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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1996
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER 1-9466
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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<CAPTION>
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
Select Technology Index Call Warrants Expiring 1998 American Stock Exchange
Global Telecommunications Stock Upside Note Securities(SM) Due 2000 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
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant at February 5, 1997 was approximately $3,225,404,902. 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 February 5, 1997, 100,808,526 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. 1996 Annual Report to
Stockholders -- Incorporated in part in Form 10-K, Parts II and IV.
(2) Lehman Brothers Holdings Inc. Proxy Statement for its 1997 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 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; 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, 1996, the fiscal year ended November 30, 1995 and
the eleven months ended November 30, 1994, 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 1996
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 15 to the Notes to Consolidated Financial Statements on page 81 of
the 1996 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 long-term relationships
with issuing clients and investing customers is a central premise of the
Company's client/customer-driven strategy. Based on management's belief that
each client and customer directs a majority of its financial transactions to a
limited number of investment banks, Lehman Brothers' investment banking and
institutional and private client sales professionals focus on a targeted group
of clients and customers worldwide to identify and develop lead relationships.
The Company believes that such relationships position Lehman Brothers to receive
a substantial portion of its clients' and customers' financial business and
lessen the volatility of revenues generally associated with the financial
services industry.
During 1996, Lehman Brothers sold a number of non-strategic businesses,
including the sale of its offshore mutual funds to Legg Mason, the sale of its
European branches to Prudential Securities and the sale
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of its domestic money market funds to Federated Investors, none of which
individually or in the aggregate were material to the financial results of the
Company. In addition, the Company exited certain commodities businesses. See
Note 16 to the Consolidated Financial Statements.
LEHMAN BUSINESSES
Lehman Brothers is a leading underwriter of global fixed income and equity
securities in the public and private markets. The Company is also a prominent
advisor for corporations and governments around the world.
INVESTMENT BANKING
Investment Banking professionals are responsible for developing and
maintaining relationships with issuing clients, gaining a thorough understanding
of their specific needs and bringing together the full resources of Lehman
Brothers to accomplish their financial objectives. Investment Banking is
organized into industry, product and geographic coverage groups, enabling
individual bankers to develop specific expertise in particular industries and
markets. Industry coverage groups include Financial Services, Financial
Sponsors, Healthcare, Industrial, Media and Telecommunications, Natural
Resources and Power, Real Estate and Technology. Where appropriate, specialized
product groups are partnered with the industry and geographic groups to provide
tailor-made solutions for Lehman Brothers' clients. These groups include Equity
Capital Markets, which include equity and equity-related securities and
derivatives; Debt Capital Markets, which incorporates expertise in syndicate,
liability management, derivatives and private placements; Mergers and
Acquisitions; and Leveraged Finance, which includes high yield debt and bank
loan syndication.
Mergers and Acquisitions/Strategic Advisory. Lehman Brothers has a long
history of providing strategic advisory services to corporate, institutional and
government clients around the world on a wide range of financial matters,
including mergers and acquisitions, restructurings and spin-offs, targeted stock
transactions, share repurchase strategies, takeover defenses, corporate
governance issues and tax optimization strategies. Linkages between strategic
advisory services and the Firm's foreign exchange, derivatives and leveraged
financing products are widely utilized. The Company's Mergers and Acquisitions
group works closely with product, industry and geographic coverage bankers
around the world. Geographically, Lehman Brothers maintains investment banking
offices in six cities within the U.S. and in sixteen cities in Europe, the
Middle East, Asia and Latin America.
Merchant Banking. Lehman Brothers' merchant banking activities include
making principal investments in partnership with clients of the Firm, raising
capital from institutional investors and managing these investments until they
are realized. In 1996, as part of a strategic decision to expand its merchant
banking capabilities, the Firm created a separate Merchant Banking group with 20
dedicated professionals based in New York, London and Hong Kong. Lehman Brothers
is in the process of marketing its second institutional merchant banking fund,
with targeted commitments of $1.5 billion.
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's current merchant banking activities include
investments in six partnerships, for which the Company acts as general partner,
as well as direct investments. These merchant banking investments include both
publicly traded and privately held companies diversified on a geographic and
industry basis. At November 30, 1996, the investment in merchant banking
partnerships, including the 1989 partnerships, was $329 million. The Company has
a commitment to invest up to $199 million in one of its employee merchant
banking investment vehicles. The Company has no remaining commitments to the
other five merchant banking partnerships or other direct investments.
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
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distribution, research and trading areas of Fixed Income, together with
investment bankers, into teams to serve the financial needs of the Company's
clients and customers. The Company is a leading underwriter of new issues, and
also makes markets in these and other fixed income securities. The Company's
global presence facilitates client and customer transactions and provides
liquidity in marketable fixed and floating rate debt securities.
Fixed Income businesses include the following:
Corporate Debt Securities. Lehman Brothers engages in the underwriting and
market making of fixed and floating rate investment grade debt worldwide.
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, Sao Paulo, Buenos Aires and New Delhi, among other
locations.
Financing. The Company's Financing unit engages in three primary
functions: managing the Company's matched book activities, supplying secured
financing to customers, and providing funding for the Company's activities.
Matched book funding involves lending cash on a short-term basis to
institutional customers collateralized by marketable securities, typically
government or government agency securities. The Company enters into these
agreements in various currencies and seeks to generate profits from the
difference between interest earned and interest paid. The Financing unit works
with the Company's institutional sales force to identify customers that have
cash to invest and/or securities to pledge to meet the financing and investment
objectives of the Company and its customers. Financing also coordinates with the
Company's treasury area to provide collateralized financing for a large portion
of the Company's securities and other financial instruments owned. In addition
to its activities on behalf of its U.S. clients and customers, the Company is a
major participant in the European and Asian repurchase agreement markets,
providing secured financing for the Firm's customers in those regions.
