major issuing and advisory clients and investing customers
worldwide. By identifying and addressing the financial needs and objectives of
these clients and customers, the Company seeks to build an increasing "flow" of
business. 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
securities industry.
During 1993, the Company sold the Shearson retail brokerage and asset
management businesses; The Boston Company private banking, trust and mutual fund
administration businesses; and Shearson's mortgage banking business. See "Recent
Developments." Excluding the results of these operations, for the year ended
December 31, 1993, Lehman Brothers' net revenues were $3.5 billion and income
from continuing operations was $355 million after deducting a $21 million
after-tax reserve for non-core businesses.
At December 31, 1993, the Company had approximately 9,300 employees and
total assets of $80.5 billion.
3
<PAGE> 8
CONCURRENT TRANSACTIONS
Prior to the Distribution, 441,600 shares of Common Stock will be offered
and sold by American Express in the Offering to executive officers of the
Company for an aggregate purchase price of approximately $11.3 million, or
approximately $25.53 per share.
Prior to the Distribution, Holdings also will (i) sell 35,407,931 shares of
Common Stock to American Express for an aggregate purchase price of
approximately $903.8 million, or approximately $25.53 per share (the "American
Express Common Stock Purchase"), (ii) sell 3,492,858 shares of Common Stock to
Nippon Life for an aggregate purchase price of approximately $89.2 million, or
approximately $25.53 per share (the "NL Common Stock Purchase"), (iii) sell to
American Express 8,000,000 shares of Cumulative Voting Preferred Stock (the
"Cumulative Preferred Stock") for an aggregate purchase price of $200 million
and 928 shares of Redeemable Voting Preferred Stock (the "Redeemable Preferred
Stock") for $1.00 per share and to Nippon Life 72 shares of Redeemable Preferred
Stock for $1.00 per share (collectively, the "Preferred Stock Purchases" and,
together with the American Express Common Stock Purchase and the NL Common Stock
Purchase, the "Equity Investment"), (iv) issue up to 3,387,963 shares, having an
aggregate purchase price of approximately $57 million, upon conversion of all
outstanding phantom equity interests offered in 1993 pursuant to the Lehman
Brothers Employee Ownership Plan (the "Phantom Share Conversion") and (v) issue
9,793,754 shares of Common Stock to American Express in exchange for $250
million of Money Market Preferred Stock of Holdings (the "MMP Shares") held by
American Express (the "MMP Exchange").
Following the Offering, the Equity Investment, the Phantom Share Conversion
and the MMP Exchange, American Express intends to distribute, subject to certain
conditions, all of the Common Stock then held by it (which will represent
approximately 92.9% of the outstanding Common Stock) pro rata to the common
shareholders of American Express. See "The Offering and the Distribution." The
Offering, the Equity Investment, the Phantom Share Conversion, the MMP Exchange
and the Distribution are collectively referred to herein as the "Concurrent
Transactions." In addition, following the Distribution, American Express and
Nippon Life will be entitled to receive approximately 92.8% and 7.2%,
respectively, of the revenue and profit participation rights received in
connection with the sale of Shearson. See "Recent Developments -- The Primerica
Transaction."
THE OFFERING
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<S> <C>
Common Stock to be sold in the Offering...... 441,600 shares
Common Stock to be distributed
in the Distribution........................ 98,254,243 shares(a)
Common Stock to be outstanding
after the Offering and the Distribution.... 105,776,664 shares(b)
Use of Proceeds.............................. Holdings will not receive any of the proceeds
from the sale of the shares of Common Stock
by American Express in the Offering. The
proceeds to Holdings from the Equity
Investment (approximately $1.2 billion) will
be used to repay commercial paper and
short-term debt and to pay related fees and
expenses estimated to be $20 million. See
"Use of Proceeds."
NYSE Symbol.................................. "LEH"
</TABLE>
- ---------------
(a) Consists of 53,052,558 shares of Common Stock held by American Express after
the Offering, 35,407,931 shares of Common Stock to be acquired by American
Express in the American Express Common Stock Purchase and 9,793,754 shares
of Common Stock to be issued to American Express in the MMP Exchange.
(b) Includes approximately 200,000 shares of restricted Common Stock to be
issued upon replacement of American Express restricted stock awards in
connection with the Distribution. Does not include up to 25,850,000 shares
of Common Stock reserved for issuance pursuant to certain employee benefit
plans. See "Management."
4
<PAGE> 9
THE DISTRIBUTION
Distribution Ratio......... One-fifth of one share of Common Stock for each
common share of American Express held on the Record
Date (the "Distribution Ratio").
Securities to be
Distributed.............. The shares to be distributed in the Distribution
will constitute approximately 92.9% of the
outstanding Common Stock of Holdings immediately
after the Distribution.
Fractional Share
Interests................ Fractional shares will not be distributed.
Fractional shares will be aggregated and, after the
Distribution, sold in the public market by the
Distribution Agent and the aggregate net cash
proceeds will be distributed ratably to those
shareholders of record otherwise entitled to
fractional interests. See "The Offering and the
Distribution -- Manner of Effecting the
Distribution."
Record Date................ , 1994 (close of business New York
time) (the "Record Date")
Distribution Date.......... , 1994 (12:00 midnight New York time)
(the "Distribution Date")
Tax Consequences of the
Distribution............. It is a condition of the Distribution that American
Express receive an opinion from tax counsel to the
effect that, although the matter is not entirely
free from doubt, the distribution of Common Stock
to the common shareholders of American Express
should qualify as a tax-free distribution for
federal income tax purposes except to the extent
that cash is received for fractional share
interests. Accordingly, American Express
shareholders will be required to apportion their
tax basis in American Express common shares held
immediately before the Distribution between such
shares and the Common Stock received in the
Distribution, based on their respective relative
fair market values as of the Distribution Date. See
"The Offering and the Distribution -- Federal
Income Tax Consequences."
Trading Market and
Symbol................... Application is being made for listing of the Common
Stock on the NYSE under the symbol "LEH."
Distribution Agent......... Chemical Bank
Transfer Agent and
Registrar for the Common
Stock.................... First National Bank of Boston
5
<PAGE> 10
DIVIDEND POLICY
Holdings anticipates that following the Distribution Date it will pay a
dividend for the third quarter of 1994 of $0.125 per share of Common Stock. No
such dividend, however, has been declared and the payment of dividends will be a
business decision to be made by Holdings' Board of Directors from time to time
based on considerations the Board of Directors deems relevant and will be
payable only out of funds legally available under Delaware law. Relevant
considerations are likely to include: (a) the Company's earnings, (b) general
market conditions, (c) the dividend policy of the Company's public competitors,
(d) the capitalization of the Company's competitors and (e) preferred stock
dividend requirements, including the dividend requirements applicable to the
Redeemable Preferred Stock.
RELATIONSHIPS WITH AMERICAN EXPRESS AND NIPPON LIFE
American Express currently owns all of the issued and outstanding Common
Stock. The Company and American Express are entering into several agreements for
the purpose of giving effect to the Distribution and defining their ongoing
relationship. See "Certain Transactions and Agreements Between the Company and
American Express."
Nippon Life currently owns approximately 12% of the outstanding voting
securities of Holdings on a fully diluted basis through its ownership of
convertible voting preferred stock of Holdings and a warrant to purchase Common
Stock. In connection with the Offering and the Distribution, certain contractual
relationships between Holdings and Nippon Life will be modified. See "Certain
Transactions and Agreements Among Holdings, American Express and Nippon Life."
Immediately prior to the Distribution, in addition to the Common Stock to
be purchased in the American Express Common Stock Purchase, American Express
will purchase from Holdings the Cumulative Preferred Stock and 928 shares of the
Redeemable Preferred Stock and, in addition to the Common Stock to be purchased
in the NL Common Stock Purchase, Nippon Life will purchase from Holdings 72
shares of the Redeemable Preferred Stock. Holders of the Redeemable Preferred
Stock will be entitled to receive, in the aggregate, an annual dividend equal to
50% of the Company's net income in excess of $400 million per year, with a
maximum dividend of $50 million per year, for each of the next eight years
commencing on or about the Distribution Date. If a Designated Event (as defined
herein) occurs, the holders of the Redeemable Preferred Stock will have the
right to require Holdings to redeem all of the Redeemable Preferred Stock for an
aggregate redemption price initially equal to $400 million if such Designated
Event takes place prior to the first anniversary of the Distribution Date,
declining by $50 million per year in each of the next seven years thereafter. In
certain circumstances Holdings would be required to pay the redemption price
through the issuance of equity securities. These redemption rights may have an
anti-takeover effect and may delay, defer or prevent a tender offer or takeover
attempt that a stockholder might believe to be in his best interest, including
those attempts that might result in a premium over the market price for the
shares of Common Stock. See "Description of Capital Stock -- Preferred
Stock -- Redeemable Preferred Stock."
Immediately following the Distribution, American Express will own no Common
Stock. Through its ownership of the Cumulative Preferred Stock and the
Redeemable Preferred Stock, American Express will own approximately 2.2% of the
outstanding voting securities of Holdings. Immediately following the
Distribution, Nippon Life will own on a fully diluted basis approximately 11.2%
of the outstanding voting securities of Holdings through its ownership of Common
Stock, preferred stock and a warrant to purchase Common Stock. See "Principal
Stockholders."
The arrangements described above involving Nippon Life are subject to final
documentation to be agreed upon by Nippon Life, Holdings and American Express.
See "Certain Transactions and Agreements Among Holdings, American Express and
Nippon Life."
6
<PAGE> 11
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7
<PAGE> 12
SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA
The following summary pro forma financial data has been derived from and
should be read in conjunction with the pro forma consolidated financial
statements and the notes thereto included elsewhere in this Prospectus and has
been prepared by the Company based on certain adjustments to the audited
historical consolidated financial statements of the Company included elsewhere
in this Prospectus. The statement of operations data reflects adjustments for
the Concurrent Transactions and the sale during 1993 of The Boston Company,
Shearson and SLHMC (see "Recent Developments") as if such transactions had
occurred as of the beginning of the periods presented. These adjustments include
(i) the elimination of the revenues and expenses of Shearson and SLHMC, (ii) the
elimination of the loss on the sale of Shearson and the reserves related to the
sale of SLHMC and (iii) a reduction in net interest expense to reflect the use
of proceeds from the Concurrent Transactions and the sales of The Boston
Company, Shearson and SLHMC to reduce commercial paper, short-term debt and
senior notes. The balance sheet data reflects adjustments for the Concurrent
Transactions as if such transactions had occurred as of December 31, 1993.
The pro forma financial data does not purport to present the financial
position and results of operations of the Company had the Concurrent
Transactions and the sales of The Boston Company, Shearson and SLHMC actually
occurred as of such dates, nor is it necessarily indicative of the results of
operations that may be achieved in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the historical
consolidated financial statements and the pro forma consolidated financial
statements and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1992 1993
------ ------
(in millions,
except per share
data)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA: (a)
Revenues
Market making and principal transactions................................. $1,122 $1,644
Investment banking....................................................... 674 802
Commissions.............................................................. 446 488
Interest and dividends................................................... 5,404 5,679
Other.................................................................... 65 79
------ ------
Total revenues................................................... 7,711 8,692
Interest expense......................................................... 4,876 5,203
------ ------
Net revenues..................................................... 2,835 3,489
------ ------
Non-interest expenses
Compensation and benefits(b)............................................. 1,551 1,825
Other expenses(c)........................................................ 1,341 1,045
Reserves for non-core businesses(d)...................................... -- 32
Other charges(e)......................................................... 245 --
------ ------
Total non-interest expenses...................................... 3,137 2,902
------ ------
Income (loss) from continuing operations before taxes...................... (302) 587
Provision for (benefit from) income taxes.................................. (88) 219
------ ------
Income (loss) from continuing operations................................... (214) 368
Preferred stock dividends(f)............................................... 42 42
------ ------
Income (loss) from continuing operations applicable to Common Stock........ $ (256) $ 326
------ ------
------ ------
Income (loss) from continuing operations per share of Common Stock(g)...... $ 3.08
------
------
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1993
------------
(in
millions)
<S> <C>
BALANCE SHEET DATA:
Total assets.................................................................... $ 80,474
Long-term indebtedness(h)....................................................... 9,899
Total stockholders' equity...................................................... 3,302
</TABLE>
8
<PAGE> 13
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1993
------------
(in millions)
<S> <C>
OTHER FINANCIAL DATA:
Total assets excluding matched book(i) (in millions)............................ $ 54,428
Book value per share(g)......................................................... $ 24.52
Ratio of total assets to total stockholders' equity............................. 24.4x
Ratio of total assets excluding matched book to total stockholders' equity(i)... 16.5x
</TABLE>
- ---------------
(a) Certain revenue and expense amounts for 1992 have been reclassified to
conform to the current period's presentation.
(b) The Company will recognize compensation expense equal to (i) the increase
in book value attributable to the Phantom Shares and (ii) the excess, if
any, of the market value of the Common Stock on the Distribution Date
issued pursuant to the Phantom Share Conversion over the price paid by
employees for the Phantom Shares.
(c) Other expenses in 1992 includes $90 million in litigation reserves and a
$162 million write-down of the carrying value of certain real estate
investments.
(d) Represents reserves for certain non-core partnership syndication activities
in which the Company is no longer actively engaged.
(e) Reflects charges in connection with a write-down of the carrying value of
the Company's holdings of Computervision Corporation.
(f) Represents dividends payable on the 5% Cumulative Convertible Voting
Preferred Stock, Series A, and on the Cumulative Preferred Stock. An 8 1/2%
dividend rate has been assumed on the Cumulative Preferred Stock. However,
this rate will be based on prevailing market rates at the time of issuance
and is therefore subject to adjustment. A 1/4% change in the dividend rate
would increase or decrease the Company's annual dividend payment by $0.5
million. Holders of the Redeemable Preferred Stock will be entitled to
receive, in the aggregate, an annual dividend equal to 50% of the Company's
net income in excess of $400 million per year, with a maximum dividend of
$50 million per year, for each of the next eight years commencing on or
about the Distribution Date. On a pro forma basis, no such dividends would
have been payable in 1992 or 1993.
(g) Per share data is calculated based on 105,776,664 pro forma shares of
Common Stock outstanding immediately following the Concurrent Transactions.
(h) Long-term indebtedness includes senior notes and subordinated indebtedness.
(i) Matched book represents a short-term interest rate arbitrage collateralized
primarily by U.S. government and agency securities. Several nationally
recognized rating agencies consider "securities purchased under agreements
to resell" ("reverse repos") a proxy for matched book assets. These rating
agencies consider reverse repos to have a low risk profile, and when
evaluating the Company's capital strength and financial ratios, exclude
reverse repos in the calculation of total assets divided by total equity.
Although there are other assets with similar risk characteristics on the
Company's balance sheet, the exclusion of reverse repos from total assets
in this calculation reflects the fact that these assets are matched against
liabilities of a similar nature, and therefore require minimal amounts of
capital support. Accordingly, the Company believes the ratio of total
assets excluding matched book to total stockholders' equity to be a more
meaningful measure of the Company's leverage.
9
<PAGE> 14
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table summarizes certain consolidated financial data with
respect to the Company and is qualified in its entirety by reference to and
should be read in conjunction with the Company's audited historical consolidated
financial statements and the notes thereto included elsewhere in this
Prospectus. During 1993, the Company completed the sales of three businesses:
The Boston Company on May 21; Shearson on July 31; and SLHMC on August 31. See
"Recent Developments." In the Company's audited historical consolidated
financial statements, the results of The Boston Company are accounted for as a
discontinued operation while the results of Shearson and SLHMC are included in
the Company's results from continuing operations through their respective sale
dates. As a result, the Company's results of operations for 1993 are not
directly comparable with the results for prior periods or with the pro forma
consolidated financial data. In addition, historical financial information may
not be indicative of the Company's future performance as an independent company.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the pro forma consolidated financial statements and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1989 1990 1991 1992 1993
------- ------- ------- ------- -------
(in millions)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA: (a)
Revenues
Market making and principal transactions.................................... $ 1,269 $ 1,199 $ 1,696 $ 1,697 $ 1,967
Investment banking.......................................................... 949 553 674 892 972
Commissions................................................................. 1,858 1,508 1,649 1,677 1,316
Interest and dividends...................................................... 6,022 4,927 5,239 5,661 5,840
Other....................................................................... 678 563 572 684 491
------- ------- ------- ------- -------
Total revenues.......................................................... 10,776 8,750 9,830 10,611 10,586
Interest expense............................................................ 5,884 4,734 4,925 5,185 5,368
------- ------- ------- ------- -------
Net revenues............................................................ 4,892 4,016 4,905 5,426 5,218
------- ------- ------- ------- -------
Non-interest expenses
Compensation and benefits................................................... 2,856 2,451 2,899 3,310 2,989
Other expenses(b)........................................................... 1,929 1,707 1,712 2,118 1,515
Loss on sale of Shearson.................................................... -- -- -- -- 535
Reserves for non-core businesses(c)......................................... -- -- -- -- 152
Other charges(d)............................................................ -- 607 144 245 --
------- ------- ------- ------- -------
Total non-interest expenses............................................. 4,785 4,765 4,755 5,673 5,191
Income (loss) from continuing operations before taxes
and cumulative effect of changes in accounting principles..................... 107 (749) 150 (247) 27
Income (loss) from continuing operations before
cumulative effect of changes in accounting principles......................... 68 (692) 197 (193) (291)
Net income (loss)............................................................... 110 (966) 207 (123) (102)
Preferred stock dividends....................................................... 25 48 48 48 48
Net income (loss) applicable to Common Stock.................................... $ 85 $(1,014) $ 159 $ (171) $ (150)
BALANCE SHEET DATA (at period end):
Total assets.................................................................... $52,372 $55,081 $59,742 $85,232 $80,474
Long-term indebtedness(e)....................................................... 6,766 5,472 5,731 7,680 9,899
Total stockholders' equity...................................................... 2,200 2,027 2,348 2,361 2,052
OTHER FINANCIAL DATA (at period end):
Total assets excluding matched book(f).......................................... $39,710 $41,892 $44,056 $58,866 $54,428
Ratio of total assets to total stockholders' equity............................. 23.8x 27.2x 25.4x 36.1x 39.2x
Ratio of total assets excluding matched book to total stockholders' equity(f)... 18.1x 20.7x 18.8x 24.9x 26.5x
</TABLE>
- ---------------
(a) Certain revenue and expense amounts for each of the years prior to 1993
have been reclassified to conform to the current period's presentation.
(b) Other expenses in 1992 includes $90 million in litigation reserves and a
$162 million write-down of the carrying value of certain real estate
investments.
(c) Includes $32 million of reserves for certain non-core partnership
syndication activities in which the Company is no longer actively engaged
and $120 million related to the sale of SLHMC.
(d) Amounts reflect charges associated with the restructuring of the Company in
1990, the write-off of the Company's investment in First Capital Holdings
Corporation in 1991 and a write-down of the carrying value of the Company's
holdings of Computervision Corporation in 1992.
(e) Long-term indebtedness includes senior notes and subordinated indebtedness.
(f) Matched book represents a short-term interest rate arbitrage collateralized
primarily by U.S. government and agency securities. Several nationally
recognized rating agencies consider "securities purchased under agreements
to resell" ("reverse repos") a proxy for matched book assets. These rating
agencies consider reverse repos to have a low risk profile, and when
evaluating the Company's capital strength and financial ratios, exclude
reverse repos in the calculation of total assets divided by total equity.
Although there are other assets with similar risk characteristics on the
Company's balance sheet, the exclusion of reverse repos from total assets
in this calculation reflects the fact that these assets are matched against
liabilities of a similar nature, and therefore require minimal amounts of
capital support. Accordingly, the Company believes the ratio of total
assets excluding matched book to total stockholders' equity to be a more
meaningful measure of the Company's leverage.
10
<PAGE> 15
THE COMPANY
Lehman Brothers is one of the leading global investment banks serving
institutional, corporate, government and high net worth individual clients and
customers. The Company's worldwide headquarters in New York and regional
headquarters in London and Tokyo are complemented by offices in 19 additional
locations in the United States, 11 in Europe and the Middle East, four in Latin
and South America and seven in the Asia Pacific region.
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; institutional
asset management; research; and the trading of foreign exchange, derivative
products and certain commodities. The Company acts as a market maker 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 NASD, and holds memberships or
associate memberships on several principal international securities and
commodities exchanges, including the London, Tokyo, Hong Kong, Frankfurt and
Milan stock exchanges.
Lehman Brothers is a leading underwriter of equity and equity-related
securities and taxable and tax-exempt fixed income securities and has an
institutional sales force of over 750 professionals and a sales force of over
500 professionals serving high net worth individuals and small and mid-sized
institutions. For 1993, according to Securities Data Company, Inc., Lehman
Brothers was the third ranked underwriter of equity and debt securities
worldwide and the fourth ranked advisor in global mergers and acquisitions.
Since 1990, the Company's equity and fixed income research departments have
ranked first or second in the annual research survey conducted by Institutional
Investor.
Since 1990, Lehman Brothers has followed a "client/customer-driven"
strategy. Under this strategy, Lehman Brothers concentrates on developing lead
relationships with major issuing and advisory clients and investing customers
worldwide. By identifying and addressing the financial needs and objectives of
these clients and customers, the Company seeks to build an increasing "flow" of
business. 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
securities industry.
During 1993, the Company sold the Shearson retail brokerage and asset
management businesses; The Boston Company private banking, trust and mutual fund
administration businesses; and Shearson's mortgage banking business. See "Recent
Developments." Excluding the results of these operations, for the year ended
December 31, 1993, Lehman Brothers' net revenues were $3.5 billion and income
from continuing operations was $355 million after deducting a $21 million
after-tax reserve for non-core businesses.
At December 31, 1993, the Company had approximately 9,300 employees and
total assets of $80.5 billion.
Holdings was incorporated in Delaware on December 29, 1983. Holdings'
principal executive offices are located at 3 World Financial Center, New York,
New York 10285, telephone 212-298-2000. Following the Distribution, the Company
will be an independent public company.
11
<PAGE> 16
THE OFFERING AND THE DISTRIBUTION
BACKGROUND AND REASONS FOR THE CONCURRENT TRANSACTIONS
Over the past two years American Express has had a goal of bringing
Holdings to the point where it could sustain an "A" credit rating on a
stand-alone basis for its long-term senior debt. It was believed that upon
attaining such a rating, American Express would have greater flexibility in
evaluating the Company's long-term relationship with American Express. In
January 1994, American Express concluded that a $1.25 billion equity investment
would be required for Holdings to achieve the desired rating from nationally
recognized rating agencies. Subsequently, after consultation with its financial
and other advisors, the American Express board of directors adopted a plan
calling for a $1.25 billion equity investment in the Company prior to the
Distribution through the purchase of a combination of newly issued preferred
stock and Common Stock, followed by a tax-free spin-off of all of the Common
Stock held by American Express.
American Express believes that the Concurrent Transactions will benefit
both American Express and the Company because they will result in the separation
of businesses with different financial and operating characteristics and capital
requirements, thereby providing the management of each company greater
flexibility to adopt strategies and pursue objectives more appropriate to its
own needs. American Express management will have the opportunity to increase its
focus on its core businesses, which, unlike the Company's, carry the American
Express brand name, and Lehman Brothers management will have the ability to
operate its business more autonomously. It is also believed that the Company
will be able to capitalize more effectively on its entrepreneurial culture by
offering to its employees incentive compensation in the form of direct and
indirect equity ownership in the Company. In addition, the Company should be
positioned to broaden its access to the equity and debt markets.
CONDITIONS TO THE OFFERING AND THE DISTRIBUTION
The Distribution and the other Concurrent Transactions are subject to,
among others, the following conditions: (i) declaration by the American Express
board of directors of the special dividend constituting the Distribution; (ii)
the receipt of a favorable tax opinion that the Distribution is tax free to
American Express and its shareholders; (iii) receipt of all necessary regulatory
approvals and material required consents of third parties; (iv) no adverse
change in the financial condition of American Express or Holdings; (v) no
adverse change in the current credit ratings of American Express or the proposed
credit ratings for Holdings or the amount of additional capital required for
Holdings to obtain such ratings; (vi) no adverse change in market conditions;
and (vii) an opinion from American Express' financial advisors that the
Distribution is fair from a financial point of view to the shareholders of
American Express.
OPINION OF FINANCIAL ADVISORS
It is a condition of the Distribution that American Express' financial
advisors, Lazard Freres & Co. ("Lazard") and James D. Wolfensohn Incorporated
("Wolfensohn"), have each delivered a written opinion, dated the declaration
date of the Distribution, addressed to the American Express Board of Directors,
to the effect that the Distribution is fair, from a financial point of view, to
holders of common shares of American Express. The summary of the opinions of
Lazard and Wolfensohn set forth below is qualified in its entirety by reference
to the proposed forms thereof, copies of which are attached hereto as Annexes A
and B, which set forth assumptions made, matters considered and limits on the
review undertaken in connection with such opinions, and should be read in their
entirety.
In connection with the delivery of their opinions, each of Lazard and
Wolfensohn reviewed, among other things, this Prospectus, dated
, 1994, and the financial and other terms of the
Distribution and related transactions described therein; publicly available
financial information relating to American Express and Lehman Brothers,
including pro forma financial statements; and certain internal financial
analyses for American Express and Lehman Brothers prepared by their respective
managements. Lazard and Wolfensohn held discussions with members of the senior
managements of American Express and Lehman Brothers regarding their past and
current business operations and financial condition, and the future prospects
and financial and strategic business objectives of their respective companies.
In addition, Lazard and Wolfensohn reviewed the reported price and trading
activity for common shares of American Express;
12
<PAGE> 17
compared certain financial and stock market information for American Express and
Lehman Brothers to similar information for other public companies which they
deemed to be generally similar to American Express and Lehman Brothers; reviewed
the terms of selected recent transactions similar to the Distribution and the
price and trading activity of stocks in such transactions both prior and
subsequent to such transactions; and performed such other studies, analyses,
inquiries and investigations as they considered appropriate.
In conducting their analyses and in arriving at their respective opinions,
neither Lazard nor Wolfensohn conducted a physical inspection of any of the
properties or assets of American Express or Lehman Brothers, nor did they make
or obtain any independent evaluation or appraisals of any properties, assets or
liabilities of American Express or Lehman Brothers. Lazard and Wolfensohn each
assumed and relied upon the accuracy and completeness of all the financial and
other information provided to them or publicly available, and did not attempt
independently to verify any of such information. With respect to the financial
analyses discussed with, or furnished to them, Lazard and Wolfensohn each
assumed without independent verification that they reflected the best currently
available estimates and judgments of the managements of American Express and
Lehman Brothers as to the business operations, financial results and condition
and prospects of their respective companies. American Express has not asked or
authorized either Lazard or Wolfensohn to solicit or investigate the possible
sale of Lehman Brothers. The opinion of each of Lazard and Wolfensohn is
necessarily based on economic, market and other conditions as in effect on, and
the information made available to each of them as of, the date of their
respective opinions.
The opinions of Lazard and Wolfensohn do not represent their opinions as to
the value of the Common Stock or the common shares of American Express following
the consummation of the Distribution, nor do they constitute a recommendation to
any current or prospective shareholder of either American Express or Lehman
Brothers as to any action or investment decision such person or party may take.
American Express has agreed to pay each of Lazard and Wolfensohn a fee of
$3 million in connection with the Distribution, which fees are in substantial
part contingent upon the consummation of the Distribution. Whether or not the
Distribution is completed, American Express has agreed to reimburse each of
Lazard and Wolfensohn for its reasonable fees and disbursements of counsel and
other reasonable out-of-pocket expenses, and to indemnify each of Lazard and
Wolfensohn against certain liabilities relating to or arising out of the
engagement, including liabilities under the federal securities laws. Each of
Lazard and Wolfensohn provides additional financial advisory services to
American Express and receives fees for the rendering of these services.
THE OFFERING
Prior to the Distribution, 441,600 shares of Common Stock will be offered
and sold by American Express in the Offering to executive officers of Lehman
Brothers for an aggregate purchase price of approximately $11.3 million or
approximately $25.53 per share. Holdings will not receive any of the proceeds
from the sale of the shares of Common Stock by American Express in the Offering.
Among the factors considered in determining the offering price, in addition
to prevailing market conditions, were the financial and operating condition and
history of the Company, the business and financial prospects of the Company, the
prospects for the industry in which the Company operates, recent market prices
of companies in businesses similar to that of the Company and other relevant
factors.
DISTRIBUTION AGENT
The distribution agent (the "Distribution Agent") is Chemical Bank, J.A.F.
Building, P.O. Box 3068, New York, New York 10116-3068, telephone 800-463-5911.
MANNER OF EFFECTING THE DISTRIBUTION
The Distribution will be made on the Distribution Date to common
shareholders of record of American Express at the close of business on the
Record Date. Prior to the Distribution Date, American Express will deliver all
outstanding shares of Common Stock held by it to the Distribution Agent for
distribution. The
13
<PAGE> 18
Distribution Agent will mail, beginning on or about the Distribution Date,
certificates representing such shares to American Express common shareholders of
record on the Record Date. Each American Express common shareholder will receive
one-fifth of one share of Common Stock for every common share of American
Express held on the Record Date. American Express common shareholders will not
be required to pay for the shares of Common Stock received in the Distribution,
or to surrender or exchange American Express shares in order to receive Common
Stock. No vote of American Express shareholders is required or sought in
connection with the Distribution, and American Express shareholders have no
appraisal rights in connection with the Distribution.
No certificates or scrip representing fractional shares will be issued to
American Express shareholders as part of the Distribution. In lieu of receiving
fractional shares of Common Stock, each record holder of common shares of
American Express who would otherwise be entitled to receive a fractional
interest in Common Stock will receive cash. The Distribution Agent will, as soon
as practicable after the Distribution Date, aggregate and sell all such
fractional interests on the NYSE at then-prevailing market prices and distribute
the aggregate proceeds (net of brokerage fees) ratably to American Express
shareholders of record otherwise entitled to fractional interests. See "Federal
Income Tax Consequences" below for a discussion of the federal income tax
treatment of fractional interests.
IN ORDER TO BE ENTITLED TO RECEIVE COMMON STOCK IN THE DISTRIBUTION,
AMERICAN EXPRESS SHAREHOLDERS MUST BE SHAREHOLDERS OF RECORD AT THE CLOSE OF
BUSINESS ON THE RECORD DATE, , 1994.
RESULTS OF THE DISTRIBUTION
After the Distribution, Holdings will be an independent public company.
Generally, the number and identity of common stockholders of Holdings
immediately after the Distribution will be the number and identity of common
shareholders of American Express on the Record Date and will also include the
Company's employees who acquired Common Stock pursuant to the Offering. See
"Management." Immediately after the Distribution, Holdings expects to have
approximately 55,000 holders of record of the Common Stock and approximately
105.8 million shares of Common Stock outstanding, based on the number of
shareholders of record and outstanding common shares of American Express on
February 28, 1994, and the Distribution Ratio of one-fifth of one share of
Common Stock for every common share of American Express. The actual number of
shares of Common Stock to be distributed will be determined as of the Record
Date. The Distribution will not affect the number of outstanding common shares
of American Express or any rights of American Express shareholders.
FEDERAL INCOME TAX CONSEQUENCES
It is a condition of the Distribution that American Express receive an
opinion, based on certain representations of American Express and the Company,
from Skadden, Arps, Slate, Meagher & Flom ("Tax Counsel"), that the Distribution
should qualify as a tax-free distribution for federal income tax purposes and
that, accordingly:
(i) no gain or loss will be recognized by a holder of American Express
common shares solely as result of the receipt of shares of Common Stock in
the Distribution except to the extent that cash is received in lieu of
fractional shares of Common Stock. A holder of American Express common
shares who receives cash in lieu of fractional shares will recognize gain
or loss to the extent of the difference between the holder's basis in the
fractional share and the amount received for the fractional share (if the
fractional shares are held as capital assets);
(ii) the holder's tax basis of American Express common shares at the
time of the Distribution will be allocated, based on relative fair market
values at the time of the Distribution, between such American Express
common shares and the Common Stock received in the Distribution;
(iii) assuming that a holder of American Express common shares holds
the American Express common shares as a capital asset, the holder's holding
period for the Common Stock received in the
14
<PAGE> 19
Distribution will include the holding period during which the American
Express common shares were held; and
(iv) no gain or loss will be recognized by American Express on the
Distribution.
The opinion of Tax Counsel will not be binding on the Internal Revenue
Service (the "Service") or a court and there can be no assurance that the
Service will not challenge the validity of the Distribution as a tax-free
distribution for federal income tax purposes or that such challenge will not
ultimately prevail. In particular, among other things, in order for the
Distribution to qualify as a tax-free distribution for federal income tax
purposes, American Express must establish to the satisfaction of the Service
that the retention by American Express of the Cumulative Preferred Stock or the
Redeemable Preferred Stock was not in pursuance of a plan having as one of its
principal purposes the avoidance of federal income tax. There is no authority
directly applicable to the retention of the Cumulative Preferred Stock or the
Redeemable Preferred Stock by American Express. Nonetheless, American Express
anticipates that Tax Counsel will conclude that the Distribution should qualify
as a tax-free distribution for federal income tax purposes, although the matter
is not entirely free from doubt.
American Express also has requested an advance ruling from the Service that
the Distribution would qualify as a tax-free distribution for federal income tax
purposes. The Service has not yet issued such a ruling and no assurances can be
given that such ruling will be forthcoming. If the Service were ultimately to
decline to issue such a ruling, such decision, although representing the view of
the Service's National Office regarding such request, would not represent a
final determination as to whether the Distribution qualifies as a tax-free
distribution for federal income tax purposes.
If the Distribution fails to qualify as a tax-free distribution for federal
income tax purposes, a holder of American Express common shares will be
considered to have received a taxable dividend includible in income in an amount
equal to the fair market value on the Distribution Date of the Common Stock
received plus the amount of any cash received in lieu of fractional shares. In
general, if certain conditions are met, any amount received by a corporate
holder of American Express common shares that is treated as a dividend would be
eligible for the dividends-received deduction. If the Distribution is treated as
a taxable distribution for federal income tax purposes, the basis of a holder of
American Express common shares of the Common Stock received on the Distribution
will equal the fair market value of the Common Stock on the Distribution Date
and the holding period of the Common Stock will begin on the Distribution Date.
In such event, the holder's basis in its American Express common shares and its
holding period therefor would not be affected by the Distribution.
THE FOREGOING IS A SUMMARY OF THE ANTICIPATED PRINCIPAL FEDERAL INCOME TAX
CONSEQUENCES OF THE DISTRIBUTION UNDER CURRENT LAW. IT DOES NOT PURPORT TO
ADDRESS ALL FEDERAL INCOME TAX CONSEQUENCES, OR TAX CONSEQUENCES THAT MAY ARISE
UNDER THE TAX LAWS OF OTHER JURISDICTIONS OR THAT MAY APPLY TO PARTICULAR
CATEGORIES OF SHAREHOLDERS. EACH SHAREHOLDER SHOULD CONSULT ITS TAX ADVISOR AS
TO THE PARTICULAR CONSEQUENCES OF THE DISTRIBUTION TO SUCH SHAREHOLDER,
INCLUDING THE APPLICATION OF FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS, AND THE
EFFECT OF POSSIBLE CHANGES IN TAX LAWS THAT MAY AFFECT THE TAX CONSEQUENCES
DESCRIBED ABOVE.
For a description of agreements pursuant to which American Express and the
Company have provided for certain tax sharing and other tax-related matters, see
"Certain Transactions and Agreements Between the Company and American
Express -- Tax Allocation Agreements."
LISTING AND TRADING OF SHARES OF THE COMMON STOCK
Application is being made for listing of the Common Stock on the NYSE under
the symbol "LEH."
There is not currently a public market for the Common Stock. Prices at
which the Common Stock may trade cannot be predicted. The prices at which the
shares of Common Stock will trade will be determined by the marketplace and may
be influenced by many factors, including, among others, the depth and liquidity
of
15
<PAGE> 20
the market for the Common Stock, investor perception of the Company and the
securities industry, the Company's dividend policy and general economic and
market conditions.
It is expected that the Common Stock will trade on a "when-issued" basis
prior to the Record Date and that "regular-way" trading will commence on the
Distribution Date.
The Common Stock distributed to American Express shareholders will be
freely transferable, except for shares of Common Stock received by persons who
may be deemed to be "affiliates" of Holdings under the Securities Act and shares
owned by those employees of the Company who acquired shares through certain
employee benefit plans and pursuant to the Phantom Share Conversion. See "The
Offering" above. Persons who may be deemed to be affiliates of Holdings after
the Distribution generally include individuals or entities that control, are
controlled by, or are under common control with Holdings and may include certain
officers and directors of the Company. Persons who are affiliates of Holdings
will be permitted to sell their shares only pursuant to an effective
registration statement under the Securities Act or an exemption from the
registration requirements of the Securities Act, such as the exemption afforded
by Section 4(1) of the Securities Act and Rule 144 thereunder. It is believed
that all persons who may be deemed to be affiliates of the Company after the
Distribution will own less than 1% of the outstanding shares of Common Stock.
16
<PAGE> 21
RECENT DEVELOPMENTS
CHANGE OF FISCAL YEAR
On March 28, 1994, the Board of Directors of Holdings approved, subject to
the Distribution, a change in the Company's fiscal year end from December 31 to
November 30. Such a change to a non-calendar cycle will shift certain year-end
administrative activities to a time period that conflicts less with the business
needs of the Company's institutional customers.
REDUCTION IN PERSONNEL
During the first quarter of 1994, the Company completed a review of
personnel needs, which will result in the termination of certain personnel. The
Company anticipates that it will record a severance charge of approximately $30
million pre-tax in the first quarter of 1994 as a result of these terminations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations."
THE PRIMERICA TRANSACTION
On July 31, 1993, pursuant to an asset purchase agreement (the "Primerica
Agreement"), the Company completed the sale (the "Primerica Transaction") of
LBI's domestic retail brokerage business (except for such business conducted
under the Lehman Brothers name) and substantially all of its asset management
business (collectively, "Shearson") to Primerica Corporation (now known as
Travelers Corporation) ("Travelers") and its subsidiary Smith Barney, Harris
Upham & Co. Incorporated ("Smith Barney"). Also included in the Primerica
Transaction were the operations and data processing functions that support these
businesses, as well as certain of the assets and liabilities related to these
operations.
LBI received approximately $1.2 billion in cash and a $586 million interest
bearing note from Smith Barney which was repaid in January 1994 (the "Smith
Barney Note"). The Smith Barney Note was issued as partial payment for certain
Shearson assets in excess of $600 million which were sold to Smith Barney. The
proceeds received at July 31, 1993, were based on the estimated net assets of
Shearson, which exceeded the minimum net assets of $600 million prescribed in
the Primerica Agreement. As further consideration for the sale of Shearson,
Smith Barney agreed to pay future contingent amounts based upon the combined
performance of Smith Barney and Shearson, consisting of up to $50 million per
year for three years based on revenues, plus 10% of after-tax profits in excess
of $250 million per year over a five-year period (the "Participation Rights").
In contemplation of the Distribution, American Express received the first
Participation Right payment in the first quarter of 1994. All of the
Participation Rights will be assigned to American Express and Nippon Life prior
to the Distribution. See "Certain Transactions and Agreements Among Holdings,
American Express and Nippon Life." As further consideration for the sale of
Shearson, the Company received 2,500,000 shares of 5.50% Convertible Preferred
Stock, Series B, of Travelers and a warrant to purchase 3,749,466 shares of
common stock of Travelers at an exercise price of $39.00 per share. In August
1993, American Express purchased such preferred stock and warrant from LBI for
aggregate consideration of $150 million. See "Business -- Relationship With
Smith Barney."
The Company recognized a 1993 first quarter loss related to the Primerica
Transaction of approximately $630 million after-tax ($535 million pre-tax),
which amount includes a reduction in goodwill of $750 million and
transaction-related costs such as relocation, systems and operations
modifications and severance.
THE MELLON TRANSACTION
On May 21, 1993, pursuant to a stock purchase agreement (the "Mellon
Agreement") between Lehman Brothers and Mellon Bank Corporation ("Mellon Bank"),
LBI sold to Mellon Bank (the "Mellon Transaction") The Boston Company, Inc.
("The Boston Company") which through subsidiaries is engaged in the private
banking, trust and custody, institutional investment management and mutual fund
administration businesses. Under the terms of the Mellon Agreement, LBI received
approximately $1.3 billion in cash, 2,500,000 shares of Mellon Bank common stock
and ten-year warrants to purchase an additional 3,000,000 shares of Mellon
Bank's common stock at an exercise price of $50.00 per share. In June 1993, such
shares and warrants were sold by LBI to American Express for an aggregate
purchase price of $169 million. After
17
<PAGE> 22
accounting for transaction costs and certain adjustments, the Company recognized
a 1993 first quarter after-tax gain related to the Mellon Transaction of $165
million.
SHEARSON LEHMAN HUTTON MORTGAGE CORPORATION TRANSACTION
LBI completed the sale of its wholly owned subsidiary, Shearson Lehman
Hutton Mortgage Corporation ("SLHMC"), to GE Capital Corporation on August 31,
1993. The sales price, net of proceeds used to retire indebtedness of SLHMC, was
approximately $70 million. During the first quarter of 1993, the Company
provided $120 million of pre-tax reserves in anticipation of the sale of SLHMC.
After accounting for these reserves, the sale did not have a material effect on
the Company's results of operations.
18
<PAGE> 23
RISK FACTORS
Persons receiving this Prospectus should consider carefully the following
factors, in addition to those discussed elsewhere in this Prospectus.
NATURE OF THE SECURITIES BUSINESS
The Company's principal business activities, investment banking, securities
trading and sales are, by their nature, subject to volatility, primarily due to
changes in interest and foreign exchange rates, global economic and political
trends, industry competition and substantial fluctuations in the volume and
price level of securities held in trading and underwriting positions. As a
result, revenues and earnings may vary significantly from quarter to quarter and
from year to year. In periods of low volume, levels of profitability are
adversely affected because certain expenses remain relatively fixed. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
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 these firms, many of whom have significantly greater equity
capital than the Company.
PRINCIPAL TRANSACTIONS
The Company's trading, market making, underwriting and arbitrage activities
involve the purchase, sale or short sale of securities (including foreign
exchange, derivative products and certain commodities) as principal. These
activities involve the risk of changes in the market prices of such securities
and a decrease in the liquidity of markets, which could limit the Company's
ability to resell securities purchased or to repurchase securities sold short.
See "Business."
REGULATION
The Company's business is, and the securities and commodities industries
generally are, subject to extensive regulation in the United States, at both the
federal and state level. As a matter of public policy, regulatory bodies are
charged with safeguarding the integrity of the securities and other financial
markets and with protecting the interests of customers participating in those
markets, not protecting the interests of Holdings' stockholders. In addition,
self-regulatory organizations and other regulatory bodies in the United States
such as the NYSE, the NASD, the Commodity Futures Trading Commission (the
"CFTC"), the National Futures Association (the "NFA") and the Municipal
Securities Rulemaking Board (the "MSRB") require strict compliance with their
rules and regulations. Abroad, the Company's business is subject to control by
various foreign governments and regulatory bodies. Any change in regulation by
such governments and bodies could restrict the participation of United States
securities firms, including the Company, in the relevant international capital
market. Failure to comply with any of these laws, rules or regulations could
result in fines, suspension or expulsion, which could have an adverse effect
upon the Company. See "Business -- Regulation."
19
<PAGE> 24
NET CAPITAL REQUIREMENTS
The SEC, the NYSE, the CFTC and various other securities and commodities
exchanges and other regulatory bodies in the United States and abroad have rules
with respect to net capital requirements which could affect the Company. A
change in such rules, or the imposition of new rules, affecting the scope,
coverage, calculation or amount of such net capital requirements, or a
significant operating loss or any unusually large charge against net capital,
could adversely affect the ability of Lehman Brothers to expand or maintain
present levels of business. See "Business -- Regulation -- Capital
Requirements."
MERCHANT BANKING PARTNERSHIPS
The Company's merchant banking activities consist principally of making
equity and equity-related investments in privately negotiated merger,
acquisition and leveraged transactions. These transactions can result in
investments with higher risks relating to illiquidity and leverage. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
HIGH YIELD SECURITIES
The Company underwrites, trades, invests and makes markets in high yield
debt securities. The Company also syndicates, trades and invests in loans of
below investment grade companies. High yield debt securities are defined as
securities or loans to companies rated below BBB- by Standard & Poor's
Corporation ("S&P") and below Baa3 by Moody's Investor Services, Inc.
("Moody's"), as well as non-rated securities or loans which, in the opinion of
management, are non-investment grade.
High yield debt securities held for sale by the Company generally involve
greater risk and volatility than investment grade debt securities due to the
lower credit ratings of the issuers, which typically have relatively high levels
of indebtedness and are, therefore, more sensitive to adverse economic
conditions. Such debt securities typically rank subordinate to bank debt of the
issuer and may rank subordinate to other debt of the issuer. In addition, the
market for these securities has been, and may in the future continue to be,
characterized by periods of illiquidity. The liquidity of any particular issue
may be significantly better or worse than the overall liquidity of the high
yield debt market at any time, depending on the quality of the issuer, and
during certain periods market quotations may not represent firm bids of dealers
or prices of actual sales. In addition, the Company, through its market making
and trading activities, may be the sole or principal source of liquidity in
certain issues and, as a result, may substantially affect the prices at which
such issues trade.
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 December
31, 1993 and 1992 included long positions with an aggregate market value of
approximately $1 billion and $920 million, respectively, and short positions
with an aggregate market value of approximately $75 million and $50 million,
respectively. The Company's portfolio may from time to time contain concentrated
holdings of selected issues. The Company's two largest high yield positions were
$179 million and $82 million at December 31, 1993 and $180 million and $123
million at December 31, 1992.
NON-CORE ASSETS
The Company has made investments in and provided financial support to
certain partnerships (the assets of which are primarily real estate). At
December 31, 1993 and 1992, the Company had net exposure including commitments
and contingent liabilities of $252 million and $329 million, respectively, for
these activities. Although a decline in the real estate market or the economy in
general or a change in the Company's disposition strategy could result in
additional real estate reserves, the Company believes it is adequately reserved.
The Company discontinued the origination of partnership syndication and real
estate investments in March 1990.
20
<PAGE> 25
DEPENDENCE ON 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.
Access to the global capital markets for unsecured financing, such as commercial
paper and short-term debt, senior notes and subordinated indebtedness, is
dependent on the Company's short-term and long-term debt ratings. In addition,
the Company's existing and prospective customers and clients base their decision
to do business with the Company in part on the Company's debt ratings. A debt
rating downgrade would reduce the availability of unsecured funding and increase
the cost of that funding to the Company and could affect the Company's ability
to transact business with certain customers and clients. Holdings' current
long-term/short-term senior debt ratings are as follows: S&P A/A-1; Moody's
A3/P-2; IBCA A-/A1; and Thomson BankWatch -- /TBW-1. As of the Distribution
Date, the Company expects to receive long-term/short-term debt ratings from
Fitch Investor Services of A/F-1.
The Company maintains an ongoing dialogue with several of the nationally
recognized rating agencies to provide timely information on the Company's
financial results, operations and other credit related matters. The Company
expects that, as of the Distribution, all of its current debt ratings will be
affirmed. However, no assurances can be given that, following the Distribution,
the Company will continue to maintain its current debt ratings and level of
access to the global capital markets.
NO PRIOR MARKET
Prior to the Offering and the Distribution, there has been no public market
for the Common Stock. Although the Company is applying for the listing of the
Common Stock on the NYSE, no assurance can be given that an active trading
market for the Common Stock will develop. Prices at which the Common Stock may
trade cannot be predicted. The prices at which the shares of Common Stock will
trade will be determined by the marketplace and may be influenced by many
factors, including, among others, the depth and liquidity of the market for the
Common Stock, investor perception of the Company and the securities industry,
the Company's dividend policy and general economic and market conditions.
LITIGATION
Many aspects of the Company's business involve substantial risks of
liability. In recent years, there has been an increasing incidence of litigation
involving the securities and commodities industries, including class action
suits that generally seek substantial damages and often treble damages for
alleged violations of the Federal Racketeer Influenced and Corrupt Organizations
Act ("RICO"). Underwriters are subject to substantial potential liability for
material misstatements and omissions in prospectuses and other communications
with respect to underwritten offerings of securities. The Company has been named
as defendant in class action and other suits. See "Business -- Legal
Proceedings."
PERSONNEL
Most aspects of the Company's business are dependent on highly skilled
individuals. The Company devotes considerable resources to recruiting, training
and compensating such individuals. Individuals employed by the Company may,
however, choose to leave the Company at any time to pursue other opportunities.
See "Business -- Employees" and "Management." The Company has attempted to
reduce this possibility by creating incentives for employees to remain with the
Company including certain deferred compensation programs. See "Recent
Developments" and "Management."
21
<PAGE> 26
USE OF PROCEEDS
Holdings will not receive any of the proceeds from the sale of the shares
of Common Stock by American Express in the Offering. The proceeds to Holdings
from the Equity Investment (approximately $1.2 billion) will be used to repay
commercial paper and short-term debt. In connection with the Concurrent
Transactions, the Company will incur various expenses currently estimated to
aggregate $20 million.
DIVIDEND POLICY
Holdings anticipates that following the Distribution Date it will pay a
dividend for the third quarter of 1994 of $0.125 per share of Common Stock. No
such dividend, however, has been declared and the payment of dividends will be a
business decision to be made by Holdings' Board of Directors from time to time
based on considerations the Board of Directors deems relevant and will be
payable only out of funds legally available under Delaware law. Relevant
considerations are likely to include: (i) the Company's earnings, (ii) general
market conditions, (iii) the dividend policy of the Company's public
competitors, (iv) the capitalization of the Company's competitors and (v)
preferred stock dividend requirements, including the dividend requirements
applicable to the Redeemable Preferred Stock.
22
<PAGE> 27
CAPITALIZATION
The following table sets forth the actual and pro forma consolidated
capitalization and short-term indebtedness of the Company as of December 31,
1993. The pro forma capitalization gives effect to the Concurrent Transactions
and the use of proceeds therefrom as if such transactions had occurred on
December 31, 1993. See "Prospectus Summary -- Concurrent Transactions," "The
Offering and the Distribution" and "Use of Proceeds." This data should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and notes thereto
included elsewhere herein.
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
------- ----------- ---------
(in millions, except share data)
<S> <C> <C> <C>
Commercial paper and short-term debt............... $11,205 $(1,193)(a) $10,012
Long-term indebtedness:
Senior notes..................................... 7,779 7,779
Subordinated indebtedness........................ 2,120 2,120
------- ----------- ---------
Total commercial paper, short-term
and long-term indebtedness............. 21,104 (1,193) 19,911
------- ----------- ---------
Stockholders' equity:
Preferred stock, $1 par value; 38,000,000 shares
authorized:
5% Cumulative Convertible Voting, Series A,
13,000,000 shares authorized, issued and
outstanding; $39.10 liquidation preference
per share................................... 508 508
Money Market Cumulative, 3,300 shares
authorized; 250 shares issued and
outstanding; $1,000,000 liquidation
preference per share........................ 250 (250)(b)
% Cumulative Voting, 8,000,000 shares
issued and outstanding pro forma; $25.00
liquidation preference per share............ 200(c) 200
Redeemable Voting, 1,000 shares issued and
outstanding pro forma; $1.00 liquidation
preference
per share................................... --(c) --
Common Stock, $.10 par value; 300,000,000 shares
authorized; 168,235,284 shares (53,494,158
shares as adjusted for the Reverse Stock
Split) issued and outstanding; 105,776,664
shares issued and outstanding
pro forma..................................... 17 (6)(d) 11
Additional paid-in capital....................... 1,871 1,306(b)(d)(e) 3,177
Foreign currency translation adjustment.......... (12) (f) (12)
Accumulated deficit.............................. (582) (582)
------- ----------- ---------
Total stockholders' equity............... 2,052 1,250 3,302
------- ----------- ---------
Total indebtedness and stockholders'
equity................................. $23,156 $ 57(f) $23,213
------- ----------- ---------
------- ----------- ---------
</TABLE>
- ---------------
(a) Reflects the repayment of commercial paper and short-term debt with the
proceeds from the Equity Investment. See "Use of Proceeds."
(b) Reflects the MMP Exchange.
(c) Reflects the Preferred Stock Purchases by American Express and Nippon Life.
(d) Reflects the decrease in the aggregate par value of Common Stock outstanding
and corresponding increase in additional paid-in-capital from the Reverse
Stock Split, partially offset by the increase in aggregate par value due to
the issuance of Common Stock.
(e) Reflects the American Express Common Stock Purchase of approximately $903.8
million and the NL Common Stock Purchase of approximately $89.2 million.
(f) Reflects the Phantom Share Conversion.
23
<PAGE> 28
CONDENSED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following pro forma financial data has been derived from and should be
read in conjunction with the pro forma consolidated financial statements and the
notes thereto included elsewhere in this Prospectus and has been prepared by the
Company based on certain adjustments to the audited historical consolidated
financial statements of the Company included elsewhere in this Prospectus. The
pro forma statement of operations reflects adjustments for the Concurrent
Transactions and the sales during 1993 of The Boston Company, Shearson and SLHMC
(see "Recent Developments") as if such transactions had occurred as of the
beginning of the periods presented. These adjustments include (i) the
elimination of revenues and expenses of Shearson and SLHMC, (ii) the elimination
of the loss on the sale of Shearson and the reserves related to the sale of
SLHMC, and (iii) a reduction in net interest expense to reflect the use of
proceeds from the Concurrent Transactions and the sales of The Boston Company,
Shearson and SLHMC to reduce commercial paper, short-term debt and senior notes.
The pro forma balance sheet reflects adjustments for the Concurrent Transactions
as if such transactions had occurred as of December 31, 1993.
The pro forma financial data does not purport to present the financial
position and results of operations of the Company had the Concurrent
Transactions and the sale of The Boston Company, Shearson and SLHMC actually
occurred as of such dates, nor is it necessarily indicative of results of
operations that may be achieved in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and the historical
consolidated financial statements and the pro forma consolidated financial
statements and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1992 1993
------------------------ ------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
(in millions, except per share data)
STATEMENT OF OPERATIONS:(a)
Revenues
Market making and principal transactions................................ $ 1,697 $ 1,122 $ 1,967 $ 1,644
Investment banking...................................................... 892 674 972 802
Commissions............................................................. 1,677 446 1,316 488
Interest and dividends.................................................. 5,661 5,404 5,840 5,679
Other................................................................... 684 65 491 79
---------- --------- ---------- ---------
Total revenues................................................... 10,611 7,711 10,586 8,692
Interest expense........................................................ 5,185 4,876 5,368 5,203
---------- --------- ---------- ---------
Net revenues..................................................... 5,426 2,835 5,218 3,489
---------- --------- ---------- ---------
Non-interest expenses
Compensation and benefits(b)............................................ 3,310 1,551 2,989 1,825
Other expenses(c)....................................................... 2,118 1,341 1,515 1,045
Loss on sale of Shearson................................................ -- -- 535 --
Reserves for non-core businesses(d)..................................... -- -- 152 32
Other charges(e)........................................................ 245 245 -- --
---------- --------- ---------- ---------
Total non-interest expenses...................................... 5,673 3,137 5,191 2,902
---------- --------- ---------- ---------
Income (loss) from continuing operation before taxes and
cumulative effect of changes in accounting principles................... (247) (302) 27 587
Provision for (benefit from) income taxes................................. (54) (88) 318 219
---------- --------- ---------- ---------
Income (loss) from continuing operations before
cumulative effect of changes in accounting principles................... (193) (214) (291) 368
Preferred stock dividends(f).............................................. 48 42 48 42
---------- --------- ---------- ---------
Income (loss) from continuing operations before cumulative effect of
changes in accounting principles applicable to Common Stock............. $ (241) $ (256) $ (339) $ 326
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Income (loss) from continuing operations per share of Common Stock(g)..... $ (3.20) $ 3.08
---------- ---------
---------- ---------
</TABLE>
- ---------------
(a) Certain revenue and expense amounts for 1992 have been reclassified to
conform to the current period's presentation.
