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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1995
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [No Fee Required]
Commission File Number 1-9466
Lehman Brothers Holdings Inc.
(Exact Name of Registrant as Specified in its Charter)
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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)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 526-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.10 par value New York Stock Exchange
Pacific Stock Exchange
AMEX Hong Kong 30 Index Call Warrants Expiring January 23, 1998 American Stock Exchange
6 1/2% Amgen Yield Enhanced Equity Linked Debt Securities Due 1997 American Stock Exchange
FT-SE Eurotrack 200 Index Call Warrants Expiring June 4, 1996 American Stock Exchange
Global Telecommunications Stock Upside Note SecuritiesSM Due 2000 American Stock Exchange
Regional Bank Stock Upside Note Securities Due 1996 American Stock Exchange
Japanese Yen Bear Warrants Expiring March 5, 1996 American Stock Exchange
9 1/8% Micron Yield Enhanced Equity Linked Debt Securities Due 1997 American Stock Exchange
8 3/4% Notes Due 2002 New York Stock Exchange
8.30% Quarterly Income Capital Securities Series A, Due December 31, 2035 New York Stock Exchange
$55 Million Serial Zero Coupon Senior Notes Due May 16, 1998 American Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Sec.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Aggregate market value of the voting stock held by non-affiliates of the
Registrant at January 31, 1996 was approximately $2,663,944,404. 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, 1996, 104,524,039 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. 1995 Annual Report to
Stockholders--Incorporated in part in Form 10-K, Parts II and IV.
(2) Lehman Brothers Holdings Inc. Proxy Statement for its 1996 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.
LEHMAN BROTHERS
Lehman Brothers is one of the leading global investment banks serving
institutional, corporate, government and high-net-worth individual clients and
customers. The Company's worldwide headquarters in New York and regional
headquarters in London and Tokyo are complemented by offices in additional
locations in the United States, Europe, the Middle East, Latin and South America
and the Asia Pacific region. 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; 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.
The Company's business activities are highly integrated and constitute a
single industry segment. Financial information concerning the Company for the
fiscal year ended November 30, 1995, the eleven months ended November 30, 1994
and the fiscal year ended December 31, 1993, including the amount of revenue
contributed by classes of similar products or services that accounted for 10% or
more of the Company's consolidated revenues in any one of those periods, is set
forth in the Consolidated Financial Statements and the Notes thereto in the 1995
Annual Report to Stockholders and is incorporated herein by reference.
Information with respect to the Company's operations by geographic area are set
forth in Note 19 to the Notes to Consolidated Financial Statements on page 84 of
the 1995 Annual Report to Stockholders and is incorporated herein by reference.
Since 1990, Lehman Brothers has focused on a "client/customer-driven"
strategy. Under this strategy, Lehman Brothers concentrates on serving the needs
of major issuing and advisory clients and investing customers worldwide to build
an increasing "flow" of business that leverages the Company's research,
underwriting and distribution capabilities. Customer flow continues to be the
primary source of the Company's net revenues. Developing 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
institutional and private client sales professionals focus on a targeted group
of clients and customers worldwide to identify and develop
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lead relationships. The Company believes that such relationships position Lehman
Brothers to receive a substantial portion of its clients' and customers'
financial business and lessen the volatility of revenues generally associated
with the financial services industry.
LEHMAN BUSINESSES
INVESTMENT BANKING
Lehman Brothers is a leading underwriter of global equity and fixed income
securities in the public and private markets. The Company is also a prominent
advisor for corporations and governments around the world.
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, product and geographic coverage groups, enabling
individual bankers to develop specific expertise in particular industries and
markets. Industry coverage groups include Consumer Products, Financial Services,
Financial Sponsors, Health Care, Industrials, Merchandising, Natural Resources,
Real Estate and Mortgage Finance, Technology, Media and Telecommunications,
Transportation and Utilities. Where appropriate, specialized product groups such
as Equity Capital Markets, Debt Capital Markets, Mergers and Acquisitions,
Private Placements, Leveraged Finance, Derivatives, Liability Management 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 Mergers and Acquisitions group works
closely with product, industry and geographic coverage bankers around the world.
Geographically, Lehman Brothers maintains investment banking offices in seven
cities within the U.S. and in sixteen cities in Europe, the Middle East, Asia
and Latin America. In 1995, the Company opened new offices in Sao Paolo and New
Delhi to broaden the geographic scope of its operations.
Merchant Banking. Through its Merchant Banking group, the Company makes
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.
Since 1989, the Company's principal method of making merchant banking
investments has been through a series of partnerships (the "1989 Partnerships"),
for which the Company acts as general partner, and in some cases as a limited
partner. During the remaining life of the 1989 Partnerships, the Company's
merchant banking activities, with respect to investments made by the 1989
Partnerships, will be directed toward selling or otherwise monetizing such
investments. The Company continues to pursue merchant banking opportunities that
target certain industries and geographical areas in both the U.S. and non-U.S.
markets. For example, during 1995 the Company established a $75 million fund
specifically designed to invest in the oil tanker industry.
FIXED INCOME
Lehman Brothers actively participates in all key fixed income markets
worldwide and maintains a 24-hour trading presence in global fixed income
securities. The Company combines professionals from the sales, trading,
financing, derivatives and research areas of Fixed Income, together with
investment bankers, into teams to serve the financial needs of the Company's
clients and customers. The Company
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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; dollar and
non-dollar 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 financing unit 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 leaders
among the 37 primary dealers in U.S. government securities, as designated by the
Federal Reserve Bank of New York, participating in the underwriting and
market-making of U.S. Treasury bills, notes and bonds, and securities of federal
agencies. 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. The Company has significantly increased its activities in France as a
reporting dealer and in Italy as a super-primary dealer. The Company has also
expanded its activities in the Canadian market with the opening of its Toronto
office in 1995.
Money Market Products. Lehman Brothers holds dominant market positions in
the origination and distribution of medium-term notes and commercial paper. The
Company has received global
medium-term note mandates for 1,125 programs with a borrowing capacity of $1.6
trillion. The Company is an appointed dealer for approximately 750 commercial
paper programs on behalf of companies and government agencies worldwide. The
Company is also a major participant in the preferred stock market.
Corporate Debt Securities. Lehman Brothers engages in the underwriting and
market making of fixed and floating rate investment grade debt worldwide.
High Yield Securities and Bank Loans. The Company also underwrites and makes
markets in non-investment grade debt securities and bank loans. In 1995, the
Company expanded its high yield, debt business from both a strategic and an
operational perspective. The Company now provides a "one-stop" leveraged finance
solution for corporate and financial acquirers and high yield issuers.
Mortgage and Asset-Backed Securities. The Company is a leading underwriter
of and market maker in mortgage and asset-backed securities. Lehman Brothers
underwrites and makes markets in the full range of U.S. agency-backed mortgage
products, mortgage-backed securities, asset-backed securities and whole loan
products. Internationally, the firm has expanded its capabilities in mortgage-
and asset-backed securities, leases, mortgages, multi-family financing and
commercial loans.
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. The Company maintains investment banking
offices in Mexico City and Buenos Aires and has opened offices in Brazil and
India over the course of 1995.
Municipal and Tax-Exempt Securities. Lehman Brothers is a major dealer in
municipal and tax-exempt securities, including general obligation and revenue
bonds, notes issued by states, counties, cities, and state and local
governmental agencies, municipal leases, tax-exempt commercial paper and put
bonds. Lehman Brothers is also a leader in the structuring, underwriting and
sale of tax-exempt and taxable securities and derivative products for city,
state, not-for-profit and other public sector clients.
Derivative Products. The Company offers a broad range of derivative product
services in more than 20 currencies on a 24-hour basis. Derivatives
professionals are integrated into all of the Company's
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major fixed income product areas to develop optimal issuance structures and
investment products for the Company's clients.
Lehman Brothers Financial Products Inc. ("LBFP"), the Company's triple-A
rated derivatives subsidiary, commenced trading with counterparties in July
1994. It exceeded expectations in 1995 in terms of notional volumes and number
of counterparties. This entity also received rating agency approval to double
the amount of products eligible for inclusion in the subsidiary.
Financing. The Company's Financing unit engages in three primary functions:
managing the Company's matched book activities, supplying secured financing to
customers, and providing funding for the Company's inventory positions. Matched
book funding involves lending cash on a short-term basis to institutional
customers collateralized by marketable securities, typically government or
government agency securities. The Company enters into these agreements in
various currencies and seeks to generate profits from the difference between
interest earned and interest paid. The Financing unit works with the Company's
institutional sales force to identify customers that have cash to invest and/or
securities to pledge to meet the financing and investment objectives of the
Company and its customers. Financing also coordinates with the Company's
treasury area to provide collateralized financing for a large portion of the
Company's securities and other financial instruments owned. In addition to its
activities on behalf of its U.S. clients and customers, the Company is a major
participant in the European repurchase agreement market, transacting daily
volume in nine major currencies. In Asia, the Financing unit is active in
providing secured financing for the Company's customers in the region. The
European and Asian repurchase agreement markets have witnessed dramatic growth,
and the Company has worked with various central banks to encourage the further
development of these markets.
Fixed Income Research. Fixed Income research at Lehman Brothers encompasses
the full range of research disciplines: quantitative, economic, strategic,
credit, portfolio and market-specific analysis. Fixed Income research is
integrated with and supports the Company's investment banking, sales and trading
activities. An important objective of Fixed Income research is to have in place
high quality research analysts covering industry, geographic and economic
sectors that support the activities of the Company's clients and customers. The
department's 200 specialists are based in New York, Toronto, London, Tokyo and
Hong Kong. Their expertise includes U.S., European and Asian government and
agency securities, derivatives, sovereign issues, corporate securities, high
yield, asset- and mortgage-backed securities, commercial real estate, emerging
market debt and municipal securities.
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, Singapore, and Tokyo 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 through its market-making activities in metals and energy derivatives
products, as well as the Company's activities in exchange futures execution for
its institutional and private clients. The Company provides its clients with
global market-making and execution through its commodities and futures
operations in New York, London, Frankfurt, Singapore, Hong Kong and Tokyo.
Lehman Brothers is particularly active as a market-maker in energy-related
products, including natural gas, crude oil, refined products and electricity.
The Company's electricity trading activities have been expanded through Citizens
Lehman Power L.P., a joint venture established with Citizens Corporation.
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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 Company's equity expertise and the integrated nature of the
Company's global operations 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 Depositary 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 domestic and
international program trading, listed options and futures, structured
derivatives and convertible products.
Equity Research. The Equity 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 Equity Research
department is comprised of 250 professionals covering 26 industry sectors and
over 1,100 companies worldwide from locations in New York, London, Hong Kong and
Tokyo.
Equity Finance. Lehman Brothers operates a comprehensive Equity Financing
and Prime Broker business to provide liquidity to 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
Financing group. The Prime Broker business engages in full operations, clearing
and processing services for that unit's customers.
ASSET MANAGEMENT
The Company's asset management activities provide investment management
services to institutional investors, individuals and small to mid-sized
institutions. At November 30, 1995, the division had over $10 billion in assets
under management. The Company plans to focus on sponsoring and distributing
sophisticated strategic funds attractive to high-net-worth individuals and
institutions. The Asset Management division also has developed individually
customized investment services through the Company's Private Client Services
group.
INSTITUTIONAL SALES
Institutional Sales serves the investing and liquidity needs of major
institutional investors worldwide and provides the distribution mechanism for
new issues and secondary market securities. Lehman Brothers maintains a network
of over 500 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
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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.
PRIVATE CLIENT SERVICES
The Company's Private Client Services Group serves the investment needs of
private investors with substantial assets as well as small and mid-sized
institutions. The group has a global presence with investment representatives
located in seven offices in North America and additional offices in major
financial centers in South America, Europe, the Middle East and Asia. The
Company's investment representatives provide investing customers with direct
access to Lehman Brothers' equity and fixed income product and research,
including capabilities in new issue and secondary product, foreign exchange and
derivatives. The Private Client Services group also enables the Company's
issuing clients to access a diverse, high-net-worth investor base throughout the
world. The group employs portfolio strategists within their organization to
optimize asset allocation requirements and to manage the specific asset classes
of their private clients.
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., mortgages, derivatives and foreign exchange).
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TRADING SERVICES AND CORPORATE
The Company's Trading Services and Corporate divisions provide support to
its businesses through the processing of certain securities and commodities
transactions; receipt, identification and delivery of funds and securities;
safeguarding of customers' securities; and compliance with regulatory and legal
requirements. In addition, this staff is responsible for technology
infrastructure and systems development, treasury operations, financial control
and analysis, tax planning and compliance, internal audit, expense management,
career development and recruiting and other support functions.
In 1995, the Company made broad enhancements to its technology environment,
including the implementation of improved funding, credit, market risk and sales
support systems. The Company also made significant investments in its employees
through management training and career development initiatives and an expanded
recruitment program for analysts and associates.
On October 12, 1994, the Company and Bear Stearns Securities Corp. ("BSSC")
entered into an agreement pursuant to which BSSC agreed to process the
transactions previously cleared by Smith Barney (the "BSSC Agreement"). As a
result, the Company is now self-clearing, and the accounts previously carried by
Smith Barney are carried on the Company's books. The BSSC Agreement took effect
on February 17, 1995 and will run for a term of five years.
ONGOING COST REDUCTION EFFORT
The Company continued its cost reduction efforts announced at year-end 1994.
Throughout 1995, the Company achieved its cost reduction goals in personnel
costs, non-personnel costs and interest and tax expense. With respect to
personnel costs, the Company's total number of employees was reduced from
approximately 8,500 at fiscal year-end 1994 to approximately 7,800 at fiscal
year-end 1995. Non-personnel cost reductions were achieved as a result of a
systematic and comprehensive global review of all major expense categories.
Through the fourth quarter of 1995, the Company reduced total expenses by
approximately $326 million on an annualized basis compared to the third quarter
of 1994.
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 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.
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In its its trading, market-making and underwriting activities, Lehman
Brothers is subject to risks relating to fluctuations in market prices and
liquidity of specific securities, instruments and derivative products, as well
as volatility in market conditions in general. The markets for these securities
and products are affected by many factors, including the financial performance
and prospects of specific companies and industries, domestic and international
economic conditions (including inflation, interest and currency exchange rates
and volatility), the availability of capital and credit, political events
(including proposed and enacted legislation) and the perceptions of participants
in these markets.
Lehman Brothers' exposure to credit risks in its trading activities arise
from the possibility that a counterparty to a transaction could fail to perform
under its contractual commitment, resulting in Lehman Brothers incurring losses
in liquidating or covering its position in the open market.
In connection with its investment banking and product origination
activities, Lehman Brothers is exposed to risks relating to the merits of
proposed transactions. These risks involve not only the market and credit risks
associated with underwriting securities and developing derivative products, but
also potential liabilities under applicable securities and other laws which may
result from Lehman Brothers' role in the transaction.
The Company aims to reduce risk through the diversification of its products,
counterparties and activities in geographic regions. The Company accomplishes
this objective 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 market conditions,
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., risk management, finance,
legal, front office senior management, credit) being included in the risk
monitoring process. The Company's risk management department independently
reviews the Company's trading portfolios on a daily basis from a market risk
perspective which includes value at risk and other quantitative and qualitative
risk measurements and analyses. The risk management department has full time
professionals dedicated to each of the trading and geographic areas. The
Company's trade analysis department performs independent verification of the
prices of trading positions, regularly monitors the aging of inventory, and
performs daily review and analysis 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.
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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.
NON-CORE ASSETS
Prior to 1990, the Company participated in a number of activities that are
not central to its current business as an institutional investment banking firm.
As a result of these activities, the Company carries on its balance sheet a
number of relatively illiquid assets (the "Non-Core Assets"), including a number
of individual real estate assets, limited partnership interests and a number of
smaller investments. Subsequent to their purchase, the values of certain of
these Non-Core Assets declined below the recorded values on the Company's
balance sheet, which necessitated the write-down of the carrying values of these
assets and corresponding charges to the Company's income statement. Certain of
these activities have resulted in various legal proceedings.
Since 1990, management has devoted substantial resources to reducing the
Company's Non-Core Assets. Between December 31, 1990 and November 30, 1995, the
Company's Non-Core Assets decreased from $2.3 billion in 1990 to approximately
$236 million in 1995. 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.
COMPETITION
All aspects of the Company's business are highly competitive. The Company
competes in domestic and international markets directly with numerous other
brokers and dealers in securities and commodities, investment banking firms,
investment advisors and certain commercial banks and, indirectly for investment
funds, with insurance companies and others.
The financial services industry has become considerably more concentrated as
numerous securities firms have either ceased operations or have been acquired by
or merged into other firms. In addition, several small and specialized
securities firms have been successful in raising significant amounts of capital
for their merger and acquisition activities and merchant banking investment
vehicles and for their own accounts. These developments have increased
competition from firms, many of whom have significantly greater equity capital
than the Company.
REGULATION
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. LBI and certain other subsidiaries
of Holdings are registered as broker-dealers and investment advisors with the
Commission and as such are subject to regulation by the Commission and by
self-regulatory organizations, principally the NASD and national securities
exchanges such as the NYSE, which has been designated by the Commission as LBI's
primary regulator, and the Municipal Securities Rulemaking Board. Securities
firms are also subject to regulation by state securities administrators in those
states in which they conduct business. LBI is a registered broker-dealer in all
50 states, the District of Columbia and the Commonwealth of Puerto Rico. The
Commission, self-regulatory organizations and state securities commissions may
conduct administrative proceedings, which may result in censure, fine, the
issuance of cease-and-desist orders or suspension or expulsion of a
broker-dealer or an investment advisor, its officers or employees.
LBI is registered with the CFTC as a futures commission merchant and is
subject to regulation as such by the CFTC and various domestic boards of trade
and other commodity exchanges. The Company's U.S. commodity futures and options
business is also regulated by the National Futures
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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 a registered broker-dealer, LBI is 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 to
maintain net capital of not less than the greater of 2% of aggregate debit items
arising from customer transactions, as defined, or 4% of funds required to be
segregated for customers' regulated commodities accounts, as defined.
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 11 of Notes to
Consolidated Financial Statements.
Lehman Brothers International (Europe) ("LBIE"), Lehman Brothers Japan Inc.
("LBJ") and other of Holdings' subsidiaries are subject to various securities,
commodities and banking regulations and capital adequacy requirements
promulgated by the regulatory and exchange authorities of the countries in which
they operate. At November 30, 1995, LBIE, LBJ and such other subsidiaries were
in compliance with the applicable local capital adequacy requirements.
EMPLOYEES
As of November 30, 1995 the Company employed approximately 7,800 persons,
including 5,600 in the U.S. and 2,200 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.
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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.
During 1995, the Company conducted a global review of its real estate
requirements, and took an occupancy-related real estate charge. See Note 20 to
Consolidated Financial Statements. The Company intends to sublet certain of
these leased premises.
Facilities owned or occupied by the Company and its subsidiaries are
believed to be adequate for the purposes for which they are currently used and
are well maintained.
ITEM 3--LEGAL PROCEEDINGS
The Company is involved in a number of judicial, regulatory and arbitration
proceedings concerning matters arising in connection with the conduct of its
business. Such proceedings include actions brought against the Company and
others with respect to transactions in which the Company acted as an underwriter
or financial advisor, actions arising out of the Company's activities as a
broker or dealer in securities and commodities and actions brought on behalf of
various classes of claimants against many securities and commodities firms of
which the Company is one.
Although there can be no assurance as to the ultimate outcome, the Company
has denied, or believes it has a meritorious defense and will deny, liability in
all significant cases pending against it including the matters described below,
and intends to defend vigorously each such case. Although there can be no
assurance as to the ultimate outcome, based on information currently available
and established reserves, the Company believes that the eventual outcome of the
actions against it, including the matters described below, will not, in the
aggregate, have a material adverse effect on the consolidated financial
condition of the Company.
Bamaodah v. E.F. Hutton & Company Inc.
In April 1986, Ahmed and Saleh Bamaodah commenced an action against E.F.
Hutton & Company Inc., ("EFH") to recover all losses the Bamaodahs had incurred
since May 1981 in the trading of commodity futures contracts in a
nondiscretionary EFH trading account. The Dubai Civil Court ruled that the
trading of commodity futures contracts constituted illegal gambling under
Islamic law and that therefore the brokerage contract was void. In January 1987,
a judgment was rendered against EFH in the amount of $48,656,000. On January 5,
1991, the Dubai Court of Appeals affirmed the judgment. On March 22, 1992, the
Court of Cassation, Dubai's highest court, revoked and quashed the decision of
the Court of Appeals and ordered that the case be remanded to the Court of
Appeals for a further review. On April 26, 1994, the Dubai Court of Appeals
again affirmed the judgment of the Dubai Civil Court. The Company appealed the
judgment to the Court of Cassation, which reversed the Court of Appeals on
November 27, 1994 and ordered that a new expert be appointed to review the case.
A new expert has been appointed, with instructions to report back to the Court
of Cassation.
Actions Relating To First Capital Holdings Inc.
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,
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William L. Mack and Jerome H. Miller (collectively, the "Outside Directors"),
and Michael Milken. The complaints alleged 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
sought damages for losses suffered by FCH, punitive damages and attorneys' fees.
On January 30, 1996, these two actions were dismissed.
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 raised claims under the federal securities laws and alleged that
the defendants concealed adverse material information regarding the finances,
financial condition and future prospects of FCH and made material misstatements
regarding these matters.
On 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 was brought purportedly on behalf of three classes. The first
class is similar to the Shareholder Class; the second consisted 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
raised 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 was 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
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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.
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 be part of the MDL action. The complaint alleged
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 alleged that the failure to act constituted a waste of
corporate assets and caused damage to American Express' reputation. The
complaint sought 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 parties to the American Express Shareholder
Action and the American Express Derivative Action have entered into a settlement
agreement, subject to approval by the Court.
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.
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. 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-
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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 the
motion of LBIE and PLC, the case was remanded back to the Court. Following the
remand, the parties entered into a stipulation pursuant to which all proceedings
have been stayed pending the outcome of the appeal in Macmillan v. Bishopsgate
Investment Trust et al., referred to below.
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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 disputed 10.6 million shares of
Berlitz common stock, including the 1.9 million shares then held by PLC. After a
trial, on December 10, 1993, the High Court of Justice handed down a judgment
finding for the Company on all aspect of its defense and dismissing MacMillan's
claims. On November 2, 1995, the Court of Appeal issued a preliminary judgment
dismissing MacMillan s appeal. MacMillan has sought leave to appeal to the House
of Lords.
MCC Proceeds Inc. v. Lehman Brothers International (Europe) This action was
commenced by issuance of a writ in the High Court of Justice in London, England
on July 14, 1995. In this action, MCC Proceeds Inc., as successor to Macmillan,
Inc., seeks relief identical to that sought in the Berlitz action described
above, but based on a legal theory which was initially pleaded but ultimately
abandoned by the plaintiff in Berlitz. The High Court granted LBIE's application
to dismiss the proceeding and assessed costs against MCC Proceeds.
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. Unipec asserted fifteen counterclaims
against Lehman entities based on violations of federal securities and
commodities laws and rules and theories of fraud, breach of fiduciary duty,
conversion and business torts. Unipec seeks $8 million in compensatory damages,
as well as punitive damages. The Court granted the motion of the Lehman
counterclaim defendants in part, and dismissed the counterclaims based on
business tort theories. Discovery is progressing.
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. On June 26, 1995,
the court granted CNM's motion to dismiss the claims against it, but also
granted LBCC and LBSF leave to replead. Minmetals filed fourteen counterclaims
against Lehman entities based on violations of federal securities and
commodities laws and rules, and theories of fraud, breach of fiduciary duty and
conversion. The court denied a motion by the Lehman counterclaim defendants to
dismiss the six fraud-based counterclaims. On February 7, 1996, LBCC and LBSF
sought leave to file an amended complaint naming CNM as an additional defendant.
Discovery is progressing.
Sinochem(USA) Inc. v. Lehman Brothers Inc. et al.
On January 4, 1996, a complaint was filed in the United States District
Court for the Southern District of New York by Sinochem (USA) Inc. ("Sinochem")
against Lehman Brothers Inc., Lehman
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Special Financing and Sheng Yan, a former Lehman salesperson. The complaint
alleges that Sinochem has been exposed to losses of approximately $20 million by
entering into unsuitable investments, namely interest rate swaps and repurchase
transactions, with the defendants. The complaint, which includes claims based on
fraud, breach of fiduciary duty, breach of contract and alleged violations of
federal securities and commodities laws and rules, seeks return of the capital
Sinochem invested, a declaration that the transactions are void, and punitive
damages. The defendants intend to file an answer denying the material
allegations of the complaint and to assert counterclaims against Sinochem and
its parent corporation, China National Chemicals Import & Export Corporation
("Sinochem Beijing"), to recover all amounts due and owing from Sinochem and
Sinochem Beijing.
Actions Relating to National Association of Securities Dealers Automated
Quotations System ("NASDAQ") Market Maker Antitrust and Securities Litigation.
Beginning in May, 1994, several class actions were filed in various state
and federal courts against various broker-dealers making markets in NASDAQ
securities. With respect to a number of those actions LBI was either
specifically named as a defendant or was not specifically named as a defendant
but could be deemed to be a member of the defendant class as defined in the
complaints. Plaintiffs in these cases have alleged violations of the antitrust
laws, securities laws and have pled a variety of other statutory and common law
claims. All of these actions are based on the theory that because odd-eighth
quotes occur less often than quarter quotes, NASDAQ market makers must be
colluding wrongfully to maintain a wider spread.
By Order filed October 14, 1994, the Judicial Panel on Multidistrict
Litigation consolidated these actions in the Southern District of New York and
ordered that all related actions be transferred and coordinated for all pretrial
purposes. The case is captioned In Re NASDAQ Market-Makers Antitrust Litigation,
MDL No. 1023.
On December 16, 1994, plaintiffs served a consolidated Amended Complaint
naming 33 defendants including LBI. Plaintiffs claim violations of the federal
antitrust laws including Section 1 of the Sherman Antitrust Act. Plaintiffs seek
unspecified compensatory damages trebled in accordance with the antitrust laws,
costs including attorneys' fees as well as injunctive relief. The court
dismissed the action with leave to replead, stating that the complaint failed to
identify the securities involved with sufficient specificity. The plaintiffs
replied and the defendants answered the amended complaint on November 17, 1995.
Discovery has commenced.
Leetate Smith, et al. v. Merrill Lynch, et al.
On February 28, 1995 a First Amended Consolidated Class Action Complaint for
Violations of the Federal Securities Laws and the California Corporations Code
(the Complaint ) was filed in the United States District Court for the Central
District of California amending a previously filed complaint and adding, among
other defendants, LBI. The Complaint is purportedly brought on behalf of
purchasers of bonds, notes and other securities during the period July 1, 1992
through December 6, 1994 (the "Class Period") that were issued by Orange County
or by other public entities which had funds invested in Orange County's
Investment Pool (collectively the "County"). Also named as defendants are eight
other broker-dealers who are, like LBI, alleged to have acted as underwriters of
the County's debt securities and the five financial advisors who allegedly
advised the County during the Class Period. The Complaint alleges violations of
Section 10b of the Exchange Act of 1934 and various sections of the California
Corporations Code based on alleged misstatements and omissions in the Official
Statements of the debt offerings by the County primarily relating to the
County's creditworthiness and ability to repay the debts. The Complaint seeks
(i) to certify the action as a class action; (ii) unspecified damages plus
interest; and (iii) attorneys fees.
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Sonnenfeld v. The City and County of Denver, Colorado, et al.
On August 4, 1995, a Consolidated Amended Class Action Complaint (the
"Complaint") was filed in the United States District Court for the District of
Colorado, consolidating and amending previously filed complaints and adding,
among other defendants, LBI. The Complaint is purportedly brought on behalf of
all persons, other than defendants, who purchased Denver Airport System Revenue
Bonds during the period February 27, 1992 through May 3, 1994 that were issued
by the City and County of Denver (the "Bonds") and who were damaged by their
investments. Also named as defendants are seven other broker-dealers who acted
as underwriters or financial advisors in connection with the issuances of the
Bonds and the City and County of Denver. The Complaint alleges violations of
Section 10b of the Exchange Act of 1934 and the Colorado Securities Act and
common law fraud based on alleged misstatements and omissions in the Official
Statements for the Bonds primarily relating to status of the design and
construction of the new Denver International Airport (the "Airport"), the amount
of revenues it would likely generate and the risks posed to the timely opening
of the Airport by the installation of an automated baggage system. The Complaint
seeks (i) to certify the action as a class action; (ii) unspecified damages; and
(iii) costs and attorneys fees.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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 32,799 at January 31, 1996. Information concerning the market for the
Registrant's common equity and related stockholder matters in this set forth on
page 93 of the 1995 Annual Report to Stockholders and is hereby incorporated
herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data contained on pages 89 and 90 of the 1995 Annual
Report to Stockholders is deemed a part of this Annual Report on Form 10-K 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 30 to 51 of the 1995
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 53-88 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 1995 Annual Report to Stockholders on
pages 52-88 and such information is hereby incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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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 9 and 10 of the Proxy Statement of
the Registrant for its 1996 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 Current Directors", "Compensation Committee Report of
Executive Compensation", Summary Compensation Table, "Pension Benefits" and
"Employment Contracts and other Arrangements with Executive Officers" on pages
8-16 of the Proxy Statement of the Registrant for its 1996 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 10 of the Proxy Statement of the
Registrant for its 1996 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 with American
Express and Subsidiaries", Certain Transactions and Agreements with Nippon Life
and "Certain Transactions and Agreements among the Company, American Express and
Nippon Life" on pages 17-21 of the Proxy Statement of the Registrant for its
1996 Annual Meeting of Stockholders and such information is hereby incorporated
by reference.
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 schedule required to be filed hereunder is listed on
page F-1 hereof and the schedule included herewith appears on pages F-2
through F-7 hereof.
18
<PAGE>
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<C> <S>
3.1 Restated Certificate of Incorporation of the Registrant dated May 27, 1994
(incorporated by reference to Exhibit 3.1 of the Registrant's Transition Report on
Form 10-K for the eleven months ended November 30, 1994).
3.2 By-Laws of the Registrant, amended as of October 24, 1995 (incorporated by reference
to Exhibit 3(b) of the Registrant's Registration Statement on Form S-3 (Reg. No. 33-
64899)).
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., Shearson
Lehman Brothers Inc., Shearson Lehman Government Securities, Inc. and Shearson
Lehman Commercial Paper Incorporated (incorporated by reference to Exhibit 10.1 of
the Registrant's Transition Report on Form 10-K for the eleven months ended November
30, 1994).
10.2 Tax Allocation Agreement between Shearson Lehman Brothers Holdings Inc. and American
Express Company (incorporated by reference to Exhibit 10.2 of the Registrant's
Transition Report on Form 10-K for the eleven months ended November 30, 1994).
10.3 Intercompany Agreement between American Express Company and Shearson Lehman Brothers
Holdings Inc. (incorporated by reference to Exhibit 10.3 of the Registrant's
Transition Report on Form 10-K for the eleven months ended November 30, 1994).
10.4 Investment Agreement among American Express Company, Shearson Lehman Brothers
Holdings Inc. and Nippon Life Insurance Company (incorporated by reference to
Exhibit 10.21 of the Registrant's Registration Statement on Form S-1 (Reg. No.
33-12976)).
10.5 Registration Rights Agreement between Nippon Life Insurance Company and Shearson
Lehman Brothers Holdings Inc. (incorporated by reference to Exhibit 10.22 of the
Registrant's Registration Statement on Form S-1 (Reg. No. 33-12976)).
10.6 Business Association Agreement by and among American Express Company, Shearson
Lehman Brothers Holdings Inc. and Nippon Life Insurance Company (incorporated by
reference to Exhibit 10.23 of the Registrant's Registration Statement on Form S-1
(Reg. No. 33-12976)).
10.7 Letter, dated March 23, 1987, from Nippon Life Insurance Company to American Express
Company and Shearson Lehman Brothers Holdings Inc. (incorporated by reference to
Exhibit 10.24 of the Registrant's Registration Statement on Form S-1 (Reg. No.
33-12976)).
10.8 1990 Agreement, dated as of June 12, 1990, by and between American Express Company
and Nippon Life Insurance Company (incorporated by reference to Exhibit 10.25 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1990).
10.9 Letter, dated August 10, 1990, from Shearson Lehman Brothers Holdings Inc. to Nippon
Life Insurance Company and American Express Company (incorporated by reference to
Exhibit 10.26 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1990).
10.10 Warrant, dated August 10, 1990, issued by Shearson Lehman Brothers Holdings Inc. to
Nippon Life Insurance Company (incorporated by reference to Exhibit 3.1 of the
Registrant's Transition Report on Form 10-K for the eleven months ended November 30,
1994).
10.11 Transaction Support Services Agreement dated as of September 30, 1994 by and between
Bear, Stearns Securities Corp. and Lehman Brothers Inc. (incorporated by reference
to Exhibit 10.15 of the Registrant's Transition Report on Form 10-K for the eleven
months ended November 30, 1994).
10.12 Lease dated as of October 13, 1993 between 101 Hudson Leasing Associates and Lehman
Brothers Holdings Inc. (incorporated by reference to Exhibit 10 of Holdings'
Quarterly Report on Form 10-Q for the quarter ended September 30, 1993).
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<C> <S>
10.13 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)).
10.14 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)).
10.15 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).
10.16 Lehman Brothers Holdings Inc. 1994 Management Ownership Plan (incorporated by
reference to Exhibit 10.25 of the Registrant's Registration Statement on Form S-1
(Reg. No. 33-52977))
10.17+ 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)).
10.18+ 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))
10.19 Purchase and Exchange Agreement dated April 28, 1994, between the Registrant and
American Express Company (incorporated by reference to Exhibit 10.29 of the
Registrant's Transition Report Form 10-K for the Eleven Months ended November 30,
1994).
10.20 Registration Rights Agreement, dated as of May 27, 1994, between American Express
Company and the Registrant (incorporated by reference to Exhibit 10.30 of the
Registrant's Transition Report Form 10-K for the Eleven Months ended November 30,
1994).
10.21 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. (incorporated by reference to Exhibit 10.31 of the Registrant's
Transition Report Form 10-K for the Eleven Months ended November 30, 1994).
10.22 1994 Agreement, dated April 27, 1994, between the Registrant and Nippon Life
Insurance Company. (incorporated by reference to Exhibit 10.32 of the Registrant's
Transition Report Form 10-K for the Eleven Months ended November 30, 1994).
10.23 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)).
10.24+ 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)).
10.25+ 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)).
10.26+ Lehman Brothers Holdings Inc. Cash Award Plan. (incorporated by reference to Exhibit
10.36 of the Registrant's Transition Report Form 10-K for the Eleven Months ended
November 30, 1994).
10.27 Amended and Restated Agreement of Limited Partnership of Lehman Brothers Capital
Partners III, L.P.*
11. Computation of per share Earnings.*
12. Computation in support of ratio of earnings to fixed charges and preferred stock
dividends.*
13. The following portions of the Company's 1995 Annual Report to Stockholders, which
are incorporated by reference in this Annual Report on Form 10-K:
13.1 "Management's Discussion and Analysis of Financial Condition and Results of
Operations", pages 30-51.
13.2 "Consolidated Financial Statements", pages 53-88.
13.3 "Market for Registrant's Common Equity and Related Stockholder Matters", page 93.
21. Pursuant to General Instruction J of Form 10-K, the list of the Registrant's
Subsidiaries is omitted.
23. Consent of Ernst & Young LLP.*
24. Powers of Attorney.*
27. Financial Data Schedule.*
</TABLE>
20
<PAGE>
EXHIBIT
NO.
- -------
(b) Reports on Form 8-K.
1. Form 8-K dated January 5, 1995, Items 5 and 7.
2. Form 8-K dated March 21, 1995, Items 5 and 7.
3. Form 8-K dated June 21, 1995, Item 7 only.
4. Form 8-K dated September 9, 1995, Item 7.
5. Form 8-K dated January 4, 1996, Items 5 and 7.
- ------------
* Filed herewith.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-K pursuant to Item 14(c).
21
<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 Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
LEHMAN BROTHERS HOLDINGS INC.
(Registrant)
February 28, 1996
By: /s/ KAREN M. MULLER
..................................
Title: Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE><CAPTION>
NAME TITLE DATE
- ----------------------------------- ----------------------------------- ------------------
<S> <C> <C>
* Chief Executive Officer and February 28, 1996
................................... Chairman of the Board of
Richard S. Fuld, Jr. Directors (principal executive
officer)
* Chief Operating Officer, February 28, 1996
................................... President and Director
T. Christopher Pettit
* Chief Financial Officer February 28, 1996
................................... (principal financial officer)
Robert Matza
* Controller February 28, 1996
................................... (principal accounting officer)
David Goldfarb
* Director February 28, 1996
...................................
John F. Akers
* Director February 28, 1996
...................................
Roger S. Berlind
* Director February 28, 1996
...................................
Katsumi Funaki
* Director February 28, 1996
...................................
Henry Kaufman
* Director February 28, 1996
...................................
John D. Macomber
* Director February 28, 1996
...................................
Dina Merrill
* Director February 28, 1996
...................................
Masataka Shimasaki
* Director February 28, 1996
...................................
Malcolm Wilson
</TABLE>
*By: /s/ KAREN M. MULLER
....................
