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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[_] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM JANUARY 1, 1994 TO NOVEMBER 30, 1994
COMMISSION FILE NUMBER 1-9466
LEHMAN BROTHERS HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3216325
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) (IDENTIFICATION NO.)
3 WORLD FINANCIAL CENTER 10285
NEW YORK, NEW YORK (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 526-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
Common Stock, $.10 par value New York Stock Exchange
Pacific Stock Exchange
$55 Million Serial Zero Coupon Senior Notes American Stock Exchange
Due May 16, 1998
FT-SE Eurotrack 200 Index Call Warrants American Stock Exchange
Expiring June 4, 1996
Japanese Yen Bear Warrants American Stock Exchange
Expiring September 15, 1995
7 1/4% Oracle Yield Enhanced Equity Linked Debt American Stock Exchange
Securities SM Due 1996
6 1/2% Amgen Yield Enhanced Equity Linked Debt American Stock Exchange
Securities Due 1997
Japanese Yen Bear Warrants American Stock Exchange
Expiring March 5, 1996
8 3/4% Notes Due 2002 New York Stock Exchange
Global Telecommunications Stock Upside Note American Stock Exchange
Securities SM Due 2000
9 1/8% Micron Yield Enhanced Equity Linked Debt American Stock Exchange
Securities Due 1997
AMEX Hong Kong 30 Index Call Warrants American Stock Exchange
Expiring February 26, 1996
Regional Bank Stock Upside Note American Stock Exchange
Securities Due 1996
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K [X].
Aggregate market value of the voting stock held by non-affiliates of the
Registrant at January 31, 1995 was approximately $1,768,402,526. For purposes
of this information, the outstanding shares of common stock owned by certain
executive officers of the Registrant were deemed to be shares of common stock
held by affiliates.
As of January 31, 1995, 104,524,025 shares of the registrant's Common Stock,
$.10 par value per share were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
(1) Lehman Brothers Holdings Inc. 1994 Annual Report to Stockholders--
Incorporated in part in Form 10-K, Parts I, II and IV.
(2) Lehman Brothers Holdings Inc. Proxy Statement for its 1995 Annual Meeting
of Stockholders--Incorporated in part in Form 10-K, Parts I and III.
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
As used herein, "Holdings" or the "Registrant" means Lehman Brothers Holdings
Inc., a Delaware corporation, incorporated on December 29, 1983. Holdings and
its subsidiaries are collectively referred to as the "Company" or "Lehman
Brothers," and the principal subsidiary of Holdings, Lehman Brothers Inc., a
Delaware corporation, is referred to herein as "LBI".
The Company is one of the leading global investment banks serving
institutional, corporate, government and high net worth individual clients and
customers. Its executive offices are located at 3 World Financial Center, New
York, New York 10285 and its telephone number is (212) 526-7000.
Spin-off from American Express
Prior to May 31, 1994, the American Express Company ("American Express")
owned 100% of Holdings' common stock (the "Common Stock"), which represented
approximately 93% of Holdings' voting stock. On May 31, 1994, American Express
issued a special dividend to its common shareholders consisting of all of the
Common Stock it then held (the "Distribution") and Holdings became a widely-
held public company with its Common Stock traded on the New York Stock
Exchange. Prior to the Distribution, an additional equity investment of
approximately $1.25 billion was made in Holdings, primarily from American
Express.
Change of Fiscal Year
Effective as of the Distribution, the Company's fiscal year end was changed
from December 31 to November 30. Such a change to a non-calendar cycle shifted
certain year-end administrative activities to a time period that conflicts less
with the business needs of the Company's institutional customers.
Ongoing Cost Reduction Program
The Company is committed to expense reduction efforts and the ongoing review
of its expense structure. Throughout 1994, the Company took actions to reduce
both personnel and non-personnel related expenses. Since the number of
employees at the Company directly affects these expenses, reducing headcount
was a major initiative of the cost reduction program. During 1994, the
Company's total number of employees was reduced from approximately 9,400 in
early 1994 to approximately 8,500 at fiscal year-end in November. As part of
this process, the Company recorded a $33 million pre-tax severance charge in
the first quarter of 1994. A separate and comprehensive effort focused on non-
personnel expenses across geographic regions, including the United States,
Europe and the Asia Pacific region. This process is expected to continue
throughout 1995.
LEHMAN BROTHERS
Lehman Brothers is one of the leading global investment banks serving
institutional, corporate, government and high net worth individual clients and
customers. The Company's worldwide headquarters in New York and regional
headquarters in London, Tokyo, Hong Kong and Singapore are complemented by
offices in additional locations in the United States, Europe, the Middle East,
Latin and South America. The Company is engaged primarily in providing
financial services. Other businesses in which the Company is engaged represent
less than 10 percent of consolidated assets, revenues or pre-tax income.
The Company's business includes capital raising for clients through
securities underwriting and direct placements; corporate finance and strategic
advisory services; merchant banking; securities sales and trading;
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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.
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 financial services 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 which 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.
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.
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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.
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 sales professionals in major locations around the world. Institutional Sales
focuses on the large 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 team can be comprised of
from two to five sales professionals, each specializing in a specific product.
This approach positions Lehman Brothers to understand and 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. The
division has 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. Additionally, the Financial Services
Division enables the Company's issuing clients to access a diverse investor
base throughout the world.
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.
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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 the highest 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.
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.
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 1994, Lehman Brothers developed and marketed several
innovative products designed to help investors establish or hedge positions in
individual stocks or groups of stocks, including yield enhanced equity linked
debt securities ("YEELDS SM") and stock upside note securities ("SUNS SM").
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.
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,
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into teams to serve the financial needs of the Company's clients and customers.
The Company is a leading underwriter of new issues, and also makes markets in
these and other fixed income securities. The Company's global presence
facilitates client and customer transactions and provides liquidity in
marketable fixed and floating rate debt securities.
Fixed Income 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 38
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.
Corporate Debt Securities. Lehman Brothers engages in the underwriting and
market making of fixed, floating dollar and non-dollar investment grade debt
worldwide. The Company also underwrites and makes markets in non-investment
grade debt securities and bank loans.
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.
Emerging Market Securities. The Company is active in the trading, structuring
and underwriting of Latin American, Eastern European, and Asian dollar and
local currency instruments.
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.
Derivative Products. The Company offers a broad range of fixed income
derivative product services in more than 21 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 addition, on December 3, 1993, Lehman Brothers incorporated Lehman
Brothers Financial Products Inc. ("LBFP"), a separately capitalized, triple-A
rated derivatives subsidiary, which commenced trading with counterparties in
July 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.
The
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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.
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.
Foreign Exchange
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, Hong Kong and Singapore, engages in trading activities in all
major currencies and maintains a 24-hour foreign exchange market making
capability for clients and customers worldwide. In addition to the Company's
traditional client/customer-driven foreign exchange activities, Lehman Brothers
also trades foreign exchange for its own account.
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.
Asset Management
Lehman Brothers Global Asset Management Inc. ("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 $10 billion
at November 30, 1994. 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 had 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 held by the Company include both
publicly traded and privately held companies diversified on a geographic and
industry basis.
The 1989 Partnerships have a 10 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
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directed toward selling or otherwise monetizing such investments. The Company
is currently considering several new merchant banking opportunities which will
be targeted towards specific types of investments and specific geographical
areas within the world's emerging markets.
Other Business Activities
While Lehman Brothers concentrates on its client/customer-driven strategy,
the Company also participates in business opportunities such as arbitrage and
proprietary trading that leverage the Company's expertise, infrastructure and
resources. These businesses may generate substantial revenues but generally
entail a higher degree of risk as the Company trades for its own account.
Arbitrage. Lehman Brothers engages in a variety of arbitrage activities. In
traditional or "riskless" arbitrage, the Company seeks to benefit from
temporary price discrepancies that occur when a security is traded in two or
more markets, or when a convertible or derivative security is trading at a
price disparate from its underlying security. The Company's "risk" arbitrage
activities involve the purchase of securities at discounts from the expected
values that would be realized if certain proposed or anticipated corporate
transactions (such as mergers, acquisitions, recapitalizations, exchange
offers, reorganizations, bankruptcies, liquidations or spin-offs) were to
occur. To the extent that these anticipated transactions do not materialize in
a manner consistent with the Company's expectations, the Company is subject to
the risk that the value of these investments will decline. Lehman Brothers'
arbitrage activities benefit from the Company's presence in the global capital
markets, access to advanced information technology, in-depth market research,
proprietary risk management tools and general experience in assessing rapidly
changing market conditions.
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., fixed income, 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 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.
GLOBAL SCOPE OF BUSINESS ACTIVITIES
Through its network of offices in major 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
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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.
Information concerning the revenues associated with the Company's foreign
operations is contained in the 1994 Annual Report to Stockholders on page 19
under the caption "Net Revenues" and on page 71 in Note 19 to the Consolidated
Financial Statements and is incorporated herein by reference.
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 Corporate Management
Committee (the "CMC"), which consists of the Chief Executive Officer, the
President and Chief Operating Officer, the Chief Administrative Officer, the
Chief Financial Officer and Chief Legal Officer performs broad, policy making
functions. Complementing the CMC is the Operating Committee 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-tier 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' exposure to credit risks in its trading activities arise
from the possibility that a counterparty to a transaction could fail to perform
under its contractual commitment, resulting in Lehman Brothers incurring losses
in liquidating or covering its position in the open market. 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 has 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 works 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.
Since 1990, management has devoted substantial resources to reducing the
Company's Non-Core Assets. Between December 31, 1990 and November 30, 1994, the
Company's Non-Core Assets decreased from $2.3 billion in 1990 to approximately
$388 million in 1994. The value of the Company's Non-Core Assets includes
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.
TRANSACTION SUPPORT SERVICES AGREEMENTS
Following the sale on July 31, 1993 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) and
its subsidiary Smith Barney, Harris Upham & Co. Incorporated ("Smith Barney"),
the Company entered into a clearing agreement (the "Clearing Agreement"), under
which Smith Barney carried and cleared, on a fully disclosed basis, all
accounts introduced to it by Lehman Brothers, and performed all clearing and
settlement functions for equities, municipal securities and corporate debt
securities. This agreement expired on December 31, 1994, but was extended until
February 17, 1995. On October 12, 1994, the Company and Bear Stearns Securities
Corp. ("BSSC") entered into an agreement pursuant to which BSSC has agreed to
process the transactions currently cleared by Smith Barney (the "BSSC
Agreement"). As a result, the Company will now be self-clearing, and the
accounts currently carried by Smith Barney will be carried on the Company's
books. The BSSC Agreement will take effect on February 17, 1995 and will run
for a term of five years.
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.
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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
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 believes that it is in material compliance with regulations
described herein.
The Company anticipates regulation of the securities and commodities
industries to increase at all levels and for compliance therewith to become
more difficult. Monetary penalties and restrictions on business activities by
regulators resulting from compliance deficiencies are also expected to become
more severe.
CAPITAL REQUIREMENTS
As registered broker-dealers, LBI and Lehman Government Securities Inc.
("LGSI"), a wholly owned subsidiary of LBI, are subject to the Commission's
Rule 15c3-1 (the "Net Capital Rule") promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). The Net Capital Rule requires LBI
and LGSI to maintain net capital of not less than 2% of aggregate debit items
arising from customer transactions, as defined, or 4% of funds required to be
segregated for customers' regulated commodity accounts, as defined.
Lehman Brothers International (Europe) ("LBIE"), Lehman Brothers Japan Inc.
("LBJ"), and other of Holdings' subsidiaries are subject to various securities,
commodities and banking regulations and capital adequacy requirements
promulgated by the regulatory and exchange authorities of the countries in
which they operate.
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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 12 of Notes to
Consolidated Financial Statements.
EMPLOYEES
As of November 30, 1994 the Company employed approximately 8,500 persons,
including 6,000 in the U.S. and 2,500 internationally. The Company considers
its relationship with its employees to be good.
ITEM 2. PROPERTIES
The Company's headquarters occupy approximately 1,147,000 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 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 is used by systems, operations, and
certain administrative personnel and contains certain back-up trading systems.
The lease term is approximately 16 years and commenced in August 1994.
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.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in a number of judicial, regulatory and arbitration
proceedings concerning matters arising in connection with the conduct of its
business. Such proceedings include actions brought against the Company and
others with respect to transactions in which the Company acted as an
underwriter or financial advisor, actions arising out of the Company's
activities as a broker or dealer in securities and commodities and actions
brought on behalf of various classes of claimants against many securities and
commodities firms of which the Company is one.
Although there can be no assurance as to the ultimate outcome, the Company
has denied, or believes it has a meritorious defense and will deny, liability
in all significant cases pending against it including the matters described
below, and intends to defend vigorously each such case. Although there can be
no assurance as to the ultimate outcome, based on information currently
available and established reserves, the Company believes that the eventual
outcome of the actions against it, including the matters described below, will
not, in the aggregate, have a material adverse effect on the consolidated
financial condition of the Company.
Bamaodah v. E.F. Hutton & Company Inc.
In April 1986, Ahmed and Saleh Bamaodah commenced an action against E.F.
Hutton & Company Inc., ("EFH") to recover all losses the Bamaodahs had incurred
since May 1981 in the trading of commodity futures contracts in a
nondiscretionary EFH trading account. The Dubai Civil Court ruled that the
trading of commodity futures contracts constituted illegal gambling under
Islamic law and that therefore the brokerage contract was void. In January
1987, a judgment was rendered against EFH in the amount of $48,656,000. On
January 5, 1991, the Dubai Court of Appeals affirmed the judgment. On March 22,
1992, the Court of Cassation, Dubai's highest court, revoked and quashed the
decision of the Court of Appeals and
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ordered that the case be remanded to the Court of Appeals for a further review.
On April 26, 1994, the Dubai Court of Appeals again affirmed the judgment of
the Dubai Civil Court. The Company appealed the judgment to the Court of
Cassation, which reversed the Court of Appeals on November 27, 1994 and ordered
that a new expert be appointed to review the case.
Glynwill Investment, Ltd. v. Shearson Lehman Brothers Inc.
Glynwill Investment, Ltd. ("Glynwill"), a corporation chartered in Curacao,
N.A., commenced an action against Lehman Brothers "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 Lehman Brothers' 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 Shearson Lehman Brothers' motion. After extensive discovery, Lehman
Brothers' motion for summary judgment was granted on October 26, 1994. Glynwill
has filed an appeal which will be heard during the March, 1995 term of the
Appellate Division, First Department.
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
First Capital Holdings Inc. ("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, Lehman Brothers and American
Express as defendants (individually or collectively, as the case may be, the
"American Express Defendants").
Under the terms of an agreement between American Express and Holdings,
Holdings has agreed to indemnify American Express for liabilities which it may
incur in connection with any action (including any derivative action) relating
to FCH. In connection therewith, Holdings' indemnification obligation extends
to the below described actions.
FCH Shareholder and Agent Actions. Three actions were commenced in the United
States District Courts for the Southern District of New York and the Central
District of California allegedly as class actions on behalf of the purchasers
of FCH securities during certain specified periods, commencing no earlier than
May 4, 1988 and ending no later than May 31, 1991 (the "Shareholder Class").
The complaints are captioned Larkin, et al. v. First Capital Holdings Corp., et
al., amended on May 15, 1991 to add American Express as a defendant, Zachary v.
American Express Company, et al., filed on May 20, 1991, and Morse v.
Weingarten, et al., filed on June 13, 1991 (the "Shareholder Class Actions").
The complaints 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.
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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 present 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").
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
Complaint") was filed on behalf of the Shareholder Class and the Agent Class.
The Third Complaint names as defendants American Express, Holdings, Lehman
Brothers, 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 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
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Holdings and Lehman Brothers; and breach of contract against Lehman Brothers.
Also named as defendants are the Outside Directors, the Former Outside
Directors, Weingarten and Ginsberg. Holdings and Lehman Brothers have answered
this complaint, denying the material allegations. A trial of limited issues
specified by the court commenced September 22, 1994.
American Express Derivative Action. On June 6, 1991, a purported shareholder
derivative action was filed in the United States District Court for the Eastern
District of New York, entitled Rosenberg v. Robinson, et al., against all of
the then-current directors of American Express. In January 1992, this action
was transferred by stipulation to the United States District Court for the
Central District of California for coordinated or consolidated proceedings with
all other federal actions related to FCH. The complaint alleges that the Board
of Directors of American Express should have required Holdings to divest its
investment in FCH and to write down such investment sooner. In addition, the
complaint alleges that the failure to act constituted a waste of corporate
assets and caused damage to American Express' reputation. The complaint seeks a
judgment declaring that the directors named as defendants breached their
fiduciary duties and duties of loyalty and requiring the defendants to pay
money damages to American Express, and remit their compensation for the period
in which the duties were breached, to pay attorneys' fees and costs and other
relief. The defendants have answered the complaint, denying its material
allegations.
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 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 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, Lehman Brothers, 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. On July 20, 1993 the
defendants filed a motion to dismiss the complaint. On November 22, 1994, the
Court partially granted the defendants' motion, dismissing every factual
allegation underlying plaintiffs' claims for relief with one exception. Thus
there remains one allegation against all defendants under Section 11 of the
Securities Act. The Court also dismissed plaintiffs' claim under Section 12 of
the Securities Act and for negligent misrepresentation against Computervision
and its officers and directors, but did not dismiss these claims against the
underwriters.
Easton & Co. v. Mutual Benefit Life Insurance Co., et al.; Easton & Co. v.
Lehman Brothers Inc.
Lehman Brothers 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.
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Mutual Benefit Life Insurance Co., et al. ("Easton I"), and Easton & Co. v.
Lehman Brothers Inc. ("Easton II"). The plaintiff in both of these actions is
Easton & Co., which is a broker-dealer located in Fort Lee, New Jersey. Both of
these actions allege federal securities law claims and pendent common law
claims in connection with the sale of certain municipal bonds as to which
Mutual Benefit Life Insurance Company ("MBLI") has guaranteed the payment of
principal and interest. MBLI is an insurance company which was placed in
rehabilitation proceedings under the supervision of the New Jersey Insurance
Department on or about July 16, 1991. 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 Lehman
Brothers, 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 Lehman Brothers 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 Lehman Brothers
and the other defendants.
Easton II was commenced on or about May 18, 1992, and names Lehman Brothers
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 Lehman Brothers during the period April 19, 1991 through July 16, 1991.
The complaint alleges that Lehman Brothers violated Section 10(b) and Rule 10b-
5, and seeks monetary damages in an unspecified amount, or rescission pursuant
to Section 29(b) of the Exchange Act. The complaint also contains a common law
claim of alleged breach of duty and negligence.
On or about February 9, 1993, the N.J. District Court granted plaintiffs'
motion for class certification in Easton I. The parties 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 the Company's subsidiaries are defendants in several lawsuits
arising out of transactions entered into with the late Robert Maxwell or
entities controlled by Maxwell interests. These actions are described below.
Berlitz International Inc. v. Macmillan Inc. et al. This interpleader action
was commenced in Supreme Court, New York County (the "Court") on or about
January 2, 1992, by Berlitz International Inc. ("Berlitz") against Macmillan
Inc. ("Macmillan"), Lehman Brothers Holdings PLC ("PLC"), Lehman Brothers
International Limited (now known as Lehman Brothers International (Europe),
"LBIE") and seven other named defendants. The interpleader complaint seeks a
declaration of the rightful ownership of approximately 10.6 million shares of
Berlitz common stock, including 1.9 million shares then registered in PLC's
name, alleging that Macmillan claimed to be the beneficial owner of all 10.6
million shares, while the defendants did or might claim ownership to some or
all of the shares. As a result of its bankruptcy filing, MacMillan sought to
remove this case to the Bankruptcy Court for the Southern District of New York.
On LBIE's motion, the case was remanded 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 relief virtually identical to that sought in the
Berlitz action, described above. Specifically, Macmillan sought a declaration
that it is the legal and beneficial owner of the
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disputed 10.6 million shares of Berlitz common stock, including the 1.9 million
shares then held by PLC. After a trial, on December 10, 1993, the High Court of
Justice handed down a judgment finding for the Company on all aspects of its
defense and dismissing MacMillan's claims. On April 12, 1994, MacMillan
appealed such judgment.
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 (Pounds)100 million. BIM also commenced certain
proceedings for summary disposition of its claims relating to certain of the
securities with a value of approximately (Pounds)30 million. On January 11,
1994, the parties agreed to 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. On
February 10, 1995, the parties agreed to settle all remaining claims, subject
to the execution of formal settlement documents.
Warren D. Chisum, et al. v. Lehman Brothers Inc. et al.
On February 28, 1994 a purported class action was filed in the United States
District Court for the Northern District of Texas. An amended complaint was
filed on December 15, 1994. The amended complaint names LBI and two former EFH
employees as defendants. The complaint alleges that defendants violated Section
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 nine EFH net lease real estate limited
partnerships. Plaintiffs seek: (i) to certify a class of all persons who
purchased limited partnership interests in the nine partnerships at issue, (ii)
unspecified damages (plaintiffs claim that class members invested approximately
$224 million including interest on installment payments), plus interest or
rescission, (iii) treble damages, (iv) punitive damages and (v) accounting and
attorneys' fees. The Company believes it has several meritorious defenses and
intends to vigorously defend this case.
Lehman Brothers Commercial Corporation and Lehman Brothers Special Financing
Inc. v. China International United Petroleum and Chemical Co., Ltd.
On November 15, 1994, two Lehman Brothers subsidiaries, Lehman Brothers
Commercial Corporation ("LBCC") and Lehman Brothers Special Financing Inc.
("LBSF"), commenced an action against China International United Petroleum and
Chemicals Company ("Unipec") in the United States District Court for the
Southern District of New York alleging breach of contract. The litigation arose
from the refusal by Unipec to honor its obligations with respect to certain
foreign exchange and swap transactions. LBCC and LBSF seek to recover
approximately $44 million from Unipec. The defendant has not yet responded to
the complaint. LBCC and LBSF intend to vigorously prosecute this action.
Lehman Brothers Commercial Corporation and Lehman Brothers Special Financing
Inc. v. Minmetals International Non-Ferrous Metals Trading Company
On November 15, 1994, LBCC and LBSF commenced an action against Minmetals
International Non-Ferrous Metals Trading Company ("Minmetals") and China
National Metals and Minerals Import and Export Company ("CNM") in the United
States District Court for the Southern District of New York alleging breach of
contract against Minmetals and breach of guarantee against CNM. The litigation
arose from the refusal by Minmetals and CNM to honor their obligations with
respect to certain foreign exchange and swap transactions. LBCC and LBSF seek
to recover approximately $53.5 million from Minmetals and/or CNM. The
defendants have not yet responded to the complaint. LBCC and LBSF intend to
vigorously prosecute this action.
17
<PAGE>
In re Tiphook Securities Litigation
On or about January 25, 1994, LBI was served with an Amended Complaint in an
action captioned In re Tiphook Securities Litigation. The Amended Complaint
purportedly is brought on behalf of all purchasers of American Depository
Receipts of Tiphook, PLC ("Tiphook") and all purchasers of various Tiphook
debt securities issued in offerings on November 2, 1992, March 8, 1993 and
April 23, 1993, during the alleged class period of October 8, 1992 through
November 15, 1993. The action is pending in the United States District Court
for the District of New Jersey. Also named as defendants are Tiphook, Tiphook
Finance and various officers and directors of Tiphook. The Amended Complaint
alleges violations of Sections 11 and 15 of the Securities Act of 1933, as
amended, by Lehman Brothers and the three other underwriters of the Tiphook
note offerings. Such claims are based on alleged misstatements and omissions
in the prospectuses for such note offerings. The plaintiffs seek an
unspecified amount of damages resulting from the alleged misstatements and
omissions. Lehman Brothers answered the Amended Complaint, denying its
material allegations. In December, 1994, all defendants reached an agreement
in principle which must be embodied in a formal settlement agreement and is
subject to the final approval of the Court.
Actions Relating to National Association of Securities Dealers Automated
Quotations System ("NASDAQ") Market Maker Antitrust and Securities Litigation.
Beginning in May, 1994, several class actions were filed in various state
and federal courts against various broker-dealers making markets in NASDAQ
securities. With respect to a number of those actions LBI was either
specifically named as a defendant or was not specifically named as a defendant
but could be deemed to be a member of the defendant class as defined in the
complaints. Plaintiffs in these cases have alleged violations of the antitrust
laws, securities laws and have pled a variety of other statutory and common
law claims. All of these actions are based on the theory that because odd-
eighth quotes occur less often than quarter quotes, NASDAQ market makers must
be colluding wrongfully to maintain a wider spread.
By Order filed October 14, 1994, the Judicial Panel on Multidistrict
Litigation consolidated these actions in the Southern District of New York and
ordered that all related actions be transferred and coordinated for all
pretrial purposes. The case is captioned In Re NASDAQ Market-Makers Antitrust
Litigation, MDL No. 1023.
On December 16, 1994, plaintiffs served a consolidated Amended Complaint
naming 33 defendants including LBI. Plaintiffs claim violations of the federal
antitrust laws including Section 1 of the Sherman Antitrust Act. Plaintiffs
seek unspecified compensatory damages trebled in accordance with the antitrust
laws, costs including attorneys' fees as well as injunctive relief.
State Court Action. On or about May 27, 1994, a class action entitled Abel
et al. v. Merrill Lynch et al. was instituted in the Superior Court of the
State of California, County of San Diego. This complaint was filed on behalf
of all residents of California who, within the last four years, purchased or
sold any security listed on the NASDAQ. The complaint specifically named 13
broker-dealers as defendants, including LBI. The complaint generally alleges
violations of the California Business and Professions Code--specifically the
Cartwright Act and the Unfair Competition Act--and seeks treble damages, costs
and attorneys' fees, restitution, and injunctive relief. On consent of all
parties and the Court, the response date has been extended to April 3, 1995.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The approximate number of holders of record of the Registrant's Common Stock
was 36,913 at January 31, 1995. Information concerning the market for the
Registrant's common equity and related stockholder
18
<PAGE>
matters is set forth on page 80 of the 1994 Annual Report to Stockholders and
is hereby incorporated herein by reference. Information concerning dividends
paid on the Registrant's Common Stock is set forth on pages 58 and 75 of the
1994 Annual Report to Stockholders and is hereby incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data required by this Item is contained on pages 76
and 77 of the 1994 Annual Report to Stockholders and is hereby incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations is set forth under the same caption on pages 14-38 of the 1994
Annual Report to Stockholders. Such information is hereby incorporated herein
by reference and should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto contained on pages 39-77 of such Annual
Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Registrant and its Subsidiaries
together with the Notes thereto and the Report of Independent Auditors thereon
required by this Item are contained in the 1994 Annual Report to Stockholders
on pages 39-77 and such information is hereby incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to Directors of the Registrant is set forth under the
caption "Election of Directors" on pages 4-7 of the Proxy Statement of the
Registrant for its 1995 Annual Meeting of Stockholders and information relating
to Executive Officers of the Registrant is set forth under the caption
"Executive Officers of the Company" on pages 8 and 9 of the Proxy Statement of
the Registrant for its 1995 Annual Meeting of Stockholders and such information
is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is set forth under the
captions "Compensation of Directors Prior to the Distribution", "Compensation
of Current Directors", "Executive Compensation", "Pension Benefits" and
"Employment Contracts and other Arrangements with Executive Officers" on pages
7, 8 and 12-16 of the Proxy Statement of the Registrant for its 1995 Annual
Meeting of Stockholders and such information is hereby incorporated by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to security ownership of management and certain
beneficial owners is set forth under the caption "Security Ownership of
Directors and Executive Officers" on page 9 of the Proxy Statement of the
Registrant for its 1995 Annual Meeting of Stockholders and such information is
hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related transactions is set
forth under the captions "Certain Transactions and Agreements with Directors
and Executive Officers", "Certain Transactions and Agreements between the
Company and American Express" and "Certain Transactions and Agreements among
the Company, American Express and Nippon Life" on pages 17-24 of the Proxy
Statement of the Registrant for its 1995 Annual Meeting of Stockholders and
such information is hereby incorporated by reference.
19
<PAGE>
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
The financial statements are listed on page F-1 hereof by reference to
the corresponding page number in the Annual Report.
2. Financial Statement Schedules:
The financial statement schedules required to be filed hereunder are
listed on page F-1 hereof and the schedules included herewith appear on
pages F-2 through F-6 hereof.
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S>
3.1 Restated Certificate of Incorporation of the Registrant dated May 27,
1994.*
3.2 By-Laws of the Registrant, amended as of May 27, 1994.*
4.1 The instruments defining the rights of holders of the long-term debt
securities of the Registrant and its subsidiaries are omitted pursuant
to section (b)(4)(iii)(A) of Item 601 of Regulation S-K. The
Registrant hereby agrees to furnish copies of these instruments to the
Securities and Exchange Commission upon request.
10.1 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 Tax Allocation Agreement between Lehman Brothers Holdings Inc. and
American Express Company.*
10.3 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 10.69 of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1990).
10.10 Warrant, dated May 27, 1994, issued by the Registrant to Nippon Life
Insurance Company.*
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S>
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 Transaction Support Services Agreement dated as of September 30,
1994 by and between Bear, Stearns Securities Corp. and Lehman
Brothers Inc.*,**
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 Form10-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 Holdings 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 (incorporated by
reference to Exhibit 10.23 of the Registrant's Registration
Statement on Form S-1 (Reg. No. 33-52977)).
10.23(a)+ Amendment to the Lehman Brothers Inc. Employee Ownership Plan
(incorporated by reference to Exhibit 10.23(a) of the Registrant's
Registration Statement on Form S-1 (Reg. No. 33-52977)).
10.24+ Lehman Brothers Holdings Inc. 1994 Management Ownership Plan
(incorporated by reference to Exhibit 10.24 of the Registrant's
Registration Statement on Form S-1 (Reg. No. 33-52977)).
10.25+ Lehman Brothers Holdings Inc. 1994 Management Replacement Plan
(incorporated by reference to Exhibit 10.25 of the Registrant's
Registration Statement on Form S-1 (Reg. No. 33-52977)).
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S>
10.26+ Lehman Brothers Holdings Inc. Short-Term Executive Compensation
Plan (incorporated by reference to Exhibit 10.26 of the
Registrant's Registration Statement on Form S-1 (Reg. No. 33-
52977)).
10.27+ Lehman Brothers Holdings Inc. 1994 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.27 of the Registrant's
Registration Statement on Form S-1 (Reg. No. 33-52977)).
10.28+ Lehman Brothers Inc. Participating Preferred Plan (incorporated by
reference to Exhibit 10.28 of the Registrant's Registration
Statement on Form S-1 (Reg. No. 33-52977)).
10.28(a)+ Amendment to the Lehman Brothers Inc. Participating Preferred Plan
(incorporated by reference to Exhibit 10.28(a) of the Registrant's
Registration Statement on Form S-1 (Reg. No. 33-52977)).
10.29 Purchase and Exchange Agreement dated April 28, 1994, between the
Registrant and American Express Company.*
10.30 Registration Rights Agreement, dated as of May 27, 1994, between
American Express Company and the Registrant.*
10.31 Option Agreement, dated May 27, 1994, 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.*
10.32 1994 Agreement, dated April 27, 1994, between the Registrant and
Nippon Life Insurance Company.*
10.33+ Lehman Brothers Inc. Voluntary Deferred Compensation Plan (For
Select Executives) (incorporated by reference to Exhibit 10.33 of
the Registrant's Registration Statement on Form S-1 (Reg. No. 33-
52977)).
10.34+ Lehman Brothers Inc. Voluntary Deferred Compensation Plan (For
Transferred Participants' Vested Amounts as of July 31, 1993)
(incorporated by reference to Exhibit 10.34 of the Registrant's
Registration Statement on Form S-1 (Reg. No. 33-52977)).
10.35+ Lehman Brothers Inc. Executive and Select Employees Plan (For
Transferred Participants) (incorporated by reference to Exhibit
10.35 of the Registrant's Registration Statement on Form S-1 (Reg.
No. 33-52977)).
10.36+ Lehman Brothers Holdings Inc. Cash Award Plan.*
11. Computation of per share earnings.*
12. Computation in support of ratio of earnings to fixed charges.*
13. The following portions of the Company's 1994 Annual Report to
Stockholders, which are incorporated by reference in this
Transition Report on Form 10-K:
13.1 "Management's Discussion and Analysis of Financial Condition and
Results of Operations", pages 14-38.
13.2 "Consolidated Financial Statements", pages 39-77.
13.3 "Market for Registrant's Common Equity and Related Stockholder
Matters", page 80.
21. List of the Registrant's Subsidiaries.*
23. Consent of Ernst & Young LLP.*
24. Powers of Attorney.*
27. Financial Data Schedule.
99. Pro Forma Consolidated Statement of Operations.*
(b) Reports on Form 8-K.
1. Form 8-K dated September 2, 1994, Items 5 and 7.
2. Form 8-K dated September 22, 1994, Items 5 and 7.
3. Form 8-K dated November 15, 1994, Item 5.
4. Form 8-K dated January 6, 1995, Items 5 and 7.
- --------
* Filed herewith.
** Confidential Treatment has been requested for portions of this
exhibit.
+ Management contract or compensatory plan or arrangement required
to be filed as an exhibit to this Form 10-K pursuant to Item
14(c).
</TABLE>
22
<PAGE>
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Transition Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Lehman Brothers Holdings Inc.
(Registrant)
February 28, 1995
By: /s/ Karen M. Muller
____________________________________
Title: Attorney-in-Fact
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
NAME TITLE DATE
* Chief Executive Officer and February 28,
________________________________ Chairman of the Board of 1995
RICHARD S. FULD, JR. Directors (principal executive
officer)
*
________________________________ Chief Operating Officer, February 28,
T. CHRISTOPHER PETTIT President and Director 1995
* Chief Financial Officer February 28,
________________________________ 1995
(principal financial officer)
ROBERT MATZA
*
________________________________ Controller (principal accounting
STEPHEN J. BIER officer) February 28,
1995
* Director February 28,
________________________________ 1995
ROGER S. BERLIND
* Director February 28,
________________________________ 1995
JOHN J. BYRNE
* Director February 28,
________________________________ 1995
KATSUMI FUNAKI
* Director February 28,
________________________________ 1995
JOHN D. MACOMBER
* Director February 28,
________________________________ 1995
MASATAKA SHIMASAKI
* Director February 28,
________________________________ 1995
DINA MERRILL
* Director February 28,
________________________________ 1995
MALCOLM WILSON
By: /s/ Karen M. Muller
_____________________________
KAREN M. MULLER
(ATTORNEY-IN-FACT)
FEBRUARY 28, 1995
23
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
----------------
ANNUAL
FINANCIAL STATEMENTS FORM 10-K REPORT
-------------------- --------- ------
<S> <C> <C>
Report of Independent Auditors............................. 39
Consolidated Statement of Operations for Eleven Months
Ended
November 30, 1994 and for the Years Ended December 31,
1993 and December 31, 1992................................ 40
Consolidated Statement of Financial Condition at November
30, 1994 and December 31, 1993............................ 41
Consolidated Statement of Changes in Stockholders' Equity
for the Eleven Months Ended November 30, 1994 and for the
Years Ended December 31, 1993, and December 31, 1992...... 43
Consolidated Statement of Cash Flows for the Eleven Months
Ended November 30, 1994 and for the Years Ended December
31, 1993 and December 31, 1992............................ 44
Notes to Consolidated Financial Statements................. 46
Financial Statement Schedules
Schedule III--Condensed Financial Information............. F-2
Pro Forma Consolidated Financial Statements................ Ex-99
</TABLE>
F-1
<PAGE>
SCHEDULE III
LEHMAN BROTHERS HOLDINGS INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF OPERATIONS
(PARENT COMPANY ONLY)
(IN MILLIONS)
<TABLE>
<CAPTION>
ELEVEN MONTHS TWELVE MONTHS
ENDED ENDED
NOVEMBER 30, DECEMBER 31,
------------- --------------
1994 1993 1992
------------- ------ ------
<S> <C> <C> <C>
Revenues
Principal transactions......................... $145 $ 34 $ (4)
Investment banking............................. 75 (31) (6)
Interest and dividends......................... 482 381 375
Other.......................................... 10 13 15
---- ------ ------
Total revenues............................... 712 397 380
Interest expense............................... 663 592 549
---- ------ ------
Net revenues................................. 49 (195) (169)
---- ------ ------
Non-interest expenses
Compensation and benefits...................... 69 22 46
Other.......................................... 57 39 180
Management fees................................ (102)
Severance charge............................... 6
Spin-off expenses.............................. 15
Computervision write-down...................... 230
---- ------ ------
Total non-interest expenses.................. 45 61 456
---- ------ ------
Income (loss) before taxes and cumulative effect
of changes in accounting principles............. 4 (256) (625)
Benefit from income taxes...................... (12) (85) (253)
---- ------ ------
Income (loss) before cumulative effect of changes
in accounting principles........................ 16 (171) (372)
Cumulative effect of changes in accounting
principles, net of taxes....................... 28
---- ------ ------
Income (loss) before equity in net income of
subsidiaries.................................... 16 (171) (344)
Equity in net income of subsidiaries........... 97 69 221
---- ------ ------
Net income (loss)................................ $113 $ (102) $ (123)
==== ====== ======
Net income (loss) applicable to common stock..... $ 75 $ (150) $ (171)
==== ====== ======
</TABLE>
See notes to condensed financial information of Registrant.
F-2
<PAGE>
SCHEDULE III
LEHMAN BROTHERS HOLDINGS INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
(PARENT COMPANY ONLY)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 31,
1994 1993
ASSETS ------------ ------------
<S> <C> <C>
Cash and cash equivalents.... $ 18 $ 29
Securities and other
financial instruments owned.. 1,817 287
Equity in net assets of
subsidiaries................. 3,750 4,237
Accounts receivable and
accrued interest............. 2,123 1,843
Due from subsidiaries......... 9,403 6,143
Other assets.................. 344 339
------- -------
Total assets.............. $17,455 $12,878
======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS'
EQUITY
<S> <C> <C>
Commercial paper and short-
term debt.................... $3,746 $3,835
Securities and other
financial instruments sold
but not yet purchased........ 159 142
Securities sold under
agreements to repurchase..... 1,232
Accrued liabilities, due to
subsidiaries and other
payables..................... 1,437 418
Senior notes.................. 7,336 6,281
Subordinated indebtedness..... 150 150
------- -------
Total liabilities......... 14,060 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 in 1994 and
1993; $39.10 liquidation
preference per share....... 508 508
Money Market Cumulative,
3,300 shares authorized;
250 shares issued and
outstanding in 1993;
$1,000,000 liquidation
preference per share....... 250
8.44% Cumulative Voting,
8,000,000 shares issued
and outstanding in 1994;
$25.00 liquidation
preference per share....... 200
Redeemable Voting, 1,000
shares issued and
outstanding in 1994; $1.00
liquidation preference per
share......................
Common Stock: $.10 par
value; 300,000,000 shares
authorized; 1994:
105,608,423 shares issued
and 104,537,690 shares
outstanding; 1993:
53,470,443 shares issued
and outstanding
(168,235,284 prior to the
Reverse Stock Split)....... 11 17
Common Stock issuable....... 87
Additional paid-in capital.. 3,172 1,871
Foreign currency
translation adjustment..... 6 (12)
Accumulated deficit......... (574) (582)
Common Stock in treasury at
cost, 1994: 1,070,733
shares..................... (15)
------- -------
Total stockholders'
equity................... 3,395 2,052
------- -------
Total liabilities and
stockholders' equity.... $17,455 $12,878
======= =======
</TABLE>
See notes to condensed financial information of Registrant.
F-3
<PAGE>
SCHEDULE III
LEHMAN BROTHERS HOLDINGS INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS
(PARENT COMPANY ONLY)
(IN MILLIONS)
<TABLE>
<CAPTION>
ELEVEN MONTHS ENDED TWELVE MONTHS ENDED
NOVEMBER 30, DECEMBER 31,
------------------- --------------------
1994 1993 1992
------------------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................... $ 113 $ (102) $ (123)
Adjustments to reconcile net income
(loss) to net cash (used in) pro-
vided by operating activities:
Cumulative effect of changes in ac-
counting principles............... (28)
Equity in net income of subsidiar-
ies............................... (97) (69) (221)
Computervision write-down.......... 230
Provision for losses and other re-
serves............................ 13 131
Other adjustments.................. 107 5 26
Net change in:
Securities and other financial in-
struments owned................... (1,530) (212) (40)
Accounts receivable and accrued in-
terest, Due from subsidiaries and
Other assets...................... (3,510) 182 (3,674)
Securities and other financial in-
struments sold but not yet pur-
chased and Securities sold under
agreements to repurchase.......... 1,249 142
Accrued liabilities, due to subsid-
iaries and other payables......... 1,076 201 (287)
Dividends and capital distributions
received........................... 820 587 228
------ --------- ---------
Net cash (used in) provided by
operating activities........... (1,772) 747 (3,758)
------ --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior
notes.............................. 2,799 2,827 3,187
Principal payments of senior notes.. (1,875) (1,090) (1,062)
Increase (decrease) in commercial
paper and short-term debt, net..... (89) (1,714) 1,669
Proceeds from spin-off.............. 1,193
Payment for treasury stock pur-
chases............................. (15)
Issuance of stock................... 175
Dividends paid...................... (99) (213) (81)
------ --------- ---------
Net cash provided by (used in)
financing activities........... 1,914 (190) 3,888
------ --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in investments in affili-
ates............................... (173) (545) (337)
Other............................... 20 (12) 21
------ --------- ---------
Net cash (used in) provided by
investing activities........... (153) (557) (316)
------ --------- ---------
Net change in cash and cash
equivalents.................... (11) (186)
Cash and cash equivalents, beginning
of period.......................... 29 29 215
------ --------- ---------
Cash and cash equivalents, end
of period...................... $ 18 $ 29 $ 29
====== ========= =========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN MILLIONS)
Interest paid totaled $612 in 1994, $682 in 1993 and $543 in 1992. Income
taxes (received) paid totaled $(39) in 1994, $28 in 1993 and $86 in 1992.
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 Registrant.
F-4
<PAGE>
SCHEDULE III
LEHMAN BROTHERS HOLDINGS INC.
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
1. BASIS OF PRESENTATION:
The condensed financial statements of Lehman Brothers Holdings Inc.
("Holdings") should be read in conjunction with the consolidated financial
statements of Lehman Brothers Holdings Inc. and subsidiaries and the notes
thereto.
Certain amounts reflect reclassifications to conform to the current period's
presentation.
2. SENIOR NOTES:
Holdings' Senior notes are comprised of the following (in millions):
<TABLE>
<CAPTION>
NOVEMBER 30, 1994
---------------------------------------
USD USD
CONTRACTUAL CONTRACTUAL FOREIGN DECEMBER 31,
FIXED FLOAT CURRENCY TOTAL 1993
----------- ----------- -------- ------ ------------
<S> <C> <C> <C> <C> <C>
Maturing in:
Eleven months ended
November 30, 1994......... $1,792
Year ended November 30,
1995...................... $ 516 $1,693 $ 28 $2,237 808
Year ended November 30,
1996...................... 454 709 3 1,166 911
Year ended November 30,
1997...................... 534 308 162 1,004 817
Year ended November 30,
1998...................... 755 10 173 938 858
Year ended November 30,
1999...................... 458 713 98 1,269 408
December 1, 1999 and
thereafter................ 691 31 722 687
------ ------ ---- ------ ------
$3,408 $3,464 $464 $7,336 $6,281
====== ====== ==== ====== ======
</TABLE>
As of November 30, 1994, Holdings had $3,408 million of U.S. dollar fixed
rate senior notes outstanding, including $65 million of U.S. dollar fixed rate
senior notes on which the interest rates and/or redemption values have been
linked to movements in various indices. Excluding this $65 million, contractual
interest rates on the Company's U.S. dollar fixed rate senior notes ranged from
3.86% to 10.80% as of November 30, 1994, with a contractual weighted average
interest rate of 7.67%.
Holdings entered into interest rate swap contracts which effectively
converted $1,478 million of its U.S. dollar fixed rate senior notes to floating
rates based on the London Interbank Offered Rate ("LIBOR"). Excluding this
$1,478 million, but including the effect of $404 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 8.13%.
As of November 30, 1994, Holdings had $3,464 million of U.S. dollar floating
rate senior notes outstanding, including $479 million of U.S. dollar floating
rate senior notes on which the interest rates and/or redemption values have
been linked to movements in various indices. Excluding this $479 million,
contractual rates on Holdings' U.S. dollar floating rate senior notes ranged
from 5.20% to 6.80%, with a contractual weighted average interest rate of
6.00%.
Holdings entered into interest rate swap contracts which effectively
converted $404 million of its U.S. dollar floating rate senior notes to fixed
rates. Excluding this $404 million, but including the effect of $1,478 million
of U.S. dollar fixed rate senior notes converted to floating rates through the
use of interest rate swap contracts and $1,356 million of floating rate basis
swaps, Holdings' U.S. dollar floating rate senior notes outstanding had an
effective weighted average interest rate of 6.04%.
F-5
<PAGE>
SCHEDULE III
LEHMAN BROTHERS HOLDINGS INC.
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
As of November 30, 1994, Holdings had the equivalent of $464 million of
foreign currency denominated senior notes outstanding, of which $195 million
were fixed rate and $269 million were floating rate.
Contractual interest rates on Holdings' fixed rate foreign currency
denominated senior notes, excluding the effect of $22 million of notes on which
the interest rates and/or redemption values have been linked to movements in
various indices, ranged from 3.00% to 6.00% as of November 30, 1994, with a
contractual weighted average interest rate of 4.38%. Approximately $134 million
of Holdings' fixed rate foreign currency notes were converted through the use
of interest rate swaps to U.S. dollar obligations with an effective U.S. dollar
weighted average interest rate of 5.93%. In addition, $10 million of Holdings'
fixed rate yen denominated obligations were converted to a yen floating
interest rate at an effective rate of 2.74%. Including the effect of these
swaps, Holdings' fixed rate foreign currency notes had an effective weighted
average rate of 5.36%.
Contractual interest rates on the Company's floating rate foreign currency
denominated senior notes, excluding the effect of $54 million of notes on which
the interest rates and/or redemption values have been linked to movements in
various indices, ranged from 2.75% to 3.05% as of November 30, 1994, with a
contractual weighted average interest rate of 2.88%. Approximately $116 million
of Holdings' floating rate foreign currency notes were converted through the
use of basis swaps to U.S. dollar obligations with an effective U.S. dollar
weighted average interest rate of 6.27%. In addition, $101 million of Holdings'
floating rate yen denominated obligations were converted to a yen fixed
interest rate at an effective rate of 4.09%. Including the effect of these
swaps, Holdings' floating rate foreign currency notes had an effective weighted
average rate of 4.79%. Holdings' fixed and floating rate foreign currency
senior notes not converted to U.S. dollar obligations, totaling $214 million,
were used to finance foreign currency denominated assets.
In addition to interest rate swaps utilized by Holdings to convert the
interest rate nature of its senior notes, Holdings had $867 million notional
value of swaptions outstanding at November 30, 1994. These swaptions, if
exercised, would convert a portion of Holdings' U.S. dollar fixed rate senior
notes to a floating rate. Swaptions of $617 million could be exercised In
December 1994, and the remainder have exercise dates ranging from fiscal 1996
to fiscal 1998.
Of Holdings' senior notes outstanding as of November 30, 1994, $312 million
are repayable prior to maturity at the option of the holder. These obligations
are reflected in the table presented at their put dates, which range from
fiscal 1995 to fiscal 1999, rather than at their contractual maturities, which
range from fiscal 1995 to fiscal 2023. The holders of these notes have the
option to redeem them at par value. In addition, $670 million of Holdings'
senior notes are redeemable at par at the option of Holdings. Of this amount,
Holdings has the option to redeem $83 million commencing in fiscal 1995, $555
million commencing in fiscal 1996 and $32 million at any time, subject to the
occurrence of certain events.
3. SUBORDINATED INDEBTEDNESS:
As of November 30, 1994, subordinated indebtedness was comprised of $150
million of floating rate Capital Notes due in February 1995 (the "Notes"). The
contractual interest rate on these Notes is based on an index of LIBOR, and was
6.56% as of November 30, 1994. The Notes are redeemable, in whole or in part,
at the option of Holdings on each quarterly interest payment date from the
proceeds of previously designated equity securities issuances.
4. DIVIDENDS:
Dividends and capital distributions declared to Holdings by its subsidiaries
and affiliates were $820 million in 1994, $587 million in 1993 and $228 million
in 1992.
F-6
<PAGE>
EXHIBIT 3.1
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 02:00 PM 05/27/1994
944096137 - 2024634
RESTATED CERTIFICATE OF INCORPORATION
OF
LEHMAN BROTHERS HOLDINGS INC.
Pursuant to Sections 242 and 245 of the
General Corporation Law of the State of Delaware
------------------------------------------------
I, Karen C. Manson, a Vice President of Lehman Brothers Holdings Inc.
(the "Corporation"), a corporation organized and existing under and by virtue of
the General Corporation Law of the State of Delaware, do hereby certify that the
Certificate of Incorporation of Lehman Brothers Holdings Inc. originally filed
on December 29, 1983 under the name Shearson/American Express Holdings Inc., as
heretofore amended and restated, has been amended and restated in accordance
with Sections 242 and 245 of the General Corporation Law of the State of
Delaware, as amended, and as so amended and restated, has been duly adopted in
accordance with Section 245 and is set forth in its entirety as follows:
1. NAME. The name of the corporation is Lehman Brothers Holdings Inc. (the
----
"Corporation").
2. ADDRESS. The address of its registered office in the State of Delaware is
-------
Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County
of New Castle. The registered Agent at such address is The Corporation Trust
Company.
3. PURPOSE. The purpose of the Corporation is to engage in any lawful act or
-------
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware (the "GCL").
4. CAPITAL STOCK.
-------------
4.1 Authorized Shares. The total number of shares of capital stock which the
-----------------
Corporation shall have authority to issue is three hundred million (300,000,000)
shares of common stock with one vote per share, $0.10 par value per share (the
"Common Stock"), and thirty eight million (38,000,000) shares of preferred
stock, $1.00 par value per share (the "Preferred Stock"). Shares of Preferred
Stock may be issued from time to time in one or more classes or series, each of
which class or series shall have such distinctive designation or title as shall
be fixed by the Board of Directors of the Corporation (the "Board of Directors")
or any committee thereof established by resolution of the Board of Directors
pursuant to the By-Laws prior to the issuance of any shares thereof. Each such
class or series of Preferred Stock shall have such voting powers, full or
limited, or no voting powers, and such preferences and relative, participating,
optional or other special rights and such qualifications, limitations or
restrictions thereof, as shall be stated in such resolution or resolutions
providing for the issue of such class or series of Preferred Stock as may be
adopted from time to time by the Board of Directors prior to the issuance of any
shares thereof pursuant to the authority hereby expressly vested in it, all in
accordance with the laws of the State of Delaware.
<PAGE>
Pursuant to the authority granted by the preceding paragraph, the
Board of Directors has heretofore authorized three series of Preferred Stock
having the powers, designations, preferences, rights, qualifications,
limitations and restrictions set forth in Sections A, B and C below.
A. Cumulative Convertible Voting Preferred Stock, Series A
-------------------------------------------------------
1. Designation. The Board of Directors has authorized the issuance
-----------
of a series of the Preferred Stock designated as the "Cumulative Convertible
Voting Preferred Stock, Series A" (the "Series A Preferred Stock"). The Series
A Preferred Stock shall be perpetual and the authorized number of shares of
Series A Preferred Stock shall be thirteen million (13,000,000) shares (the
"Series A Shares"). The par value of the Series A Preferred Stock shall be
$1.00 per share.
2. Definitions. Except as otherwise specified in this Section A,
-----------
defined terms in this Section A, which may be identified by the capitalization
of the first letter of each principal word thereof, have the meanings assigned
to them in the Investment Agreement, dated as of April 15, 1987, by and among
American Express Company ("AMEX") and the Corporation, on the one hand, and
Nippon Life Insurance Company ("Nippon Life"), on the other hand, as such
agreement has been amended by (a) the 1990 Agreement, dated June 12, 1990, by
and between AMEX and Nippon Life, as adopted by the Corporation in the Company
Agreement, dated as of August 10, 1990 (the 1990 Agreement, as adopted, the
"1990 Agreement") and (b) the 1994 Agreement, dated April 28, 1994, by and among
AMEX, Nippon Life and the Corporation (the "1994 Agreement"), in each case as in
effect on the date hereof (as amended, the "Investment Agreement").
3. Dividends. (a) The shares of Series A Preferred Stock shall be
---------
entitled to receive, when and as declared by the Board of Directors or a duly
authorized committee thereof, out of funds legally available for the payment of
dividends, cumulative dividends payable quarterly in cash on March 15, June 15,
September 15 and December 15 (or, if any such day is not a Business Day, then on
the next succeeding Business Day) in each year (the "Dividend Payment Dates")
commencing on June 15, 1987, in preference to dividends on shares of the Common
Stock of the Corporation (defined in the Investment Agreement as "Company Common
Stock"), or any other capital stock of the Corporation ranking junior to the
Series A Preferred Stock in payment of dividends. The amount of cash dividends
paid or payable on the Dividend Payment Dates prior to June 15, 1990, shall be
determined as set forth in the Certificate of Designation, Powers, Preferences
and Rights, filed on April 15, 1987 with the Secretary of State of the State of
Delaware, providing for the original issuance of the Series A Preferred Stock,
and on or after June 15, 1990, shall be determined as follows: The annual
dividend rate per Series A Share shall be in an amount equal to $1.955 per
share. The amount of dividends payable on each Series A Share for each full
quarterly dividend period shall be computed by dividing by four such annual
rate. Dividends payable on the Series A Preferred Stock for any period less
than a full quarterly period shall be computed on the basis of a 360-day year
consisting of twelve 30-day months for the
2
<PAGE>
actual number of days involved. Dividends with respect to any Series A Share
shall accumulate from the date of issue thereof. No cash dividends shall be
declared and set apart for payment on any capital stock ranking on a par with
the Series A Preferred Stock in the payment of dividends unless there shall
likewise be or have been declared and set apart for payment on all Series A
Shares at the time outstanding full cumulative dividends for all quarterly
dividend periods ending on or before the dividend payment date for such other
stock. If and so long as any full cumulative dividends payable on the Series A
Shares in respect of all prior dividend periods shall not have been paid or set
apart for payment, the Corporation shall not pay any dividends or make any
distributions of assets (other than dividends payable in shares of capital stock
of the Corporation ranking junior to the Series A Preferred Stock in payment of
dividends) on or redeem, purchase or otherwise acquire for consideration shares
of capital stock of the Corporation ranking junior to or on a par with the
Series A Preferred Stock in payment of dividends.
(b) Dividends on the Series A Preferred Stock shall be paid to the
holders of record of Series A Shares as they appear on the stock register of the
Corporation on such record date, not exceeding 40 days preceding the payment
date thereof, as shall be fixed by the Board of Directors or by a duly
authorized committee thereof. Dividends on account of arrears for any past
dividend periods may be declared and paid at any time, without reference to any
Dividend Payment Date, to holders of record on such date, not exceeding 40 days
preceding the payment date thereof, as may be fixed by the Board of Directors or
by a duly authorized committee thereof. Dividends shall be paid to each holder
of record in United States dollars by wire transfer of immediately available
funds to an account designated in writing by such holder not less than 10 days
preceding the payment date thereof. Notwithstanding the foregoing, from and
after the time, if any, that any shares of the Series A Preferred Stock are sold
by Nippon Life pursuant to an effective registration statement under the
Securities Act of 1933, dividends may be paid to each holder of record by check
mailed to such holders at their respective addresses appearing on the books of
the Corporation.
4. Liquidation Preference. In the event of any liquidation,
----------------------
dissolution or winding up of the Corporation, whether voluntary or involuntary,
before any distribution of the assets of the Corporation to holders of Common
Stock or any other capital stock of the Corporation ranking junior upon
liquidation, dissolution or winding up of the Corporation, the holders of the
Series A Preferred Stock shall be entitled to receive out of the assets of the
Corporation available for distribution to its stockholders, whether from
capital, surplus or earnings, an amount per Series A Share equal to $39.10 plus
an amount equal to all dividends (whether or not earned or declared) accumulated
and unpaid on such Series A Share as calculated in accordance with Paragraph 3
of this Section A to the date of final distribution. If, upon any liquidation,
dissolution or winding up of the Corporation, the assets of the Corporation, or
proceeds thereof, distributable among the holders of Series A Shares or any
capital stock ranking on a par with the Series A Preferred Stock upon
liquidation, dissolution or winding up of the Corporation, shall be insufficient
to pay in full the preferential amounts to which such stock would be entitled,
then such assets, or the proceeds thereof, shall be distributable among such
holders ratably in accordance with the respective amounts which would be payable
on such shares if all amounts payable thereon were payable in full. For the
purposes hereof, neither a consolidation nor a merger of the Corporation with
one or
3
<PAGE>
more other corporations, nor a sale or a transfer of all or substantially
all of the assets of the Corporation, shall be deemed to be a liquidation,
dissolution or winding up, voluntary or involuntary, of the Corporation.
5. Redemption. (a) The Series A Preferred Stock may not be redeemed
----------
by the Corporation prior to June 15, 1994, except as otherwise provided in the
Investment Agreement. Thereafter, the Corporation may at its option redeem
outstanding Series A Shares on any Dividend Payment Date upon at least 30 days'
and not more than 45 days' written notice to the holders thereof, at $39.10 per
share plus accumulated and unpaid dividends (whether or not earned or declared)
to the date fixed for redemption:
Number of Shares Subject
to Redemption
------------------------
to and including
June 15, 1995................... up to 2,600,000 minus the
-----
number of Series A Shares converted into
shares of Corporation Common Stock or
exchanged for AMEX Common Shares or
purchased by the Corporation pursuant to
Section 7.4 of the 1990 Agreement prior to
the date fixed for redemption
thereafter to and including
June 15, 1996................... up to 5,200,000 minus the
-----
number of Series A Shares converted into
shares of Corporation Common Stock or
redeemed or exchanged for AMEX Common Shares
or purchased by the Corporation pursuant to
Section 7.4 of the 1990 Agreement prior to
the date fixed for redemption
thereafter to and including
June 15, 1997................... up to 7,800,000 minus the
-----
number of Series A Shares converted into
shares of Corporation Common Stock or
redeemed or exchanged for AMEX Common Shares
or purchased by the Corporation pursuant to
Section 7.4 of the 1990 Agreement prior to
the date fixed for redemption
thereafter to and including
June 15, 1998................... up to 10,400,000 minus the
-----
number of Series A Shares converted into
shares of Corporation Common Stock or
redeemed or exchanged for
4
<PAGE>
AMEX Common Shares or purchased by the
Corporation pursuant to Section 7.4 of the
1990 Agreement prior to the date fixed for
redemption
thereafter...................... up to 13,000,000 minus the
-----
number of Series A Shares converted into
shares of Corporation Common Stock or
redeemed or exchanged for AMEX Common Shares
or purchased by the Corporation pursuant to
Section 7.4 of the 1990 Agreement prior to
the date fixed for redemption
provided, however, such Series A Shares shall not be redeemable by the
- -------- -------
Corporation unless (i) there is Public Company Common Stock outstanding on the
dates upon which notice of redemption is first given and such redemption is
effected, and (ii) the Average Market Price of the Common Stock of the
Corporation on the date upon which notice of redemption is first given is above
the Conversion Price (as defined in Paragraph 7 of this Section A) then in
effect.
(b) Notice of any proposed redemption of shares of Series A Preferred
Stock shall be given by the Corporation by mailing a copy of such notice to
holders of record of the Series A Shares to be redeemed at their respective
addresses appearing on the books of the Corporation. Said notice shall specify
the shares called for redemption, the redemption price and the price at which
and the date on which the shares called for redemption will, upon presentation
and surrender of the certificates of stock evidencing such shares, be redeemed
and the redemption price therefor paid. From and after the date fixed in any
such notice as the date of redemption of shares of Series A Preferred Stock,
unless default shall be made by the Corporation in providing monies at the time
and place specified for the payment of the redemption price pursuant to said
notice, all dividends on the Series A Preferred Stock thereby called for
redemption shall cease to accrue and all rights of the holders thereof as
stockholders of the Corporation, except the right to receive the redemption
price, shall cease and terminate.
6. Shares to be Retired. All Series A Shares redeemed by the
--------------------
Corporation shall be retired and canceled and shall not thereafter be reissued.
7. Conversion Rights. The Series A Shares shall be convertible, in
-----------------
whole or in part, provided that at least 250,000 Series A Shares (or such lesser
number of Series A Shares as shall then be outstanding) shall be converted at
any one time, at the option of the holders thereof, into shares of Common Stock
of the Corporation subject to the following terms and conditions:
(a) The Series A Shares shall be convertible at the office of any
Transfer Agent, and at such other office or offices, if any, as the Board of
Directors may designate, into fully paid and nonassessable shares (calculated as
to each conversion to the nearest 1/100 of a share) of
5
<PAGE>
Common Stock of the Corporation, at the Conversion Price, determined as
hereinafter provided, in effect at the time of conversion, each Series A Share
being taken by the Corporation as having a value equal to $39.10 per share. The
number of shares of Common Stock into which each share of Series A Preferred
Stock may be converted at any time shall be calculated as $39.10 divided by the
Conversion Price in effect at the time of conversion. The price at which shares
of Common Stock shall be delivered upon conversion (herein called the
"Conversion Price") shall, effective as of the Closing Date under the 1994
Agreement, be $123.0212380 per share. The Conversion Price shall be adjusted in
certain instances as provided below in subparagraphs (c), (d), (e), (f), (g) and
(i) of this Paragraph 7.
(b) In order to convert Series A Shares into Common Stock, the holder
thereof shall surrender at any office hereinabove mentioned the certificate or
certificates therefor, duly endorsed or assigned to the Corporation or in blank,
and give written notice to the Corporation at such office that he elects to
convert such shares. Such notice shall be substantially in the following form:
"NOTICE TO EXERCISE CONVERSION RIGHT
The undersigned, being a holder of the Cumulative Convertible Voting
Preferred Stock, Series A ("Series A Shares") of Lehman Brothers Holdings Inc.,
irrevocably exercises the right to convert __________ outstanding Series A
Shares on __________, 19__, into shares of Common Stock of Lehman Brothers
Holdings Inc. in accordance with the terms of the Series A Shares, and directs
that the shares issuable and deliverable upon the conversion, together with any
check in payment for fractional shares, be issued and delivered in the
denominations indicated below to the registered holder hereof unless a different
name has been indicated below. If shares are to be issued in the name of a
person other than the undersigned, the undersigned will pay all transfer taxes
payable with respect thereto.
Dated: [On or before the date fixed for conversion]
Fill in for registration of
shares of Common Stock if
to be issued otherwise
than to the registered
holder:
_____________________
Name
_____________________
Address
_____________________ _______________________
(Please print name and (Signature)
6
<PAGE>
address, including postal
code number)
Denominations: ____________________________."
A payment or adjustment shall not be made by the Corporation upon any
conversion on account of any dividends accrued on the Series A Shares
surrendered for conversion or on account of any dividends on the Common Stock
issued upon conversion.
Series A Shares shall be deemed to have been converted immediately
prior to the close of business on the day of the surrender of such shares for
conversion in accordance with the foregoing provisions, and the person or
persons entitled to receive the Common Stock issuable upon such conversion shall
be treated for all purposes as the record holder or holders of such Common Stock
at such time. As promptly as practicable on or after the conversion date, the
Corporation shall issue and shall deliver at such office a certificate or
certificates for the number of full shares of Common Stock issuable upon such
conversion, together with payment in lieu of any fraction of a share, as
hereinafter provided, to the person or persons entitled to receive the same. In
case shares of Series A Preferred Stock are called for redemption, the right to
convert such shares shall cease and terminate at the close of business on the
date fixed for redemption, unless default shall be made in payment of the
redemption price.
(c) In case the Corporation shall pay or make a dividend or other
distribution on any class of capital stock of the Corporation in Common Stock,
the Conversion Price in effect at the opening of business on the day following
the date fixed for the determination of stockholders entitled to receive such
dividend or other distribution shall be reduced by multiplying such Conversion
Price by a fraction of which the numerator shall be the number of shares of
Common Stock outstanding at the close of business on the date fixed for such
determination and the denominator shall be the sum of such number of shares and
the total number of shares constituting such dividend or other distribution,
such reduction to become effective immediately after the opening of business on
the day following the date fixed for such determination. In the event that such
distribution is not so made, (i) the Conversion Price shall again be adjusted to
be the Conversion Price which would then be in effect if such date fixed for the
determination of stockholders entitled to receive such distribution had not been
fixed, and (ii) the holders shall have the option of reversing any exercise of
their conversion rights hereunder made after such record date in contemplation
of such distribution (and thereby reestablishing such conversion rights to the
extent so exercised) by returning to the Corporation any Common Stock, cash and
other securities or property which had been received upon such conversion;
provided that the option set forth in this clause (ii) shall be exercisable by a
- --------
holder only prospectively by a written instrument delivered to the Corporation
at the time of such conversion, which instrument shall state that such holder
revokes such conversion if such distribution is not so made. For the purposes
of this subparagraph (c), the number of shares of Common Stock at any time
outstanding shall not include shares held in the treasury of the Corporation but
shall include shares issuable in respect of scrip certificates issued in lieu of
fractions of shares of Common Stock. The Corporation will not pay any dividend
or make any distribution in shares of Common Stock held in the treasury of the
7
<PAGE>
Corporation.
(d) In case the Corporation shall issue rights or warrants to all
holders of its Common Stock entitling them to subscribe for or purchase shares
of Common Stock at a price per share less than (i) if the Corporation shall have
outstanding at the time of such issuance, and for a period of at least 30
trading days immediately prior to such issuance, Public Company Stock, the
Average Market Price of the Common Stock or (ii) if otherwise, the Fair Market
Value (as defined in subparagraph (p) below of this Paragraph 7) per share of
the Common Stock, on the date fixed for the determination of stockholders
entitled to receive such rights or warrants, the Conversion Price in effect at
the opening of business on the day following the date fixed for such
determination shall be reduced by multiplying such Conversion Price by a
fraction of which the numerator shall be the number of shares of Common Stock
outstanding at the close of business on the date fixed for such determination
plus the number of shares of Common Stock which the aggregate of the offering
price of the total number of shares of Common Stock so offered for subscription
or purchase would purchase at such Average Market Price or Fair Market Value, as
the case may be, and the denominator shall be the number of shares of Common
Stock outstanding at the close of business on the date fixed for such
determination plus the number of shares of Common Stock so offered for
subscription or purchase, such reduction to become effective immediately after
the opening of business on the day following the date fixed for such
determination. In the event that such issuance is not so made, (i) the
Conversion Price shall again be adjusted to be the Conversion Price which would
then be in effect if such date fixed for the determination of stockholders
entitled to receive such rights or warrants had not been fixed, and the holders
shall have the option of reversing any exercise of their conversion rights
hereunder made after such record date in contemplation of such issuance (and
thereby re-establishing such conversion rights to the extent so exercised) by
returning to the Corporation any Common Stock, cash and other securities or
property which had been received upon such conversion; provided that the option
--------
set forth in this clause (ii) shall be exercisable by a holder only
prospectively by a written instrument delivered to the Corporation at the time
of such conversion, which instrument shall state that such holder revokes such
conversion if such distribution is not so made. For the purposes of this
subparagraph (d), the number of shares of Common Stock at any time outstanding
shall not include shares held in the treasury of the Corporation but shall
include shares issuable in respect of scrip certificates issued in lieu of
fractions of shares of Common Stock. The Corporation will not issue any rights
or warrants in respect of shares of Common Stock held in the treasury of the
Corporation.
(e) In case outstanding shares of Common Stock shall be subdivided
into a greater number of shares of Common Stock, the Conversion Price in effect
at the opening of business on the day following the date upon which such
subdivision becomes effective shall be proportionately reduced, and, conversely,
in case outstanding shares of Common Stock shall each be combined into a smaller
number of shares of Common Stock, the Conversion Price in effect at the opening
of business on the day following the day upon which such combination becomes
effective shall be proportionately increased, such reduction or increase, as the
case may be, to become effective immediately after the opening of business on
the day following the day upon which such subdivision or combination becomes
effective.
8
<PAGE>
(f) In case the Corporation shall, by dividend or otherwise,
distribute to all holders of its Common Stock evidences of its indebtedness or
assets (including securities, but excluding (i) any rights or warrants referred
to in subparagraph (d) above, (ii) any dividend or distribution paid in cash or
other property out of the Adjusted Retained Earnings of the Corporation and
(iii) any dividend or distribution referred to in subparagraph (c) above), then
either (at the option of the Corporation) (I) the Corporation shall elect to
include in such distribution the holders of shares of Series A Preferred Stock
in respect of the number of Series A Shares held by such holders as of the
record date for such distribution as if such holders had converted such Series A
Shares into Common Stock immediately prior to such record date (such conversion
assumed to be made at the Conversion Price in effect without regard to the
adjustment provided in the following clause (II)), or (II) the Conversion Price
shall be adjusted so that the same shall equal the price determined by
multiplying the Conversion Price in effect immediately prior to the close of
business on the date fixed for the determination of stockholders entitled to
receive such distribution by a fraction of which the numerator shall be the Fair
Market Price per share of the Common Stock on the date fixed for such
determination less the fair market value (as determined (A) if Nippon Life and
its Affiliates then own a majority of the Series A Shares then outstanding (i)
jointly by the Corporation and Nippon Life or (ii) if Nippon Life and the
Corporation cannot so agree, by an internationally recognized investment banking
firm selected by Nippon Life and the Corporation or (B) if Nippon Life and its
Affiliates do not then own a majority of the Series A Shares then outstanding,
by an independent, internationally recognized investment banking firm selected
by the Corporation) on such date of the portion of the assets or evidences of
indebtedness so distributed applicable to one share of Common Stock and the
denominator shall be the Fair Market Price per share of the Common Stock, such
adjustment to become effective immediately prior to the opening of business on
the day following the date fixed for the determination of stockholders entitled
to receive such distribution. In the event that such distribution is not so
made, (i) the Conversion Price shall again be adjusted to be the Conversion
Price which would then be in effect if such date fixed for the determination of
stockholders entitled to receive such distribution had not been fixed, and (ii)
the holders shall have the option of reversing any exercise of their conversion
rights hereunder made after such record date in contemplation of such
distribution (and thereby re-establishing such conversion rights to the extent
so exercised) by returning to the Corporation any Common Stock, cash and other
securities or property which had been received upon such conversion; provided
--------
that the option set forth in this clause (ii) shall be exercisable by a Holder
only prospectively by a written instrument delivered to the Corporation at the
time of such conversion, which instrument shall state that such holder revokes
such conversion if such distribution is not so made. For purposes of this
subparagraph (f), "Adjusted Retained Earnings" shall mean the retained earnings
of the Corporation as of the date of such dividend or distribution plus
----
$500,000,000 plus any dividend paid after August 10, 1990 (which has been
----
debited against retained earnings) on any Preferred Stock of the Corporation
outstanding on August 10, 1990. If the Corporation makes an election under
clause (I) of this subparagraph (f) with respect to any such distribution
payable on any Series A Share (an "Elected Company Dividend"), the Corporation
may in lieu of such distribution elect to pay the fair market value (determined
as provided above) of such Elected Company Dividend in cash (the "Cash
Equivalent") or elect to defer payment of such Elected Company Dividend or the
Cash Equivalent to the
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holder of such Series A Share and hold such amount (and any amounts subsequently
paid or earned in respect of such deferred Elected Company Dividend or Cash
Equivalent) in trust for the holder until the earlier to occur of (X) the
conversion of such Series A Share into Common Stock or (Y) the holder of such
Series A Share no longer having the right to exchange such Series A Share for
AMEX Exchange Common Shares (otherwise than as a result of an exchange for AMEX
Exchange Common Shares); provided, that payment to the holder of such Series A
--------
Share shall be made promptly after the earliest of such times; and provided,
--------
further, that any such deferred Elected Company Dividend or Cash Equivalent
- -------
shall not be payable and shall be released to the Corporation and no longer
held in trust for the holder with respect to any Series A Share that is
exchanged for AMEX Exchange Common Shares or is redeemed or is otherwise
purchased by the Corporation pursuant to Section 7.4 of the 1990 Agreement. Any
cash to be held in trust for the holder as a deferred Elected Company Dividend
or Cash Equivalent shall be invested by the Corporation in U.S. government
treasury bills.
(g) The reclassification (including any reclassification upon a
merger in which the Corporation is the continuing corporation, but not including
any transaction for which an adjustment is provided in subparagraph (h) below of
this Paragraph 7) of Common Stock into securities including other than Common
Stock shall be deemed to involve (i) a distribution of such securities other
than Common Stock to all holders of Common Stock (and the effective date of such
reclassification shall be deemed to be "the date fixed for the determination of
stockholders entitled to receive such distribution" and "the date fixed for such
determination" within the meaning of subparagraph (f) above of this Paragraph
7), and (ii) a subdivision or combination, as the case may be, of the number of
shares of Common Stock outstanding immediately prior to such reclassification
into the number of shares of Common Stock outstanding immediately thereafter
(and the effective date of such reclassification shall be deemed to be "the day
upon which such subdivision becomes effective" or "the day upon which such
combination becomes effective," as the case may be, and "the day upon which such
subdivision or combination becomes effective" within the meaning of subparagraph
(e) above of this Paragraph 7).
(h) In case of any consolidation of the Corporation with, or merger
of the Corporation into, any other Person, any merger of another Person into the
Corporation (other than a merger which does not result in any reclassification,
conversion, exchange or cancellation of outstanding shares of Common Stock) or
any sale or transfer of all or substantially all of the assets of the
Corporation, the Person formed by such consolidation or resulting from such
merger or which acquires such assets, as the case may be, shall execute and
deliver an assumption agreement satisfactory in form and substance to a majority
in interest of the holders, providing that the holders of Series A Shares shall
have the right thereafter, during the period such Series A Shares shall be
outstanding to convert such Series A Shares only into the kind and amount of
securities, cash and other property receivable upon such consolidation, merger,
sale or transfer by a holder of the number of shares of Common Stock into which
such Series A Shares might have been converted immediately prior to such
consolidation, merger, sale or transfer. If the holders of Common Stock may
elect from choices the kind or amount of securities, cash and other property
receivable in respect of any Series A Share upon such consolidation, merger,
sale or transfer, then for the purpose of this Paragraph 7 the kind and amount
of securities, cash and other property
10
<PAGE>
receivable upon such consolidation, merger, sale or transfer shall be deemed to
be the choice specified by the holder of such Series A Share, which
specification shall be made by such holder by the later of (i) 20 Business Days
after such holder is provided with a final version of all information required
by law or regulation to be furnished to holders of Common Stock concerning such
choice, or if no such information is required, 20 Business Days after the
Corporation notifies such holder of all material facts concerning such
specification and (ii) the last time at which holders of Common Stock are
permitted to make their specification known to the Corporation. If such holder
fails to make any specification, such holder's choice shall be deemed to be
whatever choice is made by a plurality of holders of Common Stock not affiliated
with the Corporation or the other Person to the merger or consolidation or, if
no such holders exist, as specified by the Board of Directors in good faith.
Such assumption agreement shall provide for adjustments which, for events
subsequent to the effective date of such written instrument, shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Paragraph 7. The above provisions of this subparagraph (h) shall similarly apply
to successive consolidations, mergers, sales or transfers.
(i) The Corporation may make such reductions in the Conversion Price,
in addition to those required by subparagraphs (c), (d), (e), (f) and (g) above
of this Paragraph 7, as it considers to be advisable in order that any event
treated for Federal income tax purposes as a dividend of stock or stock rights
shall not be taxable to the recipients.
(j) Whenever the Conversion Price is adjusted as herein provided the
Corporation shall compute the adjusted Conversion Price in accordance with this
Paragraph 7 and shall prepare a certificate signed by the Treasurer (or other
responsible financial officer) of the Corporation setting forth the adjusted
Conversion Price and showing in reasonable detail the facts upon which such
adjustment is based, and such certificate shall forthwith be filed with the
Transfer Agent or Agents for the Series A Preferred Stock and a copy air mailed
as soon as practicable to the holders of record of the Series A Shares.
(k) In case:
(i) the Corporation shall declare a dividend (or any other
distribution) on its Common Stock payable otherwise than in cash out of its
Adjusted Retained Earnings; or
(ii) the Corporation shall authorize the granting to the holders of
its Common Stock of rights or warrants to subscribe for or purchase any shares
of capital stock of any class or of any other rights; or
(iii) of any reclassification of the capital stock of the Corporation
(other than a subdivision or combination of its outstanding shares of Common
Stock), or of any consolidation or merger to which the Corporation is a party
and for which approval of common stockholders of the Corporation is required, or
of the sale or transfer of all or substantially all of the assets of the
Corporation; or
11
<PAGE>
(iv) of the voluntary or involuntary dissolution, liquidation or
winding up of the Corporation;
then the corporation shall cause to be filed with the Transfer Agent
or Agents, if any, for the Series A Preferred Stock, and shall cause to be air
mailed to the holders of record of the outstanding shares of Series A Preferred
Stock, at least 30 days (or 15 days in any case specified in clause (i) or (ii)
above) prior to the applicable record or effective date hereinafter specified, a
notice stating (X) the date on which a record is to be taken for the purpose of
such dividend, distribution, rights or warrants, or, if a record is not to be
taken, the date as of which the holders of Common Stock of record to be entitled
to such dividend, distribution, rights or warrants are to be determined, or (Y)
the date on which such reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding up is expected to become effective, and the
date as of which it is expected that holders of Common Stock of record shall be
entitled to exchange their shares of Common Stock for securities, cash or other
property deliverable upon such reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation or winding up.
(l) The Corporation shall at all times reserve and keep available,
free from preemptive rights, out of its authorized but unissued Common Stock,
for the purpose of effective the conversion of Series A Shares, the full number
of shares of Common Stock then deliverable upon the conversion of all Series A
Shares then outstanding.
(m) No fractional shares of Common Stock shall be issued upon
conversion, but, instead of any fraction of a share which would otherwise be
issuable, the Corporation shall pay a cash adjustment in respect of such
fraction in an amount equal to the same fraction of the market price per share
of Common Stock (as determined in good faith by the Board of Directors or in any
manner prescribed by the Board of Directors) at the close of business on the day
of conversion.
(n) The Corporation will pay any and all stamp or other similar taxes
that may be payable in respect of the issue or delivery of shares of Common
Stock on conversion of Series A Shares pursuant hereto. The Corporation shall
not, however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of shares of Common Stock in a name
other than that in which the Series A Shares so converted were registered, and
no such issue or delivery shall be made unless and until the person requesting
such issue has paid to the Corporation the amount of any such tax, or has
established to the satisfaction of the Corporation that such tax has been paid.
(o) In any case in which this Paragraph 7 shall require that an
adjustment shall become effective immediately after a record date for an event,
the Corporation may defer until the occurrence of such event (i) issuing to the
holder of any Series A Shares converted after such record date and before the
occurrence of such event the additional shares of Common Stock (and Elected
Company Dividend or Cash Equivalent, if any) issuable upon such conversion by
reason of the adjustment required by such event over and above the number of
shares of Common Stock issuable upon such conversion before giving effect to
such adjustment and (ii) paying to such
12
<PAGE>
holder any amount in cash in lieu of a fractional share of Common Stock pursuant
to Paragraph 7(m) of this Section A; provided, that, upon the request of such
--------
holder, the Corporation shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's rights to receive such
additional shares of Common Stock, and such cash, upon the occurrence of the
event requiring such adjustment.
(p) For the purpose of this Paragraph 7:
(i) "Adjusted Retained Earnings" shall have the meaning assigned in
Paragraph 7(f) of this Section A.
(ii) "Common Stock" shall include any stock of any class of the
Corporation which has no preference in respect of dividends or of amounts
payable in the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Corporation and which is not subject to redemption by the
Corporation. However, shares issuable on conversion of Series A Shares shall
include only shares of the class designated as Common Stock of the Corporation
as of the Closing Date, or shares of any class or classes resulting from any
reclassification or reclassifications thereof and which have no preference in
respect of dividends or of amounts payable in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation and which
are not subject to redemption by the Corporation; provided that if at any time
there shall be more than one such resulting class, the shares of each such class
then so issuable shall be substantially in the proportion which the total number
of shares of such class resulting from all such reclassifications bears to the
total number of shares of all such classes resulting from all such
reclassifications.
(iii) "Cash Equivalent" shall have the meaning assigned in Paragraph
7(f) of this Section A.
(iv) "Elected Company Dividend" shall have the meaning assigned in
Paragraph 7(f) of this Section A.
(v) "Fair Market Value" per share of Common Stock on any date means
the fair market value thereof on the date in question, which either (A) if
Nippon Life and its Affiliates then own a majority of the Series A Shares then
outstanding (i) shall be determined jointly by the Corporation and Nippon Life
or (ii) if the Corporation and Nippon Life cannot agree, shall be the value
reasonably determined in good faith by the Board of Directors of the Corporation
or (B) if Nippon Life and its Affiliates do not then own a majority of the
Series A Shares then outstanding, shall be the value reasonably determined in
good faith by the Board of Directors of the Corporation.
(vi) "Fair Market Price" per share of Common Stock on any date means
the fair market value thereof on the date in question, determined (A) if Nippon
Life and its Affiliates then own a majority of the Series A Shares then
outstanding (i) jointly by the Corporation and Nippon Life or (ii) if the
Corporation and Nippon Life cannot so agree, by an
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<PAGE>
independent internationally recognized investment banking firm selected by the
Corporation and Nippon Life or (B) if Nippon Life and its Affiliates do not then
own a majority of the Series A Shares then outstanding, shall be determined by
an independent, internationally recognized investment banking firm selected by
the Corporation, which determination in any such case shall include the value
attributable to any assets or securities to be distributed to the holders of
Common Stock.
8. Voting Rights.
-------------
The holders of Series A Preferred Stock shall have the following
voting rights subject to the following terms and conditions:
(a) The holders of Series A Preferred Stock shall have voting rights
equal to the voting rights of holders of shares of Common Stock and the Series A
Shares shall vote together with the shares of Common Stock (and of any other
class or series which may similarly be entitled to vote with the shares of
Common Stock) as a single class upon all matters upon which holders of Common
Stock are entitled to vote;
(b) So long as any of the Series A Shares remain outstanding, the
Corporation will not, either directly or indirectly or through merger or
consolidation with any other corporation, without the affirmative vote at a
meeting or the written consent with or without a meeting of the holders of at
least a majority of the Series A Shares then outstanding, amend, alter or repeal
any of the provisions of the Certificate of Designation, Powers, Preferences and
Rights of the Series A Preferred Stock or the Restated Certificate of
Incorporation of the Corporation, or authorize any reclassification of the
Series A Preferred Stock, so as in any such case to affect adversely the
preferences, special rights or powers of the Series A Preferred Stock, or
authorize any capital stock of the Corporation ranking, either as to payment of
dividends or upon liquidation, dissolution or winding up of the Corporation,
prior to the Series A Preferred Stock; and
(c) In exercising the voting rights set forth in this Paragraph 8 or
when otherwise granted voting rights by operation of law, each share of Series A
Preferred Stock shall be entitled to a number of votes equal to the quotient
obtained by dividing $39.10 by the Conversion Price in effect at the time.
No consent of holders of the Series A Preferred Stock shall be
required for (i) the creation of any indebtedness of any kind of the
Corporation, (ii) the authorization or issuance of any class of capital stock of
the Corporation ranking junior or equal to the Series A Preferred Stock in
payment of dividends or upon liquidation, dissolution or winding up of the
Corporation.
9. Sinking Fund. The Series A Preferred Stock shall not be subject
------------
to any right of mandatory payment or prepayment (except for liquidation,
dissolution or winding up of the Corporation) or to any sinking fund.
10. Transfers. Unless held by AMEX or one or more of its Affiliates,
---------
the Series A Shares
14
<PAGE>
shall be subject to the provisions of the Investment Agreement, as amended by
the 1990 Agreement and the 1994 Agreement, and may not be sold or transferred
except in accordance therewith.
11. Exchanges. Certificates representing Series A Shares shall be
---------
exchangeable, at the option of the holder, for a new certificate or certificates
of the same or different denominations representing in the aggregate the same
number of Series A Shares.
12. Term. Subject to redemption as set forth in Paragraph 5 of this
----
Section A or to conversion as set forth in Paragraph 7 of this Section A, the
Series A Preferred Stock shall be perpetual.
B. Redeemable Voting Preferred Stock
---------------------------------
1. Designation; Rank. The Board of Directors has authorized the
-----------------
issuance of a series of Preferred Stock designated as the "Redeemable Voting
Preferred Stock" (the "Redeemable Preferred Stock"). The maximum number of
shares of Redeemable Preferred Stock shall be 1,000. The Redeemable Preferred
Stock is issuable in whole shares only.
For the purposes of this Section B, any stock of any class or classes
of the Corporation shall be deemed to rank:
(a) prior to shares of the Redeemable Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, if the
holders of stock of such class or classes shall be entitled by the terms thereof
to the receipt of dividends or of amounts distributable upon liquidation,
dissolution or winding up, as the case may be, in preference or priority to the
holders of shares of the Redeemable Preferred Stock;
(b) on a parity with shares of the Redeemable Preferred Stock, either
as to dividends or upon liquidation, dissolution or winding up, or both, whether
or not the dividend rates, dividend payment dates, or redemption or liquidation
prices per share thereof be different from those of the Redeemable Preferred
Stock, if the holders of stock of such class or classes shall be entitled by the
terms thereof to the receipt of dividends or of amounts distributed upon
liquidation, dissolution or winding up, as the case may be, in proportion to
their respective dividend rates or liquidation prices, without preference or
priority of one over the other as between the holders of such stock and the
holders of shares of Redeemable Preferred Stock (the term "Parity Preferred
Stock" being used to refer to any stock on a parity with the shares of
Redeemable Preferred Stock, either as to dividends or upon liquidation,
dissolution or winding up, or both, as the context may require); and
(c) junior to shares of the Redeemable Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, if such class
shall be Common Stock of the Corporation or if the holders of the Redeemable
Preferred Stock shall be entitled to the receipt of dividends or of amounts
distributable upon liquidation, dissolution or winding up, as the
15
<PAGE>
case may be, in preference or priority to the holders of stock of such class or
classes.
The Redeemable Preferred Stock shall rank, as to dividends and upon
liquidation, dissolution or winding up, on a parity with the Corporation's
Cumulative Voting Preferred Stock and the Corporation's Cumulative Convertible
Voting Preferred Stock, Series A.
2. Certain Definitions. For purposes of this Section B, the
-------------------
following terms shall have the meanings set forth below:
(a) "Accrued Interest" means, as of any date, interest accrued up to
and including such date on any Unpaid Amounts (other than Unpaid Amounts
referred to in the proviso to Paragraph 3(c)(i) of this Section B) in respect of
all Dividends Periods ended on or prior to such date.
(b) "Applicable Amount" means, with respect to any Dividend Period, an
amount equal to the result obtained by multiplying $400,000,000 by the
Applicable Percentage for such Dividend Period.
(c) "Applicable Percentage" means, with respect to any Dividend
Period, a fraction of which the numerator is the number of calendar months in
such Dividend Period and of which the denominator is twelve (12).
(d) "Business Day" means any day other than Saturday, Sunday or any
other day on which the New York Stock Exchange is closed.
(e) "Date of Original Issue" means the date on which the
Corporation initially issues the Redeemable Preferred Stock.
(f) "Default Rate" means (i) with respect to any Unpaid Amount which
shall have been unpaid for a period of one year or less, a rate per annum equal
to the sum of (A) the Treasury Rate and (B) 0.50% and (ii) with respect to any
Unpaid Amount which shall have been unpaid for a period of more than one year, a
rate per annum equal to the sum of (A) the Two-Year Treasury Rate and (B) 1.50%.
(g) "Designated Event" means an event or series of events as a result
of which (i) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than a holder of the Redeemable Preferred Stock, is or
becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act) of shares of Voting Stock representing more than 30% (or 34% in
the case such person is Nippon Life Insurance Company) of the combined voting
power of the then-outstanding Voting Stock; (ii) the Corporation 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 the Corporation, and, in the case of any such transaction, the
outstanding Common Stock of the Corporation is changed or exchanged as a result,
unless the stockholders of the Corporation immediately before such transaction
own,
16
<PAGE>
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) the Corporation 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
Corporation's business) involving aggregate consideration to the seller in an
amount exceeding 30% of the Fair Market Value of the outstanding Common Stock of
the Corporation immediately prior to such transaction and either (a) the ratio
of consolidated indebtedness to consolidated stockholders' equity of the
Corporation as of the last day of the calendar month immediately preceding the
calendar month in which such acquisition occurs or (b) the ratio of adjusted
consolidated tangible assets (total consolidated assets less goodwill) to
consolidated tangible net worth of the Corporation as of the last day of the
calendar month immediately preceding the calendar month in which such
acquisition occurs increases, on a pro forma basis as if such acquisition
occurred on such day, by more than 20% as a result of such transaction; or (iv)
on any day (a "Calculation Date") the Corporation makes any distribution or
distributions of cash, property or securities (other than regular quarterly
dividends, or a distribution in its 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
its Common Stock, or the Corporation or any of its subsidiaries purchases or
otherwise acquires its 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 twelve 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 twelve 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 the Corporation or any subsidiary
of the Corporation 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
the Corporation or any subsidiary of the Corporation, 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.
(h) "Determination Date" means the last day of a Dividend Period.
(i) "Dividend Payment Date" has the meaning specified in Paragraph
3(b) of this Section B.
(j) "Dividend Period" means the Initial Dividend Period or any
Subsequent Dividend Period.
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<PAGE>
(k) "Earnings Release" has the meaning specified in Paragraph 2(q) of
this Section B.
(l) "Exchange Act" means the Securities Exchange Act of 1934.
(m) "Failure Amount" means, as of any date, the sum of the amount of
dividends which were payable to the holders of Redeemable Preferred Stock for
any of the two Dividend Periods prior to such date for which the amount of
dividends payable was greater than zero.
(n) "Fair Market Value" per share of capital stock of the Corporation
on any date means (i) if there is a public trading market for such stock, the
average of the daily closing prices for the 10 consecutive trading days selected
by the Corporation commencing not less than 20 days nor more than 30 trading
days before such date or (ii) if there is no trading market for such stock, the
fair market value thereof. For purposes of this definition, the closing price
for each day shall be the last reported sales price regular way or, the average
of the reported closing bid and asked prices regular way, in either case on the
New York Stock Exchange or, if the stock is not listed or admitted to trading on
such exchange, on the principal national securities exchange on which the common
stock is listed or admitted to trading or, if not listed or admitted to trading
on any national securities exchange, on the National Association of Securities
Dealers Automated Quotations National Market or, if not listed or admitted to
trading on any national securities exchange or quoted on such National Market,
the average of the closing bid and asked prices in the over-the-counter market
as furnished by any New York Stock Exchange member firm selected from time to
time by the Corporation for that purpose. For the purposes of this definition,
the term "trading day" shall mean each Monday, Tuesday, Wednesday, Thursday and
Friday, other than any day on which securities are not traded on such exchange
or in such market.
(o) "GAAP" means generally accepted accounting principles applicable
to the period in question consistently applied since the Date of Original Issue
and throughout the period in question.
(p) "Initial Dividend Period" means the period commencing on the first
day of the calendar month immediately following the calendar month in which the
Date of Original Issue occurs and ending on the earlier of (a) the day
immediately preceding the first day of the first full fiscal year of the
Corporation commencing after the Date of Original Issue and (b) the day
immediately preceding the first anniversary of the day on which the Initial
Dividend Period commenced.
(q) "Net Income" means, for any period, the aggregate net income (or
loss) of the Corporation for such period, determined on a consolidated basis in
accordance with GAAP and consistent with the Corporation's past practice if not
contrary to GAAP. Net Income with respect to each Dividend Period shall be (i)
based on consolidated financial statements which have been prepared in
compliance with Paragraph 3(e) of this Section B and (ii) calculated by a
responsible financial officer of the Corporation upon completion of each audit
referred to in Paragraph
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<PAGE>
3(e) of this Section B; provided that if such audited financial statements are
--------
not available on or prior to the Dividend Payment Date with respect to any
Dividend Period, Net Income initially shall be based on an earlier earnings
release or other similar public announcement or communication by the Corporation
which sets forth an estimate or other report of Net Income for such Dividend
Period or, if the Corporation is not subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act on such Dividend Payment Date, (and the
Corporation has not otherwise issued any such release, announcement or
communication) on an earlier estimate of Net Income for such Dividend Period as
set forth in a certificate signed by a responsible financial officer of the
Corporation (such release, communication or certificate is referred to herein as
an "Earnings Release"), which amount shall thereafter be adjusted (upward or
downward) upon the availability of such audited financial statements.
(r) "Redeemable Stock" means any capital stock of the Corporation
that, by its terms or by the terms of any security into which it is convertible
or exchangeable, is, or upon the happening of an event or passage of time would
be, required to be redeemed or repurchased, in whole or in part, including at
the option of the holder thereof.
(s) "Subsequent Dividend Period" means each period of twelve (12)
consecutive calendar months (or such shorter period ending on the day referred
to in the following proviso in the case of the final Subsequent Dividend Period)
commencing on the day immediately following the last day of the Initial Dividend
Period; provided, however, that the final Subsequent Dividend Period shall end
--------- -------
on the last day of the ninety-fifth (95th) calendar month following the calendar
month in which the Initial Dividend Period commenced.
(t) "Treasury Rate" means, with respect to any Unpaid Amount, the
yield, as of the Dividend Payment Date in respect of which such Unpaid Amount
was not paid, of the issue of United States Treasury security (other than so-
called "treasury strips" or "stripped treasuries") outstanding on, and having a
maturity date closest to the first anniversary of, such Dividend Payment Date
(or if more than one such issue of security exists, the arithmetic average of
the yields of such securities, rounded to the nearest one one-hundredth of one
percent (.0001)), as published in The Wall Street Journal, Eastern Edition, or,
-----------------------
if not so published therein, as published in or quoted by another reputable
source selected by the Corporation.
(u) "Two-Year Treasury Rate" means, with respect to any Unpaid Amount,
the yield, as of the Dividend Payment Date in respect of which such Unpaid
Amount was not paid, of the issue of United States Treasury security (other than
so-called "treasury strips" or "stripped treasuries") outstanding on, and having
a maturity date closest to the second anniversary of, such Dividend Payment Date
(or if more than one such issue of security exists, the arithmetic average of
the yields of such securities, rounded to the nearest one one-hundredth of one
percent (.0001)), as published in The Wall Street Journal, Eastern Edition, or,
-----------------------
if not so published therein, as published in or quoted by another reputable
source selected by the Corporation.
(v) "Unpaid Amount" means, with respect to any Dividend Period, the
amount, if any, of the dividend due on the Dividend Payment Date in respect of
such Dividend Period
19
<PAGE>
which is not paid in full on such date (whether due to the unavailability of
audited financial statements or otherwise), including, but not limited to, the
excess, if any, of a dividend calculated based on Net Income as set forth in
audited financial statements over a dividend calculated based on Net Income as
set forth in an Earnings Release.
(w) "Voting Stock" means all securities issued by the Corporation
having the ordinary power to vote in the election of directors of the
Corporation, other than securities having such power only upon the occurrence of
a default or any other extraordinary contingency.
3. Dividends; Priority; Certain Covenants. (a) Payments of Dividends.
-------------------------------------- ----------------------
The holders of shares of the Redeemable Preferred Stock shall be entitled to
receive dividends, when, as and if declared by the Board or a duly authorized
committee thereof, out of funds legally available for the payment of dividends.
The amount of dividends payable in respect of each share of Redeemable Preferred
Stock for any Dividend Period shall be equal to the quotient obtained by
dividing (a) the lesser of (i) the result obtained by multiplying (A) 0.50 by
(B) the amount, if any, by which Net Income for such Dividend Period exceeds the
Applicable Amount for such Dividend Period or, if there is no such excess, zero,
and (ii) the result obtained by multiplying (A) $50,000,000 by (B) the
Applicable Percentage for such Dividend Period, by (b) 1,000.
(b) Payment and Record Dates. Dividends on the Redeemable Preferred
------------------------
Stock shall be payable on the 45th day following the last day of each Dividend
Period (each a "Dividend Payment Date"); provided, however, that if any such day
-------- -------
is not a Business Day, the applicable Dividend Payment Date shall be the next
preceding day that is a Business Day. Dividends will be payable to holders of
record of shares of Redeemable Preferred Stock as they appear on the stock books
of the Corporation at the close of business on the 15th day immediately
preceding the applicable Dividend Payment Date (or, if such day is not a
Business Day, the applicable record date shall be the next preceding day that is
a Business Day). Unpaid Amounts (including Accrued Interest, if any) in respect
of any Dividend Periods may be declared and paid at any time to the holders of
record as they appear on the stock books of the Corporation on such record
dates, not more than 60 days preceding the payment dates thereof, as shall be
fixed by the Board or a duly authorized committee thereof.
(c) Accrual of Dividends; Unpaid Amounts; Interest; Excess Amounts.
--------------------------------------------------------------
(i) Dividends on the Redeemable Preferred Stock shall be fully cumulative from
the first day of the Initial Dividend Period. Unpaid Amounts shall be payable
together with Accrued Interest thereon to the date of payment of such Unpaid
Amounts at a per annum rate equal to the Default Rate; provided that interest
--------
shall not accrue on any Unpaid Amount which results from a difference between
(A) a dividend paid on a Dividend Payment Date and calculated based on the
amount of Net Income set forth in an Earnings Release made public or delivered
to the holders of the Redeemable Preferred Stock on or prior to such Dividend
Payment Date and (B) such dividend as recalculated based on the amount of Net
Income set forth in subsequently available audited financial statements
delivered to the holders of the Redeemable Preferred Stock within 45 days
following such Dividend Payment Date.
20
<PAGE>
(ii) In the event that a dividend on the Redeemable Preferred Stock
for any Dividend Period was calculated and paid based on Net Income as set forth
in an Earnings Release and the amount of such dividend is greater than the
amount of dividend recalculated based on Net Income as set forth in subsequently
available audited financial statements (such excess is hereinafter referred to
as an "Excess Dividend"), then promptly following receipt by the holders of the
Redeemable Preferred Stock to whom an Excess Dividend has been paid of written
notice from the Corporation, which notice sets forth in reasonable detail the
calculation of such Excess Dividend (including per share amounts), each such
holder shall repay to the Corporation such holder's pro rata share of such
Excess Dividend (without interest).
(d) Priority as to Dividends; Restriction on Redemption, etc. The
---------------------------------------------------------
Corporation shall not declare or pay or set apart for payment any dividends or
make any other distributions on, or payment on account of the purchase,
redemption or other retirement of Common Stock or any other capital stock of the
Corporation ranking junior to the Redeemable Preferred Stock as to dividends or
as to distributions upon liquidation, dissolution or winding up of the
Corporation unless (i) full cumulative dividends (including Accrued Interest, if
any) on the shares of Redeemable Preferred Stock have been paid for all Dividend
Periods ended on or prior to the date of such payment, distribution, purchase,
redemption or other retirement with respect to such stock ranking junior to the
Redeemable Preferred Stock, and (ii) the Corporation is not in default with
respect to any obligation (including its obligations pursuant to Paragraphs 7(a)
and 7(b) of this Section B) to redeem or retire shares of the Redeemable
Preferred Stock; provided, however, that the foregoing shall not apply to (x)
-------- -------
any dividend payable solely in any shares of any stock ranking, as to dividends
and as to distributions in the event of a liquidation, dissolution or winding up
of the Corporation, junior to the Redeemable Preferred Stock or (y) the
acquisition of shares of any stock ranking, as to dividends or as to
distributions in the event of a liquidation, dissolution or winding up of the
Corporation, junior to the Redeemable Preferred Stock in exchange solely for
shares of any other stock ranking, as to dividends and as to distributions in
the event of a liquidation, dissolution or winding up of the Corporation, junior
to the Redeemable Preferred Stock. When full cumulative dividends (including,
in the case of the Redeemable Preferred Stock, Accrued Interest, if any) are not
paid in full to the most recent dividend payment date upon the shares of
Redeemable Preferred Stock or any other class of stock of the Corporation
ranking on a parity as to dividends with shares of Redeemable Preferred Stock,
all dividends declared upon shares of Redeemable Preferred Stock and any such
other class of stock ranking on a parity as to dividends with shares of
Redeemable Preferred Stock shall be declared pro rata so that the amount of
dividends declared per share on shares of Redeemable Preferred Stock and such
other classes of stock shall in all cases bear to each other the same ratio that
accrued and unpaid dividends (including, in the case of the Redeemable Preferred
Stock, Accrued Interest, if any) per share on the shares of Redeemable Preferred
Stock and such other classes of stock bear to each other.
(e) Financial Statements. Promptly following the end of each Dividend
--------------------
Period, but in no event later than 90 days following the end of such Dividend
Period, the Corporation shall prepare, or cause to be prepared, consolidated
financial statements of the Corporation as of the end of and for such period,
audited by a nationally recognized firm of independent public accountants.
21
<PAGE>
(f) Financial Information. The Corporation will provide to all
---------------------
holders of the Redeemable Preferred Stock, promptly after the same become
available, copies of all annual, quarterly, current and other reports filed by
the Corporation with the Securities and Exchange Commission pursuant to Section
13 or 15(d) of the Exchange Act. If the Corporation is not required to file
such documents pursuant to Section 13 or 15(d) of the Exchange Act, or, if the
Corporation is so required to file such reports pursuant to the Exchange Act and
the last day of a Dividend Period does not coincide with the last day of the
Corporation's fiscal year, the Corporation will provide to all holders of the
Redeemable Preferred Stock, promptly after the same become available,
consolidated financial statements of the Corporation with respect to each
Dividend Period, audited by a nationally recognized firm of independent public
accountants, together with the accountants' report thereon and an officer's
certificate which sets forth in reasonable detail the calculation of the
dividend on the Redeemable Preferred Stock for such Dividend Period.
4. Liquidation Preference. In the event of any liquidation,
----------------------
dissolution or winding up of the Corporation, whether voluntary or involuntary,
before any distribution of the assets of the Corporation to the holders of
Common Stock or any other capital stock of the Corporation ranking junior to the
Redeemable Preferred Stock upon liquidation, dissolution or winding up of the
Corporation, the holders of the Redeemable Preferred Stock shall be entitled to
receive out of the assets of the Corporation available for distribution to its
stockholders, whether from capital, surplus or earnings, an amount per share of
Redeemable Preferred Stock equal to $1.00 plus an amount equal to all dividends
(whether or not earned or declared) accrued and accumulated and unpaid on such
shares (including Accrued Interest, if any) to the date of final distribution.