(b) The Company will recognize compensation expense equal to (i) the increase in
book value attributable to the Phantom Shares and (ii) the excess, if any,
of the market value of the Common Stock on the Distribution Date issued
pursuant to the Phantom Share Conversion over the price paid by employees
for the Phantom Shares.
(c) The historical and pro forma amounts in 1992 include $90 million in
litigation reserves and a $162 million write-down of the carrying value of
certain real estate investments.
(d) The historical and pro forma amounts include $32 million of reserves related
to certain partnership syndication activities in which the Company is no
longer actively engaged. The historical amount also includes $120 million of
reserves related to the sale of SLHMC.
(e) Amount reflects the write-down of the carrying value of the Company's
holdings of Computervision Corporation.
(f) Historical amounts represent dividends payable on the 5% Cumulative
Convertible Voting Preferred Stock, Series A, and the Money Market
Cumulative Preferred Stock. Pro forma amounts include dividends payable on
the 5% Cumulative Convertible Voting Preferred Stock, Series A, and the
Cumulative Preferred Stock. An 8 1/2% dividend rate has been assumed on the
Cumulative Preferred Stock. However, this rate will be based on prevailing
market rates at the time of issuance and is therefore subject to adjustment.
A 1/4% change in the dividend rate would increase or decrease the Company's
annual dividend payment by $0.5 million. Holders of the Redeemable Preferred
Stock will be entitled to receive, in the aggregate, an annual dividend
equal to 50% of the Company's net income in excess of $400 million per year,
with a maximum dividend of $50 million per year, for each of the next eight
years commencing on or about the Distribution Date. On a pro forma basis, no
such dividends would have been payable in 1992 or 1993.
(g) Per share data is calculated based on 105,776,664 pro forma shares of Common
Stock outstanding immediately following the Concurrent Transactions.
24
<PAGE> 29
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1993
---------------------------------------
PRO FORMA PRO
HISTORICAL ADJUSTMENTS FORMA
---------- ----------- -------
(in millions, except share data)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents.......................................... $ 1,333 $ 1,333
Cash and securities segregated and on deposit for regulatory and
other purposes................................................... 1,073 1,073
Securities and other financial instruments owned................... 35,699 35,699
Collateralized short-term agreements............................... 30,418 30,418
Receivables........................................................ 10,398 10,398
Other assets....................................................... 1,279 1,279
Excess of cost over fair value of net assets acquired (net of
accumulated amortization of $107)................................ 274 274
---------- -------
Total assets.............................................. $ 80,474 $80,474
---------- -------
---------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper and short-term debt............................... $ 11,205 $(1,193)(a) $10,012
Securities and other financial instruments sold but not yet
purchased........................................................ 8,313 8,313
Securities sold under agreements to repurchase..................... 39,191 39,191
Securities loaned.................................................. 1,116 1,116
Payables........................................................... 5,515 5,515
Accrued liabilities and other payables............................. 3,183 (57)(b) 3,126
Senior notes....................................................... 7,779 7,779
Subordinated indebtedness.......................................... 2,120 2,120
---------- ----------- -------
Total liabilities......................................... 78,422 (1,250) 77,172
---------- ----------- -------
Stockholders' equity:
Preferred stock, $1 par value; 38,000,000 shares authorized:
5% Cumulative Convertible Voting, Series A, 13,000,000 shares
authorized, issued and outstanding; $39.10 liquidation
preference per share......................................... 508 508
Money Market Cumulative, 3,300 shares authorized; 250 shares
issued and outstanding; $1,000,000 liquidation preference per
share........................................................ 250 (250)(c)
% Cumulative Voting, 8,000,000 shares issued and
outstanding pro forma; $25.00 liquidation preference per
share........................................................ 200(d) 200
Redeemable Voting, 1,000 shares issued and outstanding pro
forma; $1.00 liquidation preference per share................ --(d) --
Common Stock, $.10 par value; 300,000,000 shares authorized;
168,235,284 shares (53,494,158 shares as adjusted for the
Reverse Stock Split) issued and outstanding; 105,776,664 shares
issued and outstanding pro forma............................... 17 (6)(e) 11
Additional paid-in capital....................................... 1,871 904(f) 3,177
250(c)
89(g)
57(b)
6(e)
Foreign currency translation adjustment.......................... (12) (12)
Accumulated deficit.............................................. (582) (582)
---------- ----------- -------
Total stockholders' equity................................ 2,052 1,250 3,302
---------- ----------- -------
$ 80,474 $ $80,474
---------- ----------- -------
---------- ----------- -------
</TABLE>
- ---------------
(a) Reflects the repayment of commercial paper and short-term debt with the
proceeds from the Equity Investment. See "Use of Proceeds."
(b) Reflects the Phantom Share Conversion.
(c) Reflects the MMP Exchange.
(d) Reflects the Preferred Stock Purchases by American Express and Nippon Life.
(e) Reflects the decrease in the aggregate par value of Common Stock outstanding
and corresponding increase in additional paid-in-capital from the Reverse
Stock Split, partially offset by the increase in aggregate par value due to
the issuance of Common Stock.
(f) Reflects the American Express Common Stock Purchase of approximately $903.8
million.
(g) Reflects the NL Common Stock Purchase of approximately $89.2 million.
25
<PAGE> 30
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table summarizes certain consolidated financial information
with respect to the Company and is derived from the audited historical financial
statements of the Company. During 1993, the Company completed the sales of three
businesses: The Boston Company on May 21; Shearson on July 31; and SLHMC on
August 31. See "Recent Developments." In the Company's historical financial
statements, the operating results of The Boston Company are accounted for as a
discontinued operation while the operating results of Shearson and SLHMC are
included in the Company's results from continuing operations through their
respective sale dates. As a result, the Company's results of operations for 1993
are not directly comparable with the results for prior periods or with the pro
forma consolidated financial data. In addition, historical financial information
may not be indicative of the Company's future performance as an independent
company. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited historical consolidated financial statements and the
notes thereto and the pro forma consolidated financial statements and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1989 1990 1991 1992 1993
------- ------- ------ ------- -------
(in millions, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA: (a)
Revenues
Market making and principal transactions.......... $ 1,269 $ 1,199 $1,696 $ 1,697 $ 1,967
Investment banking................................ 949 553 674 892 972
Commissions....................................... 1,858 1,508 1,649 1,677 1,316
Interest and dividends............................ 6,022 4,927 5,239 5,661 5,840
Other............................................. 678 563 572 684 491
------- ------- ------ ------- -------
Total revenues............................. 10,776 8,750 9,830 10,611 10,586
Interest expense.................................. 5,884 4,734 4,925 5,185 5,368
------- ------- ------ ------- -------
Net revenues............................... 4,892 4,016 4,905 5,426 5,218
------- ------- ------ ------- -------
Non-interest expenses
Compensation and benefits......................... 2,856 2,451 2,899 3,310 2,989
Other expenses(b)................................. 1,929 1,707 1,712 2,118 1,515
Loss on sale of Shearson.......................... -- -- -- -- 535
Reserves for non-core businesses(c)............... -- -- -- -- 152
Other charges(d).................................. -- 607 144 245 --
------- ------- ------ ------- -------
Total non-interest expenses................ 4,785 4,765 4,755 5,673 5,191
------- ------- ------ ------- -------
Income (loss) from continuing operations before
taxes and cumulative effect of changes in
accounting principles............................. 107 (749) 150 (247) 27
Provision for (benefit from) income taxes........... 39 (57) (47) (54) 318
------- ------- ------ ------- -------
Income (loss) from continuing operations before
cumulative effect of changes in accounting
principles........................................ 68 (692) 197 (193) (291)
------- ------- ------ ------- -------
Income (loss) from discontinued operations, net of
taxes
Income (loss) from operations..................... 42 (117) 10 77 24
Gain on disposal.................................. -- -- -- -- 165
------- ------- ------ ------- -------
42 (117) 10 77 189
------- ------- ------ ------- -------
Income (loss) before cumulative effect of changes in
accounting principles............................. 110 (809) 207 (116) (102)
Cumulative effect of changes in accounting
principles(e)..................................... -- (157) -- (7) --
------- ------- ------ ------- -------
Net income (loss)................................... 110 (966) 207 (123) (102)
Preferred stock dividends........................... 25 48 48 48 48
------- ------- ------ ------- -------
Net income (loss) applicable to Common Stock........ $ 85 $(1,014) $ 159 $ (171) $ (150)
------- ------- ------ ------- -------
------- ------- ------ ------- -------
Income (loss) from continuing operations per share
of Common Stock(f)................................ $ (3.20)
-------
-------
Net income (loss) per share of Common Stock(f)...... $ (1.41)
-------
-------
</TABLE>
26
<PAGE> 31
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------
1989 1990 1991 1992 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA: (in millions)
Total assets.................................................. $52,372 $55,081 $59,742 $85,232 $80,474
Long-term indebtedness(g)..................................... 6,766 5,472 5,731 7,680 9,899
Total stockholders' equity.................................... 2,200 2,027 2,348 2,361 2,052
OTHER FINANCIAL DATA:
Total assets excluding matched book(h) (in millions).......... $39,710 $41,892 $44,056 $58,866 $54,428
Ratio of total assets to total stockholders' equity........... 23.8x 27.2x 25.4x 36.1x 39.2x
Ratio of total assets excluding matched book to total
stockholders' equity(h)..................................... 18.1x 20.7x 18.8x 24.9x 26.5x
</TABLE>
- ---------------
(a) Certain revenue and expense amounts for each of the years prior to 1993 have
been reclassified to conform to the current period's presentation.
(b) Other expenses in 1991 includes $32 million write-down of the Company's
equity investment in DR Holdings Inc., the former parent company of
Computervision Corporation. 1992 amount includes $90 million in litigation
reserves and a $162 million write-down of the carrying value of certain real
estate investments.
(c) Includes $32 million of reserves for certain non-core partnership
syndication activities in which the Company is no longer actively engaged
and $120 million of reserves related to the sale of SLHMC.
(d) Amounts reflect charges associated with the restructuring of the Company in
1990, the write-off of the Company's investment in First Capital Holdings
Corporation in 1991 and a write-down of the carrying value of the Company's
holdings of Computervision Corporation in 1992.
(e) Effective January 1, 1992, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 106, "Employers' Accounting for
Post-Retirement Benefits Other Than Pensions," for the Company's retiree
health and other benefit plans. The cumulative effect of adopting SFAS No.
106 reduced 1992 net income by $76 million (net of taxes of $52 million). Of
this amount, $5 million (net of taxes of $3 million) related to discontinued
operations. The Company adopted SFAS No. 109 "Accounting for Income Taxes,"
as of January 1, 1992 and recorded a $69 million increase in consolidated
net income from the cumulative effect of a change in accounting principle,
$64 million of which related to discontinued operations. Effective as of
January 1, 1990, the Company adopted the policy of expensing the cost of all
internally developed software as incurred. The cumulative effect of the
change for periods prior to January 1, 1990 increased the 1990 net loss by
$157 million, $58 million of which related to discontinued operations.
(f) Per share data is calculated based on 105,776,664 pro forma shares of Common
Stock outstanding immediately following the Concurrent Transactions.
(g) Long-term indebtedness includes senior notes and subordinated indebtedness.
(h) Matched book represents a short-term interest rate arbitrage collateralized
primarily by U.S. government and agency securities. Several nationally
recognized rating agencies consider "securities purchased under agreements
to resell" ("reverse repos") a proxy for matched book assets. These rating
agencies consider reverse repos to have a low risk profile, and when
evaluating the Company's capital strength and financial ratios, exclude
reverse repos in the calculation of total assets divided by total equity.
Although there are other assets with similar risk characteristics on the
Company's balance sheet, the exclusion of reverse repos from total assets in
this calculation reflects the fact that these assets are matched against
liabilities of a similar nature, and therefore require minimal amounts of
capital support. Accordingly, the Company believes the ratio of total assets
excluding matched book to total stockholders' equity to be a more meaningful
measure of the Company's leverage.
27
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS ENVIRONMENT
The Company's principal business activities, investment banking and
securities trading and sales are, by their nature, subject to volatility,
primarily due to changes in interest and foreign exchange rates, global 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.
In 1993, the Company's operating results were achieved in an environment of
declining interest rates in the United States, mixed economic trends around the
world and continued globalization of the capital markets.
The general decline in interest rates in the United States, which began in
1990, continued in 1993 with interest rates declining to their lowest levels in
more than 10 years. Investors, seeking higher returns, reduced their holdings of
short-term fixed income securities in favor of longer term debt and equity
securities in U.S. and non-U.S. markets. Corporate issuers took advantage of
this environment and the pools of capital available for investment to
restructure their balance sheets through the issuance of equity, repayment of
debt and refinancing of debt at lower interest rates. These factors resulted in
record levels of debt and equity issuances in 1993.
In addition, though the U.S. economy grew slowly in 1993, and the economies
of Europe and Japan continued to stagnate, many emerging market economies,
particularly in Asia and Latin America, grew more rapidly. Increasing ease of
cross-border capital movement, due to lessening of currency and investment
restrictions, enhanced the ability of investors and issuers to participate in
the international capital markets.
RESULTS OF OPERATIONS
During 1993, the Company completed the sales of three businesses: The
Boston Company on May 21; Shearson on July 31; and SLHMC on August 31. See
"Recent Developments." In the Company's audited historical consolidated
financial statements, the operating results of The Boston Company are accounted
for as a discontinued operation while the operating results of Shearson and
SLHMC are included in the Company's results from continuing operations through
their respective sale dates.
Because of the significant sale transactions completed during 1993, the
Company's historical financial statements are not fully comparable for all years
presented. To facilitate an understanding of the Company's results, the
following discussion is segregated into three sections and provides financial
tables that serve as the basis for the review of results. These sections are as
follows:
- Historical Results: the results of the Company's ongoing businesses; the
results of Shearson and SLHMC through their respective sale dates; the
loss on the sale of Shearson; the reserves for non-core businesses; the
results of The Boston Company (accounted for as a discontinued
operation); and the cumulative effect of changes in accounting
principles.
- The Lehman Businesses: the results of the ongoing businesses of the
Company.
- The Businesses Sold: the results of Shearson and SLHMC; the loss on the
sale of Shearson; and the reserves for non-core businesses related to the
sale of SLHMC.
28
<PAGE> 33
HISTORICAL RESULTS (CONTINUING, SOLD AND DISCONTINUED BUSINESSES)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1991 1992 1993
------ ------ ------
(in millions)
<S> <C> <C> <C>
Net revenues............................................. $4,905 $5,426 $5,218
Total non-interest expenses.............................. 4,755 5,673 5,191
------ ------ ------
Income (loss) from continuing operations before taxes.... 150 (247) 27
Provision for (benefit from) income taxes................ (47) (54) 318
------ ------ ------
Income (loss) from continuing operations................. 197 (193) (291)
Income from discontinued operations, net of taxes........ 10 77 189
------ ------ ------
Income (loss) before cumulative effect of changes in
accounting principles.................................. 207 (116) (102)
Cumulative effect of changes in accounting principles.... (7)
------ ------ ------
Net income (loss)........................................ $ 207 $ (123) $ (102)
------ ------ ------
------ ------ ------
</TABLE>
HISTORICAL RESULTS (CONTINUING, SOLD AND DISCONTINUED BUSINESSES)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
Net revenues decreased 4% to $5,218 million in 1993 from $5,426 million in
1992 due to the sale of Shearson and SLHMC, offset in part by a 25% increase in
net revenues of the Lehman Businesses. Net revenues of $5,426 million in 1992
increased 11% over 1991 net revenues of $4,905 million with net revenues of the
Lehman Businesses and the Businesses Sold increasing by 11% and 10%,
respectively.
Non-interest expenses decreased 8% to $5,191 million in 1993 from $5,673
million in 1992 due to the sale of Shearson and SLHMC and to a decrease in
non-interest expenses of the Lehman Businesses. Non-interest expenses of $5,673
million in 1992 increased 19% over 1991 non-interest expenses of $4,755 million
due primarily to $497 million of write-downs and reserves taken in 1992 and a
15% increase in compensation and benefits expenses related to the Businesses
Sold.
The Company reported a net loss of $102 million for the year ended December
31, 1993 compared to a net loss of $123 million in 1992 and net income of $207
million in 1991. Included in the 1993 net loss of $102 million was an after-tax
loss on the sale of Shearson of $630 million ($535 million pre-tax) and an
after-tax charge of $100 million ($152 million pre-tax) related to certain
non-core businesses, including a $79 million ($120 million pre-tax) charge
related to the sale of SLHMC and a $21 million ($32 million pre-tax) charge
related to certain partnership syndication activities in which the Company is no
longer actively engaged. The 1993 net loss also included income from
discontinued operations of The Boston Company of $189 million, which included an
after-tax gain of $165 million on the sale and after-tax operating earnings of
$24 million. The 1992 net loss of $123 million included charges totaling $316
million ($497 million pre-tax) consisting of $59 million ($90 million pre-tax)
of additional litigation reserves, a $107 million ($162 million pre-tax) write-
down in the carrying value of certain real estate investments, and a $150
million ($245 million pre-tax) charge related to the Company's holdings of
Computervision Corporation ("Computervision"). Also included in the 1992 results
were income from discontinued operations of $77 million and a charge of $7
million related to the cumulative effect of the changes in accounting for
non-pension postretirement benefits and income taxes. Net income of $207 million
in 1991 included a $144 million (pre-tax and after-tax) write-off of the
Company's investment in First Capital Holdings Corporation ("FCH"), a $32
million (pre-tax and after-tax) write-down of the Company's equity-related
investment in DR Holdings Inc., the former parent company of Computervision,
income from discontinued operations of $10 million, and a $122 million tax
benefit on previously reported losses for which no financial statement benefit
had been permitted.
29
<PAGE> 34
Included in the table below are the specific revenue and expense categories
comprising the historical results as segregated between the Lehman Businesses
and the Businesses Sold. The historical amounts for the Lehman Businesses do not
include pro forma adjustments for the effects of the Concurrent Transactions
and, therefore, differ in some respects from the pro forma financial statements
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------------
1991 1992 1993
---------------------------------- ---------------------------------- ----------------------------------
LEHMAN BUSINESSES LEHMAN BUSINESSES LEHMAN BUSINESSES
(IN MILLIONS) BUSINESSES SOLD HISTORICAL BUSINESSES SOLD HISTORICAL BUSINESSES SOLD HISTORICAL
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Market making
and principal
transactions... $1,146 $ 550 $1,122 $ 575 $1,644 $ 323
Investment
banking....... 468 206 674 218 802 170
Commissions..... 495 1,154 446 1,231 488 828
Interest and
dividends..... 4,909 330 5,404 257 5,679 161
Other........... 50 522 65 619 79 412
---------- ---------- ---------- ---------- ---------- ----------
Total
revenues.... 7,068 2,762 7,711 2,900 8,692 1,894
Interest
expense....... 4,569 356 4,928 257 5,225 143
---------- ---------- ---------- ---------- ---------- ----------
Net
revenues.... 2,499 2,406 $4,905 2,783 2,643 $5,426 3,467 1,751 $5,218
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Non-interest
expenses:
Compensation and
benefits...... 1,370 1,529 1,551 1,759 1,825 1,164
Other
expenses...... 900 812 1,341 777 1,045 470
Loss on sale of
Shearson...... 535
Reserves and
other
charges....... 144 245 32 120
---------- ---------- ---------- ---------- ---------- ----------
Total
non-interest
expenses.... 2,414 2,341 4,755 3,137 2,536 5,673 2,902 2,289 5,191
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
continuing
operations
before taxes and
cumulative
effect of
changes in
accounting
principles...... 85 65 150 (354) 107 (247) 565 (538) 27
Provision for
(benefit from)
income taxes.... (84) 37 (47) (109) 55 (54) 210 108 318
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
continuing
operations
before
cumulative
effect of
changes in
accounting
principles...... $ 169 $ 28 $ 197 $ (245) $ 52 $ (193) $ 355 $ (646) $ (291)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
THE LEHMAN BUSINESSES
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1992
Summary. For the Lehman Businesses, income from continuing operations
before the cumulative effect of changes in accounting principles was $355
million in 1993 consisting of $376 million of income from the continuing
businesses and a $21 million reserve ($32 million pre-tax) for certain non-core
partnership syndication activities in which the Company is no longer actively
engaged. The loss of $245 million in 1992 from the Lehman Businesses includes
charges totaling $316 million ($497 million pre-tax), as described above in
"Historical Results."
Net Revenues. Net revenues increased 25% to $3,467 million in 1993 from
$2,783 million in 1992. Revenues related to market making and principal
transactions and investment banking were the primary sources of the increase.
Net revenues increased both domestically and internationally. Revenues
associated with international products and services increased 63% to $850
million in 1993 from $520 million in 1992. The Company estimates that
approximately $300 million in 1993 revenues that were associated with domestic
products and services resulted from relationships with international clients and
customers. These international results reflect the Company's strategy to
increase the global scope of its business activities.
30
<PAGE> 35
Market Making and Principal Transactions. Market making and principal
transactions include the results of the Company's market making and trading
related to customer activities, as well as proprietary trading for the Company's
own account. Revenues from these activities encompass net realized and mark-to-
market gains (losses) on securities and other financial instruments owned as
well as securities and other financial instruments sold but not yet purchased.
The Company utilizes various hedging strategies as it deems appropriate to
minimize its exposure to significant movements in interest and foreign exchange
rates and the equity markets. Market making and principal transactions revenues
increased 47% to $1,644 million in 1993 from $1,122 million in 1992, reflecting
greater activity and strong customer order flow across all business lines. The
following discussion provides an analysis of the Company's market making and
principal transactions revenues based upon the various product groups which
generated these revenues.
Market Making & Principal Transactions Revenues (in millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1991 1992 1993
------ ------ ------
<S> <C> <C> <C>
Fixed income................................... $ 643 $ 671 $ 759
Equity......................................... 338 243 338
Derivative products............................ 85 136 399
Foreign exchange and commodities............... 80 72 148
------ ------ ------
$1,146 $1,122 $1,644
------ ------ ------
------ ------ ------
</TABLE>
Fixed income revenues increased 13% to $759 million in 1993 from $671
million in 1992. This increase was due principally to increased revenues from
several products, particularly emerging markets, high yield and corporate debt
instruments.
Equity revenues include net gains on market making and trading in listed
and over-the-counter equity securities. Equity revenues increased 39% to $338
million in 1993 from $243 million in 1992, primarily as a result of higher
revenues from the Company's proprietary trading activities.
Derivative products revenues, which include revenues from fixed income
derivative products and equity derivative products, increased 193% to $399
million in 1993 from $136 million in 1992.
Fixed income derivative products revenues include net revenues from the
trading and market making activities of the Company's fixed income derivative
products business. These products include interest rate and currency swaps,
caps, collars, floors and similar instruments. Fixed income derivative products
revenues increased 197% to $318 million in 1993 from $107 million in 1992,
representing 40% of the total increase in market making and principal
transactions revenues. The increased revenues were primarily a result of
increased Company activity in these markets and increased usage of these
products by the Company's clients and customers. At December 31, 1993, the
notional value of the Company's fixed income derivatives contracts increased to
over $260 billion from approximately $105 billion at December 31, 1992. Notional
amounts do not represent a quantification of the market or credit risk of the
positions; rather, notional amounts represent the amounts used to calculate
contractual cash flows to be exchanged and are generally not actually paid or
received. During 1994, the Company will commence derivative trading and market
making activities through Lehman Brothers Financial Products Inc., a separately
capitalized triple-A rated derivatives subsidiary. This subsidiary is expected
to increase the Company's volume of activity in its fixed income derivatives
business and capture additional underwriting and trading business.
Equity derivative products revenues include net revenues from the trading
and market making activities of the Company's equity derivative products
business. Such revenues increased 179% to $81 million in 1993 from $29 million
in 1992. The Company's equity derivatives business expanded during 1993 due to
the Company's increased emphasis on equity derivative products and the Company's
activity in the equities business generally. At December 31, 1993, the notional
value of equity derivatives contracts was approximately $24 billion. Notional
amounts for 1992 and 1991 were not material.
Foreign exchange and commodities revenues include revenues derived from
market making and trading in spot and forward foreign currency contracts,
foreign currency futures contracts, and energy and other
31
<PAGE> 36
commodity futures contracts. Revenues from these sources increased 106% to $148
million in 1993 from $72 million in 1992. Included in these results were foreign
exchange revenues of $115 million and $62 million for 1993 and 1992,
respectively, reflecting an increase of 85%. This increase was due primarily to
increased customer-related and proprietary trading activities throughout 1993.
Revenues from commodity trading activities increased 154% to $33 million in 1993
from $10 million in 1992, due primarily to increased customer-related trading
activities throughout 1993. Foreign exchange contracts outstanding, including
forward commitments to purchase and forward commitments to sell, at December 31,
1993 and 1992 were $230 billion and $104 billion, respectively.
Investment Banking. Investment banking revenues increased 19% to $802
million in 1993 from $674 million in 1992. The 1993 results were driven
primarily by a 40% increase in underwriting revenues to $523 million in 1993
from $373 million in 1992. Underwriting revenues increased as a result of
significantly higher underwriting volumes in both domestic equity and fixed
income products, with the increase in equity underwriting the primary component.
Also included in these results were merchant banking revenues which decreased
10% to $105 million in 1993 from $117 million in 1992. Such revenues include net
realized gains, net unrealized changes in the value of merchant banking
investments and advisory fees.
Commissions. Commission revenues increased 9% to $488 million in 1993 from
$446 million in 1992, primarily as a result of higher volumes of customer
trading of securities and commodities on exchanges. Commission revenues are
generated from the Company's agency activities on behalf of corporations,
institutions and high net worth individuals.
Interest and Dividends. Interest and dividend revenues increased 5% to
$5,679 million in 1993 from $5,404 million in 1992. Net interest and dividend
income decreased 5% to $454 million in 1993 from $476 million in 1992. Net
interest and dividend revenue amounts are closely related to the Company's
trading activities. A significant portion of net interest revenue is due to
trading decisions and strategies, the results of which are reflected in market
making and principal transactions. The Company evaluates these strategies on a
total return basis. Therefore, changes in net interest revenue from period to
period should not be viewed in isolation but should be viewed in conjunction
with revenues from market making and principal transactions.
Other Revenues. Other revenues increased 22% to $79 million in 1993 from
$65 million in 1992. Asset management fees were the principal component of this
increase. Asset management and related advisory fees increased 25% to $35
million in 1993 from $28 million in 1992, as assets under management increased
substantially to over $12 billion in 1993 from $3 billion in 1992.
Non-interest Expense. Compensation and benefits expense increased 18% to
$1,825 million in 1993 from $1,551 million in 1992, reflecting higher
compensation due to increases in revenues and profitability. However,
compensation and benefits expense as a percentage of net revenues decreased to
52.6% in 1993 from 55.7% in 1992 due to improvements in productivity.
Excluding compensation and benefits expense, non-interest expenses
decreased 32% to $1,077 million in 1993 from $1,586 million in 1992. Included in
the 1993 amount was a charge of $32 million ($21 million after-tax) related to
certain non-core partnership syndication activities in which the Company is no
longer actively engaged. The 1992 results included a series of charges totaling
$497 million ($316 million after-tax) which consisted of a charge of $90 million
($59 million after-tax) for additional litigation reserves, a $162 million ($107
million after-tax) write-down of the carrying value of certain real estate
investments, and a $245 million ($150 million after-tax) charge related to the
Company's holdings of Computervision. Excluding these charges, as well as
compensation and benefits, non-interest expenses declined 4% to $1,045 million
in 1993 from $1,089 million in 1992. This decrease was due primarily to lower
levels of provisions for legal settlements and bad debts and reduced operating
expenses.
Cost Reduction Effort. In August 1993, the Company announced an expense
reduction program with the objective of reducing costs by $200 million on an
annualized basis by the end of the first quarter of 1994. The Company's expense
structure for the first half of 1993, adjusted for changes in the volume and mix
of
32
<PAGE> 37
revenues as well as for additional costs due to external factors such as
inflation or new legislation, is the basis against which these goals are being
measured. As of March 31, 1994 the Company had taken the following actions which
it believes will result in $200 million of cost reductions on an annualized
basis: (i) reduced certain purchased costs by lowering the volume of goods and
services purchased, renegotiating rates with vendors and strengthening internal
compliance with established policies and procedures; (ii) consolidated certain
administrative and support functions; (iii) strengthened compliance and control
functions; and (iv) completed its annual review of personnel, the objective of
which is to upgrade personnel and eliminate positions to improve the Company's
overall productivity. See "Recent Developments -- Reduction in Personnel."
In addition to these actions, the Company has identified a variety of
actions that are expected to reduce expenses further, such as (i) additional
reductions in certain purchased expenses and (ii) the relocation in the summer
of 1994 of certain administrative, operations and other support personnel to
newly leased facilities in New Jersey. See "Business -- Properties."
THE LEHMAN BUSINESSES
FOR THE YEARS ENDED DECEMBER 31, 1992 AND 1991
Summary. In 1992, the Company reported a loss from continuing operations
before the cumulative effect of changes in accounting principles of $245 million
compared to net income of $169 million in 1991. The 1992 results included
charges of $316 million ($497 million pre-tax) as described above. Income of
$169 million in 1991 included $313 million of income from the continuing core
businesses, reduced by a charge of $144 million (pre-and after-tax) related to
the write-off of the Company's investment in FCH. The 1991 income from the
continuing core businesses also included a tax benefit of $122 million from the
recognition of tax benefits under SFAS No. 96.
Net Revenues. Net revenues increased 11% to $2,783 million in 1992 from
$2,499 million in 1991. Investment banking revenues were the primary source of
the improvement, increasing 44% to $674 million in 1992 from $468 million in
1991. Net revenues from domestic products and services accounted for most of the
increase, rising 14% to $2,263 million in 1992. Net revenues from international
products and services increased 2% to $520 million in 1992. The Company
estimates that approximately $100 million of 1992 net revenues associated with
domestic products and services resulted from relationships with international
clients and customers.
Market Making and Principal Transactions. Market making and principal
transactions include the results of the Company's market making and trading
related to customer activities and proprietary trading for the Company's own
account. Revenues from these activities encompass net realized and
mark-to-market gains (losses) on securities and other financial instruments
owned as well as securities and other financial instruments sold but not yet
purchased. The Company uses various hedging strategies to minimize its exposure
to significant movements in interest and foreign exchange rates and the equity
markets as it deems appropriate. Market making and principal transactions
revenues decreased 2% in 1992 to $1,122 million from $1,146 million in 1991. The
following discussion provides an analysis of the Company's market making and
principal transactions revenues based upon the various product groups which
generated these revenues.
Revenues from fixed income products increased 4% to $671 million in 1992
from $643 million in 1991, with money market products and government securities
contributing most of the increase.
Equity revenues include net gains on market making and trading in listed
and over-the-counter equity securities. Equity revenues decreased 28% to $243
million in 1992 from $338 million in 1991, primarily as a result of lower
revenues from the Company's proprietary trading activities.
Derivative products revenues, which include revenues from fixed income
derivative products and equity derivative products increased 60% to $136 million
in 1992 from $85 million in 1991.
Fixed income derivative products revenues include net revenues from the
trading and market making activities of the Company's fixed income derivatives
business. These products include interest rate and
33
<PAGE> 38
currency swaps, caps, collars, floors and similar instruments. Fixed income
derivative products revenues increased 84% to $107 million in 1992 from $58
million in 1991, primarily as a result of increased Company activity in these
markets and increased usage of these products by the Company's clients and
customers. At December 31, 1992, the notional value of the Company's fixed
income derivatives contracts increased to approximately $105 billion from
approximately $45 billion at December 31, 1991.
Equity derivative products revenues increased 7% to $29 million in 1992
from $27 million for 1991. The notional value of the Company's equity
derivatives contracts was not material at December 31, 1992 and 1991.
Foreign exchange and commodities revenues include revenues derived from
market making and trading in spot and forward foreign currency contracts,
foreign currency futures contracts and energy and other commodity futures
contracts. Revenues from these sources decreased 10% to $72 million in 1992 from
$80 million in 1991. Foreign exchange revenues increased 27% to $62 million in
1992 from $49 million in 1991, primarily due to an expansion of the Company's
proprietary trading activities during 1992. Commodity trading revenues decreased
to $10 million in 1992 from approximately $31 million in 1991. Foreign exchange
contracts outstanding, including forward commitments to purchase and forward
commitments to sell, at December 31, 1992 and 1991 were $104 billion and $60
billion, respectively.
Investment Banking. Investment banking revenues increased 44% to $674
million in 1992 from $468 million in 1991. This increase was due to increased
underwriting revenues and improved merchant banking results. Underwriting
revenues increased 57% to $373 million in 1992 from $238 million in 1991, while
merchant banking revenues increased 92% to $117 million in 1992 from $61 million
in 1991. Merchant banking revenues include net realized gains, net unrealized
changes in the value of the Company's merchant banking investments and advisory
fees.
Commissions. Commission revenues decreased 10% to $446 million in 1992
from $495 million in 1991. This decrease was due primarily to the strategic
deemphasis of the Company's institutional futures sales activities in 1992.
Commission revenues are generated from the Company's agency activities on behalf
of corporations, institutions and high net worth individuals.
Interest and Dividends. Interest and dividend revenues increased 10% to
$5,404 million in 1992 from $4,909 million in 1991. Net interest and dividend
income increased 40% to $476 million in 1992 from $340 million in 1991. Net
interest and dividend revenue amounts are closely related to the Company's
trading activities. A significant portion of net interest revenue results from
trading decisions and strategies, the results of which are reflected in market
making and principal transactions. The Company evaluates these strategies on a
total return basis. Therefore, changes in net interest revenue from period to
period should not be viewed in isolation but should be viewed in conjunction
with revenues from market making and principal transactions.
Other Revenues. Other revenues increased 30% to $65 million in 1992 from
$50 million in 1991. The growth in asset management fees was the primary source
of this increase. Asset management and related advisory fees increased 33% to
$28 million in 1992 from $21 million in 1991 due to an increase in assets under
management.
Non-interest Expense. Compensation and benefits expense increased 13% to
$1,551 million in 1992 from $1,370 million in 1991. Compensation and benefits
expense as a percent of net revenues was 55.7% in 1992 versus 54.8% in 1991, as
a result of competitive pressures which caused compensation and benefits expense
to increase at a faster rate than revenues.
Excluding compensation and benefits, non-interest expenses increased 52% to
$1,586 million in 1992 from $1,044 million in 1991. As previously discussed,
1992 results included a series of charges totaling $497 million while 1991
results included a charge of $144 million related to the write-off of the
Company's investment in FCH. Excluding these charges, as well as compensation
and benefits expense, other non-interest expenses increased 21% to $1,089
million in 1992 from $900 million in 1991. The increase in expenses was due
primarily to higher provisions for legal settlements and bad debts as well as
increased operating expenses related to the Company's investments in the
expansion of its international, foreign exchange and derivatives businesses.
34
<PAGE> 39
THE LEHMAN BUSINESSES
INCOME TAXES -- FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
In 1993, the Lehman Businesses had an income tax provision of $210 million
which consisted of a provision of $221 million for continuing businesses and a
tax benefit of $11 million related to non-core business reserves. The effective
tax rate for the continuing businesses was 37%, which is greater than the
statutory U.S. federal income tax rate principally due to state and local income
taxes partially offset by benefits attributable to income subject to
preferential tax treatment and increased foreign profits. During the third
quarter of 1993, the statutory U.S. federal income tax rate was increased to 35%
from 34%, effective January 1, 1993. The Company's 1993 tax provision includes a
one-time benefit of approximately $10 million from the impact of the federal
rate change on the Company's net deferred tax assets. The Company's effective
tax rate for continuing businesses is expected to increase slightly in 1994,
subject to changes in the level and geographic mix of the Company's profits. See
"Certain Transactions and Agreements Between the Company and American
Express -- Tax Allocation Agreements."
The Company's net deferred tax assets decreased in 1993 to $265 million
from $338 million in 1992. The decrease was primarily related to the utilization
of net operating loss carryforwards ("NOLs") which resulted in cash savings to
the Company. It is anticipated that the remaining deferred tax asset will be
realized through future earnings.
In addition, the Company had, as of December 31, 1993, approximately $175
million of tax NOLs available to offset future taxable income, the benefits of
which have not yet been reflected in the financial statements. Although the
benefit related to these NOLs does not currently meet the recognition criteria
of SFAS No. 109, strategies are being implemented to increase the likelihood of
realization. Approximately $35 million of these NOLs will be transferred to
American Express in connection with the Distribution.
In 1992, the Lehman Businesses had an income tax benefit of $109 million
which consisted of a provision of $72 million from continuing businesses and a
tax benefit of $181 million related to the special charges previously discussed.
Excluding the tax benefit, the effective tax rate for the continuing businesses
was 50%, which was higher than the statutory U.S. federal income tax rate
primarily due to state and local taxes and the impact of certain non-deductible
foreign losses. The effective rate on the benefit for special charges was 36%.
Effective January 1, 1992, the Company adopted SFAS No. 109, "Accounting
for Income Taxes." Previously, the Company accounted for income taxes in
accordance with SFAS No. 96. As a result of the adoption, the Company recorded a
$69 million increase in consolidated net income from the cumulative effect of
this change in accounting principle, $64 million of which related to
discontinued operations. In addition, the Company reduced goodwill by $258
million related to the recognition of deferred tax benefits attributable to the
Company's 1988 acquisition of The E. F. Hutton Group Inc. The Company
established a deferred tax asset of $327 million in the first quarter of 1992
related to tax benefits previously unrecorded under SFAS No. 96.
The 1991 tax benefit of $84 million includes $122 million for the
recognition of benefits on previously reported losses for which no financial
statement benefit had been permitted. Excluding the recognition of these
benefits, the 1991 effective tax rate was 45%, which was higher than the
statutory U.S. federal income tax rate due primarily to state and local income
taxes and the non-deductibility of goodwill amortization.
THE BUSINESSES SOLD
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1992
This discussion is provided to analyze the operating results of the
Businesses Sold. For purposes of this discussion, the amounts described as the
Businesses Sold include the results of operations of Shearson and SLHMC, the
loss on sale of Shearson and the reserve for non-core businesses related to the
sale of SLHMC. All 1993 amounts for the Businesses Sold include results through
their dates of sale and therefore reported results for 1993 are not fully
comparable with prior years' results.
Net revenues related to the Businesses Sold were $1,751 million in 1993 and
$2,643 in 1992. Excluding the loss on the sale of Shearson and the reserve for
non-core businesses related to SLHMC, non-interest
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<PAGE> 40
expenses of the Businesses Sold were $1,634 million in 1993 and $2,536 million
in 1992. Compensation and benefits expense were $1,164 million in 1993 and
$1,759 million in 1992.
The Businesses Sold recorded a net loss of $646 million in 1993 compared to
net income of $52 million in 1992. The 1993 results include a loss on sale of
Shearson of $630 million and a $79 million charge recorded in the first quarter
as a reserve for non-core businesses in anticipation of the sale of SLHMC. The
loss on the sale of Shearson included a reduction in goodwill of $750 million
and transaction-related costs such as relocation, systems and operations
modifications and severance. Excluding the $630 million after-tax loss on sale,
Shearson's net income was $63 million in 1993 compared to $55 million in 1992.
Excluding the $79 million after-tax charge discussed above, SLHMC operations
were break-even in 1993 compared to a net loss of $3 million in 1992.
THE BUSINESSES SOLD
FOR THE YEARS ENDED DECEMBER 31, 1992 AND 1991
Net revenues related to the Businesses Sold increased 10% to $2,643 million
in 1992 from $2,406 million in 1991, due primarily to increases in other
revenues and commissions. The growth in other revenues was due to increases in
investment advisory and custodial fees, reflecting growth in the Company's
managed asset products. An increase in the volume of customer directed trading
activity was the primary source of the increased level of commission revenues.
Non-interest expenses of the Businesses Sold increased 8% to $2,536 million in
1992 from $2,341 million in 1991. Compensation and benefits increased 15% to
$1,759 million in 1992 from $1,529 million in 1991, reflecting higher
compensation due to increased revenues.
Net income for the Businesses Sold increased 86% to $52 million in 1992
from $28 million in 1991. Shearson net income was $55 million in 1992 and $29
million in 1991.
THE BUSINESSES SOLD
INCOME TAXES -- FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
The 1993 tax provision of $108 million for Businesses Sold included (i)
expenses of $54 million related to the operating results of Shearson; (ii) an
expense of $95 million from the sale of Shearson and (iii) a tax benefit of $41
million related to the $120 million reserve for non-core businesses recorded in
anticipation of the sale of SLHMC. The provision related to the sale of Shearson
primarily resulted from the write-off of $750 million of goodwill which was not
deductible for tax purposes. For 1992 and 1991 the tax expense related
principally to the Shearson operations. The effective tax rate for the
Businesses Sold was 51% in 1992 and 57% in 1991, with the excess over the
statutory U.S. federal income tax rate primarily resulting from state and local
taxes and the non-deductibility of goodwill amortization.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1993, total assets were $80.5 billion, compared to $85.2
billion at December 31, 1992. The composition of the Company's assets changed
significantly during 1993 due to the sales of The Boston Company, Shearson and
SLHMC. The Company's asset base now consists primarily of cash and cash
equivalents, and assets which can be sold within one year, including securities
and other financial instruments owned, collateralized short-term agreements and
receivables. At December 31, 1993, these assets comprised approximately 95% of
the Company's balance sheet. Long-term assets consist primarily of other
receivables, which include a $945 million interest-bearing receivable from
American Express due in 1996, property, equipment and leasehold improvements,
deferred expenses and other assets, and excess of cost over fair value of net
assets acquired.
Daily Funding Activities. The Company finances its short-term assets
primarily on a secured basis through the use of securities sold under agreements
to repurchase, securities loaned, securities and other financial instruments
sold but not yet purchased and other collateralized liability structures.
Repurchase agreements and other types of collateralized borrowings historically
have been a more stable financing source under all market conditions. Because of
their secured nature, these collateralized financing sources are less credit
sensitive and also provide the Company access to lower cost funding.
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<PAGE> 41
The Company uses short-term unsecured borrowing sources to fund short-term
assets not financed on a secured basis. The Company's primary sources of
short-term, unsecured general purpose funding include commercial paper and
short-term debt, including master notes and bank borrowings under uncommitted
lines of credit. Commercial paper and short-term debt outstanding totalled $11.2
billion at December 31, 1993, compared to $13.4 billion at December 31, 1992. Of
these amounts, commercial paper outstanding totalled $2.6 billion at December
31, 1993, with an average maturity of 31 days, compared to $6.8 billion at
December 31, 1992, with an average maturity of 22 days. The 1993 year-end
balances reflected the repayment of commercial paper and short-term debt
obligations with the proceeds from the sales of The Boston Company, Shearson and
SLHMC. As of December 31, 1993, the Company had $1.6 billion of unused committed
bank credit lines, provided by 35 banks, to support its commercial paper
programs.
To reduce liquidity risk, the Company carefully manages its commercial
paper and master note maturities to avoid large refinancings on any given day.
In addition, the Company limits its exposure to any single commercial paper
investor to avoid concentration risk. The Company's and LBI's access to
short-term and long-term debt financing is highly dependent on their debt
ratings. Holdings' current long-term/short-term senior debt ratings are as
follows: S&P A/A-1; Moody's A3/P-2; IBCA A-/A1; and Thomson BankWatch --/ TBW-1.
As of the Distribution Date, the Company expects to receive long-term/short-term
debt ratings from Fitch Investor Services of A/F-1. LBI's long-term and
short-term debt ratings are generally comparable to or in certain instances
higher than those of Holdings.
The Company's uncommitted lines of credit provide an additional source of
short-term financing. As of December 31, 1993, the Company had in excess of
$10.8 billion in uncommitted lines of credit, provided by 158 banks and
institutional lenders, consisting of facilities that the Company has been
advised are available but for which no contractual lending obligation exists.
Long-term assets are financed with a combination of long-term debt and
equity. The Company's long-term funding sources are unsecured senior notes and
subordinated indebtedness. The Company maintains long-term debt in excess of its
long-term assets to provide additional liquidity, which the Company uses to meet
its short-term funding requirements and reduce its reliance on commercial paper
and short-term debt.
During 1993, the Company issued $4.2 billion in long-term debt, compared to
$3.5 billion in 1992. In addition to refinancing long-term debt, these issuances
strengthened the Company's capital base, which consists of long-term debt plus
equity. The Company staggers the maturities of its long-term debt to minimize
refunding risk. At December 31, 1993, the Company had long-term debt outstanding
of $9.9 billion with an average life of 3.1 years, compared to $7.7 billion
outstanding at December 31, 1992, with an average life of 3.8 years. For
long-term debt with a maturity of greater than one year, the Company had $7.4
billion outstanding with an average life of 4.0 years at December 31, 1993,
compared to $6.0 billion outstanding with an average life of 4.7 years at
December 31, 1992.
As of December 31, 1993, the Company had $3.2 billion available for
issuance of debt securities under various shelf registrations. In July 1993, the
Company initiated a $1 billion Euro medium-term note program, which is not
registered under the Securities Act. As of December 31, 1993, $560 million of
issuance availability remained under this program.
The Company anticipates that 1994 long-term debt issuances will be below
that of prior years due to the previously described changes in its asset
composition and the pre-funding in 1993 of a portion of the Company's long-term
debt maturing in 1994. The cash proceeds to the Company from the Equity
Investment, which will total approximately $1,193 million, will be used to
reduce commercial paper and short-term debt and to pay related fees and expenses
estimated to be $20 million.
The Company enters into a variety of financial and derivative products
agreements as an end user to hedge and/or modify its exposure to foreign
exchange and interest rate risk of certain assets and liabilities. These
agreements are not part of the Company's trading portfolio of derivative
products. The Company primarily enters into interest rate swaps and caps to
modify the interest characteristics of its long-term debt obligations. The
Company recognizes the net interest expense or income related to these
agreements on an accrual basis, including the amortization of premiums, over the
life of the contracts.
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<PAGE> 42
At December 31, 1993 and 1992, the Company had outstanding interest rate
swap and cap agreements for the above purposes of approximately $4.5 billion and
$3.8 billion, respectively. Included in these amounts were approximately $2.3
billion of interest rate swaps and caps, maturing in 1995 and 1997, which serve
to reduce the Company's overall fixed rate debt to a lower fixed rate. Of the
remaining interest rate swaps, the most significant serve to convert a portion
of the Company's debt to either a fixed rate or a floating rate. The Company has
matched substantially all of the maturities of its remaining interest rate swaps
to the terms of its underlying borrowings.
The $4.5 billion notional amount of interest rate swap and cap agreements
matures as follows:
<TABLE>
<CAPTION>
(in millions)
<S> <C>
1994..................................................... $ 845
1995..................................................... 1,540
1996..................................................... 345
1997..................................................... 910
1998..................................................... 320
1999 and thereafter...................................... 540
-------------
$ 4,500
-------------
-------------
</TABLE>
The effect of interest rate swap and cap agreements was to decrease
interest expense by approximately $56 million, $57 million and $15 million in
1993, 1992 and 1991, respectively. At December 31, 1993, the unrecorded net loss
on these agreements was approximately $5 million compared to a net unrecorded
gain of $64 million at December 31, 1992. The Company has no deferred gains or
losses related to terminated agreements.
The Company expects to continue using interest rate swap and cap agreements
to modify the effective interest cost associated with its long-term
indebtedness. The $2.3 billion of interest rate swaps and caps described above,
which reduce the Company's rate on its fixed rate debt to a lower fixed rate,
will lower 1994 and 1995 interest expense by approximately $25 million and $15
million, respectively. The effect of the remaining interest rate swaps is
dependent on the level of interest rates in the future.
Liquidity Management. The maintenance of the liability structure and
balance sheet liquidity as discussed above is achieved through the daily
execution of the following financing policies: (i) match funding the Company's
assets and liabilities; (ii) maximizing the use of collateralized borrowing
sources; and (iii) diversifying and expanding borrowing sources.
(i) The Company's first financing policy focuses on funding the
Company's assets with liabilities which have maturities similar to the
anticipated holding period of the assets to minimize refunding risk. The
anticipated holding period of assets financed on an unsecured basis is
determined by the expected time it would take to obtain financing for these
assets on a collateralized basis.
(ii) The Company's second financing policy is to maximize that portion
of its balance sheet that is funded through collateralized borrowing
sources, which include repurchase agreements, securities loaned, securities
sold but not yet purchased and other collateralized liability structures.
The Company currently funds over 60% of its assets on a collateralized
basis. As discussed above, repurchase agreements and other types of
collateralized borrowings historically have been a more reliable financing
source under all market conditions.
(iii) The Company's third financing policy is to diversify and expand
its borrowing sources in an effort to maximize liquidity and reduce
concentration risk. Through its institutional sales force, the Company
seeks financing from a global investor base with the goal of broadening the
availability of its funding sources. The Company accesses both the
unsecured and collateralized debt markets through its operations in New
York, London, Tokyo, Hong Kong, Frankfurt and Geneva. In addition to
maintaining geographic diversification, the Company also utilizes a broad
range of debt instruments, which it issues in varying maturities. Where the
Company deems it to be appropriate, foreign currency denominated assets are
financed with corresponding foreign currency denominated liabilities.
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<PAGE> 43
The Company incorporates these policies in its liquidity contingency
planning process, which is designed to enhance the availability of alternative
sources of funding in a period of financial stress. Financial stress is defined
as any event which severely constrains the Company's access to unsecured funding
sources. The Company's liquidity contingency plan is based on an estimate of its
ability to meet its funding requirements with collateralized financing. To help
achieve this objective, the Company would rely on the additional liquidity
created by its policy of issuing long-term debt in excess of long-term assets
and its ability to pledge its unencumbered marketable securities as collateral
to obtain financing rather than on a sale of these securities.
The Company's liquidity contingency plan assumes no draw-down of committed
bank credit lines. The plan's assumptions are continually reviewed and updated
as the Company's asset/liability mix and liquidity requirements change. The
Company believes that these policies, combined with the maintenance of
sufficient capital levels, position the Company to meet its liquidity
requirements in periods of financial stress.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS AND DERIVATIVES
In addition to financial instruments recorded on the consolidated balance
sheet, the Company enters into off-balance sheet financial instruments primarily
consisting of derivative contracts and credit-related arrangements. Derivative
products include futures, forwards, swaps, options, caps, collars, floors, swap
options, forward rate agreements, foreign exchange contracts and similar
instruments.
Derivative products are generally based on notional amounts, while
credit-related arrangements are based upon contractual amounts. The notional
values of these instruments are generally not recorded on the balance sheet.
Off-balance sheet treatment is generally considered appropriate when the
exchange of the underlying asset or liability has not occurred or is not
assured, or where the notional amounts are utilized solely as a basis for
determining cash flows to be exchanged. Therefore, the notional amounts of these
instruments do not reflect the Company's market or credit risk amount.
The Company conducts its derivative activities through wholly owned
subsidiaries. In late 1993, the Company established a new subsidiary, Lehman
Brothers Financial Products Inc., a separately capitalized triple-A rated
derivatives subsidiary. This subsidiary, which is expected to commence
activities during the third quarter of 1994, was established to increase the
volume of the Company's derivatives business related to customer-driven
derivative activities and to capture additional underwriting and trading
business.
The Company records derivatives from dealer-related and proprietary trading
activities at market or fair value, with unrealized gains and losses recognized
in the consolidated statement of operations as market making and principal
transactions revenue. While the notional value of these instruments is not
reflected in the consolidated balance sheet, the mark to market value of
trading-related derivatives is reflected on a net basis in the December 31, 1993
and 1992 balance sheets as "securities and other financial instruments owned" or
"securities and other financial instruments sold but not yet purchased," as
applicable.
Derivative products, like all financial instruments, include various
elements of risk which must be actively managed. General types of risk from
derivative products include market risk, liquidity risk and credit risk.
Market risk from derivatives results from the potential for changes in
interest and foreign exchange rates and fluctuations in commodity or equity
prices. The market risk for derivatives is similar to that of cash instruments.
The Company may employ hedging strategies to reduce its exposure to fluctuations
in market prices of securities and volatility in interest or foreign exchange
rates.
Liquidity risk from derivatives represents the cost to the Company of
adjusting its positions in times of high volatility and financial stress. The
liquidity of derivative products is highly related to the liquidity of the
underlying cash instruments. As with on-balance sheet financial instruments, the
Company's valuation policies for derivatives include consideration of liquidity
factors.
Credit risk from derivatives relates to the potential for a counterparty
defaulting on its contractual agreement. The Company manages its counterparty
credit risk through a process similar to its other trading-related activities.
This process includes an evaluation of the counterparty's credit worthiness at
the inception of the transaction, periodic review of credit standing and various
credit enhancements in certain circumstances.
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<PAGE> 44
In addition, the Company attempts to execute master netting agreements which
provide for net settlement of contracts with the same counterparty in the event
of cancellation or default when appropriate or when allowable under relevant
law.
For a discussion of the Company's policies and procedures regarding risk,
see "Business -- Risk Management."
Cash Flows. Cash and cash equivalents increased $692 million in 1993 to
$1,333 million, as the net cash provided by investing activities exceeded the
net cash used in operating and financing activities. In addition, cash and cash
equivalents for discontinued operations increased $42 million in 1993. Net cash
used in operating activities of $1,361 million included the loss from continuing
operations adjusted for non-cash items of approximately $677 million for the
year ended December 31, 1993. Net cash used in financing activities was $372
million in 1993. Net cash provided by investing activities of $2,467 million in
1993 included cash proceeds from the sales of The Boston Company, Shearson and
SLHMC of $2,570 million.
Cash and cash equivalents decreased $250 million in 1992 to $641 million,
as the net cash used in operating activities exceeded the net cash provided by
financing and investing activities. In addition, cash and cash equivalents for
discontinued operations decreased $1,082 million and the effect of exchange rate
changes on cash was an increase of $9 million. Net cash used in operating
activities of $6,277 million included the loss from continuing operations
adjusted for non-cash items of approximately $733 million for the year ended
December 31, 1992. Net cash provided by financing and investing activities was
$4,913 million and $23 million, respectively.
Cash and cash equivalents decreased $299 million in 1991 to $891 million.
In addition, cash and cash equivalents for discontinued operations increased
$706 million and the effect of exchange rate changes on cash was an increase of
$4 million. Net cash used in operating activities of $3,111 million included
income from continuing operations adjusted for non-cash items of approximately
$804 million for the year ended December 31, 1991. Net cash provided by
financing and investing activities was $157 million and $3,357 million,
respectively.
SPECIFIC BUSINESS ACTIVITIES AND TRANSACTIONS
The following sections include information on specific business activities
of the Company which affect overall liquidity and capital resources:
Merchant Banking Partnerships. At December 31, 1993, the Company's
investment in merchant banking partnerships was $381 million, which included
$168 million in one employee-related partnership in which the Company, as
general partner, is entitled to a priority return. At December 31, 1993, the
Company had commitments to make investments through merchant banking
partnerships of approximately $120 million of which approximately $66 million
expired in March 1994. The Company's policy is to carry its interests in
merchant banking partnerships at fair value based upon the Company's assessment
of the underlying investments. The Company's merchant banking investments, made
primarily through the 1989 Partnerships (as defined below under "Business"),
are, consistent with the terms of the 1989 Partnerships, expected to be sold or
otherwise monetized during the remaining term of the partnerships.