Karen M. Muller
(Attorney-in-Fact)
February 28, 1996
22
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE><CAPTION>
PAGE
--------------------------
FORM
FINANCIAL STATEMENTS 10--K ANNUAL REPORT
- ---------------------------------------------------------------- --------- -------------
<S> <C> <C>
Report of Independent Auditors.................................. 52
Consolidated Statement of Operations for the Twelve Months Ended
November 30, 1995, for the Eleven Months Ended November 30,
1994 and for the Twelve Months Ended December 31, 1993.......... 53
Consolidated Statement of Financial Condition at November 30,
1995, and November 30, 1994..................................... 54
Consolidated Statement of Changes in Stockholders' Equity for
the Twelve Months Ended November 30, 1995, for the Eleven
Months Ended November 30, 1994 and for the Twelve Months Ended
December 31, 1993............................................... 56
Consolidated Statement of Cash Flows for the Twelve Months Ended
November 30, 1995, for the Eleven Months Ended November 30,
1994 and for the Twelve Months Ended December 31, 1993.......... 57
Notes to Consolidated Financial Statements...................... 59
FINANCIAL STATEMENT SCHEDULES
- ----------------------------------------------------------------
Schedule III--Condensed Financial Information................... F-2
</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>
TWELVE MONTHS ELEVEN MONTHS TWELVE MONTHS
ENDED ENDED ENDED
NOVEMBER 30, NOVEMBER 30, DECEMBER 31,
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Revenues
Principal transactions............................. $ 152 $ 145 $ 34
Investment banking................................. 90 75 (31)
Interest and dividends............................. 804 482 381
Other.............................................. 1 10 13
----- ----- ------
Total revenues................................... 1,047 712 397
Interest expense................................... 899 663 592
----- ----- ------
Net revenues..................................... 148 49 (195)
----- ----- ------
Non-interest expenses
Compensation and benefits.......................... 121 69 22
Other.............................................. 87 57 39
Management fees.................................... (145) (102)
Restructuring charge............................... 27
Severance charge................................... 6
Spin-off expenses.................................. 15
----- ----- ------
Total non-interest expenses...................... 90 45 61
----- ----- ------
Income (loss) before taxes........................... 58 4 (256)
Provision for (benefit from) income taxes.......... 47 (12) (85)
----- ----- ------
Income (loss) before equity in net income of
subsidiaries......................................... 11 16 (171)
Equity in net income of subsidiaries............... 231 97 69
----- ----- ------
Net income (loss).................................... $ 242 $ 113 $(102)
----- ----- ------
----- ----- ------
Net income (loss) applicable to common stock......... $ 200 $ 75 $(150)
----- ----- ------
----- ----- ------
</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,
------------------
1995 1994
------- -------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................................ $ 18 $ 18
Securities and other financial instruments owned......................... 2,595 1,817
Equity in net assets of subsidiaries..................................... 3,734 3,750
Accounts receivable and accrued interest................................. 1,048 2,123
Due from subsidiaries.................................................... 9,249 9,403
Other assets............................................................. 574 344
------- -------
Total assets........................................................... $17,218 $17,455
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper and short-term debt..................................... $ 2,102 $ 3,746
Securities and other financial instruments sold but not yet purchased.... 176 159
Securities sold under agreeements to repurchase.......................... 2,073 1,232
Accrued liabilities, due to subsidiaries and other payables.............. 825 1,437
Long-term debt:
Senior notes........................................................... 8,344 7,336
Subordinated indebtedness.............................................. 150
------- -------
Total liabilities.................................................... 13,520 14,060
------- -------
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $1 par value; 38,000,000 shares authorized: 5%
Cumulative Convertible Voting, Series A, 13,000,000 shares
authorized, issued and outstanding; $39.10 liquidation preference per
share................................................................ 508 508
8.44% Cumulative Voting, 8,000,000 shares issued and outstanding;
$25.00 liquidation preference per share.............................. 200 200
Redeemable Voting, 1,000 shares issued and outstanding; $1.00
liquidation preference per share.....................................
Common Stock: $.10 par value; 300,000,000 shares authorized; shares
issued: 105,684,565 in 1995 and 105,608,423 in 1994; shares
outstanding: 104,565,875 in 1995 and 104,537,690 in 1994............. 11 11
Common Stock issuable.................................................. 211 87
Additional paid-in capital............................................. 3,172 3,172
Foreign currency translation adjustment................................ 9 6
Accumulated deficit.................................................... (397) (574)
Common Stock in treasury at cost: 1,118,690 in 1995 and 1,070,733 in
1994................................................................. (16) (15)
------- -------
Total stockholders' equity........................................... 3,698 3,395
------- -------
Total liabilities and stockholders' equity........................... $17,218 $17,455
------- -------
------- -------
</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>
TWELVE MONTHS ELEVEN MONTHS TWELVE MONTHS
ENDED ENDED ENDED
NOVEMBER 30 NOVEMBER 30 DECEMBER 31
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................................... $ 242 $ 113 $ (102)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Equity in net income of subsidiaries............. (231) (97) (69)
Restructuring charge............................. 27
Provision for losses and other reserves.......... 13
Other adjustments................................ 127 107 5
Net change in:
Securities and other financial instruments
owned........................................... (778) (1,530) (212)
Accounts receivable and accrued interest, due
from subsidiaries and other assets............. 945 (3,510) 182
Securities and other financial instruments sold
but not yet purchased and Securities sold under
agreements to repurchase....................... 858 1,249 142
Accrued liabilities, due to subsidiaries and
other payables................................. (576) 1,076 201
Dividends and capital distributions received..... 851 820 587
------ ------ ------
Net cash provided by (used in) operating
activities................................... 1,465 (1,772) 747
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes............... 4,226 2,799 2,827
Principal payments of senior notes................... (3,196) (1,875) (1,090)
Principal payments of subordinated indebtedness...... (150)
Payments for commercial paper and short-term debt.... (1,670) (89) (1,714)
Proceeds from spin-off............................... 1,193
Payment for treasury stock purchases................. (1) (15)
Dividends paid....................................... (64) (99) (213)
------ ------ ------
Net cash (used in) provided by financing
activities................................... (855) 1,914 (190)
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in investments in affiliates................ (610) (173) (545)
Other................................................ 20 (12)
------ ------ ------
Net cash used in investing activities.......... (610) (153) (557)
------ ------ ------
Net change in cash and cash equivalents........ (11)
Cash and cash equivalents, beginning of period....... 18 29 29
------ ------ ------
Cash and cash equivalents, end of period....... $ 18 $ 18 $ 29
------ ------ ------
------ ------ ------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN MILLIONS)
Interest paid totaled $884 in 1995, $612 in 1994 and $682 in 1993. Income
taxes received totaled $163 in 1995, $102 in 1994 and $239 in 1993.
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITY
Holdings' noncash investing and financing activity for all periods presented
was insignificant.
See notes to condensed financial information of Registrant.
F-4
<PAGE>
SCHEDULE III
NOTE 1. BASIS OF PRESENTATION
The condensed financial statements of Lehman Brothers Holdings Inc.
("Holdings" or the "Company") should be read in conjunction with the
consolidated financial statements of Lehman Brothers Holdings Inc. and
subsidiaries and the notes thereto.
Certain prior period amounts reflect reclassifications to conform to the
current period's presentation.
NOTE 2. LONG-TERM DEBT
<TABLE><CAPTION>
U.S. DOLLAR NON-U.S. DOLLAR
----------------- ----------------- NOVEMBER 30
FIXED FLOATING FIXED FLOATING ---------------
RATE RATE RATE RATE 1995 1994
------ -------- ------ -------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Senior Notes
Maturing in Fiscal 1995......................... $2,237
Maturing in Fiscal 1996......................... $ 512 $ 1,184 $1,696 1,166
Maturing in Fiscal 1997......................... 640 266 $ 163 $ 41 1,110 1,004
Maturing in Fiscal 1998......................... 987 145 122 76 1,330 938
Maturing in Fiscal 1999......................... 627 190 670 41 1,528 1,269
Maturing in Fiscal 2000......................... 722 40 32 794 672
December 1, 2000 and thereafter................. 1,864 22 1,886 50
------ -------- ------ -------- ------ ------
Senior Notes.................................. $5,352 $ 1,825 $ 977 $ 190 $8,344 $7,336
------ -------- ------ -------- ------ ------
------ -------- ------ -------- ------ ------
Subordinated Indebtedness maturing in Fiscal
1995............................................ $ 150
------ -------- ------ -------- ------ ------
------ -------- ------ -------- ------ ------
Long-Term Debt.................................. $5,352 $ 1,825 $ 977 $ 190 $8,344 $7,486
------ -------- ------ -------- ------ ------
------ -------- ------ -------- ------ ------
</TABLE>
Of the Company's long-term debt outstanding as of November 30, 1995, $629
million is repayable prior to maturity at the option of the holder, at par
value. These obligations are reflected in the above table at their put dates,
which range from fiscal 1996 to fiscal 2002, rather than at their contractual
maturities, which range from fiscal 2003 to fiscal 2023. In addition, $319
million of the Company's long-term debt is redeemable at par at the option of
the Company upon specified dates from 1996 through 2000 or based upon the
occurrence of specified events. These obligations are reflected in the above
table at their contractual maturity dates.
As of November 30, 1995, the Company's fixed and floating rate debt
portfolios included approximately $110 million and $160 million, respectively,
of debt for which the interest rates and/or redemption values have been linked
to various indices including industry baskets of stocks or commodities. The
interest rates on such indexed notes have all been effectively converted to
floating rates based primarily on LIBOR through the use of interest rate and
cross currency swaps.
F-5
<PAGE>
END USER DERIVATIVE ACTIVITIES
The Company utilizes a variety of derivative products including interest
rate and currency swaps, and swaptions as an end user to modify the interest
rate characteristics of its portfolio. The Company actively manages the interest
rate exposure on its long-term debt portfolio to more closely match the terms of
its debt to the assets being funded and to minimize interest rate risk. In
addition, the Company utilizes cross currency swaps to hedge its exposure to
foreign currency risk as a result of its non-U.S. dollar debt obligations, after
consideration of non-U.S. dollar assets which are funded with long-term debt
obligations in the same currency. In certain instances, two or more derivative
contracts may be utilized by the Company to manage the interest rate nature
and/or currency exposure of an individual long-term debt issuance. In these
cases, the notional value of the derivative contracts may exceed the carrying
value of the related long-term debt issuance.
At November 30, 1995, the notional values of the Company's interest rate and
currency swaps related to its long-term debt obligations were approximately $6.8
billion. In terms of notional amounts outstanding, these derivative products
mature as follows:
<TABLE><CAPTION>
U.S. DOLLAR NON-U.S. DOLLAR CROSS CURRENCY TOTAL
----------- --------------- -------------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Maturing in Fiscal 1996..................... $ 775 $ 775
Maturing in Fiscal 1997..................... 861 $ 108 $ 96 1,065
Maturing in Fiscal 1998..................... 1,013 125 1,138
Maturing in Fiscal 1999..................... 641 687 1,328
Maturing in Fiscal 2000..................... 647 647
December 1, 2000 and thereafter............. 1,811 53 1,864
----------- ----- ----- ------
Total....................................... $ 5,748 $ 108 $ 961 $6,817
----------- ----- ----- ------
----------- ----- ----- ------
Weighted average rate at November 30, 1995
Receive rate (1)............................ 6.89% 1.44% 4.21% 6.42%
Pay rate (1)................................ 6.13% 3.82% 6.54% 6.15%
</TABLE>
- ------------
(1) Weighted average interest rates were calculated utilizing non-U.S. dollar
interest rates, where applicable.
In addition, at November 30, 1995 and 1994, the Company had approximately
$250 million and $867 million, respectively, of notional value of written
swaptions outstanding which if exercised would convert an equal amount of the
Company's long-term debt from a fixed rate to a floating rate. As of November
30, 1995, the swaptions had exercise dates ranging from fiscal 1996 to fiscal
1998. The Company accounts for these written swaptions on a mark-to-market
basis.
F-6
<PAGE>
The Company's end user derivative activities resulted in the following
changes to the Company's mix of fixed and floating rate debt and effective
weighted average rates of interest:
<TABLE><CAPTION>
NOVEMBER 30, 1995
---------------------------------------------------------
LONG-TERM DEBT WEIGHTED AVERAGE(1)
------------------------ -----------------------------
BEFORE AFTER CONTRACTUAL EFFECTIVE RATE
END USER END USER INTEREST AFTER END USER
ACTIVITIES ACTIVITIES RATE ACTIVITIES
---------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
USD Obligations
Fixed Rate...................................... $5,352 $ 619 8.02% 7.36%
Floating Rate................................... 1,825 7,519 6.79% 6.90%
---------- ----------
7,177 8,138 7.71% 6.93%
Non-USD Obligations............................... 1,167 206 3.86% 3.53%
---------- ----------
Total............................................. $8,344 $8,344 7.17% 6.85%
---------- ----------
---------- ----------
<CAPTION>
NOVEMBER 30, 1994
---------------------------------------------------------
LONG-TERM DEBT WEIGHTED AVERAGE(1)
------------------------ -----------------------------
BEFORE AFTER CONTRACTUAL EFFECTIVE RATE
END USER END USER INTEREST AFTER END USER
ACTIVITIES ACTIVITIES RATE ACTIVITIES
---------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
USD Obligations
Fixed Rate...................................... $3,408 $2,334 7.79% 7.98%
Floating Rate................................... 3,614 4,938 6.10% 5.79%
---------- ----------
7,022 7,272 6.92% 6.50%
Non-USD Obligations............................... 464 214 3.82% 3.75%
---------- ----------
Total............................................. $7,486 $7,486 6.73% 6.42%
---------- ----------
---------- ----------
</TABLE>
- ------------
(1) Weighted average interest rates were calculated utilizing non-U.S. dollar
interest rates, where applicable.
NOTE 3. DIVIDENDS
Dividends and capital distributions declared to Holdings by its subsidiaries
and affiliates were $851 million in 1995, $820 million in 1994, and $587 million
in 1993.
NOTE 4. NET REVENUES
Net revenues in 1995 include a special revenue gain of $129 million related
to the sale of the Company's interest in Omnitel Sistemi Radiocellullari Italani
S.p.A. ("Omnitel"), recognized in the Statement of Operations in principal
transactions. Following recognition of related compensation and taxes, the
Company recognized a $47 million gain in 1995 related to the Omnitel sale
transaction.
NOTE 5. RESTRUCTURING CHARGE
During the fourth quarter of 1995, the Company recorded a charge of $27
million pretax ($16 million aftertax) for occupancy-related real estate
expenses. This charge resulted from a complete global review of the Company and
its affiliates' real estate requirements at current headcount levels and the
elimination of excess real estate primarily in its New York location. The charge
includes the cost to write-down the carrying value of leasehold improvements as
well as the difference between expected operating costs and projected sublease
recoveries.
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company has guaranteed certain of its subsidiaries' unsecured lines of
credit and other contractual obligations.
F-7
<PAGE>
<TABLE>
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EXHIBIT INDEX
EXHIBIT
NO.
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<C> <S>
3.1 Restated Certificate of Incorporation of the Registrant dated May 27, 1994
(incorporated by reference to Exhibit 3.1 of the Registrant's Transition Report on
Form 10-K for the eleven months ended November 30, 1994).
3.2 By-Laws of the Registrant, amended as of October 24, 1995 (incorporated by reference
to Exhibit 3(b) of the Registrant's Registration Statement on Form S-3 (Reg. No. 33-
64899)).
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., Shearson
Lehman Brothers Inc., Shearson Lehman Government Securities, Inc. and Shearson
Lehman Commercial Paper Incorporated (incorporated by reference to Exhibit 10.1 of
the Registrant's Transition Report on Form 10-K for the eleven months ended November
30, 1994).
10.2 Tax Allocation Agreement between Shearson Lehman Brothers Holdings Inc. and American
Express Company (incorporated by reference to Exhibit 10.2 of the Registrant's
Transition Report on Form 10-K for the eleven months ended November 30, 1994).
10.3 Intercompany Agreement between American Express Company and Shearson Lehman Brothers
Holdings Inc. (incorporated by reference to Exhibit 10.3 of the Registrant's
Transition Report on Form 10-K for the eleven months ended November 30, 1994).
10.4 Investment Agreement among American Express Company, Shearson Lehman Brothers
Holdings Inc. and Nippon Life Insurance Company (incorporated by reference to
Exhibit 10.21 of the Registrant's Registration Statement on Form S-1 (Reg. No.
33-12976)).
10.5 Registration Rights Agreement between Nippon Life Insurance Company and Shearson
Lehman Brothers Holdings Inc. (incorporated by reference to Exhibit 10.22 of the
Registrant's Registration Statement on Form S-1 (Reg. No. 33-12976)).
10.6 Business Association Agreement by and among American Express Company, Shearson
Lehman Brothers Holdings Inc. and Nippon Life Insurance Company (incorporated by
reference to Exhibit 10.23 of the Registrant's Registration Statement on Form S-1
(Reg. No. 33-12976)).
10.7 Letter, dated March 23, 1987, from Nippon Life Insurance Company to American Express
Company and Shearson Lehman Brothers Holdings Inc. (incorporated by reference to
Exhibit 10.24 of the Registrant's Registration Statement on Form S-1 (Reg. No.
33-12976)).
10.8 1990 Agreement, dated as of June 12, 1990, by and between American Express Company
and Nippon Life Insurance Company (incorporated by reference to Exhibit 10.25 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1990).
10.9 Letter, dated August 10, 1990, from Shearson Lehman Brothers Holdings Inc. to Nippon
Life Insurance Company and American Express Company (incorporated by reference to
Exhibit 10.26 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1990).
10.10 Warrant, dated August 10, 1990, issued by Shearson Lehman Brothers Holdings Inc. to
Nippon Life Insurance Company (incorporated by reference to Exhibit 3.1 of the
Registrant's Transition Report on Form 10-K for the eleven months ended November 30,
1994).
10.11 Transaction Support Services Agreement dated as of September 30, 1994 by and between
Bear, Stearns Securities Corp. and Lehman Brothers Inc. (incorporated by reference
to Exhibit 10.15 of the Registrant's Transition Report on Form 10-K for the eleven
months ended November 30, 1994).
10.12 Lease dated as of October 13, 1993 between 101 Hudson Leasing Associates and Lehman
Brothers Holdings Inc. (incorporated by reference to Exhibit 10 of Holdings'
Quarterly Report on Form 10-Q for the quarter ended September 30, 1993).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT
NO.
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<C> <S>
10.13 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)).
10.14 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)).
10.15 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).
10.16 Lehman Brothers Holdings Inc. 1994 Management Ownership Plan (incorporated by
reference to Exhibit 10.25 of the Registrant's Registration Statement on Form S-1
(Reg. No. 33-52977))
10.17+ 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)).
10.18+ 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))
10.19 Purchase and Exchange Agreement dated April 28, 1994, between the Registrant and
American Express Company (incorporated by reference to Exhibit 10.29 of the
Registrant's Transition Report Form 10-K for the Eleven Months Ended November 30,
1994).
10.20 Registration Rights Agreement, dated as of May 27, 1994, between American Express
Company and the Registrant (incorporated by reference to Exhibit 10.30 of the
Registrant's Transition Report Form 10-K for the Eleven Months Ended November 30,
1994).
10.21 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. (incorporated by reference to Exhibit 10.31 of the Registrant's
Transition Report Form 10-K for the Eleven Months Ended November 30, 1994).
10.22 1994 Agreement, dated April 27, 1994, between the Registrant and Nippon Life
Insurance Company. (incorporated by reference to Exhibit 10.32 of the Registrant's
Transition Report Form 10-K for the Eleven Months Ended November 30, 1994).
10.23 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)).
10.24+ 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)).
10.25+ 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)).
10.26+ Lehman Brothers Holdings Inc. Cash Award Plan. (incorporated by reference to Exhibit
10.36 of the Registrant's Transition Report Form 10-K for the Eleven Months Ended
November 30, 1994).
10.27 Amended and Restated Agreement of Limited Partnership of Lehman Brothers Capital
Partners III, L.P.*
11. Computation of per share Earnings.*
12. Computation in support of ratio of earnings to fixed charges and preferred stock
dividends.*
13. The following portions of the Company's 1995 Annual Report to Stockholders, which
are incorporated by reference in this Annual Report on Form 10-K:
13.1 "Management's Discussion and Analysis of Financial Condition and Results of
Operations", pages 30-51.
13.2 "Consolidated Financial Statements", pages 53-88.
13.3 "Market for Registrant's Common Equity and Related Stockholder Matters", page 93.
21. Pursuant to General Instruction J of Form 10-K, the list of the Registrant's
Subsidiaries is omitted.
23. Consent of Ernst & Young LLP.*
24. Powers of Attorney.*
27. Financial Data Schedule.*
</TABLE>
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO.
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(b) Reports on Form 8-K.
1. Form 8-K dated January 5, 1995, Items 5 and 7.
2. Form 8-K dated March 21, 1995, Items 5 and 7.
3. Form 8-K dated June 21, 1995, Item 7 only.
4. Form 8-K dated September 9, 1995, Item 7.
5. Form 8-K dated January 4, 1996, Items 5 and 7.
- ------------
* Filed herewith.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-K pursuant to Item 14(c).
Exhibit 10.27
================================================================================
APPENDIX C
----------
LEHMAN BROTHERS CAPITAL PARTNERS III, L.P.
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
---------------------
______________, 1995
---------------------
================================================================================
<PAGE>
AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
LEHMAN BROTHERS CAPITAL PARTNERS III, L.P.
AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP, dated as of
__________, 1995, by and among Lehman Brothers Holdings Inc., a corporation
organized under the laws of the State of Delaware, as general partner
hereunder (the "General Partner"), the Initial Limited Partner (as
described in Section 4.1 hereof) and the persons who have signed this
Agreement and have been admitted as additional limited partners hereunder
(the "Limited Partners") (the General Partner and the Limited Partners are
collectively referred to as the "Partners").
ARTICLE 1
CERTAIN DEFINED TERMS
As used in this Agreement, the following terms shall have the following
meanings:
Act Delaware Revised Uniform Limited Partnership Act,
6 Del. C. Sec.Sec. 17-101 et seq., as amended from time
to time and any successor to said act
Affiliate Any person or entity that controls, is controlled
by, or is under common control with, any other
person or entity
Agreement This Amended and Restated Agreement of Limited
Partnership, as the same may be amended, modified
or supplemented from time to time
Capital Account As defined in Section 7.1
Capital Commitment Aggregate amount the Limited Partner has agreed to
pay to the Partnership as the purchase price for
his or her Units
Capital Contributions Amounts contributed to the Partnership by the
Partners, which do not include any amount invested
in the Money Funds
Carrying Value With respect to any Partnership asset, the asset's
adjusted basis for Federal income tax purposes,
except that the Carrying Values of all Partnership
assets shall be adjusted to equal their respective
fair market values (as determined by the General
Partner), in accordance with the rules set forth
in Treasury Regulations Section
1.704-1(b)(2)(iv)(f), except as otherwise provided
herein, immediately prior to: (a) the date of the
acquisition of any additional Partnership Interest
by any new or existing Partner in exchange for
more than a de minimis Capital Contribution; (b)
the date of the distribution of more than a
de minimis amount of Partnership property (other
than a pro rata distribution) to a Partner; or (c)
the date of the termination of the Partnership
under Section 708(b)(i)(B) of the Code; provided
that adjustments pursuant to clauses (a) and (b)
above shall be made only if the General Partner
determines in its sole discretion that such
adjustments are necessary or
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appropriate to reflect the relative economic
interests of the Partners. The Carrying Value of
any Partnership asset distributed to any Partner
shall be adjusted immediately prior to such
distribution to equal its Fair Market Value
Cause Termination of employment of a Limited Partner by
Lehman Brothers due to a material breach by a
Limited Partner of his or her employment contract
with Lehman Brothers, failure by a Limited Partner
to devote substantially all business time
exclusively to the performance of his or her
employment duties for Lehman Brothers, willful
misconduct or material dishonesty, conviction of a
felony, serious crime or other crime material to
the Limited Partner's employment with Lehman
Brothers (or failure to contest prosecution for
such a crime), substantial and continuing failure
to perform employment duties or obligations
satisfactorily, engaging in Detrimental Activity
or the violation of regulatory requirements or of
policies and practices adopted by Lehman Brothers
Code Internal Revenue Code of 1986, as amended
Commitment Period The period from the date hereof until the earlier
of (i) December 31, 1999 or June 30, 2000 (with
respect to any proposed investment for which, on
or prior to December 31, 1999, the Partnership has
entered into a letter of intent, agreement in
principle or definitive agreement to invest) and
(ii) any date as of which the General Partner has
determined in its sole discretion to terminate the
obligation of Limited Partners to make Capital
Contributions
Competitive Activity Involvement, at any time between the date of
termination of the Limited Partner's employment
with Lehman Brothers and June 30, 2000, whether as
an employee, proprietor, consultant or otherwise,
with any person or entity engaged in any business
activity which is materially competitive with any
business carried on by Lehman Brothers at such
time, as determined in the sole discretion of the
General Partner
Cost of Funds Rate Average daily cost of funds of Lehman Brothers as
determined by its Treasurer's Office
Detrimental Activity (a) Using information that was received by or
disclosed to such Limited Partner during his or
her employment with Lehman Brothers relating to
the business affairs of Lehman Brothers or any of
its clients, in breach of his or her undertakings
to keep such information confidential or (b)
directly or indirectly by any means persuading or
attempting to persuade any employee of Lehman
Brothers to terminate his or her employment or any
customer or client of Lehman Brothers to terminate
or curtail its business relationship with Lehman
Brothers or to breach any term of any agreement
with Lehman Brothers or (c)
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<PAGE>
any activity deemed to be detrimental to Lehman
Brothers, in each case as determined in the sole
discretion of the General Partner
Disability A disability which meets the criteria under both
the Lehman Brothers Group Long Term Disability
Plan and the Social Security Disability Act
Eligible Investors Certain key officers, employees, consultants and
directors of Lehman Brothers designated by Lehman
Brothers in its sole discretion (each such person,
an "Eligible Investor"), provided such person (i)
had income from his or her employer or employers
in excess of $100,000 in 1994 and (ii) has (x) an
individual net worth or net worth with his or her
spouse that exceeds $1,000,000 or (y) an
individual income in excess of $200,000 in each of
1993 and 1994 or joint income with his or her
spouse in excess of $300,000 in each of such years
and has a reasonable expectation of reaching the
same income level in 1995
Fixed Return Cumulative (but not compound) preferred annual
return on the General Partner's aggregate Capital
Contributions equal to the Cost of Funds Rate plus
0.50% or, if higher, an amount determined by the
General Partner with reference to the lowest
United States federal rate available for interest
on loans then utilized by the Internal Revenue
Service in connection with below-market loans
General Partner Lehman Brothers Holdings Inc., a corporation
organized under the laws of the State of Delaware,
as general partner of the Partnership
Government Service Employment with or appointment under any nation or
government, any state or other political
subdivision thereof or any entity exercising
executive, legislative, judicial, regulatory or
administrative functions of or pertaining to
government
Initial Limited
Partner Steven Berkenfeld, as the Initial Limited Partner
of the Partnership
Initial Payment One-quarter (25%) of the amount of the aggregate
Capital Commitment represented by the Units
subscribed for that is unconditionally due and
payable upon execution and delivery of the
subscription agreement
Investment Committee The Investment Committee of Lehman Brothers
Holdings Inc.
Lehman Brothers Lehman Brothers Holdings Inc. and its subsidiaries
Limited Partners Persons who have signed this Agreement and have
been admitted as additional limited partners to
the Partnership
Memorandum Confidential Private Placement Memorandum dated
November 1995 relating to the Partnership, as
amended or supplemented from time to time
-3-
<PAGE>
Money Fund Lehman Brothers Daily Income Fund, a money market
fund sponsored by Lehman Brothers, or an interest
bearing deposit account denominated in U.S.
dollars at a United States commercial bank
Nonrecourse
Deductions As defined in U.S. Treasury Regulations Section
1.704-2(b). The amount of Partnership Nonrecourse
Deductions for a fiscal year equals the net
increase, if any, in the amount of Partnership
minimum gain during that fiscal year, determined
according to the provisions of U.S. Treasury
Regulations Section 1.704-2(c)
Partner Nonrecourse
Debt An amount with respect to each partner nonrecourse
debt (as defined in Minimum Gain
Treasury Regulations Section 1.704-2(b)(4)) equal
to the Partnership Minimum Gain that would result
if such partner nonrecourse debt were treated as a
nonrecourse liability (as defined in Treasury
Regulations Section 1.752-1(a)(2)) determined in
accordance with Treasury Regulations Section
1.704-2(i)(3)
Partner Nonrecourse
Deductions As defined in U.S. Treasury Regulations Section
1.704-2(i)(2)
Partners Collectively, the General Partner and the Limited
Partners
Partnership Lehman Brothers Capital Partners III, L.P., the
limited partnership formed by the General Partner
and the Initial Limited Partner and continued by
the General Partner and the parties hereto under
the Act in accordance with this Agreement, under
the laws of the State of Delaware
Partnership Minimum
Gain As defined in Treasury Regulations Section 1.704-
2(b)(2) and 1.704-2(d)
Profits and Losses For each fiscal year or other period, the taxable
income or loss of the Partnership, or particular
items thereof, determined in accordance with the
accounting method used by the Partnership for
federal income tax purposes with the following
adjustments: (a) all items of income, gain, loss
or deduction allocated pursuant to Section 8.2
shall not be taken into account in computing such
taxable income or loss; (b) any income of the
Partnership that is exempt from federal income
taxation and not otherwise taken into account in
computing Profits and Losses shall be added to
such taxable income or loss; (c) if the Carrying
Value of any asset differs from its adjusted tax
basis for federal income tax purposes, any gain or
loss resulting from a disposition of such asset
shall be determined with reference to such
Carrying Value; (d) upon an adjustment to the
Carrying Value of any asset, pursuant to the
definition of Carrying Value, the amount of the
adjustment shall be included as gain or loss in
computing such taxable income or loss; (e) if the
Carrying Value of any asset differs from its
adjusted tax basis for U.S. federal income tax
purposes the amount of depreciation, amortization
or cost recovery deductions with respect to such
asset shall for purposes of determining Profits
and Losses be an amount
-4-
<PAGE>
which bears the same ratio to such Carrying Value
as the federal income tax depreciation,
amortization or other cost recovery deductions
bears to such adjusted tax basis (provided that if
the federal income tax depreciation, amortization
or other cost recovery deduction is zero, the
General Partner may use any reasonable method for
purposes of determining depreciation, amortization
or other cost recovery deductions in calculating
Profits and Losses); and (f) except for items in
(a) above, any expenditures of the Partnership not
deductible in computing taxable income or loss,
not properly capitalizable and not otherwise taken
into account in computing Profits and Losses
pursuant to this definition shall be treated as
deductible items
Representative Any executor, administrator, trustee, committee,
guardian, conservator or representative appointed
by a court of competent jurisdiction to act on
behalf of a Limited Partner or the Estate of a
Limited Partner
Repurchase Notice Following the termination of a Limited Partner's
employment with Lehman Brothers, a writing in
which the General Partner will notify such Limited
Partner by certified mail (or its equivalent) or
via overnight courier of its determination whether
to purchase such Limited Partner's Units
Required Investment As applicable, (i) at any time prior to the date
on which the General Partner has received
distributions, in cash or in kind, in an amount
equal to 75% of its aggregate Capital
Contributions plus the Fixed Return (the
"Distribution Date"), an amount equal to the
amount invested by the Partnership, or (ii) at any
time on or after the Distribution Date, an amount
equal to three times the amount invested by the
Partnership
Retirement Termination of employment with Lehman Brothers
which meets the criteria for retirement under the
qualified defined benefit pension plan of Lehman
Brothers Holdings Inc. and for the commencement of
benefits under such plan, or for the commencement
of benefits under any other pension plan in a
territory outside the United States which is
sponsored by Lehman Brothers, if the Limited
Partner is entitled to benefits under such other
pension plan
Transfer As defined in Section 10.1(a)
Transfer Application Written and dated notification of a Transfer of
all or any portion of the Units of a Limited
Partner
Transferring Limited
Partner As defined in Section 10.1(c)
Units Units of limited partnership interests in the
Partnership
-5-
<PAGE>
Unvested Interest The unvested portion of such Limited Partner's
interest in the Partnership, determined in
accordance with Section 10.4
Vesting Schedule The schedule according to which a Limited
Partner's interest in the Partnership generally
will vest, as set forth in Section 10.4
ARTICLE 2
FORMATION, NAME AND PLACE OF BUSINESS;
PURPOSE AND LIMITATION ON OPERATIONS; TERM;
CONVERSION TO CORPORATE FORM
2.1. Formation. The General Partner and the Initial Limited Partner
have formed, and the General Partner and the parties hereto hereby
continue, under the Act, a limited partnership for the purposes hereinafter
described. In the event that it shall be necessary for the Partnership to
exist in or qualify to do business under the laws of any state or states
other than, or in addition to, the State of Delaware, the parties hereby
agree that the Partnership shall take such action as may be necessary to
exist or qualify to do business in any state in which such existence or
qualification shall be required, provided that in any such event the
Partnership shall at all times continue to be a limited partnership formed
under and governed by the provisions of the Act.
2.2. Name. The name of the Partnership shall be "Lehman Brothers
Capital Partners III, L.P." The business of the Partnership may be
conducted under any other name deemed necessary or desirable by the General
Partner in order to comply with local law.
2.3. Place of Business. The principal place of business of the
Partnership shall be at 3 World Financial Center, New York, New York 10285,
and/or at such other place within or without the State of New York as the
General Partner hereafter may designate in writing to the Limited Partners.
2.4. Purpose. The purpose and character of the business of the
Partnership is to invest the funds of the Partnership in various
investments, seeking substantial capital appreciation. To achieve its
investment objective, the Partnership, subject to the limitations described
herein, may enter into high risk investment opportunities of all kinds in
all markets globally, directly or indirectly, including, without
limitation, (i) making investments in connection with merger and
acquisition transactions, including leveraged buy-out or liquidation
candidates and corporate reorganizations of all types, including buy-outs
originated by Lehman Brothers, Affiliates of the General Partner and
others, recapitalizations of leveraged buy-outs or other highly leveraged
companies and minority investments, (ii) investing in equity and debt
securities of all types, whether subordinated or unsubordinated, issued by
sovereigns, governments, municipalities, agencies, companies or other
issuers, secured or unsecured, rated or unrated, listed or unlisted, or
denominated in U.S. dollars or other currencies, (iii) participating in
venture capital activities and other special situations, (iv) investing and
trading in various derivative instruments, (v) investing in foreign
currencies and precious metals, and related derivative instruments,
(vi) participating in classic arbitrage (including, without limitation,
convertible securities arbitrage) and risk arbitrage transactions on
securities exchanges, including, without limitation, in connection with
mergers, acquisitions, sales of assets, exchange offers, cash tender
offers, recapitalizations, liquidations and other similar transactions,
(vii) investing in individual real estate and other types of assets or
interests therein and entities that hold real estate or other types of
assets or interests therein, (viii) investing in joint ventures or directly
in pooled investment vehicles or similar entities managed or
-6-
<PAGE>
organized by third parties, (ix) investing in work-outs and special
situations and (x) making short-term investments in mezzanine equity and
debt securities and bridge loans or other short-term instruments.
2.5. Term. (a) The Partnership shall continue until December 31, 2020,
unless the Partnership is dissolved prior to such date or dates pursuant to
the provisions of Article 11 hereof or as otherwise provided by operation
of law.
(b) No Limited Partner's death, incapacity or bankruptcy, resignation
or retirement from Lehman Brothers or other termination of employment with
Lehman Brothers shall result in the dissolution or termination of the
Partnership as among the remaining Partners.
2.6. Conversion to Corporate Form. In the event of changes in the law,
regulations or interpretations applicable to the Partnership or its
operations or changes in other circumstances which, in the sole judgment of
the General Partner, render it desirable or helpful for the business of the
Partnership to be conducted in a corporate rather than in a partnership
form (including without limitation a limited liability company), the
General Partner, without the approval of the Limited Partners, shall have
the power to incorporate the Partnership or take such other action as it
may deem advisable in light of such changed conditions, including, without
limitation, dissolving the Partnership, transferring its assets as an
entirety to a successor investment vehicle or causing it to merge with a
successor investment vehicle.
ARTICLE 3
GENERAL PARTNER; RELATIONSHIP WITH LEHMAN BROTHERS
3.1. General Partner; Management of General Partner. Lehman Brothers
Holdings Inc. is the sole general partner of the Partnership. The General
Partner will have complete control of the Partnership's business. Such
control shall be exercised by Lehman Brothers Holding Inc., in its capacity
as general partner of the Partnership, by the appropriate officers of the
General Partner or their designees.
3.2. No Compensation of Officers and Directors; Expenses. (a) No
compensation shall be paid by the Partnership to the General Partner or to
its officers and directors solely for their services as General Partner and
officers and directors thereof, respectively, other than reimbursement for
out-of-pocket expenses incurred in the course of conducting the business of
the Partnership. The General Partner shall be reimbursed for (i) fees paid
to others for Partnership accounting and communication services and
(ii) certain other fees and expenses (including those paid to consultants,
attorneys, accountants or other professionals) incurred by it on behalf of
the Partnership, including, but not limited to, all fees and expenses of
litigation and tax audits of the Partnership and for the outside valuation
of securities or property obtained by the Partnership, whether in a merger,
sale or otherwise. The General Partner shall not be reimbursed for payroll
and other costs of salaried personnel and rent or general office overhead
of the General Partner, which will be borne by the General Partner.
(b) The costs and expenses incurred on behalf of the Partnership with
respect to the organization of the Partnership, pre-offering activities and
offering activities and the selling of Units including, but not limited to,
travel, telephone, postage, legal and accounting expenses, shall be paid by
the Partnership. Except as otherwise provided herein to the contrary, the
Partnership will bear all other expenses of its operations including fees
and expenses of attorneys, accountants and experts, commitment and
investment banking fees, and interest and all expenses related to
investments or potential investments and to the acquisition, holding and
sale or other disposition of investments.
-7-
<PAGE>
3.3. Day-to-Day Operations; Acts of Investment Committee. The day-to-
day operations of the Partnership, including the identification, review and
structuring of, and analysis and recommendations with respect to, proposed
investments and realizations will be managed by the Merchant Banking Group
of the General Partner. All final investment and realization decisions will
be made on behalf of the General Partner, in its capacity as general
partner of the Partnership, by members of the Investment Committee. In
connection with Partnership matters, the Investment Committee will operate
in accordance with its corporate authorization.
3.4. Services by Lehman Brothers; Charges and Expenses. (a) Investment
advisory services for the Partnership will be performed, and brokerage,
custody and other administrative and similar services for the Partnership
may be performed, by Lehman Brothers, and in connection therewith no charge
shall be made to the Partnership for the time of any employee of Lehman
Brothers (other than for actual out-of-pocket expenses as set forth in
Section 3.2).
(b) The Partnership may borrow funds from Lehman Brothers in order to
provide funds for investments or to expand the funds available for
investment, and Lehman Brothers shall be entitled to receive interest on
amounts loaned at the prime rate as charged from time to time by a major
money center bank or at such other rate as the General Partner determines
shall be required to avoid the imputation of interest under the Code. In
connection with the investment activities of the Partnership, Lehman
Brothers and its Affiliates shall be entitled to receive certain fees,
brokerage commissions or other benefits from purchasers, sellers and
portfolio companies (including other investment partnerships, funds or
pooled investment vehicles) in connection with services rendered to these
companies, which fees may be higher or lower than market rates for similar
services to third parties.
3.5. Related Partnerships. The General Partner and any of its
Affiliates in the future may serve as the general partner of other
partnerships formed for the benefit of employees and directors of Lehman
Brothers, which partnerships may have the same or a similar purpose and may
invest or propose to invest in the same types of investments as the
Partnership. However, during the Commitment Period, Lehman Brothers will
not sponsor or manage another employee investment vehicle which has an
investment objective substantially similar to that of the Partnership
unless at least 50% of the aggregate Capital Commitments have been called.
If Lehman Brothers establishes such a vehicle thereafter, the Partnership
and such vehicle shall co-invest on a pro rata basis to the extent
practicable.
ARTICLE 4
LIMITED PARTNERS
4.1. Initial Limited Partner. (a) The Initial Limited Partner has
become such only for the purpose of organizing the Partnership and has
contributed $10.00 to the Partnership as a Capital Contribution.
Immediately subsequent to the admission of one or more additional Limited
Partners, the Initial Limited Partner shall withdraw from the Partnership,
the Initial Limited Partner's capital shall be returned and he shall have
no other rights or liabilities with respect to the Partnership in his or
her capacity as Initial Limited Partner.