If, upon any liquidation, dissolution or winding up of the Corporation, the
assets of the Corporation, or proceeds thereof, distributable among the holders
of Redeemable Preferred Stock or any capital stock ranking on a parity with the
Redeemable Preferred Stock upon liquidation, dissolution or winding up of the
Corporation, shall be insufficient to pay in full the preferential amounts to
which such stock would be entitled, then such assets, or the proceeds thereof,
shall be distributable among such holders ratably in accordance with the
respective amounts which would be payable on such shares if all amounts payable
thereon were payable in full. For the purposes hereof, neither a consolidation
nor a merger of the Corporation with one or more other corporations, nor a sale
or a transfer of all or substantially all of the assets of the Corporation,
shall be deemed to be a liquidation, dissolution or winding up, voluntary or
involuntary, of the Corporation.
5. Conversion. The Redeemable Preferred Stock is not convertible
----------
into shares of any other class or series of stock of the Corporation.
6. Voting Rights. The holders of shares of Redeemable Preferred Stock
-------------
shall, in addition to any voting rights to which they may be entitled under the
laws of the State of Delaware, have the right to vote in person or by proxy on
all matters voted on by the holders of Common Stock, voting together with the
holders of Common Stock as a class, with each holder
22
<PAGE>
of Redeemable Preferred Stock entitled to cast thereon 1,059 votes per share of
Redeemable Preferred Stock standing in such holder's name; provided, however,
-------- --------
that if the arithmetic average of the high and low "when-issued" sales prices
per share of Common Stock on the New York Stock Exchange (the "NYSE") on May 27,
1994 (the "May 27 Average Market Price") is less than $17.00, then from and
after the close of trading on the NYSE on May 27, 1994 the number of votes per
share of Redeemable Preferred Stock standing in such holder's name shall equal
the quotient obtained by dividing (i) eighteen thousand dollars ($18,000.00) by
(ii) such May 27 Average Market Price, increased to the next highest thousandth
of a vote; provided further, that, notwithstanding the foregoing proviso, (A) if
-------- -------
the arithmetic average of the high and low regular way sales prices per share of
Common Stock on the NYSE on May 31, 1994 (the "May 31 Average Market Price") is
less than $17.00, then from and after the close of trading on the NYSE on May
31, 1994, the number of votes per share of Redeemable Preferred Stock standing
in such holder's name shall equal the quotient obtained by dividing (x) eighteen
thousand dollars ($18,000.00) by (y) such May 31 Average Market Price, increased
to the next highest thousandth of a vote and (B) if the May 31 Average Market
Price is $17.00 or greater, then such number of votes shall be 1,059 per share
of Redeemable Preferred Stock.
In addition, whenever, at any time or times, dividends payable on the
shares of Redeemable Preferred Stock or on any Parity Preferred Stock, shall be
in arrears for an aggregate number of days equal to six calendar quarters or
more, whether or not consecutive (which, in the case of the Redeemable Preferred
Stock shall be deemed to be an amount of accumulated and unpaid dividends equal
to the Failure Amount), the authorized number of directors of the Corporation
shall automatically be increased by two and the holders of the outstanding
shares of Redeemable Preferred Stock shall have the right, with holders of
shares of any one or more other class or series of Parity Preferred Stock
outstanding at the time upon which like voting rights have been conferred and
are exercisable ("Voting Parity Stock") (voting together as a class), to elect
two directors to fill such newly created directorships at the Corporation's next
annual meeting of stockholders and at each subsequent annual meeting of
stockholders until such arrearages have been paid or set apart for payment, at
which time such right shall terminate, except as herein or by law expressly
provided, subject to revesting in the event of each and every subsequent default
of the character above mentioned. Upon any termination of the right of the
holders of shares of Redeemable Preferred Stock and Voting Parity Stock as a
class to vote for directors as herein provided, the term of office of all
directors then in office so elected shall terminate immediately and the
authorized number of directors shall be reduced by the number of directors
elected by the holders of the Redeemable Preferred Stock and Voting Parity Stock
pursuant to this paragraph.
Any director who shall have been so elected pursuant to the
immediately preceding paragraph may be removed at any time, either with or
without cause. Any vacancy thereby created may be filled only by the
affirmative vote of the holders of shares of Redeemable Preferred Stock voting
separately as a class (together with the holders of shares of Voting Parity
Stock). If the office of any director elected by the holders of shares of
Redeemable Preferred Stock voting as a class (together with the holders of
shares of Voting Parity Stock) becomes vacant for any reason other than removal
from office as aforesaid, the remaining director elected pursuant to the
preceding paragraph may choose a successor who shall hold office for the
unexpired term in
23
<PAGE>
respect of which such vacancy occurred. At elections for such directors, each
holder of shares of Redeemable Preferred Stock shall be entitled to 2,800 votes
for each share held (the holders of shares of any other class or series of
Voting Parity Stock being entitled to such number of votes, if any, for each
share of such stock held as may be granted to them).
So long as any shares of the Redeemable Preferred Stock remain
outstanding, the Corporation will not, either directly or indirectly or through
merger or consolidation with any other corporation, without the affirmative vote
at a meeting or the written consent with or without a meeting of the holders of
at least two-thirds of the shares of Redeemable Preferred Stock then
outstanding, (a) authorize, create or issue, or increase the authorized or
issued amount, of any class or series of stock ranking prior to the Redeemable
Preferred Stock with respect to payment of dividends or the distribution of
assets on liquidation, dissolution or winding up of the Corporation, or
reclassify any authorized stock of the Corporation into any such shares, or
create, authorize or issue any obligations or security convertible into or
evidencing the right to purchase any such shares or (b) amend, alter or repeal
any of the provisions of the Certificate of Designation, Powers, Preferences and
Rights of the Redeemable Voting Preferred Stock, so as in any such case to
materially and adversely affect the preferences, special rights or powers of the
Redeemable Preferred Stock; provided, however, that any increase in the amount
-------- -------
of authorized Common Stock or authorized preferred stock or any increase or
decrease in the number of shares of any series of preferred stock or the
authorization, creation and issuance of other classes or series of Common Stock
or other stock, in each case ranking on a parity with or junior to the shares of
Redeemable Preferred Stock with respect to the payment of dividends and the
distribution of assets upon liquidation, dissolution of winding up, shall not be
deemed to materially and adversely affect such preferences, special rights or
powers.
7. Redemption. (a) Mandatory Redemption. Subject to Paragraph 7(b)
---------- --------------------
of this Section B, the shares of the Redeemable Preferred Stock may not be
redeemed by the Corporation prior to the Dividend Payment Date (the "Final
Payment Date") in respect of the final Subsequent Dividend Period (as determined
in accordance with the proviso to Paragraph 2(s) of this Section B). On the
Final Payment Date, the Corporation shall redeem, out of funds legally available
therefor, all of the then outstanding shares of Redeemable Preferred Stock. The
redemption pursuant to this Paragraph 7(a) shall be made upon not less than 30
days' prior notice (which notice shall comply with the provisions of Paragraph
7(c) of this Section B) mailed to the holders of Redeemable Preferred Stock at
their respective addresses as shown on the stock books of the Corporation;
provided, however, that the Corporation's failure to give such notice shall in
- -------- -------
no way affect its obligation to redeem the shares of Redeemable Preferred Stock
as provided in this Paragraph 7(a). The redemption price for each share of
Redeemable Preferred Stock redeemed pursuant to this Paragraph 7(a) shall be
equal to $1.00 per share together with an amount equal to all dividends (whether
or not earned or declared) accrued and accumulated and unpaid on such shares
(including Accrued Interest, if any) to the Redemption Date (as defined below).
(b) The Corporation shall deliver written notice (an "Event Notice")
to each holder of the Redeemable Preferred Stock at their respective addresses
as shown on the stock
24
<PAGE>
books of the Corporation within 10 business days of the occurrence of a
Designated Event. If a Designated Event occurs, each record holder of shares of
Redeemable Preferred Stock, by written request (a "Request Notice") delivered to
the Corporation no later than 25 days following delivery by the Corporation to
such holder of an Event Notice in respect of such Designated Event, may require
the Corporation to redeem, out of funds legally available therefor, any or all
of the shares of Redeemable Preferred Stock held by such holder at the
redemption price set forth below. Any redemption made pursuant to this Paragraph
7(b) shall be made (i) upon not less than 15 days and not more than 30 days
prior notice (which notice shall (A) comply with the provisions of Paragraph
7(c) of this Section B and (B) shall not be delivered prior to the earlier of
the termination of the 25-day period referred to above and the request for
redemption pursuant to this Paragraph 7(b) by the holders of all of the then
outstanding shares of Redeemable Preferred Stock) mailed to each holder
requesting such redemption as shown on the stock books of the Corporation,
provided, however, that the Corporation's failure to give such notice, or
- -------- -------
an Event Notice, shall in no way affect its obligation to redeem the shares
of Redeemable Preferred Stock as provided in this Paragraph 7(b), and (ii) not
later than 60 days (or such later time as determined pursuant to the following
paragraph) following receipt by the Corporation of the first Request Notice in
respect of the applicable Designated Event. With respect to each occurrence of a
Designated Event, the Corporation shall call for redemption on one Redemption
Date all of the shares (subject to the availability of funds being legally
available therefor) of Redeemable Preferred Stock requested to be redeemed by
each requesting holder during the 25-day period referred to above.
The redemption price for each share of Redeemable Preferred Stock
redeemed pursuant to this Paragraph 7(b) shall be equal to the quotient obtained
by dividing (i) the result obtained by multiplying (A) $50,000,000 by (B) 8
minus the number of Determination Dates which have occurred prior to the date
(the "Event Date") the Designated Event occurs, by (ii) 1,000, together with (1)
accrued interest, if any, on such amount from the 1st day following the
expiration of the 60 day period referred to in clause (ii) of the immediately
preceding paragraph of this Paragraph 7(b) or the 90 day period referred to in
the last sentence of this paragraph of Paragraph 7(b), whichever is applicable,
to the Redemption Date at the Default Rate (such interest to be calculated
assuming that, for purposes of the definition of Default Rate and defined terms
used in such definition, that such amount is an "Unpaid Amount" and that such
61st day or 91st day, as the case may be, is a "Dividend Payment Date") and (2)
an amount equal to all dividends (whether or not earned or declared) accrued and
accumulated and unpaid on such shares (including Accrued Interest, if any) to
the Redemption Date. If any redemption obligations arise pursuant to this
Paragraph 7(b) as a result of the occurrence of a Designated Event of the type
described under clause (i) of Paragraph 2(g) of this Section B, and any
acquisition of Voting Stock by the applicable person referred to therein had
been made without approval of a majority of the Board as constituted prior to
the time such Designated Event takes place (a "Hostile Event"), the Corporation
shall pay the redemption price only with the proceeds of one or more sales of
capital stock of the Corporation, other than Redeemable Stock. In the event a
Hostile Event occurs and at such time the Corporation is not eligible to use
Form S-3 under the Securities Act of 1933 for the registration of its capital
stock or the Corporation otherwise determines in good faith that additional time
is necessary to complete the financial statements required to be included in a
registration
25
<PAGE>
statement in respect of the sale of its capital stock, then the redemption made
pursuant to this Paragraph 7(b) shall be made within 90 days following receipt
by the Corporation of the first Request Notice in respect of such Hostile Event.
(c) Redemption Notices. Notice of redemption (a "Redemption Notice")
------------------
of shares of Redeemable Preferred Stock pursuant to Paragraphs 7(a), 7(b) or
7(d) of this Section B shall be given by the Corporation by mailing a copy of
such notice to holders of record of the shares of Redeemable Preferred Stock at
their respective addresses appearing on the books of the Corporation. Said
notice shall specify the shares called for redemption, the price at which and
the date (the "Redemption Date") on which the shares called for redemption will,
upon presentation and surrender of the certificates of stock evidencing such
shares, be redeemed. From and after the Redemption Date fixed in any such
notice, unless default shall be made by the Corporation in providing monies at
the time and place specified for the payment of the redemption price pursuant to
said notice, all dividends (including Accrued Interest, if any) on the shares of
Redeemable Preferred Stock thereby called for redemption shall cease to accrue
and all rights of the holders thereof as stockholders of the Corporation, except
the right to receive the redemption price (and such Accrued Interest, if any),
shall cease and terminate. In addition, all dividends (but not Accrued
Interest, if any) shall be deemed to have ceased accruing from and after the
Event Date in respect of any Designated Event on any shares of Redeemable
Preferred Stock called for redemption pursuant to a Request Notice in respect of
such Designated Event covering such shares, unless default shall be made by the
Corporation in providing monies at the time and place specified for the payment
of the redemption price pursuant to the Redemption Notice delivered in
connection therewith. All shares of Redeemable Preferred Stock redeemed by the
Corporation shall be retired and canceled and shall not thereafter be reissued.
(d) Insufficient Funds for Redemption. If the funds of the
---------------------------------
Corporation legally available for redemption of the Redeemable Preferred Stock
on a Redemption Date in respect of its redemption obligations pursuant to
Paragraphs 7(a) or 7(b) of this Section B are insufficient to redeem the number
of shares of Redeemable Preferred Stock to be so redeemed pursuant to Paragraphs
7(a) or 7(b) of this Section B, the holders of the Redeemable Preferred Stock
shall share ratably in any funds legally available for redemption of such shares
according to the respective amounts which would be payable with respect to the
number of shares owned by them if the shares to be so redeemed on such
Redemption Date were redeemed in full. The shares of Redeemable Preferred Stock
not redeemed shall remain outstanding and entitled to all rights and preferences
provided herein. At any time thereafter when additional funds of the
Corporation are legally available for the redemption of such shares of
Redeemable Preferred Stock, such funds will be used, as soon as practicable but
no later than the end of the next succeeding fiscal quarter, to redeem the
balance of such shares, or such portion thereof for which funds are then legally
available, on the basis set forth above. If the Corporation is in default of
its redemption obligations pursuant to Paragraphs 7(a) or 7(b) of this Section
B, in addition to the restrictions set forth in Paragraph 3(d) of this Section
B, the Corporation shall not declare or pay or set apart for payment any
dividends or make any other distributions on, or payment on account of the
purchase, redemption or other retirement of any capital stock of the Corporation
ranking on a parity with the Redeemable Preferred Stock as to dividends or as to
distributions upon liquidation,
26
<PAGE>
dissolution or winding up of the Corporation; provided, however, that the
-------- -------
foregoing shall not apply to (x) any dividend payable solely in any shares of
any stock ranking, as to dividends and as to distributions in the event of a
liquidation, dissolution or winding up of the Corporation, junior to the
Redeemable Preferred Stock or (y) the acquisition of shares of any stock
ranking, as to dividends or as to distributions in the event of a liquidation,
dissolution or winding up of the Corporation, on a parity with the Redeemable
Preferred Stock in exchange solely for shares of any stock ranking, as to
dividends and as to distributions in the event of a liquidation, dissolution or
winding up of the Corporation, junior to the Redeemable Preferred Stock.
C. Cumulative Voting Preferred Stock
---------------------------------
1. Designation and Amount; Fractional Shares. The Board of Directors has
-----------------------------------------
authorized the issuance of a series of Preferred Stock designated as the
"Cumulative Voting Preferred Stock" (the "Cumulative Preferred Stock"). The
maximum number of shares of Cumulative Preferred Stock shall be 8,000,000. The
Cumulative Preferred Stock is issuable in whole shares only.
2. Dividends. Holders of shares of Cumulative Preferred Stock will be
---------
entitled to receive, when, as and if declared by the Board or a duly authorized
committee thereof out of assets of the Corporation legally available for
payment, cash dividends payable quarterly at the Annual Dividend Rate (as
defined below) per annum. Dividends on the Cumulative Preferred Stock will be
payable quarterly on March 15, June 15, September 15 and December 15 of each
year, commencing June 15, 1994 (each a "dividend payment date"). Dividends on
shares of the Cumulative Preferred Stock will be cumulative from the date of
initial issuance of such shares of Cumulative Preferred Stock. Dividends will
be payable, in arrears, to holders of record as they appear on the stock books
of the Corporation on such record dates, not more than 60 days nor less than 10
days preceding the payment dates thereof, as shall be fixed by the Board. The
amount of dividends payable for each full quarterly dividend period in respect
of each share of Cumulative Preferred Stock shall be equal to the result
obtained by multiplying $6.25 by the Annual Dividend Rate. The amount of
dividends payable for the initial dividend period or any period shorter than a
full quarterly dividend period shall be calculated on the basis of a 360-day
year of twelve 30-day months. As used in this Section C, "Annual Dividend Rate"
means the arithmetic average of the yields, as of the close of business on the
business day immediately preceding the day on which the shares of Cumulative
Preferred Stock are initially issued, of each of the issues of securities set
forth below and outstanding on such business day, as published in or quoted by a
reputable source selected by the Corporation.
Issuer Preferred Security
- ------ ------------------
The Bank of New York Company, Inc 8.60% Cumulative Preferred Stock, Series B
BankAmerica Corporation 11.00% Preferred Stock, Series J
8 3/8% Preferred Stock, Series K
27
<PAGE>
8.16% Preferred Stock, Series L
7 7/8% Preferred Stock, Series M
8.50% Preferred Stock, Series N
The Bear Stearns Companies Inc. 7 7/8% Cumulative Preferred Stock, Series B
7.60% Cumulative Preferred Stock, Series C
The Chase Manhattan Corporation 10.50% Preferred Stock, Series G
8.5% Preferred Stock, Series K
8.32% Preferred Stock, Series L
8.40% Preferred Stock, Series M
Chemical Banking Corporation 8 3/8% Cumulative Preferred Stock, Series H
7.92% Cumulative Preferred Stock, Series I
7.58% Cumulative Preferred Stock, Series J
7.50% Cumulative Preferred Stock, Series K
Citicorp 8% Noncumulative Preferred Stock, Series 16
7.5% Noncumulative Preferred Stock, Series 17
Household International 8.25% Preferred Stock, Series 1992-A
7.35% Preferred Stock, Series, 1991-A
Salomon Inc. 8.08% Cumulative Preferred Stock, Series D
Wells Fargo & Company 9.00% Preferred Stock, Series C
8 7/8% Preferred Stock, Series D
No dividends may be declared or paid or set apart for payment on any
Parity Preferred Stock (as defined in Paragraph 9(b) below of this Section C)
with regard to the payment of dividends unless there shall also be or have been
declared and paid or set apart for payment on the Cumulative Preferred Stock,
dividends for all dividend payment periods of the Cumulative Preferred Stock
ending on or before the dividend payment date of such Parity Preferred Stock,
ratably in proportion to the respective amounts of dividends (x) accumulated and
unpaid or payable on such Parity Preferred Stock, on the one hand, and (y)
accumulated and unpaid through the dividend payment period or periods of the
Cumulative Preferred Stock next preceding such dividend payment date, on the
other hand.
Except as set forth in the preceding sentence, unless full cumulative
dividends on the Cumulative Preferred Stock have been paid through the most
recently completed quarterly dividend period for the Cumulative Preferred Stock,
no dividends (other than in Common Stock of the Corporation) may be paid or
declared and set aside for payment or other distribution made upon the Common
Stock or on any other stock of the Corporation ranking junior to or on a parity
28
<PAGE>
with the Cumulative Preferred Stock as to dividends, nor may any Common Stock or
any other stock of the Corporation ranking junior to or on a parity with the
Cumulative Preferred Stock as to dividends be redeemed, purchased or otherwise
acquired for any consideration (or any payment be made to or available for a
sinking fund for the redemption of any shares of such stock; provided, however,
-------- -------
that any moneys theretofore deposited in any sinking fund with respect to any
preferred stock of the Corporation in compliance with the provisions of such
sinking fund may thereafter be applied to the purchase or redemption of such
preferred stock in accordance with the terms of such sinking fund, regardless of
whether at the time of such application full cumulative dividends upon shares of
the Cumulative Preferred Stock outstanding to the last dividend payment date
shall have been paid or declared and set apart for payment) by the Corporation;
provided that any such junior or parity stock or Common Stock may be converted
- --------
into or exchanged for stock of the Corporation ranking junior to the Cumulative
Preferred Stock as to dividends.
3. Liquidation Preference. The shares of Cumulative Preferred Stock
----------------------
shall rank, as to liquidation, dissolution or winding up of the Corporation,
prior to the shares of Common Stock and any other stock of the Corporation
ranking junior to the Cumulative Preferred Stock as to rights upon liquidation,
dissolution or winding up of the Corporation, so that in the event of any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, the holders of the Cumulative Preferred Stock shall be entitled to
receive out of the assets of the Corporation available for distribution to its
stockholders, whether from capital, surplus or earnings, before any distribution
is made to holders of shares of Common Stock or any other such junior stock, an
amount equal to $25.00 per share (the "Liquidation Preference" of a share of
Cumulative Preferred Stock) plus an amount equal to all dividends (whether or
not earned or declared) accrued and accumulated and unpaid on the shares of
Cumulative Preferred Stock to the date of final distribution. The holders of
the Cumulative Preferred Stock will not be entitled to receive the Liquidation
Preference until the liquidation preference of any other stock of the
Corporation ranking senior to the Cumulative Preferred Stock as to rights upon
liquidation, dissolution or winding up shall have been paid (or a sum set aside
therefor sufficient to provide for payment) in full. After payment of the full
amount of the Liquidation Preference and such dividends, the holders of shares
of Cumulative Preferred Stock will not be entitled to any further participation
in any distribution of assets by the Corporation. If, upon any liquidation,
dissolution or winding up of the Corporation, the assets of the Corporation, or
proceeds thereof, distributable among the holders of shares of Parity Preferred
Stock shall be insufficient to pay in full the preferential amount aforesaid,
then such assets, or the proceeds thereof, shall be distributable among such
holders ratably in accordance with the respective amounts which would be payable
on such shares if all amounts payable thereon were paid in full. For the
purposes hereof, neither a consolidation or merger of the Corporation with or
into any other corporation, nor a merger of any other corporation with or into
the Corporation, nor a sale or transfer of all or any part of the Corporation's
assets shall be considered a liquidation, dissolution or winding up of the
Corporation.
4. Conversion. The Cumulative Preferred Stock is not convertible
----------
into shares of any other class or series of stock of the Corporation.
5. Voting Rights. The holders of shares of Cumulative Preferred
-------------
Stock shall, in addition
29
<PAGE>
to any voting rights to which they may be entitled under the laws of the State
of Delaware, have the right to vote in person or by proxy on all matters voted
on by the holders of Common Stock, voting together with the holders of Common
Stock as a class, with each holder of Cumulative Preferred Stock entitled to
cast thereon 0.295 votes per share of Cumulative Preferred Stock standing in
such holder's name; provided, however, that if the arithmetic average of the
-------- -------
high and low "when-issued" sales prices per share of Common Stock on the New
York Stock Exchange (the "NYSE") on May 27, 1994 the ("May 27 Average Market
Price") is less than $17.00, then from and after the close of trading on the
NYSE on May 27, 1994 the number of votes per share of Cumulative Preferred Stock
standing in such holder's name shall equal the quotient obtained by dividing (i)
five dollars ($5.00) by (ii) such May 27 Average Market Price, increased to the
next highest thousandth of a vote; provided further, that, notwithstanding the
-------- -------
foregoing provison, (A) if the arithmetic average of the high and low regular
way sales prices per share of Common Stock on the NYSE on May 31, 1994 (the "May
31 Average Market Price") is less than $17.00, then from and after the close of
trading on the NYSE on May 31, 1994, the number of votes per share of Redeemable
Preferred Stock standing in such holder's name shall equal the quotient obtained
by dividing (x) five dollars ($5.00) by (y) such May 31 Average Market Price,
increased to the next highest thousandth of a vote and (B) if the May 31 Average
Market Price is $17.00 or greater, then such number of votes shall be 0.295 per
share of Redeemable Preferred Stock.
In addition, whenever, at any time or times, dividends payable on the
shares of Cumulative Preferred Stock or on any Parity Preferred Stock, shall be
in arrears for an aggregate number of days equal to six calendar quarters or
more, whether or not consecutive, the authorized number of directors of the
Corporation shall automatically be increased by two and the holders of the
outstanding shares of Cumulative Preferred Stock shall have the right, with
holders of shares of any one or more other class or series of Parity Preferred
Stock outstanding at the time upon which like voting rights have been conferred
and are exercisable ("Voting Parity Stock") (voting together as a class), to
elect two directors to fill such newly created directorships at the
Corporation's next annual meeting of stockholders and at each subsequent annual
meeting of stockholders until such arrearages have been paid or set apart for
payment, at which time such right shall terminate, except as herein or by law
expressly provided, subject to revesting in the event of each and every
subsequent default of the character above mentioned. Upon any termination of
the right of the holders of shares of Cumulative Preferred Stock and Parity
Voting Stock as a class to vote for directors as herein provided, the term of
office of all directors then in office so elected shall terminate immediately
and the authorized number of directors shall be reduced by the number of
directors elected by the holders of the Cumulative Preferred Stock and Voting
Parity Stock pursuant to this paragraph.
Any director who shall have been so elected pursuant to the
immediately preceding paragraph of this Paragraph 5 may be removed at any time,
either with or without cause. Any vacancy thereby created may be filled only by
the affirmative vote of the holders of shares of Cumulative Preferred Stock
voting separately as a class (together with the holders of shares of Voting
Parity Stock). If the office of any director elected by the holders of shares
of Cumulative Preferred Stock voting as a class (together with the holders of
shares of Voting Parity Stock) becomes vacant for any reason other than removal
from office as aforesaid, the remaining director
30
<PAGE>
elected pursuant to the immediately preceding paragraph of this Paragraph 5 may
choose a successor who shall hold office for the unexpired term in respect of
which such vacancy occurred. At elections for such directors, each holder of
shares of Cumulative Preferred Stock shall be entitled to one vote for each
share held (the holders of shares of any other class or series of Voting Parity
Stock being entitled to such number of votes, if any, for each share of such
stock held as may be granted to them).
In addition, so long as any shares of Cumulative Preferred Stock
remain outstanding, the consent of the holders of at least two-thirds of the
shares of Cumulative Preferred Stock outstanding at the time given in person or
by proxy, either in writing or at any meeting called for the purpose, shall be
necessary to permit, effect or validate any one or more of the following:
(a) the issuance or increase of the authorized amount of shares of
any class or series of stock ranking prior (as that term is defined in Paragraph
9(a) of this Section C) to the Cumulative Preferred Stock; or
(b) the amendment, alteration or repeal, whether by merger,
consolidation or otherwise, of any of the provisions of the Certificate of
Incorporation, (including this resolution or any provision hereof) that would
materially and adversely affect any power, preference, or special right of the
shares of Cumulative Preferred Stock or of the holders thereof; provided,
--------
however, that any increase in the amount of authorized Common Stock or
- -------
authorized preferred stock or any increase or decrease in the number of shares
of any series of preferred stock or the authorization, creation and issuance of
other classes or series of Common Stock or other stock, in each case ranking on
a parity with or junior to the shares of Cumulative Preferred Stock with respect
to the payment of dividends and the distribution of assets upon liquidation,
dissolution of winding up, shall not be deemed to materially and adversely
affect such powers, preferences or special rights.
The foregoing voting provisions shall not apply if, at or prior to the
time when the act with respect to which such vote would otherwise be required or
upon which the holders of Cumulative Preferred Stock shall be entitled to vote
shall be effected, all outstanding shares of Cumulative Preferred Stock shall
have been redeemed or called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
6. Redemption. The shares of the Cumulative Preferred Stock may be
----------
redeemed at the option of the Corporation, as a whole, or from time to time in
part, at any time, upon not less than 30 days' prior notice mailed to the
holders of the shares to be redeemed at their addresses as shown on the stock
books of the Corporation; provided, however, that shares of the Cumulative
-------- -------
Preferred Stock shall not be redeemable prior to June 1, 2001. Subject to the
foregoing, on or after such date, shares of the Cumulative Preferred Stock are
redeemable at a redemption price equal to $25.00 per share together with an
amount equal to all dividends (whether or not earned or declared) accrued and
accumulated and unpaid to, but excluding, the date fixed for redemption.
If full cumulative dividends on the Cumulative Preferred Stock have
not been paid, the Cumulative Preferred Stock may not be redeemed in part and
the Corporation may not purchase
31
<PAGE>
or acquire any shares of the Cumulative Preferred Stock otherwise than pursuant
to a purchase or exchange offer made on the same terms to all holders of the
Cumulative Preferred Stock. If fewer than all the outst anding shares of
Cumulative Preferred Stock are to be redeemed, the Corporation will select those
to be redeemed by lot or a substantially equivalent method.
If a notice of redemption has been given pursuant to this Paragraph 6
and if, on or before the date fixed for redemption, the funds necessary for such
redemption shall have been set aside by the Corporation, separate and apart from
its other funds, in trust for the pro rata benefit of the holders of the shares
of Cumulative Preferred Stock so called for redemption, then, notwithstanding
that any certificates for such shares have not been surrendered for
cancellation, on the redemption date dividends shall cease to accrue on the
shares to be redeemed, and at the close of business on the redemption date the
holders of such shares shall cease to be stockholders with respect to such
shares and shall have no interest in or claims against the Corporation by virtue
thereof and shall have no voting or other rights with respect to such shares,
except the right to receive the moneys payable upon surrender (and endorsement,
if required by the Corporation) of their certificates, and the shares evidenced
thereby shall no longer be outstanding. Subject to applicable escheat laws, any
moneys so set aside by the Corporation and unclaimed at the end of two years
from the redemption date shall revert to the general funds of the Corporation,
after which reversion the holders of such shares so called for redemption shall
look only to the general funds of the Corporation for the payment of the amounts
payable upon such redemption. Any interest accrued on funds so deposited shall
be paid to the Corporation from time to time.
7. Authorization and Issuance of Other Securities. No consent of the
----------------------------------------------
holders of the Cumulative Preferred Stock shall be required for (a) the creation
of any indebtedness of any kind of the Corporation, (b) the authorization,
creation, or increase or decrease in the amount, of any class or series of stock
of the Corporation not ranking prior as to dividends or upon liquidation,
dissolution or winding up to the Cumulative Preferred Stock or (c) any increase
or decrease in the amount of authorized Common Stock or any increase, decrease
or change in the par value thereof or in any other terms thereof.
8. Amendment of Resolution. The Board reserves the right by
-----------------------
subsequent amendment of this resolution from time to time to increase or
decrease the number of shares that constitute the Cumulative Preferred Stock
(but not below the number of shares thereof then outstanding) and in other
respects to amend this resolution within the limitations provided by law, this
resolution and the Certificate of Incorporation.
9. Rank. For the purposes of this Section C, any stock of any
----
class or classes of the Corporation shall be deemed to rank:
(a) prior to shares of the Cumulative Preferred Stock, either as
to dividends or upon liquidation, dissolution or winding up, or both, if the
holders of stock of such class or classes shall be entitled by the terms thereof
to the receipt of dividends or of amounts distributable upon liquidation,
dissolution or winding up, as the case may be, in preference or priority to the
holders of shares of the Cumulative Preferred Stock;
32
<PAGE>
(b) on a parity with shares of the Cumulative Preferred Stock,
either as to dividends or upon liquidation, dissolution or winding up, or both,
whether or not the dividend rates, dividend payment dates, or redemption or
liquidation prices per share thereof be different from those of the Cumulative
Preferred Stock, if the holders of stock of such class or classes shall be
entitled by the terms thereof to the receipt of dividends or of amounts
distributed upon liquidation, dissolution or winding up, as the case may be, in
proportion to their respective dividend rates or liquidation prices, without
preference or priority of one over the other as between the holders of such
stock and the holders of shares of Cumulative Preferred Stock (the term "Parity
Preferred Stock" being used to refer to any stock on a parity with the shares of
Cumulative Preferred Stock, either as to dividends or upon liquidation,
dissolution or winding up, or both, as the context may require); and
(c) junior to shares of the Cumulative Preferred Stock, either as
to dividends or upon liquidation, dissolution or winding up, or both, if such
class shall be Common Stock or if the holders of the Cumulative Preferred Stock
shall be entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference or
priority to the holders of stock of such class or classes.
The Cumulative Preferred Stock shall rank, as to dividends and upon
liquidation, dissolution or winding up, on a parity with the Corporation's
Redeemable Voting Preferred Stock and the Corporation's Cumulative Convertible
Voting Preferred Stock, Series A.
4.2 No Preemptive Rights. No shares of the capital stock of the Corporation
--------------------
shall be entitled to preemptive rights.
5. BY-LAWS. In furtherance and not in limitation of the powers conferred by
-------
statute, the Board of Directors is expressly authorized to make, alter or repeal
the By-Laws of the Corporation.
6. ELECTION OF DIRECTORS.
---------------------
6.1 Number, Election and Term. Except as otherwise fixed pursuant to the
-------------------------
provisions of Article 4 hereof relating to the rights of the holders of any
class or series of stock having a preference over the Common Stock as to
dividends or upon liquidation to elect additional directors under specified
circumstances, the number of directors of the Corporation shall be fixed from
time to time by or pursuant to the By-Laws. The Board of Directors shall be
divided into three classes, designated Class I, Class II and Class III. Each
class shall consist, as nearly as may be possible, of one-third of the total
number of directors constituting the entire Board of Directors. Class I
directors shall be elected initially for a one-year term, Class II directors
initially for a two-year term and Class III directors initially for a three-year
term. At each succeeding annual meeting of stockholders beginning in 1995,
successors to the class of directors whose term expires at that annual meeting
shall be elected for a three-year term. If the number of directors is changed,
any increase or decrease shall be apportioned among the classes so as to
maintain the number of
33
<PAGE>
directors in each class as nearly equal as possible, and any additional director
of any class shall hold office for a term that shall coincide with the remaining
term of that class, but in no case will a decrease in the number of directors
shorten the term of any incumbent director. A director shall hold office until
the annual meeting for the year in which his term expires and until his
successor shall be elected and shall qualify, subject, however, to prior death,
disability, resignation, retirement, disqualification or removal from office. No
decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.
6.2 Newly Created Directorships and Vacancies. Newly created directorships
-----------------------------------------
resulting from any increase in the authorized number of directors and any
vacancies on the Board of Directors resulting from death, disability,
resignation, retirement, disqualification, removal from office or other cause
shall be filled by a majority vote of the directors then in office, by a sole
remaining director or if there are no directors then in office, by the
stockholders.
7. INDEMNIFICATION.
---------------
7.1 Right to Indemnification. The Corporation shall have the power to
------------------------
indemnify to the fullest extent permitted, from time to time, by applicable law
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative in nature by reason of the fact that
he is or was a director, officer, employee or agent of the Corporation, or,
while a director, officer, employee or agent of the Corporation, is or was
serving at the request of the Corporation as a director, officer, trustee,
employee or agent of or in any other capacity with another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against expenses (including attorneys' fees), judgments, fines, penalties and
amounts paid in settlement in connection with such action, suit or proceeding.
The Corporation shall have the power to enter into agreements providing any such
indemnity.
7.2 Expenses. The Corporation shall have the power to advance to a director,
--------
officer, employee or agent of the Corporation expenses incurred in connection
with defending any action, suit or proceeding referred to above or in the By-
Laws at any time before the final disposition of such action, suit or proceeding
upon receipt of an undertaking by or on behalf of the indemnified person to
repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the Corporation as authorized in this Article 7 or as
provided in the By-Laws. The Corporation shall have the power to enter into
agreements providing for such advancement of expenses.
7.3 Non-exclusivity. The indemnification and other rights provided for in this
----------------
Article 7 shall not be exclusive of any provision with respect to
indemnification or the payment of expenses in the By-Laws or any other contract
or agreement between the Corporation and any officer, director, employee or
agent of the Corporation or any other person.
7.4 Future Changes. Neither the amendment nor repeal of this Article 7, nor
--------------
the adoption of any provision of this Restated Certificate of Incorporation
inconsistent with this Article 7, shall
34
<PAGE>
eliminate or reduce the effect of such provisions in respect of any act or
omission or any matter occurring prior to such amendment, repeal or adoption of
an inconsistent provision regardless of when any cause of action, suit or claim
relating to any such matter accrued or matured or was commenced, and such
provision shall continue to have effect in respect of such act, omission or
matter as if such provision had not been so amended or repealed or if a
provision inconsistent therewith had not been so adopted.
8. COMPROMISE OR SETTLEMENT PROPOSALS. Whenever a compromise or arrangement is
----------------------------------
proposed between this Corporation and its creditors or any class of them and/or
between this Corporation and its stockholders or any class of them, any court of
equitable jurisdiction within the State of Delaware may, on the application in a
summary way of this Corporation or of any creditor or stockholder thereof or on
the application of any receiver or receivers appointed for this Corporation
under the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or off the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
9. ACTION OF STOCKHOLDERS. Any action required or permitted to be taken by the
----------------------
holders of the capital stock of the Corporation must be effected at a duly
called annual or special meeting of such holders and may not be taken by written
consent in lieu of a meeting.
10. DIRECTORS' LIABILITY.
--------------------
10.1 Limitation of Liability of Directors. A director shall not be personally
------------------------------------
liable to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director; provided that this sentence shall not eliminate or
limit the liability of a director (i) for any breach of his duty of loyalty to
the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the GCL, or (iv) for any transaction from which the
Director derives an improper personal benefit. If the GCL is amended after the
date this Restated Certificate of Incorporation becomes effective to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the GCL, as so amended.
10.2. Future Changes. Neither the amendment nor repeal of this Article 10, nor
--------------
the adoption of any provision of this Restated Certificate of Incorporation
inconsistent with this Article 10 shall
35
<PAGE>
eliminate or reduce the effect of such provisions, in respect of any matter
occurring prior to such amendment, repeal or adoption of an inconsistent
provision or in respect of any act or omission or any matter occurring prior to
such amendment, repeal or adoption of an inconsistent provision, regardless of
when any cause of action, suit or claim relating to any such matter accrued or
matured or was commenced, and such provision shall continue to have effect in
respect of such act, omission or matter as if such provision had not been so
amended or repealed or if a provision inconsistent therewith had not been so
adopted.
11. AMENDMENTS. The affirmative vote of the holders of at least a majority of
-----------
shares of capital stock entitled to vote, voting together as a single class,
shall be required to amend or repeal any provision in this Restated Certificate
of Incorporation or adopt any provision inconsistent with any such provision
unless a higher percentage is specified herein, in which case such higher
percentage will be applicable.
IN WITNESS WHEREOF, the undersigned has hereunto signed her name and
affirms that the statements made in this Restated Certificate of Incorporation
are true under the penalties of perjury this 27th day of May 1994.
/s/ Karen C. Manson
_____________________________
Karen C. Manson
Attest:
/s/ Madeline Shapiro
____________________________
Madeline Shapiro
36
<PAGE>
EXHIBIT 3.2
Effective May 27, 1994
LEHMAN BROTHERS HOLDINGS INC.
Incorporated Under the Laws of the
State of Delaware
BY-LAWS
-------
ARTICLE I
OFFICES
Lehman Brothers Holdings Inc. (the "Corporation") shall maintain a
registered office in the State of Delaware. The Corporation may also have other
offices at such places, either within or without the State of Delaware, as the
Board of Directors may from time to time designate or the business of the
Corporation may require.
ARTICLE II
STOCKHOLDERS
Section 1. Place of Meetings. Meetings of the stockholders for the
-----------------
election of directors or for any other purpose shall be held on such date, at
such time and at such place, either within or without the State of Delaware, as
shall be designated from time to time by the Board of Directors and stated in
the notice of the meeting or in a duly executed waiver of notice thereof.
Section 2. Annual Meeting. The Annual Meeting of Stockholders shall
--------------
be held on such date and at such time as shall be designated from time to time
by the Board of Directors and stated in the notice of the meeting, at which
meetings the stockholders shall elect by a plurality vote a Board of Directors,
and transact only such other business as is properly brought before the meeting
in accordance with these By-Laws. Written notice of the Annual Meeting stating
the place, date and hour of the meeting shall be given as permitted by law to
each stockholder entitled to vote at such meeting not less than ten (10) nor
more than sixty (60) days before the date of the meeting.
Section 3. Special Meetings. Unless otherwise prescribed by law or
----------------
the Restated Certificate of Incorporation (such Certificate, as amended from
time to time, including resolutions adopted from time to time by the Board of
Directors establishing the designation, rights, preferences and other terms of
any class or series of capital stock, the "Certificate of Incorporation")
special meetings of the stockholders may be called only by the Chairman of the
Board, the Chief Executive Officer, the President, the Secretary at the request
of the Board of Directors or any committee thereof or the holders of at least a
majority of the shares of capital stock issued and outstanding and entitled to
vote thereat ("Voting Stock"). Written notice of a Special Meeting stating the
place, date and hour of the meeting and the purpose or
<PAGE>
purposes for which the meeting is called shall be given not less than ten (10)
nor more than sixty (60) days before the date of the meeting to each stockholder
entitled to vote at such meeting. Only such business as is specified in the
notice of special meeting shall come before such meeting.
Section 4. Quorum. Except as otherwise provided by law or by the
------
Certificate of Incorporation, the holders of a majority of the Voting Stock,
present in person or represented by proxy, shall constitute a quorum at all
meetings of the stockholders for the transaction of business. If, however, such
quorum shall not be present or represented at any meeting of the stockholders,
the stockholders entitled to vote thereat, present in person or represented by
proxy, shall have the power to adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present
or represented. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally noticed. If the adjournment is for more than thirty
(30) days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder entitled to vote at the meeting. When a quorum is once present, it
is not broken by the subsequent withdrawal of any stockholder.
Section 5. Appointment of Inspectors of Election. The Board of
--------------------------------------
Directors shall, in advance of sending to the stockholders any notice of a
meeting of the holders of any class of shares, appoint one or more inspectors of
election ("inspectors") to act at such meeting or any adjournment or
postponement thereof and make a written report thereof. The Board of Directors
may designate one or more persons as alternate inspectors to replace any
inspector who fails to act. If no inspector or alternate is so appointed or if
no inspector or alternate is able to act, the Chairman of the Board shall
appoint one or more inspectors to act at such meeting. Each inspector, before
entering upon the discharge of such inspector's duties, shall take and sign an
oath faithfully to execute the duties of inspector with strict impartiality and
according to the best of such inspector's ability. The inspectors shall not be
directors, officers or employees of the Corporation.
Section 6. Voting. Except as otherwise provided by law or by the
------
Certificate of Incorporation, each stockholder of record of any class or series
of stock having a preference over the Common Stock of the Corporation as to
dividends or upon liquidation shall be entitled on each matter submitted to a
vote at each meeting of stockholders to such number of votes for each share of
such stock as may be fixed in the Certificate of Incorporation, and each
stockholder of record of Common Stock shall be entitled at each meeting of
stockholders to one vote for each share of such stock, in each case, registered
in such stockholder's name on the books of the Corporation on the date fixed
pursuant to Section 5 of Article VI of these By-Laws as the record date for the
determination of stockholders entitled to notice of and to vote at such meeting,
or if no such record date shall have been so fixed, then at the close of
business on the day next preceding the day on which notice of such meeting is
given, or if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held.
2
<PAGE>
Each stockholder entitled to vote at any meeting may vote either in
person or by proxy, duly appointed by an instrument in writing executed by such
stockholder and bearing a date not more than three years prior to said meeting,
unless said proxy provides for a longer period. Any such proxy shall be
delivered to the secretary of such meeting at or prior to the time designated
for holding such meeting, but in any event not later than the time designated in
the order of business for so delivering such proxies.
At all meetings of stockholders all matters, except as otherwise
provided by law, the Certificate of Incorporation, or these By-Laws shall, be
determined by a majority vote of the stockholders present in person or by proxy
and entitled to vote thereat, and where a separate vote by class is required, a
majority of the votes cast by the stockholders of such class present in person
or by proxy, shall be the act of such class.
The vote on any matter, including the election of directors, shall be
by written ballot. Each ballot shall be signed by the stockholder voting, or by
such stockholder's proxy, and shall state the number of shares voted. All
proxies, ballots and vote tabulations that identify the particular vote of a
stockholder shall be kept confidential, except that disclosure of the particular
vote may be made: (i) to allow the inspectors to certify the results of the
vote; (ii) as necessary under applicable legal requirements, including the
pursuit or defense of judicial actions; (iii) when such disclosure is expressly
requested by such stockholder; and (iv) except where such vote is included in a
comment written on a proxy, consent or ballot, and disclosure is necessary, in
the opinion of the inspector, for an understanding of the comment.
Proxy cards shall be returned in envelopes addressed to the
inspectors, who shall receive, inspect and tabulate the proxies. Comments
written on proxies, consents or ballots shall be transcribed and provided to the
Secretary with the name and address of the stockholder.
Nothing in this Section 6 shall prohibit the inspector from making
available to the Corporation, during the period prior to any annual or special
meeting, information as to which stockholders have not voted and periodic status
reports on the aggregate vote.
Section 7. List of Stockholders Entitled to Vote. The officer of the
-------------------------------------
Corporation who has charge of the stock ledger of the Corporation shall prepare
and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order and showing the address of each stockholder and the number of
shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder of the Corporation who is
present.
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Section 8. Stock Ledger. The stock ledger of the Corporation shall
-------------
be the only evidence as to who are the stockholders entitled to examine the
stock ledger, the list required by Section 6 of this Article II or the books of
the Corporation, or to vote in person or by proxy at any meeting of
stockholders.
Section 9. Advance Notice of Stockholder-Proposed Business at Annual
---------------------------------------------------------
Meeting. To be properly brought before the Annual Meeting, business must be
- --------
either (a) specified in the notice of meeting (or any supplement thereto) given
by or at the direction of the Board of Directors, (b) otherwise properly brought
before the meeting by or at the direction of the Board of Directors or (c)
otherwise properly brought before the meeting by a stockholder. For business to
be properly brought before an Annual Meeting by a stockholder, the stockholder
must have given timely notice thereof in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive officers of the Corporation not
less than ninety (90) nor more than one hundred twenty (120) days prior to the
one year anniversary of the date of the Annual Meeting of the previous year;
provided, however, that in the event that the Annual Meeting is called for a
date that is not within thirty (30) days before or after such anniversary date,
notice by the stockholder in order to be timely must be so received not earlier
than one hundred twenty (120) days prior to such Annual Meeting and not later
than the close of business on the tenth (10th) day following the day on which
notice of the date of the Annual Meeting was mailed or public disclosure of the
date of the annual meeting was made, whichever first occurs. A stockholder's
notice to the Secretary shall set forth as to each matter the stockholder
proposes to bring before the Annual Meeting (i) a brief description of the
business desired to be brought before the Annual Meeting and the reasons for
conducting such business at the Annual Meeting, (ii) the name and address, as
they appear on the Corporation's books, of the stockholder proposing such
business, (iii) the class and number of shares of the Corporation that are
beneficially owned by the stockholder, (iv) any material interest of the
stockholder in such business and (v) any other information relating to the
person or the proposal that is required to be disclosed pursuant to Regulation
14A under the Securities Exchange Act of 1934, as amended (or any successor
provision or law) or applicable law.
Notwithstanding anything in these By-Laws to the contrary, no business
shall be conducted at an Annual Meeting except in accordance with the procedures
set forth in this Section 9; provided, however, that nothing in this Section 9
shall be deemed to preclude discussion by any stockholder of any business
properly brought before the Annual Meeting.
The Cha irman of an Annual Meeting shall, if the facts warrant , determine and
declare to the meeting that business w as not properly brought before the
meeting in accorda nce with the provisions of this Section 9 and if he shou ld
so determine, he shall so declare to the meeting and any such business not
properly brought before the mee ting shall not be transacted.
Section 10. Nomination of Directors; Advance Notice of Stockholder
------------------------------------------------------
Nominations. Only persons who are nominated in accordance with the procedures
- ------------
set forth in this Section 10 shall be eligible for election as directors.
Nominations of persons for election to the Board of
4
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Directors of the Corporation at the Annual Meeting or at any special meeting of
stockholders called in the manner set forth in Article II, Section 3 hereof for
the purpose of electing directors may be made at a meeting of stockholders by or
at the direction of the Board of Directors, by any nominating committee or
person appointed for such purpose by the Board of Directors, or by any
stockholder of the Corporation entitled to vote for the election of directors at
the meeting who complies with the notice procedures set forth in this Section
10. Such nominations, other than those made by, or at the direction of, or under
the authority of the Board of Directors, shall be made pursuant to timely notice
in writing to the Secretary of the Corporation. To be timely, a stockholder's
notice shall be delivered to or mailed and received at the principal executive
offices of the Corporation (a) in the case of an Annual Meeting, not less than
ninety (90) nor more than one hundred twenty (120) days prior to the one year
anniversary of the date of the Annual Meeting of the previous year; provided,
however, that in the event that the Annual Meeting is called for a date that is
not within thirty (30) days before or after such anniversary date, notice by the
stockholder in order to be timely must be so received not earlier than one
hundred twenty (120) days prior to such Annual Meeting and not later than the
close of business on the tenth (10th) day following the day on which notice of
the date of the annual meeting was mailed or public disclosure of the date of
the Annual Meeting was made, whichever first occurs; and (b) in the case of a
special meeting of stockholders called in the manner set forth in Article II,
Section 3 hereof for the purpose of electing directors, not earlier than one
hundred twenty (120) days prior to such special meeting and not later than the
close of business on the tenth (10th) day following the day on which notice of
the date of the special meeting was mailed or public disclosure of the date of
the special meeting was made, whichever first occurs. Such stockholder's notice
to the Secretary shall set forth (a) as to each person whom the stockholder
proposes to nominate for election or re-election as a director, (i) the name,
age, business address and residence address of the person, (ii) the principal
occupation or employment of the person, (iii) the class and number of shares of
capital stock of the Corporation, if any, which are beneficially owned by the
person and (iv) any other information relating to the person that is required to
be disclosed in solicitations for proxies for election of Directors pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (or any
successor provision or law) or applicable law; and (b) as to the stockholder
giving the notice (i) the name and record address of the stockholder and (ii)
the class and number of shares of capital stock of the Corporation which are
beneficially owned by the stockholder.
The Chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
foregoing procedures and, if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.
ARTICLE III
DIRECTORS
Section 1. Number; Resignation; Removal. Except as otherwise required
----------------------------
by the Certificate of Incorporation, the number of directors which shall
constitute the whole Board of
5
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Directors shall be fixed from time to time by resolution of the Board of
Directors, but shall not be less than six (6) nor more than twenty-four (24).
Except as provided in Section 2 of this Article III and in the Certificate of
Incorporation, directors shall be elected by a plurality of the votes cast at
the Annual Meeting of Stockholders. The directors shall be divided into three
classes, designated Class I, Class II and Class III, as provided in the
Certificate of Incorporation. A director may resign at any time upon notice to
the Corporation. A director may be removed only for cause.
Section 2. Vacancies: Vacancies and newly created directorships
---------
resulting from any increase in the authorized number of directors may be filled
by a majority of the remaining directors then in office, though less than a
quorum, or by a sole remaining director, and the directors so elected shall hold
office until the next election for such class and until their successors are
duly elected and qualified, or until their earlier resignation or removal. If
there are no directors in office, then an election of directors may be held in
the manner provided by the General Corporation Law of the State of Delaware. No
decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.
Section 3. Duties and Powers. The business of the Corporation shall
-----------------
be managed by or under the direction of the Board of Directors which may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by statute or by the Certificate of Incorporation or by these
By-Laws directed or required to be exercised or done solely by the stockholders.
Section 4. Meetings. The Board of Directors of the Corporation may
--------
hold meetings, both regular and special, either within or without the State of
Delaware. Regular meetings of the Board of Directors may be held without notice
at such time and at such place as may from time to time be determined by the
Board of Directors. Special meetings of the Board of Directors may be called by
the Chairman of the Board, the Chief Executive Officer, the President or any
director. Notice thereof stating the place, date and hour of the meeting shall
be given to each director either (i) by mail or courier not less than forty-
eight (48) hours before the date of the meeting or (ii) by telephone, telegram
or facsimile transmission, not less than twenty-four (24) hours before the time
of the meeting or on such shorter notice as the person or persons calling such
meeting may deem necessary or appropriate in the circumstances (provided that
notice of any meeting need not be given to any director who shall either, before
or after such meeting, submit a signed waiver of notice or attends the meeting
without protesting, prior to its commencement, the lack of notice).
Section 5. Quorum. Except as may be otherwise provided by law, the
------
Certificate of Incorporation or these By-Laws, a majority of the entire Board of
Directors shall be necessary to constitute a quorum for the transaction of
business, and the vote of a majority of the directors present at a meeting at
which a quorum is present shall be the act of the Board of Directors. If a
quorum is not present at a meeting of the Board of Directors, a majority of the
directors present may adjourn the meeting to such time and place as they may
determine without notice other than an announcement at the meeting until enough
directors to constitute a
6
<PAGE>
quorum shall attend.
Section 6. Action Without A Meeting. Unless otherwise provided by the
------------------------
Certificate of Incorporation or these By-Laws, any action required or permitted
to be taken by the Board of Directors or any committee thereof may be taken
without a meeting if all members of the Board of Directors or the committee
consent in writing to the adoption of a resolution authorizing the action. The
resolution and the written consents thereto by the members of the Board of
Directors or committee shall be filed with the minutes of the proceedings of the
Board of Directors or such committee.
Section 7. Participation By Telephone. Unless otherwise provided by
--------------------------
the Certificate of Incorporation or these By-Laws, any one or more members of
the Board of Directors or any committee thereof may participate in a meeting of
the Board of Directors or such committee by means of a conference telephone or
similar communications equipment allowing all persons participating in the
meeting to hear each other. Participation by such means shall constitute
presence in person at the meeting.
Section 8. Compensation. The directors may be paid their expenses, if
-------------
any, of attendance at each meeting of the Board of Directors or any committee
thereof and may be paid compensation as a director, committee member or chairman
of any committee and for attendance at each meeting of the Board of Directors or
committee thereof. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor or
entering into transactions otherwise permitted by the Certificate of
Incorporation, these By-Laws or applicable law.
Section 9. Resignation. Any director may resign at any time. Such
-----------
resignation shall be made in writing and shall take effect at the time specified
therein, or, if no time be specified, at the time of its receipt by the Chairman
of the Board, or if none, by the Chief Executive Officer, President or the
Secretary. The acceptance of a resignation shall not be necessary to make it
effective unless so specified therein.
ARTICLE IV
COMMITTEES
Section 1. Committees. The Board of Directors, by resolution passed
----------
by a majority of the entire Board of Directors, may designate one or more
committees, each committee to consist of one or more of the directors of the
Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of any such committee. In the absence or disqualification
of a member of a committee, and in the absence of a designation by the Board of
Directors of an alternate member to replace the absent or disqualified member,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not such member or member constitute a quorum, may by
unanimous vote appoint another member of the Board of Directors to act at the
meeting in the place of any absent or
7
<PAGE>
disqualified member. Any committee, to the extent allowed by law and provided in
the resolution establishing such committee, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the Corporation, including the power to adopt a certificate of
ownership and merger pursuant to Section 253 of Delaware General Corporation
Law, the authority to issue shares and the authority to declare a dividend,
except as limited by Delaware General Corporate law or other applicable law. All
acts done by any committee within the scope of its powers and duties pursuant to
these By-Laws and the resolutions adopted by the Board of Directors shall be
deemed to be, and may be certified as being, done or conferred under authority
of the Board of Directors. The Secretary or any Assistant Secretary is empowered
to certify that any resolution duly adopted by any such committee is binding
upon the Corporation and to execute and deliver such certifications from time to
time as may be necessary or proper to the conduct of the business of the
Corporation.
Section 2. Resignation. Any member of a committee may resign at any
-----------
time. Such resignation shall be made in writing and shall take effect at the
time specified therein, or, if no time be specified, at the time of its receipt
by the Chairman of the Board, or if none, by the Chief Executive Officer,
President or the Secretary. The acceptance of a resignation shall not be
necessary to make it effective unless so specified therein.
Section 3. Quorum. A majority of the members of a committee shall
------
constitute a quorum. The vote of a majority of the members of a committee
present at any meeting at which a quorum is present shall be the act of such
committee. thereof shall have no powers
Section 4. Record of Proceedings. Each committee shall keep a record
---------------------
of its acts and proceedings, and shall report the same to the Board of Directors
when and as required by the Board of Directors.
Section 5. Organization, Meetings, Notices. A committee may hold its
-------------------------------
meetings at the principal office of the Corporation, or at any other place upon
which a majority of the committee may at any time agree. Each committee may
make such rules as it may deem expedient for the regulation and carrying on of
its meetings and proceedings.
ARTICLE V
OFFICERS
Section 1. General. The officers of the Corporation shall be elected
-------
by the Board of Directors and shall consist of a Chairman of the Board, Chief
Executive Officer, a President, a Chief Financial Officer, one or more Senior
Executive Vice Presidents, one or more Executive Vice Presidents, one or more
Senior Vice Presidents, one or more First Vice Presidents, one or more Vice
Presidents, a Secretary, a Treasurer and a Controller. The Board of Directors,
in its discretion, may also elect and specifically identify as officers of the
Corporation one or more Vice Chairmen of the Board, one or more Assistant Vice
Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers
and one or more Assistant Controllers
8
<PAGE>
as in its judgment may be necessary or desirable. Any number of offices may be
held by the same person, unless otherwise prohibited by law, the Certificate of
Incorporation or these By-Laws. The officers of the Corporation need not be
stockholders or directors of the Corporation.
Section 2. Election; Removal; Remuneration. The Board of Directors
--------------------------------
at its first meeting held after each Annual Meeting of Stockholders shall elect
the officers of the Corporation who shall hold their offices for such terms and
shall exercise such powers and perform such duties as shall be determined from
time to time by the Board of Directors and may elect additional officers and may
fill vacancies among the officers previously elected at any subsequent meeting
of the Board of Directors; and all officers of the Corporation shall hold office
until their successors are chosen and qualified, or until their earlier
resignation or removal. Any officer elected by the Board of Directors may be
removed at any time, either for or without cause, by the affirmative vote of a
majority of the Board of Directors. The compensation of all officers of the
Corporation shall be fixed by the Board of Directors or a committee thereof.
Section 3. Voting Securities Owned by the Corporation. Powers of
-------------------------------------------
attorney, proxies, waivers of notice of meetings, consents and other instruments
relating to securities owned by the Corporation may be executed in the name of
and on behalf of the Corporation by the Chairman of the Board, Chief Executive
Officer, the President, Secretary or any Senior Executive Vice President,
Executive Vice President, Senior Vice President, First Vice President, Vice
President or Assistant Secretary and any such officer may, in the name and on
behalf of the Corporation, take all such action as any such officer may deem
advisable to vote in person or by proxy at any meeting of security holders of
any corporation in which the Corporation may own securities and at any such
meeting shall possess and may exercise any and all rights and powers incident to
the ownership of such securities and which, as the owner thereof, the
Corporation might have exercised and possessed if present. The Board of
Directors may, by resolution, from time to time confer like powers upon any
other person or persons.
Section 4. Chairman of the Board. The Chairman of the Board may be,
---------------------
but need not be, a person other than the Chief Executive Officer of the
Corporation. The Chairman of the Board may be, but need not be, an officer or
employee of the Corporation. The Chairman of the Board shall preside at
meetings of the Board of Directors and shall establish agendas for such
meetings. In addition, the Chairman of the Board shall assure that matters of
significant interest to stockholders and the investment community are addressed
by management. The Chairman of the Board shall be an ex-officio of each
standing committee of the Board to which the Board of Directors has not
specifically designated him as a member.
Section 5. Chief Executive Officer. The Chief Executive Officer
-----------------------
shall, subject to the direction of the Board of Directors, have general and
active control of the affairs and business of the Corporation and general
supervision of its officers, officials, employees and agents. The Chief
Executive Officer shall preside at all meetings of the stockholders and shall
preside
9
<PAGE>
at all meetings of the Board of Directors and any committee thereof of which he
is a member, unless the Board of Directors or such committee shall have chosen
another chairman. The Chief Executive Officer shall see that all orders and
resolutions of the Board are carried into effect, and in addition, the Chief
Executive Officer shall have all the powers and perform all the duties generally
appertaining to the office of the chief executive officer of a corporation. The
Chief Executive Officer shall designate the person or persons who shall exercise
his powers and perform his duties in his absence or disability and the absence
or disability of the President.
Section 6. President. The President shall have such powers and
---------
perform such duties as are prescribed by the Chief Executive Officer or the
Board of Directors, and in the absence or disability of the Chief Executive
Officer, the President shall have the powers and perform the duties of the Chief
Executive Officer, except to the extent the Board of Directors shall have
otherwise provided. In addition, the President shall have such powers and
perform such duties generally appertaining to the office of the president of a
corporation, except to the extent the Chief Executive Officer or the Board of
Directors shall have otherwise provided.
Section 7. Vice Chairmen of the Board. The Vice Chairmen of the
---------------------------
Board shall be members of the Board of Directors and shall perform such duties
and have such powers as may be prescribed by the Board of Directors, by the
Chairman of the Board or these By-Laws.
Section 8. Senior Executive Vice Presidents. The Senior Executive
--------------------------------
Vice Presidents of the Corporation shall perform such duties and have such
powers as may, from time to time, be assigned to them by these By-Laws, the
Board of Directors, the Chairman of the Board, the Chief Executive Officer or
the President.
Section 9. Executive Vice Presidents. The Executive Vice Presidents
-------------------------
of the Corporation shall perform such duties and have such powers as may, from
time to time, be assigned to them by these By-Laws, the Board of Directors, the
Chairman of the Board, the Chief Executive Officer, the President or a Senior
Executive Vice President.
Section 10. First Vice Presidents. The First Vice Presidents of the
---------------------
Corporation shall perform such duties and have such powers as may, from time to
time, be assigned to them by these By-Laws, the Board of Directors, the Chairman
of the Board, the Chief Executive Officer, the President, a Senior Executive
Vice President or an Executive Vice President.
Section 11. Vice Presidents. The Vice Presidents of the Corporation
---------------
shall perform such duties and have such powers as may, from time to time, be
assigned to them by these By-Laws, the Board of Directors, the Chairman of the
Board, the Chief Executive Officer, the President, a Senior Executive Vice
President, an Executive Vice President or a First Vice President.
Section 12. Secretary. The Secretary shall attend all meetings of the
---------
Board of Directors and of the stockholders and record all votes and the minutes
of all proceedings in a
10
<PAGE>
book to be kept for that purpose, and shall perform like duties for any
committee appointed by the Board of Directors. The Secretary shall keep in safe
custody the seal of the Corporation and affix it to any instrument when so
authorized by the Board of Directors. The Secretary shall give or cause to be
given, notice of all meetings of stockholders and special meetings of the Board
of Directors and shall perform generally all the duties usually appertaining to
the office of secretary of a corporation and shall perform such other duties and
have such other powers as may be prescribed by the Board of Directors or these
By-Laws. The Board of Directors may give general authority to any other officer
to affix the seal of the Corporation and to attest the affixing by his
signature.
Section 13. Assistant Secretaries. The Assistant Secretaries shall be
---------------------
empowered and authorized to perform all of the duties of the Secretary in the
absence or disability of the Secretary and shall perform such other duties and
have such other powers as may be prescribed by the Board of Directors, the
Secretary or these By-Laws.
Section 14. Chief Financial Officer. The Chief Financial Officer
------------------------
shall have responsibility for the administration of the financial affairs of the
Corporation and shall exercise supervisory responsibility for the performance of
the duties of the Treasurer and the Controller. The Chief Financial Officer
shall render to the Board of Directors, at its regular meetings, or when the
Board of Directors so requires, an account of all of the transactions effected
by the Treasurer and Controller and of the financial condition of the
Corporation. The Chief Financial Officer shall generally perform all the duties
usually appertaining to the affairs of a chief financial officer of a
corporation and shall perform such other duties and have such other powers as
may be prescribed by the Board of Directors or these By-Laws.
Section 15. Treasurer. The Treasurer shall have the custody of the
---------
corporate funds and securities and shall cause to be kept full and accurate
accounts of receipts and disbursements in books belonging to the Corporation and
shall deposit all monies and other valuable effects in the name and to the
credit of the Corporation in such depositories as may be designated by persons
authorized by the Board of Directors. The Treasurer shall disburse the funds of
the Corporation as may be ordered by the Board of Directors, taking proper
vouchers for such disbursements, and shall render to the Chairman of the Board,
the President and the Directors whenever they may require it, an account of all
of the transactions effected by the Treasurer and of the financial condition of
the Corporation. The Treasurer may be required to give a bond for the faithful
discharge of his or her duties. The Treasurer shall generally perform all
duties appertaining to the office of treasurer of a corporation and shall
perform such other duties and have such other powers as may be prescribed by the
Board of Directors or these By-Laws.
Section 16. Assistant Treasurers. The Assistant Treasurers shall be
--------------------
empowered and authorized to perform all the duties of the Treasurer in the
absence or disability of the Treasurer and shall perform such other duties and
have such other powers as may be prescribed by the Board of Directors, the
Treasurer or these By-Laws.
11
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Section 17. Controller. The Controller shall prepare and have the
-----------
care and custody of the books of account of the Corporation. The Controller
shall keep a full and accurate account of all moneys, received and paid on
account of the Corporation, and shall render a statement of the Controller's
accounts whenever the Board of Directors shall require. The Controller shall
generally perform all the duties usually appertaining to the affairs of the
controller of a corporation and shall perform such other duties and have such
other powers as may be prescribed by the Board of Directors, the Chief Financial
Officer or these By-Laws. The Controller may be required to give a bond for the
faithful discharge of his or her duties.
Section 18. Assistant Controllers. The Assistant Controllers shall
----------------------
in the absence or disability of the Controller perform the duties and exercise
the powers of the Controller and shall perform such other duties and have such
other powers as may be prescribed by the Board of Directors, the Controller or
these By-Laws.
Section 19. Additional Powers and Duties. In addition to the
-----------------------------
foregoing especially enumerated duties and powers, the several officers of the
Corporation shall perform such other duties and exercise such further powers as
the Board of Directors may, from time to time, determine, or as may be assigned
to them by any superior officer.
Section 20. Other Officers. The Board of Directors may designate
---------------
such other officers having such duties and powers as it may specify from time to
time.
ARTICLE VI
CAPITAL STOCK
Section 1. Form of Certificate. Every holder of stock in the
-------------------
Corporation shall be entitled to have a certificate signed, in the name of the
Corporation (i) by the Chairman of the Board, the Chief Executive Officer, the
President or any Vice President and (ii) by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary, certifying the number of
shares owned by such holder in the Corporation.
Section 2. Signatures. Any signature required to be on a certificate
-----------
may be a facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
Section 3. Lost, Stolen or Destroyed Certificates. The Board of
---------------------------------------
Directors may direct a new certificate to be issued in place of any certificate
theretofore issued by the Corporation alleged to have been lost, stolen or
destroyed, upon the making an affidavit of that fact by the person claiming the
certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate, the Board of Directors may, in its discretion and as
a condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate, or his legal representative, to advertise the
same in such manner as the Board of
12
<PAGE>
Directors shall require and/or to give the Corporation a bond in such sum as it
may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen or
destroyed.
Section 4. Transfers. Stock of the Corporation shall be transferable
----------
in the manner prescribed by law and in these By-Laws. Transfers of stock shall
be made on the books of the Corporation only by the holder of record or by such
person's attorney duly authorized upon surrender and cancellation of
certificates for a like number of shares properly endorsed, and the payment of
all taxes due thereon.
Section 5. Record Date. In order that the Corporation may determine
------------
the stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, or entitled to express consent to corporate action,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than sixty (60) days nor less than ten (10) days before the date of
such meeting, nor more than sixty (60) days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
Section 6. Beneficial Owners. The Corporation shall be entitled to
------------------
recognize the exclusive right of the person registered on its books as the owner
of a share to receive dividends and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
law.
Section 7. Dividends. Subject to the provisions of the Certificate
----------
of Incorporation or applicable law, dividends upon the capital stock of the
Corporation, if any, may be declared by the Board of Directors at any regular or
special meeting, and may be paid in cash, in property, or in shares of capital
stock. Before payment of any dividend, there may be set aside out of any funds
of the Corporation available fore dividends such sum or sums as the Board of
Directors from time to time, in its absolute discretion, deems proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation or for any proper
purpose, and the Board of Directors may modify or abolish any such reserve.
ARTICLE VII
INDEMNIFICATION
Section 1. Indemnification Respecting Third Party Claims. (a) The
---------------------------------------------
Corporation, to
13
<PAGE>
the full extent and in a manner permitted by Delaware law as in effect from time
to time, shall indemnify, in accordance with the provisions of this Article, any
person (including the heirs, executors, administrators or estate of any such
person) who was or is made a party to or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (including any
appeal thereof), whether civil, criminal, administrative, regulatory or
investigative in nature (other than an action by or in the right of the
Corporation), by reason of the fact that such person is or was a director or
officer of the Corporation, or, at a time when he was a director or officer of
the Corporation, is or was either serving at the request of the Corporation as a
director, officer, partner, trustee, fiduciary, employee or agent (a "Subsidiary
Officer") of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise (an "Associated Entity"), against expenses
(including attorneys' fees and disbursements), costs, judgments, fines,
penalties and amounts paid in settlement actually and reasonably incurred by
such person in connection with such action, suit or proceeding if such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful; provided, however, that (i) the Corporation shall not be obligated
to indemnify a person who is or was a director or officer of the Corporation
against expenses incurred in connection with an action, suit, proceeding or
investigation to which such person is threatened to be made a party but does not
become a party unless the incurring of such expenses was authorized by or under
the authority of the Board of Directors and (ii) the Corporation shall not be
obligated to indemnify against any amount paid in settlement unless the Board of
Directors has consented to such settlement. The termination of any action, suit
or proceeding by judgment, order, settlement or conviction or upon a plea of
nolo contendere or its equivalent shall not, of itself, create a presumption
- ---- ----------
that the person did not act in good faith and in a manner which such person
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, that such
person had reasonable cause to believe that his conduct was unlawful.
Notwithstanding anything to the contrary in the foregoing provisions of this
Section 1(a), a person shall not be entitled, as a matter of right, to
indemnification pursuant to this Section 1(a) against costs or expenses incurred
in connection with any action, suit or proceeding commenced by such person
against the Corporation or any Associated Entity or any person who is or was a
director, officer, fiduciary, employee or agent of the Corporation or a
Subsidiary Officer of any Associated Entity, but such indemnification may be
provided by the Corporation in a specific case as permitted by Section 6 below
in this Article.
(b) The Corporation may indemnify any employee or agent of the
Corporation in the manner and to the same extent as it is required to indemnify
any director or officer under Section 1(a) above in this Article.
Section 2. Indemnification Respecting Derivative Claims. (a) The
--------------------------------------------
Corporation, to the full extent and in a manner permitted by Delaware law as in
effect from time to time, shall indemnify, in accordance with the provisions of
this Article, any person (including the heirs, executors, administrators or
estate of any such person) who was or is made a party to or is
14
<PAGE>
threatened to be made a party to any threatened, pending or completed action or
suit (including any appeal thereof) brought in the right of the Corporation to
procure a judgment in its favor by reason of the fact that such person is or was
a director or officer of the Corporation, or, at a time when he was a director
or officer of the Corporation, is or was serving at the request of the
Corporation as a Subsidiary Officer of an Associated Entity against expenses
(including attorneys' fees and disbursements) and costs actually and reasonably
incurred by such person in connection with the defense or settlement of such
action or suit if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Corporation, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless, and only to the extent that the Board of
Directors or a court having jurisdiction with respect shall determine that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses and costs as the Board of Directors or such court shall deem proper;
provided, however, that the Corporation shall not be obligated to indemnify a
director or officer of the Corporation against expenses incurred in connection
with an action or suit to which such person is threatened to be made a party but
does not become a party unless the incurrence of such expenses was authorized by
or under the authority of the Board of Directors. Notwithstanding anything to
the contrary in the foregoing provisions of this Section 2(a), a person shall
not be entitled, as a matter of right, to indemnification pursuant to this
Section 2(a) against costs and expenses incurred in connection with any action
or suit in the right of the Corporation commenced by such person, but such
indemnification may be provided by the Corporation in any specific case as
permitted by Section 6 below in this Article.
(b) The Corporation may indemnify any employee or agent of the
Corporation in the manner and to the same extent as it is required to indemnify
any director or officer under Section 2(a) above in this Article.
Section 3. Determination of Entitlement to Indemnification. Any
-----------------------------------------------
indemnification to be provided under any of Section 1(a), 1(b), 2(a) or 2(b)
above in this Article (unless ordered by a court of competent jurisdiction)
shall be made by the Corporation only as authorized in the specific case upon a
determination that indemnification is proper under the circumstances because
such person had met the applicable standard of conduct set forth in such section
of this Article. Such determination shall be made (i) by the Board of Directors
by a majority vote of a quorum consisting of directors who were not parties to
the action, suit or proceeding in respect of which indemnification is sought or
by majority vote of the members of a committee of the Board of Directors
composed of at least two members each of whom is not a party to such action,
suit or proceeding, or (ii) if such a quorum is not obtainable and/or such a
committee is not established or available, or, even if such a quorum is
obtainable or committee available, if a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (iii) by action
of the stockholders taken as permitted by law. In the event a request for
indemnification is made by any person referred to in paragraph 1(a) or 2(a)
above in this Article, the Corporation shall use its reasonable best efforts to
cause such determination to be made not later than 60 days after such request is
made.
15
<PAGE>
Section 4. Right to Indemnification upon Successful Defense and for
--------------------------------------------------------
Service as a Witness. (a) Notwithstanding the other provisions of this
- --------------------
Article, to the extent that a director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in any of Section 1(a), 1(b), 2(a) or
2(b) above in this Article, or in defense of any claim, issue or matter therein,
such person shall be indemnified against expenses (including attorneys' fees and
disbursements) and costs actually and reasonably incurred by such person in
connection therewith.
(b) To the extent any person who is or was a director or officer of
the Corporation in office on the effective date of this Article or thereafter
has served or prepared to serve as a witness in, but is not a party to, any
action, suit or proceeding (whether civil, criminal, administrative, regulatory
or investigative in nature), including any investigation by any legislative body
or any securities or commodities exchange of which the Corporation or an
Associated Entity is a member or to the jurisdiction of which it is subject, by
reason of his or her services as a director or officer of the Corporation or his
or her service as a Subsidiary Officer of an Associated Entity at a time when he
was a director or officer of the Corporation (assuming such person is or was, as
evidenced by a writing to such effect, serving at the request of, or to
represent the interests of, the Corporation as a Subsidiary Officer of such
Associated Entity), the Corporation may indemnify such person against expenses
(including attorneys' fees and disbursements) and out-of-pocket costs actually
and reasonably incurred by such person in connection therewith and shall use its
reasonable best efforts to provide such indemnity within 60 days after receipt
by the Corporation from such person of a statement requesting such
indemnification, averring such service and reasonably evidencing such expenses
and costs; it being understood, however, that the Corporation shall have no
obligation under this Article to compensate such person for such person's time
or efforts so expended. The Corporation shall indemnify any employee or agent
of the Corporation in the manner and to the same extent as it is required to
indemnify any director or officer of the Corporation pursuant to the foregoing
sentence of this Section 4(b).
Section 5. Advance of Expenses. (a) Expenses and costs incurred by
-------------------
any person referred to in Section 1(a) or 2(a) above in this Article in
defending a civil, criminal, administrative, regulatory or investigative action,
suit or proceeding shall be paid by the Corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking in
writing by or on behalf of such person to repay such amount if it shall
ultimately be determined that such person is not entitled to be indemnified in
respect of such costs and expenses by the Corporation as authorized by this
Article.
(b) Expenses and costs incurred by any person referred to in Section
1(b) or 2(b) above in this Article in defending a civil, criminal,
administrative, regulatory or investigative action, suit or proceeding may be
paid by the Corporation in advance of the final disposition of such action, suit
or proceeding as authorized by or under the authority of the Board of Directors
upon receipt of an undertaking in writing by or on behalf of such person to
repay such amount if it shall ultimately be determined that such person is not
entitled to be
16
<PAGE>
indemnified by the Corporation in respect of such costs and expenses as
authorized by this Article and subject to any limitations or qualifications
provided by or under the authority of the Board of Directors.
Section 6. Indemnification Not Exclusive. The provision of
-----------------------------
indemnification to or the advancement of expenses and costs to any person under
this Article, or the entitlement of any person to indemnification or advancement
of expenses and costs under this Article, shall not limit or restrict in any way
the power of the Corporation to indemnify or advance expenses and costs to such
person in any other way permitted by law or be deemed exclusive of, or
invalidate, any right to which any person seeking indemnification or advancement
of expenses and costs may be entitled under any law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in such
person's capacity as an officer, director, employee or agent of the Corporation
and as to action in any other capacity.
Section 7. Corporate Obligations; Reliance. The provisions of
-------------------------------
Sections 1 through 6 above of this Article shall be deemed to create a binding
obligation on the part of the Corporation to the officers and directors of the
Corporation on the effective date of this Article and persons thereafter elected
as officers and directors (including persons who served as officers and
directors on or after such date but who are no longer officers and directors at
the time they present claims for advancement of expenses or indemnity), and such
persons in acting in their capacities as officers or directors of the
Corporation or Subsidiary Officers of any Associated Entity shall be entitled to
rely on such provisions of this Article, without giving notice thereof to the
Corporation.
Section 8. Successors. The right of any person who is or was a
----------
director, officer, employee or agent of the Corporation to indemnification or
advancement of expenses under Sections 1 through 7 above in this Article shall
continue after he shall have ceased to be a director, officer, employee or agent
and shall inure to the benefit of the heirs, distributees, executors,
administrators and other legal representatives of such person.
Section 9. Insurance. The Corporation may purchase and maintain
---------
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of, or to
represent the interests of, the Corporation as a Subsidiary Officer of any
Associated Entity, against any liability asserted against such person and
incurred by such person in any capacity, or arising out of such person's status
as such, whether or not the Corporation would have the power to indemnify such
person against such liability under the provisions of this Article or applicable
law.
Section 10. Definitions of Certain Terms. (a) For purposes of this
----------------------------
Article, references to "the Corporation" shall include, in addition to the
resulting corporation, any constituent corporation (including any constituent of
a constituent) absorbed into the Corporation after the effective date of this
Article in a consolidation or merger if such corporation would have been
permitted (if its corporate existence had continued) under applicable law to
indemnify its directors, officers, employees or agents, so that any person
17
<PAGE>
who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request, or to represent the interests
of, such constituent corporation as a director, officer, employee or agent of
any Associated Entity shall stand in the same position under the provisions of
Sections 1 through 9 above in this Article with respect to the resulting or
surviving corporation as such person would have with respect to such constituent
corporation if its separate existence had continued; provided, however, that, no
such person shall be entitled to indemnity from the Corporation in respect of
his service to such constituent corporation, or at the request or to represent
the interests of such constituent corporation, pursuant to Section 1(a) or 2(a)
above but may be indemnified by the Corporation in respect thereof as permitted
by Section 1(b) or 2(b) above.
(b) For purposes of this Article, references to "fines" shall include
any excise taxes assessed on a person with respect to any employee benefit plan;
references to "serving at the request of the Corporation" shall include any
service as a director, officer, trustee, fiduciary, employee or agent of the
Corporation or any Associated Entity which service imposes duties on, or
involves services by, such director, officer, trustee, fiduciary, employee or
agent with respect to any employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner such person
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this
Article.
ARTICLE VIII
GENERAL
Section 1. Fiscal Year. The end of year fiscal year of the
------------
Corporation shall be such date as shall be fixed by resolution of the Board of
Directors from time to time.
Section 2. Corporate Seal. The corporate seal shall have inscribed
---------------
thereon the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware" The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise upon any paper,
certificate or document.
Section 3. Disbursements. All checks, drafts or demands for money
--------------
out of the funds of the Corporation and all notes and other evidences of
indebtedness of the Corporation shall be signed by such officer or officers or
such other person or persons as the Board of Directors may from time to time
designate.
Section 4. Amendments. These By-Laws may be altered amended or
-----------
repealed, in whole or in part, or new By-Laws may be adopted by the stockholders
or by the Board of Directors at any meeting thereof; provided, however, that
notice of such alteration, amendment, repeal or adoption of new By-Laws shall be
contained in the notice of such meeting of stockholders or in a notice of such
meeting of the Board of Directors, as the case may be. Unless a higher
percentage is required by the Certificate of Incorporation as to any matter
which is the subject of these By-Laws, all such amendments must be approved by
either
18
<PAGE>
the holders of at least a majority of the outstanding capital stock entitled to
vote thereon or by a majority of the entire Board of Directors then in office.
Section 5. Definitions. As used in this Article and in these By-Laws
------------
generally, the term "entire Board of Directors" means the total number of
directors which the Corporation would have if there were no vacancies.
19
<PAGE>
EXHIBIT 10.1
RESTATED AND AMENDED
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
PREMISES
AMERICAN EXPRESS TOWER
BATTERY PARK CITY
THREE WORLD FINANCIAL CENTER
NEW YORK, NEW YORK
SECTION: 1
BLOCK: 16
LOT: 140
DATED AS OF MAY 27, 1994
<PAGE>
TABLE OF CONTENTS
RECITALS.............................................. 1
DEFINITIONS........................................... 6
ARTICLE I
PURPOSES AND NATURE OF THIS AGREEMENT...... 8
1.1 PURPOSES OF THIS AGREEMENT.................. 8
1.2 REFERENCES TO CO-TENANTS; DESIGNATION OF
REPRESENTATIVES............................. 8
1.3 INTEREST AND SPACE.......................... 9
1.4 NATURE OF THIS AGREEMENT.................... 10
ARTICLE II
MANAGEMENT OF THE PROPERTY............ 11
2.1 MANAGING CO-TENANT.......................... 11
2.2 POWER AND AUTHORITY REGARDING CERTAIN
AGREEMENTS.................................. 11
2.3 PROPERTY OBLIGATIONS........................ 17
2.4 COMMON FACILITIES........................... 18
2.5 DUTIES OF MANAGING CO-TENANT; CO-TENANT'S
CHANGES..................................... 36
2.6 CONTRACTS................................... 41
2.7 MANAGEMENT COMPANY; CHANGE OF MANAGING
CO-TENANT................................... 41
2.8 BUILDING SECURITY; SECURE AREAS............. 42
2.9 DEBT OBLIGATIONS............................ 44
2.10 UTILITIES; UTILITY EXPENSES; UTILITY FA-
CILITIES.................................... 44
2.11 USE OF SPACE................................ 46
2.12 TELECOMMUNICATION FACILITIES AND T.V. STU-
DIO......................................... 46
ARTICLE III
FINANCIAL MATTERS................ 47
3.1 BUDGETS..................................... 47
3.2 PAYMENT OF UTILITY EXPENSES AND PROPERTY
OBLIGATIONS................................. 48
3.3 PAYMENT OF DEBT OBLIGATIONS................. 52
3.4 FUNDS OF CO-TENANTS......................... 52
3.5 EXCESS FUNDS................................ 53
3.6 PERIODIC STATEMENTS......................... 54
3.7 BOOKS AND RECORDS........................... 54
3.8 FINAL ACCOUNTING............................ 55
3.9 FAILURE TO PAY.............................. 55
3.10 INSURANCE................................... 56
<PAGE>
ARTICLE IV
TRANSFERS.................... 59
4.1 CONSENT REQUIRED............................ 59
4.2 SUBLETTING PERMITTED........................ 59
4.3 ASSIGNMENTS................................. 60
4.4 ADDITIONAL RESTRICTIONS..................... 62
4.5 TRANSFEREE USE OF UTILITY FACILITIES AND
COMMON FACILITIES........................... 63
4.6 PARTITION................................... 64
4.7 RIGHT OF FIRST OFFER........................ 64
4.8 RIGHT OF FIRST REFUSAL...................... 66
4.9 REQUIRED TRANSFERS.......................... 69
4.10 BROKERAGE................................... 69
4.11 RIGHT OF DISAPPROVAL........................ 70
4.12 SUBMISSION TO CONDOMINIUM REGIME............ 70
ARTICLE V
GENERAL..................... 72
5.1 NOTICES..................................... 72
5.2 ENTIRE AGREEMENT............................ 73
5.3 GOVERNING LAWS.............................. 73
5.4 WAIVER...................................... 74
5.5 SEVERABILITY................................ 74
5.6 BENEFIT..................................... 74
5.7 TERMINOLOGY................................. 74
5.8 STATUS REPORTS.............................. 75
5.9 NO RECORDING OF THIS AGREEMENT.............. 75
5.10 BINDING AGREEMENT........................... 75
5.11 LIABILITY OF CO-TENANTS/INDEMNIFICATION..... 75
5.12 CLAIMS...................................... 77
5.13 CONSENT OR APPROVAL......................... 77
5.14 TERM........................................ 77
5.15 ARBITRATION................................. 78
5.16 CONSUMER PRICE INDEX........................ 79
5.17 AFFIRMATIVE ACTION PROGRAM.................. 79
5.18 SIGNS; NAME OF BUILDING..................... 80
5.19 RULES AND REGULATIONS....................... 80
5.20 POWER OF ATTORNEY........................... 81
5.21 RECORDING OF EXISTING LEASEHOLD MORTGAGES.
............................................ 81
<PAGE>
EXHIBIT A -Description of Parcel C
EXHIBIT B -Space Exhibit
EXHIBIT C -Common Facilities
EXHIBIT D -Employee Assistance Program Services
EXHIBIT E -Debt Obligations
EXHIBIT F -Secure Areas
EXHIBIT G -Form of Budget
EXHIBIT H -Fitness Center Services
EXHIBIT I -Medical Center Services
EXHIBIT J -Intentionally Deleted
<PAGE>
THIS RESTATED AND AMENDED AGREEMENT ("Agreement") made as of this 27th
day of May, 1994, by and among AMERICAN EXPRESS COMPANY ("Amexco"), a New York
corporation, AMERICAN EXPRESS BANK LTD. ("AEBL"), a Connecticut corporation
formerly known as American Express International Banking Corporation, AMERICAN
EXPRESS TRAVEL RELATED SERVICES COMPANY, INC. ("TRSCO"), a New York corporation,
LEHMAN BROTHERS INC. ("Lehman"), a Delaware corporation formerly known as
Shearson Lehman Brothers Inc., Shearson/American Express Inc. and/or Shearson
Lehman/American Express Inc., LEHMAN GOVERNMENT SECURITIES, INC. ("LGS"), a New
York corporation formerly known as Shearson Lehman Government Securities Inc.,
and LEHMAN COMMERCIAL PAPER INCORPORATED ("LCP"), a New York corporation
formerly known as Shearson Lehman Commercial Paper Incorporated, each having an
office at American Express Tower, Three World Financial Center, New York, New
York 10285.
RECITALS
A. Pursuant to a certain Agreement of Severance Lease dated as of
June 15, 1983, by and between Battery Park City Authority ("BPCA"), a public
benefit corporation under the laws of the State of New York, as landlord, and
Olympia & York Battery Park Company ("O&Y"), a New York partnership, as tenant
(as the same may have been or as the same may hereafter be modified, amended,
extended, renewed or assigned, the "Lease"), a memorandum of which Lease was
recorded in the Office of the Register of the City of New York, County of New
York, in reel 696, page 472, O&Y became the owner of a leasehold interest in
certain real property commonly known as Parcel C at the Battery Park City
Commercial Center (also known as the World Financial Center), together with
certain easements and other rights in and to real property appurtenant thereto,
in the borough of Manhattan, City, County and State of New York, all as more
particularly described in Exhibit A annexed hereto and made a part hereof.
B. By a certain Assignment of Severance Lease with Assumption, dated
as of June 15, 1983, and recorded in the Office of the Register of the City of
New York, County of New York, in reel 696, page 582, O&Y assigned to Amexco,
AEBL, TRSCO and Lehman, collectively, O&Y's
<PAGE>
interest as tenant under the Lease (the "Leasehold"), and the obligations of
tenant under the Lease were jointly and severally assumed by Amexco, AEBL, TRSCO
and Lehman.
C. BPCA, O&Y, and Amexco, AEBL, TRSCO and Lehman, collectively,
executed a Project Operating Agreement dated as of June 15, 1983 (as the same
may have been or as the same may hereafter be modified, amended, extended,
renewed or assigned, the "Project Operating Agreement"), relating to operation
of the Common Areas (as such term is defined in the Project Operating Agreement)
of the World Financial Center, and the rights and obligations of the parties
with respect thereto.
D. Thereafter, a 51-story office building commonly known as the
American Express Tower located at Three World Financial Center, New York, New
York, and certain other improvements were constructed on Parcel C (collectively,
"WFC" or the "Building"). The Leasehold and the Building are sometimes
collectively referred to hereinafter as the "Property".
E. By separate instruments of assignment and assumption, each dated
as of May 30, 1985, Amexco, AEBL, TRSCO and Lehman, collectively as assignor,
assigned all of said assignor's right, title and interest in, to and under the
Lease and the Project Operating Agreement to Amexco, AEBL, TRSCO, Lehman, LGS
and LCP, collectively as assignee, and said assignee accepted such assignments
and assumed all of said assignor's obligations thereunder.
F. (1) Pursuant to a certain Indenture dated as of December 1, 1985
(the "ABC Indenture") by and among the Tenants (hereinafter defined), as
issuers, Amexco, as guarantor, and Bankers Trust Company, as trustee (the "ABC
Trustee"), the Co-Tenants severally issued certain notes referred to as Series A
Guaranteed Notes Due 1989, Series B Guaranteed Notes Due 1992 and Series C
Guaranteed Notes Due 1997 in the aggregate principal amount of $272,690,000
(said notes, including any notes issued in exchange, substitution or replacement
thereof are hereinafter collectively referred to as the "ABC Notes").
(2) Pursuant to a certain Indenture dated as of June 1, 1985 (the "D
Indenture") by and among the Co-Tenants, as issuers, Amexco, as guarantor, and
Manufacturers Hanover Trust Company, as trustee (Bankers
2
<PAGE>
Trust Company having assumed the obligations under said Indenture of
Manufacturers Hanover TrustCompany, is hereinafter referred to as the "D
Trustee"), the Co-Tenants severally issued certain notes referred to as 11-5/8%
Guaranteed Notes Due 2000 in the aggregate principal amount of $151,679,000
(said notes, including any notes issued in exchange, substitution or replacement
thereof are hereinafter collectively referred to as the "D Notes").
(3) Pursuant to a certain Indenture dated as of June 1, 1985 (the "Z
Indenture") by and among the Co-Tenants, as issuers, Amexco, as guarantor, and
Chemical Bank, as trustee (the "Z Trustee"), the Co-Tenants severally issued
certain notes referred to as Zero Coupon Notes Due 2000 in the aggregate
original principal amount of $84,895,200 ($450,000,000 face amount payable at
maturity) (said notes, including any notes issued in exchange, substitution or
replacement thereof are hereinafter collectively referred to as the "Z Notes").
(4) Pursuant to a Note Purchase Agreement dated July 29, 1986 (the
"7.319% Purchase Agreement"), by and among the Co-Tenants, as issuers, Lehman
Special Securities Incorporated and Sumitomo Life Insurance Company, the Co-
Tenants severally issued certain notes guaranteed by Amexco referred to as
7.319% Guaranteed Notes Due 1996 in an aggregate principal amount of $30,000,000
(said notes, including any notes issued in exchange, substitution or replacement
thereof are hereinafter collectively referred to as the "7.319% Notes").
(5) Pursuant to a Note Purchase Agreement dated August 26, 1986 (the
"7.187% Purchase Agreement"), by and among the Co-Tenants, as issuers, and
Lehman Special Securities Incorporated, the Co-Tenants severally issued certain
notes guaranteed by Amexco referred to as 7.187% Guaranteed Notes Due 1996 in an
aggregate principal amount of $40,000,000 (said notes, including any notes
issued in exchange, substitution or replacement thereof are hereinafter
collectively referred to as the "7.187% Notes").
(6) Pursuant to a Loan Agreement dated July 29, 1986 (the "July Yen
Loan Agreement"), by and among the Co-Tenants, Amexco, as guarantor, Sumitomo
Life Insurance Company and The Long-Term Credit Bank of Japan,
3
<PAGE>
Limited, the Co-Tenants borrowed on a several basis the aggregate principal
amount of Yen 4,700,000,000, and the Co-Tenants entered into a related Currency
Exchange Agreement, dated July 29, 1986 (said loan, and the obligations under
said Currency Exchange Agreement, including any loans or exchange agreements
made in exchange, substitution or replacement thereof are hereinafter
collectively referred to as the "July Yen Loan").
(7) Pursuant to a Loan Agreement dated August 27, 1986 (the "August
Yen Loan Agreement"), by and among the Co-Tenants, Amexco, as guarantor, The
Dai-Ichi Mutual Life Insurance Company and The Long-Term Credit Bank of Japan,
Limited, the Co-Tenants borrowed on a several basis the aggregate principal
amount of Yen 6,100,000,000, and the Co-Tenants entered into a related Currency
Exchange Agreement dated August 27, 1986 (said loan, and the obligations under
said Currency Exchange Agreement, including any loans or exchange agreements
made in exchange, substitution or replacement thereof are hereinafter
collectively referred to as the "August Yen Loan").
(8) Pursuant to a certain Indenture dated as of December 28, 1984 (the
"11.95% Indenture"), by and between American Express Company, as issuer, and
Morgan Guaranty Trust Company of New York, as Trustee (the "11.95% Trustee"),
Amexco issued its 11.95% Notes Due January 15, 1995 in the original aggregate
principal amount of $175,000,000 (said notes, including any notes issued in
exchange, substitution or replacement thereof are hereinafter collectively
referred to as the "11.95% Notes").
(9) The ABC Indenture, D Indenture, Z Indenture, 7.319% Purchase
Agreement, 7.187% Purchase Agreement, July Yen Loan Agreement, August Yen Loan
Agreement, 11.95% Indenture are collectively referred to hereinafter as the
"Existing Indentures". The Existing Indentures and any other indenture,
agreement or instrument under which the Co-Tenants or any of them shall issue
obligations the repayment of which may or shall from time to time be secured by
instruments which encumber the Property or the proceeds of which shall be used
in connection with the Property, other than with respect solely to a Co-Tenant's
Space (hereinafter defined), are collectively referred to hereinafter as the
"Indentures". The ABC
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Notes, D Notes, Z Notes, 7.319% Notes, 7.187% Notes, July Yen Loan, August Yen
Loan and 11.95% Notes are collectively referred to hereinafter as the "Existing
Notes". The Existing Notes and any other notes, exchange agreements or other
instruments of the Co-Tenants or any of them, the repayment of which may or
shall from time to time be secured by instruments which encumber the Property or
the proceeds of which shall be used in connection with the Property are
collectively referred to hereinafter as the "Notes".
G. (1) By a mortgage dated as of March 19, 1987 (the "Superior
Mortgage"), the Co-Tenants, as mortgagors, granted a leasehold mortgage in the
Property to the Z Trustee, as trustee, in order to secure the payment of the Z
Notes.
(2) By a mortgage dated as of March 19, 1987 (the "Subordinate
Mortgage"), the Co-Tenants, as mortgagors, granted a leasehold mortgage in the
Property to the ABC Trustee and the D Trustee, as trustees, in order to secure
the payment of the ABC and D Notes.
(3) The Superior Mortgage and the Subordinate Mortgage are
collectively referred to hereinafter as the "Existing Leasehold Mortgages". The
Existing Leasehold Mortgages and any other mortgages, deeds of trust or security
agreements which may from time to time encumber the Property are collectively
referred to hereinafter as the "Leasehold Mortgages".
H. By a certain agreement dated May 30, 1985 (the "American Express
Tower Operating Agreement"), the Co-Tenants set forth their agreement as to the
enforcement and discharge of certain of their respective rights and obligations
(i) as tenants-in-common of the Property, (ii) with respect to the operation of
the Building, and (iii) as parties to the Project Operating Agreement.
I. By agreement dated as of May 6, 1987 (the "Agreement of Tenants-
In-Common"), the Co-Tenants amended and restated in its entirety the American
Express Tower Operating Agreement in all respects.
J. It is the intention of the Co-Tenants that this Agreement further
amend and restate in its entirety
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the Agreement of Tenants-In-Common in all respects, and that this Agreement
shall supersede the Agreement of Tenants-In-Common and the American Express
Tower Operating Agreement.
K. Each Co-Tenant acknowledges and agrees that the Building is
unique as the headquarters facility of several major financial institutions and,
accordingly, there are significant security and business confidentiality
requirements and other concerns with respect to the occupants and owners thereof
in keeping with the desired character of the Building, as hereinafter provided.
Accordingly, the parties have agreed herein to many special and unique
restrictions on their rights to sell, assign, mortgage or sublet their interests
and space in the Building, which they specifically acknowledge they believe to
be reasonable under the circumstances.
DEFINITIONS
As used in this Agreement, the following terms shall have the
respective meanings ascribed to such terms below (all other initially
capitalized terms used but not otherwise defined herein shall have the meanings
ascribed to such terms in the Intercompany Agreement, dated as of the date
hereof, between Holdings (as defined herein) and Amexco):
"Distribution Date" shall mean the effective date of the distribution
to holders of common shares of Amexco of all outstanding shares of common stock
of Lehman Brothers Holdings Inc., a Delaware corporation ("Holdings") held by
Amexco.
"Employee Assistance Program Services" and "EAP Services" shall mean
(subject to modification pursuant to Section 2.4 II) the employee assistance
programs and services listed on Exhibit D hereto, it being understood that
Exhibit D is intended to describe the scope and level of services currently
being provided by Amexco to Lehman Co-Tenants' employees (including those
special services which are provided on an as-needed basis).
"Fitness Center Services" shall mean (subject to modification pursuant
to Section 2.4 (III)) the fitness center services listed on Exhibit H hereto, it
being understood that Exhibit H is intended to describe the
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scope and level of services currently being provided by Amexco to Lehman Co-
Tenants' employees (including those special services which are provided on an
as-needed basis).
"Losses" shall mean, collectively, any and all costs and expenses
arising out of any claim or action (including, without limitation, attorneys'
fees, interest, penalties and costs of investigation or preparation for
defense), judgments, fines, losses, claims, damages, liabilities, demands,
assessments and amounts paid in settlement.
"Medical Center Services" shall mean (subject to modification pursuant
to Section 2.4 (IV)) the medical center services listed on Exhibit I hereto, it
being understood that Exhibit I is intended to describe the scope and level of
services currently being provided by Amexco to Lehman Co-Tenants' employees
(including those special services which are provided on an as-needed basis).
"Non-discriminatory Basis" shall mean with respect to any
modification, elimination or reduction in any benefits or services granted or
provided to Lehman Co-Tenants' employees and AMEX Co-Tenants' employees, a basis
for such modification, elimination or reduction which treats as one group Lehman
Co-Tenants' employees and AMEX Co-Tenants' employees.
"Pre-Distribution Basis" shall mean with respect to any services, a
basis for the determination and allocation of the costs and expenses incurred in
providing such services which is substantially the same as that used by the
parties hereto in connection with the same or substantially similar services
immediately prior to the Distribution Date.
"WFC Indebtedness" shall mean, collectively, all of the Indentures,
Notes, and Leasehold Mortgages (as the same are referenced and defined in the
Recitals hereof).
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ARTICLE I
PURPOSES AND NATURE OF THIS AGREEMENT
1.1 PURPOSES OF THIS AGREEMENT
Amexco, AEBL, TRSCO, Lehman, LGS and LCP hereby enter into this
Agreement (i) to amend and restate in its entirety the Agreement of Tenants-In-
Common in all respects, (ii) to set forth their respective rights, obligations
and interests as tenants-in-common with respect to the Property, (iii) to ensure
their collective compliance with the terms, covenants and conditions of the
Lease, the Project Operating Agreement and the Leasehold Mortgages, and (iv) to
set forth their respective ongoing rights, obligations and interests following
the distribution to holders of common shares of Amexco of all outstanding shares
of common stock of Holdings held by Amexco.
1.2 REFERENCES TO CO-TENANTS; DESIGNATION OF REPRESENTATIVES
(a) Amexco, AEBL, TRSCO, Lehman, LGS and LCP (and their respective
successors and assigns) are sometimes hereinafter referred to collectively as
the "Co-Tenants" and individually as a "Co-Tenant". Amexco, AEBL, TRSCO,
Lehman, LGS and LCP are sometimes hereinafter referred to collectively as the
"Initial Co-Tenants" and individually as an "Initial Co-Tenant".
(b) Amexco, AEBL and TRSCO (and their respective successors and
assigns) are sometimes hereinafter referred to collectively as the "AMEX Co-
Tenants". Lehman, LGS and LCP (and their respective successors and assigns) are
sometimes hereinafter referred to collectively as the "Lehman Co-Tenants".
(c) For themselves, their respective successors and assigns, the AMEX
Co-Tenants hereby designate and appoint Amexco, and the Lehman Co-Tenants hereby
designate and appoint Lehman, to be their sole representative in all respects
for any required or desired communications, notices, consents, approvals,
demands, or any other actions, in connection with or with respect to this
Agreement and all other activities of the Co-Tenants as tenants-in-common of the
Property. The within designa-
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tion and appointment shall continue in existence until such time as each of the
AMEX Co-Tenants on one hand, or each of the Lehman Co-Tenants on the other hand,
shall designate and appoint another Co-Tenant as their representative. The Co-
Tenants may rely upon the actions of Amexco with respect to the AMEX Co-Tenants,
and Lehman with respect to the Lehman Co-Tenants, as being binding, conclusive
and duly authorized. Lehman and Amexco, in their capacities as aforesaid, are
sometimes hereinafter referred to individually as a "Designated Co-Tenant" and
jointly as the "Designated Co-Tenants". The Designated Co-Tenant which is not
then the Managing Co-Tenant is sometimes hereinafter referred to as the "Non-
Managing Designated Co-Tenant".
1.3 INTEREST AND SPACE
(a) (i) Each Co-Tenant owns, as a tenant-in-common, an
undivided leasehold interest in the Property and said interest is hereinafter
referred to as the "Interest" of a Co-Tenant or as the "Interests" when
referring to more than one Co-Tenant.
(ii) Effective on the date of the transfer of the five floors by the
AMEX Co-Tenants to the Lehman Co-Tenants as contemplated under that certain
Letter Agreement, dated May 27, 1994, among the Lehman Co-Tenants, Holdings and
the AMEX Co-Tenants, the aggregate Interests in the Property will be as follows:
(1) AMEX Co-Tenants................... 48.53%
(2) Lehman Co-Tenants................. 51.47%
provided, however, the foregoing percentages shall not take effect with respect
to the payment of Property Obligations until August 1, 1994.