Westinghouse. In May 1993, the Company and Westinghouse Electric
Corporation ("Westinghouse") entered into a partnership to facilitate the
disposition of Westinghouse's commercial real estate portfolio valued at
approximately $1.1 billion, which will be accomplished substantially by
securitizations and asset sales. The Company invested approximately $154 million
in the partnership, and also made collateralized loans to the partnership of
$752 million. During the third quarter of 1993, Lennar Inc. was appointed
portfolio servicer and purchased a 10% limited partnership interest from the
Company and Westinghouse.
At December 31, 1993, the carrying value of the Company's investment in the
partnership was $154 million and the outstanding balance of the collateralized
loan, including accrued interest, was $539 million. The remaining loan balance
is expected to be repaid in 1994 through a combination of mortgage remittances,
securitizations, asset sales and refinancings by third parties.
40
<PAGE> 45
High Yield Securities. The Company underwrites, trades, invests and makes
markets in high yield corporate debt securities. The Company also syndicates,
trades and invests in loans to below investment grade companies. For purposes of
this discussion, high yield securities are defined as securities or loans to
companies rated below BBB- by S&P and below Baa3 by Moody's, as well as
non-rated securities or loans which, in the opinion of management, are below
investment grade. High yield debt securities are carried at market value and
unrealized gains or losses for these securities are reflected in the Company's
Consolidated Statement of Operations. The Company's portfolio of such securities
at December 31, 1993 and 1992 included long positions with an aggregate market
value of approximately $1.0 billion and $920 million, respectively, and short
positions with an aggregate market value of approximately $75 million and $50
million, respectively. The portfolio of high yield securities may from time to
time contain concentrated holdings of selected issues. The Company's two largest
high yield positions were $179 million and $82 million at December 31, 1993 and
$180 million and $123 million at December 31, 1992.
Change in Facilities. In 1993, the Company agreed to lease approximately
392,000 square feet of office space located at 101 Hudson Street in Jersey City,
New Jersey (the "Operations Center"). The lease term will commence in August
1994 and provides for minimum rental payments of approximately $87 million over
its 16-year term. Concurrently, the Company announced it would relocate certain
administrative employees to five additional floors at 3 World Financial Center
in New York, New York. These floors will be purchased from American Express for
approximately $44 million, with the Company financing the purchase through the
issuance of notes to American Express. In connection with the relocation to the
Operations Center and the additional space at the World Financial Center, the
Company anticipates incremental fixed asset additions of approximately $112
million which is expected to be funded from the issuance of long-term debt. The
relocation is expected to be completed in the summer of 1994.
Non-Core Activities and Investments. In March 1990, the Company
discontinued the origination of partnerships (whose assets are primarily real
estate) and investments in real estate. Currently, the Company acts as a general
partner for approximately $4.2 billion of partnership investment capital and
manages a real estate investment portfolio with an aggregate investment basis of
approximately $322 million. The Company provided additional reserves for these
activities of $32 million and $162 million in 1993 and 1992, respectively. At
December 31, 1993 and 1992, the Company had remaining net exposure to these
investments (defined as the remaining unreserved investment balance plus
outstanding commitments and contingent liabilities under guarantees and credit
enhancements) of $252 million and $329 million, respectively. In certain
circumstances, the Company provides financial and other support and assistance
to such investments to maintain investment values. There is no contractual
requirement that the Company continue to provide this support. Although a
decline in the real estate market or the economy in general or a change in the
Company's disposition strategy could result in additional real estate reserves,
the Company believes that it is adequately reserved.
The Company holds $98 million of long-term subordinated indebtedness and
equity securities of American Marketing Industries Holding Inc. ("AMI"). The
subordinated debt, as amended, matures in 1997, and includes certain provisions
which limit cash interest payments and provides for payment-in-kind securities
above such cash interest payments. The AMI loan is current in payment in
accordance with its terms.
The Company has other equity, partnership and debt investments unrelated to
its ongoing businesses. At December 31, 1993, the total carrying value of the
AMI loan and these other investments was $229 million. Management's intention
with regard to non-core assets is the prudent liquidation of these investments
as and when possible. See "Business -- Non-Core Assets."
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.
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<PAGE> 46
NEW ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board Interpretation No. 39, "Offsetting of
Amounts related to Certain Contracts" ("FIN No. 39"), was issued in March 1992.
Effective for balance sheets after January 1, 1994, FIN No. 39 restricts the
current industry practice of offsetting certain receivables and payables.
Although the implementation of this standard is expected to substantially
increase gross assets and liabilities, the Company believes that its results of
operations and overall financial condition will not be affected. The Financial
Accounting Standards Board ("FASB") has instructed its staff to explore
modifying FIN No. 39 to create certain exceptions, which, if enacted, would
substantially mitigate the increase in the Company's gross assets and
liabilities expected to initially result from the implementation of FIN No. 39.
In November 1992, the FASB issued Statement of Financial Standards ("SFAS")
No. 112, "Employers Accounting for Postemployment Benefits." This statement
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. The Company will record a charge to reflect a
cumulative effect of a change in accounting principle of approximately $13
million after-tax in the first quarter of 1994.
In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Company records substantially
all its securities at market value. No adjustment is anticipated to be recorded
as a result of this accounting pronouncement.
RISK MANAGEMENT
Risk management is an integral part of the Company's business. The Company
has established extensive policies and procedures to identify, monitor, assess
and manage risk effectively. For a discussion of these policies and procedures,
see "Business -- Risk Management."
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<PAGE> 47
BUSINESS
Lehman Brothers is one of the leading global investment banks serving
institutional, corporate, government and high net worth individual clients and
customers. The Company's worldwide headquarters in New York and regional
headquarters in London and Tokyo are complemented by offices in 19 additional
locations in the United States, 11 in Europe and the Middle East, four in Latin
and South America and seven in the Asia Pacific region.
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; asset
management; research; and the trading of foreign exchange, derivative products
and certain commodities. The Company acts as a market maker 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 NASD, and 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 followed 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 capabilities and
generates a majority of the Company's revenues and profits. Developing lead
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
sales professionals work together with global products and services
professionals to identify and develop lead relationships with priority clients
and customers worldwide. 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 securities industry.
Lehman Brothers' strategy consists of the following four key elements:
(1) Focused coverage of major issuing clients and institutional and high
net worth individual investing customers. The Company's Investment Banking and
Sales areas develop and maintain relationships with clients and customers to
understand and meet their financial needs. Business volume generated through
these relationships accounts for the majority of Lehman Brothers' business.
(2) Comprehensive product and service capabilities. Lehman Brothers has
built capabilities in major product and service categories to enable the Company
to develop lead relationships with its clients and customers, meet their diverse
needs and increase the Company's overall volume of business. Each of these
product and service capabilities is provided to clients and customers by
Investment Banking and Sales.
(3) Global scope of business activities. Lehman Brothers pursues a global
strategy in order to: (i) enhance the Company's product and service
capabilities; (ii) position the Company to increase its flow of business as the
international markets continue to expand; (iii) leverage the Company's
infrastructure to benefit from economies of scale; and (iv) geographically
diversify the Company's revenues.
(4) Organizational structure that enables and encourages the Company's
business units to act in a coordinated fashion as "One Firm." The Company is
organized to provide the delivery of products and services through teams
comprised of professionals with specialized expertise focused on meeting the
financial objectives of the Company's clients and customers.
Lehman Brothers also engages in activities such as arbitrage and
proprietary trading that leverage the Company's expertise and infrastructure and
provide attractive profit opportunities, but generally entail a higher degree of
risk as the Company makes investments for its own account.
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FOCUSED CLIENT AND CUSTOMER COVERAGE
INVESTMENT BANKING
Lehman Brothers is a leading underwriter of equity and equity-related
securities in the equity capital markets and of taxable and tax-exempt fixed
income securities denominated in U.S. dollars and other currencies in the fixed
income markets. The Company also engages in project and real estate financings
around the world. According to Securities Data Company, Inc., Lehman Brothers
was the third ranked underwriter of debt and equity securities worldwide in
1993, compared to a ranking of eighth in 1990. During 1993, Lehman Brothers lead
managed 784 offerings of debt and equity securities worldwide with a total
volume of $129.4 billion.
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 to accomplish their financial objectives. Investment Banking is
organized into industry and geographic coverage groups, enabling individual
bankers to develop specific expertise in particular industries and markets.
Industry coverage groups include consumer products, financial institutions,
health care, industrial, media, merchandising, natural resources, real estate,
technology, telecommunications, transportation and utilities. Where appropriate,
professionals with specialized expertise in Strategic Advisory, Equities, Fixed
Income, Foreign Exchange, Commodities, Derivatives and Project Finance are
integrated into the client coverage teams.
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, divestitures,
leveraged transactions, takeover defenses, spin-offs, corporate reorganizations
and recapitalizations, tender and exchange offers, privatizations, opinion
letters and valuations. The Company's Strategic Advisory Group works closely
with industry and geographic coverage investment bankers and product specialists
around the world. As mergers and acquisitions activity has become increasingly
global, Lehman Brothers has maintained its position as a leader in cross-border
transactions. In 1993, Lehman Brothers was ranked fourth in terms of mergers and
acquisitions transactions worldwide according to Securities Data Company, Inc.,
the same ranking it held in 1990. In 1993, the Company advised clients worldwide
on transactions totaling $23.2 billion.
Lehman Brothers has increased its international presence during the past
few years in recognition of the current and anticipated growth in international
markets. Most recently, in 1993 the Company strengthened its presence in
Germany, initiated banking coverage of the People's Republic of China, and in
early 1994, opened an office in Beijing. During 1993, Lehman Brothers also
brought together resources from around the world to advise on a complete range
of financial and strategic issues in other emerging markets such as Mexico and
Turkey.
INSTITUTIONAL SALES
Institutional Sales serves the investing and liquidity needs of major
institutional investors worldwide and provides the distribution mechanism for
new issues and secondary market securities. Lehman Brothers maintains a network
of over 750 sales professionals in 19 locations around the world. Institutional
Sales focuses on the major institutional investors that constitute the major
share of global buying power in the financial markets. Lehman Brothers' goal is
to be considered one of the top three investment banks by such institutional
investors. By serving the needs of these customers, the Company also gains
insight into investor sentiment worldwide regarding new issues and secondary
products and markets, which in turn benefits the Company's issuing clients.
Institutional Sales is organized into four distinct sales forces, operating
globally and specialized by the following product types: Equities, Fixed Income,
Foreign Exchange/Commodities and Asset Management. Institutional Sales
professionals work together to coordinate coverage of major institutional
investors through customer teams. Depending on the size and investment
objectives of the institutional investor, a customer
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team can be comprised of from two to five sales professionals, each specializing
in a specific product. This approach positions Lehman Brothers to deliver the
full resources of the Company to its customer base.
HIGH NET WORTH AND MIDDLE MARKET SALES
The Company's Financial Services Division serves the investment needs of
high net worth individual investors and small and mid-sized institutions. This
division has one of the largest sales forces of its kind among major investment
banks, with over 500 investment representatives located in seven offices in the
major financial centers of the United States and 19 offices in major financial
centers in Latin America, Europe, the Middle East and the Asia Pacific region.
The Company's investment representatives provide investing customers with ready
access to Lehman Brothers' equity and fixed income research, execution
capabilities and global product offerings. The Financial Services Division also
enables the Company's issuing clients to access a diverse investor base
throughout the world.
The global network of investment representatives is supported by the
Investor Services Group located in New York, London and Hong Kong. This group
provides an integrated, global approach to transaction execution, marketing
support, asset allocation strategies, and product development. The Investor
Services Group also works closely with Lehman Brothers Global Asset Management
to develop proprietary product offerings for investing customers.
Through Lehman Brothers Bank (Switzerland) S.A. (the "Bank"), the Financial
Services Division provides high net worth investors the traditional personalized
services of a Swiss bank, combined with the global resources of a leading
securities company. The Bank's services include deposit facilities,
international investment products, multi-currency secured lending and global
custodial services.
COMPREHENSIVE PRODUCT AND SERVICE CAPABILITIES
Lehman Brothers provides equity, fixed income, foreign exchange,
commodities, asset management and merchant banking products and services to
clients and customers worldwide. Each area is organized on a global basis and
professionals are integrated into teams, supported by a dedicated administrative
and operations staff, to provide high quality products and services.
EQUITIES
Lehman Brothers combines professionals from the sales, trading, financing,
derivatives and research areas of Equities, together with investment bankers,
into teams to serve the financial needs of the Company's equity clients and
customers. The integrated nature of the Company's global operations and the
equity expertise delivered through the Company's client and customer teams
enable Lehman Brothers 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. According to Securities Data Company, Inc., Lehman
Brothers ranked fourth in lead managed equity and equity-related securities
offerings worldwide in 1993, compared to a ranking of sixth in 1990. During
1993, the Company lead managed 138 equity offerings worldwide totaling $10.6
billion.
The Equities product 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 Depository Receipts, convertibles, options, warrants and
derivatives. The Company participates 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 and Milan. During 1993, Lehman Brothers made markets in the
top 300 NASDAQ stocks as measured by volume. The Company also makes markets in
almost all major European large capitalization stocks. In addition, the
Company's convertible securities trading professionals
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make markets in nearly 300 convertible debenture issues and 100 convertible
preferred stock issues around the world.
Derivative Products. Lehman Brothers offers equity derivative capabilities
across a wide spectrum of products and currencies, including listed options and
futures, portfolio trading, OTC options, equity swaps, warrants and similar
products. In 1993, Lehman Brothers developed and marketed several innovative
products designed to help investors establish or hedge positions in global
markets and currencies. These included products such as certain call and put
warrants that use major stock indices as a benchmark, including the Hang Seng,
the FT-SE Eurotrack 200, the Mexican Bolsa, and the Nikkei Index. Warrants were
also issued on baskets of stocks, including the Company's Ten Uncommon
Values(sm), which is based on the recommendations of Lehman Brothers' equity
research analysts. In addition, Lehman Brothers lead managed the largest ever
stand-alone U.S. corporate warrant issue in 1993.
Equities Research. The Equities research department is integrated with and
supports the Company's investment banking, sales and trading activities. An
important objective of Equities research is to have in place high quality
research analysts covering industry and geographic sectors that support the
activities of the Company's clients and customers. The Equities research
department is comprised of regional teams staffed by industry specialists,
covering more than 50 industry sectors and 1,000 companies worldwide from
locations in New York, London, Hong Kong and Tokyo. During 1993, the Company
expanded its global economics coverage and technical market analysis
capabilities.
Equity Finance. Lehman Brothers operates a comprehensive equity finance
business to support the funding, sales and trading activities of the Company and
its clients and customers. Margin lending for the purchase of equities and
equity derivatives, securities lending and short sale facilitation are among the
main functions of the equity finance group. This group also engages in a conduit
business, whereby the Company seeks to earn a positive net spread on matched
security borrowing and lending activities.
FIXED INCOME
Lehman Brothers actively participates in all major fixed income product
areas worldwide and maintains a 24-hour trading presence in global fixed income
securities. The Company combines professionals from the sales, trading,
financing, derivatives and research 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. According to
Securities Data Company, Inc., Lehman Brothers ranked third in lead managed
fixed income securities offerings worldwide in 1993, compared to a ranking of
ninth in 1990. During 1993, the Company lead managed 646 offerings worldwide for
a total of $118.8 billion of fixed income securities.
Fixed Income products consist of dollar and non-dollar government,
sovereign and supranational agency obligations; money market products; corporate
debt securities; mortgage and asset-backed securities; emerging market
securities; municipal and tax-exempt securities; derivative products and
research. In addition, the Company's central funding operation provides global
access to cost efficient debt financing sources, including repurchase
agreements, for the Company and its clients and customers.
Government and Agency Obligations. Lehman Brothers is one of the leading
39 primary dealers in U.S. Government securities, as designated by the Federal
Reserve Bank of New York, and participates in the underwriting of, and maintains
positions in, U.S. Treasury bills, notes and bonds, and securities of federal
agencies. The Company is also a market maker in the government securities of all
G7 countries, and participates in other major European and Asian government bond
markets.
Money Market Products. Lehman Brothers is a global market leader in the
origination and distribution of short-term debt obligations, including
commercial paper, short-term notes, preferred stock and Money Market Preferred
Stock(R). The Company is an appointed dealer for approximately 600 commercial
paper programs on behalf of companies and government agencies worldwide.
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Corporate Debt Securities. Lehman Brothers is a leader in the underwriting
and market making of fixed, floating dollar and non-dollar investment grade debt
worldwide and trades approximately $2.0 billion of these securities on a daily
basis. According to Securities Data Company, Inc., during 1993, Lehman Brothers
ranked third in new issue domestic investment grade debt. The Company also
underwrites and makes markets in non-investment grade debt securities and bank
loans. Lehman Brothers trades in excess of $2.0 billion of high yield securities
on a monthly basis.
Mortgage and Asset-Backed Securities. The Company is a leading underwriter
of and market maker in mortgage and asset-backed securities. Lehman Brothers
makes markets and trades in the full range of U.S. agency-backed mortgage
products, as well as public and private collateralized mortgage obligations and
whole loan products. The Company's trading activity in the secondary mortgage
market exceeds $4.0 billion on a daily basis. According to Securities Data
Company, Inc., the Company ranked second with $39.9 billion of residential,
commercial and multi-family mortgage securities underwritten on a lead managed
basis in 1993.
Emerging Market Securities. The Company is a leader in the trading,
structuring and underwriting of Latin American, Eastern European, and Asian
dollar and local currency instruments. In 1993, the emerging markets group lead
managed over $1 billion of new issues and traded over $150 billion of loans and
Brady bonds.
Municipal and Tax-Exempt Securities. Lehman Brothers is a leading 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. The Company's Public
Finance group advises state and local governments on the issuance of municipal
securities, and works closely with the municipal sales and trading area to
underwrite both negotiated and competitive short- and long-term offerings.
According to Securities Data Company, Inc., Lehman Brothers ranked third in lead
managed municipal securities offerings in 1993 with a total volume of $29.3
billion.
Derivative Products. The Company offers a broad range of derivative
product services in more than 15 currencies on a 24-hour basis in nine major
financial centers. Derivatives professionals are integrated into all of the
Company's major fixed income product areas. In 1993, Lehman Brothers assisted
over 1,000 clients and customers worldwide, in the execution of over 3,900
transactions aggregating over $265 billion (notional amount).
In 1993, the Company introduced several new derivative products to meet the
needs of both issuers and investors, including Step-Up Recovery Floating Rate
Notes and Range Floaters. These innovative products are designed to offer
issuers and investors the opportunity to diversify their investment and
liability portfolios. In late 1993, Lehman Brothers incorporated Lehman Brothers
Financial Products Inc. ("LBFP"), a separately capitalized triple-A rated
derivatives subsidiary. Lehman Brothers established LBFP to increase the volume
of its derivatives business and capture additional underwriting and trading
business. It is expected that LBFP will commence its derivatives activities in
the third quarter of 1994.
Central Funding. The central funding unit engages in two major activities,
matched book funding and secured financing. Matched book funding involves
lending cash on a short-term basis to institutional customers collateralized by
marketable securities, typically government or government agency securities.
These arrangements are classified on the Company's balance sheet as "securities
purchased under agreements to resell." The Company may also enter into
short-term contractual agreements, referred to as "securities sold under
agreements to repurchase," whereby securities are pledged as collateral in
exchange for cash. The Company enters into these agreements in various
currencies and seeks to generate profits from the difference between interest
earned and interest paid.
Central funding 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.
Central funding 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.
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Fixed Income Research. Fixed Income research at Lehman Brothers
encompasses a broad 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. Fixed Income research specialists are based in New York, London,
Tokyo and Hong Kong. Their expertise includes U.S. government and agency
securities, sovereign and supranational issues, corporate securities, high
yield, asset and mortgage-backed securities and emerging market debt. Fixed
Income research expanded its quantitative capabilities and its coverage of the
commercial real estate market during 1993.
FOREIGN EXCHANGE
According to a leading market research firm, Lehman Brothers is one of the
top two global investment banks that trade foreign exchange for clients and
customers. Through its foreign exchange operations, Lehman Brothers seeks to
provide its clients and customers with superior trading execution, price
protection and hedging strategies to manage volatility. The Company, through
operations in New York, London, and Hong Kong, engages in trading activities in
all major currencies and maintains a 24-hour foreign exchange market making
capability for clients and customers worldwide. In 1993, Lehman Brothers
enhanced its foreign exchange capabilities by becoming the first U.S. investment
bank to join the Electronic Broking Service in Europe. In addition to the
Company's traditional client/customer-driven foreign exchange activities, Lehman
Brothers also trades foreign exchange for its own account. See
"Business -- Business Strategy -- Proprietary Trading."
COMMODITIES AND FUTURES
Lehman Brothers engages in commodities and futures trading in three
business lines: market making in metals and energy, exchange futures execution
services, and managed futures. To service the needs of the Company's clients and
customers in the energy industry, Lehman Brothers is an active market maker in
energy-related refined products. The Company seeks to provide clients and
customers with innovative investment and hedging strategies to satisfy their
investing and risk management objectives. In 1993, professionals from
Commodities, Investment Banking and Equities worked together to structure and
issue gold-denominated preferred stock, which was the first commodity-linked
equity security to be listed on the New York Stock Exchange.
ASSET MANAGEMENT
Lehman Brothers Global Asset Management ("LBGAM") provides discretionary
and non-discretionary investment management services to institutional and high
net worth investors worldwide. LBGAM's asset management philosophy combines
fundamental research with quantitative techniques to identify investment
opportunities that span the global equity, fixed income and currency markets.
Established in late 1992, LBGAM's assets under management were over $12 billion
at December 31, 1993. During 1993, LBGAM launched the Lehman Brothers
Institutional Funds, a family of money market funds directed toward U.S.
institutional investors, and expanded its offshore mutual funds directed toward
non-U.S. investors and its managed futures funds for investors throughout the
world. LBGAM serves its customers from four principal locations in New York,
Boston, London and Tokyo.
MERCHANT BANKING FUND MANAGEMENT
Since 1989, the Company's principal method of making merchant banking
investments has been through a series of partnerships (the "1989 Partnerships"),
for which the Company acts as general partner, and in some cases as a limited
partner. Merchant banking activities have consisted principally of making equity
and certain other investments in merger, acquisition, restructuring and
leveraged capital transactions, including leveraged buyouts, either
independently or in partnership with the Company's clients. Current merchant
banking investments include both publicly traded and privately held companies
diversified on a geographic and industry basis.
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The 1989 Partnerships have a ten-year life with capital available for
investment for only the first five years, which period ended in March 1994.
Accordingly, during the remaining life of the 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 is continuing to review its strategic opportunities in
merchant banking and intends to participate in selected merchant banking
opportunities. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Specific Business Activities and
Transactions -- Merchant Banking Transactions."
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 in value. 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.
Proprietary Trading. Lehman Brothers engages in the trading of various
securities, derivatives, currencies 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
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).
ADMINISTRATION AND OPERATIONS
The Company's administration and operations staff supports its businesses
through the processing of certain securities and commodities transactions;
receipt, identification and delivery of funds and securities; internal financial
controls; safeguarding of customers' securities; and compliance with regulatory
and legal requirements. In addition, this staff is responsible for information
systems, communications, facilities, legal, internal audit, treasury, tax,
accounting and other support functions.
In response to the needs of certain of its domestic and international
businesses, the Company has acquired sophisticated data processing and
telecommunications equipment. The Company believes such acquisition will enable
it to provide the high level of technological and analytical support required to
process, settle and account for transactions in a worldwide marketplace.
Automated systems also provide sophisticated decision support which enhances
trading capability and the management of the Company's cash and collateral
resources. There is considerable fluctuation within each year and from year to
year in the volume of business that the Company must process, clear and settle.
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GLOBAL SCOPE OF BUSINESS ACTIVITIES
Through its network of offices in 44 cities around the world, Lehman
Brothers pursues a global strategy to meet more effectively the needs of clients
and customers and to generate increased business volume for the Company. The
Company's headquarters in New York and regional headquarters located in London
and Tokyo provide support for and are closely linked to the Company's other
regional offices. Because Lehman Brothers' global strategy is based on a unified
team approach to serving the financial needs of its clients and customers, the
Company's regional offices enable Investment Banking and Sales to more
effectively develop relationships and deliver products and services to clients
and customers whose businesses are located in a given area or who predominantly
transact business in that region. Based on the growth in international business
activities over the past several years and the continued development of a more
integrated global financial economy, Lehman Brothers expects international
business activities to continue to grow in the future. The Company believes that
its global presence and operating strategy position it to continue to increase
the Company's flow of business, and thereby continue to realize greater benefits
from economies of scale.
ORGANIZATION
The organization and culture of Lehman Brothers represent the fourth
element of the Company's overall strategy. This strategy requires close
integration of investment bankers and sales professionals and product and
service professionals to maximize the Company's effectiveness in developing
client and customer relationships. To effect this strategy, Lehman Brothers is
managed as an integrated global operation. Business planning and execution is
coordinated between regional locations and product heads. The Company's
18-member Operating Committee is the principal governing body of Lehman
Brothers, and is comprised of representatives from every major area of the
organization, including the senior managers from the Company's operations in the
European and Asia Pacific regions. This structure promotes communication and
cooperation, enabling Lehman Brothers to rapidly identify and address
opportunities and issues on a global, firm-wide level. The Operating Committee
facilitates management's ability to run the business as a whole, as opposed to
managing the business units separately.
This structure is reinforced with a culture and operating practices that
promote integration through the implementation and communication of
organizational values and principles consistent with the Company's "One Firm"
philosophy. An example of one of these operating practices is the Company's
approach to compensation, whereby employees are compensated to a significant
extent on the overall performance of the Company and to a lesser extent on the
performance of any individual business area.
RISK MANAGEMENT
Risk is an inherent part of all of Lehman Brothers' businesses and
activities. The extent to which Lehman Brothers properly and effectively
identifies, assesses, monitors and manages each of the various types of risks
involved in its trading, brokerage and investment banking activities is critical
to the success and profitability of the Company. The principal types of risk
involved in Lehman Brothers' activities are market risks, credit or counterparty
risks and transaction risks. Lehman Brothers has developed a control
infrastructure to monitor and manage each type of risk on a global basis
throughout the Company.
MARKET RISK
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 has developed a multi-level approach for monitoring and
managing its market risk. The base level control is at the trading desks where
various risk management functions are performed, including daily mark to market
by traders and on-going monitoring of inventory aging and pricing by trading
desk
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managers, product area management and the independent risk managers for each
product area. The next level of management of market risk occurs in the Trade
Analysis department, which independently reviews the prices of the Company's
trading positions and regularly monitors the aging of inventory positions.
The final level of the risk management process is the Senior Risk
Management Committee, which is composed of senior management from the various
product areas and from credit, trade analysis and risk management. In addition,
when appropriate, Lehman Brothers employs hedging strategies to reduce its
exposure to fluctuations in market prices of securities and volatility in
interest or foreign exchange rates.
CREDIT OR COUNTERPARTY RISKS
Lehman Brothers is exposed to credit risks in its trading activities 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. The responsibility for
managing these credit risks rests with the Corporate Credit department which has
operations in New York, London, Frankfurt, Tokyo and Hong Kong. The department,
which is organized along both industry and geographic lines, is independent from
any of Lehman Brothers' product areas. Corporate Credit manages the Company's
credit risks by establishing and monitoring counterparty limits, structuring and
approving specific transactions, actively managing credit exposures and
participating in the new product review process. In addition, Lehman Brothers,
when appropriate, may require collateral from the counterparty to secure its
obligations to the Company or seek some other form of credit enhancement (such
as financial covenants, guarantees or letters of credit) to support the
counterparty's contractual commitment.
TRANSACTION RISK
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.
Each proposed transaction involving the underwriting or placement of
securities by Lehman Brothers is reviewed by the Company's Commitment Committee.
The Commitment Committee is staffed by senior members of the Company with
extensive experience in the securities industry. The principal function of the
Commitment Committee is to determine whether Lehman Brothers should participate
in a transaction in which the Company's capital and reputation will be at risk.
Fairness opinions and valuation letters to be delivered by Lehman Brothers
must be reviewed and approved by the Company's Fairness Opinion Committee, which
is composed of senior investment bankers who provide an independent evaluation
of the opinions and conclusions to be rendered to the Company's clients.
In connection with its investment banking or merchant banking activities,
the Company may from time to time make proprietary investments in securities
that are not readily marketable. These investments primarily result from the
Company's efforts to help clients achieve their financial and strategic
objectives. Any such proposed investment which falls within established criteria
with respect to the amount of capital invested, the anticipated holding period
and the degree of liquidity of the securities must be reviewed and approved by
the Company's Investment Committee, which is composed of senior investment
bankers. The Investment Committee reviews in detail the proposed investment and
applies relevant valuation methodologies to evaluate the risk of loss of capital
compared to the anticipated returns from the investment and determine whether to
proceed with the transaction.
Lehman Brothers recently established a New Products and Business Committee
(the "NPBC") for new products developed by Lehman Brothers or new businesses to
be entered into by the Company. The NPBC will work in cooperation with the
originators or sponsors of a new product or business to evaluate its
feasibility, assess its potential risks and liabilities and analyze its costs
and benefits.
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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, certain bridge
loans 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. See "Legal Proceedings."
Since 1990, management has devoted substantial resources to reducing the
Company's Non-Core Assets. Between December 31, 1990 and December 31, 1993, the
Company's Non-Core Assets decreased from $2.3 billion in 1990 to approximately
$481 million in 1993, with Non-Core Assets defined as carrying value plus
contingent exposures net of reserves. Management's intention with regard to
these Non-Core Assets is the prudent liquidation of these investments as and
when possible. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
RELATIONSHIP WITH SMITH BARNEY
On July 31, 1993, the Company completed the sale of Shearson which
consisted of the Company's domestic retail brokerage business (except for such
business conducted under the Lehman Brothers name), substantially all of its
asset management business, the operations and data processing functions that
supported those business and certain related assets and liabilities. See "Recent
Developments."
SECURITIES CLEARING, DATA SERVICES AND GENERAL SERVICES AGREEMENTS
Pursuant to a clearing agreement (the "Clearing Agreement"), Smith Barney
carries and clears, on a fully disclosed basis, all accounts introduced to it by
Lehman Brothers, and performs all clearing and settlement functions for
equities, municipal securities and corporate debt which were previously
performed by Shearson. Lehman Brothers also conducts certain securities lending
activities as agent for Smith Barney under the Clearing Agreement. Pursuant to
Data Services and General Services Agreements, Smith Barney provides to the
Company all of the same data processing and related services that it previously
received from Shearson. Charges for services under these three agreements are
generally calculated using the intercompany transfer pricing methodology in
effect prior to the Primerica Transaction. These agreements expire on December
31, 1994, but may be extended for up to an additional six months upon payment by
the Company of up to $5 million. The Company has been reviewing alternative
clearing, data processing and other servicing arrangements to take effect after
the expiration of its arrangements with Smith Barney.
CERTAIN ARRANGEMENTS
Revolving Cash Subordination Agreement. The Company has agreed to lend to
Smith Barney up to $150 million to cover capital charges in excess of $50
million incurred by Smith Barney as a result of carrying LBI's customer and
proprietary positions (the "Lehman Capital Charges"). The Company will lend
additional amounts to Smith Barney in the event that the Lehman Capital Charges
increase above $200 million. As of March 28, 1994, $150 million was outstanding.
Under certain circumstances, Travelers is required to purchase all or part of
Smith Barney's indebtedness to the Company under the facility up to $250
million. The Company is only required to fund in excess of $250 million under
this facility if Travelers agrees to a corresponding increase in its purchase
obligation; provided that, without such agreement, the Company may not engage in
any activity which results in the Lehman Capital Charges exceeding $300 million.
Revolving Credit Agreements. Pursuant to a Revolving Credit Agreement,
Smith Barney may borrow funds from LBI secured by securities having a market
value equal to not less than 130% of the aggregate unpaid principal amount
borrowed for the purpose of funding customer margin debits carried by Smith
Barney. As of March 28, 1994, there were no amounts outstanding under this
facility. Pursuant to an Unsecured Revolving Credit Agreement, Holdings has
agreed to advance funds to Smith Barney in order to finance, in part, certain of
the cash demands of the securities lending activities conducted under the
Clearing
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Agreement. As of March 28, 1994, $756 million was outstanding under this
facility. These facilities will terminate upon the termination of the Clearing
Agreement.
Non-Solicitation. In connection with the Primerica Transaction, both LBI
and Smith Barney agreed that they would refrain from soliciting each other's
employees and certain customers for varying periods of time after July 31, 1993.
The majority of the customer-related non-solicitation provisions have expired.
Shearson Related Litigation. LBI and Smith Barney agreed to a division of
litigation relating to Shearson pursuant to which, subject to certain
exceptions, Smith Barney is liable for such litigations arising after April 11,
1993. With respect to matters arising on or before April 11, 1993, LBI
transferred to Smith Barney a $50 million reserve. If that reserve is exhausted,
the parties have agreed to share liability equally on the matters arising on or
before April 11, 1993. LBI retained liability for regulatory matters. LBI also
retained liability for certain litigation involving the origination of limited
partnerships and underwritings (the "Products"); however, Smith Barney and LBI
share responsibility for broker misconduct litigation with respect to the
Products.
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 advisers 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 adviser, 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.
The Company does business in the international fixed income, equity and
commodity markets and undertakes investment banking activities through its
London 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, the Company is
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
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banking activities) and the Bank of England (which regulates its wholesale money
market, bullion and foreign exchange businesses).
Holdings' subsidiary, Lehman Brothers Japan Inc., is a licensed securities
company in Japan and a member of the Tokyo Stock Exchange, the Osaka Stock
Exchange and the Tokyo Financial Futures Exchange and, as such, is regulated by
the Japanese Ministry of Finance, the Japan Securities Dealers Association and
such exchanges.
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
As registered broker-dealers LBI and Lehman Government Securities Inc.
("LGSI"), a wholly owned subsidiary of LBI, are subject to the Commission's net
capital rule (Rule 15c3-1, the "Net Capital Rule") promulgated under the
Exchange Act. The NYSE and the NASD monitor the application of the Net Capital
Rule by LBI and LGSI, respectively. LBI and LGSI compute net capital under the
alternative method of the Net Capital Rule which requires the maintenance of
minimum net capital, as defined. A broker-dealer may be required to reduce its
business if its net capital is less than 4% of aggregate debit balances and may
also be prohibited from expanding its business or paying cash dividends if
resulting net capital would be less than 5% of aggregate debit balances. In
addition, the Net Capital Rule does not allow withdrawal of subordinated capital
if net capital would be less than 5% of such debit balances.
The Net Capital Rule also limits the ability of broker-dealers to transfer
large amounts of capital to parent companies and other affiliates. Under the Net
Capital Rule, equity capital cannot be withdrawn from a broker-dealer without
the prior approval of the Commission when net capital after the withdrawal would
be less than 25% of its securities position haircuts (which are deductions from
capital of certain specified percentages of the market value of securities to
reflect the possibility of a market decline prior to disposition). In addition,
the Net Capital Rule requires broker-dealers to notify the Commission and the
appropriate self-regulatory organization two business days before a withdrawal
of excess net capital if the withdrawal would exceed the greater of $500,000, or
30% of the broker-dealer's excess net capital, and two business days after a
withdrawal that exceeds the greater of $500,000, or 20% of excess net capital.
Finally, the Net Capital Rule authorizes the Commission to order a freeze on the
transfer of capital if a broker-dealer plans a withdrawal of more than 30% of
its excess net capital and the Commission believes that such a withdrawal would
be detrimental to the financial integrity of the Company or would jeopardize the
broker-dealer's ability to pay its customers. Certain of LBI's other
subsidiaries are also subject to the Net Capital Rule.
Compliance with the Net Capital Rule could limit those operations of LBI
that require the intensive use of capital, such as underwriting and trading
activities and the financing of customer account balances, and also could
restrict the ability of Holdings to withdraw capital from LBI, which in turn
could limit the ability of Holdings to pay dividends, repay debt and redeem or
purchase shares of its outstanding capital stock. See Footnote 18 of Notes to
Consolidated Financial Statements.
PROPERTIES
The Company's headquarters occupy approximately 915,000 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. The Company expects to relocate in or about August 1994,
certain administrative personnel from 388 and 390 Greenwich Street to five
floors in the World Financial Center which are currently occupied by
subsidiaries of American Express. These five floors will be added to the
Company's interest in the World Financial Center, resulting in total occupancy
of approximately 1,147,000 square feet. See "Certain Transactions and Agreements
Between the Company and American Express -- World Financial Center."
The Company entered into a lease for approximately 392,000 square feet for
offices located at 101 Hudson Street in Jersey City, New Jersey (the "Operations
Center"). The Operations Center will be
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used by systems, operations, and certain administrative personnel and contains
certain back-up trading facilities. The lease term is approximately 16 years and
is expected to commence in August 1994.
The Company occupies 14 floors at 388 and 390 Greenwich Street which it
expects to vacate by July 31, 1994 and will relocate the personnel to the
Operations Center and the World Financial Center.
The Company leases approximately 344,000 square feet of office space in
London, England. The Company consolidated most of its London operations into
this space in 1987. Most of the Company's other offices are located in leased
premises, the leases for which expire at various dates through the year 2007.
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.
EMPLOYEES
As of December 31, 1993 the Company employed approximately 9,300 persons,
including 6,900 in the U.S. and 2,400 internationally. The Company considers its
relationship with its employees to be good. See "Recent
Developments -- Reduction in Personnel."
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 business or consolidated
financial condition of the Company.
GENERAL ACQUISITION, INC. ET AL. V. GENCORP, INC. ET AL. V. WAGNER & BROWN, ET
AL. AND SHEARSON LEHMAN BROTHERS INC. AND SHEARSON LEHMAN BROTHERS HOLDINGS INC.
This litigation in the United States District Court for the Southern
District of Ohio (the "Ohio Court") arose out of the Company's representation of
Wagner & Brown and AFG Industries, Inc. ("AFG") in connection with their effort
to acquire GenCorp, Inc. ("GenCorp") in March 1986. In response to the tender
offer and the litigation commenced by Wagner & Brown and AFG on March 17, 1986,
GenCorp amended its answer and counterclaims on April 2, 1986 to assert claims
against LBI and the Company. Only GenCorp's counterclaims against LBI remain
pending. GenCorp asserted common law claims for breach of fiduciary duty, fraud,
negligence and unjust enrichment against LBI. The claims are based on prior
contacts between LBI and GenCorp and LBI's subsequent role in advising and
assisting Wagner & Brown and AFG with respect to the tender offer. GenCorp seeks
$258 million in damages and the imposition of a constructive trust on the fees
and profits the Company earned in the transaction. On or about October 2, 1992,
the Ohio Court granted LBI's motion for summary judgment and dismissed GenCorp's
claim for compensatory damages. GenCorp has appealed this decision to the United
States Court of Appeals for the Sixth Circuit. No decision has been rendered.
GenCorp's claim for disgorgement of the fees that LBI received has been stayed
pending the appeal.
BAMAODAH V. E.F. HUTTON & COMPANY INC.
In April 1986, Ahmed and Saleh Bamaodah commenced an action against E.F.
Hutton & Company Inc. ("EFH"), a subsidiary of The E.F. Hutton Group Inc.
("Hutton"), to recover all losses the Bamaodahs had incurred since May 1981 in
the trading of commodity futures contracts in a nondiscretionary EFH trading
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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.
PAUL WILLIAMS AND BEVERLY KENNEDY, ET AL. V. BALCOR PENSION INVESTORS ET AL.
In February 1990, a purported class action complaint was filed in the
United States District Court for the Northern District of Illinois. The
complaint names eight separate limited partnerships originated by The Balcor
Company ("Balcor"), which was then a wholly owned subsidiary of LBI, known as
the Balcor Pension Investors series. Also named as defendants were the general
partner of each named limited partnership, including Balcor, and Balcor
Securities Co., LBI and American Express. The complaint which was amended on
October 10, 1990 alleges that the named entities violated certain federal
securities laws with regard to the adequacy and accuracy of disclosure of
information in connection with the offering of limited partnership interests.
The complaint also alleges breach of fiduciary duty, fraud, negligence and
violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO").
The complaint seeks compensatory damages and punitive damages. Defendants'
Amended Counterclaim filed on September 19, 1990, asserts common law claims of
fraud and breach of warranty against plaintiffs. Defendants seek to recover for
the alleged damage to their reputation and business as well as their costs and
attorneys fees in defending against the claims brought by plaintiffs. On
November 29, 1990, W.B. Copeland, Trustee, Ploof Truck Lines, Inc. Profit
Sharing Plan and Allan Hirschfield filed a class action counterclaim against
defendants which is identical to the Amended Complaint seeking, among other
things, leave to join this action as named plaintiffs.
On September 8, 1993, the plaintiffs filed a Third Amended Complaint adding
additional named plaintiffs and an amended motion for class certification which
motions had previously been denied. No plaintiff class has yet been certified
and no judicial determination has been made. No merits discovery has been
conducted.
RALPH MAJESKI, ET AL. V. BALCOR ENTERTAINMENT COMPANY, LTD. ET AL.;
ROBERT ECKSTEIN, ET AL. V. BALCOR FILM INVESTORS, ET AL.
These two actions were filed in United States District Court for the
Eastern District of Wisconsin (the "Wisconsin District Court"). LBI is a
defendant only in the Majeski case. Plaintiffs allege that the named defendants
in the lawsuits violated certain federal securities laws with regard to the
adequacy and accuracy of disclosure of information in respect of the offering of
limited partnership interests in Balcor Film Investors, a partnership of which a
Balcor subsidiary is the general partner. The Majeski complaint also alleges, in
general, breach of fiduciary duty, common law fraud, misrepresentation, breach
of contract and a cause of action in the nature of a derivative action. On
January 18, 1991, the Wisconsin District Court entered an order certifying a
plaintiffs class of all persons who purchased or currently own interests in the
Partnership which were purchased from January 8, 1985 through December 31, 1985.
The Wisconsin District Court also consolidated the Eckstein and Majeski actions
for the remainder of the pretrial proceedings and trial, but did not merge such
actions. On March 11, 1992, the Wisconsin District Court granted defendants'
motions to dismiss on statute of limitations grounds in both actions.
In August 1993, the U.S. Court of Appeals for the Seventh Circuit (the
"Court of Appeals") issued an opinion which reversed the order of the Wisconsin
District Court and remanded the cases to such court for further proceedings. The
defendants sought a writ of certiorari in the U.S. Supreme Court which was
denied in January 1994. Upon remand to the Wisconsin District Court, plaintiffs
filed a motion to amend the complaint to assert a RICO claim; defendants opposed
this amendment, and the motion is pending. In addition, defendants have renewed
their motions to dismiss. These motions are pending before the Wisconsin
District Court.
On or about March 8, 1993, the Majeski plaintiffs filed an action in the
Circuit Court for Milwaukee County, Wisconsin. The allegations, including
damages, in this complaint are essentially the same as in their
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federal court action, described above. Plaintiff's counsel has represented that
this state court action will be dismissed.
GLYNWILL INVESTMENT, LTD. V. SHEARSON LEHMAN BROTHERS INC.
Glynwill Investment, Ltd. ("Glynwill"), a corporation chartered in Curacao,
N.A., commenced an action against LBI "as successor in interest to E.F. Hutton &
Co., Inc." in May of 1990 in the Supreme Court of the State of New York (the
"New York Court"), alleging fraud and breach of contract on the part of EFH in
overcharging Glynwill for foreign exchange transactions executed for Glynwill.
The New York Court, on LBI's motion to dismiss, held that the release signed by
Glynwill after Glynwill's repayment of approximately one half of the $10 million
unsecured debit created in Glynwill's account was not a general release
encompassing the claims raised by Glynwill in this action and denied LBI's
motion. Discovery is ongoing.
ACTIONS RELATING TO FIRST CAPITAL HOLDINGS INC.
FCH Derivative Actions. On or about March 29, 1991, two identical
purported shareholder derivative actions were filed, entitled Mentch v.
Weingarten, et al. and Isaacs v. Weingarten, et al. The complaints in these two
actions, pending in the Superior Court of the State of California, County of Los
Angeles, are filed allegedly on behalf of and naming as a nominal defendant FCH.
Other defendants include Holdings, two former officers and directors of FCH,
Robert Weingarten and Gerry Ginsberg, the four outside directors of FCH, Peter
Cohen, Richard DeScherer, William L. Mack and Jerome H. Miller (collectively,
the "Outside Directors"), and Michael Milken. The complaints allege generally
breaches of fiduciary duty, gross corporate mismanagement and waste of assets in
connection with FCH's purchase of non-rated bonds underwritten by Drexel Burnham
Lambert Inc. and seek damages for losses suffered by FCH, punitive damages and
attorneys' fees. The actions have been stayed pursuant to the bankruptcy of FCH.
Concurrent with the bankruptcy filing of FCH and the conservatorship and
receivership of its two life insurance subsidiaries, First Capital Life
Insurance Company ("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 additional actions were
instituted, naming one or more of Holdings, LBI and American Express as
defendants (individually or collectively, as the case may be, the "American
Express Defendants").
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 raise claims under the federal securities laws and allege 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 July 1, 1991 an action was filed in the United States District Court for
the Southern District of Ohio entitled Benndorf v. American Express Company, et
al. The action is brought purportedly on behalf of three classes. The first
class is similar to the Shareholder Class; the second consists of managing
general agents and general agents who marketed various First Capital Life
products from April 2, 1990 to the filing of the suit and to whom it is alleged
misrepresentations were made concerning FCH (the "Agent Class"); and the third
class consists of Agents who purchased common stock of FCH through the First
Capital Life Non Qualified Stock Purchase Plan ("FSPP") and who have an interest
in the Stock Purchase Account under the FSPP (the "FSPP Class"). The complaint
raises claims similar to those asserted in the other Shareholder Class Actions,
along with additional claims relating to the FSPP Class and the Agent Class
alleging damages in marketing the products. In addition, on August 15, 1991,
Kruthoffer v. American Express Company, et al. was filed in the United States
District Court for the Eastern District of Kentucky, whose complaint is nearly
identical to the Benndorf complaint (collectively the "Agent Class Actions").
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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 Agent Class Actions, 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 complaint (the "Third Amended
Complaint") was filed on behalf of the Shareholder Class and the Agent Class.
The Third Amended Complaint names as defendants the American Express Defendants,
Weingarten and his wife, Palomba Weingarten, Ginsberg, Philip A. Fitzpatrick
(FCH's Chief Financial Officer), the Outside Directors and former FCH outside
directors Jeffrey B. Lane and Robert Druskin (the "Former 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. It also
issued an order denying class certification to the Agent Class. The FSPP Class
action had been previously dropped by the plaintiffs.
The American Express Shareholder Action. On or about May 20, 1991, a
purported class action was filed on behalf of all shareholders of American
Express who purchased American Express common shares during the period beginning
August 16, 1990 to and including May 10, 1991. The case is captioned Steiner v.
American Express Company, et al. and was commenced in the United States District
Court for the Eastern District of New York. The defendants are Holdings,
American Express, James D. Robinson, III, Howard L. Clark, Jr., Harvey Golub and
Aldo Papone. The complaint alleges generally that the defendants failed to
disclose material information in their possession with respect to FCH which
artificially inflated the price of the common shares of American Express from
August 16, 1990 to and including May 10, 1991 and that such nondisclosure
allegedly caused damages to the purported shareholder class. The action has been
transferred to California and is now part of the MDL Action. The defendants have
answered the complaint, denying its material allegations.
The Bankruptcy Court Action. In the FCH bankruptcy, pending in the United
States Bankruptcy Court for the Central District of California (the "Bankruptcy
Court"), on February 11, 1992, the Official Committee of Creditors Holding
Unsecured Claims (the "Creditors' Committee") obtained permission from the
Bankruptcy Court to file an action for and on behalf of FCH and the parent
corporations of the Insurance Subsidiaries. On March 3, 1992, the Creditors'
Committee initiated an adversary proceeding in the Bankruptcy Court, Case No. AD
92-01723, in which they assert claims for breach of fiduciary duty and waste of
corporate assets against Holdings; fraudulent transfer against both Holdings and
LBI; and breach of contract against LBI. Also named as defendants are the
Outside Directors, the Former Outside Directors, Weingarten and Ginsberg.
Holdings and LBI have answered this complaint, denying the material allegations.
Fact discovery has been completed and the contract claim has been dropped by
plaintiffs. No trial date has been set.
The Virginia Commissioner of Insurance Action. On December 9, 1992, a
complaint was filed in federal court in the Eastern District of Virginia by
Steven Foster, the Virginia Commissioner of Insurance 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
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Bankers Life and its present and former policyholders and creditors and punitive
damages. Holdings has answered the complaint, denying its material allegations.
IN RE COMPUTERVISION CORPORATION SECURITIES LITIGATION
In connection with public offerings of notes and common stock of
Computervision, actions were commenced in federal district court in
Massachusetts against Computervision, certain of its executive officers, the
directors of Computervision, LBI, Donaldson, Lufkin & Jenrette Securities
Corporation, The First Boston Corporation and Hambrecht & Quist Incorporated,
the Company and J.H. Whitney & Co. in the United States District Court for the
District of Massachusetts (collectively the "Massachusetts Case"). These actions
have been consolidated in a consolidated amended class action complaint which
alleges in substance that the registration statement and prospectus used in
connection with the offerings contained materially false and misleading
statements and material omissions related to Computervision's anticipated
operating results for 1992 and 1993. The plaintiffs purport to represent a class
of individuals who purchased in the public offering or in the aftermarket. The
complaint seeks damages for negligent misrepresentation and under Sections 11,
12 and 15 of the Securities Act.
In addition, three suits were filed in the United States District Court for
the Southern District of New York. The suits raise claims similar to those in
the Massachusetts Case against the same defendants. The Judicial Panel on
Multidistrict Litigation has ordered these cases consolidated with the
Massachusetts Case.
CC&F MEDFORD III INVESTMENT COMPANY V. THE BOSTON COMPANY, INC. AND
WELLINGTON-MEDFORD III PROPERTIES, INC.
In September 1992, Wellington-Medford Properties, Inc. ("W-M III"), then a
subsidiary of The Boston Company and now a subsidiary of LBI, and The Boston
Company, then a subsidiary of LBI, were sued in Superior Court of the
Commonwealth of Massachusetts by a limited partner in a partnership (the
"Partnership") of which W-M III is the general partner. The Partnership's
principal asset is an office building which is leased to The Boston Company.
Financing in the amount of $74 million provided to the Partnership by The Sanwa
Bank, Ltd. ("Sanwa") is secured by the office building and the lease with The
Boston Company. The financing matured in December 1992 and Sanwa has initiated a
foreclosure process.
The complaint alleges that W-M III has breached its obligation to secure
successor financing in order to prevent The Boston Company from being required
to pay increased rental pursuant to a rental formula in its lease. The complaint
seeks damages in an unspecified amount and a declaration regarding The Boston
Company's lease obligations and W-M III's obligations to secure successor
financing. W-M III and The Boston Company have answered, denying the material
allegations of the complaint.
In April 1993, The Boston Company filed a third-party complaint against
Sanwa seeking a declaration as to The Boston Company's obligations pursuant to
its lease of the office building. Sanwa answered and asserted claims against The
Boston Company and W-M III, including claims for treble damages based on alleged
breaches of the construction loan agreement.
In December 1993, the parties entered into a stay of proceedings for
purposes of facilitating negotiations of a possible settlement. Those
negotiations are ongoing but have not resulted in agreement. The stay has been
extended and now expires on April 15, 1994, with trial scheduled to commence on
or after May 16, 1994.
EASTON & CO. V. MUTUAL BENEFIT LIFE INSURANCE CO., ET AL.; EASTON & CO. V.
LEHMAN BROTHERS INC.
LBI has been 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,
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1991. In the Matter of the Rehabilitation of Mutual Benefit Life Insurance
Company, (Sup. Ct. N.J. Mercer County.)
Easton I was commenced on or about September 17, 1991. In addition to LBI,
the defendants named in this complaint are MBLI, Henry E. Kates (MBLI's former
Chief Executive Officer) and Ernst & Young (MBLI's accountants). The litigation
is purportedly brought on behalf of a class consisting of all persons and
entities who purchased DeKalb, Georgia Housing Authority Multi-Family 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 alleges that LBI violated Section 10(b) of the Exchange
Act and Rule 10b-5 promulgated thereunder, and seeks damages in an unspecified
amount or rescission. The complaint also alleges a common law negligent
misrepresentation claim against LBI and the other defendants.
Easton II was commenced on or about May 18, 1992, and names LBI as the only
defendant. Plaintiff purports to bring this second lawsuit on behalf of a class
composed of all persons who purchased "MBLI-backed Bonds" from LBI during the
period April 19, 1991 through July 16, 1991. The complaint alleges that LBI
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 contains a common law claim of alleged breach of duty and
negligence.
On or about February 9, 1993, the New Jersey District Court granted
plaintiffs' motion for class certification in Easton I. The parties have agreed
to certification of a class in Easton II for purchases of certain fixed-rate
MBLI-backed bonds during the class period.
MAXWELL RELATED LITIGATION
Certain of Holdings' 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. LBIE
and PLC have moved to remand the case back to the Court.
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 December 9, 1991. In this
action, Macmillan sought a declaration that it is the legal and beneficial owner
of approximately 10.6 million shares of Berlitz common stock, including 1.9
million shares then registered in PLC's name. (The same shares that are at issue
in the Berlitz case in New York discussed above.) After a trial, on December 10,
1993, the High Court of Justice handed down a judgment finding for the Company
on all aspects of its defense and dismissing Macmillan's claims.
Bishopsgate Investment Management Limited (in liquidation) v. Lehman
Brothers International (Europe) and Lehman Brothers Holdings PLC. In August
1993, Bishopsgate Investment Management Limited ("BIM") served a Writ and
Statement of Claim against LBIE and PLC. The Statement of Claim alleges that
LBIE and PLC knew or should have known that certain securities received by them,
either for sale or as collateral in connection with BIM's stock loan activities,
were in fact, beneficially owned by various pension funds associated with the
Maxwell Group entities. BIM seeks recovery of any securities still held by LBIE
and PLC or recovery of any proceeds from securities sold by them. The total
value of the securities is alleged to be L.100 million. BIM also commenced
certain proceedings for summary disposition of its claims relating to certain of
the securities with a value of approximately L.30 million. On January 11, 1994,
the parties agreed to
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a settlement of that portion of the claim relating to BIM's request for summary
disposition with respect to certain securities. Under this agreement, two
securities holdings were delivered to BIM. The Company continues to defend the
balance of BIM's claim for recovery of other assets alleged to be worth
approximately L.70 million. The case is scheduled for trial in April 1995.
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. The complaint names
Lehman Brothers and two former E. F. Hutton & Company Inc. employees as
defendants. The complaint alleges that defendants violated Section 10b 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 four Hutton net lease real estate limited partnerships. Plaintiffs
seek: (i) to certify a class of all persons who purchased limited partnership
interests in the four partnerships at issue, (ii) damages in excess of $140
million plus interest or rescission, (iii) treble and punitive damages and (iv)
accounting and attorneys' fees. The Company believes it has several meritorious
defenses and intends to vigorously defend this case.