(b) Unless the context otherwise specifically requires, references in
this Agreement to the Limited Partners, their capital and their rights and
obligations shall not be references to the Initial Limited Partner.
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4.2. Additional Limited Partners. The General Partner is authorized to
admit additional Limited Partners to the Partnership pursuant to the terms
of the Memorandum and this Agreement and upon execution and delivery by
each additional Limited Partner of a subscription agreement and such other
documents as the General Partner deems necessary or advisable, each in form
satisfactory to the General Partner, relating to the Units. The manner of
the offering of the Units, the terms and conditions under which
subscriptions for such Units will be accepted, and the manner of and
conditions to the sale of Units to subscribers therefor will be as provided
in this Agreement and in the Memorandum and the various subscription
agreements between the Partnership and each Limited Partner, and subject to
any provisions of any of them. A person shall be admitted as a Limited
Partner on the day his or her admission is reflected on the books and
records of the Partnership.
4.3. List of Limited Partners. The name, residence and business
address of each additional Limited Partner and the aggregate amount of such
Limited Partner's aggregate Capital Commitment is set forth on Schedule A
hereto, as amended from time to time.
4.4. No Management by Limited Partners. No Limited Partner as such
shall take part in the management of the Partnership's business, transact
any business in the Partnership's name or have the power to sign documents
for or otherwise bind the Partnership. Limited Partners will not
participate in any investment decisions made on behalf of the Partnership,
although members of the Merchant Banking Group and the Investment Committee
may invest in the Partnership if they are Eligible Investors.
4.5. Limitation on Transfer of Limited Partners' Units. Except as set
forth in Article 10 herein, no Limited Partner shall, directly or
indirectly, Transfer any Units.
ARTICLE 5
LIABILITY OF PARTNERS
5.1. General Partner. Except as provided in paragraph 11.2(e), the
General Partner shall not be required to contribute to the capital of, or
lend, the Partnership any funds other than the General Partner's Capital
Contribution. Neither the General Partner nor any of its Affiliates shall
have any personal liability for the return or repayment of the aggregate
Capital Contributions of any Limited Partner.
5.2. Limited Partners. Except as otherwise provided under Delaware
law, no Limited Partner shall be liable for the debts, liabilities,
contracts or any other obligations of the Partnership, except to the extent
of such Limited Partner's Capital Commitment, or for the debts or
liabilities of any other Partner. No Limited Partner shall be required to
lend the Partnership any funds.
ARTICLE 6
POWERS OF GENERAL PARTNER; PROHIBITED TRANSACTIONS
AND RESTRICTIONS; DUTIES OF GENERAL PARTNER;
INDEMNIFICATION AND CONTRIBUTION
6.1. Powers. (a) In addition to and not in limitation of any rights
and powers conferred by law or other provisions of this Agreement, and
except as limited, restricted or prohibited by the express provisions of
this Agreement, the General Partner shall have and may exercise on behalf
of the Partnership all powers and rights necessary, proper, convenient or
advisable to effectuate and carry out
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the purpose and business of the Partnership. These powers shall include,
without limitation, the following powers:
(i) to borrow money in the name of the Partnership for use in the
Partnership business, and, if security is required therefor,
to mortgage or subject to any other security device any
portion of the assets of the Partnership, to obtain
replacements of any mortgage or other security device, and to
prepay, in whole or in part, refinance, increase, modify,
consolidate or extend any mortgage or other security device;
(ii) to enter into transactions and make investments with or
through Affiliates of the General Partner and to participate
in investment transactions sponsored, managed or underwritten
by Affiliates of the General Partner or in entities as to
which Affiliates of the General Partner serve as investment
adviser or placement agent;
(iii) to purchase interests in entities sponsored, managed or
underwritten by Affiliates of the General Partner, or in
which Affiliates of the General Partner have an interest,
including, but not limited to, limited partnership interests
in limited partnerships in which such Affiliates serve as
general partner;
(iv) to lend money to the Partnership on commercially reasonable
terms;
(v) prior to making long-term investments or pending cash
distributions to the Partners, to make temporary investments
of Partnership capital in all types of securities, including,
without limitation, short-term United States government and
agency securities, certificates of deposit, interest-bearing
deposits in United States banks, securities issued by or on
behalf of states, municipalities and their instrumentalities,
the interest from which is exempt from federal income tax,
prime-grade commercial paper, repurchase agreements with
respect to any of the foregoing, securities prime-grade
commercial paper issued by other investment companies
(including unit investment trusts and taxable and tax-exempt
money market funds sponsored and/or advised by Affiliates of
the General Partner);
(vi) to enter into contracts (including, without limitation,
insurance policies and contracts, of any type and coverage)
and make commitments on behalf of the Partnership and, in
general, to do and perform everything which may be necessary,
advisable, suitable or proper for the conduct of the
Partnership's business and for the carrying out of the
purposes and objects herein before enumerated, including the
delegation to any person or persons of such functions and
authority as the General Partner may determine; and
(vii) to employ attorneys and accountants to represent and audit
the books of the Partnership, which attorneys and accountants
may also serve as counsel and auditors to the General Partner
and any of its Affiliates.
(b) Any person not a party to this Agreement dealing with the
Partnership shall be entitled to rely conclusively upon the power and
authority of any officer or director of the General Partner to bind the
Partnership in all respects, and to execute agreements, instruments and
other writings on behalf of and in the name of the Partnership.
6.2. Prohibited Transactions. Notwithstanding anything to the contrary
contained herein, the following transactions are specifically prohibited to
the Partnership:
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(i) the Partnership shall not make any loans to the General
Partner or any of its Affiliates, except that this provision
shall not prohibit the Partnership from entering into
repurchase agreements with Lehman Brothers;
(ii) the Partnership shall not sell or lease any property to the
General Partner or any of its Affiliates except on terms that
are at least as favorable as those obtainable from
unaffiliated third parties, except that this provision shall
not prohibit any transaction contemplated by Section 10.4 or
Section 11.2 hereof or any transaction that is permitted by
the terms of any partnership agreement or investment contract
into which the Partnership may enter in the future by virtue
of its investment as a general or limited partner of such
partnership, where an Affiliate of the General Partner also
acts as general partner of such partnership;
(iii) the Partnership shall not engage in any transaction with an
affiliated person prohibited by the Investment Company Act of
1940, as amended, unless an exemption therefor has been duly
obtained;
(iv) the Partnership shall not issue any debt securities in
violation of the Investment Company Act of 1940, as amended,
unless an exemption therefor has been duly obtained; and
(v) the Partnership shall not co-invest with Lehman Brothers or
one or more investment partnerships or funds managed by
Lehman Brothers unless the following conditions are met:
(A) in the case of a co-investment with Lehman Brothers or a
Lehman Brothers Affiliate, the officers and directors of
the General Partner shall have determined that the
investment by the affiliated co-investor would not
disadvantage the Partnership in making the investment, in
maintaining its investment position or in disposing of
its position;
(B) the amount invested by the co-investor shall be at least
equal to the Required Investment; and
(C) the General Partner obtains from the co-investor an
undertaking (x) to maintain its investment in an amount
at least equal to the Required Investment in the joint
investment, (y) to give the General Partner sufficient,
but not less than one day's, notice of its intent to
dispose of any of its investment in the joint investment,
and (z) to refrain from disposing of its investment
unless the Partnership has the opportunity to dispose of
its investment in the joint investment prior to or
concurrently with, and on the same terms as, the co-
investor;
provided, that an investment may be made in an instance in which
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the amount of the affiliated co-investors' investment is less
than the Required Investment if (i) all joint investments by the
Partnership, including any investments by a co-investor in an
amount less than the Required Investment, will in the aggregate
satisfy the undertaking that the amount invested by a co-
investor will be at least equal to the Required Investment, (ii)
the Partnership will be permitted by the co-investor to
determine what portion of the available investment the
Partnership wishes to take so that the Partnership would not be
required to limit its investment in favor of the co-investor,
and (iii) the co-investor undertakes to the
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Partnership that it will abide by the determination of the
Partnership as to (x) disposing of the joint investment or (y)
exercising any right to vote that may accompany the investment.
6.3. Restrictions on the Authority of the General Partner. Without the
approval of a majority in interest of the Limited Partners, the General
Partner shall not have the authority to alter the purpose of the
Partnership.
6.4. Duties. (a) Other than with respect to temporary investments, and
after setting aside suitable reserves, the General Partner shall invest the
Capital Contributions of the Partners and reinvest the revenues of the
Partnership in accordance with the purposes of the Partnership, monitor the
investments of the Partnership and manage the related affairs of the
Partnership.
(b) Except as otherwise expressly provided herein, the General Partner
shall take all action that may be necessary or appropriate for the
continuation of the Partnership's valid existence as a limited partnership
under the laws of the State of Delaware, and for the acquisition, holding
and disposition, in accordance with the provisions of this Agreement and
applicable laws and regulations, of the investments of the Partnership.
(c) The General Partner shall prepare or cause to be prepared and shall
file on or before the due date (or any extension thereof) any United States
federal, state or local tax returns required to be filed by the
Partnership. The General Partner shall cause the Partnership to pay, from
Partnership funds, any taxes payable by the Partnership.
(d) The General Partner shall be under a fiduciary duty and obligation
to conduct the affairs of the Partnership in the best interest (or not
opposed to the best interest) of the Partnership, including the safekeeping
and use of all Partnership funds and assets (whether or not in the
immediate possession or control of the General Partner) for the benefit of
the Partnership. The General Partner shall at all times act with integrity
and good faith and exercise due diligence in all activities relating to the
conduct of the business of the Partnership and in resolving conflicts of
interest.
(e) The General Partner may delegate or assign any action which may be
or is required to be taken by the General Partner to any third party,
including without limitation, an Affiliate of the General Partner.
6.5. Exculpation, Indemnification and Contribution. Neither the
General Partner, any of its officers, directors, agents or representatives
(including any members of the Merchant Banking Group or the Investment
Committee) nor any person who controls the General Partner (a "control
person") within the meaning of Section 15 of the Securities Act of 1933, as
amended, shall be liable to the Partnership or the Limited Partners for any
act or failure to act relating in any way to the Partnership, its assets,
business or affairs so long as such act or failure to act does not
constitute such person's willful misconduct, bad faith or gross negligence
or reckless disregard of the duties involved in the conduct of the
Partnership or such person's office. The General Partner and its officers,
directors, agents, representatives (including members of the Merchant
Banking Group and the Investment Committee) and control persons shall be
indemnified by the Partnership to the fullest extent permitted by law for
any and all losses, claims, damages and expenses arising out of or incurred
in connection with any claim, action or demand against the General Partner,
the Partnership or any such indemnified person relating to the Partnership,
its assets, business or affairs (including, without limitation, attorneys'
fees and expenses and any amounts paid in settlement or compromise of any
such claim, action or demand); provided, however, that the foregoing
indemnification shall not apply if a court of competent jurisdiction makes
a final
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decision that such claim, action or demand resulted directly from such
indemnified person's willful misconduct, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of the Partnership
or such person's office.
6.6. General Partner Loans. Subject to the provisions of Sections 3.4
and 6.2, in the event that the Partnership at any time lacks sufficient
funds to meet its financial obligations, the General Partner shall have the
right to, but shall not be required to, lend money to the Partnership on
terms, including interest rates, that are fair and reasonable to the
Partnership (but in no event less than the rate required under United
States tax law to avoid compensation income to the Limited Partners)
without any approval of the Limited Partners. The General Partner may
execute written agreements governing any such loans on behalf of the
Partnership.
ARTICLE 7
CAPITAL CONTRIBUTIONS AND ACCOUNTS; NO FURTHER
CONTRIBUTIONS REQUIRED; INTEREST; ACCOUNTING AND VALUATION
7.1. Capital Contributions and Accounts. (a) Subscriptions for Units
shall be accepted or rejected by the General Partner as it determines in
its sole discretion. Each Unit represents a Capital Commitment of $25,000.
The minimum Capital Commitment of each Limited Partner is one Unit
($25,000). Additional whole Units may be purchased up to a maximum Capital
Commitment as determined on a case-by-case basis by the General Partner in
its sole discretion. The Initial Payment for each unit is unconditionally
due and payable upon execution and delivery of the related subscription
agreement and shall be deposited by the General Partner in the Money Fund
until needed to fund one or more Partnership investments. The balance of
the Capital Commitment is due at any time during the Commitment Period upon
subsequent call dates to be determined by the General Partner upon 30 days'
prior written notice to the Limited Partners. Any Capital Contributions
made to the Partnership by a Limited Partner must be paid in cash. The
obligation of a Limited Partner to pay the purchase price for such Limited
Partner's Units in full shall be limited by the provisions of this
paragraph 7.1(a), paragraph 7.1(b) and Section 10.4.
(b) An investor who does not pay the Initial Payment upon subscription
will not be admitted as a Limited Partner. In the event that any Limited
Partner fails to pay in full any Capital Contribution as the installment
becomes due, the General Partner shall send to the Limited Partner a
written notice by certified mail (or its equivalent) or via overnight
courier stating that the installment is overdue. If the Limited Partner
fails to pay the installment in full within five business days following
the General Partner's mailing of the notice, the Limited Partner will be in
breach of this Agreement and:
(i) such Limited Partner's entire interest in any Money Fund, if
any, shall be applied in partial satisfaction of such installment;
(ii) such Limited Partner's entire interest in the Partnership,
including the positive balance of its capital account, shall be reduced
by one-third (1/3) as liquidated damages;
(iii) the defaulting Limited Partner shall have no further right or
obligation to make future Capital Contributions; and
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(iv) except as required under the Act, any vote, approval or
decision by the Limited Partners provided for in this Agreement shall
be tabulated or made as though such defaulting Limited Partner were not
a Limited Partner.
The defaulting Limited Partner shall continue to share in allocations
of Partnership income, gain, loss, deduction or credit with respect to his
or her remaining two-thirds (2/3) interest in the Partnership. The powers
conferred upon the General Partner in this Article 7 shall not limit any
actions available at law or in equity or by statute that the General
Partner may undertake against a defaulting Limited Partner.
(c) Pending the making of investments for which the Partnership
requires capital, installment payments for the purchase price of each
Limited Partner's Units will be invested in the Money Fund. Shares in the
Money Fund may not be redeemed by Limited Partners, although dividends paid
by the Money Fund will be paid to the Limited Partners periodically. The
General Partner will redeem Money Fund shares from time to time as needed
to fund specific Partnership investments. Amounts remaining in the Money
Fund at the end of the Commitment Period that have not been used for
Partnership purposes and which the Partnership has not committed for future
use shall be distributed to the Limited Partners in proportion to their
allocable share of amounts remaining in the Money Fund.
(d) The General Partner shall contribute to the capital of the
Partnership an amount equal to eight times the aggregate amount contributed
by the Limited Partners. The General Partner shall make its Capital
Contributions in installments by contributing eight times the amounts
withdrawn from the Money Fund to make Partnership investments or otherwise
to fund Partnership expenses.
(e) A separate capital account (the "Capital Account") shall be
established and maintained for each Partner. The Capital Account of each
Partner shall be credited with such Partner's aggregate Capital
Contributions, all Profits allocated to such Partner pursuant to Section
8.1 and any items of income or gain which are specially allocated pursuant
to Section 8.2; and shall be debited with all Losses allocated to such
Partner pursuant to Section 8.1, any items of loss or deduction of the
Partnership specially allocated to such Partner pursuant to Section 8.2,
and all cash and the Carrying Value of any property (net of liabilities
assumed by such Partner and the liabilities to which such property is
subject) distributed by the Partnership to such Partner. To the extent not
provided for in the preceding sentence, the Capital Accounts of the
Partners shall be adjusted and maintained in accordance with the rules of
Treasury Regulations Section 1.704-1(b)(2)(iv), as the same may be amended
or revised; provided that such adjustment and maintenance does not have a
material adverse effect on the economic interests of the Partners. Any
references in any section of this Agreement to the Capital Account of a
Partner shall be deemed to refer to such Capital Account as the same may be
credited or debited from time to time as set forth above. In the event of
any Transfer of any interest in the Partnership in accordance with the
terms of this Agreement, the transferee shall succeed to the Capital
Account of the transferor to the extent it relates to the transferred
interest.
7.2. Further Capital Contributions. No Limited Partner shall be
required to purchase additional Units or make any Capital Contribution to
the Partnership in excess of such Limited Partner's Capital Commitment.
After all Capital Contributions in respect of Capital Commitments have been
made and all contributions, including required General Partner
contributions, have been invested by the Partnership, if the General
Partner determines it to be in the best interests of the Partnership, the
Partnership may offer all Limited Partners the opportunity to make
additional contributions to the Partnership's capital on a pro rata basis,
as determined by the General Partner.
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7.3. Interest. No Limited Partner shall receive interest on amounts
credited to such Limited Partner's capital account.
7.4. Fixed Return to the General Partner. The General Partner shall
receive the Fixed Return. The General Partner will determine the amount of
the Fixed Return using the Cost of Funds Rate plus 0.50% per annum for the
applicable period of time or federal rates, if applicable, when the General
Partner, in consultation with counsel, determines doing so to be
appropriate. The General Partner's determination of the Fixed Return shall
be final and binding on the Partners absent a finding of manifest error.
7.5. Accounting Periods and Taxable Years. An accounting period and
taxable year shall mean the calendar year, except that the last accounting
period and taxable year shall mean the period ending with the termination
of the Partnership.
ARTICLE 8
ALLOCATIONS
8.1. Allocation of Profits and Losses; Other Allocations. Except as
otherwise provided in this Agreement, Profit or Loss of the Partnership for
each taxable year shall be allocated annually at the end of the
Partnership's fiscal year in the following order and priority:
(i) Profits shall be allocated as follows:
(A) first, if on a cumulative basis the General Partner has had
Losses previously allocated to it in excess of Profits
previously allocated to it, then to the General Partner to
the extent of such excess;
(B) then, to the General Partner up to an amount equal to the
Fixed Return;
(C) then, if on a cumulative basis the Limited Partners have had
Losses previously allocated to them in excess of Profits
previously allocated to them, to the Limited Partners to the
extent of such excess; and
(D) thereafter, any remaining Profits shall be allocated 90% to
the Limited Partners and 10% to the General Partner.
(ii) Losses of the Partnership shall be allocated as follows:
(A) first, 90% to the Limited Partners and 10% to the General
Partner in an amount equal to the excess, if any, of (x) the
cumulative Profits previously allocated to the Partners
pursuant to clause (i)(D) above over (y) the cumulative
Losses previously allocated to the Partners pursuant to this
clause (ii)(A);
(B) then, 100% to the Limited Partners until the Limited
Partners' capital accounts are reduced to zero; and
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(C) thereafter, 100% to the General Partner;
provided, however, that in no event shall Losses be allocated to the
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Limited Partners if the effect of such allocation would reduce their
capital accounts below zero.
8.2. Special Allocation Provisions. Notwithstanding anything to the
contrary in this Agreement, the following special allocations shall be
made:
(a) Minimum Gain Chargeback. Notwithstanding any other provision in
this Article 8, if there is a net decrease in Partnership minimum gain
or partner nonrecourse debt minimum gain (determined in accordance with
the principles of U.S. Treasury Regulations Sections 1.704-2(d) and
1.704-2(i)) during any Partnership taxable year, the Partners shall be
specially allocated items of Partnership income and gain for such year
(and, if necessary, subsequent years) in an amount equal to their
respective shares of such net decrease during such year, determined
pursuant to U.S. Treasury Regulations Sections 1.704-2(g) and 1.704-
2(i)(5). The items to be so allocated shall be determined in accordance
with U.S. Treasury Regulations Section 1.704-2(f). This Section 8.2(a)
is intended to comply with the minimum gain chargeback requirements in
such U.S. Treasury Regulations Sections and shall be interpreted
consistently therewith; including that no chargeback shall be required
to the extent of the exceptions provided in U.S. Treasury Regulations
Sections 1.704-2(f) and 1.704-2(i)(4).
(b) Qualified Income Offset. In the event any Limited Partner
unexpectedly receives any adjustments, allocations, or distributions
described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5)
or (6), items of Partnership income and gain shall be specially
allocated to such Limited Partner in an amount and manner sufficient to
eliminate the deficit balance in his or her Capital Account created by
such adjustments, allocations or distributions as promptly as possible.
(c) Gross Income Allocation. In the event any Limited Partner has a
deficit Capital Account at the end of any Fiscal Year which is in
excess of the amount such Partner is deemed to be obligated to restore
pursuant to the penultimate sentences of Treasury Regulations Section
1.704-2(g)(1) and 1.704-2(i)(5), each such Limited Partner shall be
specially allocated items of Partnership income and gain in the amount
of such excess as quickly as possible, provided that an allocation
pursuant to this Section 8.2(c) shall be made only if and to the extent
that a Limited Partner would have a deficit Capital Account in excess
of such amount after all other allocations provided for in this Article
8 have been tentatively made as if Section 8.2(a) and this Section
8.2(c) were not in this Agreement.
(d) Nonrecourse Deductions. Nonrecourse Deductions shall be allocated
10% to the General Partner and 90% among the Limited Partners in
accordance with their respective Capital Account balances.
(e) Partner Nonrecourse Deductions. Partner Nonrecourse Deductions
for any taxable period shall be allocated to the Partner who bears the
economic risk of loss with respect to the liability to which such
Partner Nonrecourse Deductions are attributable in accordance with U.S.
Treasury Regulations Section 1.704-2(j).
8.3. Tax Allocations. For income tax purposes only, each item of
income, gain, loss and deduction of the Partnership shall be allocated
among the Partners in the same manner as the
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corresponding items of Profits and Losses and specially allocated items are
allocated for Capital Account purposes; provided that in the case of any
Partnership asset the Carrying Value of which differs from its adjusted tax
basis for United States federal income tax purposes, income, gain, loss and
deduction with respect to such asset shall be allocated solely for income
tax purposes in accordance with the principles of Sections 704(b) and (c)
of the Code (in any manner determined by the General Partner) so as to take
account of the difference between Carrying Value and adjusted basis of such
asset.
8.4. Allocation among Limited Partners, Transfers. (a) Profits and
Losses allocated to Limited Partners will be apportioned among each Limited
Partner based upon a fraction, the numerator of which is the aggregate
Capital Contributions by such Limited Partner (or his or her predecessor in
interest) and the denominator of which is the aggregate Capital
Contributions of all Limited Partners, taking into account any change in
such ratio during the period; provided, however, that for purposes of such
calculation the aggregate Capital Contributions of a defaulting Limited
Partner shall be deemed to be reduced by one-third (1/3).
(b) In the event of a permitted Transfer of a Unit or the termination
or reduction of a Partner's interest in the Partnership during a taxable
year of the Partnership, allocations of income, gain, loss, deductions and
credits of the Partnership will be based on an interim closing of the
Partnership's books.
8.5. Tax Elections. The General Partner is hereby authorized and
empowered to make on behalf and in the name of the Partnership any
election, and to prepare or have prepared, to execute or have executed and
to file, on behalf and in the name of the Partnership, any returns,
applications and other instruments and documents, under the Code and the
regulations thereunder, as in effect from time to time, which the General
Partner determines in its sole discretion are desirable or advisable in
connection with determining such allocations.
ARTICLE 9
DISTRIBUTIONS; WITHDRAWAL
9.1. General Partner Discretion. Distributions may be made in cash or
in kind in the General Partner's sole discretion. The General Partner may
in its sole discretion offer Limited Partners the right to elect whether to
receive cash or in kind distributions in connection with any distribution
and, following any such election, may (but shall not be required to) make a
distribution to some Limited Partners in cash and to others in kind. The
General Partner shall have no obligation to make cash or non-cash
distributions to the Limited Partners prior to termination of the
Partnership, and may reinvest the earnings on and proceeds of any of the
Partnership's investments in its sole discretion. The General Partner in
its sole discretion will determine the aggregate amount of and payment
dates for any cash and non-cash distributions to Partners after
establishing such reasonable reserves as the General Partner deems
appropriate in its sole discretion for working capital, contingencies or
other items and for the satisfaction of liabilities (including, without
limitation, contingent liabilities and the Fixed Return) as they come due
or may come due.
9.2. Distributions. (a) Distributions from the Partnership shall be
made in the following order and priority:
(i) first, to the Limited Partners to the extent of available
cash in an amount equal to 35% of the taxable ordinary income
and capital gain allocated to Limited Partners pursuant to
clause (i)(D) of paragraph 8.1 by the Partnership for the
current taxable year; provided that
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the General Partner in its sole discretion may adjust the
percentage of taxable ordinary income and capital gain distributed
to the Limited Partners hereunder to take into account changes in
income tax rates applicable to individuals or for any other
reason;
(ii) then to the General Partner until it has received (x) first an
amount equal to the Fixed Return and (y) then an amount equal to
its aggregate Capital Contributions;
(iii) then to the Limited Partners until they have received an
aggregate amount pursuant to this clause (iii) equal to their
aggregate Capital Contributions; and
(iv) thereafter, to the Limited Partner and the General Partner in
accordance with the ratio which each Partner's positive capital
account balance bears to the sum of all Partners' positive
capital account balances.
(b) Distributions to Limited Partners will be apportioned among each
Limited Partner based upon a fraction, the numerator of which is the
aggregate Capital Contributions by such Limited Partner (or his or her
predecessor in interest) and the denominator of which is the aggregate
Capital Contributions of all Limited Partners, taking into account any
change in such ratio during the period; provided, however, that for
purposes of such calculation the aggregate Capital Contributions of a
defaulting Limited Partner shall be deemed to be reduced by one-third
(1/3).
9.3. Non-Cash Distributions. Whenever possible non-cash distributions,
including distributions under paragraph 11.2(c), shall be made pro rata
among the Partners in accordance with the terms of Section 9.2. The value
of any non-cash assets that are distributed shall be determined by the
General Partner in accordance with Section 12.4 hereof.
9.4. Withholding. The Partnership shall withhold from any amounts
otherwise distributable to any Partner the amounts required by law to be
withheld for income tax or other purposes; any amounts so withheld shall be
treated as having been distributed to such Partner for all purposes of this
Agreement.
9.5. Withdrawal. No Partner shall have the right to withdraw such
Partner's Capital Contribution or any part thereof from the Partnership or
to receive a return of such Partner's Capital Contribution or any part
thereof except upon termination and dissolution of the Partnership, except
as may be permitted by the General Partner in its sole discretion.
ARTICLE 10
TRANSFERABILITY OF INTERESTS; VESTING;
TERMINATION OF EMPLOYMENT
10.1. Restrictions and Conditions on Transfers of Units. (a) Except
for Transfers permitted under Section 10.4, no direct or indirect sale,
exchange, transfer, assignment, pledge, creation of a security interest in,
or encumbrance on, or other disposition by a Limited Partner of all or any
portion of such Limited Partner's Units or any economic interest therein
(including without limitation by means of any participation or swap
transaction (each, a "Transfer") shall be made except, with the prior
written consent of the General Partner (which consent may be withheld in
the sole discretion of the General Partner), to a person who is a member of
the transferor Limited Partner's immediate family or to the General Partner
or any of its Affiliates. Any Units acquired by the General Partner may be
transferred to
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any Eligible Investor, subject to the restrictions contained in Section
10.1(b), provided that the General Partner does not own more than 80% of
the Units.
(b) Any Transfer otherwise permitted under this Article 10 may only be
made if:
(i) such Transfer, when added to the total of all other Transfers
of Units within the preceding twelve months, would not result
in the Partnership being considered to have terminated within
the meaning of Section 708 of the Code;
(ii) such Transfer would not violate any United States securities
laws, or any state securities or "blue sky" laws (including any
investor suitability standards) or the laws of any jurisdiction
outside the United States applicable to the Partnership or the
Units to be Transferred; and
(iii) such Transfer would not cause the Partnership to lose its
status as a partnership for United States federal income tax
purposes.
(c) The General Partner, each Limited Partner, the Partnership and
their respective officers, directors, agents and control persons shall be
indemnified by a Limited Partner (the "Transferring Limited Partner") to
the fullest extent permitted by law for any and all losses, claims, damages
and expenses arising out of or reasonably incurred in connection with any
claim, action or demand against the General Partner, the Partnership or any
such indemnified person relating to the Partnership, its properties,
business or affairs (including, without limitation, attorneys' fees and
expenses and any amounts paid in settlement or compromise of any such
claim, action or demand) against expenses for which the Partnership, the
General Partner or such other person has not otherwise been reimbursed
(including attorneys' fees, judgments, fines and amounts paid in
settlement) actually and reasonably incurred by them in connection with
such action, suit or proceeding and arising out of, relating to, or in
connection with, any Transfer of all or any portion of such Transferring
Limited Partner's Units, or in connection with the admission of a
substituted Limited Partner to the Partnership; provided, however, that the
foregoing indemnification shall not apply if a court of competent
jurisdiction makes a final decision that such claim, action or demand
resulted primarily from such indemnified person's willful misconduct, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of the Partnership or such person's office.
(d) Subject to Section 10.4, no Unit may be subdivided into fractional
Units.
10.2. Assignees. (a) The Partnership shall not recognize for any
purpose any purported Transfer of all or any portion of the Units of a
Limited Partner unless the provisions of Section 10.1 shall have been
complied with and there shall have been filed with the Partnership a
Transfer Application, in form satisfactory to the General Partner, executed
and acknowledged by both the seller, transferor or assignor and the
purchaser, transferee or assignee and such Transfer Application
(i) contains the acceptance by the purchaser, transferee or assignee of all
of the terms and provisions of this Agreement, (ii) contains an assumption
by the purchaser, transferee or assignee of the obligations of the
Transferring Limited Partner to pay any unpaid portion of his or her
Capital Commitment, (iii) represents that such Transfer was made in
accordance with all applicable laws and regulations and (iv) contains the
purchaser's, transferee's or assignee's power of attorney identical to that
provided in Section 13.1 and, in addition, appoints the General Partner his
or her attorney-in-fact to execute this Agreement on behalf of such
purchaser, transferee or assignee. Any Transfer shall be recognized by the
Partnership as effective as of the date on which such Transfer Application
is filed with the Partnership.
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(b) Any Limited Partner who shall assign all of his or her Units shall
not cease to be a Limited Partner unless and until a substituted Limited
Partner is admitted in his or her stead.
(c) A person who is the assignee of all or any portion of the Units of
a Limited Partner, but does not become a substituted Limited Partner and
desires to make a further assignment of such Units, shall be subject to all
the provisions of this Article 10 to the same extent and in the same manner
as any Limited Partner desiring to effect a Transfer of his or her Units.
10.3. Substituted Limited Partners. (a) No Limited Partner shall have
the right to substitute a purchaser, assignee, transferee, donee, heir,
legatee, distributee or other recipient of all or any portion of such
Limited Partner's Units as a Limited Partner in his or her place. Any such
purchaser, assignee, transferee, donee, heir, legatee, distributee or other
recipient of Units shall be admitted to the Partnership as a substituted
Limited Partner only (i) with the consent of the General Partner, which
consent shall be granted or withheld in the sole and absolute discretion of
the General Partner and may be arbitrarily withheld, and (ii) by an
amendment to Schedule A to this Agreement executed by all necessary parties
and recorded, as and to the extent required by law, in the proper records
of each jurisdiction in which such recordation is necessary to qualify the
Partnership to conduct business or to preserve the limited liability of the
Limited Partners. The Limited Partners hereby consent to the admission of a
substituted Limited Partner whose admission has been consented to by the
General Partner. Any such consent by the General Partner and the Limited
Partners may be evidenced by the execution by the General Partner of an
amendment to this Agreement on its behalf and on behalf of all Limited
Partners evidencing the admission of such person as a Limited Partner and
the making of any filing required by law.
(b) To the extent required by law, the General Partner shall file an
amended certificate of limited partnership with the appropriate authorities
of each state in which the Partnership transacts business for the purpose
of adding as substituted Limited Partners all assignees of Units previously
approved by the General Partner for admission as substituted Limited
Partners and deleting any person who is no longer a Limited Partner or
reflecting accurately Capital Contributions of the Limited Partners or to
receive any interest thereon.
(c) No person shall become a substituted Limited Partner until such
person shall have delivered a Transfer Application as provided in paragraph
10.2(a) and become a party to this Agreement; provided, however, that for
the purpose of allocating profits, losses and distributable cash, a person
shall be treated as having become, and as appearing in the records of the
Partnership as, a Limited Partner on such date as the Transfer to such
person was recognized by the Partnership pursuant to paragraph 10.2(a).
10.4. Termination of Employment, Death, Disability, Retirement of
Limited Partner.
(a) Generally. If prior to April 1, 1999, a Limited Partner's
employment with Lehman Brothers is terminated for any reason (other than
termination of employment by Lehman Brothers without Cause or due to such
Limited Partner's death, Disability, Retirement or Government Service) or
the General Partner determines that a Limited Partner has engaged in
Competitive Activity (other than following termination of employment
without Cause or due to Government Service) or Detrimental Activity, then
the General Partner or its assignee will have the right, exercisable in its
sole discretion by written notice sent by certified mail (or its
equivalent) or via overnight courier (the "Repurchase Notice") to such
Limited Partner (or his or her Representative) within 30 days following
such termination of employment or determination, to purchase the unvested
portion of such Limited Partner's interest in the Partnership (the
"Unvested Interest"), which Unvested Interest shall be determined according
to the following schedule (the "Vesting Schedule"):
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IF SUCH TERMINATION OR DETERMINATION OCCURS
PERCENTAGE OF INTEREST UNVESTED
ON OR AFTER BUT PRIOR TO THAT IS VESTED INTEREST
The date of this
Agreement April 1, 1996 0% 100%
April 1, 1996 April 1, 1997 25% 75%
April 1, 1997 April 1, 1998 50% 50%
April 1, 1998 April 1, 1999 75% 25%
April 1, 1999 100% 0%
provided that upon a Limited Partner's termination of employment prior to
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April 1, 1999 due to such Limited Partner's death, Disability or
Retirement, such Limited Partner's Units will immediately become fully
vested and provided, further, that the General Partner shall have authority
to accelerate (but not otherwise modify) the Vesting Schedule at any time,
for any and all of the Limited Partners, in its sole discretion.
If the General Partner does not exercise its right to purchase the
Unvested Interest, the Unvested Interest will remain subject to, and
continue to vest in accordance with, the Vesting Schedule and, if at any
time following termination of a Limited Partner's employment the General
Partner determines in good faith that such Limited Partner has engaged in
any Competitive Activity (other than following termination of employment
without Cause or due to Government Service) or Detrimental Activity,
whether before or after such termination, the General Partner will promptly
notify the Limited Partner of its determination in writing by certified
mail (or its equivalent) or via overnight courier and thereafter the
General Partner will have the right to purchase the Unvested Interest, if
any, as of the date of such determination, upon the same terms and at a
purchase price determined in the same manner as described in paragraph (b)
hereof and such Limited Partner's right to make additional Capital
Contributions in accordance with this Agreement will cease, except as set
forth in paragraph (c) below. To the extent a Limited Partner's interest in
the Partnership has vested, such Limited Partner will be entitled to
continue to share in allocations of Partnership income, gain, loss, expense
or deduction.
The General Partner in its sole discretion may assign all or any part
of its right to purchase any Unvested Interest to any of its Affiliates or
any Eligible Investor (including, without limitation, any Limited Partner)
or, if the General Partner determines a purchase of such interest by the
Partnership to be in the best interests of the Partnership, to the
Partnership. Units representing any Unvested Interest acquired for the
account of the Partnership will be retired.
(b) Purchase Price of Unvested Interest. The purchase price of the
Unvested Interest acquired pursuant to paragraph (a) shall be an amount
payable in cash equal to the sum of (i) the aggregate amount of such
Limited Partner's Capital Contributions (net of any distributions to such
Limited Partner other than distributions pursuant to paragraph 9.2(a)(i))
in respect of such Unvested Interest plus (ii) a rate of return on the
amount determined in clause (i) equal to the Cost of Funds Rate to (but not
including) the date the Unvested Interest is purchased. The General Partner
or its assignee will pay for the Units to be acquired in cash as soon as
practicable but in no event later than 30 days following the date of the
Repurchase Notice. A Limited Partner whose Unvested Interest is purchased
as described above will forfeit the related portion of his or her interest
in the Partnership's profits. The determination of the General Partner of
the purchase price for the Unvested Interest shall be determined in good
faith by the General Partner and shall be final and binding on the Limited
Partner.
(c) Right to Make Further Capital Contributions. A Limited Partner
shall not have any obligation to make and shall not have any right or
otherwise be permitted to make any additional Capital
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Contributions on and after the day on which his or her employment with
Lehman Brothers is terminated for any reason (other than termination of
employment due to such Limited Partner's death, Disability, Retirement or
Government Service) or following any determination that a Limited Partner
has engaged in any Competitive Activity (other than following termination
of employment without Cause or due to Government Service) or Detrimental
Activity, whether or not such Limited Partner's interest has fully vested
in accordance with the Vesting Schedule, unless, within 30 days following
any such termination of employment or determination, the General Partner
sends written notice by certified mail (or its equivalent) or via overnight
courier to such Limited Partner offering the opportunity to continue to
make such Capital Contributions. If the General Partner does not make such
an offer, or if such offer is made but such Limited Partner declines or
does not accept such offer within the time specified for acceptance in such
notice (which date will not be less than 30 days from the date of such
notice (or, if earlier, the date the next Capital Contribution is due)),
such Limited Partner will not be permitted to make any further Capital
Contributions, and the Partnership will return such Limited Partner's
remaining interest in the Money Fund, if any.
(d) Termination by Lehman Brothers Without Cause. In the case of a
termination of a Limited Partner's employment by Lehman Brothers without
Cause, (i) the General Partner shall not have the right to purchase such
Limited Partner's Unvested Interest as provided in paragraph (a) hereof,
(ii) such Limited Partner's Unvested Interest will remain subject to, and
continue to vest in accordance with, the Vesting Schedule and (iii) such
Limited Partner's right and obligation to make further Capital
Contributions will cease unless the General Partner sends written notice by
certified mail (or its equivalent) or via overnight courier to such Limited
Partner within 30 days following such termination of employment offering
the opportunity to continue to make Capital Contributions and such Limited
Partner accepts such offer as described in paragraph (c) hereof. If at any
time following any termination of employment by Lehman Brothers without
Cause the General Partner determines in good faith that such Limited
Partner has engaged in any Detrimental Activity, whether before or after
such termination of employment, the General Partner will promptly notify
the Limited Partner of its determination and the General Partner will have
the right thereafter to purchase such Limited Partner's Unvested Interest,
if any, as of the date of such notice in accordance with paragraphs (a) and
(b) hereof and such Limited Partner's right and obligation to make further
Capital Contributions, if any, will cease unless the General Partner again
determines to offer such Limited Partner the opportunity to continue making
Capital Contributions in accordance with paragraph (c) hereof.
(e) Termination Due to Government Service. Upon a Limited Partner's
termination of employment by Lehman Brothers due to such Limited Partner's
Government Service, the General Partner shall not have the right to
purchase such Limited Partner's Unvested Interest as provided in paragraph
(a) hereof, and such Limited Partner's Unvested Interest will remain
subject to, and continue to vest in accordance with, the Vesting Schedule.