Fixed Income Derivatives. The Company offers a broad range of derivative
product services in all major currencies on a 24-hour per-day global basis.
Derivatives professionals are integrated into all of the Company's fixed income
areas in the response to the continued convergence of the cash and derivative
markets worldwide.
Foreign Exchange. Lehman Brothers' global foreign exchange operation
provides its customers with market access and liquidity in more than 20
currencies on a 24-hour-per-day basis. With six locations worldwide, Lehman
Brothers offers its customers superior execution, market intelligence, analysis
and hedging capabilities, utilizing foreign exchange as well as foreign exchange
options and derivatives. In a collaboration with the Firm's emerging markets
unit, the Firm's foreign exchange activities have increasingly diversified into
Latin America, Eastern Europe and Asian currencies. Lehman Brothers also
provides advisory services to central banks, corporations, investors worldwide,
structuring innovative products to fit their specific needs. The Firm makes
extensive use of its worldwide macroeconomics research to advise clients on the
appropriate strategies to minimize interest rate and currency risk. In addition
to the Company's traditional client/ customer-driven foreign exchange
activities, Lehman Brothers also trades foreign exchange for its own account.
Government and Agency Obligations. Lehman Brothers is one of the leaders
among the 37 primary dealers in U.S. government securities, as designated by the
Federal Reserve Bank of New York, participating in the underwriting and
market-making of U.S. Treasury bills, notes and bonds, and securities of federal
agencies. 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 the Canadian
market with its Toronto office, in France as a reporting dealer and in Italy as
a super-primary dealer.
High Yield Securities and Bank Loans. The Company also underwrites and
makes markets in non-investment grade debt securities and bank loans. The
Company now provides a "one-stop" leveraged finance solution for corporate and
financial acquirers and high yield issuers.
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Money Market Products. Lehman Brothers holds dominant market positions in
the origination and distribution of medium-term notes and commercial paper.
Since 1992, the Company has received global medium-term note mandates for 1,416
programs with a borrowing capacity of $2 trillion. The Company is an appointed
dealer for over 600 active commercial paper programs on behalf of companies and
government agencies worldwide. The Company is also a major participant in the
preferred stock market, managing numerous offerings of long-term and perpetual
preferreds and auction rate securities.
Mortgage and Asset-Backed Securities. The Company is a leading underwriter
of and market-maker in residential and commercial mortgage- and asset-backed
securities. Lehman Brothers underwrites and makes markets in the full range of
U.S. agency-backed mortgage products, mortgage-backed securities, asset-backed
securities and whole loan products. Internationally, the Firm has expanded its
capabilities in mortgage and asset-backed securities, leases, mortgages,
multi-family financing and commercial loans.
Municipal and Tax-Exempt Securities. Lehman Brothers is a major dealer in
municipal and tax-exempt securities, including general obligation and revenue
bonds, notes issued by states, counties, cities, and state and local
governmental agencies, municipal leases, tax-exempt commercial paper and put
bonds. Lehman Brothers is also a leader in the structuring, underwriting and
sale of tax-exempt and taxable securities and derivative products for city,
state, not-for-profit and other public sector clients.
EQUITIES
Lehman Brothers combines professionals from the sales, trading, investment
banking and research areas of Equities, into teams to serve the financial needs
of the Company's equity clients and customers. The Company's equity expertise
and the integrated nature of the Company's global operations enable Lehman
Brothers to structure and execute global equity transactions for clients
worldwide. The Company is a leading underwriter of initial public and secondary
offerings of equity and equity-related securities. Lehman Brothers also makes
markets in these and other securities, and executes block trades on behalf of
clients and customers. The Company also actively participates in assisting
governments around the world in raising equity capital as part of their
privatization programs.
The Equities group is responsible for the Company's equity operations and
all dollar and non-dollar equity and equity-related products worldwide. These
products include listed and over-the-counter ("OTC") securities, American
Depositary Receipts, convertibles, options, warrants and derivatives. The
Company 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, Milan and Stockholm.
Equity Derivatives. Lehman Brothers offers equity derivative capabilities
across a wide spectrum of products and currencies, including domestic and
international program trading, listed options and futures and structured
derivatives.
Equity Finance. Lehman Brothers maintains an extensive Equity Financing
and Prime Broker business to provide liquidity to its clients and customers and
supply a source of secured financing for the Firm. Margin lending for the
purchase of equities and other capital markets' products as well as securities
lending and short selling. The Prime Broker business engages in full operations,
clearing and processing services for that unit's customers.
GLOBAL DISTRIBUTION
Lehman Brothers' institutional and private client sales organizations
encompass distinct global sales forces that have been integrated into the fixed
income and equity businesses to provide investors with the full array of
products and research offered by the Firm.
Fixed Income Sales. The Firm's Fixed Income sales force is one of the
largest in the industry, with close to 300 professionals in 15 locations
worldwide, serving the investing and liquidity needs of major institutional
investors. Employing a relationship management approach that provides superior
information flow and product opportunities for the Firm's customers, the Fixed
Income sales organization covers the major share of the
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buying power in the global fixed income markets. Further, the Firm's expertise
in foreign exchange and derivatives provides customers with comprehensive
solutions to their global risk management needs.