(b) Each of the Co-Tenants shall have (i) the exclusive right to
occupy a certain portion of space in the Property, subject to the easements
granted to the Managing Co-Tenant (as hereinafter defined) in Section 1.3(c) and
Section 2.10(b) hereof and any access by the Managing Co-Tenant required for the
performance of its duties hereunder (subject to the provisions of this
Agreement) and (ii) the non-exclusive use and benefit, along with the other Co-
Tenants, of the Common Facilities (as defined in Section 2.4 hereof), subject to
the provisions of Section 4.5 with respect to Special Common Facilities (as
defined in Section 2.4 hereof). That portion of the Property so occupied by
each Co-Tenant shall be hereinafter referred to with respect to each
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Co-Tenant as that Co-Tenant's "Space". As of the date hereof, the Space
occupied by the AMEX Co-Tenants and the Lehman Co-Tenants is as set forth in
Exhibit B annexed hereto and made a part hereof. For purposes hereof, the term
"Affiliate" shall mean a person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
an Initial Co-Tenant.
(c) The AMEX Co-Tenants and the Lehman Co-Tenants each hereby grant to
the Managing Co-Tenant an easement to enter upon their respective Spaces in
connection with the performance of all of the Managing Co-Tenant's duties
hereunder, subject, however, to the right, to be reasonably exercised, of any
Co-Tenant to condition access by the Managing Co-Tenant as to certain Secure
Areas (as defined in Section 2.8).
1.4 NATURE OF THIS AGREEMENT
(a) This Agreement shall not constitute the Co-Tenants as, and the Co-
Tenants do not intend to be, partners or joint venturers with respect to the
Property or otherwise. Except as herein expressly and specifically provided,
this Agreement shall not (i) constitute any Co-Tenant the agent of any other Co-
Tenant, (ii) permit any Co-Tenant to have any authority to act for or to assume
any obligations or responsibilities on behalf of any other Co-Tenant, (iii) in
any manner limit or restrict the Co-Tenants in carrying on their respective
separate businesses or activities, (iv) impose upon either party any fiduciary
duty by reason of its carrying on its separate business or activity, or (v)
impose upon any Co-Tenant any liability or obligation.
(b) The Co-Tenants acknowledge that they have been informed that each
of the Co-Tenants is or may hereafter be a stockholder or affiliate of
corporations or a partner or co-venturer in partnerships and joint ventures
owning or operating real property, or is or may hereafter be an owner, operator,
or co-owner of real property. The Co-Tenants agree that the same shall not be
deemed a breach of duty on the part of a Co-Tenant to the other Co-Tenants and
shall not impose any greater or future obligation upon it.
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ARTICLE II
MANAGEMENT OF THE PROPERTY
2.1 MANAGING CO-TENANT
Subject to the terms and conditions of Section 2.2(c) hereof, AEBL,
TRSCO, Lehman, LGS and LCP hereby appoint Amexco to serve as the managing Co-
Tenant (the "Managing Co-Tenant") and to act as the agent on behalf of the other
Co-Tenants to supervise the operation of, and manage, the Property, in
accordance with the terms of this Agreement.
2.2 POWER AND AUTHORITY REGARDING CERTAIN AGREEMENTS
(a) Except as specifically provided in Section 2.2(b) hereof, each of
the Co-Tenants hereby grants to the Managing Co-Tenant full power and authority,
(i) with respect to the Project Operating Agreement, to serve as the
Co-Tenants' representative or representatives on the Management Committee (as
defined in the Project Operating Agreement) and, in connection therewith,
interact and negotiate with any of the parties to the Project Operating
Agreement on behalf of the Co-Tenants, and, further, to make decisions on behalf
of and to bind the Co-Tenants;
(ii) with respect to the Lease,
(A) to represent the Co-Tenants in all dealings with the
landlord under the Lease and to undertake all steps and procedures which
Managing Co-Tenant shall deem necessary or desirable to protect the Co-
Tenants' interest as tenant under the Lease, and, further, to satisfy the
obligations of and covenants by (and thereafter obtain reimbursement from
the other Co-Tenants pursuant to this Agreement), and to enforce the rights
and privileges of, the Co-Tenants under the Lease, including, without
limitation, by means of contesting and settling the computation of any
Rental (as defined in the Lease) due under the Lease;
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(B) to represent the Co-Tenants in all dealings with any current
or future subtenants or other occupants occupying the Retail (as defined in
the Lease) space in the Building, including, without limitation, the
negotiation, amendment, renewal and termination of leases for the Retail
space, the collection of all rent due from said subtenants or occupants of
said Retail space, and the use of the same in accordance with the terms
hereof, and to take all steps and procedures which Managing Co-Tenant shall
deem necessary or desirable to protect the Co-Tenants' interest as
sublandlord under any sublease or occupancy agreements respecting said
Retail space, and, further, to enforce all the rights and privileges of the
Co-Tenants under any such agreements;
(iii) with respect to the Affirmative Action Program
Agreement (to which reference is made in Section 5.19 hereof), to serve as the
Operator (as defined in the Affirmative Action Program Agreement) thereunder
with respect to the Property and to ensure that all the terms, covenants and
conditions thereof are observed, performed and/or complied with, as the case may
be;
(iv) with respect to the Leasehold Mortgages (other than the Existing
Leasehold Mortgages), the Indentures (other than the Existing Indentures) and
the Notes (other than the Existing Notes), to represent the Co-Tenants in all
dealings with any trustees, holders or mortgagees thereof (and any successors-
in-interest to such entities), as well as all other parties to said documents or
entities or persons having any connection, interaction or dealings with the
parties thereto and, further, to undertake all steps and procedures which
Managing Co-Tenant shall deem necessary or desirable to ensure that at all times
the Co-Tenants are in full compliance with all of the terms, covenants and
conditions of each of the Leasehold Mortgages, the Indentures, and the Notes and
to enforce all of the rights and privileges of the Co-Tenants thereunder;
(v) with respect to contracts, agreements or any other arrangements
which one or more Co-Tenants may now have, or in the future may have, with any
entity or person respecting the construction, alter-
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ation, or repair of any portion of the Property to represent the Co-Tenants with
respect to all matters concerning the same (except as otherwise provided
herein), including, without limitation, the enforcement of the Co-Tenants'
rights and privileges thereunder, and the objection to, negotiation and
settlement of, all claims and disputes arising therefrom;
(vi) with respect to any liens against the Leasehold, the Building,
and/or the Improvements which are not Permitted Exceptions (as such terms are
defined in the Superior Mortgage and the Subordinate Mortgage), take any
remedial measures; and
(vii) to contest and settle any real estate and commercial
rent or occupancy tax proceedings and assessments relating to the Property;
provided, however, that with respect to any such proceedings or assessments
affecting or arising out of a Co-Tenant's Space (including any such proceedings
or assessments relating to the Property as a whole), if Managing Co-Tenant shall
notify a Co-Tenant of its decision not to handle any such proceeding or
assessment (which notification Managing Co-Tenant shall endeavor to make as
early as reasonably practical so as to avoid prejudicing the rights of the Co-
Tenant of said Space), then said Co-Tenant shall have the right to contest and
settle same (it being understood that said Co-Tenant shall not permit or allow
such proceeding or assessment to become a lien upon the Property or any portion
thereof).
(b) With respect to the performance of its duties under this
Agreement, Managing Co-Tenant shall from time to time (but not less frequently
than on a quarterly basis) consult and meet with a soon to be formed advisory
property management committee (the "Management Committee") in order to be aware
of the needs and desires of the Co-Tenants. The Management Committee shall act
strictly in an advisory capacity (until such time as the conditions set forth in
Section 2.2(c) are met) and shall have three (3) representatives designated by
the Lehman Co-Tenants and three (3) representatives designated by the AMEX Co-
Tenants. Nothing in this Paragraph (b) shall be construed in any way to reduce,
limit or modify the final decision-making authority of the Managing Co-Tenant
with respect to the operation and management of the Property. Notwithstanding
anything to
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the contrary contained herein, without the prior approval of the Non-Managing
Designated Co-Tenant, which approval shall not be unreasonably withheld or
delayed, Managing Co-Tenant shall not, except as required by the Lease, the
Project Operating Agreement, any Leasehold Mortgage or any Legal Requirements
(as hereinafter defined):
(i) make any expenditures or incur any obligation with respect to
which the Lehman Co-Tenants, if Amexco is the Managing Co-Tenant (or the AMEX
Co-Tenants, if Lehman is the Managing Co-Tenant) shall have any obligation to
pay for hereunder with respect to any capital improvement to the Property the
total cost of which, whether performed in one or several phases, exceeds
$6,000,000, adjusted annually to reflect any increases in the Consumer Price
Index (hereinafter defined);
(ii) perform or cause to be performed any act which (other than on a
temporary basis consistent with past practices and procedures which shall
include reasonable coordination with the Non-Managing Designated Co-Tenant)
materially and adversely affects the use or operation of data processing or
communications equipment or services of any of the Co-Tenants in the Building
(including, without limitation, the supply of utilities and chilled or condenser
water);
(iii) change the name of the Building, except as otherwise
permitted in Section 5.20.
(c) Notwithstanding anything to the contrary contained herein, (i)
prior to the satisfaction of the WFC Indebtedness, Amexco shall be the Managing
Co-Tenant and shall be permitted to assign its rights thereunder to any
Affiliate or assignee without the consent of any Co-Tenant; (ii) after the
satisfaction of the WFC Indebtedness, (q) if the aggregate Interests and
occupancy level of the AMEX Co-Tenants is 40% or greater, then the AMEX Co-
Tenants shall be the Managing Co-Tenant and shall also have the right to
transfer their Interest (or a portion thereof 40% or greater) as Managing Co-
Tenant to a single entity (the "Amex Assignee"); (r) if either the aggregate
Interest or the occupancy level of the AMEX Co-Tenants is less than 40% but
greater than 25%, or if the AMEX Managing Co-Tenant has transferred its Interest
(or a portion thereof 40% or greater) to the
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Amex Assignee, then either the AMEX Co-Tenants or the Amex Assignee, as the case
may be, shall serve as a Co-Managing Co-Tenant with the Lehman Co-Tenants,
provided the Lehman Co-Tenants' aggregate Interest and occupancy level is
greater than 40%; (s) if either the Amex Assignee or the Lehman Co-Tenants'
aggregate Interests or occupancy levels falls below 25%, and the other Co-
Tenants' aggregate Interest and occupancy level remains above 25% then the Co-
Managing Co-Tenant falling below 25%, shall lose its Co-Managing Co-Tenant
status and the other Co-Managing Co-Tenant shall be the sole Managing Co-Tenant,
provided its aggregate Interest and occupancy level remain above 25%; (t) if
both the AMEX Co-Tenants' and the Amex Assignee's and the Lehman Co-Tenants' and
the Lehman Assignee's (as hereinafter defined) aggregate Interest or occupancy
level remain below 25% then both the AMEX Co-Tenants and the Lehman Co-Tenants
shall be Co-Managing Co-Tenants; (u) provided the Lehman Co-Tenants have an
aggregate Interest and occupancy level above 40% then the Lehman Co-Tenants
shall also have the same rights as set forth above in sub-clause (q ) to assign
to an assignee which is a single entity (the "Lehman Assignee"), their rights as
a Co-Managing Co-Tenant; and (v) if either the AMEX Co-Tenants' or the Amex
Assignee's or the Lehman Co-Tenants' or the Lehman Assignee's, as the case may
be, aggregate Interest or occupancy levels falls below 25% and the other Co-
Tenants' Interest and occupancy level is between 25% and 40%, then the Co-
Tenant whose Interest and occupancy level is between 25% and 40% shall become
the sole Managing Co-Tenant. For purposes of this paragraph only, in
calculating the aggregate Interests of either the Amex Co-Tenants or the Lehman
Co-Tenants, the Interests of any assignees of either the Lehman Co-Tenants or
the Amex Co-Tenants shall not be considered. Notwithstanding the foregoing, if
either party exercises its option to purchase the other party's Interest
pursuant to that certain Option Agreement, dated as of the date hereof, among
the parties thereto (either prior to or after the satisfaction of the WFC
Indebtedness), the exercising party shall become the Managing Co-Tenant until
the satisfaction of the WFC Indebtedness at which time the provisions of (c)(ii)
above shall determine which Co-Tenant shall be the Managing Co-Tenant or Co-
Managing Co-Tenant, as the case may be.
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If under a Co-Managing Co-Tenant relationship, the Co-Managing Co-
Tenants are deadlocked with respect to the management of the Property or any
other matter to be determined by the Managing Co-Tenant pursuant to this
Agreement, such determination shall be jointly made by the respective Chief
Financial Officers of the Designated Co-Tenants. If the matter is still
unresolved after ten (10) days, then either Designated Co-Tenant shall have the
right to submit the matter to arbitration in accordance with Section 5.15
hereof. In the event that at any time (either prior to or after satisfaction of
the WFC Indebtedness) the party that is the Managing Co-Tenant or a Co-Managing
Co-Tenant files a voluntary bankruptcy petition or has an involuntary bankruptcy
petition filed against it, then the Non-Managing Designated Co-Tenant or Co-
Managing Co-Tenant, as the case may be, shall immediately upon such filing
become the Managing Co-Tenant and shall remain so until such Co-Tenant emerges
from bankruptcy protection at which time the provisions of paragraph (c)
immediately above shall control and determine which Co-Tenant shall be the
Managing Co-Tenant or the Co-Managing Co-Tenant, as the case may be.
(d) With respect to the Existing Leasehold Mortgages, the Existing
Indentures and the Existing Notes, Amexco shall represent the Co-Tenants in all
dealings with (i) any trustees, holders or mortgagees thereof (and any
successors-in-interest to such entities), (ii) any rating agencies (only with
respect to the rating of the Existing Notes), and (iii) all other parties to
said documents or entities or persons having any connection, interaction or
dealings with the parties thereto. Further, Amexco shall undertake all steps
and procedures which it shall deem necessary or desirable to ensure that at all
times the Co-Tenants are in full compliance with all of the terms, covenants and
conditions of each of the Existing Leasehold Mortgages, the Existing Indentures,
and the Existing Notes and to enforce all of the rights and privileges of the
Co-Tenants thereunder. To the extent Amexco is required under the Existing
Leasehold Mortgages or the Existing Indentures, to deliver any certificates or
notices, the Lehman Co-Tenants shall deliver to Amexco such back-up
certificates or notices requested by Amexco at least three (3) business days
prior to the date such back-up certificates or notices are due.
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2.3 PROPERTY OBLIGATIONS
(a) Each of the Co-Tenants shall be obligated, in accordance with the
terms of this Agreement, to bear and pay their proportionate share of all
Property Obligations (hereinafter defined). Except as hereinafter provided, the
AMEX Co-Tenants' and Lehman Co-Tenants' proportionate shares of Property
Obligations shall be equal to their respective Interests.
(b) The term "Property Obligations" shall mean all (i) Rental, (ii)
Common Area Charges (as such term is defined in the Project Operating Agreement)
except for Utility Expenses (hereinafter defined) with respect to the Co-
Tenants' respective Spaces which are to be paid as set forth in Section 2.10
hereof, (iii) insurance premiums relating to the Property except (A) for
premiums attributable solely to insurance on a Co-Tenant's installations and/or
improvements located within its Space or which relate to insurance obtained at
the request, and for the exclusive benefit, of a Co-Tenant, in each such case
the cost of which premiums shall be borne solely by said Co-Tenant, (B) that the
cost of insurance to each Co-Tenant shall be equitably adjusted to reflect the
loss experience of each Co-Tenant if premiums fluctuate as a direct result of
insured losses of one or more Co-Tenants, and (C) that with the prior consent of
the Managing Co-Tenant a Co-Tenant may provide its equitable share of any
insurance required under the Lease and any Leasehold Mortgage, (iv) Utility
Expenses with respect to those portions of the Property other than the Spaces of
the Co-Tenants, (v) costs and expenses reasonably incurred and equitably
determined by Managing Co-Tenant in performing its duties hereunder, including,
without limitation, bookkeeping, accounting and legal fees and expenses (whether
performed by independent contractors or employees of Managing Co-Tenant), and
(vi) all other costs and expenses with respect to the shell, core and central
systems of the Building and the Common Facilities.
(c) Prior to the execution of this Agreement, various payments with
respect to Property Obligations, Debt Obligations (as hereinafter defined) and
Utility Expenses were made based upon estimated amounts. Accordingly, if and to
the extent the estimated payments made prior to the execution of this Agreement
by the
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Co-Tenants on account of Property Obligations, Debt Obligations and Utility
Expenses differ from the payments based on final figures when available, there
shall be appropriate adjustments, equitably determined by the Managing Co-
Tenant, and each Co-Tenant shall pay its proper share of such adjustments (with
interest to be applied at the Federal funds rate).
2.4 COMMON FACILITIES
I. Common Facilities in General.
(a) The term "Common Facilities" (which term shall include those
Common Facilities designated on Exhibit C as "Special Common Facilities") shall
mean those areas of the Property (i) not included within the Space of any Co-
Tenant and (ii) intended by the Co-Tenants for the joint and common use of each
of the Co-Tenants. Certain of the areas of the Property constituting Common
Facilities as of the date hereof are indicated on Exhibit C annexed hereto and
made a part hereof.
(b) The Property Obligations for any Common Facility shall be
comprised of the applicable (i) Maintenance Costs (hereinafter defined), and
(ii) Usage Costs (hereinafter defined).
(c) The term "Maintenance Costs" shall mean those costs attributable
to the construction, installation, decoration, alteration, maintenance,
operation and repair of a Common Facility, but shall not include any Usage Costs
for that Common Facility. The Maintenance Cost for any Common Facility shall be
borne by each of the Co-Tenants in accordance with its respective Interest,
except as provided herein.
(d) The term "Usage Costs" shall mean those costs attributable to a
Co-Tenant's use of a Common Facility, or the use thereof by a permitted
subtenant or assignee of a Co-Tenant. The Usage Costs for a Co-Tenant for any
Common Facility shall be determined on the basis of any of:
(i) the cost incurred as a result of actual usage by a Co-Tenant (such
Common Facilities being hereinafter referred to as "Cost-Based Common
Facilities");
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(ii) the product of (A) the total Usage Costs for such Common Facility
and (B) the fraction, the numerator of which shall be equal to the population of
the Co-Tenant in the Building and the denominator of which shall be equal to the
total popula- tion of the Building; (such Common Facilities being hereinafter
referred to as "Population-Based Common Facilities");
(iii) the product of (A) the total Usage Costs for such
Common Facility and (B) the Interest of the Co-Tenant (such Common Facilities
being hereinafter referred to as "Interest-Based Common Facilities"); or
(iv) with respect to the Building's Retail space, cashiers and credit
union area, telecommunication facilities (the "Telecommunication Facilities")
and the television studio located at the +12.5 foot level of the Building (the
"T.V. Studio"), the Usage Costs shall be determined as provided in Exhibit C
hereof.
(e) From time to time, the Managing Co-Tenant shall reasonably and
equitably determine (i) the Maintenance Costs and Usage Costs for all Common
Facilities (other than the Usage Costs for the T.V. Studio and the
Telecommunication Facilities), and (ii) which Common Facilities shall constitute
Cost-Based Common Facilities, Population-Based Common Facilities and Interest-
Based Common Facilities. As of the date hereof, the Cost-Based Common
Facilities, Population-Based Common Facilities and Interest-Based Common
Facilities are as indicated on Exhibit C.
(f) Managing Co-Tenant shall have the right to segregate any Common
Facility in the Building, including, without limitation, mail services, shipping
and receiving facilities, elevators and utilities, such that one or more Co-
Tenants shall have the exclusive use of all or a portion of such segregated
facilities (the "Segregated Facilities"), provided that no Co-Tenant shall be
excluded from the benefit or use of any Segregated Facility unless and until a
suitable substitute for such facility is provided. Any Co-Tenant or Co-Tenants
benefitting from a Segregated Facility to the exclusion of any other Co-Tenants
shall bear an equitable portion of the Property Obligations in respect thereof
and with respect to any substitute therefor.
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(g) The Managing Co-Tenant may, from time to time, upon not less than
twenty (20) days notice to the Non-Managing Designated Co-Tenant (the "Notice
Period"), convert a Common Facility (or portion thereof) to office space (a
"Proposed Converted Common Facility"), provided that the same is done in
compliance with all applicable laws and regulations, the terms and provisions of
the Lease and any Leasehold Mortgages. The Proposed Converted Common Facility
may be occupied either by means of reallocation of Interests or by means of a
sublease executed by the Managing Co-Tenant on behalf of the Co-Tenants.
Notwithstanding the foregoing, the Non-Managing Designated Co-Tenant shall have
the right at any time prior to the expiration of the Notice Period to give
notice (the "Election Notice") to the Managing Co-Tenant pursuant to which the
Non-Managing Designated Co-Tenant agrees to assume for its own use, and, at its
option, the use of certain of the other Co-Tenants, the operation and cost of
the Proposed Converted Common Facility (in either its entirety or as reduced
pursuant to the terms below) including, without limitation, all Rental (as such
term is defined in the Lease), Maintenance Obligations and Utility Expenses
attributable to the Proposed Converted Common Facility as well as all costs and
expenses under all service provider and vendor contracts related thereto. In
the Election Notice, the Non- Managing Designated Co-Tenant shall also state
whether it desires to reduce the size of the Proposed Converted Common Facility
and, if so, the amount of space which it desires to reduce (the "Space
Reduction"). If the Non-Managing Designated Co-Tenant elects a Space Reduction,
then the Managing Co-Tenant, working together with the Non-Managing Designated
Co-Tenant, shall prepare or cause to be prepared plans and specifications for
the Space Reduction and arrange for the necessary work, all of which shall be at
the sole cost and expense of the Non-Managing Designated Co-Tenant. If Managing
Co-Tenant, in its reasonable discretion, determines that the Space Reduction
cannot be accomplished, in whole or in part, then the Non-Managing Designated
Co- Tenant shall accept the Proposed Converted Common Facility in its present or
partially reduced size and with respect to the amount of space that cannot be
eliminated through the Space Reduction, the Non-Managing Designated Co-Tenant
shall not be required to pay the Rental with respect thereto other than as a Co-
Tenant hereunder. The Non-Managing Designated Co-Tenant shall accept the pro-
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posed Converted Common Facility (together with its trade fixtures and equipment
in "as is" condition) and assume control and operation of the Proposed Converted
Common Facility on the date which is the later of (i) sixty (60) days after
giving the Election Notice, and (ii) ten (10) days after Managing Co-Tenant
completes the alterations referred to above. In connection therewith, the
Managing Co-Tenant shall work in close cooperation with the Non-Managing
Designated Co-Tenant to ensure a smooth and orderly transition. Notwithstanding
the foregoing, except as otherwise required by the Lease, Project Operating
Agreement, any Leasehold Mortgage or any Legal Requirements, the Managing Co-
Tenant shall not convert the lobby areas on the street and mezzanine levels of
the Building to office space if (i) such conversion will materially reduce the
fair market value of the Property, or (ii) the size of the lobby area, as
reduced, will not be consistent with other first class office buildings in the
New York City area.
(h) Except as otherwise provided herein, Managing Co-Tenant shall (i)
make the Common Facilities available to all Co-Tenants on a reasonable and
equitable basis, and (ii) control all Building systems and utilities in order to
maintain the Building in the manner contemplated by this Agreement; provided,
however, that no assignee, transferee or subtenant of a Lehman Co-Tenant shall
have any right to the use or service of the Employee Assistance Programs, the
Fitness Center or the Medical Center (as such terms are defined herein) but
shall be entitled to use all other Common Facilities in accordance with the
terms hereof. Notwithstanding the foregoing, any assignee, transferee or
subtenant that is an Affiliate of a Lehman Co-Tenant shall have the right to use
all of the Common Facilities in accordance with the terms hereof.
II. Employee Assistance Program.
(a) On and after the Distribution Date, Amexco shall provide EAP
Services to Lehman Co-Tenants' employees. The costs and expenses of providing
such EAP Services shall be determined and allocated on a Pre-Distribution Basis
in good faith by Amexco after consultation with Lehman. AMEX Co-Tenants or
Lehman Co-Tenants may at any time propose changes to the EAP Services being
provided.
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(b) Notwithstanding Section (a) above, following the Distribution
Date, Amexco may make changes in the scope and level of EAP Services it provides
to Lehman Co-Tenants employees so long as any such change is made on a Non-
discriminatory Basis; provided, however, that (i) Amexco shall notify Lehman in
writing of any such proposed change which is reasonably likely to materially
adversely affect Lehman Co-Tenants' employees (and its good faith estimate of
the cost and expense implications thereof) at least 90 days prior to such change
being implemented and (ii) Amexco shall continue to provide the then-existing
level of the applicable service (or such other level as the parties hereto may
then agree) to Lehman Co-Tenants employees if Lehman (A) so requests in writing
and (B) agrees in writing to pay to Amexco an amount equal to all of Amexco's
incremental costs for providing such services. In the event that Amexco
proposes to cease providing all EAP Services, the rights granted to Lehman
pursuant to clause (ii) above shall not be available to Lehman. Should Amexco
propose to cease providing all EAP Services, the Lehman Co-Tenants shall have
the option to (A) perform such services in the Lehman Co-Tenant's Space, and (B)
offer continued employment to the EAP Services staff, without interference by
Amexco, in connection with the provision by Lehman of such services to Lehman
Co-Tenants employees. Lehman shall offer to the Amex Co-Tenants EAP Services on
the same basis as made available to the Lehman Co-Tenants.
(c) Lehman may, upon 90 days' written notice to Amexco, request that
Amexco provide to Lehman Co-Tenants' employees a reduced level of EAP Services
provided such level of EAP Services does not increase or decrease the number of
employees needed to provide such services, in which case, the notice period
shall be 180 days. Following such 90 or 180 day notice period, as applicable,
Amexco shall provide to Lehman Co-Tenants' employees such reduced level of
services and will adjust the charges to Lehman Co-Tenants if such reduced
services decrease operating costs as reasonably determined by Amexco, provided,
however, that Lehman cannot thereafter provide the EAP Services so reduced
within the Building.
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(d) Intentionally Deleted
(e) Consistent with past practices and procedures, Amexco shall use
its reasonable efforts to provide to Lehman, at Lehman's request, information
regarding services provided by competitors which are similar to EAP Services.
If Lehman determines for reasons of a material cost difference to replace Amexco
as its EAP Services provider, in whole or in part, Amexco shall have the right,
for a period of 90 days following written notice by Lehman of its proposed
change, to match the level and cost of services to which Lehman proposes to
change. If Amexco does not match the level and cost of services to which Lehman
proposes to change, then Lehman shall have the right to retain such service
provider to provide such services within the Building, provided, however, Lehman
shall not have the right to engage any then employees of the EAP Services staff.
(f) Amexco shall prepare and deliver to Lehman, on or prior to June 30
of each year, unless otherwise agreed to in writing by both parties, a proposed
operating budget for EAP Services. Each such budget (other than the budget for
1994) shall contain estimated staff bonuses as an item thereof. Each operating
budget, and any changes made thereto made during any budgeted year, shall be
prepared in good faith by Amexco, in consultation with Lehman.
(g) Lehman shall have the right to participate in and make
recommendations with respect to the performance appraisal process and
compensation review process, including bonus recommendations, for all EAP
Services staff and the right to participate in the hiring process for new senior
staff (directors and managers and above). Lehman shall also have the right to
review and approve all written communications to Lehman Co-Tenants' employees
concerning EAP Services.
(h) Amexco shall cause the EAP Services staff to, on substantially the
same basis as prior to the Distribution Date, maintain in a reasonably
confidential manner all records and files relating to Lehman Co-Tenants'
employees. Amexco shall act in a manner consistent with past practices and
procedures intended to ensure that any information relating to the businesses or
activities of Lehman Co-Tenants obtained from any Lehman
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Co-Tenants' employee in connection with such employee's participation in EAP
Services shall not be disclosed to any representative of AMEX Co-Tenants or any
other party (other than EAP Services staff or Medical Services staff on an as-
needed basis), except as required by law as may be interpreted in good faith by
Amexco.
(i) Notwithstanding Amexco's obligation contained in this Article II,
Lehman hereby agrees and acknowledges that Amexco may engage any third party to
provide all or any EAP Services, subject to the provisions of this Article II.
Lehman shall have the right to participate in and make recommendations prior to
Amexco's engagement of a third party.
(j) Notwithstanding anything to the contrary contained in (a), (f),
(g) and (i) above, Amexco shall have the right to make any final decisions with
respect to EAP Services, except with respect to the scope and level of services
provided to the Lehman Co-Tenants as set forth in this Article II.
III. Fitness Centers.
(a) On and after the Distribution Date, Amexco shall provide Fitness
Center Services with respect to the fitness centers on the fourth and forty-
fourth floors of the Building (collectively, the "Fitness Center") to AMEX Co-
Tenants' and Lehman Co-Tenants' employees. The costs and expenses of providing
such Fitness Center Services shall be determined and allocated on a
Predistribution Basis in good faith by Amexco after consultation with Lehman.
Amexco or Lehman may at any time propose changes to the Fitness Center Services
being provided.
(b) Notwithstanding Section (a) above, following the Distribution
Date, Amexco may make changes in the scope and level of Fitness Center Services
it provides to Lehman Co-Tenants' employees so long as any such change is made
on a Non- discriminatory Basis; provided, however, that (i) Amexco shall notify
Lehman in writing of any such proposed change which is reasonably likely to
materially adversely affect Lehman Co-Tenants' employees (and its good faith
estimate of the cost and expense implications thereof) at least 90 days prior to
such change being implemented and (ii) Amexco shall
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continue to provide the then-existing level of the applicable service (or such
other level as the parties hereto may then agree) to Lehman Co-Tenants'
employees if Lehman (A) so requests in writing and (B) agrees in writing to pay
to Amexco an amount equal to all the incremental costs incurred for providing
such services. In the event that Amexco proposes to cease providing all Fitness
Center Services, the rights granted to Lehman pursuant to clause (ii) above
shall not be available to Lehman. Should Managing co-Tenant propose to cease
providing all Fitness Center Services, Lehman Co-Tenants shall have the option
to (A) occupy and use in connection with its provision of such services to
Lehman Co-Tenants' employees the Space Amexco theretofore occupied in connection
with Amexco's provisions of such services, such Space shall be treated as a
Proposed Converted Common Facility pursuant to Section 2.4(I)(g), and (B) offer
continued employment to the Fitness Center Services staff, without interference
by Amexco, in connection with the provision by Lehman of such services to Lehman
Co-Tenants' employees. Lehman shall offer to the Amex Co-Tenants the Fitness
Center services on the same basis as made available to the Lehman Co-Tenants.
(c) Lehman may, upon 90 days' written notice to Amexco, request that
Amexco provide to Lehman Co-Tenants' employees a reduced level of Fitness Center
Services provided such level of Fitness Center Services does not increase or
decrease the number of employees needed to provide such services, in which case,
the notice period shall be 180 days. Following such 90 or 180 day notice
period, as applicable, Amexco shall provide to Lehman Co-Tenants' employees such
reduced level of services and will adjust the charges to Lehman Co-Tenants if
such reduced services decrease operating costs as reasonably determined by
Amexco, provided, however, that Lehman cannot thereafter provide the Fitness
Center Services so reduced within the Building.
(d) Intentionally Deleted
(e) Consistent with past practices and procedures, Amexco shall use
its reasonable efforts to provide to Lehman, at Lehman's request, information
regarding services provided by competitors which are similar to Fitness Center
Services. If Lehman determines for reasons of a material cost difference to
replace
25
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Amexco as its Fitness Center Services provider, in whole or in part, Amexco
shall have the right, for a period of 90 days following written notice by Lehman
of its proposed change, to match the level and cost of services to which Lehman
proposes to change. If Amexco does not match the level and cost of services to
which Lehman proposes to change, then Lehman shall have the right to retain a
service provider within the Building, provided, however, Lehman shall not have
the right to engage any then employees of the Fitness Center Services staff.
(f) Amexco shall prepare and deliver to Lehman Co-Tenants, on or prior
to June 30 of each year unless otherwise agreed to in writing by both parties, a
proposed operating budget for Fitness Center Services. Each such budget (other
than the budget for 1994) shall contain estimated staff bonuses as an item
thereof. Each operating budget, and any changes made thereto during any
budgeted year, shall be prepared in good faith by Amexco, in consultation with
Lehman.
(g) Lehman shall have the right to participate in the performance
appraisal process and compensation review process, including bonus
recommendations, for all Fitness Center Services staff and the right to
participate in the hiring process for new senior staff (directors and managers
and above). Lehman shall also have the right to review and approve all written
communications to Lehman Co-Tenants' employees concerning Fitness Center
Services.
(h) Upon the Distribution Date, the fitness center on the fourth
floor will be renamed the "WFC Fitness Center".
(i) Within six months after the Distribution Date (which period is
subject to reasonable extension to be mutually agreed upon by the parties), if
Lehman so chooses, it may expand the WFC Fitness Center to accommodate an
additional Three Hundred (300) Lehman Co-Tenants' members thereof. In
connection therewith, Lehman will pay the construction expense thereof and the
expense of the purchase of new equipment.
(j) After the Distribution Date, Amexco will replace all the shirts
(the "Shirts") currently used at the Fitness Center with two thousand (2,000)
new
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shirts reflecting the new name "WFC Fitness Center". Amexco will also replace
all the forms (the "Forms") currently used at the Fitness Center to reflect the
new name (including enrollment forms, risk check forms, letterhead and
envelopes, and laminated clothing center cards). The 1994 WFC Health and
Fitness Center operating budget has been approved by Amexco and Lehman to
include an allocation covering 100% of the replacement costs of the Forms and
50% of the replacement costs of the Shirts. Lehman will pay the remaining 50%
of the replacement costs of the Shirts.
(k) Amexco shall cause the Fitness Center Services staff to, on
substantially the same basis as prior to the Distribution Date, maintain in a
reasonably confidential manner all records and files relating to Lehman Co-
Tenants' employees.
(l) Lehman Co-Tenants shall be entitled to have 59% of the membership
of the WFC Fitness Center if and when the WFC Fitness Center expansion occurs
pursuant to paragraph (h) and in such event, shall pay 59% of all costs and
expenses related thereto in accordance with the terms and conditions contained
in this Agreement. Until such expansion occurs, the membership shall be based
on a current allocation (which is: AMEX Co-Tenants - 45%; Lehman Co-Tenants -
55%). The foregoing percentages shall remain in effect until such time as the
aggregate Interests of the Lehman Co-Tenants or the AMEX Co-Tenants change, in
which event such percentages shall be recalculated on a populational basis.
(m) [intentionally deleted]
(n) Upon request and at no additional cost, the Fitness Center
Services staff will provide advice and oversight to Lehman about the
establishment and operation of a fitness center at 101 Hudson Street, Jersey
City, New Jersey, and/or other locations within New York/New Jersey Metropolitan
area (each an "Additional Fitness Center") and subject to the Fitness Center
Services staff's time availability and reimbursement, advise and consult about
the establishment and operation of a fitness center in other locations
throughout the domestic United States.
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(o) Upon request and on such terms and conditions, including
additional fees, as the parties may mutually agree, the Fitness Center Services
staff will supervise and manage the operation of one or more Additional Fitness
Centers.
(p) Lehman hereby agrees and acknowledges that in connection with
Amexco's obligations contained in this Article III, Amexco may, consistent with
past practice and procedures, at its sole discretion, engage any third party to
provide all or any Fitness Center Services subject to the provisions of this
Article III. Lehman shall have the right to participate in and make
recommendations prior to Amexco's engagement of a third party.
(q) Notwithstanding anything to the contrary contained (a), (f) , (g)
and (p) above, Amexco shall have the right to make any final decisions with
respect to Fitness Center Services, except with respect to the scope and level
of services provided to the Lehman Co-Tenants, as set forth in this Article III.
IV. Medical Center.
(a) On and after the Distribution Date, Amexco shall provide Medical
Center Services in the medical center of the Building ("Medical Center") to all
AMEX Co-Tenants' and Lehman Co-Tenants' employees. The costs and expenses of
providing such Medical Center Services shall be determined and allocated on a
Pre-Distribution Basis. Amexco or Lehman may at any time propose changes to the
Medical Center Services being provided.
(b) Notwithstanding Section (a) above, following the Distribution
Date, Amexco may make changes in the scope and level of services it provides to
Lehman Co-Tenants' employees so long as any such change is made on a Non-
discriminatory Basis; provided, however, that (i) Amexco shall notify Lehman in
writing of any such proposed change which is reasonably likely to materially
adversely affect Lehman Co-Tenants' employees (and its good faith estimate of
the cost and expense implications thereof) at least 90 days prior to such change
being implemented and (ii) Amexco shall continue to provide the then-existing
level of the applicable service (or such other level as the parties hereto may
then agree) to
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<PAGE>
Lehman Co-Tenants' employees if Lehman (A) so requests in writing and (B) agrees
in writing to pay to Amexco an amount equal to all the incremental costs
incurred for providing such services. In the event that Amexco proposes to
cease providing all Medical Center Services, the rights granted to Lehman
pursuant to clause (ii) above shall not be available to Lehman. Should Amexco
propose to cease providing all Medical Center Services, the Lehman Co-Tenants
shall have the option to (A) occupy and use in connection with its provision of
such services to Lehman Co-Tenants' employees the Space Amexco theretofore
occupied in connection with Amexco's provisions of such services, such Space
shall be treated as a Proposed Converted Common Facility pursuant to Section
2.4(I)(g), and (B) offer continued employment to the Medical Center Services
staff, without interference by Amexco, in connection with the provision by
Lehman of such services to Lehman Co-Tenants' employees. Lehman shall offer to
the Amex Co-Tenants the Medical Center Services on the same basis as made
available to the Lehman Co-Tenants.
(c) Lehman may, upon 90 days' written notice to Amexco, request that
Amexco provide to Lehman Co-Tenants' employees a reduced level of Medical Center
Services provided such level of Medical Center Services does not increase or
decrease the number of employees needed to provide such services, in which case,
the notice period shall be 180 days. Following such 90 or 180 day notice
period, as applicable, Amexco shall either provide to Lehman Co-Tenants'
employees such reduced level of services and will adjust the charges to Lehman
Co-Tenant if such reduced services decrease operating costs as reasonably
determined by Amexco, provided, however, that Lehman cannot thereafter provide
Medical Services so reduced within the Building.
(d) Intentionally Deleted
(e) Consistent with past practices and procedures, Amexco shall use
its reasonable efforts to provide to Lehman, at Lehman's request, information
regarding services provided by competitors which are similar to Medical Center
Services. If Lehman determines for reasons of a material cost difference to
replace Amexco as its Medical Center Services provider, in whole or in part,
Amexco shall have the right, for a period of 90 days following written notice by
Lehman of its pro-
29
<PAGE>
posed change, to match the level and cost of services to which Lehman proposes
to change. If Amexco does not match the level and cost of services to which
Lehman proposes to change, then Lehman shall have the right to retain a service
provider to provide such services within the Building, provided, however, Lehman
shall not have the right to engage any then employees of the Medical Center
Services staff.
(f) Amexco shall prepare and deliver to Lehman Co-Tenants, on or prior
to June 30 of each year, unless otherwise agreed to in writing be both parties,
a proposed operating budget for Medical Center Services. Each such budget
(other than the budget for 1994) shall contain estimated staff bonuses as an
item thereof. Each operating budget, and any changes thereto during any
budgeted year, shall be prepared in good faith by Amexco, in consultation with
Lehman.
(g) Lehman shall have the right to participate in the performance
appraisal process and compensation review process, including bonus
recommendations, for all Medical Center Services staff and the right to
participate in the hiring process for new senior staff (directors and managers
and above). Lehman shall also have the right to review and approve all written
communications to Lehman Co-Tenants employees concerning Medical Center
Services.
(h) Upon the Distribution Date, the Medical Center will be
renamed the "WFC Medical Department".
(i) Amexco shall cause the Medical Center Services staff to, on
substantially the same basis as prior to the Distribution Date, maintain in a
reasonably confidential manner all records and files relating to Lehman Co-
Tenants employees.
(j) Upon request and at no additional cost, the Medical Center
Services staff will provide advice and oversight to Lehman about the
establishment and operation of a medical center located within the New York/New
Jersey Metropolitan area (each an "Additional Medical Center") and subject to
the Medical Center Services staff's time availability and reimbursement, shall
provide advice and consultation with respect to the
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establishment and operation of other medical centers to be located within the
domestic United States.
(k) Lehman hereby agrees and acknowledges that in connection with
Amexco's obligations contained in this Article IV, Amexco may, consistent with
past practices and procedures, at its sole discretion, engage any third party to
provide all or any Medical Center Services subject to the provisions of this
Article IV. Lehman shall have the right to participate in and make
recommendations prior to Amexco's engagement of a third party.
(l) Notwithstanding anything herein to the contrary, Amexco shall not
be required to provide any Medical Center Services which would subject the
Amexco, in its good faith judgment, to an unacceptable risk of liability.
(m) Notwithstanding anything to the contrary contained in (a), (f),
(q) and (k) above, Amexco shall have the right to make any final decisions with
respect to Medical Center Services except with respect to the scope and level of
services provided to the Lehman Co-Tenants, as set forth in this Article IV.
V. Parking Facilities.
(a) The parking spaces located within the Building (except for the P-3
parking spaces currently used for storage and the seven (7) spaces on P-4 and P-
3 levels of the Building that are considered unusable for parking) shall be
considered to be Common Facilities and shall be allocated by the Managing Co-
Tenant in accordance with each Co-Tenant's Interest. The cost of any parking
spaces allocated to a Co-Tenant shall be borne by such Co-Tenant as a Cost-Based
Common Facility. The cost of all other parking spaces shall be borne by the Co-
Tenants as an Interest-Based Common Facility.
(b) In the event that in the future (i) any of the parking spaces
currently located within the Building become available, or (ii) the number of
available parking spaces is decreased in order to support Building or WFC
operations or as a result of a casualty or a condemnation or as otherwise
required pursuant to Legal Requirements, Managing Co-Tenant shall allocate the
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available parking spaces among the Co-Tenants, in accordance with each Co-
Tenant's Interest.
VI. Conference Center Services.
On and after the Distribution Date, Lehman shall have the right to use
the WFC Conference Center on the 26th Floor of the Building, the costs and
expenses of which use shall be determined and allocated on a Pre-Distribution
Basis. All conference rooms and the auditorium will, consistent with past
practice, be reserved and used on a first-come-first serve basis, except that
(i) two large conference rooms shall be permanently designated as Lehman rooms
and not be used by anyone other than Lehman without Lehman's prior consent and
(ii) two large conference rooms shall be permanently designated Amexco rooms and
not be used by anyone other than Amexco without Amexco's prior consent. Any Co-
Tenant may use the WFC Conference Center after normal business hours, the costs
and expenses of which use shall be reasonably determined by the Managing Co-
Tenant and borne exclusively by the Co-Tenant using the WFC Conference Center
during such period.
VII. Food Service.
On and after the Distribution Date, Lehman shall have the right to
continue using the contracted food services for the Building, including the WFC
Cafeteria, the WFC Trader Food Services, Marcellus Berry, the 19th Floor
Executive Food Services and the WFC Conference Catering (but specifically
excluding executive dining services on the 50th Floor of the WFC) on the same
basis as it was permitted to use such services and facilities prior to the
Distribution Date. Amexco and Lehman shall jointly review all contracted food
services on a quarterly basis, provided that Amexco shall have the right to make
all final decisions with respect to contracted food services subject to the
terms and conditions contained herein.
VIII. Lehman Library.
On and after the Distribution Date, Amexco employees shall have the
right to continue to use the Lehman Library located on the 15th floor of the
Building on the same basis as was permitted immediately prior to
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the Distribution Date. Notwithstanding the foregoing, upon 60 days notice,
Lehman shall retain the right to discontinue operation of the Lehman Library
provided such discontinuance is made on a Non-discriminatory Basis.
IX. Mail, Messengers and Delivery Services.
(a) On and after the Distribution Date, Amexco shall no longer provide
to Lehman at the WFC any package or courier acceptance or delivery services and
Amexco messengers will no longer be permitted on Lehman floors at the WFC
without permission. On and after the Distribution Date, Lehman shall have the
right to establish and operate a Lehman messenger center in a designated portion
of the existing Amexco Messenger Center in the WFC Lobby. On and after the
Distribution Date, all small packages delivered to Lehman by the United States
Postal Service shall be delivered via the internal conveyor system in the
Building. At the request of Lehman, Amexco shall provide courier services and
for the acceptance and delivery of packages at a cost to Lehman of Two Dollars
and Sixty Cents ($2.60) per piece (subject to CPI increase beginning in 1995)
for inbound delivery service. Any adjustment to such prices (other than
adjustments pursuant to CPI) must be pre-approved by Amexco and Lehman.
(b) On and after the Distribution Date, Amexco shall provide Lehman
with outgoing domestic and international courier mail services at the WFC
substantially similar to those provided immediately prior to the Distribution
Date. Amexco will charge Lehman a handling charge for such courier services at
the rate of $2.35 per piece during 1994; (subject to CPI increase beginning in
1995); thereafter such price may be adjusted on an annual basis (other than
adjustments pursuant to CPI), the determination and allocation of costs and
expenses being made on Pre-Distribution Basis (unless otherwise determined by
both Amexco and Lehman). Lehman will continue to be responsible for all direct
courier mail charges. Amexco will use only couriers for Lehman which have been
pre-approved by Lehman. Lehman has the right at any time on reasonable notice
to Amexco to discontinue using such Amexco outgoing courier mail service and to
establish and operate its own outgoing courier mail services at the Building
either in the Space of any Lehman Co-Tenant or in an area reasonably desig-
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nated by Amexco (i.e., not in the Space of any AMEX Co-Tenant).
(c) On and after the Distribution Date, Lehman shall have a right to
establish and maintain a presence on the WFC loading dock including use with
the AMEX Co-Tenants of the AMEX loading dock office (not to exceed one Lehman
employee), which in addition to providing any services referred to in Sections
(a) and (b) above, shall have the right to direct all incoming and outgoing
Lehman parcels, records and equipment.
(d) On and after the Distribution Date, Amexco will continue to sort
and distribute all incoming domestic and international Lehman mail on the same
basis as immediately prior to the Distribution Date, except that it will deliver
research mail to Lehman three (3) times a day. For the duration of 1994,
Lehman shall pay to Amexco a fee for such services in the annual amount of Two
Hundred and Seventy Six Thousand Dollars ($276,000) (to be billed at Twenty-
Three Thousand Dollars ($23,000) monthly) (subject to CPI increase beginning in
1995). Any adjustments to such rate shall be pre-approved by Amexco and Lehman
and shall reasonably account for substantial increases or decreases in volume of
mail of the Lehman Co-Tenants and the cost of trucking.
(e) On and after the Distribution Date, Amexco will continue to pick
up and deliver Lehman records to and from the warehouse in Piscataway, New
Jersey and to and from Lehman offices in New York City and 101 Hudson on the
same basis as immediately prior to the Distribution Date. If there are
additional costs as a result of time delays in deliveries by Amexco to and from
101 Hudson Street, the parties agree to review the costs associated therewith
and the Lehman Co-Tenants shall pay any increases related to such time delays or
if the Lehman Co-Tenants elect not to pay such increases, the Lehman Co-Tenants
shall have the right upon 30 days notice to Amexco to discontinue such service
and shall have the right to provide such services subject to the applicable
rules and regulations of the WFC. The costs and expenses of providing such
services is included in the Two Hundred and Seventy Six Thousand Dollars
($276,000) referenced above. Lehman may at any time on reasonable notice to
Amexco discontinue utilization of such services.
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(f) The parties agree that in no event shall any increase in the
CPI exceed 5% per annum with respect to this Article IX.
X. Communication Bins and Other Communications on Shared Floors.
(a) On and after the Distribution Date, all of the Lehman and Amexco
discount flyers in the front two lobby bins located near the turnstyles on the
Winter Garden side of the WFC shall be available to all Co-Tenants' employees.
The bins shall be clearly identified as containing the information of either
Amexco or Lehman.
(b) On and after the Distribution Date, the present job posting window
and retail merchandise windows shall remain under the exclusive control of
Amexco.
(c) On and after the Distribution Date, Amexco shall continue to
maintain the posting of any required governmental communications in the windows
located on the third floor of WFC. Upon request, Lehman shall have the use of
such windows on an as needed basis for the purpose of posting required notices.
(d) On and after the Distribution Date, both Amexco and Lehman shall
obtain the pre-approval of the other for the use of the employee cafeteria in
WFC for events to occur during the cafeteria's regular hours of operation,
including, without limitation, events where either Amexco or Lehman is a co-
sponsor, provided, however, in no event shall such use interfere with the normal
operations of the cafeteria, as reasonably determined by the Managing Co-Tenant.
(e) On and after the Distribution Date, both Amexco and Lehman shall
advise each other in advance prior to the posting of any business announcements
in the public areas of the Building including, without limitation, announcements
with regard to new clients. In the event of a possible conflict of business
interest, Amexco and Lehman each shall retain approval authority for the
postings of the other in the public areas of the Building.
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(f) On and after the Distribution Date, Amexco shall turn off all
television monitors on the floors occupied by Lehman Co-Tenants until the
parties are able to determine whether each Lehman Co-Tenant can use the monitors
for its own communication messages.
(g) On and after the Distribution Date, Amexco and Lehman shall advise
each other in advance of, and assume coordinating responsibility of, the use of
any area outside of the security turnstiles of the Amexco lobby in WFC. Should
a possible conflict of business interest exist, Amexco and Lehman shall obtain
from the other pre-approval for such use.
(h) On and after the Distribution Date, the Co-Tenants shall determine
the costs for programming television monitors to broadcast programs of Lehman
and the "stock crawl" to floors occupied by Lehman Co-Tenants. Should Amexco and
Lehman mutually approve in writing of such costs and the allocation thereof,
they will subsequently implement the broadcast of such programs.
2.5 DUTIES OF MANAGING CO-TENANT; CO-TENANT'S CHANGES
(a) Managing Co-Tenant shall, as agent for and at the expense of the
Co-Tenants and subject to and in accordance with the terms and provisions of
this Agreement, the Lease, the Project Operating Agreement, any Leasehold
Mortgages and the Affirmative Action Program Agreement, (i) make or cause to be
made all necessary or desirable repairs and improvements to the shell, core and
central systems of the Building and the Common Facilities, (ii) purchase needed
materials and supplies with respect thereto or otherwise in accordance with the
provisions of this Agreement, (iii) satisfy, in a timely manner, the Property
Obligations and the Debt Obligations (as hereinafter defined), and (iv) make all
other necessary and ordinary expenditures in connection with the operation,
repair, improvement and maintenance of the shell, core and central systems of
the Building and the Common Facilities, each as Managing Co-Tenant shall
reasonably deem advisable or necessary in the performance of its duties
hereunder. In performing its duties under (i) above, the Managing Co-Tenant
shall act in a reason-
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able and prudent manner so as not to unduly disrupt the Co-Tenant's business.
(b) Managing Co-Tenant shall have the authority to hire, discharge and
supervise independent contractors and all operating, service and maintenance
personnel, service contractors, architects, space planners, attorneys and other
consultants engaged in furnishing services in the performance of Managing Co-
Tenant's duties hereunder.
(c) Upon obtaining knowledge thereof, each Co-Tenant shall promptly
notify Managing Co-Tenant of any violation, order, rule or determination of any
Federal, State or municipal authority affecting the Property. Managing Co-
Tenant shall diligently attempt to obtain, renew and extend as and when
necessary, all permits, licenses and other governmental authorizations necessary
to operate the Building and/or the Leasehold and any cost or expense incurred in
connection therewith shall be considered a Property Obligation, except for the
cost and expense of any such item required with respect to a Co-Tenant's Space,
which shall be borne by such Co-Tenant.
(d) (i) Each Co-Tenant may make any proposed alterations, repairs,
additions or improvements (collectively, "Co-Tenant's Changes") to its Space,
provided that any such Co-Tenant's Changes are performed in compliance with the
provisions of this Agreement. Prior to the performance of any Co-Tenant's
Change, the Co-Tenant in whose Space the Co-Tenant's Change is proposed to be
made shall deliver to Managing Co-Tenant (1) the identity of the architect(s)
and engineer(s) preparing plans and specifications relating to such proposed Co-
Tenant's Change, (2) complete plans and specifications (including layout,
architectural, mechanical and structural drawings and specifications) relating
to such proposed Co-Tenant's Change, and (3) any additional information which
may be required by the Lease or any Leasehold Mortgage with respect to such
proposed Co-Tenant's Change. Upon receipt of the materials listed in (1) through
(3) above, Managing Co-Tenant shall with all reasonable diligence (but in no
event later than ten (10) days after receipt thereof) review such materials and
advise the submitting Co-Tenant of those additional materials, if any, which are
required for submission to
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the landlord under the Lease and/or the holders of any Leasehold Mortgage,
and/or, if applicable, any objections by any of the parties required to give
consent under clause (d)(ii) below. When all such materials have been provided
to Managing Co-Tenant, Managing Co-Tenant shall promptly submit such materials
to the landlord under the Lease and the holders of any Leasehold Mortgage for
any required consent to the performance of the proposed Co-Tenant's Change.
Thereafter, Managing Co-Tenant shall, using reasonable commercial efforts,
pursue any such required consent and shall transmit to the submitting Co-Tenant
any requests or comments made by the landlord under the Lease or the holders of
any Leasehold Mortgage with respect to the proposed Co-Tenant's Change.
(ii) No Co-Tenant's Change shall be performed unless and until the
landlord under the Lease and the holders of any Leasehold Mortgages have
consented to the proposed Co-Tenant's Change, or Managing Co-Tenant has
determined that no such consent is required (which determination shall be
diligently made). All Co-Tenant's Changes:
(A) shall be made solely at the expense of the Co-Tenant in
whose Space said Co-Tenant's Change is proposed to be made;
(B) shall be performed in accordance with all laws, orders and
regulations of all state, federal, municipal and local governments,
departments, commissions and boards and all applicable requirements of
insurance bodies having jurisdiction over the Property (collectively,
"Legal Requirements") and there shall be delivered to Managing Co-Tenant
prior to the performance of any work, if practical (or as soon thereafter
as possible), copies of any plans and specifications and applications made
with respect to any required building permits and copies of any building
permits received with respect to the proposed Co-Tenant's Change;
(C) shall not result in an adverse effect on the basic structure
of the Building or any Building systems (including without limitation any
of the Building's security systems), Utility Facilities (hereinafter
defined) or services
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to other Co-Tenants or other occupants of the Property;
(D) shall be made in compliance with the practices of Managing
Co-Tenant then in effect regarding the use of unions and union employees;
and
(E) shall be made only if permitted under, and are to be
performed in accordance with, the provisions of the Lease, the Affirmative
Action Program Agreement and any Leasehold Mortgages.
(iii) All Co-Tenant's Changes shall be performed by and all materials
used in connection therewith supplied by contractors, subcontractors and
materialmen approved by the Managing Co-Tenant (collectively, the "Approved
Contractors"). If a Co-Tenant shall desire to have a Co-Tenant's Change
performed by a contractor or subcontractor, or have materials used in connection
therewith supplied by a materialman, which is not an Approved Contractor, said
Co-Tenant shall furnish the name thereof to Managing Co-Tenant and Managing Co-
Tenant shall issue its consent or disapproval of such contractor, subcontractor
and/or materialman within five (5) business days of its receipt of request
therefor.
(iv) All Co-Tenant's Changes are to be performed at such times and in
such a manner as to minimize interference with the use and enjoyment of the
Building by the other Co-Tenants. With reasonable diligence following the
completion of any Co-Tenant's Changes, the Co-Tenant in whose Space a Co-
Tenant's Change was made shall cause to be prepared and delivered to Managing
Co-Tenant, at said Co-Tenant's sole cost and expense, such "as-built plans",
equipment manuals, licenses and such other documents as may be required under
the Lease. Such Co-Tenant shall also pay the expenses of incorporating such as-
built plans into any electronic data base maintained by the Managing Co-Tenant.
Prior to the performance of any Co-Tenant's Changes, Managing Co-Tenant may
require from the Co-Tenant for whom the Co-Tenant's Change is being made (a)
waivers of liens (if then obtainable) from all contractors, subcontractors and
materialmen performing work or supplying materials in connection with such Co-
Tenant's Changes and (b) evidence
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that all such contractors, subcontractors and materialmen will be paid in full,
which evidence may include, without limitation, payment and performance bonds.
(e) The quantity and quality of services which Managing Co-Tenant
shall provide hereunder to the Co-Tenants shall be of the quantity and quality
which Managing Co-Tenant shall deem necessary or appropriate for the maintenance
of the Property reasonably consistent with current levels and practices as of
the date hereof. If at any time a Co-Tenant should determine that it needs or
requires services (other than utility services) which are in excess of the
quantity and/or quality of services then being supplied to it by Managing Co-
Tenant (the "Additional Services"), the Co-Tenant shall request such Additional
Services from Managing Co-Tenant only, and, if reasonably practicable, Managing
Co-Tenant shall cause such Additional Services to be furnished to the Co-Tenant,
at that Co-Tenant's sole cost and expense. With respect to utility services,
the Co-Tenants acknowledge that the Lehman Co-Tenants presently utilize a
percentage of the base building infrastructure capacity which is greater than
their aggregate Interests. The Co-Tenants hereby consent to the usage levels
existing as of the date hereof for the Lehman Co-Tenants so long as, and to the
extent, Lehman's trading floor and electronic data processing operations as
presently constituted continue. However, if at any time, such trading floor or
electronic data processing operations shall be discontinued or curtailed then
said usage levels shall be adjusted accordingly. Further, if the Lehman Co-
Tenants or the AMEX Co-Tenants, as the case may be, (each, a "Requesting Co-
Tenant") should determine that they need or require additional base building
infrastructure capacity (for example, additional kilowatt hours or tonnage of
chilled water) in excess of that being furnished or made available to them as of
the date hereof ("Additional Capacity"), the Requesting Co-Tenant shall request
in writing such Additional Capacity from the Managing Co-Tenant. The Managing
Co-Tenant shall cause such Additional Capacity to be furnished or made available
to the Requesting Co-Tenant, at its sole cost and expense, if (i) reasonably
practicable in the opinion of the Managing Co-Tenant, and (ii) the amount of the
Additional Capacity does not exceed the Requesting Co-Tenant's "fair share" (as
measured by their then aggregate Interest) of the
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available system capacity as measured from the date hereof.
(f) Managing Co-Tenant shall have no liability to the other Co-Tenants
by reason of any inconvenience, annoyance, interruption or injury to business
arising from Managing Co-Tenant's making any repairs or changes which Managing
Co-Tenant is required or permitted by this Agreement, or required by law, to
make in or to any portion of the Property or in or to the fixtures, equipment or
appurtenances of the Property. Further, Managing Co-Tenant reserves the right,
without any liability to Tenant, to stop service of any of the heating,
ventilating, air conditioning, electric, sanitary, elevator or other primary or
secondary systems serving the Property, or the rendition of any of the other
services required of Managing Co-Tenant under this Agreement, whenever and for
so long as may be necessary, by reason of accidents, emergencies, strikes or the
making of repairs or changes which Managing Co-Tenant is required or permitted
to make pursuant to this Agreement.
2.6 CONTRACTS
Subject to and in accordance with the provisions of this Agreement,
Managing Co-Tenant is authorized in the name and at the expense of the Co-
Tenants, to make contracts for electricity, gas, steam, telephone, cleaning
services, vermin extermination, and other materials, supplies and services as
Managing Co-Tenant shall reasonably deem advisable. Managing Co-Tenant shall
not be required to obtain competitive bids for any such contracts.
2.7 MANAGEMENT COMPANY; CHANGE OF MANAGING CO-TENANT
Managing Co-Tenant may at any time retain any reputable management
company to perform all or a portion of the responsibilities and obligations of
Managing Co-Tenant under this Agreement, and the fees and expenses paid to such
management company shall be considered a Property Obligation.
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2.8 BUILDING SECURITY; SECURE AREAS
(a) Managing Co-Tenant shall provide such security services and
security systems for the Building as it shall deem necessary and/or desirable,
subject to any restrictions set forth in the Lease or the Project Operating
Agreement (the "Security Services"). The Security Services shall include,
without limitation, (i) placing security personnel at the lobby entrances and
parking garage of the Building and the Building's lobby elevator and stairway
entrances and (ii) having security personnel patrol the public areas, elevators
and stairways of the Building; in each case 24 hours a day, 365 days a year, in
each case in accordance with current practices and procedures.
(b) (i) Each Co-Tenant shall be permitted to install security
systems and security devices other than those furnished as part of the Security
Services (the "Additional Security Services"), provided that (A) Managing Co-
Tenant shall have determined to consent to the installation and/or provision of
such Additional Security Services, which determination managing Co-Tenant shall
make in good faith, (B) the Co-Tenant in whose Space such Additional Security
Services will be provided shall bear the sole cost of the installation,
maintenance and repair of the same, as well as any increase in costs of the
provision of Security Services to the other Co-Tenants resulting from the
provision of Additional Security Services to the requesting Co-Tenant, and (C)
the Additional Security Services shall not violate any laws, orders or
regulations or any provision contained in the Lease or the Project Operating
Agreement.
(c) Each Co-Tenant shall use its best efforts to preserve the security
and safety of other occupants of the Building and in the event Managing Co-
Tenant receives any complaints from other tenants or occupants at the Building
with respect to breaches of security or safety arising out of, or any nuisance
with respect to the conduct of a Co-Tenant's employees, agents, contractors or
invitees, said Co-Tenant shall immediately take whatever measures as shall be
reasonably necessary or as Managing Co-Tenant shall reasonably direct to remedy
any such complaint. No Co-Tenant shall perform any action (including
installation of electronic
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equipment) which may adversely affect the Building's security systems.
(d) (i) Each Co-Tenant may, fifteen (15) days after having
given notice to Managing Co-Tenant (or sooner, in the event of compelling
business reasons) designate and establish certain discrete enclosed portions of
its Space, as to which it has strict security requirements (the "Secure Areas").
Additionally, those portions of the Building as to which Co-Tenants have strict
security requirements as of the date hereof shall constitute Secure Areas, and
are identified on Exhibit F annexed hereto and made a part hereof.
(ii) Managing Co-Tenant shall have such access to any Secure Area as
may reasonably be required to perform its obligations hereunder, to assure
compliance with the Lease or the Leasehold Mortgages, or to maintain, repair,
install or otherwise service, or to gain access to, any Utility Facility, Common
Facility or Building system, provided that Managing Co-Tenant shall be
accompanied by a representative of the Co-Tenant in whose Space the Secure Area
is located and in compliance with such other reasonable restrictions as said Co-
Tenant may establish in connection herewith. Each Co-Tenant agrees to make a
representative available on reasonable notice, except in the case of an
emergency. Managing Co-Tenant may enter the Secured Area, provided it shall
keep confidential all information which it obtains during such emergency entry..
(iii) Unless Managing Co-Tenant shall have such access as it
reasonably deems necessary to secure, maintain or operate any Secure Area,
Managing Co-Tenant shall have no obligations, responsibilities or liability with
respect to the security, maintenance or operation thereof and the Co-Tenant in
whose Space a Secure Area is located shall provide all such services with
respect thereto in accordance with the provisions of this Agreement and
consistent with the level of such services then being provided to the balance of
Space. The Co-Tenant in whose Space a Secure Area is located shall have the
option of permitting Managing Co-Tenant to have access to said Secure Area in
order to furnish cleaning, security, maintenance and other services with respect
thereto. If there shall be any additional expenses in furnishing such services
to any Secure Area,
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the Co-Tenant in whose Space the same is located shall bear said additional
expenses.
2.9 DEBT OBLIGATIONS
(a) Each of the Co-Tenants shall be obligated, in accordance with the
terms of this Agreement, to bear and pay its portion of the Debt Obligations as
reasonably determined by the Managing Co-Tenant in good faith in accordance with
the methodology that Amexco applied prior to the Distribution Date to apportion
the Debt Obligations among the Co-Tenants.
(b) The outstanding principal amount of the Debt Obligations owed by
each of the Lehman Co-Tenants and the AMEX Co-Tenants as of May 31, 1994 and as
of August 1, 1994 is as set forth in Exhibit E, which amounts may be adjusted
---------
from time to time by way of payments and accretions or as otherwise agreed to by
the parties without regard to any stated percentages contained in any Leasehold
Mortgages, Notes or other documents, and without regard to any Co-Tenant's
Interest. Each of the Co-Tenants hereby affirmatively represents and covenants
that it shall promptly pay its respective portion of the Debt Obligations.
(c) The term "Debt Obligations" shall mean the total aggregate amount
of outstanding principal balance and accrued and unpaid interest due at any time
under the Indentures and Notes.
2.10 UTILITIES; UTILITY EXPENSES; UTILITY FACILITIES
(a) Each Co-Tenant shall bear and timely pay the cost of all
electricity, gas, water, steam, chilled and condensed water and all other
utilities (the "Utility Expenses") servicing its Space. Utility Expenses shall
be equitably apportioned among the Co-Tenants by Managing Co-Tenant, until such
time, if ever, as submeters are installed, following which the submeters shall
govern. The cost of all submeters installed with respect to Utility Expenses
shall be considered Property Obligations hereunder.
(b) Each of the Spaces shall be benefitted and burdened by certain
non-exclusive easements in
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favor of the Managing Co-Tenant for the construction, installation, operation,
maintenance, repair, restoration and replacement of certain lines, conduits,
pipes, ducts, vents, tanks, equipment, machinery, conveyors, dumb-waiters, and
connections for utilities, HVAC and other systems in the Building, and the
closets and other areas housing or containing each of the foregoing, to the
extent the same serve a Space or Spaces other than the Space in which they are
located (collectively, the "Utility Facilities"). Each Co-Tenant hereby agrees
to use all reasonable efforts not to permit any interference with or damage to
the Utility Facilities within its Space.
(c) Each Utility Facility shall be constructed, installed, operated,
maintained, repaired, restored, replaced and insured by Managing Co-Tenant, with
the cost of each of the foregoing constituting a "Utility Facility Expense."
(d) The Utility Facility Expense for each Utility Facility shall
be borne as follows:
(i) with respect to any Utility Facility which serves only one Space
(the "Benefitted Space") but is located in another Space (the "Burdened Space"),
the Co-Tenant of the Benefitted Space shall reimburse the Co-Tenant of the
Burdened Space within ten (10) days after demand therefor for the Utility
Facility Expenses incurred by the Co-Tenant of the Burdened Space during the
period covered by such demand;
(ii) with respect to any Utility Facility which serves more than one
Space, the Co-Tenants of the Spaces which are served shall bear the Utility
Facility Expense in accordance with an equitable apportionment made by the
Managing Co-Tenant.
(e) The Co-Tenant of any Burdened Space shall utilize its reasonable
commercial efforts to prevent the Utility Facility therein from being interfered
or tampered with, or affected, in any manner whatsoever (except by Managing Co-
Tenant or its agents or contractors).
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2.11 USE OF SPACE
(a) Each Co-Tenant may use its Space for any lawful purpose in
accordance with the provisions of this Agreement, the Certificate of Occupancy
for such Space, the Lease and any Leasehold Mortgages; provided, however, that
no Co-Tenant shall at any time be permitted to change, or permit the change of,
the then current particular use of its Space without the prior written consent
of the Managing Co-Tenant if such use would increase the burden on the Building
systems and/or the Utility Facilities, except that without any such consent a
Co-Tenant may change the particular use of its Space to (i) a use already in
effect in the Building or (ii) other uses required for the business of Co-Tenant
provided the character of the Building is not in any manner diminished and
subject to the provisions of Section 2.5(e) regarding Additional Capacity, in
each such case in accordance with the Certificate of Occupancy for such Space.
(b) Each Co-Tenant shall maintain its Space in a manner consistent
with a New York City first-class headquarters office building and in accordance
with the rules and regulations to which reference is made in Section 5.22.
(c) A Co-Tenant may leave all or any material portion of its Space
unoccupied for a period not to exceed eighteen (18) months upon satisfaction of
the following conditions:
(i) such Co-Tenant shall give written notice to the Managing
Co-Tenant before leaving the Space unoccupied, and
(ii) such Co-Tenant shall in all respects comply with the provisions
of this Agreement, the Lease and any Leasehold Mortgages with respect to such
Space.
2.12 TELECOMMUNICATION FACILITIES AND T.V. STUDIO
With respect to the Telecommunication Facilities, Lehman, and with
respect to the T.V. Studio, TRSCO, shall: (a) manage and supervise its operation
and (b)
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make it available to all Co-Tenants on a reasonably equitable basis. The Usage
Costs of the Telecommunication Facilities and T.V. Studio shall be determined in
accordance with the provisions of Exhibit C annexed hereto.
ARTICLE III
FINANCIAL MATTERS
3.1 BUDGETS
(a) (i) Managing Co-Tenant shall prepare, for planning and
informational purposes only, a proposed annual budget ("Budget") for the
Property for each calendar year during the term of this Agreement and shall
deliver such proposed Budget to each of the Co-Tenants not later than sixty (60)
days prior to the beginning of the calendar year to which such Budget relates.
Such proposed Budget shall contain those expenditure categories set forth on
Exhibit G or otherwise as Managing Co-Tenant may reasonably adopt (the "Budget
Categories"). Each proposed Budget Category shall show in reasonable detail the
estimated costs of operating the Building for the following calendar year, but
shall not include capital expenditures, Rental under the Lease, Debt Obligations
and Common Area Expenses under the Project Operating Agreement.
(ii) The Managing Co-Tenant shall have the authority to modify, amend
and/or supplement a Budget, a Budget Category or a Capital Budget (hereinafter
defined).
(iii) Managing Co-Tenant shall prepare, for planning and
informational purposes only, a separate proposed annual budget for capital
expenditures for the Property ("Capital Budget") for each calendar year during
the term of this Agreement and shall deliver the same to each of the Co-Tenants
simultaneously with delivery of the proposed Budget for each such calendar year.
Such Capital Budget shall describe in reasonable detail those capital
expenditures scheduled for the immediately following calendar year and the
estimated cost thereof.
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3.2 PAYMENT OF UTILITY EXPENSES AND PROPERTY OBLIGATIONS
(a) (i) The Managing Co-Tenant shall advance funds on behalf of
each of the Co-Tenants in order to timely satisfy the Utility Expenses and
Property Obligations.
(ii) The Co-Tenants each promise to timely reimburse to managing Co-
Tenant their respective Utility Expenses, Interests of all Property Obligations
and any Interest Component (hereinafter defined) due in connection with either
of the foregoing, each in accordance with the provisions of this Section 3.2.
(b) (i) The term "Interest Component" shall mean the amount of
interest, whether computed at the Cost Rate (hereinafter defined), Investment
Rate (hereinafter defined), Penalty Rate (hereinafter defined) or any other rate
agreed upon between Managing Co-Tenant and a Co-Tenant, which accrues hereunder
with respect to any Utility Expense or Property Obligation.
(ii) The term "Cost Rate" for any particular period (currently
determined on a calendar month basis) shall mean the interest rate equal to
Managing Co-Tenant's average short term cost of funds for such period, as
determined by Managing Co-Tenant.
(iii) The term "Investment Rate" for any particular period
(currently determined on a calendar month basis) shall mean the interest rate
equal to (A) the average return on Managing Co-Tenant's short term investments
for such period, as determined by Managing Co-Tenant, or (B) if no such short
term investments for such period are then being made, Managing Co-Tenant's
average short term cost of funds for such period, as determined by Managing Co-
Tenant.
(iv) The term "Penalty Rate" shall mean the lesser of (A) the interest
rate equal to 200 basis points in excess of the annual prime rate charged by
Morgan Guaranty Bank, as in effect from time to time, or (B) the maximum rate
then permitted by law.
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(v) The term "payment" shall refer to the delivery of good funds,
unless otherwise indicated.
(c) (i) If, during any particular month or quarter (as the case may
be), Managing Co-Tenant shall have engaged in any short term borrowing, the
amount of any funds of Managing Co-Tenant used to satisfy the Utility Expenses
and/or Property Obligations accruing during such month or quarter (as the case
may be) shall bear interest from the date such funds were used to satisfy such
Utility Expenses and/or Property Obligations to the earlier of the date of
payment or the Due Date (as herein defined), at the greater of (A) the Cost
Rate, or (B) the Investment Rate for such period, as computed from time to time.
(ii) If, during any particular month or quarter (as the case may
be), Managing Co-Tenant shall not have engaged in any short term borrowing, the
amount of any funds of Managing Co-Tenant used to satisfy the Utility Expertise
and/or Property Obligations accruing during such month or quarter (as the case
may be) shall bear interest from the date such funds were used to satisfy such
Utility Expenses and/or Property Obligations to the Due Date, at the Investment
Rate for such period, as computed from time to time.
(d) The Managing Co-Tenant shall prepare or cause to be prepared, and
shall submit to each Co-Tenant,
(i) statements (each, a "Property Obligation and Utility Expense
Statement") within fifteen (15) days after the end of each month (or as soon as
possible thereafter) setting forth the particular Co-Tenant's respective (A)
Utility Expenses, (B) Interest of the Property Obligations incurred by the
Managing Co-Tenant during the preceding month, and (C) Interest on any accrued
but unpaid Interest Component; and
(ii) statements (each, a "Capital Property Obligation Statement") on
each April 15, July 15, November 15 and February 15 (or as soon as possible
after each such date) setting forth the particular Co-Tenant's respective
Interest of the (A) Property Obligations with respect to capital expenditures
("Capi-
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tal Property Obligations") and which are incurred by the Managing Co-Tenant
during, respectively, the first, second and third quarters of the then current
calendar year, and with respect to the February 15 statement, the fourth quarter
of the immediately preceding calendar year, and (B) any accrued but unpaid
Interest Component. With respect to specific and identifiable Capital Property
Obligations which are in excess of $1,000,000, Managing Co-Tenant shall, where
reasonably practical, issue in advance Capital Property Obligation Statements
with respect thereto setting forth the date by which payment thereof is
required.
(e) A Co-Tenant shall pay Managing Co-Tenant the amounts indicated on
its respective Property Obligation and Utility Expense Statement and Capital
Property Obligation Statement by the end of the thirtieth (30th) day following
Co-Tenant's receipt thereof (the "Due Date"). Any payment by a Co-Tenant in
full or partial satisfaction of its Utilities Expenses, Interest of Property
Obligations or its Capital Property Obligations shall be applied first to
payment of principal and then to interest. If a Co-Tenant shall at any time
fail to pay the full amount of its Utility Expenses (and any Interest Component
due in connection therewith) or its respective Interest of any Property
Obligation (or any Interest Component due in connection with either of the
foregoing) by the applicable Due Date, the unpaid portion of any such amount
shall bear interest at the Penalty Rate from the Due Date until fully paid.
Notwithstanding anything to the contrary which may be contained in this
Agreement, the portion of any Interest Component computed at the Penalty Rate
shall be the sole property of Managing Co-Tenant.
(f) At any time after the end of each month, Managing Co-Tenant shall
be permitted to pay itself, on behalf of the other Co-Tenants, either by
borrowing funds or out of such funds of the Co-Tenants (as Co-Tenants only) as
it may then be in possession of, any accrued but unpaid Interest Component
relating to any Property Obligation or Capital Obligation incurred by Managing
Co-Tenant during the previous month.
(g) If, subsequent to the payment by a Co-Tenant to Managing Co-Tenant
of any Utility Expense or Property Obligation (and Interest Component on either
of
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the foregoing), Managing Co-Tenant determines that there has been
(i) an overpayment of any such amounts by said CoTenant (an
"Overpayment"), Managing Co-Tenant shall, within thirty (30) days after such
determination has been reached, pay to said Co-Tenant (A) the amount of said
Overpayment, including the portion of any Interest Component paid to Managing
Co-Tenant and attributable to said Overpayment, and (B) interest on the
Overpayment, computed (1) at the rate, from time to time, then in effect for the
period from the date of payment of the Overpayment by Co-Tenant to the end of
the thirty (30) day period described above, and, if payment shall not have been
made by the end of such period, thereafter, at the Penalty Rate until payment
shall be made; or
(ii) an underpayment of any such amounts by said Co-Tenant (an
"Underpayment"), Co-Tenant shall, within thirty (30) days following notice
thereof from Managing Co-Tenant, pay the amount of such Underpayment, including
any Interest Component due in connection therewith computed at the rate, from
time to time, then in effect for the period from the date such Underpayment
should have been paid to the end of the thirty (30) day period referred to
above, and, if payment shall not have been made by the end of such period,
thereafter, at the Penalty Rate until payment shall be made.
(h) All Co-Tenants agree to work together to promptly determine
whether there has been any overpayment or underpayment with respect to Utility
Expenses or Property Obligations. Each Co-Tenant's obligation hereunder to pay
any Property Obligations, Utility Expenses or Interest Component as herein
provided shall not in any manner be affected by the failure of the Managing Co-
Tenant to prepare or deliver to any Co-Tenant any Property Obligation and
Utility Expense Statement or Capital Property Obligation Statement.
(i) Nothing herein contained shall prevent the Managing Co-Tenant from
adjusting the length of the monthly and quarterly periods used in administering
the Property Obligations for purposes of facilitating the billing and collection
of such amounts.
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3.3 PAYMENT OF DEBT OBLIGATIONS
(a) The Managing Co-Tenant shall prepare or cause to be prepared, and
shall submit, periodic statements (each, a "Debt Obligation Statement") to the
other Co-Tenants not less than fifteen (15) days prior to the date a Debt
Obligation is due (or as soon thereafter as possible), setting forth the Debt
Obligations due for the next succeeding month. Each Co-Tenant shall furnish
Managing Co-Tenant with a check drawn on a bank which is a member of the New
York Clearing House Association (or any other means by which good funds are
available by 12:00 o'clock noon on the subsequent business day) in the amount of
its respective Debt Percentage of the Debt Obligations set forth in said Debt
Obligation Statement no later than 12:00 o'clock noon on the business day
preceding the day which Managing Co-Tenant reasonably determined to be the date
such Debt Obligations must be paid. Each Co-Tenant's obligation hereunder to
pay any Debt Obligations as herein provided shall not in any manner be affected
by the failure of Managing Co-Tenant to prepare or deliver to any Co-Tenant any
Debt Obligation Statement.
(b) It is the intention of the parties hereto that at no time prior
to, during or after the term of this Agreement, shall Managing Co-Tenant be
required to satisfy from its own funds any of the Debt Obligations (other than
Managing Co-Tenant's Debt Percentage thereof).
3.4 FUNDS OF CO-TENANTS
(a) All monies received by Managing Co-Tenant for or on behalf of the
Co-Tenants, other than those monies received by Managing Co-Tenant and intended
as payment or prepayment to Managing Co-Tenant, may be commingled with other
funds of Managing Co-Tenant but shall be held in trust by Managing Co-Tenant for
the Co-Tenants. Managing Co-Tenant shall have the right to sign checks on
behalf of the Co-Tenants for any amounts which the Co-Tenants may be obligated
to pay either herein or under the Lease, Project Operating Agreement or any
Leasehold Mortgages, without the prior consent of the Co-Tenants. Such monies
may be invested by Managing Co-Tenant in Managing Co-Tenant's discretion, in any
of (i) the investments contained in Amexco's short term
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investment list approved by the Finance Committee of the Board of Directors of
Amexco, (ii) any investment-grade short term security or (iii) in so-called
"money market funds". Managing Co-Tenant shall have no responsibility for
failing to select the investment which would have provided the maximum rate of
return on the monies of the Co-Tenants or for the solvency of the issuer or
depository selected in accordance with the foregoing provisions. Except as
otherwise provided herein, any interest earned on such deposits shall remain the
property of the Co-Tenants, in accordance with their respective Interests.
(b) Managing Co-Tenant shall have the right without the consent of any
other Co-Tenant to sign all checks on behalf of the Co-Tenants for any
expenditures incurred in accordance with the provisions of this Agreement.
3.5 EXCESS FUNDS
(a) If at any time Managing Co-Tenant shall have collected funds from
or on behalf of a Co-Tenant in excess of said Co-Tenant's Interest of its then
due and owing installment of Property Obligations, such excess funds shall (i)
earn interest for the account of said Co-Tenant at the rate, from time to time,
in effect during the period commencing on the date of Managing Co-Tenant's
retention of such excess funds through the Managing Co-Tenant's disposition of
said excess funds and (ii) said excess funds and the interest earned thereon
(collectively, the "Excess Funds") shall be:
(A) retained by Managing Co-Tenant, if agreed to by said Co-
Tenant, and thereafter applied against said Co-Tenant's next accruing
installments of Property Obligations; or
(B) returned to said Co-Tenant upon either (1) the decision of
Managing Co-Tenant to return the same or (2) within five (5) days after
demand therefor by Co-Tenant (and, if said Excess Funds are not paid on the
end of the fifth day of said period, such Excess Funds shall accrue
interest at the Penalty Rate until the same are paid to Co-Tenant).
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(b) Any income to the Co-Tenants arising from the Common Facilities
shall be collected, retained and applied in accordance with the Co-Tenants'
Interests by Managing Co-Tenant to satisfy any Property Obligations accruing
hereunder, and any sums remaining shall be distributed to the Co-Tenants in
accordance with the Co-Tenants' Interests.
3.6 PERIODIC STATEMENTS
Managing Co-Tenant shall use reasonable efforts to deliver to the Co-
Tenants within fifteen (15) days after the end of each month (or as soon as
possible thereafter), (i) an unaudited report of income and expense of the
Property for such next previous month prepared on a cash disbursement basis
(including a statement of funds, if any, held by it as provided in Section 3.4
hereof), (ii) an unaudited report of income and expense prepared on an accrual
basis, compared on a monthly and year-to-date basis to the Budget and (iii) an
unaudited report reflecting the then current status of the Debt Obligations. In
addition, after the close of each calendar year, Managing Co-Tenant shall cause
to be prepared by its independent public accountants and delivered to the Co-
Tenants audited annual financial statements (required by the Lease) as well as
all relevant income tax reporting information. The fees of such independent
public accountants and all other costs incurred in connection with the
preparation and delivery of such statements shall be considered Property
Obligations.
3.7 BOOKS AND RECORDS
Managing Co-Tenant shall maintain and keep available, at its offices,
at all times, such complete and up-to-date books and records of the operation of
the Property as are customarily maintained by managing agents, or as reasonably
required by the Co-Tenants, including paid bills and vouchers as well as leases,
lease amendments and contracts relating to the Property. The Co-Tenants and
their respective partners, directors, agents and designees reasonably acceptable
to the Managing Co-Tenant shall, at all reasonable hours, have a right to audit
and examine said books, records, leases, lease amendments and contracts relating
to the Property and to make transcripts or photostats of all or any part
thereof. The books of account relating to the operation
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of the Property shall be the property of the Co-Tenants; however all records
relating thereto shall be the property of Managing Co-Tenant, but copies thereof
shall at reasonable times be available to the Co-Tenants.
3.8 FINAL ACCOUNTING
Upon termination of this Agreement or upon the substitution of a new
Managing Co-Tenant, Managing Co-Tenant shall promptly render a final accounting
of receipts and disbursements to the Co-Tenants for any period for which an
accounting has not theretofore been submitted, all accounts shall be closed and
the Managing Co-Tenant shall transfer to such parties all funds being held by
the Managing Co-Tenant to which such parties are entitled. In addition the
books of account maintained by the Managing Co-Tenant for the Property together
with copies of the relevant Property records shall be delivered to the Managing
Co-Tenant.
3.9 FAILURE TO PAY
(a) If any Co-Tenant shall fail to pay when due any installment of
Property Obligations, Debt Obligations or any other payments due hereunder when
required of it pursuant to this Agreement (such Co-Tenant unable or unwilling to
make such a payment being hereinafter referred to as a "Delinquent Co-Tenant"),
then Managing Co-Tenant shall so notify the other Co-Tenants who may, within
five (5) days following such notice advance the amount of such Delinquent Co-
Tenant's required payment and that amount shall be treated as a debt of the
Delinquent Co-Tenant to the other Co-Tenants which debt shall bear interest from
the date of advance to the date of repayment at the Penalty Rate.
(b) In addition to any other remedy which may be available at law or
in equity, upon failure of a Delinquent Co-Tenant to pay when due any
installment of Property Obligations, Debt Obligations or any other payments due
hereunder when required of it pursuant to this Agreement, and upon the other Co-
Tenants having advanced the amount of the Delinquent Co-Tenant's required
payment as set forth above, then such advance, together with interest thereon as
set forth above, shall become a lien against the Interest of such Delinquent Co-
Tenant upon the filing in the Office of the Register
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of the City of New York, County of New York, of record of a notice of lien by
the other Co-Tenants. To the extent permitted by law, such lien shall be
evidenced, enforced, discharged or removed as an equitable lien under the laws
of the State of New York.
(c) Each Co-Tenant authorizes Managing Co-Tenant to apply its share of
any income due it or attributable to it, from any source whatsoever, against the
amounts due any other Co-Tenants (as Co-Tenants only) (including interest) from
such Co-Tenant (as a Delinquent Co-Tenant) under this Section 3.9.
3.10 INSURANCE
(a) On and after the Distribution Date, Managing Co-Tenant shall
obtain and maintain "all risk" property insurance (covering real and personal
property and business interruption/extra expense loss) for WFC (the "Property
Policy"). The insured amount of the Property Policy shall be no less than the
greater of the (i) replacement cost value of the Building including, any
leasehold improvements and improvements and betterments therein, and (ii) the
amount required under the WFC Indebtedness. Managing Co-Tenant shall arrange
for the other Co-Tenants to be named as insureds and loss-payees under the
Property Policy to the extent of their insurable interest. Managing Co-Tenant
shall have the right to negotiate and settle with the applicable insurer all
claims pursuant to the Property Policy, provided, however, that Non-Managing
Designated Co-Tenant shall have the right, upon notice to Managing Co-Tenant, to
negotiate and settle directly with the applicable insurer any claim involving
the leasehold improvements or betterments (other than personal property) when
the loss only affects the Non-Managing Designated Co-Tenant's Space or the Space
of its related Co-Tenants. The Non-Managing Designated Co-Tenant agrees to
participate with the Managing Co-Tenant with regard to the negotiating and
settling of any claims involving the core, shell or central systems within the
Non-Managing Designated Co-Tenant's Space or the Space of its related Co-Tenants
or claims involving leasehold improvements, improvements or betterments, when
the loss goes beyond the Non-Managing Designated Co-Tenant's Space or the Space
of its related Co-Tenants. All policy terms and deductible levels shall be
reasonably acceptable to the Non-Managing Designated Co-Tenant.
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(b) (i) On and after the Distribution Date, the Managing Co-Tenant
shall obtain and maintain occurrence-based commercial general liability
insurance for WFC excluding liabilities of tenancy arising from the Non-Managing
Designated Co-Tenant's Space and the Space of its related Co-Tenants (the
"Managing Co-Tenant's Commercial Policy"). The insured amount of the Managing
Co-Tenant's Commercial Policy shall be no less than the greater of (i) One
Hundred Million-Dollars ($100,000,000), and (ii) the amount specified and
required under the WFC Indebtedness. The insured amount and coverage under the
Managing Co-Tenant's Commercial Policy shall conform to and be consistent with
industry practice and include, but not be limited to, contractual liability,
products/completed operations, independent contractors, broad form property
damage, personal injury, cross liability and severability of interest. All
policy terms and deductible levels shall be reasonably acceptable to the Non-
Managing Designated Co-Tenant.
(ii) On and after the Distribution Date, the Non-Managing Designated
Co-Tenant shall obtain and maintain occurrence-based commercial general
liability insurance for liabilities of tenancy arising from the Non-Managing
Designated Co-Tenant's Space and the Space of its related Co-Tenant's (the "Non-
Managing Designated Co-Tenant's Commercial Policy"). The insured amount and
coverage of the Non-Managing Designated Co-Tenant's Commercial Policy shall
conform to and be consistent with industry practice including, but not limited
to, contractual liability, products/completed operations, independent
contractors, broad form property damage, cross liability/severability of
interests and personal injury.
(iii) On and after the Distribution Date, the Non-Managing
Designated Co-Tenant shall obtain and maintain "all risk" property insurance for
the personal property of its related Co-Tenants. The personal property shall be
insured at replacement cost. The form, coverage and limits covered shall
conform to and be consistent with industry practice.
(iv) (A) The Managing Co-Tenant shall name the Non-Managing
Designated Co-Tenant and its related Co-Tenants as additional insureds on
the Managing Co-Tenant's Commercial Policy to the extent necessary to
insure the Non-Managing Designated
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Co-Tenant and its related Co-Tenants against claims arising out of the
premises and/or operations of the Managing Co-Tenant's Space (or the Space
of its related Co-Tenants) or the Common Facilities.
(B) The Non-Managing Designated Co-Tenant shall name the
Managing Co-Tenant and its related Co-Tenants as additional insureds on the
Non-Managing Designated Co-Tenant's Commercial Policy to the extent
necessary to insure the Managing Co-Tenant and its related Co-Tenants
against claims arising out of the premises and/or operations of the Non-
Managing Designated Co-Tenant's Space or the Space of its related Co-
Tenants..
(c) The Managing Co-Tenant shall cause any insurance policy obtained
and maintained by it hereunder to provide, as a condition precedent to the
cancellation of such policy, a minimum of 30 days' advance written notice by
such insurer to the Non-Managing Designated Co-Tenant. A copy of each insurance
policy obtained by the Managing Co-Tenant hereunder shall be provided to the
Non-Managing Designated Co-Tenant.
(d) Each policy of insurance shall contain a waiver of the insurer's
right of subrogation. A certificate of each policy issued hereunder and
required to be carried by any Co-Tenant under the Lease, any Leasehold Mortgage
or hereunder shall be delivered promptly following its availability to Managing
Co-Tenant and shall provide as a condition precedant to the cancellation of such
policy, a minimum of 30 days advanced written notice by such insurer to the
Managing Co-Tenant. The Co-Tenants shall be entitled to all dividends or return
premiums in connection therewith in accordance with their payments with respect
thereto in accordance with clause (iii) of Section 2.3(b).
(e) Each of the Managing Co-Tenants and the Non-Managing Designated
Co-Tenants shall make best efforts to collect under available insurance policies
before seeking indemnification from the other, where allowed.
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ARTICLE IV
TRANSFERS
4.1 CONSENT REQUIRED
Except as otherwise expressly provided in this Agreement, each of the
Co-Tenants expressly covenants that they shall not transfer, assign, mortgage,
create a security interest in, or otherwise encumber, all or any part of their
respective Interests, or sublet all or any part of their respective Spaces, or
suffer or permit all or any part of their respective Spaces to be used by
others.
4.2 SUBLETTING PERMITTED
Except with respect to a sublease to an Affiliate (as to which the
following limitations shall not apply and which is permitted hereunder from time
to time upon ten (10) business days prior notice to the Managing Co-Tenant),
provided that there shall have been no exercise of a Right of First Offer or
Right of First Refusal (as such terms are hereinafter defined) with respect to a
proposed subletting of Space, Managing Co-Tenant shall, on behalf of the Co-
Tenants and for the account of the subletting Co-Tenant, enter into a sublease
of all or a portion of said subletting Co-Tenant's Space, provided that:
(i) such sublease shall be for a term of not less than five (5) years;
(ii) the portion of the Space demised under such sublease shall not be
less than one (1) full floor of the Building;
(iii) such sublease shall provide for fair market terms, concessions
and rental;
(iv) the terms and conditions of such sublease (including the specific
uses permitted thereunder) shall be in form and substance reasonably acceptable
to Managing Co-Tenant and shall comply in all respects with the terms and
provisions of the Lease and any and all Leasehold Mortgages;
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(v) the subtenant shall (a) have a financial rating, as measured by
the Standard and Poor's Corporation, of not less than "Investment Grade" (or
successor rating of similar standing), or (b) be an entity with a balance sheet
and income statement, which Managing Co-Tenant determines to be reasonably
adequate, taking into consideration the terms and provisions of the sublease in
question;
(vi) such sublease shall by its terms appoint the Managing Co-Tenant
to administer such sublease on behalf of the subletting Co-Tenant;
(vii) the subletting Co-Tenant shall indemnify and hold harmless the
other Co-Tenants and the Property from and against any and all real property
transfer and transfer gains taxes and any Commercial Rent or Occupancy Tax,
attributable to such sublease;
(viii) if the subletting Co-Tenant is (A) a Lehman Co-Tenant, the
subtenant shall not then be engaged in any significant business or businesses of
any AMEX Co-Tenant, or (B) an AMEX Co-Tenant, the subtenant shall not then be
engaged in any significant business or businesses of any Lehman Co-Tenant;
(ix) the subtenant shall, in the reasonable judgment of Managing Co-
Tenant, be of a character in keeping with the standards of the Building as a
first-class New York City office building and consistent with other tenants
and/or occupants in the Building; and
(x) the proposed subtenant shall not be entitled, directly or
indirectly, to diplomatic or sovereign immunity and shall be subject to the
service of process in, and the jurisdiction of the courts of, the State of New
York.
4.3 ASSIGNMENTS
Supplementing each of the other provisions contained in this Agreement
respecting the assignment or other transfer of any Interest of a Co-Tenant
hereunder, there shall be no assignment or transfer whatsoever of any Interest
of a Co-Tenant, in whole or in part, without the consent of Managing Co-Tenant,
which consent shall be granted or denied in the sole and absolute discretion of
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Managing Co-Tenant until such time as the Existing Leasehold Mortgages and
Existing Notes are satisfied. After the satisfaction of the Existing Leasehold
Mortgages and Existing Notes, there shall be no assignment or transfer
whatsoever of any Interest of a Co-Tenant, in whole or in part, without the
consent of the Managing Co-Tenant, which consent shall not be unreasonably
withheld or delayed provided that:
(i) the terms and conditions of such assignment shall be in form and
substance reasonably acceptable to Managing Co-Tenant and shall comply in all
respects with the terms and provisions of the Lease and any and all Leasehold
Mortgages;
(ii) the assignee shall (a) have a financial rating, as measured by
the Standard and Poor's Corporation, of not less than "Investment Grade" (or
successor rating of similar standing), or (b) be an entity with a balance sheet
and income statement, which Managing Co-Tenant determines to be reasonably
adequate, taking into consideration the terms and provisions of the assignment
in question;
(iii) the assigning Co-Tenant shall indemnify and hold harmless the
other Co-Tenants and the Property from and against any and all real property
transfer and transfer gains taxes and any Commercial Rent or Occupancy Tax,
attributable to such assignment;
(iv) if the assigning Co-Tenant is (A) a Lehman Co-Tenant, the
assignee shall not then be engaged in any significant business or businesses of
any AMEX Co-Tenant, or (B) an AMEX Co-Tenant, the assignee shall not then be
engaged in any significant business or businesses of any Lehman Co-Tenant;
(v) the assignee shall, in the reasonable judgment of Managing Co-
Tenant, be of a character in keeping with the standards of the Building as a
first-class New York City headquarters office building and consistent with other
tenants and/or occupants in the Building; and
(vi) the proposed assignee shall not be entitled, directly or
indirectly, to diplomatic or sovereign immunity and shall be subject to the
service of
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process in, and the jurisdiction of the courts of, the State of New York.
4.4 ADDITIONAL RESTRICTIONS
(a) Each sublease or instrument of assignment of a CoTenant's Space or
Interest as the case may be, is to be executed by Managing Co-Tenant on behalf
of the Co-Tenants. Each assigning or subletting Co-Tenant shall remain fully
liable for the performance of all of its obligations hereunder notwithstanding
any subletting or assignment provided for herein and, without limiting the
generality of the foregoing, shall remain fully responsible and liable to the
other Co-Tenants for all acts and omissions of any subtenant, assignee or anyone
claiming by, through or under any subtenant or assignee, which shall be in
violation of any of the obligations of this Agreement, and any such violation
shall be deemed to be a violation by the Co-Tenant. Notwithstanding any
assignment and assumption by the assignee of the obligations of a Co-Tenant,
said Co-Tenant (unless released in accordance with the following sentence), and
each immediate or remote successor in interest of said Co-Tenant shall remain
liable, jointly and severally (as a primary obligor), with its assignee and all
subsequent assignees for the performance of said Co-Tenant's obligations
hereunder, and shall remain fully and directly responsible and liable to each of
the other Co-Tenants for all acts and omissions on the part of any assignee or
subtenant subsequent to it in violation of any of the obligations of this
Agreement. A Co-Tenant which has assigned its Interest in whole or in part may
be released of all responsibility and liability for the performance of its
obligations hereunder with respect to its assigned Interest only, provided that
all such responsibilities and liabilities are assumed by an entity which, in
Managing Co-Tenant's reasonable discretion, has a financial standing comparable
to that of said Co-Tenant as of the date of the assignment and assumption in
question.
(b) If there shall be any assignment, sublease or other agreement of
occupancy of a Co-Tenant's Space or Interest, as the case may be, permitted
under this Agreement, of or affecting all or any portion of such Co-Tenant's
Space, or if there is any transfer of the Co-Tenant's Interest by operation of
law or other-
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wise, and if such Co-Tenant shall be entitled to any consideration from the
assignee, subtenant or licensee for or in connection with the assignment of such
Co-Tenant's Interest or the subletting or occupancy of such Co-Tenant's Space,
subject to the provisions of Section 4.7(d), said Co-Tenant shall be entitled to
receive all such consideration, and any interest earned thereon pursuant to
Section 3.5(a).
(c) The consent of Managing Co-Tenant to an assignment or a
subletting, shall not relieve any Co-Tenant from obtaining the consent of
Managing Co-Tenant to any further assignment or subletting.
4.5 TRANSFEREE USE OF UTILITY FACILITIES AND COMMON FACILITIES
(a) In the event of an assignment or transfer of the Interest of a Co-
Tenant, in whole or in part (other than to an Affiliate), or a subletting of any
or all of a Co-Tenant's Space (other than to an Affiliate), or the occupancy of
any or all of Co-Tenant's Space by an entity or individual other than the Co-
Tenant or an Affiliate, the assignee, transferee, subtenant or occupant of said
Interest or Space (the "Transferee"), as the case may be, shall not be permitted
to use (i) the Utility Facilities if and to the extent Managing Co-Tenant
determines that any such use would materially diminish or reduce the
availability or security of Utility Facilities to the Co-Tenants then occupying
Space in the Building, or (ii) without Managing Co-Tenant's prior consent, which
consent shall be in the sole and absolute discretion of the Managing Co-Tenant,
any Special Common Facilities. If Managing Co-Tenant shall fail or refuse to
consent to the use of a Special Common Facility by a Transferee and the
transferring Co-Tenant does not elect to utilize said Special Common Facility
for its own purposes, the Maintenance Cost and the Usage Cost shall be equitably
reapportioned among the Co-Tenants (other than the transferring Co-Tenant and
the Transferee) so as to ensure that such costs are thereafter fully satisfied.
Except as otherwise provided above, a Transferee shall be entitled to utilize
the Common Facilities on the same basis and cost as the Initial Co-Tenants
provided, however, that the Transferring Co-Tenant shall indemnify and hold
hereunder to the fullest extent permitted by law the other Co-Tenants (including
the Managing Co-Tenant) from and
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against all losses, claims, damages, liabilities, costs and expenses (including,
without limitation, reasonable attorney fees) based on, arising out of or
resulting from, or in connection with use of the Common Facilities by the
Transferee, its employees, agents and investees.
4.6 PARTITION
(a) So long as any Initial Co-Tenant or an Affiliate shall own an
Interest, any rule of law to the contrary notwithstanding, except as
specifically provided in this Agreement:
(i) notwithstanding any changes in the ownership of an Interest, the
Interests will continue to be subject to this Agreement;
(ii) no Co-Tenant shall terminate or commence any proceeding to
attempt to terminate this Agreement;
(iii) no Co-Tenant shall have the right to partition the Leasehold or
the Building and no Co-Tenant shall apply for, commence or prosecute any action
or proceeding for partition, it being understood and agreed by the Co-Tenants
that a material inducement to their entering into this Agreement is that their
sole and exclusive methods to divest themselves of their Interest are as
specifically set forth in this Agreement; and
(iv) any transfer, assignment, mortgaging, creation of a security
interest in, or encumbrance of, an Interest, or subletting of any Space, in
breach of this Agreement shall be null and void.
4.7 RIGHT OF FIRST OFFER
(a) Subject to the provisions of Section 4.3 and except as provided in
Section 4.7(e), if at any time during the term of this Agreement, any Co-Tenant
shall desire to sublet all or any portion of its Space or assign or otherwise
transfer its Interest, to any person or entity, then Lehman, if such Co-Tenant
is a Lehman Co-Tenant, or Amexco, if such Co-Tenant is an AMEX Co-Tenant, (the
"Transferring Co-Tenant"), shall give notice thereof (hereinafter called "Co-
Tenant's Notice")
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to the Managing Co-Tenant, setting forth the terms and conditions upon which the
Transferring Co-Tenant is willing to sublet such Space, or assign or otherwise
transfer its Interest, as the case may be. The Managing Co-Tenant shall have
the right for itself or its Affiliates (the "Right of First Offer") to sublease
such space, take an assignment of, or otherwise be the transferee of the
Transferring Co-Tenant's Interest, as the case may be, upon the terms and
conditions set forth in the Co-Tenant's Notice. In order to exercise the Right
of First Offer, the Managing Co-Tenant must give notice of such exercise
(hereinafter called the "First Offer Exercise Notice") to the Transferring Co-
Tenant prior to the end of the thirtieth (30th) day after the receipt of a Co-
Tenant's Notice (said thirty-day period being hereinafter referred to as the
"First Offer Period"). Time shall be of the essence with respect to the giving
of the First Offer Exercise Notice.
(b) If the Managing Co-Tenant shall not exercise its Right of First
Offer, then the Transferring Co-Tenant shall, subject to compliance with the
provisions of Section 4.2 or Section 4.3, as the case may be, and Section 4.8,
be free so to sublet, assign or otherwise transfer, as the case may be, the
Space or Interest which was the subject of the Co-Tenant's Notice to any other
person or entity (the "Outside Party") upon terms and conditions not more
favorable to the Outside Party than those set forth in the Co-Tenant's Notice.
If Co-Tenant shall fail to sublease, assign or otherwise transfer, as the case
may be, such Space or Interest to any Outside Party on such terms and conditions
within 270 days with respect to an assignment, and 180 days with respect to a
sublease, after the date of receipt of the Co-Tenant's Notice, and if the
Transferring Co-Tenant shall still desire to sublease, assign or otherwise
transfer, as the case may be, such Space or Interest, then the procedure set
forth in the foregoing provisions of this Section 4.7 shall be followed in
respect of said subleasing, assigning or other transfer thereof.
(c) If the Managing Co-Tenant shall effectively exercise its Right of
First Offer, then the Transferring Co-Tenant shall sublease, assign or otherwise
transfer, as the case may be, to the Managing Co-Tenant (or its Affiliate)
(herein the "exercising Co-Tenant") and the exercising Co-Tenant shall hire and
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take from the Transferring Co-Tenant said Space or Interest upon the terms and
conditions set forth in the Co-Tenant's Notice. Without limitation of the
foregoing, the exercising Co-Tenant shall, with respect to the Interest, be
subject to all of the terms and provisions set forth in this Agreement, the
Lease and any Leasehold Mortgages, including, without limitation, all provisions
respecting the use of the Space.