Except as set forth in the last paragraph of this paragraph (e), such
Limited Partner or his or her Representative will have the right (but not
the obligation) to continue making Capital Contributions pursuant to this
Agreement.
Promptly following termination of employment due to Government Service,
the General Partner will send the Limited Partner or his or her
Representative a written notice by certified mail (or its equivalent) or
via overnight courier requesting such Limited Partner's election with
respect to whether such Limited Partner wishes to continue making Capital
Contributions in the future pursuant to this Agreement. If such Limited
Partner or his or her Representative, as the case may be, does not elect,
by notice to the General Partner within the time specified for acceptance
in such notice (which date will not be less than 30 days from the date of
the notice (or, if earlier, the date the next Capital Contribution is
due)), to continue making Capital Contributions, such Limited Partner or
his or her Representative will
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be deemed to have elected not to exercise such right and will not be
permitted to make any further Capital Contributions and the Partnership
will return any of such Limited Partner's remaining interest in any Money
Fund.
Notwithstanding anything to the contrary contained in this paragraph
(e), if at any time following such termination of employment due to
Government Service the General Partner determines in good faith that such
Limited Partner has engaged in any Detrimental Activity, whether before or
after such termination of employment, (i) the General Partner will have the
right thereafter to purchase such Limited Partner's Unvested Interest, if
any, as of such determination date, in accordance with paragraphs (a) and
(b) hereof and (ii) such Limited Partner's right and obligation to make
further Capital Contributions, if any, will cease unless the General
Partner offers such Limited Partner the opportunity to continue making
Capital Contributions in accordance with paragraph (c) hereof.
(f) Termination Due to Death, Disability or Retirement. Upon a
Limited Partner's termination of employment due to such Limited Partner's
death, Disability or Retirement, such Limited Partner's Units will
immediately become fully vested. Promptly following any termination of
employment due to death, Disability or Retirement, the General Partner will
send such Limited Partner or his or her Representative a notice by
certified mail (or its equivalent) or via overnight courier requesting such
Limited Partner's election with respect to whether such Limited Partner
wishes to continue making Capital Contributions in the future pursuant to
this Agreement. If such Limited Partner or his or her Representative, as
the case may be, does not elect, by notice to the General Partner within
the time specified for acceptance in such notice (which date will not be
less than 30 days from the date of the notice (or, if earlier, the date the
next Capital Contribution is due)), to continue making Capital
Contributions, such Limited Partner or his or her Representative will be
deemed to have elected not to exercise such right and will not be permitted
to make any further Capital Contributions and the Partnership will return
any of such Limited Partner's remaining interest in any Money Fund.
(g) Death; Incompetency; Bankruptcy. If a Limited Partner dies or
becomes an adjudicated incompetent (or equivalent under the laws of any
jurisdiction other than the United States) or bankrupt, as the case may be,
then for purposes of this Agreement the Representative shall have all the
rights of a Limited Partner for the purpose of settling or managing the
Units of such Limited Partner, and such power as such Limited Partner
possessed to assign all or any part of such Limited Partner's Units and to
join with such assignee in satisfying conditions precedent to such assignee
becoming a substituted Limited Partner as provided in Section 10.3. If a
Limited Partner is required in connection with any Government Service to
deposit his or her assets in a blind trust or similar discretionary trust,
the trustee of such blind trust shall have all the rights of a Limited
Partner for the purpose of settling or managing the Units of such Limited
Partner, and such power as the Limited Partner possessed to assign all or
any part of the Limited Partner's Units and to join with such assignee in
satisfying conditions precedent to such assignee becoming a substituted
Limited Partner as provided in Section 10.3.
10.5. Disposition of General Partner's Interest. The General Partner
shall not dispose of its interest in the Partnership as a general partner
except to an entity controlled by, or affiliated with, Lehman Brothers,
executive officers and directors of which are Eligible Investors. No
disposition of the General Partner's interest shall be effective, and the
General Partner shall not cease to be a general partner of the Partnership,
unless and until the transferee thereof is admitted as a general partner of
the Partnership and agrees in writing to continue the business of the
Partnership with itself as general partner and to be bound by the
provisions of this Agreement.
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ARTICLE 11
DISSOLUTION AND LIQUIDATION OF THE PARTNERSHIP
11.1. Events Causing Dissolution. The Partnership shall be dissolved
upon the expiration of its term as set forth in Section 2.5 hereof, or
sooner upon the happening of any of the following events:
(a) the resignation, withdrawal, dissolution or bankruptcy of the
General Partner or the occurrence of any other event that causes the
General Partner to cease to be a general partner of the Partnership under
the Act; provided that the Partnership shall not be dissolved or required
to be wound up upon the happening of such event if (i) at the time of such
event there is at least one remaining general partner of the Partnership
and such remaining general partner carries on the business of the
Partnership or (ii) within 90 days after such event, all remaining Partners
agree in writing to continue the business of the Partnership and to the
appointment, effective as of the date of such event, of one or more
additional general partners;
(b) the insolvency or bankruptcy of the Partnership;
(c) the sale of all or substantially all of the Partnership's assets
other than in the ordinary course of business;
(d) the conversion of the Partnership to corporate form pursuant to
Section 2.6 hereof; or
(e) the affirmative vote of a majority in interest of the Limited
Partners.
Dissolution of the Partnership shall be effective on the date on which the
event occurs giving rise to the dissolution, but the Partnership shall not
terminate until the Partnership's certificate of limited partnership has
been canceled and the assets of the Partnership have been distributed as
provided in Section 11.2.
11.2. Liquidation. (a) Upon dissolution of the Partnership, its
liabilities shall be paid in the order provided herein. The General Partner
shall cause Partnership assets to be sold in such manner as the General
Partner, in its sole discretion, shall determine. The General Partner may,
to the extent permitted by applicable law, purchase from the Partnership
any Partnership investments upon which there are significant restrictions
or for which another purchaser willing to pay fair market value is not
readily obtainable. Payment of the fair market value of any such investment
at the time of the transfer determined by the General Partner in accordance
with this Section 11.2 shall be deemed fair and reasonable and not a
violation of the General Partner's fiduciary duty to the Partnership.
Pending sale of Partnership assets, the General Partner shall have the
right to continue to operate and otherwise to deal with Partnership assets.
In the event that the General Partner has resigned, withdrawn, dissolved or
is bankrupt, or has otherwise ceased to be a general partner of the
Partnership, the majority in interest of the Limited Partners shall elect a
person (the "liquidating trustee") who is hereby authorized to perform the
functions of the General Partner in liquidating the assets of the
Partnership and in winding up its affairs.
(b) Profits and losses arising from sales upon liquidation shall be
allocated in the manner set forth in Article 8. If, over the term of the
partnership, the amounts distributed to the General Partner in respect of
the Fixed Return pursuant to Section 9.2(a)(ii)(x) exceed the Profits
allocated to the General Partner in respect of the Fixed Return pursuant to
Section 8.1(i)(B), then the amount of such excess shall be treated as a
guaranteed payment and the Partners' capital accounts shall be adjusted
accordingly.
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(c) Proceeds received upon the liquidation of Partnership assets shall
be applied and distributed in the following order:
(i) to the payment of debts and liabilities of the Partnership
(whether by payment or establishment of reasonable reserves),
including those to Partners who are creditors, to the extent
required by law, in the order of priority as provided by law,
and to the payment of the expenses of liquidation;
(ii) if not paid pursuant to clause 11.2(c)(i), to the payment to the
General Partner of the unpaid balance and interest on its loans,
if any, to the Partnership;
(iii) if not paid pursuant to clause 11.2(c)(i), to the payment to
the General Partner of the Fixed Return which payment shall
be treated as a guaranteed payment to the extent it exceeds
profits allocated to the General Partner pursuant to Section
8.1(i)(B);
(iv) to the payment to the General Partner of its aggregate Capital
Contributions;
(v) to the Partners any cash and non-cash assets pro rata in
accordance with their positive capital account balances to the
extent thereof (after giving effect to any allocation of profits
or losses arising from sales on liquidation); and
(vi) thereafter 100% to the Limited Partners apportioned among each
Limited Partner based upon a fraction, the numerator of which is
the aggregate Capital Contributions by such Limited Partner (or
his or her predecessor in interest) and the denominator of which
is the aggregate Capital Contributions of all Limited Partners,
taking into account any change in such ratio during the period;
provided, however, that for purposes of such calculation the
aggregate Capital Contributions of a defaulting Limited Partner
shall be deemed to be reduced by one-third (1/3), and the
aggregate Capital Contributions of each other Limited Partner
shall be deemed to be increased by such non-defaulting Limited
Partner's pro rata interest of such amount.
Any reserves established by the General Partner or any liquidating
trustee pursuant to clause (i) above shall be paid over by the General
Partner or the liquidating trustee, as the case may be, to an escrow agent
who is not an Affiliate of any Partner, with instructions to discharge any
of the liabilities and obligations referred to in such clause (i) and, at
the expiration of such period as the General Partner or the liquidating
trustee, as the case may be, shall provide, to distribute any balance then
remaining in the manner provided in clauses (ii) through (vii) above.
(d) In the sole discretion of the General Partner, payments in
liquidation may be made either in cash or in non-cash assets designated by
the General Partner, or partly in cash and partly in non-cash assets. If
payment is made in non-cash assets, the value of such assets shall be
determined by the General Partner in accordance with Section 12.4 hereof.
In the event of any distribution of non-cash assets to any Limited Partner,
such Limited Partner agrees, if requested by the General Partner at the
time of such distribution, to deliver to the Partnership a letter in form
and substance satisfactory to the General Partner, or which may be deemed
necessary or desirable by the General Partner, to comply with governmental
regulations, including restrictions on the resale of securities.
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(e) In the event that following the final distribution under paragraph
11.2(c) above, the General Partner has a deficit balance in its capital
account balance, the General Partner shall contribute cash to the
Partnership in an amount equal to the deficit balance.
ARTICLE 12
BOOKS AND RECORDS; ACCOUNTING;
APPRAISAL; TAX MATTERS AND ELECTIONS
12.1. Books and Records. The books and records of the Partnership,
including information relating to the sale by the General Partner or any of
its Affiliates of securities, property, goods or services to the
Partnership, and a list of the name, residence or business address and
Units of each Limited Partner, shall be maintained by the General Partner
at the office of the Partnership or of the General Partner and shall be
available for examination there by any Limited Partner or his or her duly
authorized Representatives at any and all reasonable times for any purpose
reasonably related to the Limited Partner's interest as a limited partner
of the Partnership. Any Limited Partner, or his or her duly authorized
Representatives, upon paying the costs of collection, duplication and
mailing, shall be entitled to a copy of the list of the names, residence or
business addresses and Units of the Limited Partners. Such information
shall be used only for a purpose reasonably related to the Limited
Partner's interest as a limited partner of the Partnership. The Partnership
may maintain such other books and records and may provide such financial or
other statements as the General Partner in its sole discretion deems
advisable.
12.2. Accounting Basis, Fiscal Year. The books and records and the
financial statements and reports of the Partnership shall be kept on such
basis as the General Partner shall determine. The fiscal year of the
Partnership shall be the calendar year.
12.3. Bank Accounts. The General Partner shall maintain the
Partnership bank account, and withdrawals shall be made only in the regular
course of the Partnership business on such signature or signatures as the
General Partner may determine. Temporary investments are deemed activities
in the ordinary course of Partnership business.
12.4. Appraisal. If at any time the value of one or more non-cash
assets of the Partnership is required to be determined under this
Agreement, the General Partner shall value such assets, taking into account
all relevant factors, including without limitation restrictions on
transfer, other legal or contractual restrictions and the costs and
expenses of disposition of such assets. In the sole discretion of the
General Partner, the valuation of any non-cash assets may be made by
independent third parties appointed by the General Partner and deemed
qualified by the General Partner to render an opinion as to the value of
Partnership assets, using such methods and considering such information
relating to such assets as such persons may deem appropriate. The valuation
of Partnership assets reflected in an appraisal made in good faith by the
General Partner or any adviser or consultant retained for such purpose
shall be conclusive and binding on the Limited Partners.
12.5. Reports. Within 90 days after the end of each fiscal year, or as
soon as practicable thereafter, the General Partner shall send to each
person who was a Limited Partner at any time during the fiscal year then
ended (i) a statement (which shall be audited by independent certified
public accountants) showing the distributable cash (or assets distributed
in kind) distributed in respect of such year; (ii) such tax information as
shall be necessary for the preparation by such Limited Partner of his or
her United States federal and state income tax returns; (iii) a report of
the investment activities of the Partnership during such year; and (iv)
financial statements of the Partnership audited by its accountants.
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12.6. Tax Matters and Elections. (a) Each Limited Partner hereby
appoints and designates the General Partner as tax matters partner of the
Partnership, as such term is defined under the Code, and hereby agrees that
any action taken by the General Partner in connection with audits of the
Partnership under the Code will be binding upon the Limited Partners. Each
Limited Partner further agrees that he or she will not treat any
Partnership item on his or her individual income tax return in a manner
inconsistent with the treatment of the item on the Partnership's tax return
and that he will not act independently with respect to tax audits or tax
litigation affecting the Partnership, unless, in either case, previously
authorized to do so in writing by the General Partner, which authorization
may be withheld in the sole discretion of the General Partner.
(b) As such tax matters partner, the General Partner may cause the
Partnership to make all elections required or permitted to be made by the
Partnership under the Code (including an election under Section 754 thereof
permitting the adjustment in basis of Partnership assets upon the
occurrence of certain events, such as a sale of Units or the death of a
Limited Partner) and not otherwise expressly provided for in this Agreement
in the manner that the General Partner believes will be most advantageous
to individual taxpayers who (i) are married and filing joint United States
federal income tax returns and (ii) are not "dealers" for United States
federal income tax purposes.
ARTICLE 13
MISCELLANEOUS PROVISIONS
13.1. Appointment of the General Partner as Attorney-in-Fact. (a) Each
Limited Partner, by his or her execution of this Agreement (which execution
may be by his or her attorney-in-fact pursuant to a power of attorney
contained in a subscription agreement or Transfer Application), hereby
makes, constitutes and appoints the General Partner, acting by any of its
officers or their designees, his or her true and lawful agent and attorney-
in-fact, with full power of substitution and full power and authority in
his or her name, place and stead to make, execute, sign, acknowledge, swear
to, record and file, on his or her behalf and on behalf of the Partnership
such documents, instruments and conveyances that may be necessary or
appropriate to carry out the provisions or purposes of this Agreement,
including, without limitation:
(i) the original certificate of limited partnership of the
Partnership and all amendments thereto required or permitted
by law or the provisions of this Agreement including, without
limitation, the admission to the Partnership of additional
Limited Partners and substituted Limited Partners, and any
certificate of cancellation with respect thereto and
modifications of Schedule A hereto and all other instruments
that the General Partner deems appropriate to reflect a
change or modification or amendment of this Agreement, in
accordance with this Agreement;
(ii) all certificates and other instruments deemed advisable by the
General Partner to carry out the provisions of this Agreement or
to permit the Partnership to become or to continue in the
jurisdictions where the Partnership may be doing business as a
limited partnership or partnership wherein the Limited Partners
have limited liability;
(iii) all conveyances and other instruments or papers deemed
advisable by the General Partner to effect the dissolution
and termination of the Partnership;
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(iv) all fictitious or assumed name certificates required or
permitted to be filed on behalf of the Partnership; and
(v) all other instruments, documents, undertakings, certificates,
agreements or papers which may be required or permitted by law
to be filed on behalf of the Partnership.
(b) The foregoing power of attorney:
(i) is coupled with an interest, shall be irrevocable, shall not
be affected by and shall survive the subsequent death,
disability, incapacity or incompetence of each Limited
Partner;
(ii) may be exercised by the General Partner either by signing
separately as attorney-in-fact for each Limited Partner or by a
single signature of the General Partner acting as attorney-in-
fact for all of them or by any other legally acceptable means;
and
(iii) shall survive the delivery of an assignment by a Limited
Partner of the whole or any portion of his or her Units;
except that, where the assignee of the whole of such Limited
Partner's Units has been approved by the General Partner for
admission to the Partnership as a substituted Limited
Partner, the power of attorney of the assignor shall survive
the delivery of such assignment for the sole purpose of
enabling the General Partner to execute, swear to,
acknowledge and file any instrument necessary or appropriate
to effect such substitution.
(c) Each Limited Partner shall execute and deliver to the General
Partner within five days after receipt of the General Partner's request
therefor such further designations, powers-of-attorney and other
instruments as the General Partner deems necessary or appropriate to carry
out the terms of this Agreement.
13.2. Amendments of this Agreement. (a) An amendment to this Agreement
may be proposed by the General Partner by submitting to all Limited
Partners (i) the text of such amendment and (ii) a statement of the purpose
of such amendment. Subject to paragraph (c) below, the proposed amendment
shall be deemed adopted (A) 30 days after the General Partner submits such
notice, unless Limited Partners holding two-thirds of the outstanding Units
have, by the end of such notice period, delivered their written disapproval
thereof to the General Partner or (B) if earlier, upon the delivery by
Limited Partners holding two-thirds of the outstanding Units of their
written approval thereof to the General Partner.
(b) An amendment to this Agreement may be proposed by Limited Partners
holding 25% of the outstanding Units. The Limited Partner or Limited
Partners proposing such amendment shall submit to the General Partner
(i) the text of such amendment, (ii) a statement of the purpose of such
amendment, (iii) an opinion of counsel obtained by the Limited Partner or
Partners proposing such amendment to the effect that such amendment is
permitted by the Act and the laws of any other jurisdiction where the
Partnership is qualified to do business, will not impair the limited
liability of the Limited Partners and will not adversely affect the
classification of the Partnership as a partnership for United States
federal income tax purposes. The General Partner shall, within 20 days
after receipt of any proposal under this Section 13.2, give notice to all
Limited Partners of such proposed amendment, which notice shall include all
items submitted by the Limited Partners with respect to such proposed
amendment and a statement of the General Partner with respect to such
proposed amendment. Subject to paragraph (c) below, the proposed amendment
shall be deemed adopted (A) 30 days after the General Partner submits such
notice, unless
-28-
<PAGE>
Limited Partners holding two-thirds of the outstanding Units have, by the
end of such notice period, delivered their written disapproval thereof to
the General Partner or (B) if earlier, upon the delivery by Limited
Partners holding two-thirds of the outstanding Units of their written
approval thereof to the General Partner.
(c) Notwithstanding any other provision of this Section to the
contrary, no amendment may:
(i) expand the obligations of any Partner under this Agreement or
convert the Units of any Limited Partner into the interest of
a General Partner or adversely affect the limited liability
of any Limited Partner, in each case without the approval of
such Partner;
(ii) amend Section 6.3 or this Section 13.2 without the approval of
all Partners; or
(iii) modify the method provided in Article 8 or 9 of determining
and allocating or distributing, as the case may be, profits
and losses and distributable cash;
without the approval of the General Partner and Limited Partners holding
75% of the outstanding Units that are adversely affected by such
modification.
(d) Upon the adoption of any amendment to this Agreement, the amended
Agreement shall be executed by the General Partner for itself and on behalf
of the Limited Partners pursuant to the power of attorney granted in
Section 13.1, and, if such amendment affects the certificate of limited
partnership of the Partnership under the Act, or any other filing made in
any other state, the General Partner, pursuant to the power of attorney
granted in Section 13.1, shall execute and file proper amendments and
filings in the State of Delaware and in each jurisdiction in which such
action is necessary for the Partnership to conduct business or to preserve
the limited liability of the Limited Partners.
13.3. Arbitration. Any dispute, controversy or claim arising out of or
in connection with or relating to this Agreement or any breach or alleged
breach hereof shall (to the extent not prohibited by governing law) be
determined and settled by arbitration in The City of New York pursuant to
the rules then in effect of the American Arbitration Association. Any award
rendered shall be final and conclusive upon the parties and a judgment
thereon may be entered in the highest court of the forum, state or federal,
having jurisdiction.
13.4. Notices. Except as otherwise specifically provided herein, all
notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if (i) delivered or
mailed, certified or registered mail, first-class postage paid or via
overnight courier or (ii) transmitted via facsimile, if to any Limited
Partner, at such Limited Partner's business address, or to such Limited
Partner's facsimile number, set forth in the Partnership's records, and if
to the Partnership, to the General Partner at the General Partner's
address, or to the General Partner's facsimile number, set forth on
Schedule A, Attention: Fred Steinberg, or to such other person or address
as any Partner shall have last designated by notice to the Partnership, and
in the case of a change in address by the General Partner, by notice to the
Limited Partners. Any notice shall be deemed to have been duly given if
personally delivered or sent by the mails or by facsimile and will be
deemed received, unless earlier received, (i) if sent by certified or
registered mail, return receipt requested, or via overnight courier, one
business day after mailing, (ii) if sent by overnight mail or courier, when
actually received, (iii) if sent by facsimile transmission, on the date
sent provided confirmatory notice is sent by first-class mail, postage
prepaid, and (iv) if delivered by hand, on the date of receipt.
-29-
<PAGE>
13.5. Binding Provisions. The covenants and agreements contained
herein shall be binding upon and inure to the benefit of the heirs,
executors, administrators, successors and assigns of the respective parties
hereto.
13.6. Applicable Law. This Agreement shall be construed and enforced
in accordance with the laws of the State of Delaware.
13.7. Counterparts. This Agreement may be executed in several
counterparts, all of which together shall constitute one agreement binding
on all parties hereto, notwithstanding that not all the parties have signed
the same counterpart. The General Partner may execute any document by
facsimile signature of a duly authorized officer.
13.8. Separability of Provisions. If for any reason any provision or
provisions hereof that are not material to the purposes or business of the
Partnership or the Limited Partners' Units are determined to be invalid and
contrary to any existing or future law, such invalidity shall not impair
the operation of or affect those portions of this Agreement that are valid.
13.9. Entire Agreement. This Agreement constitutes the entire
agreement among the parties. This Agreement supersedes any prior agreement
or understanding among the parties and may not be modified or amended in
any manner other than as set forth herein.
13.10. Paragraph Titles. Article, section and paragraph titles are for
descriptive purposes only and shall not control or alter the meaning of
this Agreement as set forth in the text.
13.11. Waiver of Right of Partition. Each Partner hereby waives its
right of partition.
13.12. Effectiveness. This Agreement shall become effective as of the
day and year first above written upon execution hereof by the General
Partner and the Initial Limited Partner and, as to each additional Limited
Partner, when the prescribed subscription hereto by such party has been
accepted by the General Partner.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
GENERAL PARTNER:
LEHMAN BROTHERS HOLDINGS INC.
By:
-30-
<PAGE>
INITIAL LIMITED PARTNER:
-------------------------------------
Steven Berkenfeld
ADDITIONAL LIMITED PARTNERS:
All Limited Partners now and hereafter
admitted as limited partners of the
Partnership pursuant to powers of
attorney now and hereafter executed in
favor of and delivered to the General
Partner.
By: GENERAL PARTNER, as Attorney-in-Fact:
LEHMAN BROTHERS HOLDINGS INC.
By:
-------------------------------
-31-
<PAGE>
SCHEDULE A
GENERAL PARTNER:
Name: Lehman Brothers Holdings Inc.
Registered Office:
c/o Corporation Trust Company
Corporation Trust Center
1209 Orange Street
Wilmington, Delaware 19801
Business Address:
3 World Financial Center
New York, New York 10285
Capital Contributions:
Initial: $90
INITIAL LIMITED PARTNER:
Name: Steven Berkenfeld
Business Address:
3 World Financial Center
New York, New York 10285
Capital Contribution: $10
-32-
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1 Certain Defined Terms . . . . . . . . . . . . . . . . . . . . 1
ARTICLE 2 Formation, Name and Place of Business;
Purpose and Limitation on Operations; Term;
Conversion to Corporate Form . . . . . . . . . . . . . . . . 6
2.1. Formation . . . . . . . . . . . . . . . . . . . . . . . 6
2.2. Name . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.3. Place of Business . . . . . . . . . . . . . . . . . . . 6
2.4. Purpose . . . . . . . . . . . . . . . . . . . . . . . . 6
2.5. Term . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.6. Conversion to Corporate Form . . . . . . . . . . . . . . 7
ARTICLE 3 General Partner; Relationship with Lehman Brothers . . . . . 7
3.1. General Partner; Management of General Partner . . . . . 7
3.2. No Compensation of Officers and Directors;
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.3. Day-to-Day Operations; Acts of Investment
Committee . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.4. Services by Lehman Brothers; Charges and Expenses . . . 8
3.5. Related Partnerships . . . . . . . . . . . . . . . . . . 8
ARTICLE 4 Limited Partners . . . . . . . . . . . . . . . . . . . . . . 8
4.1. Initial Limited Partner . . . . . . . . . . . . . . . . 8
4.2. Additional Limited Partners . . . . . . . . . . . . . . 8
4.3. List of Limited Partners . . . . . . . . . . . . . . . . 9
4.4. No Management by Limited Partners . . . . . . . . . . . 9
4.5. Limitation on Transfer of Limited Partners' Units . . . 9
ARTICLE 5 Liability of Partners . . . . . . . . . . . . . . . . . . . . 9
5.1. General Partner . . . . . . . . . . . . . . . . . . . . 9
5.2. Limited Partners . . . . . . . . . . . . . . . . . . . . 9
ARTICLE 6 Powers of General Partner; Prohibited Transactions
and Restrictions; Duties of General Partner;
Indemnification and Contribution . . . . . . . . . . . . . . 9
6.1. Powers . . . . . . . . . . . . . . . . . . . . . . . . . 9
6.2. Prohibited Transactions . . . . . . . . . . . . . . . . 10
6.3. Restrictions on the Authority of the General
Partner . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.4. Duties . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.5. Exculpation, Indemnification and Contribution . . . . . 12
6.6. General Partner Loans . . . . . . . . . . . . . . . . . 13
ARTICLE 7 Capital Contributions and Accounts; No Further
Contributions Required; Interest; Accounting and Valuation . 13
7.1. Capital Contributions and Accounts . . . . . . . . . . . 13
7.2. Further Capital Contributions . . . . . . . . . . . . . 14
(i)
<PAGE>
Page
7.3. Interest . . . . . . . . . . . . . . . . . . . . . . . . 14
7.4. Fixed Return to the General Partner . . . . . . . . . . 14
7.5. Accounting Periods and Taxable Years . . . . . . . . . . 15
ARTICLE 8 Allocations . . . . . . . . . . . . . . . . . . . . . . . . . 15
8.1. Allocation of Profits and Losses; Other
Allocations . . . . . . . . . . . . . . . . . . . . . . . . 15
8.2. Special Allocation Provisions . . . . . . . . . . . . . 15
8.3. Tax Allocations . . . . . . . . . . . . . . . . . . . . 16
8.4. Allocation among Limited Partners, Transfers . . . . . . 16
8.5. Tax Elections . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE 9 Distributions; Withdrawal . . . . . . . . . . . . . . . . . . 17
9.1. General Partner Discretion . . . . . . . . . . . . . . . 17
9.2. Distributions . . . . . . . . . . . . . . . . . . . . . 17
9.3. Non-Cash Distributions . . . . . . . . . . . . . . . . . 18
9.4. Withholding . . . . . . . . . . . . . . . . . . . . . . 18
9.5. Withdrawal . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE 10 Transferability of Interests; Vesting;
Termination of Employment . . . . . . . . . . . . . . . . . . 18
10.1. Restrictions and Conditions on Transfers of
Units . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
10.2. Assignees . . . . . . . . . . . . . . . . . . . . . . . 19
10.3. Substituted Limited Partners . . . . . . . . . . . . . 19
10.4. Termination of Employment, Death, Disability,
Retirement of Limited Partner . . . . . . . . . . . . . . . 20
10.5. Disposition of General Partner's Interest . . . . . . . 23
ARTICLE 11 Dissolution and Liquidation of the Partnership . . . . . . 23
11.1. Events Causing Dissolution . . . . . . . . . . . . . . 23
11.2. Liquidation . . . . . . . . . . . . . . . . . . . . . . 24
ARTICLE 12 Books and Records; Accounting;
Appraisal; Tax Matters and Elections . . . . . . . . . . . . 25
12.1. Books and Records . . . . . . . . . . . . . . . . . . . 25
12.2. Accounting Basis, Fiscal Year . . . . . . . . . . . . . 26
12.3. Bank Accounts . . . . . . . . . . . . . . . . . . . . . 26
12.4. Appraisal . . . . . . . . . . . . . . . . . . . . . . . 26
12.5. Reports . . . . . . . . . . . . . . . . . . . . . . . . 26
12.6. Tax Matters and Elections . . . . . . . . . . . . . . . 26
ARTICLE 13 Miscellaneous Provisions . . . . . . . . . . . . . . . . . 27
13.1. Appointment of the General Partner as Attorney-
in-Fact . . . . . . . . . . . . . . . . . . . . . . . . . . 27
13.2. Amendments of this Agreement . . . . . . . . . . . . . 28
13.3. Arbitration . . . . . . . . . . . . . . . . . . . . . . 29
13.4. Notices . . . . . . . . . . . . . . . . . . . . . . . . 29
13.5. Binding Provisions . . . . . . . . . . . . . . . . . . 29
13.6. Applicable Law . . . . . . . . . . . . . . . . . . . . 29
(ii)
<PAGE>
Page
13.7. Counterparts . . . . . . . . . . . . . . . . . . . . . 29
13.8. Separability of Provisions . . . . . . . . . . . . . . 30
13.9. Entire Agreement . . . . . . . . . . . . . . . . . . . 30
13.10. Paragraph Titles . . . . . . . . . . . . . . . . . . . 30
13.11. Waiver of Right of Partition . . . . . . . . . . . . . 30
13.12. Effectiveness . . . . . . . . . . . . . . . . . . . . 30
(iii)
EXHIBIT 11
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE><CAPTION>
TWELVE MONTHS ELEVEN MONTHS TWELVE MONTHS
ENDED ENDED ENDED
NOVEMBER 30 NOVEMBER 30 DECEMBER 31
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
PRIMARY:
Weighted average shares outstanding:
Common stock.................................. 104,535,218 105,436,860 105,608,423
Common stock issuable......................... 8,420,122 2,532,543
Common stock equivalents...................... 459,344 61,389 73,056
------------- ------------- -------------
Total........................................... 113,414,684 108,030,792 105,681,479
------------- ------------- -------------
------------- ------------- -------------
Income (loss) from continuing operations before
cumulative effect of change in accounting
principle..................................... $ 242.2 $ 125.2 $ (291.0)
Net income from discontinued operations......... 189.4
Cumulative effect of change in accounting
principle....................................... (12.7)
------------- ------------- -------------
Net income (loss)............................... 242.2 112.5 (101.6)
Preferred dividends............................. (42.3) (37.6) (47.9)
------------- ------------- -------------
Net income (loss) applicable to common stock.... $ 199.9 $ 74.9 $ (149.5)
------------- ------------- -------------
------------- ------------- -------------
Earnings Per Common Share:
Income (loss) from continuing operations before
cumulative effect of change in accounting
principle..................................... $ 1.76 $ 0.81 $ (3.20)
Discontinued operations......................... 1.79
Cumulative effect of change in accounting
principle....................................... (0.12)
------------- ------------- -------------
Earnings per common share....................... $ 1.76 $ 0.69 $ (1.41)
------------- ------------- -------------
------------- ------------- -------------
FULLY DILUTED:
Weighted average shares outstanding:
Common stock.................................. 104,535,218 105,436,860 105,608,423
Common stock issuable......................... 8,420,122 2,532,543
Common stock equivalents...................... 551,936 61,389 73,056
------------- ------------- -------------
Total........................................... 113,507,276 108,030,792 105,681,479
------------- ------------- -------------
------------- ------------- -------------
Income (loss) from continuing operations before
cumulative effect of change in accounting
principle..................................... $ 242.2 $ 125.2 $ (291.0)
Net income from discontinued operations......... 189.4
Cumulative effect of change in accounting
principle....................................... (12.7)
------------- ------------- -------------
Net income (loss)............................... 242.2 112.5 (101.6)
Preferred dividends............................. (42.3) (37.6) (47.9)
------------- ------------- -------------
Net income (loss) applicable to common stock.... $ 199.9 $ 74.9 $ (149.5)
------------- ------------- -------------
------------- ------------- -------------
Earnings Per Common Share:
Income (loss) from continuing operations before
cumulative effect of change in accounting
principle..................................... $ 1.76 $ 0.81 $ (3.20)
Discontinued operations......................... 1.79
Cumulative effect of change in accounting
principle..................................... (0.12)
------------- ------------- -------------
Earnings per common share....................... $ 1.76 $ 0.69 $ (1.41)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
EXHIBIT 12
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
COMPUTATION IN SUPPORT
OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS
(DOLLARS IN MILLIONS)
<TABLE><CAPTION>
FOR THE FOR THE
ELEVEN MONTHS YEAR
FOR THE YEAR ENDED DECEMBER 31 ENDED ENDED
-------------------------------------- NOVEMBER 30 NOVEMBER 30
1991 1992 1993 1994 1995
------ ------------------ ------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Combined Fixed Charges and
Preferred Dividends:
Interest expense:
Subordinated indebtedness........ $ 170 $ 150 $ 144 $ 158 $ 206
Bank loans and other
borrowings*...................... 4,755 5,035 5,224 6,294 10,199
Interest component of rentals of
office and equipment............. 70 74 76 42 44
Other adjustments**.............. 2 2 7 4 28
------ ------- ------ ------------- ------------
Total fixed charges.............. 4,997 5,261 5,451 6,498 10,477
Preferred dividends (tax
equivalent basis).............. 48 48 48 58 64
------ ------- ------ ------------- ------------
TOTAL (A)........................ $5,045 $5,309 $5,499 $ 6,556 $ 10,541
------ ------- ------ ------------- ------------
------ ------- ------ ------------- ------------
Earnings:
Pretax income (loss) from
continuing operations............ $ 150 $ (247) $ 27 $ 193 $ 369
Fixed charges.................... 4,997 5,261 5,451 6,498 10,477
Other adjustments***............. 7 (6) (4) (28)
------ ------- ------ ------------- ------------
TOTAL (B)........................ $5,154 $5,014 $5,472 $ 6,687 $ 10,818
------ ------- ------ ------------- ------------
------ ------- ------ ------------- ------------
(B / A).......................... 1.02 **** **** 1.02 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 preferred dividends and
would have had to increase approximately $295 million in 1992 and $27
million in 1993 in order to cover the deficiency.
LEHMAN BROTHERS 1995 ANNUAL REPORT
================================================================================
MANAGMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
---------------------
Set forth on the following pages is Management's Discussion and Analysis of
Financial Condition and Results of Operations for the twelve months ended
November 30, 1995, the eleven months ended November 30, 1994 and the twelve
months ended December 31, 1993.
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, primarily due to changes in interest and foreign exchange
rates, global economic and political trends and industry competition. As a
result, revenues and earnings may vary significantly from quarter to quarter and
from year to year.
The adverse market conditions that prevailed during the last three quarters of
1994, characterized by rising interest rates and depressed underwriting volumes,
continued throughout most of the first quarter of 1995.
In the second quarter of 1995, market conditions showed signs of improvement as
expectations for lower U.S. interest rates prompted strong rallies in the stock
and bond markets. Although customer volumes increased in both the debt and
equity markets, market conditions continued to be volatile during this period.
In general, investors remained conservative and defensive due to uncertainties
surrounding the direction of U.S. interest rates and the value of the dollar.
Over the same period, derivative transaction volumes showed improvement as
customers and clients were looking for protection in a declining interest rate
and volatile currency environment.
The positive momentum established during the second quarter of 1995 continued
into the third quarter of 1995. In early July 1995, the U.S. Federal Reserve
Bank reduced the federal funds rate by one-quarter of a percentage point.
Investors reacted favorably to this long-awaited rate cut, leading to a rally in
the bond market. However, by the middle of July 1995, positive economic data
caused renewed investor concerns regarding inflation, the growth rate of the
economy and the future direction of interest rates. Towards the end of the third
quarter, the market tone turned decidedly more positive as investors concluded
that interest rate increases would be unnecessary. In addition, the dollar
continued to strengthen against key currencies such as the yen and the Deutsche
mark, providing further support for a more stable interest rate environment.
The fixed income and equity markets rallied as a result of these factors.
Improved market conditions allowed for a continuing increase in debt and equity
origination activity. Driving the robust equity markets were strong individual
company and industry fundamentals, near record levels of merger and acquisition
activity and substantial cash inflows into mutual funds.
The market rally, which began in September, accelerated through the months of
October and November. The more favorable view on interest rates provided strong
support for the U.S. equity market as the major equity indices hit all-time
highs. Business fundamentals have remained reasonably positive in the U.S. bond
market, as lower levels of inflation and the possibility of a deficit reduction
agreement by the U.S. Government have raised the potential for further interest
rate reductions by the U.S. Federal Reserve Bank. These conditions have been
positive for debt and equity origination activity and secondary trading volumes
for the industry as a whole. Internationally, lower growth rates in
- THIRTY -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
the major European countries have prompted interest rate reductions from a
number of central banks and strong rallies in their respective bond and stock
markets. Higher relative returns in the U.S. markets vis-a-vis foreign markets
have bolstered international interest in U.S. securities and provided support
for the U.S. dollar. This positive market environment has continued into 1996.
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 6 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
reported its 1994 financial statements on the basis of an eleven month
transition period ended November 30, 1994. Due to the eleven month reporting
period for 1994, the Company's 1994 results of operations are not directly
comparable with the Company's results for 1995 or 1993.
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 21 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.
Results of Operations
Summary
The Company reported net income of $242 million for 1995, including a $47
million aftertax gain related to the Company's sale of its interest in Omnitel
Sistemi Radiocellullari Italiani S.p.A. ("Omnitel") and a $58 million aftertax
charge for occupancy-related real estate expenses and severance. Excluding these
special items, net income was $253 million for 1995. The Company's 1995 results
reflect improved performance in corporate finance advisory activity and in fixed
income and equity origination as well as higher levels of customer activity in a
number of businesses. The Company benefited from the continuing increase in
merger and acquisition activity throughout the year and from a stronger market
climate beginning in the second quarter of 1995. Realization of benefits from
the continued investments in selective investment banking, research and sales
resources, combined with reductions in the Company's personnel and nonpersonnel
expenses, also had a positive effect on 1995 results. For 1994, the Company
reported net income of $113 million, including 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 related to the spin-off from American Express on May 31, 1994.
The 1994 results reflect the difficult market environment for many of the
Company's principal businesses. The Company reported a net loss of $102 million
- THIRTY ONE -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
for 1993 which included a loss of $646 million for businesses sold, net income
of $355 million for the Company's continuing businesses and a net gain of $189
million from discontinued operations. A detailed breakout of the 1993 results
into these three categories is included on page 39. The primary discussion and
comparison of operating results for 1993 includes only the continuing Lehman
Businesses, with a separate section for Businesses Sold/Discontinued Operations
listed subsequently on pages 39-40.