Equity Sales. Lehman Brothers' institutional Equity sales group of over
300 professionals provides an extensive range of services to institutional
investors through locations in the U.S., Europe and Asia. The Equity sales
organization focuses on developing long-term relationships though a
comprehensive understanding of customers' investment objectives, while providing
proficient execution and consistent liquidity in a wide range of global equity
securities and derivatives. For the world's largest and most active investors,
the Firm has appointed senior account managers to enhance the coordination
between Equity and Fixed Income sales coverage in serving these complex
investors' needs.
Private Client Sales. The Company's Private Client Services group serves
the investment needs of private investors with substantial assets as well as
over 1,000 mid-sized institutional accounts worldwide. The group has a global
presence with investment representatives located in six offices in North America
and additional offices in major financial centers in Latin America, Europe, the
Middle East and Asia. Among other services, investment professional provide
their clients with direct access to fixed income, equity, foreign exchange and
derivative products, as well as the Firm's research and execution capabilities,
thereby serving as a valuable extension of the Firm's institutional sales force.
The Private Client Services group also enables the Company's issuing clients to
access a diverse, high-net-worth investor base throughout the world. The Firm
also has established a comprehensive array of onshore and offshore investment
vehicles, managed by multiple third parties, to broaden the range of the
services and investment strategies provided to its clients.
RESEARCH
Fixed Income Research. Fixed Income research at Lehman Brothers
encompasses the full range of research disciplines: quantitative, economic,
strategic, credit, portfolio and market-specific analysis. Fixed Income research
is integrated with and supports the Company's investment banking, sales and
trading activities. An important objective of Fixed Income research is to have
in place high quality research analysts covering industry, geographic and
economic sectors that support the activities of the Company's clients and
customers. The department's 235 specialists provide expertise in U.S., European
and Asian government and agency securities, derivatives, sovereign issues,
corporate securities, high yield, asset- and mortgage-backed securities,
commercial real estate, emerging market debt and municipal securities.
Equity Research. The Equity Research department is integrated with and
supports the Company's investment banking, sales and trading activities. To
ensure in-depth expertise within various markets, Equity Research has
established regional teams on a worldwide basis that are staffed with industry
and strategy specialists. The Equity Research department is comprised of 260
professionals covering 50 industry sectors and over 1,300 companies worldwide.
OTHER BUSINESS ACTIVITIES
While Lehman Brothers concentrates on its client/customer-driven strategy,
the Company also participates in business opportunities such as arbitrage and
proprietary trading that leverage the Company's expertise, infrastructure and
resources. These businesses may generate substantial revenues but generally
entail a higher degree of risk as the Company trades for its own account.
Arbitrage. Lehman Brothers engages in a variety of arbitrage activities.
In traditional or "riskless" arbitrage, the Company seeks to benefit from
temporary price discrepancies that occur when a security is traded in two or
more markets, or when a convertible or derivative security is trading at a price
disparate from its underlying security. The Company's "risk" arbitrage
activities involve the purchase of securities at discounts from the expected
values that would be realized if certain proposed or anticipated corporate
transactions (such as mergers, acquisitions, recapitalizations, exchange offers,
reorganizations, bankruptcies, liquidations or spin-offs) were to occur. To the
extent that these anticipated transactions do not materialize in a manner
consistent with the Company's expectations, the Company is subject to the risk
that the value of these investments will decline. Lehman Brothers' arbitrage
activities benefit from the Company's presence in
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the global capital markets, access to advanced information technology, in-depth
market research, proprietary risk management tools and general experience in
assessing rapidly changing market conditions.
Asset Management. The Company plans to focus on sponsoring and
distributing sophisticated strategic funds attractive to high-net-worth
individuals and institutions.
Proprietary Trading. In addition to its customer-flow activities, Lehman
Brothers also takes proprietary positions in interest rate, foreign exchange,
various securities, derivatives and commodities for its own account. The
Company's proprietary trading activities bring together various research and
trading disciplines allowing it to take market positions, which at times may be
significant, consistent with the Company's expectations of future events (such
as movements in the level of interest rates, changes in the shape of yield
curves and changes in the value of currencies). The Company is subject to the
risk that actual market events will be different from the Company's
expectations, which may result in significant losses associated with such
proprietary positions. The Company's proprietary trading activities are
generally carried out in consultation with personnel from the relevant major
product area (e.g., mortgages, derivatives and foreign exchange).
TRADING SERVICES AND CORPORATE
The Company's Trading Services and Corporate divisions provide support to
its businesses through the processing of certain securities and commodities
transactions; receipt, identification and delivery of funds and securities;
safeguarding of customers' securities; and compliance with regulatory and legal
requirements. In addition, this staff is responsible for technology
infrastructure and systems development, treasury operations, financial control
and analysis, tax planning and compliance, internal audit, expense management,
career development and recruiting and other support functions.
In 1996, the Company invested in a strategic global foundation for
information technology upon which all future investments in technology will be
leveraged. The Company also continued to make significant investments in its
employees through management training and career development initiatives.
RISK MANAGEMENT
As a leading global investment banking company, risk is an inherent part of
all of Lehman Brothers' businesses and activities. Lehman Brothers has developed
policies and procedures to identify, measure and monitor each of the various
types of risks involved in its trading, brokerage and investment banking
activities on a global basis. The principal risks involved in Lehman Brothers'
activities are market risks, credit or counterparty risks, liquidity, legal and
operational risks. Lehman Brothers has developed a control infrastructure to
monitor and manage each type of risk on a global basis throughout the Company.