(d) The Transferring Co-Tenant shall indemnify and hold harmless the
other Co-Tenants (other than the exercising Co-Tenant) and the Property from and
against any and all real property transfer and transfer gains taxes, and any
Commercial Rent or Occupancy Tax, in any way related to the transfer of the
offered Space or Interest and shall execute and deliver all documents and
instruments to the exercising Co-Tenant as necessary and appropriate to
effectuate the transfer of such Space or Interest, as the case may be. If, as
of the closing, the Transferring Co-Tenant has any outstanding debts to the
other Co-Tenants (as Co-Tenants), an amount sufficient to satisfy all such
outstanding debts including any interest earned thereon, shall be paid to
Managing Co-Tenant out of the proceeds for the sublease, assignment or other
transfer at the closing thereof, to be held for and on behalf of the
Transferring Co-Tenant until all such outstanding debts ofthe Transferring Co-
Tenant, including interest, if any, shall have been paid and discharged in full.
(e) Notwithstanding anything to the contrary contained in this Article
IV, the Right of First Offer shall not be applicable with respect to (i) any
sublease or assignment to an Affiliate of the Co-Tenant or (ii) any sublease to
an existing subtenant of the Transferring Co-Tenant (previously approved by the
Managing Co-Tenant in accordance with the terms and provisions of Section 4.2
hereof) then occupying at least 100,000 square feet of space in the Premises (a
"Major Subtenant").
4.8 RIGHT OF FIRST REFUSAL
(a) Subject to the provisions of Section 4.3 and 4.7 and except as
provided in Section 4.8(d), if at any time during the term of this Agreement,
any Co-Tenant shall desire to sublet all or any portion of
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its Space or assign or otherwise transfer all or any part of its Interest to any
person or entity in accordance with a bona fide offer therefor (a "Bona Fide
Offer"), then Lehman, if such Co-Tenant is a Lehman Co-Tenant, or Amexco, if
such Co-Tenant is an AMEX Co-Tenant, so desiring to accept such Bona Fide Offer
(the "Offeree Co-Tenant") shall give the other Designated Co-Tenant (i) a copy
of such Bona Fide Offer and (ii) a written notice which shall set forth the
identity, resume of individual principals and general financial and managerial
capacity of the offeror of the Bona Fide Offer (the "BFO"), including, without
limitation, information with respect to any financial rating and credit history
thereof, and the intended use or uses of the transferred portion of the Space or
the Interest (collectively, the "Bona Fide Offer Notice"). Every Bona Fide
Offer shall be expressed only in cash and/or debt securities payable in lawful
money. Additionally, the Offeree Co-Tenant shall, at a time not later than the
receipt by the other Designated Co-Tenant of a Bona Fide Offer Notice, have
delivered to the BFO a written notice which expressly states that the BFO's
offer is subject to the Right of First Refusal (hereinafter defined) provided
for herein. The other Designated Co-Tenant shall thereafter have the right for
itself, its Affiliates or its Major Subtenants (the "Right of First Refusal") to
sublease, take an assignment of, or otherwise be the transferee of, as the case
may be, the Offeree Co-Tenant's Space or Interest, as the case may be, on terms
which reflect at least the same amount of cash as the amount contained in the
Bona Fide Offer and debt securities of equivalent value to the debt securities
which are part of the Bona Fide Offer (such valuation in each case to be made by
an investment banker reasonably acceptable to both the Offeree Co-Tenant and the
other Designated Co-Tenant). The other Designated Co-Tenant shall exercise such
Right of First Refusal by giving the Offeree Co-Tenant written notice thereof
within ten (10) days (the "First Refusal Period") after receipt of the Bona Fide
Offer Notice from the Offeree Co-Tenant of its desire to transfer its Space or
Interest, as the case may be. Time shall be of the essence as to the First
Refusal Period.
(b) Failure to deliver written notice prior to the end of the final
day of the First Refusal Period shall constitute an election not to exercise the
Right of First Refusal with respect to such Offeree
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Co-Tenant's Space or Interest, as the case may be. In the event of any exercise
of the Right of First Refusal, the transfer of the Offeree Co-Tenant's Interest
to the other Designated Co-Tenant (or its Affiliate) (herein the "exercising Co-
Tenant") shall be consummated and closed within one hundred twenty (120) days
(or, if additional time is needed to obtain any regulatory approvals, as soon as
possible thereafter) after the date of the Offeree Co-Tenant's Bona Fide Offer
Notice. The Offeree Co-Tenant shall indemnify and hold harmless the other Co-
Tenants (other than the exercising Co-Tenant) and the Property from and against
any and all real property transfer and transfer gains taxes, and any Commercial
Rent or Occupancy Tax, in any way related to such transfer, and shall execute
and deliver all documents and instruments to the exercising Co-Tenant as
necessary and appropriate to effectuate the transfer of such offered Space or
Interest, as the case may be. If as of the closing the Offeree Co-Tenant has any
outstanding debts to the other Co-Tenants (as Co-Tenants), an amount sufficient
to satisfy all such outstanding debt, including any interest earned thereon,
shall be paid to the Managing Co-Tenant for and on behalf of the Offeree Co-
Tenant until all outstanding debts relating to the Property of the Offeree Co-
Tenant, including interest, if any, shall have been paid and discharged in full.
(c) In the event there is no timely exercise of the Right of First
Refusal in a particular instance and the consent of the Managing Co-Tenant is
obtained, an Offeree Co-Tenant shall then be permitted in such instance to
transfer its Space or Interest, as the case may be, to the person or entity
identified in the Bona Fide Offer Notice on terms identical in all material
respects to those described therein. The closing and consummation of such
transfer shall occur within one hundred eighty (180) days after the date set
forth for the date of closing in the Bona Fide Offer Notice (or, if additional
time is needed to obtain any regulatory approvals, as soon as possible
thereafter), and, if such transfer is not so closed and consummated to such
person or entity on such identical terms within such one hundred eighty (180)
day period (as extended, as set forth above), the Right of First Refusal shall
again be exercisable with respect to the Space or Interest thereafter proposed
to be transferred. In the event any Space or Interest is sublet or transferred
in accordance with the
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terms hereof, then the person or entity to whom such Space or Interest is
transferred shall take such Space or acquire such Interest, subject in all
respects to the terms and provisions of this Agreement.
(d) Notwithstanding anything to the contrary contained in this Article
IV, the Right of First Refusal shall not be applicable with respect to (i) any
sublease or assignment to an Affiliate of the Co-Tenant or (ii) a sublease to a
Major Subtenant.
4.9 REQUIRED TRANSFERS
If AEBL, TRSCO or any other Co-Tenant which is then one of the AMEX
Co-Tenants, on one hand, or LGS, LCP or any other Co-Tenant which is then one of
the Lehman Co-Tenants, on the other hand, shall at any time cease to be an
Affiliate of Amexco or Lehman, as the case may be, then the Interest of such Co-
Tenant (the "Former Affiliate") shall, at the option of the related Designated
Co-Tenant, be transferred to such related Designated Co-Tenant and such related
Designated Co-Tenant shall have the right to sublet back such space to the
Former Affiliate upon market terms and conditions, subject to the terms and
conditions of Section 4.2 hereof. If such related Designated Co-Tenant elects
not to exercise its option to acquire such Interest, then the non-related
Designated Co-Tenant shall have the right to acquire from the Former Affiliate
such Interest, upon 180 days' notice, at Fair Market Value as determined
pursuant to the Option Agreement, dated as of the date hereof, among the Lehman
Co-Tenants and the AMEX Co-Tenants.
4.10 BROKERAGE
(a) No Co-Tenant shall contact, have discussions or negotiate with in
any manner whatsoever, a broker, finder or like agent in connection with any
sublease of any part of its Space, assignment or other transfer in whole or in
part of its Interest, except through its Designated Co-Tenant, which shall
coordinate all brokerage activities with respect to the Building with the other
Designated Co-Tenant.
(b) Managing Co-Tenant shall have the right to contract with a broker
in order to facilitate the rental of any portion of the Retail Space in the
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Property or any Common Facilities which shall have been converted to office or
retail use. Any brokerage commission due in the event of the rental of any such
space shall be borne by the Co-Tenants in accordance with their respective
Interests.
4.11 RIGHT OF DISAPPROVAL
Notwithstanding anything contained herein to the contrary, with
respect to any proposed mortgaging, creation of a security interest, or other
encumbrances of all or any part of a Co-Tenant's Interest, Managing Co-Tenant,
shall have the right (the "Right of Disapproval"), to be exercised in its sole
and absolute discretion, to disapprove of any such proposal, and if Managing Co-
Tenant, should exercise such Right of Disapproval with respect to any such
proposal, the party making such proposal shall not effect or permit to be
effected the proposed mortgaging, creation of security interest or other
encumbrance, as the case may be.
4.12 SUBMISSION TO CONDOMINIUM REGIME
(a) After satisfaction of the Existing Leasehold Mortgages and
Existing Notes, upon the request of either Designated Co-Tenant and upon ninety
(90) days' notice from one to the other, the Co-Tenants shall together submit
the Leasehold to the provisions of Article 9-B of the Real Property Law of the
State of New York or any statute in lieu thereof (the "Condominium Act") by
executing and recording such instruments (collectively, the "Declaration") by
which the Leasehold is submitted to the Condominium Act, together with all
amendments, modifications and all supplements thereto, subject in all respects
to any requisite consent by the landlord under the Lease and the holders of any
Leasehold Mortgage. Except as provided in this Section 4.13, the Declaration
(or other documents executed in connection therewith or contemporaneously
thereto) shall conform in all material respects to the terms, provisions and
intent of this Agreement and shall provide, inter alia, (i) for the Interests of
each Co-Tenant under this Agreement to be exchanged for an appropriate
condominium unit as described in the Declaration, (ii) for Common Facilities to
be treated substantially in the same manner as provided in this Agreement, (iii)
for Managing Co-Tenant to have the rights and obligations contained (and to be
deter-
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mined or designated, as the case may be, in the manner set forth) in this
Agreement, (iv) for restrictions on the transfers of, and encumbrances upon, the
condominium units which are equivalent to the restrictions on the transfers of,
and encumbrances upon, the Interests and subletting of Space contained in this
Agreement (as supplemented and modified by clause (b), below), provided,
however, that the Declaration shall not contain a right of disapproval
comparable to the right described in Section 4.12, and (v) for costs with
respect to the Property to be allocated and paid as provided in this Agreement.
(b) The Declaration (and such other documents) shall permit the
owner of each condominium unit to:
(i) enter into a traditional "sale-leaseback" financing transaction
with an "institutional lender", as such term is defined in the Lease (an
"Institutional Lender"), which is not an entity of the type proscribed in clause
(x) of Section 4.2, provided that the other unit owners are given a right of
first offer, comparable to the right described in Section 4.7, both to enter
into the sale-leaseback as the owner/lessor and to acquire the interest of the
owner/lessor upon all subsequent transfers thereof;
(ii) grant a mortgage encumbering its condominium unit to an
Institutional Lender which is not an entity of the type proscribed in clause (x)
of Section 4.2, provided that the other unit owners are given a right of first
offer, comparable to the right described in Section 4.7, to be the mortgagee in
any such mortgage transaction, and, notwithstanding anything contained elsewhere
herein, permit a successful bidder/purchaser at a foreclosure sale to transfer
its interest in the condominium unit to a transferee free of any occupancy
restrictions or any restrictions on transfers contained in the Declaration,
provided that said transferee and all subsequent transferees shall take the
condominium unit subject to all such restrictions; and
(iii) transfer its condominium unit to a transferee which has
a financial rating or balance sheet and income statement of the type described
in clause (v) of Section 4.2, which is not a competitor
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of the type described in clause (viii) of Section 4.2 and which is not an entity
of the type proscribed in clause (x) of Section 4.2, provided that the other
unit owners are given the right of first refusal (comparable to the right
described in Section 4.8), and further provided that the condominium unit shall
be occupied only in accordance with the provisions of the Declaration.
(c) The Leasehold shall not be submitted to the provisions of the
Condominium Act if, in the opinion of Stroock & Stroock & Lavan (or any other
law firm selected by the Managing Co-Tenant), (i) the provisions of the
Declaration with regard to the clauses set forth in (a) and (b) above, are, more
likely than not, unenforceable, (ii) the Leasehold Mortgages then outstanding
cannot be partially released and/or reallocated to permit a transfer of a
condominium unit or (iii) the Declaration shall contain any provision which in
any material respect violates any provision of law.
(d) The Designated Co-Tenant initially electing to file the
Declaration shall pay all costs and expenses incurred in order to file the
Declaration and effect the exchange of Interests as referred to in clause (a)
above (the "Submission Costs"), which shall include, without limitation,
transfer and transfer gains taxes and attorneys' fees and disbursements and
shall reimburse the other Designated Co-Tenant for those costs and expenses
which the other Designated Co-Tenant would not have incurred if not for the
filing of the Declaration including, without limitation, loss of any tax credits
or governmental benefits or subsidies.
ARTICLE V
GENERAL
5.1 NOTICES
(a) All notices, demands, consents, approvals, requests or other
communications provided for or permitted to be given pursuant to this Agreement
must be in writing.
(b) All notices, demands, consents, requests or other communications
to be sent to any Co-Tenant hereunder shall be deemed to have been properly
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given or served when personally delivered, provided receipt is acknowledged, or
three days after being deposited in the United States mails, postage prepaid,
certified mail, return receipt requested.
(c) All notices required, permitted or appropriate hereunder shall be
served upon the respective parties at the following addresses:
If to the AMEX
Co-Tenants, to
Amexco at: American Express Company
American Express Tower
World Financial Center
New York, New York 10285
Attn: General Counsel
If to the Lehman
Co-Tenants, to
Lehman at: Lehman Brothers Inc.
American Express Tower
World Financial Center
New York, New York 10285
Attention: Chief Legal Officer
or to such other addresses as may be designated by notice to the other parties
hereto.
5.2 ENTIRE AGREEMENT
This Agreement constitutes the entire agreement among the Co-Tenants relative
to the Property, its ownership and its operation. No variations, modifications,
or changes herein or hereof shall be binding upon any Co-Tenant unless set forth
in a document duly executed and acknowledged by or on behalf of such Co-Tenant
(through its Designated Co-Tenant).
5.3 GOVERNING LAWS
This Agreement and the rights and obligations of the Co-Tenants hereunder
shall be interpreted, construed and enforced in accordance with the laws of the
State of New York.
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5.4 WAIVER
No consent or waiver, express or implied, by any Co-Tenant to or of any
breach or default by any other Co-Tenant in the performance by a Co-Tenant of
its obligations hereunder shall be deemed or construed to be a consent or waiver
to or of any other breach or default in the performance by any Co-Tenant of the
same or any other obligations of any other Co-Tenant hereunder. Failure on the
part of any Co-Tenant to complain of any act or failure to act of any other Co-
Tenant or to declare any other Co-Tenant in default, irrespective of how long
such failure continues, shall not constitute a waiver by such Co-Tenant of its
rights hereunder.
5.5 SEVERABILITY
(a) If any provision of this Agreement or the application thereof to any
person or circumstance shall be invalid or unenforceable to any extent, the
remainder of this Agreement and the application of such provisions to other
persons or circum- stances shall not be affected thereby and shall be enforced
to the greatest extent permitted by law.
(b) If any provision of this Agreement or the application thereof to any
person or circumstance shall violate any of the provisions of the Lease or any
Leasehold Mortgages, then said provision of this Agreement shall be deemed to be
of no force and effect, it being understood that said provision shall continue
to have full force and effect with respect to the application thereof to all
other persons or circumstances.
5.6 BENEFIT
The provisions of this Agreement relate only to the Co-Tenants and their
successors and permitted assigns, and are not intended to benefit any other
parties and are in no event to be enforceable by any other parties.
5.7 TERMINOLOGY
All personal pronouns used in this Agreement, whether used in the masculine,
feminine, or neuter gender, shall include all other genders; the singular shall
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include the plural and vice versa. Titles are for convenience only, and neither
limit nor amplify the provisions of this Agreement.
5.8 STATUS REPORTS
Recognizing that each Co-Tenant may find it necessary from time to time to
establish to third parties such as accountants, banks, mortgagees, subtenants
and assignees, or the like, the then current status of performance hereunder,
each Co-Tenant agrees, upon the written request of any other Co-Tenant, made
from time to time, to prepare, execute and furnish to the requesting Co-Tenant
promptly a written statement (which statement shall be acknowledged, if
requested) with respect to the status of any matter pertaining to this
Agreement, which statement may be to the best of the knowledge and belief of the
party making such statement.
5.9 NO RECORDING OF THIS AGREEMENT
The Co-Tenants covenant that neither this Agreement, nor any memorandum
hereof, shall be filed or recorded.
5.10 BINDING AGREEMENT
Subject to the restrictions on transfers and encumbrances set forth herein,
this Agreement shall inure to the benefit of and be binding upon the Co-Tenants
and their respective successors (whether by operation of law or otherwise), and
permitted assigns.
5.11 LIABILITY OF CO-TENANTS/INDEMNIFICATION
(a) In performing its duties hereunder, each Co-Tenant shall act at all
times in good faith and shall use best efforts in all respects to collect from
the Building's and each Co-Tenant's respective insurance policy before
proceeding against another Co-Tenant hereunder.
(b) In the event of any physical damage to property of any Co-Tenant (a
"Non-Negligent Co-Tenant"), to the extent such physical damage is not covered by
insurance, such Non-Negligent Co-Tenant shall be responsible for such uninsured
damage provided that,
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to the extent such damage was caused by the gross negligence, bad faith or
wilful misconduct of any other Co-Tenant, such Co-Tenant shall indemnify, defend
and hold such Non-Negligent Co-Tenant harmless from and against all uninsured
physical property damage incurred by such Non-Negligent Co-Tenant and caused by
such gross negligence, bad faith or wilful misconduct.
(c) Amexco and Lehman hereby mutually indemnify one another and hold the
other free and harmless from and against any losses or damages, which may be
incurred by, or asserted against, either Amexco or Lehman on account of the
injury to any person or property damage liability occurring in or about any of
the Common Facilities. Amexco and Lehman shall be liable for any losses or
damages arising out of injuries to a third party or third party's property
sustained in a Common Facility in accordance with their respective Interests,
provided however that in regard to injuries to a third party or a third party's
property who is an employee of any Co-Tenant, Amexco and Lehman shall be jointly
(but not severally) liable for any such losses and damages on a 50/50 basis and;
provided, further however, that in regard to injuries to a third party or a
third party's property sustained entirely within a Co-Tenant's Space, the Co-
Tenant occupying such Space shall indemnify and hold harmless all other Co-
Tenants against losses or damages arising out of claims brought by such third
party.
(d) Notwithstanding anything to the contrary contained herein, no Co-Tenant
(including Managing Co-Tenant) shall be liable to any other Co-Tenant for any
consequential damages (including without limitation, loss of business, and loss
of use or income from the Property), as the result of any loss or damage
incurred by any Co-Tenant in connection with the Building.
(e) In connection with the Managing Co-Tenant entering into any contract or
agreement with a vendor, the Managing Co- Tenant will endeavor to require that
such vendor have insurance in force that is reasonable and customary, and will
endeavor in good faith to require that such policies of insurance name each Co-
Tenant as an additional insured. The failure of the Managing Co-Tenant to
comply with the foregoing shall not result in any liability accruing to the
Managing
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Co-Tenant unless the Managing Co-Tenant acts in complete disregard with respect
to its obligations set forth in this paragraph (e).
5.12 CLAIMS
Whenever any Co-Tenant shall learn through the filing of a claim or the
commencement of a proceeding or otherwise of the existence of any liability for
which another Co-Tenant is or may be responsible and which relates to the
Property, such Co-Tenant shall notify the other Co-Tenants and Managing Co-
Tenant promptly and furnish such copies of documents (and make originals thereof
available) and such other information as such Co-Tenant may have which may be
used or useful in the defense of such claims.
5.13 CONSENT OR APPROVAL
In any case where the provisions of this Agreement require the consent or
approval of Managing Co-Tenant (other than such consents or approvals as
required in Article IV hereof), Managing Co-Tenant agrees that it will respond
affirmatively or negatively (stating specific reasons for the denial) and in
writing to requests for such consents or approvals within ten (10) days of
receipt therefor unless Managing Co-Tenant advises in writing it will need
longer than ten (10) days, in which case Managing Co-Tenant shall respond within
thirty (30) days of receipt of written request therefor, it being understood
that any such request for approval shall apply only with respect to the
particular matter or act to which such consent or approval is sought. If
Managing Co-Tenant shall fail to so respond affirmatively or negatively (with
specific reasons for the denial) to any such request within such 10-day period,
the requested consent or approval of Managing Co-Tenant shall be deemed to have
been given.
5.14 TERM
(a) The term of this Agreement shall commence on the date of execution
hereof and shall continue until the earlier occurrence of the following events:
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(i) the assignment or other transfer (by one or a series of transactions)
of the whole of the Interests of each of the Initial Co-Tenants (including a
termination of the Lease) and the distribution of the proceeds of such transfer
or transfers; or
(ii) the decision of the Managing Co-Tenant to terminate this Agreement.
(b) In the event of the assignment or other transfer of the whole of the
Interests of each of the Co-Tenants (including a termination of the Lease), the
parties agree that the costs incurred in connection with such transfer
including, without limitation, all real property and transfer gain taxes shall
be paid by the Co-Tenants in accordance with their respective Interests at the
time of such transfer and that any monies remaining shall be distributed to the
Co-Tenants in accordance with their respective Interests at the time of such
transfer.
5.15 ARBITRATION
All disputes or questions between or among the Co-Tenants shall be settled by
arbitration as hereinafter provided. All arbitrations shall be initiated,
prosecuted and defended by the Designated Co-Tenants only. The Designated Co-
Tenant desiring arbitration shall appoint a disinterested person as arbitrator
on its behalf and give notice thereof to the other Designated Co-Tenant who
shall, within 15 days thereafter, appoint a second disinterested person as
arbitrator on its behalf and give written notice thereof to the first Designated
Co-Tenant. The two arbitrators thus appointed shall together appoint a third
disinterested person within 15 days after the appointment of the second
arbitrator, and said three arbitrators shall, as promptly as possible, determine
the matter which is the subject of the arbitration and the decision of the
majority of them shall be conclusive and binding on all Co-Tenants and judgment
upon the award may be entered in any court having jurisdiction. If, after
appointment of the first arbitrator, the Designated Co-Tenant who shall have the
right pursuant to the foregoing to appoint a second arbitrator fails or neglects
to do so, then in such event, the other Designated Co-Tenant (or if the two
arbitrators appointed by the Designated Co-Tenants shall fail to appoint a third
arbitrator when
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required hereunder, then either Designated Co-Tenant) may apply to any court of
competent jurisdiction to appoint such arbitrator. The arbitration shall be
conducted in the City and County of New York and, to the extent applicable and
consistent with this Section 5.15, shall be in accordance with the Commercial
Arbitration Rules then obtaining of the American Arbitration Association or
successor body of similar function. The expenses of arbitration shall be shared
equally by the Designated Co-Tenants, and each Designated Co-Tenant shall be
responsible for the fees and disbursements of its own attorneys and the expenses
of its own proof. The Co-Tenants agree to sign all documents and do all other
things necessary to submit any such matter to arbitration and further agree to,
and hereby do, waive any and all rights they or any of them may at any time have
to revoke their agreement hereof to submit to arbitration and to abide by the
decision rendered thereof. The arbitrators shall have no power to vary or
modify any of the provisions of this Agreement and their jurisdiction is limited
accordingly. If the arbitration concerns only construction matters, then each
of the arbitrators shall be licensed professional engineers or registered
architects, having at least ten (10) years' experience in the design of office
buildings. If the arbitration concerns only the value of real property, then
each of the arbitrators shall be members of the American Institute of Real
Estate Appraisers or the Society of Real Estate Appraisers, or any successor
bodies of comparable function, having at least ten (10) years' experience in the
appraisal of first class office buildings.
5.16 CONSUMER PRICE INDEX
As used herein, the term "Consumer Price Index" or "CPI" shall mean the
"Consumer Price Index for All Urban Consumers" (1967-100) specified for "All
Items" relating to New York-Northern New Jersey-Long Island, NY-NJ-CT, published
by the Bureau of Labor Statistics of the United States Department of Labor, or
any successor index thereto covering New York City, appropriately adjusted.
5.17 AFFIRMATIVE ACTION PROGRAM
The Co-Tenants hereby acknowledge that in connection with the acquisition of
the Property, the
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Co-Tenants became bound to the provisions of a certain Affirmative Action
Program Agreement, a copy of which is annexed to the Lease as Exhibit C. Such
Affirmative Action Program Agreement requires compliance with BPCA's affirmative
action program. The Co-Tenants further acknowledge that the Affirmative Action
Program Agreement continues to be, and shall remain throughout the term of the
Lease, in full force and effect and each Co-Tenant covenants to faithfully
observe and comply with all provisions contained therein.
5.18 SIGNS; NAME OF BUILDING
(a) No Co-Tenant shall display or erect any lettering, signs,
advertisements, posters, displays or awnings on the outside of its Space or any
interior signs which are visible from the outside (collectively, "Signs")
without obtaining Managing Co-Tenant's prior written approval. In addition to
complying with all of the terms and conditions of this Agreement and the Lease,
each Co-Tenant shall submit to Managing Co-Tenant a detailed sketch of any such
Sign and if approved, the same shall not be altered in any manner whatsoever
without first obtaining Managing Co-Tenant's prior written consent for such
proposed change. All such Signs shall be maintained by the Co-Tenant at its
sole cost and expense in good order and condition, and in accordance with all of
the terms and provisions of this Agreement. Any work done with respect to any
Sign shall be considered to be a Co-Tenant's Change hereunder.
(b) Amexco shall be permitted to change the name of the Building to conform
with a change in the name of Amexco, without the consent of any Co-Tenant.
5.19 RULES AND REGULATIONS
Each Co-Tenant agrees to comply with such rules and regulations which may
from time to time be promulgated by the Managing Co-Tenant with respect to the
use, maintenance and operation of the Property; provided, however, that all such
rules and regulations shall be reasonable and equitable, consistent with the
provisions of this Agreement and each Co-Tenant is given as much advance written
notice thereof as is reasonably practical. Should there be a conflict between
the rules and
80
<PAGE>
regulations and the provisions of this Agreement, the provisions of this
Agreement shall govern.
5.20 POWER OF ATTORNEY
Each of the Co-Tenants hereby constitutes, appoints and grants to the
Managing Co-Tenant an irrevocable power of attorney, coupled with an interest,
to execute any subleases, contracts and other instruments which Managing Co-
Tenant is authorized to execute on behalf of the Co-Tenants in accordance with
this Agreement.
5.21 RECORDING OF EXISTING LEASEHOLD MORTGAGES.
Amexco has the right at its option and its cost and expense at any
time to cause the Existing Leasehold Mortgages to be recorded and to cause to be
filed related financing statements and any other related documentation required
in connection therewith, and the Lehman Co-Tenants will execute any such
required financing statements and related documents.
IN WITNESS WHEREOF, this Agreement has been duly executed by the
parties hereto effective as of the date first set forth above.
AMERICAN EXPRESS COMPANY
/s/ Louise M. Parent
------------------------------
By: Louise M. Parent
Title: Executive Vice President and General Counsel
AMERICAN EXPRESS BANK LTD.
/s/ Robert Sicina
------------------------------
By: Robert Sicina
Title: Chief Financial Officer
81
<PAGE>
AMERICAN EXPRESS TRAVEL
RELATED SERVICES COMPANY, INC.
/s/ Walter S. Berman
-----------------------------
By: Walter S. Berman
Title: Chief Financial Officer
LEHMAN BROTHERS INC.
/s/ Karen M. Muller
-----------------------------
By: Karen M. Muller
Title: Secretary
LEHMAN GOVERNMENT
SECURITIES, INC.
/s/ Karen Manson
----------------------------
By: Karen Manson
Title: Secretary
LEHMAN COMMERCIAL
PAPER INCORPORATED
/s/ Karen Manson
----------------------------
By: Karen Manson
Title: Secretary
82
<PAGE>
COUNTY OF NEW YORK )
: ss.:
STATE OF NEW YORK )
On this ____ day of May, 1994, before me came Louise M. Parent to me known,
who being by me duly sworn did depose and say that she resides at
_______________________________, that she is the Executive Vice President and
General Counsel of AMERICAN EXPRESS COMPANY, one of the CO-TENANTS described in
and which executed the foregoing instrument; and that she signed her name hereto
by order of the Board of Directors of said corporation.
/s/ Peter F. Honchaurk
Notary Public
PETER F. HONCHAURK
Notary Public, State of New York
No. 24-4996092
Qualified in Kings County
Commission Expires May 11, 1996
83
<PAGE>
COUNTY OF NEW YORK )
: ss.:
STATE OF NEW YORK )
On this ____ day of May, 1994, before me came Robert Sicina to me known, who
being by me duly sworn did depose and say that he resides at __________________,
that he is the Chief Financial Officer of AMERICAN EXPRESS BANK LTD., one of the
CO-TENANTS described in and which executed the foregoing instrument; and that he
signed his name hereto by order of the Board of Directors of said corporation.
/s/ Douglas H. Daniels
Notary Public
DOUGLAS H. DANIELS
Notary Public, State of New York
No. O2DA4954686
Qualified in Queens County
Commission Expires Aug. 14, 1995
84
<PAGE>
COUNTY OF NEW YORK )
: ss.:
STATE OF NEW YORK )
On this ____ day of May, 1994, before me came Walter S. Berman to me known,
who being by me duly sworn did depose and say that he resides at
______________________________, that he is the Chief Financial Officer of
AMERICAN EXPRESS TRAVEL RELATED SERVICES COMPANY, INC., one of the CO-TENANTS
described in and which executed the foregoing instrument; and that he signed his
name hereto by order of the Board of Directors of said corporation.
/s/ Douglas H. Daniels
Notary Public
DOUGLAS H. DANIELS
Notary Public, State of New York
No. O2DA4954686
Qualified in Queens County
Commission Expires Aug. 14, 1995
85
<PAGE>
COUNTY OF NEW YORK )
: ss.:
STATE OF NEW YORK )
On this 27th day of May in the year 1994 before me personally came Karen
Muller to me known, who, being by me duly sworn, did depose and say that she
resides at ___________________________, that he/she is Managing Director of
Lehman Brothers Inc. (the "Corporation"), the Corporation described in and which
-----------
executed the foregoing assignment, and that he/she signed his/her name thereto
by authority of the board of directors of the Corporation and he/she did thereby
bind the Corporation.
/s/ Peter F. Honchaurk
----------------------
Notary Public
PETER F. HONCHAURK
Notary Public, State of New York
No. 24-4996092
Qualified in Kings County
Commission Expires May 11, 1996
86
<PAGE>
COUNTY OF NEW YORK )
: ss.:
STATE OF NEW YORK )
On this 27th day of May in the year 1994 before me personally came Karen
Manson to me known, who, being by me duly sworn, did depose and say that he/she
resides at _______________________________, that he/she is Secretary
of Lehman Government Securities Inc. (the "Corporation"), the Corporation
-----------
described in and which executed the foregoing assignment, and that he/she signed
his/her name thereto by authority of the board of directors of the Corporation
and he/she did thereby bind the Corporation.
/s/ Peter F. Honchaurk
----------------------
Notary Public
PETER F. HONCHAURK
Notary Public, State of New York
No. 24-4996092
Qualified in Kings County
Commission Expires May 11, 1996
87
<PAGE>
COUNTY OF NEW YORK )
: ss.:
STATE OF NEW YORK )
On this 27th day of May in the year 1994 before me personally came Karen
Manson to me known, who, being by me duly sworn, did depose and say that he/she
resides at _____________________________________, that he/she is Secretary of
Lehman Brothers Commercial Paper Inc. (the "Corporation"), the Corporation
described in and which executed the foregoing assignment, and that he/she signed
his/her name thereto by authority of the board of directors of the Corporation
and he/she did thereby bind the Corporation.
/s/ Peter F. Honchaurk
----------------------
Notary Public
PETER F. HONCHAURK
Notary Public, State of New York
No. 24-4996092
Qualified in Kings County
Commission Expires May 11, 1996
88
<PAGE>
EXHIBIT 10.2
TAX ALLOCATION AGREEMENT
This TAX ALLOCATION AGREEMENT, dated this 27th day of May, 1994 (the
"Agreement"), is between American Express Company, a New York corporation
("AMEX"), and Lehman Brothers Holdings Inc., a Delaware corporation ("LBH").
AMEX and LBH each has its executive office at American Express Tower, World
Financial Center, City of New York, County of New York, State of New York.
WHEREAS, from June 30, 1981 through May 15, 1987 and August 10, 1990
through the Closing Date (defined below) of the Spinoff (defined below), income
of certain present and former members of the LBH Group (defined below) has been
or will be included in the U.S. consolidated Federal income tax returns of the
AMEX Group (defined below); and
WHEREAS, certain LBH Group members have filed or will file combined state
or local tax returns with certain AMEX Group members; and
WHEREAS, the consolidated U.S. Federal income tax liability of the AMEX
Group and certain combined state and local income tax liabilities have been
allocated and settled among the members of the AMEX Group in accordance with the
U.S. Federal Income Tax Policy (de-
<PAGE>
fined below) and Tax Instruction 400 (defined below), respectively, and in prior
years were allocated under predecessor procedures; and
WHEREAS, in connection with the initial public offering of LBH stock
in May 1987, AMEX and LBH entered into the Shearson Agreement (defined below);
and
WHEREAS, LBH and other members of the LBH Group will cease to be
members of the AMEX Group upon the Closing Date; and
WHEREAS, AMEX and LBH (i) desire to set forth in this Agreement tax
allocation principles for Affiliation Years which, except to the extent provided
herein, will supersede the U.S. Federal Income Tax Policy, the Shearson
Agreement and Tax Instruction 400 and (ii) desire to define the effects upon the
settlement and allocation of certain tax liabilities and tax benefits of
transactions or developments that occur during Interim Years (defined below) and
Post-Affiliation Years (defined below).
NOW, THEREFORE, LBH and AMEX agree as follows:
Section 1. Definitions. For all purposes of this Agreement, the following
-----------
terms shall have the following meanings:
(a) "Adjusted Separate LBH Group-Federal Tax Liability" shall mean with
respect to any Affiliation Year(.s) the U.S. Federal income tax liability of the
LBH
2
<PAGE>
Group, determined by AMEX, applying the Highest Tax Rate, computed as if the LBH
Group (with LBH as the common parent) filed a consolidated U.S. Federal income
tax return separately from the AMEX Group, and applying such U.S. tax laws and
regulations that would have been applicable to LBH if it had so filed
separately, including any applicable limitations or carryforwards or carrybacks
(subject to limitations applicable to carryforwards and carrybacks hereunder,
including those set forth in Section 11 hereof and without regard to the AMT as
defined in Section 5 of this Agreement, provided, however, LBH shall remain
liable for AMT due pursuant to Section 5) that would apply for such separate
consolidated return for such year, adjusted as follows:
(1) the LBH Group shall be treated as bound by all elections made by AMEX
and all methods and policies in force for the AMEX Group for all
Affiliation Years;
(2) the LBH Group shall be permitted to reduce its Adjusted Separate LBH
Group Federal Tax Liability (not below zero) to the extent that AMEX
determines that the AMEX Group is able to reduce its U.S. Federal income
tax liability in the AMEX Consolidated Return for such Affiliation Year by
utilizing items of deduction, loss, or Credit which AMEX determines the LBH
Group would have been unable to
3
<PAGE>
utilize if it had filed a consolidated Federal income tax return separately
from the AMEX Group for such year ("Excess Items"); provided, that it shall
--------
be assumed that such items of deduction, loss or Credit were utilized in
the AMEX Consolidated Return only after items in the same category for the
same Affiliation Year of other members of the AMEX Group were utilized on
actual Tax Returns as filed, subject to any Adjustments thereto ("last-in
basis"), and shall not be given effect to the extent, on such last-in
basis, AMEX determines that they exceed any limitations applicable to the
AMEX Group for such year; provided, further, such limitations shall take
-------- -------
into account carryforwards or carrybacks to an Affiliation Year of members
of the AMEX Group (other than the LBH Group), but only to the extent such
carryforwards or carrybacks are allowable by law; provided, further, that
-------- -------
to the extent that the LBH Group reduces its Adjusted Separate LBH Group
Federal Tax Liability for an Affiliation Year by Excess Items, it shall not
be permitted to take such Excess Items into account in computing such
liability in any other Affiliation Year; and provided, further, if,
-------- -------
pursuant to the above provisions, an Excess Item is not usable by the AMEX
Group in one Affiliation Year, it shall be
4
<PAGE>
carried forward or carried back as an Excess Item to any other Affiliation
Years subject to the same limitations as above and any other applicable
limitations hereunder.
(3) the LBH Group shall take into account the items of income, gain, loss,
deduction or Credit attributable to deferred intercompany items, excess
loss accounts, dual consolidated losses or other items that AMEX determines
are required to be restored, recaptured or otherwise triggered as a result
of the Spinoff.
(b) "Adjustment" shall mean, with respect to any Affiliation Year, any
change in actual tax liability from the tax liability reported on an AMEX
Consolidated Return (except for items described in Sections 6, 7(c) or 11 of
this Agreement), including changes attributable to amended returns, deficiencies
asserted by the IRS, overpayments, claims for refund, and IRS audits,
examinations, proceedings or litigation resulting from any of the foregoing
events. If such Adjustment relates only to a separate consolidated return
computation for the LBH Group hereunder, such Adjustment shall relate to an item
of income, gain, loss, deduction or Credit of a member of the LBH Group.
(c) "Affiliation Year" shall mean each taxable year, or portion
thereof, with respect to which the LBH
5
<PAGE>
Group was a member of the AMEX Group and for which the LBH Group joined or will
join the AMEX Group in the filing of consolidated U.S. Federal income Tax
Returns. Reference to "Affiliation Years" shall mean all of the Affiliation
Years taken as a whole.
(d) "AMEX Consolidated Return" shall mean a consolidated U.S. Federal
income Tax Return filed by AMEX on behalf of the AMEX Group.
(e) "AMEX Group" shall mean the affiliated group of corporations (as
constituted from time to time), within the meaning of Section 1504 of the Code,
including AMEX, of which AMEX is the common parent.
(f) "Closing Date" shall mean the effective date of the Spinoff
(hereinafter defined). For purposes of filing all Tax Returns and making all
determinations under this Agreement, the LBH Group shall cease to be a member of
the AMEX Group as of 12:00 a.m. on the first day after the Closing Date, and LBH
shall cause the LBH Group's books of account to be closed for accounting and tax
purposes as of the end of the Closing Date in accordance with AMEX's direction.
(g) "Code" shall mean the Internal Revenue Code of 1986, as amended.
Any references to the Code and Treasury regulations promulgated thereunder shall
include any successor provisions thereto.
6
<PAGE>
(h) "Credits" shall mean, with respect to an Affiliation Year, all of the
credits against U.S. Federal income tax of the LBH Group attributable to that
Affiliation Year. Credits shall include, but not be limited to, foreign tax
credits, research credits, investment tax credits and targeted job credits but
specifically exclude Employee Stock Ownership Plan credits.
(i) "Excess AMEX Group Benefits" shall mean the amount by which AMEX
determines that AMEX was able to reduce its U.S. Federal income tax liability in
the AMEX Consolidated Return for an Affiliation Year by use of Excess Items (as
defined above under "Adjusted Separate LBH Group Federal Tax Liability") which
would reduce the Adjusted Separate LBH Group Federal Tax Liability for such
year, if zero, below zero ("Additional Excess Items"). Use of Additional Excess
Items shall otherwise be subject to the same limitations and other provisions
applicable to the use of Excess Items, as determined by AMEX.
(j) "LBH Group" shall mean each of (i) LBH, its subsidiaries and any
predecessor corporations and (ii) any corporation which at any time would have
been or is entitled to file consolidated U.S. Federal income Tax Returns with
any of the corporations described in (i) as the common parent.
7
<PAGE>
(k) "Final Settlement" shall mean a final settlement with a taxing
authority that is binding on all parties or, if applicable, a final judicial
decision upon the expiration of the time for the decision to be appealed, with
respect to the items in question.
(1) "Highest Tax Rate" for the taxable year in question shall mean the
highest Federal income tax rate that would apply to that particular type of
income for such year. With respect to the Affiliation Year beginning on January
1, 1987 and ending on May 15, 1987, the Highest Tax Rate shall not exceed forty
percent (40%).
(m) "Income Tax Benefit", for purposes of Section 6(a), 6(c) or 11 of the
Agreement, shall mean the amount of the tax savings realized by the AMEX Group,
as determined by AMEX. Such amount shall be determined by comparing (i) the
actual U.S. Federal income tax liability of the AMEX Group for the year(s) in
question without giving effect to the item(s) in question with (ii) the actual
U.S. Federal income tax liability of the AMEX Group for such year after giving
full effect to such item(s), provided that it shall be assumed that such items
are utilized on a last-in basis as defined above in "Adjusted Separate LBH Group
Federal Tax Liability". An Income Tax Benefit shall be deemed to be realized at
the time that the AMEX Group receives a refund or credit for refund from the
relevant taxing authority upon a Final
8
<PAGE>
Settlement of the items in question. "Income Tax Detriment" shall mean, for
purposes of Section 7(c), the amount of additional tax incurred by the AMEX
Group as determined by AMEX. Such amount shall be determined by comparing (i)
the actual U.S. Federal income tax liability of the AMEX Group for the year(s)
in question after giving effect to the item(s) in question with (ii) the actual
U.S. Federal income tax liability of the AMEX Group without giving effect to the
item(s) in question, on such a last-in basis. An Income Tax Detriment shall be
deemed to be incurred at such time that payment is due to the relevant taxing
authority upon a Final Settlement of the items in question. For purposes of
these definitions, (i) U.S. Federal income tax liability shall be determined by
giving full effect to the U.S. Federal income tax laws applicable to the years
in question, and (ii) full effect shall be given to the collateral effects
including, without limitation, carrybacks, carryforwards, and the non-
deductibility of ordinary losses at the rates of tax applicable to ordinary
income, as determined by AMEX. In computing the U.S. Federal income tax
liability of the AMEX Group for purposes of "(ii)" of the first sentence of this
definition, increases or decreases in the U.S. Federal income tax liability of
the AMEX Group attributable to the effect on AMEX' s (or any subsidiary's) basis
in the stock of any member of the LBH
9
<PAGE>
Group shall be ignored. For purposes of Sections 6(a) and 7(c), as the context
requires, "LBH" shall be substituted for AMEX for purposes of applying these
definitions, except AMEX shall make all relevant determinations therefor.
(n) "Interim Years" shall mean all taxable periods beginning on or
after May 16, 1987 and ending on or before August 9, 1990 during which the LBH
Group was not a member of the AMEX Group and did not join the AMEX Group in the
filing of its consolidated U.S. Federal income Tax Returns.
(o) "IRS" shall mean the U.S. Internal Revenue Service.
(p) "Post-Affiliation Years" shall mean all taxable periods after the
Closing Date during which the LBH Group was not or will not be a member of the
AMEX Group and did not or will not join the AMEX Group in the filing of its
consolidated U.S. Federal income Tax Return.
(q) "Section 11 Claims" shall mean claims for refund attributable to
items described in and filed pursuant to Section 11 of this Agreement.
(r) "Shearson Agreement" shall mean the tax allocation agreement,
dated March 25, 1987, between AMEX and LBH, then known as Shearson Lehman
Brothers Holdings Inc.
10
<PAGE>
(s) "Spinoff" shall mean the distribution of common shares of LBH to
the public shareholders of AMEX.
(t) "Tax Instruction 400" shall mean AMEX Tax Instruction 400, dated
January 1, 1984 (copy attached as Exhibit "A").
(u) "Tax Return" shall mean any tax return (including amended return),
report, information return, election, notice or other document filed or to be
filed with a taxing authority, including any schedules or related or supporting
information. For purposes of this Agreement, references to "combined" Tax
Returns shall include unitary Tax Returns.
(v) "U.S. Federal Income Tax Policy" shall mean the U.S. Federal
Income Tax Liability Allocation Policy of the AMEX Group, dated April 18, 1988.
Section 2. Applicable Standards.
--------------------
(a) Except as otherwise specifically provided herein, this Agreement
shall supersede in all respects the U.S. Federal Income Tax Policy, the Shearson
Agreement, Tax Instruction 400 and any other procedures governing the allocation
of tax liability among the members of the AMEX Group. However, this Agreement
shall not supersede the agreements set forth on Schedule I hereto, with respect
to which AMEX shall control all matters relating to determinations of tax
liability.
11
<PAGE>
(b) Except as otherwise specifically provided hereunder, all
determinations and actions required under this Agreement will be taken by AMEX
and shall be made in good faith taking into account, among other factors, the
goal of reducing the taxes of the parties. LBH shall have the right to review
the basis for all determinations and actions taken by AMEX and LBH and its
designated agents shall have full access to the information and data which
formed the basis therefor.
Section 3. Tax Allocation for Pre-1994 Taxable Years.
-----------------------------------------
(a) LBH shall be responsible for and shall indemnify AMEX against the
U.S. Federal income tax liability of the LBH Group for all taxable years ending
on or before December 31, 1993, including the "1993 Tax Liability" (defined
below), as follows: LBH shall be liablefor and pay AMEX the Adjusted Separate
LBH Group Federal Tax Liability for each such Affiliation Year. AMEX shall pay
LBH but LBH shall remain liable for the Excess AMEX Group Benefits. The 1993 Tax
Liability is such U.S. Federal income tax liability for the taxable year ending
on December 31, 1993.
(b) No later than March 14, 1994, LBH shall pay to AMEX or AMEX shall pay
to LBH an amount equal to the difference between (i) the 1993 Tax Liability
determined by AMEX and (ii) (A) the sum of any payments previ-
12
<PAGE>
ously made by LBH to AMEX with respect to the 1993 Tax Liability (B) reduced by
the sum of any payments previously made by AMEX to LBH with respect to the 1993
Tax Liability.
(c) No later than the day AMEX files the AMEX Consolidated Return for
the 1993 Taxable Year, AMEX shall determine the amount of the 1993 Tax Liability
and LBH shall pay to AMEX or AMEX shall pay to LBH an amount equal to the
difference between (i) the 1993 Tax Liability, as finally determined, based upon
the tax information contained in such return and (ii) (A) the sum of any
payments made by LBH to AMEX with respect to the 1993 Tax Liability (B) reduced
by the sum of any payments previously made by AMEX to LBH with respect to the
1993 Tax Liability. For purposes of subsections (b) and (c), LBH shall use its
best efforts to secure and provide AMEX with the most accurate and complete tax
information available with respect to the 1993 Tax Liability in accordance with
AMEX's request.
Section 4. Tax Allocation for the 1994 Taxable Year.
----------------------------------------
(a) LBH shall be responsible and pay AMEX for, and indemnify and hold
harmless AMEX against, the "1994 Tax Liability." The 1994 Tax Liability shall be
the Adjusted Separate LBH Group Federal Tax Liability for the taxable year
beginning on January 1, 1994 and ending on
13
<PAGE>
and including the Closing Date (the "1994 Taxable Year") with regard to the
separate consolidated return computation for the LBH Group and the taxable year
of the AMEX Group ending on December 31, 1994 with regard to the AMEX
Consolidated Return computation in respect of Excess Items, if applicable. AMEX
shall pay LBH but LBH shall remain liable for the Excess AMEX Group Benefits, if
any, for the taxable year of the AMEX Group ending on December 31, 1994 if the
Adjusted Separate LBH Group Federal Tax Liability is zero under the preceding
sentence.
(b) From and after the date of this Agreement, LBH shall pay to AMEX
or AMEX shall pay to LBH on the day before each due date for the payment of
quarterly estimated U.S. Federal income taxes for the taxable year of the AMEX
Group ending on December 31, 1994 and on March 14, 1995, the difference between
(i) the 1994 Tax Liability determined by AMEX and (ii) (A) the sum of any
payments previously made by LBH to AMEX with respect to the 1994 Tax Liability
(B) reduced by the sum of any payments previously made by AMEX to LBH with
respect to the 1994 Tax Liability. The amount of such estimated payments shall
be determined, to the extent relevant, based on AMEX's determination of the
ability of the AMEX Group to utilize LBH Group's deductions, losses and Credits
for the taxable year of the AMEX Group ending December 31, 1994.
14
<PAGE>
(c) No later than the date that AMEX files the AMEX Consolidated Return for
the taxable year ending on December 31, 1994, AMEX shall determine the amount of
the 1994 Tax Liability and LBH shall pay to AMEX or AMEX shall pay to LBH, as
the case may be, the difference between (i) the 1994 Tax Liability, as finally
determined, based upon the tax information contained in such return and (ii) (A)
the sum of the amounts previously paid by LBH to AMEX with respect to the 1994
Tax Liability (B) reduced by the sum of any payments previously made by AMEX to
LBH with respect to the 1994 Tax Liability. For purposes of subsections (b) and
(c), LBH shall use its best efforts to secure and provide AMEX with the most
accurate and complete tax information available with respect to the 1994 Tax
Liability in accordance with AMEX's request.
(d) LBH and AMEX shall cooperate to settle all tax payable accounts on or
before the Closing Date for the 1993 Tax Liability and 1994 Tax Liability and
all prior Affiliation Years pursuant to Section 3, in accordance with AMEX's
direction, based on the most accurate and complete information then available.
(e) AMEX shall determine the amounts of income, gain, loss, deduction,
and credit of the LBH Group for the 1994 Taxable Year which are properly
includable in the AMEX Consolidated Return for the taxable year of the AMEX
Group
15
<PAGE>
ending on December 31, 1994. The amounts of such items that are includable in
the consolidated U.S. Federal income Tax Return of the LBH Group for the Post-
Affiliation Year of the LBH Group beginning on the first day following the
Closing Date shall be reported by LBH in a manner consistent with the manner in
which such items were reported for the 1994 Taxable Year. Notwithstanding the
previous sentence, for purposes of apportioning its interest expense for foreign
tax credit purposes, the LBH Group may determine the value of its assets for
such Post-Affiliation Year on a basis more frequent than the beginning and end
of the taxable year if permitted to do so by the IRS, but only if the use of
such method does not require conformity by any member of the AMEX Group or
otherwise require participation by AMEX.
(f) Without limiting the foregoing, AMEX shall also determine the
portion of any Foreign Attribute (defined below) for the LBH Group that is
allocable to the 1994 Taxable Year, including whether the allocation of any such
Attribute is to be made by reference to the closing of the LBH Group's books of
account as of the end of the Closing Date or by any other method (which specific
authority is limited to positions that are consistent with applicable law and
regulations); provided that such portion shall not include any amount described
--------
in Section 951(a) of the Code (relating to inclusions in income of controlled
foreign corporation earnings) or any
16
<PAGE>
amount described in Section 1293(a) of the Code (relating to inclusions in
income of qualified electing fund earnings), or any indirect foreign tax credit
under Section 960 of the Code for foreign income taxes deemed paid with
respect to either of these items, all as determined by AMEX; and provided,
--------
further, that, without the prior written consent of AMEX, LBH shall not be
- -------
permitted to elect to recapture an amount of taxable income from sources without
the U.S. of any member of the LBH Group greater than the minimum amount required
by Section 904(f)(1) of the Code for any Affiliation Year or the Post-
Affiliation Year beginning on the first day following the Closing Date. A
"Foreign Attribute" is any item of income, gain, loss or deduction or any asset
or liability relevant to the computation of taxable income from sources without
the U.S. and any item of credit described in Section 901 of the Code (without
regard to the limitation of Section 904 of the Code). LBH shall provide AMEX
with all information it requests to make any determination under this subsection
(f). AMEX will likewise share all information with LBH necessary for LBH to
determine its share of the consolidated foreign tax credits for the 1994 Taxable
Year.
Section 5. Alternative Minimum Tax.
-----------------------
(a) Notwithstanding any other provision in this Agreement, if, for any
Affiliation Year, the AMEX
17
<PAGE>
Group is liable for alternative minimum tax for U.S. Federal income tax purposes
(or any similar U.S. Federal tax) ("AMT") and the LBH Group would be liable for
AMT if it filed a Tax Return as a separate consolidated group ("LBH Separate
AMT"), LBH shall pay to AMEX an amount (the "LBH AMT Liability") determined by
AMEX equal to the product of the AMT liability for the AMEX Group (the "AMEX AMT
Liability") and a fraction (x) the numerator of which is the sum of the tax
preference items and adjustments of the LBH Group relevant for purposes of the
computation of AMT (the "TPIs") and (y) the denominator of which is the sum of
the TPIs of all members of the AMEX Group for such Affiliation Year. The LBH AMT
Liability for any Affiliation Year shall not exceed the LBH Separate AMT for
such Affiliation Year.
(b) If, for any Affiliation Year, LBH has paid to AMEX the LBH AMT
Liability, AMEX shall pay to LBH its proportionate share of the minimum tax
credit for U.S. Federal income tax purposes (the "Minimum Tax Credit") for such
Affiliation Year which is actually utilized by the AMEX Group in a subsequent
Affiliation Year or the Minimum Tax Credit which the LBH Group would have used
for such year if it had filed a consolidated U.S. Federal income tax return
separately from the AMEX Group (with LBH as the common parent), if greater.
LBH's proportionate share of the Minimum Tax Credit of the AMEX Group for
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<PAGE>
any Affiliation Year shall be equal to the product of such Minimum Tax Credit
and a fraction (A) the numerator of which is the LBH AMT Liability reduced by
any amounts previously paid by AMEX to LBH in respect of the Minimum Tax Credit
and (B) the denominator of which is the AMEX AMT Liability reduced by the
Minimum Tax Credit previously received by the AMEX Group in respect of such
AMEX AMT Liability for all relevant taxable years. In no event shall LBH be
paid an amount in respect of the Minimum Tax Credit in excess of the LBH AMT
Liability.
Section 6. Carryover Items; NOL Reattribution;
-----------------------------------
Use of Excess Items in Post-Affiliation Years.
- ---------------------------------------------
(a) Carryover Items. Within five (5) business days after LBH
---------------
realizes such Income Tax Benefit, LBH shall pay to AMEX the amount of any Income
Tax Benefit realized with respect to the amount of any Credits and any other
items apportioned to a member leaving a consolidated group pursuant to Treas.
Reg. (S) 1.1502-79 which (i) reduced the amounts payable by LBH with respect to
U.S. Federal income taxes for any Affiliation Year, (ii) were not utilized by
the AMEX Group in such Affiliation Year, and (iii) are apportioned and carried
over to a Post-Affiliation Year of the LBH Group in accordance with Treas. Reg.
(S) 1.1502-79 and utilized by the LBH Group in such year (the "Carryover
Items"). LBH shall notify AMEX at the time that any such Carryover Items are
reflected
19
<PAGE>
in the Tax Returns of any member of the LBH Group. Prior to the Closing Date,
LBH shall provide AMEX all information it requests to prepare a schedule setting
forth all potential Carryover Items.
(b) NOL Reattribution. LBH has listed on Schedule II hereto the LBH
-----------------
subsidiaries, with their respective employer identification numbers, that have
reported net operating losses for Federal income tax purposes that arose in the
taxable years indicated, as the same may be adjusted to the Closing Date
("NOLs"). At AMEX's request, LBH agrees to reattribute to AMEX or cause to be
reattributed to AMEX the NOLs in accordance with Treas. Reg. section 1.1502-
20(g). In furtherance thereof, LBH shall cause each of the subsidiaries listed
on Schedule II to sign the statement prepared by AMEX that is required by Treas.
Reg. section 1.1502-20(g)(5)(i) to elect to reattribute their losses to AMEX and
to satisfy any other requirements for the NOLs to be reattributed to AMEX. At
AMEX's request, LBH shall provide to AMEX all such information as AMEX may, in
good faith, request to support the NOLs. In the event that any such NOL is
contested by a taxing authority, LBH shall promptly notify AMEX of such contest,
and AMEX, at its sole cost and expense, shall have the sole authority to control
and settle such contest.
20
<PAGE>
(c) Use of Excess Items in Post-Affiliation Years. In the event an
---------------------------------------------
Excess Item (as defined under "Adjusted Separate LBH Group Federal Tax
Liability" above) not used by the AMEX Group in an Affiliation Year, and not
apportioned to the LBH Group pursuant to Treas. Reg. section 1.1502-79, is
carried forward to a Post-Affiliation Year of the AMEX Group, if AMEX determines
that it has realized an Income Tax Benefit with respect to such carryforward,
AMEX shall pay to LBH an amount equal to such Income Tax Benefit within five (5)
business days after AMEX realizes such benefit. AMEX shall have full control of
the nature of all actions to be taken in connection with realizing a benefit
therefor.
Section 7. Adjustments.
-----------
(a) If an Adjustment occurs, the tax liability of LBH or AMEX, as the
case may be, pursuant to Sections 3, 4 or 5 hereof, shall be recomputed by AMEX.
As recomputed, LBH shall make payments to AMEX for an increase in its tax
liability or AMEX shall make payments to LBH for an increase in its tax
liability. For purposes of Sections 3 and 4, LBH's tax liability shall be deemed
to have increased by any Adjustment that results in the increase in the Adjusted
Separate LBH Group Federal Tax Liability or a decrease in the Excess AMEX Group
Benefits, and AMEX's tax liability shall be deemed to have increased by any
Adjustment that results
21
<PAGE>
in a decrease in the Adjusted Separate LBH Group Federal Tax Liability or an
increase in the Excess AMEX Group Benefits. Payments due from LBH to AMEX shall
be made no later than one (1) business day before the due date for payment upon
the Final Settlement of the items in question, or, to the extent no payment is
due, within five (5) business days after the date of such Final Settlement. Such
payments shall include any interest, penalties and additions to tax and, if
applicable, any reasonable external costs for professional services incurred by
AMEX thereon. In calculating any interest payable by LBH to AMEX hereunder,
interest, if any, due from AMEX to the IRS shall first be deemed to arise with
respect to the increase in the tax liability of LBH, as determined above.
However, to the extent the increase in the tax liability of LBH, as determined
above, exceeds the amount of AMEX's tax deficiency to the IRS, interest thereon
shall be paid by LBH to AMEX at the overpayment rate specified in Section 6621
of the Code from the date payment was due under the Code or applicable
regulations. Payments due from AMEX to LBH shall be made (together with interest
at the overpayment rate specified in Section 6621 of the Code) within five (5)
business days after AMEX receives a refund or a credit for a refund with regard
to the items in question. For any Affiliation Year, AMEX, in its sole
discretion,
22
<PAGE>
exercisable in good faith, may determine whether to give effect, through any Tax
Return, claim for refund or otherwise, to items of loss, deduction or credit for
the LBH Group which are greater than those reflected on prior Tax Returns and
the nature of all actions taken with respect thereto. AMEX will be deemed to
have satisfied this standard if it rejects a request by LBH to file such a claim
for refund, because, among other reasons, it determines, in good faith, that a
member of the AMEX Group will incur a detriment, financial or otherwise, in any
year affected by such claim or such claim involves an election, method or policy
that is inconsistent with that used by the AMEX Group. If AMEx files such a
claim, LBH will indemnify AMEX for any additional taxes or loss of tax benefits
incurred by a member of the AMEX Group (including interest, penalties and
additions to tax) arising from such claim.
(b) LBH shall be responsible for the payment to AMEX of the amount
allocated to the LBH Group pursuant to the tax allocation procedures in Sections
3, 4, 5 and 6(a) as adjusted pursuant to this Section 7, if applicable, and
shall indemnify and hold AMEX harmless against all such amounts. AMEX shall
indemnify and hold the LBH Group harmless from and against all other U.S.
Federal income taxes in excess of the amount determined in the previous sentence
in respect of the Affiliation
23
<PAGE>
Years, including all U.S. Federal income taxes imposed pursuant to Treas. Reg.
section 1.1502-6 with respect to members of the AMEX Group other than members of
the LBH Group. Subject to Section 13, to be entitled to indemnification under
this Section, either party shall give notice to the other party pursuant to
Section 16 of this Agreement, and a reasonable opportunity to respond, before
making any payment which would cause this indemnity provision to be applicable.
(c) If the application of Code Section 482 as between the AMEX Group
(not including the LBH Group) and the LBH Group results in an Income Tax
Detriment to the AMEX Group (not including the LBH Group) or the LBH Group, as
the case may be, the party incurring the Income Tax Detriment shall be paid by
the other party an amount equal to such Income Tax Detriment (including any
interest, penalties and additions to tax) within five (5) business days after
such Income Tax Detriment is incurred. Subject to Section 13, each party shall
notify the other at the time that such party receives notice of any claim,
deficiency or other notice by the taxing authorities with respect to an item
that could give rise to such an Income Tax Detriment or a payment pursuant to
this Section 7(c).
24
<PAGE>
Section 8. Preparation of Tax Returns and Computation.
------------------------------------------
(a) AMEX shall have sole authority for the preparation and filing of any
consolidated U.S. Federal income Tax Return or combined state and local Tax
Returns, which include the items of income, gain, loss, deduction and credit of
the LBH Group for all relevant taxable periods ending prior to or with and
including the Closing Date including, but not limited to, determination of
Foreign Attributes (as defined in Section 4(f) of this Agreement). With respect
to the U.S. Federal income Tax Returns for the taxable years ending December 31,
1993 and December 31, 1994, respectively, AMEX agrees to notify LBH if it plans
to file such tax returns reflecting data or information that is materially
different from the final data or information provided by LBH in respect of the
LBH Group in respect of these years and, in this event, subject to filing
deadlines, to give LBH an opportunity to comment on the reporting of such data
or information. In addition, with respect to any combined state and local Tax
Return for the taxable years ending December 31, 1993 and December 31, 1994, in
which LBH is projected to have tax liability in excess of $500,000, AMEX will,
subject to filing deadlines, give LBH an opportunity to review and comment on
the accuracy of such returns as they relate to LBH's tax liability.
25
<PAGE>
Any decisions with respect to the timing, filing, or content of the above Tax
Returns shall be made by AMEX and shall be final and binding upon the parties
hereto. LBH and the appropriate members of the LBH Group shall make or give
their consent to such elections or other matters relating to the LBH Group as
AMEX determines are necessary or advisable in connection with the filing of any
such Tax Returns.
(b) LBH shall have sole authority for the preparation and filing of
all separate state and local Tax Returns of all members of the LBH Group for
all relevant taxable years; provided, however, that all such Tax Returns shall
-------- -------
be filed in a manner consistent with the treatment of items and transactions
on the relevant AMEX Consolidated Return, subject to applicable law at the time
such return is filed. LBH shall be liable for and shall indemnify and hold AMEX
harmless against all taxes required to be shown on such Tax Returns plus any
interest, penalties and additions to tax relating to such taxes.
(c) All the computations and determinations that are required to be
made under this Agreement shall be made by AMEX. LBH and the other members of
the LBH Group shall extend such cooperation to AMEX as AMEX, in good faith,
requests in order to perform all such computations. Whenever consent, election
or other action by
26
<PAGE>
LBH under this Agreement will, as determined by AMEX, not be effective without
such consent, election or other action being provided by other members of the
LBH Group, upon request by AMEX, LBH shall cause such consent, election or other
action to be provided by such other members.
Section 9. Cooperation and Furnishing: of Tax Return Information.
-----------------------------------------------------
(a) Subject to Section 13, AMEX and LBH each agree to cooperate fully
in connection with (i) the resolution of any tax audits, proceedings or disputes
and the preparation of any Tax Return relating to any Affiliation Year. AMEX and
LBH shall each provide the other with such documents as the other may request
which are relevant to such audits, proceedings or disputes and make available
personnel familiar with the item which is the subject of such audit, proceeding
or dispute. In this regard, the tax department of the LBH Group shall, at the
expense of LBH, continue to perform the same functions with respect to such
audits, proceedings or disputes as they performed during the Affiliation Years
with respect to such audits, proceedings or disputes.
(b) For purposes of the preparation by AMEX of Tax Returns for the
taxable years ending on December 31, 1993 and December 31. 1994, respectively,
on or prior to such date as is specified by AMEX, LBH shall provide AMEX
27
<PAGE>
with a separate consolidated return for the LBH Group, subject to applicable
limitations, schedule(s) showing the items of income, gain, loss, deduction and
credit and Foreign Attributes (as defined in Section 4(f)) attributable to the
LBH Group with respect to each such taxable year and complete workpapers
together with such other information as AMEX may request. The information
described herein shall be consistent with any similar information provided by
LBH to AMEX in respect of prior taxable years.
Section 10. Interim Years and Post-Affiliation Years.
----------------------------------------
(a) LBH shall not (i) file or amend any Tax Return for Interim Years,
the Post-Affiliation Year beginning on the first day following the Closing Date,
or the subsequent Post-Affiliation Years ending in 1995 and 1996, in a manner
inconsistent with the manner in which AMEX filed its Tax Returns in an
Affiliation Year (except as to the manner by which it determines the value of
its assets for purposes of apportioning interest expense for foreign tax credit
purposes, as previously described in Section 4(e) of the Agreement) or (ii) make
any election for any Interim Year or Post-Affiliation Year if such election
would have the effect of binding or requiring conformity by any member of the
AMEX Group for any taxable year.
28
<PAGE>
(b) LBH shall be obligated to inform and disclose fully to AMEX any actions
taken or transactions undertaken in an Interim Year or Post-Affiliation Year
which can reasonably be expected to affect in any material way the U.S. Federal
income tax liability of the AMEX Group for any Affiliation Year, including,
without limitation, carryforward or carryback claims for net operating or net
capital losses, investment tax credits, or foreign tax credits. AMEX shall
likewise inform LBH of any actions which could reasonably be expected to affect,
in any material way, the tax liability of LBH in an Affiliation Year.
(c) LBH shall promptly notify AMEX of any proposed adjustments which
arise out of an audit or examination of an Interim Year or Post-Affiliation Year
Tax Return of the LBH Group and which could reasonably be expected to affect in
any material way the U.S. Federal income tax liability of the AMEX Group for any
taxable year, including, without limitation, carryforwards or carrybacks of net
operating losses, investment tax credits or foreign tax credits, or which could
result in treatment of items that is inconsistent with the manner in which AMEX
filed its Tax Returns in respect of the LBH Group for such items in any
Affiliation Year. If such adjustment involves an administrative or judicial
proceeding, LBH shall keep AMEX fully informed of any material developments in
any such proceeding. LBH shall, in
29
<PAGE>
good faith, consult with AMEX concerning the appropriate actions or positions to
be taken throughout the course of such proceedings and shall allow AMEX to
participate jointly, at AMEX's own expense, in conjunction with LBH, in any such
proceeding. Except as otherwise provided in this Agreement, LBH, subject to
subsection (a) hereof, shall have full control over any judicial or
administrative proceeding relating solely to an Interim Year or Post-Affiliation
Year Tax Return of the LBH Group and ultimate discretion with respect to any
decisions to be made or the nature of any action to be taken in the course
thereof.
(d) The LBH Group shall not elect to be considered as not having been
a member of the AMEX Group for U.S. Federal income tax purposes or a member of a
combined group including one or more members of the AMEX Group for state or
local tax purposes for any taxable year or portion thereof during which the LBH
Group is eligible to file consolidated U.S. Federal income Tax Returns or
combined Tax Returns with one or more members of the AMEX Group, without the
prior written consent of AMEX.
Section 11. Certain Carryforwards and Carrybacks.
------------------------------------
If the LBH Group sustains losses or generates credits for Interim
Years which may be carried forward or
30
<PAGE>
back to an Affiliation Year and will generate an Income Tax Benefit, LBH may
request AMEX to file a Section 11 Claim with the IRS with respect to the U.S.
Federal income tax liability of the AMEX Group for such Affiliation Year. In
addition, if the LBH Group sustains losses or generates credits in a Post-
Affiliation Year which may be carried back to an Affiliation Year and will
generate an Income Tax Benefit, LBH may request AMEX to file a Section 11 Claim
with the IRS with respect to the U.5. Federal income tax liability of the AMEX
Group for such Affiliation Year. AMEX shall have sole discretion to reject or
accept all requests to file carryforward or carryback claims (except for foreign
tax credit or domestic source capital loss carryback claims) and file any
amended returns or claims for refund relating thereto, which discretion may be
exercised without regard to satisfying a standard of good faith or any other
standard provided for in this Agreement or elsewhere. With regard to requests to
file foreign tax credit or domestic source capital loss carryback claims to an
Affiliation Year, AMEX shall have the sole discretion, exercised in good faith,
to reject or accept such request. AMEX will be deemed to have satisfied this
standard if it rejects such request, because, among other reasons, it
determines, in good faith, that a member of the AMEX Group will incur a
detriment, financial or
31
<PAGE>
otherwise, in any year affected by such claim or such claim involves an
election, method or policy that is inconsistent with that used by the AMEX
Group.
If AMEX elects to file a Section 11 Claim, AMEX shall have full
control over the Section 11 Claim and may determine in its sole discretion the
nature of all actions to be taken in connection with seeking such refund. If
AMEX realizes an Income Tax Benefit with respect to a Section 11 Claim, AMEX
shall pay to LBH an amount equal to such Income Tax Benefit within five (5)
business days after AMEX realizes such Income Tax Benefit. It is understood that
in no event will such payment be due earlier than five (5) business days after
the later of (i) the date the taxable year of LBH from which such Section 11
Claim derived is closed, (ii) the date the taxable year of AMEX to which such
Section 11 Claim is carried is closed and (iii) the date the last taxable year
of AMEX from which a claim can be carried to the taxable year in which the
Section 11 Claim is carried is closed. However, if AMEX receives payment from
the IRS with respect to a Section 11 Claim prior to the date payment is due to
LBH under the preceding sentence, AMEX will pay such amount to an independent
escrow agent, selected by AMEX, in good faith. to be held in escrow and invested
in Treasury Bills until the date payment is due to LBH under the preceding
sentence, at which time the
32
<PAGE>
escrow agent shall pay the escrowed funds, both principal and income (as may be
adjusted as set forth hereinafter), to LBH; provided, however, that if the
-------- -------
Income Tax Benefit relating to the escrowed funds is reduced, at AMEX's
direction, the portion of the escrowed funds attributable to such reduction
shall be paid to AMEX. All escrow fees shall be borne by LBH. If AMEX files a
Section 11 Claim, LBH will indemnify AMEX for any additional taxes or loss of
tax benefits incurred by a member of the AMEX Group (including interest,
penalties and additions to tax) arising from such claim. AMEX shall also be
entitled to reimbursement from LBH for any reasonable external costs for
professional services incurred by AMEX which are attributable to the Section 11
Claim whether or not AMEX realizes an Income Tax Benefit.
Section 12. State Income Tax Liabilities.
----------------------------
(a) If any member of the AMEX Group and any member of the LBH Group
are required to file, or if AMEX elects, pursuant to Section 8, that a member of
the AMEX Group and a member of the LBH Group shall file, combined state or local
Tax Returns for any taxable years or where any state or local taxing authority
successfully asserts such a combined filing requirement, the allocation and
settlement of amounts due between the parties shall be governed, except as
provided otherwise in this Section 12, by Tax Instruction 400, which is
incorporated herein
33
<PAGE>
by reference. For purposes of this Agreement, Tax Instruction 400 will be
amended to provide that if an audit adjustment results in additional positive
taxable income on a combined state return that is attributable solely to AMEX,
in a jurisdiction in which AMEX has zero apportionment factors, AMEX will bear
tax on this additional positive taxable income, assuming an AMEX apportionment
percentage equal to the percentage reported by the AMEX Group (including
members of the LBH Group) on the relevant combined tax return as originally
filed.
(b) State and/or local amended Tax Returns or claims for refund which
are in the nature of Section 11 Claims shall be governed by the principles of
Section 11 of this Agreement.
(c) Tax Return preparation and tax computations under this Section 12
shall be governed by the principles of Section 8 of this Agreement.
(d) The obligation to furnish information with respect to Tax Returns
set forth in Sections 9 and 14 of this Agreement shall apply also to any
combined state and/or local Tax Returns. In addition, AMEX will inform LBH of
any developments with respect to all state or local combined tax audits that
could materially adversely affect LBH. LBH will be permitted to meet, jointly
with AMEX, with representatives of the relevant state or local taxing
authorities with respect to any such audit.
34
<PAGE>
(e) State and/or local administrative and judicial proceedings shall
be governed by the principles of Section 13.
(f) LBH shall be responsible for the payment to AMEX of the amount
allocated to the LBH Group pursuant to this Section 12 and shall indemnify and
hold AMEX harmless against all such amounts. AMEX shall indemnify and hold LBH
harmless from and against all other combined state and local income taxes in
excess of the amount determined in the previous sentence. Subject to the
principles of Section 13, to be entitled to indemnification under this Section,
either party shall give notice to the other party pursuant to Section 16 of
this Agreement, and a reasonable opportunity to respond, before making any
payment which would cause this indemnity provision to be applicable.
(g) AMEX shall have the sole authority to make determinations of
matters that are necessary to effectuate this Section 12.
Section 13. Administrative and Judicial Proceedings.
---------------------------------------
(a) AMEX and LBH hereby agree that during the course of the audit of
any taxable year to which the provisions of Section 7 may apply, they will in
good faith endeavor to discuss and resolve separately with the IRS district
agents any "LBH Issues" and "AMEX Issues"
35
<PAGE>
(defined below). LBH Issues are issues relating to items of income, gain,
loss, deduction, or credit that are attributable solely to the LBH Group and
that could not have material adverse consequences for the U.S. Federal income
tax liability of a member of the AMEX Group (other than a member of the LBH
Group) if resolved against the taxpayer, as determined in good faith by AMEX.
AMEX Issues are any other issues, including issues relating to Foreign
Attributes (as defined in Section 4(f) of the Agreement) of the LBH Group,
determinations as to which Foreign Attributes will be made by AMEX in good
faith.
In the event a Revenue Agent's Report ("RAR") is issued with respect
to such taxable year, and the RAR contains adjustments proposed with respect to
LBH Issues, at LBH's request, AMEX shall Protest (as defined in applicable U.S.
Treasury Regulations) the adjustments made with respect to LBH Issues. LBH will
prepare that portion of any Protest which it determines should be filed in
connection with any adjustment proposed with respect to LBH Issues and shall
limit such portion of the Protest to the defense of the specific LBH Issues
raised in the RAR, unless AMEX, in its sole discretion, determines otherwise.
After the filing of such Protest, AMEX and LBH shall jointly meet
with the representatives of the IRS responsible for disposing of the issues in
dispute and
36
<PAGE>
request the separate resolution of the AMEX and LBH Issues. They shall further
request that the IRS assign separate representatives to conduct any review of
or proceedings on their respective issues.
Regardless of whether the IRS agrees to resolve the issues affecting
each party or assign separate representatives to deal with the issues of each,
AMEX and LBH each will attend meetings and will prepare written presentations
to be made to the IRS regarding any adjustments proposed only with respect to
its respective issues. In accordance with the provisions of Section 9, AMEX and
LBH shall keep each other informed, as soon as possible, of any developments
and discussions at any such meetings concerning adjustments, whether or not
formally proposed, affecting the other party.
(b) For each Affiliation Year, AMEX shall have full control over all
AMEX Issues and all LBH Issues not otherwise settled by LBH at the audit or
Appellate Level of the IRS ("LBH Unsettled Issues") if the aggregate liability
for taxes, for which LBH would be liable hereunder ("Section 13 Taxes"), with
respect to all LBH Unsettled Issues for such Affiliation Year does not exceed
$1,000,000. If the aggregate liability for Section 13 Taxes with respect to LBH
Unsettled Issues for any Affiliation Year exceeds $1,000,000. LBH shall obtain
an evaluation of the LBH Unsettled Issues ("Evaluation")
37
<PAGE>
from an independent attorney experienced in the field of federal corporate
taxation and/or an independent attorney experienced in the field of state
corporate taxation or an independent attorney experienced in the fields of
federal corporate taxation and state corporate taxation, as relevant, who shall
be selected jointly by the parties. The Evaluation shall state, for the LBH
Unsettled Issues on an issue-by-issue basis, whether, in the opinion of the
attorney, there is a realistic possibility of the position being sustained on
its merits, as defined in 31 CFR Section 10.34(a)(4)(i) (Proposed Amendment,
dated October 8, 1992). Any discussions with respect to the Evaluation shall be
held with both parties jointly, and such attorney shall send a copy of the
Evaluation (including any drafts thereof) to both parties simultaneously.
If the Evaluation discloses any LBH Unsettled Issues which do not
meet the aforementioned standard, LBH shall be obligated to settle such issues
with the IRS at its own cost and expense within a reasonable period of time
after receipt of the Evaluation. If the aggregate liability for Section 13
Taxes with respect to the remaining LBH Unsettled Issues does not exceed
$1,000,000, LBH also shall be obligated to settle all such issues at its own
cost and expense within a
38
<PAGE>
reasonable period of time after receipt of the Evaluation.
(c) If, for any Affiliation Year, the aggregate liability for Section
13 Taxes with respect to the remaining LBH Unsettled Issues exceeds $1,000,000,
AMEX may select one of two options: (i) retain complete control over and
liability for the remaining LBH Unsettled Issues, or (ii) cede complete control
to LBH for the remaining LBH Unsettled Issues. In the event that AMEX selects
option (ii), LBH shall assume complete responsibility and liability for all LBH
Issues, and LBH shall be liable for, but AMEX shall control the resolution of,
(A) each AMEX Issue which is not expressly set forth in the RAR with respect to
such Affiliation Year ("New AMEX Issues") and (B) each AMEX Excess Issue. For
purposes of this Section 13, an "AMEX Excess Issue" shall mean an AMEX Issue
the tax liability for which (including any related interest, penalties and
additions to tax) exceeds any proposed deficiency set forth in the RAR with
respect to such AMEX Issue or, if less, the amount of any deficiency with
respect to such AMEX Issue in an agreement with the IRS reached during
Appellate proceedings ("IRS Agreement"). LBH's liability for an AMEX Excess
Issue shall be an amount equal to the excess, it any, of the actual liability
for taxes (including any related interest, penalties and additions to tax)
with respect to such
39
<PAGE>
AMEX Excess Issue over the proposed deficiency in the RAR or IRS Agreement, as
the case may be.
(d) In any case where judicial proceedings are instituted, AMEX shall
be entitled to select the forum for such judicial proceedings, unless AMEX
determines, in good faith, that such proceedings involve only LBH Unsettled
Issues. In such event, LBH shall be entitled to select the forum for judicial
proceedings. Each party shall bear the costs of litigation in respect of its
own issues, provided, however, that LBH shall bear the costs of litigation in
-------- -------
respect of New AMEX Issues.
Section 14. Books and Records.
-----------------
(a) Without limiting any of the provisions of this Agreement, each of
the parties agrees that it shall retain, until the expiration of the
appropriate statutes of limitations (including any extensions), copies of any
Tax Returns for any open periods during the Affiliation Years and for any
periods after such date which might be subject to adjustment under this
Agreement, supporting work schedules and other books, records or information
which may be relevant and that it will not destroy or otherwise dispose of such
records without first providing the other party with a reasonable opportunity
to review and copy the same. Without limiting the foregoing, LBH shall
cooperate with AMEX in identifying such books, records or information and so
retain or provide to AMEX
40
<PAGE>
such books, records or information as may be specified by AMEX in writing
within 180 days after the Closing Date. Any information obtained pursuant to
this Agreement, or any other information obtained by AMEX or LBH relating to
the tax position of either party shall be kept confidential by the parties
hereto, except if required by a taxing authority.
(b) LBH shall maintain and provide to AMEX upon request information
which will enable AMEX to determine, clarify or verify the adjusted book and
tax bases of the LBH stock held by AMEX, LBH's assets, both tangible and
intangible, including the stock of all directly and indirectly owned
subsidiaries of LBH which were members of the LBH Group at any time during the
Affiliation Years, and the adjusted book and tax bases of all assets, both
tangible and intangible, of such subsidiaries. In addition, LBH shall maintain
and provide to AMEX upon request all relevant information for the determination
of earnings and profits of any members of the LBH Group, in accordance with
applicable provisions of the Code and regulations thereunder.
(c) Without limiting the foregoing, each of the parties hereto agrees
that it shall retain copies of any books and records in its possession as
required by any record retention agreement in effect from time to time,
between AMEX and the IRS.
41
<PAGE>
Section 15. Interest. If any payments hereunder are not made when
--------
due, interest shall accrue on the unpaid amount at the underpayment rate in
effect under Section 6621 of the Code while such amount is outstanding.
Section 16. Notices. Any payment, notice or communication required or
-------
permitted to be given under this Agreement by either party hereto to the other
party shall be delivered personally or mailed by registered or certified mail,
first class postage prepaid and return receipt requested, at their respective
addresses as stated in this Agreement, to the attention of their respective Tax
Officers. Any payment, notice or other communication given by personal delivery
or mail shall be effective upon actual receipt. Notice deposited in the mail in
accordance with the terms hereof shall be deemed to have been delivered on the
third business day following such deposit. Any party may change any address to
which a payment, notice or other communication is to be made or given to it by
giving a notice of such change of address as provided above.
Section 17. Transfer of Smith Barney Receivables.
------------------------------------
In connection with the transfer by a member(s) of the LBH Group to AMEX
of certain participation rights due to such member(s) by Smith Barney, Harris
Upham & Co.
42
<PAGE>
Incorporated (now known as Smith Barney Shearson) ("Smith Barney") pursuant
to an Additional Purchase Price Based on Revenue Agreement dated July 31, 1993
and an Additional Purchase Price-Based on Profit Participation Agreement dated
July 31, 1993 (the "Smith Barney Receivables"), AMEX shall pay to LBH or credit
against the 1994 Tax Liability (as defined in Section 4(a)), an amount,
determined, in good faith, by AMEX, equal to (i) the excess of the sum of (A)
the fair market value of 100% of the Smith Barney Receivables on the date of
transfer, as determined by a valuation by James D. Wolfensohn Incorporated
and/or Lazard Freres & Co., not taking into account the value of such
receivables in respect of which $50,000,000 was received by AMEX in February of
1994 and (B) S50,000,000, over the tax basis of such member(s) in the Smith
Barney Receivables (the "Smith Barney Gain"), multiplied by the Highest Tax
Rate, within five (5) business days after the Closing Date and (ii) the actual
state tax liability attributable to the Smith Barney Gain, determined, in good
faith, by AMEX after referring to the relevant state tax returns of the LBH
Group as filed, net of the Federal income tax benefit therefor (assuming
Federal income taxes payable at the Highest Tax Rate) within twenty (20)
business days of AMEX's receipt of copies of said returns; provided, however,
-------- -------
if the Smith Barney Gain is contested by a taxing authority, the contest and
settlement of the dispute shall be within the sole
43
<PAGE>
authority of AMEX; and upon Final Settlement, a corresponding adjustment to the
payment hereunder (payable together with interest, if any) will be made. If the
actual state tax liability under (ii) consists, in whole or in part, of state
minimum tax, LBH shall pay to AMEX the amount of any minimum state tax
credit(s) it utilizes in subsequent years, up to the amount of such minimum tax
liability, determined in good faith by AMEX. LBH shall provide to AMEX copies
of all relevant state tax returns for years subsequent to that provided
pursuant to (ii) and any other information that AMEX, in good faith, requests
relating to such credit(s).
Section 18. LBH Payment for Stock Options and Restricted Stock
--------------------------------------------------
Benefits.
--------
LBH shall pay to AMEX on or before the Closing Date, or AMEX may
credit against any tax payable account, all unpaid amounts due to AMEX in
respect of stock options and restricted stock under Section 11.06 of the
Intercompany Agreement dated as of May 1, 1987, by and between AMEX and LBH
(then known as Shearson Lehman Brothers Holdings Inc.).
Section 19. Dual Consolidated Losses.
------------------------
(a) Notwithstanding any other provision of this Agreement or the
provisions of any closing agreement relating to Dual Consolidated Losses
(defined below) of any member of the LBH Group, including, without limitation,
the closing agreement between AMEX, LBH (then known
44
<PAGE>
as Shearson Lehman Hutton Holdings Inc.) and the IRS, dated June 11, 1991 (the
"Shearson Closing Agreement"), the closing agreement to be entered into between
AMEX, Mellon Bank Corporation ("Mellon") and the IRS pursuant to a letter
agreement, dated May 21, 1993, between Lehman Brothers Inc. (then known as
Shearson Lehman Brothers, Inc.) and Mellon, or any future closing agreement
entered into by AMEX, LBH and the IRS (collectively, the "Closing Agreements"),
LBH shall be solely liable for and indemnify AMEX against (i) any tax liability
together with interest, penalties and additions to tax (including, without
limitation, the interest charge described in or that results from the
application of Treas. Regs. Section 1.1503-2 or Treas. Regs. Section 1.1503-2A,
or interest determined under any of the Closing Agreements, including Section 7
of the Shearson Closing Agreement) that arises from any triggering event or
recapture under such regulations or Closing Agreements, applicable to an item
of deduction or loss of any current or former member of the LBH Group (a "Dual
Consolidated Loss") or from the receipt of any payment under this Section and
(ii) any costs or expenses (including, without limitation, attorneys' and
accountants' fees) incurred by AMEX in connection with determining, avoiding or
contesting such Recapture Taxes or enforcing the provisions of this Section.
All indemnifiable amounts described in this
45
<PAGE>
subsection (a) shall be collectively referred to as "Recapture Taxes".
(b) Recapture Taxes shall be determined by AMEX, based, in relevant
part, on the following assumptions: (i) the amount of gross income realized
from a triggering event or recapture of a Dual Consolidated Loss cannot be
offset by any losses, deductions or credits (other than those offsets actually
permitted under Treas. Regs. Section 1.1503-2(g)(vii)(B) or (C)(2), provided
that such regulations are applicable and all applicable requirements of the
regulations are fully satisfied by LBH); (ii) the amount of gross income, if
any, realized upon the receipt any payment under this Section cannot be offset
by any losses, deductions or credits; and (iii) the amounts described in (i)
and (ii) are taxable at the Highest Tax Rate and applicable effective State and
local tax rates.
(c) At LBH's request, AMEX shall cooperate ln good faith to enter
into a closing agreement with the IRS of the type described in Treas. Regs.
Section 1.1503-2(g)(2)(iv)(B)(2), substantially in the form of Exhibit B
(except as otherwise required by the IRS), to the effect that Dual Consolidated
Losses will not be recaptured as a result of the Spinoff. If such a closing
agreement is not entered into for any reason or LBH fails to realize
46
<PAGE>
the benefit of any closing agreement entered into, AMEX shall have no liability
to LBH under this Agreement.
(d) The parties shall provide each other with prompt notice of any
proposed adjustment by any taxing authority relating to Recapture Taxes, and
shall keep each other informed of material developments relating to such
adjustment and shall jointly deal with the taxing authority and jointly make
any decisions with regard to the contest or settlement of such adjustment. Upon
request by AMEX, LBH shall obtain an evaluation from an attorney experienced in
the field of international corporate taxation, who shall be selected jointly by
the parties, that conforms to the standard for an evaluation set forth in
Section 13(b). If such evaluation does not meet such standard, LBH shall be
obligated to settle such proposed adjustment(s) within a reasonable period of
time after the receipt of the evaluation.
Section 20. Counterparts. This Agreement may be executed in one or
------------
more counterparts, each of which shall be deemed an original, but all of the
counterparts together shall constitute one and the same instrument.
Section 21. Headings. Headings of sections in this Agreement are
--------
inserted for convenience of reference only and are not intended to be a part of
or to affect the meaning or interpretation of this Agreement.
47
<PAGE>
Section 22. Entire Agreement. This Agreement contains the entire
----------------
agreement between the parties hereto with respect to the subject matter hereof,
and supersedes all prior agreements, understandings, negotiations and
discussions, whether written or oral, of the parties. This Agreement may not be
amended or supplemented except by an instrument in writing executed by both
parties.
Section 23. Waivers. The observance of any term of this Agreement may
-------
be waived (either generally or in a particular instance and either
retroactively or prospectively) by the party entitled to enforce such term, but
any such waiver shall be effective only if in a writing signed by the party
against which such waiver is to be asserted. No delay on the part of any party
hereto in exercising any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any waiver on the part of any party hereto of any
right, power or privilege hereunder operate as a waiver of any other right,
power or privilege hereunder nor shall any single or partial exercise of any
right, power or privilege hereunder preclude any other or further exercise
thereof of any other right, power or privilege hereunder.
Section 24. Severability. If any one or more of the provisions of this
------------
Agreement shall, for any reason, be held to be invalid, illegal or
unenforceable in any
48
<PAGE>
respect, such invalidity, illegality or unenforceability shall not affect any
other provision of this Agreement.
Section 25. Binding Effect and Assignment; Right of Offset. This
----------------------------------------------
Agreement shall be binding upon, and shall inure to the benefit of, the parties
hereto and their respective successors and assigns; provided, however, that no
party may, without the consent of the other, assign any of its rights, benefits
or obligations hereunder. Notwithstanding any other provision in this
Agreement, AMEX shall have the right to offset against amounts due from AMEX to
LBH under this Agreement any amounts due from LBH to AMEX under this Agreement.
LBH will likewise have the right to offset against amounts due from LBH to AMEX
under this Agreement any amounts due from AMEX to LBH under this Agreement.
Section 26. Governing: Law. This Agreement shall be construed and
--------------
enforced in accordance with the laws of the State of New York (excluding any
conflicts-of-law rule or principle that might require the application of the
laws of another jurisdiction).
49
<PAGE>
IN WITNESS WHEREOF, the parties hereto have entered into this
Agreement as of the date first above written
AMERICAN EXPRESS COMPANY
By: /s/ Louise M. Parent
------------------------------------
Name: Louise M. Parent
Title: Executive Vice President and
General Counsel
LEHMAN BROTHERS HOLDINGS INC.
By:
-----------------------------------
Name:
Title:
50
<PAGE>
IN WITNESS WHEREOF, the parties hereto have entered into this
Agreement as of the date first above written.
AMERICAN EXPRESS COMPANY
By:
-----------------------------------
Name:
Title:
LEHMAN BROTHERS HOLDINGS INC.
By: /s/ Karen Manson
-----------------------------------
Name: Karen Manson
Title: Vice President
51
<PAGE>
EXHIBIT 10.3
INTERCOMPANY AGREEMENT
INTERCOMPANY AGREEMENT, dated as of May 27, 1994, between Lehman
Brothers Holdings Inc., a Delaware corporation ("Holdings"), and American
Express Company, a New York corporation ("American Express").
In contemplation of the distribution to holders of common shares of
American Express of all outstanding shares of common stock of Holdings held by
American Express, the parties hereto have agreed as follows:
SECTION 1: Definitions.
-----------
As used in this Agreement, the following terms shall have the meanings
ascribed to such terms below (all other initially capitalized terms used but not
otherwise defined herein shall have the meanings ascribed to such terms in the
Registration Statement):
"Actions" has the meaning specified in Section 3.1(a).
"Amexco" means American Express and/or its subsidiaries (other than
Holdings and its subsidiaries), as the context requires.
"AMEX Group" means the affiliated group of corporations (as
constituted from time to time), within the meaning of Section 1504 of the Code,
including American Express, of which American Express is the common parent.
"Balcor" means The Balcor Company and/or its subsidiaries, as the
context requires.
"Code" means the Internal Revenue Code of 1986, as amended. Any
reference to the Code and Treasury Regulations promulgated thereunder includes
any successor provision thereto.
"Comfort Letters" means, collectively, (i) the letter, dated March 9,
1986, of American Express to the Japanese Minister of Finance relating to the
activities in Japan of Shearson Lehman Brothers Asia, Inc., (ii) the letters,
dated May 2, 1991 and September 28, 1993 of
<PAGE>
American Express, in each case to Governor Mieno of the Bank of Japan, relating
to requests for current transaction accounts at the Bank of Japan for certain
LBHI entities and (iii) any and all other letters or agreements from Amexco to
similar effect.
"Common Stock" means the common stock, par value $0.10 per share, of
Holdings.
"Deferred Compensation Plans" means, collectively, LBHI's Executive
and Select Employees Plan and Voluntary Deferred Compensation Plan, the Lehman
Brothers Kuhn Loeb Deferred Compensation Plans and certain other deferred
compensation programs, as set forth in the DCP Guarantee.
"D&O Policy" means the 1991-1992 Amexco directors and officers
insurance policy.
"DCP Guarantee" means the guarantee of Amexco, dated August 10, 1990
pursuant to which Amexco agreed to guarantee certain payments under the Deferred
Compensation Plans.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"FCH" means First Capital Holdings Inc. and/or its subsidiaries, as
the context requires.
"FIFO Basis" means, with respect to any competing Unrelated Claims, a
basis whereby insurance proceeds are collected upon the success of a claim, with
each such successful claim being paid in full until the limit of the applicable
insurance policy is met.
"Guarantees" means, collectively, the WFC Guarantee and the DCP
Guarantee.
"Highest Tax Rate," with respect to any type of income for a
particular taxable year, means the highest Federal income tax rate that would
apply to that particular type of income for such year.
"Intercompany Long Distance Agreements" means, collectively, the
Agreements, dated July 29, 1993 and
2
<PAGE>
October 14, 1993, respectively, among Amexco and LBHI, relating to the Long
Distance Agreements.
"IRS" means the U.S. Internal Revenue Service.
"LB Co-tenants" means, collectively, Lehman Brothers Inc., Lehman
Government Securities Inc. and Lehman Commercial Paper Inc.
"LBHI" means Holdings and/or its subsidiaries, as the context
requires.
"LBHI Group" means each of (A) Holdings, its subsidiaries and any
predecessor corporations and (B) any corporation which at any time would have
been or is entitled to file a consolidated U.S. Federal Income Tax Return with
any of the corporations described in (A) as the common parent.
"L/D Letter" means the letter in the form attached hereto as Exhibit A
relating to the Intercompany Long Distance Agreements.
"Long Distance Agreements" means, collectively, (i) the Tariff 12,
Option 3 and the 1993 Agreement for Virtual Telecommunications Network Services
between American Express and American Telephone and Telegraph Company, and (ii)
the Contract Tariff and Agreement for Special Customer Telecommunications
Services, dated October 14, 1994, between American Express and MCI
Telecommunications Corporation.
"Losses" has the meaning specified in Section 3.1(a).
"1987 Intercompany Agreement" means the Intercompany Agreement, dated
as of May 1, 1987, by and between American Express and Holdings, together with
all exhibits and attachments thereto.
"Non-discriminatory Basis" means, with respect to any modification,
elimination or reduction in any benefits or services granted or provided to LBHI
employees and Amexco employees, a basis for such modification, elimination or
reduction which treats as one group LBHI employees and Amexco employees.
3
<PAGE>
"Pre-Distribution Basis" means, with respect to any services, a basis
for the determination and allocation of the costs and expenses incurred in
providing such services which is substantially the same as that used by the
parties hereto in connection with the same or substantially similar services
immediately prior to the Distribution Date.
"Prospectuses" means the Distribution Prospectus and the Offering
Prospectus, whether preliminary, interim or final, as amended or supplemented.
"Registration Statement" means the Registration Statement of Holdings
on Form S-1 (File No. 33-52977) covering the registration of the Distribution
and the Offering, together with all exhibits, schedules and pre- and post-
amendments thereto.
"Related Claims" means claims against an Amexco insurance policy made
by each of Amexco and/or its insured parties, on the one hand, and LBHI and/or
its insured parties, on the other hand, filed in connection with Losses suffered
by each of Amexco and LBHI arising out of the same underlying event(s).
"Securities Act" means the Securities Act of 1933, as amended.
"SRI Plan" means the Sale and Retention Incentive Plan adopted by The
Boston Company in connection with the sale thereof by Holdings.
"Tax Allocation Agreement" shall mean the Tax Allocation Agreement,
dated May 27, 1994, between American Express and Holdings.
"Tax Return" shall mean any tax return (including any amended return),
report, information return, election, notice or other document filed or to be
filed with a governmental taxing authority, including any schedules or related
or supporting information.
"TIC Agreement" means the Restated and Amended Agreement of Tenants-
In-Common, dated as of May 27, 1994, by and among American Express, American
Express Bank Ltd., American Express Travel Related Services Company, Inc. and
the LB Co-tenants.
4
<PAGE>
"Unrelated Claims" means claims against an Amexco insurance policy
made by each of Amexco and/or its insured parties, on the one hand, or LBHI
and/or its insured parties, on the other hand, filed in connection with losses
suffered by each of Amexco and LBHI arising out of unrelated and separate
events.
"WFC" means the premises located at 3 World Financial Center, New
York, New York 10285.
"WFC Guarantee" means the guarantees of Amexco set forth in the
indentures governing the terms of the WFC Indebtedness pursuant to which Amexco
agreed to guarantee the obligations of the LB Co-tenants under the WFC
Indebtedness.
"WFC Indebtedness" means, collectively, the notes representing the
approximately $649 million aggregate original principal amount of indebtedness
issued by the LB Co-tenants and the $175 million original principal amount of
indebtedness issued by American Express, in each case to finance the WFC.
SECTION 2: Allocation of Costs and Expenses; Other Agreements.
--------------------------------------------------
2.1 Costs and Expenses. Holdings shall pay for all fees, costs and
------------------
expenses incurred in connection with the Distribution, the Offering and the
other Concurrent Transactions, including, but not limited to, any and all fees,
costs and expenses related to (a) the preparation, printing and filing of the
Registration Statement, including all fees and expenses of complying with
applicable federal, state or foreign securities laws and domestic or foreign
securities exchange rules and regulations, together with fees and expenses of
counsel retained to effect such compliance, (b) the preparation and negotiation
of all of the documentation related to all of the Concurrent Transactions, (c)
the preparation, printing and distribution of each of the Prospectuses, (d) the
preparation and execution or filing of any and all further documents,
agreements, forms, applications, contracts or consents associated with the
Concurrent Transactions and (e) the listing of the Common Stock on any domestic
or foreign securities exchange, except that American Express shall pay for all
of the fees, costs and
5
<PAGE>
expenses incurred in connection with (i) the preparation and delivery of a legal
opinion from Skadden, Arps, Slate, Meagher & Flom to American Express regarding
certain tax matters relating to the Distribution, (ii) the preparation and
filing of the Section 355 Ruling Request made by American Express to the IRS
regarding the Distribution, including all fees and expenses of counsel
associated therewith, (iii) the preparation, negotiation and delivery to
American Express of written opinions from each of Lazard Freres & Co. and James
D. Wolfensohn Incorporated, financial advisors to American Express, regarding
the Distribution (together with certain fees associated with the Distribution
payable to such financial advisors as described in the Registration Statement)
and (iv) the merger of Lehman Capital Corporation with and into Holdings.
2.2 Other Agreements. In connection with the Registration
----------------
Statement, Holdings shall:
(a) furnish to American Express such number of copies of the
Registration Statement and Prospectuses (including any documents referred to
therein) as American Express may reasonably request and a copy of any and all
transmittal letters or other correspondence with the Securities and Exchange
Commission (the "SEC") or any other governmental agency or self-regulatory body
or other body having jurisdiction (including any securities exchange) relating
to the Offering or the Distribution;
(b) use its best efforts to qualify the Common Stock covered by the
Registration Statement (collectively, the "Securities") for offer and sale under
the securities, "blue sky" or similar laws of such jurisdictions as American
Express shall reasonably request and use its best efforts to obtain all
appropriate registrations, permits and consents required in connection
therewith, except that Holdings shall not for any such purpose be required to
qualify generally to do business as a foreign corporation in any jurisdiction
wherein it is not so qualified, or to subject itself to taxation in any such
jurisdiction, or to consent to general service of process in any such
jurisdiction;
(c) furnish to American Express, addressed to it, dated the
Distribution Date, a "cold
6
<PAGE>
comfort" letter signed by the independent public accountants who have certified
Holdings' financial statements included in the Registration Statement, covering
substantially the same matters with respect to the Registration Statement (and
the Prospectuses) as are customarily covered in accountants' letters delivered
to underwriters in underwritten public offerings of securities;
(d) furnish unlegended certificates representing ownership of the
Securities being sold and distributed in such denominations as shall be
requested by American Express;
(e) promptly inform American Express (i) of the date on which the
Registration Statement or any post-effective amendment thereto becomes effective
and (ii) of any request by the SEC, any securities exchange, government agency,
self-regulatory body or other body having jurisdiction for any amendment of or
supplement to the Registration Statement or Prospectuses;
(f) until such time as all of the Securities have been disposed of in
accordance with the intended method of disposition by American Express set forth
in the Registration Statement (and the expiration of any prospectus delivery
requirements in connection therewith), keep effective and maintain any
registration, qualification or approval obtained in connection with the Offering
or the Distribution, and amend or supplement the Registration Statement or
Prospectuses to the extent necessary in order to comply with applicable
securities laws and immediately notify American Express of any such amendment or
supplement;
(g) use its best efforts to have the Securities listed on the
New York Stock Exchange, Inc.; and
(h) promptly notify American Express of the happening of any event as
a result of which the Registration Statement or either Prospectus includes an
untrue statement of any material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading, and prepare, file as appropriate and furnish to American Express as
promptly as possible as many copies as American Express shall request of a
supplement thereto or
7
<PAGE>
amendment thereof which shall correct such untrue statement or eliminate such
omission.
SECTION 3: Business and Registration Statement
-----------------------------------
Indemnification.
---------------
3.1 General Cross Indemnification. (a) American Express agrees to
-----------------------------
indemnify and hold harmless LBHI and each of the officers, directors, employees
and agents of LBHI against any and all costs and expenses arising out of third
party claims (including, without limitation, attorneys' fees, interest,
penalties and costs of investigation or preparation for defense), judgments,
fines, losses, claims, damages, liabilities, demands, assessments and amounts
paid in settlement (collectively, "Losses"), in each case, based on, arising out
of, resulting from or in connection with any claim, action, cause of action,
suit, proceeding or investigation, whether civil, criminal, administrative,
investigative or other (collectively, "Actions"), based on, arising out of,
pertaining to or in connection with (i) any action or inaction (A) on or prior
to the Distribution Date, on the part of Amexco or any of its officers,
directors, employees, fiduciaries or agents, if such action or inaction does not
involve or relate to any business conducted by LBHI and (B) subsequent to the
Distribution Date, on the part of Amexco or any of its officers, directors,
employees, fiduciaries or agents, (ii) any breach by American Express of this
Agreement or any breach by Amexco of any agreement between Amexco and LBHI and
(iii) any item described on Schedule A hereto; provided, however, that this
-------- -------
indemnification shall not apply to the role of American Express or its officers
in connection with the administration of the SRI Plan.