OTHER MATTERS
In connection with the regulatory attention focused on the U.S. treasury
market, LGSI received from the Commission and the U.S. Department of Justice,
Antitrust Division, subpoenas and letters requesting information and testimony
in connection with a review of the activities of various participants in the
government securities market. LGSI has responded to the subpoenas and letters.
The Company continues to cooperate and supply documents and testimony requested.
As of the date hereof, the Company does not believe that the investigations will
have a material adverse effect on the Company.
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MANAGEMENT
DIRECTORS
The Board of Directors of Holdings consists of 12 Directors, two of whom
are officers of Holdings. The Board of Directors is divided into three classes,
designated Class I, Class II and Class III, serving staggered three-year terms.
As of the Distribution Date, the Board of Directors of Holdings will consist of
nine Directors, two of whom will be officers of Holdings and none of whom will
be an officer or director of American Express. The current By-Laws provide that
each class may consist of between two and eight Directors. As of the
Distribution Date, the By-Laws will provide that each class must be
substantially equal in size. The Restated Certificate of Incorporation of
Holdings provides that the Holdings Board of Directors must be comprised of
between six and 24 Directors. Prior to the end of 1994, as many as four
additional Directors, not more than two of whom will be employees of the
Company, may be added to the Holdings Board of Directors. In the event that
additional Directors are elected, the Holdings Board of Directors may decide to
increase the membership of one or more of the standing Board Committees.
CURRENT DIRECTORS
<TABLE>
<S> <C> <C>
CLASS I CLASS II CLASS III
Richard S. Fuld, Jr. Roger S. Berlind David M. Culver
Katsumi Funaki Sherman R. Lewis, Jr. Richard M. Furlaud
T. Christopher Pettit Dina Merrill Harvey Golub
Malcolm Wilson Masataka Shimasaki Roger S. Penske
</TABLE>
DIRECTORS AS OF THE DISTRIBUTION DATE
<TABLE>
<S> <C> <C>
CLASS I CLASS II CLASS III
Richard S. Fuld, Jr. Roger S. Berlind John J. Byrne
Katsumi Funaki Dina Merrill John D. Macomber
Malcolm Wilson Masataka Shimasaki T. Christopher Pettit
</TABLE>
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DIRECTORS FOR LEHMAN BROTHERS HOLDINGS INC.
CLASS I DIRECTORS -- TERM EXPIRES 1996
RICHARD S. FULD, JR.(A) SINCE 1990 AGE: 47
Chairman and Chief Executive Officer of Holdings and LBI. Mr. Fuld was
elected Chairman of the Board of Directors of Holdings and LBI in April 1994 and
has been Chief Executive Officer of Holdings and LBI since November 1993. Mr.
Fuld was President and Chief Operating Officer of Holdings and LBI from March
1993 to April 1994 and was Co-President and Co-Chief Operating Officer of both
corporations from January 1993 to March 1993. He was President and Co-Chief
Executive Officer of the Lehman Brothers Division from August 1990 to March
1993. Mr. Fuld was a Vice Chairman of LBI from August 1984 until 1990. He also
serves as a director and executive officer of several of Holdings' subsidiaries.
Mr. Fuld has been a director of LBI since 1984 and a Director of Holdings since
1990. Mr. Fuld is a trustee of Mount Sinai Medical Center, a member of the
Executive Committee of Mount Sinai Children's Center Foundation, a trustee of
Wilbraham & Monson Academy and a director of Ronald McDonald House.
KATSUMI FUNAKI(A) DIRECTOR SINCE 1991 AGE: 52
Senior General Manager for International Business of the Finance and
Investment Planning Office of Nippon Life. Mr. Funaki has been affiliated with
Nippon Life, Japan's largest insurance company, since 1964 and has been Senior
General Manager for International Business of the Finance and Investment
Planning Office since March 1994. Mr. Funaki was Chief General Manager for the
Americas from 1993 through March 1994, and Mr. Funaki was General Manager for
North America from March 1991 until 1993. He was Deputy Chief of International
Investment Headquarters of Nippon Life from 1990 to 1991. Mr. Funaki was General
Manager of the International Investment Department of Nippon Life from 1988 to
1990 and Deputy General Manager of the International Investment Department of
Nippon Life from 1986 to 1988.
MALCOLM WILSON(A) DIRECTOR SINCE 1984 AGE: 80
Counsel to Kent, Hazzard, Jaeger, Greer, Wilson & Fay. Mr. Wilson, former
Governor of the State of New York, has been counsel at the law firm of Kent,
Hazzard, Jaeger, Greer, Wilson & Fay since 1986. Governor Wilson is a trustee of
the New York State Historical Association, St. Agnes Hospital, the Clark
Foundation, St. Patrick's Cathedral and Trustee Emeritus of Fordham Preparatory
School and Fordham University. Governor Wilson is also a director of LBI, the
Thomas & Agnes Carvel Foundation and the Farmer's Museum.
CLASS II DIRECTORS -- TERM EXPIRES 1995
ROGER S. BERLIND(A) DIRECTOR SINCE 1985 AGE: 63
Private Investor. Roger S. Berlind has been a theatrical producer for
Berlind Productions since 1981. Mr. Berlind is a director of LBI, a Governor of
the League of American Theaters and Producers, and has served as a Trustee of
Princeton University, The Eugene O'Neill Theater Center and the American Academy
of Dramatic Arts.
DINA MERRILL(A) DIRECTOR SINCE 1988 AGE: 64
Actress and Private Investor. Dina Merrill, an actress and private
investor, is a director and Vice Chairman of RKO Pictures, Inc. Ms. Merrill was
a Presidential Appointee to the Kennedy Center Board of Trustees and is a Vice
President of the New York City Mission Society, a Trustee of The Eugene O'Neill
Theater Foundation and a member of the board of Project Orbis, the Juvenile
Diabetes Foundation and the Museum of Broadcasting.
MASATAKA SHIMASAKI(A) DIRECTOR SINCE 1994 AGE: 50
General Manager for the Americas of Nippon Life. Mr. Shimasaki has been
affiliated with Nippon Life, Japan's largest insurance company, since 1967 and
has been General Manager for the Americas since March
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1994. He was General Manager, International Planning Department of Nippon Life
from 1993 until March 1994. Mr. Shimasaki was General Manager of Nippon Life's
International Finance Department from 1990 until 1993, and Chief Representative
of Nippon Life's London Representative Office from 1988 through 1990.
SHERMAN R. LEWIS, JR.(C) DIRECTOR SINCE 1990 AGE: 57
Vice Chairman and Director of Holdings and LBI. Mr. Lewis has been a Vice
Chairman and Director of Holdings since September 1990. He has been Vice
Chairman of LBI since January 1983 and a Director of LBI since September 1979.
Mr. Lewis is a Trustee of Northwestern University, Chairman of the Visiting
Committee of the College of Arts and Sciences at Northwestern University and a
Regent of Northwestern University. Mr. Lewis is also a member of the Council to
the Graduate School of Business of the University of Chicago. Mr. Lewis is
currently and will continue to be a Vice Chairman and Director of LBI.
CLASS III DIRECTORS -- TERM EXPIRES 1994
JOHN J. BYRNE(B) AGE: 61
Chairman of Fund American Enterprises Holdings, Inc. Mr. Byrne has been
Chairman of Fund American Enterprises Holdings, Inc., an operating company
engaged in the mortgage business since 1985. He was Chairman of Fireman's Fund
Insurance Companies from 1989 to 1990. Mr. Byrne is a director of Martin
Marietta Corp., Potomac Electric Power Company, Zurich Reinsurance Centre
Holdings Inc., the Stanford Research Institute and New Dartmouth Bank. Mr.
Byrne's election as a Director of the Company is subject to certain bank
regulatory approvals.
JOHN D. MACOMBER(B) AGE: 66
Principal of JDM Investment Group Mr. Macomber has been a Principal of JDM
Investment Group, a private investment firm, since 1992. He was Chairman and
President of the Export-Import Bank of the United States from 1989 to 1992. Mr.
Macomber is a director of Bristol-Myers Squibb Company, the Brown Group, Inc.,
DNA Plant Technology Corporation, Pilkington Ltd., Textron Inc. and Xerox
Corporation. Mr. Macomber is Chairman of the Council for Excellence in
Government. He is a Trustee of the Carnegie Institution of Washington and The
Rockefeller University and a member of the Council on Foreign Relations.
T. CHRISTOPHER PETTIT(A) AGE: 49
President and Chief Operating Officer of Holdings and LBI. Mr. Pettit was
elected President and Chief Operating Officer of Holdings and LBI in April 1994.
Mr. Pettit is responsible for the day-to-day operations of the Company. He was
Managing Partner of Holdings and LBI from 1993 to April 1994 and Managing
Director of LBI from 1992 to April 1994. Mr. Pettit, who was a Senior Executive
Vice President of LBI from 1984 to 1992 was appointed the Managing Partner of
the Lehman Brothers Division in 1991. Mr. Pettit also serves as a director and
executive officer of several of Holdings' subsidiaries.
DAVID M. CULVER(C) DIRECTOR SINCE 1987 AGE: 69
Chairman of CAI Capital Corporation. Mr. Culver has been Chairman of CAI
Capital Corporation, a Canadian-based equity investment fund, since 1990 and
Chairman of D. Culver & Co. Investments Inc., a private investment firm, since
1989. He was Chairman and Chief Executive Officer of Alcan Aluminium Limited, a
Canadian based multinational company engaged in all aspects of the aluminum
business from 1987 to 1989. Mr. Culver is a director of American Cyanamid
Company, The Seagram Company Ltd. and American Express. He is Honorary Chairman
of the Business Council on National Issues, a member of the International
Council of J.P. Morgan & Co., the Advisory Council of the Institute of
International Studies of Stanford University, the Board of Governors of The
Joseph H. Lauder Institute of Management and International Studies (University
of Pennsylvania) and the Board of Trustees of the Lester B. Pearson College of
the Pacific.
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RICHARD M. FURLAUD(C) DIRECTOR SINCE 1987 AGE: 70
Chairman of the Executive Committee of American Express. Mr. Furlaud has
been Chairman of the Executive Committee of the Board of Directors of American
Express, a diversified financial services corporation, since August 1993 and was
Chairman of the Board of American Express from February 1993 to August 1993. He
has been a private investor and corporate director since 1991. Mr. Furlaud was
President and a Director of Bristol-Myers Squibb Company, a pharmaceutical and
health care products company from 1989 to 1991 and he was Chairman and Chief
Executive Officer of Squibb Corporation from 1968 to 1989. Mr. Furlaud is also a
director of International Flavors & Fragrances, Inc. He is Chairman of the Board
of Trustees of The Rockefeller University, a trustee of the John M. Olin
Foundation, a member of the Council of Foreign Relations and Board of Overseers
of Memorial Sloan-Kettering Cancer Center.
HARVEY GOLUB(C) DIRECTOR SINCE 1991 AGE: 54
Chairman and Chief Executive Officer of American Express. Mr. Golub has
been Chairman and Chief Executive Officer of American Express, a diversified
financial services corporation, since August 1993. Prior to August 1993 Mr.
Golub held the following positions with American Express: President and Chief
Executive Officer from February 1993 to August 1993, President from 1991 to 1993
and Vice Chairman from 1990 to 1991. Mr. Golub has also been Chairman and Chief
Executive Officer of American Express Travel Related Services Company, Inc.
since 1991. Mr. Golub was Chairman of IDS Financial Corporation ("IDS") from
1990 to 1992, Chairman and Chief Executive Officer of IDS from 1990 to 1991, and
its President and Chief Executive Officer from 1984 to 1990. Mr. Golub is also a
director of American Express Bank Ltd.
ROGER S. PENSKE(C) DIRECTOR SINCE 1989 AGE: 57
President of Penske Corporation. Mr. Penske has been President of Penske
Corporation, a privately-held transportation service company since 1969. He is
also Chairman and Chief Executive Officer of Detroit Diesel Corporation, a
manufacturer of diesel engines, and President and Chief Executive Officer of
Penske Truck Leasing Corporation. Mr. Penske is a director of Philip Morris
Companies Inc., Conner Peripherals, Inc. and American Express and a trustee of
the Henry Ford Museum and Greenfield Village.
- ---------------
(a) Director who will continue after the Distribution.
(b) Individual who will become a Director as of the Distribution Date.
(c) Director who will resign prior to the Distribution.
CURRENT BOARD OF DIRECTORS COMMITTEES
The Board of Directors currently has four standing committees: the
Executive Committee, the Audit Committee, the Finance Committee and the
Compensation and Benefits Committee.
Executive Committee. The Executive Committee consists of Mr. Fuld and Mr.
Golub, who chairs the Executive Committee. The Executive Committee has the
authority, in the intervals between meetings of the Board of Directors, to
exercise all of the authority of the Board of Directors (including the power to
declare dividends and approve mergers and consolidations pursuant to Section 253
of the Delaware General Corporation Law ("DGCL")), except for those matters that
the DGCL or the Restated Certificate of Incorporation reserves to the full Board
of Directors. The Executive Committee held three meetings during the 1993 fiscal
year.
Audit Committee. The Audit Committee consists of Governor Wilson, who
chairs the Audit Committee, and Mr. Berlind, both of whom are non-employee
Directors. The Audit Committee held three meetings during the 1993 fiscal year.
The Audit Committee represents the Board in discharging its responsibilities
relating to the accounting, reporting and financial control practices of the
Company. The Audit Committee has general responsibility for surveillance of
financial controls, as well as for the Company's accounting and audit
activities. The Audit Committee annually reviews the qualifications of the
independent accountants,
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makes recommendations to the Board of Directors as to their selection, reviews
the plan, fees and results of their audit, and approves their non-audit services
and related fees.
Finance Committee. The Finance Committee consists of Mr. Culver, who
chairs the Finance Committee, and Messrs. Berlind, Funaki, Furlaud, Golub and
Penske. The Finance Committee held six meetings during the 1993 fiscal year. The
Finance Committee reviews and advises the Board of Directors concerning the
Company's financial policies and strategy, reviews the Company's results of
operations and major capital expenditure programs and other significant capital
transactions and the policies and procedures pursuant to which such commitments
are made. In addition, until March 1994, the Finance Committee was responsible
for compensation of employees whose salaries were above stated levels, made
recommendations to the Board and approved standards for setting compensation
levels for key employees. The Finance Committee is responsible for administering
all of the Company's employee benefit and compensation plans which were
established prior to March 1994. It is anticipated that as of the Distribution
Date, the Compensation and Benefits Committee will assume responsibility for the
administration of such plans. No member of the Finance Committee, with the
exception of Mr. Berlind, was an officer or employee of the Company during the
1993 fiscal year or at any other time. Mr. Berlind, who was an executive officer
of a predecessor firm, ceased his employment with such firm in 1975.
Compensation and Benefits Committee. The Compensation and Benefits
Committee (the "Compensation Committee"), which was formed during the first
quarter of 1994, consists of Mr. Culver, who chairs the Compensation Committee,
Mr. Penske and Governor Wilson. None of the members of the Compensation
Committee was an officer or employee of the Company during the 1993 fiscal year
or at any other time. The Compensation Committee establishes corporate policy
and programs with respect to the compensation of officers and employees of the
Company, including establishing compensation programs, policies and practices,
such as salary, cash incentive, long-term incentive compensation, stock purchase
and other programs and making grants under such plans.
COMPENSATION OF CURRENT DIRECTORS
Directors who are not employees of the Company or any affiliate which owns
40 percent or more of Holdings ("Outside Directors") receive an annual retainer
of $20,000 plus $750 for each Board of Directors meeting attended and are
reimbursed for reasonable travel and related expenses. Each Outside Director who
serves on a committee of the Board of Directors receives an additional annual
retainer of $2,500 (or $5,000 each in the case of a committee chairman) plus
$500 per committee meeting attended.
Holdings' Retirement Plan for Outside Directors. The Lehman Brothers
Holdings Inc. Retirement Plan for non-employee Directors is a non-qualified
retirement plan which provides a limited annual retirement benefit for Outside
Directors who have earned five or more years of service as defined in the Plan.
Retirement benefits are paid from the general assets of Holdings. The amount of
the annual retirement benefit is equal to the annual retainer payable to an
eligible Outside Director for the year in which retirement occurs. Annual
retirement benefit payments will be made over a period which is equal to the
number of full years of service credited to an Outside Director upon retirement,
unless such former Outside Director dies prior to the completion of such
retirement benefits, in which case payments will cease as of the date of death.
The Board of Directors, upon recommendation of the Finance Committee, may
provide retirement benefits to Outside Directors who do not otherwise qualify
for benefits under this Plan. Other than with respect to accrued benefits of
non-employee Directors, it is anticipated that this Plan will be terminated as
of the Distribution.
Holdings' Deferred Compensation Plan for Outside Directors. The Lehman
Brothers Holdings Inc. Deferred Compensation Plan for non-employee Directors is
a non-qualified deferred compensation plan which provides each Outside Director
an opportunity to elect to defer receipt of compensation to be earned for
services on the Board of Directors. Each Outside Director may elect to defer all
or a specified percentage of his or her future compensation (or such election
may be limited to such Outside Director's annual retainer fees) with respect to
one or more terms as director. Such an election can be revoked only by a showing
of financial hardship and with the consent of the Finance Committee. Amounts
deferred are credited quarterly with interest, based upon the average 30-day
U.S. Treasury Bill rate, and compounded annually. Deferred
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amounts will be paid in either a lump sum or in annual installments over a
period not to exceed ten years as elected by the Outside Director. Payments will
commence pursuant to an election by the Outside Director at a specified date in
the future or upon termination of service as an Outside Director. The rights of
an Outside Director under this Plan are no greater than the rights of an
unsecured creditor of the Company.
Capital Partners I and II. Lehman Brothers Capital Partners I ("Capital
Partners I") and Lehman Brothers Capital Partners II, L.P. ("Capital Partners
II"), are limited partnerships established in 1985 and 1988, respectively, to
provide senior officers and other employees of the Company, as well as certain
senior officers of American Express and its subsidiaries, with the opportunity
to invest in a portfolio of high risk opportunities. Directors of Holdings were
given an opportunity to invest in Capital Partners II. During 1993 Messrs.
Berlind, Golub, Lewis and Wilson received $153,203, $161,454, $186,988 and
$20,427, respectively, which amounts reflect income distributions and
distributions related to the liquidation of assets.
BOARD OF DIRECTORS COMMITTEES AS OF THE DISTRIBUTION DATE
Composition. As of the Distribution Date, there will be five standing
committees of the Board of Directors: the Executive Committee, the Audit
Committee, the Compensation and Benefits Committee, the Finance Committee and
the Nominating Committee, although the Board of Directors may, from time to
time, establish other committees.
Executive Committee. As of the Distribution Date, the Executive Committee
will have substantially the same authority as it did prior to the Distribution
except that it will not, other than by specific delegation, have the authority
to declare dividends, to authorize the issuance of stock or to appoint or
terminate the appointment of officers. As of the Distribution Date, the
Executive Committee will be comprised of Messrs. Fuld, Pettit and Byrne.
Audit Committee. The Audit Committee, which will consist entirely of
non-employee directors, will have substantially the same authority as the
current Audit Committee. As of the Distribution Date, the members of the Audit
Committee will be Governor Wilson, Messrs. Berlind, Macomber and Shimasaki.
Compensation and Benefits Committee. The Compensation Committee, which
will consist entirely of non-employee Directors, will have substantially the
same authority as the current Compensation Committee. In addition, commencing in
March 1994, the Compensation Committee will be responsible for compensation of
employees whose salaries are above stated levels, make recommendations to the
Board and approve standards for setting compensation levels for key employees
and establishing and administering all of the Company's employee benefit and
compensation plans, and will have the authority, where appropriate, to delegate
its duties. As of the Distribution Date, the members of the Compensation
Committee will be Messrs. Byrne, Macomber and Wilson.
Finance Committee. The Finance Committee will have the responsibility for
reviewing and advising on financial policies and practices of the Company. Among
other matters the Finance Committee will periodically review, among other
things, major capital expenditure programs and significant capital transactions,
as well as recommend a dividend policy to the Board of Directors. As of the
Distribution Date, the members of the Finance Committee will be the members of
the Audit Committee and Mr. Fuld.
Nominating Committee. The Nominating Committee will consider and make
recommendations to Holdings' Board of Directors with respect to the size and
composition of the Board of Directors and Board Committees and with respect to
potential candidates for membership on the Board of Directors. At least three
members of the Nominating Committee must be non-employee Directors and one
member of such committee will be a non-voting employee Director. As of the
Distribution Date, the members of the Nominating Committee will be the members
of the Compensation Committee and Mr. Fuld as a non-voting member.
COMPENSATION OF DIRECTORS AS OF THE DISTRIBUTION DATE
Directors who do not receive compensation as officers or employees of the
Company or any of its affiliates will be paid an annual retainer of $45,000 and
be reimbursed for reasonable travel and related expenses. No additional fees
will be paid for attendance at Board of Directors or committee meetings. Each
Director will be expected to attend all Board meetings. Compensation for
attending meetings is deemed to be included within the annual retainers which
shall be paid quarterly; however, the fourth quarter payment will be withheld
for failure to attend 75% of the required number of meetings.
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Under the terms of the 1994 Management Ownership Plan, a grant of
Restricted Stock Units representing $30,000 fair market value of Common Stock
will be made to each non-employee Director on the first business day following
the Company's annual meeting of stockholders for each year that such Plan is in
effect. Restricted Stock Units representing $30,000 of Common Stock will be
granted to each non-employee Director in calendar year 1994 on the date which is
the first day of regular way public trading of Common Stock or, if later, on the
first business day following commencement of a non-employee Director's service.
As of each date a dividend is paid on Common Stock, each non-employee Director
holding Restricted Stock Units shall be credited with a number of additional
Restricted Stock Units equal to the product of (A) the dividend paid on one
share of Common Stock, multiplied by (B) the number of Restricted Stock Units
held by the non-employee Director, divided by (C) the closing price of Common
Stock on the NYSE on such date. One-third of the Restricted Stock Units granted
to non-employee Directors will vest ratably on the first three anniversaries of
the date of grant, or, if earlier, immediately upon death, disability or
termination of service as a non-employee Director after serving ten years.
One-third of a non-employee Director's vested Restricted Stock Units is payable
in Common Stock on each of the first three anniversaries following death,
disability or termination of service. The number of Restricted Stock Units
granted will be based on the closing price of the Common Stock on the NYSE on
the day such units are awarded.
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EXECUTIVE OFFICERS OF HOLDINGS
The current Executive Officers of Holdings are set forth below, excluding
Messrs. Fuld and Pettit, whose biographies are included above.
T. ANTHONY BROOKS AGE: 54
Managing Director of LBI. Mr. Brooks has been a Managing Director of LBI
and responsible for the Company's Equity New Issue group since 1992. Mr. Brooks
was a Managing Director at First Boston Corporation from 1987 to 1991 where he
was responsible for Equity Capital Markets and Equity Syndicate.
JEREMIAH M. CALLAGHAN AGE: 51
Managing Director of LBI. Mr. Callaghan has been a Managing Director of
LBI and head of the Company's Trading Services group since December 1993. After
the announcement of the Primerica Transaction, Mr. Callaghan became a consultant
to LBI until December 1993. He was a Senior Executive Vice President of Shearson
and head of its Securities Processing Group from 1991 to 1993. From 1987 to 1991
Mr. Callaghan was a Covenant House volunteer.
JAMES A. CARBONE AGE: 42
Managing Director of LBI. Mr. Carbone has been a Managing Director of LBI
since 1988 and is Managing Partner for the Company's Asia Pacific operations
since 1992. Mr. Carbone is a director and executive officer of several of
Holdings' subsidiaries. He was responsible for LBI's Capital Markets
Origination, Corporate Bond and Fixed Income Syndicate groups from 1990 to 1992
and was head of LBI's Money Market Origination area from 1986 to 1990.
JOHN L. CECIL AGE: 39
Chief Administrative Officer of Holdings and LBI. Mr. Cecil has been Chief
Administrative Officer of Holdings and LBI as well as a Managing Director of LBI
since January 1994. Mr. Cecil joined McKinsey & Company, Inc. in 1980 where he
was elected a partner in 1986 and a director in 1991. Mr. Cecil is a member of
the Board of Directors of Graham-Windham Agency and is the Chairman of its
Executive Committee.
RONALD L. GALLATIN AGE: 48
Senior Executive Vice President of Holdings and Managing Director of
LBI. Mr. Gallatin has been Senior Executive Vice President of Holdings since
January 1993 and a Managing Director of LBI since 1984 and is responsible for
Corporate Strategy, Product Development and Non-Core Assets. As a senior
investment banker for the Company, Mr. Gallatin has had general corporate
finance responsibilities which resulted in his developing a number of new
securities. Mr. Gallatin was in charge of several product areas including the
proprietary option, commodity and the corporate tax departments of a predecessor
of LBI.
ROBERT E. GENIRS AGE: 58
Managing Director of LBI. Mr. Genirs has been a Managing Director of LBI
since 1992 and is the Chairman of the Company's Cost Reduction Committee. Mr.
Genirs was a Senior Executive Vice President of LBI from May 1991 to March 1992
and an Executive Vice President of LBI from 1984 until May 1991. Mr. Genirs was
the Chief Administrative Officer for the Lehman Brothers Division from July 1991
until May 1993.
JOSEPH M. GREGORY AGE: 42
Managing Director of LBI. Mr. Gregory has been a Managing Director of LBI
since March 1992 and is responsible for the Company's Global Fixed Income
Business. Mr. Gregory was a Senior Executive Vice President of LBI from May 1991
to March 1992 and an Executive Vice President of LBI from 1984 until May
69
<PAGE> 74
1991 during which time he was responsible for various aspects of the fixed
income business. Mr. Gregory is a director and executive officer of several of
Holdings' subsidiaries.
BRUCE R. LAKEFIELD AGE: 50
Managing Director of LBI. Mr. Lakefield has been a Managing Director of
LBI since March 1992 and is responsible for the Company's Foreign Exchange,
Commodities, Municipal and Public Finance businesses. Mr. Lakefield was a Senior
Executive Vice President of Lehman Brothers from May 1991 through March 1992 and
an Executive Vice President of Lehman Brothers from January 1985 to May 1991
during which time he held various positions in the Company's fixed income
department. Mr. Lakefield is a director and executive officer of several of
Holdings' subsidiaries. Mr. Lakefield is a member of the Board of Directors of
the Public Securities Association (the "PSA"), and a member of the PSA's
Treasury Borrowing Advisory Committee. He is also a member of the Board of
Directors of Liberty Brokers, Inc.
STEPHEN M. LESSING AGE: 39
Managing Director of LBI. Mr. Lessing has been a Managing Director of LBI
since March 1992 and is responsible for the Company's Global Fixed Income Sales.
Mr. Lessing was an Executive Vice President of LBI from July 1989 to March 1992.
Mr. Lessing is a member of the Trustee Advisory Committee for Fairfield
University and a member of the Board of Directors of Lessing's Inc.
ROBERT MATZA AGE: 37
Chief Financial Officer of Holdings and LBI. Mr. Matza has been Chief
Financial Officer of Holdings and LBI since January 1994 and a Managing Director
of LBI since 1992. He also has been a director of LBI since January 1994. Mr.
Matza was Chief Financial Officer of the LBI Division from November 1990 to July
1993. Mr. Matza was Controller of Holdings and LBI from 1987 through November
1990 and Executive Vice President of LBI from 1987 through 1992.
THOMAS A. RUSSO AGE: 50
Managing Director of LBI. Mr. Russo has been a Managing Director of LBI
since 1993. He is responsible for the Company's Legal, Compliance, Credit,
Corporate Communications, Internal Audit and Government Relations departments,
as well as the Company's Investment and Commitment Committees. From 1977 until
he joined LBI in 1993, Mr. Russo was a partner at the law firm of Cadwalader,
Wickersham & Taft where he had a financial markets and general corporate
practice. Mr. Russo is a member of the American Bar Association where he is a
member of its Executive Council for the Futures Regulation Committee, and the
Advisory Committee of the Committee on Federal Regulations of Securities.
MEL A. SHAFTEL AGE: 50
Managing Director of LBI. Mr. Shaftel has been a Managing Director of LBI
since 1984 and is the head of the Company's Investment Banking group. During his
tenure with the Company, Mr. Shaftel has held various positions in Investment
Banking, including heading the financial institutions group.
STEVEN SPIEGEL AGE: 49
Managing Director of LBI. Mr. Spiegel has been a Managing Director of LBI
since 1992 and is responsible for the Company's Financial Services and Global
Asset Management divisions. Mr. Spiegel served as Managing Director and country
head of the Company's United Kingdom operations from 1989 to 1992. Mr. Spiegel
was Senior Executive Vice President of LBI from 1991 to 1992 and an Executive
Vice President from 1984 through 1991. Mr. Spiegel is a director of the Oporto
Fund and a member of the International Committee of the Securities Industry
Association.
70
<PAGE> 75
THOMAS H. TUCKER AGE: 49
Managing Director of LBI. Mr. Tucker has been a Managing Director of LBI
since 1992 and is responsible for the Company's Global Institutional Sales. Mr.
Tucker was a Senior Executive Vice President of LBI from 1991 to 1992, and an
Executive Vice President of LBI from 1985 through 1991 during which time he was
involved in the sales of various money market instruments and fixed income
products. Mr. Tucker is a director and executive officer of several of Holdings'
subsidiaries.
C. DANIEL TYREE AGE: 45
Managing Director of LBI. Mr. Tyree has been a Managing Director of LBI
and the Managing Partner of the Company's European and Middle Eastern businesses
since 1992. Mr. Tyree is also a director and executive officer of several of
Holdings' European subsidiaries. Prior to joining LBI in 1992, Mr. Tyree was a
Managing Director of Salomon Brothers where, at various times, he had been
responsible for its high yield business, and its international investment
banking division. Mr. Tyree is a member of the Board of Directors of the
International Primary Market Association.
PAUL D. WILLIAMS AGE: 50
Managing Director of LBI. Mr. Williams has been a Managing Director of LBI
since 1992 and is responsible for the Company's equity business. Mr. Williams
was a Senior Executive Vice President of LBI from 1991 to 1992, and one of its
Executive Vice Presidents from 1985 to 1991. Mr. Williams was responsible for
the Company's retail trading activities from 1984 through 1992.
71
<PAGE> 76
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth (i) the expected beneficial ownership of
Common Stock as of the Distribution Date and (ii) as of March 25, 1994,
beneficial ownership of common shares of American Express, by each current
Director, by all individuals who will be Directors as of the Distribution Date
and all current Directors and Executive Officers of Holdings as a group. Except
as described below, each of the persons listed below has sole voting and
investment power with respect to the shares shown.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF NUMBER OF AMERICAN EXPRESS
COMMON STOCK NUMBER OF AMERICAN EXPRESS COMMON SHARES
TO BE OWNED AS OF THE COMMON SHARES WHICH MAY BE ACQUIRED
NAMES OF DIRECTORS(A) DISTRIBUTION DATE(B) OWNED(C)(D)(E) WITHIN 60 DAYS(C)(F)
- ------------------------------------ ----------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
CONTINUING DIRECTORS
Roger S. Berlind.................... 107,148 535,740 1,440
Richard S. Fuld, Jr................. 128,808 105,264 104,120
Katsumi Funaki...................... 0 0 0
Dina Merrill........................ 240 1,200 960
T. Christopher Pettit............... 89,432 9,734 14,694
Masataka Shimasaki.................. 0 0 0
Malcolm Wilson...................... 9,938 49,690 1,440
NEW DIRECTORS AS OF DISTRIBUTION
DATE
John J. Byrne....................... 4,000(g) 20,000(g) 0
John D. Macomber.................... 0 0 0
OTHER CURRENT DIRECTORS
David M. Culver..................... 249 1,248 8,106
Richard M. Furlaud.................. 5,000 25,000 8,106
Harvey Golub........................ 13,872 226,861 405,602
Sherman R. Lewis, Jr................ 31,872 79,131 68,986
Roger S. Penske..................... 2,000 10,000 5,146
All current Directors and Executive
Officers as a group (28
individuals)(h)................... 883,887 1,244,717 716,275
</TABLE>
- ---------------
(a) List includes all current Directors and all individuals who will be
Directors as of the Distribution Date.
(b) Includes the number of shares of Common Stock expected (i) to be acquired
in the Offering and Phantom Share Conversion and (ii) to be received in the
Distribution as a dividend on American Express common shares.
(c) As a result of the Distribution, adjustments will be made by American
Express to American Express restricted stock awards and options on American
Express common shares held by American Express directors and employees and
Lehman Brothers directors and employees. Subsequent to such adjustments,
the American Express restricted stock awards and options on American
Express common shares held by the Company's employees will be cancelled by
American Express as of the Distribution Date and restricted Common Stock
and options on Common Stock will be granted to such employees under
Holdings' 1994 Management Replacement Plan. The number of shares of
restricted Common Stock and options on Common Stock to be granted under
such plan can be determined only subsequent to the Distribution. See "1994
Management Replacement Plan" below.
(d) The number of American Express common shares owned by Mr. Fuld, Mr. Pettit
and all current Directors and Executive Officers as a group include 134,
134 and 12,110 shares held in their respective employee benefit plan
accounts as of dates ranging from September 30, 1993 to March 1, 1994.
In addition to the share amounts in this column, Mr. Furlaud has invested
all of his American Express director's fees in 24,612 American Express
Common Share Equivalent Units as of December 31, 1993, under the American
Express Directors' Deferred Compensation Plan.
The number of American Express common shares as to which beneficial
ownership is disclaimed is as follows: 200,000 shares owned by Mr.
Berlind's wife, 400 shares owned by Mr. Culver's wife, 2,018 shares held by
a trust of which Mr. Culver is a co-trustee, 2,116 shares owned by a child
of Mr. Golub, 280 shares owned by two children of Mr. Lewis and 204,814
shares disclaimed by all current Directors and Executive Officers as a
group.
(e) The number of American Express common shares owned by all current Directors
and Executive Officers as a group includes 159,167 shares of restricted
stock, as to which shares the holders possess sole voting power, but no
investment power, during the restricted period. Restrictions on the sale of
such restricted stock lapse over a period of years ending in 1997.
(f) Shares shown include American Express common shares subject to stock
options.
(g) The number of shares shown does not include 5,150,000 shares owned by Fund
American Enterprises Holdings, Inc. ("FAEH") and certain subsidiaries. Mr.
Byrne is Chairman, President and Chief Executive Officer of FAEH and owns
approximately 5% of its outstanding voting capital stock. (The outstanding
voting preferred stock of FAEH is owned by American Express.) Mr. Byrne
also owns warrants to purchase 1,280,000 additional shares of FAEH voting
capital stock. Upon exercise of such warrants, Mr. Byrne would own
approximately 13% of the outstanding
72
<PAGE> 77
voting capital stock of FAEH. Mr. Byrne has disclaimed beneficial ownership
of the shares of American Express owned by FAEH and its subsidiaries.
(h) The Company's current Directors and Executive Officers as a group
beneficially owned approximately 1.96 million American Express common
shares as of March 25, 1994, representing approximately 0.4% of American
Express' then outstanding common shares.
SECURITY OWNERSHIP OF NAMED EXECUTIVES
The following table sets forth (i) the expected beneficial ownership of
Common Stock as of the Distribution Date and (ii) as of March 25, 1994,
beneficial ownership of American Express common shares of Richard S. Fuld, Jr.,
Chairman and Chief Executive Officer of Holdings, each of the four most highly
compensated Executive Officers of Holdings at the end of 1993 other than Mr.
Fuld, and certain other individuals who are named in the summary compensation
table below (collectively, the "Named Executives").
<TABLE>
<CAPTION>
NUMBER OF AMERICAN PERCENT OF CLASS
NUMBER OF SHARES OF NUMBER OF AMERICAN EXPRESS COMMON OF AMERICAN
COMMON STOCK EXPRESS SHARES WHICH MAY EXPRESS
OWNED AS OF THE COMMON SHARES BE ACQUIRED WITHIN COMMON
NAME DISTRIBUTION DATE(A) OWNED(B)(C)(D) 60 DAYS(E) SHARES
- ------------------------------------- -------------------- ------------------ --------------------- ----------------
<S> <C> <C> <C> <C>
R.S. Fuld, Jr........................ 128,808 105,264 104,120 0.043%
T.C. Pettit.......................... 89,432 9,734 14,694 0.005
J.M. Gregory......................... 49,421 7,498 7,491 0.003
M.A. Shaftel......................... 50,482 48,049 17,735 0.013
B.R. Lakefield....................... 43,066 14,891 7,491 0.005
H.L. Clark, Jr....................... 28,722 90,077 366,587 0.093
J.T. Hill III........................ 30,635 153,180 0 0.031
</TABLE>
- ---------------
(a) Includes the number of shares of Common Stock expected (i) to be acquired in
the Offering and Phantom Share Conversion and (ii) to be received in the
Distribution as a dividend on American Express common shares.
(b) As a result of the Distribution, adjustments will be made by American
Express to the American Express restricted stock awards and options on
American Express common shares held by Holdings' employees. As of the
Distribution Date, such awards will be cancelled by American Express and
restricted Common Stock and options on Common Stock will be granted to such
employees under Holdings' 1994 Management Replacement Plan. The number of
shares of restricted Common Stock and options on Common Stock to be granted
under such plan can be determined only subsequent to the Distribution. See
"1994 Management Replacement Plan" below.
(c) The number of American Express common shares owned by Messrs. Fuld, Pettit,
Gregory, Shaftel, Lakefield, Clark and Hill includes 134, 134, 134, 152,
2,719, 8,166 and 3,756 shares held in their respective employee benefit plan
accounts as of dates ranging from September 30, 1993 to March 1, 1994.
(d) The number of American Express common shares owned by Mr. Clark includes
23,000 shares of restricted stock, as to which shares Mr. Clark possesses
sole voting power, but no investment power, during the restricted period.
(e) Shares shown include American Express common shares subject to stock options
and common shares issuable upon conversion of a convertible debenture held
by Mr. Clark. Mr. Clark's debenture is convertible into 6,921 American
Express common shares. The conversion price of Mr. Clark's debenture will be
adjusted pursuant to its terms as a result of the Distribution.
73
<PAGE> 78
EXECUTIVE COMPENSATION
The following table shows, for the fiscal years ending December 31, 1993,
1992 and 1991, as applicable, the cash and other compensation paid or accrued
and certain American Express long-term awards made to the Named Executives for
services in all capacities. None of the Named Executives was an executive
officer of Holdings prior to 1993.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------------- -------------------------------------------
AWARDS PAYOUTS
--------------------------- -------------
NAME AND OTHER ANNUAL RESTRICTED LONG-TERM ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION STOCK AWARDS OPTIONS/SARS INCENTIVE COMPENSATION
AT DECEMBER 31, 1993 YEAR ($) ($)(A) ($)(B) ($)(C) (# SHARES) PAYOUTS($)(D) ($)(E)
- -------------------- ----- --------- ---------- ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
R.S. Fuld, Jr....... 1993 $ 400,000 $8,425,000 $175,883 $ 0 0 $ 74,710 $ 243,081
Chairman and Chief
Executive Officer
T.C. Pettit......... 1993 300,000 6,800,000 122,272 0 0 0 157,255
President and Chief
Operating Officer
J.M. Gregory........ 1993 225,000 5,375,000 76,739 0 0 0 97,735
Managing Director
of LBI
M.A. Shaftel........ 1993 300,000 4,400,000 62,798 0 0 0 187,203
Managing Director
of LBI
B.R. Lakefield...... 1993 225,000 4,375,000 63,432 0 0 0 156,990
Managing Director
of LBI
H.L. Clark, Jr...... 1993 382,696 1,717,302 139,636 0 0 404,670 1,468,521
Former Chairman and 1992 525,000 1,500,000 73,890 0 55,000 1,198,523 346,678
Chief Executive 1991 525,000 1,500,000 -- 233,463 55,000 252,792 --
Officer
J.T. Hill III....... 1993 173,077 0 0 0 0 0 5,313,343
Former Co-President
</TABLE>
- ---------------
(a) Pursuant to the Operating Committee Ownership Plan (the "OCP") and the
Employee Ownership Plan ("EOP"), in 1993 50% of the salary and bonus of
Messrs. Fuld and Pettit, and 33 1/3% of the salary and bonus of Messrs.
Gregory, Shaftel, and Lakefield was deferred. In addition, 25% of the bonus
of Mr. Clark was deferred under the EOP. In connection with the
Distribution, the Finance Committee has determined to terminate the OCP
which will result in the acceleration of vesting and payment in cash prior
to the Distribution of amounts deferred by the participants in the OCP. It
is anticipated that each OCP participant will purchase Common Stock with
the after-tax proceeds received from such plan. Under the EOP each
participant was credited with phantom units, each consisting of a Phantom
Share and a Cash Right. The Phantom Shares will be converted into shares of
Common Stock as of the Distribution Date and the Cash Right will be paid to
the EOP participants as of such date. See "Employee Ownership Plan" below.
(b) Amounts reported in this column for 1993 reflect perquisites and other
personal benefits, amounts reimbursed for the payment of taxes and cash
earnings on deferred compensation paid or payable in 1993 in excess of 120
percent of the applicable federal long-term rate. Included in the cost to
Holdings and its subsidiaries are the following: above-market interest paid
under the Participating Preferred Plan for Messrs. Fuld, Pettit, Gregory,
Shaftel and Lakefield of $161,678, $122,272, $76,739, $62,798 and $63,432,
respectively; and financial counseling expenses of $44,936 and personal
travel expenses of $28,209 for Mr. Clark.
(c) Mr. Clark held 23,000 American Express restricted shares on December 31,
1993 with a fair market value of $710,125, based on the per share closing
price of American Express common shares on the NYSE on December 31, 1993
($30.875). These restricted shares will be cancelled as of the Distribution
Date (except for approximately 8,000 of such shares which will vest in May
1994) in accordance with the terms of the American Express 1989 Long-Term
Incentive Plan and new restricted shares of Common Stock will be issued to
Mr. Clark under the 1994 Management Replacement Plan. See "1994 Management
Replacement Plan" below.
Dividends are payable on the restricted shares to the extent and on the
same date as dividends are paid on all other American Express common
shares.
(d) Includes payouts of a portion of the final values of Portfolio Grant-II
("PG-II") awards granted under the American Express 1989 Long-Term
Incentive Plan. Final values of the PG-II awards were based on achievement
of cumulative earnings and average return on equity targets for the
business segments of American Express and for American Express on a
consolidated basis, weighted based on the Named Executive's
responsibilities. PG-II awards were based on performance for the period
January 1989 to December 1991 for Mr. Clark and January 1991 through
December 1991 for Mr. Fuld.
74
<PAGE> 79
(e) Amounts reported under "All Other Compensation" for 1993 consist of the
dollar value of the following:
<TABLE>
<CAPTION>
ABOVE-MARKET
PAYMENTS EARNINGS
UNDER CAPITAL ACCRUED ON VALUE OF PAYMENTS
PARTNERS I DEFERRED SPLIT-DOLLAR UNDER
AND II COMPENSATION LIFE INSURANCE AGREEMENTS
------------- ------------ -------------- ----------
<S> <C> <C> <C> <C>
R.S Fuld, Jr. ............................ $ 238,055 $5,026 $ 0 $ 0
T.C. Pettit............................... 156,347 908 0 0
J.M. Gregory.............................. 95,164 2,571 0 0
M.A. Shaftel.............................. 186,988 215 0 0
B.R. Lakefield............................ 156,347 643 0 0
H.L. Clark, Jr. .......................... 136,018 6,791 30,789 1,294,924
J.T. Hill III............................. 289,123 2,992 0 5,021,228
</TABLE>
Capital Partners I and Capital Partners II are limited partnerships
established by LBI in 1985 and 1988, respectively. Pursuant to these
partnerships, senior officers were offered the opportunity to invest in a
portfolio of high risk investments. An affiliate of Holdings is general
partner and invested most of the capital of the partnerships. Amounts
reported reflect income distributions and distributions related to the sale
of assets.
Above-market earnings on deferred compensation include credits to
compensation deferred pursuant to the Executive and Select Employees Plan
which was established in 1985 and Lehman Brothers Kuhn Loeb Deferred
Compensation Plans, which were established in 1977, 1980 and 1983 for the
Named Executives other than Mr. Clark who received credits under various
American Express plans.
In January 1993, Mr. Clark relinquished his position as Chairman and Chief
Executive Officer of Holdings and LBI, and in March 1993 he signed an
agreement with LBI. Amounts shown in the column "Payments under Agreements"
for Mr. Clark include $200,000 received at that time in consideration of
his agreement to comply with certain new restrictive covenants, and
$902,128 representing accelerated vesting and payment of a portion of his
balance under a 1992 incentive award. In May 1993, Mr. Clark assumed the
position of a Vice Chairman of LBI and signed an employment contract with
LBI. Pursuant to such contract, Mr. Clark was awarded $182,796 under a
deferred compensation plan for certain of the Company's executives. See
"Agreements with Former Executives" below. During 1993 Mr. Clark received
$10,000 as an advisor to Ayco Asset Management, a subsidiary of American
Express.
In March 1993, Mr. Hill relinquished his positions as Co-President and
Co-Chief Operating Officer of Holdings and LBI, and in June 1993 signed an
agreement with LBI. Amounts shown in the column "Payments under Agreements"
for Mr. Hill include $4,901,923 received during 1993 in consideration of
his agreement to provide advisory services to the Company and to comply
with certain restrictive covenants, and $119,305, representing accelerated
vesting and payment of certain balances under incentive plans. See
"Agreements with Former Executives" below.
The following table sets forth information for the Named Executives
regarding the exercise of stock options and/or SARs during 1993 and unexercised
options and SARs held as of the end of 1993:
AGGREGATED AMERICAN EXPRESS OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
YEAR-END AMERICAN EXPRESS OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES DECEMBER 31, 1993 DECEMBER 31, 1993(A)
ACQUIRED VALUE --------------------------------- ---------------------------------
NAME ON EXERCISE REALIZED EXERCISABLE(#) UNEXERCISABLE(#) EXERCISABLE($) UNEXERCISABLE($)
- ---------------------------- -------- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
R.S. Fuld,
Jr. ........... 0 0 97,453 11,947 $ 101,665 $ 35,835
T.C. Pettit...... 0 0 14,694 480 16,549 0
J.M. Gregory..... 0 0 7,491 288 15,515 0
M.A. Shaftel..... 0 0 17,735 960 31,029 0
B.R. Lakefield... 0 0 7,491 288 15,515 0
H.L. Clark,
Jr. ........... 67,152 648,060 322,999 55,001 1,179,164 446,881
J.T. Hill III.... 13,333 76,665 0 0 0 0
</TABLE>
- ---------------
(a) Calculated based on the closing price per share of American Express common
shares on the NYSE on December 31, 1993 ($30.875).
75
<PAGE> 80
The following table sets forth information concerning long-term incentive
plan awards made in 1993 to the Named Executives:
LONG TERM INCENTIVE PLANS -- AWARDS IN 1993
<TABLE>
<CAPTION>
NAME DOLLAR VALUE($)(A)
---------------------------------------------------- ------------------
<S> <C>
R.S. Fuld, Jr. ..................................... $646,717
T.C. Pettit......................................... 489,090
J.M. Gregory........................................ 306,952
M.A. Shaftel........................................ 251,188
B.R. Lakefield...................................... 253,730
H.L. Clark, Jr. .................................... 114,241
J.T. Hill III....................................... 0
</TABLE>
- ---------------
(a) Reflects credits under the Participating Preferred Plan ("PPP"), an
incentive compensation plan. Participant account balances under the PPP are
adjusted annually by crediting or debiting the account with a return based
on Holdings' after-tax return on average annual risk-adjusted equity
(calculated as provided in the Plan). The amounts indicated above reflect
credits based on Holdings' 1993 results. It is anticipated that the Finance
Committee will approve the termination of the PPP which would result in the
acceleration of payment of all deferred balances immediately prior to the
Distribution Date.
PENSION BENEFITS
Lehman Brothers Holdings Inc. Retirement Plan (the "Holdings Retirement
Plan") is a funded, qualified, noncontributory, integrated, defined benefit
pension plan covering eligible employees.
LEHMAN BROTHERS HOLDINGS INC. RETIREMENT PLAN
GROSS ANNUAL BENEFIT BY YEARS OF SERVICE
<TABLE>
<CAPTION>
CAREER
AVERAGE
EARNINGS 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
- --------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 100,000 $ 20,277 $ 26,287 $ 32,272 $ 38,303 $ 44,646
150,000 32,652 42,787 52,897 63,053 73,521
200,000 45,027 59,287 73,522 87,803 102,396
235,840 53,897 71,115 88,306 105,544 123,094
</TABLE>
The table above illustrates the annual pension benefits provided by the
Holdings Retirement Plan for the benefit of eligible employees upon retirement
at age 65. The benefits shown in the table are not subject to reduction for
Social Security benefit amounts.
Employees eligible to participate in the Holdings Retirement Plan are
generally salaried or commissioned employees of Holdings or a designated
subsidiary who have attained the age of 21 and completed one year of service.
The Holdings Retirement Plan formula provides for an annual retirement benefit
payable at age 65, calculated as a straight life annuity. Pensionable earnings
are total Form W-2 earnings (plus elective deferrals under the Lehman Brothers
Holdings Inc. Tax Deferred Savings Plan and certain other health plan deferral
amounts) up to the Internal Revenue Service maximum of $235,840 in 1993
($150,000 for 1994 plan year). For each year of plan participation prior to
1989, the annual accrual was based on percentages of pensionable earnings up to
and in excess of the Social Security taxable wage base. After 1988 the annual
accrual is equal to one percent of pensionable earnings up to the average Social
Security taxable wage base plus 1.65% of pensionable earnings in excess of the
average taxable wage base. Generally, participants have a non-forfeitable right
to their accrued benefits upon completing five years of vesting service. As of
January 1, 1994, the estimated credits for Messrs. Fuld, Pettit, Gregory,
Shaftel and Lakefield for purposes of projecting annual benefits under Holdings
Retirement Plan were 24, 17, 19, 18 and 19 years, respectively. Mr. Hill will
receive annual benefits under the Holdings Retirement Plan based upon 11 years
of employment.
76
<PAGE> 81
The Compensation and Benefits Committee of the Board of Directors of
American Express approved unfunded, non-qualified arrangements for Mr. Clark who
in 1990 transferred at the request of American Express to a position at
Holdings. As of January 1, 1994, Mr. Clark had three years of credited service
under the Holdings Retirement Plan. The arrangement provides that for Mr. Clark
the total value of the pension benefits to which he would be entitled at the
time of his retirement (based on 13 total years of service), plus the value of
his base salary and cash bonus received while employed by Holdings, would not be
lower as a result of his assumption of duties at Holdings than would have been
the case had he remained in his prior position at American Express. The American
Express Compensation and Benefits Committee has retained broad discretion in the
methodology for determining the respective values for comparisons and making any
equitable adjustments deemed necessary to carry out the intent of the
arrangements.
AGREEMENTS WITH FORMER EXECUTIVE OFFICERS
In January 1993, Mr. Clark relinquished his positions as Chairman and Chief
Executive Officer of Holdings and LBI. Pursuant to an agreement signed in March
1993, Mr. Clark agreed to continue to provide transition and advisory services
until April 15, 1994 or earlier commencement of other full-time employment. At
that time LBI made certain payments to Mr. Clark which are included in the
summary compensation table above. In May 1993, Mr. Clark was named a Vice
Chairman of LBI and in connection therewith executed an employment contract
which rescinded the March 1993 agreement. LBI (i) agreed to pay Mr. Clark salary
and bonus for 1993 and 1994 of at least $1.75 million per year, subject to
resignation or termination for cause, (ii) credited Mr. Clark with a $182,796
award under an incentive compensation plan for Lehman Brothers executives and
(iii) agreed that Mr. Clark would continue to participate in Lehman Brothers'
employee benefit and incentive programs.
On March 29, 1993, Mr. Hill relinquished all officer and director positions
with LBI, Holdings and their subsidiaries. Pursuant to an agreement signed on
June 1, 1993 (the "Agreement"), Mr. Hill agreed, among other things, to continue
providing advisory assistance to the Company through December 31, 1993 and also
agreed to comply with certain restrictive covenants through December 31, 1994,
in consideration for which LBI made payments to Mr. Hill during 1993 aggregating
$4,901,923. Under the terms of the Agreement, Mr. Hill also received $74,710
upon acceleration of vesting of a performance award, the acceleration of receipt
of 12,302 shares of Computervision Corporation common stock and approximately
$52,573 in accordance with the terms of a deferred compensation plan. Mr. Hill's
3,600 restricted American Express common shares vested in accordance with the
terms of the plan under which they were awarded. Mr. Hill also is entitled to
continue his participation in Capital Partners I and II and to receive,
beginning at age 65, payments under a deferred compensation plan. Under the
terms of the Holdings Retirement Plan, Mr. Hill will receive an annual
retirement benefit of approximately $42,919. The Company made a payment of
$1,392,820 to a charitable trust designated by Mr. Hill in satisfaction of any
claims under an incentive compensation plan. Mr. Hill will also receive
$1,100,000 in December 1994, subject to his compliance with restrictive
covenants.
1994 MANAGEMENT OWNERSHIP PLAN
Holdings has adopted, effective as of the Distribution Date, the Lehman
Brothers Holdings Inc. 1994 Management Ownership Plan ("1994 Plan"). The 1994
Plan is administered by the Compensation Committee, which is comprised
exclusively of non-employee Directors. The 1994 Plan provides for the granting
of incentive and non-qualified stock options, stock appreciation rights
("SARs"), restricted stock and restricted stock units ("RSUs"), performance
shares and performance units (collectively or individually, "Awards"). Except
with respect to grants of RSUs to non-employee Directors, as described above,
the Compensation Committee has discretion to select the individuals to whom
Awards will be granted and to determine the type, size and terms of each Award
and the authority to administer, construe and interpret the 1994 Plan. The
Compensation Committee's decisions are final, binding and conclusive. Awards may
be issued to officers, salaried or commissioned employees and consultants. In
addition, non-employee Directors will receive an annual grant of RSUs. See
"Compensation of Directors" above. As of March 28, 1994, approximately 9,000
individuals were eligible to participate in the 1994 Plan.
A total of 16,500,000 shares of Common Stock may be subject to Awards under
the 1994 Plan, subject to adjustment in accordance with the terms of the 1994
Plan. A total of 150,000 additional shares of Common
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Stock may be subject to RSUs which will be issued to non-employee Directors.
Common Stock issued under the 1994 Plan may be either authorized but unissued
shares, or treasury shares, or any combination thereof. Unless prohibited by
Rule 16b-3 under Section 16 of the Exchange Act, as amended, if any shares of
Common Stock subject to repurchase or forfeiture rights are reacquired by
Holdings or if any Award is cancelled, terminates or expires unexercised, the
shares of Common Stock which were issued or would have been issuable pursuant
thereto will become available for new Awards. No individual may receive options
or SARs over the life of the 1994 Plan attributable to more than 1,650,000
shares of Common Stock, subject to adjustment in accordance with the terms of
the 1994 Plan.
Set forth below are the types of awards which may be granted under the 1994
Plan.
Stock Options for Eligible Individuals. A stock option (each, an
"Option"), which may be a non-qualified or an incentive stock option, is the
right to purchase a specified number of shares of Common Stock at a price (the
"Option Price") fixed by the Compensation Committee. The Option Price of an
Option may be no less than the fair market value of the underlying Common Stock
on the date of grant.