In its trading, market-making and underwriting activities, Lehman Brothers
is subject to risks relating to fluctuations in market prices and liquidity of
specific securities, instruments and derivative products, as well as volatility
in market conditions in general. The markets for these securities and products
are affected by many factors, including the financial performance and prospects
of specific companies and industries, domestic and international economic
conditions (including inflation, interest and currency exchange rates and
volatility), the availability of capital and credit, political events (including
proposed and enacted legislation) and the perceptions of participants in these
markets.
Lehman Brothers' exposure to credit risks in its trading activities arise
from the possibility that a counterparty to a transaction could fail to perform
under its contractual commitment, resulting in Lehman Brothers incurring losses
in liquidating or covering its position in the open market.
In connection with its investment banking and product origination
activities, Lehman Brothers is exposed to risks relating to the merits of
proposed transactions. These risks involve not only the market and credit risks
associated with underwriting securities and developing derivative products, but
also potential liabilities under applicable securities and other laws which may
result from Lehman Brothers' role in the transaction.
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The Company aims to reduce risk through the diversification of its
products, counterparties and activities in geographic regions. The Company
accomplishes this objective by allocating the usage of capital to each of its
businesses, establishing trading limits for individual products and traders, and
setting credit limits for individual counterparties including regional
concentrations.
The Company's risk management strategy is headed by a Risk Management
Committee, which reviews exposures, ratifies division risk limits, and signs off
on Risk Management guidelines. Overall risk management is based on a multi-tier
approach to risk which includes many independent groups (i.e., the Risk
Management Committee, the Market and Credit Risk Management Departments, Audit,
Finance, Legal and Treasury) that assist in the identification, assessment and
control of risk. Senior management plays a critical role in the ongoing
evaluation of risks, and adjusts risk management policies as necessary. A
further description of the Firm's Risk Management procedures is contained in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Management" on pages 49-51 of the 1996 Annual Report to
Stockholders, and is incorporated herein by reference.
NON-CORE ASSETS
Prior to 1990, the Company participated in a number of activities that are
not central to its current business as an institutional investment banking firm.
As a result of these activities, the Company carries on its balance sheet a
number of relatively illiquid assets (the "Non-Core Assets"), including a number
of individual real estate assets, limited partnership interests and a number of
smaller investments. Subsequent to their purchase, the values of certain of
these Non-Core Assets declined below the recorded values on the Company's
balance sheet, which necessitated the write-down of the carrying values of these
assets and corresponding charges to the Company's income statement. Certain of
these activities have resulted in various legal proceedings.
Since 1990, management has devoted substantial resources to reducing the
Company's Non-Core Assets. Between December 31, 1990 and November 30, 1996, the
Company's Non-Core Assets decreased from $2.3 billion in 1990 to approximately
$151 million in 1996. 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 commis-
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sions may conduct administrative proceedings, which may result in censure, fine,
the issuance of cease-and-desist orders or suspension or expulsion of a
broker-dealer or an investment advisor, its officers or employees.
LBI is registered with the CFTC as a futures commission merchant and is
subject to regulation as such by the CFTC and various domestic boards of trade
and other commodity exchanges. The Company's U.S. commodity futures and options
business is also regulated by the National Futures Association, a not-for-profit
membership corporation which has been designated as a registered futures
association by the CFTC.
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
LBI, Lehman Brothers International (Europe) ("LBIE"), the Tokyo branch of
Lehman Brothers Japan Inc. ("LBJTB") 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. Reference is made to "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Regulatory Capital" on page 45 of the 1996 Annual Report to
Stockholders, and Footnote 9 of Notes to Consolidated Financial Statements.
EMPLOYEES
As of November 30, 1996 the Company employed approximately 7,560 persons,
including 5,350 in the U.S. and 2,210 internationally. The Company considers its
relationship with its employees to be good.
ITEM 2. PROPERTIES
The Company's headquarters occupy approximately 1.1 million 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. Approximately 74,000 square feet has been subleased in
connection with a real estate restructuring. See Note 16 to the Consolidated
Financial Statements.
The Company entered into a lease for approximately 405,000 square feet for
offices located at 101 Hudson Street in Jersey City, New Jersey (the "Operations
Center"). The Operations Center is used by systems, operations, and certain
administrative personnel and contains certain back-up trading systems. The lease
term is approximately 16 years and commenced in August 1994. Approximately
63,000 square feet has been subleased in connection with a real estate
restructuring.
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The Company leases approximately 338,000 square feet of office space in
London, England. The Company consolidated most of its London operations into
this space in 1987. Most of the Company's other offices are located in leased
premises, the leases for which expire at various dates through the year 2007.
Facilities owned or occupied by the Company and its subsidiaries are
believed to be adequate for the purposes for which they are currently used and
are well maintained.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in a number of judicial, regulatory and arbitration
proceedings concerning matters arising in connection with the conduct of its
business. Such proceedings include actions brought against the Company and
others with respect to transactions in which the Company acted as an underwriter
or financial advisor, actions arising out of the Company's activities as a
broker or dealer in securities and commodities and actions brought on behalf of
various classes of claimants against many securities and commodities firms of
which the Company is one.
Although there can be no assurance as to the ultimate outcome, the Company
has denied, or believes it has a meritorious defense and will deny, liability in
all significant cases pending against it including the matters described below,
and intends to defend vigorously each such case. Although there can be no
assurance as to the ultimate outcome, based on information currently available
and established reserves, the Company believes that the eventual outcome of the
actions against it, including the matters described below, will not, in the
aggregate, have a material adverse effect on the consolidated financial
condition of the Company.