(b) Holdings agrees to indemnify and hold harmless Amexco and each of
the officers, directors, employees and agents of Amexco against any and all
Losses, in each case, based on, arising out of, resulting from or in connection
with any Actions, based on, arising out of, pertaining to or in connection with
(i) any action or inaction on the part of LBHI or any of its officers,
directors, employees, affiliates, fiduciaries or agents, (ii) any breach by
Holdings of this Agreement or any breach by LBHI, of any agreement between
Amexco and LBHI, (iii) any item described on Schedule B hereto
8
<PAGE>
and (iv) the use of the Marks (as defined in the 1987 Intercompany Agreement) by
LBHI.
Except as otherwise provided in Schedule B with respect to clause
(iii) of Section 3.1(b), the indemnity agreement contained in this Section 3.1
shall be applicable whether or not any Action or the facts or transactions
giving rise to such Action arose prior to, on or subsequent to the date of this
Agreement.
3.2 Indemnification by Holdings With Respect to the Registration
------------------------------------------------------------
Statement. Holdings agrees to indemnify and hold harmless Amexco, each of its
- ---------
officers and directors, and each person, if any, who controls any of the
foregoing persons within the meaning of Section 15 of the Securities Act from
and against any and all Losses, joint or several, to which they or any of them
may become subject, under the Securities Act, the Exchange Act or other federal
or state statutory law or regulation, at common law or otherwise, as and when
incurred, insofar as such Losses (or Actions in respect thereof) arise out of,
or are based upon, any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement, or in the Prospectuses,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or arise out of or are based upon any
violation by Holdings of the Securities Act, any blue sky laws, securities laws
or other applicable laws of any state or country in which the securities covered
by the Registration Statement are offered or distributed and relating to action
or inaction required of Holdings in connection with such offering or
distribution, and agrees to promptly reimburse each such indemnified party, as
and when incurred, for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such Losses; provided,
--------
however, that (i) Holdings will not be liable in any such case to the extent
- -------
that any such Losses arise out of, or are based upon, any such untrue statement
or alleged untrue statement or omission or alleged omission made therein in
reliance upon and in conformity with written information furnished to Holdings
by Amexco specifically for use in connection with the preparation thereof and
(ii) such indemnity with respect to the Prospectuses shall not inure to the
benefit of Amexco (or any person controlling
9
<PAGE>
Amexco) if the person asserting any such Losses purchased or received Common
Stock from Amexco and such person did not receive a copy of the applicable
Prospectus at or prior to the confirmation of the sale of the Common Stock (or,
in the case of the Distribution Prospectus, at or prior to the time delivery
thereof is required by law) to such person in any case where such delivery is
required by the Securities Act and the untrue statement or omission of a
material fact contained in the Prospectus was corrected in the final version of
such Prospectus, unless such failure to deliver such final Prospectus was a
result of noncompliance by Holdings with its obligations under this Agreement.
3.3 Indemnification by American Express With Respect to the
-------------------------------------------------------
Registration Statement. American Express agrees to indemnify and hold harmless
- ----------------------
LBHI, each of its directors, each of its officers who signed the Registration
Statement, and each person, if any, who controls LBHI within the meaning of
Section 15 of the Securities Act from and against any and all Losses, joint or
several, to which they or any of them may become subject, under the Securities
Act, the Exchange Act or other federal or state statutory law or regulation, at
common law or otherwise, as and when incurred, insofar as such Losses (or
Actions in respect thereof) arise out of, or are based upon, any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, or in the Prospectuses, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that the same was made
therein in reliance upon and in conformity with written information furnished to
Holdings by Amexco specifically for use in connection with the preparation
thereof, or arise out of or are based upon any violation or alleged violation by
American Express of the Act, any blue sky laws, securities laws or other
applicable laws of any state or country in which the securities covered by the
Registration Statement are offered or distributed and relating to action or
inaction required of American Express in connection with such offering or
distribution, and agrees to promptly reimburse each such indemnified party, as
and when incurred, for any legal or other expense reasonably incurred by
10
<PAGE>
them in connection with investigating or defending any such Losses.
3.4 Procedure for Indemnification. Promptly after receipt by an
-----------------------------
indemnified party under this Section 3 of notice of the commencement of any
Action, such indemnified party will, if a claim in respect thereof is to be made
against the indemnifying party under this Section 3, notify the indemnifying
party in writing of the commencement thereof, but the omission to so notify the
indemnifying party will not relieve it from any liability which it may have to
any indemnified party otherwise than under this Section 3. In case any such
Action is brought against any indemnified party, and it notifies the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein and, to the extent that it may elect by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof, with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
-------- -------
defendants in any such Action include both the indemnified party and the
indemnifying party and either (i) the indemnifying party or parties and the
indemnified party or parties mutually agree or (ii) representation of both the
indemnifying party or parties and the indemnified party or parties by the same
counsel is inappropriate under applicable standards of professional conduct due
to actual or potential differing interests between them, the indemnified party
or parties shall have the right to select separate counsel to assume such legal
defenses and to otherwise participate in the defense of such Action on behalf of
such indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of its election so to assume the defense of such
Action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 3 for any legal
or other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
counsel in connection with the assumption of legal defenses in accordance with
the proviso to the next preceding sentence, (ii) the indemnifying party shall
not have employed counsel satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of commencement of the
Action or (iii) the
11
<PAGE>
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. If the indemnified party
employs separate counsel, it will not enter into any settlement agreement which
is not approved by the indemnifying party, such approval not to be unreasonably
withheld. If the indemnifying party so assumes the defense thereof, it may not
agree to any settlement of any such claim or action as the result of which any
remedy or relief, other than monetary damages for which the indemnifying party
shall be responsible hereunder, shall be applied to or against the indemnified
party, without the prior written consent of the indemnified party. If the
indemnifying party does not assume the defense thereof, it shall be bound by any
settlement to which the indemnified party agrees, irrespective of whether the
indemnifying party consents thereto. In any Action as to which the indemnifying
party has assumed the defense thereof with counsel satisfactory to the
indemnified party, the indemnified party shall continue to be entitled to
participate in the defense thereof, with counsel of its own choice, but, except
as set forth above, the indemnifying party shall not be obligated hereunder to
reimburse the indemnified party for the costs thereof.
The parties hereto shall, and shall cause their respective
subsidiaries to, cooperate with each other in a reasonable manner with respect
to access to unprivileged information and similar matters in connection with any
Action.
3.5 Contribution. If the indemnification provided for in this
------------
Section 3 shall for any reason be unavailable to any indemnified party in
respect of any Loss, then each indemnifying party shall, in lieu of indemnifying
such indemnified party, contribute to the amount paid or payable by such
indemnified party as a result of such Loss in such proportion as shall be
appropriate to reflect the relative fault of the indemnifying party or parties,
on the one hand, and the indemnified party or parties, on the other hand, with
respect to the facts and circumstances which resulted in such Loss, as well as
any other relevant equitable considerations. With respect to the
indemnification provided for in Section 3.2 and 3.3, the relative fault shall be
determined by reference to whether the untrue or alleged untrue statement of a
material fact or omission or al-
12
<PAGE>
leged omission to state a material fact relates to information supplied by the
indemnifying party on the one hand or the indemnified party on the other, the
intent of the parties and their relative knowledge, access to information and
opportunity to correct or prevent such statement or omission, but not by
reference to Amexco's or any other indemnified party's stock ownership in
Holdings. The amount paid or payable by an indemnified party as a result of any
Loss shall be deemed to include any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any such
Action. With respect to any Loss described in Section 3.2 or 3.3, no person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
The provisions of this Section 3 are for the benefit of, and are
intended to create third party beneficiary rights in favor of, each of the
indemnified parties referred to herein.
SECTION 4: Separate Return Provision.
-------------------------
(a) Notwithstanding any other provision in this Agreement or in the
Tax Allocation Agreement, in the event there is a final determination ("Final
Determination"), pursuant to Section 1313 of the Code, that Holdings is not a
member of the AMEX Group because of its failure to satisfy the requirements
under Section 1504 of the Code for any taxable year, commencing on or after
August 10, 1990 and ending on or before the Distribution Date ("LBHI
Consolidation Years"), in which American Express filed a consolidated U.S.
Federal income tax return which included Holdings as a member ("Separate Return
Event"), the obligations of the parties will be as set forth below:
American Express will be liable for and will indemnify LBHI against
Incremental Taxes (as defined below) determined, in good faith, by American
Express, of the AMEX Group and the LBHI Group, and related interest and
penalties, if any, less Holdings' share of the liability for such items.
Holdings will be liable for and will indemnify Amexco against (i) fifty percent
(50%) of
13
<PAGE>
the first One Hundred Million Dollars ($100,000,000) of Incremental Taxes and
(ii) a share of all such interest and penalties as its share of Incremental
Taxes under (i) bears to total Incremental Taxes.
"Incremental Taxes" means additional U.S. Federal income taxes
actually incurred by the AMEX Group and the LBHI Group for the LBHI
Consolidation Years, which result from the Separate Return Event, or such other
amounts as are paid in final settlement of an assertion of a Separate Return
Event, all as determined, in good faith, by American Express. Such Incremental
Taxes will be computed in good faith by American Express by comparing the U.S.
Federal income tax liability of the AMEX Group for the year(s) in question,
which would have been payable if the LBHI Group were consolidated, with the sum
of (i) the actual U.S. Federal income tax liability of the AMEX Group for the
year(s) in question and (ii) the actual U.S. Federal income tax liability of the
LBHI Group in filing a return(s) separately from the AMEX Group for the year(s)
in question.
(b) If any member of the LBHI Group utilizes a Tax Benefit Item (as
defined below) in connection with a Separate Return Event, in any year, Holdings
shall pay to American Express the value of such Tax Benefit Item, as set forth
below, with related interest received thereon from the IRS up to the amount of
Amexco's share of the Incremental Taxes and related interest and penalties, all
as determined in good faith by American Express. A "Tax Benefit Item" is any
item of loss, deduction or credit of any member of the LBHI Group that was not
used by the AMEX Group or LBHI Group as a result of a Separate Return Event as
set forth in (a) above, as determined in good faith by American Express. The
value of Tax Benefit Items shall be equal to the sum of (i) the credits so
utilized (or to the extent they cannot be so utilized, their utilization as
deductions, to the extent allowable by law, valued at the amount of the credits
so utilized multiplied by the Highest Tax Rate) and (ii) deductions and losses,
not otherwise included in (i), so utilized multiplied by the Highest Tax Rate.
The use of Tax Benefit Items in any taxable year will be deemed to be
proportionate to each party's share of the liability for Incremental Taxes and
related interest and penalties, as described above and determined in good faith
by American Express.
14
<PAGE>
Holdings shall act in good faith to reduce the taxes of the parties,
by, among other items, taking actions, in good faith, after consultation with
American Express, to have the LBHI Group utilize the Tax Benefit Items as soon
as feasible on a current, carryforward or carryback basis. Such actions shall
include amending Tax Returns and filing claims for refund as appropriate.
Notwithstanding anything in this Agreement or the Tax Allocation Agreement to
the contrary, if a Separate Return Event occurs, the LBHI Group shall not be
entitled to carry back or carry forward any Tax Benefit Items to the
consolidated return of which American Express is the common parent.
(c) Payments for Incremental Taxes and related interest and penalties
shall be made no later than one (1) business day before the due date for payment
upon the Final Determination or final settlement of the items in question.
Payments for Tax Benefit Items and related interest shall be made within five
(5) business days after a Final Determination or final settlement of the items
in question, provided, however, if any member of the LBHI Group is paid or
-------- -------
receives credit for such items before such determination or settlement, Holdings
shall pay the value of such items and related interest to American Express
promptly after receipt or credit, which will be subject to adjustment upon such
determination or settlement.
(d) Each of the parties shall give notice to the other party within
five (5) business days of any notice or communication from a taxing authority
relating to the issue of a possible Separate Return Event. American Express
will control, in good faith, all audits, litigation and other administrative and
judicial proceedings and other matters relating to such issue and any issues
relating to the ability of the LBHI Group to file a separate consolidated U.S.
Federal income tax return with Holdings as common parent ("LBHI
Reconsolidation"). Holdings shall fully cooperate with all good faith requests
made by Amexco in respect of any such proceedings or matters and shall not allow
any member of the LBHI Group to make any communication, take any position or
file any Tax Return relating to these issues without the prior written approval
of American Express, which approval will be exercised in good faith. American
Express will keep Holdings informed of any material developments
15
<PAGE>
in any such proceedings, and will, in good faith, consult with Holdings
concerning the appropriate actions and positions to be taken in such
proceedings. Notwithstanding the foregoing, American Express will have ultimate
discretion, to be exercised in good faith, with respect to any decisions to be
made or the nature of any actions to be taken in the course thereof. In
furtherance of the foregoing, in the event of a Separate Return Event, at the
direction of American Express, Holdings shall file a request and use its best
efforts to obtain IRS approval for the LBHI Reconsolidation at the earliest
possible date.
(e) Each of the parties shall have the right to review the basis for
all determinations and actions taken by the other party, and each party and its
designated agents shall have full access to the information and data which
formed the basis therefor. Pursuant to the good faith request of American
Express, Holdings shall provide American Express, from time to time, with
detailed data and other information relating to the proposed and actual
utilization of Tax Benefit Items. Each of the parties agrees that it shall
retain, until the expiration of the appropriate statutes of limitation
(including any extensions), copies of any Tax Returns for any open periods
pertaining to the subject matter of this Section 4, supporting work schedules
and other books, records or information which may be relevant and that it will
not destroy or otherwise dispose of such records without first providing the
other party with a reasonable opportunity to review and copy the same. Any
information so obtained shall be kept confidential by the parties hereto, except
if required by a taxing authority or for the filing of a Tax Return.
(f) If any payments under this Section 4 are not made when due,
interest shall accrue on the unpaid amount at the underpayment rate in effect
under Section 6621 of the Code while such amount is outstanding.
(g) The obligations of either party under this Section 4 shall
automatically terminate upon the institution by the other party of proceedings
to be adjudicated a bankrupt or insolvent, or the consent by it to the
institution of bankruptcy or insolvency proceedings against it, or the filing by
it of a petition or answer or consent seeking reorganization or relief under the
16
<PAGE>
United States Bankruptcy Code or any other applicable Federal or State law, or
the consent by it to the filing of any such petition or to the appointment of a
receiver, liquidator, assignee, trustee, sequestrator (or similar official) of
such party or of any substantial part of its property, or the making by it of an
assignment for the benefit of creditors, or the admission by it, in writing, of
its inability to pay debts as they generally become due, or the taking of
corporate action by such party in furtherance of such action.
SECTION 5: Termination of 1987 Intercompany Agreement; Provision of
--------------------------------------------------------
Information.
-----------
5.1 Termination of 1987 Intercompany Agreement. American Express and
------------------------------------------
Holdings hereby agree that the 1987 Intercompany Agreement is superseded in its
entirety by this Agreement and that the 1987 Intercompany Agreement, including
the license of the Marks contained therein, is in all respects of no further
force or effect. Holdings shall, and shall cause each of its subsidiaries to,
execute all additional documents which American Express may reasonably request,
as being required in order to perfect, maintain, defend or terminate any right
of any party in the Marks in any country of the world, as determined by American
Express in its sole discretion; provided that Holdings shall not be so obligated
--------
if the execution of such document(s) would result in material expense to or
liability of LBHI.
5.2 Provision of Information. From and after the Distribution Date,
------------------------
Holdings shall promptly provide to American Express such financial and other
information with respect to Holdings, which information is reasonably necessary
in order for Amexco to comply with its reporting obligations under the Exchange
Act. From and after the Distribution Date, American Express shall promptly
provide to Holdings such financial and other information with respect to
American Express, which information is reasonably necessary in order for LBHI to
comply with its reporting obligations under the Exchange Act.
17
<PAGE>
SECTION 6: Inapplicability of Restrictions on Transfer.
-------------------------------------------
American Express and Holdings hereby agree that all restrictions on
the sale, assignment, pledge or other transfer of the Common Stock held by
Amexco, pursuant to all agreements between them as entered into prior to the
date hereof, are of no further force or effect.
SECTION 7: Insurance.
---------
7.1 Return of Premiums. Holdings shall be entitled to receive upon
------------------
receipt by American Express or directly from its insurers (a) approximately
$312,000 representing a return of premiums for property insurance as a result of
the sale of Shearson to Primerica Corporation, (b) approximately $1.2 million or
20% of the total returned premiums, whichever is greater, representing a return
of premiums for commutation of the 1986 to 1991 National Indemnity Directors and
Officers policy, and (c) any additional return of premiums received by Amexco as
a result of the sale of Shearson, The Boston Company, SLHMC or as a result of
the Distribution (other than any return of premiums related to LBHI's ceasing to
participate in Amexco's 1993-94 comprehensive crime insurance policy); each of
which amounts if received by American Express shall be paid promptly following
receipt.
7.2 Amexco Policies. On and after the Distribution Date, American
---------------
Express shall, in connection with any LBHI claim under an Amexco insurance
policy, instruct the applicable insurance carrier to negotiate with, accept
proof of loss and pay such claim directly to LBHI. The parties hereto
acknowledge that claims arising out of an occurrence or event which occurred
prior to the Distribution Date may be filed by LBHI against "occurrence-based"
insurance policies of Amexco following the Distribution Date, in accordance with
the terms of such policies. Amexco and LBHI each agree to provide necessary
releases to resolve claim settlements.
7.3 Collection. Amexco and LBHI will use their reasonable best
----------
efforts to collect under their respective available insurances before seeking
indemnification, where allowed.
18
<PAGE>
7.4 Workers Compensation. LBHI shall take all actions necessary to
--------------------
secure a program of workers' compensation insurance of the scope customarily
obtained by corporations similarly situated, which program shall be in effect no
later than the Distribution Date. LBHI agrees that each workers' compensation
claim under Amexco's workers' compensation program brought by a current or
former LBHI employee shall be transferred to the LBHI workers' compensation
program no later than the Distribution.
7.5 Related Claims. In the event that Amexco and LBHI file Related
--------------
Claims, each of Amexco and LBHI shall receive a pro rata amount of the available
insurance proceeds, based on the relationship the loss incurred by each such
party bears to the total loss to both such parties from the event(s) underlying
the Related Claims.
7.6 Unrelated Claims. To the extent that the limits of an insurance
----------------
policy preclude payment in full of Unrelated Claims filed by Amexco and LBHI,
the insurance proceeds available shall be paid to Amexco and/or LBHI on a FIFO
Basis.
7.7 Optima/FCH. Notwithstanding anything in this Agreement to the
----------
contrary, in the event a global settlement of the D&O Policy under which certain
claims relating to the activities of FCH and certain claims relating to Amexco's
Optima business are pending, is made with Amexco and LBHI, whereby the carriers
of such policy pay an aggregate amount for all outstanding claims thereunder
without allocating the payment to specific claims (i) Amexco shall receive from
the proceeds of such settlement an aggregate amount of $7,993,630 and (ii) LBHI
shall receive either directly from such carriers or from Amexco to the extent
such payments are first made to Amexco by the carriers the remaining proceeds of
such settlement.
7.8 WFC. Each of Amexco and LBHI shall provide insurance relating to
---
the WFC to the extent required by the TIC Agreement.
This Section 7 shall not apply to insurance matters relating to
employee benefit arrangements.
19
<PAGE>
SECTION 8: Certain Litigation.
------------------
8.1 Balcor W/C Claims. Holdings hereby assumes responsibility for
-----------------
managing and paying any workers' compensation claims (i) which have been brought
by current and former employees of Balcor and (ii) which were covered under AIG
policies during the three-year period from September 30, 1987 to September 30,
1990 (each a "Balcor W/C Claim").
8.2 FCH Claims. American Express hereby agrees that, notwithstanding
----------
anything in this Agreement to the contrary, LBHI shall have the right to make
any and all claims on behalf of Amexco against the D&O Policy or any similar
Amexco policy with respect to any Losses relating to Item 2 on Schedule B.
8.3 Amexco, on the one hand, and LBHI, on the other hand, shall pay
for the respective fees, costs and expenses incurred by them in connection with
a pending matter regarding the Money Market Preferred Stock of American Express.
8.4 Each of Amexco, on the one hand, and LBHI, on the other hand,
shall pay for 50% of all Losses arising out of the Wilkins Action that is
-------
currently pending.
SECTION 9: Credit Union/Check Cashing Services.
-----------------------------------
On and after the Distribution Date, American Express, at no cost to
American Express, will cooperate with LBHI with a view to enabling LBHI to be
named as a party under the agreement with respect to credit union services
provided at the WFC. American Express will not object to a representative of
Holdings serving on the board of directors of such credit union.
SECTION 10: American Express Guarantees; Other Matters.
------------------------------------------
10.1 Guarantee Fee. In consideration for American Express
-------------
maintaining the WFC Guarantee, commencing on the last day of the fiscal quarter
of Holdings in which the Balcor Notes are paid in full and on the last day of
each fiscal quarter thereafter, Holdings shall pay to American Express a fee
equal to the product of (a)
20
<PAGE>
0.15625% multiplied by (b) LBHI's (including the LB Co-tenants and their
successors and assigns under such indebtedness) proportionate share of the daily
weighted average balance of the principal amount (or, in the case of
indebtedness issued with original issue discount, the accreted value) of WFC
Indebtedness outstanding during such fiscal quarter. In consideration for
American Express maintaining the DCP Guarantee, commencing on the last day of
the fiscal quarter of Holdings in which the Distribution occurs and on the last
day of each fiscal quarter thereafter, Holdings shall pay to American Express a
fee equal to the product of (x) 0.15625% multiplied by (y) the daily weighted
average amount due under the Deferred Compensation Plans during such fiscal
quarter. If LBHI delivers to Amexco an unconditional release of Amexco's
obligations under a Guarantee, signed by all of the parties to such Guarantee
and such other parties as Amexco may reasonably determine is required to validly
effect such a release, in form and substance reasonably satisfactory to Amexco,
then LBHI's fee obligation with respect to such Guarantee pursuant to this
Section shall terminate, subject to LBHI paying to American Express any
theretofore unpaid fees in respect of such Guarantee for any fiscal quarter
prior to and including the fiscal quarter in which such release is delivered.
10.2 WFC Indemnification. In connection with the financing of the LB
-------------------
Co-tenants' interests in WFC, American Express has unconditionally guaranteed
the obligations of the LB Co-tenants to third parties under the WFC Indebtedness
(collectively, the "Obligations"). In addition, the LB Co-tenants have certain
obligations to make payments pursuant to the TIC Agreement. LBHI agrees to
indemnify and hold harmless American Express in respect of (a) all amounts that
American Express shall pay on behalf of the LB Co-tenants under the TIC
Agreement and (b) all amounts paid (including all penalties and interest and
reasonable fees and expenses) by American Express based on or resulting from any
such guarantees. This indemnification shall be unaffected by any disposition by
any of the LB Co-tenants of all or any part of their interests in the WFC
(except to Amexco or any wholly-owned subsidiary of Amexco) and by any
limitation of liability or limitations as to recourse against the LB Co-tenants
provided in any of the Obligations.
21
<PAGE>
10.3 LB Guarantee. Lehman Brothers Inc. ("LB")has issued a Sole
------------
Recourse Note and Loan Agreement to American Express, dated December 4, 1987, in
the principal amount of $74,917,500. At or prior to the Distribution, Holdings
shall execute and deliver to American Express its guarantee and indemnity of the
foregoing obligations of LB, such guarantee to be in such form as reasonably
requested by American Express and such guarantee to provide that payment will be
made by Holdings without regard to and notwithstanding any subordination or
limited recourse or other provisions in the notes limiting the obligations of
LB.
10.4 Stock Options and Restricted Stock Unit Awards. Under the 1979
----------------------------------------------
and 1989 Long-Term Incentive Plans of American Express, certain officers and key
employees of LBHI have received nonqualified stock options to purchase American
Express common shares (2 individuals) and restricted stock unit awards (3
individuals). Holdings shall pay to American Express upon the exercise of such
nonqualified stock options, amounts equal to the income realized for federal
income tax purposes by the individual holders of such nonqualified stock options
as a result of such event (option exercise), multiplied by the highest marginal
federal corporate income tax rate in effect at such time. Holdings shall pay to
American Express, upon the expiration of the respective restricted periods of
such restricted stock unit awards, amounts equal to $41.48 per share multiplied
by the number of shares issued under such restricted stock unit awards (such
amounts being subject to adjustment in accordance with the provisions of such
plans and such awards). It is understood that the amounts so paid represent
amounts paid to purchase American Express common shares for the employees of
LBHI, and any reporting with respect to such payments for tax purposes shall be
consistent therewith.
10.5 Restricted Stocks Awards. Amounts pre-paid to American Express
------------------------
by LBHI with respect to stock awards granted under the 1989 Long-Term Incentive
Plans of American Express will be refunded to LBHI by American Express following
the cancellation of such awards on the Distribution Date as soon as practicable
following such date.
22
<PAGE>
10.6 National Medical Examiners Matter. In connection with Aetna
---------------------------------
Life Insurance Company's successful suit against National Medical Examiners,
American Express received a recovery as part of their participation in the Aetna
Contract. LB's share of the payment will be mutually agreed by LB and American
Express reflecting LB's proportionate share of the claims experience.
10.7 SRI Plan. Holdings shall provide American Express, from time to
--------
time or as otherwise requested, with all documents and related information it
has in its possession, and otherwise cooperate with American Express in order to
enable American Express to properly administer the SRI Plan.
10.8 Transfer Taxes. Other than with respect to the transfer of
--------------
floors 21, 24, 27, 28 and 29 of American Express Tower from American Express
Travel Related Services Company, Inc. and American Express Bank Ltd. to Holdings
(as to which Transfer Taxes are addressed elsewhere), Holdings hereby agrees to
reimburse and indemnify Amexco for 50% of any New York State Real Estate
Transfer Tax, New York State Real Property Transfer Gains Tax and/or New York
City Realty Transfer Tax (together, "Transfer Taxes"), as determined by Amexco,
in good faith, that are imposed with respect to the Distribution; and Amexco
shall reimburse and indemnify Holdings for 50% of any Transfer Taxes imposed
with respect to the Distribution.
If the amount of any Transfer Tax is contested by a taxing authority,
Amexco and Holdings shall consult and participate together therein although the
ultimate determination as to the contest and settlement of the dispute shall be
within the sole authority of Amexco; and upon Final Settlement (as that term is
defined in the Tax Allocation Agreement), a corresponding adjustment to the
payment hereunder (payable together with interest, if any) will be made.
10.9 FDC Reimbursement. To the extent that American Express is
-----------------
requested to reimburse First Data Corporation ("FDC") under that certain letter
agreement, dated May 9, 1993, between FDC and American Express relating to
Integrated Systems Technologies Corporation and The Boston Company, Holdings
shall be notified by American Express with respect thereto and after a reason-
23
<PAGE>
able opportunity to verify the validity and basis of the FDC request, shall
reimburse American Express for valid payments made to FDC under the letter, up
to $12,000,000 ("Holdings Reimbursements"). Reimbursements shall be made to
American Express by Holdings no later than 30 days after notice is given to
Holdings by American Express with respect to such reimbursement. It is further
agreed that Holdings may communicate directly with FDC. Finally, to the extent
FDC reimburses American Express for amounts which American Express has received
Holdings Reimbursements, American Express shall pay such FDC monies to Holdings.
SECTION 11: Communications.
--------------
11.1 Long Distance Carriers. On and after the Distribution Date,
----------------------
LBHI shall continue to be covered by the Long Distance Agreements. In
connection therewith, American Express will consent to permit LBHI to be so
covered under such agreements. All costs and charges incurred under the Long
Distance Agreements shall be allocated pursuant to the terms of the Intercompany
Long Distance Agreements and the L/D Letter. On or prior to the Distribution
Date, American Express and Holdings shall execute the L/D Letter.
11.2 LBHI is in the process of obtaining for itself at the WFC
telephone equipment and services comparable to Amexco's Systems 85 and is in the
process, with Amexco's assistance, of migrating from the Systems 85 to a NYNEX
Intellipath system. On and after the Distribution Date, (i) for a period of six
months thereafter, American Express will continue to provide to LBHI such
assistance and services as LBHI shall reasonably require or request to complete
such migration in a timely manner, and (ii) LBHI shall continue to pay Amexco on
a Pre-Distribution Basis for those Amexco Systems 85 services or equipment which
it obtains or utilizes.
SECTION 12: Purchasing.
----------
LBHI will continue to be covered under the IBM Master Volume Purchase
Agreement, dated September 23, 1991 (and as updated and renewed by letter
agreement dated January 22, 1992), between International Business
24
<PAGE>
Machines Corporation ("IBM") and American Express, through September 30, 1994
and thereafter Amexco shall have no obligation to LBHI in connection therewith.
In connection therewith, American Express shall consent to permit LBHI to (i) be
so covered and (ii) obtain IBM's compliance therewith.
SECTION 13: Temporary Clerical Services.
---------------------------
American Express will use its reasonable efforts to enter into, on or
prior to the Distribution Date, purchasing agreements for temporary clerical
services with one or more vendors, which agreements would permit LBHI, until May
1, 1995, to be covered thereunder in its own capacity with direct obligations to
the temporary clerical services agencies and not through American Express,
provided that (a) after May 1, 1995 Amexco shall have no obligation to LBHI in
- --------
connection therewith and (b) American Express shall not be required to enter
into any such agreement if, after exercising its reasonable efforts, American
Express determines that permitting LBHI to be so covered under such agreement
would directly increase American Express' costs thereunder.
SECTION 14: Technology Transfer and Licensing Agreements.
--------------------------------------------
Amexco and LBHI hereby agree to enter into, on or about the
Distribution Date, certain licensing and transfer of ownership agreements,
regarding certain software and other related materials acquired or developed by
LBHI which are to be licensed or transferred to Amexco, by entering into
separate Supplements to the Master Intercompany Intellectual Property and
Technology Sharing Agreement, dated as of January 2, 1991, among certain Amexco
entities and LBHI.
SECTION 15: Aviation Services.
-----------------
LBHI shall have the right to continue to use Amexco aircraft and
related aviation services until June 30, 1994 on the same basis as it did prior
to the Distribution Date and after June 30, 1994, Amexco shall have no
obligation to LBHI in connection therewith. The costs
25
<PAGE>
and expenses incurred in connection with providing such services shall be
determined and allocated on a Pre-Distribution Basis. Until December 31, 1994
and upon LBHI's request, the staff of Amexco's aviation department will provide,
at no additional cost to LBHI, advice to LBHI relating to obtaining alternative
aviation services.
SECTION 16: Equal Employment Opportunity Reporting.
--------------------------------------
On or before September 1, 1994, Holdings shall cause the appropriate
federal agency or agencies to be notified that as of the Distribution Date, LBHI
will no longer file EEO-1 reports through or in conjunction with Amexco. Other
than with respect to its reporting obligations for 1994 and prior years,
following the Distribution Date, LBHI shall no longer be required to deliver
EEOC-1 reports to Amexco.
SECTION 17: Employee Scholarships.
---------------------
LBHI will continue to participate in the Amexco scholarship grant
selection program (the "SGP") for 1994. Thereafter, LBHI shall no longer
participate in the SGP. On and after the Distribution Date, Holdings will
assume responsibility for the cost and administration of all scholarships
granted to LBHI applicants under the SGP, including those selected under the
1994 SGP. Until September 30, 1997, American Express shall provide LBHI with
such support and assistance as it may reasonably request or require to complete
such transfer of responsibilities to LBHI in an appropriate manner. Holdings
and American Express shall jointly approve any communications to LBHI
scholarship recipients related to such change in responsibilities.
SECTION 18: Comfort Letters.
---------------
LBHI acknowledges that Amexco intends to withdraw the Comfort Letters
and agrees that Amexco shall not be liable in any way to LBHI as a result of
such withdrawal.
SECTION 19: Cultural Affairs.
----------------
26
<PAGE>
Until December 31, 1994, LBHI shall be entitled to continue to
participate in all Amexco sponsored cultural events and programs and receive
culture card benefits on the same basis as it did prior to the Distribution
Date. American Express and Holdings shall cooperate in obtaining an appropriate
credit for LBHI in respect of each Amexco grant or sponsorship in which LBHI
participated and which continues after 1994.
SECTION 20: Philanthropy.
------------
LBHI has paid its proportionate share of 1994 contributions to the
American Express Foundation and will continue to participate in the American
Express Foundation programs for 1994 and American Express will cause the
American Express Foundation to allocate funds in 1994 to LBHI sponsored projects
on the same basis as prior to the Distribution Date; provided, however, that to
-------- -------
the extent appropriate, on and after the Distribution Date, gifts or grants made
in 1994 will be made jointly in the names of designees of American Express and
Holdings.
SECTION 21: General Provisions.
------------------
21.1 Force Majeure. Neither American Express nor Holdings shall be
-------------
liable for any failure to perform, or for any delay in performance attributable
to any cause or circumstance beyond its reasonable control. Each such party,
however, shall be obligated to take all commercially reasonable action necessary
in order to resume the services which it provides to the other hereunder in a
prompt fashion.
21.2 Notices. Unless otherwise indicated, all notices required under
-------
the terms and provisions hereof shall be in writing, either delivered by hand,
by mail (postage prepaid), or by facsimile and any such notice shall be
effective when received at the address specified below.
27
<PAGE>
If to LBHI: Lehman Brothers Holdings Inc.
Three World Financial Center
New York, New York 10285
Attention: Chief Legal Officer
Facsimile No. (212) 528-6265
If to Amexco: American Express Company
American Express Tower
World Financial Center
200 Vesey Street
New York, New York 10285
Attention: General Counsel
Facsimile No. (212) 267-9061
or at such other address as such party may designate from time to time by notice
duly given in accordance with the provisions hereof.
21.3 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
-------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING
EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF.
21.4 Relationship. Neither this Agreement nor any transaction
------------
hereunder shall be deemed to create a partnership or joint venture, affiliate or
agency relationship between the parties.
21.5 Amendment; Waivers. No failure or delay on the part of any
------------------
party hereto in exercising any power or right hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right or
power, or any abandonment or discontinuance of steps to enforce such a right or
power, preclude any other or further exercise thereof or the exercise of any
other right or power. No waiver of any provision of this Agreement nor consent
to any departure therefrom shall in any event be effective unless the same shall
be in writing, and then such waiver or consent shall be effective only in the
specific instance and for the purpose for which given. This Agreement shall not
be amended or modified unless such amendment or modification is in writing and
signed by American Express and Holdings.
21.6 Successors and Assigns. Neither party hereto may assign or
----------------------
transfer its rights and obligations under this Agreement without the other's
written consent.
28
<PAGE>
This Agreement shall inure to the benefit of and be binding upon the parties
hereto, their respective successors and their permitted assigns.
21.7 Severability. In the event that any part of this Agreement is
------------
declared by any court or other judicial or administrative body to be null, void
or unenforceable, said provision shall survive to the extent it is not so
declared, and all of the other provisions of this Agreement shall remain in full
force and effect.
21.8 Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which shall constitute the
same instrument.
21.9 Entire Agreement. This Agreement contains the entire
----------------
understanding of the parties hereto with respect to its subject matter. Except
as otherwise expressly set forth herein, this Agreement supersedes all prior
agreements and understandings between American Express and Holdings with respect
to the subject matter hereof. The parties hereto acknowledge, however, that
there exist other independent agreements between them regarding other subject
matter, each of which shall remain in full force and effect in accordance with
its respective terms, unless otherwise terminated or modified hereby.
21.10 Further Assurances, Etc. Subject to the specific terms of this
------------------------
Agreement, each of American Express and Holdings shall (a) make, execute,
acknowledge and deliver such other instruments and documents and take all such
other actions as may be reasonably required in order to effectuate the purposes
of this Agreement and to consummate the transactions contemplated hereby and (b)
endeavor to resolve any matter arising as a result of the cessation of the
parent/subsidiary relationship of American Express and Holdings which is not
specifically addressed in this Agreement or any contemporaneous agreement.
21.11 Section Headings. The section headings and subheadings in this
----------------
Agreement are for purposes of reference only and shall not limit or otherwise
affect the meaning hereof.
29
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly signed as of the date
first above written by the duly authorized representatives of the parties
hereto.
AMERICAN EXPRESS COMPANY LEHMAN BROTHERS HOLDINGS INC.
By /s/ M. P. Monaco By /s/ Karen M. Muller
---------------------------------- ------------------------------
Name: Michael P. Monaco Name: Karen M. Muller
Title: Executive Vice President Title: Vice President
and Chief Financial Officer
<PAGE>
EXHIBIT 10.10
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER STATE SECURITIES LAWS. THE
TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE
CONDITIONS SPECIFIED IN THE INVESTMENT AGREEMENT DATED AS OF APRIL 15, 1987 BY
AND AMONG AMERICAN EXPRESS COMPANY ("PARENT") AND LEHMAN BROTHERS HOLDINGS INC.
(FORMERLY NAMED SHEARSON LEHMAN HUTTON HOLDINGS INC.) ("COMPANY"), ON THE ONE
HAND, AND NIPPON LIFE INSURANCE COMPANY (INVESTOR"), ON THE OTHER HAND (THE
"INVESTMENT AGREEMENT"), THE 1990 AGREEMENT, DATED AS OF JUNE 12, 1990, BY AND
BETWEEN PARENT AND INVESTOR, AS ADOPTED BY COMPANY IN THE COMPANY AGREEMENT,
DATED AS OF AUGUST 10, 1990 AND THE 1994 AGREEMENT, DATED AS OF APRIL 28, 1994,
BY AND AMONG PARENT, COMPANY AND INVESTOR AND IN SECTION 12 HEREOF. A COPY OF
SUCH CONDITIONS WILL BE FURNISHED BY THE COMPANY TO THE HOLDER HEREOF UPON
WRITTEN REQUEST AND WITHOUT CHARGE. THESE SECURITIES MAY NOT BE RESOLD OR
TRANSFERRED UNLESS SUCH CONDITIONS ARE COMPLIED WITH AND UNLESS REGISTERED OR
EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
APPLICABLE STATE SECURITIES LAWS.
WARRANT
to Purchase
3,304,880
Shares
of
Common Stock (par value $.10 per share)
of
LEHMAN BROTHERS HOLDINGS INC.
Initial Price: $35.0500 per share
This certifies that, for value received, NIPPON LIFE INSURANCE
COMPANY, a mutual insurance company organized under the laws of Japan
("Investor"), or its registered assigns (each, a "Holder") is entitled to
purchase,
<PAGE>
subject to the provisions of this Warrant and the 1990 Agreement (as defined
below), from LEHMAN BROTHERS HOLDINGS INC., a Delaware corporation ("Company"),
at any time on or after the date hereof and on or before the Expiration Date, an
aggregate of 3,304,880 (the "Warrant Number") fully paid and nonassessable
shares of Common Stock, par value $.10 per share ("Company Common Stock"), of
the Company at a purchase price of $35.0500 per share (as adjusted from time to
time as hereinafter set forth, the "Warrant Price"). As used herein, the term
"Expiration Date" means with respect to all or a portion of the Warrant, as the
case may be, the earlier of (i) the date fixed for acceleration of this Warrant
by the Company pursuant to Section 10 and (ii) April 15, 1996. The Warrant
Number and the Warrant Price are subject to adjustment from time to time as
hereinafter set forth. This Warrant is the Company Warrant referred to in
Section 2.2 of the 1990 Agreement, dated as of June 12, 1990, by and between
Parent and Investor, as adopted by the Company in the Company Agreement, dated
as of August 10, 1990 (the 1990 Agreement, as adopted, the "1990 Agreement").
Section 1. Definitions. Except as otherwise specified herein,
------------
defined terms herein, which may be
2
<PAGE>
identified by the capitalization of the first letter of each principal word
thereof, have the meanings assigned to them in the 1990 Agreement, as in effect
on the date hereof.
Section 2. Exercise of Warrant. Subject to the provisions hereof,
--------------------
this Warrant may be exercised, at any time on or after the date hereof and on or
before the Expiration Date (with respect to all or that portion of the Warrant
which has not been accelerated pursuant to Section 10), by presentation and
surrender hereof to Company at the office or agency of Company maintained for
that purpose pursuant to Section 11 (the "Warrant office or agency"), with the
Purchase Form annexed hereto duly executed and accompanied by payment to
Company, for the account of Company, of the Warrant Price for the number of
shares specified in such form. Company shall keep at the Warrant office or
agency a register for the registration and registration of transfer of Warrants.
The Warrant Price for the number of shares of Company Common Stock specified in
the Purchase Form shall be payable in United States dollars by bank check or
wire transfer of immediately available funds to an account designated by Company
for this purpose.
3
<PAGE>
Upon receipt by Company of this Warrant at the Warrant office or
agency, in proper form for exercise, Holder shall be deemed to be the holder of
record of the shares of Company Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of Company shall then be closed or
that certificates representing such shares of Company Common Stock shall not
then be actually delivered to Holder. Company shall pay all expenses, and any
and all stamp or similar taxes that may be payable in connection with the
preparation, issuance and delivery of stock certificates under this Section 2,
except that Company shall not be required to pay any tax which may be payable in
respect off any transfer involved in the issue and delivery of shares of Company
Common Stock in a name other than that of Holder who shall have surrendered the
same in exercise of the subscription right evidenced thereby and no such
issuance or delivery shall be made unless and until the person requesting such
issuance has paid to the Company such tax or has established to the satisfaction
of the Company that such tax has been paid.
All shares of Company Common Stock issued upon exercise of this
Warrant shall be duly authorized and validly issued, fully paid and
nonassessable.
4
<PAGE>
Section 3. Reservation of Shares; Preservation of Rights of Holder.
--------------------------------------------------------
Company hereby agrees that there shall be reserved for issuance and/or delivery
upon exercise of this Warrant, free from preemptive rights, such number of
shares of authorized but unissued or treasury shares of Company Common Stock, or
other stock or securities deliverable pursuant to paragraph (g) of Section 7, as
shall be required for issuance or delivery upon exercise of this Warrant.
Company further agrees that it will not, by amendment of its Restated
Certificate of Incorporation or through reorganization, consolidation, merger,
dissolution or sale of assets, or by any other voluntary act, avoid or seek to
avoid the observance or performance of any of the covenants, stipulations or
conditions to be observed or performed hereunder by the Company. Without
limiting the generality of the foregoing, Company agrees that before taking any
action which would cause an adjustment reducing the Warrant Price below the then
par value of Company Common Stock issuable upon exercise hereof, Company will
from time to time take all such action which may be necessary in order that
Company may validly and legally issue fully paid and nonassessable shares of
such Company Common Stock at the Warrant Price as so adjusted.
5
<PAGE>
Section 4. Fractional Shares. Company shall not be required to issue
------------------
fractional shares of Company Common Stock upon exercise of this Warrant but
shall pay for such fraction of a share in cash or by certified or official bank
check at the Warrant Price.
Section 5. Loss of Warrant. Upon receipt by Company of evidence
----------------
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
this Warrant, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Warrant, if mutilated, Company will execute and deliver a new Warrant of like
tenor and date. Any such new Warrant executed and delivered shall constitute an
additional contractual obligation on the part of Company, whether or not this
Warrant so lost, stolen, destroyed or mutilated shall be at any time enforceable
by anyone.
Section 6. Rights of the Investor. Holder shall not, by virtue
-----------------------
hereof, be entitled to any rights of a shareholder in Company.
Section 7. Antidilution Provisions. The Warrant Price and the
------------------------
Warrant Number shall be subject to adjustment from time to time as provided in
this Section 7.
6
<PAGE>
(a) In case Company shall pay or make a dividend or other
distribution on any class of capital stock of Company in Company Common Stock,
the Warrant Price in effect at the opening of business on the day following the
date fixed for the determination of stockholders entitled to receive such
dividend or other distribution shall be reduced by multiplying such warrant
Price by a fraction of which the numerator shall be the number of shares of
Company Common Stock outstanding at the close of business on the date fixed for
such determination and the denominator shall be the sum of such number of shares
and the total number of shares constituting such dividend or other distribution,
such reduction to become effective immediately after the opening of business on
the day following the date fixed for such determination. In the event that such
distribution is not so made, (i) the Warrant Price shall again be adjusted to be
the Warrant Price which would then be in effect if such date fixed for
determination of stockholders entitled to receive such distribution had not been
fixed, and (ii) Holder shall have the option of reversing any exercise of this
Warrant made after such record date in contemplation of such distribution (and
thereby re-establishing this Warrant to the extent so exercised) by returning to
7
<PAGE>
Company any Company Common Stock, cash and other securities or property which
had been received on such exercise; provided, that the option set forth in this
--------
clause (ii) shall be exercisable only prospectively by a written instrument
delivered to Company at the time this Warrant is so exercised, which instrument
shall state that Holder revokes such exercise of this Warrant if such
distribution is not so made. For the purposes of this paragraph (a), the number
of shares of Company Common Stock at any time outstanding shall not include
shares held in the treasury of Company but shall include shares issuable in
respect of scrip certificates issued in lieu of fractions of shares of Company
Common Stock. Company will not pay any dividend or make any distribution on
shares of Company Common Stock held in the treasury of Company.
(b) In case Company shall issue rights or warrants to all holders of
Company Common Stock entitling them to subscribe for or purchase shares of
Company Common Stock at a price per share less than (i) if Company shall have
outstanding at the time of such issuance and for a period of at least 30 trading
days immediately prior to such issuance Public Company Stock, the Average Market
Price of Company Common Stock or (ii) if otherwise, the Fair Market Value per
share of Company Common
8
<PAGE>
Stock, on the date fixed for the determination of stockholders entitled to
receive such rights or warrants, the Warrant Price in effect at the opening of
business on the day following the date fixed for such determination shall be
reduced by multiplying such Warrant Price by a fraction of which the numerator
shall be the number of shares of Company Common Stock outstanding at the close
of business on the date fixed for such determination plus the number of shares
of Company Common Stock which the aggregate of the offering price of the total
number of shares of Company Common Stock so offered for subscription or purchase
would purchase at such Average Market Price or Fair Market Value, as the case
may be, and the denominator shall be the number of shares of Company Common
Stock outstanding at the close of business on the date fixed for such
determination plus the number of shares of Company Common Stock so offered for
subscription or purchase, such reduction to become effective immediately after
the opening of business on the day following the date fixed for such
determination. In the event that such issuance is not so made, (i) the Warrant
Price shall again be adjusted to be the Warrant Price which would then be in
effect if such date fixed for determination of stockholders entitled to receive
such
9
<PAGE>
rights or warrants had not been fixed, and (ii) Holder shall have the option of
reversing any exercise of this Warrant made after such record date in
contemplation of such issuance (and thereby re-establishing this Warrant to the
extent so exercised) by returning to Company any Company Common Stock, cash and
other securities or property which had been received on such exercise;
provided, that the option set forth in this clause (ii) shall be exercisable
- --------
only prospectively by a written instrument delivered to Company at the time this
Warrant is so exercised, which instrument shall state that Holder revokes such
exercise of this Warrant if such issuance is not so made. For the purposes of
this paragraph (b), the number of shares of Company Common Stock at any time
outstanding shall not include shares held in the treasury of Company. Company
agrees that it will not issue any rights or warrants in respect of shares of
Company Common Stock held in the treasury of Company. For purposes of this
paragraph (b), "Fair Market Value" per share of Company Common Stock on any date
means the fair market value thereof on the date in question, which either (A)
shall be determined jointly by Company and Investor or (B) if Investor and
Company cannot agree, shall be rea-
10
<PAGE>
sonably determined in good faith by the Board of Directors of Company.
(c) In case outstanding shares of Company Common Stock shall be
subdivided into a greater number of shares of Company Common Stock, the Warrant
Price in effect at the opening of business on the day following the date upon
which such subdivision becomes effective shall be proportionately reduced, and
conversely, in case outstanding shares of Company Common Stock shall each be
combined into a smaller number of shares of Company Common Stock, the Warrant
Price in effect at the opening of business on the day following the date upon
which such combination becomes effective shall be proportionately increased,
such reduction or increase, as the case may be, to become effective immediately
after the opening of business on the day following the date upon which such
subdivision or combination becomes effective.
(d) In case Company shall, by dividend or otherwise, distribute to
all holders of Company Common Stock evidences of its indebtedness or assets
(including securities, but excluding (i) any rights or warrants referred to in
paragraph (b) of this section 7, (ii) any dividend or distribution paid in cash
or other property out of the Adjusted Retained Earnings of Company and
11
<PAGE>
(iii) any dividend or distribution referred to in paragraph (a) of this Section
7), then either (at the option of Company) (I) Company shall elect to include in
such distribution Holder (as of the record date for such distribution) as if
Holder had exercised this Warrant for Company Common Stock immediately prior to
such record date (such exercise assumed to be made at the Warrant Price in
effect without regard to the adjustment provided in the following clause (II)),
or (II) the Warrant Price shall be adjusted so that the same shall equal the
price determined by multiplying the Warrant Price in effect immediately prior to
the close of business on the date fixed for the determination of stockholders
entitled to receive such distribution by a fraction of which the numerator shall
be the Fair Market Price per share of Company Common Stock on the date fixed for
such determination less the fair market value (as determined jointly by Company
and Investor, or an independent, internationally recognized investment banking
firm selected by them if they are unable to reach agreement) on such date of the
portion of the assets or evidences of indebtedness so distributed applicable to
one share of Company Common Stock and the denominator shall be the Fair Market
Price per share of Company Common Stock, such adjustment to
12
<PAGE>
become effective immediately prior to the opening of business on the day
following the date fixed for the determination of stockholders entitled to
receive such distribution. In the event that such distribution is not so made,
(i) the Warrant Price shall again be adjusted to be the Warrant Price which
would then be in effect if such date fixed for determination of stockholders
entitled to receive such distribution had not been fixed, and (ii) Holder shall
have the option of reversing any exercise of this Warrant made after such record
date in contemplation of such distribution (and thereby re-establishing this
Warrant to the extent so exercised) by returning to Company any Company Common
Stock, cash and other securities or property which had been received on such
exercise; provided, that the option set forth in this clause (ii) shall be
--------
exercisable only prospectively by a written instrument delivered to Company at
the time this Warrant is so exercised, which instrument shall state that Holder
revokes such exercise of this Warrant if such distribution is not so made. If
Company makes an election under clause (I) of this paragraph (d) with respect to
any such distribution payable on this Warrant (an "Elected Company Dividend"),
Company may in lieu of such distribution elect to pay the fair market value
13
<PAGE>
(determined as provided above) of such Elected Company Dividend in cash (the
"Cash Equivalent") or elect to defer payment of such Elected Company Dividend or
the Cash Equivalent to the Holder and hold such amount (and any amounts
subsequently paid or earned in respect of such deferred Elected Company Dividend
or Cash Equivalent) in trust for the Holder until this Warrant is exercised;
provided, that payment to the Holder shall be made promptly upon exercise; and
- --------
provided, further, that any such deferred Elected Company Dividend or Cash
- -------- -------
Equivalent applicable to any portion of this Warrant shall not be payable and
shall be released to Company and no longer held in trust for the Holder with
respect to such portion after this Warrant has expired. Any cash to be held in
trust for Holder as a deferred Elected Company Dividend or Cash Equivalent shall
be invested by Company in U.S. government treasury bills. For purposes of this
paragraph (d): "Adjusted Retained Earnings" shall mean the retained earnings of
Company as of the date of such dividend or distribution plus $500,000,000 and
----
any dividend paid after the Closing Date (which has been debited against
retained earnings) on any preferred stock of Company outstanding on the Closing
Date; and "Fair Market Price" per share of Company Common Stock on any date
14
<PAGE>
means the fair market value thereof on the date in question, determined (i)
jointly by Company and Investor or (ii) if Investor and Company cannot so agree,
by an independent, internationally recognized investment banking firm selected
by Investor and Company which determination in any such case shall include the
value attributable to any assets or securities to be distributed to the holders
of Company Common Stock.
(e) The reclassification (including any reclassification upon a
consolidation or merger in which Company is the continuing corporation, but not
including any transactions for which an adjustment is provided in paragraph (g)
below) of Company Common Stock into securities including other than Company
Common Stock shall be deemed to involve (i) a distribution of such securities
other than Company Common Stock to all holders of Company Common Stock (and the
effective date of such reclassification shall be deemed to be "the date fixed
for the determination of stockholders entitled to receive such distribution" and
"the date fixed for such determination" within the meaning of paragraph (d) of
this Section 7), and (ii) a subdivision or combination, as the case may be, of
the number of shares of Company Common Stock outstanding immediately prior to
such reclassification
15
<PAGE>
into the number of shares of Company Common Stock outstanding immediately
thereafter (and the effective date of such reclassification shall be deemed to
be "the date upon which such subdivision becomes effective" or "the date upon
which such combination becomes effective," as the case may be, and "the date
upon which such subdivision or combination becomes effective" within the meaning
of paragraph (c) of this Section 7).
(f) Company may make such reductions in the Warrant Price, in
addition to those required by paragraphs (a), (b), (c), (d) and (e) of this
Section 7, as it considers to be advisable in order that any event treated for
Federal income tax purposes as a dividend of stock or stock rights shall not be
taxable to the recipients.
(g) In case of any consolidation of Company with, or merger of
Company into, any other Person, any merger of another Person into Company (other
than a merger which does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of Company Common Stock) or any
sale or transfer of all or substantially all of the assets of Company, the
Person formed by such consolidation or resulting from such merger or which
acquires such assets, as the case
16
<PAGE>
may be, shall execute and deliver to the Holder a new Warrant satisfactory in
form and substance to Holder, providing that the Holder shall have the right
thereafter, during the period such Warrant shall be outstanding to exercise such
Warrant only into the kind and amount (if any) of securities, cash and other
property receivable upon such consolidation, merger, sale or transfer by a
holder of the number of shares of Company Common Stock of the Company into which
such Warrant might have been exercised immediately prior to such consolidation,
merger, sale or transfer. If the holders of the Company Common Stock may elect
from choices the kind or amount of securities, cash and other property
receivable upon such consolidation, merger, sale or transfer, then for the
purpose of this Section 7 the kind and amount of securities, cash and other
property receivable upon such consolidation, merger, sale or transfer shall be
deemed to be the choice specified by Holder, which specification shall be made
by Holder by the later of (i) 20 Business Days after Holder is provided with a
final version of all information required by law or regulation to be furnished
to holders of Company Common Stock concerning such choice, or if no such
information is required, 20 Business Days after Company notified Holder of all
material
17
<PAGE>
facts concerning such specification and (ii) the last time at which holders of
Common Stock are permitted to make their specification known to Company. If
Holder fails to make any specification, Holder's choice shall be deemed to be
whatever choice is made by a plurality of holders of Common Stock not affiliated
with Company or the other Person to the merger or consolidation or, if no such
holders exist, as specified by the Board of Directors of the Company in good
faith. Such new Warrant shall provide for adjustments which, for events
subsequent to the effective date of such new Warrant, shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Section
7. The above provisions of this paragraph (g) shall similarly apply to
successive consolidations, mergers, sales or transfers.
(h) Whenever there shall be any change in the Warrant Price
hereunder, then there shall be an adjustment (to the nearest hundredth of a
share) in the number of shares of Company Common Stock purchasable upon exercise
of this Warrant, which adjustment shall become effective at the time such change
in the Warrant Price becomes effective and shall be made by multiplying the
number of shares of Company Common Stock purchasable upon exercise of this
Warrant immediately before such change
18
<PAGE>
in the Warrant Price by a fraction the numerator of which is the Warrant Price
immediately before such change and the denominator of which is the Warrant Price
immediately after such change. Any Elected Company Dividend or Cash Equivalent
then being held in trust by Company shall, following such adjustment, continue
to be so held for distribution with respect to the adjusted number of shares of
Company Common Stock.
(i) No adjustment in the Warrant Price shall be required unless such
adjustment would require an increase or decrease of at least 5% in such price;
provided, however, that any adjustments which by reason of this subsection (i)
- -------- -------
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment. Notwithstanding the foregoing, any adjustment
required by this subsection (i) shall be made no later than the earlier of three
years from the date of the transaction which mandates such adjustment or the
expiration of the right to exercise the Warrant or a portion thereof.
(j) In any case in which this Section 7 shall require that an
adjustment shall become effective immediately after a record date for an event,
Company may defer until the occurrence of such event (i) issuing to Holder,
19
<PAGE>
if the Warrant is exercised after such record date and before the occurrence of
such event, the additional Company Common Stock (and associated Elected Company
Dividend or Cash Equivalent, if any) issuable upon such exercise by reason of
the adjustment required by such event over and above Company Common Stock (and
associated Elected Company Dividend or Cash Equivalent, if any) issuable upon
such exercise before giving effect to such adjustment and (ii) paying to Holder
any amount in cash in lieu of a fractional share of Company Common Stock
pursuant to Section 4 above; provided, that, upon request of Holder, Company
--------
shall deliver to such Holder a due bill or other appropriate instrument
evidencing such Holder's rights to receive such additional Company Common Stock
and such cash, upon the occurrence of the event requiring such adjustment.
Section 8. Notice of Adjustment of Warrant Price. Whenever the
-------------------------------------
Warrant Price is adjusted as herein provided, Company shall compute the adjusted
Warrant Price in accordance with Section 7 and shall prepare a certificate
signed by the Treasurer of Company (or other responsible financial officer)
setting forth the adjusted Warrant Price and showing in reasonable detail the
facts upon which such adjustment is based, and such certificate
20
<PAGE>
shall forthwith be filed at the Warrant office or agency of Company and a copy
sent by air mail as soon as practicable to Holder (other than Investor) at its
last address as it shall appear upon the register provided for in Section 2 or
to such other address, otherwise as provided in Section 13.
Section 9. Notice Regarding Dividends, Subscription Rights,
------------------------------------------------
Reclassifications, Dissolutions. In case:
- -------------------------------
(a) Company shall declare a dividend (or any other distribution) on
Company Common Stock payable otherwise than in cash out of its Adjusted
Retained Earnings; or
(b) Company shall authorize the granting to the holders of Company
Common Stock of rights or warrants to subscribe for or purchase any shares
of capital stock of any class or of any other rights; or
(c) of any reclassification of Company Common Stock (other than a
subdivision or combination of its outstanding shares of Company Common
Stock), or of any consolidation or merger to which Company is a party and
for which approval of any stockholders of Company is required, or of the
sale or transfer of
21
<PAGE>
all or substantially all of the assets of Company; or
(d) of the voluntary or involuntary dissolution, liquidation or
winding up of Company;
then Company shall cause to be filed at its Warrant office or agency, and shall
cause to be air mailed to Holder at its last address as it shall appear upon the
register provided for in Section 2, at least 30 days (or 15 days in any case
specified in clause (a) or (b) above) prior to the applicable record or
effective date hereinafter specified, a notice stating (x) the date on which a
record is to be taken for the purpose of such dividend, distribution or issuance
of rights or warrants, or, if a record is not to be taken, the date as of which
the holders of Company Common Stock of record to be entitled to such dividend,
distribution or rights or warrants are to be determined, or (y) the date on
which such reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding up is expected to become effective, and the date as of
which it is expected that holders of Company Common Stock of record shall be
entitled to exchange their shares of Company Common Stock for securities, cash
or other property deliverable upon such
22
<PAGE>
reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding up.
Section 10. Acceleration of Expiration Date. Company may at its
--------------------------------
option, and upon at least 60 days' and not more than 75 days' prior written
notice to the Holder, accelerate expiration of that portion of this Warrant set
forth below:
Number of Shares As to
----------------------
Which Warrant Expires
---------------------
From the Closing Date
to and including
August 10, 1991........ up to (i) 0.2 times (ii) the Warrant Number minus
-----
the number of shares of Company Warrant Common
Stock issued prior to the date fixed for
acceleration.
thereafter to
and including
August 10, 1992........ up to (i) 0.4 times (ii) the Warrant Number minus
-----
the number of shares of Company Warrant Common
Stock issued or accelerated prior to the date
fixed for acceleration.
thereafter to
and including
August 10, 1993........ up to (i) 0.6 times (ii) the Warrant Number minus
-----
the number of shares of Company Warrant Common
Stock issued or accelerated prior to the date
fixed for acceleration.
23
<PAGE>
thereafter to
and including
August 10, 1994........ up to (i) 0.8 times (ii) the Warrant Number minus
-----
the number of shares of Company Warrant Common
Stock issued or accelerated prior to the date
fixed for acceleration.
thereafter............. up to the Warrant Number minus the number of
-----
shares of Company Warrant Common Stock issued or
accelerated prior to the date fixed for
acceleration.
provided, however, Company shall not have the right to require such an
- -------- -------
acceleration unless (i) there is Public Company Common Stock outstanding on the
date upon which notice of acceleration is first given and such redemption is
effected, and (ii) the closing price (determined in the manner provided in the
definition of "Average Market Price" set forth in Exhibit 1 to the Investment
Agreement) of Company Common Stock has equaled or exceeded 135% of the then
current Exercise Price on at least twenty (20) of thirty (30) consecutive
trading days ending not earlier than the Business Day prior to the day on which
notice of acceleration is first given; and provided, further, that the effective
-------- -------
date of any acceleration pursuant to this Section 10 shall be delayed (but in no
event more than one year) to the extent necessary
24
<PAGE>
for the Holder or Company to effect compliance with any laws or regulations
applicable to the exercise of Holder's right to exercise this Warrant. The
notice of expiration shall state the Warrant Price as of the date thereof. Upon
any such expiration in part, the Company shall, if requested by Holder, issue a
new Warrant representing the unexpired portion upon receipt of this Warrant.
Section 11. Maintenance of Office or Agency. Company will maintain an
--------------------------------
office or agency in the Borough of Manhattan, The City of New York, where this
Warrant may be presented or surrendered for split-up, combination, registration
of transfer, or exchange and where notices and demands to or upon Company in
respect of the Warrant may be served.
Section 12. Assignments or Transfers. Unless Holder is Parent or one
-------------------------
of its Affiliates, Holder may not (i) transfer, sell or otherwise assign this
Warrant to any Person other than Investor, Company or Parent, or an Affiliate of
any of them, or (ii) request that shares of Company Common Stock be issued upon
exercise of this Warrant to any Person other than Investor, Company or Parent,
or an Affiliate of any of them, unless transfer of such Company Common Stock is
permitted to such person
25
<PAGE>
under Section 7.3 of the 1990 Agreement, in each case without the prior written
consent of Company.
Section 13. Notices. Notices under this Warrant to Company and
--------
Investor shall be provided in the manner, and to the addresses of Company and
Investor, set forth in the Company Agreement.
Section 14. Governing Law. This Warrant shall be governed by, and
--------------
interpreted in accordance with, the laws of the State of New York, without
regard to principles of conflicts of law.
Dated: Amended and LEHMAN BROTHERS
Restated as of HOLDINGS INC.
May 27, 1994
(Seal)
By /s/ Karen C. Manson
------------------------
Vice President
ATTEST:
/s/ Madeline L. Shapiro
- ---------------------------
Assistant Secretary
26
<PAGE>
PURCHASE FORM
-------------
The undersigned hereby irrevocably elects to exercise the within
Warrant to the extent of purchasing _________ shares of Company Common Stock,
par value $.10 per share, of LEHMAN BROTHERS HOLDINGS INC. and hereby makes
payment of $____________ in payment of the Warrant Price thereof.
Dated: ____________________, 19__.
Instructions for Registration of Stock
- --------------------------------------
Name_____________________________________________
(please typewrite or print in block letters)
Address__________________________________________
27
<PAGE>
EXHIBIT 10.15
BEAR STEARNS BEAR, STEARNS SECURITIES CORP.
ONE METROTECH CENTER NORTH
BROOKLYN, NEW YORK 11201-3859
(212) 272-1000
September 30, 1994
Lehman Brothers Inc.
200 Vesey Street
New York, New York 10285
Attention: Jeremiah Callaghan
Managing Director
Re: Agreement for Transaction Support Services
Gentlemen:
This Agreement sets forth the terms and conditions under which Bear, Stearns
Securities Corp. ("BSSC") will provide transaction support services and such
other back office support services (collectively, the "Services"), as more
specifically set forth herein, to Lehman Brothers Inc. ("you") to enable you to
carry certain of your customer and proprietary accounts, and clear certain of
your customer and proprietary securities transactions, as mutually agreed upon.
This Agreement also sets forth the terms and conditions under which BSSC will
open and carry, in your name, certain omnibus accounts, as more particularly
described in paragraph 5(a), in order to facilitate the clearance by BSSC of
government securities, securities settled outside the forty-eight contiguous
states ("Non-U.S. Settled Securities") and such other products as you and BSSC
shall agree. BSSC will also provide certain Services to Lehman Brothers Holdings
Inc. and its subsidiaries. For purposes of the Securities Investor Protection
Act and the financial responsibility rules of the Securities and Exchange
Commission ("SEC"), customers shall be deemed to be your customers.
1. Engagement
----------
You hereby engage BSSC to provide the Services and to make available to
you such personnel and facilities as are necessary therefor. The
Services shall be performed in compliance with and subject to all
applicable U.S. federal, state and foreign securities laws and
regulations, and, as applicable, the constitution, rules, by-laws and
regulations of the New York Stock Exchange Inc. and all other exchanges,
boards of trade, contract markets and clearing organizations of which
BSSC or you is a member (collectively, the "Applicable Rules").
1
<PAGE>
2. Commissions
-----------
You shall have sole discretion to determine the amount of commissions and
fees charged to your customer accounts, to the extent permitted by the
Applicable Rules.
3. Fees - Term of Agreement
------------------------
[Confidential treatment has been requested for this section]
2
<PAGE>
(j) In the event of an industry wide event that materially impacts the costs
associated with providing the Services contemplated by this Agreement, the
parties hereto agree to negotiate in good faith to amend the fees provided
herein in a manner consistent with such event.
(k) The term business day, as used in this Agreement, is defined as any day
which is not a Saturday or Sunday on which the New York Stock Exchange is
open for business.
4. Financial Information
---------------------
You and BSSC each agree to supply the other with copies of monthly and
quarterly Financial and Operational Combined Uniform Single Reports
("Focus Reports"), excluding the income statement and any profit and
loss calculations, simultaneously with the filing thereof.
5. Omnibus Accounts
----------------
(a) In order to facilitate the clearance of government securities, Non-U.S.
Settled Securities and such other products as you and BSSC shall agree, BSSC
will open and carry in your name, a special omnibus account for the benefit
of your customers (the "Customer Omnibus Account") and a separate omnibus
account for your proprietary transactions (the "Proprietary Omnibus
Account") (collectively, the "Omnibus Accounts"). You will become an omnibus
correspondent of BSSC with respect to such Omnibus Accounts, which will be
carried as either cash or margin accounts.
(b) With respect to the Customer Omnibus Account, you and BSSC agree as follows:
(i) the Customer Omnibus Account shall be established and maintained in
compliance with the requirements of SEC Rule 15(c) 3-3 and Regulation T;
(ii) all property held therein shall be held by BSSC for the exclusive
benefit of your customer's (subject, however, to a lawfully issued subpoena
or court order); (iii) BSSC shall maintain physical possession or control of
the securities therein, free of any charge, lien or claim of any kind in
favor of BSSC or any persons claiming through BSSC; (iv) BSSC shall not
subject the Customer Omnibus Account to any right, charge, security
interest, lien or other claim in favor of BSSC or any other party (except in
response to a lawfully issued subpoena or court order); (v) there shall be
no commingling of funds or property of the Customer Omnibus Account with
funds or property of yours or of BSSC's, and (vi) day short sales effected
will be short sales made on behalf of your customers, other than your
partners, if any.
(c) With respect to the Omnibus Accounts, you will be responsible to BSSC for:
(i) compliance with Regulation T; (ii) maintaining margin in accordance with
the Applicable Rules; (iii) unsecured debits; (iv) all check payments until
credited to BSSC; and (v) the delivery of securities sold or loaned, in good
delivery form under the Applicable Rules.
3
<PAGE>
(d) BSSC shall have sole discretion to execute buy-ins or sell outs in the
Omnibus Accounts whenever it determines such action appropriate.
(e) During a tender period, BSSC will tender only on a trade date basis the
number of shares net long in the Omnibus Accounts as of either the proration
or withdrawal date.
(f) BSSC shall issue and deliver comparisons and confirmations covering the
Omnibus Accounts directly to you on BSSC's forms, with the following
disclosure: "Transactions cleared through BSSC, a wholly owned and
guaranteed subsidiary of Bear, Stearns & Co. Inc. You will be responsible
for advising BSSC regarding the allocation of all transactions to each
customer covered by the Customer Omnibus Account. BSSC shall issue and
deliver confirmations and notices to your customers in accordance with
paragraph 6.
(g) Unless otherwise agreed, BSSC shall not be required to comply with any
request other than from you to make transfers of cash or securities directly
to your customers or other third parties.
(h) You agree not to exceed, either acting alone for the Proprietary Omnibus
Account or with others in concert, the applicable position and exercise
limits for each of the Omnibus Accounts, respectively, as established by the
options exchange or marketplace where options transactions are executed.
(i) You agree that BSSC shall have a lien upon and security interest in all
property held in the Proprietary Omnibus Account as security for the
repayment of your obligations and liabilities to BSSC arising out of or
incurred in connection with the Omnibus Accounts. You further agree that
BSSC, having made a best efforts attempt, market conditions permitting, to
provide you with prior notice, may debit any cash balance and/or liquidate
any securities or commodities held in the Proprietary Omnibus Account and
credit the proceeds to its account in an amount necessary to satisfy such
obligations. This provision shall survive the termination of this Agreement,
thereby extending the right to any lien and security interest for the
duration of any account transfer period and for an additional reasonable
period of time until, in the reasonable discretion of BSSC, security for the
repayment of such obligations is no longer required.
6. Transaction Support Services
----------------------------
In order to provide the Services contemplated by this Agreement, BSSC will
make available to you such personnel, data processing services and such
other facilities as will be required to enable either you or BSSC, as the
case may be, to carry your customer and proprietary accounts and clear your
customer and proprietary transactions.
(a) BSSC will provide such Services as are necessary and customary in order to
enable you or BSSC, as the case may be, to clear securities transactions
executed by you for certain
4
<PAGE>
of your customer and proprietary accounts. BSSC will make available to you,
at no extra charge, such operational and systems enhancements and provide
such Services as are necessary to ensure your compliance with new settlement
and other procedures mandated by the Applicable Rules. BSSC will also
provide Services to enable either you or BSSC, as the case may be, to clear
such new products as shall be mutually agreed upon.
(b) BSSC will, in your name and on your behalf, issue and deliver, or receive
and review, as the case may be, the documentation necessary to complete
comparisons and trade confirmations, with respect to transactions listed on
the BSSC end-of-day records (except transactions in Non-U.S. Settled
Securities), on forms for such purpose which shall display your name in
front (and not that of BSSC); except that (i) you shall be responsible for
all trade date telephonic and other comparisons with brokers or dealers and
(ii) you will instruct your counterparties to contact you directly if they
find any discrepancies in confirmations. BSSC will send you duplicates of
such documentation as you may reasonably request from time to time. At the
end of each day, BSSC will report to you and you will report to BSSC any
discrepancies that are disclosed during such day as a result of the
comparison or confirmation process. BSSC will also provide you with a list
of transactions with brokers or dealers for which BSSC has not received the
necessary comparison information. You are solely responsible for reconciling
all such discrepancies and BSSC is not obligated to perform any further
Services under this Agreement in connection with any unreconciled
transaction until all such discrepancies with respect to such transaction
are resolved. BSSC is not responsible for any failure to settle or allocate
securities, or for other irregularities that may arise, because either you
or your counterparty did not call discrepancies to its attention during the
comparison and confirmation process.
(c) BSSC will, utilizing information provided by you, compute and produce, on a
daily basis, calculations of the following requirements: (i) all possession
and control; (ii) all margin requirements; (iii) reserve formula (on a
weekly and calendar month-end basis and as reasonably needed by you, and
only to the extent the information is provided to BSSC); (iv) daily
settlement obligations (projected and final) of all clearing corporations
and depository corporations; and (v) such other calculations as are feasible
to compute and produce, given the information provided by you, to enable you
to balance, monitor and reconcile all positions in securities and other
instruments held by BSSC on your behalf for your customer and proprietary
accounts. BSSC will provide you with a daily statement reporting such
calculations and positions, and will make 2 best efforts attempt to
accommodate your cut-off dates in providing such statement to you.
(d) BSSC will, in your name and on your behalf and under your supervision and
control, monitor your customer accounts for the following purposes: (i)
requiring your customers to remit payment for purchases, interest and margin
obligations and other charges, (ii) requiring your customers to deliver
securities sold, (iii) requiring your customers to maintain money,
securities and options as required by the Applicable Rules, (iv) advising
your customers of the necessity to buy-in or sell-out positions based upon
your
5
<PAGE>
determination of such necessity, but subject to BSSC's interpretation of the
Applicable Rules, (v) transferring securities to and from the accounts of
your customers against payment and supervising funds deposits and transfers,
(vi) arranging for the exercise and assignment of options, and (vii)
providing custody, segregation and such safekeeping as is mutually agreed
upon of money and securities of your customers. Other than as specifically
set forth herein, BSSC shall not contact your customers during the term of
this Agreement, unless specifically requested by you.
(e) BSSC shall: (i) maintain certain of your books and records, as mutually
agreed, pertaining to transactions with respect to which the Services are
performed by BSSC on your behalf; (ii) provide the data necessary to enable
you or your agent to prepare monthly statements for your customer accounts,
as required by the Applicable Rules governing brokers having custody of
money and securities; and (iii) provide such other services as are
necessary, appropriate and consistent with this Agreement.
(f) During the Termination Period, as such term is defined in paragraph 3(c),
BSSC, in addition to continuing to provide the Services, shall provide such
services as you and BSSC reasonably deem necessary and appropriate,
including but not limited to data processing and employee transition support
services, to enable you to deconvert your customer and proprietary accounts.
(g) BSSC will provide the Services with the same standard of care it utilizes to
clear and carry the transactions and accounts introduced to it by Bear,
Stearns & Co. Inc.; provided, however, that BSSC shall be entitled to rely
upon, as correct, all information provided by you for the purposes of this
Agreement.
(h) BSSC will not provide Services to enable either you or BSSC, as the case may
be, to clear securities transactions in non-U.S. markets where BSSC does not
have the required facilities or relationship to provide clearance services
and BSSC has made a good faith determination not to provide such services in
such non-U.S. market.
(i) The Services shall be performed in accordance with BSSC's interpretation of
the Applicable Rules. In the event of a dispute relating to such
interpretation, you and BSSC hereby agree to present such dispute to a
mutually acceptable expert unrelated to either party, and to make a good
faith attempt to resolve such dispute in a commercially reasonable manner
and as expeditiously as practicable, without resorting to industry
arbitration. In the event such dispute is not resolved in a timely manner,
BSSC will continue to perform the Services that are the subject of the
dispute. In the event such dispute is resolved in accordance with BSSC's
interpretation of the Applicable Rules and against your interpretation
thereof, you shall indemnify BSSC for all loss, liability, damage, claim,
cost or expense (including but not limited to reasonable fees and expenses
of legal counsel) arising out of or incurred in connection with BSSC having
performed such Services.
6
<PAGE>
(j) BSSC shall serve as a passive, non-discretionary, non-bank custodian to your
customer Individual Retirement Accounts ("IRAs") and Qualified Retirement
Plans ("QRPs"), subject to BSSC receiving the approval of the Internal
Revenue Service, and BSSC will maintain such custodial accounts in the same
manner as BSSC maintains those established in connection with its IRA's and
QRPs.
7. Financing Obligations
---------------------
(a) BSSC shall neither finance nor in any way act as your creditor in connection
with the Services to be provided to you hereunder, except to the extent the
Omnibus Accounts are carried in margin accounts. It is agreed that: (i) all
settlement obligations, including but not limited to those set forth in
Section 6 of this Agreement, shall be your sole and exclusive responsibility
and (ii) BSSC shall neither provide nor arrange for the borrowing and
lending of securities in connection with the performance of the Services
hereunder;
(b) If BSSC incurs any liability, obligation, interest or other charge, charge-
back, assessment or collateralization requirement with respect to the
Omnibus Accounts, pursuant to the rules, regulations, procedures or other
binding terms of a clearing corporation or system or arrangement for the
settlement or comparison of your transactions which liability, obligation,
interest or other charge, charge-back, assessment or collateralization
requirement would not customarily be included in BSSC's standard processing
charge, you shall promptly, upon demand by BSSC, transfer to BSSC such
amount in immediately available funds or collateral sufficient to satisfy
your pro-rata share of such liability, obligation, interest or other charge,
charge-back, or assessment or collateralization requirement, such pro-rata
share to be determined between you and BSSC on a basis comparable to that
employed by such Clearing Corporation, system or arrangement in determining
the amount of any such liability, obligation, interest or other charge,
charge-back, assessment payable by, or collateralization requirement imposed
upon BSSC. BSSC shall promptly send to you any written materials it receives
from any such Clearing Corporation, system or arrangement describing any
such liability, obligation, interest or other charge, charge-back or
assessment or collateralization requirement.
(c) BSSC will credit or debit you, as the case may be, at the BSSC Internal
Benchmark Rate which is currently the Federal Funds Rate plus 3/8%, which
rate may change at BSSC's discretion, for any open fail transactions BSSC
has with you or with any other counterparty on account of your transactions,
including but not limited to any cash account credit or debit balance in the
Omnibus Accounts, BSSC fail transactions to or from you and unsettled
syndicate transactions.
(d) In the event you request BSSC to arrange for financing not specifically
provided for herein (including margin balances in the Omnibus Accounts),
such financing shall be provided on such terms and conditions as shall be
mutually agreed upon.
7
<PAGE>
8. Indemnification
---------------
(a) You shall indemnify and hold harmless BSSC, its control persons and
affiliates and its and their respective officers, directors, employees,
successors and assigns ("Indemnified Parties") from and against any loss,
liability, damage, claim, cost or expense (to the extent such cost or
expense is not otherwise covered in paragraph 3), including but not limited
to reasonable fees and expenses of legal counsel, incurred by BSSC or
Indemnified Parties arising directly or indirectly out of or in connection
with BSSC's performance of the Services hereunder; provided, however, that
BSSC and Indemnified Parties shall not be indemnified or held harmless to
the extent that such loss, liability, damage, claim, cost or expense arises
from BSSC's negligence, bad faith or willful misconduct. You further agree
to indemnify and hold harmless BSSC and Indemnified Parties for any act or
omission of BSSC in its capacity as custodian of your customer IRAs and
Qualified Retirement Plans, except insofar as such loss, liability, damage,
claim, cost or expense arises from BSSC's negligence, bad faith or willful
misconduct.
(b) BSSC agrees to indemnify and hold harmless you and Indemnified Parties and
you agree to indemnify and hold harmless BSSC and Indemnified Parties from
and against any loss, liability, damage, claim, cost or expense (including
but not limited to reasonable fees and expenses of legal counsel but
excluding special or punitive damages) arising out of or resulting from any
failure by the indemnifying party or its employees to carry out fully the
duties and responsibilities assigned to such herein or any breach of any
representation, warranty or covenant herein by such party under this
Agreement. The indemnifying party shall have the right to retain legal
counsel of its choosing, provided that the indemnified party consents to
such legal counsel (which consent shall not be unreasonably withheld), and
the indemnifying party shall have the right to settle any action for which
indemnification is sought.
(c) BSSC hereby agrees that it will not, without your prior written consent,
initiate any legal action against any of your customers relating to or
arising from this Agreement and BSSC's performance of the Services
hereunder.
9. Representations, Warranties and Covenants
-----------------------------------------
(a) You represent, warrant and covenant to BSSC as follows: (i) you are now
conducting, and during the course of this Agreement you will conduct your
business in all material respects in accordance with all federal and state
statutes and the regulations and rules of all self-regulatory organizations
that have jurisdiction over those matters; (ii) you are now, and during the
term of this Agreement will remain, a member in good standing of the New
York Stock Exchange Inc. and the National Association of Securities Dealers,
Inc., and you agree to promptly notify BSSC of any additional affiliations
or exchange memberships; (iii) you are now and during the term of this
Agreement will remain, duly authorized and in good standing under the laws
of the jurisdiction of your incorporation, and have the corporate power to
own your property and to carry on your business as now
8
<PAGE>
being conducted and are duly qualified to do business in each jurisdiction
where such qualification is necessary; (iv) you have all the requisite
authority in conformity with all Applicable Rules to enter into this
Agreement and to retain the services of BSSC in accordance with the terms
hereof and you have taken all necessary action to authorize the execution
and delivery of this Agreement and the performance of your obligations
hereunder; (v) you are in compliance, and during the term of this Agreement
will remain in compliance, with; ( 1) the capital and financial reporting
requirements of every national securities exchange or other securities
exchange and/or securities association of which you are a member, (2) the
net capital requirements of the Securities and Exchange Commission, and (3)
the capital requirements of every state in which you are licensed as a
broker-dealer; (vi) you hereby agree and warrant that you have and will
maintain appropriate brokers blanket bond insurance policies covering all
such acts of your employees, agents and officers, in the amount of
$100,000,000. This insurance shall remain in effect until the effective date
of termination of this Agreement. You further agree to notify BSSC
immediately in the event such insurance is either cancelled, reduced or
otherwise changed in any material respect.
(b) BSSC represents, warrants and covenants to you as follows: (i) BSSC during
the term of this Agreement (a) is and will remain duly organized and validly
existing as a Delaware corporation, (b) is and will remain duly registered
or licensed and in good standing as a broker dealer with the SEC and a
member firm of the New York Stock Exchange Inc. and the National Association
of Securities Dealers, Inc. (c) has corporate power to own its properties,
to carry on its businesses now being conducted and to enter into and perform
this Agreement and (d) has taken necessary action to authorize the execution
of this Agreement and the performance of its obligations hereunder; (ii)
BSSC has all the requisite authority in conformity with all Applicable Rules
to enter into and perform this Agreement; (iii) BSSC hereby agrees and
warrants that it has and will maintain appropriate brokers blanket bond
insurance policies covering all such acts of its employees, agents and
officers, in the amount of $200,000,000. BSSC further agrees to obtain a
rider to such brokers blanket bond insurance policies acknowledging you as a
loss payee for losses to your property and securities sustained as a result
of the Services performed pursuant to this Agreement. This insurance shall
remain in effect until the effective date of termination of this Agreement.
BSSC further agrees to notify you immediately in the event such insurance is
either cancelled, reduced or otherwise changed in any material respect.
(c) You acknowledge that you will be responsible for obtaining such SIPC
insurance as you deem necessary to cover losses arising out of or incurred
in connection with a SIPC proceeding affecting your customers.
(d) Each party shall be responsible for obtaining and maintaining registered and
first class mail insurance covering losses arising out of or incurred in
connection with any loss of mail under the control of each respective party.
9
<PAGE>
10. Confidentiality
---------------
You and BSSC each hereby undertake to keep confidential any information
either party may acquire as a result of this Agreement regarding the
business affairs and customers of the other party which each party supplies
to the other party in confidence solely by reason of the Services provided
hereunder. You and BSSC shall each endeavor in good faith to cause their
respective employees to comply with this undertaking.
11. Supervision of Accounts
-----------------------
(a) You shall be solely responsible for: (i) knowing each of your customers,
assessing the suitability and transactions for your customer accounts and
the Customer Omnibus Account; (ii) reviewing your customer accounts and the
Customer Omnibus Account for, among other things, manipulative practices,
insider trading, control and restricted securities and compliance with all
federal and state statutes and the regulations and rules of all self-
regulatory organizations that have jurisdiction over those matters; (iii)
obtaining and maintaining all proper documentation including all new account
documents and such other documents as are necessary for the performance of
your responsibilities under this Agreement and retaining such documents in
accordance with all federal and state statutes and the regulations and rules
of all self-regulatory organizations that have jurisdiction over those
matters except to the extent BSSC has either agreed to be responsible
therefor or BSSC deems it necessary or desirable to be responsible therefor
for the performance of its responsibilities hereunder, including but not
limited to its responsibilities as custodian of your customer IRAs and
Qualified Retirement Plans.
(b) You shall be solely responsible for the supervision of your employees who
open, approve or authorize transactions and their compliance with all
federal and state statutes and the regulations and rules of all self-
regulatory organizations that have jurisdiction over those matters, as well
as for overall supervision of functions and activities performed by BSSC.
12. Systems Access
--------------
In consideration of BSSC providing you access to certain of BSSC's computer
systems, documentation and the programs and data accessible thereby
(collectively the "Systems"), you acknowledge and agree to the following
terms and conditions:
(a) You acknowledge that any User I.D.s or password given to you relating to the
Systems will be designated exclusively for your use and programmed
specifically according to the functionality (i.e., entitlements) you have
requested and been granted. Each such User I.D. is intended to enable you to
view your data exclusively. You will take all necessary steps to preserve
the confidentiality of and prevent any unauthorized person from obtaining
access to or using any such User I.D. or password. You shall be required to
change your password every 90 days. For the purposes of this Agreement,
"your data" shall include but not necessarily be limited to your customers'
names, addresses,
10
<PAGE>
securities positions and activity, and the securities positions and activity
in your proprietary account(s), including such positions and activities of
your affiliates.
(b) Although access to your data may be obtained from any location, device or
other machine using the software provided to you, it is intended that access
to your data will be controlled by the User I.D.s and passwords.
Notwithstanding the foregoing, (i) you shall be solely responsible for
controlling the access to and activity in your customer and proprietary
accounts, (ii) otherwise protecting and preserving the confidentiality of
all data, and (iii) you shall not copy or distribute any system programs or
in any way use or allow use of the Systems beyond the specific use or uses
for which you have been authorized. You shall not be responsible for
controlling BSSC's access to and activity in your customer and proprietary
accounts or for ensuring that BSSC, its employees and its agents adhere to
BSSC's confidentiality obligation hereunder.
(c) You shall be solely responsible for requesting the initiation, termination
or limitation of the functionality of your User I.D.s. In particular, you
acknowledge that time is of the essence in notifying BSSC of the termination
or change in status of any employee or agent who has access to the Systems.
All such requests and notices shall be in writing to your BSSC relationship
manager.
(d) You will communicate all requests for access to the Systems in writing to
your BSSC relationship manager.
(e) You acknowledge that BSSC may, in the course of maintaining the Systems,
monitor your activities, and you hereby consent to such monitoring, subject
to BSSC's express agreement to adhere to its obligation of confidentiality
hereunder.
(f) You hereby agree to release and discharge BSSC and the Indemnified Parties
from all responsibility and liability arising out of or incurred in
connection with your use of the Systems, your failure to perform any
obligation pursuant to this paragraph 12 or BSSC providing you access to the
Systems and from all damages that flow as a consequence of such action or
failure to perform. You further agree to indemnify and hold harmless BSSC
and the Indemnified Parties from any loss, liability, damage, claim, cost or
expense (including but not limited to reasonable fees and expenses of legal
counsel) arising out of or incurred in connection with your use of the
Systems, your failure to perform any obligation pursuant to this paragraph
12 or BSSC providing you access to the Systems, except insofar as such loss,
liability, damage, claim, cost or expense arises out of BSSC's negligence,
bad faith or willful misconduct.
(g) You undertake to take all reasonable steps to ensure that all of your
employees and agents having access to the Systems comply with the terms of
this paragraph 12.
11
<PAGE>
13. Default
-------
Notwithstanding any provision in this Agreement, the following events or
occurrences shall constitute an Event of Default under this Agreement:
(a) Either party hereto shall fail to perform or observe any term, covenant or
condition to be performed hereunder and such failure shall continue to be
unremedied for a period of 30 days after written notice from the non-
defaulting party to the defaulting party specifying the failure and
demanding that the same be remedied; provided, however, that non-payment of
the fees due under paragraph 3 as a result of a bona-fide fee dispute shall
not be deemed an Event of Default; or
(b) Any representation or warranty made by either party shall prove to be
incorrect at any time in any material respect; or
(c) A receiver, liquidator or trustee of either party hereto or of any property
held by either party, is appointed by court order and such order remains in
effect for more than 30 days; or either party is adjudicated bankrupt or
insolvent; or any property of either party is sequestered by court order and
such order remains in effect for more than 30 days; or a petition is filed
against either party under any bankruptcy, reorganization, arrangement,
insolvency, readjustment of debt, dissolution or liquidation law of any
jurisdiction, whether now or hereafter in effect (collectively, "Insolvency
Laws"), and is not dismissed within 30 days after such filing; or
(d) Either party hereto files a petition in voluntary bankruptcy or seeks relief
under any provision of any bankruptcy, reorganization, arrangement,
insolvency, readjustment of debt, dissolution or liquidation law of any
jurisdiction, whether now or hereafter in effect, or consents to the filing
of any petition against it under any such law ; or
(e) Either party hereto makes an assignment for the benefit of its creditors, or
admits in writing its inability to pay its debts generally as they become
due, or consents to the appointment of a receiver, trustee or liquidator of
either party, or of any property held by either party; or
(f) Either party hereto ceases for whatever reason to be a member of the New
York Stock Exchange or the National Association of Securities Dealers; or
(g) Either party hereto fails to comply with the Applicable Rules in a manner
which materially adversely affects the business of that party.
Upon the occurrence of any such Event of Default, the nondefaulting party
may, at its option and subject to the Applicable Rules, by notice to the
defaulting party declare that this Agreement shall be thereby terminated and
such termination shall be effective as of the date such notice has been
communicated to the defaulting party. Termination
12
<PAGE>
hereunder shall not release either party from obligations incurred in
connection with this Agreement prior to the effective date of termination.
14. Software
--------
In the event of an Event of Default with respect to BSSC under paragraph
13(c), (d) or (e), BSSC shall, to the extent permissible under the
Insolvency Laws, negotiate with you regarding your request to purchase such
of BSSC's proprietary systems software as shall have been used in connection
with BSSC's provision of the Services hereunder.
15. Relationship of Parties
-----------------------
(a) BSSC shall limit its services pursuant to the terms of this Agreement to the
Services expressly defined and set forth herein. Neither this Agreement nor
any operation hereunder shall create a general or limited partnership,
association or joint venture or agency relationship between you and BSSC.
(b) Neither party or its respective affiliates shall, without the prior written
approval of the other party, place any advertisement in any newspaper,
publication, periodical, sales literature or any other media if such
advertisement in any manner makes reference to this Agreement or the
Services embodied herein. BSSC and its affiliates shall not solicit your
customers using this Agreement or the relationship created thereby as a
marketing tool.
(c) Should you in any way hold yourself out as, advertise or represent that you
are an agent of BSSC, BSSC shall have the power, at its option, to terminate
this Agreement and you shall be liable for any loss, liability, damage,
claim, cost or expense (including but not limited to fees and expenses of
legal counsel) sustained or incurred by BSSC as a result of such a
representation of agency or apparent authority to act as an agent of BSSC or
agency by estoppel. Notwithstanding the provision of this Agreement that any
dispute or controversy between the parties relating to or arising out of
this Agreement shall be referred to and settled by arbitration, in
connection with any breach by you of this paragraph 15, BSSC may, at any
time prior to the initial arbitration hearing pertaining to such dispute or
controversy, seek by application to the United States District Court for the
Southern District of New York or the Supreme Court of the State of New York
for the County of New York any such temporary or provisional relief or
remedy ("provisional remedy") provided for by the laws of the United States
of America or the laws of the State of New York as would be available in an
action based upon such dispute or controversy in the absence of an agreement
to arbitrate. The parties acknowledge and agree that it is their intention
to have any such application for a provisional remedy decided by the Court
to which it is made and that such application shall not be referred to or
settled by arbitration. No such application to either said Court for a
provisional remedy, nor any act or conduct by either party in furtherance of
or in opposition to such application, shall constitute a relinquishment or
13
<PAGE>
waiver of any right to have the underlying dispute or controversy with
respect to which such application is made settled by arbitration in
accordance with this Agreement.
16. No Waiver of Rights
-------------------
The enumeration herein of specific remedies shall not be exclusive of any
other remedies. Any delay or failure by any party to this Agreement to
exercise any right herein contained, now or hereafter existing under the
Applicable Rules shall not be construed to be a waiver of such right, or to
limit the exercise of such right. No single, partial or other exercise of
any such right shall preclude the further exercise thereof or the exercise
of any other right.
17. NYSE Filing Requirement
-----------------------
This Agreement shall be submitted to and approved by the New York Stock
Exchange, Inc., or other regulatory and self-regulatory bodies vested with
the authority to review and approve this Agreement or any amendment or
modifications hereto. In the event of disapproval, the parties hereto agree
to bargain in good faith to achieve the requisite approval.
18. Arbitration/Governing Law
-------------------------
(a) This Agreement shall be governed by and construed in accordance with the
laws of the State of New York, without giving effect to the conflicts of law
principles thereof.
(b) In the event of a dispute or controversy relating to or in any way arising
out of this Agreement, you and BSSC hereby agree to present such dispute or
controversy to a panel to consist of three senior representatives of each
party, including Jeremiah Callaghan of your firm and Bruce Geismar of BSSC,
or their respective designees.
(c) In the event a dispute or controversy is not resolved in accordance with
subparagraph (b) above, such dispute or controversy shall be settled by
arbitration before and under the rules and auspices of the New York Stock
Exchange, Inc., unless the transaction which gives rise to such dispute or
controversy is effected in another United States market which provides
arbitration facilities, in which case it shall be settled by arbitration
under such facilities.
19. Extraordinary Events/Acts of God
--------------------------------
(a) BSSC shall not be liable for losses caused directly or indirectly by any
inability of BSSC to provide the Services occasioned by government actions
or restrictions, exchange or market rulings, suspension of trading, war,
strikes, natural calamities (including weather conditions), delays,
communications or utilities failures, terrorism,
14
<PAGE>
criminal acts of others not under the control of BSSC or any other
conditions or occurrences beyond its control.
(b) You hereby acknowledge that BSSC has represented to you that it has a
disaster recovery plan covering its back office operations located at One
Metrotech Center North, Brooklyn, New York but that no such disaster
recovery plan exists at the time of execution of this Agreement covering
BSSC's data processing facility located at 115 South Jefferson Road,
Whippany, New Jersey. The development of such a disaster recovery plan is in
progress and will be implemented, with input from you, in a reasonable and
timely manner.
20. Notices
-------
BSSC agrees that it will send to you copies of all written notices sent to
customers. Notices to you shall be sent to: Lehman Brothers Inc., 200 Vesey
Street, New York, New York 10285, Attention, Jeremiah Callaghan, Managing
Director, with a copy to David Marcus, Esq., Managing Director and General
Counsel, at the same address.
Notices to BSSC shall be sent to Richard Harriton, the President of Bear,
Stearns Securities Corp., 245 Park Avenue, New York, N.Y. 10167, with a copy
to Mark E. Lehman, Senior Managing Director and Chief Legal Officer of BSSC.
Termination shall not affect any of the rights and liabilities of the
parties hereto incurred before the date of receipt of such notice of
termination.
21. Statute of Fraud; Amendments
----------------------------
(a) This Agreement supersedes all other agreements between the parties with
respect to the Services contemplated herein. This Agreement may not be
amended except by a writing signed by both parties hereto.
15
<PAGE>
(b) This Agreement shall be binding upon and inure to the benefit of the
respective successors of the parties. Neither party may assign any of its
rights or obligations hereunder without the prior written consent of the
other party, unless such assignment is made as part of a general assignment
of a party s assets to another firm.
Please evidence your agreement to the foregoing by executing and delivering to
BSSC the enclosed copy hereof. whereupon you and BSSC shall have entered into
this Agreement.
Very truly yours,
BEAR, STEARNS SECURITIES CORP.
By: /s/ Richard Harriton
-------------------------------
Title: President
----------------------------
Date: 10/12/94
----------------------------
ACCEPTED AND AGREED TO:
- ----------------------------------
Lehman Brothers Inc.
By: Jeremiah Callaghan
-------------------------------
Title: Managing Director
----------------------------
Date: 10/12/94
----------------------------
16
<PAGE>
EXHIBIT 10.29
LEHMAN BROTHERS HOLDINGS INC.
45,201,685 Shares of Common Stock
928 Shares of Redeemable Voting Preferred Stock
8,000,000 Shares of Cumulative Voting Preferred Stock
PURCHASE AND EXCHANGE AGREEMENT
-------------------------------
April 28, 1994
American Express Company
American Express Tower
World Financial Center
200 Vesey Street
New York, New York 10285
Ladies and Gentlemen:
Lehman Brothers Holdings Inc., a Delaware corporation (the "Company"),
hereby confirms its agreement with you with respect to the issuance by the
Company to you of an aggregate of 45,201,685 shares (as the same may be adjusted
in accordance with Section 2(a) hereof the "Common Shares") of the Company's
common stock, par value $0.10 per share ("Common Stock"), 928 shares of the
Company's Redeemable Voting Preferred Stock (the "Redeemable Preferred Shares")
and 8,000,000 shares of the Company's Cumulative Voting Preferred Stock (the
"Cumulative Preferred Shares" and, together with the Redeemable Preferred
Shares, the "Preferred Shares" and, together with the Redeemable Preferred
Shares and the Common Shares, the "Shares"). On the basis of the
representations, warranties and agreements herein contained, and upon the terms
and subject to the conditions herein set forth, the Company agrees to issue and
sell to you, and you agree to purchase from the Company, the Shares. Initially
capitalized terms not otherwise defined in this Agreement shall have the
definitions assigned thereto in the Certificate of Designations, Powers,
Preferences and Rights creating the Redeemable Preferred Shares, a copy of which
is attached hereto as Exhibit A (the "Redeemable
<PAGE>
Certificate"), and in the Certificate of Designations, Powers, Preferences and
Rights creating the Cumulative Preferred Shares, a copy of which is attached
hereto as Exhibit B (the "Cumulative Certificate" and, together with the
Redeemable Certificate, the "Certificates").
Section 1. Representations and Warranties.
------------------------------
(a) The Company represents and warrants to American Express Company
("Amexco") that:
(i) The Company has been duly incorporated and is validly existing and
in good standing as a corporation under the laws of the State of Delaware.
(ii) This Agreement has been duly authorized, executed and delivered
by the Company and is enforceable against the Company in accordance with its
terms, except as such enforceability may be affected by bankruptcy and other
similar laws affecting creditors' rights generally and by general principles of
equity.
(iii) The execution and delivery of this Agreement, the issuance and
delivery of the Shares, the consummation by the Company of the transactions
contemplated herein and compliance by the Company with the terms of this
Agreement and the Certificates, do not and will not conflict with, or result in
a breach of any of the terms or provisions of, or constitute a default under, or
result in the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any significant subsidiary thereof under
(A) the Restated Certificate of Incorporation or By-laws of the Company or (B)
any existing applicable law, rule or regulation or any judgment, order or decree
of any government, governmental instrumentality or court, domestic or foreign,
having jurisdiction over the Company or any of its properties, except, with
respect to this clause (B), such conflicts, breaches, defaults or liens which
individually and in the aggregate will not have a material and adverse effect on
the investment by Amexco contemplated hereby or on Amexco's rights hereunder.
(iv) No filing, authorization, approval, consent, order, registration,
qualification or license of or with any court or governmental regulatory body or
authority (other than such consents, approvals, authori-
2
<PAGE>
zations, registrations, qualifications or filings as have been made or obtained
or as may be required under the securities or blue sky laws of the various
states and other than the filing of the Certificates with the Secretary of State
of the State of Delaware) is required for (A) the valid authorization, issuance,
sale and delivery of the Shares, (B) the valid execution and delivery by the
Company of this Agreement or (C) the consummation by the Company of the
transactions contemplated in this Agreement, except, with respect to this clause
(C), filings and authorizations which may be required in connection with the
exercise of the registration rights referred to in Section 5 hereof.
(v) The Shares have been validly authorized and, upon payment therefor as
provided in this Agreement, will be validly issued and outstanding, fully paid
and nonassessable and free of preemptive rights, with no personal liability
attaching to the ownership thereof, and none of the Shares will be subject to
any lien, charge or encumbrance or any other claim of any third party arising
out of any act of the Company.
(vi) When issued, the Preferred Shares will have such designation,
preferences, limitations and relative rights as set forth in the Certificates
and such shares and such designation, preferences, limitations and relative
rights are valid under Delaware law. Except to the extent set forth in the
Investment Agreement, dated as of April 15, 1987, by and among Amexco, the
Company and Nippon Life Insurance Company, as such agreement has been amended
through the date hereof, no stockholders of the Company have any preemptive or
similar rights with respect to the Shares.
(vii) The Company does not have any Significant Subsidiaries (as such term
is defined in Rule 1-02 of Regulation S-X under the Securities Act of 1933 (the
"Act"), except for Lehman Brothers Inc., Lehman Commercial Paper Inc. and Lehman
Government Securities Inc. (the "Named Subsidiaries").
(viii) Neither the Company nor any of the Named Subsidiaries is in
violation of its corporate charter or by-laws or in default under any agreement,
indenture or instrument, the effect of which violation or
3
<PAGE>
default would be material to the Company and its subsidiaries taken as a whole.
(b) Amexco represents and warrants to the Company that:
(i) Amexco has been duly incorporated and is validly existing and in
good standing as a corporation under the laws of the State of New York.
(ii) This Agreement has been duly authorized, executed and delivered
by Amexco and is enforceable against Amexco in accordance with its terms, except
as such enforceability may be affected by bankruptcy and other similar laws
affecting creditors' rights generally and by general principles of equity.
(iii) The execution and delivery of this Agreement and the
consummation by Amexco of the transactions contemplated herein and compliance by
Amexco with the terms of this Agreement do not and will not conflict with, or
result in a breach of any of the terms or provisions of, or constitute a default
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of Amexco or any significant subsidiary
thereof under (A) the Restated Certificate of Incorporation, as amended, or By-
laws of Amexco or (B) any existing applicable law, rule or regulation or any
judgment, order or decree of any government, governmental instrumentality or
court, domestic or foreign, having jurisdiction over Amexco or any of its
properties, except, with respect to this clause (B), such conflicts, breaches,
defaults or liens which individually and in the aggregate will not have a
material and adverse effect on the business of Amexco and its subsidiaries taken
as a whole.
(iv) No filing, authorization, approval, consent, order, registration,
qualification or license of or with any court or governmental regulatory body or
authority (other than such consents, approvals, authorizations, registrations,
qualifications or filings as have been made or obtained) is required for (A) the
valid execution and delivery by Amexco of this Agreement or (B) the consummation
by Amexco of the transactions contemplated in this Agreement, except, with
respect to this clause (B), filings and authorizations as may be required
4
<PAGE>
in connection with the exercise of the registration rights referred to in
Section 5 hereof.
(v) Immediately prior to the Closing Date (as defined below), Amexco will
have good and valid title to the MMP Shares to be transferred to the Company
pursuant to Section 2 hereof, free and clear of all liens, charges or
encumbrances or any other claim of any third party arising out of any act of
Amexco (other than the interest of the Company therein arising hereunder).
Section 2. Sale and Delivery to Amexco; Closing.