Net Revenues
Net revenues were $3,071 million for 1995, $2,738 million for 1994 and $3,555
million for 1993. Net revenues in 1995, excluding a special revenue gain of $129
million from the sale of the Company's investment in Omnitel, were $2,942
million. Revenues in 1995 were positively affected by increased underwriting
volumes and customer flow activity due to strong rallies in the stock and bond
markets during the last three quarters of the year. The Company's revenues
increased during each quarter of 1995. Although 1994 revenues on an annualized
basis were comparable to 1995 levels, the Company's 1994 revenues declined
throughout the year from a first quarter peak as increasing interest rates and
volatile equity markets served to depress underwriting volumes and to reduce
customer flow activity. Revenues in 1993 were affected by the positive economic
environment, which resulted in a record year for Lehman Brothers and for the
U.S. securities industry, as historically low interest rates, higher volumes of
new stock and bond issues and the continued restructuring of corporate balance
sheets produced strong results.
Since 1990, Lehman Brothers has focused on a "client/customer-driven" strategy.
Under this strategy, Lehman Brothers concentrates on serving the needs of major
issuing and advisory clients and investing customers worldwide to build an
increasing "flow" of business that leverages the Company's research,
underwriting and distribution capabilities. Customer flow continues to be the
primary source of the Company's net revenues. In addition to its customer flow
activities, the Company also takes proprietary positions based upon expected
movements in interest rate, foreign exchange, equity and commodity markets in
both the short- and long-term. The Company's success in this area is dependent
upon its ability to anticipate economic and market trends and to develop trading
strategies that capitalize on these anticipated changes. Consistent with the
Company's client/customer-driven strategy, proprietary trading activities
accounted for approximately 9% of net revenues in 1995, 6% in 1994 and 10% in
1993. Proprietary trading is not anticipated to grow significantly.
The Company, through its subsidiaries, is a market-maker in all major equity and
fixed income products in both the domestic and international 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. As part of its market-making activities, the Company
maintains inventory positions of varying amounts across a broad range of
financial instruments which are marked-to-market on a daily basis and along with
the Company's proprietary trading positions, give rise to principal transactions
revenues. The Company utilizes various hedging strategies to minimize its
exposure to significant movements in interest and foreign exchange rates and the
equity markets. Net revenues from the Company's market-making and trading
activities in fixed income and equity products are recognized as either
principal transactions or net interest revenues depending upon the method of
financing and/or hedging related to specific inventory positions. The Company
evaluates its trading strategies on an overall profitability basis which
includes both principal transaction revenues and net interest. Therefore,
changes in net interest should not be viewed in isolation but should be viewed
in conjunction with revenues from principal transactions. During 1995, net
interest revenues increased from 1994 levels, primarily related to the benefit
of the Company's liability management activities as well as decreased financing
costs due to the $1.2 billion infusion of capital in connection with the May 31,
1994 spin-off from the American Express Company. Such liability management
activities included the conversion of a portion of the Company's existing
long-term debt portfolio from fixed to floating rate through the use of interest
rate swaps.
- THIRTY TWO -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
Net revenues from international sources as a percentage of total net revenues
(excluding Omnitel) were 44% for 1995, 42% for 1994 and 33% for 1993, reflecting
the Company's strategy to increase the global scope of its business activities.
This includes approximately $368 million, $337 million and $300 million of
revenues that were associated with domestic products and services in 1995, 1994
and 1993, respectively, that the Company estimates resulted from relationships
with international clients and customers.
The following table of net revenues by business unit and the accompanying
discussion have been prepared in order to present the Company's net revenues in
a format which reflects the manner in which the Company manages its businesses.
For internal management purposes, the Company has been segregated into five
major business units: Fixed Income, Equity, Corporate Finance Advisory, Merchant
Banking and Asset Management. Each business unit represents a grouping of
financial activities and products with similar characteristics. These business
activities result in revenues that are recognized in multiple revenue categories
contained in the Company's Consolidated Statement of Operations. Net revenues by
business unit contain certain internal allocations, including funding costs,
which are centrally managed.
TWELVE MONTHS ENDED NOVEMBER 30, 1995
Principal
Transactions
and Net Investment
Interest* Commissions Banking Other Total
--------- ----------- ---------- ----- -----
Fixed Income $1,390 $ 92 $ 180 $ 15 $1,677
Equity 419 330 218 2 969
Corporate Finance Advisory 231 231
Merchant Banking (35) 172 137
Asset Management 2 28 27 57
- -------------------------------------------------------------------------------
$1,776 $ 450 $ 801 $ 44 $ 3,071
- -------------------------------------------------------------------------------
* 1995 equity revenues include $129 million from the sale of Omnitel.
ELEVEN MONTHS ENDED NOVEMBER 30, 1994
Principal
Transactions
and Net Investment
Interest Commissions Banking Other Total
---------- ----------- ---------- ----- -----
Fixed Income $1,420 $ 103 $ 73 $ 25 $1,621
Equity 240 312 183 16 751
Corporate Finance 180 180
Advisory
Merchant Banking (8) 136 128
Asset Management 2 30 26 58
- --------------------------------------------------------------------------------
$1,654 $ 445 $ 572 $ 67 $ 2,738
- --------------------------------------------------------------------------------
TWELVE MONTHS ENDED DECEMBER 31, 1993
<TABLE><CAPTION>
Principal
Transactions
and Net Investment
Interest Commissions Banking Other Total
---------- ----------- ---------- ----- -----
<S> <C> <C> <C> <C> <C>
Fixed Income $ 1,718 $ 117 $ 208 $ (7) $ 2,036
Equity 472 339 344 52 1,207
Corporate Finance Advisory 133 133
Merchant Banking (12) 117 105
Asset Management 8 32 34 74
- --------------------------------------------------------------------------------------
$ 2,186 $ 488 $ 802 $ 79 $ 3,555
- --------------------------------------------------------------------------------------
</TABLE>
- THIRTY THREE -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
For 1995, net revenues increased in all major business units except asset
management relative to the levels posted in 1994, as underwriting, merger and
acquisition and customer activity strengthened throughout the year. Net revenues
by business unit for 1994 were down in each major category except corporate
finance advisory and merchant banking in comparison to the business unit
revenues recorded in 1993, reflecting the particularly robust conditions in the
capital markets for the entire 1993 year. In 1995, fixed income revenues of
$1,677 million reflected a higher contribution from investment banking, as the
mix and after-market performance of the Company's underwriting improved from
1994 levels. Equity revenues increased to $969 million in 1995 ($840 million,
excluding Omnitel) as stronger market conditions resulted in a higher level of
investment banking underwriting activity as well as increased customer trading
volumes. Corporate finance advisory revenues of $231 million in 1995 reflected
the Company's increased participation in strategic mergers and acquisitions and
advisory activities throughout the year. Merchant banking revenues of $137
million in 1995 reflected a slight increase over 1994 due to favorable
valuations on the underlying investments in the Company's merchant banking
funds. Asset management revenues of $57 million in 1995 were virtually unchanged
from 1994 levels.
The following discussion provides an analysis of the Company's net revenues
based upon the various business units which generated these revenues.
Fixed Income The Company's fixed income revenues reflect customer flow
activities (both institutional and high-net-worth retail), secondary trading,
debt underwriting, syndicate and financing activities related to fixed income
products. Fixed income products include dollar and non-dollar government
securities, mortgage- and asset-backed securities, money market products, dollar
and non-dollar corporate debt securities, emerging market securities, municipal
securities, financing (global access to debt financing sources including
repurchase and reverse repurchase agreements), foreign exchange, commodities and
fixed income derivative products. Lehman Brothers is one of the leading 37
primary dealers in U.S. government securities and is a market-maker in the
government securities of all major industrial countries. The Company, through
its subsidiaries, is also a dominant market-maker for a broad range of other
fixed income products.
Fixed income revenues were $1,677 million for 1995, $1,621 million for 1994 and
$2,036 million for 1993. Reduced interest rates and a strengthening U.S. dollar
contributed to a favorable market environment in 1995, particularly during the
second half of the Company's year. The improved market environment contributed
to a stronger debt syndicate calendar and increased customer flow activities for
many of the Company's fixed income products, including high grade corporates,
municipals and foreign exchange. The most significant component of the increases
in fixed income revenues was investment banking due to a strengthening in
origination volumes and an improved mix of underwriting revenues compared to the
depressed 1994 levels. Lehman ranked #2 in lead-managed fixed income offerings
worldwide in 1995 with underwritings of $77 billion, based on Securities Data
Company information. Fixed income derivative revenues were down slightly in 1995
compared to 1994 due to a decrease in new customer activity early in the year.
Toward the end of 1995, derivative activities increased with related revenues in
the fourth quarter up substantially compared to the same quarter in 1994; much
of the increase was attributable to a broadening of the Company's international
customer and client business. This reflects a concerted effort to continue to
globalize the Company's efforts in these areas. Financing revenues were slightly
down in 1995 compared to 1994 due to decreased net interest spreads in certain
of the matched book portfolios.
Rising interest rates and inflationary concerns in 1994 had a negative effect on
customer activity resulting in reduced profitability for most of the fixed
income businesses as compared to 1993. Commission revenues which primarily
relate to the Company's foreign exchange and commodities trading in listed
products decreased slightly throughout the three year period.
- THIRTY FOUR -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
Equity The Company's equity revenues reflect customer flow activities (both
institutional and high-net-worth retail), secondary trading, equity
underwriting, equity finance, equity derivatives and arbitrage activities.
Equity revenues were $969 million for 1995, $751 million for 1994 and $1,207
million for 1993. Included in the 1995 results were net revenues of $129 million
resulting from the Company's sale of its stake in Omnitel. Excluding the Omnitel
transaction, equity revenues were $840 million for 1995. Revenues in 1995
reflect a very strong equity syndicate calendar that benefited both the
Company's NASDAQ and listed businesses. The favorable syndicate calendar in
1995 also contributed to increased customer flow in the Company's secondary
trading activities.Commission revenues were up as trading volumes on domestic
exchanges increased, partially offset by reduced market trading volumes on
certain Asian and European exchanges. The Company ranked third in total NYSE
listed trading volume throughout all of 1995. Equity derivative revenues in 1995
were up substantially compared to 1994 and 1993 due to increased customer
activity and more favorable market conditions. Equity finance revenues were down
in 1995 versus 1994 due to decreased net spreads in certain of the conduit
matched books.
The decrease in equity revenues in 1994 from 1993 reflected the difficult
business environment in 1994. The 1994 decline was broad based across most
equity-related products.
Corporate Finance Advisory Corporate finance advisory net revenues, classified
in the Consolidated Statement of Operations as a component of investment banking
revenues, result primarily from fees earned by the Company in its role as
strategic advisor to its clients. This role primarily consists of advising
clients on mergers and acquisitions, divestitures, leveraged buyouts, financial
restructurings, and a variety of cross border transactions. The net revenues for
corporate finance advisory increased in 1995 to $231 million from $180 million
and $133 million in 1994 and 1993, respectively. The increased revenues
reflected a strong mergers and acquisitions environment throughout 1995 as
companies concentrated on cost cutting and creating greater economies of scale
via acquisitions, asset sales, and corporate restructurings on a global basis.
During 1995, the Company acted as advisor for 141 completed transactions valued
at approximately $67 billion, based on Securities Data Company information.
Reflecting the international nature of the Company's corporate finance advisory
business, 47 of the transactions completed in 1995, valued at $21 billion, were
cross-border in nature. Corporate finance advisory exhibited renewed strength in
1994 versus 1993 as both the fees earned by the Company and the number of
completed transactions increased from 1993 levels.
Merchant Banking Merchant banking net revenues, classified in the Consolidated
Statement of Operations as a component of investment banking revenues, primarily
represent the net realized gains and net unrealized changes resulting from the
Company's participation in certain investment partnerships, less the related net
interest expense to finance capital contributions to the partnerships. Merchant
banking revenues were $137 million, $128 million and $105 million for 1995, 1994
and 1993, respectively.
The Company is the fund manager for five merchant banking partnerships,
including three institutional funds and two employee investment vehicles.
Current merchant banking investments held by the partnerships include both
publicly traded and privately held companies diversified on a geographic and
industry basis. For 1995, merchant banking revenues resulting from the
participation in these partnerships increased to $172 million from $136 million
for 1994. This increase was principally due to increases in the value of several
publicly traded investments within the institutional funds and employee
investment vehicles. For 1994, merchant banking revenues increased to $136
million from $117 million for 1993. Net revenues of the merchant banking
business include an allocation of net interest expense related to the Company's
investment in the partnerships. The method used to allocate interest expense was
revised in 1995 from prior periods to better reflect the costs of capital
utilized.
- THIRTY FIVE -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
The Company continues to pursue merchant banking opportunities that target
certain industries and geographic areas in both the U.S. and non-U.S. markets.
For example, during 1995, the Company established a $75 million fund
specifically designed to invest in the oil tanker industry. In addition, in
December 1995 the Company established a third employee investment vehicle, a
$225 million partnership that will invest in global merchant banking
opportunities.
Asset Management Revenues from asset management activities were $57 million for
1995, $58 million for 1994 and $74 million for 1993. These revenues primarily
consist of fees from the management of various funds, commissions from the sale
of funds to customers and fees from the management of certain accounts for
institutions and high-net-worth individuals. In December 1995, the Company
entered into an agreement to sell Lehman Brothers Global Asset Management, Ltd.
("LBGAM"), an offshore, retail oriented family of funds. Instead, the Company
plans to focus on sponsoring and distributing more sophisticated strategic funds
attractive to high-net-worth individuals and institutions. As a part of this
strategy, asset management launched two funds, a fixed income fund and an Asia
Pacific fund during 1995. Excluding the assets of LBGAM, total assets under
management were $10.1 billion, $6.9 billion and $8.2 billion at November 30,
1995, November 30, 1994 and December 31, 1993, respectively. The decrease in
revenues from 1993 to 1994 relates to the loss of certain commissions and other
revenues related to funds and customers transferred to Smith Barney in
conjunction with the sale of the retail division.
Non-Interest Expenses
Non-interest expenses were $2,702 million for 1995, including a restructuring
charge of $97 million and compensation and benefits expenses of $50 million
attributable to Omnitel. Non-interest expenses were $2,545 million and $2,990
million for 1994 and 1993, respectively. Non-interest expenses in 1994 included
a $33 million severance charge and a $15 million spin-off charge. 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 restructuring charge in 1995 included an $80 million occupancy related
real-estate charge and a $17 million severance charge. The real-estate component
of the charge resulted from a complete review of the Company's real estate
requirements at current headcount levels and the elimination of excess real
estate, primarily in New York, London and Tokyo. This charge includes costs to
write-down the carrying value of leasehold improvements, as well as projected
shortfalls of sublease rentals versus expected operating costs related to the
Company's excess capacity. The excess real estate capacity resulted from
headcount reductions associated with the Company's cost reduction efforts. The
severance component of the charge relates to payments made to terminated
personnel arising from a formalized fourth quarter business unit productivity
review. The Company expects to realize approximately $24 million of reduced
occupancy and depreciation expenses on an annualized basis as a result of these
actions.
Excluding these special charges, non-interest expenses were $2,555 million for
1995, $2,497 million for 1994 and $2,958 million for 1993.
- THIRTY SIX -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
Compensation and benefits expenses declined as a percentage of net revenues to
50.8% for 1995 (excluding Omnitel) from 51.6% for 1994 and 51.4% for 1993.
Excluding special charges, nonpersonnel expenses decreased to $1,061 million for
1995, from $1,084 million for 1994 and $1,133 million for 1993. This decline in
compensation and benefits and nonpersonnel expenses in 1995 reflects the
Company's continued focus on improving productivity and reducing costs.
TWELVE MONTHS ELEVEN MONTHS TWELVE MONTHS
ENDED ENDED ENDED
NOVEMBER 30 NOVEMBER 30 DECEMBER 31
(IN MILLIONS) 1995(1) 1994 1993
- -------------------------------------------------------------------------------
Compensation and
benefits expense $ 1,494 $ 1,413 $ 1,825
Compensation and
benefits/net revenues 50.8% 51.6% 51.4%
Nonpersonnel expenses:
Excluding reserves
and other charges $ 1,061 $ 1,084 $ 1,133
Reserves and other charges 97 48 32
- -------------------------------------------------------------------------------
Total nonpersonnel
expenses $ 1,158 $ 1,132 $ 1,165
- -------------------------------------------------------------------------------
Nonpersonnel expenses/net
revenues: Total nonpersonnel
(excluding reserves and
expenses and other charges) 36.1% 39.6% 31.9%
(1) 1995 amounts exclude revenues and expenses related to the Omnitel
transaction.
Cost Reduction Effort
At year-end 1994, the Company announced a cost reduction program to reduce
expenses by $300 million on an annualized basis (pretax) compared to the third
quarter 1994 expense run rate. The Company's cost reduction efforts were
targeted into three areas: personnel cost savings of $100 million, nonpersonnel
cost savings of $150 million and interest and tax expense savings of $50
million. Through November 1995, the Company achieved its cost reduction goals in
all the identified cost categories. In fact, through the fourth quarter of 1995,
the Company reduced total expenses by approximately $326 million on an
annualized basis compared to the third quarter of 1994. These cost savings
achieved do not include the $24 million of future cost savings attributable to
the real-estate related restructuring charge previously discussed.
With respect to the Company's personnel related cost reduction goals, the
Company reduced headcount to 7,771 at November 30, 1995 from 8,512 at November
30, 1994 and 17% from a peak of 9,400 in early 1994. As a result of these
reductions, the Company reduced its compensation and benefits ratio to 50.7% in
the fourth quarter of 1995 (excluding Omnitel) from the third quarter 1994
benchmark of 53.9%, translating into annualized cost savings of approximately
$100 million.
Nonpersonnel cost reductions were achieved as a result of a systematic and
comprehensive global review of all major expense categories. As a result,
nonpersonnel expenses decreased to $254 million in the fourth quarter of 1995
from the third quarter 1994 benchmark of $298 million, resulting in reduced
quarterly expenses of $44 million or annualized savings of approximately $177
million.
The Company achieved its $50 million cost reduction goal related to interest and
taxes through equal reductions in each category. The Company's interest expense
savings were accomplished as a result of the Company's efforts to improve the
Company's collateral utilization and long-term debt hedging strategies. Tax
savings of approximately $25 million were achieved as a result of the
implementation of additional tax planning strategies.
As a result of these efforts, the Company's expense base has been permanently
lowered. The Company plans to continue its focus on nonpersonnel costs, with the
goal of achieving further cost savings in excess of $50 million by the end of
1996.
- THIRTY SEVEN -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
Income Taxes
Through affirmative actions the Company continues to aggressively pursue
maintaining a low effective tax rate. The actions taken in 1995 include the
restructuring of certain legal entities and a general review of overall
operations to assure the Company is operating in the most tax efficient manner.
The Company anticipates ongoing benefits related to the actions taken.
The Company had an income tax provision of $127 million, $67 million and $318
million for 1995, 1994 and 1993, respectively. The effective tax rate for the
Company was 34% for 1995, 35% for 1994 and 37% for 1993. The lower tax rate in
1995 versus 1994 reflects the Company's continued focus on generating income
subject to preferential tax treatment as well as creating organizational
structures that optimize tax results. The lower tax rate in 1994 versus 1993
reflects a reduction in pretax results and 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
non-core 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.
The Company's net deferred tax assets increased $89 million to $309 million at
November 30, 1995 from $220 million at November 30, 1994. The net increase is
primarily attributable to the reversal of certain temporary differences. It is
anticipated that the remaining deferred tax asset will be realized through
future earnings. The Company's net deferred tax assets decreased $71 million to
$220 million at November 30, 1994 from $291 million at December 31,1993. The
net reduction is attributable to the reversal of certain temporary difference,
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.
As of November 30, 1995, the Company had approximately $25 million of tax net
operating losses available to offset future taxable income.
1993 Results
Because of the significant sale transactions completed during 1993, the
Company's 1993 financial statements are not fully comparable with 1995 and 1994.
In order to facilitate an understanding of the Company's 1993 results, the
following table segregates the Company's results between the results of the
Lehman Businesses (the results of the businesses that now comprise Lehman
Brothers), Businesses Sold (the results of Shearson and SLHMC through their
respective sale dates; the loss on the sale of Shearson; and the reserves for
non-core businesses) and Discontinued Operations (the results of The Boston
Company accounted for as a discontinued operations).
- THIRTY EIGHT -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
<TABLE><CAPTION>
Twelve months ended December 31
1993
--------------------------------------------------------
Lehman Businesses Discontinued
(In millions) Businesses Sold Operations Historical
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Principal transactions $1,732 $ 323
Investment banking 802 170
Commissions 488 828
Interest and dividends 5,679 161
Other 79 412
- -------------------------------------------------------------------------------------------------
Total revenues 8,780 1,894
Interest expense 5,225 143
- -------------------------------------------------------------------------------------------------
Net revenues 3,555 1,751 $ 5,306
- -------------------------------------------------------------------------------------------------
Non-interest expenses:
Compensation and benefits 1,825 1,164
Other expenses 1,133 470
Loss on sale of Shearson 535
Reserves and other charges 32 120
- -------------------------------------------------------------------------------------------------
Total non-interest expenses 2,990 2,289 5,279
- -------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before taxes 565 (538) 27
Provision for income taxes 210 108 318
- -------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 355 (646) (291)
- -------------------------------------------------------------------------------------------------
Income from discontinued operations,
net of taxes $ 189 189
- -------------------------------------------------------------------------------------------------
Net income (loss) $ 355 $ (646) $ 189 $(102)
- -------------------------------------------------------------------------------------------------
</TABLE>
The discussion of the 1993 results for the Lehman Businesses has been
included in the previous sections discussing revenues, non-interest expenses
and taxes. The following section includes a discussion of the Businesses
Sold/ Discontinued Operations.
Businesses Sold/Discontinued Operations
This discussion is provided to analyze the results of the Businesses Sold.
All 1993 amounts for the Businesses Sold include results through their
dates of sale.
The Businesses Sold recorded a net loss of $646 million for 1993. 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 for 1993. Excluding the $79
million aftertax charge discussed above, SLHMC operations were break-even
in 1993.
Net revenues related to the Businesses Sold were $1,751 million for 1993.
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 for 1993. Compensation and benefits expense were $1,164
million for 1993.
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 the write-off of $750 million of
goodwill which was not deductible for tax purposes.
- THIRTY NINE -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
The Company reported net income of $189 million from discontinued
operations of The Boston Company, including an aftertax gain of $165
million on the sale and aftertax earnings of $24 million. (See Note 21 for
further discussion of the Businesses Sold and the Discontinued Operations)
Liquidity and Capital Resources
The Company's total assets increased to $115.3 billion at November 30, 1995
from $109.9 billion at November 30, 1994. The increase in total assets is
primarily the result of the change in the Company's clearing arrangements,
partially offset by decreases in other areas. At the close of business on
February 17, 1995, the Company became self-clearing for equities, municipal
securities and corporate debt instruments. As a result of this arrangement,
assets increased at that time by approximately $11 billion which were
predominantly funded with offsetting liabilities. The Company's
Consolidated Statement of Financial Condition now includes accounts
previously cleared, settled and carried by Smith Barney Inc. Principal
areas impacted include the Company's stock borrow and lending activities
and high-net-worth customer business. The Company has entered into an
agreement for a term of five years with the Bear Stearns Securities Corp.
("BSSC") pursuant to which BSSC has agreed to process the transactions
previously cleared by Smith Barney Inc.
The Company's balance sheet is highly liquid and consists primarily of cash
and cash equivalents, securities and other financial instruments owned
which are marked-to-market daily and collateralized short-term financing
agreements which arise primarily from the Company's customer flow
securities transactions. As the Company's primary activities are based on
customer flow, the assets experience a rapid turnover rate. In addition,
the highly liquid nature of these assets provides the Company with
flexibility in financing and managing its business. At November 30, 1995,
short-term assets, those which can be converted to cash in less than one
year, represented approximately 97% of the Company's total balance sheet.
Long-term assets consist primarily of other receivables, property,
equipment and leasehold improvements, deferred expenses and other assets
and excess of cost over fair value of net assets acquired. The Company has
set a goal of prudently liquidating those long-term assets, which are not
part of the core operating business. These non-operating assets have
decreased by approximately $800 million during 1995, with the majority of
this reduction being comprised of two items. On June 22, 1995, American
Express repaid $700 million of a $945 million interest bearing receivable
which was due in June 1996. The maturity of the remaining $245 million was
extended to the year 2000. Portions of this note will be repaid by American
Express, prior to the maturity date in proportion to the Company's payments
and prepayments on any indebtedness related to its obligations for the
World Financial Center. On December 12, 1995, American Express repaid an
additional $37 million reducing the outstanding receivable to $208 million.
Further payments and prepayments on the World Financial Center debt are
expected to reduce the amount of the receivable to $88 million by November
30, 1997. In addition, on November 16, 1995, American Marketing Industries
Holdings Inc. repaid in full its $98 million long-term subordinated
indebtedness.
Balance sheet leverage ratios are one methodology to evaluate the financial
risk inherent in the balance sheet. The Company evaluates this risk by
monitoring its adjusted leverage, defined as total assets less the lower of
securities purchased under agreements to resell or securities sold under
agreements to repurchase, which represent short-term collateralized
transactions with high quality assets, divided by stockholders' equity. As
of November 30, 1995 and 1994 the Company's adjusted leverage ratios were
21.4x and 21.3x, respectively, which are in line with the Company's peer
group of competitor firms.
Funding and Capital Policies
The Company's Global Asset and Liability Committee ("ALCO"), which includes
senior officers from key areas of the Company, are responsible for
establishing and managing the funding and liquidity policies of the
Company. This includes recommendations for balance sheet size as well as
the allocation of balance sheet to product areas as determined by internal
profitability models and return on equity targets. In addition, in
coordination with the Regional Asset and Liability Committees, ALCO works
to ensure coordination of global funding efforts. The Regional Asset and
Liability
- FORTY -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
Committees are aligned with the Company's geographic funding centers and
are responsible for implementing funding strategies consistent with the
direction set by ALCO and to monitor and manage liquidity for the region.
The primary goal of the Company's funding principles as set by ALCO are 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.
The Company manages Total Capital, defined as long-term debt, both senior
notes and subordinated indebtedness, plus stockholders' equity, on a
business and product level. The determination of the amount of capital
assigned to each business and product is a function of asset quality, risk,
liquidity and regulatory capital requirements. Periodically, the Company
reallocates capital to its businesses based upon their ability to obtain
targeted returns, perceived opportunities in the marketplace and the
Company's long term strategy.
II To maximize the portion of the Company's balance sheet that is funded
through collateralized borrowing sources and conversely minimize the use of
commercial paper and short term debt.
Collateralized borrowing sources include securities and other financial
instruments sold but not yet purchased, as well as collateralized short
term financings, defined as securities sold under agreements to repurchase
("repos") and securities loaned.
Because of their secured nature, repos and other types of collateralized
borrowing sources are less credit-sensitive and have historically been a
more stable financing source under adverse market conditions. Also,
collateralized borrowing sources generally provide the Company with access
to lower cost funding. The Company has been able to exceed its goal of
maintaining repo funding lines significantly in excess of actual
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.
The Company continually reviews its mix of long- and short-term borrowings
as it relates to maturity matching and the availability of secured and
unsecured financing. In general, long-term assets are financed with fixed
rate long-term debt and stockholders' equity and inventories and all other
short-term assets are financed with a combination of short-term funding and
floating rate long-term debt and stockholders' equity.
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 obtains global funding from both the banking community and
short- and long-term investors through its centers 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 and currencies.
The Company accesses both commercial paper and other short-term debt
instruments, including master notes and bank borrowings under uncommitted
lines of credit. To reduce liquidity risk, the Company carefully manages
its maturities to avoid large refinancings on any one given day. In
addition, the Company limits its exposure to any single 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.
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LEHMAN BROTHERS 1995 ANNUAL REPORT
The Company's liquidity contingency plans are continually reviewed and
updated as the Company's asset/liability mix and liquidity requirements
change. The Company's liquidity contingency plan is based on an estimate of
its ability to meet its funding requirements through a combination of
collateralized short-term financings and short-term secured debt as well as
Total Capital.
To achieve this objective, the Company's liquidity policies include
maintaining sufficient excess unencumbered securities to use as collateral,
if necessary, to obtain secured financing to meet maturities of short-term
unsecured liabilities as well as current maturities of long-term debt.
Also, the Company maintains a sufficient amount of Total Capital to enable
the Company to fund those assets which are less liquid. Lastly, the Company
periodically tests its secured and unsecured credit facilities to ensure
availability and operational readiness. The Company believes that these
policies position the Company to meet its liquidity requirements in all
periods including those of financial stress.
Short-Term Funding
To implement the policies as noted above, each business is required to fund
its products primarily through global collateralized financings. There are
two principal business areas which are responsible for these efforts,
Lehman Brothers' Fixed Income Financing ("Financing") and Equity Finance.
Financing works in conjunction with the institutional fixed income sales
and trading professionals to provide financing to customers and the firm
through the repurchase markets. Equity Finance provides a similar function
in the equity markets typically through securities loaned/securities
borrowed transactions. An ability to leverage global market expertise and
the Company's distribution capabilities are key to successful financing
efforts. The amount of the Company's collateralized borrowing activities
will vary reflecting changes in the mix and overall levels of securities
and other financial instruments owned and global market conditions.
However, at all times, the majority of the Company's assets are funded with
collateralized borrowing sources.
The Company's treasury area works closely with Financing and Equity Finance
to develop funding plans to support the business areas, as well as to
execute daily funding activities. On a daily basis, treasury is responsible
for meeting any funding needs not met through Financing and Equity Finance.
Funding through treasury is managed globally with regional centers which
have access to the capital markets through the issuance of commercial paper
as well as bank lines of credit and other short- and long- term debt
instruments.
At November 30, 1995 and 1994, $81 billion and $77 billion, respectively,
of the Company's total balance sheet was financed using collateralized
borrowing sources. The remainder of the financing for the balance sheet is
comprised of commercial paper and short-term debt, payables and Total
Capital.
In addition, in October 1995, the Company established a $1 billion Secured
Revolving Credit Facility (the "Facility") for Lehman Brothers
International (Europe) ("LBIE"), the Company's major operating entity in
Europe. Under the terms of this committed Facility, the bank group has
committed to provide up to $1 billion for up to 364 days on a secured basis
with a variety of financial instruments as collateral. The bank group has
further committed to provide loans under the Facility for up to 6 months
beyond the Facility maturity date. The loans provided by the bank group are
available in several currencies including U.S. dollar, British pound
sterling, Deutsche mark, ECU, French franc, and Italian lira, as well as
many other currencies as required. There were no borrowings outstanding
under this Facility as of November 30, 1995. However, the Company
anticipates utilizing this Facility for general corporate purposes from
time to time.
In conjunction with the increase in collateralized short-term financings,
as well as the increase in the Company's Total Capital, as discussed below,
the Company's use of commercial paper and short-term debt decreased to $6.2
billion at November 30, 1995 from $9.8 billion at November 30, 1994. Of
these amounts, commercial paper outstanding at November 30, 1995 was $1.4
billion with an average maturity of 78 days, compared to $2.8 billion with
an average maturity of 53 days at November 30, 1994.
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LEHMAN BROTHERS 1995 ANNUAL REPORT
At November 30, 1995 Holdings maintained a Revolving Credit Agreement with
a group of banks. Under the terms of the credit agreement, the banks have
committed to provide up to $2 billion for up to 364 days. The credit
agreement contains restrictive covenants which require, among other things
that the Company maintain specified levels of consolidated stockholders'
equity and tangible net worth, as defined. The Company has been in
compliance with these covenants at all times. There were no borrowings
outstanding under this agreement as of November 30, 1995.
The Company's uncommitted lines of credit provide an additional source of
secured and unsecured short-term financings. At November 30, 1995, the
Company had $14.1 billion of uncommitted lines of credit compared to $12.5
billion at November 30, 1994. Uncommitted lines consist of facilities that
the Company has been advised are available but for which no contractual
lending obligations exists.
Total Capital
Long-term assets are financed with Total Capital.The Company maintains
Total Capital 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.
At November 30, 1995 the Company had $16.5 billion of Total Capital
compared to $14.7 billion at November 30, 1994. During 1995, the Company
issued $5.3 billion in long-term debt, compared to $3.9 billion for 1994.
The Company issued $1.4 billion in excess of its maturing debt to further
strengthen the Company's Total Capital base. In conjunction with the
Company's liquidity policies, the Company increased the average maturity of
its long-term debt portfolio. At November 30, 1995 the Company had
long-term debt outstanding of $12.8 billion with an average life of 3.7
years, compared with $11.3 billion with an average life of 2.9 years at
November 30, 1994. Moreover, for debt with a maturity of greater than one
year, the average life increased to 4.6 years at November 30, 1995 from 3.8
years at November 30, 1994.
The diversity of the Company's long-term funding sources and the expansion
of its investor base, has allowed the Company to increase its total
long-term debt and extend the average maturity, at spreads over treasuries
which were lower than issuing spreads in 1994, despite the downgrade of the
Company's credit ratings by Moody's Investors Service Inc.("Moody's").
At November 30, 1995 the Company had approximately $7.8 billion available
for issuance of debt securities under various shelf registrations and debt
programs.
The Company's stockholders' equity increased to $3.7 billion at November
30, 1995 from $3.4 billion at November 30, 1994 primarily due to the
retention of 1995 earnings and the recognition of common stock issuable
under the Company's stock award plans. (See Note 9 to the Consolidated
Financial Statements.) Over time the Company intends to either repurchase
shares in the open market or issue additional common stock or a combination
of both to fund common stock issuable under the Company's employee
incentive compensation programs.
Additionally, the Company closely monitors its primary double leverage
ratio. Primary double leverage, defined as Holdings' investment in
subsidiaries divided by Holdings' stockholders' equity, was 1.01 at
November 30, 1995, a continued decrease from 1.10 at November 30, 1994 and
2.06 at December 31, 1993.
At November 30, 1995 Lehman Brothers Inc.'s net capital, as defined by
regulatory authorities, aggregated $1.4 billion and was $1.3 billion in
excess of the minimum regulatory requirements. 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, 1995, the Company
is in compliance with all such regulatory capital requirements.
In 1996, the Company expects to maintain Total Capital at levels consistent
with the amount outstanding at November 30, 1995.
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LEHMAN BROTHERS 1995 ANNUAL REPORT
In February 1996, the Company issued $200 million of Quarterly Income
Capital Securities Series A Subordinated Debentures ("Series A QUICS"). The
Series A QUICS have an interest rate of 8.3% and mature in 2035, subject to
early redemption by the Company on or after March 31, 2001. The Company
retains the right to defer interest payments on the Series A QUICS on one
or more occasions for a period of up to twenty consecutive quarters.
Interest payments may not be deferred beyond the maturity of the Series A
QUICS. The Series A QUICS are subordinated to all senior and subordinated
debt of the Company. The Company repurchased the $200 million 8.44%
Cumulative Preferred Stock owned by American Express with the proceeds from
the Series A QUICS. The repurchase of the preferred stock included a
premium of $2 million over the par value. In future periods, preferred
dividends will decrease by $16.9 million on an annual basis, with net
income available to common stockholders and cash flow increasing by
approximately $7 million on an annual basis, assuming a 40% effective tax
rate for interest paid on the Series A QUICS. Net income available to
common stockholders will decrease by approximately $1.7 million in the
first quarter of 1996 due to the premium paid on the repurchase of the
preferred stock net of the partial period savings realized on the issuance
of the Series A QUICS.
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 global capital markets for short-term financing, such
as commercial paper and short-term debt, senior notes and subordinated
indebtedness are dependent on the Company's short- and long-term debt
ratings. The current short- and long-term senior debt ratings of Holdings
and the current short- and long-term senior and subordinated ratings of the
Company's 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 Credit Rating Co. D-1 A D-1 A/A-
Fitch Investors Service Inc. F-1 A F-1 A/A-
IBCA A1 A- A1 A/A-
Moody's P2 Baa1 P2 A3*/Baa1
S&P+ A-1 A A-1 A+*/A
Thomson BankWatch TBW-1 A- TBW-1 A/A-
</TABLE>
* Provisional ratings on shelf registration
** Senior/subordinated
+ Long-term ratings outlook revised to negative on September 21, 1994
On March 21, 1995 Moody's lowered the ratings of Holdings and its
subsidiaries. The Company currently estimates that the Moody's action
increased interest expense before the effect of compensation and taxes by
approximately $15 million on an annual basis.
End User Activities
To achieve certain asset and liability management objectives as set forth
by ALCO, the Company utilizes a variety of derivative products as an end
user to modify the interest rate characteristics of its long-term debt
portfolio and to reduce borrowing costs (see Note 5 to the Consolidated
Financial Statements).
In addition, the Company also enters into interest rate swap agreements as
an end user to modify its interest rate exposure associated with its secured
financing activities, including securities purchased under agreements to
resell, securities borrowed, securities sold under agreements to repurchase and
securities loaned (see Note 16 to the Consolidated Financial Statements).
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LEHMAN BROTHERS 1995 ANNUAL REPORT
Stockholders' Equity
Stockholders' equity increased 9% to $3.7 billion at November 30, 1995 from
$3.4 billion at November 30, 1994 primarily due to the retention of 1995
earnings and the recognition of common stock issuable under the Company's
stock award plans. Such increases in equity were partially offset by dividends
declared on the Company's common and preferred stock.
In 1994, to broaden and increase the level of employee ownership in
Holdings, the Company's Compensation and Benefits Committee (the
"Compensation Committee") approved the 1994 Management Ownership Plan (the
"1994 Plan") pursuant to which it has awarded in 1995 and 1994
approximately 8.0 million and 5.2 million Restricted Stock Units ("RSUs"),
respectively, to employees as a portion of total compensation in lieu of
cash, subject to vesting and transfer restrictions. Included in the 1995
awards are Performance Stock Units ("PSUs") granted by the Compensation
Committee to members of the Corporate Management Committee as part of a
three year long-term incentive award. The number of PSUs which may be
earned, if any, is dependent upon the achievement of certain performance
levels within a two-year period. At the end of the performance period, any
PSUs earned will convert one-for-one to RSUs which then vest at the end of
the third year. Stockholders' equity increased by approximately $124
million and $87 million in 1995 and 1994, respectively, as a result of RSUs
and PSUs awarded, net of cancellations.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.
Cash Flows
Cash and cash equivalents decreased $90 million in 1995 to $874 million, as
the net cash used in financing and investing activities exceeded the net
cash provided by operating activities. Net cash provided by operating
activities of $1,855 million included income from continuing operations
adjusted for non-cash items of approximately $439 million for 1995. Net
cash used in financing and investing activities was $1,893 million and $52
million, respectively.
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. Net cash used in operating
activities of $1,395 million included income from continuing operations
adjusted for non-cash items of approximately $639 million for 1994. 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 $651 million for
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.