Options are not transferable during the Optionee's lifetime and will
generally expire not later than ten years after the date on which they are
granted. Options become exercisable at such times and in such installments as
the Compensation Committee shall determine. The Committee may also accelerate
the period for the exercise of any or all Options held by an Optionee. Payment
of the Option Price must be made in full at the time of exercise in cash or by
tendering to the Company Common Stock having a fair market value equal to the
Option Price, or by other means that the Compensation Committee deems
appropriate.
The Committee may, at the time of the grant of an Option or thereafter,
grant a Limited Right, defined as a right to surrender to Holdings all or a
portion of the related Option. In exchange for such surrender, the Optionee
would receive cash in an amount equal to the number of shares subject to the
Option multiplied by the excess of the higher of (i) the highest price per share
of Common Stock paid in certain change of control transactions or (ii) the
highest fair market value per share of Common Stock at any time during the
90-day period preceding such a change of control over the Option Price of the
Option to which the Limited Right relates. A Limited Right can be exercised
within the 30-day period following a change of control. A Limited Right will
only be exercisable during the term of the related Option and may be granted
following the Distribution Date.
Stock Appreciation Rights. An SAR may be granted alone or in tandem with
Options or other Awards. An SAR granted in connection with an Option shall be
exercisable to the extent that the related Option is exercisable, and will be
transferable only to the extent the related Option may be transferred. Upon the
exercise of an SAR related to an Option, the Grantee shall be entitled to
receive an amount determined by multiplying (A) the excess of the fair market
value of a share of Common Stock on the date preceding the date of exercise of
such SAR over the per share Option Price, by (B) the number of shares as to
which such SAR is being exercised. The Option related thereto will be cancelled.
SARs unrelated to an Option shall contain such terms and conditions as to
exercisability, vesting and duration as the Compensation Committee shall
determine, but such duration shall be no greater than ten years. The Committee
may accelerate the period for the exercise of an SAR unrelated to an Option.
Upon exercise of an SAR unrelated to an Option, the Grantee shall be entitled to
receive an amount determined by multiplying (A) the excess of the fair market
value of a share of Common Stock on the date the SAR was exercised over the fair
market value of Common Stock on the date preceding the date the SAR was granted,
by (B) the number of shares as to which the SAR is being exercised. The Grantee
will receive, at the election of the Compensation Committee, cash or shares of
Common Stock. An individual to whom an Award is made has no rights as a
stockholder with respect to any Common Stock issuable pursuant to any such
Option or SAR until the date of issuance of the stock certificate for such
shares upon payment of the Option Price or settlement of the SAR. The Committee
may, at the time of the grant of an SAR unrelated to an Option or thereafter,
grant a Limited Right in tandem with the SAR which will operate in a manner
comparable to the Limited Rights described above under the caption "Stock
Options for Eligible Individuals."
Restricted Stock. A Restricted Stock Award is an Award of Common Stock
which is subject to forfeiture and/or a restriction against transfer (except in
the case of death) for a period specified by the
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Compensation Committee. Prior to the expiration of the restricted period, a
Grantee who has received a Restricted Stock Award has the right to vote and to
receive dividends on the shares subject to the Award. Dividends may be deferred
until the lapsing of the restrictions and, at the Compensation Committee's
discretion, reinvested in shares of restricted Common Stock or paid in cash. If
deferred dividends are to be held in cash, they may be credited at the end of
each year with interest on the amount in the account at the beginning of the
year at a rate the Compensation Committee may determine. Payment of deferred
dividends, together with interest, shall be made upon the lapsing of
restrictions and any deferred dividends shall be forfeited upon the forfeiture
of such shares.
Restricted Stock Units. An RSU is an Award of a unit representing the
right to receive a share of Common Stock upon the lapse of such restrictions as
may be determined by the Compensation Committee. Dividend equivalents may be
deferred until the lapsing of the restrictions and, at the Compensation
Committee's discretion, reinvested in RSUs or paid in cash. See "Directors as of
the Distribution Date" above for a description of the annual grant of RSUs to
non-employee Directors.
Performance Units. Performance Units are Awards whose final value, if any,
is determined by the degree to which specified company, business unit,
participant and/or other performance objectives are achieved during a specified
performance period (the "Performance Cycle"), subject to such adjustments as the
Compensation Committee may approve based on relevant factors. Performance
objectives may be based on earnings per share, net income, return on equity,
and/or on other measures as it deems appropriate. Prior to the end of a
Performance Cycle, the Compensation Committee, in its discretion and only under
conditions which do not affect the deductibility of compensation attributable to
Performance Units under Section 162(m) of the Code, may adjust the performance
objectives to reflect a change in the capitalization, a change in the tax rate
or book tax rate of Holdings or any subsidiary or any other event which may
materially affect the performance of Holdings, a subsidiary or a division,
including, but not limited to, market conditions or a significant acquisition or
disposition of assets or other property by Holdings, a subsidiary or a division.
Performance Units may be denominated in shares of Common Stock or a
specified dollar amount and, contingent upon the attainment of specified
performance objectives within the Performance Cycle, represent the right to
receive payment (i) in the case of Common Stock-denominated Performance Units,
the fair market value of a share of Common Stock on the date the Performance
Unit was granted, the date the Performance Unit became vested or any other date
specified by the Compensation Committee, (ii) in the case of dollar-denominated
Performance Units, the specified dollar amount or (iii) a percentage (which may
be more than 100%) of the amount described in clause (i) or (ii) depending on
the level of performance objective attainment; provided, however, that the
Compensation Committee may, at the time a Performance Unit is granted, specify a
maximum amount payable in respect of a vested Performance Unit. A Grantee shall
vest to the extent the performance objectives are satisfied. Payment shall be
made within 60 days after the last day of the Performance Cycle.
Performance Shares. Performance Shares are Awards whose final value, if
any, is denominated or paid in Common Stock or RSUs, as determined by the
Compensation Committee at the time of grant. The number of shares of Common
Stock or RSUs earned will be based on the factors described above with respect
to Performance Units. The Compensation Committee shall specify at the time of
grant the length of the performance period. The Grantee shall have, in the
discretion of the Compensation Committee, the right to receive payments
equivalent in value to dividends or other distributions paid or made with
respect to the underlying shares of Common Stock ("Dividend Equivalents"). Until
any restrictions upon the Performance Shares have lapsed, such Performance
Shares shall not be sold, transferred or otherwise disposed of and shall not be
pledged or otherwise hypothecated, nor shall they be delivered to the Grantee.
Restrictions upon Performance Shares shall lapse at such time or times and
on such terms, as the Compensation Committee may determine at the time an Award
is granted. The Compensation Committee may determine that the payment of
Dividend Equivalents shall be deferred until the lapsing of the restrictions
upon such Performance Shares and reinvested in shares of Common Stock (which
shall be held as additional Performance Shares) or held in cash. If such
Dividend Equivalents are held in cash, such amount may be credited with interest
at a rate determined by the Compensation Committee. Payment of deferred Dividend
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Equivalents shall be made upon the lapsing of restrictions and any Dividend
Equivalents deferred (together with any interest accrued thereon) in respect of
any Performance Shares shall be forfeited upon the forfeiture of such
Performance Shares.
Additional Information. Under the 1994 Plan, if there is any change in the
outstanding shares of Common Stock by reason of any stock split, stock dividend,
combination, subdivision or exchange of shares, recapitalization, merger,
consolidation, reorganization or other extraordinary or unusual event, the
Compensation Committee may direct that appropriate changes be made in the number
or kind of securities that may be issued under the 1994 Plan and in the terms of
outstanding Awards, except that RSUs granted to non-employee Directors may be
adjusted only to maintain the proportionate interests of the holder in RSUs and
to preserve the value of such RSUs. The Committee may accelerate vesting,
exercisability or lapse of restrictions on all or any portion of any Award at
any time, other than with respect to: (i) Awards of RSUs to non-employee
Directors, vesting of which may be accelerated only under such circumstances as
will not cause such persons to fail to be "disinterested persons," within the
meaning of Rule 16b-3 under the Exchange Act; and (ii) Awards other than Options
or SARs, to the extent that such acceleration would jeopardize the Company's tax
deduction for the payment or exercise of the Awards under Section 162(m) of the
Code.
Generally, an individual's rights under the 1994 Plan may not be assigned
or transferred (except in the event of death). The Compensation Committee may
permit an individual to pay taxes required to be withheld with respect to an
Award in any appropriate manner (including, without limitation, by the surrender
of Holdings Common Stock owned by such person or Common Stock that would
otherwise be distributed, or have been distributed, as the case may be, pursuant
to such Award).
The 1994 Plan shall terminate on the day preceding the tenth anniversary of
the date of its adoption by Holdings and no Award may be granted thereafter.
Holdings may terminate the 1994 Plan sooner and the Board of Directors may at
any time and from time to time amend, modify or suspend the 1994 Plan; provided,
however, that no such amendment, modification, suspension or termination shall
materially impair or materially adversely alter any Awards theretofore granted
under the 1994 Plan, except with the consent of the Optionee or Grantee, nor
shall any amendment, modification, suspension or termination deprive any
Optionee or Grantee of any Common Stock which he or she may have acquired
through or as a result of the 1994 Plan; and no such amendment shall be
effective unless and until the same is approved by stockholders of Holdings
where the absence of stockholder approval would adversely affect the compliance
of the 1994 Plan with Rule 16b-3, Code Section 162(m) or other applicable law or
regulation. Rule 16b-3 currently requires stockholder approval if the amendment
would, among other things, materially increase the benefits accruing to
Optionees or Grantees under the 1994 Plan.
Certain Federal Income Tax Consequences of Options. Certain of the federal
income tax consequences to Optionees and their employers of Options granted
under the 1994 Plan should generally be as set forth in the following summary.
For purposes of this discussion, the term "employer" shall be deemed to include
the employer of an employee Optionee and the taxpayer for whom a non-employee
Optionee performs services.
An employee to whom an incentive stock option ("ISO") which qualifies under
Section 422 of the Code is granted will not recognize income at the time of
grant or exercise of such Option. No federal income tax deduction will be
allowable to the employee's employer upon the grant or exercise of such ISO.
However, upon the exercise of an ISO, special alternative minimum tax rules
apply for the employee. When the employee sells such shares more than one year
after the date of transfer of such shares and more than two years after the date
of grant of such ISO, the employee will normally recognize a long-term capital
gain or loss equal to the difference, if any, between the sale prices of such
shares and the Option exercise price. If the employee does not hold such shares
for this period, when the employee sells such shares, the employee will
recognize ordinary compensation income and possibly capital gain or loss in such
amounts as are prescribed by the Code and regulations thereunder and the
employee's employer will generally be entitled to a federal income tax deduction
in the amount of such ordinary compensation income.
An individual to whom a non-qualified Option (which is treated as an option
for federal income tax purposes) is granted will not recognize income at the
time of grant of such Option. When such optionee exercises such non-qualified
Option, the optionee will recognize ordinary compensation income equal to the
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difference, if any, between the Option Price paid and the fair market value, as
of the date of Option exercise, of the shares the optionee receives. The tax
basis of such shares to such optionee will be equal to the Option Price paid
plus the amount includable in the optionee's gross income, and the optionee's
holding period for such shares will commence on the day on which the optionee
recognized taxable income in respect of such shares. Subject to applicable
provisions of the Code and regulations thereunder, the employer of such optionee
will generally be entitled to a federal income tax deduction in respect of
non-qualified Options in an amount equal to the ordinary compensation income
recognized by the optionee. Any compensation includable in the gross income of
an employee in respect of a non-qualified Option will be subject to appropriate
federal income and employment taxes.
The discussion set forth above does not purport to be a complete analysis
of all potential tax consequences relevant to recipients of Options or their
employers or to describe tax consequences based on particular circumstances and
does not address Awards other than Options. It is based on federal income tax
law and interpretational authorities as of the date of this prospectus, which
are subject to change at any time.
1994 MANAGEMENT REPLACEMENT PLAN
Holdings has adopted, effective as of the Distribution Date, the Lehman
Brothers Holdings Inc. 1994 Management Replacement Plan (the "Replacement
Plan"). A maximum of 3,200,000 shares of Common Stock will be subject to awards
under the Replacement Plan. Under the Replacement Plan, the Compensation
Committee will have the authority to grant nonqualified stock options and shares
of restricted Common Stock. The primary purpose of the Replacement Plan is to
replace awards relating to American Express common shares which were outstanding
as of April 4, 1994. Substantially all awards previously made under the American
Express 1979 and 1989 Long-Term Incentive Plans to Lehman Brothers' employees
which are outstanding immediately prior to the Distribution Date and subject to
the terms of these plans will be cancelled as of the Distribution Date.
Approximately 1,000 of the Company's employees hold such awards and will be
eligible to receive, as of the Distribution Date, the new awards under the
Replacement Plan.
Cancelled American Express restricted common shares and cancelled options
on American Express common shares will be replaced with restricted Common Stock
and options on Common Stock, respectively. The number of shares of restricted
Common Stock and options on Common Stock issued in replacement of the cancelled
American Express awards will be determined as of the Distribution Date, and will
be based upon such factors as: (i) the relative trading price of American
Express common shares and the Common Stock at the close of business on the first
day of "regular way" trading; (ii) the application of a valuation model to be
determined by the Compensation Committee, which model may be modified as the
Compensation Committee deems appropriate; and (iii) such other factors as the
Compensation Committee, in its discretion shall determine.
It is expected that the replacement options will mirror those of the
American Express options with respect to which they are granted, including
similar exercisability and termination provisions. In all other material
respects, the replacement options are expected to be identical to stock options
granted under the 1994 Plan. Similarly, awards of Common Stock under the
Replacement Plan are expected to include a number of shares of restricted Common
Stock having a value substantially equivalent to the cancelled American Express
restricted shares, and to continue the same vesting and other conditions that
apply to the replaced awards.
The Compensation Committee has authority to administer, construe and
interpret the Replacement Plan. Its decisions are final, binding and conclusive.
In addition, the Replacement Plan has substantially the same provisions as those
described more fully above under "1994 Management Ownership Plan."
EMPLOYEE OWNERSHIP PLAN
During 1993, LBI established the Lehman Brothers Inc. Employee Ownership
Plan (the "Employee Ownership Plan") pursuant to which certain key employees of
the Company deferred a percentage of their 1993 salary and bonus for the
purchase of certain Phantom Units of Holdings. Each Phantom Unit is comprised of
a phantom equity interest representing a notional interest in a share of Common
Stock (a "Phantom Share") and the right to receive a certain amount in cash with
respect to a Phantom Share ("Cash
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Right"). The number of Phantom Units which were available to each participant
was determined by the Finance Committee.
Up to 6,000,000 Phantom Shares (3,566,277 as adjusted for the Reverse Stock
Split) were available for "purchase" through voluntary and mandatory deferrals
of 1993 compensation. The price of each Phantom Unit was $10.00 per Phantom
Share and $6.67 for each related Cash Right ($16.82 per Phantom Share and $11.22
per related Cash Right, as adjusted for the Reverse Stock Split) and was
determined by the Finance Committee in July 1993 using an assumed capital
structure of Holdings for purposes of the program and taking into account
various factors, including market multiples for comparable companies, the
absence of a public market for Holdings, vesting requirements, and the
restrictions on transferability of the Phantom Units.
The Phantom Units representing voluntary deferrals are immediately vested
and non-forfeitable; however, there is a restriction on transferability of such
Units. There is also a restriction on transferability of the Common Stock which
employees will receive upon conversion of Phantom Shares. Generally, such
restrictions will lapse ratably over a three-year period. In accordance with the
terms of the Employee Ownership Plan, each Phantom Share will be converted to
Common Stock and each Cash Right will be paid upon the Distribution.
The Phantom Units representing mandatory deferrals are subject to the same
restrictions on transfer provisions as described above. Common Stock which
employees receive upon conversion of these Phantom Shares, in addition to the
three-year restriction on transferability, will continue to be subject to
forfeiture in accordance with the vesting schedule applicable to the Phantom
Shares prior to conversion. Vested Common Stock issued with restrictions upon
conversion will be subject to repurchase if the participant resigns or is
terminated for cause.
PARTICIPATING PREFERRED PLAN
During 1993, LBI converted a deferred compensation plan that was
established in 1990 into the Participating Preferred Plan (the "PPP").
The deferred balances in the PPP are credited with a fixed return of 12%
per annum, payable in cash on or as soon as possible following the end of each
calendar quarter. The deferred balances are also credited or debited with an
annual return (the "New Accretions") equal to the after-tax return on average
annual risk-adjusted equity of Lehman Brothers multiplied by the deferred
balance in the PPP account.
The beginning balance in all PPP accounts will vest on January 1, 1995. New
Accretions will vest on the first anniversary of crediting to the PPP accounts
commencing January 1, 1994. Except as the administrator of the PPP may
determine, all unvested amounts will be forfeited upon termination of
employment, except termination upon retirement, death, disability, government
service or termination without cause. The Finance Committee may pay out all or
any portion of a PPP account at any time. Such distribution, and distributions
of vested amounts upon termination of employment, will be paid in cash in a lump
sum, or in three annual installments together with 8% interest thereon. After
two years of participation in the PPP (including participation in the previous
plans), any participant age 52 or older will begin to receive annual payments of
10% (20% at age 57) of his or her PPP account balance.
It is anticipated that the Finance Committee will approve the termination
of the PPP which would result in the acceleration of payment of all deferred
balances immediately prior to the Distribution Date.
1994 EMPLOYEE STOCK PURCHASE PLAN
The Compensation Committee adopted effective June 1, 1994, or such later
date as the Compensation Committee shall designate, and subject to the
Distribution, the Lehman Brothers Holdings Inc. 1994 Employee Stock Purchase
Plan (the "ESPP"), under which 6,000,000 shares of Common Stock were reserved
for issuance subject to adjustment in accordance with the terms of the ESPP.
Purpose, Eligibility and Administration. The ESPP, which is intended to
qualify under Section 423 of the Code, is designed to encourage stock ownership
by employees of the Company. All employees of Holdings
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and designated subsidiaries are eligible to participate. No employee is eligible
to participate who, after the grant of options under the ESPP, owns (including
all shares which may be purchased under any outstanding options) 5% or more of
the total combined voting power or value of all classes of shares of Holdings.
Approximately 9,000 persons will be eligible to participate in the ESPP. The
ESPP is administered by the Compensation Committee.
Payroll Deductions. Each ESPP participant may authorize the Company to
deduct up to 10% of the participant's total cash remuneration for each quarterly
period (each, an "Offering Period") subject to a maximum amount of $15,000 per
year.
Stock Purchase. On the first day of each Offering Period, Holdings will
grant to each participant an option to purchase on the last day of the Offering
Period (the "Exercise Date") at a price determined as described below (the
"Purchase Price") the number of full shares of Common Stock of Holdings which
his or her accumulated payroll deductions on the Exercise Date will purchase at
the Purchase Price. The Purchase Price for each Offering Period will be 85% of
the fair market value of Holdings Common Stock on the Exercise Date. Fractional
shares of Common Stock may be purchased, at the discretion of the Committee; if
the purchase of fractional shares is not allowed, and only full shares of Common
Stock may be purchased, any balance remaining in the participant's account will
be carried over to the next Offering Period or returned to the participant.
Adjustment for Recapitalization, Merger, Etc. Subject to any required
action by the stockholders of Holdings, the number of shares available under the
ESPP as well as the price per share of Common Stock covered by each option under
the ESPP that has not yet been exercised shall be proportionately adjusted for
any increase or decrease in the number of issued shares of Common Stock
resulting from a stock split, reverse stock split, stock dividend, combination
or reclassification of the Common Stock, or any other increase or decrease in
the number of shares of Common Stock effected without receipt of consideration
by Holdings.
In the event of a proposed sale of all or substantially all of the assets
of Holdings, or the merger of Holdings with or into another corporation, each
option under the ESPP shall be assumed or an equivalent option shall be
substituted by such successor corporation or a parent or subsidiary of such
successor corporation, unless the Compensation Committee determines to shorten
the Offering Period then in progress, in which case a new Exercise Date will be
set and participants will be given the choice of having their options exercised
on the new Exercise Date or withdrawing from the ESPP and receiving the balance
of their accounts.
Withdrawal from ESPP. A participant may withdraw from the ESPP at any
time. Upon such withdrawal, the entire amount credited to the participant's
account will be refunded to him. Upon any termination of a participant's
service, the entire amount then credited to the participant's account shall be
refunded to the participant, or, in case of the participant's death, to the
participant's estate.
Termination or Amendment. The Board of Directors of Holdings may amend or
terminate the ESPP at any time without the approval of stockholders, provided
that no such action shall adversely affect options already granted thereunder,
and further provided that no such action will (a) increase the total number of
shares of Common Stock available under the ESPP (except in connection with
certain capital adjustments), (b) expand the class of persons eligible to
receive shares, or (c) extend the term during which shares may be purchased. See
"Adjustment for Recapitalization, Merger, Etc." above.
Federal Income Tax Consequences. Under Section 423(a) of the Code, the
transfer of a share of Common Stock to a participant pursuant to the ESPP is
entitled to the benefits of Section 421(a) of the Code. Under that Section, a
participant will not be required to recognize income at the time the option is
granted or at the time the option is exercised. If the option price under the
ESPP is less than the fair market value of the stock on the date of grant,
Section 423(c) of the Code requires that, provided the holding periods described
below are met, when the shares of Common Stock received pursuant to the ESPP are
sold or otherwise disposed of in a taxable transaction (or in the event of the
death of the participant while owning such shares whether or not the holding
period requirements are met), the participant will recognize compensation income
(taxed as ordinary income), for the taxable year in which disposition or death
occurs, in
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an amount equal to the lesser of (i) the excess of the fair market value of the
Common Stock at the time of such disposition or death over the amount paid for
the shares, and (ii) the excess of the fair market value of the stock at the
time the option was granted over the option price. Such recognition of
compensation income upon disposition shall have the effect of increasing the
basis of the shares in the participant's hands by an amount equal to the amount
of compensation income recognized. The Company will not be entitled to any
business expense deduction with respect to the ESPP, except in connection with a
disqualifying disposition as discussed below. Any additional gain or loss
resulting from the disposition (provided it is not a disqualifying disposition),
measured by the difference between the amount paid for the shares and the amount
realized (less the amount recognized as compensation income as described above),
will be recognized by the participant as long-term capital gain or loss. No
portion of the amount received pursuant to such a disposition will be subject to
withholding for federal income taxes, or be subject to FICA or FUTA taxes.
In order for a participant to receive the favorable tax treatment provided
in Section 421(a) of the Code, Section 423(a) requires that the participant make
no disposition of the shares within two years from the date the option was
granted nor within one year from the date such option was exercised and the
shares were transferred to him or her.
If a participant disposes of Common Stock acquired pursuant to the ESPP
before the expiration of the holding period requirements set forth above, the
participant will realize, at the time of the disposition, ordinary income to the
extent the fair market value of the Common Stock on the date the shares were
purchased exceeds the Purchase Price. The difference between the fair market
value of the Common Stock on the date the shares were purchased and the amount
realized on disposition is treated as long-term or short-term capital gain or
loss, depending on the participant's holding period in the Common Stock. The
amount treated as ordinary income may be subject to the income tax withholding
requirements of the Code and FICA withholding requirements. The participant will
be required to reimburse Holdings, either directly or through payroll deduction,
for all withholding taxes (e.g., federal income tax and FICA) Holdings is
required to pay on behalf of the participant. At the time of the disposition,
the Company may adopt procedures to assist it in identifying such deductions,
and may require a participant to notify Holdings of his or her intention to
dispose of any such shares.
The market value of the Common Stock that may be issued or acquired
pursuant to the 1994 Plan, the Replacement Plan and the ESPP cannot be
determined until the Distribution Date.
SHORT-TERM EXECUTIVE COMPENSATION PLAN
The Short-Term Executive Compensation Plan (the "STEP") was adopted by the
Compensation Committee effective as of January 1, 1994 (and subject to the
successful completion of the Distribution). The STEP allows the Compensation
Committee (or, in certain situations, its delegate) to grant to certain
employees of the Company annual cash awards of two types -- "Standard Awards"
and "Special Awards."
A Standard Award may be granted in the discretion of the Compensation
Committee or its delegate to any employee. The amount of the Standard Award will
be based on any criteria the Compensation Committee or its delegate wishes to
consider, including but not limited to, the objective or subjective performance
of the employee, the Company or any subsidiary or division thereof. A Standard
Award will be paid at the time determined by the Compensation Committee or its
delegate.
A Special Award may be granted in the discretion of the Compensation
Committee to any employee who the Compensation Committee reasonably believes may
be a "Covered Employee," as defined in Section 162(m) of the Code. Section
162(m) limits the Company's deduction to $1 million per year per executive for
certain compensation paid to each of its Chief Executive Officer ("CEO") and the
four highest compensated executives other than the CEO. In general, the proposed
regulations exclude from this limitation compensation that is calculated based
on "objective" performance criteria. The amount of any Special Award will be
based on objective performance goals established by the Compensation Committee.
The Compensation Committee must certify as to the attainment of the applicable
performance goals prior to payment of any Special Award, and may reduce the
amount of any Special Award. Under no circumstances may a Special Award be paid
unless the material terms of the Special Award, including the performance
measures applicable
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thereto, have been disclosed to and approved by the stockholders of Holdings.
All terms and conditions of Special Awards, and the STEP provisions referring
thereto, shall be administered and interpreted in accordance with Section 162(m)
of the Code, to ensure the deductibility by the Company of the Special Awards.
NEW PLAN BENEFITS
The table set forth below shows (i) the number of shares of Common Stock
underlying the awards of stock options made by the Compensation Committee on
March 28, 1994, to the individuals and group listed below and (ii) the value of
the annual grant of restricted stock units to all of Holdings' non-employee
Directors as a group, assuming that seven non-employee Directors will each
receive an annual grant of RSUs representing underlying Common Stock with a fair
market value of $30,000 in each case under the 1994 Plan.
LEHMAN BROTHERS HOLDINGS INC. 1994 MANAGEMENT OWNERSHIP PLAN
<TABLE>
<CAPTION>
DOLLAR VALUE OF
COMMON STOCK NUMBER OF SHARES OF
UNDERLYING RESTRICTED COMMON STOCK
STOCK UNITS UNDERLYING OPTIONS
--------------------- -------------------
<S> <C> <C>
NAME AND POSITION
R.S. Fuld, Jr.
Chairman and Chief Executive Officer 0 78,320
T.C. Pettit
President and Chief Operating Officer 0 61,760
J.M. Gregory
Managing Director of LBI 0 29,440
M.A. Shaftel
Managing Director of LBI 0 23,680
B.R. Lakefield
Managing Director of LBI 0 23,040
H.L. Clark, Jr.
Former Chairman of the Board and Chief
Executive Officer 0 0
J.T. Hill III
Former Co-President and Co-Chief
Operating Officer 0 0
GROUP
Executive Officer group 0 360,720
GROUP
Non-Employee Director group $ 210,000 0
</TABLE>
Lehman Brothers Holdings Inc. 1994 Management Replacement Plan. Certain
restricted American Express common shares and options on American Express common
shares previously awarded under the American Express 1979 and 1989 Long-Term
Incentive Plans held by employees of the Company will be cancelled as of the
Distribution Date. As more fully described above, the number and value of new
awards to be issued under the Replacement Plan will be based upon the closing
price of the Common Stock on the NYSE on the first day of "regular way" trading,
as well as the value of the cancelled awards. Therefore, the actual number of
shares of restricted Common Stock and options on Common Stock can be determined
only subsequent to the Distribution. See "1994 Management Replacement Plan"
above.
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<PAGE> 90
CERTAIN TRANSACTIONS AND AGREEMENTS BETWEEN THE COMPANY
AND AMERICAN EXPRESS
SERVICES AND PAYMENTS BETWEEN THE COMPANY AND AMERICAN EXPRESS
American Express and its subsidiaries, including TRS, AEB and IDS (as
hereafter defined), from time to time provide services to the Company. The
following table lists the fees paid by the Company for significant services,
other expenses allocated by American Express to the Company and amounts received
by the Company in respect of certain projects funded by American Express.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1991 1992 1993
------- ------- -------
(in thousands of dollars)
<S> <C> <C> <C>
Rent and shared services(a)(b)................................ $ 4,941 $ 5,738 $ 4,636
Communications and data processing(b)(c)...................... 4,975 5,337 4,797
General services(b)(d)........................................ 4,642 2,718 4,120
Insurance(b).................................................. 9,561 12,515 9,468
Salaries and incentives(b)(e)................................. 2,161 5,299 3,526
Tax payments (credits)(f)..................................... (74,331) 72,569 (3,337)
American Express Tower common charges(g)(h)................... 18,335 16,159 16,477
American Express funded projects(b)(i)........................ (1,754) (4,675) (3,708)
Other(j)...................................................... 376 2,393 1,725
</TABLE>
- ---------------
(a) Primarily represents rents and allocations paid to American Express for
shared facilities other than American Express Tower.
(b) Services expected to be discontinued on the Distribution Date or prior to
December 31, 1994.
(c) Charges and allocations for shared communications equipment, time sharing
services and data processing.
(d) Charges for certain central purchasing, distribution, supplies and services.
(e) Represents salary allocations as well as certain consulting payments and the
cost of training provided by American Express.
(f) See "Tax Allocation Agreements" below. The future amount of tax payments
cannot be determined.
(g) The Company's share of common area and service charges at American Express
Tower and fees charged by American Express as managing co-tenant of World
Financial Center.
(h) See "World Financial Center" below.
(i) Amounts funded by American Express for certain of the Company's technology
projects.
(j) See "Intercompany Agreements" below.
CERTAIN TRANSACTIONS WITH AMERICAN EXPRESS AND SUBSIDIARIES
The Company, American Express International Inc., a subsidiary of American
Express Travel Related Services Company, Inc. ("TRS"), and American Express Bank
Ltd. ("AEB") share office space in Hong Kong for which they are jointly and
severally liable for lease payments of approximately $3.1 million per year.
Until the sale of Shearson (a) IDS Life Insurance Company, a wholly owned
subsidiary of IDS Financial Corporation ("IDS"), and IDS Life Insurance Company
of New York, a wholly owned subsidiary of IDS Life Insurance Company, sold
deferred annuities and single premium variable life policies through the
Company's Financial Consultants and (b) AMEX Life Assurance Company sold
long-term care insurance through the Company's Financial Consultants. Such
insurance companies paid the Company a selling commission in connection with the
sale of such products.
American Express has invested $5.2 million in a domestic merchant banking
partnership in which the Company acts as general partner and remains committed
to invest an additional $0.5 million. American Express has received partnership
distributions in an aggregate amount of $8.9 million in respect of this
investment. Subsidiaries of American Express are the general partners and
another subsidiary is a limited
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<PAGE> 91
partner in a limited partnership which has invested in an offshore merchant
banking partnership which the Company acts as general partner.
Lehman Brothers Financial Resource Accounts include, as one of the features
of the integrated financial services accounts, the Gold Card, issued by TRS, for
which Lehman Brothers pays TRS a portion of the fees received from the holders.
Lehman Brothers and TRS have agreed to extend such arrangements for a three-year
period on an exclusive basis. TRS also provides the Corporate Card to employees
of the Company, for which TRS receives annual fees. In January 1994, the Company
agreed to consolidate all its business travel reservations through TRS' Travel
Center in Omaha. Lehman Brothers and TRS have agreed to extend such arrangements
with respect to the Corporate Card and travel services for 5 years, with TRS as
the sole provider of such services.
Until 1992 the Company and AEB had a Swiss joint venture, Lehman Brothers
Finance S.A., which engaged in certain trading and underwriting activities.
In August 1990, American Express acquired all of the then publicly-held
common stock of Holdings pursuant to a merger of a wholly owned subsidiary of
American Express with and into Holdings (the "Merger"). In connection with the
Merger, American Express agreed to guarantee certain payments to employees who
were then active employees of the Company or its affiliates under the Company's
Executive and Select Employees Plan, a deferred compensation plan for highly
compensated executives (the "ESEP"), the Company's Voluntary Deferred
Compensation Plan, the Lehman Brothers Kuhn Loeb Deferred Compensation Plans
("LDCP") and certain other deferred compensation programs of the Company,
subject to certain limitations. The guarantee covered participants of the ESEP
and the LDCP only if such participants elected to accept certain amendments to
these plans and the deferral agreements thereunder. As of December 31, 1993,
deferred compensation with an aggregate balance of approximately $59 million was
covered by this guarantee. The Company will pay to American Express after the
Distribution an annual fee equal to 0.625% of the outstanding balance under such
deferred compensation plans, in consideration of American Express maintaining
the guarantee.
American Express provided letters to several foreign regulatory bodies,
confirming the Company's financial well-being and ongoing business operations.
These letters did not constitute guarantees but did further the Company's
ability to secure certain regulatory approvals for its business operations.
These letters are being rescinded at the Distribution and will be replaced with
letters from Holdings.
Lehman Brothers has participated, along with other units of American
Express, in the American Express philanthropic program. In 1993, 1992 and 1991,
Lehman Brothers contributed $2.8 million, $3.6 million and $4 million,
respectively, to support American Express philanthropic activities.
In April 1992, American Express pledged $1 million callable from January 1,
1997 to December 31, 2003 for the development by the New York Public Library of
a Science, Business and Industry Library. Holdings, as co-pledgor, has agreed to
reimburse American Express for 50% of the pledge.
In connection with the sale of The Ayco Corporation ("Ayco") by the Company
to American Express on December 31, 1989, the Company agreed to guarantee
specified levels of revenue from certain financial planning services to be
performed for Lehman Brothers in the years 1990 and 1991, which was terminated
on March 31, 1991. The parties also agreed that until December 31, 1994, Ayco
and Lehman Brothers would continue certain working relationships whereby Ayco
will provide financial consulting and related services to customers of Lehman
Brothers or its affiliates, and Lehman Brothers or its affiliates will provide
certain investment services and products to Ayco clients. In addition, Ayco
provides certain administrative services for the ESEP and for certain other
Company plans, pursuant to which Ayco receives customary fees. Ayco also
provides financial counseling and tax preparation services to certain executive
officers of the Company.
In June 1989, the domestic mutual fund transfer agency business ("TSSG") of
an affiliate of The Boston Company was sold to certain subsidiaries of American
Express which included First Data Corporation. In connection with such sale, the
Company agreed that, for each calendar quarter during the period from January 1,
1991 to December 1, 1995, in the event TSSG does not act as transfer agent for a
specified percentage of shareholder accounts of certain mutual funds, unit
investment trusts, limited partnerships, offshore investment companies and money
market demand accounts, then The Boston Company will pay
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<PAGE> 92
TSSG the amount of any resulting shortfall in net revenues. The Boston Company's
obligations were guaranteed by Holdings. Subject to applicable fiduciary
requirements, the Company is also obligated, until June 1999, to designate TSSG
as transfer agent for those unit investment trusts and other entities for which
the Company has the legal power or authority to make such appointment, and
otherwise to recommend TSSG as transfer agent. The Company and its affiliates
also agreed, subject to applicable fiduciary duties, to recommend a TSSG nominee
to serve on the board of directors of selected representative mutual funds, for
which Lehman Brothers is the primary adviser, until 1996. The Company is
obligated to promote actively the transfer agent services provided by TSSG,
until June 1996.
On June 28, 1991, Lehman sold all the issued and outstanding stock (the
"Stock") of its wholly owned subsidiary The Balcor Company ("Balcor") to
National Express Company, Inc. ("NEC"), a wholly owned subsidiary of American
Express. In connection therewith, the Company sold to American Express certain
loans (the "Loans") made by the Company to Balcor and one of Balcor's wholly
owned subsidiaries. Pursuant to the terms of the transaction, NEC and American
Express purchased the Stock and the Loans at book value for $1.445 billion
consisting of $500 million in cash and a $945 million promissory note due June
28, 1996 (the "Balcor Note"). Effective as of the Distribution Date, the Balcor
Note will be divided into two separate notes, each with a maturity date of June
28, 1996, in the amounts of $382 million and $563 million (collectively, the
"Balcor Notes"). The Company will have the ability to pledge the $382 million
note (the principal amount of which may be increased as described below)(the
"Pledge Right") subject to American Express' right, commencing one year
subsequent to the Distribution Date, to revoke the Pledge Right (and any pledge
of the $382 million note) if American Express has a reasonable belief that such
note is necessary to secure outstanding Lehman Brothers debt to American Express
at such time. American Express will have a set-off right with respect to the
$563 million note which could be extended to the $382 million note in connection
with the revocation referred to above. The principal amount of the $382 million
note will be increased (but not above $500 million) and the principal amount of
the $563 million note will be decreased (but not below $445 million) by an
amount equal to any principal repayments of the WFC Indebtedness (as defined
below) by the Company. See "World Financial Center" below.
In order to facilitate the sale by the Company of SLHMC to GE Capital
Mortgage Services, Inc. ("GE") on August 31, 1993, American Express provided an
indemnity to GE with respect to certain tax and ERISA liabilities. In
consideration of American Express providing such indemnity, the Company paid
American Express $10 million.
In connection with the Primerica Transaction and the Mellon Transaction,
certain securities received as proceeds were transferred by the Company to
American Express for consideration. See "Recent Developments" for further
information with respect to these transfers.
FINANCIAL SERVICES
The Company from time to time provides investment banking, commercial paper
placement, brokerage and various other financial services such as repurchase
transactions, investment advisory, strategic advisory and derivative products to
American Express and its subsidiaries, including acting as placement agent for
medium-term notes, dealer for commercial paper and advisor regarding certain
dispositions. The Company, American Express and its subsidiaries also engage in
the ordinary course of business in various trading and short-term funding
transactions, including foreign exchange and precious metals transactions. AEB
issues letters of credit and provides overnight loans which are used in
financing the Company's overseas activities.
TAX ALLOCATION AGREEMENTS
Holdings and American Express have entered into an agreement (the "Tax
Allocation Agreement") providing for the allocation and settlement of their
respective federal, state and local income tax liabilities (including Holdings'
and its subsidiaries' share of liability, if any, for alternative minimum tax)
and detailing the procedures that determine the payments to be made to or by
Holdings with respect to those liabilities, including payments with respect to
adjustments to tax liabilities resulting from audits or other proceedings with
respect to taxes for taxable periods for which Holdings or its subsidiaries were
included in a consolidated federal or combined state or local income tax return
with American Express. Certain relevant terms of the Tax Allocation Agreement
are as follows:
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<PAGE> 93
In general, Holdings will be liable and has agreed to indemnify American
Express for Holdings' share of the American Express consolidated federal tax
liability or combined state or local tax liability (together with interest,
penalties and additions to tax) for taxable periods for which Holdings or its
subsidiaries are included in any returns with American Express. Holdings' share
of federal tax liabilities will generally be based on its tax liability
determined as if Holdings and its subsidiaries filed federal income tax returns
as a separate taxpayer. Holdings will be given credit for tax benefits American
Express can use in its consolidated federal income tax return, provided that it
will be subject to any consolidated limitations, as adjusted, that affect
American Express, and, if these limitations apply, Holdings' benefits will be
considered to be used after the benefits of other members of the American
Express consolidated group. If Holdings is required under the Tax Allocation
Agreement to repay amounts previously received in respect of a tax benefit or
attribute arising during an affiliation year, Holdings could report a permanent
earnings charge. Holdings' share of combined state or local tax liabilities will
generally be based on Holdings' and its subsidiaries' proportionate share of the
tax liabilities of all members of the combined group with positive tax
liabilities, determined as if such members were each separate taxpayers after
giving effect to all apportionment factors on a separate taxpayer basis.
Holdings will be liable to American Express for any taxes (together with
interest, penalties and additions to tax) resulting from any adjustment in the
tax liability of the American Express consolidated or combined group (as a
result, for example, of tax audits or judicial decisions) that results in an
increase in its share of such tax liability as described above. Holdings will be
required to settle all unsettled audit issues that do not satisfy a prescribed
legal standard or the taxes for which do not exceed $1 million in the aggregate
in a taxable year. Holdings will indemnify American Express for taxes (together
with interest, penalties and additions to tax) with respect to certain new tax
issues or tax liabilities in excess of those previously identified if Holdings
is permitted by American Express to assume control of the proceedings.
American Express will control the filing and content of all consolidated
and combined tax returns which include Holdings or its subsidiaries, including
all determinations whether to file amended returns or claims for refund. In
addition, American Express may, in its discretion, generally in good faith,
determine whether to claim certain carrybacks or carryovers of losses and
credits by Holdings or its subsidiaries from taxable years during which they
have or will file federal income tax returns separately from American Express
("separate return years") to taxable years in which they filed returns with
American Express, and may impose certain limits on Holdings or its subsidiaries
taking inconsistent positions.
In the Tax Allocation Agreement, American Express and the Company have
agreed to reattribute to American Express up to $35 million of net operating
losses of Holdings and its subsidiaries to the extent allowable by law, the tax
benefits for which have not been reflected in the consolidated financial
statements of Holdings and its subsidiaries.
WORLD FINANCIAL CENTER
LBI, LGSI and Lehman Commercial Paper Inc. (collectively, the "LB
Co-tenants") are co-tenants together with American Express and certain of its
other subsidiaries (the "AXP Co-tenants" and, together with the LB Co-tenants,
the "Co-tenants") of the leasehold interest in 3 World Financial Center in New
York City (the "Property").
The Co-tenants issued approximately $649 million aggregate original
principal amount, and American Express issued $175 million original principal
amount (a portion of which was re-loaned to the LB Co-tenants) of long-term debt
to finance the Property, in a series of notes with various financial terms and
maturities through the year 2000 (the "WFC Indebtedness"). The LB Co-Tenants are
liable, on a limited recourse basis, for their proportionate share
(approximately 50%) of the debt issued by the Co-tenants, which debt has been
guaranteed by American Express, and are liable to American Express, on a limited
recourse basis, for their proportionate share of the notes issued by American
Express. Certain of the debt issued by the Co-tenants is secured by a first
and/or second mortgage granted on the interest of the Co-tenants as tenants-
in-common in the Property. In consideration of the American Express guarantee of
the WFC Indebtedness, the Company will pay a guarantee fee, commencing upon the
repayment of the Balcor Notes, of 0.625% of its
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<PAGE> 94
proportionate share of the aggregate outstanding WFC Indebtedness per annum.
Holdings has agreed to indemnify American Express for all payments that American
Express may be required to make on behalf of the LB Co-tenants under the
guarantees and under the Agreement of Tenants-In-Common referred to below, and
Holdings has guaranteed payment of their share of the $175 million in long-term
debt originally issued by American Express. Prior to the Distribution Date,
American Express will assign to the Company its tenancy-in-common interest
applicable to five floors of the Property in exchange for promissory notes in an
aggregate principal amount of $44 million.
In 1987, the Co-tenants entered into an Agreement of Tenants-In-Common
which sets forth their respective rights, obligations and interests as
tenants-in-common with respect to the Property. Prior to the Distribution Date,
a new Agreement of Tenants-In-Common will be entered into which supersedes the
1987 agreement. The new agreement provides, among other things, that: (i) a
Co-tenant is obligated to pay its proportionate share of all Property
obligations; (ii) a Co-tenant may not assign or transfer all or any portion of
its interest in the Property without the consent of the managing Co-tenant,
which consent shall not be unreasonably withheld or delayed after satisfaction
of the WFC Indebtedness; (iii) a Co-tenant may enter into a sublease of all or a
portion of its space subject to the terms and conditions set forth in the
agreement; (iv) a Co-tenant shall not have the right to partition its interest
in the Property so long as any initial Co-tenant or an affiliate thereof shall
own an interest in the Property; (v) a Co-tenant can not pledge or mortgage its
interest in the Property without the consent of the managing Co-tenant; (vi)
subject to certain conditions, American Express will act as managing Co-tenant
of the Property and in that capacity will retain certain discretionary rights
with respect to its management and operation; (vii) after satisfaction of the
WFC Indebtedness, a Co-tenant may cause the conversion of the Property to a
condominium form of ownership; and (viii) American Express has a right of first
refusal with respect to any proposed sublease of the LBI Co-tenants' space or
any proposed assignment or transfer of their interest in the Property and the
LBI Co-tenants have similar rights with respect to the AXP Co-tenants.
Under the terms of the WFC Indebtedness, certain events affecting one or
more of the Co-tenants of the Property constitute events of default. Such
defaults in turn may cause the acceleration of other indebtedness of a
Co-tenant. In order to afford themselves better individual protection against
the effects of such defaults, and in furtherance of the ongoing separation of
the Company's activities and obligations from those of American Express, the
Co-tenants are presently engaged in discussions concerning the possible
severance of their joint obligations under the WFC Indebtedness and the
Property. Among the possibilities are transfer of legal or beneficial title to
the Property to a different legal structure (including by sale-leaseback) and/or
exchange of debt. None of the Co-tenants, by engaging in such discussions, has
committed or obligated itself to implement any particular change except as
described in the next paragraph below. Certain of these alternatives may require
consent of the ground lessor or the trustees or holders of the debt and, if they
agree, modification of the ground lease or debt instruments.
The alternative that will be adopted if no other approach is agreed upon by
the parties, or the relevant debt instruments are not amended, is a mutual
buy-sell agreement (the "Buy-Sell Agreement") under which, upon the occurrence
of certain specified events with respect to a Co-tenant, American Express (if
such Co-tenant is a Lehman Brothers entity) or the Company (if such Co-tenant is
an American Express entity) could acquire such Co-tenant's interest in the
Property at fair value. In connection with such purchase, (i) the selling party
will borrow from the purchasing party funds necessary to pay the selling party's
prior share of the WFC indebtedness as and when due thereafter, in consideration
of the payment by the purchaser of such amounts to the holders of the WFC
indebtedness, and (ii) the purchasing party would sublease the applicable
portion of Property back to the selling party for a term to expire upon
satisfaction of the WFC Indebtedness upon terms and conditions substantially
similar to those contained in the Agreement of Tenants-In-Common with such
modifications as may be required by the provisions of the WFC Indebtedness. Upon
exercise of such purchase option, depending on the then current valuation of the
Property, the selling party might be required to recognize a loss, which could
be substantial. The Buy-Sell Agreement would provide that at the end of the term
of the sublease, the Property would be reconveyed to the seller and the
Agreement of Tenants-in-Common would be reinstated.
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<PAGE> 95
As to any of the possible alternatives (whether the Buy-Sell Agreement or,
in lieu thereof, any other alternative to which the parties may hereafter
mutually agree), whenever implemented, the transaction costs thereof, such as
transfer, occupancy, income and mortgage recording taxes, could be significant.
As part of their continuing discussion the parties will agree as to how any such
expenses would be shared. The implementation of any of such options could also
have tax, regulatory, accounting or other consequences which may have a material
adverse effect on the business or financial condition of the Company.
INTERCOMPANY AGREEMENTS
As of May 1, 1987, Holdings and American Express entered into an
Intercompany Agreement which governed certain rights and liabilities of the
parties with respect to trademark usage, insurance, the sharing of facilities
and certain other matters. Such agreement terminates in its entirety at the
Distribution Date.
American Express and the Company will enter into a new Intercompany
Agreement (the "1994 Intercompany Agreement") which will govern certain business
arrangements between the parties after the Distribution. The 1994 Intercompany
Agreement will provide, in general, that the Company may, for specified periods
of time after the Distribution, continue to use certain shared facilities at the
World Financial Center, such as the fitness centers, the cafeteria, the medical
center, the Lehman Corporate Library and the conference center; obtain certain
services from American Express related to the World Financial Center, such as
mail and courier services; obtain certain volume purchasing benefits, such as
the purchase of computer equipment and software; as well as continue other
similar arrangements, on substantially the same basis as prior to the
Distribution. Such arrangements are generally favorable to the Company or
necessary in order to provide the Company with a reasonable period of time in
which to obtain similar services from another provider or provide such services
internally. The 1994 Intercompany Agreement also will provide: that, after the
Distribution, each party will be responsible, with certain exceptions, for
losses, liabilities and claims relating to or arising out of such party's
business; how certain joint litigation will be managed and how any monies
payable in respect thereof will be shared; and whether the Company shall be
entitled to receive its proportionate share of certain refunded insurance
premiums.
It is expected that prior to the Distribution Date, Holdings and American
Express will enter into a stock purchase agreement relating to the American
Express Common Stock Purchase and the acquisition by American Express of the
Cumulative Preferred Stock and the Redeemable Preferred Stock. The agreement
will contain customary representations, warranties and covenants and certain
other terms including registration and information rights with respect thereto.
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<PAGE> 96
CERTAIN TRANSACTIONS AND AGREEMENTS AMONG HOLDINGS,
AMERICAN EXPRESS AND NIPPON LIFE
INVESTMENT AGREEMENT
In connection with the sale in 1987 of 13,000,000 shares of Cumulative
Convertible Voting Preferred Stock, Series A ("Series A Preferred Stock"), to
Nippon Life, Holdings, American Express and Nippon Life entered into an
Investment Agreement which was amended in 1990 (as so amended, the "Investment
Agreement"). Nippon Life, Holdings and American Express have entered into a
non-binding letter of intent that is subject to final documentation containing
mutually acceptable terms and conditions. The letter calls for such parties to
enter into a new agreement (the "1994 Agreement"), as part of the Concurrent
Transactions, which, in addition to providing for Nippon Life's Equity
Investment and the right to receive a portion of the Participation Rights as
described above, would provide for certain modifications to the investment
arrangement with Nippon Life, as described below. The following is a description
of the Investment Agreement, and the proposed changes to be made by the 1994
Agreement.
Board of Directors Representation. Pursuant to the Investment Agreement,
Nippon Life has nominated, and American Express has voted its shares of Voting
Stock for two directors to Holdings' Board of Directors, one of whom serves on
the Finance Committee of the Board of Directors. These rights continue so long
as Nippon Life owns shares of Voting Stock, with a value (as determined in
accordance with the Investment Agreement) equal to not less than two-thirds of
the aggregate purchase price of the Series A Preferred Stock ($508.3 million),
as adjusted (the "Investor's Minimum Investment"). Except to the extent Nippon
Life may participate in the management of Holdings through its nominees, Nippon
Life has agreed that it will not, alone or in concert with any other person,
seek to affect or influence the control of the management or business operations
of Holdings. Voting Stock means all securities issued by Holdings having the
ordinary power to vote in the election of directors of Holdings, other than
securities having such power only upon the occurrence of a default or any other
extraordinary contingency.
Rights Under the Series A Preferred Stock. In the event that in April 1996
Holdings does not have any class or series of Voting Stock registered under the
Securities Exchange Act of 1934 which is broadly held and actively traded
("Public Stock"), then Nippon Life will have the right to require either
American Express or Holdings (at the option of American Express) to purchase all
of the shares of Series A Preferred Stock at the price at which Nippon Life
purchased from Holdings the Series A Preferred Stock ($39.10 per share or $508.3
million in the aggregate) plus accumulated and unpaid dividends (the "Preferred
Sale Price") and shares of Common Stock Holdings received upon any conversion of
the Series A Preferred Stock at a price per share equal to the conversion price
per share (currently $122.97) on the date of conversion for such shares
(adjusted for stock dividends, splits and reverse stock splits) plus declared
and unpaid dividends ("the Common Sale Price") on terms specified in the
Investment Agreement (the "1996 Put Option"). American Express intends to
require Holdings to purchase the Series A Preferred Stock in the event Nippon
Life were to exercise the 1996 Put Option.
The 1996 Put Option will expire prior to April 1996 if the trading price of
the American Express common shares equals or exceeds the exchange price of
$81.46 (as it may be adjusted) for a period of 20 days out of any 30 consecutive
trading days. See "Right to Exchange Series A Preferred Stock for American
Express Common Shares" below. American Express' and Holdings' obligations under
the 1996 Put Option may be satisfied by delivering, in lieu of cash, freely
marketable American Express common shares or debt securities (other than
"zero-coupon" or "deep discount" debt, but including debt of American Express
Credit Corporation, a subsidiary of American Express, if it has a credit rating
at least as high as American Express' rating), or certain investment grade debt
securities or other marketable securities of non-American Express issuers.
Under the 1994 Agreement, the Series A Preferred Stock, currently entitled
to one vote per share, would have its votes reduced to 0.3179723 votes per
share.
Right to Exchange Series A Preferred Stock for American Express Common
Shares. In addition to Nippon Life's right to convert the Series A Preferred
Stock into Common Stock at a conversion price of
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$122.97 per share, American Express has granted to Nippon Life the
non-transferable right (the "Exchange Right") to exchange all or a portion of
the Series A Preferred Stock for American Express common shares. The Exchange
Right entitles Nippon Life to sell shares of Series A Preferred Stock to
American Express and receive 0.48 of an American Express common share for each
share of Series A Preferred Stock to be exchanged (or an aggregate of 6,240,000
American Express common shares at the initial exchange price of $81.46 per
share). The exchange price is subject to certain anti-dilution adjustments. The
Exchange Right terminates on December 31, 1999, provided that American Express
or Holdings may require Nippon Life to sell to American Express or Holdings, as
the case may be, the Series A Preferred Stock in cumulative annual increments of
2,600,000 shares, on any dividend payment date, if the average market price (as
defined in the Investment Agreement) of American Express common shares exceeds
the exchange price per share, and American Express or Holdings may require such
sale to American Express or Holdings, as the case may be, on any dividend
payment date on and after June 15, 1994, if the average per share market price
of publicly traded Common Stock exceeds the conversion price per share of Series
A Preferred Stock, in each case, on the date notice of required sale is given.
Pursuant to the 1994 Agreement, American Express would not have the right
to require Nippon Life to sell to American Express shares of the Series A
Preferred Stock.
Warrant for Common Stock. In 1990, Nippon Life acquired a Warrant (the
"Warrant") to purchase approximately 3.3 million shares of Common Stock (the
"Warrant Shares"). The Warrant has an exercise price of $47.17 per share and
expires on April 15, 1996. If the Common Stock is publicly traded, Holdings may
accelerate the expiration of the Warrant with respect to 20% of the underlying
Warrant Shares each year if at the time of acceleration the per share trading
price of the underlying Common Stock for 20 out of 30 consecutive trading days
is equal to or greater than 135% of the exercise price of the Warrant. The right
to accelerate the Warrant is cumulative each year. The Warrant is
non-transferable except to affiliates of Nippon Life. The Warrant Shares are
non-transferable except (i) among affiliates of Nippon Life, (ii) subject to
American Express' right of first refusal, after American Express ceases to own
at least 70% of the outstanding Voting Stock of Holdings and (iii) subject to
American Express' right of first refusal, after December 31, 1999.
Notwithstanding the foregoing, Nippon Life is not subject to any restriction
against transfer of Warrant Shares purchased upon exercise of that portion of
the Warrant the expiration of which has been accelerated. The exercise price of
the Warrant and the number of Warrant Shares are subject to certain
anti-dilution adjustments.
Pursuant to the 1994 Agreement, the exercise price of the Warrant would be
reduced to $35.03 per share and American Express' right of first refusal would
terminate.
Nippon Life and its affiliates have certain registration rights with
respect to the Warrant Shares if the Common Stock is publicly traded at the
time.
Other Rights and Restrictions. Until April 2012, Nippon Life has agreed
that it will not directly or indirectly increase its ownership of Voting Stock
above 33 1/3% of the outstanding Voting Stock without the consent of Holdings.