------------------------------------
(a) At 10:00 A.M., New York City time, on May 26, 1994, or such other time
or date agreed to by the parties hereto (the "Closing Date"), delivery of
certificates for the Shares, against receipt by the Company of the consideration
therefor, shall be made at the offices of the Company or such other place as
shall be agreed upon by Amexco and the Company. The consideration for the
issuance and sale of the Common Shares shall consist of (i) in respect of
35,407,931 of the Common Shares, $903,839,657.00, or approximately $25.52647 per
share, in cash and (ii) in respect of 9,793,754 of the Common Shares, the
transfer by Amexco to the Company of all of Amexco's right, title and interest
in and to the 250 shares (the "MMP Shares") of the Company's Money Market
Cumulative Preferred Stock acquired from the Company by Amexco pursuant to that
certain Purchase Agreement, dated December 28, 1989, between the Company and
Amexco. The consideration for the issuance and sale of the Redeemable Preferred
Shares shall be $928.00, or $1.00 per share, in cash and the consideration for
the issuance of the Cumulative Preferred Shares shall be $200,000,000.00, or
$25.00 per share, in cash. Payment of the cash portion of such consideration
shall be made to the Company by wire transfer of immediately available funds in
the aggregate amount of $1,103,840,585.00 to Account No. 056-23-787 maintained
by the Company at Morgan Guaranty Trust Company of New York (ABA routing number
021-000-238), and payment of the noncash portion of such consideration shall be
made by delivery to the Company of the certificates represented by the MMP
Shares, duly executed by Amexco for transfer to the Company or accompanied by
duly executed stock powers, in each case, against delivery to Amexco of
certificates representing the Shares. The
5
<PAGE>
number of Common Shares to be purchased and sold hereunder on the Closing Date
shall be subject to adjustment in the event that the actual reverse split ratio
referred to in the registration statement on Form S-1 of Holdings (File No. 33-
52977) (the "Registration Statement") is other than 0.3179723, in which case
such number of shares shall equal that number determined utilizing the actual
reverse split ratio and the methodology heretofore employed in determining share
numbers for purposes of the Registration Statement.
(b) The certificates representing the Shares will be issued in fully
registered form and registered in the name of Amexco or its nominee in
accordance with the Company's Restated Certificate of Incorporation.
(c) Each certificate representing the Preferred Shares will contain a
legend stating that no sale, pledge, hypothecation or other transfer of such
Shares shall be made except in a transaction that is registered under the Act or
in a transaction that is not subject to, or that is exempt from, the
registration requirements of the Act. The Company will issue to Amexco or any
transferee of Amexco new certificates representing Shares which do not contain
such a legend if the Shares in question are sold pursuant to an effective
registration statement or pursuant to Rule 144.
Section 3. Covenants of the Company. The Company hereby covenants and
------------------------
agrees as follows:
(a) On or prior to the Closing Date, the Certificates will be filed with
the Secretary of State of the State of Delaware without modification to the
forms thereof attached hereto as Exhibit A and Exhibit B.
(b) So long as Amexco or any of its affiliates is the holder of any
Shares, the Company will, if so requested, pay all dividends and other sums
becoming due on any of the Shares registered in the name of Amexco or any
affiliate of Amexco by wire transfer of immediately available funds to an
account designated in writing by such holder not less than 10 days preceding the
payment date thereof or by such other method as Amexco (or such affiliate) shall
have from time to time specified to the Company in writing at least 10 days
prior to the date such payment shall be due. In addition, the Company will
6
<PAGE>
agree to make payments on the Preferred Shares by wire transfer of immediately
available funds to any transferee from Amexco or an affiliate of Amexco (or
successive transferees from such a transferee) who so requests if such
transferee holds not less than 15% of the aggregate liquidation preference of
the Redeemable Preferred Shares or the Cumulative Preferred Shares at the time
outstanding. Upon request of Amexco, such affiliate or such a transferee, the
Company will enter into a written agreement with such transferee to the
foregoing effect.
Section 4. Conditions of Closing. The Company and Amexco agree that the
---------------------
sale of the Shares shall be conditioned on and subject to the accuracy on and as
if made on the Closing Date of their respective representations and warranties,
performance of their respective covenants and other obligations hereunder and to
the following further conditions:
(a) Thomas A. Russo, Esq., counsel to the Company, shall have furnished to
Amexco his written opinion, dated the Closing Date, in form reasonably
satisfactory to Amexco and its counsel, to the effect that:
(i) the Company has been duly incorporated and is validly existing and
in good standing as a corporation under the laws of the State of Delaware;
(ii) this Agreement has been duly authorized, executed and delivered
by the Company and is enforceable against the Company in accordance with its
terms (subject to customary exceptions);
(iii) the execution and delivery of this Agreement, the issuance and
delivery of the Shares, the consummation by the Company of the transactions
contemplated herein and compliance by the Company with the terms of this
Agreement and the Certificates do not and will not conflict with, or result in a
breach of any of the terms or provisions of, or constitute a default under, or
result in the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any of the Named Subsidiaries under (A) the
Restated Certificate of Incorporation or By-laws of the Company or (B) any
material agreement, indenture or instrument or any existing applicable law, rule
or regu-
7
<PAGE>
lation (other than the securities or blue sky laws of the various states, as to
which such counsel need express no opinion) or any judgment, order or decree of
any court or governmental agency having jurisdiction over the Company, any of
the Named Subsidiaries or their property;
(iv) no filing, authorization, approval, consent, order, registration,
qualification or license of or with any court or governmental regulatory body or
authority (other than such consents, approvals, authorizations, registrations,
qualifications or filings as have been made or obtained or as may be required
under the securities or blue sky laws of the various states) is required for (A)
the valid authorization, issuance, sale and delivery of the Shares, (B) the
valid execution and delivery by the Company of this Agreement or (C) the
consummation by the Company of the transactions contemplated in this Agreement,
except, with respect to this clause (C), filings and authorizations which may be
required in connection with the exercise of the registration rights referred to
in Section 5 hereof;
(v) the certificates representing the Shares are in due and proper form,
and the Shares have been duly authorized and validly issued and are fully paid
and non-assessable, and no holder thereof will be subject to personal liability
by reason of being such a holder; the Preferred Shares have such designation,
preferences, limitations and relative rights as set forth in the Certificates
and the Preferred Shares and such designation, preferences, limitations and
relative rights are valid under Delaware law;
(vi) the Company does not have any Significant Subsidiaries except for the
Named Subsidiaries; and
(vii) neither the Company nor any of the Named Subsidiaries is in
violation of its corporate charter or By-laws or in default under any agreement,
indenture or instrument, the effect of which violation or default would be
material to the Company and its subsidiaries taken as a whole.
Such opinion, in addition, shall be to such further effect with respect to
other legal matters relat-
8
<PAGE>
ing to this Agreement and the issuance of the Shares hereunder as counsel to
Amexco may reasonably request.
(b) Counsel to Amexco shall have been furnished with all such documents,
certificates and opinions as they may reasonably request for the purpose of
enabling them to pass upon the issuance of the Shares and the issuance and
delivery of the Shares as herein contemplated and in order to evidence the
accuracy and completeness of any of the representations, warranties or
statements of the Company, the performance of any of the covenants of the
Company, or the fulfillment of any of the conditions herein contained; and all
proceedings taken by the Company at or prior to the Closing Date in connection
with the authorization, issuance and delivery of the Shares as herein
contemplated shall be reasonably satisfactory in form and substance to Amexco
and its counsel.
(c) Amexco shall have executed and delivered to the Company a Purchaser's
Agreement substantially in the form of Exhibit C hereto.
Section 5. Registration Rights. The Company and Amexco hereby agree that
-------------------
the Company and Amexco shall have the rights and obligations set forth in (a)
Exhibit D hereto with respect to the Preferred Shares and (b) the Registration
Rights Agreement, dated as of May 1, 1987, between Amexco and the Company, with
respect to the Common Shares.
Section 6. Transfer of Shares.
------------------
(a) Amexco may transfer all or any of the Shares to any of its majority
owned subsidiaries, and such majority owned subsidiaries shall have the same
rights and obligations as Amexco under this Agreement.
(b) Amexco may, subject to Section 6(e) hereof, transfer at any time or
from time to time in a private placement any or all of the Shares, and any such
transferee of Amexco may, subject to Section 6(e) hereof, further transfer such
Shares to a subsequent transferee.
In connection with each such transfer by Amexco or a Qualified Transferee
(as defined in Section 6(g) hereof), the Company shall as expeditiously as
possible
9
<PAGE>
and at the Company's expense prepare and deliver a Private Placement Memorandum
(a "Memorandum") which contains such disclosure that, in the opinion of legal
counsel to the Company (which opinion and counsel shall be reasonably acceptable
to Amexco or such Qualified Transferee), is required by law and which shall
otherwise be in form and substance reasonably satisfactory to Amexco or such
Qualified Transferee; provided, however, that the aggregate number of Memoranda
-------- -------
required to be prepared and delivered with respect to any class of the Preferred
Shares plus the number of demand registrations with respect to such class
requested pursuant to the registration provisions referred to in Exhibit D
hereto shall not exceed six and provided further that the Company shall not be
-------- -------
required to prepare and deliver more than two Memoranda in any period of 360
consecutive days.
The Company represents, warrants and covenants to Amexco or such Qualified
Transferee that neither the Memorandum nor any information supplied for use in
connection with the transfer of the Shares thereunder will include an untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading, except that the foregoing will not apply to
statements or omissions made in reliance upon and in conformity with information
relating to Amexco or such Qualified Transferee, or relating to the transaction
pursuant to which such transfer is to be effected, furnished in writing to the
Company by or on behalf of Amexco or such Qualified Transferee, as the case may
be, expressly for use in the Memorandum. Notwithstanding the foregoing, the
Company shall be entitled to defer for a reasonable period of time, but not in
excess of 90 days (a "Blackout Period"), the delivery to potential transferees
of the Shares of any Memorandum otherwise required to be prepared and delivered
by it, if in the good faith judgment of the General Counsel of the Company, the
delivery to such potential purchasers of a Memorandum at such time would require
the disclosure of material information which is confidential and which the
Company has a bona fide business purpose for preserving as confidential or the
Company is unable to comply with securities law requirements such as the
preparation of pro forma financial information; provided, however that not more
-------- -------
than two such Blackout Periods may be commenced during any period of 360
consecutive days.
10
<PAGE>
If a Blackout Period is commenced, the Company shall promptly make such delivery
as soon as the conditions which permit it to delay such delivery no longer
obtain, but in no event later than such 90th day. If the anticipated delivery
date of a Memorandum falls after 45 days and within 90 days subsequent to the
end of a fiscal year, and the Company would be required under applicable law to
include in the Memorandum audited financial statements for its most recently
completed fiscal year, then the Company may delay the delivery of a Memorandum
for such period (up to 90 days after the end of such fiscal year) as is
reasonably necessary in the Company's judgment to include therein its audited
financial statements for such fiscal year.
(c) In connection with any transfer by Amexco or such Qualified Transferee
pursuant to Section 6(b) hereof, the Company shall
(i) furnish to Amexco or such Qualified Transferee such number of
copies of the Memorandum in preliminary and final form (including any exhibits
thereto or documents referred to therein) as Amexco or such Qualified Transferee
may reasonably request;
(ii) furnish to Amexco, addressed to it, to such Qualified Transferee,
addressed to it, and, if requested by the transferee of the Shares, to the
transferee, addressed to it, an opinion of counsel for the Company, dated the
date of the closing of the transfer, with respect to matters customarily opined
on by issuer's counsel in transactions involving the issuance of securities in a
private placement;
(iii) amend or supplement such Memorandum to the extent that, in the
opinion of legal counsel to the Company (which opinion and counsel shall be
reasonably acceptable to Amexco or such Qualified Transferee), is necessary in
order to comply with applicable securities laws;
(iv) promptly notify Amexco or such Qualified Transferee of the
happening of any event as a result of which the Memorandum includes an untrue
statement of any material fact or omits to state any material fact required to
be stated therein or necessary to make the statements therein not misleading,
and prepare, file
11
<PAGE>
as appropriate and furnish to Amexco or such Qualified Transferee as promptly as
possible as many copies as Amexco or such Qualified Transferee shall reasonably
request of a supplement to or amendment of such Memorandum which shall correct
such untrue statement or eliminate such omission; and
(v) take such other actions and execute and deliver such other
documents as may reasonably be necessary to give full effect to the rights of
Amexco or such Qualified Transferee hereunder and to effect the transfer of the
Shares.
(d) In connection with each such transfer, the Company shall, subject to
Section 6(e) hereof, take such action as is required to effectuate the
registration of the transfer of such Shares in the stock register of the
Company.
(e) In the case of any transfer of Shares pursuant to Section 6(a) or 6(b)
hereof, no such transfer shall be effective and the Company shall not be
obligated to register the transfer of such Securities in the stock register of
the Company unless and until the transferee executes and delivers to the Company
a Purchaser's Agreement substantially in the form of Exhibit C hereto and, in
the case of Section 6(b) hereof, furnishes the Company (if the Company shall so
request) with an opinion of its counsel to the effect that such transfer may be
effected without registration under the Act. In the case of any transfer of
Securities pursuant to Section 6(a) or 6(b) hereof, the Company shall
acknowledge in writing that such transferee shall have the rights then
applicable to such transferee as set forth herein.
(f) In connection with any private placement by Amexco or any majority
owned subsidiary of Amexco contemplated by Section 6(b) hereof, the Company
shall indemnify and hold harmless Amexco, such majority owned subsidiary of
Amexco and their respective officers and directors and each person, if any, who
controls any of the foregoing persons within the meaning of the Act, contribute
to their losses and reimburse them for expenses to the same extent, and upon the
same procedures set forth in, Section 5 of the Registration Rights Agreement.
12
<PAGE>
(g) As used in this Section 6, the term "Qualified Transferee" means a
transferee or subsequent transferee of any Shares who does not receive, (A)
within 10 Business Days of its request therefor to the Company, an unqualified
legal opinion from legal counsel to the Company (which opinion and counsel shall
be reasonably acceptable to such transferee) to the effect that the transfer of
Shares then contemplated by such transferee is exempt from the provisions of
Section 5 of the Act (or any successor provision) and (B) prior to the time of
such proposed transfer, an unqualified legal opinion from its counsel to the
effect that the transfer of Shares then contemplated by such transferee is
exempt from the provisions of Section 5 of the Act (or any successor provision).
Notwithstanding the foregoing, a Qualified Transferee shall not include a
transferee from any person other than Amexco if such person was not a Qualified
Transferee at the time of its transfer to such transferee.
(h) The restrictions on transfer contained in this Section 6 shall not
apply to any transfer pursuant to an effective registration statement, or Rule
144, under the Act and in compliance with all applicable state securities laws.
(i) For so long as the Company is subject to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"), the Company shall timely
file the reports required to be filed by it thereunder (including but not
limited to the reports under Sections 13 and 15(d) of the Exchange Act referred
to in subparagraph (c) of Rule 144 under the Act) and the rules and regulations
adopted by the Commission thereunder.
Section 7. Other Agreements. (a) Notwithstanding anything to the
----------------
contrary contained herein or in the Certificates, so long as Amexco or any of
its subsidiaries is the holder of any Preferred Shares, such shares shall be
voted for and against any proposal or matter submitted to a vote of the holders
of Voting Stock in the same proportion as the votes cast by the holders of the
Common Stock.
(b) For so long as Amexco and Nippon Life, or either of them, hold in the
aggregate all of the issued and outstanding Redeemable Preferred Shares, for
purposes
13
<PAGE>
of Section 2(g) and Section 2(n)(ii) of the Redeemable Certificate, the fair
market value of any distribution, purchase or capital stock shall be determined
(A) jointly by the Company and the holders of a majority of the shares of
Redeemable Preferred Stock outstanding on the Calculation Date or (B) if the
Company and such holders cannot so agree, by a nationally recognized independent
investment banking firm (an "Independent Banker") selected by the Company and
such holders, or (C) if the Company and such holders cannot agree on the
selection of an Independent Banker, by an Independent Banker selected by two
Independent Bankers, one of which shall be selected by the Company and the other
selected by such Holders and all of the fees, costs and expenses incurred in
connection with the engagement of such Independent Banker(s) shall be paid (x)
by the Company if, as a result of such determination, a Designated Event is
deemed to have occurred or (y) by such holders in all other cases.
(c) On the Closing Date, the Company will pay to Amexco by wire transfer of
immediately available funds to an account designated by Amexco at least two
business days prior to the Closing Date the sum of $5,000,000.00 (the "Base
Amount"). If Amexco requests a registration pursuant to Section 1(a) of Exhibit
D hereto in connection with an underwritten offering and selects Lehman Brothers
Inc. (or any other affiliate of the Company) as the lead underwriter of such
offering, then notwithstanding Section 4 of Exhibit D hereto, the aggregate
underwriting discount in connection with such offering shall not exceed the Base
Amount.
(d) Prior to the Closing Date, the Company and American Express shall
execute and deliver such agreements and documents that expressly provide for all
agreements between the parties, not theretofore evidenced by a writing,
disclosed in the Registration Statement as being in effect on or prior to the
Distribution Date (as defined in the Registration Statement) including, but not
limited to the Balcor Notes and the set-off rights with respect thereto referred
to in the Registration Statement.
Section 8. Notices. Any notice by the Company to Amexco shall be
-------
sufficient if given in writing delivered in person or by mail or facsimile (No.
(212) 267-9061 addressed to Amexco at its address set forth above,
14
<PAGE>
to the attention of each of Treasurer and General Counsel, and any notice by
Amexco to the Company shall be sufficient if given in writing delivered in
person or by mail or facsimile (No. (212) 528-6265) addressed to the Company at
3 World Financial Center, New York, New York 10285, to the attention of each of
Treasurer and Chief Legal Officer or such other address as any party may, from
time to time, designate in a written notice in a like manner. Notice given by
facsimile shall be deemed delivered on the business day after it is received by
the recipient. Notice given by mail as set out above shall be deemed delivered
five calendar days after the date the same is mailed.
Section 9. Binding Agreement. This Agreement shall be binding upon
-----------------
Amexco, the Company and Amexco's and the Company's respective successors. This
Agreement and the terms and provisions hereof are for the sole benefit of only
those persons, except (a) as set forth in Section 6 hereof and (b) that the
representations, warranties, indemnities and agreements of the Company contained
in this Agreement shall also be deemed to be for the benefit of any person or
persons who control Amexco within the meaning of Section 15 of the Act. Nothing
in this Agreement is intended or shall be construed to give any person, other
than the persons referred to in this Section, any legal or equitable right,
remedy or claim under or in respect of this Agreement or any provision contained
herein.
Section 10. Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of New York, regardless of the laws that
might otherwise govern under applicable principles of conflicts of law.
Section 11. Injunctions. Irreparable damage would occur in the event that
-----------
any provision of this Agreement was not performed in accordance with its
specific terms or was otherwise breached. Therefore, the parties hereto shall
be entitled to an injunction or injunctions to prevent breaches of the
provisions of this Agreement and to enforce specifically the terms and
provisions hereof in any court having jurisdiction, such remedy being in
addition to any other remedy to which they may be entitled at law or in equity.
15
<PAGE>
Section 12. Severability. If any term or provision of this Agreement is
------------
held by a court of competent jurisdiction to be invalid, void or unenforceable,
the remainder of the terms and provisions set forth herein shall remain in full
force and effect and shall in no way be affected, impaired or invalidated, and
the parties hereto shall use their best efforts to find and employ an
alternative means to achieve the same or substantially the same result as that
contemplated by such term or provision.
Section 13. Further Assurances. Subject to the specific terms of this
------------------
Agreement, each of Amexco and the Company shall make, execute, acknowledge and
deliver such other instruments and documents, and take all such other actions,
as may be reasonably required in order to effectuate the purposes of this
Agreement and to consummate the transactions contemplated hereby.
Section 14. Waivers, Etc. No failure or delay on the part of Amexco or
-------------
the Company in exercising any power or right hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right or power, or
any abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. No modification, waiver, discharge or termination of any
provision of this Agreement nor consent to any departure by Amexco or the
Company therefrom shall in any event be effective unless the same shall be in
writing, and then shall be effective only in the specific instance and for the
purpose for which given.
Section 15. Miscellaneous. This Agreement constitutes the entire
-------------
agreement and understanding of the parties hereto with respect to the matters
and transactions contemplated hereby and supersedes all prior agreements and
understandings whatsoever relating to such matters and transactions. The
headings in this Agreement are for the purposes of reference only and shall not
limit or otherwise affect the meaning hereof. This Agreement may be executed in
counterparts, each of which shall constitute an original, but all of which shall
together constitute one instrument.
16
<PAGE>
If the foregoing correctly sets forth our agreement, please so indicate in
the space provided below for that purpose, whereupon this letter shall
constitute a binding agreement between the Company and Amexco.
Very truly yours,
LEHMAN BROTHERS
HOLDINGS INC.
By: /s/ Karen M. Muller
----------------------------
Name: Karen M. Muller
Title: Vice President
ACCEPTED at New York, New
York as of the date first
above written.
AMERICAN EXPRESS COMPANY
By: /s/ Michael F. Konaw
-------------------------------
Name: Michael F. Konaw
Title: Executive Vice President
and Chief Financial Officer
17
<PAGE>
EXHIBIT 10.30
REGISTRATION RIGHTS AGREEMENT dated as of May 27, 1994, between
AMERICAN EXPRESS COMPANY, a New York corporation ("Amexco"), and
LEHMAN BROTHERS HOLDINGS INC., a Delaware Corporation
("Holdings").
WHEREAS, upon consummation of the transactions contemplated by the
Purchase and Exchange Agreement, dated April 28, 1994, between Amexco and
Holdings (the "Purchase Agreement"), Amexco will be the owner of 8,000,000
shares (the "Cumulative Preferred Shares") of Cumulative Voting Preferred Stock
of Holdings and 928 shares (the "Redeemable Preferred Shares") of Redeemable
Voting Preferred Stock of Holdings; and
WHEREAS, Holdings is granting to Amexco the registration rights set
forth below with respect to the Cumulative Preferred Shares and the Redeemable
Preferred Shares (collectively, the "Amexco Securities").
NOW, THEREFORE, upon the premises and the mutual promises herein
contained, and for good and valuable consideration, the receipt and adequacy of
which is acknowledged, the parties agree as follows:
<PAGE>
1. Registration Rights.
-------------------
(a) Demand Registration. If Amexco shall request Holdings in
-------------------
writing to register under the Securities Act of 1933, as amended (the "Act"),
any Amexco Securities held by it or any transferee as defined in Section 8
(whether for purposes of a public offering, an exchange offer or otherwise),
Holdings shall as expeditiously as possible prepare and file and use its best
efforts to cause to become effective as soon as practicable a registration
statement under the Act to effect the offering of the Amexco Securities
specified in such request in the manner specified in such request. If Amexco
shall so request and Holdings is then eligible to register such Amexco
Securities on Form S-3 (or a successor form), Holdings will register such Amexco
Securities for offering on a delayed or continuous basis pursuant to Rule 415
(or any successor rule or rules to similar effect) under the Act. If Amexco
shall so request, Holdings shall, at the expense of Amexco, take such actions as
shall be necessary or appropriate to permit any Amexco Securities specified in
such request to be offered and sold in compliance with the securities laws or
other relevant laws of any European jurisdiction or in Japan (including, without
limitation, listing such
2
<PAGE>
Amexco Securities on any foreign securities exchange in Europe or in Japan on
which the Common Stock of Holdings is then listed) and shall otherwise cooperate
in a timely manner in such offering. Notwithstanding the foregoing, Holdings
shall be entitled to defer for a reasonable period of time, but not in excess of
90 days (a "Blackout Period"), the filing of any registration statement
otherwise required to be prepared and filed by it if in the good faith judgment
of the General Counsel of Holdings, the filing of a registration statement at
such time would require the disclosure of material information which Holdings
has a bona fide business purpose for preserving as confidential or Holdings is
unable to comply with SEC requirements such as the preparation of pro forma
financial information; provided, however, that not more than two such Blackout
-------- -------
Periods may be commenced during any period of 365 consecutive days. If a
Blackout Period is commenced, Holdings shall promptly make such filing as soon
as the conditions which permit it to delay such filing no longer obtain. In the
event of any such deferral, Amexco shall have the right to withdraw its request
for registration and such withdrawn request shall not be considered as a demand
registration under this Section 1(a). The aggregate number of times that Amexco
3
<PAGE>
(together with any transferees of Amexco) shall have the right to exercise
demand registration rights pursuant to this Section 1(a) with respect to either
class of the Amexco Securities plus the number of private placement memoranda
required to be prepared and delivered by Holdings with respect to such class
pursuant to Section 6(b) of the Purchase Agreement shall not exceed six, and
Amexco (together with any transferees of Amexco) shall have the right to
exercise demand registration rights pursuant to this Section 1(a) up to two
times during any period of 365 consecutive days.
(b) Condition to Exercise of Rights. The obligations of Holdings
-------------------------------
under paragraph (a) of this Section 1 shall be subject to the limitation that
Holdings shall not be obligated to register or take other specified actions with
respect to Amexco Securities, unless the number of shares specified in such
request shall be at least 10% of the total number of shares of such class at the
time outstanding; provided, however, that such limitation shall not apply in the
-------- --------
case of a demand for registration if such sale is necessary or advisable in the
good faith judgment of the General Counsel of Amexco in order to comply with any
applicable law or any order of a regulatory authority or court. If
4
<PAGE>
the anticipated effective date of a filing falls after 45 days and within 90
days subsequent to the end of a fiscal year, and Holdings would be required to
include in the registration statement audited financial statements for its most
recently completed fiscal year, then Holdings may delay the filing of a
registration statement for such period (up to 90 days after the end of such
fiscal year) as is reasonably necessary in Holdings' judgment to include therein
its audited financial statements for such fiscal year. In addition, Holdings
shall not be required to file a registration statement for Amexco pursuant to
this Section l until a period of 90 days shall have elapsed from the effective
date of the most recent previous registration for Amexco under this Section l.
(c) Piggyback Registration. If prior to May l, 2001, Holdings shall
----------------------
propose to register any securities for public sale under the Act, including any
registration by Holdings of securities for the account of another securityholder
of Holdings, on a form and in a manner which would permit registration of the
Amexco Securities for sale to the public, then Holdings shall give the President
or Chief Financial Officer of Amexco prompt notice of the proposed registration
and shall include in such registration such number of Amexco
5
<PAGE>
Securities as Amexco shall request within 15 business days after the giving of
such notice; provided, however, that Holdings may at any time prior to the
-------- -------
effectiveness of any such registration statement, in its sole discretion and
without the consent of Amexco, abandon the proposed offering in which Amexco had
requested to participate. Notwithstanding the foregoing, (i) Holdings shall not
be obligated to include such Amexco Securities in such offering if Holdings is
advised in writing by a recognized independent investment banking firm selected
by Holdings (with a copy to Amexco) that inclusion in such offering of all or a
specified number of such Amexco Securities requested to be included therein
would interfere with the successful marketing of the securities (other than such
Amexco Securities) in such offering; provided, however, that Holdings shall in
-------- -------
any case be obligated to include such number or amount of Amexco Securities in
such offering, if any, as such investment banking firm shall determine will not
so interfere with such marketing, and (ii) Holdings shall not be obligated to
effect any registration of such Amexco Securities incidental to the registration
by Holdings of any of its securities in connection with mergers, acquisitions,
exchange offers, subscription offers, dividend
6
<PAGE>
reinvestment plans or stock option or other director or employee benefit plans.
(d) Conversion of Other Securities. etc. Should Amexco offer any
------------------------------------
options, rights, warrants or other securities issued by it or any other person
that are offered with, convertible into or exercisable or exchangeable for any
Amexco Securities, Holdings' obligations under this Section l shall be
applicable to such securities to be purchased upon such conversion, exercise or
exchange or offered with such other securities.
(e) Third Person Shares. Holdings shall have the right to cause the
-------------------
registration of additional securities for sale for the account of any person in
any registration of Amexco Securities requested by Amexco pursuant to Section
l(a), provided, that, Holdings shall not have the right to cause the
-------- ----
registration of such additional securities if (i) Amexco is advised in writing
(with a copy to Holdings) by a recognized independent investment banking firm
selected by Amexco that, in such firm's opinion, registration of such additional
securities would interfere with the successful marketing of such Amexco
Securities, or (ii) Amexco does not receive assurances satisfactory to it that
the person for
7
<PAGE>
whose account such additional securities are being registered will pay its pro
---
rata share of the registration expenses. Amexco may require that any such
- ----
additional securities be included in the offering proposed by Amexco on the same
terms and conditions as the Amexco Securities are included therein.
2. Covenants of Holdings. In connection with any offering of Amexco
---------------------
Securities pursuant to this Agreement, Holdings shall
(a) furnish to Amexco such number of copies of any preliminary,
base, interim or final prospectus, registration statement, offering memorandum
or other offering document (including any exhibits thereto or documents referred
to therein) as Amexco may reasonably request and a copy of any and all
transmittal letters or other correspondence with the Securities and Exchange
Commission (the "SEC") or any other governmental agency or self-regulatory body
or other body having jurisdiction (including any domestic or foreign securities
exchange) relating to such offering of Amexco Securities;
(b) use its best efforts to qualify such Amexco Securities for
offer and sale under the securities, "blue sky" or similar laws of such
8
<PAGE>
jurisdictions (including Japan and any country in Europe or any political
subdivision thereof) as Amexco or any underwriter shall reasonably request and
use its best efforts to obtain all appropriate registrations, permits and
consents required in connection therewith, except that Holdings shall not for
any such purpose be required to qualify generally to do business as a foreign
corporation in any jurisdiction wherein it is not so qualified, or to subject
itself to taxation in any such jurisdiction, or to consent to general service of
process in any such jurisdiction; provided that, in the case of any such
--------
registration or qualification in any non-United States jurisdiction,
notwithstanding Section 4, Amexco shall pay all costs and expenses incurred by
Holdings in connection with such registration or qualification in such
jurisdiction;
(c) furnish to Amexco, addressed to it, (i) an opinion of counsel for
Holdings, dated the date of the closing of the offering of Amexco Securities,
and (ii) a "cold comfort" letter signed by the independent public accountants
who have certified Holdings' financial statements included in such registration
statement, covering substantially the same matters with respect to such
registration statement (and the prospectus included
9
<PAGE>
therein) and, in the case of such accountants' letter, with respect to events
subsequent to the date of such financial statements, as are customarily covered
in opinions of issuer's counsel and in accountants' letters delivered to
underwriters in underwritten public offerings of securities and such other
matters as Amexco may reasonably request;
(d) furnish unlegended certificates representing ownership of the
Amexco Securities being sold in such denominations as shall be requested by
Amexco or the lead underwriter;
(e) promptly inform Amexco (i) in the case of any offering of Amexco
Securities in respect of which a registration statement is filed under the Act,
of the date on which such registration statement or any post-effective amendment
thereto becomes effective (and, in the case of an offering abroad of Amexco
Securities, of the date when any required filing under the securities and other
laws of such foreign jurisdictions shall have been made and when the offering
may be commenced in accordance with such laws) and (ii) of any request by the
SEC, any securities exchange, government agency, self-regulatory body or other
body having jurisdiction for any amendment of or supplement to any registration
statement
10
<PAGE>
or preliminary prospectus or prospectus included therein or any offering
memorandum or other offering document relating to such offering;
(f) until the earlier of (i) such time as all of the Amexco Securities
being offered have been disposed of in accordance with the intended method of
disposition by Amexco set forth in the Registration Statement or other offering
document (and the expiration of any prospectus delivery requirements in
connection therewith) or (ii) the expiration of nine months after such
Registration Statement or other offering document becomes effective (unless the
offering is a continuous offering of securities under Rule 415, in which case
until the offering is completed), keep effective and maintain any registration,
qualification or approval obtained in connection with the offering of the Amexco
Securities, and amend or supplement the registration statement or prospectus or
other offering document used in connection therewith to the extent necessary in
order to comply with applicable securities laws and immediately notify Amexco of
any such amendment or supplement;
(g) use its best efforts to have such Amexco Securities listed on any
domestic and foreign securities exchanges as to which Amexco shall request such
listing;
11
<PAGE>
provided, however, that in the case of any such listing on any foreign
- -------- -------
securities exchange, notwithstanding Section 4, Amexco shall pay all costs and
expenses incurred by Holdings in connection with such listing;
(h) promptly notify Amexco of the happening of any event as a result
of which any registration statement or any preliminary prospectus or prospectus
included therein or any offering memorandum or other offering document includes
an untrue statement of any material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading, and prepare, file as appropriate and furnish to Amexco as promptly
as possible as many copies as Amexco shall request of a supplement to or
amendment of such offering document which shall correct such untrue statement or
eliminate such omission;
(i) If Amexco so requests, use its best efforts to establish, at the
expense of Amexco, a depositary arrangement with respect to the Redeemable
Preferred Shares, in order that interests in the Redeemable Preferred Shares may
be sold via the use of depositary receipts; and
(j) take such other actions and execute and deliver such other
documents as may reasonably be
12
<PAGE>
necessary to give full effect to the rights of Amexco under this Agreement.
3. Underwriting; Due Diligence.
---------------------------
(a) If requested by the underwriters for any underwritten offering
of Amexco Securities pursuant to a registration requested hereunder, Holdings
will enter into an underwriting agreement with such underwriters for such
offering, such agreement to contain such representations and warranties by
Holdings and such other terms and provisions as are customarily contained in
underwriting agreements with respect to secondary distributions, including,
without limitation, indemnities and contribution to the effect and to the extent
provided in Section 5 and the provision of opinions of counsel and accountants'
letters to the effect and to the extent provided in Section 2(c). The holders
of the Amexco Securities on whose behalf the Amexco Securities are to be
distributed by such underwriters shall be parties to any such underwriting
agreement and the representations and warranties by, and the other agreements on
the part of Holdings to and for the benefit of such underwriters, shall also be
made to and for the benefit of such holders of the Amexco Securities.
13
<PAGE>
(b) In the event that any registration pursuant to Section 1(c) shall
involve, in whole or in part, an underwritten offering, Holdings may require the
Amexco Securities requested to be registered pursuant to Section 1(c) to be
included in such underwriting on the same terms and conditions as shall be
applicable to the other securities being sold through underwriters under such
registration. The representations and warranties in such underwriting agreement
by, and the other agreements on the part of, Holdings to and for the benefit of
such underwriters, shall also be made to and for the benefit of the holders of
the Amexco Securities.
(c) In connection with the preparation and filing of each registration
statement registering securities under the Act, Holdings will give Amexco and
the underwriters, if any, and their respective counsel and accountants, such
reasonable and customary access to its books and records and such opportunities
to discuss the business of Holdings with its officers and the independent public
accountants who have certified its financial statements as shall be necessary,
in the opinion of Amexco and such underwriters or their respective counsel, to
conduct a reasonable investigation within the meaning of the Act.
14
<PAGE>
4. Expenses.
--------
(a) All expenses incurred in complying with Amexco's first four
demands under Section 1(a) hereof, including, without limitation, all
registration and filing fees (including all expenses incident to any filing with
the National Association of Securities Dealers, Inc. or listing on any domestic
or foreign securities exchange), fees and expenses of complying with securities
and blue sky laws (including those of counsel retained to effect such
compliance) and printing expenses (collectively, the "Registration Expenses")
shall be borne by Holdings. All Registration Expenses relating to any
additional demands of Amexco shall be borne by Amexco. Notwithstanding the
foregoing (i) Amexco shall, subject to Section 7(c) of the Purchase Agreement,
pay all underwriting discounts and commissions and any stamp, duty or transfer
tax, and (ii) Holdings shall pay (x) the fees and disbursements of its
independent public accountants (including any such fees and expenses incurred in
performing any special audits required in connection with any such offering and
incurred in connection with the preparation of pro forma financial statements
and comfort letters for any such offering), (y) transfer agents', depositaries'
and registrars' fees
15
<PAGE>
and the fees of any other agent appointed in connection with such offering, and
(z) all security engraving and security printing expenses, and (iii) each party
shall pay the fees and expenses of its counsel. In no event, however, shall
Amexco be required to pay any internal costs of Holdings.
(b) All expenses incurred in complying with Section 1(c) hereof,
including, without limitation, any Registration Expenses, shall be paid by
Holdings, except that (i) Amexco shall pay all underwriting discounts,
commissions and expenses specifically attributable to the inclusion in the
offering under said Section 1(c) of the Amexco Securities, including any stamp,
duty or transfer tax attributable to the Amexco Securities, and (ii) each party
shall pay the fees and expenses of its counsel.
5. Indemnification.
---------------
(a) Holdings Indemnity. In the case of each offering of Amexco
------------------
Securities made pursuant to this Agreement, Holdings agrees to indemnify and
hold harmless Amexco, its officers and directors, each underwriter of Amexco
Securities so offered and each person, if any, who controls any of the foregoing
persons within the meaning of the Act, against any and all losses, claims,
damages
16
<PAGE>
or liabilities, joint or several, to which they or any of them may become
subject under the Act, the Securities Exchange Act of 1934 (the "Exchange Act")
or other federal or state statutory law or regulation, at common law or
otherwise, including any amount paid in settlement of any litigation commenced
or threatened, and shall promptly reimburse them, as and when incurred, for any
legal or other expenses incurred by them in connection with investigating any
claims and defending any actions, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in the
registration statement, as originally filed or in any amendment thereof, or in
any preliminary, interim or final prospectus included therein, or in any
amendment thereof or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
arise out of or are based upon any violation or alleged violation by Holdings of
the Act, any blue sky laws, securities laws or other applicable laws of any
state or country in which the Amexco Securities are offered and relating to
action or
17
<PAGE>
inaction required of Holdings in connection with such offering, and agrees to
promptly reimburse each such indemnified party, as and when incurred, for any
legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that (i) Holdings will not be liable in any such case to the
- -------- -------
extent that any such loss, claim, damage or liability arises out of, or is based
upon, any such untrue statement or alleged untrue statement or omission or
alleged omission made therein in reliance upon and in conformity with written
information furnished to Holdings by Amexco specifically for use in connection
with the preparation thereof, and (ii) such indemnity with respect to any
preliminary, interim or, in the case of a Rule 415 offering, base prospectus
shall not inure to the benefit of Amexco (or any person controlling Amexco), or
any underwriter (or any person controlling such underwriter) from whom the
person asserting any such loss, claim, damage or liability purchased the Amexco
Securities which are the subject thereof if such person did not receive a copy
of the final prospectus at or prior to the confirmation of the sale of such
Amexco Securities to such person in any case where such delivery is required
18
<PAGE>
by the Act and the untrue statement or omission of a material fact contained in
the preliminary, interim or base prospectus was corrected in the final
prospectus, unless such failure to deliver the final prospectus was a result of
noncompliance by Holdings with its obligations under this Agreement. This
indemnity agreement will be in addition to any liability which Holdings may
otherwise have.
(b) Amexco Indemnity. In the case of each offering made pursuant to
----------------
this Agreement, Amexco agrees to indemnify and hold harmless Holdings, each of
its directors, each of its officers who sign the registration statement, and
each person, if any, who controls Holdings within the meaning of the Act (and if
requested by the underwriters, each underwriter who participates in the offering
and each person, if any, who controls any such underwriter within the meaning of
the Act), from and against any and all losses, claims, damages or liabilities,
joint or several, to which they or any of them may become subject, under the
Act, the Exchange Act or other federal or state statutory law or regulation, at
common law or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of, or are based upon any
19
<PAGE>
untrue statement or alleged untrue statement of a material fact contained in the
registration statement, or in any preliminary, interim, base or final
prospectus, or in any amendment thereof or supplement thereto, or arise out of
or are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, in each case to the extent, but only to the extent, that the
same was made therein in reliance upon and in conformity with written
information furnished to Holdings by Amexco specifically for use in the
preparation thereof, or arise out of or are based upon any violation or alleged
violation by Amexco of the Act, any blue sky laws, securities laws or other
applicable laws of any state or country in which the Amexco Securities are
offered and relating to action or inaction required of Amexco in connection with
such offering, and agrees to promptly reimburse each such indemnified party, as
and when incurred, for any legal or other expense reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action. This indemnity agreement will be in addition to any
liability which Amexco may otherwise have.
20
<PAGE>
(c) Procedure for Indemnification. Promptly after receipt by an
-----------------------------
indemnified party under this Section 5 of notice of the commencement of any
action, such indemnified party will, if a claim in respect thereof is to be made
against the indemnifying party under this Section 5, notify the indemnifying
party in writing of the commencement thereof; but the omission so to notify the
indemnifying party will not relieve it from any liability which it may have to
any indemnified party otherwise than under this Section 5. In case any such
action is brought against any indemnified party, and it notifies the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein, and to the extent that it may elect by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof, with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
-------- -------
defendants in any such action include both the indemnified party and the
indemnifying party and either (i) the indemnifying party or parties and the
indemnified party or parties mutually agree or (ii) representation of both the
indemnifying party or parties and the indemnified party or parties by
21
<PAGE>
the same counsel is inappropriate under applicable standards of professional
conduct due to actual or potential differing interests between them, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of its election so to
assume the defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified party
under this Section 5 for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed counsel in connection with the assumption
of legal defenses in accordance with the proviso to the next preceding sentence,
(ii) the indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of commencement of the action or (iii) the indemnifying party has
authorized the employment of counsel for the indemnified party at the expense of
the indemnifying party. If the indemnified
22
<PAGE>
party or parties employ such separate counsel they will not enter into any
settlement agreement which is not approved by the indemnifying party, such
approval not to be unreasonably withheld. If the indemnifying party so assumes
the defense thereof, it may not agree to any settlement of any such claim or
action as the result of which any remedy or relief, other than monetary damages
for which the indemnifying party shall be responsible hereunder, shall be
applied to or against the indemnified party, without the prior written consent
of the indemnified party. If the indemnifying party does not assume the defense
thereof, it shall be bound by any settlement to which the indemnified party
agrees, irrespective of whether the indemnifying party consents thereto. In any
action hereunder as to which the indemnifying party has assumed the defense
thereof with counsel satisfactory to the indemnified party, the indemnified
party shall continue to be entitled to participate in the defense thereof, with
counsel of its own choice, but, except as set forth above, the indemnifying
party shall not be obligated hereunder to reimburse the indemnified party for
the costs thereof.
The parties hereto shall, and shall cause their respective
subsidiaries to, cooperate with each other in
23
<PAGE>
a reasonable manner with respect to access to unprivileged information and
similar matters in connection with any Action.
(d) Contribution. If the indemnification provided for in this Section
------------
5 shall for any reason be unavailable to an indemnified party in respect of any
loss, claim, damage or liability, or any action in respect thereof, referred to
therein, then each indemnifying party shall, in lieu of indemnifying such
indemnified party, contribute to the amount paid or payable by such indemnified
party as a result of such loss, claim, damage or liability, or action in respect
thereof, in such proportion as shall be appropriate to reflect the relative
fault of the indemnifying party on the one hand and the indemnified party on the
other with respect to the statements or omissions which resulted in such loss,
claim, damage or liability, or action in respect thereof, as well as any other
relevant equitable considerations. The relative fault shall be determined by
reference to whether the untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the indemnifying party on the one hand or the indemnified party on
the other, the intent of the parties
24
<PAGE>
and their relative knowledge, access to information and opportunity to correct
or prevent such statement or omission, but not by reference to Amexco's or any
other indemnified party's stock ownership in Holdings. The amount paid or
payable by an indemnified party as a result of the loss, claim, damage or
liability, or action in respect thereof, referred to above in this paragraph
shall be deemed to include, for purposes of this paragraph, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
6. Amexco Affiliates. The rights of Amexco under this Agreement
-----------------
with respect to any Amexco Securities may be transferred by Amexco to any one or
more corporations or other entities as to which Amexco shall at the time of such
transfer own 50% or more of the outstanding securities thereof or interests
therein having by the terms thereof ordinary voting power to elect at least 50%
of the Board of Directors or others performing similar functions with respect to
such
25
<PAGE>
corporation or other entity.
7. Rule 144. Holdings shall take such measures and file such
--------
information, documents and reports as shall be required by the SEC as a
condition to the availability of Rule 144 (or any successor provision).
8. Transfer of Rights.
------------------
(a) Amexco may transfer its rights under this Agreement to any
transferee (each, a "transferee") of an amount of Amexco Securities owned by
Amexco exceeding 10 percent of the outstanding class of such Amexco Securities
at the time of transfer. Any transfer of registration rights pursuant to this
Section shall be effective upon receipt by Holdings of written notice from
Amexco stating the name and address of any transferee and identifying the Amexco
Securities with respect to which the rights under this Agreement are being
transferred. In connection with any such transfer, the term "Amexco" as used
herein shall, where appropriate to assign the rights and obligations of Amexco
hereunder to such transferee, be deemed to refer to the transferee holder of the
Amexco Securities. Amexco and such transferees may exercise the registration
rights hereunder in such proportion as they shall agree among themselves.
26
<PAGE>
(b) After any such transfer, Amexco shall retain its rights under
this Agreement with respect to all other Amexco Securities owned by Amexco.
(c) Upon the request of Amexco, Holdings shall execute a
Registration Rights Agreement with such transferee or a proposed transferee
substantially similar to this Agreement, and any demand registrations granted to
such transferee shall reduce the then remaining number of demand registrations
to which Amexco is entitled under Section 1(a).
9. Miscellaneous.
-------------
(a) Injunctions. Irreparable damage would occur in the event
-----------
that any of the provisions of this Agreement was not performed in accordance
with its specific terms or was otherwise breached. Therefore, the parties hereto
shall be entitled to an injunction or injunctions to prevent breaches of the
provisions of this Agreement and to enforce specifically the terms and
provisions hereof in any court having jurisdiction, such remedy being in
addition to any other remedy to which they may be entitled at law or in equity.
(b) Severability. If any term or provision of this Agreement is
------------
held by a court of competent jurisdiction to be invalid, void or
27
<PAGE>
unenforceable, the remainder of the terms and provisions set forth herein shall
remain in full force and effect and shall in no way be affected, impaired or
invalidated, and the parties hereto shall use their best efforts to find and
employ an alternative means to achieve the same or substantially the same result
as that contemplated by such term or provision.
(c) Further Assurances. Subject to the specific terms of this
------------------
Agreement, each of Amexco and Holdings shall make, execute, acknowledge and
deliver such other instruments and documents, and take all such other actions,
as may be reasonably required in order to effectuate the purposes of this
Agreement and to consummate the transactions contemplated hereby.
(d) Waivers, Etc. No failure or delay on the part of Amexco or
-------------
Holdings in exercising any power or right hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right or power, or
any abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. No modification or waiver of any provision of this Agreement
nor consent to any departure by Amexco or Holdings therefrom shall in any event
be
28
<PAGE>
effective unless the same shall be in writing, and then such waiver or consent
shall be effective only in the specific instance and for the purpose for which
given.
(e) Entire Agreement. This Agreement contains the entire
----------------
understanding of the parties with respect to the transactions contemplated
hereby and, with respect to the Cumulative Preferred Shares and the Redeemable
Preferred Shares, supersedes all prior agreements with respect to such
transactions, including the Registration Rights Agreement, dated as of May 1,
1987, between Amexco and Holdings.
(f) Counterparts. For the convenience of the parties any number
------------
of counterparts of this Agreement may be executed by the parties hereto, and
each such executed counterpart shall be, and shall be deemed to be, an original
instrument.
(g) Notices. All notices, consents, requests instructions,
-------
approvals and other communications provided for herein shall be validly given,
made or served, if in writing and delivered personally by facsimile or sent by
registered mail, postage prepaid:
(i) If to Amexco, to
American Express Company
American Express Tower
World Financial Center
New York, New York 10285
29
<PAGE>
Attention: Treasurer and General Counsel
Facsimile No.: (212) 267-9061
(ii) If to Holdings, to
Lehman Brothers Holdings Inc.
American Express Tower
World Financial Center
New York, New York 10285
Attention: Treasurer and Chief
Legal Officer
Facsimile No.: (212) 528-6265
or such other address as any party may, from time to time, designate in a
written notice in a like manner. Notice given by facsimile shall be deemed
delivered on the business day after it is received by the recipient. Notice
given by mail as set out above shall be deemed delivered five calendar days
after the date the same is mailed.
(h) Governing Law. This Agreement shall be governed by and construed
-------------
and enforced in accordance with the laws of the State of New York applicable to
contracts made and to be performed therein.
(i) Assignment. Except as provided herein, the parties may not assign
----------
their rights under this Agreement. Holdings may not delegate its obligations
under this Agreement.
30
<PAGE>
IN WITNESS WHEREOF, Amexco and Holdings have caused this Agreement to
be duly executed as of the date first above written.
AMERICAN EXPRESS COMPANY
By /s/ Michael P. Monaco
-----------------------------
Name: Michael P. Monaco
Title: Executive Vice President and
Chief Financial Officer
LEHMAN BROTHERS
HOLDINGS INC.
By /s/ Karen Manson
-----------------------------
Name: Karen Manson
Title: Vice President
31
<PAGE>
EXHIBIT 10.31
OPTION AGREEMENT
OPTION AGREEMENT (this "Option Agreement"), made as of May 27, 1994, by and
among AMERICAN EXPRESS COMPANY ("AXP"), AMERICAN EXPRESS TRAVEL RELATED SERVICES
COMPANY, INC. ("TRS"), AMERICAN EXPRESS BANK LTD. ("AEB"; AXP, TRS and AEB each
individually, an "AXP Co-tenant", and collectively, the "AXP Co-tenants"), and
LEHMAN BROTHERS HOLDINGS INC. ("Holdings"), LEHMAN BROTHERS INC. ("LB"), LEHMAN
GOVERNMENT SECURITIES INC. ("LGS"), LEHMAN BROTHERS COMMERCIAL PAPER INC.
("LCP"; Holdings, LB, LGS and LCP each individually a "LB Co-tenant", and
collectively, the "LB Co-tenants"; each of the AXP Co-tenants and the LB Co-
tenants individually, a "Co-tenant", and all collectively, the "Co-tenants").
W I T N E S S E T H
WHEREAS, the Co-tenants, as tenants-in-common under the TIC Agreement (as
hereinafter defined), are, and in the case of Holdings will be, owners of the
leasehold interest in the land and building (the "Premises") known as Three
World Financial Center, New York, New York, as more particularly described in
Exhibit A attached hereto and made a part hereof, pursuant to the Agreement of
Severance Lease, dated as of June 15, 1983, by and between Battery Park City
Authority, as landlord ("Landlord") and Olympia & York Battery Park Company
<PAGE>
("Assignor"), as tenant, as assigned (as so assigned, the "Lease") by an
Assignment of Severance Lease with Assumption, dated as of June 15, 1983,
between Assignor, as assignor, and the Co-tenants, as assignee, for the joint
occupancy of the Co-tenants, for an eighty-six (86) year term commencing as of
June 15, 1983 (the "Co-tenant Assignment");
WHEREAS, as tenants-in-common and pursuant to the Lease, the liability of the
Co-tenants is joint and several;
WHEREAS, the Co-tenants share certain common areas and shared facilities, and
otherwise each occupy discrete premises within the Premises (as to each
(inclusive of its allocable share of such common areas and shared facilities),
its "Individual Premises"), all as further described in the Restated and Amended
Agreement of Tenants-in-Common (as amended from time to time, the "TIC
Agreement") among the Co-tenants, dated as of the date hereof, which TIC
Agreement sets forth the Co-tenants' agreements with respect to the occupancy
and operation of the Premises;
WHEREAS, (i) the Co-tenants are also co-obligors under certain debt incurred
by them in connection with the construction and furnishing of the Premises,
consisting of debt issued by the Co-tenants in the original principal amount of
approximately Six Hundred Forty-Nine Million Dollars ($649,000,000), guaranteed
by AXP and identified and described more specifically in Appendix 1
2
<PAGE>
hereto (the "WFC Cross-Default Debt"), and (ii) AXP issued its 11.95% Notes Due
January 15, 1995 in the original principal amount of One Hundred Seventy-Five
Million Dollars ($175,000,000) and reloaned portions thereof to the Co-tenants
(the "WFC AXP Debt"), such Debt maturing at various dates through and including
the year 2000 (the WFC Cross-Default Debt and the WFC AXP Debt collectively, and
specifically including the indentures, mortgages, notes, loan agreements and
other documents evidencing and securing the same in effect as of the date
hereof, the "WFC Debt"; and the holders, lenders, and mortgagees thereof,
collectively, the "Lenders");
WHEREAS, although the obligations of the Co-tenants as issuers with respect to
the WFC Cross-Default Debt are several as specified therein, the occurrence of
certain events (the "Causative Events") with respect to any of the Co-tenants
may constitute an event of default under the WFC Cross-Default Debt, and may
result in the acceleration thereof with respect to all the Co-tenants;
WHEREAS, certain of the Co-tenants are obligated under other indebtedness or
agreements pursuant to which acceleration of the WFC Cross-Default Debt may
constitute an event of default (collectively, the "Cross-Defaults");
WHEREAS, it is the goal of the Co-tenants by this Agreement to segregate their
status with respect to the WFC Cross-Default Debt, such that a Causative Event
as to any of them shall not cause Cross-Defaults for any others of them, or
3
<PAGE>
at a minimum, such that a Causative Event as to an AXP Co-tenant shall not cause
Cross-Defaults for any LB Co-tenant, and a Causative Event as to an LB Co-tenant
shall not cause Cross-Defaults for any AXP Co-tenant;
WHEREAS, the Co-tenants desire to grant to one another the reciprocal Option
(as hereinafter defined) for the consideration and upon the terms, covenants and
conditions herein contained.
NOW, THEREFORE, in consideration of the mutual promises contained herein and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the Co-tenants hereby agree as follows:
I. Grant of Option.
- -------------------
Each Co-tenant hereby grants to each other Co-tenant and its successors and
assigns but only if such successor or assignee is either AXP or Holdings or a
direct or indirect fifty percent (50%) or more owned subsidiary (a "Subsidiary")
of AXP or Holdings, as the case may be, the Option set forth in this Section I
pursuant to the terms hereof.
A. If, prior to the earlier of (i) the payment on maturity (on dates through
and including December 12, 2000) or earlier satisfaction in full of all the WFC
Debt, and (ii) the date upon which the Co-tenant with respect to which the
Trigger Event (as hereinafter defined) occurs is no longer an obligor pursuant
to any of the WFC Debt:
4
<PAGE>
1. an LB Trigger Event (as hereinafter defined) occurs, then AXP (or its
designee guaranteed by AXP) shall be entitled to exercise the Option described
in paragraph C below, as the "Buyer", and Holdings, LB, LGS and LCP collectively
(but in the case of LB Trigger Events other than that set forth in Clause 5
thereof, only if LB, LGS or LCP, as the case may be, is a Subsidiary of
Holdings and in the case of Clause 5, only the entity that has ceased to be a
Subsidiary as specified therein) shall be the "Seller" and shall take each
action specified herein to be taken by the Seller.
2. an AXP Trigger Event (as hereinafter defined) occurs as to AXP, or an AXP
Trigger Event as set forth in clause (y) of the definition of "AXP Trigger
Event" occurs as to an AXP Co-tenant, or a TRS Trigger Event (as hereinafter
defined) occurs as to TRS, or an AEB Trigger Event (as hereinafter defined)
occurs as to AEB, then LB or, at its option, Holdings or their designee
guaranteed by Holdings, shall be entitled to exercise the Option described in
paragraph C below, as the "Buyer", and the entity of AXP, TRS and AEB to which a
Trigger Event has occurred shall be the "Seller".
B. "LB Trigger Event": shall mean the occurrence of any one of the following
six events:
1. the average maturity for all commercial paper issued by Holdings and all
of its subsidiaries other than LB shall be less than fifteen (15) days
5
<PAGE>
and Holdings shall fail, within three (3) business days after such
occurrence, to cause the average maturity of all such commercial paper to
be equal to or greater than fifteen (15) days, provided, however, that if
such average maturity for all such commercial paper shall again fall
below fifteen (15) days on or before the third (3rd) month anniversary of
the expiration of such three (3) business day period with respect to the
first such occurrence, then Holdings shall not be entitled to such three
(3) business day cure period as to such second occurrence within such
three-month period;
2. the aggregate of all uncommitted lines of credit (the "Uncommitted
Lines") to Holdings and all of its subsidiaries, on a consolidated basis,
is less than $6 billion;
3. the aggregate of all committed lines of credit (the "Committed Lines")
available to Holdings and all of its subsidiaries, on a consolidated
basis, is less than $1.35 billion;
4. the total consolidated stockholders equity ("Net Worth") of Holdings is
less than $2.4 billion;
5. transfer of more than fifty percent (50%) of the voting stock in any LB
Co-tenant (other than Holdings) to any party other than a Subsidiary of
6
<PAGE>
Holdings. In the case of this trigger event, the Option shall only
apply to the LB Co-tenant so affected; or
6. if Holdings fails to deliver a notice required pursuant to clause a) of
Section I.I., within five business days after its due date, and AXP
notifies Holdings (by two copies, each set by receipted hand delivery,
addressed respectively to the attention of the Chief Financial Officer of
Holdings and the Chief Legal Officer of Holdings, together with same-day
telecopy to the attention of each of such persons, in both cases to the
addresses and telecopy numbers set forth in Section VII.A. hereof) of
such failure, and Holdings fails to deliver to AXP such required notice
within three (3) business days of receipt of such notice from AXP.
Upon the occurrence of a LB Trigger Event, AXP or its guaranteed designee shall
have the right to exercise the Option for a period equal to such time as the
applicable Trigger Event shall remain outstanding, plus three (3) months, except
in the case of a LB Trigger Event set forth in (x) clause 5 above, in which case
AXP or its guaranteed designee shall have the right to exercise the Option at
any time thereafter, and (y) clause 6 above, in which case AXP or its guaranteed
designee shall have the right to exercise the Option at any time prior to the
7
<PAGE>
delivery by Holdings of a notice relating to a subsequent month pursuant to
clause a) of Section I.I. within the required time period set forth therein.
"AXP Trigger Event": shall mean (x) the reduction of the long-term debt rating
of AXP to less than "BBB-" by Standard and Poor's Ratings Group ("S&P"), or to
less than "Baa3" by Moody's Investors Service ("Moody's"), or (y) transfer of
more than fifty percent (50%) of the voting stock in any AXP Co-tenant (other
than AXP) to any party other than a Subsidiary of AXP. Upon the occurrence of
an AXP Trigger Event, LB, Holdings or Holdings' guaranteed designee shall have
the right to exercise the Option for a period equal to such time as the AXP
Trigger Event shall remain outstanding, plus three (3) months, in the case of
the event set forth in clause (x), or at any time thereafter, in the case of the
event set forth in clause (y). In the case of the event set forth in clause
(y), the Option shall only apply to the AXP Co-tenant so affected.
"TRS Trigger Event": shall mean the reduction of the long-term debt rating of
TRS to less than "BBB-" by S&P, or to less than "Baa3" by Moody's. Upon the
occurrence of a TRS Trigger Event, LB, Holdings or Holdings' guaranteed designee
shall have the right to exercise the Option for a period equal to such time as
the TRS Trigger Event shall remain outstanding, plus three (3) months.
"AEB Trigger Event": shall mean the reduction of the long-term debt rating of
AEB to less than "BBB-" by S&P, or to less than "Baa3" by Moody's. Upon
8
<PAGE>
the occurrence of an AEB Trigger Event, LB, Holdings or Holdings' guaranteed
designee shall have the right to exercise the Option for a period equal to such
time as the AEB Trigger Event remains outstanding, plus three (3) months.
"Trigger Event" shall be any of a LB Trigger Event, an AXP Trigger Event, a
TRS Trigger Event and an AEB Trigger Event.
C. The Buyer shall have the option (the "Option"), exercisable upon written
notice (the "Exercise Notice") to the Seller during the periods specified in
Section I.B. hereof, to take all (but not some) of the following steps, as an
entirety, whereupon the Seller shall accept, cooperate and take all such actions
necessary to facilitate the Buyer's exercise of the Option. In furtherance
thereof, upon the exercise of the Option (the "Option Exercise") by the Buyer,
such Buyer and the Seller shall take all actions necessary in order for the
transactions set forth in items (1) through (5) below to occur. The transactions
described in items (1) through (4) shall occur simultaneously with the Option
Exercise; and the transactions described in item (5) shall occur thereafter in
accordance with the provisions thereof, but shall nonetheless constitute a
required component of the Option.
1. The Buyer shall acquire for Fair Value (as hereinafter defined) by an
assignment (the "Tenancy Assignment") in substantially the form of Exhibit B
attached hereto and made a part hereof the Seller's entire interest (the
"Interest") as a tenant-in-common with respect to the Property (as such term is
defined in the
9
<PAGE>
WFC Debt) pursuant to the Co-tenant Assignment. The Fair Value consideration
for such assignment may be paid, at the Buyer's election, in immediately
available funds or by delivery of a promissory note by the Buyer for the benefit
of the Seller in substantially the form of Exhibit C attached hereto and made a
part hereof (the "Buyer Note"). The Buyer shall purchase the Interest "AS IS,"
based upon the status of the Interest and the applicable Individual Premises as
of the date of the Tenancy Assignment. The Buyer acknowledges that the Seller
makes no representations or warranties, whether expressed or implied, by
operation of law or otherwise, with respect to the Interest or the applicable
Individual Premises, including without limitation representations or warranties
respecting the existence of any liens or encumbrances affecting the foregoing or
the state of title thereof;
2. The Buyer shall be substituted for the Seller as (i) obligor (and, if the
Seller is AXP, as guarantor if necessary) on the WFC Cross-Default Debt , and
(ii) tenant under the Lease, pursuant to, respectively, (a) an express
assumption (the "Buyer Assumption") of all the obligations of the Seller under
such WFC Debt in substantially the form of Exhibit D attached hereto and made a
part hereof and (b) an assignment and assumption of the Lease in recordable form
(the "Lease Assignment") and the TIC Agreement in substantially the form of
Exhibit E attached hereto and made a part hereof. Following the Buyer
Assumption, the
10
<PAGE>
Buyer shall be obligated to make all payments due from the Seller under such WFC
Cross-Default Debt and the Lease as and when due to the appropriate parties.
AXP, in its capacity as Managing Co-tenant (as defined in the TIC Agreement),
hereby agrees that upon the Option Exercise the Buyer shall be deemed admitted
as a Co-tenant under the TIC Agreement;
3. The Buyer shall lend to the Seller (the "Buyer Loan") as evidenced by a
note in substantially the form of Exhibit F attached hereto and made a part
hereof (the "Seller Note"), funds necessary to pay as and when due the Seller's
assigned share of the WFC Cross-Default Debt. In the event that any of the LB
Co-tenants is the Seller, then Holdings shall indemnify and hold harmless the
Buyer with respect to the performance and payment of the Seller Note by the
Seller. In the event that any of the AXP Co-tenants is the Seller, then AXP
shall indemnify and hold harmless the Buyer with respect to the performance and
payment of the Seller Note by the Seller. Proceeds of the Buyer Loan shall be
retained by the Buyer and shall be earmarked and applied solely to payments by
the Buyer in satisfaction of the Seller's assigned share of such WFC Debt.
Notwithstanding the foregoing, in the event that any of the LB Co-tenants is the
Seller, and the making of the Seller Note shall cause a net capital problem to
such Seller, then (a) Seller shall deliver to Buyer the Seller Note as provided
-
in this Agreement, and (b) promptly thereafter Buyer shall cooperate with Seller
-
in
11
<PAGE>
determining how to revise such Seller Note or assign it to address such net
capital problem in a manner that does not disadvantage Buyer;
4. The Buyer shall sublease to the Seller the Individual Premises
attributable to the Seller, on the terms and conditions described in Section G
below (the "Sublease"), for a term to expire upon the earlier of the
reconveyance of the Individual Premises to the Seller, and ninety (90) days
after the maturity or earlier satisfaction of all the WFC Cross-Default Debt;
and
5. Upon the maturity or earlier satisfaction of all the WFC Cross-Default
Debt or as promptly as possible thereafter, the Buyer shall reconvey to the
Seller, who shall be obligated to accept the same, the Interest previously
acquired by the Buyer upon exercise of the Option. Upon such reconveyance, (i)
the Buyer Note shall be cancelled (or, if it has been paid prior to the
reconveyance, payment thereof shall be refunded simultaneously with such
reconveyance, together with interest at the rate of interest publicly announced
from time to time by Morgan Guaranty Trust Company of New York as its Prime
Rate, from the date of payment of the Buyer Note to the date of such refund),
(ii) the Sublease shall be terminated and be of no further force and effect,
(iii) the TIC Agreement shall be reinstated to full force and effect with
respect to the Seller and (iv) the Buyer and Seller shall execute an Assumption
and Lease Assignment substantially in the forms attached hereto as required to
effectuate such reconveyance. Upon such
12
<PAGE>
reconveyance, the condition of title of the Interest and the applicable
Individual Premises shall be the same as or better than that conveyed to the
Buyer. In the event of a casualty loss or condemnation affecting the applicable
Individual Premises following the transfer of the Interest to the Buyer and
prior to the reconveyance thereof, any insurance and/or condemnation proceeds
related thereto which have not been applied to the restoration of the Individual
Premises shall be reassigned to the Seller or paid by the Buyer to the Seller,
as applicable, simultaneously with the reconveyance.
D. The determination by the Buyer whether to exercise the Option shall be
made acting in good faith.
E. Any out-of-pocket expenses incurred and owing to third parties, including
without limitation (A) any occupancy tax that would be due and (B) any taxes
that would be due under the Gains and Transfer Tax Laws (collectively, the
"Taxes") due (and any interest or penalties thereon, unless incurred by willful
misconduct or failure to perform obligations under this Agreement), in
connection with the Option Exercise shall be borne equally by the Buyer and
Seller. However, the Buyer shall thereafter reimburse the Seller for the half
of such expenses borne by the Seller if: (1) prior to the maturity or earlier
satisfaction of all the WFC Debt, a Causative Event has not occurred with
respect to the Seller,
13
<PAGE>
or (2) within 12 months after the Option Exercise, the Seller's Trigger Event is
no longer in effect and a Causative Event has not occurred.
F. Appendix 2 hereof contains (i) an acceptable appraiser and (ii)
instructions to be provided to such appraiser in connection with any appraisal
of the Property. Pursuant to the foregoing parameters and upon terms of
employment to be agreed upon by the Co-tenants, an appraiser will be retained by
the Co-tenants to deliver updated reports on the Fair Value (as hereinafter
defined) of each Individual Premises as follows: (i) an initial appraisal
update or report, as appropriate, shall be completed within thirty (30) days of
the date hereof, and (ii) further appraisal updates shall be performed annually
thereafter, at the Co-tenants' shared cost. In the event of an Option Exercise,
the "Fair Value" shall be determined in accordance with the most recent
appraisal with respect to the applicable Individual Premises. Appraisal updates
may also be obtained upon request of the Buyer or Seller at the time of the
Option Exercise. In the event that the Buyer or the Seller requests an
additional appraisal update in connection with the Option Exercise, the Buyer
may purchase the Seller's tenant-in-common interest with respect to its
Individual Premises in accordance with the terms of this Option Agreement prior
to receipt of such requested appraisal update, the Fair Value to be determined
initially in accordance with the most recent appraisal update theretofore
received by the Co-tenants. The consideration paid by the
14
<PAGE>
Buyer in connection with the Option Exercise (whether paid by delivery of the
Buyer Note or payment of immediately available funds) shall be adjusted pursuant
to the updated appraisal requested in connection with the Option Exercise
promptly upon receipt thereof.
G. 1. Promptly after the date which is thirty (30) days after the date of
this Agreement, unless the parties agree otherwise, the parties will commence
and diligently proceed to negotiate the form and substance of the Sublease
Agreement, which shall be consistent in all respects with the obligations of the
parties under the TIC Agreement; however, the execution of the Sublease
Agreement shall not be a prerequisite to the effectiveness of, or affect the
validity of, this Option Agreement or the Sublease, which shall take effect
immediately and automatically upon the Buyer's purchase of the Seller's interest
in the Property at Option Exercise. The financial obligations of the tenant
under the Sublease and the Seller Note, taken together, will be at least equal
to the financial obligations of the Seller under the TIC Agreement (including as
to the WFC Debt).
2. The parties intend that the economic, legal and practical effect of the
Sublease, the Buyer Note and the Seller Note all taken together, shall be in all
respects equal to that which would pertain if they remained co-owners under the
TIC Agreement at such time, so that the Co-tenants each have the same general
rights, powers, cost attributions, etc., as the TIC Agreement provides; and the
15
<PAGE>
Sublease shall include such provisions, steps and changes in format or procedure
as may be necessary to achieve this ultimate result. As an example, if the rent
under the Sublease is equal to fair market rent and such rent is greater than
the sum of (x) the obligations the Seller would have been obligated to pay under
the TIC Agreement and (y) the interest payable on the Buyer Note, then the Buyer
shall repay such differential to the Seller.
3. To the extent that additional topics, unexpected at present and not
addressed in the TIC Agreement, may have arisen by the time the Sublease is to
become effective, the same shall be determined consistently with the approach
indicated in the TIC Agreement as much as possible, and where not analogous,
consistently with then-prevailing practices among co-owners, but giving effect
to the status of the Buyer, the Seller, or both, as Managing Co-tenant under the
TIC Agreement. If the Co-tenants are unable after good-faith efforts to agree
upon the same, the same shall be arbitrated as provided in Section II below.
4. The parties acknowledge that the WFC Debt contains certain provisions with
respect to the terms of any leases. If at the time the Sublease becomes
effective either party believes the Sublease requires modification in order to
meet the requirements of the WFC Debt, the parties shall work together to
implement such modifications as are necessary to achieve the same, with
appropriate adjustments elsewhere to ensure the ultimate result described in
paragraph 2 of
16
<PAGE>
this Section, and if the Co-tenants are unable after good-faith efforts to agree
upon the same, the same shall be arbitrated as provided in Section II below.
Alternatively, the parties may agree to seek the Lenders' waiver of the
requirement in question.
5. The parties hereby agree that a Seller shall have the same rights to
consent to any modification or amendment of the WFC Debt as such Seller would
have had under the WFC Debt prior to the Option Exercise.
H. In the event that a Buyer and Seller each enter into a Buyer Note and a
Seller Note, respectively, in connection with the Option Exercise, and either
party defaults under its respective note, then the non-defaulting party shall
have the right to offset one against the other to the fullest extent permitted
by law.
I. Holdings shall:
a) deliver to AXP within three (3) business days after the end of each
calendar month, a written confirmation that no LB Trigger Event has occurred;
b) deliver to AXP, if Holdings or its ultimate parent, if any, shall be
a publicly-traded company, within two (2) business days after the release of its
or such parent's quarterly earnings, or, if Holdings or its ultimate parent, if
any, shall not be a publicly-traded company, within forty-five (45) days after
the end of each calendar quarter, information specifying (x) the Uncommitted
Lines, (y) the Committed Lines, and (z) the Net Worth;
17
<PAGE>
c) deliver to AXP notice of the occurrence of any LB Trigger Event (but
without regard to any cure rights set forth in the LB Trigger Event described in
clause (1) thereof) immediately after the occurrence thereof; and
d) promptly deliver to AXP notice of any LB Co-tenant's ceasing to be a
Subsidiary of Holdings.
Holdings shall have no reporting obligations to AXP other than as set forth
herein.
J. AXP shall promptly deliver to Holdings notice of (i) the occurrence of any
AXP Trigger Event immediately after receiving notice from the applicable rating
agency that it is downgrading the relevant debt and/or (ii) any AXP Co-tenant's
ceasing to be a Subsidiary of AXP.
II. Expedited Arbitration of Disputes.
- ---------------------------------------
A. In the event of dispute between the Co-tenants hereunder with respect to
the matters set forth in clauses 3 or 4 of Section I.G. hereof, either the
sublessor or the sublessee (the "Initiator"), may send notice thereof to the
other (the "Recipient"), and such dispute shall be settled and finally
determined by arbitration in New York, New York, in accordance with the
following provisions. The foregoing is not intended to limit in any way any
arbitration provisions contained in the TIC Agreement.
18
<PAGE>
B. The Initiator's notice shall state that it wishes such dispute to be
arbitrated and shall set forth the names and addresses of up to three
arbitrators, any of whom the Initiator would be willing to have decide such
dispute and each of whom has agreed to act as provided herein. The Recipient
shall give a reply notice to the Initiator within five (5) business days from
receipt of the Initiator's notice; the Recipient's reply notice shall either
designate one or more of the Initiator's arbitrators as acceptable to the
Recipient or state that none of the same is acceptable and designate up to three
others who would be acceptable to the Recipients and each of whom has agreed to
act as provided herein. Within three (3) business days from receipt of the
Recipient's response notice, the Initiator shall designate one of the
Recipient's listed arbitrators either to perform the arbitration or to act
jointly with one of the Initiator's listed arbitrators to select a third,
independent arbitrator, which such two arbitrators shall do within a further
three (3) business day period. Should the Recipient fail to respond timely to
the Initiator's initial notice, then the Initiator may designate any one of the
arbitrators on its list to perform the arbitration; should the Initiator fail to
respond timely to the Recipient's reply notice, then the Recipient may designate
any one of the arbitrators on its list to perform the arbitration. If two
arbitrators have been appointed and they are unable in good faith to identify a
third arbitrator who is
19
<PAGE>
willing to act hereunder, they may apply to the American Arbitration Association
or any successor organization thereto for the designation of such an arbitrator.
C. All arbitrators shall be persons with at least ten (10) years' experience
specializing in large-scale, sophisticated commercial real estate transactions
(sale, financing, leasing or operation, as appropriate to the matter at issue)
in New York, New York, as appraisers, attorneys, asset managers or brokers, as
appropriate to the matter at issue in accordance with the terms hereof.
D. The arbitrator selected shall be required to rule in favor of either the
Initiator's position or the Recipient's position on the issue arbitrated, and
shall not be permitted to create a different ruling. In making his or her
determination, the arbitrator may request such information and conduct such
hearings as he/she deems appropriate, making a determination in writing and
giving notice to the Initiator and the Recipient thereof within seven (7)
business days, if at all possible, or as soon thereafter as is possible, after
designation. The arbitrator shall also determine by whom (and in what
proportion) his/her fees and expenses, as well as those of the two other
nominating arbitrators if appropriate, shall be borne, consistent with his/her
ruling on the issue arbitrated. The determination of the arbitrator shall be
binding upon the Initiator and the Recipient, and may be entered in any court
having jurisdiction.
III. Documentation.
- -------------------
20
<PAGE>
The following documents and agreements shall be executed and delivered by the
appropriate parties in connection with the Option Exercise:
A. Tenancy Assignment in substantially the form of Exhibit B;
B. Buyer Note (if applicable) in substantially the form of Exhibit C;
C. Buyer Assumption in substantially the form of Exhibit D;
D. Lease Assignment in substantially the form of Exhibit E;
E. Seller Note in substantially the form of Exhibit F;
F. Sublease Agreement;
G. Officer's certificate for the Seller to deliver in compliance with Section
19.2 of the Superior Mortgage; and
H. If required, opinion of tax counsel, or agreement or guarantee of an
appropriate entity, for the Seller to deliver under Section 19.2 of the Superior
Mortgage (all capitalized terms in Section G and this Section H which are not
otherwise defined in this Option Agreement shall have the respective meanings
assigned thereto in the TIC Agreement).
IV. Attorney-in-Fact.
- ---------------------
Each Co-tenant, in the event it is deemed the Seller pursuant to this Option
Agreement, and solely in its capacity as the Seller, appoints the Co-tenant who
would then be deemed the Buyer in connection therewith and solely in its
capacity as the Buyer, its attorney-in-fact for the purpose of effectuating any
21
<PAGE>
Option Exercise in accordance with this Option Agreement, including (i) the
execution and filing of any Tax Forms and (ii) for any reconveyance.
V. Consent of Lenders.
- ---------------------
The parties hereto acknowledge their collective opinion (but not by way of
representation to one another) that in the event a wholly-owned subsidiary of
AXP exercises the Option upon the terms contemplated herein, the consent of the
Lenders should not be required.
VI. Alternatives to the Option.
- -------------------------------
A. The Co-tenants desire to alleviate the risk that a Causative Event with
respect to one Co-tenant would cause a Cross-Default of other indebtedness and
agreements of the other Co-tenants. The Co-tenants have agreed to adopt the
Option described herein to achieve that goal. The Co-tenants will cooperate
with each other to discuss and consider implementing alternative proposals that
a Co-tenant may suggest in substitution of the Option, including proposals which
may be beneficial to one Co-tenant in a material respect while being, on
balance, neither beneficial nor detrimental to another in any material way. No
Co-tenant shall be obligated to agree to any alternative proposal.
B. If the Co-tenants agree to pursue a particular course of action, the same
may be conditional upon the obtaining of any consents or modifications required
22
<PAGE>
of the Lenders or their trustees, the Landlord, or any other third party. The
Co-tenants will agree, as part of the decision-making process, upon the strategy
and presentation to be adopted, and the parties who will be designated, to
solicit such consents or modifications. Any documentation implementing an
agreed upon course of action will require the approval of all the Co-tenants,
acting reasonably.
C. Any out-of-pocket expenses incurred to third parties (except for any
expenses incurred by Co-tenant, if it shall form a new entity, to capitalize the
same or form the same) in identifying, analyzing, and considering proposals and
implementing an agreed upon course of action to achieve the overall goal
described in this Section VI above shall be shared by the AXP Co-tenants and the
LB Co-tenants equally.
VII. Miscellaneous.
- -------------------
A. Any notice or other communication required or permitted to be given
hereunder and any approval by any party shall be in writing and shall be
personally delivered or delivered by overnight courier, in each case with
receipt acknowledged, or deposited in an official depository of the United
States Post Office, postage prepaid, by registered or certified mail, return
receipt requested, to the other party or parties at the addresses listed below.
All notices and other communications shall be deemed to have been duly given on
(a) the date of
23
<PAGE>
receipt thereof (including all required copies thereof as set forth below) if
delivered personally or by overnight courier or (b) three (3) business days
after the date of mailing thereof (including all required copies thereof as set
forth below) if transmitted by mail. Each party may change its address for
receipt of notices by a notice given to the other parties in accordance with
this Paragraph. Notices shall be addressed as follows:
If to the AXP Co-tenants:
American Express Company
American Express Tower
World Financial Center
New York, New York 10285
Attn: General Counsel
If to the LB Co-tenants:
Lehman Brothers Inc.
American Express Tower
World Financial Center
New York, New York 10285
Attn: Chief Legal Officer
Telecopy Number: (212) 528-6268
or if to the Chief Financial Officer at:
Telecopy Number: (212) 528-7268.
B. After execution of this Option Agreement with respect to the Option, the
Co-tenants together will, if a Co-tenant requests, approach the Lenders to seek
to amend Section 10.03 and any other operative sections of the WFC Cross-Default
24
<PAGE>
Debt to provide that a Co-tenant may at any time assign all or any part of its
interest in the Property and/or the WFC Cross-Default Debt to the other Co-
tenants as contemplated by, and in order to effectuate the intent of, the
Option.
C. If a Co-tenant exercises the Option in accordance with, and shall perform
all of its obligations under, this Option Agreement and if any other party
hereto shall fail or refuse to proceed to closing under such Option as required
by the terms hereof, or if any party otherwise shall be in default in the
performance of its obligations hereunder, then the Co-tenant exercising such
Option, in addition to any other rights or remedies it may have hereunder or at
law or in equity, shall be entitled to specific performance of such party's
obligations hereunder, it being acknowledged and agreed that the subject matter
of this transaction is unique.
D. The Option shall be a covenant running with the land, and the obligations
of the "Seller" hereunder (but not the rights of the "Buyer" (except as
specifically set forth in Section I hereof)) shall be binding on the owners of
the Premises and their successors and assigns regardless of any transfer by any
of the parties hereto. If either AXP or Holdings shall be merged into or
consolidated with a successor entity, such successor entity shall be deemed to
be "AXP" for purposes of the "AXP Trigger Event" definitions contained in
Section I(B) hereof, or "Holdings" for purposes of the "LB Trigger Event"
definitions contained in
25
<PAGE>
Section I(B), Items (1)-(6) hereof, as the case may be. Notwithstanding the
foregoing, if any Subsidiary of Holdings or AXP shall hereafter become a Co-
tenant, the LB Trigger Events or the AXP Trigger Events, as the case may be,
shall be deemed to be Trigger Events as to any such Subsidiary upon their
occurrence. Additionally, the LB Trigger Event set forth in Section I (B) (5)
hereof and the AXP Trigger Event set forth in clause (y) of the definition of
"AXP Trigger Event" shall be applicable to such Subsidiary. If any such AXP
Trigger Event or LB Trigger Event shall occur, then such Subsidiary shall be a
Seller hereunder. This Option Agreement shall be binding upon the Co-tenants
and their respective successors and assigns without the execution of any
additional documentation; provided, however, that any such successor or assign
shall execute an acknowledgement and ratification hereof at the request of any
Co-tenant.
E. This Option Agreement shall be construed and governed by the laws of the
State of New York (without giving effect to the conflicts of laws provisions
thereof).
F. Whenever the singular or the masculine gender is used in this Option
Agreement, it shall be construed as if the plural, or the feminine or neuter
gender, respectively, had been used where the context so requires, and vice
26
<PAGE>
versa, and the rest of the sentence shall be construed as if the grammatical and
terminological changes thereby rendered necessary had been made.
G. This Option Agreement may not be changed or modified orally, but only by a
writing signed by all the parties hereto.
H. This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
I. In addition, each Co-tenant hereby agrees to execute and deliver such
other certificates, agreements and documents and take such other actions as may
reasonably be requested by and in cooperation with any other party hereto in
order to consummate, implement or effectuate the transactions contemplated
herein. In furtherance thereof, upon the Option Exercise, each Co-tenant shall
use best efforts to effectuate the Option Exercise as soon as possible from the
Seller to the Buyer pursuant to the terms hereof.
J. The parties agree to record a memorandum of this Option Agreement within
thirty (30) days following the execution hereof, the costs of which recording
shall be borne equally between the Co-tenants.
K. No consent or waiver, express or implied, by any Co-Tenant to or of any
breach or default by any other Co-Tenant in the performance by a Co-Tenant of
its obligations hereunder shall be deemed or construed to be a consent or
27
<PAGE>
waiver to or of any other breach or default in the performance by any Co-Tenant
of any other obligations of any other Co-Tenant hereunder. Failure on the part
of any Co-Tenant to complain of any act or failure to act of any other Co-Tenant
or to declare any other Co-Tenant in default, irrespective of how long such
failure continues, shall not constitute a waiver by such Co-Tenant of its rights
hereunder, except with respect to any cure periods for an AXP Trigger Event or
LB Trigger Event set forth in Article I hereof.
28
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Option Agreement on
the date and year first above written.
AMERICAN EXPRESS COMPANY
By: /s/ Louise M. Parent
----------------------
Name: Louise M. Parent
Title: Executive Vice President and
General Counsel
AMERICAN EXPRESS TRAVEL
RELATED SERVICES COMPANY, INC.
By: /s/ Walter S. Berman
----------------------
Name: Walter S. Berman
Title: Chief Financial Officer
AMERICAN EXPRESS BANK LTD.
By: /s/ Robert Sicina
--------------------
Name: Robert Sicina
Title: Chief Financial Officer
LEHMAN BROTHERS INC.
By: /s/ Karen Manson
------------------
Name: Karen Manson
Title: Senior Vice President
<PAGE>
LEHMAN GOVERNMENT
SECURITIES INC.
By: /s/ Karen Manson
------------------
Name: Karen Manson
Title: Secretary
LEHMAN BROTHERS COMMERCIAL
PAPER INC.
By: /s/ Karen Manson
------------------
Name: Karen Manson
Title: Secretary
LEHMAN BROTHERS HOLDINGS INC.
By: /s/ Karen M. Muller
---------------------
Name: Karen M. Muller
Title: Vice President
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On this 26th day of May in the year 1994 before me personally came
Louise M. Parent to me known, who, being by me duly sworn, did depose and say
that he/she resides at ___________________________________, that he/she is
Executive Vice-President and General Counsel of American Express Company (the
"Corporation"), the Corporation described in and which executed the foregoing
-----------
assignment, and that he/she signed his/her name thereto by authority of the
board of directors of the Corporation and he/she did thereby bind the
Corporation.
/s/ Douglas H. Daniels
______________________
Notary Public
DOUGLAS H. DANIELS
Notary Public, State of New York
No. 02DA4954686
Qualified in Queens County
Commission Expires Aug. 14, 1995
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On this 26th day of May in the year 1994 before me personally came
Walter S. Berman to me known, who, being by me duly sworn, did depose and say
that he/she resides at ___________________________________, that he/she is
Chief Financial Officer of American Express Travel Related Services Company,
Inc. (the "Corporation"), the Corporation described in and which executed the
-----------
foregoing assignment, and that he/she signed his/her name thereto by authority
of the board of directors of the Corporation and he/she did thereby bind the
Corporation.
/s/ Douglas H. Daniels
______________________
Notary Public
DOUGLAS H. DANIELS
Notary Public, State of New York
No. 02DA4954686
Qualified in Queens County
Commission Expires Aug. 14, 1995
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On this 26th day of May in the year 1994 before me personally came
Robert Sicina to me known, who, being by me duly sworn, did depose and say
that he/she resides at ___________________________________, that he/she is
Chief Financial Officer of American Express Bank Ltd. (the "Corporation"), the
-----------
Corporation described in and which executed the foregoing assignment, and that
he/she signed his/her name thereto by authority of the board of directors of the
Corporation and he/she did thereby bind the Corporation.
/s/ Douglas H. Daniels
______________________
Notary Public
DOUGLAS H. DANIELS
Notary Public, State of New York
No. 02DA4954686
Qualified in Queens County
Commission Expires Aug. 14, 1995
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On this 27th day of May in the year 1994 before me personally came
Karen Manson to me known, who, being by me duly sworn, did depose and say
that he/she resides at ___________________________________, that he/she is
Senior Vice President of Lehman Brothers Inc. (the "Corporation"), the
-----------
Corporation described in and which executed the foregoing assignment, and that
he/she signed his/her name thereto by authority of the board of directors of the
Corporation and he/she did thereby bind the Corporation.
/s/ Peter F. Honchaurk
______________________
Notary Public
PETER F. HONCHAURK
Notary Public, State of New York
No. 24-4996092
Qualified in Kings County
Commission Expires Aug. 11, 1996
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On this 27th day of May in the year 1994 before me personally came
Karen Manson to me known, who, being by me duly sworn, did depose and say
that he/she resides at ___________________________________, that he/she is
Secretary of Lehman Government Securities Inc. (the "Corporation"), the
-----------
Corporation described in and which executed the foregoing assignment, and that
he/she signed his/her name thereto by authority of the board of directors of the
Corporation and he/she did thereby bind the Corporation.
/s/ Peter F. Honchaurk
______________________
Notary Public
PETER F. HONCHAURK
Notary Public, State of New York
No. 24-4996092
Qualified in Kings County
Commission Expires Aug. 11, 1996
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On this 27th day of May in the year 1994 before me personally came
Karen Manson to me known, who, being by me duly sworn, did depose and say
that he/she resides at ___________________________________, that he/she is
Secretary of Lehman Brothers Commercial Paper Inc. (the "Corporation"), the
-----------
Corporation described in and which executed the foregoing assignment, and that
he/she signed his/her name thereto by authority of the board of directors of the
Corporation and he/she did thereby bind the Corporation.
/s/ Peter F. Honchaurk
______________________
Notary Public
PETER F. HONCHAURK
Notary Public, State of New York
No. 24-4996092
Qualified in Kings County
Commission Expires Aug. 11, 1996
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On this 27th day of May in the year 1994 before me personally came
Karen M. Muller to me known, who, being by me duly sworn, did depose and say
that he/she resides at ___________________________________, that he/she is
Vice President of Lehman Brothers Holdings Inc. (the "Corporation"), the
-----------
Corporation described in and which executed the foregoing assignment, and that
he/she signed his/her name thereto by authority of the board of directors of the
Corporation and he/she did thereby bind the Corporation.
/s/ Peter F. Honchaurk
______________________
Notary Public
PETER F. HONCHAURK
Notary Public, State of New York
No. 24-4996092
Qualified in Kings County
Commission Expires Aug. 11, 1996
<PAGE>
EXHIBIT 10.32
LEHMAN BROTHERS HOLDINGS INC.
1994 AGREEMENT
--------------
April 28, 1994
Nippon Life Insurance Company
1-1, Yurakucho 1-chome
Chiyoda-ku
Tokyo, 100
Japan
Ladies and Gentlemen:
Lehman Brothers Holdings Inc., a Delaware corporation (the "Company"),
-------
hereby confirms its agreement with you with respect to the issuance by the
Company to you of an aggregate of 3,492,858 shares (the "Common Shares") of the
-------------
Company's common stock, par value $0.10 per share ("Common Stock") and 72 shares
------------
of the Company's Redeemable Voting Preferred Stock (the "Preferred Shares" and,
----------------
together with the Common Shares, the "Shares") and its sale to you of a 7.24%
------
interest in certain agreements between the Company and Smith Barney Shearson,
Inc. (the "Interest"), and American Express Company, a New York corporation
--------
("Amexco"), at present the owner of all the Common Stock, hereby confirms with
------
you certain related agreements set forth herein. On the basis of the
representations, warranties and agreements herein contained, and upon the terms
and subject to the conditions herein set forth, the Company agrees to sell to
you, and you agree to purchase from the Company, the Shares and the Interest.
Initially capitalized terms not otherwise defined in this Agreement shall have
the definitions assigned thereto in the Certificate of Designation, Powers,
Preferences and Rights creating the Redeemable Preferred Shares, a copy of which
is attached hereto as Exhibit A (the "Preferred Share Certificate" and, with the
---------------------------
Amended and Restated Certificate of the Designation, Powers, Preferences and
Rights of the Cumulative Convertible Voting Preferred Stock, Series A (the
"Series A Preferred Stock") in the form of Exhibit B hereto (the "Series A
- ------------------------- --------
Certificate"), the "Certificates").
- ----------- ------------
Section 1. Representations and Warranties.
------------------------------
(a) The Company represents and warrants to Nippon Life Insurance
Company ("NLI") that:
---
(i) The Company has been duly incorporated and is validly existing
and in good standing as a corporation under the laws of the State of Delaware.
(ii) This Agreement and each of the Existing Documents (as defined in
paragraph (vi) below) has been duly authorized,
<PAGE>
2
executed and delivered by the Company and is enforceable against the Company in
accordance with its terms, except as such enforceability may be affected by
bankruptcy and other similar laws affecting creditors' rights generally and by
general principles of equity.
(iii) The execution and delivery of this Agreement and each of the
Existing Documents, the issuance and delivery of the Shares and the transfer of
the Interest hereunder and the issuance and delivery of the Common Stock
issuable on conversion thereof (the "Conversion Shares"), the Warrant and the
-----------------
Common Stock issuable on exercise thereof (the "Warrant Shares"), the
--------------
consummation by the Company of the transactions contemplated herein and in the
Existing Documents and compliance by the Company with the terms of this
Agreement, the Existing Documents and the Certificates do not and will not
conflict with, or result in a breach of any of the terms or provisions of, or
constitute a default under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any
significant subsidiary thereof under (A) the Restated Certificate of
Incorporation or By-laws of the Company or (B) any existing applicable law, rule
or regulation or any judgment, order or decree of any government, governmental
instrumentality or court, domestic or foreign, having jurisdiction over the
Company or any of its properties, except, with respect to this clause (B), such
conflicts, breaches, defaults or liens which individually and in the aggregate
will not have a material and adverse effect on the investment by NLI
contemplated hereby or on NLI's rights hereunder.
(iv) No filing, authorization, approval, consent, order,
registration, qualification or license of or with any court or governmental
regulatory body or authority (other than such consents, approvals,
authorizations, registrations, qualifications or filings as have been made or
obtained or as may be required under the securities or blue sky laws of the
various states and filings referred to under Section 4(e) hereof (including
filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976) and
other than the filing of the Certificates with the Secretary of State of the
State of Delaware) is required for (A) the valid authorization, issuance, sale
and delivery of the Shares and the transfer of the Interest hereunder and sale
of the Conversion Shares, the Warrant and the Warrant Shares, (B) the valid
execution and delivery by the Company of this Agreement or (C) the consummation
by the Company of the transactions contemplated in this Agreement except with
respect to registration rights contained in the 1990 Agreement and filings for
listing the Common Stock.
(v) The Shares, the Series A Preferred Stock, the Conversion Shares
and the Warrant Shares have been validly
<PAGE>
3
authorized, and the Series A Preferred Stock is, and the Shares, upon payment
therefor as provided in this Agreement, the Conversion Shares on issuance
pursuant to the Series A Certificate and the Warrant Shares on issuance pursuant
to the Warrant will be, validly issued and outstanding, fully paid and
nonassessable, with no personal liability attaching to the ownership thereof,
and none of the Shares will be subject to any lien, charge or encumbrance or any
other claim of any third party arising out of any act of the Company. The
Common Stock will be listed on the New York Stock Exchange.
(vi) When issued, the Preferred Shares, and when the Series A
Certificate is filed the Series A Preferred Stock, will have such designation,
preferences, limitations and relative rights as set forth in the respective
Certificates and such shares and such designation, preferences, limitations and
relative rights are valid under Delaware law. Except to the extent set forth in
the Investment Agreement, dated as of April 15, 1987, by and among NLI, the
Company and Amexco, as such agreement has been amended through the date hereof
(the "Investment Agreement" and with the 1990 Agreement between NLI and Amexco
--------------------
(the "1990 Agreement") and the Warrant referred to in Section 2(d), the
--------------
"Existing Documents"), no stockholders of the Company have any preemptive or
------------------
similar rights with respect to the Shares.
(vii) The Company does not have any Significant Subsidiaries (as such
term is defined in Rule 1-02 of Regulation S-X under the Securities Act of 1933
(the "Act")), except for Lehman Brothers Inc., Lehman Commercial Paper Inc. and
---
Lehman Government Securities Inc. (the "Named Subsidiaries").
------------------
(viii) Neither the Company nor any of the Named Subsidiaries is in
violation of its corporate charter or by-laws or in default under any agreement,
indenture or instrument, the effect of which violation or default would be
material to the Company and its subsidiaries taken as a whole.
(ix) The authorized, issued and outstanding capital stock of the
Company (as defined in the S-1 referred to below) are as described in the
Registration Statement on Form S-1 (Registration No. 33-52977) filed by the
Company under the Act (as amended by one or more amendments in the form
heretofore furnished to NLI, the "S-1"). All such outstanding shares are or
---
will at the time of the Distribution referred to in the S-1 be duly and validly
issued and are or will at the time of such Distribution be fully paid and
nonassessable. Except as set forth in the S-1, (A) there are no outstanding
subscriptions, warrants, options, calls or commitments of any character relating
to or entitling any person to purchase or otherwise acquire any stock of the
Company or any Named Subsidiary; (B) there are no
<PAGE>
4
obligations or securities convertible into or exchangeable for shares of any
stock of the Company or any Named Subsidiary or any commitments of any character
relating to or entitling any Person to purchase or otherwise acquire any such
obligations or securities; and (C) there are no preemptive or similar rights to
subscribe for or to purchase any stock of the Company or any Named Subsidiary.
(x) The financial statements included in the S-1 have been prepared
in conformity with generally accepted accounting principles and fairly present
in all material respects the consolidated financial position and results of
operations and changes in financial position of the Company and its subsidiaries
as of the dates and for the periods indicated. Except as may be disclosed in
the S-1, since December 31, 1993, the Company and its subsidiaries taken as a
whole have not suffered any material adverse change in their properties,
business, operations, assets, liabilities or condition (financial or other).
(xi) The S-1 contains no untrue statement of a material fact and does
not omit to state a material fact necessary to make the statements contained
therein not misleading.
(xii) The sale of the Shares hereunder is exempt from the
registration and prospectus delivery requirements of the Act. The Company
agrees that neither it, nor anyone acting on its behalf, will offer any
securities for issuance or sale if the sale of the Shares and any such
securities would be integrated as a single offering resulting in a violation of
the Act.
(b) NLI represents and warrants to the Company that:
(i) NLI has been duly incorporated and is validly existing and in good
standing as a corporation under the laws of Japan.
(ii) This Agreement has been duly authorized, executed and delivered
by NLI and is enforceable against NLI in accordance with its terms, except as
such enforceability may be affected by bankruptcy and other similar laws
affecting creditors' rights generally and by general principles of equity.
(iii) The execution and delivery of this Agreement and the
consummation by NLI of the transactions contemplated herein and compliance by
NLI with the terms of this Agreement do not and will not conflict with, or
result in a breach of any of the terms or provisions of, or constitute a default
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of NLI or any significant subsidiary
thereof under (A) the charter or similar instrument of NLI or (B) any existing
applicable law, rule or regulation or any
<PAGE>
5
judgment, order or decree of any government, governmental instrumentality or
court, domestic or foreign, having jurisdiction over NLI or any of its
properties, except, with respect to this clause (B), such conflicts, breaches,
defaults or liens which individually and in the aggregate will not have a
material and adverse effect on the business of NLI and its subsidiaries taken as
a whole.
(iv) No filing, authorization, approval, consent, order,
registration, qualification or license of or with any court or governmental
regulatory body or authority (other than the consent of the Bank of Japan and
the Ministry of Finance (which NLI will use reasonable efforts to obtain), such
consents, approvals, authorizations, registrations, qualifications or filings as
have been made or obtained, filings to be made in the ordinary course and the
filings referred to in Section 4(e)) is required for (A) the valid execution and
delivery by NLI of this Agreement or (B) the consummation by NLI of the
transactions contemplated in this Agreement.
Section 2. Sale and Delivery to NLI; Closing.
---------------------------------
(a) At 10:00 A.M., New York City time, on May 26, 1994, or such other
time or date agreed to by the parties hereto (the "Closing Date"), delivery of
------------
certificates for the Shares and sale of the Interest, against receipt by the
Company of the consideration therefor, shall be made at the offices of the
Company or such other place as shall be agreed upon by NLI and the Company. The
consideration for the issuance of the Shares and sale of the Interest is
$89,160,406 to be paid to the Company hereunder. In addition, in connection
with the sale of the Shares and the Interest by the Company to NLI, NLI will
agree to make additional payments in respect of the Interest as set forth in
that certain letter agreement between NLI and Amexco to be dated the Closing
Date in the form heretofore agreed (the "Letter Agreement"). Payment of the
----------------
cash portion of such consideration owing to the Company shall be made by wire
transfer of immediately available funds to Account No. 056-23-787 maintained by
the Company at Morgan Guaranty Trust Company of New York (ABA routing number
021-000-238). Contemporaneously therewith, the Agreement in Connection with
Assignment in the form of Exhibit C hereto and the Assignment Agreement in the
form of Exhibit D hereto (together, the "Assignment Agreements") shall be
---------------------
executed and delivered by the parties hereto.
(b) The certificates representing the Shares will be issued in fully
registered form and registered in the name of NLI or its nominee in accordance
with the Company's Restated Certificate of Incorporation.
<PAGE>
6
(c) Each certificate representing the Shares will contain a legend
stating that no sale, pledge, hypothecation or other transfer of such Shares
shall be made except in a transaction that is registered under the Act or in a
transaction that is not subject to, or that is exempt from, the registration
requirements of the Act. The Company will issue to NLI or any transferee of NLI
new certificates representing Shares which do not contain such a legend if the
Shares in question are sold pursuant to an effective registration statement or
pursuant to Rule 144, or otherwise in a manner that does not require
registration under the Act.
(d) At the closing, the Company shall deliver to NLI an amended
warrant to purchase Common Stock dated the Closing Date in the form attached
hereto as Exhibit D-1 ("the Warrant").
-------
(e) If at the closing any of the conditions to the closing specified
in Section 4 of this Agreement shall not have been fulfilled or if the closing
fails to occur on or before July 31, 1994, NLI shall, at its election and
notwithstanding anything to the contrary in this Agreement, be relieved of all
further obligations under this Agreement.
(f) At the closing, Amexco shall pay to an account designated by NLI
(or at its option credit against NLI's obligation under the Letter Agreement in
accordance with the terms thereof) $3,620,000.
Section 3. Covenants of the Company. The Company hereby covenants
------------------------
and agrees as follows:
(a) Before the closing, the Company shall file an amendment to its
certificate of incorporation in the form attached hereto as Exhibit E (the
"Charter Amendment"), and immediately thereafter shall file the Certificates,
- ------------------
with the Secretary of State of the State of Delaware without modification to the
forms thereof attached hereto (except that the Charter Amendment may be combined
with the Series A Certificate in a manner satisfactory to NLI).
(b) So long as NLI or any of its affiliates is the holder of any
Shares, and notwithstanding anything contained herein or in the Certificate or
in the Charter Amendment to the contrary, the Company will, if so requested, pay
all dividends and other sums becoming due on any of the Shares registered in the
name of NLI or any affiliate of NLI by wire transfer of immediately available
funds to an account designated in writing by such holder not less than 10 days
preceding the payment date thereof or by such other method as NLI (or such
affiliate) shall have from time to time specified to the Company in writing at
least 10 days prior to the date such payment shall be due.
<PAGE>
7
Notwithstanding the provisions of the Certificate, the Company will agree to
make payments on the Preferred Shares by wire transfer of immediately available
funds to any transferee from NLI or an affiliate of NLI (or successive
transferees from such a transferee) who so requests if such transferee holds not
less than 15% of the aggregate liquidation preference of the Preferred Shares at
the time outstanding. Upon request of NLI, such affiliate or such a transferee,
the Company will enter into a written agreement with such transferee to the
foregoing effect. Nothing in this paragraph shall affect the rights of any
holder of Preferred Shares who is not entitled or does not elect to receive
payments in accordance with this paragraph to receive dividends as provided in
the Certificate.
(c) The Company will use reasonable efforts to cause the New York
Stock Exchange to determine that NLI may exercise its rights under Section
5.1(d) of the Investment Agreement from time to time without the necessity of a
stockholder vote, and will provide NLI with an opportunity to comment on
submissions to and (subject to the Company's reasonable discretion) to attend
meetings with the New York Stock Exchange in this regard. Unless the New York
Stock Exchange rules that no such stockholder approval is required, the Company
will submit to stockholders at its 1995 annual meeting, and use its best efforts
to cause them to approve, a proposal reserving 13.7 million shares of common
stock for issuance to NLI on exercise of its preemptive rights. Whenever all
such shares have been used, the Company will submit to its stockholders at its
next annual meeting, and use its best efforts to cause them to approve, an
additional reservation of not less than the same number of shares for the same
purpose. If at any such meeting such a proposal is defeated, the Company shall
have no further obligations to submit such proposals to its stockholders.