Off-Balance Sheet Financial Instruments and Derivatives
Overview
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 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 ("OTC") derivative contracts are individually negotiated
between contracting parties and include forwards, swaps and certain
options, including caps, collars and floors. The use of derivative
financial instruments has expanded significantly over the past decade.
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LEHMAN BROTHERS 1995 ANNUAL REPORT
One reason for this expansion is that derivatives provide a cost effective
alternative for managing market risk. In this regard, derivative contracts
provide a reduced funding alternative for managing market risk since
derivatives are based upon notional values, which are generally not
exchanged, but rather are used merely as a basis for exchanging cash flows
during the duration of the contract. Derivatives are also utilized
extensively as highly effective tools that enable users to adjust risk
profiles, such as interest rate, currency, or other market risks, or to
take proprietary trading positions, since OTC derivative instruments can be
tailored to meet individual client needs. Additionally, derivatives provide
users with access to market risk management tools which are often times
unavailable in traditional cash instruments.
Derivatives are subject to various risks similar to non-derivative
financial instruments including market, credit 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. A brief description of these risks is included
below.
Market Risk Market risk is the potential for a financial loss due to
changes in the value of derivative financial instruments due to market
changes. Market risk includes interest rate risk, foreign exchange risk,
equity price risk and commodity price risk. Market risk is affected by
both the absolute levels and volatility of interest and foreign exchange
rates and equity and commodity prices. Market risk is also directly
impacted by the size, diversification and duration of positions held, and
the liquidity in the markets in which the related underlying assets are
traded.
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. Credit risk is a significant factor in the evaluation of OTC
derivatives. Credit risk considerations for OTC derivative instruments
include assessing the credit quality of the counterparty, length of time
to the maturity of the derivative contract, collateral arrangements and
the existence of a master netting agreement. At any point in time, the
credit risk for OTC derivative contracts is limited to the net unrealized
gain for each counterparty for which a master netting agreement exists,
net of collateral received. Exchange clearing houses require margin to be
posted on exchange-traded contracts on the origination of the contract
and for any changes in the market value of open contracts on a daily
basis (certain foreign exchanges extend settlement to three days). Due to
the daily settlement of variation margin, credit risk related to
exchange-traded contracts is limited to unsettled variation and original
margin outstanding.
Operational Risk Operational risk is the possibility of a deficiency in
systems for executing derivative transactions. Such risks include the
potential for liabilities resulting from one'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, counterparties to derivative financial
instruments may also be exposed to legal risks related to its derivative
activities including the possibility that a transaction may be
unenforceable under applicable law. The Company may be exposed to the
risk that a derivative transaction may not be enforceable against the
counterparty. The Company mitigates this risk through a process of
carefully reviewing derivative transactions with the counterparties to
ensure that they fully understand the economic and legal consequences of
entering into a derivative products transaction. In addition, the Company
performs its own legal due diligence to ensure that the counterparty has
the legal capacity to enter into the derivative product transaction and
that the transaction is appropriately documented.
As derivative products have continued to expand in volume, so has market
participation and competition. As a result, additional liquidity has been
added into the markets for conventional derivative products, such as
interest rate swaps. Competition has also contributed to the development of
more complex products structured for specific clients. It is this rapid
growth and complexity of certain derivative products which has led to the
perception, by some, that derivative products are unduly risky to users and
the financial markets. In order to remove the public perception that
derivatives may be unduly risky and to ensure ongoing liquidity of
derivatives in the marketplace, the Company supports the efforts of the
regulators in striving for enhanced risk management disclosures which
consider the effects of both derivative products and cash instruments. In
addition, the Company supports the activities of regulators which are
designed to ensure
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LEHMAN BROTHERS 1995 ANNUAL REPORT
that users of derivatives are fully aware of the nature of risks inherent
within derivative transactions. As evidence of this support, the Company,
through its participation as a member of the Derivatives Policy Group,
provided leadership in the development of a framework for voluntary
industry self regulation of derivatives. The Company has also been actively
involved with the various regulatory and accounting authorities in the
development of additional enhanced reporting requirements related to
derivatives. The Company strongly believes that derivatives provide
significant value to the financial markets and is committed to providing
its clients with innovative products to meet their financial needs.
Lehman Brothers' Use of Derivative Instruments
In the normal course of business, the Company enters into derivative
transactions both in a trading capacity and as an end user. As an end user,
the Company utilizes derivative products to adjust the interest rate nature
of its funding sources from fixed to floating interest rates and vice
versa, and to change the index upon which floating interest rates are based
(i.e., Prime to LIBOR) (collectively, "End User Derivative Activities").
For a further discussion of the Company's End User Derivative Activities
see Note 16 to the Consolidated Financial Statements.
The Company utilizes derivative products in a trading capacity both as a
dealer to satisfy the financial needs of its clients and in each of its
trading businesses (collectively, "Trading Related Derivative Activities").
The Company's use of derivative products in its trading businesses is
combined with cash instruments to fully execute various trading strategies.
As a dealer, the Company conducts its activities in fixed income derivative
products through its special purpose subsidiary, Lehman Brothers Special
Financing Inc., and a separately capitalized triple-A rated subsidiary,
Lehman Brothers Financial Products Inc. As a dealer of interest rate swap
products, the Company enters into derivative transactions to satisfy the
financial needs of its clients who wish to modify the nature of their
interest rate risk based upon existing positions or speculate on the
direction or volatility of interest rates. These fixed income derivative
products include swaps (interest and currency), interest rate option
contracts (caps, collars, and floors), swap options and similar
instruments. In addition, the Company also takes proprietary positions to
profit from market movements based upon the Company's expectations
regarding the level and volatility of interest rates. The counterparties to
the Company's fixed income derivative products business are primarily other
swap dealers, commercial banks, insurance companies, corporations and other
financial institutions.
The Company conducts its equity derivative products business primarily
through its special purpose equity derivatives subsidiary, Lehman Brothers
Finance S.A. ("LBF"). LBF enters into OTC equity option contracts,
warrants, equity swaps and other sophisticated equity derivatives as a
dealer in equity derivatives and through the Company with respect to
exchange-traded derivatives. As a dealer and position taker in equity
derivatives in the global equity markets, the Company is exposed to risks
related to the absolute levels and volatility of equity security/index
prices. The counterparties to the Company's equity derivative products
business are primarily other investment banks, brokers and dealers,
commercial banks, investment funds, and other corporations.
In addition to these businesses, the Company also enters into derivative
transactions in its role as a global investment bank. The Company is a
market-maker in a number of foreign currencies. As a market-maker, the
Company actively trades currencies in the OTC spot, forward and futures
markets and also takes positions in the currency markets in which the
Company seeks to profit from pricing inconsistencies in the spot, forward
and futures currency markets. The Company also makes a market in foreign
currency options and offers clients currency swaps as a means to hedge or
speculate in the currency markets on a longer-term basis. The significant
majority of the Company's foreign exchange transactions are conducted in
major foreign currencies, including: Canadian dollar, Deutsche mark, French
franc, British pound sterling, Swiss franc and the Japanese yen. The
Company also transacts in a broad range of other foreign currencies,
including the currencies of emerging market countries. The counterparties
to the Company's OTC foreign exchange transactions primarily include
central banks, commercial banks, other investment banks, brokers and
dealers and other corporations.
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LEHMAN BROTHERS 1995 ANNUAL REPORT
As a global investment bank the Company also actively trades in the global
commodity markets. The Company is a market-maker in physical metals (base
and precious) and energy products (principally oil and natural gas) and is
active in trading a variety of derivatives related to these commodities,
such as futures, forwards and exchange and OTC options. The counterparties
to the Company's commodity derivative transactions primarily include energy
and precious metal producers, consumers and refiners, central banks and
shipping companies.
The Company manages the risks associated with derivatives on an aggregate
basis along with the risks associated with its proprietary trading and
market-making activities in cash instruments as part of its firmwide risk
management policies. For a further discussion of the Company's risk
management policies refer to Management's Discussion and Analysis page 51.
The Company's Trading-Related Derivative Activities have increased during
the current year to a notional value of $1,209 billion at November 30, 1995
from $1,104 billion at November 30, 1994 primarily as a result of growth in
the Company's activities as a dealer in fixed income and equity derivative
products. Notional values are not recorded on the balance sheet and are not
indicative of potential risk, but rather they provide a measure of the
Company's involvement with such instruments.
As a result of the Company's Trading-Related Derivative Activities, the
Company is subject to credit risk. With respect to OTC derivative
contracts, the Company's credit exposure is directly with its
counterparties and extends through the duration of the derivative
contracts. The Company views its net credit exposure to be $3,732 million
at November 30, 1995, representing the fair value of the Company's OTC
contracts in an unrealized gain position, after consideration of
collateral. Collateral held related to OTC contracts generally includes
cash and U.S. government and federal agency securities. At November 30,
1995 approximately 81% of the Company's net credit risk exposure related to
OTC contracts was with counterparties rated single-A or better.
Additionally, the Company is exposed to credit risk related to its
exchange-traded derivative contracts. Exchange-traded derivative contracts
include futures contracts and certain options. Futures contracts and
options on futures are transacted on the respective exchange. The exchange
clearing house is a counterparty to the futures contracts and options. As a
clearing member firm, the Company is required by the exchange clearing
house to deposit cash or other securities as collateral for its obligation
upon the origination of the contract and for any daily changes in the
market value of open futures contracts. Unlike OTC derivatives which
involve numerous counterparties, the number of counterparties from
exchange-traded derivatives include only those exchange clearing houses of
which the Company is a clearing member firm or utilizes other member firms
as agents. Substantially all of the Company's exchange-traded derivatives
are transacted on exchanges of which the Company is a clearing member firm.
To protect against the potential for a default, all exchange clearing
houses impose net capital requirements for their membership. Therefore, the
potential for losses from exchange-traded products is limited. As of
November 30, 1995, the Company had approximately $898 million on deposit
with futures exchanges consisting of cash and securities (customer and
proprietary), and had posted approximately $250 million of letters of
credit. Included within this amount was $94 million and $804 million of
cash and securities related to domestic and foreign futures exchanges,
respectively, and $152 million and $98 million of letters of credit to
domestic and foreign exchanges, respectively. As of November 30, 1995, the
following cash and securities were on deposit with foreign futures
exchanges: $346 million with the Tokyo Stock Exchange, $104 million with
the Singapore International Monetary Exchange, $102 million with the Osaka
Securities Exchange, $102 million with Deutsche Termin Borse, and $48
million with the London Clearing House. In addition, the Company had
letters of credit of approximately $90 million on deposit with the London
Clearing House.
See Note 16 to the Consolidated Financial Statements for a further
discussion of the Company's Trading-Related Derivative Activities.
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LEHMAN BROTHERS 1995 ANNUAL REPORT
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 as BB+ or lower, or equivalent ratings by recognized
credit rating agencies, as well as non-rated securities or loans which, in
the opinion of management, are non-investment grade. Non-investment grade
securities generally involve greater risks than investment grade securities
due to the issuer's creditworthiness and the liquidity of the market for
such securities. In addition, these issuers have higher levels of
indebtedness, resulting in an increased sensitivity to adverse economic
conditions. The Company recognizes these risks and aims to reduce market
and credit risk through the diversification of its products and
counterparties. High yield debt securities are carried at market value and
unrealized gains or losses for these securities are reflected in the
Company's consolidated statement of operations. The Company's portfolio of
such securities at November 30, 1995 and 1994 included long positions with
an aggregate market value of approximately $1.2 billion and $1.1 billion,
respectively, and short positions with an aggregate market value of
approximately $172 million and $94 million, respectively. The portfolio
may, from time to time, contain concentrated holdings of selected issues.
The Company's largest high yield position was $73 million at November 30,
1995 and $252 million at November 30, 1994.
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,
asset sales and mortgage remittances. The Company's original investment in
the partnership was approximately $136 million. The Company also advanced
approximately $750 million of financing to the partnership in 1993, which
has subsequently been repaid in its entirety from proceeds related to the
disposition of the real estate assets. In August 1995, the Company agreed
to purchase the partnership interests owned by Westinghouse. The Company
also entered into an agreement to sell a portion of its partnership
interest to an affiliate of Lennar Inc., a third party mortgage servicer,
so that the Company and Lennar Inc. would own 75% and 25%, respectively, of
the partnership. The Company's net investment in the partnership at
November 30, 1995 is $142 million. As a result of its increased ownership
percentage, the Company's consolidated financial statements at November 30,
1995 include the accounts of the partnership. The partnership expects to
substantially liquidate the remaining real estate assets by the end of
1996.
Merchant Banking Partnerships
At November 30, 1995 the Company's investment in merchant banking
partnerships, for which the Company acts as a general partner, was $261
million. At November 30, 1995 the Company had no remaining commitments to
make investments through these partnerships. 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 1995, the Company established Capital Partners
III, its third employee investment vehicle. The Company has a commitment to
invest up to $200 million in the $225 million partnership previously
discussed.
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 billion of partnership investment capital and manages the remaining real
estate investment portfolio. At November 30, 1995 the Company
- FORTY NINE -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
had $45 million of investments in these real estate activities, as well as
$107 million of commitments and contingent liabilities under guarantees and
credit enhancements, both net of applicable reserves. 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.
The Company also has equity, partnership and debt investments made in
previous years that are unrelated to its ongoing businesses. On November
16, 1995, American Marketing Industries Holdings Inc. ("AMI") repaid in
full its $98 million subordinated loan held by the Company. The Company has
other investments that are also awaiting their disposition or the
occurrence of certain events which will ultimately lead to their
liquidation. The Company carries these equity, partnership and debt
investments, at their estimated net realizable value, which approximates
$84 million at November 30, 1995.
Non-core activities and investments have declined 39% since November 30,
1994. Management's intention with regard to non-core assets is the prudent
liquidation of these investments as and when possible.
New Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No.
123 establishes financial accounting and reporting standards for
stock-based employee compensation plans. The financial accounting standards
of SFAS No. 123 permit companies to either continue accounting for stock-based
compensation under existing rules or adopt SFAS No. 123 and begin reflecting the
fair value of stock options and other forms of stock-based compensation in the
results of operations as additional expense. The disclosure requirements of SFAS
No. 123 require companies which elect not to record the fair value in the
statement of operations to provide pro forma disclosures of net income and
earnings per share in the notes to the consolidated financial statements as if
the fair value of stock-based compensation had been recorded. The disclosure
requirements of SFAS No. 123 are effective for financial statements for
fiscal years beginning after December 15, 1995. The Company will provide
the pro forma disclosures beginning with its 1996 Annual Report and will
continue accounting for such plans under the existing accounting rules.
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. In
January 1995, the Financial Accounting Standards Board issued
Interpretation No. 41, "Offsetting of Amounts Related to Certain Repurchase
and Reverse Repurchase Agreements" ("FIN No. 41"). FIN No. 41 is a
modification to FIN No. 39, to permit certain limited exceptions to the
criteria established under FIN No. 39 for offsetting certain repurchase and
reverse repurchase agreements with the same counterparty. The Company has
adopted this modification, effective January 1995, which partially
mitigates the increase in the Company's gross assets and liabilities
resulting from the implementation of FIN No. 39.
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
- FIFTY -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
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. Lehman Brothers has developed a control
infrastructure to monitor and manage each type of risk on a global basis
throughout the Company.
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 market conditions, 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., risk management,
finance, legal, front office senior management, credit) being included in
the risk monitoring process. The Company's risk management department
independently reviews the Company's trading portfolios on a daily basis
from a market risk perspective which includes value at risk and other
quantitative and qualitative risk measurements and analyses. The risk
management department has full time professionals dedicated to each of our
trading and geographic areas.The Company's trade analysis department
performs independent verification of the prices of trading positions,
regularly monitors the aging of inventory, and performs daily review and
analysis 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 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.
- FIFTY ONE -
Exhibit 13.2
LEHMAN BROTHERS 1995 ANNUAL REPORT
<TABLE><CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS
TWELVE MONTHS ELEVEN MONTHS TWELVE MONTHS
ENDED NOVEMBER 30 ENDED NOVEMBER 30 ENDED DECEMBER 31
(IN MILLIONS, EXCEPT PER SHARE DATA) 1995 1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Principal transactions $1,393 $1,345 $2,055
Investment banking 801 572 972
Commissions 450 445 1,316
Interest and dividends 10,788 6,761 5,840
Other 44 67 491
- --------------------------------------------------------------------------------------------------
Total revenues 13,476 9,190 10,674
Interest expense 10,405 6,452 5,368
- --------------------------------------------------------------------------------------------------
Net revenues 3,071 2,738 5,306
- --------------------------------------------------------------------------------------------------
Non-interest expenses
Compensation and benefits 1,544 1,413 2,989
Brokerage, commissions and clearance fees 241 243 236
Communications 180 184 318
Occupancy and equipment 174 160 257
Professional services 159 166 203
Business development 110 116 161
Depreciation and amortization 105 116 157
Other 92 99 271
Restructuring charge 97
Severance charge 33
Spin-off expenses 15
Loss on sale of Shearson 535
Reserves for non-core businesses 152
- --------------------------------------------------------------------------------------------------
Total non-interest expenses 2,702 2,545 5,279
- --------------------------------------------------------------------------------------------------
Income from continuing operations before taxes and
cumulative effect of change in accounting
principle 369 193 27
Provision for income taxes 127 67 318
- --------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
cumulative effect of change in accounting
principle 242 126 (291)
- ---------------------------------------------------------------------------------------------------
Income from discontinued operations, net of taxes:
Income from operations 24
Gain on disposal 165
- ---------------------------------------------------------------------------------------------------
Net income from discontinued operations 189
- ---------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change in
accounting principle 242 126 (102)
Cumulative effect of change in accounting principle,
net of taxes (13)
- ---------------------------------------------------------------------------------------------------
Net income (loss) $ 242 $ 113 $ (102)
- ---------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ 200 $ 75 $ (150)
- ---------------------------------------------------------------------------------------------------
Number of shares used in earnings per
common share computation 113.4 108.0 105.7
- ---------------------------------------------------------------------------------------------------
Earnings (loss) per common share:
Income (loss) from continuing operations before
cumulative effect of change in accounting
principle $ 1.76 $ 0.81 $ (3.20)
Discontinued operations 1.79
Cumulative effect of change in accounting
principle (0.12)
- ---------------------------------------------------------------------------------------------------
Net income (loss) $ 1.76 $ 0.69 $ (1.41)
- ---------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
- FIFTY THREE -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE><CAPTION>
NOVEMBER 30 NOVEMBER 30
(IN MILLIONS) 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 874 $ 964
Cash and securities segregated and on deposit for regulatory
and other purposes 945 1,420
Securities and other financial instruments owned:
Governments and agencies 22,849 24,840
Corporate obligations and other contractual commitments 11,415 9,962
Corporate stocks and options 7,143 4,549
Mortgages and mortgage-backed 6,847 6,774
Certificates of deposit and other money market instruments 3,068 1,348
- --------------------------------------------------------------------------------------------------------
51,322 47,473
- --------------------------------------------------------------------------------------------------------
Collateralized short-term agreements:
Securities purchased under agreements to resell 36,234 37,490
Securities borrowed 16,290 10,617
Receivables:
Brokers, dealers and clearing organizations 2,845 4,934
Customers 3,891 2,794
Others 1,434 2,762
Property, equipment and leasehold improvements
(net of accumulated depreciation and amortization
of $585 in 1995 and $520 in 1994) 495 619
Deferred expenses and other assets 793 686
Excess of cost over fair value of net assets
acquired (net of accumulated amortization
of $95 in 1995 and $87 in 1994) 180 188
- --------------------------------------------------------------------------------------------------------
Total assets $115,303 $109,947
- --------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
- FIFTY FOUR -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE><CAPTION>
NOVEMBER 30 NOVEMBER 30
(IN MILLIONS, EXCEPT SHARE DATA) 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Commercial paper and short-term debt $ 6,235 $ 9,807
Securities and other financial instruments sold but not yet purchased:
Governments and agencies 11,665 9,867
Corporate stocks and options 4,393 3,731
Corporate obligations and other contractual commitments 3,796 3,432
- --------------------------------------------------------------------------------------------------------
19,854 17,030
- --------------------------------------------------------------------------------------------------------
Collateralized short-term financings:
Securities sold under agreements to repurchase 59,035 58,419
Securities loaned 1,966 1,627
Payables:
Brokers, dealers and clearing organizations 2,513 2,597
Customers 6,311 3,060
Accrued liabilities and other payables 2,926 2,691
Long-term debt:
Senior notes 10,505 9,107
Subordinated indebtedness 2,260 2,214
- --------------------------------------------------------------------------------------------------------
Total liabilities 111,605 106,552
- --------------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' Equity
Preferred stock, $1 par value; 38,000,000 shares authorized:
5% Cumulative Convertible Voting, Series A,
13,000,000 shares authorized, issued and outstanding;
$39.10 liquidation preference per share 508 508
8.44% Cumulative Voting, 8,000,000 shares issued and
outstanding; $25.00 liquidation preference per share 200 200
Redeemable Voting, 1,000 shares issued and outstanding;
$1.00 liquidation preference per share
Common Stock, $.10 par value; 300,000,000 shares
authorized; shares issued: 105,684,565 in 1995
and 105,608,423 in 1994; shares outstanding: 104,565,875
in 1995 and 104,537,690 in 1994 11 11
Common Stock issuable 211 87
Additional paid-in capital 3,172 3,172
Foreign currency translation adjustment 9 6
Accumulated deficit (397) (574)
Common Stock in treasury at cost: 1,118,690 shares in 1995
and 1,070,733 shares in 1994 (16) (15)
- ---------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,698 3,395
- --------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $115,303 $109,947
- --------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
- FIFTY FIVE -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE><CAPTION>
TWELVE MONTHS ELEVEN MONTHS TWELVE MONTHS
ENDED NOVEMBER 30 ENDED NOVEMBER 30 ENDED DECEMBER 31
(IN MILLIONS) 1995 1994 1993
- --------------------------------------------------------------------------------------------------
<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
MMP Exchange (250)
- --------------------------------------------------------------------------------------------------
Ending balance 250
- --------------------------------------------------------------------------------------------------
8.44% Cumulative Voting:
Beginning balance 200
Shares issued to American Express 200
- --------------------------------------------------------------------------------------------------
Ending balance 200 200
- --------------------------------------------------------------------------------------------------
Redeemable Voting:
Beginning and ending balance
- --------------------------------------------------------------------------------------------------
Total Preferred Stock, ending balance 708 708 758
- --------------------------------------------------------------------------------------------------
Common Stock
Beginning balance 11 17 17
Reverse Stock Split (11)
American Express Common Stock purchase 4
MMP Exchange 1
- --------------------------------------------------------------------------------------------------
Ending balance 11 11 17
- --------------------------------------------------------------------------------------------------
Common stock issuable
Beginning balance 87
RSUs awarded, net of cancellations 124 87
- --------------------------------------------------------------------------------------------------
Ending balance 211 87
- --------------------------------------------------------------------------------------------------
Additional paid-in capital
Beginning balance 3,172 1,871 1,871
Exercise of stock options 1
Employee stock purchase plan (1)
Reverse Stock Split 11
American Express Common Stock purchase 900
MMP Exchange 249
Nippon Life Common Stock purchase 89
EOP conversion 57
Other, net (5)
- --------------------------------------------------------------------------------------------------
Ending balance 3,172 3,172 1,871
- --------------------------------------------------------------------------------------------------
Foreign currency translation adjustment
Beginning balance 6 (12) (5)
Translation adjustment, net (1) 3 18 (7)
- ---------------------------------------------------------------------------------------------------
Ending balance 9 6 (12)
- ---------------------------------------------------------------------------------------------------
Accumulated deficit
Beginning balance (574) (582) (267)
Net income (loss) 242 113 (102)
Cash dividends declared:
5% Cumulative Convertible Voting Preferred
Stock (25) (19) (25)
Money Market Cumulative Preferred Stock (6) (23)
8.44% Cumulative Voting Preferred Stock (17) (9)
Common Stock (23) (71) (165)
- ---------------------------------------------------------------------------------------------------
Ending balance (397) (574) (582)
- ---------------------------------------------------------------------------------------------------
Common stock in treasury
Beginning balance (15)
Purchases of treasury stock (1) (15)
- ---------------------------------------------------------------------------------------------------
Ending balance (16) (15)
- ---------------------------------------------------------------------------------------------------
Net unrealized securities losses
Beginning balance (13)
Change in unrealized securities losses, net 13
- --------------------------------------------------------------------------------------------------
Ending balance
- --------------------------------------------------------------------------------------------------
Total Stockholders' Equity $ 3,698 $ 3,395 $2,052
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) Net of income taxes of $(2) in 1995, $(15) in 1994 and $5 in 1993.
See Notes to Consolidated Financial Statements.
- FIFTY SIX -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE><CAPTION>
TWELVE MONTHS ELEVEN MONTHS TWELVE MONTHS
ENDED NOVEMBER 30 ENDED NOVEMBER 30 ENDED DECEMBER 31
(IN MILLIONS) 1995 1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Income (loss) from continuing operations before
cumulative effect of change in accounting
principle $ 242 $ 126 $ (291)
Adjustments to reconcile income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 105 116 157
Restructuring charge 80
Provisions for losses and other reserves 38 37 106
Loss on sale of Shearson 535
Non-core business reserves 152
Deferred tax provision (benefit) (195) 167 (108)
Other adjustments 169 193 100
Net change in:
Cash and securities segregated 475 (347) 180
Receivables from brokers, dealers and
clearing organizations 2,089 125 (2,313)
Receivables from customers (1,097) (148) (268)
Securities purchased under agreements to resell 1,256 (11,444) 320
Securities borrowed (5,673) (6,245) 3,251
Loans originated or purchased for resale (62)
Securities and other financial instruments owned (3,849) (11,774) (2,228)
Payables to brokers, dealers and clearing
organizations (84) 1,212 (361)
Payables to customers 2,918 (1,070) 430
Accrued liabilities and other payables 165 (506) 902
Securities sold under agreements to repurchase 616 19,228 1,754
Securities loaned 339 511 (881)
Securities and other financial instruments sold
but not yet purchased 2,824 8,717 (3,093)
Other operating assets and liabilities, net 1,437 (293) (71)
- ---------------------------------------------------------------------------------------------------
1,855 (1,395) (1,789)
Net cash flows provided by operating activities
of discontinued operations 428
- ---------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities $1,855 $(1,395) $(1,361)
- ---------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
- FIFTY SEVEN -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE><CAPTION>
TWELVE MONTHS ELEVEN MONTHS TWELVE MONTHS
ENDED NOVEMBER 30 ENDED NOVEMBER 30 ENDED DECEMBER 31
(IN MILLIONS) 1995 1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Financing Activities
Proceeds from issuance of senior notes $ 5,033 $ 3,365 $ 3,609
Principal payments of senior notes (3,725) (1,982) (1,346)
Proceeds from issuance of subordinated indebtedness 258 540 568
Principal payments of subordinated indebtedness (214) (451) (602)
Proceeds from spin-off 1,193
Payments for commercial paper and short-term debt (3,180) (1,349) (2,087)
Payments for treasury stock purchases (1) (15)
Dividends paid (64) (99) (213)
Net cash flows used in financing activities of
discontinued operations (301)
- ---------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing
activities (1,893) 1,202 (372)
- ---------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Purchase of property, equipment and leasehold
improvements (52) (176) (129)
Proceeds from the sale of:
The Boston Company 1,300
Shearson 1,200
SLHMC 70
Other 111
Net cash flows used in investing activities of
discontinued operations (85)
- ---------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing
activities (52) (176) 2,467
- --------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents of discontinued
operations 42
- --------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (90) (369) 692
- --------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of period 964 1,333 641
- --------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 874 $ 964 $ 1,333
- --------------------------------------------------------------------------------------------------
</TABLE>
Supplemental Disclosure of Cash Flow Information (in millions) (including The
Boston Company)
Interest paid totaled $10,372 in 1995, $6,257 in 1994 and $5,591 in 1993.
Income taxes paid (received) totaled $149 in 1995, $(39) in 1994 and $28 in
1993.
Supplemental Schedule of Non-Cash Investing and Financing Activity
During 1993, the Company completed the sale of The Boston Company, Shearson and
SLHMC. The cash proceeds related to these sales have been separately reported in
the above statement. Excluded from the statement are the individual statement
of financial condition changes related to the net assets sold as well as the
non-cash proceeds related to these sales. (See Note 21.)
See Notes to Consolidated Financial Statements.
- FIFTY EIGHT -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
==============================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
NOTE 1 Summary of Significant Accounting Policies
- -------------------------------------------------
Basis of Presentation
- ---------------------
The consolidated financial statements include the accounts of Lehman Brothers
Holdings Inc. ("Holdings") and subsidiaries (collectively, the "Company" or
"Lehman Brothers"). Lehman Brothers is one of the leading global investment
banks serving institutional, corporate, government and high-net-worth individual
clients and customers. The Company's worldwide headquarters in New York and
regional headquarters in London and Tokyo are complemented by offices in
additional locations in North America, Europe, the Middle East, Latin and South
America and the Asia Pacific region. The Company is engaged primarily in
providing financial services. The principal subsidiary of Holdings is Lehman
Brothers Inc. ("LBI"), a registered broker-dealer. All material intercompany
accounts and transactions have been eliminated in consolidation. Prior to May
31, 1994, the American Express Company ("American Express") owned 100% of
Holdings' common stock (the "Common Stock"), which represented approximately 93%
of Holdings' voting stock. Effective May 31, 1994, Holdings became a widely held
public company with its Common Stock traded on the New York Stock Exchange. (See
Note 6.)
The Consolidated Statement of Operations includes the results of operations of
Shearson and SLHMC which were sold on July 31, 1993 and August 31, 1993,
respectively. (See Note 21 for definitions and additional information concerning
these sales.)
The Company uses the trade date basis of accounting for recording principal
transactions.
Certain prior period amounts reflect reclassifications to conform to the current
period's presentation.
Discontinued Operations
- -----------------------
As described in Note 21, the Company completed the sale of The Boston Company,
Inc. ("The Boston Company"), on May 21, 1993. The accompanying consolidated
financial statements and notes to consolidated financial statements reflect The
Boston Company as a discontinued operation.
Translation of Foreign Currencies
- ---------------------------------
Assets and liabilities of foreign subsidiaries having non-U.S. dollar functional
currencies are translated at exchange rates at the statement of financial
condition date. Revenues and expenses are translated at average exchange rates
during the period. The gains or losses resulting from translating foreign
currency financial statements into U.S. dollars, net of hedging gains or losses
and related tax effects, are included in a separate component of stockholders'
equity, the foreign currency translation adjustment. Gains or losses resulting
from foreign currency transactions are included in the Consolidated Statement of
Operations.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Management believes that the estimates utilized in preparing its financial
statements are reasonable and prudent. Actual results could differ from these
estimates.
- FIFTY NINE -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
Securities and Other Financial Instruments
- ------------------------------------------
Securities and other financial instruments owned and securities and other
financial instruments sold but not yet purchased are valued at market or fair
value, as appropriate, with unrealized gains and losses reflected in principal
transactions in the Consolidated Statement of Operations. Market value is
generally based on listed market prices. If listed market prices are not
available, fair value is determined based on other relevant factors, including
broker or dealer price quotations and valuation pricing models which take into
account time value and volatility factors underlying the financial instruments.
Derivative Financial Instruments
- --------------------------------
Derivatives include futures, forwards, swaps and options and other similar
instruments. Derivative transactions entered into for market-making or
proprietary position taking or used as hedges of other trading instruments are
recorded at market or fair value with realized and unrealized gains and losses
reflected in principal transactions in the Consolidated Statement of Operations.
The market or fair value associated with derivatives utilized for trading
purposes is recorded on a net by counterparty basis where a legal right of
set-off exists in the Consolidated Statement of Financial Condition. Unrealized
gains and losses related to swaps and option contracts are recorded as
securities and other financial instruments owned and securities and other
financial instruments sold but not yet purchased, as applicable. Unrealized
gains and losses related to securities and foreign exchange forwards and
commodity contracts are recorded as receivables and payables with brokers,
dealers and clearing organizations and customers, as applicable.
In addition to trading and market-making activities, the Company enters into
various derivative products as an end user to modify the interest rate exposure
of certain assets and liabilities. In this regard, the Company utilizes interest
rate and currency swaps, caps, collars and floors to manage the interest rate
exposure associated with its long-term debt obligations and secured financing
activities, including securities purchased under agreements to resell,
securities borrowed, securities sold under agreements to repurchase and
securities loaned. In addition to modifying the interest rate exposure of
existing assets and liabilities, the Company utilizes derivative instruments as
an end user to modify the interest rate characteristics of certain anticipated
transactions related to its secured financing activities, where there is a high
degree of certainty that the Company will enter into such contracts. Derivatives
which have been designated and are effective in modifying the interest rate
characteristics of existing assets and liabilities or anticipated transactions
are accounted for on an accrual basis, with the exception of written swaptions
which are accounted for on a mark-to-market basis.
The Company monitors the effectiveness of its end user hedging activities by
periodically comparing the change in the value of the hedge instrument to the
underlying item being hedged and re-assessing the likelihood of the occurrence
of anticipated transactions. In the event that the Company determines that a
hedge is no longer effective, such as upon extinguishment of the underlying
asset or liability or a change in circumstances whereby there is not a high
degree of certainty that the anticipated transaction will occur, the derivative
transaction is accounted for at fair value, with changes in the fair value of
the derivative contract being recognized in the Consolidated Statement of
Operations. In the event that a derivative designated as a hedge is terminated
early, any realized gain or loss on termination would be deferred and amortized
over the original period of the hedge.
Repurchase and Resale Agreements
- --------------------------------
Securities purchased under agreements to resell and securities sold under
agreements to repurchase, which are treated as financing transactions for
financial reporting purposes, are collateralized primarily by government and
government agency securities and are carried net by counterparty, when
permitted, at the amounts at which the securities will be subsequently resold or
repurchased plus accrued interest. It is the policy of the Company to take
possession of securities purchased under agreements to resell. The Company
monitors the market value of the underlying positions on a
- SIXTY -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
daily basis as compared to the related receivable or payable balances, including
accrued interest. The Company requires counterparties to deposit additional
collateral or return collateral pledged as necessary, to ensure that the market
value of the underlying collateral remains sufficient. Securities and other
financial instruments owned which are sold under repurchase agreements are
carried at market value with changes in market value reflected in the
Consolidated Statement of Operations.
Securities purchased under agreements to resell and securities sold under
agreements to repurchase for which the resale/repurchase date corresponds to the
maturity date of the underlying securities are accounted for as purchases and
sales, respectively. At November 30, 1995, such resale and repurchase agreements
which have not yet matured aggregated $6.7 billion and $3.1 billion,
respectively.
Securities Borrowed and Loaned
- ------------------------------
Securities borrowed and securities loaned are carried at the amount of cash
collateral advanced or received plus accrued interest. It is the Company's
policy to value the securities borrowed and loaned on a daily basis and to
obtain additional cash as necessary to ensure such transactions are adequately
collateralized.
Income Taxes
- ------------
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
The Company recognizes the current and deferred tax consequences of all
transactions that have been recognized in the financial statements using the
provisions of the enacted tax laws. In this regard, deferred tax assets are
recognized for temporary differences that will result in deductible amounts in
future years and for tax loss carryforwards, if in the opinion of management, it
is more likely than not that the deferred tax asset will be realized. SFAS 109
requires companies to set up a valuation allowance for that component of net
deferred tax assets which does not meet the "more likely than not" criterion for
realization.
Fixed Assets and Intangibles
- ----------------------------
Property, equipment, and leasehold improvements are recorded at historical cost,
net of accumulated depreciation and amortization. Depreciation is recognized on
a straight-line basis over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the lesser of their economic useful
lives or the terms of the underlying leases. The Company capitalizes interest
costs during construction and amortizes the interest costs based on the useful
lives of the assets.
Excess of cost over fair value of net assets acquired (goodwill) is amortized
using the straight-line method over a period of 35 years. Goodwill is also
reduced upon the recognition of certain acquired net operating loss carryforward
benefits.
Statement of Cash Flows
- -----------------------
The Company defines cash equivalents as highly liquid investments with original
maturities of three months or less, other than those held for sale in the
ordinary course of business.
Earnings Per Common Share
- -------------------------
Earnings per common share was computed by dividing net income applicable to
common stock by the weighted average number of shares of common stock and common
stock equivalents outstanding. Pursuant to the Securities and Exchange
Commission ("SEC") requirements, the number of shares used in the 1994 and 1993
earnings per common share calculations includes Common Stock as of May 31, 1994.
(See Note 10.)
- SIXTY ONE -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
NOTE 2 Change of Year-End
- -------------------------
During 1994, the Company changed its year-end from December 31 to November 30.
Such a change to a non-calendar cycle shifts certain year-end administrative
activities to a time period that conflicts less with the business needs of the
Company's institutional customers.
The following is selected financial data for the eleven month transition period
ending November 30, 1994 and the comparable prior year period.
ELEVEN MONTHS ENDED
NOVEMBER 30
-------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 1994 1993
- -------------------------------------------------------------------------------
UNAUDITED
Total revenues $ 9,190 $ 9,918
Interest expense 6,452 4,932
- -------------------------------------------------------------------------------
Net revenues 2,738 4,986
Non-interest expenses 2,545 5,014
- -------------------------------------------------------------------------------
Income (loss) from continuing operations before taxes and
cumulative effect of change in accounting principle 193 (28)
Provision for income taxes 67 304
- -------------------------------------------------------------------------------
Income (loss) from continuing operations before cumulative
effect of change in accounting principle 126 (332)
- -------------------------------------------------------------------------------
Income from discontinued operations, net of taxes:
Income from operations 24
Gain on disposal 165
- -------------------------------------------------------------------------------
Net income from discontinued operations 189
- -------------------------------------------------------------------------------
Income (loss) before cumulative effect of change in
accounting principle 126 (143)
Cumulative effect of change in accounting principle,
net of taxes (13)
- --------------------------------------------------------------------------------
Net income (loss) $ 113 $ (143)
- --------------------------------------------------------------------------------
Net income (loss) applicable to common stock $75 $ (187)
- --------------------------------------------------------------------------------
Number of shares used in earnings per common share
computation 108.0 105.7
- --------------------------------------------------------------------------------
Earnings (loss) per common share:
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $ 0.81 $(3.56)
Discontinued operations 1.79
Cumulative effect of change in accounting principle (0.12)
- --------------------------------------------------------------------------------
Net income (loss) $ 0.69 $(1.77)
- --------------------------------------------------------------------------------
The selected financial data for 1993 includes the results of operations of
Shearson and SLHMC, which were sold on July 31, 1993 and August 31, 1993,
respectively. The Company completed the sale of The Boston Company on May 21,
1993. The above selected financial data for 1993 reflects The Boston Company as
a discontinued operation. (See Note 21 for definitions and additional
information concerning these sales.)