Nippon Life will, to the extent permitted by any securities exchange upon which
the Voting Stock is listed or as otherwise granted to American Express and so
long as it owns the Investor's Minimum Investment, have the right to purchase a
pro rata share (based on its then current percentage equity interest in
Holdings) of any voting equity security or any securities convertible into or
exchangeable for shares of voting equity securities issued by Holdings
(excluding shares of any such security offered pursuant to Holdings' employee
benefit plans, dividend reinvestment plans and other offerings other than for
cash). After April 1994, all shares of Common Stock received upon conversion of
the Series A Preferred Stock and Series A Preferred Stock held by Nippon Life
are freely transferable, except that American Express (so long as American
Express owns directly or indirectly at least 5% of the issued and outstanding
Holdings' Voting Stock) and Holdings will have a right of first refusal with
respect to any sales of shares of Voting Stock by Nippon Life in an amount
greater than 2% of the total outstanding Voting Stock of Holdings during any
six-month period (from January to June and from July to December). All
transferees of shares in an amount greater than 2% of the total outstanding
Voting Stock of Holdings must agree to the restrictions to which Nippon Life is
subject, and provided the Company then has Public Stock outstanding, Nippon Life
is entitled
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to require Holdings to register under the Securities Act its shares of Common
Stock acquired upon conversion of the Series A Preferred Stock and is also
entitled, subject to certain limitations and exceptions, to have such shares
registered in the event Holdings registers common equity securities for sale to
the public. Any such sales by Nippon Life are subject to American Express' and
Holdings' right of first refusal, the right of Holdings to delay the public
offering under certain circumstances and the requirement that Nippon Life use
its best efforts to effect a broad distribution of the shares of Common Stock
sold in the public offering.
Pursuant to the 1994 Agreement, American Express' rights of first refusal
would terminate and Holdings' rights of first refusal would not be applicable to
sales made pursuant to underwritten public offerings involving broad
distributions. In addition, the 1994 Agreement would provide Nippon Life with
certain registration rights with respect to the Series A Preferred Stock and the
Common Stock acquired in the NL Common Stock Purchase if there is Public Stock
outstanding at the time.
BUSINESS TRANSACTIONS
Holdings, American Express and Nippon Life entered into a Business
Association Agreement in 1987. The Company and Nippon Life have conducted
certain personnel exchanges pursuant to such agreement.
On September 24, 1987 and October 3, 1988, Holdings entered into loan
agreements with Nippon Life (the "1987 Loan" and the "1988 Loan," respectively).
Pursuant to these loan agreements Holdings borrowed Y10,000,000,000. These
borrowings were used to meet the Company's general funding requirements.
Interest on any advance outstanding under the 1987 Loan was paid at a rate of
5.3% per annum, and under the 1988 Loan is paid at a rate of 5.5% per annum. The
1987 Loan matured in September 1992. The Company, through certain of its
subsidiaries, has entered into securities lending agreements with Nippon Life
pursuant to which Nippon Life loans securities and in exchange therefor the
Company provides collateral, the types and amounts of which are negotiated on an
arm's-length basis. Nippon Life invested $134.8 million in a merchant banking
partnership in which the Company acts as general partner. Nippon Life remains
committed to invest approximately $4.2 million in this merchant banking
partnership. Nippon Life has received partnership distributions in an aggregate
amount of $62.8 million in respect of this investment. The relationship also
provides the Company with access to numerous Asian institutions for private
placements and underwritings.
Holdings' subsidiaries from time to time engage in certain trading
activities with Nippon Life in return for commissions and fees which are
negotiated on an arm's-length basis.
Each of the Company and Nippon Life owns 50% of the outstanding common
stock of PanAgora Asset Management Inc. ("PanAgora"). Nippon Life and the
Company also are parties to an agreement regarding the cooperation and
management of PanAgora and PanAgora Asset Management Ltd., an asset management
company established by the Company and Nippon Life in London in July 1989.
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PRINCIPAL STOCKHOLDERS
Set forth below are those persons known to Holdings to be beneficial owners
of more than five percent of any class of voting securities of Holdings.
<TABLE>
<CAPTION>
SHARES OWNED
------------------------------------------------------------------
AFTER THE EQUITY
INVESTMENT,
THE OFFERING
AND THE PHANTOM
BEFORE CONCURRENT AFTER THE
SHARE
TRANSACTIONS(A) CONVERSION DISTRIBUTION
-------------------- -------------------- --------------------
PERCENT PERCENT PERCENT
NAME OF NUMBER OF OF NUMBER OF OF NUMBER OF OF
TITLE OF CLASS BENEFICIAL OWNER SHARES CLASS SHARES CLASS SHARES CLASS
- ----------------------------- ---------------------------- ---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Common Stock American Express Company(b) 53,494,158 87.8% 98,254,243 86.8% -0- 0.0%
Common Stock Nippon Life Insurance
Company(c)................ 7,439,986(d) 12.2 10,932,844(d) 9.7 12,930,552(d) 11.2
Cumulative Convertible Voting
Preferred Stock, Series A Nippon Life Insurance
Company(c)................ 13,000,000 100.0 13,000,000 100.0 13,000,000 100.0
Cumulative Voting Preferred
Stock American Express
Company(b)................ -- -- 8,000,000 100.0 8,000,000 100.0
Redeemable Voting Preferred
Stock American Express
Company(b)................ -- -- 928 92.8 928 92.8
Redeemable Voting Preferred
Stock Nippon Life Insurance
Company(c)................ -- -- 72 7.2 72 7.2
</TABLE>
- ---------------
(a) Gives effect to the Reverse Stock Split.
(b) The address of American Express Company is American Express Tower, World
Financial Center, New York, New York 10285.
(c) The address of Nippon Life Insurance Company is 2-2, Yurakucho, 1-chome,
Chiyoda-ku, Tokyo, 100, Japan.
(d) Includes 3,306,346 shares of Common Stock issuable upon exercise of the
Warrant and 4,133,640 shares of Common Stock issuable upon conversion of the
Cumulative Convertible Voting Preferred Stock, Series A.
------------------------
American Express is selling in the Offering 441,600 shares of Common Stock
to executive officers of Lehman Brothers for an aggregate purchase price of
approximately $11.3 million, or approximately $25.53 per share. See "The
Offering and the Distribution." Holdings will not receive any proceeds from the
sale of shares of Common Stock by American Express in the Offering.
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DESCRIPTION OF CAPITAL STOCK
Under the Restated Certificate of Incorporation of Holdings which will be
in effect as of the Distribution Date (the "Certificate of Incorporation"),
Holdings is authorized to issue up to 38,000,000 shares of preferred stock, par
value $1.00 per share ("Preferred Stock"), and 300,000,000 shares of Common
Stock.
COMMON STOCK
Dividends. Subject to any prior dividend rights of the holders of
Preferred Stock, dividends may be paid on the Common Stock as determined by the
Board of Directors out of funds legally available therefor. Holdings' ability to
pay dividends is contingent upon the earnings of its subsidiaries, as well as
their ability to declare and pay dividends to Holdings. Certain subsidiaries may
be limited in their ability to pay dividends by capital and other rules of
regulatory bodies, as well as certain covenants in instruments governing certain
indebtedness.
Voting. Holders of Common Stock are entitled to vote, together with the
holders of Series A Preferred Stock, the Cumulative Preferred Stock and the
Redeemable Preferred Stock as a single class, on all matters to be voted on by
the stockholders of Holdings, including the election of directors. Each share of
Common Stock is entitled to one vote on all matters. Holders of Common Stock do
not have cumulative voting rights.
Liquidation Value. After the satisfaction in full of any liquidation
preferences of holders of Preferred Stock, holders of Common Stock are entitled
to ratable distribution of the remaining assets available for distribution to
stockholders in the event of any liquidation, dissolution or winding up of
Holdings.
Other. The Common Stock is not subject to redemption by operation of a
sinking fund or otherwise. Holders of Common Stock are not entitled to
preemptive rights under the Certificate of Incorporation or under the Restated
By-laws of Holdings which will be in effect as of the Distribution Date (the
"By-laws").
The transfer agent and registrar for the Common Stock is First National
Bank of Boston.
PREFERRED STOCK
General. Preferred Stock may be issued from time to time in one or more
series with such designations, voting powers, dividend rates, rights of
redemption, conversion rights, participating, optional or other special rights,
and qualifications, limitations or restrictions thereon as may be stated in the
resolutions providing for the issue of such series adopted by the Board of
Directors. The rights and preferences of each series of the Preferred Stock, if
issued, will be superior and prior to the rights of the Common Stock to the
extent determined by the resolution of the Board of Directors creating such
series.
Certain terms of the Redeemable Preferred Stock may be deemed to have an
anti-takeover effect. See "Redeemable Voting Preferred Stock" below. In
addition, although Holdings has no intention at the present time of doing so, it
could issue an additional series of Preferred Stock that could, depending on the
terms of such series, either impede or facilitate the completion of a merger,
tender offer or other takeover attempt. For instance, such series of Preferred
Stock might impede a business combination by including class voting rights which
would enable the holder to block such a transaction or facilitate a business
combination by including voting rights which would provide a required percentage
vote of the stockholders. Although the Board of Directors is required to make
any determination to issue such stock based on its judgment as to the best
interests of the stockholders of Holdings, the Board of Directors could act in a
manner that would discourage an acquisition attempt or other transaction that
some, or a majority, of the stockholders might believe to be in their best
interests or in which stockholders might receive a premium for their stock over
the then market price of such stock. The Board of Directors does not at present
intend to seek stockholder approval prior to any issuance of currently
authorized stock, unless otherwise required by law or stock exchange
regulations. Frequently, opportunities arise that require prompt action, and the
Board of Directors believes that the delay occasioned by seeking stockholder
approval of a specific issuance could be to the detriment of Holdings and its
stockholders.
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Series A Preferred Stock. Holdings has issued 13,000,000 shares of Series
A Preferred Stock pursuant to the authority granted to it by the Certificate of
Incorporation.
As of the date hereof, Nippon Life owns all of the issued and outstanding
shares of Series A Preferred Stock.
Holders of shares of Series A Preferred Stock are entitled to receive
preferential dividends, as and when declared by the Board of Directors out of
funds legally available therefor, in an amount equal to 5% per annum of the
price per share paid by Nippon Life ($39.10) upon purchase of the Series A
Preferred Stock (the "Preferred Sale Price") payable quarterly on a cumulative
basis before any dividends are paid to the holders of shares of Common Stock.
Upon the liquidation or winding-up of Holdings (other than by merger or transfer
of assets to a successor), holders of shares of Series A Preferred Stock will be
entitled to receive, out of the assets of Holdings legally available for
distribution to stockholders and before any payment to holders of Common Stock,
an amount per share equal to the Preferred Sale Price plus accumulated and
unpaid dividends.
Except as otherwise agreed to in the Investment Agreement, holders of
Series A Preferred Stock have no preemptive rights or subscription rights, and
are not subject to further calls or assessments by Holdings. See "Certain
Transactions and Agreements Among Holdings, American Express and Nippon Life."
Holdings may not redeem shares of Series A Preferred Stock prior to June
15, 1994. Thereafter, subject to restrictions on redemptions when dividends are
in arrears, Holdings (to the extent funds are legally available therefor) will
have the right to redeem shares of Series A Preferred Stock on not less than 30
nor more than 45 days' notice in cumulative annual increments of 2,600,000
shares, subject to adjustment for shares theretofore converted. Such redemption
will be at a price per share equal to the Preferred Sale Price and is permitted
only if there is a public market for the Common Stock and the average market
price of shares of Common Stock exceeds the conversion price on the date notice
of redemption is given.
Each share of Series A Preferred Stock is convertible, at any time prior to
the date of redemption, into 0.3179723 of a share of Common Stock, provided that
at least 250,000 shares of Series A Preferred Stock (or such lesser number of
such shares then outstanding) must be converted each time. The conversion rate
is subject to adjustment in certain events. Holders of Series A Preferred Stock
are entitled to vote, together with the holders of Common Stock as one class
(except as otherwise required by law), on all matters to be voted on by
stockholders of the Company, including the election of Directors. Each share of
Series A Preferred Stock is entitled to one vote, subject to adjustment at the
Distribution Date, at which time each share will be entitled to 0.3179723 votes.
In addition, the affirmative vote of the holders of at least a majority of the
Series A Preferred Stock is required to (i) amend, alter or repeal the
Certificate of Designation of the Series A Preferred Stock or the Certificate of
Incorporation or authorize any reclassification of the Series A Preferred Stock
in a manner which adversely affects the preferences, special rights or powers of
the Series A Preferred Stock or (ii) authorize any capital stock of Holdings
ranking, as to dividends or upon liquidation, senior to the Series A Preferred
Stock.
Nippon Life has the non-transferable right to exchange the Series A
Preferred Stock for American Express common shares. In addition, Holdings will
also have the right to redeem the Series A Preferred Stock (and American Express
may call the Series A Preferred Stock) if the average market price of American
Express common shares exceeds the exchange price on the date notice of
redemption is given. See "Certain Transactions and Agreements Among Holdings,
American Express and Nippon Life."
Cumulative Voting Preferred Stock. Prior to the Distribution, Holdings
will issue and sell to American Express 8,000,000 shares of the Cumulative
Preferred Stock pursuant to the authority granted to it by the Certificate of
Incorporation. Immediately following the Distribution, American Express will own
all of the issued and outstanding shares of Cumulative Preferred Stock.
Holders of shares of Cumulative Preferred Stock will be entitled to receive
preferential dividends, as and when declared by the Board of Directors out of
funds legally available therefor, in an amount equal to $ per share per
annum, payable quarterly on a cumulative basis before any dividends are paid to
the holders of shares of Common Stock. Upon the liquidation or winding-up of
Holdings (other than by merger or transfer of assets to a successor), holders of
shares of the Cumulative Preferred Stock will be entitled to receive, out of
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Holdings' assets legally available for distribution to stockholders and before
any payment to holders of Common Stock, an amount per share equal to $25.00 plus
accumulated and unpaid dividends.
Holders of the Cumulative Preferred Stock will not have preemptive rights
or subscription rights, and will not be subject to further calls or assessments
by Holdings. Holders of the Cumulative Preferred Stock will have certain
registration and information rights.
Holdings may not redeem shares of the Cumulative Preferred Stock prior to
, 2001. Thereafter, subject to restrictions on redemptions when dividends
are in arrears, Holdings (to the extent funds are legally available therefor)
will have the right to redeem shares of the Cumulative Preferred Stock on not
less than 30 days' notice at a price per share equal to $25.00 plus accumulated
and unpaid dividends.
Holders of the Cumulative Preferred Stock will be entitled to vote,
together with the holders of Common Stock as one class on all matters to be
voted on by stockholders of Holdings, including the election of Directors.
Notwithstanding the foregoing, American Express has agreed that so long as it or
any of its subsidiaries holds any shares of the Cumulative Preferred Stock, it
will vote such shares in the same proportion as the votes cast by the holders of
shares of Voting Stock on matters to be voted on by stockholders of Holdings
generally. Each share of the Cumulative Preferred Stock will be entitled to 0.25
votes. The affirmative vote of the holders of at least two-thirds of the
Cumulative Preferred Stock will be required to (i) amend, alter or repeal the
Certificate of Designation of the Cumulative Preferred Stock or the Certificate
of Incorporation in a manner which adversely affects the preferences, special
rights or powers of the Cumulative Preferred Stock or (ii) issue or increase the
authorized amount of any capital stock of Holdings ranking, as to dividends or
upon liquidation, senior to the Cumulative Preferred Stock. In addition, if the
equivalent of six quarterly dividends (whether or not consecutive) on the
Cumulative Preferred Stock or any parity preferred stock shall be in arrears,
then the authorized number of directors of Holdings shall be increased by two
and the holders of the Cumulative Preferred Stock will have the right (voting as
a class with the holders of any other parity preferred stock of Holdings upon
which like voting rights have been conferred and are exercisable) to elect such
two directors until such time as all accumulated dividends have been paid.
Redeemable Voting Preferred Stock. Prior to the Distribution, Holdings
will issue and sell to American Express 928 shares of Redeemable Preferred Stock
and to Nippon Life 72 shares of Redeemable Preferred Stock pursuant to the
authority granted to it by the Certificate of Incorporation. Immediately
following the Distribution, American Express and Nippon Life together will own
all of the issued and outstanding shares of Redeemable Preferred Stock.
The holders of shares of Redeemable Preferred Stock will be entitled to
receive preferential dividends, as and when declared by the Board of Directors
out of funds legally available therefor, on a cumulative basis before any
dividends are paid to the holders of shares of Common Stock. For each of eight
annual dividend periods following the Distribution, the holders of Redeemable
Preferred Stock will be entitled to receive dividends in an amount equal to, in
the aggregate, 50% of the amount, if any, by which the Company's net income for
the applicable dividend period exceeds $400 million, up to a maximum of $50
million for any such period (the "Dividend Formula"), payable on the 45th day
following the last day of the dividend period. Accumulated and unpaid dividends
on Redeemable Preferred Stock will accrue interest at a rate per annum based on
the yield on one year treasury securities plus 0.50%. Upon the liquidation or
winding-up of Holdings (other than by merger or transfer of assets to a
successor), holders of shares of Redeemable Preferred Stock will be entitled to
receive, out of Holdings' assets legally available for distribution to
stockholders and before any payment to holders of Common Stock, an amount per
share equal to $1.00 plus accumulated and unpaid dividends and accrued interest,
if any, thereon.
Holders of Redeemable Preferred Stock will not have preemptive rights or
subscription rights, and will not be subject to further calls or assessments by
Holdings. Holders of the Redeemable Preferred Stock will have certain
registration and information rights.
Other than as set forth below, Holdings may not redeem shares of Redeemable
Preferred Stock prior to the final dividend payment date for the Redeemable
Preferred Stock. Subject to funds being legally available therefor, Holdings
will be required to redeem all of the Redeemable Preferred Stock on the final
dividend
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payment date for the Redeemable Preferred Stock, or as soon as practicable
thereafter when funds become legally available, at a price per share equal to
$1.00 plus accumulated and unpaid dividends and accrued interest, if any,
thereon. In addition, if a Designated Event occurs, the holders of the
Redeemable Preferred Stock will have the right to require Holdings to redeem,
out of funds legally available therefor, all of the Redeemable Preferred Stock
for an aggregate redemption price initially equal to $400 million if such
Designated Event takes place prior to the first anniversary of the Distribution
Date, declining by $50 million per year in each of the next seven years
thereafter. These redemption rights may have an anti-takeover effect and may
delay, defer or prevent a tender offer or take-over attempt that a stockholder
might believe to be in his best interest, including those attempts that might
result in a premium over the market price for the shares held by stockholders.
"Designated Event" means an event or series of events as a result of which
(i) any "person" (as such term in used in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the "beneficial owner" (as defined in Rules 13d-3
and 13d-5 under the Exchange Act) of shares representing more than 30% (or 34%
in the case of Nippon Life) of the combined voting power of the then-outstanding
Voting Stock; (ii) Holdings consolidates with or merges into any other
corporation, or conveys, transfers or leases all or substantially all of its
assets to any person, or any other corporation merges into Holdings, and, in the
case of any such transaction, the outstanding Common Stock is changed or
exchanged as a result, unless the stockholders of Holdings immediately before
such transaction own, directly or indirectly immediately following such
transaction, at least 51% of the combined voting power of the outstanding voting
securities of the corporation resulting from such transaction in substantially
the same proportion as their ownership of the Voting Stock immediately before
such transaction; (iii) Holdings or any of its subsidiaries consummates an
acquisition (other than the acquisition, directly or indirectly through any
special purpose entity, of securities or other inventory in the ordinary course
of the Company's business) involving aggregate consideration to the seller in an
amount exceeding 30% of the fair market value of the outstanding Common Stock
immediately prior to such transaction and either (a) the ratio of consolidated
indebtedness to consolidated stockholders' equity of Holdings or (b) the ratio
of adjusted consolidated tangible assets (total consolidated assets less
goodwill) to consolidated tangible net worth of Holdings immediately before such
transaction increases by more than 20% as a result of such transaction; or (iv)
on any day (a "Calculation Date") Holdings makes any distribution or
distributions of cash, property or securities (other than regular quarterly
dividends, or in Common Stock, preferred stock which is substantially equivalent
to Common Stock or rights to acquire Common Stock or preferred stock which is
substantially equivalent to Common Stock) to holders of Common Stock, or
Holdings or any of its subsidiaries purchases or otherwise acquires Common
Stock, and the sum of the fair market value of such distribution or purchase on
the Calculation Date, plus the fair market value, when made, of all other such
distributions and purchases which have occurred during the 12-month period
ending on the Calculation Date, exceeds 30% of the aggregate fair market value
of all of the shares of Common Stock outstanding at the close of business on the
last day prior to such 12-month period. Notwithstanding the foregoing, a
Designated Event shall not be deemed to occur solely because any person (the
"Subject Person") becomes the beneficial owner of more than the permitted
amounts of the outstanding Voting Stock as a result of the acquisition of Voting
Stock by Holdings or any subsidiary of Holdings that, by reducing the number of
shares of Voting Stock outstanding, increases the proportional number of shares
beneficially owned by the Subject Person, provided that if a Designated Event
would occur (but for the operation of this sentence) as a result of the
acquisition of Voting Stock by Holdings or any subsidiary of Holdings, and after
such share acquisition, the Subject Person becomes the beneficial owner of any
additional Voting Stock that increases the percentage of the then-outstanding
Voting Stock beneficially owned by the Subject Person by more than 2%, then a
Designated Event shall occur. With respect to Designated Events covered by
clause (i) above, in the event of an acquisition of Voting Stock not approved by
a majority of the Board in place at the time any such acquisition is proposed,
Holdings will pay the redemption price of the Redeemable Preferred Stock through
proceeds raised by the issuance of Holdings equity securities that are not
mandatorily redeemable.
Holders of Redeemable Preferred Stock will be entitled to vote, together
with the holders of Common Stock as one class, on all matters to be voted on by
stockholders of Holdings, including the election of Directors. Notwithstanding
the foregoing, American Express has agreed that so long as it or any of its
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subsidiaries holds any shares of the Redeemable Preferred Stock, it will vote
such shares in the same proportion as the votes cast by the holders of shares of
Voting Stock on matters to be voted on by stockholders of Holdings generally.
Each share of Redeemable Preferred Stock will be entitled to 560 votes. The
affirmative vote of at least two-thirds of the Redeemable Preferred Stock will
be required to amend, alter, or repeal the Certificate of Designation of the
Redeemable Preferred Stock or the Certificate of Incorporation so as to affect
adversely the preferences, special rights or powers of the Redeemable Preferred
Stock. The affirmative vote of the holders of at least two-thirds of the
Redeemable Preferred Stock and any other parity preferred stock upon which like
voting rights have been conferred and are exercisable (voting together as a
class) will be required to authorize, create or issue, or increase the
authorized amount of, any capital stock of Holdings ranking, as to dividends or
upon liquidation, senior to the Redeemable Preferred Stock. In addition, if the
equivalent of six quarterly dividends (whether or not consecutive) to which the
holders of the Redeemable Preferred Stock are entitled in accordance with the
Dividend Formula, or to which the holders of any parity preferred stock are
entitled pursuant to the terms of such parity preferred stock, are in arrears,
then the authorized number of directors of Holdings shall be increased by two
and the holders of the Redeemable Preferred Stock will have the right (voting as
a class with the holders of any other parity preferred stock of Holdings upon
which like voting rights have been conferred and are exercisable) to elect such
two directors until such time as all accumulated dividends have been paid.
SENIOR SUBORDINATED CAPITAL NOTES OF THE COMPANY
Holdings has issued Senior Subordinated Capital Notes maturing February 8,
1995 in the aggregate principal amount of $150 million with an initial interest
rate of LIBOR plus 0.75% which upon maturity will be exchanged for Common Stock,
perpetual preferred stock of Holdings or a combination thereof (the "Equity
Securities"), which choice will be made by Holdings in its sole discretion,
having a market value equal to the principal amount of the Senior Subordinated
Capital Notes, except to the extent Holdings, at its option, elects to pay in
cash the principal amount of the Senior Subordinated Capital Notes, in whole or
in part, from amounts representing proceeds of other issuances of Equity
Securities which Holdings, in its sole discretion, has designated for such use
(the "Designated Proceeds"). Holdings will be unconditionally obligated to sell
Equity Securities in a secondary offering on behalf of the holders of Senior
Subordinated Capital Notes in an amount equal to the principal amount of such
Senior Subordinated Capital Notes less any Designated Proceeds applied by
Holdings to the payment of such Senior Subordinated Capital Notes. If Holdings
does not sell in such secondary offering a sufficient amount of Equity
Securities so that the sale proceeds thereof, when added to any Designated
Proceeds, are sufficient to satisfy the cash election of such holders, then such
holders will receive, at their option, either cash or Equity Securities to the
extent that aggregate cash elections exceed the aggregate amount of the sales
proceeds from such secondary offering and any Designated Proceeds. Prior to the
exchange of Equity Securities for Senior Subordinated Capital Notes, a holder of
a Senior Subordinated Capital Note will have none of the rights or privileges of
a stockholder of Holdings. None of the holders of the Senior Subordinated
Capital Notes is affiliated with Holdings. As of December 31, 1993, Designated
Proceeds were $150 million.
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CERTAIN CORPORATE GOVERNANCE MATTERS
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BY-LAWS
Certain provisions of the Certificate of Incorporation and By-laws
summarized below may be deemed to have an anti-takeover effect and may delay,
defer or prevent a tender offer or takeover attempt that a stockholder might
believe to be in its best interest, including those attempts that might result
in a premium over the market price for the shares of Common Stock.
As of the Distribution Date, the Certificate of Incorporation will provide
(i) for a classified Board of Directors and (ii) that any action required or
permitted to be taken by the stockholders of Holdings may be effected only at an
annual or special meeting of stockholders, and that stockholder action by
written consent in lieu of a meeting is prohibited. As of the Distribution Date,
the By-laws will provide (i) that directors can be removed from office only for
cause and only by the affirmative vote of the holders of a majority of the then
outstanding shares of capital stock entitled to vote generally in an election of
directors, (ii) that vacancies on the Board of Directors may be filled only by
the remaining directors and not by the stockholders unless there are no
directors then in office, (iii) for an advance notice procedure for the
nomination, other than by or at the direction of the Board of Directors, of
candidates for election as directors, as well as for other stockholder proposals
to be considered at annual or special meetings of stockholders and (iv) special
meetings of stockholders may be called only by the Chairman of the Board, the
President or the Secretary of Holdings or any such officer at the request in
writing of the Board of Directors. In general, notice of intent to nominate a
director or raise business at such meetings must be received by Holdings not
less than 90 or more than 120 days prior to the anniversary of the previous
year's annual meeting, and must contain certain information concerning the
person to be nominated or the matters to be brought before the meeting and
concerning the stockholder submitting the proposal.
The foregoing summary is qualified in its entirety by the provisions of the
Certificate of Incorporation and By-laws, copies of which have been filed with
the Securities and Exchange Commission as exhibits to the Registration Statement
of which this Prospectus forms a part.
CERTAIN STATUTORY PROVISIONS
Section 203 of the DGCL prohibits certain transactions between a Delaware
corporation and an "interested stockholder", which is defined as a person who,
together with any affiliates and/or associates of such person, beneficially
owns, directly or indirectly, 15% or more of the outstanding voting shares of a
Delaware corporation. This provision prohibits certain business combinations
(defined broadly to include mergers, consolidations, sales or other dispositions
of assets having an aggregate value in excess of 10% of the consolidated assets
of the corporation and certain transactions that would increase the interested
stockholder's proportionate share ownership in the corporation) between an
interested stockholder and a corporation for a period of three years after the
date the interested stockholder acquired its stock, unless (i) the business
combination is approved by the corporation's board of directors prior to the
date the interested stockholder acquired shares; (ii) the interested stockholder
acquired at least 85% of the voting stock of the corporation in the transaction
in which it became an interested stockholder; or (iii) the business combination
is approved by a majority of the board of directors and by the affirmative vote
of two-thirds of the votes entitled to be cast by disinterested stockholders at
an annual or special meeting. Section 203 of the DGCL could prohibit or delay
mergers or other takeover or change of control attempts with respect to Holdings
and, accordingly, may discourage attempts to acquire Holdings.
LIMITATION OF LIABILITY OF DIRECTORS
As of the Distribution Date, the Certificate of Incorporation will provide,
pursuant to authority conferred by Section 102 of the DGCL, that the directors
of Holdings shall not be personally liable to Holdings or its stockholders for
monetary damages for breach of fiduciary duty. The directors of Holdings will
remain liable, however, for (i) any breach of the duty of loyalty to Holdings or
its stockholders, (ii) any act or omission not in good faith or which involves
intentional misconduct or a knowing violation of law, (iii) any violation of
101
<PAGE> 106
Section 174 of the DGCL, which proscribes the payment of dividends and stock
purchases or redemptions under certain circumstances, and (iv) any transaction
from which the director derives an improper personal benefit. The Certificate of
Incorporation also will provide that any future repeal or amendment of its terms
will not adversely affect any rights or directors existing thereunder with
respect to acts or omissions occurring prior to such repeal or amendment and
incorporates any future amendments to Delaware law which further eliminate or
limit the liability of directors.
INDEMNIFICATION AND INSURANCE
The Certificate of Incorporation provides that the Company will indemnify
its directors and officers to the fullest extent permitted by Section 145 of the
DGCL, or any successor provisions or amendments thereof. In addition, the
Company is obligated to, in the case of a director, and may, in the case of an
officer, advance the expenses of defending a civil or criminal action or
proceeding against such director or officer. The Certificate of Incorporation
provides that the right to indemnification provided therein is not exclusive of
any other right which a director or officer may have or thereafter acquire under
the By-laws or any contract or agreement with Holdings.
The Certificate of Incorporation and By-laws also authorize Holdings to
purchase insurance for directors, officers, employees and agents of Holdings or
another person against any expense, liability or loss, whether or not Holdings
would have the power to indemnify such person against such expense, liability or
loss under the DGCL. Holdings maintains such insurance coverage for its officers
and directors, as well as insurance coverage to reimburse Holdings for potential
costs of its corporate indemnification of directors and officers.
LEGAL MATTERS
Certain legal matters will be passed upon for Holdings and American Express
by Skadden, Arps, Slate, Meagher & Flom, 919 Third Avenue, New York, New York
10022, and for Holdings by Thomas A. Russo, Esq., Chief Legal Officer of
Holdings. Certain attorneys of Skadden, Arps, Slate, Meagher & Flom own or have
investment discretion with respect to an aggregate of approximately 112,000
common shares of American Express. Upon completion of the Distribution, Mr.
Russo will own approximately 18,150 shares of Common Stock.
EXPERTS
The consolidated financial statements and financial statement schedules of
the Company at December 31, 1993 and 1992 and for each of the three years in the
period ended December 31, 1993 appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young, independent auditors, as set forth
in their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
102
<PAGE> 107
INDEX TO HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Auditors..................................................... F-2
Consolidated Balance Sheet at December 31, 1992 and 1993........................... F-3
Consolidated Statement of Operations for the three years ended December 31, 1993... F-4
Consolidated Statement of Stockholders' Equity for the three years ended
December 31, 1993............................................................... F-5
Consolidated Statement of Cash Flows for the three years ended December 31, 1993... F-6
Notes to Consolidated Financial Statements......................................... F-8
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS:
Pro Forma Consolidated Balance Sheet at December 31, 1993.......................... F-31
Pro Forma Consolidated Statements of Operations for the years ended December 31,
1993 and 1992................................................................... F-33
Notes to Pro Forma Financial Statements............................................ F-35
</TABLE>
F-1
<PAGE> 108
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
Lehman Brothers Holdings Inc.
We have audited the accompanying consolidated balance sheet of Lehman
Brothers Holdings Inc. and Subsidiaries as of December 31, 1993 and 1992, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1993.
Our audits also included the financial statement schedules listed in the index
at Item 16(b). 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
Holdings Inc. and Subsidiaries at December 31, 1993 and 1992, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1993 in conformity with generally
accepted accounting principles. Also, in our opinion the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
As discussed in Note 11 to the consolidated financial statements, in 1992
the Company changed its methods of accounting for postretirement benefits and
income taxes.
Ernst & Young
New York, New York
February 3, 1994, except for Note 2
as to which the date is April 4, 1994
F-2
<PAGE> 109
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1992 1993
------- -------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................................ $ 641 $ 1,333
Cash and securities segregated and on deposit for regulatory and other
purposes............................................................... 1,253 1,073
Securities and other financial instruments owned......................... 33,165 35,699
Collateralized short-term agreements:
Securities purchased under agreements to resell........................ 26,366 26,046
Securities borrowed.................................................... 7,705 4,372
Receivables:
Brokers and dealers.................................................... 2,841 5,059
Customers.............................................................. 6,078 2,646
Other.................................................................. 2,028 2,693
Property, equipment and leasehold improvements (net of accumulated
depreciation and amortization of $766 in 1992 and $438 in 1993)........ 1,122 529
Deferred expenses and other assets....................................... 1,972 750
Net assets of discontinued operations.................................... 1,004
Excess of cost over fair value of net assets acquired (net of accumulated
amortization of $272 in 1992 and $107 in 1993)......................... 1,057 274
------- -------
$85,232 $80,474
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper and short-term debt..................................... $13,427 $11,205
Securities and other financial instruments sold but not yet purchased.... 11,442 8,313
Securities sold under agreements to repurchase........................... 37,437 39,191
Securities loaned........................................................ 2,777 1,116
Payables:
Brokers and dealers.................................................... 2,071 1,385
Customers.............................................................. 5,183 4,130
Accrued liabilities and other payables................................... 2,854 3,183
Senior notes............................................................. 5,468 7,779
Subordinated indebtedness................................................ 2,212 2,120
------- -------
Total liabilities.............................................. 82,871 78,422
------- -------
Stockholders' equity:
Preferred stock, $1 par value; 38,000,000 shares authorized:
5% Cumulative Convertible Voting, Series A, 13,000,000 shares
authorized, issued and outstanding; $39.10 liquidation preference
per share.......................................................... 508 508
Money Market Cumulative, 3,300 shares authorized; 250 shares issued
and outstanding; $1,000,000 liquidation preference per share....... 250 250
Common Stock, $.10 par value; 300,000,000 shares authorized;
168,235,284 shares issued and outstanding in 1992 and 1993.......... 17 17
Additional paid-in capital............................................. 1,871 1,871
Net unrealized securities losses....................................... (13)
Foreign currency translation adjustment................................ (5) (12)
Accumulated deficit.................................................... (267) (582)
------- -------
Total stockholders' equity..................................... 2,361 2,052
------- -------
$85,232 $80,474
------- -------
------- -------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 110
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1991 1992 1993
------- ------- -------
<S> <C> <C> <C>
Revenues
Market making and principal transactions.................... $ 1,696 $ 1,697 $ 1,967
Investment banking.......................................... 674 892 972
Commissions................................................. 1,649 1,677 1,316
Interest and dividends...................................... 5,239 5,661 5,840
Other....................................................... 572 684 491
------- ------- -------
Total revenues...................................... 9,830 10,611 10,586
Interest expense............................................ 4,925 5,185 5,368
------- ------- -------
Net revenues........................................ 4,905 5,426 5,218
------- ------- -------
Non-interest expenses
Compensation and benefits................................... 2,899 3,310 2,989
Communications.............................................. 353 378 318
Occupancy and equipment..................................... 300 326 254
Professional services....................................... 169 212 203
Advertising and market development.......................... 164 205 161
Depreciation and amortization............................... 197 185 157
Brokerage, commissions and clearance fees................... 106 117 140
Other....................................................... 423 695 282
Loss on sale of Shearson.................................... 535
Reserves for non-core businesses............................ 152
Computervision write-down................................... 245
First Capital Holdings Corp. write-off...................... 144
------- ------- -------
Total non-interest expenses......................... 4,755 5,673 5,191
------- ------- -------
Income (loss) from continuing operations before taxes and
cumulative effect of changes in accounting principles....... 150 (247) 27
Provision for (benefit from) income taxes..................... (47) (54) 318
------- ------- -------
Income (loss) from continuing operations before cumulative
effect of changes in accounting principles.................. 197 (193) (291)
------- ------- -------
Income from discontinued operations, net of taxes:
Income from operations...................................... 10 77 24
Gain on disposal............................................ 165
------- ------- -------
10 77 189
------- ------- -------
Income (loss) before cumulative effect of changes in
accounting principles....................................... 207 (116) (102)
Cumulative effect of changes in accounting principles......... (7)
------- ------- -------
Net income (loss)............................................. 207 (123) (102)
Preferred stock dividends..................................... 48 48 48
------- ------- -------
Net income (loss) applicable to Common Stock.................. $ 159 $ (171) $ (150)
------- ------- -------
------- ------- -------
Income (loss) from continuing operations per share of Common
Stock....................................................... $ (3.20)
-------
-------
Net income (loss) per share of Common Stock................... $ (1.41)
-------
-------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 111
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1993
(IN MILLIONS)
<TABLE>
<CAPTION>
MONEY NET FOREIGN
SERIES A MARKET ADDITIONAL UNREALIZED CURRENCY
PREFERRED PREFERRED COMMON PAID-IN SECURITIES TRANSLATION ACCUMULATED
TOTAL STOCK STOCK STOCK CAPITAL LOSSES ADJUSTMENT DEFICIT
------ --------- --------- ------ ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1991.... $2,027 $ 508 $ 250 $ 16 $1,700 $ (174) $(51) $(222)
Net income.................... 207 207
Preferred dividends........... (48) (48)
Net change in unrealized
securities losses........... 119 119
Other......................... 43 (3) 46
------ --------- --------- ------ ---------- ---------- ----- -----------
Balance at December 31,
1991........................ 2,348 508 250 16 1,697 (55) (5) (63)
Net loss...................... (123) (123)
Preferred dividends........... (48) (48)
Common dividends.............. (33) (33)
Net change in unrealized
securities losses........... 42 42
Issuance of Common Stock...... 175 1 174
------ --------- --------- ------ ---------- ---------- ----- -----------
Balance at December 31,
1992........................ 2,361 508 250 17 1,871 (13) (5) (267)
Net loss...................... (102) (102)
Preferred dividends........... (48) (48)
Common dividends.............. (165) (165)
Net change in unrealized
securities losses........... 13 13
Foreign currency translation
adjustment.................. (7) (7)
------ --------- --------- ------ ---------- ---------- ----- -----------
Balance at December 31,
1993........................ $2,052 $ 508 $ 250 $ 17 $1,871 $ $(12) $(582)
------ --------- --------- ------ ---------- ---------- ----- -----------
------ --------- --------- ------ ---------- ---------- ----- -----------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 112
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1991 1992 1993
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) from continuing operations before cumulative
effect of changes in accounting principles.................. $ 197 $ (193) $ (291)
Adjustments to reconcile income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization............................... 197 185 157
Provisions for losses and other reserves.................... 181 458 106
Loss on sale of Shearson.................................... 535
Non-core business reserves.................................. 152
Deferred tax benefit........................................ (46) (65) (82)
Computervision write-down................................... 245
First Capital Holdings Corp. write-off...................... 144
Other adjustments........................................... 131 103 100
Net change in:
Cash and securities segregated.............................. 273 (44) 180
Receivables from brokers and dealers........................ (1,049) (88) (2,313)
Receivables from customers.................................. (703) (908) (268)
Securities purchased under agreements to resell............. (2,497) (10,680) 320
Securities borrowed......................................... 864 (4,634) 3,251
Loans originated or purchased for resale.................... (126) (26) (62)
Securities and other financial instruments owned............ (3,013) (10,844) (2,228)
Payables to brokers and dealers............................. 676 450 (361)
Payables to customers....................................... 344 (19) 430
Accrued liabilities and other payables...................... 101 (506) 902
Securities sold under agreements to repurchase.............. (368) 13,905 1,754
Securities loaned........................................... 306 (170) (881)
Securities and other financial instruments sold but not yet
purchased................................................ 1,674 6,081 (3,093)
Other receivables and other assets.......................... 200 464 (97)
------- ------- -------
(2,514) (6,286) (1,789)
Net cash flows provided by (used in) operating activities of
discontinued operations..................................... (597) 9 428
------- ------- -------
Net cash used in operating activities....................... (3,111) (6,277) (1,361)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes........................ 1,663 3,407 3,609
Principal payments of senior notes............................ (1,113) (1,567) (1,346)
Proceeds from issuance of subordinated indebtedness........... 214 88 568
Principal payments of subordinated indebtedness............... (339) (14) (602)
Issuance of other indebtedness................................ 3,996 4,992 5,751
Principal payments of other indebtedness...................... (3,853) (5,482) (6,023)
Increase (decrease) in commercial paper and short-term debt,
net......................................................... 1,168 4,048 (1,815)
Issuance of stock............................................. 175
Dividends paid................................................ (48) (81) (213)
Net cash flows used in financing activities of discontinued
operations.................................................. (1,531) (653) (301)
------- ------- -------
Net cash provided by (used in) financing activities......... $ 157 $ 4,913 $ (372)
------- ------- -------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 113
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS -- (CONTINUED)
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1991 1992 1993
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of buildings, furnishings, equipment and leasehold
improvements................................................ $ (75) $ (108) $ (129)
Proceeds from the sale of:
The Boston Company.......................................... 1,300
Shearson.................................................... 1,200
SLHMC....................................................... 70
Other assets................................................ 607
Balcor loans................................................ 500
Other......................................................... 98 (38) 111
Net cash flows provided by (used in) investing activities of
discontinued operations..................................... 2,834 (438) (85)
------- ------- -------
Net cash provided by investing activities................... 3,357 23 2,467
------- ------- -------
Net change in cash and cash equivalents of discontinued
operations.................................................. 706 (1,082) 42
------- ------- -------
Effect of exchange rate changes on cash....................... 4 9
------- ------- -------
Net change in cash and cash equivalents............. (299) (250) 692
------- ------- -------
Cash and cash equivalents at beginning of year................ 1,190 891 641
------- ------- -------
Cash and cash equivalents at end of year............ $ 891 $ 641 $ 1,333
------- ------- -------
------- ------- -------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN MILLIONS)
(INCLUDING THE BOSTON COMPANY)
Interest paid (net of amount capitalized) totaled $5,535 in 1991; $5,561 in
1992 and $5,591 in 1993. Income taxes (received) paid totaled $(47) in 1991; $86
in 1992 and $28 in 1993.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITY
During 1993, the Company completed the sale of The Boston Company, Shearson
and SLHMC. The cash proceeds related to these sales have been separately
reported in the above statement. Excluded from the statement are the individual
balance sheet changes related to the net assets sold as well as the non cash
proceeds received related to these sales. See notes 3, 4 and 5 which discuss
these sale transactions in further detail.
See notes to consolidated financial statements.
F-7
<PAGE> 114
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The consolidated financial statements include the accounts of Lehman
Brothers Holdings Inc. (formerly Shearson Lehman Brothers Holdings Inc.,
"Holdings"), (Holdings together with its subsidiaries, the "Company" or "Lehman
Brothers" unless the context otherwise requires) whose principal subsidiary is
Lehman Brothers Inc. (formerly Shearson Lehman Brothers Inc., "LBI"), a
registered broker-dealer. American Express Company ("American Express") owns
100% of Holdings' common stock, par value $.10 per share (the "Common Stock"),
which represents approximately 93% of Holdings' voting stock. The remainder of
Holdings' voting stock is owned by Nippon Life Insurance Company ("Nippon
Life"). (See Note 2.) All material intercompany transactions and accounts have
been eliminated.
The Consolidated Statement of Operations includes the results of operations
of Shearson and SLHMC, which were sold on July 31, 1993 and August 31, 1993,
respectively. (See Notes 4 and 5 for definitions and additional information
concerning these sales.)
The balance sheet accounts of the Company's foreign subsidiaries are
translated using the exchange rates at the balance sheet date. Revenues and
expenses are translated at average exchange rates during the year. The resulting
translation adjustments, net of hedging gains or losses, are included in
stockholders' equity. Gains or losses resulting from foreign currency
transactions are included in the Consolidated Statement of Operations.
The Company uses the trade date basis of accounting for recording principal
transactions. Customer accounts reflect transactions on a settlement date basis.
Certain amounts reflect reclassifications to conform to the current
period's presentation.
The number of shares outstanding at December 31, 1993 included in the
consolidated financial statements and notes thereto do not give effect to the
Reverse Stock Split which will be effected immediately prior to the
Distribution. Per share amounts, except earnings per share, also have not been
adjusted for the Reverse Stock Split. (See Note 2 for a discussion of the
Reverse Stock Split and the Distribution.)
Discontinued Operations
As described in Note 3, the Company completed the sale of The Boston
Company, Inc. ("The Boston Company"), on May 21, 1993. The accompanying
consolidated financial statements and notes to consolidated financial statements
reflect The Boston Company as a discontinued operation.
Securities and Other Financial Instruments
Securities and other financial instruments owned and securities and other
financial instruments sold but not yet purchased, including interest rate and
currency swaps, caps, collars, floors, swaptions, forwards, options and similar
instruments are valued at market or fair value, as appropriate, with unrealized
gains and losses reflected in market making and principal transactions in the
Consolidated Statement of Operations. These amounts also include certain
instruments with multiple characteristics whose principal repayment is
contingent upon the performance of certain stocks, stock indexes or change in
foreign exchange rates. Market value is generally based on listed market prices.
If listed market prices are not available, market 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.
F-8
<PAGE> 115
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition to trading and market making activities, the Company enters
into a variety of financial instruments and derivative products as an end user
to hedge and/or modify its exposure to foreign exchange and interest rate risk
of certain assets and liabilities. As an end user, the Company primarily enters
into interest rate swaps and caps to modify the interest characteristics of its
long-term debt obligations. The Company recognizes the net interest
expense/revenue related to these instruments on an accrual basis, including the
amortization of premiums, over the life of the contracts. Other than in
connection with its debt related hedging programs, the Company's other hedging
activities are immaterial.
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 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 and to value the securities on a daily basis to protect the
Company in the event of default by the counterparty. In addition, provisions are
made to obtain additional collateral if the market value of the underlying
assets is not sufficient to protect the Company. Securities and other financial
instruments owned which are sold under repurchase agreements are carried at
market value with changes in market value reflected in the Consolidated
Statement of Operations.
Securities purchased under agreements to resell and Securities sold under
agreements to repurchase for which the resale/repurchase date corresponds to the
maturity date of the underlying securities are accounted for as purchases and
sales, respectively. At December 31, 1993, such resale and repurchase agreements
aggregated $5.5 billion and $5.2 billion, respectively.
Securities Borrowed and Loaned
Securities borrowed and Securities loaned are carried at the amount of cash
collateral advanced or received plus accrued interest. It is the Company's
policy to value the securities borrowed and loaned on a daily basis, and to
obtain additional cash as necessary to ensure such transactions are adequately
collateralized.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes".
Prior to January 1, 1992, the Company accounted for income taxes under the
provisions of SFAS No. 96.
Fixed Assets and Intangibles
Property and equipment is depreciated 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 is amortized using
the straight-line method over a period of 35 years.
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.
F-9
<PAGE> 116
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUBSEQUENT EVENTS:
Equity Investments and Distribution of Common Stock
American Express has announced its intention to distribute, subject to
certain conditions, all of the Common Stock then held by it on a pro rata basis
to the common shareholders of American Express (the "Distribution"). Prior to
the Distribution, the following series of transactions which affect the capital
structure of Holdings will occur.
-- The shares of Common Stock presently outstanding will be subject to a
reverse stock split of approximately .3179723 for 1 (the "Reverse Stock
Split") prior to the offerings of Common Stock and preferred stock
discussed below. The calculation of the reverse split ratio is based on
the number of American Express common shares outstanding as of February
28, 1994; however, the final reverse split ratio will be based on the
number of American Express common shares outstanding as of the record
date for the Distribution.
-- Holdings will sell 35,407,931 shares of Common Stock to American Express
for an aggregate purchase price of approximately $903.8 million (the
"American Express Common Stock Purchase") and 3,492,858 shares of Common
Stock to Nippon Life for an aggregate purchase price of approximately
$89.2 million (the "NL Common Stock Purchase").
-- Holdings will issue up to 3,387,963 shares of Common Stock, having an
aggregate purchase price of approximately $57 million, upon conversion
of all outstanding phantom equity interests issued pursuant to the
Lehman Brothers Holdings Inc. Employee Ownership Plan (the "Phantom
Share Conversion") and American Express will offer 441,600 shares of
Common Stock to executive officers of the Company for an aggregate
purchase price of $11.3 million (the "Offering").
-- American Express will purchase 8,000,000 shares of Cumulative Voting
Preferred Stock of Holdings (the "Cumulative Preferred Stock") for an
aggregate purchase price of $200 million and 928 shares of Redeemable
Voting Preferred Stock of Holdings (the "Redeemable Preferred Stock")
for $1 per share and Nippon Life will purchase 72 shares of Redeemable
Preferred Stock for $1 per share (collectively, the "Preferred Stock
Purchases"). Holders of the Redeemable Preferred Stock will be entitled
to receive, in the aggregate, 50% of the Company's net income in excess
of $400 million per year, with a maximum dividend of $50 million per
year, for each of the next eight years commencing on or about the date
of the Distribution.
-- In exchange for $250 million of Money Market Preferred Stock of Holdings
held by American Express, Holdings will issue to American Express
9,793,754 shares of Common Stock (the "MMP Exchange").
-- Under the Lehman Brothers Holdings Inc. 1994 Management Replacement
Plan, as described below, Holdings will issue approximately 200,000
shares of restricted Common Stock to employees in replacement of
restricted stock awards of American Express.
The American Express Common Stock Purchase, the NL Common Stock Purchase
and the Preferred Stock Purchases are collectively referred to herein as the
"Equity Investment." The Equity Investment, the Offering, the Phantom Share
Conversion, the MMP Exchange and the Distribution are collectively referred to
herein as the "Concurrent Transactions." In connection with the Concurrent
Transactions, the Company will incur certain expenses which will be charged
primarily to operating results in the second quarter of 1994. The Company and
American Express are entering into several agreements for the purpose of giving
effect to the Distribution and defining their ongoing relationships.
Following the Concurrent Transactions, American Express and Nippon Life
will be entitled to receive 92.8% and 7.2%, respectively, of certain revenue and
profit participation rights received in connection with the sale of Shearson.
(See Note 4.)
F-10
<PAGE> 117
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Earnings Per Share
Earnings per share calculations are based on 105,776,664 pro forma number
of shares of Common Stock outstanding immediately following the Concurrent
Transactions. This includes 53,052,558 shares of Common Stock held by American
Express prior to the American Express Common Stock Purchase and the MMP
Exchange, 35,407,931 and 9,793,754 shares of Common Stock to be acquired by
American Express in the American Express Common Stock Purchase and the MMP
Exchange, respectively, 441,600 shares to be issued in the Offering, 3,387,963
shares to be issued in the Phantom Share Conversion, 3,492,858 shares to be
acquired by Nippon Life in the NL Common Stock Purchase and approximately
200,000 shares of Restricted Common Stock to be issued to employees in
replacement of American Express restricted stock awards. Earnings per share data
is not presented for years other than the most recent year as such presentation
would not be meaningful.
Nippon Life Warrant Amendment
In connection with the Concurrent Transactions, the exercise price of
Nippon Life's warrant to purchase approximately 3,306,346 shares of Common Stock
(10,398,221 shares before adjusting for the Reverse Stock Split) will be reduced
from $47.17 per share ($15 per share before adjusting for the Reverse Stock
Split) to $35.03 per share.
Establishment of Long-Term Incentive Plans
Prior and subject to the Distribution, Holdings adopted the Lehman Brothers
Holdings Inc. 1994 Management Ownership Plan (the "1994 Plan"), the Lehman
Brothers Holdings Inc. 1994 Management Replacement Plan (the "Replacement
Plan"), and the Lehman Brothers Holdings Inc. Employee Stock Purchase Plan (the
"ESPP").
The 1994 Plan provides for the Compensation and Benefits Committee (the
"Compensation Committee") of the Board of Directors to grant stock options,
stock appreciation rights ("SARs"), restricted stock units ("RSUs"), restricted
stock, performance related shares and performance units to eligible employees.
In addition, the 1994 Plan provides for non-employee directors to receive annual
RSUs representing $30,000 of Common Stock, which vests ratably over a three-year
period. Stock options may be awarded as either incentive stock options or
non-qualified stock options. The exercise price for any stock option shall not
be less than the market price of Common Stock on the day of the grant. SARs may
be awarded as a single award or in conjunction with a stock option. Vesting
provisions for stock options and SARs are at the discretion of the Compensation
Committee, but in no case may the term of the award exceed 10 years. The 1994
Plan also allows the Compensation Committee to grant restricted stock,
performance related shares and performance units to eligible employees, with
vesting and performance objective terms at the discretion of the Compensation
Committee. The 1994 Plan expires in ten years. A total of 16,500,000 shares of
Common Stock may be subject to awards under the 1994 Plan and an additional
150,000 shares may be subject to RSUs to be issued to non-employee directors. No
individual may receive options or SARs over the life of the 1994 Plan
attributable to more than 1,650,000 shares.
The Replacement Plan allows the Compensation Committee to grant stock
options and restricted stock awards to eligible employees. The primary purpose
of the Replacement Plan is to replace awards relating to American Express common
shares granted to Company employees which will be cancelled as of the date of
the Distribution. A maximum of 3,200,000 shares of Common Stock will be subject
to awards under the Replacement Plan. The number and terms of awards currently
outstanding to individuals, as well as the current stock prices of American
Express and the Company, will determine the actual number of shares awarded
under the Replacement Plan. Awards made under the Replacement Plan will
generally contain the same vesting conditions that apply to the cancelled
awards.
F-11
<PAGE> 118
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Compensation Committee adopted, effective June 1, 1994, or such later
date as the Compensation Committee shall designate, and subject to the
Distribution, the ESPP, under which 6,000,000 shares of Common Stock were
reserved for issuance. The ESPP will allow employees to purchase Common Stock at
a 15% discount to market value, with a maximum of $15,000 in annual aggregate
purchases by any one individual.
Change of Fiscal Year-End
On March 28, 1994, the Board of Directors of Holdings approved, subject to
the Distribution, a change in the Company's fiscal year-end from December 31 to
November 30. Such a change to a non-calendar cycle will shift certain year-end
administrative activities to a time period that conflicts less with the business
needs of the Company's institutional customers.
Reduction in Personnel
During the first quarter of 1994, the Company completed a review of
personnel needs, which will result in the termination of certain personnel. The
Company anticipates that it will record a severance charge of approximately $30
million pre-tax in the first quarter of 1994 as a result of these terminations.
3. SALE OF THE BOSTON COMPANY:
On May 21, 1993, pursuant to a stock purchase agreement (the "Mellon
Agreement") between Lehman Brothers and Mellon Bank Corporation ("Mellon Bank"),
LBI sold to Mellon Bank (the "Mellon Transaction") The Boston Company, which
through subsidiaries is engaged in the private banking, trust and custody,
institutional investment management and mutual fund administration businesses.
Under the terms of the Mellon Agreement, LBI received approximately $1.3 billion
in cash, 2,500,000 shares of Mellon Bank common stock and ten-year warrants to
purchase an additional 3,000,000 shares of Mellon Bank's common stock at an
exercise price of $50 per share. In June 1993, such shares and warrants were
sold by LBI to American Express for an aggregate purchase price of $169 million.
After accounting for transaction costs and certain adjustments, the Company
recognized a 1993 first quarter after-tax gain of $165 million.
As a result of the Mellon Transaction, the Company has treated The Boston
Company as a discontinued operation. Accordingly, the Company's financial
statements segregate the net assets of The Boston Company as of December 31,
1992, and operating results of The Boston Company for the three years ended
December 31, 1993.