(d) Except as explicitly provided for herein, before the closing the
Company shall not do any act that would result in an adjustment of the exercise
price under the Warrant had it been issued on the date hereof or the Conversion
Price of the Series A Preferred Stock.
(e) So long as NLI holds any Preferred Shares, the Company will not
without NLI's written consent permit any amendment to the Preferred Share
Certificate that adversely affects the preferences, special rights or powers
thereof.
Section 4. Conditions of Closing. The Company and NLI agree that the
---------------------
sale of the Shares and the Interest shall be conditioned on and subject to the
accuracy on and as if made on the Closing Date of the other's representations
and warranties, performance of the other's covenants and other obligations
hereunder, receipt of a certificate signed by an authorized
<PAGE>
8
officer of the other confirming such accuracy and performance and in the case of
NLI's obligations to the following further conditions:
(a) Thomas A. Russo, Esq., counsel to the Company, shall have
furnished to NLI his written opinion, dated the Closing Date, in form reasonably
satisfactory to NLI and its counsel, to the effect that:
(i) the Company has been duly incorporated and is validly existing
and in good standing as a corporation under the laws of the State of Delaware;
(ii) this Agreement has been duly authorized, executed and delivered
by the Company and is, and the Existing Documents as amended hereby each is,
enforceable against the Company in accordance with its terms (subject to
customary exceptions);
(iii) the execution and delivery of this Agreement, the issuance and
delivery of the Shares and the transfer of the Interest, the consummation by the
Company of the transactions contemplated herein and compliance by the Company
with the terms of this Agreement and the Existing Documents as amended hereby
and the Certificates do not and will not conflict with, or result in a breach of
any of the terms or provisions of, or constitute a default under, or result in
the creation or imposition of any lien, charge or encumbrance upon any property
or assets of the Company or any of the Named Subsidiaries under (A) the Restated
Certificate of Incorporation or By-laws of the Company or (B) any material
agreement, indenture or instrument or any existing applicable law, rule or
regulation (other than the securities or blue sky laws of the various states, as
to which such counsel need express no opinion) or any judgment, order or decree
of any court or governmental agency having jurisdiction over the Company, any of
the Named Subsidiaries or their property;
(iv) no filing, authorization, approval, consent, order,
registration, qualification or license of or with any court or governmental
regulatory body or authority (other than such consents, approvals,
authorizations, registrations, qualifications or filings as have been made or
obtained or as may be required under the securities or blue sky laws of the
various states and filings referred to under Section 4(e) hereof (including
filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976) and
other than the filing of the Certificates with the Secretary of State of the
State of Delaware) is required for (A) the valid authorization, issuance, sale
and delivery of the Shares and the transfer of the Interest hereunder and of the
Conversion Shares, the Warrant and the Warrant Shares, (B) the valid execution
and delivery by the Company of this Agreement or (C) the consummation by the
Company
<PAGE>
9
of the transactions contemplated in this Agreement except with respect to
registration rights contained in the 1990 Agreement and filings for listing the
Common Stock;
(v) the certificates representing the Shares are in due and proper
form, and the Shares have been duly authorized and validly issued and upon
payment of the consideration provided in Section 2, will be fully paid and non-
assessable, and no holder thereof will be subject to personal liability by
reason of being such a holder; the shares of Common Stock issuable on conversion
of the Series A Preferred Stock and exercise of the Warrant have been duly
authorized and reserved for issuance upon conversion or exercise, and when
issued upon conversion or exercise will be validly issued, fully paid and non-
assessable, and no holder thereof will be subject to personal liability by
reason of being such a holder; the Preferred Shares and the Series A Preferred
Stock have such designation, preferences, limitations and relative rights as set
forth in the respective Certificates and such designation, preferences,
limitations and relative rights are valid under Delaware law;
(vi) the Company does not have any Significant Subsidiaries except for
the Named Subsidiaries; and
(vii) neither the Company nor any of the Named Subsidiaries is in
violation of its corporate charter or By-laws or in default under any agreement,
indenture or instrument, the effect of which violation or default would be
material to the Company and its subsidiaries taken as a whole.
Such opinion, in addition, shall be to such further effect with
respect to other legal matters relating to this Agreement as counsel to NLI may
reasonably request.
(b) Counsel to NLI shall have been furnished with all such documents,
certificates and opinions as they may reasonably request for the purpose of
enabling them to pass upon the issuance of the Shares and the issuance and
delivery of the Shares and the sale of the Interest as herein contemplated and
in order to evidence the accuracy and completeness of any of the
representations, warranties or statements of the Company, the performance of any
of the covenants of the Company, or the fulfillment of any of the conditions
herein contained; and all proceedings taken by the Company at or prior to the
Closing Date in connection with the authorization, issuance and delivery of the
Shares as herein contemplated shall be reasonably satisfactory in form and
substance to NLI and its counsel.
(c) Simultaneously with the sale to NLI of the Shares and the
Interest to be purchased by it at the closing, the Company shall have sold and
received payment for the securities
<PAGE>
10
to be purchased by Amexco in accordance with the Purchase and Exchange Agreement
between it and the Company in the form heretofore furnished by the Company to
NLI and Amexco shall have sold approximately 441,600 shares of Common Stock to
the Company's executive officers for a price of approximately $11.3 million.
(d) The long-term senior debt securities of the Company shall be
rated "A3" by Moody's Investor Services and "A" by Standard & Poor's and shall
not have been placed on Creditwatch or any similar list with negative
implications.
(e) All applicable waiting periods under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 shall have expired, all other applicable
government approvals (including those of the Bank of Japan and the Ministry of
Finance) shall have been obtained in form reasonably satisfactory to NLI and no
action or proceeding shall be pending or threatened challenging NLI's
acquisition of the Shares or the Interest.
(f) The Assignment Agreements and the Consent to Assignment in the
form of Exhibit F shall have been executed and delivered by all parties thereto
and shall be in full force and effect (it being understood that the Company and
Amexco will continue to request that the parties to the Consent to Assignment
execute it in a form containing the changes heretofore proposed by NLI).
The obligations of the Company hereunder are conditioned on the
execution and delivery to the Company by NLI of a Purchaser's Agreement
substantially in the form of Exhibit G hereto.
Section 5. Amendments to Existing Documents.
--------------------------------
(a) Effective as of the closing:
(i) The definition of Registrable Securities in Exhibit 1 to the
Investment Agreement and in Exhibit 13 to the 1990 Agreement shall be amended to
read in its entirety as set forth in Exhibit H-1 hereto.
(ii) Exhibit 13 to the 1990 Agreement shall be amended by adding
thereto a new Section 4.4 to read as set forth in Exhibit H-2 hereto.
(iii) Section 7.1 of the Investment Agreement shall be amended to
read in its entirety as set forth in Exhibit H-3 hereto.
<PAGE>
11
(iv) Section 7.4 of the 1990 Agreement shall be amended to read in its
entirety as set forth in Exhibit H-4 hereto.
(v) The first paragraph of Section 5.1(d) of the Investment Agreement
shall be amended to read in its entirety as set forth in Exhibit H-5 hereto.
(vi) The introduction to Section 4.1 of Exhibit 13 to the 1990
Agreement shall be amended to read in its entirety as set forth in Exhibit H-6
hereto.
(vii) Section 5.3(a) of the Investment Agreement shall be amended to
read in its entirety as set forth in Exhibit H-7 hereto.
(viii) Article VIII of the 1990 Agreement shall be deleted.
(ix) The definition of Investor Minimum Investment in Schedule 1 to
the Investment Agreement shall be amended to read in its entirety as set forth
in Schedule H-8 hereto.
(b) Except as herein provided, the Existing Agreements and the Series
A Preferred Stock shall remain unchanged and in full force and effect, and each
reference to any of the Existing Agreements and words of similar import in the
Existing Agreements and the Series A Preferred Stock shall be a reference to
such Existing Agreement or the Series A Preferred Stock as amended hereby or
pursuant hereto and as the same may be further amended, supplemented and
otherwise modified and in effect from time to time.
(c) NLI hereby waives its rights under Section 5.2(d) of the
Investment Agreement, as amended by the 1990 Agreement.
Section 6. Notices. Any notice to NLI shall be sufficient if given
-------
in writing delivered in person or by mail or courier addressed to NLI at its
address set forth above, to the attention of the International Finance and
Planning Department, any notice to the Company shall be sufficient if given in
writing delivered in person or by mail or facsimile (No. (212) 528-6268)
addressed to the Company at 3 World Financial Center, New York, New York 10285,
to the attention of each of Treasurer and Chief Legal Officer and any notice to
Amexco shall be sufficient if given in writing delivered in person or by mail or
facsimile (No. (212) 267-9061) addressed to it at American Express Tower, World
Financial Center, 200 Vesey Street, New York, New York 10285, to the attention
of each of Treasurer and General Counsel, or such other address as any party
may, from time to time, designate in a written notice in a like manner.
<PAGE>
12
Notice shall be deemed delivered on the business day after it is received by the
recipient.
Section 7. Binding Agreement. This Agreement shall be binding upon
-----------------
NLI, the Company and Amexco and their respective successors. This Agreement and
the terms and provisions hereof are for the sole benefit of only those persons,
except that the representations, warranties, indemnities and agreements of the
Company contained in this Agreement shall also be deemed to be for the benefit
of any person or persons who control NLI within the meaning of Section 15 of the
Act. Nothing in this Agreement is intended or shall be construed to give any
person, other than the persons referred to in this Section, any legal or
equitable right, remedy or claim under or in respect of this Agreement or any
provision contained herein.
Section 8. Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of New York, regardless of the laws that
might otherwise govern under applicable principles of conflicts of law.
Section 9. Injunctions. Irreparable damage would occur in the event
-----------
that any provision of this Agreement was not performed in accordance with its
specific terms or was otherwise breached. Therefore, the parties hereto shall
be entitled to an injunction or injunctions to prevent breaches of the
provisions of this Agreement and to enforce specifically the terms and
provisions hereof in any court having jurisdiction, such remedy being in
addition to any other remedy to which they may be entitled at law or in equity.
Section 10. Severability. If any term or provision of this Agreement
------------
is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms and provisions set forth herein shall
remain in full force and effect and shall in no way be affected, impaired or
invalidated, and the parties hereto shall use their best efforts to find and
employ an alternative means to achieve the same or substantially the same result
as that contemplated by such term or provision.
Section 11. Further Assurances. Subject to the specific terms of
------------------
this Agreement, the parties shall make, execute, acknowledge and deliver such
other instruments and documents, and take all such other actions, as may be
reasonably required in order to effectuate the purposes of this Agreement and to
consummate the transactions contemplated hereby.
Section 12. Waivers, Etc. No failure or delay on the part of any
------------
party hereto in exercising any power or right hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right or
power, or any
<PAGE>
13
abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. No modification, waiver, discharge or termination of any
provision of this Agreement nor consent to any departure by any party hereto
therefrom shall in any event be effective unless the same shall be in writing,
and then shall be effective only in the specific instance and for the purpose
for which given.
Section 13. Publicity. No party hereto shall make any disclosure
---------
concerning the contents of this Agreement prior to the Closing Date unless the
form of such disclosure is acceptable to the others, unless required by law.
Section 14. Miscellaneous. This Agreement constitutes the entire
-------------
agreement and understanding of the parties hereto with respect to the matters
and transactions contemplated hereby and supersedes all prior agreements and
understandings whatsoever relating to such matters and transactions including
without limitation the letter of intent dated April 4, 1994. The headings in
this Agreement are for the purposes of reference only and shall not limit or
otherwise affect the meaning hereof. This Agreement may be executed in
counterparts, each of which shall constitute an original, but all of which shall
together constitute one instrument.
Section 15. Indemnity. NLI agrees that it will indemnify the Company
---------
for any income tax expense that it might incur, Federal and state and local
(including interest and penalties) as well as any penalty for failure to
withhold tax, arising out of the transfer by the Company to NLI of the property
described in this Agreement. NLI further agrees to reimburse the Company for
any costs incurred as a result of the above. However, the Company agrees,
should NLI so request and the Company in its good faith discretion concur, to
permit at its own cost NLI's selected counsel to contest the assertion by any
tax authority of any amount for which indemnification is provided. The
foregoing, however, shall not include any indemnification for amounts received
by the Company from Amexco under Section 17 of the Tax Allocation Agreement in
the form heretofore provided, entered into between the Company and American
Express, as that provision relates to the NLI purchase described above.
<PAGE>
14
If the foregoing correctly sets forth our agreement, please so
indicate in the space provided below for that purpose, whereupon this letter
shall constitute a binding agreement among the Company, Amexco and NLI.
Very truly yours,
LEHMAN BROTHERS HOLDINGS INC.
By: /s/ Karen M. Muller
---------------------------
Name: Karen M. Muller
Title: Vice President
AMERICAN EXPRESS COMPANY
By: /s/ Michael F. Monaco
---------------------------
Name: Michael F. Monaco
Title: Executive Vice President and
Chief Financial Officer
ACCEPTED at Tokyo, Japan
as of the date first
above written.
NIPPON LIFE INSURANCE COMPANY
By: /s/ Fumio Masada
--------------------------
Name: Fumio Masada
Title: Executive Vice President
<PAGE>
Exhibit 10.36
Cash Award Plan
1. Effectiveness of Contingent Payment Rights
1.1 Pursuant to the action of the Compensation and Benefits Committee on
November 29, 1994, each member (a "Grantee") of the Corporate Management
Committee (the "CMC") of Lehman Brothers Holdings Inc. (the "Company") is
granted Contingent Payment Rights (the "Rights"), upon a grant to the Grantee of
Restricted Stock Units ("RSUs") under the Company's 1994 Management Ownership
Plan.
1.2 Rights held by a Grantee shall be effective for a period of six months
following the related grant to the Grantee of RSUs (an "Effective Period")
unless such RSUs are sooner terminated, in which case the Rights shall be void.
2. Timing and Amount of Payment with Respect to Rights.
2.1 Upon the occurrence of a Change of Control, as hereafter defined, a
cash payment in respect to each Right as provided in Section 2.2 shall become
immediately payable; provided, however that if the Change of Control occurs due
to a tender offer such Right shall become payable in cash only if shares are
purchased during the Effective Period pursuant to the tender offer.
2.2
(a) On the date Rights become payable under this Section 2, each Grantee
shall be entitled to receive from the Company a cash payment in an amount equal
to (i) in the case of a Grantee other than the Chief Executive Officer and the
President, 150% of such Grantee's total cash compensation paid or accrued in
respect of the calendar year preceding the occurrence of a Hostile Change of
Control and in the case of the Chief Executive Officer and the President of the
Company, 250% of such Grantee's total cash compensation paid or accrued in
respect of the calendar year preceding the occurrence of a Hostile Change of
Control and (ii) unless the CMC determines that the following payments should
not be made, in the case of a Grantee other than the Chief Executive Officer and
the President, 75% of such Grantee's total cash compensation paid or accrued in
respect of the calendar year preceding the occurrence of a Friendly Change of
Control and in the case of the Chief Executive Officer and the President of the
Company, 125% of such Grantee's total cash compensation paid or accrued in
respect of the calendar year preceding the occurrence of a Friendly Change of
Control. The actual cash payments in respect of Rights, as so calculated, shall
be made within three business days after such Rights become payable under
Section 2.1 above.
<PAGE>
(b) In the event, however, that a Grantee was (i) employed by the Company
for a portion but not all of the calendar year preceding the occurrence of a
Hostile or Friendly Change in Control, or (ii) not employed by the Company at
any time during the calendar year preceding the occurrence of a Hostile or
Friendly Change in Control, such Grantee's cash compensation utilized in making
the calculations called for by Section 2.2(a) shall be calculated as follows:
(x) in the case of (i) above, the compensation shall be the highest annual rate
of salary at which such Grantee was employed by the Company for the calendar
year preceding the Hostile or Friendly Change in Control plus the cash bonus
paid to, or accrued on behalf of, such Grantee in such year on an annualized
basis and (y) in the case of (ii) above, the compensation shall be the highest
annual rate of salary at which such Grantee was paid by the Company during the
calendar year of the occurrence of the Hostile or Friendly Change in Control
plus such Grantee's target cash bonus for such calendar year.
3. Withholding of Taxes.
3.1 The Company shall have the right to deduct from any distribution of
cash to any Grantee hereunder, an amount equal to the federal, state and local
income taxes and other amounts as may be required by law to be withheld with
respect to any payment in respect of a Right.
4. Parachute Tax.
4.1 If all or any portion of the payments with respect to Rights, either
alone or together with other payments and benefits a Grantee receives or is then
entitled to receive from the Company, would constitute a payment described in
Section 280G(b) (2) (or its successors) of the Internal Revenue Code (the
"Code"), such payments and benefits provided to Grantee shall be reduced to the
extent necessary so that no portion thereof shall be subject to the excise tax
imposed by Section 4999 of the Code; but only if, by reason of such reduction,
the net after tax benefit of Grantee shall exceed the net after tax benefit if
such reduction were not made. For this purpose, the determination as to whether
such payments and benefits constitute a payment described in Code Section 280G
(b) (2) and as to the amount of such reduction, if any, necessary to avoid the
excise tax shall be based upon the agreement of the Company and the Grantee, or
in the absence of such agreement, a determination by the accounting firm as
described in Section 4.2 below. In the event of a determination that such
reduction is to take place, the Grantee shall be entitled to designate which
payments and benefits shall be reduced, but in the event the Grantee fails to
make such designation within 15 days following notification of such
determination, the Company shall allocate the reduction among such payments and
benefits in its sole discretion.
2
<PAGE>
4.2 "Net after tax benefit" for purposes of this Section 4 shall mean the
sum of (i) the total payments payable to Grantee hereunder, plus (ii) all other
payments and benefits which the Grantee receives or is then entitled to receive
from the Company that would constitute a payment described in Section 280G(b)
(2) of the Code, less (iii) the amount of federal, state and local income taxes
payable with respect to the foregoing calculated at the maximum marginal income
tax rate for each year in which the foregoing shall be paid to Grantee (based
upon the rate in effect for such year as set forth in the Code at the time of
termination of Grantee's employment), less (iv) the amount of excise taxes
imposed with respect to the payments and benefits described in (i) and (ii)
above by Section 4999 of the Code. The foregoing calculations shall be made, at
the Company's expense, by the Company and Grantee. If no agreement on the
calculations is reached, Grantee and the Company shall agree to the selection of
an accounting firm to make the calculations. If no agreement can be reached
regarding the selection of an accounting firm, the Company shall select a
nationally recognized accounting firm which has no current or recent business
relationship with the Company. The determination of any such firm selected
shall be conclusive and binding on all parties.
4.3 In the event a determination is made as described in Sections 4.1 and
4.2 above that payments with respect to Rights are to be reduced pursuant to
this Section 4 and if such determination occurs after the Grantee has received
payments as described in Section 2.2 without such reduction having been made,
the amount by which such payment is to be reduced as provided in Section 4.2
above shall be deemed to be a loan from the Company to the Grantee and shall be
due and payable by the Grantee to the Company three days following notification
by the Company to the Grantee of such determination and the amount owing. No
interest shall be due on such amount.
5. Non-Transferability.
5.1 No Right granted hereunder shall be transferred, hypothecated, pledged
or otherwise disposed of by the Grantee to whom granted otherwise than by will
or the laws of descent and distribution. The terms of such Right shall be
final, binding and conclusive upon the beneficiaries, executors, administrators,
heirs and successors of the Grantee.
6. Definitions.
6.1 "Change of Control" shall mean the occurrence of any of the following:
(a) The commencement (within the meaning of Rule 14d-2 under the Securities
Exchange Act of 1934 (the "Exchange Act")) of a tender offer for more than 20%
of the Company's outstanding shares of capital stock having ordinary voting
power in the election of directors ("Voting Securities").
3
<PAGE>
(b) An acquisition (other than directly from the Company) of any Voting
Securities by any "Person" (as the term person is used for purposes of Section
13(d) or 14(d) of the Exchange Act) immediately after which such Person has
"Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of twenty percent (20%) or more of the combined voting power of
the Company's then outstanding Voting Securities, provided, however, in
determining whether a Change of Control has occurred, Voting Securities which
are acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not
constitute an acquisition which would cause a Change in Control. A "Non-Control
Acquisition" shall mean an acquisition by (i) an employee benefit plan (or a
trust forming a part thereof or a trustee thereof acting solely in its capacity
as trustee) maintained by (A) the Company or (B) any corporation or other Person
of which a majority of its voting power or its voting equity securities or
equity interest is owned, directly or indirectly, by the Company (for purposes
of this definition, a "Subsidiary"), (ii) the Company or its Subsidiaries, or
(iii) any Person who files in connection with such acquisition a Schedule 13D
which expressly disclaims any intention to seek control of the Company and does
not expressly reserve the right to seek such control; provided that any
amendment to such statement of intent which either indicates an intention or
reserves the right to seek control shall be deemed to be an "acquisition" of the
securities of the Company reported in such filing as beneficially owned by such
Person for purposes of this subparagraph (b).
(c) The individuals who, as of the effective date of the 1994 initial
public trading in Company shares, are members of the Board of Directors (the
"Incumbent Board"), ceasing for any reason to constitute at least a majority of
the members of the Board of Directors; provided, however, that if the election,
or nomination for election by the Company's common stockholders, of any new
director was approved by a vote of at least a majority of the Incumbent Board,
such new director shall, for purposes of this Plan, be considered as a member of
the Incumbent Board; provided further, however, that no individual shall be
considered a member of the Incumbent Board if such individual initially assumed
office as a result of either an actual or threatened "Election Contest" (as
described in Rule 14a-11 promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person other
than the Board (a "Proxy Contest") including by reason of any agreement intended
to avoid or settle any Election Contest or Proxy Contest.
(d) Approval by stockholders of the Company of:
(i) A merger, consolidation or reorganization involving the Company, unless
such merger, consolidation or reorganization is a "Non-Control Transaction";
i.e., meets each of the requirements described in (A), (B), and (C) below:
(A) the stockholders of the Company, immediately before such merger,
consolidation or reorganization, own, directly or indirectly immediately
following such merger, consolidation or reorganization, at least eighty percent
(80%) of the combined voting power of the outstanding voting securities of the
corporation
4
<PAGE>
resulting from such merger or consolidation or reorganization (the "Surviving
Corporation") in substantially the same proportion as their ownership of the
Voting Securities immediately before such merger, consolidation or
reorganization;
(B) the individuals who were members of the Incumbent Board immediately
prior to the execution of the agreement providing for such merger, consolidation
or reorganization constitute at least two-thirds of the members of the Board of
Directors of the Surviving Corporation immediately following the consummation of
such merger, consolidation or reorganization; and
(C) no Person, other than the Company, a Subsidiary, any employee benefit
plan (or any trust forming a part thereof or a trustee thereof acting solely in
its capacity as trustee) maintained by the Company, the Surviving Corporation,
or any Subsidiary, or any Person who, immediately prior to such merger,
consolidation or reorganization had Beneficial Ownership of twenty percent (20%)
or more of the then outstanding Voting Securities, has Beneficial Ownership of
twenty percent (20%) or more of the combined voting power of the Surviving
Corporation's then outstanding Voting Securities immediately following the
consummation of such merger, consolidation or reorganization.
(ii) A complete liquidation or dissolution of the Company; or
(iii) An agreement for the sale or other disposition of all or
substantially all of the assets of the Company to any Person (other than a
transfer to a Subsidiary).
6.2 "Hostile Change of Control" shall mean the occurrence of 6.1 (a), (b),
(c) or (d) without the prior approval of a majority of the independent members
of the Incumbent Board.
6.3. "Friendly Change of Control" shall mean any Change of Control which is
not a Hostile Change of Control.
7. Reimbursement Provision.
7.1. Each Grantee who incurs federal, state or local income tax prior to
1999, as a result of the acceleration and distribution of Company shares in
connection with a tender offer constituting a Hostile Change of Control which is
not completed, shall be reimbursed by the Company an amount equal to the
federal, state and local income taxes (based on the highest marginal rate)
related to the excess of (i) the amount of taxable income caused by the
distribution of the shares over (ii) the value of the shares following the
withdrawal or termination of such a tender (the "Spread"); plus such additional
amounts as shall be required so that the net after-tax amount payable to the
Grantee in respect of such distribution is the same as it would be if the tax on
the Spread had not been imposed.
5
<PAGE>
8. Amendments.
8.1 This plan may be amended or terminated by the Compensation and
Benefits Committee, but no amendment or termination may in any way adversely
impact any outstanding Rights.
6
<PAGE>
Exhibit 11
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ELEVEN TWELVE
MONTHS MONTHS
ENDED ENDED
NOVEMBER DECEMBER
30, 31,
1994 1993
----------- -----------
<S> <C> <C>
PRIMARY:
Weighted average shares outstanding:
Common stock...................................... 105,436,860 105,608,423
Common stock equivalents:
Restricted stock units.......................... 2,593,932 73,056
----------- -----------
Total common stock and common stock equivalents..... 108,030,792 105,681,479
=========== ===========
Income (loss) from continuing operations before
cumulative effect of change in accounting
principle.......................................... $ 125.2 $ (291.0)
Net income from discontinued operations............. 189.4
Cumulative effect of change in accounting principle. (12.7)
----------- -----------
Net income (loss)................................... 112.5 (101.6)
Preferred dividends................................. (37.6) (47.9)
----------- -----------
Net income (loss) applicable to common stock........ $ 74.9 $ (149.5)
=========== ===========
EARNINGS PER COMMON SHARE:
Income (loss) from continuing operations before cu-
mulative effect of change in accounting principle.. $ 0.81 $ (3.20)
Discontinued operations............................. 1.79
Cumulative effect of change in accounting principle. (0.12)
----------- -----------
Earnings per common share........................... $ 0.69 $ (1.41)
=========== ===========
FULLY DILUTED:
Weighted average shares outstanding:
Common stock...................................... 105,436,860 105,608,423
Common stock equivalents:
Restricted stock units.......................... 2,593,932 73,056
----------- -----------
Total common stock and common stock equivalents..... 108,030,792 105,681,479
=========== ===========
Income (loss) from continuing operations before cu-
mulative effect of change in accounting principle.. $ 125.2 $ (291.0)
Net income from discontinued operations............. 189.4
Cumulative effect of change in accounting principle. (12.7)
----------- -----------
Net income (loss)................................... 112.5 (101.6)
Preferred dividends................................. (37.6) (47.9)
----------- -----------
Net income (loss) applicable to common stock........ $ 74.9 $ (149.5)
=========== ===========
EARNINGS PER COMMON SHARE:
Income (loss) from continuing operations before cu-
mulative effect of change in accounting principle.. $ 0.81 $ (3.20)
Discontinued operations............................. 1.79
Cumulative effect of change in accounting principle. (0.12)
----------- -----------
Earnings per common share........................... $ 0.69 $ (1.41)
=========== ===========
</TABLE>
<PAGE>
Exhibit 12
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
COMPUTATION IN SUPPORT OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE
ELEVEN MONTHS
ENDED
FOR THE YEAR ENDED DECEMBER 31, NOVEMBER 30,
--------------------------------- -------------
1990 1991 1992 1993 1994
------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C>
Fixed charges:
Interest expense:
Subordinated indebtedness. $ 203 $ 170 $ 150 $ 144 $ 158
Bank loans and other
borrowings*.............. 4,531 4,755 5,035 5,224 6,294
Interest component of
rentals
of office and equipment.. 62 70 74 76 42
Other adjustments**......... 8 2 2 7 4
------- ------- ------- ------- ------
TOTAL (A)............... $ 4,804 $ 4,997 $ 5,261 $ 5,451 $6,498
======= ======= ======= ======= ======
Earnings:
Pre-tax income (loss) from
continuing operations...... $ (749) $ 150 $ (247) $ 27 $ 193
Fixed charges............... 4,804 4,997 5,261 5,451 6,498
Other adjustments***........ (17) 7 (6) (4)
------- ------- ------- ------- ------
TOTAL (B)............... $ 4,038 $ 5,154 $ 5,014 $5,472 $6,687
======= ======= ======= ======= ======
(B/A)......................... **** 1.03 **** 1.00 1.03
</TABLE>
- --------
* Includes amortization of long-term debt discount.
** Other adjustments include capitalized interest and debt issuance costs and
amortization of capitalized interest.
*** Other adjustments include adding the net loss of affiliates accounted for
at equity whose debt is not guaranteed by the Company and subtracting
capitalized interest and debt issuance costs and undistributed net income
of affiliates accounted for at equity.
**** Earnings were inadequate to cover fixed charges and would have had to
increase approximately $766 million in 1990 and $247 million in 1992 in
order to cover the deficiency.
<PAGE>
EXHIBIT 13
Management's Discussion and Analysis of Financial Condition and
- ---------------------------------------------------------------
Results of Operations
---------------------
Set forth on the following pages is Management's Discussion and Analysis of
Financial Condition and Results of Operations for the eleven months ended
November 30, 1994 and the twelve months ended December 31, 1993 and 1992.
Business Environment
The principal business activities of Lehman Brothers Holdings Inc.
("Holdings") and subsidiaries (collectively, the "Company" or "Lehman
Brothers") are investment banking and securities trading and sales, which by
their nature are subject to volatility and cyclicality, 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 period to period.
In February of 1994, inflationary concerns prompted the U.S. Federal Reserve
Bank to raise interest rates in the first of six such actions over the course
of the year. These actions resulted in an increase in the absolute level of
interest rates and a general contraction in the differentials between short-
and long-term interest rates in 1994.
Uncertainties over the direction of interest rates and the shape of the yield
curve had a detrimental effect on the volume of debt and equity offerings in
the U.S. markets, with lead-managed domestic underwritings falling a total of
32 percent for the industry as a whole in 1994 when compared to 1993 levels.
Interest rate concerns also had a negative effect on the levels and relative
profitability of customer activity, as investors focused on shorter duration
products that were inherently less profitable. Volatility in the U.S. fixed
income markets extended into other markets, affecting the levels of interest
rates in Europe and decreasing liquidity in the equity market.
Increasing interest rates had a negative impact on the industry's costs to
finance securities inventory positions as well as on the valuations of
various types of fixed income securities, affecting the levels of net
interest and principal transactions revenue.
During 1994, the derivatives business became a focal point of media,
congressional and judicial scrutiny. New legal and regulatory proposals, as
well as several highly publicized court actions created uncertainty in the
derivatives market, which particularly affected end user volumes.
In late 1994, the Mexican government's unexpected devaluation of the peso
caused a rapid decline in the value of that country's currency as well as the
prices on various debt and equity securities. This action provoked a
liquidity crisis in Mexico as certain investors withdrew from that market. A
financial aid package, totaling approximately $50 billion, provided by the
U.S., the International Monetary Fund and the Bank for International
Settlement appears to have stablized the Mexican markets. However, the
circumstances in Mexico could result in increased volitility and decreased
liquidity in emerging markets over the near term as investors react more
cautiously to political and economic events.
Although market conditions were difficult throughout 1994, the environment
for merger and acquisition activity was extremely positive. Driving this
trend was a wave of consolidations in various industries coupled with
multinational corporations completing strategic acquisitions both
domestically and abroad to strengthen competitive positions worldwide. This
trend has continued into 1995.
14
<PAGE>
During 1993, the Company's operating results were achieved in a more
favorable environment which was characterized by declining interest rates,
record levels of debt and equity issuances and significant growth in many
emerging market economies, particularly in Asia and Latin America. The 1993
environment resulted in record operating profits for companies in the
securities industry.
The adverse market conditions experienced during 1994 have continued into
1995. Any further increases in U.S. interest rates could exert pressures on
the Company's business.
Results of Operations
Spin-off from American Express
On May 31, 1994, American Express effected a special dividend to its common
shareholders of record on May 20, 1994, of approximately 98.2 million shares
of Holdings' common stock. (See Note 7 to the Consolidated Financial
Statements.) As part of the spin-off, Holdings' equity capital was increased
and restructured, with Holdings receiving a net increase of $1.25 billion of
equity, primarily from American Express. As a result of the Distribution,
Holdings became a widely held public corporation with its common stock traded
on the New York Stock Exchange.
Change in Year-End
Effective with the Distribution, the Company changed its year-end from
December 31 to November 30, in order to shift certain year-end administrative
activities to a time period that conflicts less with the business needs of
the Company's institutional customers. As a result of the change in the
Company's year-end, it is reporting its 1994 financial statements on the
basis of an eleven month transition period ended November 30, 1994 (the "1994
Fiscal Year"). Due to the eleven month reporting period for 1994, the
Company's 1994 results of operations are not directly comparable with
financial results of prior years.
Businesses Sold
The Company completed the sale of three businesses during 1993: The Boston
Company, Shearson, and SLHMC which were completed on May 21, July 31, and
August 31, 1993, respectively. (See Note 20 to the Consolidated Financial
Statements.) The Company's operating results reflect The Boston Company as a
discontinued operation, while the operating results of Shearson and SLHMC are
included in the Company's results from continuing operations for all periods
prior to their sale in 1993. Because of the significant sale transactions
completed during 1993, the Company's historical financial statements are not
fully comparable for all periods presented. To facilitate an understanding of
the Company's results, the following table and discussions segregate the
Company's results into three sections.
* HISTORICAL RESULTS: the results of the businesses that now comprise Lehman
Brothers; the results of Shearson and SLHMC through their respective sale
dates; the loss on the sale of Shearson; the reserves for non-core
businesses; and the results of The Boston Company (accounted for as a
discontinued operation).
* THE LEHMAN BUSINESSES: the results of the businesses that now comprise
Lehman Brothers.
* BUSINESSES SOLD: the results of Shearson and SLHMC; the loss on the sale of
Shearson; and the reserves for non-core businesses related to the sale of
SLHMC.
15
<PAGE>
HISTORICAL RESULTS (CONTINUING, SOLD AND DISCONTINUED BUSINESSES)
For the Eleven Months Ended November 30, 1994 and the Years Ended December
31, 1993 and 1992
<TABLE>
<CAPTION>
Eleven months Twelve months
ended ended
November 30 December 31
----------------- --------------------
1994 1993 1992
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues $ 2,738 $ 5,306 $ 5,496
Total non-interest expenses 2,545 5,279 5,743
- -----------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before taxes 193 27 (247)
Provision for (benefit from) income taxes 67 318 (54)
- ------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 126 (291) (193)
Income from discontinued operations, net of taxes 189 77
- ------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of changes in
accounting principles 126 (102) (116)
Cumulative effect of changes in accounting principles,
net of taxes (13) (7)
- ------------------------------------------------------------------------------------------------------
Net income (loss) $ 113 $ (102) $ (123)
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
Net revenues were $2,738 million for the 1994 Fiscal Year, $5,306 million and
$5,496 million for the years ended December 31, 1993 and 1992, respectively.
Net revenues in 1994 were reduced from the prior year due to lower levels of
trading and underwriting revenues for the Lehman Businesses in 1994 due to
unfavorable market conditions and the elimination of revenues from Businesses
Sold during 1993. Net revenues decreased 3% to $5,306 million in 1993 from
$5,496 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.
Non-interest expenses were $2,545 million for the 1994 Fiscal Year, $5,279
million and $5,743 million for the years ended December 31, 1993 and 1992,
respectively. Non-interest expenses in 1994 included a $33 million severance
charge and a $15 million charge in connection with the Concurrent
Transactions (see Note 7 to the Consolidated Financial Statements) and
certain expenses related to the May 31, 1994 divestiture from American
Express (the "Spin-off Charge"). Non-interest expenses decreased 8% to $5,279
million in 1993 from $5,743 million in 1992, due to the sale of Shearson and
SLHMC and to a decrease in non-interest expenses of the Lehman Businesses.
The Company reported net income of $113 million for the 1994 Fiscal Year and
a net loss of $102 million and $123 million for the years ended December 31,
1993 and 1992, respectively. The 1994 results included a $13 million aftertax
charge for the cumulative effect of a change in accounting for postemployment
benefits as a result of the adoption of Statement of Financial Accounting
Standards ("SFAS") No. 112, an $18 million aftertax severance charge and a
$12 million aftertax Spin-off Charge. The 1993 net loss of $102 million was
comprised of net income from the Lehman Businesses of $355 million, net
income of $189 million from the discontinued operations of The Boston
Company, including an aftertax gain of $165 million on the sale and aftertax
earnings of $24 million, and a net loss from the Businesses Sold of $646
million, which included an aftertax loss on the sale of Shearson of $630
million ($535 million pretax), an aftertax charge of $79 million ($120
million pretax) related to a reserve for non-core businesses recognized in
anticipation of the sale of SLHMC, and operating earn-
16
<PAGE>
LEHMAN BROTHERS 1994 ANNUAL REPORT
ings from Shearson of $63 million. The 1992 net loss of $123 million included
charges totaling $316 million ($497 million pretax) consisting of $59 million
($90 million pretax) of additional litigation reserves, a $107 million ($162
million pretax) write-down in the carrying value of certain real estate
investments, and a $150 million ($245 million pretax) charge related to the
Company's holdings of 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.
Earnings per common share for the 1994 Fiscal Year were $0.81 before the
cumulative effect of change in accounting principle and were $0.69 after the
cumulative effect of change in accounting principle. Earnings per common
share for the year ended December 31, 1993, as adjusted for the number of
shares of common stock outstanding on May 31, 1994, were a loss of $1.41
comprised of earnings of $2.91 for the Lehman Businesses, a loss of $6.11 for
the Businesses Sold and earnings of $1.79 for the discontinued operations of
The Boston Company.
17
<PAGE>
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.
<TABLE>
<CAPTION>
Eleven months Twelve months
ended ended
November 30 December 31
------------- -------------------------------------------------------------------------------
1994 1993 1992
------------- ---------------------------------------- -------------------------------------
Lehman Lehman Businesses Lehman Businesses
(in millions) Businesses Businesses Sold Historical Businesses Sold Historical
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Principal transactions $ 1,345 $ 1,732 $ 323 $ 1,192 $ 575
Investment banking 572 802 170 674 218
Commissions 445 488 828 446 1,231
Interest and dividends 6,761 5,679 161 5,404 257
Other 67 79 412 65 619
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenues 9,190 8,780 1,894 7,781 2,900
Interest expense 6,452 5,225 143 4,928 257
- -----------------------------------------------------------------------------------------------------------------------------------
Net revenues 2,738 3,555 1,751 $ 5,306 2,853 2,643 $ 5,496
- -----------------------------------------------------------------------------------------------------------------------------------
Non-interest expenses:
Compensation and benefits 1,413 1,825 1,164 1,551 1,759
Other expenses 1,084 1,133 470 1,411 777
Loss on sale of Shearson 535
Reserves and other charges 48 32 120 245
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-interest expenses 2,545 2,990 2,289 5,279 3,207 2,536 5,743
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations before taxes and
cumulative effect of changes in
accounting principles 193 565 (538) 27 (354) 107 (247)
Provision for (benefit from)
income taxes 67 210 108 318 (109) 55 (54)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations before cumulative
effect of changes in accounting
principles $ 126 $ 355 $ (646) $ (291) $ (245) $ 52 $ (193)
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
LEHMAN BROTHERS 1994 ANNUAL REPORT
[GRAPH APPEARS HERE]
THE LEHMAN BUSINESSES
For the Eleven Months Ended November 30, 1994 and the Year Ended December 31,
1993
SUMMARY Net income for the Lehman Businesses was $113 million for the 1994
Fiscal Year. Net income for 1994 included a $13 million ($23 million pretax)
charge for the cumulative effect of a change in accounting for postemployment
benefits, an $18 million ($33 million pretax) severance charge recorded in
the first quarter of 1994 related to the Company's ongoing review of its
personnel needs ("Severance Charge") and a $12 million ($15 million pretax)
Spin-off Charge. Excluding these charges, net income for the Lehman
Businesses was $156 million in the 1994 Fiscal Year. Net income from
continuing operations was $355 million for the year ended December 31, 1993,
consisting of $376 million of income from the continuing businesses and a $21
million reserve ($32 million pretax) for certain non-core partnership
syndication activities in which the Company is no longer actively engaged.
NET REVENUES Net revenues were $2,738 million for the 1994 Fiscal Year and
$3,555 million for the year ended December 31, 1993. Net revenue levels in
1994 were adversely affected by significantly reduced underwriting volumes
and a less favorable mix of investor activity, due to increasing interest
rates and volatile equity markets as compared with the prior year. Principal
transactions revenues declined to $1,345 million for the 1994 Fiscal Year as
improved profitability from the derivative products business was insufficient
to offset broad based declines across the fixed income, equity, foreign
exchange and commodities businesses. Investment banking revenues in the 1994
Fiscal Year decreased to $572 million as significantly reduced underwriting
revenues in both fixed income and equities more than overshadowed strong
gains in strategic advisory activities and improved results in merchant
banking. Commission revenues in 1994 were down slightly to $445 million due
to the Company's lower market volumes of customer activity in listed
securities. Net interest and dividend income declined to $309 million for the
1994 Fiscal Year primarily due to reduced spreads in fixed income products
and overall increased funding costs as a result of the higher interest rate
environment. Other revenues declined slightly primarily due to reduced asset
management fees.
For internal management purposes, the Company is structured by business unit,
which is essentially a grouping of financial products with similar
characteristics. Revenues attributed to each business unit for internal
reporting purposes encompass all components of net revenues as reflected in
the Consolidated Statement of Operations including: principal transactions,
investment banking, commissions (retail and institutional), other revenue and
net interest and dividends. Business unit net revenues also contain certain
internal allocations, including funding costs which are centrally managed.
The net revenues of the Company's primary business units for the 1994 Fiscal
Year were as follows: fixed income $1,052 million, equities $713 million,
derivative products $433 million, foreign exchange and commodities $233
million, corporate finance advisory (primarily merger and acquisition
activities) $179 million and merchant banking $128 million. Prior year
amounts are not comparable due to changes in the reporting period and
internal allocation methodologies employed.
Net revenues from international sources as a percentage of total net revenues
were 42% for the 1994 Fiscal Year and 33% in 1993, reflecting the Company's
strategy to increase the global scope of its business activities. This
includes approximately $337 million and $300 million of revenues that were
associated with domestic products and services in the 1994 Fiscal Year and
the year ended December 31, 1993, respectively, that the Company estimates
resulted from relationships with international clients and customers.
19
<PAGE>
The economic environment in 1993 resulted in a record year for Lehman
Brothers as well as the United States securities industry, which benefited
from historically low interest rates, record volumes of new stock and bond
issues, and the continued restructuring of corporate balance sheets.
PRINCIPAL TRANSACTIONS Principal transactions revenues include the results of
the Company's market making and trading related to customer flow activities,
as well as proprietary trading for the Company's own account (on a combined
basis, "Trading Activities").
Since 1990, Lehman Brothers has focused on a "client/customer-driven"
strategy. Under this strategy, Lehman Brothers concentrates on serving the
needs of major issuing and advisory clients and investing customers worldwide
to build an increasing "flow" of business that leverages the Company's
research, underwriting and distribution capabilities. Customer flow continues
to be the primary source of the Company's principal transactions revenues.
In addition to its customer flow activities, the Company also takes
proprietary positions based upon expected movements in interest rate, foreign
exchange, equity and commodity markets in both the short- and long-term. The
Company's success in this area is dependent upon its ability to anticipate
economic and market trends and to develop trading strategies that capitalize
on these anticipated changes. These activities accounted for approximately 6%
of net revenues in 1994.
The Company, through its subsidiaries, is a market maker in all major equity
and fixed income products in both the domestic and international markets. As
part of its market-making activities, the Company maintains inventory
positions of varying amounts across a broad range of financial instruments
which are marked-to-market on a daily basis, along with the Company's
proprietary trading positions, and give rise to principal transactions
revenues. The Company utilizes various hedging strategies to minimize its
exposure to significant movements in interest and foreign exchange rates and
the equity markets. In order to facilitate its Trading Activities, the
Company is a member of all principal securities and commodities exchanges in
the United States 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.
The following discussion provides an analysis of the Company's Trading
Activities based upon the various product groups which generated these
revenues.
PRINCIPAL TRANSACTIONS REVENUES
<TABLE>
<CAPTION>
Eleven months Twelve months
ended ended
November 30 December 31
------------- ------------------
(in millions) 1994 1993 1992
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed income $ 597 $ 801 $ 707
Equity 104 349 250
Derivative products 541 413 150
Foreign exchange and commodities 103 169 85
- ----------------------------------------------------------------------------------
$ 1,345 $ 1,732 $ 1,192
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
Fixed income products consist of dollar and non-dollar government, sovereign
and government agency obligations; money market products; corporate debt
securities; mortgage and asset-backed securities; emerging market securities;
municipal and tax-exempt securities and certain related fixed income
derivative products including options, futures and forwards utilized by the
Company in its trading-related activities, excluding those transactions
executed by the Company's fixed income derivative
20
<PAGE>
LEHMAN BROTHERS 1994 ANNUAL REPORT
products business. Lehman Brothers is one of the leading 38 primary dealers in
U.S. government securities, and is a market maker in the government securities
of all major industrialized countries. The Company, through its subsidiaries, is
also a market leader in market making for a broad range of other fixed income
products.
Fixed income revenues were $597 million for the 1994 Fiscal Year and $801
million for the year ended December 31, 1993. Rising interest rates and
inflationary uncertainties had a negative effect on customer activity
throughout 1994 resulting in reduced profitability for most of the fixed
income businesses. In addition, customers concentrated on short-term, high
quality products in the fixed income area which typically provide reduced
profit margins. Broad based declines across certain fixed income businesses
were offset in part by stronger 1994 results in governments and high yield.
Equity revenues include net gains on market making and trading in listed and
over-the-counter equity securities, American Depository Receipts,
convertibles, options, warrants and other related equity derivatives utilized
by the Company in its trading-related activities, excluding those
transactions executed by the Company's equity derivative products business.
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. Equity revenues were $104 million for the 1994 Fiscal Year
and $349 million for the year ended December 31, 1993. The decline in equity
trading revenue was broad based as revenues were negatively impacted by
increased volatility in the equity markets, outflows of capital from the
equity markets and reduced customer demand as yields on fixed income
securities increased throughout 1994.
Derivative product revenues were $541 million for the 1994 Fiscal Year and
$413 million for the year ended December 31, 1993. Derivative product
revenues include the results of fixed income and equity derivative products.
Fixed income derivative product revenues include net revenues from the
trading and market making activities of the Company's fixed income derivative
products business. The fixed income derivative products business is conducted
by the Company's special purpose subsidiary Lehman Brothers Special
Financing, Inc. and a separately capitalized triple-A rated subsidiary,
Lehman Brothers Financial Products Inc., whose operations commenced in
mid-1994. Fixed income derivatives include swaps (interest and currency),
interest rate option contracts (caps, collars and floors), swap options and
similar instruments. Fixed income derivative product revenues were $461
million for the 1994 Fiscal Year and $330 million for the year ended
December 31, 1993. This increase was primarily attributable to the growth in our
international derivative activities, most significantly in Asia. The total
notional value of fixed income derivative products increased by 61% to $421
billion at November 30, 1994 from over $261 billion at December 31, 1993.
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.
Equity derivative product revenues include net revenues from the trading and
market making activities of the Company's equity derivative products
business. Equity derivative revenues were $80 million for the 1994 Fiscal
Year and $83 million for the year ended December 31, 1993. As a result of the
Company's increased emphasis on equity products, the Company's equity
derivative products business continued to expand during 1994.
As evidence of the growth in this business, the total notional/contract value
of equity derivative products increased 93% to $54 billion at November 30,
1994 from approximately $28 billion at December 31, 1993.
21
<PAGE>
Foreign exchange and commodities revenues were $103 million for the 1994
Fiscal Year and $169 million for the year ended December 31, 1993. Foreign
exchange revenues of $92 million and $134 million for the 1994 Fiscal Year
and for the year ended December 31, 1993, respectively, include revenues
derived from market making and trading in spot and forward foreign exchange
contracts, foreign currency futures contracts and foreign exchange option
contracts. Reduced customer activity due to volatility in worldwide
currencies contributed to decreased 1994 revenue. As a market maker in
foreign exchange products, the Company engages in foreign exchange trading
activities in all major currencies and maintains a 24-hour foreign exchange
market making capability for customers worldwide. The notional/contract value
of foreign exchange products outstanding, including forward commitments to
purchase and forward commitments to sell at November 30, 1994 and December
31, 1993, were $281 billion and $232 billion, respectively. Commodities
revenues include revenues derived from the purchase and sale of energy
products, metals and other commodity futures contracts. The notional/contract
value related to commodities was $17 billion and $12 billion at November 30,
1994 and December 31, 1993, respectively.
INVESTMENT BANKING Investment banking revenues were $572 million for the 1994
Fiscal Year and $802 million for the year ended December 31, 1993. Worldwide
debt and equity underwriting volumes decreased to $80.6 billion for the 1994
Fiscal Year from $129.5 billion for the year ended December 31, 1993. The
Company's 1994 results were adversely affected by lower origination volumes
in both equities and fixed income, resulting in underwriting revenues of $243
million for the 1994 Fiscal Year and $539 million for the year ended December
31, 1993. Partially offsetting this decrease were higher levels of revenues
from merchant banking activities and improved results from strategic advisory
activities. Merchant banking revenues were $128 million for the 1994 Fiscal
Year and $105 million for the year ended December 31, 1993. Such revenues
include net realized gains and net unrealized changes in the value of
merchant banking investments. Over time, the Company expects to derive lower
levels of revenues from prior merchant banking investments. Strategic
advisory activity exhibited renewed strength as fees in Fiscal 1994 increased
to $179 million from $132 million in 1993 with the increased number of merger
and acquisition transactions.
COMMISSIONS Commission revenues were $445 million for the 1994 Fiscal Year
and $488 million for the year ended December 31, 1993. Commission revenues
declined slightly from prior year levels, primarily as the result of the
Company's restructuring of the high net worth brokerage unit and the
corresponding reduction of approximately 100 salespeople. Commission revenues
are generated from the Company's agency activities on behalf of corporations,
institutions and high net worth individuals. The Company's Investment
Representatives averaged $600 thousand in total revenues on an annualized,
weighted average basis for fiscal 1994.
INTEREST AND DIVIDENDS Interest and dividend revenues were $6,761 million for
the 1994 Fiscal Year and $5,679 million for the year ended December 31, 1993.
Net interest and dividend income was $309 million for the 1994 Fiscal Year
and $454 million for the year ended December 31, 1993. Net interest and
dividend revenue amounts are closely related to the Company's Trading
Activities. The Company evaluates its trading strategies on an overall
profitability basis which includes both principal transactions revenues and
net interest. Therefore, changes in net interest and dividend revenue from
period to period should not be viewed in isolation but should be viewed in
conjunction with revenues from principal transactions. Net interest and
dividend revenue is impacted by the balance sheet size and mix of assets, the
amount and mix of short- and long-term funding sources, as well as the
prevailing level,
22
<PAGE>
LEHMAN BROTHERS 1994 ANNUAL REPORT
[GRAPH APPEARS HERE]
term structure and volatility of interest rates. Net interest and dividend
revenues for the current year were adversely affected by reduced spreads on
fixed income products and increased funding costs to the Company as a result of
the higher interest rate environment. The 1994 decrease in net interest and
dividend revenue was partially offset by reduced funding costs of the Company,
due to the $1.2 billion cash proceeds received as a result of the Distribution
and an increased level of interest earning assets.
OTHER REVENUES Other revenues were $67 million for the 1994 Fiscal Year and
$79 million for the year ended December 31, 1993. Asset management fees were
the principal component of this revenue category. Asset management and
related advisory fees were $25 million for the 1994 Fiscal Year and $35
million for the year ended December 31, 1993. Assets under management were
over $10 billion at November 30, 1994 as compared to over $12 billion at
December 31, 1993. The decreases in asset management revenues and assets
under management were primarily due to the sale of a financial advisory
company in the first quarter of 1994 and the transfer of certain advisory
contracts related to Smith Barney sponsored funds.
NON-INTEREST EXPENSES Non-interest expenses were $2,545 million for the 1994
Fiscal Year and $2,990 million for the year ended December 31, 1993.
Compensation and benefits expense was $1,413 million for the 1994 Fiscal Year
and $1,825 million for the year ended December 31, 1993. Compensation and
benefits expense as a percentage of net revenues was 51.6% for the 1994
Fiscal Year, and 51.4% for 1993.
Excluding compensation and benefits expense, nonpersonnel expenses were
$1,132 million for the 1994 Fiscal Year and $1,165 million for the year ended
December 31, 1993. Included in the 1994 results was a $33 million Severance
Charge and a $15 million Spin-off Charge. The 1993 results included a $32
million charge related to certain non-core partnership syndication activities in
which the Company is no longer actively engaged. Excluding these charges,
nonpersonnel expenses were $1,084 million for the 1994 Fiscal Year and $1,133
million for the year ended December 31, 1993.
<TABLE>
<CAPTION>
Eleven months Twelve months
ended ended
November 30 December 31
------------- ----------------------
(in millions) 1994 1993 1992
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Compensation and benefits expense $ 1,413 $ 1,825 $ 1,551
Compensation and benefits/net revenues 51.6% 51.4% 54.4%
Nonpersonnel expenses:
Excluding reserves and other charges $ 1,084 $ 1,133 $ 1,411
Reserves and other charges 48 32 245
- ------------------------------------------------------------------------------------------
Total nonpersonnel expenses $ 1,132 $ 1,165 $ 1,656
- ------------------------------------------------------------------------------------------
Nonpersonnel expenses/net revenues:
Total nonpersonnel expenses 41.3% 32.8% 58.1%
Total nonpersonnel expenses
(excluding reserves and other charges) 39.6% 31.9% 49.5%
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
COST REDUCTION EFFORT Significant effort was spent during 1994 on reducing
both personnel and nonpersonnel expenses. During 1994, the Company took
actions to reduce its headcount from a peak of 9,400 employees reached in the
first quarter to 8,512 by November 30, 1994. More than 100% of this net
reduction has occurred in the United States, with growth continuing in the
non-U.S. busi-
23
<PAGE>
nesses. Nonpersonnel costs, including all non-interest expenses except
compensation and benefits, were also reduced in the last half of 1994. These
nonpersonnel costs had been growing in recent years as the Company completed the
bulk of its international infrastructure and incurred the costs of separating
from Shearson. Total nonpersonnel costs peaked at $305 million for the second
quarter of 1994. Since then, a number of actions have been taken which reduced
these costs to $298 million in the third quarter and $287 million in the fourth
quarter. This represents an annualized reduction of approximately $70 million
from the second quarter to the fourth quarter.
While significant progress has been made thus far in reducing costs, the
Company will take several additional actions in fiscal 1995.
The Company intends to lower its cost structure by $300 million on an
annualized basis (pretax) compared to the third quarter 1994 expense run
rate. These reductions have been categorized into three areas: personnel
costs; nonpersonnel costs; and interest and tax expense.
Personnel reductions made in the fourth quarter of 1994 will result in over
$50 million of the savings on a run rate basis, with additional reductions to
be made in 1995. Further personnel savings will be achieved by completing the
process begun in 1994 to restructure certain businesses, reduce staffing
levels, reduce capacity in businesses which are continuing to experience
lower volume, and restructure and automate certain support functions.
Nonpersonnel costs are targeted to be reduced significantly from the
third-quarter run rate, with major reduction efforts underway on a global
basis against all major cost categories. As stated previously, nonpersonnel
costs were reduced from $305 million in the second quarter of 1994 to $298
million in the third quarter and $287 million in the fourth quarter. On an
annualized basis, this represents a savings of approximately $70 million in
total off the second quarter and $44 million off the third quarter total that
the Company is using as its benchmark. Additional savings of over $100
million on a run rate basis are expected to come from many individual actions
to be taken throughout fiscal 1995.
Interest and taxes are areas which are also expected to provide substantial
cost reductions. The Company has restructured its debt portfolio, developed
additional secured financing opportunities on a global basis and has
implemented new tax planning strategies. The interest expense and equivalent
tax savings achieved in the fourth quarter total approximately $40 million on
an annualized basis.
As these reductions in costs will come from many actions and require changes
in the business, the Company expects that they will not be complete until the
end of fiscal 1995.
THE LEHMAN BUSINESSES
For the Years Ended December 31, 1993 and 1992
SUMMARY For the Lehman Businesses, income from continuing operations was $355
million in 1993, consisting of $376 million of income from the continuing
businesses and a $21 million reserve ($32 million pretax) 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 pretax), as described in
"Historical Results."
NET REVENUES Net revenues increased 25% to $3,555 million in 1993 from $2,853
million in 1992. Revenues related to principal transactions and investment
banking were the primary sources of the increase. Net revenues from
international sources as a percentage of total net revenues were 33% in 1993
and 23% in 1992, reflecting the Company's strategy to increase the global
scope of its business activities.
24
<PAGE>
LEHMAN BROTHERS 1994 ANNUAL REPORT
This includes approximately $300 million and $100 million of revenues that were
associated with domestic products and services in 1993 and 1992, respectively,
that the Company estimates resulted from relationships with international
clients and customers.
PRINCIPAL TRANSACTIONS Principal transactions revenues increased 45% to
$1,732 million in 1993 from $1,192 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 principal
transactions revenues based upon the various product groups which generated
these revenues.
Fixed income revenues increased 13% to $801 million in 1993 from $707 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 increased 40% to $349 million in 1993 from $250 million in
1992, primarily as a result of higher revenues from the Company's proprietary
trading activities.
Derivative product revenues, which include revenues from fixed income
derivative products and equity derivative products, increased 175% to $413
million in 1993 from $150 million in 1992.
Fixed income derivative product revenues increased 180% to $330 million in
1993 from $118 million in 1992, representing 39% of the total increase in
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 trading-related fixed income derivative
contracts increased to over $260 billion from approximately $105 billion at
December 31, 1992.
Equity derivative product revenues increased 159% to $83 million in 1993 from
$32 million in 1992. The Company's equity derivative products 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 $28 billion. Notional amounts for 1992 were not
material.
Foreign exchange and commodities revenues increased 99% to $169 million in
1993 from $85 million in 1992. Included in these results were foreign
exchange revenues of $134 million and $71 million for 1993 and 1992,
respectively, reflecting an increase of 89%. This increase was due primarily
to increased customer-related and proprietary trading activities throughout
1993. Revenues from commodity trading activities increased 150% to $35
million in 1993 from $14 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 $232 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 36% increase in underwriting revenues to $539 million in 1993, 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 within these results were merchant banking revenues,
which decreased 10% to $105 million in 1993 from $117 million in 1992.
25
<PAGE>
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.
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.
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 at December 31, 1993 from $3
billion at December 31, 1992.
NON-INTEREST EXPENSE Non-interest expenses were $2,990 million and $3,207
million for the years ended December 31, 1993 and 1992, respectively.
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 51.4% in 1993 from 54.4% in 1992,
due to improvements in productivity.
Excluding compensation and benefits expense, nonpersonnel expenses decreased
30% to $1,165 million in 1993 from $1,656 million in 1992. Included in the
1993 amount was a charge of $32 million, 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
which consisted of a charge of $90 million for additional litigation
reserves, a $162 million write-down of the carrying value of certain real
estate investments, and a $245 million charge related to the Company's
holdings of Computervision. Excluding these charges and compensation and
benefits expense, nonpersonnel expenses declined 2% to $1,133 million in 1993
from $1,159 million in 1992. This decrease was due primarily to lower levels
of provisions for legal settlements and bad debts and reduced operating
expenses.
THE LEHMAN BUSINESSES -- INCOME TAXES
For the Eleven Months Ended November 30, 1994 and the Years Ended December
31, 1993 and 1992
For the eleven months ended November 30, 1994, the Lehman Businesses had an
income tax provision of $67 million and $210 million for the year ended
December 31, 1993. The effective tax rate for the Lehman Businesses was 35%
for the 1994 Fiscal Year and 37% for the year ended December 31, 1993. The
lower tax rate in 1994 reflects the reduction in pretax results, an increase
in benefits attributable to income subject to preferential tax treatment,
partially offset by the impact of certain nondeductible foreign losses and
the nondeductibility of a portion of the Spin-off Charge. The 1993 income tax
provision includes a provision of $221 million for continuing businesses and
a tax benefit of $11 million related to noncore business reserves. The 1993
effective tax rate was greater than the statutory U.S. federal income tax
rate, principally due to state and local income taxes, partially offset by
benefits attributable to income subject to preferential tax 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.
26
<PAGE>
LEHMAN BROTHERS 1994 ANNUAL REPORT
The Company's net deferred tax assets decreased $84 million to $181 million
at November 30, 1994 from $265 million at December 31, 1993. The net
reduction is attributable to the reversal of certain temporary differences,
partially offset by an increase in the deferred tax asset resulting from the
ability to recognize benefits related to the 1988 acquisition of E.F. Hutton.
It is anticipated that the remaining deferred tax asset will be realized
through future earnings.
As of November 30, 1994, the Company had approximately $200 million of tax
net operating losses ("NOLs") available to offset future taxable income. The
benefits related to approximately $65 million of these NOLs has not yet been
reflected in the financial statements.
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 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
nondeductible foreign losses. The effective rate on the benefit for the
charges previously discussed 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.
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 million in 1992. Excluding the loss on the sale of Shearson and the
reserve for non-core businesses related to SLHMC, non-interest 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 the
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 aftertax loss on the sale, Shearson's net income was $63 million in
1993, compared to $55 million in 1992. Excluding the $79 million aftertax
charge discussed above, SLHMC operations were break-even in 1993, compared to
a net loss of $3 million in 1992.
The 1993 tax provision of $108 million for the 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
27
<PAGE>
[PIE CHART APPEAR HERE]
[PIE CHART APPEAR HERE]
the write-off of $750 million of goodwill which was not deductible for tax
purposes. For 1992, the tax expense related principally to the Shearson
operations. The effective tax rate for the Businesses Sold was 51% in 1992, with
the excess over the statutory U.S. federal income tax rate, primarily resulting
from state and local taxes and the nondeductibility of goodwill amortization.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY MANAGEMENT Due to the nature of the Company's business and the
size of the Company's asset base, funding and liquidity are critical to the
Company's daily activities. As a consequence, the Company has developed
certain funding principles to guide its global funding strategy and to
provide sufficient liquidity and availability of funding sources throughout
all market environments. These funding principles are:
(i) To maintain an appropriate overall capital structure to support the
business activities in which the Company is engaged.
(ii) To maximize the portion of the Company's balance sheet that is funded
through collateralized borrowing sources, and conversely minimize the use of
short-term unsecured financings. Collateralized borrowing sources include
securities and other financial instruments sold but not yet purchased,
securities sold under agreements to repurchase ("repos") and securities
loaned.
Because of their secured nature, repos, and other types of collateralized
borrowings are less credit-sensitive and have historically been a more stable
financing source under adverse market conditions. Secured financings
generally provide the Company access to lower cost funding. The Company has
been able to exceed its goal of maintaining repo funding lines of at least
two times actual balance sheet utilization.
(iii) To minimize refunding risk by funding the Company's assets with
liabilities which have maturities similar to the anticipated holding period
of the assets. Where the Company deems it to be appropriate, foreign currency
denominated assets are financed with corresponding foreign currency
denominated liabilities.
(iv) To diversify and expand the Company's borrowing sources to maximize
liquidity and reduce concentration risk. The Company seeks financing from a
global investor base with the goal of broadening the availability of its
funding sources and maintaining funding availability well in excess of actual
utilization. The Company accesses both unsecured and collateralized debt
markets through its operations in New York, London, Tokyo, Hong Kong and
Frankfurt. In addition to maintaining geographic diversification, the Company
also utilizes a broad range of debt instruments, which it issues in varying
maturities.
To reduce liquidity risk, the Company carefully manages its commercial paper
and master note maturities to avoid large refinancings on any one given day.
In addition, the Company limits its exposure to any single commercial paper
investor to avoid concentration risk.
(v) To maintain sufficient liquidity 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 through a combination of collateralized financing sources,
long-term debt and stockholders' equity. To achieve this
28
<PAGE>
LEHMAN BROTHERS 1994 ANNUAL REPORT
objective, the Company's liquidity policies include maintaining sufficient
excess unencumbered securities to use as collateral to obtain secured
financing, if necessary, to meet maturities of short-term unsecured liabilities
as well as current maturities of long-term debt. Also the Company maintains a
sufficient amount of long-term debt and stockholders' equity to enable the
Company to maintain an excess cash position in the event it becomes necessary to
fund on a fully secured basis.
The Company's liquidity contingency plans are continually reviewed and
updated as the Company's asset/liability mix and liquidity requirements
change. The Company believes that all of these liquidity policies position
the Company to meet its liquidity requirements in all periods including those
of financial stress.
DAILY FUNDING ACTIVITIES Total assets increased to $109.9 billion at November
30, 1994 from $80.5 billion at December 31, 1993. A substantial portion of
this increase was due to the adoption of FIN No. 39, which restricts the
historical industry practice of offsetting certain receivables and payables.
(See Note 13 to the Consolidated Financial Statements.)
The Company's asset base consists primarily of cash and cash equivalents and
assets which can be converted to cash within one year, including securities
and other financial instruments owned, collateralized short-term agreements,
and receivables. At November 30, 1994, these assets comprised approximately
96% 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.
On a daily basis the Company reviews its mix of long- and short-term
borrowings as it relates to maturity matching and the availability of secured
and unsecured financing. Tracking of collateral is done to ensure sufficient
unencumbered collateral. Lastly, the Company periodically tests its secured
and unsecured credit facilities to ensure availability.
SHORT-TERM SECURED FUNDING As noted above, the Company finances its
short-term assets primarily on a secured basis. At November 30, 1994, 81% of
the Company's securities and other financial instruments owned, securities
purchased under agreements to resell and securities borrowed are financed by
securities sold but not yet purchased and other short-term secured
financings.
SHORT-TERM UNSECURED FUNDING The Company uses short-term unsecured borrowing
sources to fund short-term assets not financed on a secured basis. The
Company's primary sources of short-term, unsecured general purpose funding
include commercial paper and short-term debt, including master notes and bank
borrowings under uncommitted lines of credit. Commercial paper and short-term
debt outstanding totaled $9.8 billion at November 30, 1994, compared to $11.2
billion at December 31, 1993. Of these amounts, commercial paper outstanding
totaled $2.8 billion at November 30, 1994, with an average maturity of 53
days, compared to $2.6 billion at December 31, 1993, with an average maturity
of 31 days. At November 30, 1994, Holdings had $2.5 billion of unused
committed bank credit lines to support its commercial paper programs.
29
<PAGE>
[GRAPH APPEARS HERE]
The Company's uncommitted lines of credit provide an additional source of
secured and unsecured short-term financing. At November 30, 1994, the Company
had $12.5 billion in uncommitted lines of credit compared to $10.8 billion at
December 31, 1993. Uncommitted lines consist of facilities that the Company
has been advised are available but for which no contractual lending
obligation exists.
TOTAL CAPITAL Long-term assets are financed with a combination of long-term
debt and stockholders' equity (collectively, "Total Capital"). The Company's
long-term unsecured funding sources are senior notes and subordinated
indebtedness. The Company maintains long-term debt in excess of its long-term
assets to provide additional liquidity, which the Company uses to meet its
short-term funding requirements and to reduce its reliance on commercial
paper and short-term debt.
During the 1994 Fiscal Year, the Company issued $3.9 billion in long-term
debt, compared to $4.2 billion in 1993. In addition to refinancing long-term
debt, these issuances strengthened the Company's Total Capital base. The
Company staggers the maturities of its long-term debt to minimize refunding
risk. At November 30, 1994, the Company had long-term debt outstanding of
$11.3 billion with an average life of 2.9 years, compared to $9.9 billion
outstanding at December 31, 1993, with an average life of 3.1 years. For
long-term debt with a maturity of greater than one year, the Company had $8.2
billion outstanding with an average life of 3.8 years at November 30, 1994,
compared to $7.5 billion outstanding with an average life of 4.0 years at
December 31, 1993.
At November 30, 1994, the Company had approximately $3.1 billion available
for issuance of debt securities under various shelf registrations.
The Company's stockholders' equity has increased from $2.1 billion at
December 31, 1993 to $3.4 billion at November 30, 1994 primarily due to the
$1.25 billion increase in stockholders' equity as a result of the May 31,
1994 spin-off from American Express, the retention of fiscal 1994 earnings
and the recognition of common stock issuable under the 1994 stock award
plans. (See Note 10 to the Consolidated Financial Statements.)
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. The current short-term and long-term senior debt
ratings of Holdings and its principal subsidiary Lehman Brothers Inc. ("LBI")
are as follows:
<TABLE>
<CAPTION>
Holdings LBI
-----------------------------------------------
Short-term Long-term Short-term Long-term*
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Duff & Phelps D-1 A D-1 A-
Fitch Investor Services F-1 A F-1 A-
IBCA A1 A- A1 --
Moody's P2 A3 P1 A3
S&P A-1 A A-1 A
Thomson Bank Watch TBW-1 A- TBW-1 A-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
*Relates to subordinated indebtedness only.
30
<PAGE>
LEHMAN BROTHERS 1994 ANNUAL REPORT
On September 21, 1994, Standard & Poor's affirmed the short- and long-term
ratings of the Company. However, in light of weaker market conditions
resulting from interest rate uncertainties and inflationary concerns, S&P has
revised the long-term debt outlook of the Company from stable to negative.
Furthermore, S&P indicated that weak or volatile earnings over the next few
quarters could lead to a rating downgrade.
On February 16, 1995, Moody's Investors Service ("Moody's") confirmed the
ratings of Holdings and its subsidiaries, after placing the ratings on review
for possible downgrade. Moody's highlighted the Company's efforts to lower
its overall cost structure and diversify revenues beyond fixed income businesses
enabling the Company to earn more stable and robust returns over time. The
confirmations also reflected the Company's strategic focus on customer flow
business rather than on more volatile proprietary position taking and
anticipates continuing improvements in the Company's finanacial flexibility
through further reductions in illiquid assets and double leverage.
Other rating agencies either took no action or affirmed the Company's
existing ratings.
END USER ACTIVITIES The Company enters into a variety of financial and
derivative product 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. In order to modify the interest characteristics of
its long-term debt obligations, the Company enters into interest rate swaps,
caps and swaptions as an end user. 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. At November 30,
1994 and December 31, 1993, the notional values of the Company's interest
rate swaps and caps related to its long-term debt obligations were
approximately $8.1 billion and $4.5 billion, respectively. Included in these
amounts were approximately $2.3 billion of interest rate swaps and caps,
maturing in fiscal 1995 and fiscal 1997, which serve to reduce the Company's
subordinated fixed rate indebtedness to a lower fixed rate. The Company has
matched substantially all of the maturities of its remaining interest rate
swaps to the terms of its underlying borrowings.
In addition, the Company has $1,259 million notional value of swaptions
outstanding at November 30, 1994, which, if exercised, would convert $1,059
million of the Company's long-term fixed rate debt to a floating rate. The
remaining swaptions, if exercised, would convert a portion of the Company's
long-term debt from a floating rate to a fixed rate. Swaptions of $809
million could be exercised in December 1994, with the remaining swaptions having
exercise dates ranging from fiscal 1996 to fiscal 1998.
The $8.1 billion notional amount of interest rate swaps and caps outstanding
as of November 30, 1994, mature as follows (in millions):
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Year ended November 30, 1995 $ 2,849
Year ended November 30, 1996 877
Year ended November 30, 1997 2,457
Year ended November 30, 1998 997
Year ended November 30, 1999 447
December 1, 1999 and thereafter 511
- --------------------------------------------------------------------------------
$ 8,138
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
The effect of interest rate swap and cap agreements was to decrease interest
expense by approximately $30 million, $56 million and $57 million in 1994,
1993 and 1992, respectively. The unrecorded net loss on these agreements was
approximately $99 million and $5 million at November 30, 1994 and December
31, 1993, respectively. At November 30, 1994, the unrecognized loss on these
agreements was more than offset by unrecognized gains on the Company's
long-term debt.
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 previously
discussed, which reduce the Company's rate on its fixed rate subordinated
indebtedness to a lower fixed rate, will lower fiscal 1995 and fiscal 1996
interest expense by approximately $15 million and $5 million, respectively.
The effect of the remaining interest rate swaps is dependent on the level of
interest rates in the future.
The Company also enters into interest rate swap and cap agreements as an end
user. The Company, as an end user, utilized derivative financial instruments
with an aggregate notional amount of $32.3 billion at November 30, 1994 to
modify the interest rate characteristics of certain assets and liabilities,
which aggregated approximately $108 billion at November 30, 1994. The Company
had unrecognized net losses of approximately $110 million at November 30,
1994 related to these derivative financial instruments which were offset by
unrecognized net gains arising from these assets and liabilities. The total
notional value of these swap and cap agreements had a weighted average
maturity of 1.2 years as of November 30, 1994. The effect of these interest
rate swap and caps was to decrease interest expense by approximately $6
million in the 1994 Fiscal Year.
CAPITAL ADEQUACY The Company strives to ensure the efficient use of its
equity capital by targeting returns consistent with the degree of risks
taken. The Company allocates available capital to its business units and
establishes target levels of returns consistent with the nature of the risks
of each of the Company's businesses. Periodically, the Company reallocates
capital to its businesses based upon their ability to obtain targeted
returns, perceived opportunities in the market place, and the Company's
long-term strategy. Additionally, the Company closely monitors its primary
double leverage ratio to ensure that Holdings has sufficient access to its
capital invested with its subsidiaries. Primary double leverage, defined as
Holdings' investment in subsidiaries divided by Holdings' stockholders'
equity, was 1.1 at November 30, 1994, a significant reduction from the 2.1 as
of December 31, 1993. The Company has developed specific actions to further
reduce its primary double leverage ratio.
At November 30, 1994, LBI's net capital, as defined by regulatory
authorities, aggregated $1,338 million and was $1,281 million in excess of
the minimum regulatory requirements. Lehman Government Securities Inc., a
wholly-owned subsidiary of LBI and the Company's primary dealer in U.S.
government securities, had net capital, as defined, which aggregated $575
million and was $556 million in excess of the minimum requirement. The
Company is subject to certain rules and regulations which limit the amount of
capital which can be withdrawn from regulated entities. As of November 30,
1994 the Company believes it is in material compliance with all such
regulatory capital requirements.
32
<PAGE>
LEHMAN BROTHERS 1994 ANNUAL REPORT
STOCKHOLDERS' EQUITY Stockholders' equity increased 65% to $3,395 million at
November 30, 1994 from $2,052 million at December 31, 1993 primarily due to
the $1.25 billion increase in equity as a result of the May 31, 1994 spin-off
from American Express, the retention of fiscal 1994 earnings, and the
recognition of common stock issuable under the 1994 stock award plans. Such
increases in equity were partially offset by dividends declared on the
Company's common and preferred stock and the repurchase of common shares into
the treasury.
To broaden and increase the level of employee ownership in Holdings, the
Compensation Committee approved the 1994 Management Ownership Plan (the "1994
Plan") pursuant to which it awarded, subject to vesting provisions and
transfer restrictions, approximately 5.2 million Restricted Stock Units
("RSUs") to employees and determined to award RSUs to certain officers of
Lehman Brothers based on performance goals during the period June 1, 1994
through December 31, 1994. Approximately one million RSUs for certain
officers were added to common stock issuable at November 30, 1994. The RSUs
will comprise part of the bonuses awarded for the 1994 calendar year.
Stockholders' equity increased by approximately $87 million at November 30,
1994 as a result of the RSUs. Holdings will meet the share requirements for
the 1994 Plan and other common stock based compensation and benefit plans by
either repurchasing shares in the open market or issuing additional common
stock or a combination of both.
On September 6, 1994, the Company announced an odd-lot buyback program for
stockholders who owned less than 100 shares on such date. Approximately
973,000 shares were repurchased under this program.
CASH FLOWS Cash and cash equivalents decreased $369 million in 1994 to $964
million, as the net cash used in operating and investing activities, exceeded
the net cash provided by financing activities. In addition, the effect of
exchange rate changes on cash was a decrease of $1 million. Net cash used in
operating activities of $1,394 million included income from continuing
operations adjusted for non-cash items of approximately $678 million for the
1994 fiscal year. Net cash provided by financing activities was $1,202
million and net cash used in investing activities was $176 million.
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 noncash 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.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS AND DERIVATIVES
Derivatives are financial instruments, which include swaps, options, futures
and forwards whose value is based upon an underlying asset (e.g., treasury
bond), index (e.g., S&P 500) or reference rate (e.g., LIBOR).
33
<PAGE>
A derivative contract may be traded on an exchange or negotiated in the
over-the-counter markets. Exchange-traded derivatives are standardized and
include futures, and certain option contracts listed on an exchange. Over-the-
counter derivative contracts are individually negotiated between contracting
parties and include forwards, swaps and certain options including caps, collars
and floors. The origination and trading of derivative financial instruments have
expanded significantly over the past decade. Derivative instruments have been
utilized as highly effective tools that enable users to adjust risk profiles,
such as interest rate, currency, or other market risks, or to take proprietary
trading positions. Derivatives provide a cost-effective alternative to assuming
market risks associated with traditional on-balance sheet financial instruments
and commodities.
Users of derivative products are primarily financial intermediaries (U.S. and
foreign banks), securities firms, corporations, governments and their
agencies, finance companies, insurance companies, investment companies and
pension funds. In the normal course of business, the Company enters into
derivative transactions both as a dealer and as an end user. Acting as a
dealer, the Company enters into derivative transactions to satisfy the
financial needs of its clients and to manage the Company's own exposure to
market and credit risks resulting from its proprietary trading activities
(collectively, "Trading-Related Derivative Activities"). As an end user, the
Company primarily enters into interest rate swap and option contracts to
adjust the interest rate nature of its funding sources from fixed to floating
interest rates and vice versa, and to change the index upon which floating
interest rates are based (i.e., Prime to LIBOR) (collectively, "End User
Derivative Activities").
The Company conducts its derivative activities through wholly owned
subsidiaries. The fixed income derivative products business is conducted by
the Company's special purpose subsidiary, Lehman Brothers Special Financing,
Inc. and a separately capitalized triple-A rated subsidiary, Lehman Brothers
Financial Products, Inc., whose operations commenced in mid-1994. The Company
conducts its equity derivative business through Lehman Brothers Finance S.A.
As derivative products have continued to expand in volume, so has market
participation and competition. As a result, additional liquidity has been
added into the markets for conventional derivative products, such as interest
rate swaps. Competition has also contributed to the development of more
complex products structured for specific clients. It is this rapid growth and
complexity of certain derivative products which has led to the perception, by
some, that derivative products are unduly risky to users and the financial
markets. Derivatives are subject to risks similar to non-derivative financial
instruments including market, credit, liquidity and operational risk. The
risks of derivatives should not be viewed in isolation but they should be
considered on an aggregate basis along with the Company's other
trading-related activities. The Company manages risks associated with
derivatives on an aggregate basis along with the risks associated with its
proprietary trading and market making activities in cash instruments as part
of its firm-wide risk management policies.
In light of the recent publicized losses by certain users of derivative
products, regulators have voiced increased concern regarding the risks of
derivatives to users and the adequacy of disclosures provided to users of
sophisticated derivative products and the readers of financial statements.
The Company supports the efforts of the regulators in striving for enhanced
disclosures and to ensure that users of derivatives are fully aware of the
nature of risks inherent within derivative transactions. As evidence of this
support, the Company is participating, at the request of the Securities and
Exchange Commission, in a select industry task force aimed at developing
additional disclosure standards for derivative financial instruments.
34
<PAGE>
LEHMAN BROTHERS 1994 ANNUAL REPORT
The Company's Trading-Related Derivatives Activities have increased during
the current year to a notional value of $1,143 billion at November 30, 1994
from $867 billion at December 31, 1993, primarily as a result of growth in
the Company's activities as a dealer in derivative products. Notional values
are not recorded on the balance sheet and are not indicative of potential
risk, rather they are utilized as a basis for determining the exchange of
future cash flows and provide a measure of the Company's involvement with
such instruments. The Company's credit risk with respect to derivatives was
$3.8 billion at November 30, 1994 after consideration of master netting
agreements and collateral. Approximately 85% of the Company's net credit risk
exposure was with counterparties rated single-A or better. See Note 17 to the
Consolidated Financial Statements for a discussion of the Company's
activities in derivatives including trading and end user products, value of
off-balance-sheet financial instruments and the credit exposure of the
Company's derivatives.
SPECIFIC BUSINESS ACTIVITIES AND TRANSACTIONS
The following sections include information on specific business activities of
the Company which affect overall liquidity and capital resources:
HIGH YIELD SECURITIES The Company underwrites, trades, invests and makes
markets in high yield corporate debt securities. The Company also syndicates,
trades and invests in loans to below investment grade companies. For purposes
of this discussion, high yield debt securities are defined as securities or
loans to companies rated below BBB- by S&P and below Baa3 by Moody's, as well
as non-rated securities or loans which, in the opinion of management, are
non-investment grade. High yield debt securities are carried at market value
and unrealized gains or losses for these securities are reflected in the
Company's Consolidated Statement of Operations. The Company's portfolio of
such securities at November 30, 1994 and December 31, 1993 included long
positions with an aggregate market value of approximately $1.1 billion and $1
billion, respectively, and short positions with an aggregate market value of
approximately $94 million and $75 million, respectively. The portfolio may,
from time to time, contain concentrated holdings of selected issues. The
Company's two largest high yield positions were $252 million and $89 million
at November 30, 1994, and $179 million and $82 million at December 31, 1993.
WESTINGHOUSE In May 1993, the Company and Westinghouse Electric Corporation
("Westinghouse") entered into a partnership to facilitate the disposition of
Westinghouse's commercial real estate portfolio, valued at approximately $1.1
billion, to be accomplished substantially through securitizations and asset
sales. The Company invested approximately $154 million in the partnership,
and also made collateralized loans to the partnership of $752 million. During
the third quarter of 1993, Lennar Inc. was appointed portfolio servicer and
purchased a 10% limited partnership interest from the Company and
Westinghouse.
At November 30, 1994, the carrying value of the Company's investment in the
partnership was $193 million and the outstanding balance of the
collateralized loans, including accrued interest, was $155 million. The
remaining loan balance and the related investment is expected to be fully
recovered by the second half of 1995 through a combination of
securitizations, asset sales, mortgage remittances and refinancings by third
parties.
MERCHANT BANKING PARTNERSHIPS At November 30, 1994, the Company's investment
in merchant banking partnerships was $425 million, which included $140
million in one employee-related partnership in which the Company, as general
partner, is entitled to a priority return. At November 30, 1994, the Company
had no remaining commitments to make investments through these partnerships.
35
<PAGE>
The Company's policy is to carry its interests in merchant banking
partnerships at fair value based upon the Company's assessment of the
underlying investments. The Company's merchant banking investments, made
primarily through a series of partnerships are consistent with the terms of
those partnerships and are expected to be sold or otherwise monetized during
the remaining term of the partnerships. In December 1994, these partnerships
sold certain investments, the proceeds of which will reduce the Company's
investment in merchant banking partnerships to approximately $270 million.
The Company's remaining $270 million investment in such partnerships includes
approximately $27 million in one employee-related partnership in which the
Company, as general partner, is entitled to a priority return.
NON-CORE ACTIVITIES AND INVESTMENTS In March 1990, the Company discontinued
the origination of partnerships (the assets of which are primarily real
estate) and investments in real estate. Currently, the Company acts as a
general partner for approximately $4.1 billion of partnership investment
capital and manages the remaining real estate investment portfolio. At
November 30, 1994, the Company had net exposure to these investments of
approximately $209 million. This amount includes $46 million of investments in
these real estate activities, net of applicable reserves, as well as $163
million of commitments and contingent liabilities under guarantees and credit
enhancements. The Company believes any exposure under these commitments and
contingent liabilities has been adequately reserved. In certain
circumstances, the Company provides financial and other support and
assistance to such investments to maintain investment values. There is no
contractual requirement that the Company continue to provide this support.
Although a decline in the real estate market or the economy in general or a
change in the Company's disposition strategy could result in additional real
estate reserves, the Company believes that it is adequately reserved.
The Company has equity, partnership and debt investments made in previous
years that are unrelated to its ongoing businesses. The Company holds $98
million of long-term subordinated indebtedness of American Marketing Industries
Holding Inc. ("AMI"). The subordinated indebtedness, as amended, matures in
1997, and includes certain provisions which limit cash interest payments and
provides for payment-in-kind securities above such cash interest payments.
The AMI loan is current in payment in accordance with its terms. The Company
has other investments that are also awaiting their disposition or the
occurrence of certain events which will ultimately lead to their liquidation.
The Company carries these equity, partnership and debt investments, including
AMI, at their estimated net realizable value, which approximates $179 million
at November 30, 1994. Certain non-core assets, including the Company's
remaining investment in Computervision Corporation, were sold during the
second quarter of 1994.
Management's intention with regard to noncore assets is the prudent
liquidation of these investments as and when possible.
CLEARING AGREEMENT
Pursuant to a clearing agreement (the "Clearing Agreement"), Smith Barney
carried and cleared, on a fully disclosed basis, all accounts introduced to
it by Lehman Brothers, and performed all clearing and settlement functions
for equities, municipal securities and corporate debt securities. The
Clearing Agreement expired on December 31, 1994, but was extended until
February 17, 1995. On October 12, 1994, the Company and Bear Stearns
Securities Corp. ("BSSC") entered into an agreement pursuant to which BSSC
has agreed to process the transactions currently cleared by Smith Barney (the
36
<PAGE>
LEHMAN BROTHERS 1994 ANNUAL REPORT
"BSSC Agreement"). As a result, the Company will now be self clearing and the
accounts currently carried by Smith Barney will be carried on the Company's
books. The BSSC Agreement will take effect on February 17, 1995 and will run
for a term of five years. As a result of this arrangement, the Company
estimates that assets will increase by approximately $10 billion which will
be predominantly funded with offsetting liabilities.
NEW ACCOUNTING PRONOUNCEMENTS
During the first quarter of 1994, the Company adopted Financial Accounting
Standards Board Interpretation No. 39, "Offsetting of Amounts Related to
Certain Contracts" ("FIN No. 39"). FIN No. 39 restricts the historical
industry practice of offsetting certain receivables and payables. A
substantial portion of the increase in the Company's gross assets and
liabilities from December 31, 1993 to November 30, 1994 is due to the
adoption of FIN No. 39. In January 1995, the Financial Accounting Standards
Board issued Interpretation No. 41, Offsetting of Amounts Related to Certain
Repurchase and Reverse Repurchase Agreements ("FIN No. 41"). FIN No. 41 is a
modification to FIN No. 39, to permit certain limited exceptions to the
criteria established under FIN No. 39 for offsetting certain repurchase and
reverse repurchase agreements with the same counterparty. The Company will
adopt this modification on a prospective basis which will partially mitigate
the increase in the Company's gross assets and liabilities resulting from the
implementation of FIN No. 39.
Effective January 1, 1994, the Company adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." SFAS No. 112 requires the accrual of
obligations associated with services rendered to date for employee benefits
accumulated or vested for which payment is probable and can be reasonably
estimated. These benefits principally include the continuation of salary,
health care and life insurance costs for employees on service disability
leaves. The Company previously expensed the cost of these benefits as they
were incurred. The cumulative effect of adopting SFAS No. 112 reduced net
income for the first quarter of 1994 by $13 million aftertax ($23 million
pretax). Excluding the cumulative effect of this accounting change, the
effect of this change on the 1994 results of operations was not material.
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.
RISK MANAGEMENT
As a leading global investment company, 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 risks involved in Lehman Brothers'
activities are market risk, credit or counterparty risk, and transaction
risk.
37
<PAGE>
The Company aims to reduce risk through the diversification of its products,
counterparties and activities in geographic regions. The Company accomplishes
this objective through allocating the usage of capital to each of its
businesses, establishing trading limits for individual products and traders,
and the approval of credit limits for individual counterparties including
regional concentrations. In addition, the Company is committed to employing
qualified personnel with expertise in each of its various businesses who are
responsible for the establishment of risk management policies and the
continued review and evaluation of these policies in light of changes in
environmental factors, counterparty credit status, and the long- and
short-term goals of the Company. Senior management plays a critical role in
the ongoing evaluation of risks, including credit, market, operational and
liquidity risks and makes necessary changes in risk management policies in
light of these factors.
The Company's risk management strategy is based on a multi-tier approach to
risk which includes many independent groups (i.e., finance, legal, front
office senior management, credit) being included in the risk monitoring
process. The Company's Trade Analysis department performs independent
verification of the prices of trading positions, regularly monitors the aging
of inventory, and performs daily due diligence of the Company's
profitability, by business unit. The Corporate Credit department, which has
operations in New York, London, Frankfurt, Tokyo and Hong Kong has the
responsibility for establishing and monitoring counterparty limits,
structuring and approving specific transactions, and establishing collateral
requirements or other credit enhancement features (such as financial
covenants, guarantees or letters of credit), when deemed necessary, to secure
the Company's position. The Company's Commitment Committee has the
responsibility for reviewing and approving proposed transactions involving the
underwriting or placement of securities by Lehman Brothers, while the
Investment Committee performs a similar function in reviewing and approving
proposed transactions related to investments of capital in connection with
the Company's investment banking and merchant banking activities.
Additionally, the Company employs an Internal Audit Department that reports
directly to the Company's Audit Committee and the Board of Directors. This
group performs periodic reviews to evaluate compliance with established
control processes. These reviews include performing tests on the accuracy of
inventory prices, compliance with established credit and trading limits, and
compliance with securities and other laws. The Company's control structure
and various control mechanisms are also subject to periodic reviews as a
result of examinations by the Company's external auditors as well as various
regulatory authorities. The final level of risk oversight is performed by the
Senior Risk Management Committee, which is comprised of senior management
from the various product areas and from the Credit, Trade Analysis and Risk
Management departments.
The Company seeks to ensure that it achieves adequate returns from each of
its business units commensurate with the risks assumed. To achieve this
objective, the Company periodically re-allocates capital to each of its
businesses based upon their ability to obtain returns consistent with
established guidelines as well as perceived opportunities in the marketplace
and the Company's long-term strategy.
38
<PAGE>
Lehman Brothers 1994 Annual Report
Report of Independent Auditors
The Board of Directors and Stockholders of
Lehman Brothers Holdings Inc. and Subsidiaries
We have audited the accompanying consolidated statement of financial condition
of Lehman Brothers Holdings Inc. and Subsidiaries (the "Company") as of November
30, 1994 and December 31, 1993, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the eleven month period
ended November 30, 1994 and for each of the two years in the period ended
December 31, 1993. 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 November 30, 1994 and December 31, 1993, and
the consolidated results of its operations and its cash flows for the eleven
month period ended November 30, 1994 and for each of the two years in the period
ended December 31, 1993, in conformity with generally accepted accounting
principles.
As discussed in Note 13 to the consolidated financial statements, in 1994 the
Company changed its method of accounting for postemployment benefits and in 1992
changed its methods of accounting for postretirement benefits and income taxes.
Ernst & Young LLP
New York, New York
January 5, 1995
39
<PAGE>
Consolidated Statement of Operations
<TABLE>
<CAPTION>
Eleven months Twelve months
ended ended
--------------- ---------------------------
November 30 December 31 December 31
(in millions, except per share data) 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Principal transactions $1,345 $ 2,055 $ 1,767
Investment banking 572 972 892
Commissions 445 1,316 1,677
Interest and dividends 6,761 5,840 5,661
Other 67 491 684
- ----------------------------------------------------------------------------------------------------------------------
Total revenues 9,190 10,674 10,681
Interest expense 6,452 5,368 5,185
- ----------------------------------------------------------------------------------------------------------------------
Net revenues 2,738 5,306 5,496
- ----------------------------------------------------------------------------------------------------------------------
Non-interest expenses
Compensation and benefits 1,413 2,989 3,310
Brokerage, commissions and clearance fees 243 236 192
Communications 184 318 378
Professional services 166 203 212
Occupancy and equipment 160 257 326
Business development 116 161 205
Depreciation and amortization 116 157 185
Other 99 271 690
Severance charge 33
Spin-off expenses 15
Loss on sale of Shearson 535
Reserves for non-core businesses 152
Computervision write-down 245
- ----------------------------------------------------------------------------------------------------------------------
Total non-interest expenses 2,545 5,279 5,743
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before taxes and
cumulative effect of changes in accounting principles 193 27 (247)
Provision for (benefit from) income taxes 67 318 (54)
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before cumulative
effect of changes in accounting principles 126 (291) (193)
- ----------------------------------------------------------------------------------------------------------------------
Income from discontinued operations, net of taxes:
Income from operations 24 77
Gain on disposal 165
- ----------------------------------------------------------------------------------------------------------------------
Net income from discontinued operations 189 77
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of changes in
accounting principles 126 (102) (116)
Cumulative effect of changes in accounting principles, net of taxes (13) (7)
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 113 $ (102) $ (123)
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ 75 $ (150) $ (171)
- ----------------------------------------------------------------------------------------------------------------------
Number of shares used in earnings per common share computation 108.0 105.7
- ----------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share:
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $ 0.81 $ (3.20)
Discontinued operations 1.79
Cumulative effect of change in accounting principle (0.12)
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.69 $ (1.41)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
40
<PAGE>
Consolidated Statement of Financial Condition
<TABLE>
<CAPTION>
November 30 December 31
(in millions, except share data) 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 964 $ 1,333
Cash and securities segregated and on deposit for regulatory
and other purposes 1,420 1,073
Securities and other financial instruments owned:
Governments and agencies 24,840 15,361
Corporate obligations and other contractual commitments 9,962 10,679
Mortgages and mortgage-backed 6,774 5,265
Corporate stocks and options 4,549 2,343
Certificates of deposit and other money market instruments 1,348 2,051
- ----------------------------------------------------------------------------------------------------------------------------------
47,473 35,699
- ----------------------------------------------------------------------------------------------------------------------------------
Collateralized short-term agreements:
Securities purchased under agreements to resell 37,490 26,046
Securities borrowed 10,617 4,372
Receivables:
Brokers, dealers and clearing organizations 4,934 5,059
Customers 2,794 2,646
Others 2,762 2,693
Property, equipment and leasehold improvements (net of accumulated
depreciation and amortization of $520 in 1994 and $438 in 1993) 619 529
Deferred expenses and other assets 686 750
Excess of cost over fair value of net assets acquired (net of
accumulated amortization of $117 in 1994 and $107 in 1993) 188 274
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $109,947 $ 80,474
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
41
<PAGE>
Consolidated Statement of Financial Condition
<TABLE>
<CAPTION>
November 30 December 31
(in millions, except share data) 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and stockholders' equity
Short-term financings:
Securities sold under agreements to repurchase $ 58,419 $39,191
Commercial paper and short-term debt 9,807 11,205
Securities loaned 1,627 1,116
Securities and other financial instruments sold but not yet purchased:
Governments and agencies 9,867 5,889
Corporate obligations and other contractual commitments 3,432 1,407
Corporate stocks and options 3,731 1,017
- ------------------------------------------------------------------------------------------------------------------------------------
17,030 8,313
- ------------------------------------------------------------------------------------------------------------------------------------
Payables:
Brokers, dealers and clearing organizations 2,597 1,385
Customers 3,060 4,130
Accrued liabilities and other payables 2,691 3,183
Senior notes 9,107 7,779
Subordinated indebtedness 2,214 2,120
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 106,552 78,422
- ------------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 17)
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 in 1994 and 1993;
$39.10 liquidation preference per share 508 508
Money Market Cumulative, 3,300 shares authorized; 250 shares
issued and outstanding in 1993; $1,000,000 liquidation preference
per share 250
8.44% Cumulative Voting, 8,000,000 shares issued and outstanding
in 1994; $25.00 liquidation preference per share 200
Redeemable Voting, 1,000 shares issued and outstanding in 1994;
$1.00 liquidation preference per share
Common Stock, $.10 par value; 300,000,000 shares authorized;
1994: 105,608,423 shares issued and 104,537,690 shares
outstanding; 1993: 53,470,443 shares issued and outstanding
(168,235,284 prior to the Reverse Stock Split) 11 17
Common Stock issuable 87
Additional paid-in capital 3,172 1,871
Foreign currency translation adjustment 6 (12)
Accumulated deficit (574) (582)
Common Stock in treasury at cost, 1994: 1,070,733 shares (15)
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,395 2,052
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $109,947 $80,474
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
42
<PAGE>
Lehman Brothers 1994 annual report
Consolidated Statement of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Eleven months Twelve months
ended ended
--------------- ----------------------------------
November 30 December 31 December 31
(in millions) 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Preferred stock
5% Cumulative Convertible Voting, Series A:
Beginning and ending balance $508 $508 $508
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market Cumulative:
Beginning balance 250 250 250
MMP Exchange (250)
- ------------------------------------------------------------------------------------------------------------------------------------
Ending balance 250 250
- ------------------------------------------------------------------------------------------------------------------------------------
8.44% Cumulative Voting:
Beginning balance
Shares issued to American Express 200
- ------------------------------------------------------------------------------------------------------------------------------------
Ending balance 200
- ------------------------------------------------------------------------------------------------------------------------------------
Redeemable Voting:
Beginning and ending balance
- ------------------------------------------------------------------------------------------------------------------------------------
Total Preferred Stock, ending balance 708 758 758
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock
Beginning balance 17 17 16
Shares issued to American Express 1
Reverse Stock Split (11)
American Express Common Stock purchase 4
MMP Exchange 1
- ------------------------------------------------------------------------------------------------------------------------------------
Ending balance 11 17 17
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock issuable
Beginning balance
RSUs awarded, net of cancellations 87
- ------------------------------------------------------------------------------------------------------------------------------------
Ending balance 87
- ------------------------------------------------------------------------------------------------------------------------------------
Additional paid-in capital
Beginning balance 1,871 1,871 1,697
Shares issued to American Express 174
Reverse Stock Split 11
American Express Common Stock purchase 900
MMP Exchange 249
Nippon Life Common Stock purchase 89
EOP Conversion 57
Other, net (5)
- ------------------------------------------------------------------------------------------------------------------------------------
Ending balance 3,172 1,871 1,871
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment
Beginning balance (12) (5) (5)
Translation adjustment, net (1) 18 (7)
- ------------------------------------------------------------------------------------------------------------------------------------
Ending balance 6 (12) (5)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated deficit
Beginning balance (582) (267) (63)
Net income (loss) 113 (102) (123)
Cash dividends declared:
5% Cumulative Convertible Voting Preferred Stock (19) (25) (25)
Money Market Cumulative Preferred Stock (6) (23) (23)
8.44% Cumulative Voting Preferred Stock (9)
Common Stock (71) (165) (33)
- ------------------------------------------------------------------------------------------------------------------------------------
Ending balance (574) (582) (267)
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock in treasury
Beginning balance
Treasury stock purchased:
Odd lot buyback program (14)
Other (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Ending balance (15)
- ------------------------------------------------------------------------------------------------------------------------------------
Net unrealized securities losses
Beginning balance (13) (55)
Change in unrealized securities losses, net 13 42
- ------------------------------------------------------------------------------------------------------------------------------------
Ending balance (13)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity $3,395 $2,052 $2,361
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net of income tax (expense) benefit of $(15) in 1994, $5 in 1993, and $(3)
in 1992.
See Notes to Consolidated Financial Statements.
43
<PAGE>
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Eleven months Twelve months
ended ended
--------------- ----------------------------------
November 30 December 31 December 31
(in millions) 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Income (loss) from continuing operations before cumulative
effect of changes in accounting principles $ 126 $ (291) $ (193)
Adjustments to reconcile income (loss) to net cash used in
operating activities:
Depreciation and amortization 116 157 185
Provisions for losses and other reserves 37 106 458
Loss on sale of Shearson 535
Non-core business reserves 152
Deferred tax provision (benefit) 206 (82) (65)
Computervision write-down 245
Other adjustments 193 100 103
Net change in:
Cash and securities segregated (347) 180 (44)
Receivables from brokers, dealers and clearing organizations 125 (2,313) (88)
Receivables from customers (148) (268) (908)
Securities purchased under agreements to resell (11,444) 320 (10,680)
Securities borrowed (6,245) 3,251 (4,634)
Loans originated or purchased for resale (62) (26)
Securities and other financial instruments owned (11,774) (2,228) (10,844)
Payables to brokers, dealers and clearing organizations 1,212 (361) 450
Payables to customers (1,070) 430 (19)
Accrued liabilities and other payables (506) 902 (506)
Securities sold under agreements to repurchase 19,228 1,754 13,905
Securities loaned 511 (881) (170)
Securities and other financial instruments sold but not yet
purchased 8,717 (3,093) 6,081
Other operating assets and liabilities, net (331) (97) 464
- ------------------------------------------------------------------------------------------------------------------------------------
(1,394) (1,789) (6,286)
Net cash flows provided by operating activities
of discontinued operations 428 9
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,394) (1,361) (6,277)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from issuance of senior notes 3,365 3,609 3,407
Principal payments of senior notes (1,982) (1,346) (1,567)
Proceeds from issuance of subordinated indebtedness 540 568 88
Principal payments of subordinated indebtedness (451) (602) (14)
Proceeds from spin-off 1,193
Proceeds from issuance of other indebtedness 6,038 5,751 4,992
Principal payments of other indebtedness (4,955) (6,023) (5,482)
Increase (decrease) in commercial paper and short-term debt, net (2,432) (1,815) 4,048
Issuance of stock 175
Payments for treasury stock purchases (15)
Dividends paid (99) (213) (81)
Net cash flows used in financing activities of discontinued operations (301) (653)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities $ 1,202 $ (372) $ 4,913
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE>
Lehman Brothers 1994 Annual Report
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Eleven months Twelve months
ended ended
--------------- ----------------------------------
November 30 December 31 December 31
(in millions) 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from investing activities
Purchase of property, equipment and leasehold improvements $ (176) $ (129) $ (108)
Proceeds from the sale of:
The Boston Company 1,300
Shearson 1,200
SLHMC 70
Other assets 607
Other 111 (38)
Net cash flows used in investing activities of
discontinued operations (85) (438)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (176) 2,467 23
- ------------------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents of discontinued operations 42 (1,082)
- ------------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (1) 9
- ------------------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (369) 692 (250)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of period 1,333 641 891
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 964 $1,333 $ 641
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Supplemental disclosure of cash flow information (in millions)
(including The Boston Company)
Interest paid totaled $6,257 in 1994, $5,591 in 1993 and $5,561 in 1992.
Income taxes (received) paid totaled $(39) in 1994, $28 in 1993 and $86 in
1992.
Supplemental schedule of non-cash investing and financing activity
During 1993, the Company completed the sale of The Boston Company, Shearson
and SLHMC. The cash proceeds related to these sales have been separately
reported in the above statement. Excluded from the statement are the individual
statement of financial condition changes related to the net assets sold as
well as the non-cash proceeds received related to these sales. (See Note 20.)
See Notes to Consolidated Financial Statements.