- SIXTY TWO -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
NOTE 3 Cash and Securities Segregated and on Deposit for Regulatory and Other
- -----------------------------------------------------------------------------
Purposes
- --------
In addition to amounts presented in the accompanying Consolidated Statement of
Financial Condition as cash and securities segregated and on deposit for
regulatory and other purposes, securities with a market value of approximately
$320 million and $941 million at November 30, 1995 and 1994, respectively,
primarily collateralizing securities purchased under agreements to resell, have
been segregated in a special reserve bank account for the exclusive benefit of
customers pursuant to the Reserve Formula requirements of SEC Rule 15c3-3.
NOTE 4 Short-Term Financings
- ----------------------------
The Company obtains short-term financing on both a secured and unsecured basis.
The secured financing is obtained through the use of repurchase agreements and
securities loaned agreements, which are primarily collateralized by government,
agency and equity securities. The unsecured financing is generally obtained
through short-term debt and the issuance of commercial paper.
The Company's commercial paper and short-term debt is comprised of the
following:
NOVEMBER 30 NOVEMBER 30
(IN MILLIONS) 1995 1994
- ------------------------------------------------------------------------------
Commercial paper $ 1,443 $ 2,788
Short-term debt
Bank loans 2,106 1,479
Master notes 1,753 4,081
Payables to banks 933 1,459
- ------------------------------------------------------------------------------
$ 6,235 $ 9,807
- ------------------------------------------------------------------------------
In October 1995, the Company established a $1 billion Secured Revolving Credit
Facility for Lehman Brothers International (Europe), the Company's major
operating entity in Europe. In addition, at November 30, 1995, Holdings
maintained a $2 billion Revolving Credit Agreement with a group of banks.
The Company's weighted average interest rates were as follows:
NOVEMBER 30 NOVEMBER 30
1995 1994
- ------------------------------------------------------------------------------
Commercial paper 6.0% 5.6%
Short-term debt(1) 5.3% 5.7%
Securities sold under agreements to repurchase 5.7% 5.3%
- ------------------------------------------------------------------------------
(1) Including weighted average interest rates of 6.1% and 3.9% as of November
30, 1995 related to U.S. dollar and non-U.S. dollar obligations, respectively.
- SIXTY THREE -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
NOTE 5 Long-Term Debt
- ---------------------
<TABLE><CAPTION>
U.S. DOLLAR NON-U.S. DOLLAR NOVEMBER 30
--------------------- --------------------- ------------------
FIXED FLOATING FIXED FLOATING
(IN MILLIONS) RATE RATE RATE RATE 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Senior Notes
Maturing in Fiscal 1995 $ 2,859
Maturing in Fiscal 1996 $ 724 $ 1,424 $ 251 $ 104 $ 2,503 1,603
Maturing in Fiscal 1997 643 286 210 56 1,195 1,053
Maturing in Fiscal 1998 988 200 244 166 1,598 1,085
Maturing in Fiscal 1999 649 205 740 86 1,680 1,437
Maturing in Fiscal 2000 746 175 27 56 1,004 144
December 1, 2000 and
thereafter 2,015 130 380 2,525 926
- ------------------------------------------------------------------------------------------------
Senior Notes 5,765 2,420 1,852 468 10,505 9,107
- ------------------------------------------------------------------------------------------------
Subordinated Indebtedness
Maturing in Fiscal 1995 214
Maturing in Fiscal 1996 96 162 258 259
Maturing in Fiscal 1997 741 741 741
Maturing in Fiscal 1998 350 350 350
Maturing in Fiscal 1999 179 179 179
Maturing in Fiscal 2000 192 192 192
December 1, 2000 and
thereafter 415 121 4 540 279
- ------------------------------------------------------------------------------------------------
Subordinated
Indebtedness 1,973 283 4 2,260 2,214
- ------------------------------------------------------------------------------------------------
Long-Term Debt $7,738 $2,703 $1,856 $468 $12,765 $11,321
- ------------------------------------------------------------------------------------------------
</TABLE>
Of the Company's long-term debt outstanding as of November 30, 1995, $1,096
million is repayable prior to maturity at the option of the holder, at par
value. These obligations are reflected in the above table as maturing at their
put dates, which range from fiscal 1996 to fiscal 2002, rather than at their
contractual maturities, which range from fiscal 1996 to fiscal 2023. In
addition, $376 million of the Company's long-term debt is redeemable at
par at the option of the Company upon specified dates from 1996 through 2010
or based upon the occurrence of specified events. These obligations are
reflected in the above table at their contractual maturity dates.
The Company's interest in 3 World Financial Center is financed with U.S.
dollar fixed rate senior notes totaling $308 million as of November 30, 1995.
These notes are unconditionally guaranteed by American Express with a portion
of these notes being collateralized by certain mortgage obligations.
As of November 30, 1995, the Company had $7.8 billion available for the
issuance of debt securities under various shelf registrations, which includes
$1.8 billion of issuance availability under the Company's Euro medium-term
note program.
As of November 30, 1995, the Company's fixed and floating rate debt portfolios
included approximately $235 million and $160 million, respectively, of debt for
which the interest rates and/or redemption values have been linked to various
indices including industry baskets of stocks or commodities. The interest rates
on such indexed notes have all been effectively converted to floating rates
based primarily on LIBOR through the use of interest rate and currency swaps.
End User Derivative Activities
- ------------------------------
The Company utilizes a variety of derivative products including interest rate
and currency swaps and swaptions as an end user to modify the interest rate
characteristics of its long-term debt portfolio. The Company actively manages
the interest rate exposure on its long-term debt portfolio to more closely
match the terms of its debt to the assets being funded and to minimize interest
rate risk. In addition, the Company utilizes cross currency swaps to hedge its
exposure to foreign currency risk as a result of its non-U.S. dollar debt
obligations, after consideration of non-U.S. dollar
- SIXTY FOUR -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
assets which are funded with long-term debt obligations in the same currency.
In certain instances, two or more derivative contracts may be utilized by the
Company to manage the interest rate nature and/or currency exposure of an
individual long-term debt issuance. In these cases, the notional value of the
derivative contracts may exceed the carrying value of the related long-term
debt issuance.
At November 30, 1995, the notional values of the Company's interest rate and
currency swaps related to its long-term debt obligations were approximately
$11 billion. In terms of notional amounts outstanding, these derivative products
mature as follows:
<TABLE><CAPTION>
(IN MILLIONS) U.S. DOLLAR NON-U.S. DOLLAR CROSS CURRENCY TOTAL
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturing in Fiscal 1996 $ 978 $ 66 $ 279 $ 1,323
Maturing in Fiscal 1997 2,324 126 140 2,590
Maturing in Fiscal 1998 1,368 17 319 1,704
Maturing in Fiscal 1999 825 14 788 1,627
Maturing in Fiscal 2000 974 52 1,026
December 1, 2000 and thereafter 2,285 325 91 2,701
- -----------------------------------------------------------------------------------------------------
Total $8,754 $548 $1,669 $10,971
- -----------------------------------------------------------------------------------------------------
Weighted average rate at November 30, 1995
Receive rate(1) 6.81% 5.24% 4.24% 6.34%
Pay rate(1) 6.14% 5.07% 6.48% 6.14%
</TABLE>
(1) Weighted average interest rates were calculated utilizing non-U.S. dollar
interest rates, where applicable.
In addition, at November 30, 1995 and 1994, the Company had approximately $250
million and $1,259 million, respectively, of notional value of written swaptions
outstanding which if exercised would convert an equal amount of the Company's
long-term debt from a fixed rate to a floating rate. As of November 30, 1995,
the swaptions had exercise dates ranging from fiscal 1996 to fiscal 1998. The
Company accounts for these written swaptions on a mark-to-market basis.
During 1995, the Company terminated certain swaps which were utilized to modify
the interest rate characteristics of the Company's long-term debt issuances. At
November 30, 1995, the Company had deferred gains of approximately $16 million
related to such terminated contracts which will be amortized to reduce interest
expense through fiscal 1997. On an overall basis, the Company's long-term debt
related end user derivative activities resulted in reduced interest expense of
approximately $74 million, $30 million and $56 million in 1995, 1994 and 1993,
respectively. In addition, the Company's end user derivative activities
resulted in the following changes to the Company's mix of fixed and floating
rate debt and effective weighted average rates of interest.
<TABLE><CAPTION>
NOVEMBER 30, 1995
------------------------------------------------------------ -----------------------
LONG-TERM DEBT WEIGHTED AVERAGE (1) LONG-TERM DEBT
------------------------ ------------------------------- -----------------------
BEFORE AFTER CONTRACTUAL EFFECTIVE BEFORE AFTER
END USER END USER INTEREST RATE AFTER END END USER END USER
(IN MILLIONS) ACTIVITIES ACTIVITIES RATE USER ACTIVITIES ACTIVITIES ACTIVITIES
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
USD Obligations
Fixed Rate $ 7,738 $ 1,198 8.20% 8.19% $ 5,783 $ 3,157
Floating Rate 2,703 10,912 6.76% 7.00% 4,482 7,846
------------------------------------------------------------------------------------------
10,441 12,110 7.83% 7.12% 10,265 11,003
------------------------------------------------------------------------------------------
Non-USD Obligations 2,324 655 4.41% 4.73% 1,056 318
------------------------------------------------------------------------------------------
Total $ 12,765 $ 12,765 7.21% 6.99% $11,321 $11,321
<CAPTION>
NOVEMBER 30, 1994
--------------------------------
WEIGHTED AVERAGE (1)
--------------------------------
CONTRACTUAL EFFECTIVE
INTEREST RATE AFTER END
(IN MILLIONS) RATE USER ACTIVITIES
- ---------------------------------------------------
<S> <C> <C>
USD Obligations
Fixed Rate 8.12% 8.28%
Floating Rate 5.69% 6.11%
------------------------
7.06% 6.73%
------------------------
Non-USD Obligations 3.92% 4.67%
------------------------
Total 6.77% 6.67%
------------------------
</TABLE>
(1) Weighted average interest rates were calculated utilizing non-U.S. dollar
interest rates, where applicable.
- SIXTY FIVE -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
NOTE 6 Equity Investments and Distribution of Common Stock
- ----------------------------------------------------------
On May 31, 1994, all of the shares of Common Stock of Holdings were distributed
(the "Distribution") to American Express common shareholders of record on May
20, 1994 (the "Record Date").
Prior to the Distribution, Holdings effected a 0.3178313 for 1 reverse stock
split (the "Reverse Stock Split") which had the effect of reducing the number of
shares of Common Stock held by American Express from 168,235,284 to 53,470,443.
The calculation of the ratio for the Reverse Stock Split was based upon the
number of American Express common shares outstanding on the Record Date. Also
prior to the Distribution:
I Holdings sold:
(a) 35,379,920 shares of Common Stock to American Express for an aggregate
purchase price of approximately $903.8 million, or approximately $25.55 per
share (the "American Express Common Stock Purchase");
(b) 3,490,094 shares of Common Stock to Nippon Life Insurance Company
("Nippon Life") for approximately $89.2 million, or approximately $25.55
per share (the "NL Common Stock Purchase");
(c) 8,000,000 shares of its Cumulative Voting Preferred Stock (which stock
has a dividend rate of 8.44% per annum) (the "Cumulative Preferred Stock")
to American Express for an aggregate purchase price of $200 million; and
(d) 928 and 72 shares of its Redeemable Voting Preferred Stock ("Redeemable
Preferred Stock") for $1.00 per share to American Express and Nippon Life,
respectively (the Cumulative Preferred Stock and the Redeemable Preferred
Stock collectively, the "Preferred Stock") (the sales of such Preferred
Stock, the "Preferred Stock Purchases").
II Holdings issued:
(a) 3,366,677 shares of Common Stock, with an aggregate value of
approximately $57 million, upon conversion of all of the outstanding
phantom equity interests held by certain key employees of Lehman Brothers
pursuant to the terms of the Lehman Brothers Inc. Employee Ownership Plan
(the "EOP Conversion"); and
(b) 9,786,006 shares of Common Stock to American Express in exchange for
$250 million of Money Market Preferred Stock of Holdings held by American
Express (the "MMP Exchange").
The American Express Common Stock Purchase, the NL Common Stock Purchase and the
Preferred Stock Purchases are collectively referred to herein as the "Equity
Investment." The Equity Investment, the EOP Conversion, the MMP Exchange and the
Distribution are collectively referred to herein as the "Concurrent
Transactions." The Company charged approximately $15 million ($12 million
aftertax) to operating expenses in the second quarter of 1994 related to costs
incurred in connection with the Concurrent Transactions and other related
expenses. The Company and American Express entered into several agreements for
the purpose of giving effect to the Distribution and defining their ongoing
relationships.
- SIXTY SIX -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
NOTE 7 Preferred Stock
- ----------------------
Cumulative Convertible Voting, Series A
- ---------------------------------------
In 1987, Holdings issued to Nippon Life the Cumulative Convertible Voting
Preferred Stock, Series A ("Series A Preferred Stock"), for a cash purchase
price of $508 million, as adjusted, or $39.10 per share. The holder of the
Series A Preferred Stock is entitled to receive preferred dividends at an annual
rate of 5%, payable quarterly before any dividends are paid to the holders of
Common Stock.
The Company has the right to redeem the shares of Series A Preferred Stock on
any dividend payment date after June 15, 1994, in cumulative annual increments
of 2,600,000 shares, subject to adjustment, and subject to restrictions on
redemptions when dividends are in arrears. Such redemption will be at a price
per share equal to $39.10 and is permitted only if there is a public market for
the Common Stock and the average market price of shares of Common Stock exceeds
the conversion price on the date notice of redemption is given.
Each share of Series A Preferred Stock is convertible, at any time prior to the
date of redemption, into 0.3178313 of a share of Common Stock, provided that at
least 250,000 shares of Series A Preferred Stock (or such lesser number of such
shares then outstanding) are converted each time. The conversion rate at
November 30, 1995 was $123.02.
8.44% Cumulative Voting
- -----------------------
In 1994, Holdings issued the Cumulative Preferred Stock to American Express for
$200 million. The holder of the Cumulative Preferred Stock is entitled to
receive preferred dividends at an annual rate of 8.44%, payable quarterly before
any dividends are paid to the holders of Common Stock.
Holdings may not call the shares of the Cumulative Preferred Stock for
redemption prior to June 1, 2001. However, the holder of such preferred stock
may sell its shares at any time, subject to certain restrictions. These shares
are not convertible into Common Stock.
Redeemable Voting
- -----------------
In 1994, Holdings issued the Redeemable Preferred Stock to American Express and
Nippon Life for $1,000. The holders of the Redeemable Preferred Stock will be
entitled to receive preferred dividends for each of eight annual dividend
periods following the Distribution in an amount equal to 50% of the amount, if
any, by which the Company's net income for the applicable dividend period
exceeds $400 million, up to a maximum of $50 million for any such period.
Holdings may not redeem shares of the Redeemable Preferred Stock prior to the
final dividend payment date. However, in the event of a change of control of the
Company, holders of the Redeemable Preferred Stock will have the right to
require Holdings to redeem all of this stock for an aggregate redemption price
equal to $300 million if such change of control occurs prior to November 30,
1996, declining $50 million per year in each of the six years thereafter. If a
change of control is not approved by a majority of the Company's Board of
Directors, the funds for redemption must be raised by an offering of the
Company's equity securities which are not redeemable. These shares are not
convertible into Common Stock.
Money Market Cumulative
- -----------------------
As of the Distribution, the Money Market Cumulative Preferred Stock was
exchanged for Common Stock.
- SIXTY SEVEN -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
<TABLE><CAPTION>
NOTE 8 Common Stock
- -------------------
Changes in shares of Common Stock outstanding are as follows:
TWELVE MONTHS ELEVEN MONTHS TWELVE MONTHS
ENDED ENDED ENDED
NOVEMBER 30 NOVEMBER 30 DECEMBER 31
1995 1994 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares outstanding, beginning of
period 104,537,690 168,235,284 168,235,284
- ------------------------------------------------------------------------------------------
Reverse Stock Split (114,764,841)
- ------------------------------------------------------------------------------------------
104,537,690 53,470,443 168,235,284
Concurrent transactions
Shares sold to American Express 35,379,920
Shares sold to Nippon Life 3,490,094
Shares issued in EOP conversion 3,366,677
Shares issued to American Express
in exchange for $250 million
Money Market Preferred Stock 9,786,006
Restricted shares granted under
the Replacement Plan 115,283
- -------------------------------------------------------------------------------------------
Outstanding Common Stock as of Spin-off date 105,608,423
Exercise of stock options and other share
issuances 76,142
Treasury stock purchases (47,957) (1,070,733)
- -------------------------------------------------------------------------------------------
Shares outstanding, end of period 104,565,875 104,537,690 168,235,284
- -------------------------------------------------------------------------------------------
The Company has reserved for issuance approximately 4.1 million shares of Common
Stock for conversion of the Series A Preferred Stock.
Nippon Life holds a non-transferable common stock purchase warrant pursuant to
which Nippon Life may purchase approximately 3.3 million shares of Common Stock
with an exercise price of $35.05 per share with an expiration date of
April 15, 1996.
There is a restriction on the transferability of the Common Stock received
under the Employee Ownership Plan. Generally, such restrictions will lapse
ratably over a three-year period.
Treasury stock purchases include approximately 973,000 shares in 1994 resulting
from the odd-lot buy back program.
NOTE 9 Incentive Plans
- ----------------------
1994 Replacement Plan
- ---------------------
The Lehman Brothers Holdings Inc. 1994 Management Replacement Plan (the
"Replacement Plan") allowed the Compensation and Benefits Committee (the
"Compensation Committee") to grant stock options and restricted stock awards
to eligible employees. The primary purpose of the Replacement Plan was to
provide awards similar to the American Express common shares granted to
Company employees which were canceled as of the date of the Distribution.
No further awards will be granted under this plan.
Employee Stock Purchase Plan
- ----------------------------
The Employee Stock Purchase Plan (the "ESPP") allows employees to purchase
Common Stock at a 15% discount from market value, with a maximum of $15,000
($25,000 effective on January 1, 1996) in annual aggregate purchases by any
- SIXTY EIGHT -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
one individual. The number of shares of Common Stock authorized for
purchase by eligible employees is 6,000,000. As of November 30, 1995 and
1994, 663,349 shares and 130,827 shares, respectively, of Common Stock were
purchased by eligible employees through the ESPP. The shares were purchased
in the open market and thus did not increase the Company's total shares
outstanding.
1994 Management Ownership Plan
The Lehman Brothers Holdings Inc. 1994 Management Ownership Plan (the "1994
Plan") provides for the Compensation Committee to grant stock options,
stock appreciation rights ("SARs"), restricted stock units ("RSUs"),
restricted stock, performance shares and performance stock units ("PSUs")
for a period of up to ten years to eligible employees. A total of
16,650,000 shares of Common Stock may be subject to awards under the 1994
Plan, including 150,000 shares available as RSUs which may be issued to
non-employee Directors. In addition, the 1994 Plan provides that
non-employee Directors of Holdings will receive on an annual basis RSUs
representing $30,000 of Common Stock, which vest ratably over a three-year
period. Vesting provisions for stock options and SARs are at the discretion
of the Compensation Committee, but in no case may the term of the award
exceed ten years. No individual may receive options or SARs over the life
of the 1994 Plan, attributable to more than 1,650,000 shares of Common
Stock. Stock options may be awarded as either incentive stock options or
non-qualified stock options. The exercise price for any stock option shall
not be less than the market price of Common Stock on the day of grant.
Under the 1994 Plan, eligible employees received RSUs in 1995 and 1994 as a
portion of their total compensation in lieu of cash. There was no further
cost to employees and senior officers associated with the RSU awards. In
addition, the Compensation Committee may, from time to time, award RSUs to
certain senior officers of Holdings and its subsidiaries (the "Firm"). The
Firm records compensation expense for RSUs based on the market value of
Common Stock and the applicable vesting provisions. All of the RSUs awarded
to employees vest 80% one year from the date of grant with the remaining
20% vesting five years from the date of grant. Each RSU outstanding on the
respective dates for which 100% vesting occurs will be exchanged for a
share of Common Stock. Holdings pays a dividend equivalent on each RSU
outstanding based on dividends paid on the Common Stock.
On October 25, 1995, the Company granted 1,125,000 options to members of
the Corporate Management Committee ("CMC") at the market price of the
Common Stock on that date ($20.875) (the "1995 Options"). The 1995 Options
become exercisable in four and one half years; exercisability is
accelerated ratably in one-third increments at such time as the closing
price of the Common Stock meets, or exceeds, $26.00, $28.00 and $30.00 for
30 consecutive trading days. If a minimum target price is not reached and
maintained for the specified period on or before April 24, 2000, the award
recipients may then exercise all of their options beginning April 25, 2000.
Other than the 1995 Options, all options awarded under the 1994 Plan become
exercisable in one-third increments ratably in the three years following
grant date. No compensation expense has been recognized for the Company's
stock options as all have been issued at the market price of the Common
Stock on the date of the respective grant.
The Compensation Committee also awarded PSUs to members of the CMC during
1995 as part of a three-year long term incentive award. The number of PSUs
which may be earned, if any, is dependent upon achievement of certain
performance levels within a two-year period. At the end of the performance
period, any PSUs earned will convert one-for-one to RSUs which then vest at
the end of the third year. The compensation cost for the estimated number
of RSUs that may eventually become payable in satisfaction of PSUs is
accrued over the three-year performance and vesting period and added to
common stock issuable.
Employee Incentive Plan
- -----------------------
During 1995, the Board of Directors adopted the Employee Incentive Plan
("EIP"), which has provisions similar to the 1994 Plan, and under which up
to 5 million shares may be awarded to eligible employees. During 1995,
approximately
- SIXTY NINE -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
2 million RSUs were awarded to new hires as part of the Company's
recruitment efforts. In addition, the Company granted PSUs and 1.4 million
options to certain senior officers which have provisions similar to the
PSUs and 1995 Options granted under the 1994 Plan. The Company will fund
these awards over time with purchases of Common Stock in the open market
and thus will not increase total shares outstanding.
The following is a summary of stock awards issued and outstanding under the
Company's stock based compensation plans:
RESTRICTED STOCK
REPLACEMENT
PLAN
Balance, January 1, 1994
Granted in connection with the spin-off 115,283
Exchanged for stock without restrictions (47,179)
Canceled (6,026)
Balance, November 30, 1994 62,078
Exchanged for stock without restrictions (5,690)
Canceled (11,560)
Balance, November 30, 1995 44,828
RESTRICTED STOCK UNITS
1994
PLAN EIP TOTAL
Balance, January 1, 1994
Granted 5,279,321 5,279,321
Canceled (674,216) (674,216)
Balance, November 30, 1994 4,605,105 4,605,105
Granted 8,021,784 2,039,220 10,061,004
Canceled (586,092) (586,092)
Balance, November 30, 1995 12,040,797 2,039,220 14,080,017
Of the RSUs issued and outstanding at November 30, 1995, approximately 4.2
million RSUs vested on July 1, 1995, approximately 5.6 million RSUs will
vest on July 1, 1996, and the remaining will vest July 1, 1997 to July 1,
2000.
STOCK OPTIONS
</TABLE>
<TABLE><CAPTION>
1994 REPLACEMENT EXERCISE EXPIRATION
PLAN PLAN EIP TOTAL PRICE DATES
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994
Granted 1,960,720 1,849,769 3,810,489 $18.00 2/95-5/04
Canceled (60,000) (60,000) $18.00
Balance, November 30, 1994 1,960,720 1,789,769 3,750,489 $18.00 2/95-5/04
Granted 1,125,000 1,400,000 2,525,000 $20.875 10/00
Exercised (68,996) (68,996) $18.00
Canceled (7,040) (291,588) (298,628) $18.00
Balance, November 30, 1995 3,078,680 1,429,185 1,400,000 5,907,865 $18.00-$20.875 5/96-5/04
</TABLE>
At November 30, 1995, approximately 2.1 million options are currently
exercisable at a price of $18.00.
- SEVENTY -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
As of December 31, 1995, the Compensation Committee awarded RSUs to members
of the CMC under the 1994 Plan based on performance goals satisfied for the
period from January 1, 1995 through December 31, 1995. An annual RSU award
also was made to employees in the Company's high-net-worth sales force.
Approximately 500,000 RSUs, not included in the preceding RSU summary, were
added to common stock issuable at November 30, 1995 for these awards.
NOTE 10 Earnings Per Common Share
- ----------------------------------
For all periods prior to May 31, 1994, the number of shares of common stock
and common stock equivalents used in the calculation is fixed at
105,681,479 (comprised of 105,608,423 shares of Common Stock and 73,056
RSUs).
The weighted average number of shares of common stock and common stock
equivalents included in the calculations of earnings per common share
follows:
TWELVE MONTHS ELEVEN MONTHS TWELVE MONTHS
ENDED ENDED ENDED
NOVEMBER 30 NOVEMBER 30 DECEMBER 31
1995 1994 1993
Common stock 104,535,218 105,436,860 105,608,423
Common stock issuable 8,420,122 2,532,543
Other share equivalents 459,344 61,389 73,056
Total 113,414,684 108,030,792 105,681,479
NOTE 11 Capital Requirements
- -----------------------------
As a registered broker-dealer, LBI is subject to SEC Rule 15c3-1, the Net
Capital Rule, which requires LBI to maintain net capital of not less than
the greater of 2% of aggregate debit items arising from customer
transactions, as defined, or 4% of funds required to be segregated for
customers' regulated commodity accounts, as defined. At November 30, 1995,
LBI's regulatory net capital, as defined, of $1,402 million exceeded the
minimum requirement by $1,301 million. On August 31, 1995, Lehman
Government Securities Inc., a wholly owned subsidiary of LBI and a
registered broker-dealer, was merged into LBI.
Lehman Brothers International (Europe) ("LBIE"), Lehman Brothers Japan Inc.
("LBJ"), and other of Holdings' subsidiaries are subject to various
securities, commodities and banking regulations and capital adequacy
requirements promulgated by the regulatory and exchange authorities of the
countries in which they operate. At November 30, 1995, LBIE, LBJ and the
other subsidiaries were in compliance with the applicable local capital
adequacy requirements.
At November 30, 1995, $2,664 million of net assets of subsidiaries of
Holdings were restricted as to the payment of dividends to Holdings, as a
result of regulatory and other requirements.
There are no restrictions on Holdings' present ability to pay dividends on
its Common Stock, other than Holdings' obligation first to make dividend
payments on its preferred stock and the governing provisions of the
Delaware General Corporation Law.
- SEVENTY ONE -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
NOTE 12 Changes in Accounting Principles
- ---------------------------------------
Accounting for Postemployment Benefits
Effective January 1, 1994, the Company adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." SFAS No. 112 requires the accrual
of obligations associated with services rendered to date for employee
benefits accumulated or vested for which payment is probable and can be
reasonably estimated. These benefits principally include the continuation
of salary, health care and life insurance costs for employees on service
disability leaves. The Company previously expensed the cost of these
benefits as they were incurred.
The cumulative effect of adopting SFAS No. 112 reduced net income for the
first quarter of 1994 by $13 million aftertax ($23 million pretax). The
effect of this accounting change on the 1994 results of operations was not
material, excluding the cumulative effect.
Offsetting of Certain Receivables and Payables
During the first quarter of 1994, the Company adopted the Financial
Accounting Standards Board Interpretation No. 39, "Offsetting of Amounts Related
to Certain Contracts" ("FIN No. 39"). FIN No. 39 restricts the historical
industry practice of offsetting certain receivables and payables. In January
1995, the Financial Accounting Standards Board issued Interpretation No. 41,
"Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase
Agreements" ("FIN No. 41"). FIN No. 41 is a modification to FIN No. 39 to permit
certain limited exceptions to the criteria established under FIN No. 39 for
offsetting certain repurchase and reverse repurchase agreements with the same
counterparty. The Company has adopted this modification, effective January
1995, which partially mitigates the increase in the Company's gross assets
and liabilities resulting from the implementation of FIN No. 39.
NOTE 13 Pension Plans
- ----------------------
The Company sponsors several noncontributory defined benefit pension plans
which cover substantially all employees. The cost of pension benefits for
eligible employees, measured by length of service, compensation and other
factors, is currently being funded through trusts established under the
plans. Funding of retirement costs for the applicable plans complies with
the minimum funding requirements specified by the Employee Retirement
Income Security Act of 1974, as amended, and other statutory requirements.
Total expense related to pension benefits for 1995, 1994 and 1993 consisted
of the following components:
<TABLE><CAPTION>
TWELVE MONTHS ELEVEN MONTHS TWELVE MONTHS
ENDED ENDED ENDED
NOVEMBER 30 NOVEMBER 30 DECEMBER 31
(IN MILLIONS) 1995 1994 1993
<S> <C> <C> <C>
Service cost -- benefits earned during the period $ 13 $ 16 $ 32
Interest cost on projected benefit obligation 31 28 40
Actual return on plan assets (77) (4) (73)
Net amortization and deferral 36 (31) 25
Total expense $ 3 $ 9 $ 24
</TABLE>
Plan assets within the trusts consist principally of equities and bonds.
The actual returns on plan assets for 1995 and 1993 reflect a favorable
market environment in those years. In addition, Company contributions
increased assets under investment in 1995. Adverse market conditions in
1994 were the principal reason for the lower return earned in that year.
- SEVENTY TWO -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
The following table sets forth the funded status of the Company's defined
benefit plans:
NOVEMBER 30 NOVEMBER 30
(IN MILLIONS) 1995 1994
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligations
Vested benefit obligation $ (428) $ (335)
- --------------------------------------------------------------------------------
Accumulated benefit obligation $ (433) $ (342)
Projected benefit obligation $ (452) $ (367)
Plan assets at fair value 564 446
- --------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 112 79
Unrecognized net loss 76 57
- --------------------------------------------------------------------------------
Pension asset recognized in the Consolidated
Statement of Financial Condition $ 188 $ 136
- --------------------------------------------------------------------------------
The weighted average assumed discount rate used in determining the
actuarial present value of the projected benefit obligation for the
Company's plans was 7.5% and 8.6% in 1995 and 1994, respectively. The
weighted average rate of increase in future compensation levels used was
5.2% and 5.7% in 1995 and 1994, respectively. The weighted average expected
long-term rate of return on assets was 9.8%, 9.6% and 9.8% in 1995, 1994
and 1993, respectively.
During 1993, the Company incurred a settlement and curtailment with respect
to its domestic pension plan in relation to the Primerica Transaction. The
net gain of approximately $26 million pretax was included in the loss on
the sale of Shearson. (See Note 21 for definitions and additional
information concerning this sale.)
NOTE 14 Postretirement Benefits
- -------------------------------
The Company sponsors several defined benefit health care plans that provide
health care, life insurance and other postretirement benefits to
substantially all eligible retired employees. The health care plans include
participant contributions, deductibles, co-insurance provisions and
service-related eligibility requirements. The Company funds the cost of
these benefits as they are incurred.
Net periodic postretirement benefits cost for 1995, 1994, and 1993
consisted of the following components:
<TABLE><CAPTION>
TWELVE MONTHS ELEVEN MONTHS TWELVE MONTHS
ENDED ENDED ENDED
NOVEMBER 30 NOVEMBER 30 DECEMBER 31
(IN MILLIONS) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 1 $ 1 $ 2
Interest cost 4 5 8
Amortization of unrecognized prior service cost (1) (1)
- -----------------------------------------------------------------------------------------------------------
Net periodic postretirement benefits cost $ 4 $ 5 $ 10
- -----------------------------------------------------------------------------------------------------------
</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 21 for definitions and additional information
concerning this sale.)
- SEVENTY THREE -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
The following table sets forth the amount recognized in the Consolidated
Statement of Financial Condition for the Company's postretirement benefit
plans (other than pension plans):
NOVEMBER 30 NOVEMBER 30
(IN MILLIONS) 1995 1994
- -------------------------------------------------------------------------------
Accumulated postretirement benefit obligation
Retirees $ 42 $ 45
Fully eligible active plan participants 4 5
Other active plan participants 6 6
- -------------------------------------------------------------------------------
52 56
- -------------------------------------------------------------------------------
Unrecognized net gain 17 12
Unrecognized net reduction in prior service cost 8 9
- -------------------------------------------------------------------------------
Accrued postretirement liability recognized in
the Consolidated Statement of Financial Condition $ 77 $ 77
- -------------------------------------------------------------------------------
The discount rate used in determining the accumulated postretirement
benefit obligation was 7.25% and 8.5% in 1995 and 1994, respectively.
The annual assumed health care cost trend rate is 11% for the year ended
November 30, 1996 and is assumed to decrease at the rate of 1% per year to
6% in the year ended November 30, 2001 and remain at that level thereafter.
An increase in the assumed health care cost trend rate by one percentage
point in each period would increase the accumulated postretirement benefit
obligation as of November 30, 1995 by approximately $1 million.
NOTE 15 Income Taxes
- ----------------------
For tax filings subsequent to the spin-off from American Express,
commencing with the period June 1, 1994 to December 31, 1994, the Company
will file a consolidated U.S. federal income tax return reflecting the
income of Holdings and its subsidiaries. For the period prior to the
spin-off, the income of the Company was included in the American Express
consolidated U.S. federal income tax return, as it had been since August of
1990.
With respect to the period in which the Company was included in the
American Express consolidated U.S. federal income tax return, intercompany
taxes are remitted to, or from, American Express when they are otherwise
due to or from the relevant taxing authority. The balances due from
American Express at November 30, 1995 and November 30, 1994 were $21
million and $47 million, respectively.
- SEVENTY FOUR -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
The provision for income taxes from continuing operations consists of the
following:
TWELVE MONTHS ELEVEN MONTHS TWELVE MONTHS
ENDED ENDED ENDED
NOVEMBER 30 NOVEMBER 30 DECEMBER 31
(IN MILLIONS) 1995 1994 1993
Current
Federal $ 170 $ (158) $ 246
State 80 (5) 130
Foreign 72 63 50
322 (100) 426
Deferred
Federal (144) 153 (85)
State (51) 14 (23)
$ 127 $ 67 $ 318
During the third quarter of 1993, the statutory U.S. federal income tax
rate was increased to 35% from 34%, effective January 1, 1993. The
Company's 1993 tax provision includes a one-time benefit of approximately
$10 million from the impact of the rate change on the Company's net
deferred tax assets as of January 1, 1993.
Income from continuing operations before taxes included $173 million, $105
million and $318 million that is subject to income taxes of foreign
jurisdictions for 1995, 1994 and 1993, respectively.
The income tax provision differs from that computed by using the statutory
federal income tax rate for the reasons shown below:
<TABLE><CAPTION>
TWELVE MONTHS ELEVEN MONTHS TWELVE MONTHS
ENDED ENDED ENDED
NOVEMBER 30 NOVEMBER 30 DECEMBER 31
(IN MILLIONS) 1995 1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes at statutory rate $ 129 $ 67 $ 9
State and local taxes 18 6 69
Tax-exempt interest and dividends (17) (21) (20)
Goodwill reduction related to the sale of Shearson 263
Amortization of goodwill 2 3 9
Foreign operations (1) 13
U.S. federal rate change (10)
Other (4) (1) (2)
- -----------------------------------------------------------------------------------------------
$ 127 $ 67 $ 318
- -----------------------------------------------------------------------------------------------
</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.
- SEVENTY FIVE -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
At November 30, 1995 and 1994, the Company's net deferred tax assets from
continuing operations consisted of the following:
NOVEMBER 30 NOVEMBER 30
(IN MILLIONS) 1995 1994
- -------------------------------------------------------------------------------
Deferred tax assets $ 552 $ 834
Less: Valuation allowance 106 156
- -------------------------------------------------------------------------------
Deferred tax assets net of valuation allowance 446 678
Deferred tax liabilities (137) (458)
- -------------------------------------------------------------------------------
Net deferred tax assets from continuing operations $ 309 $ 220
The net deferred tax assets increased by $89 million to $309 million at
November 30, 1995. The net increase is primarily attributable to the
reversal of certain temporary differences. At November 30, 1995 and 1994
the deferred tax assets and liabilities consisted of the following:
NOVEMBER 30 NOVEMBER 30
(IN MILLIONS) 1995 1994
- -------------------------------------------------------------------------------
Deferred tax assets:
Reserves not currently deductible $ 289 $ 438
Deferred compensation 212 174
Tax return NOLs 44 213
Other 7 9
- -------------------------------------------------------------------------------
Total deferred tax assets $ 552 $ 834
- -------------------------------------------------------------------------------
NOVEMBER 30 NOVEMBER 30
(IN MILLIONS) 1995 1994
- -------------------------------------------------------------------------------
Deferred tax liabilities:
Undistributed earnings of foreign subsidiaries
(net of credits) $ 4 $ 17
Excess tax over financial depreciation 83 78
Unrealized trading and investment adjustments 4 310
Pension and retirement costs 35 18
Other 11 35
- -------------------------------------------------------------------------------
Total deferred tax liabilities $ 137 $ 458
- -------------------------------------------------------------------------------
The net deferred tax assets are included in deferred expenses and other
assets in the accompanying Consolidated Statement of Financial Condition.
At November 30, 1995, the valuation allowance recorded against deferred tax
assets from continuing operations was $106 million compared to $156 million
at November 30, 1994, of which approximately $56 million and $131 million,
respectively, will reduce goodwill if future circumstances permit
recognition. The decrease in the valuation allowance primarily relates to
the write-off of certain net operating losses ("NOLs") that no longer meet
the asset recognition criteria under SFAS 109. The decrease had no impact
in the Company's Consolidated Statement of Operations since it was
associated with a corresponding decrease in the Company's net deferred tax
assets.
For tax return purposes, the Company has approximately $25 million of NOL
carryforwards, substantially all of which are attributable to the 1988
acquisition of E.F. Hutton Group, Inc., (now known as LB I Group Inc.).
Substantially, all of the NOLs are scheduled to expire in the years 1999
through 2009.
- SEVENTY SIX -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
NOTE 16 Derivative Financial Instruments
- -----------------------------------------
Derivatives are financial instruments whose value is based upon an
underlying asset (e.g., treasury bond), index (e.g., S&P 500) or reference
rate (e.g., LIBOR). Over-the-counter ("OTC") derivative products are
privately negotiated contractual agreements that can be tailored to meet
individual client needs and include forwards, swaps and certain options
including caps, collars and floors. Exchange-traded derivative products are
standardized contracts transacted through regulated exchanges and include
futures and certain option contracts listed on an exchange.
In the normal course of business, the Company enters into derivative
transactions both in a trading capacity and as an end user. Acting in a
trading capacity, the Company enters into derivative transactions to
satisfy the needs of its clients and to manage the Company's own exposure
to market and credit risks resulting from its trading activities in cash
instruments (collectively, "Trading-Related Derivative Activities"). As an
end user, the Company primarily enters into interest rate swap and option
contracts to adjust the interest rate nature of its funding sources from
fixed to floating rates and vice versa, and to change the index upon which
floating interest rates are based (i.e., Prime to LIBOR) (collectively,
"End User Derivative Activities").
There is an extensive volume of derivative products available in the
marketplace which can vary from a simple forward foreign exchange contract
to a complex derivative instrument with multiple risk characteristics
involving the aggregation of the risk characteristics of a number of
derivative product types including swap products, options, futures and
forwards. Listed below are examples of various derivative product types
along with a brief discussion of the performance mechanics of certain
specific derivative instruments.