Bamaodah v. E.F. Hutton & Company Inc.
In April 1986, Ahmed and Saleh Bamaodah commenced an action against E.F.
Hutton & Company Inc., ("EFH") to recover all losses the Bamaodahs had incurred
since May 1981 in the trading of commodity futures contracts in a
nondiscretionary EFH trading account. The Dubai Civil Court ruled that the
trading of commodity futures contracts constituted illegal gambling under
Islamic law and that therefore the brokerage contract was void. In January 1987,
a judgment was rendered against EFH in the amount of $48,656,000. On January 5,
1991, the Dubai Court of Appeals affirmed the judgment. On March 22, 1992, the
Court of Cassation, Dubai's highest court, revoked and quashed the decision of
the Court of Appeals and ordered that the case be remanded to the Court of
Appeals for a further review. On April 26, 1994, the Dubai Court of Appeals
again affirmed the judgment of the Dubai Civil Court. The Company appealed the
judgment to the Court of Cassation, which reversed the Court of Appeals on
November 27, 1994 and ordered that a new expert be appointed to review the case.
A new expert has been appointed, with instructions to report back to the Court
of Cassation.
Actions Relating To First Capital Holdings Inc.
Concurrent with the bankruptcy filing of First Capital Holdings ("FCH") in
May, 1991 and the conservatorship and receivership of its two life insurance
subsidiaries, First Capital Life Insurance Company ("First Capital Life") and
Fidelity Bankers Life Insurance Company ("Fidelity Bankers Life") (First Capital
Life and Fidelity Bankers Life collectively, the "Insurance Subsidiaries"), a
number of lawsuits were commenced, naming one or more of Holdings, Lehman
Brothers and American Express as defendants (individually or collectively, as
the case may be, the "American Express Defendants"). Some of these actions have
been subsequently settled and/or dismissed. Those matters still pending are
described below.
Under the terms of an agreement between American Express and Holdings,
Holdings has agreed to indemnify American Express for liabilities which it may
incur in connection with any action (including any derivative action) relating
to FCH. In connection therewith, Holdings' indemnification obligation extends to
the below described actions.
FCH Shareholder and Agent Actions. Three actions were commenced in the
United States District Courts for the Southern District of New York and the
Central District of California allegedly as class actions on behalf of the
purchasers of FCH securities during certain specified periods, commencing no
earlier than
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May 4, 1988 and ending no later than May 31, 1991 (the "Shareholder Class"). The
complaints are captioned Larkin, et al. v. First Capital Holdings Corp., et al.,
amended on May 15, 1991 to add American Express as a defendant, Zachary v.
American Express Company, et al., filed on May 20, 1991, and Morse v.
Weingarten, et al., filed on June 13, 1991 (the "Shareholder Class Actions").
The complaints raised claims under the federal securities laws and alleged that
the defendants concealed adverse material information regarding the finances,
financial condition and future prospects of FCH and made material misstatements
regarding these matters.
On November 14, 1991, the Judicial Panel on Multidistrict Litigation issued
an order transferring and coordinating for all pretrial purposes all related
actions concerning the sale of FCH securities, including the Shareholder Class
Action, and any future filed "tag-along" actions, to Judge John G. Davies of the
United States District Court for the Central District of California (the
"California District Court"). The cases are captioned In Re: First Capital
Holdings Corporation Financial Products Securities Litigation. MDL Docket
No.-901 (the "MDL Action").
On January 18, 1993, an amended consolidated class action complaint (the
"Third Complaint") was filed. The Third Complaint names as defendants American
Express, Holdings, Lehman Brothers, a former officer and director of FCH, Robert
Weingarten and his wife, Palomba Weingarten, other former FCH officers Gerry
Ginsberg and Philip A. Fitzpatrick, the six current and former outside directors
of FCH, Peter Cohen, Richard Descherer, William L. Mack, Jerome H. Miller,
Jeffrey B. Lane and Robert Druskin (collectively the "Outside Directors"), Fred
Buck (President of First Capital Life) and Peat Marwick. The complaint raises
claims under the federal securities law and the common law of fraud and
negligence. On March 10, 1993, the American Express defendants answered the
Third Amended Complaint, denying its material allegations.
On March 11, 1993, the California District Court entered an order granting
class certification to the Shareholder Class. The class consists of all persons,
except defendants, who purchased FCH common stock, preferred stock and
debentures during the period May 4, 1988 to and including May 10, 1991. On
September 4, 1996 the parties agreed to a settlement in principle, subject to
documentation and court approval.
The Virginia Commissioner of Insurance Action. On December 9, 1992, a
complaint was filed in the United States District Court for the Eastern District
of Virginia (the "Virginia Court") by Steven Foster, the Virginia Commissioner
of Insurance (the "Commissioner") as Deputy Receiver of Fidelity Bankers Life.
The Complaint names Holdings and Weingarten, Ginsberg and Leonard Gubar, a
former director of FCH and Fidelity Bankers Life, as defendants. The action was
subsequently transferred to California to be part of the MDL Action. The
Complaint alleges that Holdings acquiesced in and approved the continued
mismanagement of Fidelity Bankers Life and that it participated in directing the
investment of Fidelity Bankers Life assets. The complaint asserts claims under
the federal securities laws and asserts common law claims including fraud,
negligence and breach of fiduciary duty and alleges violations of the Virginia
Securities laws by Holdings. It allegedly seeks no less than $220 million in
damages to Fidelity Bankers Life and its present and former policyholders and
creditors and punitive damages. Holdings has answered the complaint, denying its
material allegations. As a result of Holdings' motion for summary judgment, the
court limited the damages the Commissioner may seek to less than approximately
$30 million. In addition, the court transferred the case back to the Virginia
Court for trial.