45
<PAGE>
Notes To Consolidated Financial Statements
- ------------------------------------------
- ----------
Note 1
- ----------
Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Lehman Brothers
Holdings Inc. ("Holdings") and subsidiaries (collectively, the "Company" or
"Lehman Brothers"). The principal subsidiary of Holdings is Lehman Brothers
Inc. ("LBI"), a registered broker-dealer. All material intercompany accounts
and transactions have been eliminated in consolidation. Prior to May 31,
1994, the American Express Company ("American Express") owned 100% of
Holdings' common stock (the "Common Stock"), which represented approximately
93% of Holdings' voting stock. Effective May 31, 1994, Holdings became a
widely held public company with its Common Stock traded on the New York Stock
Exchange. (See Note 7.)
The Consolidated Statement of Operations includes the results of operations
of Shearson and SLHMC for all periods prior to their sale in 1993. Shearson
and SLHMC were sold on July 31, 1993 and August 31, 1993, respectively. (See
Note 20 for definitions and additional information concerning these sales.)
The Company uses the trade date basis of accounting for recording principal
transactions. Customer account balances are reflected on a settlement date
basis.
Certain amounts reflect reclassifications to conform to the current period's
presentation.
Discontinued Operations
As described in Note 20, the Company completed the sale of The Boston
Company, Inc. ("The Boston Company"), on May 21, 1993. The accompanying
consolidated financial statements and notes to consolidated financial
statements reflect The Boston Company as a discontinued operation.
Translation of Foreign Currencies
Assets and liabilities of foreign subsidiaries having non-U.S. dollar
functional currencies are translated at exchange rates at the statement of
financial condition date. Revenues and expenses are translated at average
exchange rates during the period. The gains or losses resulting from
translating foreign currency financial statements into U.S. dollars, net of
hedging gains or losses and related tax effects, are included in a separate
component of stockholders' equity, the Foreign currency translation
adjustment. Gains or losses resulting from foreign currency transactions are
included in the Consolidated Statement of Operations.
Securities and Other Financial Instruments
Securities and other financial instruments owned and Securities and other
financial instruments sold but not yet purchased are valued at market or fair
value, as appropriate, with unrealized gains and losses reflected in
Principal transactions in the Consolidated Statement of Operations. These
amounts also include certain instruments with multiple characteristics whose
principal repayment is contingent upon the performance of certain stocks,
stock indices or changes in foreign exchange rates. Market value is generally
based on listed market prices. If listed market prices are not available,
fair value is determined based on other relevant factors, including broker or
dealer price quotations, and valuation pricing models which take into account
time value and volatility factors underlying the financial instruments.
Derivative Financial Instruments
Derivatives include futures, forwards, swaps and options and other similar
instruments. Derivative transactions entered into for market making or
proprietary position taking or used as hedges of other trading instruments
are recorded at market or fair value with unrealized gains and losses
reflected in Principal transactions in the Consolidated Statement of
Operations.
46
<PAGE>
LEHMAN BROTHERS 1994 ANNUAL REPORT
The market or fair value associated with derivatives utilized for trading
purposes is recorded on a net by counterparty basis where a legal right of
set-off exists in the Consolidated Statement of Financial Condition at
November 30, 1994. Prior to the adoption of Financial Accounting Standards
Board Interpretation No. 39, "Offsetting of Amounts related to Certain
Contracts" ("FIN No. 39"), the Company reflected the value of all such
contracts on a net basis. Unrealized gains and losses related to swaps and
option contracts are recorded as Securities and other financial instruments
owned and Securities and other financial instruments sold but not yet
purchased, as applicable. Unrealized gains and losses related to securities
and foreign exchange forwards and commodity contracts are recorded as
receivables and payables with Brokers, dealers and clearing organizations and
Customers, as applicable.
In addition to trading and market making activities, the Company enters into
various derivative products as an end user to hedge and/or modify its
exposure to foreign exchange and interest rate risk of certain assets and
liabilities. 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.
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. The Company monitors the market value of the
underlying positions on a daily basis as compared to the related receivable,
including accrued interest. The Company obtains additional collateral, as
necessary. Securities and other financial instruments owned which are sold
under repurchase agreements are carried at market value with changes in
market value reflected in the Consolidated Statement of Operations.
Securities purchased under agreements to resell and Securities sold under
agreements to repurchase for which the resale/repurchase date corresponds to
the maturity date of the underlying securities are accounted for as purchases
and sales, respectively. At November 30, 1994, such resale and repurchase
agreements which have not yet matured aggregated $4.2 billion and $5.3
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, equipment, and leasehold improvements are recorded at historical
cost, net of accumulated depreciation and amortization. Depreciation is
recognized on a straight-line basis over the estimated useful lives of the
related assets. Leasehold improvements are amortized over the lesser of their
economic useful lives or the terms of the underlying leases. The Company
capitalizes interest costs during construction and amortizes the interest
costs based on the useful lives of the assets.
Excess of cost over fair value of net assets acquired (goodwill) is amortized
using the straight-line method over a period of 35 years. Goodwill is also
reduced upon the recognition of certain acquired net operating loss
carryforward benefits.
47
<PAGE>
Statement of Cash Flows
The Company defines cash equivalents as highly liquid investments with
original maturities of three months or less, other than those held for sale
in the ordinary course of business.
Earnings Per Common Share
Earnings per common share was computed by dividing net income applicable to
common stock by the weighted average number of shares of common stock and
common stock equivalents outstanding. Pursuant to the Securities and Exchange
Commission ("SEC") requirements, the number of shares used in earnings per
common share calculations includes Common Stock as of the Distribution. (See
Note 7.)
- ----------
Note 2
- ----------
Change in Year-End
During 1994, the Company changed its year-end from December 31 to November 30.
Such a change to a non-calendar cycle shifts certain year-end administrative
activities to a time period that conflicts less with the business needs of the
Company's institutional customers.
The following is selected financial data for the eleven month transition period
ending November 30, 1994, and the comparable prior year period.
<TABLE>
<CAPTION>
Eleven months
ended
November 30
---------------------------
(in millions, except per share data) 1994 1993
- -------------------------------------------------------------------------------------------------
unaudited
<S> <C> <C>
Total revenues $ 9,190 $ 9,918
Interest expense 6,452 4,932
- -------------------------------------------------------------------------------------------------
Net revenues 2,738 4,986
Non-interest expenses 2,545 5,014
- -------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before taxes and
cumulative effect of change in accounting principle 193 (28)
Provision for income taxes 67 304
- -------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before cumulative
effect of change in accounting principle 126 (332)
- -------------------------------------------------------------------------------------------------
Income from discontinued operations, net of taxes:
Income from operations 24
Gain on disposal 165
- -------------------------------------------------------------------------------------------------
Net income from discontinued operations 189
- -------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change in
accounting principle 126 (143)
Cumulative effect of change in accounting principle, net of taxes (13)
- -------------------------------------------------------------------------------------------------
Net income (loss) $ 113 $ (143)
- -------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ 75 $ (187)
- -------------------------------------------------------------------------------------------------
Number of shares used in earnings per common share computation 108.0 105.7
- -------------------------------------------------------------------------------------------------
Earnings (loss) per common share:
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $ 0.81 $ (3.56)
Discontinued operations 1.79
Cumulative effect of change in accounting principle (0.12)
- -------------------------------------------------------------------------------------------------
Net income (loss) $ 0.69 $ (1.77)
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE>
LEHMAN BROTHERS 1994 ANNUAL REPORT
The selected financial data for 1993 includes the results of operations of
Shearson and SLHMC, which were sold on July 31, 1993 and August 31, 1993,
respectively. The Company completed the sale of The Boston Company on May 21,
1993. The above selected financial data for 1993 reflects The Boston Company
as a discontinued operation. (See Note 20 for definitions and additional
information concerning these sales.)
- ----------
Note 3
- ----------
Cash and Securities Segregated and on Deposit for Regulatory and Other Purposes
In addition to amounts presented in the accompanying Consolidated Statement of
Financial Condition as Cash and securities segregated and on deposit for
regulatory and other purposes, securities with a market value of approximately
$941 million and $890 million at November 30, 1994 and December 31, 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 SEC Rule 15c3-3.
- ----------
Note 4
- ----------
Short-Term Financings
The Company obtains short-term financing on both a secured and unsecured basis.
The secured financing is obtained through the use of repurchase agreements and
securities loaned agreements, which are primarily collateralized by government
and agency securities. The unsecured financing is generally obtained through the
issuance of commercial paper and short-term debt.
The Company's Commercial paper and short-term debt is comprised of the
following (in millions):
<TABLE>
<CAPTION>
November 30 December 31
1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper $ 2,788 $ 2,648
Short-term debt
Master notes 4,081 4,745
Bank loans 1,479 2,807
Payables to banks 1,459 1,005
- --------------------------------------------------------------------------------
$ 9,807 $ 11,205
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The Company issues U.S. dollar-denominated commercial paper in both the
United States and Europe, and sterling and other non-U.S. dollar-denominated
commercial paper in Europe. At November 30, 1994 and December 31, 1993, 99%
and 94%, respectively, of the Company's commercial paper outstanding was U.S.
dollar-denominated.
At November 30, 1994 and December 31, 1993, unused committed lines of credit
totaled $2.5 billion and $1.6 billion, respectively. The proceeds from these
lines, if utilized, would be used primarily to repay commercial paper
obligations. Commitment fees on the lines supporting the commercial paper
program are 1/8 of 1% on the committed line.
49
<PAGE>
The weighted average interest rates at November 30, 1994 and December 31,
1993 were as follows:
<TABLE>
<CAPTION>
November 30 December 31
1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper 5.6% 3.6%
Short-term debt 5.7% 4.3%
Securities sold under agreements to repurchase 5.3% 4.4%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
- ----------
Note 5
- ----------
Senior Notes
The Company's Senior notes are comprised of the following (in millions):
<TABLE>
<CAPTION>
November 30
1994
--------------------------------------------
USD USD
Contractual Contractual Foreign December 31
Fixed Rate Floating Rate Currency Total 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Maturing in:
Eleven months ended
November 30, 1994 $ 1,980
Year ended November 30, 1995 $ 622 $ 1,872 $ 365 $ 2,859 1,117
Year ended November 30, 1996 639 944 20 1,603 1,318
Year ended November 30, 1997 552 318 183 1,053 886
Year ended November 30, 1998 765 60 260 1,085 936
Year ended November 30, 1999 479 778 180 1,437 536
December 1, 1999 and thereafter 855 167 48 1,070 1,006
- ----------------------------------------------------------------------------------------------
$ 3,912 $ 4,139 $ 1,056 $ 9,107 $ 7,779
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
As of November 30, 1994, the Company had $3,912 million of U.S. dollar fixed
rate senior notes outstanding, including $65 million of U.S. dollar fixed
rate senior notes on which the interest rates and/or redemption values have
been linked to movements in various indices. Excluding this $65 million,
contractual interest rates on the Company's U.S. dollar fixed rate senior
notes ranged from 3.86% to 12.20%, as of November 30, 1994, with a
contractual weighted average interest rate of 8.04%.
The Company entered into interest rate swap contracts which effectively
converted $1,580 million of its U.S. dollar fixed rate senior notes to
floating rates based on the London Interbank Offered Rate ("LIBOR").
Excluding this $1,580 million, but including the effect of $414 million of
U.S. dollar floating rate senior notes effectively converted to fixed rates
through the use of interest rate swap contracts and $395 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 8.36%.
As of November 30, 1994, the Company had $4,139 million of U.S. dollar
floating rate senior notes outstanding, including $479 million of U.S. dollar
floating rate senior notes on which the interest rates and/or redemption
values have been linked to movements in various indices. Excluding this $479
million, contractual rates on the Company's U.S. dollar floating rate senior
notes ranged from 5.20% to 6.80%, with a contractual weighted average
interest rate of 5.99%.
The Company entered into interest rate swap contracts which effectively
converted $414 million of its U.S. dollar floating rate senior notes to fixed
rates. Excluding this $414 million, but including the effect of $1,580
million of U.S. dollar fixed rate senior notes converted to floating rates
through the use of
50
<PAGE>
LEHMAN BROTHERS 1994 ANNUAL REPORT
interest rate swap contracts and $1,491 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 6.05%.
As of November 30, 1994, the Company had the equivalent of $1,056 million of
foreign currency denominated senior notes outstanding of which $417 million
were fixed rate and $639 million were floating rate.
Contractual interest rates on the Company's fixed rate foreign currency
denominated senior notes, excluding the effect of $22 million of notes on
which the interest rates and/or redemption values have been linked to
movements in various indices, ranged from 2.71% to 6.00% as of November 30,
1994, with a contractual weighted average interest rate of 4.41%. Approximately
$345 million of the Company's fixed rate foreign currency notes were
converted through the use of interest rate and basis swaps to U.S. dollar
obligations with an effective U.S. dollar weighted average interest rate of
5.76%. In addition, $10 million of the Company's fixed rate yen denominated
obligations were converted to a yen floating interest rate at an effective
rate of 2.74%. Including the effect of these swaps, the Company's fixed rate
foreign currency notes had an effective weighted average rate of 5.45%.
Contractual interest rates on the Company's floating rate foreign currency
denominated senior notes, excluding the effect of $54 million of notes on
which the interest rates and/or redemption values have been linked to
movements in various indices, ranged from 2.75% to 5.81% as of November 30,
1994, with a contractual weighted average interest rate of 3.50%.
Approximately $393 million of the Company's floating rate foreign currency
notes were converted through the use of interest rate and basis swaps to U.S.
dollar obligations with an effective U.S. dollar weighted average interest
rate of 5.59%. In addition, $101 million of the Company's floating rate yen
denominated obligations were converted to a yen fixed interest rate at an
effective rate of 4.09%. Including the effect of these swaps, the Company's
floating rate foreign currency notes had an effective weighted average rate
of 4.86%. The Company's fixed and floating rate foreign currency senior notes
not converted to U.S. dollar obligations, totaling $318 million, were used to
finance foreign currency denominated assets.
In addition to the interest rate swaps utilized by the Company to convert the
interest rate nature of its senior notes, the Company had $867 million
notional value of swaptions outstanding at November 30, 1994. These
swaptions, if exercised, would convert a portion of the Company's U.S. dollar
fixed rate senior notes to a floating rate. Swaptions of $617 million could
be exercised in December 1994, and the remainder have exercise dates ranging
from fiscal 1996 to fiscal 1998.
Of the Company's senior notes outstanding as of November 30, 1994, $549
million are repayable prior to maturity at the option of the holder. These
obligations are reflected in the table presented at their put dates, which
range from fiscal 1995 to fiscal 1999, rather than at their contractual
maturities, which range from fiscal 1995 to fiscal 2023. The holders of these
notes have the option to redeem them at par value. In addition, $760 million
of the Company's senior notes are redeemable at par at the option of the
Company. Of this amount, the Company has the option to redeem $166 million
commencing in fiscal 1995, $562 million commencing in fiscal 1996 and $32
million at any time, subject to the occurrence of certain events.
The Company's interest in 3 World Financial Center is financed with U.S.
dollar, fixed rate senior notes totaling $388 million as of November 30,
1994. Of this amount, $305 million is guaranteed by American Express with a
portion of these notes being collateralized by certain mortgage obligations.
51
<PAGE>
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 November 30, 1994, the Company had $3.1 billion available for the
issuance of debt securities under various shelf registrations, which includes
$1.3 billion of issuance availability under the Company's Euro medium-term
note program.
- ----------
Note 6
- ----------
Subordinated Indebtedness
The Company's Subordinated indebtedness is comprised of the following (in
millions):
<TABLE>
<CAPTION>
November 30
1994
----------------------------------
Contractual Contractual December 31
Fixed Rate Floating Rate Total 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturing in:
Eleven months ended November 30, 1994 $ 444
Year ended November 30, 1995 $ 64 $ 150 $ 214 214
Year ended November 30, 1996 96 163 259 260
Year ended November 30, 1997 741 741 351
Year ended November 30, 1998 350 350 200
Year ended November 30, 1999 179 179 179
December 1, 1999 and thereafter 441 30 471 472
- --------------------------------------------------------------------------------------------
$ 1,871 $ 343 $ 2,214 $ 2,120
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
As of November 30, 1994, the Company had $1,871 million of fixed rate
subordinated indebtedness outstanding. Contractual interest rates on this
indebtedness ranged from 5.04% to 11.63%, as of November 30, 1994, with an
effective weighted average rate of 8.31%. The Company utilized a series of
fixed rate basis swaps totaling $1,949 million to lower the rate of its fixed
rate subordinated indebtedness, and the Company also entered into interest
rate swap contracts which effectively converted $1,460 million of this debt
to floating rates based on LIBOR. Including the effect of both the basis and
interest rate swaps applied to the Company's fixed rate indebtedness, the
effective weighted average rate on the remaining fixed rate debt was 7.75%.
As of November 30, 1994, the Company had $343 million of floating rate
subordinated indebtedness outstanding. Contractual interest rates on this
indebtedness are primarily based on LIBOR and ranged from 4.80% to 6.56% as
of November 30, 1994, with an effective weighted average rate of 6.29%.
Including the effect of the $1,460 million of fixed rate indebtedness swapped
to floating rates at an effective weighted average rate of 6.53%, the
effective weighted average rate of the Company's floating rate subordinated
indebtedness was 6.48%.
In addition to the interest rate swaps utilized by the Company to convert the
interest rate nature of its subordinated indebtedness, the Company had $392
million notional value of swaptions outstanding at November 30, 1994.
Approximately $192 million of these swaptions, if exercised in December 1994,
would convert the Company's fixed rate subordinated indebtedness to a
floating rate. The remaining $200 million of swaptions, if exercised in
November 1998, would convert the Company's floating rate subordinated
indebtedness to a fixed rate.
52
<PAGE>
LEHMAN BROTHERS 1994 ANNUAL REPORT
Of the Company's contractual fixed rate subordinated indebtedness outstanding
as of November 30, 1994, $200 million is repayable prior to maturity at the
option of the holder. This obligation is reflected in the above table as
maturing in fiscal 1997, 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 contractual floating rate subordinated indebtedness maturing
in fiscal 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.
- ----------
Note 7
- ----------
Equity Investments and Distribution of Common Stock
On May 31, 1994 all of the shares of Common Stock of Holdings were
distributed (the "Distribution") to American Express common shareholders of
record on May 20, 1994 (the "Record Date").
Prior to the Distribution, Holdings effected a 0.3178313 for 1 reverse stock
split (the "Reverse Stock Split") which had the effect of reducing the number
of shares of Common Stock held by American Express from 168,235,284 to
53,470,443. The calculation of the ratio for the Reverse Stock Split was
based upon the number of American Express common shares outstanding on the
Record Date. Also prior to the Distribution:
(i) American Express sold 441,251 shares of Common Stock to certain executive
officers of Lehman Brothers for an aggregate purchase price of approximately
$11.3 million, or approximately $25.55 per share (the "Offering");
(ii) Holdings sold:
(a) 35,379,920 shares of Common Stock to American Express for an aggregate
purchase price of approximately $903.8 million, or approximately $25.55 per
share (the "American Express Common Stock Purchase"),
(b) 3,490,094 shares of Common Stock to Nippon Life Insurance Company
("Nippon Life") for approximately $89.2 million, or approximately $25.55 per
share (the "NL Common Stock Purchase"),
(c) 8,000,000 shares of its Cumulative Voting Preferred Stock (which stock
has a dividend rate of 8.44% per annum) (the "Cumulative Preferred Stock") to
American Express for an aggregate purchase price of $200 million and
(d) 928 and 72 shares of its Redeemable Voting Preferred Stock ("Redeemable
Preferred Stock") for $1.00 per share to American Express and Nippon Life,
respectively (the Cumulative Preferred Stock and the Redeemable Preferred
Stock collectively, the "Preferred Stock") (the sales of such Preferred
Stock, the "Preferred Stock Purchases").
(iii) Holdings issued:
(a) 3,366,677 shares of Common Stock, with an aggregate value of
approximately $57 million, upon conversion of all of the outstanding phantom
equity interests held by certain key employees of Lehman Brothers pursuant to
the terms of the Lehman Brothers Inc. Employee Ownership Plan (the "EOP
Conversion") and
53
<PAGE>
(b) 9,786,006 shares of Common Stock to American Express in exchange for $250
million of Money Market Preferred Stock of Holdings held by American Express
(the "MMP Exchange").
The American Express Common Stock Purchase, the NL Common Stock Purchase and
the Preferred Stock Purchases are collectively referred to herein as the
"Equity Investment." The Equity Investment, the Offering, the EOP Conversion,
the MMP Exchange and the Distribution are collectively referred to herein as
the "Concurrent Transactions." The Company charged approximately $15 million
($12 million aftertax) to operating expenses in the second quarter of 1994
related to costs incurred in connection with the Concurrent Transactions and
other related expenses. The Company and American Express entered into several
agreements for the purpose of giving effect to the Distribution and defining
their ongoing relationships.
- ----------
Note 8
- ----------
Preferred Stock
Cumulative Convertible Voting, Series A
In 1987, Holdings issued to Nippon Life the Cumulative Convertible Voting
Preferred Stock, Series A ("Series A Preferred Stock"), for a cash purchase
price of $508 million, as adjusted, or $39.10 per share. The holder of the
Series A Preferred Stock is entitled to receive preferred dividends at an
annual rate of 5%, payable quarterly before any dividends are paid to the
holders of Common Stock.
The Company has the right to redeem the shares of Series A Preferred Stock on
any dividend payment date after June 15, 1994, in cumulative annual
increments of 2,600,000 shares, subject to adjustment, and subject to
restrictions on redemptions when dividends are in arrears. Such redemption
will be at a price per share equal to $39.10 and is permitted only if there
is a public market for the Common Stock and the average market price of
shares of Common Stock exceeds the conversion price on the date notice of
redemption is given.
Each share of Series A Preferred Stock is convertible, at any time prior to
the date of redemption, into 0.3178313 of a share of Common Stock, provided
that at least 250,000 shares of Series A Preferred Stock (or such lesser
number of such shares then outstanding) are converted each time. The
conversion rate at November 30, 1994 was $123.02.
8.44% Cumulative Voting
In 1994, Holdings issued the Cumulative Preferred Stock to American Express
for $200 million. The holder of the Cumulative Preferred Stock is entitled to
receive preferred dividends at an annual rate of 8.44%, payable quarterly
before any dividends are paid to the holders of Common Stock.
Holdings may not redeem shares of the Cumulative Preferred Stock prior to
June 1, 2001. Thereafter, Holdings will have the right to redeem shares of
the Cumulative Preferred Stock at a price per share equal to $25.00 plus
accumulated and unpaid dividends. These shares are not convertible into
Common Stock.
Redeemable Voting
In 1994, Holdings issued the Redeemable Preferred Stock to American Express
and Nippon Life for $1,000. The holders of the Redeemable Preferred Stock
will be entitled to receive preferred dividends for each of eight annual
dividend periods following the Distribution in an amount equal to 50% of the
amount, if any, by which the Company's net income for the applicable dividend
period exceeds $400 million, up to a maximum of $50 million for any such
period.
54
<PAGE>
LEHMAN BROTHERS 1994 ANNUAL REPORT
Holdings may not redeem shares of the Redeemable Preferred Stock prior to the
final dividend payment date. Holders of the Redeemable Preferred Stock will
have the right, under limited circumstances, to require Holdings to redeem
all of this stock for $400 million up to the first anniversary of the
Distribution. This amount declines by $50 million per year in each of the
next seven years thereafter. These shares are not convertible into Common
Stock.
Money Market Cumulative
As of the Distribution, the Money Market Cumulative Preferred Stock was
exchanged for Common Stock.
- ----------
Note 9
- ----------
Common Stock
Changes in shares of Common Stock outstanding are as follows:
<TABLE>
<CAPTION>
Eleven months Twelve months
ended ended
November 30 December 31
------------- -----------------------------
1994 1993 1992
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares outstanding, beginning of period 168,235,284 168,235,284 156,568,617
- -------------------------------------------------------------------------------------------------------
Reverse Stock Split (114,764,841)
- -------------------------------------------------------------------------------------------------------
53,470,443
Shares sold to American Express 11,666,667
Concurrent transactions
Shares sold to American Express 35,379,920
Shares sold to Nippon Life 3,490,094
Shares issued in EOP conversion 3,366,677
Shares issued to American Express in
exchange for $250 million
Money Market Preferred Stock 9,786,006
Restricted shares granted under the
Replacement Plan 115,283
- -------------------------------------------------------------------------------------------------------
Outstanding Common Stock as of Spin-off date 105,608,423
- -------------------------------------------------------------------------------------------------------
Treasury stock purchases (1,070,733)
- -------------------------------------------------------------------------------------------------------
Shares outstanding, end of period 104,537,690 168,235,284 168,235,284
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
The Company has reserved for issuance approximately 4.1 million shares of
Common Stock for conversion of the Series A Preferred Stock.
Nippon Life holds a non-transferable common stock purchase warrant pursuant
to which Nippon Life may purchase approximately 3.3 million shares of Common
Stock with an exercise price of $35.05 per share with an expiration date of
April 15, 1996.
There is a restriction on the transferability of the Common Stock received
under the Employee Ownership Plan. Generally, such restrictions will lapse
ratably over a three-year period.
Treasury stock purchases include approximately 973,000 shares resulting from
the odd-lot buy back program.
55
<PAGE>
- ----------
Note 10
- ----------
Incentive Plans
The Compensation and Benefits Committee (the "Compensation Committee") of the
Board of Directors of Holdings adopted, effective as of the date of the
Distribution, the Lehman Brothers Holdings Inc. 1994 Management Ownership Plan
(the "1994 Plan") and the Lehman Brothers Holdings Inc. 1994 Management
Replacement Plan (the "Replacement Plan"). In addition, the Compensation
Committee adopted, effective June 1, 1994, the Employee Stock Purchase Plan (the
"ESPP").
The 1994 Plan provides for the Compensation Committee to grant stock options,
stock appreciation rights ("SARs"), restricted stock units ("RSUs"),
restricted stock, performance shares and performance units for a period up to
ten years to eligible employees ("Eligible Employees"). A total of 16,650,000
shares of Common Stock may be subject to awards under the 1994 Plan, which
number includes 150,000 shares available as RSUs which may be issued to
non-employee Directors. In addition, the 1994 Plan provides that nonemployee
Directors of Holdings will receive on an annual basis RSUs representing
$30,000 of Common Stock, which vest ratably over a three-year period. Stock
options may be awarded as either incentive stock options or non-qualified
stock options. The exercise price for any stock option shall not be less than
the market price of Common Stock on the day of the grant. SARs may be awarded
as a single award or in conjunction with a stock option. Vesting provisions
for stock options and SARs are at the discretion of the Compensation
Committee, but in no case may the term of the award exceed ten years. All
stock options awarded in the current year under the 1994 Plan vest ratably
over three years in one-third increments annually. The 1994 Plan also allows
the Compensation Committee to grant certain stock awards to Eligible
Employees, with vesting and performance objective terms determined by such
committee. 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.
All RSUs outstanding at November 30, 1994 were granted during the current
year. Each RSU awarded in 1994 and outstanding on July 1, 1999 will be
exchanged for a share of Common Stock. Holdings will pay a dividend
equivalent on each RSU outstanding based on dividends paid on the Common
Stock.
The Replacement Plan allows the Compensation Committee to grant stock options
and restricted stock awards to Eligible Employees. The primary purpose of the
Replacement Plan is to provide awards similar to the American Express common
shares granted to Company employees which were canceled as of the date of the
Distribution. At November 30, 1994, virtually all stock options granted under
the Replacement Plan are exercisable.
The ESPP allows employees to purchase Common Stock at a 15% discount from
market value, with a maximum of $15,000 in annual aggregate purchases by any
one individual. The number of shares of
56
<PAGE>
LEHMAN BROTHERS 1994 ANNUAL REPORT
Common Stock authorized for purchase by Eligible Employees is 6,000,000. As
of November 30, 1994, 130,827 shares of Common Stock were purchased by
employees through the ESPP. The shares were purchased in the open market and
thus did not increase the total shares outstanding.
The following is a summary of stock awards issued and outstanding under the
various incentive plans established by the Company during the eleven months
ended November 30, 1994:
Restricted Stock Awards
<TABLE>
<CAPTION>
Replacement
Plan
- --------------------------------------------------------------------------------
<S> <C>
Balance, January 1, 1994
- --------------------------------------------------------------------------------
Granted in connection with the Spin-off 115,283
Exchanged for stock without restrictions (47,179)
Canceled (6,026)
- --------------------------------------------------------------------------------
Balance, November 30, 1994 62,078
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Stock Options
<TABLE>
<CAPTION>
1994 Replacement Exercise Expiration
Plan Plan Total Price Dates
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994
- --------------------------------------------------------------------------------------------
Granted 1,960,720 1,849,769 3,810,489 $ 18.00 2/95-5/04
Canceled (60,000) (60,000)
- --------------------------------------------------------------------------------------------
Balance, November 30, 1994 1,960,720 1,789,769 3,750,489
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
Restricted Stock Units
<TABLE>
<CAPTION>
1994 Plan
- --------------------------------------------------------------------------------
<S> <C>
Balance, January 1, 1994
- --------------------------------------------------------------------------------
Granted 5,279,321
Canceled (674,216)
- --------------------------------------------------------------------------------
Balance, November 30, 1994 4,605,105
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
In addition to the RSUs listed above, the Compensation Committee also
determined to award RSUs under the 1994 Plan to certain officers of Lehman
Brothers based on performance goals during the period June 1, 1994 through
December 31, 1994. Approximately one million RSUs for certain officers were
added to Common Stock issuable at November 30, 1994.
The RSUs included in Common Stock issuable at November 30, 1994 will vest
approximately 75% on July 1, 1995; 5% on July 1, 1997; and 20% on July 1,
1999.
57
<PAGE>
- ----------
Note 11
- ----------
Earnings Per Common Share
For all periods prior to May 31, 1994, the number of shares of common stock
and common stock equivalents used in the calculation is fixed at 105,681,479
(comprised of 105,608,423 shares of Common Stock and 73,056 RSUs).
The weighted average number of shares of common stock and common stock
equivalents included in the calculations of earnings per common share
follows:
<TABLE>
<CAPTION>
Eleven months Twelve months
ended ended
November 30 December 31
------------- --------------
1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C>
Common Stock 105,436,860 105,608,423
RSUs 2,593,932 73,056
- --------------------------------------------------------------------------------
Total 108,030,792 105,681,479
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
- ----------
Note 12
- ----------
Capital Requirements
As registered broker-dealers, LBI and Lehman Government Securities Inc.
("LGSI"), a wholly owned subsidiary of LBI, are subject to SEC Rule 15c3-1, the
Net Capital Rule, which requires LBI and LGSI to maintain net capital of not
less than 2% of aggregate debit items arising from customer transactions, as
defined, or 4% of funds required to be segregated for customers' regulated
commodity accounts, as defined. At November 30, 1994, LBI's regulatory net
capital, as defined, of $1,338 million exceeded the minimum requirement by
$1,281 million. LGSI's regulatory net capital, as defined, of $575 million
exceeded the minimum requirement by $556 million at November 30, 1994.
Lehman Brothers International (Europe) ("LBIE"), Lehman Brothers Japan Inc.
("LBJ"), and other of Holdings' subsidiaries are subject to various
securities, commodities and banking regulations and capital adequacy
requirements promulgated by the regulatory and exchange authorities of the
countries in which they operate. At November 30, 1994, LBIE, LBJ and the
other subsidiaries were in compliance with the applicable local capital
adequacy requirements.
At November 30, 1994, $2,127 million of net assets of subsidiaries of
Holdings were restricted as to the payment of dividends to Holdings, as a
result of regulatory and other requirements.
There are no restrictions on Holdings' present ability to pay dividends on
Common Stock, other than (a) Holdings' obligation first to make dividend
payments on its preferred stock and (b) the governing provisions of the
Delaware General Corporation Law.
- ----------
Note 13
- ----------
Changes in Accounting Principles
Accounting for Postemployment Benefits
Effective January 1, 1994, the Company adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." SFAS No. 112 requires the accrual of
obligations associated with services rendered to date for employee benefits
accumulated or vested for which payment is probable and can be reasonably
estimated. These benefits principally include the continuation of salary,
health care and life insurance costs for employees on service disability
leaves. The Company previously expensed the cost of these benefits as they
were incurred.
58
<PAGE>
LEHMAN BROTHERS 1994 ANNUAL REPORT
The cumulative effect of adopting SFAS No. 112, reduced net income for the
first quarter of 1994 by $13 million aftertax ($23 million pretax). The
effect of this accounting change on the 1994 results of operations was not
material, excluding the cumulative effect.
Offsetting of Certain Receivables and Payables
During the first quarter of 1994, the Company adopted FIN No. 39. FIN No. 39
restricts the historical industry practice of offsetting certain receivables
and payables. A substantial portion of the increase in the Company's gross
assets and liabilities from December 31, 1993 to November 30, 1994 is due to
the adoption of FIN No. 39. In January 1995, the Financial Accounting
Standards Board issued Interpretation No. 41, "Offsetting of Amounts Related
to Certain Repurchase and Reverse Repurchase Agreements" ("FIN No. 41"). FIN
No. 41 is a modification to FIN No. 39 to permit certain limited exceptions
to the criteria established under FIN No. 39 for offsetting certain
repurchase and reverse repurchase agreements with the same counterparty. The
Company will adopt this modification on a prospective basis which will
partially mitigate the increase in the Company's gross assets and liabilities
resulting from the implementation of FIN No. 39.
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 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 LBI Group Inc.,
"Hutton").
59
<PAGE>
- ----------
Note 14
- ----------
Pension Plans
The Company sponsors several noncontributory defined benefit pension plans which
cover substantially all employees. The cost of pension benefits for eligible
employees, measured by length of service, compensation and other factors, is
currently being funded through trusts established under the plans. Funding of
retirement costs for the applicable plans complies with the minimum funding
requirements specified by the Employee Retirement Income Security Act of 1974,
as amended, and other statutory requirements. Plan assets consist principally of
equities and bonds.
Total expense related to pension benefits amounted to $9 million for the
eleven months ended November 30, 1994, and $24 million and $27 million for
the twelve months ended December 31, 1993 and 1992, respectively, and
consisted of the following components (in millions):
<TABLE>
<CAPTION>
Eleven months Twelve months
ended ended
November 30 December 31
------------- -------------------
1994 1993 1992
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost--benefits earned during the period $ 16 $ 32 $ 33
Interest cost on projected benefit obligation 28 40 45
Actual return on plan assets (4) (73) (59)
Net amortization and deferral (31) 25 8
$ 9 $ 24 $ 27
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the funded status of the Company's defined
benefit plans (in millions):
<TABLE>
<CAPTION>
November 30 December 31
1994 1993
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ (335) $ (370)
- -------------------------------------------------------------------------------------------
Accumulated benefit obligation $ (342) $ (377)
- -------------------------------------------------------------------------------------------
Projected benefit obligation $ (367) $ (401)
Plan assets at fair value 446 430
- -------------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 79 29
Unrecognized net loss 57 90
Unrecognized net asset (2)
- -------------------------------------------------------------------------------------------
Pension asset recognized in the Consolidated Statement
of Financial Condition $ 136 $ 117
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
The assumed discount rates used in determining the actuarial present value of
the projected benefit obligation for the Company's plans ranged primarily
from 8.5% to 9.5% and 7.25% to 7.5% in 1994 and 1993, respectively. The rate
of increase in future compensation levels used ranged primarily from 5.5% to
7% in 1994 and 1993. The expected long-term rate of return on assets ranged
primarily from 9% to 9.75% in 1994 and 1993 and from 9% to 10% in 1992.
During 1993, the Company incurred a settlement and curtailment with respect
to its domestic pension plan in relation to the Primerica Transaction. The
net gain of approximately $26 million (pretax) was included in the loss on
the sale of Shearson. (See Note 20 for definitions and additional information
concerning this sale.)
60
<PAGE>
LEHMAN BROTHERS 1994 ANNUAL REPORT
- ----------
Note 15
- ----------
Postretirement Benefits
The Company sponsors several defined benefit health care plans that provide
health care, life insurance and other postretirement benefits to substantially
all eligible retired employees. The health care plans include participant
contributions, deductibles, co-insurance provisions and service-related
eligibility requirements. The Company funds the cost of these benefits as they
are incurred.
Net periodic postretirement benefit cost for the eleven months ended November
30, 1994 and the twelve months ended December 31, 1993 and 1992 consisted of
the following components (in millions):
<TABLE>
<CAPTION>
Eleven months Twelve months
ended ended
November 30 December 31
------------- -------------------
1994 1993 1992
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 1 $ 2 $ 3
Interest cost 5 8 10
Amortization of unrecognized prior service cost (1)
- ---------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 5 $ 10 $ 13
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
During 1993, the Company incurred a curtailment with respect to its
postretirement plan, in relation to the Primerica Transaction. The net gain
of approximately $56 million (pretax) was included in the loss on the sale of
Shearson. (See Note 20 for definitions and additional information concerning
this sale.)
The following table sets forth the amount recognized in the Consolidated
Statement of Financial Condition for the Company's postretirement benefit
plans (other than pension plans) at November 30, 1994 and December 31, 1993
(in millions):
<TABLE>
<CAPTION>
November 30 December 31
1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 45 $ 48
Fully eligible active plan participants 5 7
Other active plan participants 6 7
- -----------------------------------------------------------------------------------------------
56 62
Unrecognized net gain 12 3
Unrecognized prior service cost 9 9
- -----------------------------------------------------------------------------------------------
Accrued postretirement benefit cost $ 77 $ 74
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
The discount rate used in determining the accumulated postretirement benefit
obligation was 8.5% in 1994 and 7.25% in 1993.
The annual assumed health care cost trend rate is 12% for the year ended
November 30, 1995 and is assumed to decrease at the rate of 1% per year to 7%
in the year ended November 30, 2000 and remain at that level thereafter. An
increase in the assumed health care cost trend rate by one percentage point
in each period would increase the accumulated postretirement benefit
obligation as of November 30, 1994 by approximately $1 million.
61
<PAGE>
- ----------
Note 16
- ----------
Income Taxes
The Company will file a consolidated U.S. federal income tax return for the
period June 1, 1994 to December 31, 1994 reflecting the income of Holdings and
its subsidiaries. For the period prior to the spin-off from American Express,
the income of the Company will be included in the American Express consolidated
U.S. federal income tax return, as it had been since August of 1990. The income
tax provision for the Company is computed in accordance with the income tax
allocation agreement between the Company and American Express.
With respect to the period in which the Company was included in the American
Express consolidated U.S. federal income tax return, intercompany taxes are
remitted to, or from, American Express when they are otherwise due to or from
the relevant taxing authority. The balances due from American Express at
November 30, 1994 and December 31, 1993 were $47 million and $12 million,
respectively.
The provision for (benefit from) income taxes from continuing operations
consists of the following (in millions):
<TABLE>
<CAPTION>
Eleven months Twelve months
ended ended
November 30 December 31
------------- --------------------
1994 1993 1992
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ (197) $ 220 $ (19)
State (5) 130 22
Foreign 63 50 8
- -------------------------------------------------------------------------
(139) 400 11
Deferred:
Federal 192 (59) (67)
State 14 (23) 2
- -------------------------------------------------------------------------
$ 67 $ 318 $ (54)
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
</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 $105 million, $318
million and $1 million that is subject to income taxes of foreign
jurisdictions for the eleven months ended November 30, 1994 and the twelve
months ended December 31, 1993 and 1992, respectively.
62
<PAGE>
LEHMAN BROTHERS 1994 ANNUAL REPORT
The income tax provision (benefit) differs from that computed by using the
statutory federal income tax rate for the reasons shown below (in millions):
<TABLE>
<CAPTION>
Eleven months Twelve months
ended ended
November 30 December 31
------------- --------------------
1994 1993 1992
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes at statutory rate $ 67 $ 9 $ (84)
State and local taxes 6 69 16
Tax-exempt interest and dividends (21) (20) (4)
Goodwill reduction related to the sale of Shearson 263
Amortization of goodwill 3 9 14
Losses from foreign operations 13
U.S. federal rate change (10)
Other (1) (2) 4
- -----------------------------------------------------------------------------------------
$ 67 $ 318 $ (54)
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</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. The Company provides deferred income taxes on
undistributed earnings of foreign subsidiaries.
At November 30, 1994 and December 31, 1993, the Company's net deferred tax
assets from continuing operations consisted of the following (in millions):
<TABLE>
<CAPTION>
November 30 December 31
1994 1993
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets $ 821 $ 746
Less: Valuation allowance 156 149
- ---------------------------------------------------------------------------------------
Deferred tax assets net of valuation allowance 665 597
Deferred tax liabilities (484) (332)
- ---------------------------------------------------------------------------------------
Net deferred tax assets from continuing operations $ 181 $ 265
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
The net deferred tax asset decreased by $84 million to $181 million at
November 30, 1994. The net reduction is attributable to the reversal of
certain temporary differences partially offset by an increase in the deferred
tax asset resulting from the ability to recognize benefits related to the
1988 acquisition of Hutton. At November 30, 1994 and December 31, 1993,
deferred tax assets consisted primarily of reserves not yet deducted for tax
purposes of $426 million and $517 million, respectively, and tax return net
operating losses ("NOLs") of $213 million and $38 million, respectively, and
deferred compensation of $174 million and $178 million, respectively. At
November 30, 1994 and December 31, 1993, deferred tax liabilities consisted
primarily of unrealized trading and investment gains of $275 million and $183
million, excess tax over financial depreciation of $78 million and $68
million and undistributed earnings of foreign subsidiaries of $56 million and
$62 million, respectively.
The net deferred tax asset is included in Deferred Expenses and other assets
in the accompanying Consolidated Statement of Financial Condition. At
November 30, 1994, the valuation allowance recorded against deferred tax
assets from continuing operations was $156 million as compared to
63
<PAGE>
$149 million at December 31, 1993, of which approximately $131 million and $100
million, respectively, will reduce goodwill if future circumstances permit
recognition. The increase in the valuation allowance relates to NOLs that
previously had failed to meet the asset recognition criteria under SFAS No. 109.
This increase had no impact on the Company's profit and loss since it was
associated with a corresponding increase in gross assets.
For tax return purposes, the Company has approximately $200 million of NOL
carryforwards, substantially 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 2009. A portion of the valuation allowance discussed
above relates to these NOLs.
- ----------
Note 17
- ----------
Commitments and Contingencies
Derivative Financial Instruments
Derivatives are financial instruments, which include swaps, options, futures
and forwards, whose value is based upon an underlying asset (e.g., treasury
bond), index (e.g., S&P 500) or reference rate (e.g., LIBOR). A derivative
contract may be traded on an exchange or over-the-counter. Exchange-traded
derivatives are standardized and include futures, and certain option
contracts listed on an exchange. Over-the-counter derivative contracts are
individually negotiated between contracting parties and include forwards,
swaps and certain options including caps, collars and floors.
Derivatives are subject to various risks similar to non-derivative financial
instruments including market, credit, liquidity, and operational risk. The
risks of derivatives should not be viewed in isolation but rather should be
considered on an aggregate basis along with the Company's other
trading-related activities. The Company manages the risks associated with
derivatives on an aggregate basis along with the risks associated with its
proprietary trading and market making activities in cash instruments as part
of its firm-wide risk management policies.
Market Risk Market risk is the potential for changes in the value of
derivative financial instruments due to market changes, including interest
and foreign exchange rate movements and fluctuations in commodity or security
prices. Market risk is directly impacted by the volatility and liquidity in
the markets in which the related underlying assets are traded. The Company
manages its exposure to market risk on an aggregate basis combining the
effects of cash instruments and derivative contracts.
Credit Risk Credit risk is the possibility that a loss may occur from the
failure of a counterparty to perform according to the terms of a contract. At
any point in time, the credit risk for over-the-counter derivative contracts
is limited to the net unrealized gain for each counterparty for which a
master netting agreement exists, net of collateral received. The Company's
credit review process includes an evaluation of the counterparty's
creditworthiness at the inception of the transaction, periodic review of
credit standing, obtaining collateral and various credit enhancements in
certain circumstances. In addition, the Company actively pursues obtaining
master netting agreements for all its derivative counterparties.
64
<PAGE>
LEHMAN BROTHERS 1994 ANNUAL REPORT
Liquidity Risk Liquidity risk is the possibility that the Company may not be
able to rapidly adjust the size of its derivative positions in times of high
volatility and financial stress at a reasonable cost. The liquidity of
derivative products is highly related to the liquidity of the underlying cash
instrument. As with non-derivative financial instruments, the Company's
valuation policies for derivatives include consideration of liquidity
factors.
Operational risk Operational risk is the possibility of a deficiency in the
Company's systems for executing derivative transactions. Such risks include
the potential for liabilities resulting from the Company's role in the
execution of a derivative transaction in which there was a breakdown in
information transfer or settlement systems.
In addition to these risks, the Company may also be exposed to legal risks
related to its derivative activities including the possibility that a
transaction may be unenforceable under applicable law. Such risks may also be
present in cash instruments and are controlled through the Company's
established risk management policies.
In the normal course of business, the Company enters into derivative
transactions as a dealer and as an end user. Acting as a dealer, the Company
enters into derivative transactions to satisfy the needs of its clients and
to manage the Company's own exposure to market and credit risks resulting
from proprietary trading activities (collectively, "Trading-Related
Derivative Activities"). As an end user, the Company primarily enters into
interest rate swap and option contracts to adjust the interest rate nature of
its funding sources from fixed to floating rates and vice versa, and to
change the index upon which floating interest rates are based (i.e., Prime to
LIBOR) (collectively, "End User Derivative Activities").
At November 30, 1994, the notional value of the Company's End User Derivative
Activities was $40.4 billion. Approximately $8.1 billion of this notional
value was related to the Company's interest rate management activities for
the senior and subordinated debt portfolios, with approximately $32.3 billion
of notional value related to the management of interest rate risk of the
Company's secured financing activities, including securities purchased under
agreements to resell, securities borrowed, securities sold under agreements
to repurchase and securities loaned. The weighted average maturity of such
derivative contracts was 2.3 years for the senior and subordinated debt
related instruments and 1.2 years for the secured financing related
derivatives as of November 30, 1994.
In addition, the Company had $1,259 million notional value of swaptions
outstanding at November 30, 1994. Approximately $1,059 million of these
swaptions, if exercised, would convert a portion of the Company's fixed rate
debt to a floating rate, with the remainder converting certain other
long-term debt from a floating rate to a fixed rate. Swaptions of $809 million
could be exercised in December 1994, with the remaining swaptions having
exercise dates ranging from fiscal 1996 to fiscal 1998.
65
<PAGE>
Derivatives are generally based upon notional values. Notional values are not
recorded on-balance-sheet, but rather are utilized solely as a basis for
determining future cash flows to be exchanged. Therefore, notional amounts
provide a measure of the Company's involvement with such instruments, but are
not indicative of potential risk. The following table represents the notional
contract amounts of the Company's outstanding derivative contracts:
Trading-Related Derivative Financial Instruments
<TABLE>
<CAPTION>
1994
Weighted
Notional/Contract Value average
November 30 December 31 maturity
(in millions except weighted average maturity) 1994 1993 in years
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Swap Products $ 429,711 $ 263,361 3.71
- -------------------------------------------------------------------------------------------------------------
Financial Futures
To purchase 140,854 95,333
To sell 117,762 56,122
- -------------------------------------------------------------------------------------------------------------
258,616 151,455 0.86
- -------------------------------------------------------------------------------------------------------------
Forward Contracts
Security
To purchase 18,421 52,352
To sell 16,727 46,729
- -------------------------------------------------------------------------------------------------------------
35,148 99,081 0.08
- -------------------------------------------------------------------------------------------------------------
Foreign Exchange
To purchase 126,087 107,613
To sell 130,695 114,238
- -------------------------------------------------------------------------------------------------------------
256,782 221,851 0.19
- -------------------------------------------------------------------------------------------------------------
Options Written
Securities 76,214 95,672
Foreign Exchange 11,989 7,803
- -------------------------------------------------------------------------------------------------------------
88,203 103,475 0.47
- -------------------------------------------------------------------------------------------------------------
Options Purchased
Securities 45,334 14,114
Foreign Exchange 12,221 2,445
- -------------------------------------------------------------------------------------------------------------
57,555 16,559 0.67
- -------------------------------------------------------------------------------------------------------------
Commodities 17,076 11,508 0.77
- -------------------------------------------------------------------------------------------------------------
Total Notional/Contract Values $1,143,091 $ 867,290 1.72
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Approximately $697 billion of the notional/contract value of the Company's
Trading-Related Derivative Activities mature within the year ended November
30, 1995, of which approximately 47% have maturities of less than one month.
The Company records its Trading-Related Derivative Activities on a
mark-to-market basis with realized and unrealized gains (losses) recognized
currently in Principal transactions. While the Company may utilize derivative
products in all its businesses, the Company views its derivative product
revenues as the net revenues earned from the trading and market making
activities of its fixed income and equity derivative
66
<PAGE>
LEHMAN BROTHERS 1994 ANNUAL REPORT
products businesses. The fixed income derivative product revenues were $461
million for the eleven months ended November 30, 1994 and $330 million and
$118 million for the years ended December 31, 1993 and 1992, respectively.
The equity derivative product revenues were $80 million for the eleven months
ended November 30, 1994 and $83 million and $32 million for the years ended
December 31, 1993 and 1992, respectively.
The Company currently records unrealized gains and losses on derivative
contracts on a net basis in the Consolidated Statement of Financial Condition
for those transactions with counterparties executed under a legally
enforceable master netting agreement. Prior to the adoption of FIN No. 39 in
early 1994, the Company recorded all such contracts on a net basis. Listed in
the table below is the fair value of the Company's Trading-Related
Derivatives as of November 30, 1994. Average fair values of these instruments
are also shown below. Variances between average values and period-end values
are due to changes in the volume of activities in these instruments and
changes in the valuation of these instruments due to changes in market and
credit conditions. Average fair value was calculated based upon month-end
statement of financial condition values which the Company believes does not
vary significantly from the average fair value calculated on a more frequent
basis.
Fair Value of Trading-Related Derivative Financial Instruments
<TABLE>
<CAPTION>
Average Fair Value
Fair Value eleven months ended
November 30, 1994 November 30, 1994
---------------------- -----------------------
(in millions) Asset Liability Asset Liability
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------
Swap Products $ 3,752 $ 2,114 $ 2,998 $ 1,606
Financial Futures 15 27 171 40
Forward Contracts 823 887 1,128 1,048
Options Written 1,049 1,045
Options Purchased 992 1,088
Commodities 155 128 155 128
- --------------------------------------------------------------------------------------------
Total $ 5,737 $ 4,205 $ 5,540 $ 3,867
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
Total credit exposure of the Company's trading-related derivative contracts
at November 30, 1994, net of collateral, is $3,841 million. Collateral held
generally includes cash and U.S. government and federal agency securities.
Presented below is an analysis of the Company's net credit exposure from
these contracts based upon internal designations of counterparty credit
quality.
<TABLE>
<CAPTION>
Counterparty S&P/Moody's Net Credit
Risk Rating Equivalent Exposure
- ----------------------------------------------------------------------------
<C> <S> <C>
1 AAA/Aaa 23%
2 AA-/Aa3 or higher 26%
3 A-/A3 or higher 36%
4 BBB-/Baa3 or higher 7%
5 BB-/B3 or higher 7%
6 B+/B1 or lower 1%
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
These designations are based on actual ratings made by external rating
agencies or by equivalent ratings established and utilized by the Company's
Corporate Credit Department.
67
<PAGE>
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 and Great Britain) which, in the
aggregate, represented 23% of the Company's total assets at November 30,
1994. In addition, substantially all of the collateral held by the Company
for resale agreements or securities borrowed, which together represented 44%
of total assets at November 30, 1994, consisted of securities issued by the
U.S. government, federal agencies or non-U.S. governments. In addition to
these specific exposures, the Company's most significant concentration is
financial institutions, which include other brokers and dealers, commercial
banks and institutional clients. This concentration arises in the normal
course of the Company's business.
Other Commitments and Contingencies
As of November 30, 1994 and December 31, 1993, the Company was contingently
liable for $1.1 billion and $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
guarantees.
As of November 30, 1994 and December 31, 1993, the Company had pledged or
otherwise transferred securities, primarily fixed income, having a market
value of $20.1 billion and $34.1 billion, respectively, as collateral for
securities borrowed or otherwise received having a market value of $19.9
billion and $33.8 billion, respectively.
Securities and other financial instruments sold but not yet purchased
represent obligations of the Company to purchase the securities at prevailing
market prices. Therefore, the future satisfaction of such obligations may be
for an amount greater or less than the amount recorded. The ultimate gain or
loss is dependent upon the price at which the underlying financial instrument
is purchased to settle its obligation under the sale commitment.
68
<PAGE>
LEHMAN BROTHERS 1994 ANNUAL REPORT
In addition, the Company's customer activities may expose it to
off-balance-sheet credit and market risk. These risks may arise in the normal
course of business as a result of executing, financing and settling various
customer security and commodity transactions. Off-balance-sheet risk arises
from the potential that customers or counterparties fail to satisfy their
obligations and that the collateral obtained is insufficient. In such
instances, the Company may be required to purchase or sell financial instruments
at unfavorable market prices. The Company seeks to control these risks by
obtaining margin balances and other collateral in accordance with regulatory and
internal guidelines.
Subsidiaries of the Company, as general partner, are contingently liable for
the obligations of certain public and private limited partnerships organized
as pooled investment funds or engaged primarily in real estate activities. In
the opinion of the Company, contingent liabilities, if any, for the
obligations of such partnerships will not in the aggregate have a material
adverse effect on the Company's consolidated financial position or results of
operations.
In the normal course of its business, the Company has been named a defendant
in a number of lawsuits and other legal proceedings. After considering all
relevant facts, available insurance coverage and the advice of outside
counsel, in the opinion of the Company such litigation will not, in the
aggregate, have a material adverse effect on the Company's consolidated
financial position or results of operations.
Lease Commitments
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 under
these long-term commitments for the eleven months ended November 30, 1994 and
the twelve months ended December 31, 1993 and 1992 was $59 million, $109
million and $160 million, respectively. Certain leases on office space
contain escalation clauses providing for additional rentals based upon
maintenance, utility and tax increases. Minimum future rental commitments
under noncancellable operating leases (net of subleases of $626 million) are
as follows (in millions):
<TABLE>
<CAPTION>
Amount
- --------------------------------------------------------------------------
<S> <C>
Year ended November 30, 1995 $ 52
Year ended November 30, 1996 50
Year ended November 30, 1997 48
Year ended November 30, 1998 45
Year ended November 30, 1999 41
December 1, 1999 and thereafter 586
- --------------------------------------------------------------------------
$ 822
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
</TABLE>
69
<PAGE>
- ----------
Note 18
- ----------
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
the disclosure of the fair value of on- and off-balance-sheet financial
instruments for which it is practicable to estimate fair value, whether or not
such financial instruments are recorded at fair value in the Consolidated
Statement of Financial Condition.
The disclosure requirement 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 fixed assets and goodwill. The fair values
of the financial instruments are estimates based upon market conditions and
perceived risks as of the statement of financial condition date and require
varying degrees of management judgment. For the majority of the Company's
financial instruments, book value approximates fair value, with the exception
of Senior notes, Subordinated indebtedness, certain secured financing
activities and the related financial instruments utilized by the Company as
an end user to manage the interest rate risk of these portfolios.
At November 30, 1994, the fair value of the Company's Senior notes and
Subordinated indebtedness was $11,131 million ($10,302 million at December
31, 1993) as compared to a carrying value of $11,321 million ($9,899 million
at December 31, 1993) representing an unrecognized gain of $190 million at
November 30, 1994 (unrecognized net loss of $403 million at December 31,
1993). 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 is considered to approximate 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 financial instruments utilized by the Company as an end user to
convert the interest rate basis from fixed or floating to another basis for
the Senior notes and Subordinated indebtedness were $99 million and $5 million
at November 30, 1994 and December 31, 1993, respectively. The unrecognized net
losses on these transactions reflect the estimated amounts the Company would pay
if the agreements were terminated based on market rates as of November 30, 1994
and December 31, 1993, respectively.
At November 30, 1994, the Company had approximately $108 billion of secured
financing activities, including securities purchased under agreements to
resell, securities borrowed, securities sold under agreements to repurchase,
and securities loaned which are carried at their original contract amount
plus accrued interest. The Company, as an end user, utilized derivative
financial instruments with an aggregate notional amount of $32.3 billion at
November 30, 1994 to modify the interest rate characteristics of these
secured financings. The Company has unrecognized net losses of approximately
$110 million related to these derivative financial instruments which are
offset by unrecognized net gains arising from these secured financing
activities.
70
<PAGE>
LEHMAN BROTHERS 1994 ANNUAL REPORT
- ----------
Note 19
- ----------
International Operations
Although the Company's business activities are highly integrated and constitute
a single industry segment for the purposes of SFAS No. 14, "Financial Reporting
for Segments of a Business Enterprise," they can be broadly categorized into the
three major geographic areas in which it conducts operations: North America,
Europe and Asia Pacific.
The Company manages its businesses with the goal of maximizing worldwide
profitability by product line. Activities such as the global distribution of
underwritings and the twenty-four hour risk management of trading positions
render geographic profitability to be highly subjective as it is the result
of numerous estimates and assumptions.
The amounts presented 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 salespeople.
Income (Loss) Before Taxes includes expenses incurred within the region.
Identifiable Assets represent essentially those recorded in the legal
entities in which the Company does business within the respective region.
<TABLE>
<CAPTION>
Income
Gross Net (loss) Identifiable
(in millions) revenues revenues before taxes assets
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1992
International operations:
Europe $ 557 $ 383 $ (92) $ 8,188
Asia Pacific 185 165 15 1,006
- ------------------------------------------------------------------------------------------------------------------------
Total international 742 548 (77) 9,194
Domestic operations 9,939 4,948 (170) 76,038
- ------------------------------------------------------------------------------------------------------------------------
Total $ 10,681 $ 5,496 $ (247) $ 85,232
- ------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1993
International operations:
Europe $ 1,013 $ 660 $ 109 $ 17,949
Asia Pacific 276 224 31 1,944
- ------------------------------------------------------------------------------------------------------------------------
Total international 1,289 884 140 19,893
Domestic operations 9,385 4,422 (113) 60,581
- ------------------------------------------------------------------------------------------------------------------------
Total $ 10,674 $ 5,306 $ 27 $ 80,474
- ------------------------------------------------------------------------------------------------------------------------
Eleven months ended November 30, 1994
International operations:
Europe $ 846 $ 542 $ (43) $ 25,199
Asia Pacific 324 269 11 4,860
- ------------------------------------------------------------------------------------------------------------------------
Total international 1,170 811 (32) 30,059
Domestic operations 8,020 1,927 225 79,888
- ------------------------------------------------------------------------------------------------------------------------
Total $ 9,190 $ 2,738 $ 193 $109,947
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
71
<PAGE>
- ----------
Note 20
- ----------
Sale of Business Units
Shearson
On July 31, 1993, pursuant to an asset purchase agreement (the "Primerica
Agreement"), the Company completed the sale (the "Primerica Transaction") of
LBI's domestic retail brokerage business (except for such business conducted
under the Lehman Brothers' name) and substantially all of its asset
management business (collectively, "Shearson") to Primerica Corporation (now
known as The Travelers Inc., "Travelers") and its subsidiary, Smith Barney,
Harris Upham & Co. Incorporated ("Smith Barney"). Also included in the
Primerica Transaction were the operations and data processing functions that
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 aftertax
profits in excess of $250 million per year over a five-year period (the
"Participation Rights"). All Participation Rights, including the first
payment, were assigned to American Express prior to the Distribution. As
further consideration for the sale of Shearson, LBI received 2,500,000 shares
of 5.50% Convertible Preferred Stock, Series B, of Travelers and a warrant to
purchase 3,749,466 shares of common stock of Travelers at an exercise price
of $39 per share. In August 1993, American Express purchased such preferred
stock and warrant from LBI for aggregate consideration of $150 million.
The Company recognized a 1993 first-quarter loss related to the Primerica
Transaction of approximately $630 million aftertax ($535 million pretax),
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
-----------------------
1993 1992
- ----------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 1,825 $ 2,781
Expenses 1,708 2,669
Loss on sale of Shearson 535
- ----------------------------------------------------------------------------
Income (loss) before taxes (418) 112
Provision for income taxes 149 57
- ----------------------------------------------------------------------------
Net income (loss) $ (567) $ 55
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
Shearson operating results reflect allocated interest expense of $72 million
and $102 million for the years ended December 31, 1993 and 1992.
72
<PAGE>
The Boston Company
On May 21, 1993, pursuant to a stock purchase agreement (the "Mellon
Agreement") between LBI and Mellon Bank Corporation ("Mellon Bank"), LBI sold
to Mellon Bank (the "Mellon Transaction") The Boston Company. Under the terms
of the Mellon Agreement, LBI received approximately $1.3 billion in cash,
2,500,000 shares of Mellon Bank common stock and ten-year warrants to
purchase an additional 3,000,000 shares of Mellon Bank's common stock at an
exercise price of $50 per share. In June 1993, such shares and warrants were
sold by LBI to American Express for an aggregate purchase price of $169
million. After accounting for transaction costs and certain adjustments, the
Company recognized a 1993 first quarter aftertax gain of $165 million for the
Mellon Transaction.
As a result of the Mellon Transaction, the Company treated The Boston Company
as a discontinued operation. Accordingly, the Company's financial statements
segregate the operating results of The Boston Company.
Presented below 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
------------------------
1993 1992
- --------------------------------------------------------------------------------------
<S> <C> <C>
Discontinued Operations:
Revenues $ 201 $ 909
Expenses 159 758
- --------------------------------------------------------------------------------------
Income before taxes 42 151
Provision for income taxes 18 74
- --------------------------------------------------------------------------------------
Income from operations 24 77
Gain on disposal, net of taxes of $37 165
- --------------------------------------------------------------------------------------
Income from discontinued operations, net of taxes $ 189 $ 77
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
</TABLE>
Shearson Lehman Hutton Mortgage Corporation
LBI completed the sale of its wholly owned subsidiary, Shearson Lehman Hutton
Mortgage Corporation ("SLHMC") to GE Capital Corporation on August 31, 1993.
The sales price, net of proceeds used to retire debt of SLHMC, was
approximately $70 million. During the first quarter of 1993, the Company
provided $120 million of pretax reserves in anticipation of the sale of
SLHMC, which reserves are included in the $152 million of pretax reserves for
non-core businesses on the Consolidated Statement of Operations. After
accounting for these reserves, the sale did not have a material effect on the
Company's results of operations.
73
<PAGE>
- ----------
Note 21
- ----------
Other Charges
Spin-Off Expenses
During the second quarter of 1994, the Company recorded a charge of $15
million pretax ($12 million aftertax) in connection with the Concurrent
Transactions and certain related expenses.
Reduction in Personnel
During the first quarter of 1994, the Company completed a review of personnel
needs, which resulted in the termination of certain personnel. The Company
recorded a severance charge of $33 million pretax ($18 million aftertax) in
the first quarter of 1994.
Reserves for Non-Core Businesses
During the first quarter of 1993, the Company provided $152 million pretax
($100 million aftertax) of non-core business reserves. Of this amount, $32
million pretax ($21 million aftertax) related to certain non-core partnership
syndication activities in which the Company is no longer actively engaged.
The remaining $120 million pretax ($79 million aftertax) related to reserves
recorded in anticipation of the sale of SLHMC. Such sale was completed during
the third quarter of 1993.
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 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 aftertax charge to earnings of $84
million ($137 million pretax) 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 increasing Holdings' beneficial
ownership of Computervision Stock to 22%. On September 30, 1992, Holdings
recorded a third-quarter 1992 aftertax charge to earnings of $66 million ($108
million pretax) 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.
74
<PAGE>
- ----------
Note 22
- ----------
Quarterly Information (Unaudited)
(in millions, except per share amounts)
The following information represents the Company's unaudited quarterly
results of operations for 1994 and 1993. Certain amounts reflect
reclassifications to conform to the current period's presentation. These
quarterly results reflect all normal recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of the results.
Revenues and earnings of the Company can vary significantly from quarter to
quarter due to the nature of the Company's business activities.
<TABLE>
<CAPTION>
1994 1993
------------------------------------------- -------------------------------------------
Nov. 30 Aug. 31 June 30 Mar. 31 Dec. 31 Sep. 30 June 30 Mar. 31
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues $ 2,795 $ 2,537 $ 2,364 $ 2,321 $ 2,226 $ 2,584 $ 2,986 $ 2,878
Interest expense 2,087 1,818 1,645 1,453 1,327 1,411 1,360 1,270
- -------------------------------------------------------------------------------------------------------------------------------
Net revenues 708 719 719 868 899 1,173 1,626 1,608
Non-interest expenses:
Compensation
and benefits 356 388 364 450 443 625 951 970
Other expenses 287 298 305 297 293 374 464 472
Loss on sale
of Shearson 535
Reserves and
other charges 15 33 152
- -------------------------------------------------------------------------------------------------------------------------------
Total non-interest
expenses 643 686 684 780 736 999 1,415 2,129
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) from
continuing operations
before taxes and
cumulative effect
of change in
accounting principle 65 33 35 88 163 174 211 (521)
Provision for income
taxes 19 11 15 33 49 60 90 119
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) from
continuing operations
before cumulative
effect of change in
accounting principle 46 22 20 55 114 114 121 (640)
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 46 $ 22 $ 20 $ 42 $ 114 $ 114 $ 121 $ (451)
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss)
applicable to
common stock $ 35 $ 11 $ 12 $ 30 $ 102 $ 102 $ 109 $ (463)
- -------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per
common share
before cumulative
effect of change in
accounting principle $ 0.32 $ 0.10 $ 0.11 $ 0.41 $ 0.97 $ 0.96 $ 1.04 $ (4.38)
Dividends per
common share $ 0.05 $ 0.125
Book value per common
share (at period end) $ 24.35 $ 23.97 $ 24.65
Number of shares used in
earnings per common
share computation 110.6 109.1 105.7 105.7 105.7 105.7 105.7 105.7
- -------------------------------------------------------------------------------------------------------------------------------
===============================================================================================================================
</TABLE>
In conjunction with the decision to change its year-end, the Company reported
its third quarter results on the basis of its new fiscal year for the three
months ended August 31, 1994. As such, the results for the month of June 1994
have been reflected in both the second and third quarters of 1994. Thus, the
four quarters of 1994 are not additive.
Net income for the first quarter of 1994 includes a $13 million aftertax
charge for the cumulative effect of a change in accounting for postemployment
benefits as a result of the adoption of SFAS No. 112.
The results for the first quarter of 1993 reflects a loss on the sale of
Shearson of $630 million ($535 million pretax), reserves for non-core
businesses of $100 million ($152 million pretax) and net income from the
discontinued operations of The Boston Company of $189 million.
75
<PAGE>
Selected Financial Data
The following table summarizes certain consolidated financial information based
upon the Company's historical results included in the audited financial
statements. 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
Note 20 to the Consolidated Financial Statements). 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 1993 historical results
are not directly comparable with financial information of prior years presented.
In addition, the Company's 1994 results presented below are for the eleven month
period ended November 30, due to the Company's decision to change its year-end
from December 31. For these reasons, the Company's 1994 results are not fully
comparable with all prior year periods. 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 Company's 1994 Consolidated
Financial Statements and notes thereto.
<TABLE>
<CAPTION>
Historical Financial Data
---------------------------------------------------------
Eleven Months Twelve Months
Ended Ended
November 30 December 31
--------------- --------------------------------------
(in millions, except per share and employee data) 1994 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Revenues:
Principal transactions $ 1,345 $ 2,055 $ 1,767 $ 1,761 $ 1,247
Investment banking 572 972 892 674 553
Commissions 445 1,316 1,677 1,649 1,508
Interest and dividends 6,761 5,840 5,661 5,239 4,927
Other 67 491 684 572 563
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues 9,190 10,674 10,681 9,895 8,798
Interest expense 6,452 5,368 5,185 4,925 4,734
- -----------------------------------------------------------------------------------------------------------------------------
Net revenues 2,738 5,306 5,496 4,970 4,064
- -----------------------------------------------------------------------------------------------------------------------------
Non-interest expenses:
Compensation and benefits 1,413 2,989 3,310 2,899 2,451
Other expenses 1,084 1,603 2,188 1,777 1,755
Loss on sale of Shearson 535
Reserves and other charges 48 152 245 144 607
- -----------------------------------------------------------------------------------------------------------------------------
Total non-interest expenses 2,545 5,279 5,743 4,820 4,813
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before taxes
and cumulative effect of changes in accounting principles 193 27 (247) 150 (749)
Provision for (benefit from) income taxes 67 318 (54) (47) (57)
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before cumulative effect
of changes in accounting principles 126 (291) (193) 197 (692)
Income (loss) from discontinued operations 189 77 10 (117)
Cumulative effect of changes in accounting principles, net of taxes (13) (7) (157)
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 113 $ (102) $ (123) $ 207 $ (966)
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ 75 $ (150) $ (171) $ 159 $ (1,014)
- -----------------------------------------------------------------------------------------------------------------------------
Statement of Financial Condition (At Period End)
Total assets $109,947 $80,474 $85,232 $59,742 $ 55,081
Total assets excluding matched book (a) 72,457 54,428 58,866 44,056 41,892
Long-term indebtedness (b) 11,321 9,899 7,680 5,731 5,472
Total stockholders' equity 3,395 2,052 2,361 2,348 2,027
Total capital (c) 14,716 11,951 10,041 8,079 7,499
- -----------------------------------------------------------------------------------------------------------------------------
Per Share Data (d)
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $ 0.81 $ (3.20)
Discontinued operations 1.79
Cumulative effect of change in accounting principle (0.12)
Net income (loss) 0.69 (1.41)
Dividends declared per common share 0.175
Book value per common share (at period end) 24.35
- -----------------------------------------------------------------------------------------------------------------------------
Other Data (At Period End)
Ratio of total assets to total stockholders' equity 32.4x 39.2x 36.1x 25.4x 27.2x
Ratio of total assets excluding matched book to
total stockholders' equity (d) 21.3x 26.5x 24.9x 18.8x 20.7x
Return on common equity (annualized) (e) 6.2%
Employees 8,512 9,300
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
76
<PAGE>
As noted above, the Company's historical financial statements are not fully
comparable, due to the sales of three significant businesses in 1993 and the
eleven month reporting period presented for 1994. To facilitate an understanding
of the Company's results, included below is a table reflecting the results of
the ongoing businesses of the Company (the "Lehman Businesses") for the eleven
months ended November 30, 1994 and the years ended December 31, 1993, 1992, and
1991.
<TABLE>
<CAPTION>
Lehman Businesses
---------------------------------------------------------------
Eleven Months Twelve Months
Ended Ended
November 30 December 31
------------- -------------------------------------------
(in millions) 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Statement of Operations
Revenues:
Principal transactions $ 1,345 $ 1,732 $ 1,192 $ 1,211
Investment banking 572 802 674 468
Commissions 445 488 446 495
Interest and dividends 6,761 5,679 5,404 4,909
Other 67 79 65 50
- --------------------------------------------------------------------------------------------------------------------------
Total revenues 9,190 8,780 7,781 7,133
Interest expense 6,452 5,225 4,928 4,569
- --------------------------------------------------------------------------------------------------------------------------
Net revenues 2,738 3,555 2,853 2,564
- --------------------------------------------------------------------------------------------------------------------------
Non-interest expenses:
Compensation and benefits 1,413 1,825 1,551 1,370
Other expenses 1,084 1,133 1,411 965
Reserves and other charges 48 32 245 144
- --------------------------------------------------------------------------------------------------------------------------
Total non-interest expenses 2,545 2,990 3,207 2,479
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before taxes and
cumulative effect of changes in accounting principles 193 565 (354) 85
Provision for (benefit from) income taxes 67 210 (109) (84)
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
cumulative effect of changes in accounting principles $ 126 $ 355 $ (245) $ 169
- --------------------------------------------------------------------------------------------------------------------------
Financial Ratios (%):
Compensation and benefits/net revenues 51.6 51.4 54.4 53.4
Pretax operating margin (e) 8.8 16.8 (3.8) 8.9
Effective tax rate 35 37 N/M N/M
Return on common equity (annualized) (e) 6.2
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Matched book represents "securities purchased under agreements to resell"
("reverse repos") to the extent that such balance is less than "securities
sold under agreements to repurchase" ("repos") as of the statement of
financial condition date. Several nationally recognized rating agencies
consider such reverse repos to be a proxy for matched book assets when
evaluating the Company's capital strength and financial ratios. Such
agencies consider matched book assets to have a low risk profile and
exclude such amounts in the calculation of leverage (total assets divided by
total stockholders' equity). Although there are other assets with similar
risk characteristics on the Company's Statement of Financial Condition, 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.
(b) Long-term indebtedness includes senior notes and subordinated indebtedness.
(c) Total capital includes total stockholders' equity and long-term
indebtedness.
(d) Earnings per common share data for the year ended 1993 includes Common Stock
issued as of the Distribution.
(e) Reserves and other charges have been excluded from this calculation.
N/M Not Meaningful
77
<PAGE>
EXHIBIT 21
2/22/95 Page 1
Lehman Brothers Holdings Inc. & Subsidiaries
Subsidiary Name Incorporation
- --------------------------------------------------------------------------------
120 Bethpage Holding Corp. Delaware
270 Lafayette Street Holding Corporation New York
3375 Park Holding Corp. New York
3375 Wantagh Holding Company New York
451 North Andover Realty Trust Massachusetts
6177 Leasing Corporation New York
704-706 Broadway Corp. New York
712 Third Ave. Realty Corp. New York
AEP Premiere Corporation Delaware
AEP Premiere Corporation II Delaware
AFC III Bldg. Corp. Georgia
ALI Inc. Delaware
ASAS Investment Company Delaware
Advantaged Housing Associates Inc. Delaware
Aircraft Depositary Inc. Delaware
Americal GP Corp. Delaware
American Entertainment Depositary Corp. Delaware
American Entertainment Depositary Corp. II Delaware
American Marketing Industries Holdings Inc. Delaware
American Marketing Industries Inc. Delaware
Area Assignor Corp. Delaware
Area Depositary Corporation Delaware
Area GP Corporation Delaware
Assisted Housing Associates Inc. Delaware
Assisted Housing Inc. Delaware
B.H. Venture, Inc. Delaware
BBC Land Company Georgia
BH/GP Inc. Delaware
BK I Realty Inc. New York
BK II Properties Inc. New York
BK III Restaurants Inc. New York
Banque Lehman Brothers S.A. France
Battery Park Credit Company Delaware
Beaver Creek Corporate Center, Inc. Delaware
Belle Meadows Realty Trust Massachusetts
Blue Jay Realty Corporation Delaware
Boulevard Investors, Inc. Delaware
Boulevard Real Estate Corp. Delaware
Broad OK Corp. Delaware
Brookson Corp. Delaware
Brookwood Energy & Properties, Inc. Delaware
Burlington Investors Inc. Delaware
Buttonwood Leasing Corporation Delaware
Buxton Farms Road, Inc. Connecticut
CA Claremont Associates Inc. Delaware
CA Claremont Inc. Delaware
CA Pacific Inc. Delaware
CA Victory Assignor Corp. Delaware
CA Victory Inc. Delaware
CA Village Green Inc. California
CA Westlake Inc. California
CDF85 Real Estate Services Inc. Delaware
<PAGE>
2/22/95 Page 2
Lehman Brothers Holding Inc. & Subsidiaries
Subsidiary Name Incorporation
- --------------------------------------------------------------------------------
CG California Commercial Lending Inc. Delaware
CG Realty Funding Inc. Delaware
CG Zero Coupon Depositary Corp. Delaware
CHP Real Estate Services Inc. Delaware
CP1 Real Estate Services Inc. Delaware
CP4 Real Estate Services Inc. Delaware
CR Properties, Inc. Delaware
CRC 16th St. Holdings, Inc. Massachusetts
CRC Abington Holdings Corp. Massachusetts
CRC Bond St. Holdings, Inc. Massachusetts
CRC Broward Corporation Florida
CRC Casa Grande Holdings, Inc. New York
CRC Equity, Inc. Massachusetts
CRC Lodge Corp. New York
CRC New York Holdings Corp. Massachusetts
CRC Noblestown Rd. Holdings, Inc. Massachusetts
CRC-Oakland Inc. New Jersey
CS Housing II Inc. Delaware
Cable Income Services Inc. Delaware
Canope Credit Corp. Delaware
Capital Park Real Estate Services Inc. Delaware
Capital Preservation and Restructuring, Inc. Delaware
Casitas Associates, Inc. California
Catcon Corp. Delaware
Central Funding (Concord) Corporation Delaware
Client Account Protection Insurance Company Vermont
Cobex Realty Inc. Texas
Collins Street, Inc. Connecticut
Commerce Square Corporation Delaware
Consolidated Real Property Corp. Nevada
Corcon Corp. Delaware
Creekside Inc. Delaware
Crescent Gardens Inc. Delaware
DA Group Holdings Inc. Delaware
DAG Group Inc. Delaware
DAG Lending Corp. Delaware
DAG Realty Brokerage Inc. New York
DG Realty Corp. Delaware
DL Mortgage Corporation Delaware
DRA Management, Inc. New York
Dimont Corporation Delaware
Diogenes Holdings Inc. Delaware
Diogenes Management Company Inc. Delaware
Dixon Mill Properties Inc. Delaware
E.H.P. Depositary Corp. Delaware
EHP/GP Inc. Delaware
Eastern Avenue Inc. Delaware
Economic Advisors, Inc. Massachusetts
Edibrook Corp. California
Electric Broking Services Limited United Kingdom
Energy Services I Inc. Delaware
Energy Services II Inc. Delaware
Energy Services III Inc. Delaware
<PAGE>
2/22/95 Page 3
Lehman Brothers Holding Inc. & Subsidiaries
Subsidiary Name Incorporation
- -------------------------------------------------------------------------------
Equipment Management Inc. Delaware
Ethanol Sevices Inc. Delaware
F & J Fruit Orchard Limited Delaware
FIMI I Liquidation Inc. Delaware
FIMI II Liquidation Inc. Delaware
FRAH Special Services Inc. Delaware
Fiduciaria Lehman Brothers SpA Italy
Finanziaria Lehman Brothers S.R.L. Italy
First Dallas Associates Inc. Delaware
First Ward Properties, Inc. Delaware
Forest Management Corp. Delaware
Fort Bend Inc. Delaware
Freedom GP Inc. Delaware
GA Dekalb Inc. Delaware
GA Wildwood I Inc. Georgia
GP Real Estate Services II Inc. Delaware
Government Assisted Properties, Inc. Delaware
Grand Pacific Securities Investment Trust Co., Ltd. Taipei
Grass Valley/Marguerite, Inc. California
Growth Partners Inc. Delaware
HEI Corporation Delaware
HRH 1, Inc. Delaware
HRH Depositary Corporation Delaware
Heritage Park II Inc. Delaware
Heritage Park Inc. Delaware
HillCreste Properties Inc. Delaware
Historic Properties Inc. Delaware
Hollywood Partners Inc. Delaware
Hollywood SFA Inc. Delaware
Housing Programs Corporation II Delaware
Housing Services, Inc. Delaware
IL Lombard Inc. Delaware
Indian Oaks Inc. Delaware
Industrial Holdings Corporation New York
Insured Mortgage Equities Inc. Delaware
Intermodal Equipment Leasing Corporation Delaware
Investment Properties II Inc. Delaware
J & F Apple Corporation Delaware
Jackson Capitol Inc. Delaware
Jet Aircraft Leasing Inc. Delaware
KCP Corp. Delaware
KM-I Real Estate Company VII Delaware
Kandel Kansas, Inc. Kansas
Kandel Properties I Inc. Delaware
Kulo Corp. Connecticut
LB Energy Inc. Delaware
LB Fair Lake Corporation Florida
LB Funding Corp. II Delaware
LB I Group Inc. Delaware
LB International Limited United Kingdom
LB Investment Services Inc. Delaware
LB Leasing Inc. Delaware
LB Offshore Vessels Inc. Delaware
<PAGE>
2/22/95 Page 4
Lehman Brothers Holding Inc. Subsidiaries
Subsidiary Name Incorporation
- --------------------------------------------------------------------------------
LB Orlando Properties IV, Inc. Delaware
LB Real Properties Corp. Delaware
LB Research Inc. Delaware
LB/EJV Inc. Delaware
LB/FW Inc. Delaware
LE/MB Inc. Delaware
LE/MMG Inc. Delaware
LBKL Properties Inc. Delaware
LM Kansas Partners Inc. Delaware
LW-GP2A, Inc. Delaware
LW-GP2B, Inc. Delaware
LW-GP2C, Inc. Delaware
LW-GP2D, Inc. Delaware
LW-LP, Inc. Delaware
LW-RTC, Inc. Delaware
LW-SSP2A, Inc. Delaware
LW-SSP2B, Inc. Delaware
LW-SSP2C, Inc. Delaware
LW-SSP2D, Inc. Delaware
LW-SSP2E, Inc. Delaware
LW-SSP3, Inc. Delaware
LW-SSP4, Inc. Delaware
LW-SSP5, Inc. Delaware
LW-SSP6, Inc. Delaware
LW-SSP7, Inc. Delaware
LW-SSP8, Inc. Delaware
LW-SSP8, L.P. U.S. Virgin Is
La Jolla GP Inc. Delaware
Lakes Bay Corporation Massachusetts
Laurel Centre Depositary Corp. Delaware
Laurel Centre Inc. Delaware
Lebwab, Inc. Delaware
Lehman ABS Corporation Delaware
Lehman Asset Backed Caps Inc. Delaware
Lehman Brothers (Israel) Inc. Delaware
Lehman Brothers (Luxembourg) S.A. Luxembourg
Lehman Brothers (Spain) S.A. Madrid, Spain
Lehman Brothers (Taiwan) Ltd. Taiwan
Lehman Brothers (Thailand) Limited Thailand
Lehman Brothers Argentina S.A. Argentina
Lehman Brothers Asia Holdings Limited Hong Kong
Lehman Brothers Asia Limited Hong Kong
Lehman Brothers Asset Management Asia, Inc. Delaware
Lehman Brothers Asset Trading Inc. Delaware
Lehman Brothers Bank (Switzerland) Switzerland
Lehman Brothers Bankhaus Aktiengesellschaft (A.G.) Germany
Lehman Brothers Canada Inc. Canada
Lehman Brothers Capital Co. (H.K.) Limited Hong Kong
Lehman Brothers Capital GmbH Germany
Lehman Brothers Commercial Corporation Delaware
Lehman Brothers Commercial Corporation Asia Limited Hong Kong
Lehman Brothers Commodities (Japan) Ltd. Japan
Lehman Brothers Commodities Ltd. United Kingdom
<PAGE>
2/22/95 Page 5
Lehman Brothers Holding Inc. & Subsidiaries
Subsidiary Name Incorporation
- --------------------------------------------------------------------------------
Lehman Brothers Conseil S.A. France
Lehman Brothers De Venezuela C.A. Venezuela
Lehman Brothers EBS Limited United Kingdom
Lehman Brothers Europe Inc. Delaware
Lehman Brothers Fiduciaria Di Amministrazione S.R.L. Italy
Lehman Brothers Finance (Japan) Inc. Delaware
Lehman Brothers Finance Limited Hong Kong
Lehman Brothers Finance S.A. Switzerland
Lehman Brothers Financial Products Inc. Delaware
Lehman Brothers Futures Asia Limited Hong Kong
Lehman Brothers Futures Asset Management Corp. Delaware
Lehman Brothers Gilts Ltd. United Kingdom
Lehman Brothers Global Asset Management Inc Delaware
Lehman Brothers Global Asset Management K.K. Japan
Lehman Brothers Global Asset Management Limited United Kingdom
Lehman Brothers Global Finance Limited England
Lehman Brothers GmbH Germany
Lehman Brothers Holdings Inc. Delaware
Lehman Brothers Holdings International Inc. New York
Lehman Brothers Holdinqs Plc United Kingdom
Lehman Brothers Inc. Delaware
Lehman Brothers International (Europe) United Kingdom
Lehman Brothers International Investments Inc. Delaware
Lehman Brothers International S.A. Spain
Lehman Brothers International S.P.A. Italy
Lehman Brothers International Services, Inc Delaware
Lehman Brothers Investment Holding Company Inc. Delaware
Lehman Brothers Investment Management (Jersey) Limited Isle of Jersey
Lehman Brothers Investments Pte Limited Singapore
Lehman Brothers Japan Inc. Delaware
Lehman Brothers LBO Inc. Delaware
Lehman Brothers Limited United Kingdom
Lehman Brothers Merchant Banking Advisors Inc. Delaware
Lehman Brothers Middle East Inc. Delaware
Lehman Brothers Money Brokers Ltd. United Kingdom
Lehman Brothers N.V. Curacao, N.A.
Lehman Brothers Nominees (H.K.) Limited Hong Kong
Lehman Brothers Nominees Limited United Kingdom
Lehman Brothers Offshore Partners Ltd. Bermuda
Lehman Brothers Overseas Inc. Delaware
Lehman Brothers Pera Cable Inc. Delaware
Lehman Brothers Pera Inc. Delaware
Lehman Brothers Power Inc. Delaware
Lehman Brothers Pte Ltd. Singapore
Lehman Brothers Puerto Rico Inc. Puerto Rico
Lehman Brothers Rangers Inc. Delaware
Lehman Brothers Realty Corp. Delaware
Lehman Brothers Realty Investment Corporation Delaware
Lehman Brothers S.A. France
Lehman Brothers S.P.A. Societa' Di Intermediazione Mobiliare Italy
Lehman Brothers Securities United Kingdom
Lehman Brothers Securities Agencia de Valores Spain
Lehman Brothers Securities Asia Limited Hong Kong
<PAGE>
2/22/95 Page 6
Lehman Brothers Holding Inc. & Subsidiaries
Subsidiary Name Incorporation
- ------------------------------------------------------------------------------
Lehman Brothers Securities SpA - Societa' Di
Intermediazone Mobiliare Italy
Lehman Brothers Services SNC France
Lehman Brothers South Asia Limited Hong Kong
Lehman Brothers Special Financing Inc. Delaware
Lehman Brothers Sudamerica S.A. Argentina
Lehman Brothers Systems Zero, Inc. Delaware
Lehman Brothers U.K. Holdings (Delaware) Inc. Delaware
Lehman Brothers UK Holdings Ltd. Delaware & U.K
Lehman Brothers Uruguay S.A. Uruguay
Lehman Brothers Verwaltungs-und Beteiligungsgesellschaft mbH Germany
Lehman Brothers de Chile, S.A. Chile
Lehman Brothers/FW Inc. Delaware
Lehman Brothers/GP Inc. Delaware
Lehman Brothers/MBGP Inc. Delaware
Lehman Brothers/MBLP Inc. Delaware
Lehman Brothers/Rosecliff Inc. Delaware
Lehman CMO Inc. Maryland
Lehman Commercial Paper Inc. New York
Lehman Electric Inc. Delaware
Lehman Energy Inc. Delaware
Lehman Enterprises Inc. Delaware
Lehman Global Financial Services Co. Ltd. Taiwan
Lehman Government Securities Inc. New York
Lehman Housing Capital Inc. Delaware
Lehman Insurance Company Arizona
Lehman Investments Inc. Delaware
Lehman Lending Corp. Delaware
Lehman Ltd. I Inc. Delaware
Lehman Pass-Through Securities Inc. Delaware
Lehman Phase II Inc. New York
Lehman Q. C. Garage Inc. Delaware
Lehman Queens Center Inc. Delaware
Lehman Queens Limited Inc. Delaware
Lehman Realty & Development Corp. New York
Lehman Risk Management, Inc. Delaware
Lehman Structured Assets Inc. Delaware
Lehman VIP Holdings Inc. Delaware
Lehman VIP Investment LDC Cayman Islands
Lehman/SDI Inc. Delaware
Liberty Corner Inc. Delaware
Liberty GP II Inc. Delaware
Liberty GP III Inc. Delaware
Liberty GP Inc. Delaware
Lombard Realty Corporation Delaware
Low Income Housing Inc. Delaware
Lowell Investors Inc. Delaware
Lowell Real Estate Corp. Delaware
MTGCO Inc. Delaware
Malibu Canyon Inc. Delaware
Manhattan Beach Commercial Properties III Depositary Inc. Delaware
Manhattan Beach Commercial Properties III Inc. Delaware
Manor Building Corp. Massachusetts
Manufactured Housing Communities I Inc. Delaware
<PAGE>
2/22/95 Page 7
Lehman Brothers Holding Inc. & Subsidiaries
Subsidiary Name Incorporation
- -------------------------------------------------------------------------------
Manufactured Housing Communities II Inc. Delaware
Manufactured Housing Communities III Inc. Delaware
Manufactured Housing Services Inc. Delaware
Medical Office Properties Depositary Inc. Delaware
Medical Office Properties Inc. Delaware
Messel Nominees Limited United Kingdom
Metro Realty Corporation Delaware
Middlesex Corporation New Jersey
Midwest Centers Depositary Inc. Delaware
Midwest Centers Inc. Delaware
Morris Avenue Corporation Massachusetts
Mountainview Hotels I Inc. Delaware
Mukilteo GP Inc. Washington
N.P. Holdco, Inc. Delaware
N.P. Investment I Co. Delaware
N.P. Investment II Co. Delaware
NGP Inc. Delaware
NJ Atlantic Inc. Delaware
NJ Somerset Inc. Delaware
NL GP Inc. Delaware
NPC Inc. Delaware
NY Real Estate Services 1 Inc. Delaware
NY Real Estate Services 2 Inc. Delaware
Newark Properties One Inc. Delaware
Normandy Management, Inc. Massachusetts
Normandy-Sherbrooke, Inc. Connecticut
Northstar Equipment Leasing Income Inc. Delaware
Novacorp Realty/GP Inc. Canada
O.M.B. Limited Partner Ltd. Bermuda
One Commerce Inc. Delaware
PAC Aircraft Management Inc. New York
PAMI Nominee Corporation Delaware
PDF86 Depositary Corp. Delaware
PDF86 Real Estate Services Inc. Delaware
PREP 2 Preferred Properties Inc. Delaware
Pacific Village Inc. Delaware
Painted Post Hotel Corporation New York
Panagora Asset Management Limited United Kingdom
Panagora Asset Management, Inc. Delaware
Participating Properties Inc. Delaware
Phoenix Lease Properties II Inc. Delaware
Phoenix Lease Properties Inc. Delaware
Platform Home Loans Ltd. England
Platform Home Mortgage Securities No. 1 Plc England
Platform Home Mortgage Securities No. 10 Limited England
Platform Home Mortgage Securities No. 2 Plc England
Platform Home Mortgage Securities No. 3 Limited England
Platform Home Mortgage Securities No. 4 Limited England
Platform Home Mortgage Securities No. 5 Limited England
Platform Home Mortgage Securities No. 6 Limited England
Platform Home Mortgage Securities No. 7 Limited England
Platform Home Mortgage Securities No. 8 Limited England
Platform Home Mortgage Securities No. 9 Limited England
<PAGE>
2/22/95 Page 8
Lehman Brothers Holding Inc. & Subsidiaries
Subsidiary Name Incorporation
- -------------------------------------------------------------------------------
Platform Mortgage Limited United Kingdom
Playa Blanca Inc. Delaware
Prime Depositary Corp. Delaware
Principal Growth Depositary Corp. Delaware
Principal Growth Mortgage Investors Depositary Corp. Delaware
Principal Growth Realty Funding, Inc. Delaware
Principal Growth Realty Management Inc. Delaware
Project North Corporation Delaware
Prometheus GP Inc. Delaware
Prometheus II Inc. Delaware
Property Asset Management Inc. Delaware
QP80 Real Estate Services Inc Delaware
Queens Center Funding Corporation Delaware
RAIA Depositary Corp. Delaware
RI 2 Real Estate Services Inc. Delaware
RI 3-4 Real Estate Services, Inc. Delaware
RI 5 Real Estate Services, Inc. Delaware
RI 81 Real Estate Services Inc. Delaware
RJS Leasing Inc. Delaware
RN Properties Corp. Delaware
RPI Real Estate Services, Inc. Delaware
Raintree Corporation Massachusetts
Raintree GP Inc. Delaware
Real Estate Equity Partners Inc. Delaware
Real Estate Investors Inc. Delaware
Real Estate Services I Inc. Delaware
Real Estate Services VII Inc. Delaware
Real Estate Services XIII Inc. Delaware
Regional Malls Depositary Corp. Delaware
Regional Malls Inc. Delaware
Renaissance Tower Associates Inc. Connecticut
Research Partners Inc. Washington
Rock Hill Investors, Inc. Delaware
Rock Hill Real Estate, Inc. Delaware
SEI II Equipment Inc. Delaware
SFWY Corporation Delaware
SM4 Real Estate Investors, Inc. Texas
SM7 Apartment Investors Inc. Texas
Sacam Corp. Delaware
Sambar Properties Inc. Delaware
Sanmars Acquisition Corp. Delaware
Scranzay, Inc. Delaware
Selective Funding Inc. Delaware
Semiahmoo Marina Corporation Washington
Senior Income Depositary, Inc. Delaware
Senior Income Fund Inc. Delaware
Sharpstown Center Inc. New York
Shearson/KM, Inc. Ohio
South Cobb Land Inc. Georgia
Southern Timber Resources Corp. Delaware
Spear Tower Inc. Delaware
Special Media Inc. Delaware
Stamford Investment Realty Inc. Delaware
<PAGE>
2/22/95 Page 9
Lehman Brothers Holding Inc. & Subsidiaries
Subsidiary Name Incorporation
- --------------------------------------------------------------------------------
Stamford Real Estate Corporation Delaware
Stamford Towers Depositary Corp. Delaware
Stamford Towers Inc. Delaware
Storage Inc. Delaware
Storage Services Inc. Delaware
Structured Asset Securities Corporation Delaware
Subsidized Housing Services II Inc. Delaware
Subsidized Housing Services Inc. Delaware
Sun Distributors, Inc. Pennsylvania
TE 2 Enterprises Inc. Delaware
TX Tower Inc. Delaware
Technology Services 1, Inc. Delaware
Texas Self Storage Inc. Texas
The Titled Corporation Massachusetts
Third-Sixth Mont Corporation Delaware
Thomasville Contintental Inc. Florida
Timber Resources Corp. II Delaware
Toms River Corporation New Jersey
Tower Investors, Inc. Delaware
Tower Real Estate Corporation Delaware
Trans Orbital Sciences Inc. Delaware
Ult Development Inc. Delaware
Union Square Depositary Corp. Delaware
Union Square/GP Corp. Delaware
Venture Investment Partners Inc. Delaware
Viewmount Inc. Delaware
Walnut Grove GP Corp. Delaware
Warner Center Inc. Delaware
Warner Center/MGP Inc. Delaware
Warren Atlantic Inc. Delaware
Wellington-Medford III Properties, Inc. Massachusetts
Wes Sun Corporation Delaware
West Property Holding Corporation Delaware
Working Interest Inc. Delaware
Xebec Technology Inc. Delaware
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this 1994 Transition Report
on Form 10-K of Lehman Brothers Holdings Inc. of our report dated January 5,
1995, included in the 1994 Annual Report to Stockholders of Lehman Brothers
Holdings Inc.
Our audits also included the consolidated financial statement schedules of
Lehman Brothers Holdings Inc. listed in item 14(a). These schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, the consolidated financial
statement schedules referred to above, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements and Post Effective Amendments on Form S-3 File Nos. 33-56615, 33-
65674, 33-58548, 33-49062, 33-46146, 33-40990 and 33-3663 of Lehman Brothers
Holdings Inc. and in the related Prospectuses, of our report dated January 5,
1995 with respect to the consolidated financial statements and consolidated
financial statement schedules of Lehman Brothers Holdings Inc. included or
incorporated by reference in this 1994 Transition Report on Form 10-K for the
eleven month period ended November 30, 1994.
Ernst & Young LLP
New York, New York
February 28, 1995
<PAGE>
EXHIBIT 24
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thomas A. Russo, Michael R. Milversted and Karen
M. Muller and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign the Transition Report on
Form 10-K of Lehman Brothers Holdings Inc., for the fiscal year ended November
30, 1994 and any and all amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, or their substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: As of February 28, 1995
/s/ Richard S. Fuld, Jr. /s/ Katsumi Funaki
,____________________________________ _____________________________________
RICHARD S. FULD, JR. KATSUMI FUNAKI
/s/ T. Christopher Pettit /s/ John D. Macomber
_____________________________________ _____________________________________
T. CHRISTOPHER PETTIT JOHN D. MACOMBER
/s/ Robert Matza /s/ Masataka Shimasaki
_____________________________________ _____________________________________
ROBERT MATZA MASATAKA SHIMASAKI
/s/ Stephen J. Bier /s/ Dina Merrill
_____________________________________ _____________________________________
STEPHEN J. BIER DINA MERRILL
/s/ Roger S. Berlind /s/ Malcolm Wilson
_____________________________________ _____________________________________
ROGER S. BERLIND MALCOLM WILSON
/s/ John J. Byrne
_____________________________________
JOHN J. BYRNE
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Financial Condition at November 30, 1994 and the
Consolidated Statement of Operations for the eleven months ended November 30,
1994 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 11-MOS
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> NOV-30-1994
<CASH> 2,384
<RECEIVABLES> 10,490
<SECURITIES-RESALE> 37,490
<SECURITIES-BORROWED> 10,617
<INSTRUMENTS-OWNED> 47,473
<PP&E> 619
<TOTAL-ASSETS> 109,947
<SHORT-TERM> 9,807
<PAYABLES> 5,657
<REPOS-SOLD> 58,419
<SECURITIES-LOANED> 1,627
<INSTRUMENTS-SOLD> 17,030
<LONG-TERM> 11,321
<COMMON> 0
708
11
<OTHER-SE> 2,676
<TOTAL-LIABILITY-AND-EQUITY> 109,947
<TRADING-REVENUE> 1,345
<INTEREST-DIVIDENDS> 6,761
<COMMISSIONS> 445
<INVESTMENT-BANKING-REVENUES> 572
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 6,452
<COMPENSATION> 1,413
<INCOME-PRETAX> 193
<INCOME-PRE-EXTRAORDINARY> 126
<EXTRAORDINARY> 0
<CHANGES> (13)
<NET-INCOME> 113
<EPS-PRIMARY> 0.69
<EPS-DILUTED> 0.69
</TABLE>
<PAGE>
Exhibit 99
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ELEVEN MONTHS ENDED NOVEMBER 30, 1994
---------------------------------------------
PRO FORMA
--------------------------------
ACTUAL ADJUSTMENTS TOTAL
------------ ---------------- ------------
<S> <C> <C> <C>
Revenues
Principal transactions.... $ 1,345 $ $ 1,345
Investment banking........ 572 572
Commissions............... 445 445
Interest and dividends.... 6,761 6,761
Other..................... 67 67
------------ ------------ ------------
Total revenues.......... 9,190 9,190
Interest expense.......... 6,452 (18)(a) 6,434
------------ ------------ ------------
Net revenues............ 2,738 18 2,756
------------ ------------ ------------
Non-interest expenses
Compensation and benefits. 1,413 1,413
Brokerage, commissions and
clearance fees........... 243 243
Communications............ 184 184
Professional services..... 166 166
Occupancy and equipment... 160 160
Business development...... 116 116
Depreciation and amortiza-
tion..................... 116 116
Other..................... 99 99
Severance charge.......... 33 33
Spin-off expenses......... 15 (15)(b)
------------ ------------ ------------
Total non-interest ex-
penses................. 2,545 (15) 2,530
------------ ------------ ------------
Income before taxes and
cumulative effect of change
in accounting principle.... 193 33 226
Provision for income tax-
es....................... 67 10 (c) 77
------------ ------------ ------------
Income before cumulative ef-
fect of change in account-
ing principle.............. 126 23 149
------------ ------------ ------------
Preferred stock dividends... 38 2 (d) 40
------------ ------------ ------------
Income before cumulative
effect of change in
accounting principle
applicable to common stock. $ 88 $ 21 $ 109
============ ============ ============
Number of shares used in
earnings per common share
computation (e)............ 111.7
============
Pro forma earnings per com-
mon share.................. $ 0.98
============
</TABLE>
See notes to pro forma consolidated financial statements.
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
1. Basis of Reporting
The pro forma financial data has been prepared by the Company based on
certain adjustments to the consolidated financial statements of the Company.
The pro forma statement of operations reflects adjustments for the Concurrent
Transactions and the awarding of RSU's under the 1994 Plan (the "Stock Award
Program") as if such transactions had occurred on the first day of the period
reported on.
The pro forma financial data does not purport to present the results of
operations of the Company had the Concurrent and Stock Award Program
Transactions actually occurred as of such dates, nor is it necessarily
indicative of results of operations that may be achieved in the future.
To broaden and increase the level of employee ownership in Holdings, the
Compensation Committee approved the Stock Award Program pursuant to which it
awarded, subject to vesting provisions and transfer restrictions, 5.2 million
RSUs to employees and determined to award RSUs to certain officers of Lehman
Brothers based on performance goals during the period June 1, 1994 through
December 31, 1994. Approximately one million RSUs for certain officers were
added to Common Stock issuable at November 30, 1994. The RSUs will comprise
part of the bonuses awarded for 1994. Stockholders' equity increased by
approximately $87 million with an offsetting decrease in Accrued liabilities
and other payables with respect to the award of the RSUs. Holdings will meet
the share requirements for the Stock Award Program and other Common Stock based
compensation and benefit plans by repurchasing shares in the open market or
issuing additional Common Stock or a combination of both.
PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS:
The pro forma adjustments to the statement of operations give effect to the
items described below:
(a) Reduced interest expense of approximately $18 million in 1994,
resulting from the utilization of the cash proceeds to the Company from
the Equity Investment.
(b) The elimination of the charges which resulted from the Concurrent
Transactions and certain related expenses.
(c) Adjustment (a) above, tax effected at an assumed rate of 40% plus the
actual tax expense on (b) above.
(d) The addition of the dividend on the Cumulative Preferred Stock
partially offset by the elimination of the dividend on the Money Market
Cumulative Preferred Stock. Holders of the Redeemable Preferred Stock
will be entitled to receive, in the aggregate, an annual dividend equal
to 50% of the Company's net income in excess of $400 million per year,
with a maximum dividend of $50 million per year, for each of the next
eight years commencing on or about the distribution Date. On a pro forma
basis, no such dividends would have been payable in 1994.
(e) The number of shares used in the earnings per common share computation
includes the weighted average common stock outstanding for the eleven
months ended November 30, 1994, of 105,436,860, 73,056 RSUs awarded as of
the Distribution, and the RSUs (approximately 6.2 million) awarded during
1994. All RSUs awarded during 1994 are assumed outstanding from January
1, 1994 for the pro forma statement of operations.