Presented below are the results of operations and the gain on disposal of
The Boston Company included in income from discontinued operations (in
millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1991 1992 1993
------ ---- ----
<S> <C> <C> <C>
Discontinued Operations:
Revenues.................................................. $1,157 $909 $201
Expenses.................................................. 1,145 758 159
------ ---- ----
Income before taxes....................................... 12 151 42
Provision for income taxes................................ 2 74 18
------ ---- ----
Income from operations.................................... 10 77 24
Gain on disposal, net of taxes of $37..................... 165
------ ---- ----
Income from discontinued operations, net of taxes......... $ 10 $ 77 $189
------ ---- ----
------ ---- ----
</TABLE>
F-12
<PAGE> 119
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. SALE OF SHEARSON:
On July 31, 1993, pursuant to an asset purchase agreement (the "Primerica
Agreement"), the Company completed the sale (the "Primerica Transaction") of
LBI's domestic retail brokerage business (except for such business conducted
under the Lehman Brothers name) and substantially all of its asset management
business (collectively, "Shearson") to Primerica Corporation ("Primerica") (now
known as Travelers Corporation, "Travelers") and its subsidiary Smith Barney,
Harris Upham & Co. Incorporated ("Smith Barney"). Also included in the Primerica
Transaction were the operations and data processing functions that support these
businesses, as well as certain of the assets and liabilities related to these
operations.
LBI received approximately $1.2 billion in cash and a $586 million interest
bearing note from Smith Barney which was repaid in January 1994 (the "Smith
Barney Note"). The Smith Barney Note was issued as partial payment for certain
Shearson assets in excess of $600 million which were sold to Smith Barney. The
proceeds received at July 31, 1993, were based on the estimated net assets of
Shearson, which exceeded the minimum net assets of $600 million prescribed in
the Primerica Agreement. As further consideration for the sale of Shearson,
Smith Barney agreed to pay future contingent amounts based upon the combined
performance of Smith Barney and Shearson, consisting of up to $50 million per
year for three years based on revenues, plus 10% of after-tax profits in excess
of $250 million per year over a five-year period (the "Participation Rights").
In contemplation of the Distribution, American Express received the first
Participation Right payment in the first quarter of 1994. All of the
Participation Rights will be assigned to American Express and Nippon Life prior
to the Distribution. As further consideration for the sale of Shearson, the
Company received 2,500,000 shares of 5.50% Convertible Preferred Stock, Series
B, of Travelers and a warrant to purchase 3,749,466 shares of common stock of
Travelers at an exercise price of $39 per share. In August 1993, American
Express purchased such preferred stock and warrant from the LBI for aggregate
consideration of $150 million.
The Company recognized a 1993 first quarter loss related to the Primerica
Transaction of approximately $630 million after-tax ($535 million pre-tax),
which amount includes a reduction in goodwill of $750 million and
transaction-related costs such as relocation, systems and operations
modifications and severance.
Presented below are the results of operations and the loss on the sale of
Shearson (in millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1991 1992 1993
------ ------ ------
<S> <C> <C> <C>
Revenues................................................. $2,601 $2,781 $1,825
Expenses................................................. 2,535 2,669 1,708
Loss on sale of Shearson................................. 535
------ ------ ------
Income (loss) before taxes............................... 66 112 (418)
Provision for income taxes............................... 37 57 149
------ ------ ------
Net income (loss)........................................ $ 29 $ 55 $ (567)
------ ------ ------
------ ------ ------
</TABLE>
Shearson operating results reflect allocated interest expense of $112
million, $102 million and $72 million for the years ended December 31, 1991,
1992 and 1993, respectively.
5. SALE OF SHEARSON LEHMAN HUTTON MORTGAGE CORPORATION:
LBI completed the sale of its wholly owned subsidiary, Shearson Lehman
Hutton Mortgage Corporation ("SLHMC") to GE Capital Corp. on August 31, 1993.
The sales price, net of proceeds used to retire debt of SLHMC, was approximately
$70 million. During the first quarter of 1993, the Company provided $120 million
of pre-tax reserves in anticipation of the sale of SLHMC, which are included in
the $152 million of pre-tax reserves for non-core businesses on the Consolidated
Statement of Operations. After accounting for these reserves, the sale did not
have a material effect on the Company's results of operations.
F-13
<PAGE> 120
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. SECURITIES AND OTHER FINANCIAL INSTRUMENTS:
Securities and other financial instruments owned and Securities and other
financial instruments sold but not yet purchased are summarized as follows (in
millions):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1992 1993
------- -------
<S> <C> <C>
Securities and other financial instruments owned:
Government obligations................................. $15,600 $15,065
Certificates of deposit and other money market
instruments......................................... 3,348 2,051
Mortgage-backed........................................ 6,515 6,127
Corporate obligations and other contractual
commitments......................................... 6,330 10,103
Corporate stocks and options........................... 1,342 2,343
Spot commodities....................................... 30 10
------- -------
$33,165 $35,699
------- -------
------- -------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1992 1993
------- -------
<S> <C> <C>
Securities and other financial instruments sold but not
yet purchased:
Government obligations................................. $ 9,706 $ 5,861
Mortgage-backed securities............................. 322 116
Corporate obligations and other contractual
commitments......................................... 167 1,109
Corporate stocks and options........................... 897 947
Spot commodities....................................... 350 280
------- -------
$11,442 $ 8,313
------- -------
------- -------
</TABLE>
7. CASH AND SECURITIES SEGREGATED AND ON DEPOSIT FOR REGULATORY AND OTHER
PURPOSES:
In addition to amounts presented in the accompanying Consolidated Balance
Sheet as Cash and securities segregated and on deposit for regulatory and other
purposes, securities with a market value of approximately $341 million and $890
million at December 31, 1992 and 1993, respectively, primarily collateralizing
resale agreements, have been segregated in a special reserve bank account for
the exclusive benefit of customers pursuant to the Reserve Formula requirements
of Securities and Exchange Commission Rule 15c3-3.
8. COMMERCIAL PAPER AND SHORT-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1992 1993
------- -------
(IN MILLIONS)
<S> <C> <C>
Commercial paper......................................... $ 6,849 $ 2,648
Short-term debt.......................................... 6,578 8,557
------- -------
$13,427 $11,205
------- -------
------- -------
</TABLE>
Short-term debt consists primarily of bank loans, master notes and payables
to banks. At December 31, 1992 and 1993, unused committed lines of credit
totaled approximately $1.7 billion and $1.6 billion, respectively. The proceeds
from these lines, if utilized, would be used primarily to repay commercial paper
F-14
<PAGE> 121
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
obligations. Commitment fees on the lines supporting the commercial paper
program are 1/8 of 1% on the committed line.
9. SENIOR NOTES:
<TABLE>
<CAPTION>
DECEMBER 31, 1993
-----------------------------------------------------
USD USD
DECEMBER 31, CONTRACTUAL CONTRACTUAL FOREIGN
MATURING IN 1992 FIXED RATE FLOATING RATE CURRENCY TOTAL
--------------------------- ------------ ----------- ------------- -------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1993....................... $1,146
1994....................... 848 $ 428 $ 1,473 $125 $2,026
1995....................... 518 503 585 6 1,094
1996....................... 742 714 660 98 1,472
1997....................... 518 567 142 19 728
1998....................... 305 803 10 126 939
1999 and thereafter........ 1,391 1,352 150 18 1,520
------------ ----------- ------------- -------- ------
$5,468 $ 4,367 $ 3,020 $392 $7,779
------------ ----------- ------------- -------- ------
------------ ----------- ------------- -------- ------
</TABLE>
As of December 31, 1993 the Company had $4,367 million of U.S. dollar fixed
rate senior notes outstanding. Contractual interest rates on these notes ranged
from 3.69% to 12.20% as of December 31, 1993, with a contractual weighted
average interest rate of 7.79%.
The Company entered into interest rate swap contracts which effectively
converted $253 million of its U.S. dollar fixed rate senior notes to floating
rates based on the London Interbank Offered Rate ("LIBOR"). Excluding this $253
million, but including the effect of $552 million of U.S. dollar floating rate
senior notes effectively converted to fixed rates through the use of interest
rate swap contracts and $401 million of fixed rate basis swaps, the Company's
U.S. dollar fixed rate senior notes outstanding had an effective weighted
average interest rate of 7.84%.
As of December 31, 1993, the Company had $3,020 million of U.S. dollar
floating rate senior notes outstanding, including $192 million of U.S. dollar
floating rate senior notes on which the interest and/or redemption values have
been linked to movements in various indices. Excluding this $192 million,
contractual rates on the Company's U.S. dollar floating rate senior notes ranged
from 3.48% to 5.75%, with a contractual weighted average interest rate of 3.97%.
The Company entered into interest rate swap contracts which effectively
converted $552 million of its U.S. dollar floating rate senior notes to fixed
rates. Excluding this $552 million, but including the effect of $253 million of
U.S. dollar fixed rate senior notes converted to floating rates through the use
of interest rate swap contracts and $811 million of floating rate basis swaps,
the Company's U.S. dollar floating rate senior notes outstanding had an
effective weighted average interest rate of 3.90%.
As of December 31, 1993 the Company had the equivalent of $392 million of
foreign currency denominated senior notes outstanding of which $107 million were
fixed rate and $285 million were floating rate. Contractual interest rates on
the Company's fixed rate foreign currency denominated senior notes ranged from
2.65% to 5.50% as of December 31, 1993, with a contractual weighted average
interest rate of 4.43%. Contractual interest rates on the Company's floating
rate foreign currency denominated senior notes ranged from 2.43% to 10.06% as of
December 31, 1993, with a contractual weighted average interest rate of 3.51%.
The Company entered into cross currency swap contracts which effectively
converted a portion of its fixed and floating rate foreign currency denominated
senior notes into U.S. dollar obligations. The Company's fixed and floating rate
foreign currency senior notes not converted to U.S. dollar obligations, totaling
$283 million, were used to finance foreign currency denominated assets.
F-15
<PAGE> 122
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Of the Company's U.S. dollar fixed rate senior notes outstanding as of
December 31, 1993, $158 million are repayable prior to maturity at the option of
the holder. These obligations are reflected in the above table as $78 million,
$25 million, and $55 million maturing in 1994, 1996 and 1997, respectively,
rather than at their contractual maturities in 1998, 2003 and 2023,
respectively. The holders of these notes have the option to redeem them at par
value.
The Company's interest in 3 World Financial Center is financed with U.S.
dollar, fixed rate senior notes totaling $384 million as of December 31, 1993.
Of this amount, $301 million is guaranteed by American Express with a portion of
these notes being collateralized by certain mortgage obligations. The remaining
$83 million of debt supporting the Company's interest in 3 World Financial
Center was loaned to the Company by American Express, the recourse of which is
limited to certain fixed assets.
As of December 31, 1993, the Company had $3.2 billion available for
issuance of debt securities under various shelf registrations. In July 1993, the
Company initiated a $1.0 billion Euro medium-term note program which is not
registered under the Securities Act of 1933. As of December 31, 1993, $560
million of issuance availability remained under this program.
At December 31, 1993, the fair value of the Company's senior notes were
approximately $8,037 million ($5,608 million in 1992) which exceeded the
aggregate carrying value of the notes outstanding by approximately $258 million
($140 million in 1992). For purposes of this fair value calculation the carrying
value of variable rate debt that reprices within a year and fixed rate debt
which matures in less than six months approximates fair value. For the remaining
portfolio, fair value 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. Unrecognized net losses on interest
rate swaps and other transactions used by the Company to manage its interest
rate risk within the senior notes portfolio were $54 million and $13 million at
December 31, 1993 and 1992, respectively. The unrecognized net losses on these
transactions reflect the estimated amounts the Company would pay if the
agreements were terminated as calculated based upon market rates as of December
31, 1993 and 1992, respectively.
10. SUBORDINATED INDEBTEDNESS:
<TABLE>
<CAPTION>
DECEMBER 31, 1993
----------------------------------------
DECEMBER 31, CONTRACTUAL CONTRACTUAL
MATURING IN 1992 FIXED RATE FLOATING RATE TOTAL
---------------------------------- ------------- ----------- ------------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
1993.............................. $ 500
1994.............................. 469 $ 313 $ 194 $ 507
1995.............................. 150 145 199 344
1996.............................. 296 256 150 406
1997.............................. 191 191 191
1998.............................. 200 200
1999 and thereafter............... 606 472 472
------------- ----------- ------ ------
$ 2,212 $ 1,577 $ 543 $2,120
------------- ----------- ------ ------
------------- ----------- ------ ------
</TABLE>
As of December 31, 1993, the Company had $1,577 million of fixed rate
subordinated indebtedness outstanding. Contractual interest rates on this
indebtedness ranged from 5.75% to 12.50% as of December 31, 1993, with an
effective weighted average rate of 9.46%. The Company entered into interest rate
swap contracts which effectively converted $425 million of this debt to floating
rates based on the London Interbank Offered Rate (LIBOR). Exclusive of this $425
million, the Company utilized a series of fixed rate basis swaps totaling $1,949
million to lower the fixed rate of this portfolio to an effective weighted
average interest rate of 7.82% as of December 31, 1993.
F-16
<PAGE> 123
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1993, the Company had $543 million of floating rate
subordinated indebtedness outstanding. Contractual interest rates on this
indebtedness are primarily based on LIBOR and ranged from 2.91% to 4.25% as of
December 31, 1993, with an effective weighted average rate of 3.89%. Including
the effect of the $425 million of fixed rate indebtedness swapped to floating
rates at an effective weighted average rate of 3.58%, the effective weighted
average rate of the Company's floating rate subordinated indebtedness was 3.75%.
Of the Company's fixed rate subordinated indebtedness outstanding as of
December 31, 1993, $160 million is repayable prior to maturity at the option of
the holder. This obligation is reflected in the above table as maturing in 1996,
the year in which the holder has the option to redeem the debt at par value,
rather than its contractual maturity of 2003.
Of the Company's floating rate subordinated indebtedness maturing in 1995,
$150 million is redeemable, in whole or in part, at the option of the Company on
each quarterly interest payment date from proceeds of previously designated
equity securities issuances.
As of December 31, 1993, $1,926 million of the total subordinated
indebtedness outstanding was senior subordinated indebtedness.
As of December 31, 1993 the fair value of the Company's subordinated
indebtedness was approximately $2,265 million ($2,329 million in 1992) which
exceeded the aggregate carrying value of the notes outstanding by approximately
$145 million ($117 million in 1992). Unrecognized net gains on interest rate
swaps and other transactions used by the Company to manage its interest rate
risk on the debt was $49 million and $77 million at December 31, 1993 and 1992,
respectively.
11. CHANGES IN ACCOUNTING PRINCIPLES:
Accounting for Postretirement Benefits
Effective January 1, 1992, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," for the Company's
retiree health and other welfare benefit plans. This accounting pronouncement
requires the current recognition of these benefits as expenses based upon
actuarially determined projections of the benefits provided. The cumulative
effect of adopting SFAS No. 106 reduced 1992 net income by $76 million (net of
taxes of $52 million). Of this amount, $5 million (net of taxes of $3 million)
related to discontinued operations. Prior to the adoption of this accounting
principle, the Company recorded these benefits as they were paid.
Accounting for Income Taxes
The Financial Accounting Standards Board ("FASB") issued SFAS No. 109,
"Accounting for Income Taxes," which superseded SFAS No. 96, the accounting
standard that the Company had followed since 1987. The primary difference
between this accounting standard and SFAS No. 96, lies in the manner in which
income tax expense is determined. SFAS No. 96 provided for significantly more
restrictive criteria prior to the recognition of deferred tax assets. Under the
provisions of SFAS No. 109, 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 tax benefit will be realized. A valuation allowance is recognized, as a
reduction of the deferred tax asset, for that component of the net deferred tax
asset which does not meet the more likely than not criterion for realization.
The Company adopted SFAS No. 109 as of January 1, 1992 and recorded a $69
million increase in consolidated net income from the Cumulative effect of a
change in accounting principle, $64 million of which related to discontinued
operations. In addition, the Company reduced goodwill by $258 million related to
the recognition of deferred tax benefits attributable to the Company's 1988
acquisition of The E.F. Hutton Group Inc. (now known as LB-1 Group, Inc.,
"Hutton").
F-17
<PAGE> 124
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. PENSION PLANS:
The Company sponsors several noncontributory defined benefit pension plans.
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. Plan assets consist principally of equities and bonds.
Total expense related to pension benefits amounted to $31 million, $27
million and $24 million for the years ended December 31, 1991, 1992 and 1993,
respectively, and consisted of the following components (in millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1991 1992 1993
----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Service cost -- benefits earned during the
period.................................... $ 27 $ 33 $ 32
Interest cost on projected benefit
obligation................................ 40 45 40
Actual return on plan assets................ $(76) $(59) $(73)
Net amortization and deferral............... 40 (36) 8 (51) 25 (48)
---- ---- ---- ---- ---- ----
$ 31 $ 27 $ 24
---- ---- ----
---- ---- ----
</TABLE>
The following table sets forth the funded status of the Company's defined
benefit plans (in millions):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1992 1993
----- -----
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation................................. $(487) $(370)
----- -----
----- -----
Accumulated benefit obligation............................ $(504) $(377)
----- -----
----- -----
Projected benefit obligation................................ $(577) $(401)
Plan assets at fair value................................... 606 430
----- -----
Plan assets in excess of projected benefit obligation....... 29 29
Unrecognized net (gain) loss................................ (21) 90
Unrecognized net obligation (asset)......................... 7 (2)
----- -----
Pension asset recognized in the consolidated balance
sheet..................................................... $ 15 $ 117
----- -----
----- -----
</TABLE>
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation for the Company's plans ranged
primarily from 8.25% to 9.5% and 7.25% to 7.5% in 1992 and 1993, respectively.
The rate of increase in future compensation levels used ranged primarily from 6%
to 8% and 5.5% to 7% in 1992 and 1993, respectively. The expected long-term rate
of return on assets ranged primarily from 9% to 10% in 1992 and 9% to 9.75% in
1993.
During 1993, the Company incurred a settlement and curtailment with respect
to its domestic pension plan in relation to the Primerica Transaction. The net
gain of approximately $26 million (pre-tax) was included in the loss on sale of
Shearson.
13. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS:
The Company sponsors several defined benefit health care plans that provide
health care, life insurance and other postretirement benefits to 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.
F-18
<PAGE> 125
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net periodic postretirement benefit cost for the year ending December 31,
1992 and 1993 consisted of the following components (in millions):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
1992 1993
---- ----
<S> <C> <C>
Service cost................................................... $ 3 $ 2
Interest cost.................................................. 10 8
---- ----
Net periodic postretirement benefit cost....................... $13 $10
---- ----
---- ----
</TABLE>
The Company previously accounted for the cost of these benefits by
expensing the amount the Company paid. For the year ending December 31, 1991
$2.5 million was paid for such benefits.
During 1993, the Company incurred a curtailment with respect to its
postretirement plan, in relation to the Primerica Transaction. The net gain of
approximately $56 million (pre-tax) was included in the loss on sale of
Shearson.
The following table sets forth the amount recognized in the Consolidated
Balance Sheet for the Company's postretirement benefit plans (other than pension
plans) at December 31, 1992 and 1993 (in millions):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1992 1993
---- ----
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................... $ 43 $48
Fully eligible active plan participants..................... 40 7
Other active plan participants.............................. 32 7
---- ----
115 62
Unrecognized net gain......................................... 10 12
---- ----
Accrued postretirement benefit cost........................... $125 $74
---- ----
---- ----
</TABLE>
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 8.5% in 1992 and 7.25% in 1993.
The weighted average annual assumed health care cost trend rate is 13% for
1994 and is assumed to decrease at the rate 1% per year to 7% in 2000 and remain
at that level thereafter. An increase in the assumed health care cost trend rate
by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1993 by approximately $1.4
million.
In November 1992, the FASB issued SFAS No. 112, "Employer's Accounting for
Postemployment Benefits." This statement 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. The
Company will record a charge to reflect a cumulative effect of a change in
accounting principle of approximately $13 million after-tax in the first quarter
of 1994.
14. INCOME TAXES:
The Company's taxable income is included in the consolidated U.S. federal
income tax return of American Express and in combined state and local tax
returns with other affiliates of American Express. The income tax provision is
computed in accordance with the income tax allocation agreement between the
Company and American Express. Under the agreement, the Company receives income
tax benefits for net operating losses ("NOLs"), future tax deductions and
foreign tax credits that are recognizable on a stand-
F-19
<PAGE> 126
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
alone basis, or a share, derived by formula, of such losses, deductions and
credits that are recognizable on American Express' consolidated income tax
return. Intercompany taxes are remitted to or from American Express when they
are otherwise due to or from the relevant taxing authority. The balances due
from American Express at December 31, 1992 and 1993 were $117 million and $12
million, respectively, and are included in other receivables in the accompanying
Consolidated Balance Sheet.
The provision for (benefit from) income taxes from continuing operations
consists of the following (in millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1991 1992 1993
---- ---- ----
<S> <C> <C> <C>
Current:
Federal..................................................... $(21) $(19) $220
State....................................................... 5 22 130
Foreign..................................................... 15 8 50
---- ---- ----
(1) 11 400
Deferred:
Federal..................................................... (46) (67) (59)
State....................................................... 2 (23)
---- ---- ----
$(47) $(54) $318
---- ---- ----
---- ---- ----
</TABLE>
During the third quarter of 1993, the statutory U.S. federal income tax
rate was increased to 35% from 34%, effective January 1, 1993. The Company's
1993 tax provision includes a one-time benefit of approximately $10 million from
the impact of the rate change on the Company's net deferred tax assets as of
January 1, 1993.
Income from continuing operations before taxes included $318 million, $1
million and $26 million that was subject to income taxes of foreign
jurisdictions for 1993, 1992 and 1991, respectively.
The income tax provision for (benefit from) differs from that computed by
using the statutory federal income tax rate for the reasons shown below (in
millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1991 1992 1993
----- ---- ----
<S> <C> <C> <C>
Federal income tax provision (benefit) at statutory rate..... $ 51 $(84) $ 9
State and local taxes........................................ 4 16 69
Tax-exempt interest and dividends............................ (2) (4) (20)
Goodwill reduction related to the sale of Shearson........... 263
Amortization of goodwill..................................... 17 14 9
Decrease in unrecognized deferred tax benefits............... (122)
U.S. federal rate change..................................... (10)
Other........................................................ 5 4 (2)
----- ---- ----
$ (47) $(54) $318
----- ---- ----
----- ---- ----
</TABLE>
Deferred income tax assets and liabilities result from the recognition of
temporary differences. Temporary differences are differences between the tax
bases of assets and liabilities and their reported amounts in the consolidated
financial statements that will result in differences between income for tax
purposes and income for consolidated financial statement purposes in future
years.
F-20
<PAGE> 127
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1992 and 1993, the Company's net deferred tax assets from
continuing operations consisted of the following (in millions):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1992 1993
----- -----
<S> <C> <C>
Deferred tax assets................................................. $ 895 $ 746
Less: Valuation allowance........................................... 209 149
----- -----
Deferred tax assets net of valuation allowance...................... 686 597
Deferred tax liabilities............................................ (348) (332)
----- -----
Net deferred tax assets from continuing operations............. $ 338 $ 265
----- -----
----- -----
</TABLE>
At December 31, 1992 and 1993, deferred tax assets consisted primarily of
reserves not yet deducted for tax purposes of $398 million and $517 million,
respectively, and tax return NOLs of $256 million and $38 million, respectively,
and deferred compensation of $149 million and $178 million, respectively. At
December 31, 1992 and 1993, deferred tax liabilities consisted primarily of
unrealized trading and investment gains of $224 million and $183 million,
respectively, and excess tax over financial depreciation of $117 million and $68
million, respectively. During 1993, the Company increased deferred tax assets by
approximately $65 million related to transactions arising from the sale of The
Boston Company.
The net deferred tax asset is included in Deferred expenses and other
assets in the accompanying Consolidated Balance Sheet. At December 31, 1992, the
valuation allowance recorded against deferred tax assets from continuing
operations was $209 million as compared to $149 million at December 31, 1993.
The reduction in the valuation allowance was primarily attributable to 1993
utilization of tax return NOLs for which a valuation allowance was previously
established. Of the $149 million valuation allowance at December 31, 1993,
approximately $100 million will reduce goodwill if future circumstances permit
recognition.
For tax return purposes, the Company has approximately $175 million of NOL
carryforwards, all of which are attributable to the 1988 acquisition of Hutton.
Substantially all of the NOLs are scheduled to expire in the years 1999 through
2007. A portion of the valuation allowance discussed above relates to these
NOLs. This amount includes approximately $35 million of NOLs which will transfer
to American Express in connection with the Distribution discussed in Note 2, the
benefit of which had not been reflected in the financial statements.
15. PREFERRED STOCK:
In 1987, Holdings issued to Nippon Life 13,000,000 shares of Cumulative
Convertible Voting Preferred Stock, Series A ("Series A Preferred Stock"), for a
cash purchase price of $508 million, as adjusted, or $39.10 per share. The
holder of the Series A Preferred Stock is entitled to receive preferred
dividends at an annual rate of 5%, payable quarterly before any dividends are
paid to the holders of Common Stock.
The Company has the right to redeem the shares of Series A Preferred Stock
on any dividend payment date after June 15, 1994, in cumulative annual
increments of 2,600,000 shares, subject to adjustment, and subject to
restrictions on redemptions when dividends are in arrears. Such redemption will
be at a price per share equal to $39.10 and is permitted only if there is a
public market for the Common Stock and the average market price of shares of
Common Stock exceeds the conversion price on the date notice of redemption is
given.
Each share of Series A Preferred Stock is convertible, at any time prior to
the date of redemption, into one share of Common Stock, provided that at least
250,000 shares of Series A Preferred Stock (or such lesser
F-21
<PAGE> 128
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
number of such shares then outstanding) are converted each time. The conversion
rate is subject to adjustment in certain events.
In 1989, the Company issued to American Express Money Market Cumulative
Preferred Stock ("Cumulative Preferred Stock"), with a liquidation preference of
$250 million. The Cumulative Preferred Stock is pari passu with the Series A
Preferred Stock as to dividends and as to distributions upon liquidation. The
Cumulative Preferred Stock dividends are payable quarterly at an annual rate of
9% through the fifth anniversary of their issuance. After such time the dividend
rate will generally be set by auction.
16. COMMON STOCK:
Changes in shares of Common Stock outstanding are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1991 1992 1993
----------- ----------- -----------
<S> <C> <C> <C>
Shares outstanding at beginning of year..... 156,568,617 156,568,617 168,235,284
Shares issued to American Express........... 11,666,667
----------- ----------- -----------
Shares outstanding at end of year........... 156,568,617 168,235,284 168,235,284
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The Company has reserved for issuance 13,000,000 shares of Common Stock for
conversion of the Series A Preferred Stock.
On August 10, 1990, the Company issued to Nippon Life a non-transferable
common stock purchase warrant, pursuant to which Nippon Life may purchase
10,398,221 shares of Common Stock with an initial exercise price of $15 per
share and an expiration date of April 15, 1996.
Effective December 31, 1992, the Company sold 11,666,667 shares of Common
Stock to American Express for $175 million.
17. EMPLOYEE OWNERSHIP PLAN:
During 1993, Lehman Brothers established the Lehman Brothers Inc. Employee
Ownership Plan (the "Employee Ownership Plan") pursuant to which certain key
employees of the Company deferred a percentage of their 1993 salary and bonus
for the purchase of certain Phantom Units of Holdings. Each Phantom Unit is
comprised of a phantom equity interest representing a notional interest in a
share of Common Stock ("Phantom Share") and the right to receive a certain
amount in cash with respect to a Phantom Share ("Cash Right"). The number of
Phantom Units which were available to each participant was determined by the
Finance Committee.
Up to 6,000,000 Phantom Shares were available for "purchase" through
voluntary and mandatory deferrals of 1993 compensation. The price of each
Phantom Unit was $10.00 per Phantom Share and $6.67 for each related Cash Right
and was determined by the Finance Committee in July 1993 using an assumed
capital structure of Holdings for purposes of the program and taking into
account various factors, including market multiples for comparable companies,
the absence of a public market for Holdings, vesting requirements, and the
restrictions on transferability of the Phantom Units. In accordance with the
terms of the Plan, Phantom Units will be converted to the Common Stock
contemporaneously with the effectiveness of the Distribution. (See Note 2.)
The Phantom Units purchased through voluntary deferrals are immediately
vested and non-forfeitable; however, there is a restriction on transferability
of such Phantom Units. There is also a restriction on transferability of the
Common Stock which employees will receive upon conversion of the Phantom Shares.
Generally, such restriction will lapse ratably over a three year period. The
Phantom Units purchased through mandatory deferrals apply to selected senior
executives and vest in accordance with a schedule established by
F-22
<PAGE> 129
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company's Finance Committee of its Board of Directors and, together with the
Common Stock into which they convert, are also subject to transfer restrictions.
The Company will recognize compensation expense in 1994 equal to (i) the
increase in book value attributable to the Phantom Shares and (ii) the excess,
if any, of the market value of the Common Stock on the Distribution Date issued
pursuant to the Phantom Share conversion over the price paid by employees for
the Phantom Shares.
18. CAPITAL REQUIREMENTS:
As registered broker-dealers, LBI and certain of its subsidiaries are
subject to the Net Capital Rule (Rule 15c3-1, the "Rule") promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The New York
Stock Exchange, Inc. and the National Association of Securities Dealers, Inc.
monitor the application of the Rule by LBI and such subsidiaries, as the case
may be. LBI and such subsidiaries compute net capital under the alternative
method of the Rule which requires the maintenance of minimum net capital, as
defined. A broker-dealer may be required to reduce its business if net capital
is less than 4% of aggregate debit balances or 6% of the funds required to be
segregated pursuant to the Commodity Exchange Act (the "Commodity Act") and the
regulations thereunder, if greater. A broker-dealer may also be prohibited from
expanding its business or paying cash dividends if resulting net capital would
be less than 5% of aggregate debit balances or 7% of the funds required to be
segregated pursuant to the Commodity Act and the regulations thereunder, if
greater. In addition, the Rule does not allow withdrawal of subordinated capital
if net capital would be less than 5% of such debit balances or 7% of the funds
required to be segregated pursuant to the Commodity Act and the regulations,
thereunder, if greater.
The Rule also limits the ability of broker-dealers to transfer large
amounts of capital to parent companies and other affiliates. Under the Rule,
equity capital cannot be withdrawn from a broker-dealer without the prior
approval of the Securities and Exchange Commission (the "Commission") when net
capital after the withdrawal would be less than 25% of its securities positions
haircuts (which are deductions from capital of certain specified percentages of
the market value of securities to reflect the possibility of a market decline
prior to disposition). In addition, the Rule requires broker-dealers to notify
the Commission and the appropriate self regulatory organization two business
days before the withdrawal of excess net capital if the withdrawal would exceed
the greater of $500,000 or 30% of the broker-dealer's excess net capital, and
two business days after a withdrawal that exceeds the greater of $500,000 or 20%
of excess net capital.
Finally, the Rule authorizes the Commission to order a freeze on the
transfer of capital if a broker-dealer plans a withdrawal of more than 30% of
its excess net capital and the Commission believes that such a withdrawal would
be detrimental to the financial integrity of the firm or would jeopardize the
broker-dealer's ability to pay its customers. At December 31, 1993, LBI's net
capital aggregated $1,339 million and was $1,293 million in excess of minimum
requirement. Also at December 31, 1993, Lehman Government Securities Inc., a
wholly owned subsidiary of LBI, had net capital which aggregated $184 million
and was $161 million in excess of minimum requirement.
The Company is subject to other domestic and international regulatory
requirements. As of December 31, 1993, the Company believes it is in material
compliance with all such requirements.
F-23
<PAGE> 130
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. COMMITMENTS AND CONTINGENCIES:
The Company leases office space and equipment and has entered into ground
leases with the City of New York or its agencies. Total rent expense for each of
the years ended December 31, 1991, 1992 and 1993 was $269 million, $283 million
and $201 million, respectively. Minimum future rental commitments under
noncancellable operating leases (net of subleases of $679 million) are as
follows (in millions):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1994............................................... $ 45
1995............................................... 44
1996............................................... 44
1997............................................... 44
1998............................................... 38
1999 and thereafter................................ 425
------
$640
------
------
</TABLE>
Certain leases on office space contain escalation clauses providing for
additional rentals based upon maintenance, utility and tax increases.
On October 13, 1993, the Company executed a 16 year lease at 101 Hudson
Street in Jersey City, New Jersey. The lease, which commences in August 1994,
obligates the Company to make minimum lease payments of approximately $87
million over its term. Amounts shown above include this commitment.
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 opinions 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.
Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, the Company enters into financial
instrument transactions to conduct its trading activities, to satisfy the
financial needs of its clients and to manage its own exposure to credit and
market risks. Many of these financial instruments typically have
off-balance-sheet risk resulting from their nature including the terms of
settlement. These instruments can be broadly categorized as interest rate and
currency swaps, caps, collars, floors, swaptions and similar instruments
(collectively, "Swap Products"), foreign currency products, equity related
products, commitments and guarantees and certain other instruments.
Market risk arises from the possibility that market changes, including
interest and foreign exchange rate movements, may make financial instruments
less valuable. Credit risk results from the possibility that a loss may occur
from the failure of another party to perform according to the terms of a
contract. The Company has extensive control procedures regarding the extent of
the Company's transactions with specific counterparties, the manner in which
transactions are settled and the ongoing assessment of counterparty
creditworthiness.
The notional or contract amounts disclosed below provide a measure of the
Company's involvement in such instruments but are not indicative of potential
loss. Management does not anticipate any material adverse effect to its
financial position or results of operations as a result of its involvement in
these instruments. In many cases, these financial instruments serve to reduce,
rather than increase, market risk.
F-24
<PAGE> 131
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company enters into interest rate contracts as principal in its trading
operations or as an integral part of its interest rate risk management. These
contracts include Swap Products, financial future contracts and forward security
contracts.
The notional or contractual amounts of these instruments are set forth
below (in millions):
<TABLE>
<CAPTION>
NOTIONAL/CONTRACT
AMOUNT
---------------------
1992 1993
-------- --------
<S> <C> <C>
Swap Products.................................................. $109,695 $267,861
Financial futures:
To purchase.................................................. 27,673 95,333
To sell...................................................... 21,974 56,122
Forward contracts:
Securities:
To purchase............................................... 21,457 52,352
To sell................................................... 21,909 46,729
Foreign exchange:
To purchase............................................... 48,980 107,613
To sell................................................... 51,333 114,238
Options written:
Securities................................................... 5,195 95,672
Foreign exchange............................................. 3,495 7,803
-------- --------
$311,711 $843,723
-------- --------
-------- --------
</TABLE>
The majority of the Company's off-balance-sheet transactions are short-term
in duration with a weighted average maturity of approximately 1.64 years as of
December 31, 1992 and 1.80 years as of December 31, 1993. Presented below is a
maturity schedule for the notional/contractual amounts outstanding for Swap
Products and other off-balance-sheet instruments (in millions):
<TABLE>
<S> <C>
1994.............................................................. $592,835
1995.............................................................. 76,033
1996.............................................................. 41,640
1997.............................................................. 15,953
1998.............................................................. 82,330
1999 and thereafter............................................... 34,932
--------
$843,723
--------
--------
</TABLE>
At December 31, 1993, the replacement cost of contracts in a gain position
not recorded on the Company's consolidated balance sheet is as follows (in
millions):
<TABLE>
<S> <C>
Swap Products...................................................... $ 1,978
Forward and other contracts........................................ 1,431
-------
3,409
Less: Amounts recorded on the consolidated balance sheet......... (1,461)
-------
Credit exposure not recorded on the consolidated balance sheet..... $ 1,948
-------
-------
</TABLE>
As of December 31, 1992 and 1993, the Company was contingently liable for
$1.9 billion 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 financial guarantees.
As of December 31, 1992 and 1993, the Company had pledged or otherwise
transferred securities, primarily fixed income, having a market value of $21.7
billion and $34.1 billion, respectively, as collateral for securities borrowed
or otherwise received having a market value of $21.4 billion and $33.8 billion,
respectively.
F-25
<PAGE> 132
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Securities 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 Company's customer activities may expose it to off-balance sheet credit
risk. The Company may be required to purchase or sell financial instruments at
prevailing market prices in the event of the failure of a customer to settle
trades on their original terms, or in the event cash and securities in customer
accounts are not sufficient to fully cover customer losses. The Company seeks to
control the risks associated with customer activities through the use of systems
and procedures for financial instruments with off-balance-sheet risk.
In the normal course of business, 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.
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 (principally Japan, Germany, Great Britain and Canada) which, in the
aggregate, represented 16.6% of the Company's total assets at December 31, 1993.
In addition, substantially all of the collateral held by the Company for resale
agreements or bonds borrowed, which together represented 37.8% of total assets
at December 31, 1993, 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 brokerage trading, financing and underwriting business.
Financial Accounting Standards Board Interpretation No. 39, "Offsetting of
Amounts related to Certain Contracts" ("FIN No. 39"), was issued in March 1992.
Effective for balance sheets after January 1, 1994, FIN No. 39 restricts the
current industry practice of offsetting certain receivables and payables.
Although the implementation of this standard is expected to substantially
increase gross assets and liabilities, the Company believes that its results of
operations and overall financial condition will not be affected. The Financial
Accounting Standards Board has instructed its staff to explore modifying FIN No.
39 to create certain exceptions, which, if enacted, would substantially mitigate
the increase in gross assets and liabilities expected to initially result from
the implementation of FIN No. 39.
20. FAIR VALUE OF FINANCIAL INSTRUMENTS:
In 1992, the Company adopted SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments," which requires disclosure of the fair values of most on-
and off-balance-sheet financial instruments for which it
F-26
<PAGE> 133
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
is practicable to estimate that value. The scope of SFAS No. 107 excludes
certain financial instruments, such as trade receivables and payables when the
carrying value approximates the fair value, employee benefit obligations and all
non-financial instruments, such as land, buildings and equipment and goodwill.
The fair values of the financial instruments are estimates based upon current
market conditions and perceived risks and require varying degrees of management
judgment.
For the majority of the Company's assets and liabilities which fall under
the scope of SFAS No. 107, book value approximates fair value, with the
exception of senior notes and subordinated indebtedness, which are discussed in
Notes 9 and 10, respectively.
21. RELATED PARTY TRANSACTIONS:
The Company has entered into various related party transactions with
American Express. The Company shares certain facilities, primarily the World
Financial Center, and administrative support with American Express for which the
Company is charged based upon specific identification and allocation methods.
The Company believes that amounts arising through related party
transactions, including those allocated expenses referred to above, are
reasonable and approximate the amount that would have been incurred if the
Company operated as an unaffiliated entity.
On June 28, 1991, LBI sold all the issued and outstanding stock (the
"Stock") of its wholly owned subsidiary, the Balcor Company ("Balcor"), to
National Express Company, Inc. ("NEC"), a wholly owned subsidiary of American
Express. In connection therewith, the Company sold to American Express certain
loans (the "Loans") made by the Company to Balcor and one of Balcor's wholly
owned subsidiaries. Pursuant to the terms of the transaction, NEC and American
Express purchased the Stock and the Loans at book value for $1.445 billion in a
combination of $500 million cash and a $945 million promissory note which
matures on June 28, 1996.
22. INTERNATIONAL OPERATIONS:
Although the Company's business activities are highly integrated and
constitute a single industry segment for the purposes of SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise," they can be broadly
categorized into the three major geographic areas in which it conducts
operations: North America, Europe and Asia Pacific.
The Company manages its businesses with the goal of maximizing worldwide
profitability by product line. Activities such as the global distribution of
underwritings and the twenty-four hour risk management of trading positions
render geographic profitability to be highly subjective as it is the result of
numerous estimates and assumptions not normally performed by the Company for
internal management reporting purposes.
The amounts presented below provide a broad indication of each region's
contribution to the consolidated results. The method of allocation is as
follows: Gross and Net Revenues, if syndicate or trading related, have been
distributed based upon the location where the primary or secondary position was
fundamentally risk managed; if fee related, by the location of the senior
coverage banker; if commission related, by the location of the salesman. Income
(Loss) Before Taxes includes expenses both incurred within and allocated to the
region. Identifiable Assets represent essentially those recorded in the legal
entities in which the Company does business within the respective region.
F-27
<PAGE> 134
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
GROSS NET INCOME (LOSS) IDENTIFIABLE
REVENUES REVENUES BEFORE TAXES ASSETS
-------- -------- ------------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Year ended December 31, 1991
International operations:
Europe............................ $ 545 $ 362 $ 17 $ 3,413
Asia Pacific...................... 174 149 25 1,128
-------- -------- ------------- ------------
Total international.......... 719 511 42 4,541
Domestic operations.................. 9,111 4,394 108 55,201
-------- -------- ------------- ------------
Total........................ $ 9,830 $4,905 $ 150 $ 59,742
-------- -------- ------------- ------------
-------- -------- ------------- ------------
Year ended December 31, 1992
International operations:
Europe............................ $ 536 $ 362 $ (92) $ 8,188
Asia Pacific...................... 178 158 15 1,006
-------- -------- ------------- ------------
Total international.......... 714 520 (77) 9,194
Domestic operations.................. 9,897 4,906 (170) 76,038
-------- -------- ------------- ------------
Total........................ $ 10,611 $5,426 $(247) $ 85,232
-------- -------- ------------- ------------
-------- -------- ------------- ------------
Year ended December 31, 1993
International operations:
Europe............................ $ 988 $ 635 $ 109 $ 17,949
Asia Pacific...................... 267 215 31 1,944
-------- -------- ------------- ------------
Total international.......... 1,255 850 140 19,893
Domestic operations.................. 9,331 4,368 (113) 60,581
-------- -------- ------------- ------------
Total........................ $ 10,586 $5,218 $ 27 $ 80,474
-------- -------- ------------- ------------
-------- -------- ------------- ------------
</TABLE>
23. OTHER CHARGES:
Reserves for Non-Core Businesses
During the first quarter of 1993, the Company provided $152 million pre-tax
($100 million after-tax) of non-core business reserves. Of this amount, $32
million pre-tax ($21 million after-tax) relates to certain non-core partnership
syndication activities in which the Company is no longer actively engaged. The
remaining $120 million pre-tax ($79 million after-tax) relates to reserves
recorded in anticipation of the sale of SLHMC. Such sale was completed during
the third quarter of 1993.
Computervision Write-Down
In June 1992, in connection with the recapitalization of Computervision
Corporation ("Computervision") the Company and DR Holdings Inc. of Delaware
agreed to restructure the Company's $500 million subordinated loan (the "Loan")
to Computervision. On June 5, 1992, Computervision filed a Registration
Statement on Form S-1 with respect to the initial public offering of its common
stock (the "Computervision Stock").
On August 21, 1992, the initial public offering of the Computervision
Stock, for which the LBI was lead underwriter, was completed at a price of $12
per share. The Company received $250 million and 6,200,000 shares of
Computervision Stock as consideration for all notes held by it in connection
with the Loan and, as a result, recognized a second quarter 1992 after-tax
charge to earnings of $84 million ($137 million pre-tax) which reflected a
reduction in the carrying value of the Loan. Following the initial public
offering, LBI purchased and sold Computervision Stock in connection with its
activities as a broker-dealer and underwriter, and on August 28, 1992, sold
approximately 4,300,000 shares of Computervision Stock to Holdings thereby
F-28
<PAGE> 135
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
increasing Holding's beneficial ownership of Computervision Stock to 22%. On
September 30, 1992, Holdings recorded a third quarter 1992 after-tax charge to
earnings of $66 million ($108 million pre-tax) which reflected the losses
incurred in connection with the aforementioned trading activities, the number of
shares of Computervision Stock owned by Holdings, the market value ($6.25 per
share) of such Computervision Stock at the close of business on September 30,
1992 and the Company's valuation.
First Capital Holdings Corp. Write-Off
Until December 24, 1992, the Company owned approximately 28% of the
outstanding common stock of First Capital Holdings Corp. ("FCH"), a financial
services holding company which specialized primarily in annuities and other life
insurance products, through two subsidiaries, First Capital Life Insurance
Company ("First Capital Life") and Fidelity Bankers Life Insurance Company
("Fidelity Bankers Life"). In May 1991, First Capital Life and Fidelity Bankers
Life were placed into conservatorship, and an order for bankruptcy relief was
entered with respect to FCH by United States Bankruptcy Court for the Central
District of California. As a result, FCH wrote off the net assets of First
Capital Life and Fidelity Bankers Life, resulting in a significant deficit in
FCH's shareholders' equity. In the second quarter of 1991, the Company recorded
a charge to earnings of approximately $144 million (pre-tax and after-tax)
related to its investment in FCH.
24. QUARTERLY INFORMATION (UNAUDITED):
Quarterly results for the year ended December 31, 1992 were as follows (in
millions):
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Net revenues................................... $1,415 $ 1,459 $1,263 $ 1,289
Expenses....................................... 1,311 1,470 1,314 1,578
-------- ------- ------------ -----------
Income (loss) from continuing operations before
taxes and cumulative effect of changes in
accounting principles........................ 104 (11) (51) (289)
Provision for (benefit from) income taxes...... 52 5 (9) (102)
-------- ------- ------------ -----------
Income (loss) from continuing operations before
cumulative effect of changes in accounting
principles................................... 52 (16) (42) (187)
Income from discontinued operations, net of
taxes........................................ 19 20 17 21
-------- ------- ------------ -----------
Income (loss) before cumulative effect of
changes in accounting principles............. 71 4 (25) (166)
Cumulative effect of changes in accounting
principles................................... (7)
-------- ------- ------------ -----------
Net income (loss).............................. $ 64 $ 4 $ (25) $ (166)
-------- ------- ------------ -----------
-------- ------- ------------ -----------
</TABLE>
The results for the fourth quarter reflect $59 million after-tax ($90
million pre-tax) of additional legal provisions and a $107 million after-tax
($162 million pre-tax) write-down in the carrying value of certain real estate
investments.
F-29
<PAGE> 136
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Quarterly results for the year ended December 31, 1993 were as follows (in
millions):
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Net revenues................................... $1,587 $ 1,604 $1,150 $ 877
Expenses....................................... 2,108 1,393 976 714
-------- ------- ------------ -----------
Income (loss) from continuing operations
before taxes................................. (521) 211 174 163
Provision for income taxes..................... 119 90 60 49
-------- ------- ------------ -----------
Income (loss) from continuing operations....... (640) 121 114 114
Income (loss) from discontinued operations, net
of taxes
Income from operations....................... 24
Gain on disposal............................. 165
-------- ------- ------------ -----------
189
-------- ------- ------------ -----------
Net income (loss).............................. $ (451) $ 121 $ 114 $ 114
-------- ------- ------------ -----------
-------- ------- ------------ -----------
</TABLE>
The results for the first quarter reflect a loss on the Primerica
Transaction of $630 million ($535 million pre-tax) and reserves for non-core
businesses of $100 million ($152 million pre-tax).
F-30
<PAGE> 137
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
UNAUDITED
(IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1993
----------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Cash and cash equivalents.................................. $ 1,333 $ $ 1,333
Cash and securities segregated and on deposit for
regulatory and other purposes............................ 1,073 1,073
Securities and other financial instruments owned........... 35,699 35,699
Collateralized short-term agreements:
Securities purchased under agreements to resell.......... 26,046 26,046
Securities borrowed...................................... 4,372 4,372
Receivables:
Brokers and dealers...................................... 5,059 5,059
Customers................................................ 2,646 2,646
Other.................................................... 2,693 2,693
Property, equipment and leasehold improvements (net of
accumulated depreciation and amortization of $438)....... 529 529
Deferred expenses and other assets......................... 750 750
Excess of cost over fair value of net assets acquired (net
of accumulated amortization of $107)..................... 274 274
---------- ----------- ---------
$ 80,474 $ $80,474
---------- ----------- ---------
---------- ----------- ---------
</TABLE>
See notes to pro forma financial statements.
F-31
<PAGE> 138
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
UNAUDITED
(IN MILLIONS, EXCEPT SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, 1993
----------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Commercial paper and short-term debt....................... $ 11,205 $(1,193)(a) $10,012
Securities and other financial instruments sold but not yet
purchased................................................ 8,313 8,313
Securities sold under agreements to repurchase............. 39,191 39,191
Securities loaned.......................................... 1,116 1,116
Payables:
Brokers and dealers...................................... 1,385 1,385
Customers................................................ 4,130 4,130
Accrued liabilities and other payables..................... 3,183 (57)(b) 3,126
Senior notes............................................... 7,779 7,779
Subordinated indebtedness.................................. 2,120 2,120
---------- ----------- ---------
Total liabilities..................................... 78,422 (1,250) 77,172
---------- ----------- ---------
Stockholders' equity:
Preferred stock, $1 par value; 38,000,000 shares
authorized:
5% Cumulative Convertible Voting, Series A, 13,000,000
shares authorized, issued and outstanding; $39.10
liquidation preference per share.................... 508 508
Money Market Cumulative, 3,300 shares authorized; 250
shares issued and outstanding; $1,000,000
liquidation preference per share.................... 250 (250)(c)
Cumulative Voting, 8,000,000 shares issued and
outstanding pro forma; $25.00 liquidation preference
per share........................................... 200(d) 200
Redeemable Voting, 1,000 shares issued and outstanding
pro forma; $1.00 liquidation preference per share... --(d) --
Common Stock, $.10 par value; 300,000,000 shares
authorized; 168,235,284 shares (53,494,158 as adjusted
for the Reverse Stock Split) issued and outstanding;
105,776,664 shares issued and outstanding pro forma.... 17 (6)(e) 11
Additional paid-in capital............................... 1,871 904(f) 3,177
250(c)
89(g)
57(b)
6(e)
Foreign currency translation adjustment.................. (12) (12)
Accumulated deficit...................................... (582) (582)
---------- ----------- ---------
Total stockholders' equity.......................... 2,052 1,250 3,302
---------- ----------- ---------
$ 80,474 $ $80,474
---------- ----------- ---------
---------- ----------- ---------
</TABLE>
See notes to pro forma financial statements.
F-32
<PAGE> 139
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
-------------------------------------------------------------------
ADJUSTMENTS
---------------------------------------
CONCURRENT
HISTORICAL SHEARSON SLHMC TRANSACTIONS PRO FORMA
---------- -------- ----- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues
Market making and principal
transactions.................. $ 1,967 $ (323)(h) $ 1,644
Investment banking............... 972 (170)(h) 802
Commissions...................... 1,316 (828)(h) 488
Interest and dividends........... 5,840 (148)(h) $(13 )(i) 5,679
Other............................ 491 (356)(h) (56 )(i) 79
---------- -------- ----- ----------- ---------
Total revenues........... 10,586 (1,825) (69 ) 8,692
Interest expense................. 5,368 (116)(h),(j) (7 )(i) (42)(l) 5,203
---------- -------- ----- ----------- ---------
Net revenues............. 5,218 (1,709) (62 ) 42 3,489
---------- -------- ----- ----------- ---------
Non-interest expenses
Compensation and benefits........ 2,989 (1,147)(h) (17 )(i) 1,825
Communications................... 318 (126)(h) (4 )(i) 188
Occupancy and equipment.......... 254 (104)(h) (3 )(i) 147
Professional services............ 203 (40)(h) (2 )(i) 161
Advertising and market
development................... 161 (33)(h) (1 )(i) 127
Depreciation and amortization.... 157 (44)(h) 113
Brokerage, commissions and
clearance fees................ 140 32(h) 172
Other............................ 282 (110)(h) (35 )(i) 137
Loss on sale of Shearson......... 535 (535)(h)
Reserves for non-core
businesses.................... 152 (120 )(k) 32
---------- -------- ----- ----------- ---------
Total non-interest
expenses............... 5,191 (2,107) (182 ) 2,902
---------- -------- ----- ----------- ---------
Income (loss) from continuing
operation before taxes........... 27 398 120 42 587
Provision for (benefit from)
income taxes..................... 318 (157)(h),(m) 41 (k) 17(m) 219
---------- -------- ----- ----------- ---------
Income (loss) from continuing
operations....................... (291) 555 79 25 368
---------- -------- ----- ----------- ---------
Preferred stock dividends.......... 48 (6)(n) 42
---------- -------- ----- ----------- ---------
Income (loss) from continuing
operations applicable to Common
Stock............................ $ (339) $ 555 $ 79 $ 31 $ 326
---------- -------- ----- ----------- ---------
---------- -------- ----- ----------- ---------
Income (loss) from continuing
operations per share of Common
Stock(o)......................... $ (3.20) $ 3.08
---------- ---------
---------- ---------
</TABLE>
See notes to pro forma financial statements.
F-33
<PAGE> 140
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1992
-------------------------------------------------------------------
ADJUSTMENTS
---------------------------------------
CONCURRENT
HISTORICAL SHEARSON SLHMC TRANSACTIONS PRO FORMA
---------- -------- ----- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues
Market making and principal
transactions.................. $ 1,697 $ (575)(h) $ 1,122
Investment banking............... 892 (218)(h) 674
Commissions...................... 1,677 (1,231)(h) 446
Interest and dividends........... 5,661 (226)(h) $(31 )(i) 5,404
Other............................ 684 (531)(h) (88 )(i) 65
---------- -------- ----- ----------- ---------
Total revenues........... 10,611 (2,781) (119 ) 7,711
Interest expense................. 5,185 (243)(h),(j) (24 )(i) $ (42)(l) 4,876
---------- -------- ----- ----------- ---------
Net revenues............. 5,426 (2,538) (95 ) 42 2,835
---------- -------- ----- ----------- ---------
Non-interest expenses
Compensation and benefits........ 3,310 (1,736)(h) (23 )(i) 1,551
Communications................... 378 (194)(h) (6 )(i) 178
Occupancy and equipment.......... 326 (183)(h) (4 )(i) 139
Professional services............ 212 (66)(h) (3 )(i) 143
Advertising and market
development................... 205 (84)(h) (2 )(i) 119
Depreciation and amortization.... 185 (89)(h) (1 )(i) 95
Brokerage, commissions and
clearance fees................ 117 52(h) 169
Other............................ 695 (136)(h) (61 )(i) 498
Computervision write-down........ 245 245
---------- -------- ----- ----------- ---------
Total non-interest
expenses............... 5,673 (2,436) (100 ) 3,137
---------- -------- ----- ----------- ---------
Income (loss) from continuing
operations before taxes and
cumulative effect of changes in
accounting principles............ (247) (102) 5 42 (302)
Provision for (benefit from) income
taxes............................ (54) (53)(h),(m) 2 (i) 17(m) (88)
---------- -------- ----- ----------- ---------
Income (loss) from continuing
operations before cumulative
effect of changes in accounting
principles....................... (193) (49) 3 25 (214)
Preferred stock dividends.......... 48 (6)(n) 42
---------- -------- ----- ----------- ---------
Income (loss) from continuing
operations applicable to Common
Stock............................ $ (241) $ (49) $ 3 $ 31 $ (256)
---------- -------- ----- ----------- ---------
---------- -------- ----- ----------- ---------
</TABLE>
See notes to pro forma financial statements.
F-34
<PAGE> 141
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO PRO FORMA FINANCIAL STATEMENTS
BASIS OF REPORTING
The following pro forma financial data has been prepared by the Company
based on certain adjustments to the audited historical consolidated financial
statements of the Company. The pro forma statement of operations reflects
adjustments for the Concurrent Transactions and the sale during 1993 of The
Boston Company, Shearson and SLHMC as if such transactions had occurred as of
the beginning of the periods presented. These adjustments include (i) the
elimination of revenues and expenses of Shearson and SLHMC, (ii) the elimination
of the loss on the sale of Shearson and the reserves related to the sale of
SLHMC, and (iii) a reduction in net interest expense to reflect the use of
proceeds from the Concurrent Transactions and the sales of The Boston Company,
Shearson and SLHMC to reduce commercial paper and short-term debt and senior
notes. The pro forma balance sheet reflects adjustments for the Concurrent
Transactions as if such transactions had occurred as of December 31, 1993.