Easton & Co. v. Mutual Benefit Life Insurance Co., et al.; Easton & Co. v.
Lehman Brothers Inc.
Lehman Brothers was named as a defendant in two consolidated class action
complaints pending in the United States District Court for the District of New
Jersey (the "N.J. District Court"). Easton & Co. v. Mutual Benefit Life
Insurance Co., et al. ("Easton I"), and Easton & Co. v. Lehman Brothers Inc.
("Easton II"). The plaintiff in both of these actions is Easton & Co., which is
a broker-dealer located in Fort Lee, New Jersey. Both of these actions allege
federal securities law claims and pendent common law claims in connection with
the sale of certain municipal bonds as to which Mutual Benefit Life Insurance
Company ("MBLI") has guaranteed the payment of principal and interest. MBLI is
an insurance company which was placed in rehabilitation proceedings under the
supervision of the New Jersey Insurance Department on or about July 16, 1991.
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<PAGE> 12
Easton I was commenced on or about September 17, 1991. The litigation was
purportedly brought on behalf of a class consisting of all persons and entities
who purchased DeKalb, Georgia Housing Authority MultiFamily Housing Revenue
Refunding Bonds (North Hill Ltd. Project), Series 1991, due November 30, 1994
(the "DeKalb Bonds") during the period from May 3, 1991 (when the DeKalb bonds
were issued) through July 16, 1991. Lehman Brothers acted as underwriter for
this bond issue, which was in the aggregate principal amount of $18.7 million.
The complaint alleged that Lehman Brothers violated Section 10(b) of the
Exchange Act and Rule 10b-5 promulgated thereunder, and sought damages in an
unspecified amount or rescission. The complaint also alleged a common law
negligent misrepresentation claim against Lehman Brothers and the other
defendants.
Easton II was commenced on or about May 18, 1992, and named Lehman Brothers
as the only defendant. Plaintiff purported to bring this second lawsuit on
behalf of a class composed of all persons who purchased "MBLI-backed Bonds" from
Lehman Brothers during the period April 19, 1991 through July 16, 1991. The
complaint alleged that Lehman Brothers violated Section 10(b) and Rule 10b-5,
and seeks monetary damages in an unspecified amount, or rescission pursuant to
Section 29(b) of the Exchange Act. The complaint also contained a common law
claim of alleged breach of duty and negligence. On or about February 9, 1993,
the N.J. District Court granted plaintiffs' motion for class certification in
Easton I. The parties agreed to certification of a class in Easton II for
purchases of certain fixed-rate MBLI-backed bonds during the class period. LBI,
together with the other defendants in Easton I and Easton II, has agreed to
settle both cases, subject to court approval.
Warren D. Chisum, et al. v. Lehman Brothers Inc. et al.
On February 28, 1994 a purported class action was filed in the United
States District Court for the Northern District of Texas. An amended complaint
was filed on December 15, 1994. The amended complaint names LBI and two former
EFH employees as defendants. The complaint alleges that defendants violated
Section 10(b) of the Exchange Act and RICO, breached their fiduciary duties and
the limited partners' contract and committed fraud in connection with the
origination, sale and operation of nine EFH net lease real estate limited
partnerships. Plaintiffs seek: (i) to certify a class of all persons who
purchased limited partnership interests in the nine partnerships at issue, (ii)
unspecified damages, plus interest or rescission, (iii) treble damages, (iv)
punitive damages and (v) accounting and attorneys' fees. On April 2, 1996 the
Court filed an opinion and order certifying the litigation as a class action,
consisting of all persons who purchased interests in the nine EFH net lease
limited partnerships. On July 11, 1996, the Court issued a memorandum and order
dismissing plaintiffs' RICO claim. Defendants have answered the complaint and
denied its material allegations.
Actions Relating to the Sales and Marketing of Limited Partnerships
Subsequent to a January 26, 1996 article in the Wall Street Journal
entitled "SEC, Brokers Study Pact on Partnerships," various putative class
actions were filed in different state courts relating to the sales and marketing
of limited partnerships by E.F. Hutton & Co. and Shearson and their affiliates
during the 1980's. Thereafter all of these actions were consolidated into the
two actions described below, or were effectively stayed while these actions
proceed.
Under the terms of an agreement between American Express and Holdings,
American Express has agreed to indemnify Holdings for liabilities which it may
incur in connection with any action relating to any business conducted by The
Balcor Company, a former Lehman Brothers subsidiary ("Balcor"), in which
Holdings is named as a parent company or control person of Balcor. Holdings
believes that some of the allegations in certain of the actions described below
are covered by this indemnity.
In re Lehman Brothers Limited Partnership Litigation. On October 18, 1996,
a purported class action was filed in the Court of Chancery of the State of
Delaware in and for New Castle County on behalf of all persons who purchased
units in the public, proprietary limited partnerships organized or operated by
Shearson or E.F. Hutton & Co. between 1981 and the present (with certain
exceptions). Defendants are LBI and 56 Lehman-affiliated general partners. The
complaint alleges that defendants breached their fiduciary duties or
11
<PAGE> 13
aided and abetted such a breach by allegedly misrepresenting and or failing to
disclose the nature of the risks and the status and financial condition of the
partnerships; collecting excessive fees; failing to exercise due care in
selecting investments for the partnerships; and recommending and selling the
partnerships as suitable investments. The complaint seeks, among other things
(1) to certify the case as a class action; (2) to declare that defendants
breached their duties; (3) to enjoin defendants from operating the partnerships
for their own benefit; (4) to account for all profits and impose a constructive
trust on them; and (5) to award compensatory damages, costs and expenses and
attorneys' fees.