Swap Products
Interest rate swap products include interest rate and currency swaps,
leveraged swaps, swap options, and other interest rate option products
including caps, collars, and floors. An interest rate swap is a negotiated
OTC contract in which two parties agree to exchange periodic interest
payments for a defined period, calculated based upon a predetermined
notional amount. Interest payments are usually exchanged on a net basis
throughout the duration of the swap contract. A currency swap is an OTC
agreement to exchange a fixed amount of one currency for a specified amount
of a second currency at the outset and completion of the swap term.
Leveraged swaps involve the multiplication of the interest rate factor upon
which the interest payment streams are based (i.e., Party A pays 3 times
six month LIBOR). Caps are contractual commitments that require the writer
to pay the purchaser the amount by which an interest reference rate exceeds
a defined contractual rate, if any, at specified times during the contract.
Conversely, a floor is a contractual commitment that requires the writer to
pay the amount by which a defined contractual rate exceeds an interest
reference rate at specified times over the life of the contract, if any.
Equity swaps are contractual agreements whereby one party agrees to receive
the appreciation (or depreciation) value over a strike price on an equity
investment in return for paying another rate, which is usually based upon
equity index movements or interest rates. Commodity swaps are contractual
commitments to exchange the fixed price of a commodity for a floating price
(which is usually the prevailing spot price) throughout the swap term.
Options
Option contracts provide the option purchaser (holder) with the right but
not the obligation to buy or sell a financial instrument, commodity or
currency at a predetermined exercise price (strike price) during a defined
period (American Option) or at a specified date (European Option). The
option purchaser pays a premium to the option seller (writer) for the right
to exercise the option. The option seller is obligated to buy (call) or
sell (put) the item underlying the contract at a set price, if the option
purchaser chooses to exercise. Option contracts also exist for various
indices and are similar to options on a security or other instrument except
that, rather than settling physical with delivery of the
- SEVENTY SEVEN -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
underlying instrument, they are cash settled. As a purchaser of an option
contract, the Company is subject to credit risk but is not subject to
market risk, since the counterparty is obligated to make payments under the
terms of the option contract if the Company exercises the option. As the
writer of an option contract, the Company is not subject to credit risk but
is subject to market risk, since the Company is obligated to make payments
under the terms of the option contract if exercised.
Option contracts may be exchange-traded or OTC. Exchange-traded options are
the obligations of the exchange and generally have standardized terms and
performance mechanics. In contrast, all of the terms of an OTC option
including the method of settlement, term, strike price, premium and
security are determined by negotiation of the parties.
Futures and Forwards
Futures contracts are exchange-traded contractual commitments to either
receive (purchase) or deliver (sell) a standard amount or value of a
financial instrument or commodity at a specified future date and price.
Maintaining a futures contract requires the Company to deposit with the
exchange, as security for its obligation (original margin), an amount of
cash or other specified asset. Additionally, futures exchanges generally
require the daily cash settlement of unrealized gains/losses on open
contracts with the futures exchange. Therefore, futures contracts provide a
reduced funding alternative to purchasing the underlying cash position in
the marketplace. Futures contracts may be settled by physical delivery of
the underlying asset or cash settlement (for index futures) on the
settlement date or by entering into an offsetting futures contract with the
futures exchange prior to the settlement date.
Forwards are OTC contractual commitments to purchase or sell a specified
amount of a financial instrument, foreign currency or commodity at a future
date at a predetermined price. TBA's are forward contracts which give the
purchaser/seller an obligation to obtain/deliver mortgage securities in the
future. Therefore, TBA's subject the holder to both interest rate risk and
principal prepayment risk.
Trading-Related Derivative Activities
Derivatives are subject to various risks similar to other financial
instruments including market, credit and operational risk. In addition, the
Company may also be exposed to legal risks related to its derivative
activities including the possibility that a transaction may be
unenforceable under applicable law. The risks of derivatives should not be
viewed in isolation, but rather should be considered on an aggregate basis
along with the Company's other trading-related activities. The Company
manages the risks associated with derivatives on an aggregate basis along
with the risks associated with its proprietary trading and market-making
activities in cash instruments as part of its firmwide risk management
policies.
Derivatives are generally based upon notional values. Notional values are
not recorded on-balance-sheet, but rather are utilized solely as a basis
for determining future cash flows to be exchanged. Therefore, notional
amounts provide a measure of the Company's involvement with such
instruments, but are not indicative of potential risk.
- SEVENTY EIGHT -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
The following table reflects the notional/contract value of the Company's
Trading-Related Derivative Activities.
TRADING-RELATED DERIVATIVE FINANCIAL INSTRUMENTS
NOTIONAL/CONTRACT VALUE
NOVEMBER 30 NOVEMBER 30 1995
WEIGHTED AVERAGE
(IN MILLIONS) 1995 1994 MATURITY IN YEARS
- -----------------------------------------------------------------------------
Over-the-Counter
Swap products $ 541,776 $ 433,452 3.71
Options purchased 22,933 24,709 .43
Options written 24,964 23,374 .38
Forwards 378,300 291,930 .20
- -----------------------------------------------------------------------------
967,973 773,465 2.18
- -----------------------------------------------------------------------------
Exchange-Traded
Futures 185,635 274,905 .70
Options purchased 31,923 23,875 .19
Options written 23,462 31,640 .54
- -----------------------------------------------------------------------------
241,020 330,420 .62
- -----------------------------------------------------------------------------
$ 1,208,993 $ 1,103,885 1.86
- -----------------------------------------------------------------------------
Approximately $349 billion and $283 billion of these contracts relate to
foreign exchange transactions at November 30, 1995 and 1994, respectively.
Approximately $732 billion of the notional/contract value of the Company's
Trading-Related Derivative Activities mature within the year ended November
30, 1996, of which approximately 42% have maturities of less than one
month.
The Company records its Trading-Related Derivative Activities on a
mark-to-market basis with realized and unrealized gains (losses) recognized
currently in principal transactions. The Company currently records
unrealized gains and losses on derivative contracts on a net basis in the
Consolidated Statement of Financial Condition for those transactions with
counterparties executed under a legally enforceable master netting
agreement. While the Company may utilize derivative products in all its
businesses, the Company views its derivative product revenues as the
revenues earned from the Company's fixed income and equity derivative
products businesses, and foreign exchange and commodity derivatives.
Principal transactions revenues related to the Company's fixed income
derivative products business were $381 million for 1995, $461 million for
1994 and $330 million for 1993. Principal transactions revenues related to
the Company's equity derivative products business were $112 million for
1995, $80 million for 1994 and $82 million for 1993. Principal transactions
revenues related to foreign exchange and commodity derivatives were $66
million for 1995, $75 million for 1994 and $129 million for 1993.
Listed in the following table is the fair value of the Company's
Trading-Related Derivative Activities as of November 30, 1995 and 1994 as
well as the average fair value of these instruments. Average fair values of
these instruments were calculated based upon month-end statement of
financial condition values, which the Company believes does not vary
significantly from the average fair value calculated on a more frequent
basis. Variances between average fair values and period-end values are due
to changes in the volume of activities in these instruments and changes in
the valuation of these instruments due to variations in market and credit
conditions.
- SEVENTY NINE -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
FAIR VALUE OF TRADING-RELATED DERIVATIVE FINANCIAL INSTRUMENTS
<TABLE><CAPTION>
FAIR VALUE AVERAGE FAIR VALUES
NOVEMBER 30, 1995 NOVEMBER 30, 1994 TWELVE MONTHS 1995 ELEVEN MONTHS 1994
(IN MILLIONS) ASSETS LIABILITIES ASSETS LIABILITIES ASSETS LIABILITIES ASSETS LIABILITIES
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Swap products $2,730 $2,291 $3,752 $2,114 $2,871 $2,425 $2,998 $1,606
Options purchased 848 992 686 1,088
Options written 1,012 1,049 565 1,045
Forwards 1,358 1,526 823 887 1,557 1,561 1,128 1,048
Futures(1) 89 64 15 27 87 44 171 40
Commodities 339 434 155 128 405 487 155 128
$5,364 $5,327 $5,737 $4,205 $5,606 $5,082 $5,540 $3,867
</TABLE>
(1) Fair values of futures contracts represent the unsettled net receivable
or payable amount due to/from various futures exchanges on open futures
contracts.
Assets included in the table above represent the Company's unrealized
gains, net of unrealized losses for situations in which the Company has a
master netting agreement. Similarly, liabilities represent net amounts owed to
counterparties. Therefore, the fair value of assets related to derivative
contracts at November 30, 1995 represents the Company's net receivable for
derivative financial instruments before consideration of collateral. Included
within this amount was $5,202 million and $162 million, respectively, related to
OTC and exchange-traded contracts.
The primary difference in risks related to OTC and exchange-traded
contracts is credit risk. OTC contracts contain credit risk for unrealized
gains from various counterparties for the duration of the contract, net of
collateral. Exchange-traded contracts are transacted directly on the
respective exchanges. The exchange clearing house requires its
counterparties to post margin upon the origination of the contract and for
any changes in the market value of the contract on a daily basis (certain
foreign exchanges extend settlement to three days).
With respect to OTC instruments, the Company views its net credit exposure
to be $3,732 million at November 30, 1995, representing the fair value of
the Company's OTC contracts in an unrealized gain position, after
consideration of collateral of $1,470 million.
Counterparties to the Company's OTC derivative products are primarily
financial intermediaries (U.S. and foreign banks), securities firms,
corporations, governments and their agencies, finance companies, insurance
companies, investment companies, pension funds and consumers and producers
of energy and metals products. Collateral held related to OTC contracts
generally includes cash and U.S. government and federal agency securities.
Presented below is an analysis of the Company's net credit exposure for OTC
contracts based upon internal designations of counterparty credit quality.
1995
COUNTERPARTY S&P/MOODY'S NET CREDIT
RISK RATING EQUIVALENT EXPOSURE
1 AAA/Aaa 21%
2 AA-/Aa3 or higher 24%
3 A-/A3 or higher 36%
4 BBB-/Baa3 or higher 11%
5 BB-/Ba3 or higher 6%
6 B+/B1 or lower 2%
These designations are based on actual ratings made by external rating
agencies or by equivalent ratings established and utilized by the Company's
Corporate Credit Department.
- EIGHTY -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
With respect to exchange-traded derivative instruments, the fair value of
assets reflects the unsettled variation margin due from futures exchanges
as well as the fair value of exchange-listed purchased options. Foreign
futures exchanges, consistent with their domestic counterparts, require
cash or other securities to be deposited with the exchange as collateral
for open contracts.
End User Derivative Activities
The Company utilizes a variety of derivative products as an end user to
modify the interest rate characteristics of its long-term debt portfolio.
The Company actively manages the interest rate exposure on its long-term
debt portfolio to more closely match the terms of its debt portfolio to the
assets being funded and to minimize interest rate risk. At November 30,
1995 and November 30, 1994 the notional value of the Company's end user
activities related to its long-term debt obligations were approximately
$11.0 billion and $8.1 billion, respectively. (For a further discussion of
the Company's long-term debt-related end user activities see Note 5.)
The Company also enters into interest rate swap agreements as an end user
to modify its interest rate exposure associated with its secured financing
activities, including securities purchased under agreements to resell,
securities borrowed, securities sold under agreements to repurchase and
securities loaned. At November 30, 1995 and 1994, the Company had $114
billion and $108 billion, respectively, of such secured financing
activities. As with the Company's long-term debt, its secured financing
activities expose the Company to interest rate risk. The Company, as an end
user, manages the interest rate risk related to these activities by
entering into derivative financial instruments, including interest rate
swaps and purchased options. The Company designates certain specific
derivative transactions against specific assets and liabilities with
matching maturities. In addition, the Company manages the interest rate
risk of anticipated secured financing transactions with derivative
products. These derivative products are designated against the existing
secured financing transactions for their applicable maturity. The remaining
term of these transactions are designated against the anticipated secured
financing transactions which will replace the existing secured financing
transactions at their maturity. The Company continuously monitors the level
of secured financing transactions to ensure that there is a high degree of
certainty that the Company will enter into the anticipated secured
financing transactions at a level in excess of the designated derivative
product transactions. At November 30, 1995 and November 30, 1994, the
Company, as an end user, utilized derivative financial instruments with an
aggregate notional amount of $21.5 billion and $32.3 billion, respectively,
to modify the interest rate characteristics of its secured financing
activities. The total notional value of these agreements had a weighted
average maturity of 1.1 years and 1.2 years as of November 30, 1995 and
November 30, 1994, respectively.
During 1995, the Company terminated certain swaps designated as hedges of
the Company's secured financing activities. At November 30, 1995, a loss of
approximately $16 million from these terminated contracts was deferred and
will be amortized to interest expense in 1996. On an overall basis, the
Company's secured financing end user activities increased net interest
income by approximately $39 million and $6 million for 1995 and 1994,
respectively.
NOTE 17 Fair Value of Financial Instruments
SFAS No. 107 "Disclosures about Fair Value of Financial Instruments"
requires the disclosure of the fair value of on- and off-balance sheet
financial instruments, both assets and liabilities, for which it is
practicable to estimate fair value. Fair value is the amount at which a
financial instrument could be exchanged in a current transaction between
willing parties, other than in a forced sale or liquidation. The fair
values of financial instruments are estimates based upon market conditions
and perceived risks as of the statement of financial condition date and
require varying degrees of management judgment. Quoted market prices, when
available, are used as the measure of fair value. In cases where
- EIGHTY ONE -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
quoted market prices are not available, fair values are based on quotations
of similarly traded instruments and pricing models. Pricing models which
consider time value, volatility factors, the current market and contractual
prices of the underlying financial instrument are used to value derivatives
and other contractual agreements. The disclosure requirements of SFAS No.
107 exclude certain financial instruments such as employee benefit
obligations and all non-financial instruments such as fixed assets and
goodwill.
All of the Company's financial instruments are carried at fair value or
contractual values which approximate fair value, with the exception of
long-term debt, certain secured financing activities and the related
financial instruments utilized by the Company as an end user to manage the
interest rate risk of these portfolios. Assets and liabilities which are
carried at fair value include securities and other financial instruments
owned and securities and other financial instruments sold but not yet
purchased. Assets and liabilities, which are recorded at contractual
amounts that approximate market or fair value, include cash and cash
equivalents, cash and securities segregated and on deposit for regulatory
and other purposes, receivables, certain other assets and deferred
expenses, commercial paper and short-term debt, and payables.
The Company's long-term debt is recorded at contractual or historical
amounts that do not necessarily approximate market or fair value. For fair
value purposes, the carrying value of variable rate long-term debt that
reprices within one year and fixed rate long-term debt which matures in
less than six months is considered to approximate fair value. For the
remaining long-term debt portfolio, fair value is estimated using either
quoted market prices or discounted cash flow analyses based on the
Company's current borrowing rates for similar types of borrowing
arrangements. The Company utilizes derivative financial instruments as an
end user to convert the interest rate basis for its long-term debt from
fixed or floating to another basis. The unrecognized net gains/(losses)
related to these end user activities reflect the estimated amounts the
Company would receive/pay if the agreements were terminated based on market
rates at November 30, 1995 and 1994, respectively. The following is a
summary of the fair value of the Company's long-term debt and related end
user activities:
<TABLE><CAPTION>
NOVEMBER 30 NOVEMBER 30
(IN MILLIONS) 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Carrying value of long-term debt $12,765 $11,321
Fair value of long-term debt 13,270 11,131
- ----------------------------------------------------------------------------------------------
Unrecognized net gain (loss) on long-term debt $ (505) $ 190
- ----------------------------------------------------------------------------------------------
Unrecognized net gain (loss) on long-term debt end user activities $ 236 $ (99)
- ----------------------------------------------------------------------------------------------
</TABLE>
The Company carries its secured financing activities, including securities
purchased under agreements to resell, securities borrowed, securities sold
under agreements to repurchase and securities loaned, at their original
contract amount plus accrued interest, which for the majority of such
financing activities is an approximation of fair value. At November 30,
1995 and 1994, the Company had $114 billion and $108 billion, respectively,
of such secured financing activities. As with the Company's long-term debt,
its secured financing activities expose the Company to interest rate risk.
At November 30, 1995 and 1994, the Company, as an end user, utilized
derivative financial instruments with an aggregate notional amount of $21.5
billion and $32.3 billion, respectively, to modify the interest rate
characteristics of its secured financing activities. The unrecognized net
losses related to these derivative financial instruments of $36 million and
$110 million at November 30, 1995 and 1994, respectively, were offset by
unrecognized net gains arising from the Company's secured financing
activities.
- EIGHTY TWO -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
NOTE 18 Other Commitments and Contingencies
- -------------------------------------------
As of November 30, 1995 and 1994, the Company was contingently liable for
$2.0 billion and $1.5 billion, respectively, of letters of credit,
primarily used to provide collateral for securities and commodities
borrowed and to satisfy margin deposits at option and commodity exchanges,
and other guarantees.
The Company has commitments under certain secured lending arrangements of
approximately $1.8 billion at November 30, 1995. These commitments require
borrowers to provide acceptable collateral, as defined in the agreements,
when amounts are drawn under the lending facilities. Advances under the
above lending arrangements are typically at variable interest rates and
generally provide for over-collateralization based upon the borrowers'
creditworthiness.
As of November 30, 1995 and 1994, the Company had pledged or otherwise
transferred securities, primarily fixed income, having a market value of
$30.3 billion and $20.1 billion, respectively, as collateral for securities
borrowed or otherwise received having a market value of $30.1 billion and
$19.9 billion, respectively.
Securities and other financial instruments sold but not yet purchased
represent obligations of the Company to purchase the securities at
prevailing market prices. Therefore, the future satisfaction of such
obligations may be for an amount greater or less than the amount recorded.
The ultimate gain or loss is dependent upon the price at which the
underlying financial instrument is purchased to settle its obligation under
the sale commitment.
In addition, the Company's customer activities may expose it to
off-balance-sheet credit and market risk. These risks may arise in the
normal course of business as a result of executing, financing and settling
various customer security and commodity transactions. Off-balance-sheet
risk arises from the potential that customers or counterparties fail to
satisfy their obligations and that the collateral obtained is insufficient.
In such instances, the Company may be required to purchase or sell
financial instruments at unfavorable market prices. The Company seeks to
control these risks by obtaining margin balances and other collateral in
accordance with regulatory and internal guidelines.
Subsidiaries of the Company, as general partner, are contingently liable
for the obligations of certain public and private limited partnerships
organized as pooled investment funds or engaged primarily in real estate
activities. In the opinion of the Company, contingent liabilities, if any,
for the obligations of such partnerships will not in the aggregate have a
material adverse effect on the Company's consolidated financial position or
results of operations.
In the normal course of its business, the Company has been named a
defendant in a number of lawsuits and other legal proceedings. After
considering all relevant facts, available insurance coverage and the advice
of outside counsel, in the opinion of the Company such litigation will not,
in the aggregate, have a material adverse effect on the Company's
consolidated financial position or results of operations.
Concentrations of Credit Risk
As a major international securities firm, the Company is actively involved
in securities underwriting, brokerage, distribution and trading. These and
other related services are provided on a worldwide basis to a large and
diversified group of clients and customers, including multinational
corporations, governments, emerging growth companies, financial
institutions and individual investors.
A substantial portion of the Company's securities and commodities
transactions is collateralized and is executed with, and on behalf of,
commercial banks and other institutional investors, including other brokers
and dealers. The Company's exposure to credit risk associated with the
non-performance of these customers and counterparties in fulfilling their
contractual obligations pursuant to securities transactions can be directly
impacted by volatile or illiquid trading markets, which may impair the
ability of customers and counterparties to satisfy their obligations to the
Company.
- EIGHTY THREE -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
Securities and other financial instruments owned by the Company include
U.S. government and agency securities, and securities issued by non-U.S.
governments (principally Japan, Germany and Italy) which, in the aggregate,
represented 20% of the Company's total assets at November 30, 1995. In
addition, substantially all of the collateral held by the Company for
resale agreements or securities borrowed, which together represented 46% of
total assets at November 30, 1995, consisted of securities issued by the
U.S. government, federal agencies or non-U.S. governments. In addition to
these specific exposures, the Company's most significant concentration is
financial institutions, which include other brokers and dealers, commercial
banks and institutional clients. This concentration arises in the normal
course of the Company's business.
Lease Commitments
The Company leases office space and equipment throughout the world and has
entered into a ground lease with the Battery Park City Authority covering
its headquarters at 3 World Financial Center which extends through 2069.
Total rent expense for 1995, 1994 and 1993 was $67 million, $59 million and
$109 million, respectively. Certain leases on office space contain
escalation clauses providing for additional rentals based upon maintenance,
utility and tax increases.
Minimum future rental commitments under noncancellable operating leases
(net of subleases of $587 million) are as follows:
(IN MILLIONS) AMOUNT
- ----------------------------------------------
Fiscal 1996 $ 54
Fiscal 1997 50
Fiscal 1998 43
Fiscal 1999 41
Fiscal 2000 36
December 1, 2000 and thereafter 527
- ----------------------------------------------
$ 751
- ----------------------------------------------
The minimum future rental commitments shown above include lease obligations
related to facilities which the Company intends to vacate and sublease in
future periods, before consideration of the Company's fourth quarter
restructuring charge. (See Note 20.)
NOTE 19 International Operations
- --------------------------------
Although the Company's business activities are highly integrated and
constitute a single industry segment for the purposes of SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," they can be
broadly categorized into the three major geographic areas in which it
conducts operations: North America, Europe and Asia Pacific.
The Company manages its businesses with the goal of maximizing worldwide
profitability by product line. Activities such as the global distribution
of underwritings and the twenty-four hour risk management of trading
positions render geographic profitability to be highly subjective as it is
the result of numerous estimates and assumptions.
The amounts presented in the following table provide a broad indication of
each region's contribution to the consolidated results. The method of
allocation is as follows: Gross and Net Revenues, if syndicate or
trading-related, have been distributed based upon the location where the
primary or secondary position was fundamentally risk managed; if
fee-related, by the location of the senior coverage banker; if commission
related, by the location of the salespeople. Income (Loss)
- EIGHTY FOUR -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
Before Taxes includes expenses associated with generating the revenues
reflected in each region. Identifiable Assets represent essentially those
recorded in the legal entities in which the Company does business within
the respective region.
<TABLE><CAPTION>
INCOME
GROSS NET (LOSS) IDENTIFIABLE
(IN MILLIONS) REVENUES REVENUES BEFORE TAXES ASSETS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Twelve months ended December 31, 1993
International operations:
Europe $ 1,013 $ 660 $ 109 $ 17,949
Asia Pacific 276 224 31 1,944
- -------------------------------------------------------------------------------------------------------
Total international 1,289 884 140 19,893
Domestic operations 9,385 4,422 (113) 60,581
- -------------------------------------------------------------------------------------------------------
Total $ 10,674 $ 5,306 $ 27 $ 80,474
- -------------------------------------------------------------------------------------------------------
Eleven months ended November 30, 1994
International operations:
Europe $ 846 $ 542 $ (43) $ 25,199
Asia Pacific 324 269 11 4,860
- -------------------------------------------------------------------------------------------------------
Total international 1,170 811 (32) 30,059
Domestic operations 8,020 1,927 225 79,888
- -------------------------------------------------------------------------------------------------------
Total $ 9,190 $ 2,738 $ 193 $ 109,947
- -------------------------------------------------------------------------------------------------------
Twelve months ended November 30, 1995
International operations:
Europe $ 892 $ 575 $ (25) $ 27,844
Asia Pacific 375 355 84 5,513
- -------------------------------------------------------------------------------------------------------
Total international 1,267 930 59 33,357
Domestic operations 12,209* 2,141* 310 81,946
- -------------------------------------------------------------------------------------------------------
Total $ 13,476 $ 3,071 $ 369 $ 115,303
- -------------------------------------------------------------------------------------------------------
*Includes $129 million resulting from the Company's sale of its stake in
Omnitel.
NOTE 20 Other Charges
- --------------------
Restructuring Charge
- --------------------
During the fourth quarter of 1995, the Company recorded a charge of $97
million pretax ($58 million aftertax) for occupancy-related real estate and
severance expenses. The occupancy-related real estate expense component of
the charge, $80 million pretax ($48 million aftertax), resulted from a
complete global review of the Company's real estate requirements at current
headcount levels and the elimination of excess real estate, primarily in
its New York, London and Tokyo locations. The charge includes the cost to
write-down the carrying value of leasehold improvements as well as the
difference between expected operating costs and projected sublease
recoveries. In addition, the restructuring charge includes a $17 million
pretax ($10 million aftertax) component related to severance payments made
during the fourth quarter. The severance component of the charge relates to
payments made to terminated personnel arising from a fourth quarter
formalized business unit productivity review.
Spin-Off Expenses
- -----------------
During the second quarter of 1994, the Company recorded a charge of $15
million pretax ($12 million aftertax) in connection with the Concurrent
Transactions and certain related expenses.
- EIGHTY FIVE -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
Reduction in Personnel
During the first quarter of 1994, the Company conducted a review of
personnel needs, which resulted in the termination of certain personnel.
The Company recorded a severance charge of $33 million pretax ($18 million
aftertax) in the first quarter of 1994.
Reserves for Non-Core Businesses
During the first quarter of 1993, the Company provided $152 million pretax
($100 million aftertax) of non-core business reserves. Of this amount, $32
million pretax ($21 million aftertax) related to certain non-core
partnership syndication activities in which the Company is no longer
actively engaged. The remaining $120 million pretax ($79 million aftertax)
related to reserves recorded in anticipation of the sale of SLHMC. Such
sale was completed during the third quarter of 1993.
NOTE 21 Sale of Business Units
- -----------------------------
Shearson
On July 31, 1993, pursuant to an asset purchase agreement (the "Primerica
Agreement"), the Company completed the sale (the "Primerica Transaction")
of LBI's domestic retail brokerage business (except for such business
conducted under the Lehman Brothers' name) and substantially all of its
asset management business (collectively, "Shearson") to Primerica
Corporation (now known as The Travelers Inc., "Travelers") and its
subsidiary, Smith Barney, Harris Upham & Co. Incorporated ("Smith Barney").
Also included in the Primerica Transaction were the operations and data
processing functions that supported these businesses, as well as certain of
the assets and liabilities related to these operations.
LBI received approximately $1.2 billion in cash and a $586 million
interest-bearing note from Smith Barney which was repaid in January 1994
(the "Smith Barney Note"). As further consideration for the sale of
Shearson, LBI received 2,500,000 shares of 5.50% Convertible Preferred
Stock, Series B, of Travelers and a warrant to purchase 3,749,466 shares of
common stock of Travelers at an exercise price of $39 per share. In August
1993, American Express purchased such preferred stock and warrant from LBI
for aggregate consideration of $150 million.
The Company recognized a 1993 first quarter loss related to the Primerica
Transaction of approximately $630 million aftertax ($535 million pretax),
which included a reduction in goodwill of $750 million and
transaction-related costs such as relocation, systems and operations
modifications and severance.
- EIGHTY SIX -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
Presented below is the results of operations and the loss on the sale of
Shearson:
YEAR ENDED
DECEMBER 31
(IN MILLIONS) 1993
- -------------------------------------------
Revenues $ 1,825
Expenses 1,708
Loss on sale of Shearson 535
- -------------------------------------------
Income (loss) before taxes (418)
Provision for income taxes 149
- -------------------------------------------
Net income (loss) $ (567)
- -------------------------------------------
Shearson operating results reflect allocated interest expense of $72
million for the year ended December 31, 1993.
The Boston Company
On May 21, 1993, pursuant to a stock purchase agreement (the "Mellon
Agreement") between LBI and Mellon Bank Corporation ("Mellon Bank"), LBI
sold to Mellon Bank (the "Mellon Transaction") The Boston Company. Under
the terms of the Mellon Agreement, LBI received approximately $1.3 billion
in cash, 2,500,000 shares of Mellon Bank common stock and ten-year warrants
to purchase an additional 3,000,000 shares of Mellon Bank's common stock at
an exercise price of $50 per share. In June 1993, such shares and warrants
were sold by LBI to American Express for an aggregate purchase price of
$169 million. After accounting for transaction costs and certain
adjustments, the Company recognized a 1993 first quarter aftertax gain of
$165 million for the Mellon Transaction.
As a result of the Mellon Transaction, the Company treated The Boston
Company as a discontinued operation. Accordingly, the Company's financial
statements segregate the operating results of The Boston Company.
Presented below is the results of operations and the gain on disposal of
The Boston Company included in income from discontinued operations:
Year ended
December 31
(in millions) 1993
- -------------------------------------------------------------
Discontinued Operations:
Revenues $ 201
Expenses 159
- -------------------------------------------------------------
Income before taxes 42
Provision for income taxes 18
- -------------------------------------------------------------
Income from operations 24
Gain on disposal, net of taxes of $37 165
- -------------------------------------------------------------
Income from discontinued operations, net of taxes $ 189
- -------------------------------------------------------------
Shearson Lehman Hutton Mortgage Corporation
LBI completed the sale of its wholly owned subsidiary, Shearson Lehman
Hutton Mortgage Corporation ("SLHMC") to GE Capital Corporation on August
31, 1993. The sales price, net of proceeds used to retire debt of SLHMC,
was approximately $70 million. During the first quarter of 1993, the
Company provided $120 million of pretax reserves in anticipation of the
sale of SLHMC, which reserves are included in the $152 million of pretax
reserves for non-core businesses on the Consolidated Statement of
Operations. After accounting for these reserves, the sale did not have a
material effect on the Company's results of operations.
- EIGHTY SEVEN -
<PAGE>
LEHMAN BROTHERS 1995 ANNUAL REPORT
NOTE 22 Quarterly Information (Unaudited)
- ----------------------------------------
The following information represents the Company's unaudited quarterly
results of operations for 1995 and 1994. Certain amounts reflect
reclassifications to conform to the current period's presentation. These
quarterly results reflect all normal recurring adjustments which are, in
the opinion of management, necessary for a fair presentation of the
results. Revenues and earnings of the Company can vary significantly from
quarter to quarter due to the nature of the Company's business activities.
</TABLE>
<TABLE><CAPTION>
1995 1994
------------------------------------ -------------------------------------
(in millions, except per share amounts) Nov. 30 Aug. 31 May 31 Feb. 28 Nov. 30 Aug. 31 June 30 Mar. 31
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues $3,613 $3,453 $3,298 $3,112 $2,795 $2,537 $2,364 $2,321
Interest expense 2,729 2,703 2,567 2,405 2,087 1,818 1,645 1,453
- ---------------------------------------------------------------------------------------------------------------------
Net revenues 884 750 731 707 708 719 719 868
Non-interest expenses:
Compensation and benefits 433 380 371 360 356 388 364 450
Other expenses 254 261 270 277 287 298 305 297
Reserves and other charges 97 15 33
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest expenses 784 641 641 637 643 686 684 780
- ---------------------------------------------------------------------------------------------------------------------
Income from
continuing operations
before taxes and
cumulative effect of
change in accounting principle 100 109 90 70 65 33 35 88
Provision for income taxes 31 38 32 25 19 11 15 33
- ---------------------------------------------------------------------------------------------------------------------
Income from
continuing operations
before cumulative
effect of change in
accounting principle 69 71 58 45 46 22 20 55
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 69 $ 71 $ 58 $ 45 $ 46 $ 22 $ 20 $ 42
- ---------------------------------------------------------------------------------------------------------------------
Net income
applicable to
common stock $ 58 $ 60 $ 48 $ 34 $ 35 $ 11 $ 12 $ 30
- ---------------------------------------------------------------------------------------------------------------------
Earnings per common share
before cumulative
effect of change in
accounting principle $ 0.49 $ 0.52 $ 0.43 $ 0.31 $ 0.32 $ 0.10 $ 0.11 $ 0.41
Dividends per
common share $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.125
Book value per common
share (at period end) $25.67 $25.23 $25.16 $24.69 $24.35 $23.97 $24.65
Number of shares used in
earnings per common
share computation 117.1 116.2 110.2 110.2 110.6 109.1 105.7 105.7
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
In conjunction with the decision to change its year-end, the Company
reported its third quarter 1994 results on the basis of its new fiscal year
for the three months ended August 31, 1994. As such, the results for the
month of June 1994 have been reflected in both the second and third quarters
of 1994. Thus, the four quarters of 1994 are not additive.
Net income for the first quarter of 1994 includes a $13 million aftertax
charge for the cumulative effect of a change in accounting for
postemployment benefits as a result of the adoption of SFAS No. 112.
- EIGHTY EIGHT -
LEHMAN BROTHERS 1995 ANNUAL REPORT
OTHER STOCKHOLDER INFORMATION
Annual Meeting
The annual meeting of stockholders of Lehman Brothers Holdings Inc. will be
held on Wednesday, April 10, 1996 at 10:30 a.m. at 3 World Financial
Center, 26th floor, 200 Vesey Street, New York, NY 10285.
Transfer Agent and Registrar
Questions concerning dividends, transfer requirements, lost certificates,
changes of address, direct deposit of dividends, the dividend reinvestment
and optional cash purchase program, or other inquiries from registered
stockholders should be directed to:
Bank of Boston
c/o Boston EquiServe, L.P.
Mailstop 45-02-64
P.O. Box 644
Boston, MA 02102-0644
Telephone: (800)730-6001
Dividend Payments
Dividends on common stock are generally payable, following declaration by
the Board of Directors, on the last day of February, May, August and
November. The annual dividend rate for fiscal 1995 was $0.20 per common
share. Direct deposit of dividends is available to registered stockholders
with U.S. bank accounts. For more information regarding this program,
contact the Company's Transfer Agent listed above.
Dividend Reinvestment and Optional Cash Purchase Program
This program allows registered stockholders of twenty-five or more shares
to automatically reinvest their dividends. The program also permits
voluntary optional cash purchases of common stock up to a maximum of
$15,000 a quarter. All stockholders of record are eligible to participate
in the optional cash purchase feature. Lehman Brothers absorbs all bank
service charges and stock purchase fees under the terms of the program.
Additional information and enrollment forms may be obtained from the
Company's Transfer Agent listed above.
Form 10-K
Lehman Brothers will make available upon request copies of the Annual
Report on Form 10-K as filed with the Securities and Exchange Commission.
Requests may be addressed to:
Karen Manson
Corporate Secretary
Lehman Brothers Holdings Inc.
3 World Financial Center, 24th Floor
New York, NY 10285
Telephone: (212)526-1911
E-mail:
[email protected]
Investor Inquiries
Questions involving financial information about the Company should be
addressed to:
Shaun K. Butler
Investor Relations
Lehman Brothers Holdings Inc.
3 World Financial Center, 10th Floor
New York, NY 10285
Telephone: (212)526-8381
E-mail:
[email protected]
Additional copies of this Annual Report may be obtained through:
Corporate Communications
Lehman Brothers Holdings Inc.
3 World Financial Center, 10th Floor
New York, NY 10285
Telephone: (212)526-1829
E-mail: [email protected]
PRICE RANGE OF COMMON STOCK
The common stock of Lehman Brothers Holdings Inc. is listed on the New York
and Pacific Stock Exchanges under the trading symbol LEH. As of January
31, 1996, there were 32,799 holders of record of the Company's common
stock. On January 31, 1996, the last reported sales price of the Company's
common stock was $25.625.
<TABLE><CAPTION>
Three Months Ended
1995 1994
- ------------------------------------------------------ -----------------------------------
Nov. 30 Aug. 31 May 31 Feb. 28 Nov. 30 Aug. 31 June 30* Mar. 31
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $24 5/8 $23 7/8 $20 7/8 $18 3/4 $16 1/2 $18 1/4 $20 7/8 N/A
Low $20 7/8 $19 1/2 $17 5/8 $13 3/4 $13 3/4 $14 1/8 $14 5/8 N/A
</TABLE>
* Lehman Brothers began trading on the New York Stock Exchange in the
when-issued market on May 2, 1994.
- NINETY THREE -
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this 1995 Annual Report on
Form 10-K of Lehman Brothers Holdings Inc. of our report dated January 10, 1996,
included in the 1995 Annual Report to Stockholders of Lehman Brothers Holdings
Inc.
Our audits also included the consolidated financial statement schedule of
Lehman Brothers Holdings Inc. listed in item 14(a). This schedule is 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 schedule referred to above, when considered in relation to the basic
consolidated financial statements taken as a whole, presents 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. 33-64899,
33-62085, 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 10, 1996 with respect to the consolidated financial statements and
consolidated financial statement schedule of Lehman Brothers Holdings Inc.
included or incorporated by reference in this 1995 Annual Report on Form 10-K
for the year ended November 30, 1995.
ERNST & YOUNG LLP
New York, New York
February 28, 1996
EXHIBIT 24
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thomas A. Russo, Michael R. Milversted and Karen
M. Muller and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign the Annual Report on Form
10-K of Lehman Brothers Holdings Inc., for the fiscal year ended November 30,
1995 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, 1996
/s/ RICHARD S. FULD, JR. /s/ KATSUMI FUNAKI
............................................ ...................................
Richard S. Fuld, Jr.Katsumi Funaki
/s/ T. CHRISTOPHER PETTIT /s/ HENRY KAUFMAN
............................................ ...................................
T. Christopher Pettit Henry Kaufman
/s/ ROBERT MATZA /s/ JOHN D. MACOMBER
............................................ ...................................
Robert Matza John D. Macomber
/s/ DAVID GOLDFARB /s/ DINA MERRILL
............................................ ...................................
David Goldfarb Dina Merrill
/s/ JOHN F. AKERS /s/ MASATAKA SHIMASAKI
............................................ ...................................
John F. Akers Masataka Shimasaki
/s/ ROGER S. BERLIND /s/ MALCOLM WILSON
............................................ ...................................
Roger S. Berlind Malcolm Wilson
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Financial Condition at November 30, 1995 and the
Consolidated Statement of Operations for the twelve months ended November 30,
1995 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> DEC-01-1994
<PERIOD-END> NOV-30-1995
<CASH> 1,819
<RECEIVABLES> 8,170
<SECURITIES-RESALE> 36,234
<SECURITIES-BORROWED> 16,290
<INSTRUMENTS-OWNED> 51,322
<PP&E> 495
<TOTAL-ASSETS> 115,303
<SHORT-TERM> 6,235
<PAYABLES> 8,824
<REPOS-SOLD> 59,035
<SECURITIES-LOANED> 1,966
<INSTRUMENTS-SOLD> 19,854
<LONG-TERM> 12,765
0
708
<COMMON> 11
<OTHER-SE> 2,979
<TOTAL-LIABILITY-AND-EQUITY> 115,303
<TRADING-REVENUE> 1,393
<INTEREST-DIVIDENDS> 10,788
<COMMISSIONS> 450
<INVESTMENT-BANKING-REVENUES> 801
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 10,405
<COMPENSATION> 1,544
<INCOME-PRETAX> 369
<INCOME-PRE-EXTRAORDINARY> 242
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 242
<EPS-PRIMARY> $1.76
<EPS-DILUTED> $1.76
</TABLE>