The pro forma financial data does not purport to present the financial
position and results of operations of the Company had the Concurrent
Transactions and the sale of The Boston Company, Shearson and SLHMC actually
occurred as of such dates, nor is it necessarily indicative of results of
operations that may be achieved in the future.
The Company will incur certain costs in connection with the Concurrent
Transactions that will be charged to operating expenses in the second quarter of
1994. In addition, the Company will recognize compensation expense in 1994 equal
to (i) the increase in book value attributable to the Phantom Shares and (ii)
the excess, if any, of the market value of the Common Stock on the Distribution
Date issued pursuant to the Phantom Share Conversion over the price paid by
employees for the Phantom Shares.
PRO FORMA BALANCE SHEET ADJUSTMENTS:
As the sales of The Boston Company, Shearson and SLHMC were consummated
prior to December 31, 1993, the effects of these transactions are reflected in
the historical December 31, 1993 balance sheet. Accordingly, no further
adjustments relating to these transactions are necessary.
The pro forma adjustments to the balance sheet give effect to the items
described below:
(a) Reflects the repayment of commercial paper and short-term debt
with gross proceeds from the Equity Investment.
(b) Reflects the Phantom Share Conversion.
(c) Reflects the MMP Exchange.
(d) Reflects the Preferred Stock Purchases.
(e) Reflects the decrease in the aggregate par value of Common Stock
outstanding and corresponding increase in additional
paid-in-capital from the Reverse Stock Split, partially offset by
the increase in the aggregate par value due to the issuance of
Common Stock.
(f) Reflects the American Express Common Stock Purchase.
(g) Reflects the NL Common Stock Purchase.
F-35
<PAGE> 142
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS:
The pro forma adjustments to the statement of operations give effect to the
items described below:
(h) The elimination of revenues and expenses of Shearson and the loss
on the sale of Shearson in 1993. Also eliminated is the income
tax expense of $149 million and $57 million in 1993 and 1992,
respectively, related to these items.
(i) The elimination of revenues and expenses of SLHMC.
(j) Elimination of interest expense of approximately $52 million and
$112 million in 1993 and 1992, respectively, resulting from the
utilization of cash proceeds from the sales of The Boston
Company, Shearson and SLHMC to reduce the Company's commercial
paper, short-term debt and senior notes, offset by additional
interest expense of $72 million and $102 million in 1993 and
1992, respectively, allocated to Shearson and SLHMC for the
carrying costs of buildings, improvements and equipment and
certain acquisition-related debt, which is not directly
eliminated by the Primerica Transaction or the sale of SLHMC
other than through the utilization of available sales proceeds.
(k) The elimination of the reserves related to the sale of SLHMC and
the related income tax benefit of $41 million.
(l) Reduced interest expense of approximately $42 million in both
1993 and 1992 resulting from the utilization of the cash
proceeds to the Company from the Equity Investment.
(m) Adjustments (j) and (l) above, tax effected at an assumed rate of
40%.
(n) Elimination of the dividend on the Money Market Cumulative
Preferred Stock partially offset by the addition of the dividend
on the Cumulative Preferred Stock. An 8 1/2% dividend rate has
been assumed on the Cumulative Preferred Stock. However, this
rate will be based on prevailing market rates at the time of
issuance and is therefore subject to adjustment. A 1/4% change
in the dividend rate would increase or decrease the Company's
annual dividend payment by $0.5 million. Holders of the
Redeemable Preferred Stock will be entitled to receive, in the
aggregate, an annual dividend equal to 50% of the Company's net
income in excess of $400 million per year, with a maximum
dividend of $50 million per year, for each of the next eight
years commencing on or about the Distribution Date. On a pro
forma basis, no such dividends would have been payable in 1993 or
1992.
(o) Income (loss) from continuing operations per share of Common
Stock is calculated based on 105,776,664 pro forma number of
shares of Common Stock outstanding immediately following the
Concurrent Transactions.
F-36
<PAGE> 143
ANNEX A
,1994
The Board of Directors
American Express Company
American Express Tower
World Financial Center
New York, New York 10285-2150
Ladies and Gentlemen:
American Express Company ("American Express") proposes to distribute (the
"Distribution") to holders of common shares of American Express all outstanding
shares of common stock, par value $0.10 ("Common Stock"), of Lehman Brothers
Holdings Inc. ("Lehman Brothers") held by American Express, which will
represent, after giving effect to certain capital raising transactions,
approximately 93% of all Common Stock outstanding, all as described more fully
in the prospectus of Lehman Brothers, dated , 1994, prepared in
connection with the Distribution (the "Prospectus").
You have asked for our opinion with respect to the fairness, from a
financial point of view, of the Distribution to holders of common shares of
American Express. In connection with this opinion, we have reviewed, among other
things, the Prospectus and the financial and other terms of the Distribution and
related transactions described therein; publicly available financial information
relating to American Express and Lehman Brothers, including pro forma financial
statements; and certain internal financial analyses for American Express and
Lehman Brothers prepared by their respective managements. We have held
discussions with members of the senior managements of American Express and
Lehman Brothers regarding their past and current business operations and
financial condition, and the future prospects and financial and strategic
business objectives of their respective companies. In addition, we have reviewed
the reported price and trading activity for common shares of American Express;
compared certain financial and stock market information for American Express and
Lehman Brothers to similar information for other public companies which we
deemed to be generally similar to American Express and Lehman Brothers; reviewed
the terms of selected recent transactions similar to the Distribution and the
price and trading activity of stocks in such transactions both prior and
subsequent to such transactions; and performed such other studies, analyses,
inquiries and investigations as we considered appropriate.
In conducting our analysis and in arriving at our opinion as expressed
herein, we have not conducted a physical inspection of any of the properties or
assets of American Express or Lehman Brothers, nor have we made or obtained any
independent evaluation or appraisals of any properties, assets or liabilities of
American Express or Lehman Brothers. We have assumed and relied upon the
accuracy and completeness of all the financial and other information provided to
us or publicly available, and have not attempted independently to verify any of
such information. With respect to the financial analyses discussed with or
furnished to us, we have assumed without independent verification that they
reflect the best currently available estimates and judgments of the managements
of American Express and Lehman Brothers as to the business operations, financial
results and condition and prospects of their respective companies. Our opinion
is necessarily based on economic, market and other conditions as in effect on,
and the information made available to us as of, the date hereof.
This opinion does not represent our opinion as to the value of the Common
Stock or common shares of American Express following the consummation of the
Distribution, and does not constitute a recommendation to any current or
prospective shareholder of either American Express or Lehman Brothers as to any
action or investment decision such person or party may take. You have not asked
us nor authorized us to solicit or investigate, and accordingly in rendering our
opinion we have not considered, the possible sale of Lehman Brothers.
A-1
<PAGE> 144
We have acted as financial advisor to American Express in connection with
the Distribution and will be paid a fee for our services as financial advisor
which is in substantial part contingent upon the consummation of the
Distribution. Our firm provides additional financial advisory services for
American Express and receives fees for the rendering of these services.
It is understood that this letter is for the information of the Board of
Directors of American Express only, and may not be used for any other purpose or
disclosed or otherwise referred to without our prior written consent.
Based upon and subject to the foregoing, it is our view, as investment
bankers, that the Distribution is fair, from a financial point of view, to
holders of common shares of American Express.
Very truly yours,
A-2
<PAGE> 145
ANNEX B
,1994
The Board of Directors
American Express Company
American Express Tower
World Financial Center
New York, New York 10285-2150
Ladies and Gentlemen:
American Express Company ("American Express") proposes to distribute (the
"Distribution") to holders of common shares of American Express all outstanding
shares of common stock, par value $0.10 ("Common Stock"), of Lehman Brothers
Holdings Inc. ("Lehman Brothers") held by American Express, which will
represent, after giving effect to certain capital raising transactions,
approximately 93% of all Common Stock outstanding, all as described more fully
in the prospectus of Lehman Brothers, dated , 1994, prepared in
connection with the Distribution (the "Prospectus").
You have asked for our opinion with respect to the fairness, from a
financial point of view, of the Distribution to holders of common shares of
American Express. In connection with this opinion, we have reviewed, among other
things, the Prospectus and the financial and other terms of the Distribution and
related transactions described therein; publicly available financial information
relating to American Express and Lehman Brothers, including pro forma financial
statements; and certain internal financial analyses, for American Express and
Lehman Brothers prepared by their respective managements. We have held
discussions with members of the senior managements of American Express and
Lehman Brothers regarding their past and current business operations and
financial condition, and the future prospects and financial and strategic
business objectives of their respective companies. In addition, we have reviewed
the reported price and trading activity for common shares of American Express;
compared certain financial and stock market information for American Express and
Lehman Brothers to similar information for other public companies which we
deemed to be generally similar to American Express and Lehman Brothers; reviewed
the terms of selected recent transactions similar to the Distribution and the
price and trading activity of stocks in such transactions both prior and
subsequent to such transactions; and performed such other studies, analyses,
inquiries and investigations as we considered appropriate.
In conducting our analysis and in arriving at our opinion as expressed
herein, we have not conducted a physical inspection of any of the properties or
assets of American Express or Lehman Brothers, nor have we made or obtained any
independent evaluation or appraisals of any properties, assets or liabilities of
American Express or Lehman Brothers. We have assumed and relied upon the
accuracy and completeness of all the financial and other information provided to
us or publicly available, and have not attempted independently to verify any of
such information. With respect to the financial analyses discussed with or
furnished to us, we have assumed without independent verification that they
reflect the best currently available estimates and judgments of the managements
of American Express and Lehman Brothers as to the business operations, financial
results and condition and prospects of their respective companies. Our opinion
is necessarily based on economic, market and other conditions as in effect on,
and the information made available to us as of, the date hereof.
This opinion does not represent our opinion as to the value of the Common
Stock or common shares of American Express following the consummation of the
Distribution, and does not constitute a recommendation to any current or
prospective shareholder of either American Express or Lehman Brothers as to any
action or investment decision such person or party may take. You have not asked
us nor authorized us to solicit or investigate, and accordingly in rendering our
opinion we have not considered, the possible sale of Lehman Brothers.
B-1
<PAGE> 146
We have acted as financial advisor to American Express in connection with
the Distribution and will be paid a fee for our services as financial advisor
which is in substantial part contingent upon the consummation of the
Distribution. Our firm provides additional financial advisory services for
American Express and receives fees for the rendering of these services.
It is understood that this letter is for the information of the Board of
Directors of American Express only, and may not be used for any other purpose or
disclosed or otherwise referred to without our prior written consent.
Based upon and subject to the foregoing, it is our view, as investment
bankers, that the Distribution is fair, from a financial point of view, to
holders of common shares of American Express.
Very truly yours,
B-2
<PAGE> 147
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY COMMON
STOCK CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
The Company........................... 11
The Offering and the Distribution..... 12
Recent Developments................... 17
Risk Factors.......................... 19
Use of Proceeds....................... 22
Dividend Policy....................... 22
Capitalization........................ 23
Condensed Pro Forma Consolidated
Financial Statements................ 24
Selected Historical Consolidated
Financial Data...................... 26
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 28
Business.............................. 43
Management............................ 62
Certain Transactions and Agreements
Between the Company and
American Express.................... 86
Certain Transactions and Agreements
Among Holdings, American Express and
Nippon Life......................... 92
Principal Stockholders................ 95
Description of Capital Stock.......... 96
Certain Corporate Governance
Matters............................. 101
Legal Matters......................... 102
Experts............................... 102
Index to Historical and Pro Forma
Consolidated Financial Statements... F-1
Opinions of Financial Advisors........ A-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
441,600 SHARES
LEHMAN BROTHERS
HOLDINGS INC.
COMMON STOCK
---------------------------
PROSPECTUS
, 1994
---------------------------
------------------------------------------------------
------------------------------------------------------
<PAGE> 148
ALTERNATE PAGE FOR DISTRIBUTION PROSPECTUS
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY COMMON
STOCK CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
The Company........................... 11
The Offering and the Distribution..... 12
Recent Developments................... 17
Risk Factors.......................... 19
Use of Proceeds....................... 22
Dividend Policy....................... 22
Capitalization........................ 23
Condensed Pro Forma Consolidated
Financial Statements................ 24
Selected Historical Consolidated
Financial Data...................... 26
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 28
Business.............................. 43
Management............................ 62
Certain Transactions and Agreements
Between the Company and
American Express.................... 86
Certain Transactions and Agreements
Among Holdings, American Express and
Nippon Life......................... 92
Principal Stockholders................ 95
Description of Capital Stock.......... 96
Certain Corporate Governance
Matters............................. 101
Legal Matters......................... 102
Experts............................... 102
Index to Historical and Pro Forma
Consolidated Financial Statements... F-1
Opinions of Financial Advisors........ A-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
98,254,243 SHARES
LEHMAN BROTHERS
HOLDINGS INC.
COMMON STOCK
---------------------------
PROSPECTUS
, 1994
---------------------------
------------------------------------------------------
------------------------------------------------------
<PAGE> 149
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the estimated expenses to be incurred by the Registrant
in connection with the offering described in this Registration Statement.
<TABLE>
<S> <C>
SEC registration fee............................................ $315,555.92
Legal fees and expenses......................................... *
Accounting fees and expenses.................................... *
Fees and expenses of Transfer Agent and Distribution Agent...... *
Blue Sky qualification fees and expenses........................ *
Printing and engraving fees..................................... *
Miscellaneous................................................... *
------------
Total................................................. *
------------
------------
</TABLE>
- ---------------
* Estimated and subject to future contingencies.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Restated Certificate of Incorporation of the Registrant requires the
Registrant to indemnify its directors and officers to the fullest extent
permitted by Delaware General Corporation Law. In addition, the directors of the
Registrant are insured under officers' and directors' liability insurance
policies purchased by the Company. The directors, officers and employees of the
Registrant are also insured against fiduciary liabilities under the Employee
Retirement Income Security Act of 1974.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Not Applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The Exhibit Index beginning on page E-1 is hereby incorporated by
reference.
(b) Financial Statement Schedules
The following financial statement schedules not included in the Prospectus
appear on the following pages of this Registration Statement:
<TABLE>
<CAPTION>
SCHEDULE PAGE
---------------------------------------------------------------------- ----
<S> <C>
Schedule II -- Amounts Receivable from Related Parties and
Underwriters, Promoters and Employees Other Than Related Parties.... S-1
Schedule III -- Condensed Financial Information of Registrant......... S-5
Schedule IX -- Short-Term Borrowings.................................. S-10
</TABLE>
II-1
<PAGE> 150
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-2
<PAGE> 151
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on the 5th day of April, 1994.
LEHMAN BROTHERS HOLDINGS INC.
By /s/ KAREN M. MULLER
-----------------------------------
Name: Karen M. Muller
Title: Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/S/ RICHARD S. FULD, JR. Chairman of the Board, April 5, 1994
- ---------------------------------------- Chief Executive Officer
Richard S. Fuld, Jr. and Director
(principal executive officer)
/s/ ROBERT MATZA Chief Financial Officer April 5, 1994
- ---------------------------------------- (principal financial officer)
Robert Matza
/s/ STEPHEN J. BIER (principal accounting officer) April 5, 1994
- ----------------------------------------
Stephen J. Bier
/s/ ROGER S. BERLIND Director April 5, 1994
- ----------------------------------------
Roger S. Berlind
/s/ DAVID M. CULVER Director April 5, 1994
- ----------------------------------------
David M. Culver
/s/ KATSUMI FUNAKI Director April 5, 1994
- ----------------------------------------
Katsumi Funaki
/s/ RICHARD M. FURLAUD Director April 5, 1994
- ----------------------------------------
Richard M. Furlaud
/s/ HARVEY GOLUB Director April 5, 1994
- ----------------------------------------
Harvey Golub
</TABLE>
II-3
<PAGE> 152
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ SHERMAN R. LEWIS, JR. Director April 5, 1994
- ----------------------------------------
Sherman R. Lewis, Jr.
Director
- ----------------------------------------
Dina Merrill
/s/ ROGER S. PENSKE Director April 5, 1994
- ----------------------------------------
Roger S. Penske
/s/ T. CHRISTOPHER PETTIT Director April 5, 1994
- ----------------------------------------
T. Christopher Pettit
/s/ MASATAKA SHIMASAKI Director April 5, 1994
- ----------------------------------------
Masataka Shimasaki
/s/ MALCOLM WILSON Director April 5, 1994
- ----------------------------------------
Malcolm Wilson
</TABLE>
II-4
<PAGE> 153
SCHEDULE II
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS,
PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES
FOR THE THREE YEARS ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
-------------------------------------------------------------
BALANCE AT
BEGINNING OF AMOUNT BALANCE AT
NAME OF DEBTOR PERIOD ADDITIONS COLLECTED END OF PERIOD
- --------------------------------------- ------------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
Joel Butler............................ $ 1,087,556 $ 13,625 $ 1,073,931(a)
Michael J. Collins..................... 450,675 450,675(a)
Richard S. Collins..................... 220,600 220,600(b)
Joseph M. Grunfeld..................... 353,625 353,625(a)
Barry Hamerling........................ 400,805 400,805(b)
Ruggero Magnoni........................ 162,750 162,750(a)
Joel Margolies......................... 440,625 440,625(a)
William Taft........................... 782,863 782,863(a)
John Tuosto............................ 51,750 51,750(a)
Edward Bruksch......................... 120,000 30,000 90,000(c)
Fred Farina............................ 100,000 $ 160,000 260,000(d)
Peter Hunt............................. 100,000 100,000(e)
Todd C. Jorn........................... 105,000 105,000(f)
Adam Shafiroff......................... 72,582 22,582 50,000(g)
David Sitzer........................... 60,000 60,000
Kim Sullivan........................... 125,000 125,000
John Tuosto............................ 150,000 93,500 56,500(h)
Helen Van Eeden........................ 73,474 15,341 58,133(d)
Miriam Willard......................... 100,000 100,000(e)
Jacob Worenklein....................... 600,000 600,000(i)
Others................................. 38,697,408 74,160 31,217,866 7,553,702(j)
------------ ---------- ----------- -------------
$ 43,349,713 $1,139,160 $31,577,914 $ 12,910,959
------------ ---------- ----------- -------------
------------ ---------- ----------- -------------
</TABLE>
See notes to Schedule II on page S-4
S-1
<PAGE> 154
SCHEDULE II
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS,
PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES -- (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1992
------------------------------------------------------------
BALANCE AT
BEGINNING OF AMOUNT BALANCE AT
NAME OF DEBTOR PERIOD ADDITIONS COLLECTED END OF PERIOD
- ---------------------------------------- ------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
Joel Butler............................. $ 1,037,125 $ 119,293 $ 68,862 $ 1,087,556
Michael J. Collins...................... 450,675 450,675
Richard S. Collins...................... 220,600 220,600
Joseph M. Grunfeld...................... 353,625 353,625
Barry Hamerling......................... 400,805 400,805
Ruggero Magnoni......................... 162,750 162,750
Joel Margolies.......................... 440,625 440,625
James J. Stewart........................ 112,944 112,944
William Taft............................ 782,863 782,863
John Tuosto............................. 51,750 51,750
Edward Bruksch.......................... 150,000 30,000 120,000
James Carbone........................... 200,000 200,000
Brian Edmonds........................... 103,000 150,000 253,000
Fred Farina............................. 100,000 100,000
Joseph Gregory.......................... 225,000 225,000
La Brena Martin......................... 270,000 270,000
Gordon Paris............................ 250,000 250,000
Martin Randall.......................... 44,444 44,444
Craig Schiffer.......................... 150,000 150,000
Adam Shafiroff.......................... 145,000 72,418 72,582
David Sitzer............................ 180,000 120,000 60,000
Mark Stevenson.......................... 200,000 200,000
Kim Sullivan............................ 125,000 125,000
John Tuosto............................. 150,000 150,000
Helen Van Eeden......................... 115,000 16,267 57,793 73,474
Samuel Wasserman........................ 225,000 225,000
Richard Zielong......................... 90,000 90,000
Others.................................. 41,485,017 2,929,928 5,717,537 38,697,408
------------ ---------- ---------- -------------
$ 47,496,223 $3,940,488 $8,086,998 $ 43,349,713
------------ ---------- ---------- -------------
------------ ---------- ---------- -------------
</TABLE>
S-2
<PAGE> 155
SCHEDULE II
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS,
PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES -- (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1991
------------------------------------------------------------
BALANCE AT
BEGINNING OF AMOUNT BALANCE AT
NAME OF DEBTOR PERIOD ADDITIONS COLLECTED END OF PERIOD
- ---------------------------------------- ------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
Joel Butler............................. $ 1,037,125 $ 1,037,125
Michael J. Collins...................... 450,675 450,675
Richard S. Collins...................... 220,600 220,600
Joseph M. Grunfeld...................... 353,625 353,625
Barry Hamerling......................... 400,805 400,805
Theodore Krebsbach...................... 44,584 $ 44,584
Ruggero Magnoni......................... 162,750 162,750
Joel Margolies.......................... 440,625 440,625
James J. Stewart........................ 234,000 121,056 112,944
William Taft............................ 782,863 782,863
John Tuosto............................. 51,750 51,750
Edward Bruksch.......................... $ 150,000 150,000
James Carbone........................... 200,000 200,000
Brian Edmonds........................... 103,000 103,000
Joseph Gregory.......................... 225,000 225,000
La Brena Martin......................... 270,000 270,000
Gordon Paris............................ 250,000 250,000
Martin Randall.......................... 100,000 55,556 44,444
Adam Shafiroff.......................... 175,818 145,000 175,818 145,000
David Sitzer............................ 180,000 180,000
Helen Van Eeden......................... 120,000 15,000 20,000 115,000
Samuel Wasserman........................ 125,000 100,000 225,000
Richard Zielong......................... 120,000 30,000 90,000
Others.................................. 44,766,924 2,720,691 6,002,598 41,485,017
------------ ---------- ---------- -------------
$ 49,467,144 $4,478,691 $6,449,612 $ 47,496,223
------------ ---------- ---------- -------------
------------ ---------- ---------- -------------
</TABLE>
S-3
<PAGE> 156
SCHEDULE II
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS,
PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES -- (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1993
NOTES TO PAGE S-1 OF SCHEDULE II
(a) The Executive Stock Loan Program provides low interest demand loans, on an
unsecured basis, to assist key employees in acquiring common stock through
open market purchases. Loans under this program bear interest at the lower
of the prime lending rate minus 2% or 11%. Such loans are payable on demand
and mature on December 31, 1996.
(b) American Express is purchasing the loans of Mr. Collins and Mr. Hamerling at
the Distribution Date.
(c) Note is payable by March 1994. Interest accrues at the Company's margin
rate.
(d) Notes are payable out of February 1994 bonus. Interest accrues at the
Company's margin rate.
(e) Note is payable out of February 1994 bonus. Interest accrues at the
Company's margin rate.
(f) Notes are payable out of February 1995 bonus. Interest accrues at the
Company's margin rate.
(g) Note is payable by payroll deductions of 10% of gross commissions up to
$50,000 and all net commissions over $50,000, plus deferred compensation
and investment banking fees. Interest accrues at the Company's margin rate.
(h) Note is payable by monthly payments of $1,000 plus 50% of any net bonus
payable February 1994. Interest accrues at the Company's margin rate.
(i) Note is payable from bonus to be paid in 1994. Note is noninterest bearing.
(j) Other includes employees who transferred to Smith Barney on July 31, 1993.
In connection with this transfer Smith Barney paid the Company $25,775,013
for loans related to these individuals. The balance in other also
represents loans to individuals who terminated employment and are
outstanding at December 31, 1993.
S-4
<PAGE> 157
SCHEDULE III
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
(PARENT COMPANY ONLY)
(IN MILLIONS EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1992 1993
------- -------
<S> <C> <C>
Cash and cash equivalents................................................ $ 29 $ 29
Securities and other financial instruments owned......................... 75 287
Equity in net assets of subsidiaries and affiliates...................... 4,193 4,238
Accounts receivable and accrued interest................................. 371 1,843
Due from subsidiaries and affiliates..................................... 7,897 6,143
Other assets............................................................. 251 338
------- -------
$12,816 $12,878
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper and short-term debt..................................... $ 5,549 $ 3,835
Securities and other financial instruments sold but not yet purchased.... 142
Accrued liabilities, due to subsidiaries and other payables.............. 216 418
Senior notes............................................................. 4,540 6,281
Subordinated indebtedness................................................ 150 150
------- -------
Total liabilities.............................................. 10,455 10,826
------- -------
Stockholders' equity:
Preferred stock, $1 par value; 38,000,000 shares authorized:
5% Cumulative Convertible Voting, Series A, 13,000,000 shares
authorized, issued and outstanding; $39.10 liquidation preference
per share.......................................................... 508 508
Money Market Cumulative, 3,300 shares authorized;
250 shares issued and outstanding; $1,000,000 liquidation
preference per share............................................. 250 250
Common stock, $.10 par value; 300,000,000 shares authorized;
168,235,284 shares issued and outstanding in 1992 and 1993.......... 17 17
Additional paid-in capital............................................. 1,871 1,871
Net unrealized securities losses....................................... (13)
Foreign currency translation adjustment................................ (5) (12)
Accumulated deficit.................................................... (267) (582)
------- -------
Total stockholders' equity..................................... 2,361 2,052
------- -------
$12,816 $12,878
------- -------
------- -------
</TABLE>
See notes to condensed financial information of Registrant.
S-5
<PAGE> 158
SCHEDULE III
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF OPERATIONS
(PARENT COMPANY ONLY)
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1991 1992 1993
------ ----- -----
<S> <C> <C> <C>
Revenues
Market making and principal transactions........................ $ (10) $ (4) $ 34
Investment banking.............................................. (12) (6) (31)
Interest and dividends.......................................... 544 375 381
Other........................................................... 3 15 13
------ ----- -----
Total revenues............................................... 525 380 397
Interest expense................................................ 642 549 592
------ ----- -----
Net revenues................................................. (117) (169) (195)
------ ----- -----
Non-interest expenses
Compensation and benefits....................................... 20 46 22
Other........................................................... 46 180 39
Computervision write-down....................................... 230
First Capital Holdings Corp. write-off.......................... 144
------ ----- -----
Total non-interest expenses.................................. 210 456 61
------ ----- -----
Income (loss) before taxes and cumulative effect of changes in
accounting principles........................................... (327) (625) (256)
Provision for (benefit from) income taxes......................... (189) (253) (85)
------ ----- -----
Income (loss) before cumulative effect of changes in accounting
principles...................................................... (138) (372) (171)
Cumulative effect of changes in accounting principles........... 28
------ ----- -----
Income (loss) before equity in net loss of subsidiaries and
affiliates...................................................... (138) (344) (171)
Equity in net income of subsidiaries and affiliates............. 345 221 69
------ ----- -----
Net income (loss)................................................. 207 (123) (102)
Preferred stock dividends......................................... 48 48 48
------ ----- -----
Net income (loss) applicable to Common Stock...................... $ 159 $(171) $(150)
------ ----- -----
------ ----- -----
</TABLE>
See notes to condensed financial information of Registrant.
S-6
<PAGE> 159
SCHEDULE III
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS
(PARENT COMPANY ONLY)
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1991 1992 1993
------ ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................................. $ 207 $ (123) $ (102)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Cumulative effect of changes in accounting principles........ (28)
Equity in net income of subsidiaries......................... (345) (221) (69)
Computervision write-down.................................... 230
Provision for losses and other reserves...................... 131 13
First Capital Holdings Corp. write-off....................... 144
Other adjustments............................................ 70 26 5
Net change in securities owned, accounts receivable and accrued
interest, due from subsidiaries and affiliates and other
assets....................................................... 135 (3,714) (30)
Net change in accrued liabilities, due to subsidiaries and
other payables............................................... (51) (287) 343
Dividends and capital distributions received................... 87 228 587
------ ------- -------
Net cash provided by (used in) operating activities....... 247 (3,758) 747
------ ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of senior notes......................... 1,658 3,187 2,827
Principal payments of senior notes............................. (940) (1,062) (1,090)
Proceeds from issuance of subordinated indebtedness............
Principal payments of subordinated indebtedness................ (100)
Increase (decrease) in commercial paper and short-term debt,
net.......................................................... (955) 1,669 (1,714)
Issuance of stock.............................................. 175
Dividends paid................................................. (48) (81) (213)
------ ------- -------
Net cash provided by (used in) financing activities....... (385) 3,888 (190)
------ ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in investments in affiliates.......................... (254) (337) (545)
Proceeds from sale of Balcor loans............................. 500
Other.......................................................... 3 21 (12)
------ ------- -------
Net cash provided by (used in) investing activities....... 249 (316) (557)
------ ------- -------
Net change in cash and cash equivalents................... 111 (186)
Cash and cash equivalents at beginning of year................. 104 215 29
------ ------- -------
Cash and cash equivalents at end of year.................. $ 215 $ 29 $ 29
------ ------- -------
------ ------- -------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN MILLIONS)
Interest paid (net of amount capitalized) totaled $642 in 1991, $543 in
1992 and $1,105 in 1993. Income taxes paid (received) totaled $(47) in 1991, $86
in 1992 and $28 in 1993.
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITY
Holdings' noncash investing and financing activity for all periods
presented was insignificant.
See notes to condensed financial information of Registration.
S-7
<PAGE> 160
SCHEDULE III
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
1. SENIOR NOTES:
<TABLE>
<CAPTION>
DECEMBER 31, 1993
---------------------------------------------------
USD USD
DECEMBER 31, CONTRACTUAL CONTRACTUAL FOREIGN
1992 FIXED RATE FLOATING RATE CURRENCY TOTAL
------------ ----------- ------------- -------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1993................................. $1,107
1994................................. 812 $ 382 $ 1,433 $ $1,815
1995................................. 222 383 405 6 794
1996................................. 533 505 460 90 1,055
1997................................. 476 525 131 9 665
1998................................. 296 759 10 89 858
1999 and Thereafter.................. 1,094 1,094 1,094
------------ ----------- ------------- -------- ------
$4,540 $ 3,648 $ 2,439 $194 $6,281
------------ ----------- ------------- -------- ------
------------ ----------- ------------- -------- ------
</TABLE>
As of December 31, 1993 Holdings had $3,648 million of U.S. dollar fixed
rate senior notes outstanding. Contractual interest rates on these notes ranged
from 3.69% to 10.80% as of December 31, 1993, with a contractual weighted
average interest rate of 7.45%.
Holdings entered into interest rate swap contracts which effectively
converted $243 million of its U.S. dollar fixed rate senior notes to floating
rates based on the London Interbank Offered Rate ("LIBOR"). Excluding this $243
million, but including the effect of $542 million of U.S. dollar floating rate
senior notes effectively converted to fixed rates through the use of interest
rate swap contracts and $60 million of fixed rate basis swaps, Holdings' U.S.
dollar fixed rate senior notes outstanding had an effective weighted average
interest rate of 7.65%.
As of December 31, 1993, Holdings had $2,439 million of U.S. dollar
floating rate senior notes outstanding, including $192 million of U.S. dollar
floating rate senior notes on which the interest and/or redemption values have
been linked to movements in various indices. Excluding this $192 million,
contractual rates on Holdings' U.S. dollar floating rate senior notes ranged
from 3.48% to 4.53% with a contractual weighted average interest rate of 3.84%.
Holdings entered into interest rate swap contracts which effectively
converted $542 million of its U.S. dollar floating rate senior notes to fixed
rates. Excluding this $542 million, but including the effect of $243 million of
U.S. dollar fixed rate senior notes converted to floating rates through the use
of interest rate swap contracts and $599 million of floating rate basis swaps,
Holdings' U.S. dollar floating rate senior notes outstanding had an effective
weighted average interest rate of 3.85%.
As of December 31, 1993 Holdings had the equivalent of $194 million of
foreign currency denominated senior notes outstanding, of which $45 million were
fixed rate and $149 million were floating rate. The contractual interest rate on
Holdings' fixed rate foreign currency denominated senior notes was 5.50% as of
December 31, 1993. Contractual interest rates on Holdings' floating rate foreign
currency denominated senior notes ranged from 2.62% to 10.06% as of December 31,
1993, with a contractual weighted average interest rate of 3.04%. Holdings
entered into cross currency swap contracts which effectively converted a portion
of its floating rate foreign currency denominated senior notes into U.S. dollar
obligations. Holdings' fixed and floating rate foreign currency senior notes not
converted to U.S. dollar obligations, totaling $164 million, were used to
finance foreign currency denominated assets.
Of Holdings' U.S. dollar fixed rate senior notes outstanding as of December
31, 1993, $80 million are repayable prior to maturity at the option of the
holder. These obligations are reflected in the above table as $25
S-8
<PAGE> 161
SCHEDULE III
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
million and $55 million maturing in 1996 and 1997, respectively, rather than at
their contractual maturities in 2003 and 2023, respectively. The holders of
these notes have the option to redeem them at par value.
As of December 31, 1993, the fair value of Holdings' senior notes were
approximately $6,513 million ($4,625 million in 1992) which exceeds the
aggregate carrying value of the notes outstanding by approximately $232 million
($85 million in 1992). For purposes of this fair value calculation the carrying
value of variable rate debt that reprices within a year and fixed rate debt
which matures in less than six months approximates fair value. For the remaining
portfolio, fair value was estimated using either quoted market prices or
discounted cash flow analyses based on Holdings' current borrowing rates for
similar types of borrowing arrangements. Unrecognized net losses on interest
rate swaps and other transactions used by Holdings to manage its interest rate
risk within the senior notes portfolio were $57 million and $20 million at
December 31, 1993 and 1992, respectively. The unrecognized net losses on these
transactions reflect the estimated amounts the Company would pay if the
agreements were terminated as calculated based upon market rates as of December
31, 1993 and 1992, respectively.
2. SUBORDINATED INDEBTEDNESS:
Subordinated indebtedness at December 31, 1993 consists of $150 million
Capital Notes due 1995 (the "Notes"), with interest based on an index of LIBOR.
The contractual interest rate on this debt was 4.25% as of December 31, 1993.
The Notes are redeemable, in whole or in part, at the option of Holdings on each
quarterly interest payment date from proceeds of previously designated equity
securities issuances.
3. DIVIDENDS:
Dividends and capital distributions declared to Holdings by its
subsidiaries and affiliates were $87 million in 1991, $228 million in 1992 and
$587 million in 1993.
S-9
<PAGE> 162
SCHEDULE IX
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
SHORT-TERM BORROWINGS
DECEMBER 31, 1993
Information pertaining to aggregate short-term borrowings during each of
the three years in the period ended December 31, 1993 was as follows (dollars in
billions):
<TABLE>
<CAPTION>
MAXIMUM AMOUNT AVERAGE AMOUNT WEIGHTED AVERAGE
WEIGHTED AVERAGE OUTSTANDING OUTSTANDING INTEREST RATE
CATEGORY OF AGGREGATE INTEREST RATE AT DURING THE DURING THE DURING THE
SHORT-TERM BORROWINGS YEAR-END YEAR(A) YEAR(B) YEAR(C)
- ----------------------------- ---------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
Commercial paper
1991.................... 5.6% $ 4.3 $ 3.4 6.3%
1992.................... 4.0% $ 6.8 $ 5.0 4.2%
1993.................... 3.6% $ 6.8 $ 4.8 3.5%
Short-term debt
1991.................... 5.4% $ 8.1 $ 6.8 7.1%
1992.................... 4.4% $ 7.6 $ 6.6 4.7%
1993.................... 4.3% $ 10.4 $ 8.3 4.0%
Securities sold under
agreements to repurchase
1991.................... 5.0% $ 34.1 $ 27.3 6.1%
1992.................... 4.0% $ 41.3 $ 34.0 4.2%
1993.................... 4.4% $ 51.4 $ 45.7 4.1%
</TABLE>
- ---------------
(a) The maximum amount outstanding was based on month end balances.
(b) The average borrowings were computed using the monthly amounts outstanding.
(c) Interest rates were determined by dividing the actual interest expense for
the year by the average monthly amounts outstanding.
S-10
<PAGE> 163
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of the Registrant.*
3.2 Amended Certificate of the Designation, Powers, Preferences and Rights of the
Cumulative Convertible Voting Preferred Stock, Series A, of the Registrant dated
August 10, 1990 (incorporated by reference to Exhibit 3.7 of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1990).
3.3 Form of Certificate of the Designation, Powers, Preferences and Rights of %
Cumulative Voting Preferred Stock*
3.4 Form of Certificate of the Designation, Powers, Preferences and Rights of Redeemable
Voting Preferred Stock of the Registrant*
3.5 Restated By-Laws of the Registrant*
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.
5 Opinion of Thomas A. Russo, Esq.*
8 Opinion of Skadden, Arps, Slate, Meagher & Flom*
10.1 Amended and Restated Form of Agreement of Tenants-In-Common by and among American
Express Company, American Express Bank Ltd., American Express Travel Related Services
Company, Inc., Lehman Brothers Inc., Lehman Government Securities, Inc. and Lehman
Commercial Paper Incorporated.*
10.2 Amended and Restated Tax Allocation Agreement between Lehman Brothers Holdings Inc.
and American Express Company.*
10.3 Amended and Restated Intercompany Agreement between American Express Company and
Lehman Brothers Holdings Inc.*
10.4 Investment Agreement among American Express Company, Shearson Lehman Brothers
Holdings Inc. and Nippon Life Insurance Company (incorporated by reference to Exhibit
10.21 of the Registrant's Registration Statement on Form S-1 (Reg. No. 33-12976)).
10.5 Registration Rights Agreement between Nippon Life Insurance Company and Shearson
Lehman Brothers Holdings Inc. (incorporated by reference to Exhibit 10.22 of the
Registrant's Registration Statement on Form S-1 (Reg. No. 33-12976)).
10.6 Business Association Agreement by and among American Express Company, Shearson Lehman
Brothers Holdings Inc. and Nippon Life Insurance Company (incorporated by reference
to Exhibit 10.23 of the Registrant's Registration Statement on Form S-1 (Reg. No.
33-12976)).
10.7 Letter, dated March 23, 1987, from Nippon Life Insurance Company to American Express
Company and Shearson Lehman Brothers Holdings Inc. (incorporated by reference to
Exhibit 10.24 of the Registrant's Registration Statement on Form S-1 (Reg. No.
33-12976)).
10.8 1990 Agreement, dated as of June 12, 1990, by and between American Express Company
and Nippon Life Insurance Company (incorporated by reference to Exhibit 10.25 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1990).
10.9 Letter, dated August 10, 1990, from Shearson Lehman Brothers Holdings Inc. to Nippon
Life Insurance Company and American Express Company (incorporated by reference to
Exhibit 10.26 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1990).
</TABLE>
E-1
<PAGE> 164
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -------------------------------------------------------------------------------------
<S> <C>
10.10 Warrant, dated August 10, 1990, issued by Shearson Lehman Brothers Holdings Inc. to
Nippon Life Insurance Company (incorporated by reference to Exhibit 10.27 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1990).
10.11 Stock Purchase Agreement, dated as of September 14, 1992, by and between Mellon Bank
Corporation and Shearson Lehman Brothers Inc. (Incorporated by reference to Exhibit
10.15 of the Registrant's Annual Report on form 10-K for the year ended December 31,
1992).
10.12 Asset Purchase Agreement, dated as of March 12, 1993, by and among Primerica
Corporation, Smith Barney, Harris Upham & Co. Incorporated and Shearson Lehman
Brothers Inc. (incorporated by reference to Exhibit 10.16 of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1992).
10.13 Amendment No. 1 dated as of July 31, 1993, to Asset Purchase Agreement dated March
12, 1993, by and among Primerica Corporation, Smith Barney, Harris Upham & Co.
Incorporated and Shearson Lehman Brothers Inc. (incorporated by reference to Exhibit
10.1 of Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1993).
10.14 Amendment No. 2 dated as of July 31, 1993, to Asset Purchase Agreement dated March
12, 1993, by and among Primerica Corporation, Smith Barney, Harris Upham & Co.
Incorporated and Shearson Lehman Brothers Inc. (incorporated by reference to Exhibit
10.2 of Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1993).
10.15 Clearing Agreement dated as of July 31, 1993, by and between Smith Barney, Harris
Upham & Co. Incorporated and Shearson Lehman Brothers Inc. (incorporated by reference
to Exhibit 10.3 of Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1993).
10.16 Lease dated as of October 13, 1993 between 101 Hudson Leasing Associates and Lehman
Brothers Holdings Inc. (incorporated by reference to Exhibit 10 of Holdings'
Quarterly Report on Form 10-Q for the quarter ended September 30, 1993) .
10.17 Lehman Brothers Holdings Inc. Voluntary Deferred Compensation Plan (incorporated by
reference to Exhibit 10.9 of Lehman Brothers Inc. Annual Report on Form 10-K for the
year ended December 31, 1987).
10.18 Lehman Brothers Inc. Executive and Select Employees Plan (incorporated by reference
to Exhibit 10.4 of the Registrant's Registration Statement on Form S-1 (Reg. No.
33-12976)).
10.19 Lehman Brothers Holding Inc. Deferred Compensation Plan for Non-Employee Directors
(incorporated by reference to Exhibit 10.11 of the Registrant's Registration
Statement on Form S-1 (Reg. No. 33-12976)).
10.20 The E.F. Hutton Group Partnership Award Deferred Compensation Plan (incorporated by
reference to Exhibit 1 to Amendment No. 1 of The E.F. Hutton Group Inc.'s
Registration Statement on Form S-8 (Reg. No. 33-02134)).
10.21 Amended and Restated Agreements of Limited Partnership of Shearson Lehman Brothers
Capital Partners I (incorporated by reference to Exhibit 10.47 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1988).
10.22 Amended and Restated Agreements of Limited Partnership of Shearson Lehman Hutton
Capital Partners II (incorporated by reference to Exhibit 10.48 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1988).
10.23 Lehman Brothers Inc. Employee Ownership Plan.*
10.24 Lehman Brothers Holdings Inc. 1994 Management Ownership Plan.*
10.25 Lehman Brothers Holdings Inc. 1994 Management Replacement Plan.*
</TABLE>
E-2
<PAGE> 165
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -------------------------------------------------------------------------------------
<S> <C>
10.27 Lehman Brothers Holdings Inc. Short-Term Executive Compensation Plan.*
10.28 Lehman Brothers Holdings Inc. 1994 Employee Stock Purchase Plan.*
10.29 Lehman Brothers Inc. Participating Preferred Plan.*
10.30 Purchase Agreement, dated , 1994, between Lehman Brothers Holdings Inc.
and American Express Company.*
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young.
23.2 Consent of Thomas A. Russo, Esq. (included within Exhibit 5).
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom (included within Exhibit 8).
23.4 Consent of Lazard Freres & Co.*
23.5 Consent of James D. Wolfensohn Incorporated.*
24 Powers of Attorney.
99.1 Consent of John D. Macomber to be named as a Director.
99.2 Consent of John J. Byrne to be named as a Director.
</TABLE>
- ---------------
* To be filed by Amendment
E-3
<PAGE> 1
EXHIBIT 21
LEHMAN BROTHERS HOLDINGS INC. SUBSIDIARIES (ACTIVE)
SUBSIDIARY
AEP Premiere Corporation
AEP Premiere Corporation II
AFC I Bldg. Corp.
AFC II Bldg. Corp.
AFC III Bldg. Corp
ALI Inc.
ASAS Investment Company
Americal GP Corp.
American Entertainment Depositary Corp.
American Entertainment Depositary Corp. II
American Marketing Industries Holdings Inc.
American Marketing Industries Inc.
B.H. Venture, Inc.
BBC Land Company
Banque Lehman Brothers S.A.
Beaver Creek Corporate Center, Inc.
Broad OK Corp.
CA Claremont Associates Inc.
CA Claremont Inc.
CA Victory Assignor Corp.
CA Victory Inc.
CG California Commercial Lending Inc.
CG Realty Funding Inc.
CG Zero Coupon Depositary Corp.
CPR Group Inc.
Cable Income Services Inc.
Capital Preservation and Restructuring, Inc.
Chief Auto Parts Inc.
Client Account Protection Insurance Company
Commerce Square Corporation
E.H.P. Depositary Corp.
EHP/GP Inc.
Eastern Avenue Inc.
Economic Advisors, Inc.
F & J Fruit Orchard Limited
FIMI I Liquidation Inc.
FIMI II Liquidation Inc.
Fiduciaria Lehman Brothers SpA
Finanziaria Lehman Brothers S.R.L.
Freedom GP Inc.
G & P Cable-1, Inc.
Growth Partners Inc.
HBLP Acquisition Corp.
Heritage Park II Inc.
HillCreste Properties Inc.
Industrial Holdings Corporation
J & F Apple Corporation
L-B Associates Inc.
<PAGE> 2
LEHMAN BROTHERS HOLDINGS INC. SUBSIDIARIES (ACTIVE)
SUBSIDIARY
LB Energy Inc.
LB Investment Inc.
LB Real Properties Corp.
LB/FW Inc.
LB/MB Inc.
LB/MMG Inc.
Laurel Centre Depositary Corp.
Laurel Centre Inc.
Lehman Atlanta Properties Inc.
Lehman Brothers (China) Limited
Lehman Brothers (Luxenbourg) S.A.
Lehman Brothers (Taiwan) Ltd.
Lehman Brothers (Thailand) Ltd.
Lehman Brothers Asset Trading Inc.
Lehman Brothers Bank (Switzerland)
Lehman Brothers Bankhaus Aktiengesellschaft (A.G.)
Lehman Brothers Capital Co. (H.K.) Limited
Lehman Brothers Capital GMBH
Lehman Brothers Commercial Corporation
Lehman Brothers Commodities (Japan) Ltd.
Lehman Brothers Commodities Ltd.
Lehman Brothers Conseil S.A.
Lehman Brothers Fiduciaria Di Amministrazione S.R.L.
Lehman Brothers Finance S.A.
Lehman Brothers Futures Asset Management Corp.
Lehman Brothers Gilts Ltd.
Lehman Brothers Global Asset Management Inc.
Lehman Brothers Global Asset Management Limited
Lehman Brothers Group Inc.
Lehman Brothers Holdings Inc.
Lehman Brothers Holdings Plc
Lehman Brothers II Investment Inc.
Lehman Brothers Inc.
Lehman Brothers International (Europe)
Lehman Brothers International Investments Inc.
Lehman Brothers International S.A.
Lehman Brothers International S.P.A.
Lehman Brothers Investments Pte Limited
Lehman Brothers Japan Inc.
Lehman Brothers Limited
Lehman Brothers Merchant Banking Advisors Inc.
Lehman Brothers Merchant Banking Partners Inc.
Lehman Brothers Middle East Inc.
Lehman Brothers Money Brokers Ltd.
Lehman Brothers N.V.
Lehman Brothers N.V. Holdings Inc.
Lehman Brothers Nominees Limited
Lehman Brothers Offshore Partners Ltd.
Lehman Brothers Pera Inc.
<PAGE> 3
LEHMAN BROTHERS HOLDINGS INC. SUBSIDIARIES (ACTIVE)
SUBSIDIARY
Lehman Brothers Realty Corp.
Lehman Brothers S.P.A. Societa' Di Intermediazione Mobiliare
Lehman Brothers Securities
Lehman Brothers Securities SpA--Societa' Di Intermediazone Mobiliare
Lehman Brothers UK Holdings Limited
Lehman Brothers Verwaltungs-und Beteiligungsgesellschaft mbH
Lehman Brothers/FW Inc.
Lehman Brothers/GP Inc.
Lehman Brothers/MBGP Inc.
Lehman Brothers/MBLP Inc.
Lehman Brothers/Rosecliff Inc.
Lehman Capital Corporation
Lehman Electric Inc.
Lehman Funding Corp.
Lehman Global Financial Services Co., Ltd.
Lehman Hollywood Partners Inc.
Lehman Investments Inc.
Lehman Lending Corp.
Lehman Ltd. I Inc.
Lehman Q. C. Garage Inc.
Lehman Queens Center Inc.
Lehman Queens Limited Inc.
Lehman SFA Inc.
Lehman Special Securities Inc.
Lehman Structured Assets Inc.
Lehman-Global Financial Services Co., Ltd.
Lehman/SDI Inc.
Liberty GP II Inc.
Liberty GP III Inc.
Liberty GP Inc.
Manhattan Beach Commercial Properties III Depositary Inc.
Manhattan Beach Commercial Properties III Inc.
Medical Office Properties Depositary Inc.
Medical Office Properties Inc.
Messel (Foreign) Nominees Limited
Messel Nominees Limited
Midwest Centers Depositary Inc.
Midwest Centers Inc.
NJ Somerset Inc.
NL GP Inc.
Northstar Equipment Leasing Income Inc.
O.M.B. Limited Partner Ltd.
PDF86 Depositary Corp.
PDF86 Real Estate Services Inc.
Panagora Asset Management Limited
Platform Mortgage Limited
Prime Depositary Corp.
Principal Growth Depositary Corp.
Principal Growth Mortgage Investors Depositary Corp.
<PAGE> 4
LEHMAN BROTHERS HOLDINGS INC. SUBSIDIARIES (ACTIVE)
SUBSIDIARY
Principal Growth Realty Funding, Inc.
Principal Growth Realty Management Inc.
Property Asset Management Inc.
R-H Wildwood-I, Inc.
RAIA Depositary Corp.
Regional Malls Depositary Corp.
Regional Malls Inc.
Senior Income Depositary, Inc.
Senior Income Fund Inc.
South Cobb Land Inc.
Stamford Towers Depositary Corp.
Stamford Towers Inc.
Storage Inc.
Sun Distributors, Inc.
Union Square Depositary Corp.
Union Square/GP Corp.
Walnut Grove GP Corp.
Warner Center Inc.
Warren Atlantic Inc.
Wellington-Medford III Properties, Inc.
Working Interest Inc.
LEHMAN BROTHERS HOLDINGS INC. SUBSIDIARIES (INACTIVE)
SUBSIDIARY
Balcor/Shearson Lehman Brothers Inc.
Barony RH Corporation
Connaught Maritime Ltd.
Global Clearing Corporation
Interstate Orlando, Inc.
Kuhn Loeb Lehman Brothers International B.V.
LB Investment Services Inc.
LBKL 82-1 Investors Inc.
Lee Higginson & Co.
Lehman Brothers Amex Asia Ltd.
Lehman Brothers FGIC Holdings Inc.
Lehman Brothers Gestion S.A.
Lehman Brothers Staderas Company Limited
Lehman International Finance N.V.
Lehman Overseas N.V.
Lehman Tax Credit Advisor Inc.
Messel Futures Limited
Messels Service Company
Mideast-American, Inc.
Posthorn Global Asset Management (UK) Ltd.
R-H Development Corp.
R-H Emerson Center, Inc.
R-H International, Inc.
<PAGE> 5
LEHMAN BROTHERS HOLDINGS INC. SUBSIDIARIES (INACTIVE)
SUBSIDIARY
R-H Lenox, Inc.
R-H Perimeter, Inc.
R-H Properties, Inc.
RHLA, Inc.
SLB Builders, Inc.
SLB Capital, Inc.
SLB Export Credit Inc.
SLB Mortgage Backed Securities (No. 1) Ltd.
SLB Mortgage Backed Securities (No. 2) Ltd.
SLB Services, Inc.
SLBP Acquisition Corp.
SLH Capital Partners II Inc.
SLH Lending Corp.
SLM Series Two Depositary Corp.
Shearson Beverage Corporation
Shearson Fillmore Inc.
Shearson Lehman Brothers Eurocell Inc.
Shearson Lehman Brothers International (U.K.) Limited
Shearson Lehman Brothers International Championships Inc.
Shearson Lehman Brothers Partnership Services, Inc.
Shearson Lehman Brothers Tax Exempt Income Fund Corporation
Shearson Lehman Brothers/EDF 86, Inc.
Shearson Lehman Cable Services II Inc.
Shearson Lehman Commercial Properties II Inc.
Shearson Lehman Commercial Properties IV Inc.
Shearson Lehman First American Center Inc.
Shearson Lehman Global Asset Management S.A.
Shearson Lehman Hutton ABS Consultants Inc.
Shearson Lehman International Limited
Shearson Lehman Ltd.
Shearson Lehman Realty Advisors, Inc.
Shearson South Olive, Inc.
WFC Construction Company Inc.
Yukon Shipping Limited
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the inclusion in the Registration Statement on Form S-1 of Lehman Brothers
Holdings Inc. and the related prospectuses of our report dated February 3, 1994,
except for Note 2 as to which the date is April 4, 1994, with respect to the
consolidated financial statements and financial statement schedules of Lehman
Brothers Holdings Inc. and Subsidiaries.
Ernst & Young
New York, New York
April 5, 1994
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thomas A. Russo, Robert Matza and Michael R.
Milversted 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 any and all amendments
(including post-effective amendments) and supplements to this Registration
Statement 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 conforming all that said attorneys-in-fact and
agents, or any of them, or their substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ RICHARD S. FULD, JR. Chairman of the Board, April 5, 1994
- ---------------------------------------- Chief Executive Officer
Richard S. Fuld, Jr. and Director
(principal executive officer)
/s/ ROBERT MATZA Chief Financial Officer, April 5, 1994
- ---------------------------------------- (principal financial officer)
Robert Matza
/s/ STEPHEN J. BIER (principal accounting officer) April 5, 1994
- ----------------------------------------
Stephen J. Bier
/s/ ROGER S. BERLIND Director April 5, 1994
- ----------------------------------------
Roger S. Berlind
/s/ DAVID M. CULVER Director April 5, 1994
- ----------------------------------------
David M. Culver
/s/ KATSUMI FUNAKI Director April 5, 1994
- ----------------------------------------
Katsumi Funaki
/s/ RICHARD M. FURLAUD Director April 5, 1994
- ----------------------------------------
Richard M. Furlaud
/s/ HARVEY GOLUB Director April 5, 1994
- ----------------------------------------
Harvey Golub
/s/ SHERMAN R. LEWIS, JR. Director April 5, 1994
- ----------------------------------------
Sherman R. Lewis, Jr.
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
Director
- ----------------------------------------
Dina Merrill
/s/ ROGER S. PENSKE Director April 5, 1994
- ----------------------------------------
Roger S. Penske
/s/ T. CHRISTOPHER PETTIT Director April 5, 1994
- ----------------------------------------
T. Christopher Pettit
/s/ MALCOLM WILSON Director April 5, 1994
- ----------------------------------------
Malcolm Wilson
/s/ MASATAKA SHIMASAKI Director April 5, 1994
- ----------------------------------------
Masataka Shimasaki
</TABLE>
<PAGE> 1
EXHIBIT 99.1
CONSENT
I consent to the inclusion in the Registration Statement on Form S-1 of
Lehman Brothers Holdings Inc. ("Holdings") and the related prospectuses of my
name as a Class III Director of Holdings as of the Distribution Date and the
related biography included therein.
/s/ JOHN D. MACOMBER
--------------------------------------
John D. Macomber
Date: March 29, 1994
<PAGE> 1
EXHIBIT 99.2
CONSENT
I consent to the inclusion in the Registration Statement on Form S-1 of
Lehman Brothers Holdings Inc. ("Holdings") and the related prospectuses of my
name as a Class III Director of Holdings as of the Distribution Date and the
related biography included therein.
/s/ JOHN J. BYRNE
--------------------------------------
John J. Byrne
Date: March 29, 1994