Klein, et al. v. Lehman Brothers, Inc., et al. On August 30, 1996 a
purported class action was filed in the Superior Court of New Jersey, Law
Division: Union County on behalf of investors in certain specified limited
partnerships offered by Shearson and Balcor. Named as defendants are LBI,
American Express Company, Smith Barney Holdings, Inc. and 17 Shearson limited
partnerships and a number of Balcor-originated limited partnerships. The
complaint alleges claims in connection with the marketing, sale and operation of
the limited partnerships for common law fraud and deceit, equitable fraud,
negligent misrepresentation, breach of fiduciary duty and contract and violation
of certain New Jersey statutes relating to the sale of securities. The complaint
seeks compensatory damages for lost principal and interest, general damages and
punitive damages, treble damages under the New Jersey statutes, and costs and
attorneys' fees.
Maxwell Related Litigation
Certain of the Company's subsidiaries are defendants in several lawsuits
arising out of transactions entered into with the late Robert Maxwell or
entities controlled by Maxwell interests. These actions are described below.
Berlitz International Inc. v. Macmillan Inc. et al. This interpleader
action was commenced in Supreme Court, New York County (the "Court") on or about
January 2, 1992, by Berlitz International Inc. ("Berlitz") against Macmillan
Inc. ("Macmillan"), Lehman Brothers Holdings PLC ("PLC"), Lehman Brothers
International Limited (now known as Lehman Brothers International (Europe),
("LBIE") and seven other named defendants. The interpleader complaint seeks a
declaration of the rightful ownership of approximately 10.6 million shares of
Berlitz common stock, including 1.9 million shares then registered in PLC's
name, alleging that Macmillan claimed to be the beneficial owner of all 10.6
million shares, while the defendants did or might claim ownership to some or all
of the shares. As a result of its bankruptcy filing, MacMillan sought to remove
this case to the Bankruptcy Court for the Southern District of New York. On the
motion of LBIE and PLC, the case was remanded back to the Court. Following the
remand, the parties entered into a stipulation pursuant to which all proceedings
have been stayed pending the outcome of the appeal in Macmillan v. Bishopsgate
Investment Trust et al., referred to below.
Macmillan, Inc. v. Bishopsgate Investment Trust, Shearson Lehman Brothers
Holdings PLC et al. This action was commenced by issuance of a writ in the High
Court of Justice in London, England on or about December 9, 1991. In this
action, Macmillan sought relief virtually identical to that sought in the
Berlitz action, described above. Specifically, Macmillan sought a declaration
that it is the legal and beneficial owner of the disputed 10.6 million shares of
Berlitz common stock, including the 1.9 million shares then held by PLC. After a
trial, on December 10, 1993, the High Court of Justice handed down a judgment
finding for the Company on all aspect of its defense and dismissing Macmillan's
claims. On November 2, 1995, the Court of Appeal issued a preliminary judgment
dismissing Macmillan's appeal. Subsequently, the House of Lords denied
Macmillan's request for leave to appeal.
MCC Proceeds Inc. v. Lehman Brothers International (Europe) This action
was commenced by issuance of a writ in the High Court of Justice in London,
England on July 14, 1995. In this action, MCC Proceeds Inc., as successor to
Macmillan, Inc., seeks relief identical to that sought in the Berlitz action
described above, but based on a legal theory which was initially pleaded but
ultimately abandoned by the plaintiff in Berlitz. The High Court granted LBIE's
application to dismiss the proceeding and assessed costs against MCC Proceeds.
MCC Proceeds has appealed the dismissal, and LBIE has responded.
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Lehman Brothers Commercial Corporation and Lehman Brothers Special Financing
Inc. v. Minmetals International Non-Ferrous Metals Trading Company
On November 15, 1994, two Lehman Brothers subsidiaries, Lehman Brothers
Commercial Corporation ("LBCC") and Lehman Brothers Special Financing Inc.
("LBSF"), commenced an action against Minmetals International Non-Ferrous Metals
Trading Company ("Minmetals") and China National Metals and Minerals Import and
Export Company ("CNM") in the United States District Court for the Southern
District of New York alleging breach of contract against Minmetals and breach of
guarantee against CNM. The litigation arose from the refusal by Minmetals and
CNM to honor their obligations with respect to certain foreign exchange and swap
transactions. LBCC and LBSF seek to recover approximately $52.5 million from
Minmetals and/or CNM. On June 26, 1995, the court granted CNM's motion to
dismiss the claims against it, but also granted LBCC and LBSF leave to replead.
Minmetals filed fourteen counterclaims against Lehman entities based on
violations of federal securities and commodities laws and rules, and theories of
fraud, breach of fiduciary duty and conversion. The court denied a motion by the
Lehman counterclaim defendants to dismiss the six fraud-based counterclaims. On
June 24, 1996, the court granted the motion of LBCC and LBSF to file an amended
complaint naming CNM as an additional defendant. Discovery is progressing.
Actions Relating to National Association of Securities Dealers Automated
Quotations System ("NASDAQ") Market Maker Antitrust and Securities Litigation.
Beginning in May, 1994, several class actions were filed in various state
and federal courts against various broker-dealers making markets in NASDAQ
securities. With respect to a number of those actions LBI was either
specifically named as a defendant or was not specifically named as a defendant
but could be deemed to be a member of the defendant class as defined in the
complaints. Plaintiffs in these cases have alleged violations of the antitrust
laws, securities laws and have pled a variety of other statutory and common law
claims. All of these actions are based on the theory that because odd-eighth
quotes occur less often than quarter quotes, NASDAQ market makers must be
colluding wrongfully to maintain a wider spread.
By Order filed October 14, 1994, the Judicial Panel on Multidistrict
Litigation consolidated these actions in the Southern District of New York and
ordered that all related actions be transferred and coordinated for all pretrial
purposes. The case is captioned In Re NASDAQ Market-Makers Antitrust Litigation,
MDL No. 1023.
On December 16, 1994, plaintiffs served a consolidated Amended Complaint
naming 33 defendants including LBI. Plaintiffs claim violations of the federal
antitrust laws including Section 1 of the Sherman Antitrust Act. Plaintiffs seek
unspecified compensatory damages trebled in accordance with the antitrust laws,
costs including attorneys' fees as well as injunctive relief. The court
dismissed the action with leave to replead, stating that the complaint failed to
identify the securities involved with sufficient specificity. The plaintiffs
repled and the defendants answered the amended complaint on November 17, 1995.
Discovery has commenced.
LBI entered into a Stipulation and Order resolving a civil complaint filed
by the U.S. Department of Justice alleging that LBI and 23 other NASDAQ market
makers violated Section 1 of the Sherman Act in connection with certain market
making practices. In entering into the Stipulation and Order the parties agreed
that the defendants would not engage in certain types of market making
activities and the defendants undertook specified steps to assure compliance
with their agreement. The Stipulation and Order are subject to approval by the
United States District Court for the Southern District of New York following a
public hearing, and if the Court approves the Stipulation and Order, the
complaint will be dismissed with prejudice.
Leetate Smith, et al. v. Merrill Lynch, et al.
On September 28, 1995 a class action complaint was filed in the Superior
Court for the State of California in Orange County (the "Complaint"). The
Complaint was purportedly brought on behalf of purchasers of bonds, notes and
other securities during the period July 1, 1992 through December 6, 1994 (the
"Class Period") that were issued by Orange County or by other public entities
which had funds invested in Orange County's Investment Pool (collectively the
"County"). Also named as defendants are eight other
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<PAGE> 15
broker-dealers who are, like LBI, alleged to have acted as underwriters of the
County's debt securities and the five financial advisors who allegedly advised
the County during the Class Period. The Complaint alleges violations of various
sections of the California Corporations Code based on the alleged misstatements
and omissions in the Official Statements of the debt offerings by the County
primarily relating to the County's creditworthiness and ability to repay the
debts. Certain of the defendants, including LBI, entered into a settlement which
was approved by the state court on December 10, 1996. A parallel complaint filed
in federal court was voluntarily dismissed.
Sonnenfeld v. The City and County of Denver, Colorado, et al.
On August 4, 1995, a Consolidated Amended Class Action Complaint (the
"Complaint") was filed in the United States District Court for the District of
Colorado, consolidating and amending previously filed complaints and adding,
among other defendants, LBI. The Complaint is purportedly brought on behalf of
all persons, other than defendants, who purchased Denver Airport System Revenue
Bonds during the period February 27, 1992 through May 3, 1994 that were issued
by the City and County of Denver (the "Bonds") and who were damaged by their
investments. Also named as defendants are seven other broker-dealers who acted
as underwriters or financial advisors in connection with the issuances of the
Bonds and the City and County of Denver. The Complaint alleges violations of
Section 10b of the Exchange Act of 1934 and the Colorado Securities Act and
common law fraud based on alleged misstatements and omissions in the Official
Statements for the Bonds primarily relating to status of the design and
construction of the new Denver International Airport (the "Airport"), the amount
of revenues it would likely generate and the risks posed to the timely opening
of the Airport by the installation of an automated baggage system. The Complaint
seeks (i) to certify the action as a class action; (ii) unspecified damages; and
(iii) costs and attorneys fees.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The approximate number of holders of record of the Registrant's Common
Stock was 27,313 at January 31, 1997. Information concerning the market for the
Registrant's common equity and related stockholder matters in this set forth on
page 88 of the 1996 Annual Report to Stockholders and is hereby incorporated
herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data contained on pages 85 and 86 of the 1996 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 32 to 51 of the 1996
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 53-84 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 1996
14
<PAGE> 16
Annual Report to Stockholders on pages 52-84 and such information is hereby
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to Directors of the Registrant is set forth under the
caption "Election of Directors" on pages 4-7 of the Proxy Statement of the
Registrant for its 1997 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 1997 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 1997 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 1997 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 18-21 of the Proxy Statement of the Registrant for its
1997 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.
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<PAGE> 17
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.
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 September 24, 1996.*
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 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)).
10.6 Letter, dated March 23, 1987, from Nippon Life Insurance 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)).
10.7 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).
10.8 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).
10.9 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).
10.10 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>
16
<PAGE> 18
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<C> <S>
10.11 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)).
10.12 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)).
10.13 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).
10.14 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)).
10.15 Lehman Brothers Holdings Inc. 1996 Management Ownership Plan (incorporated by
reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for the
quarter ended August 31, 1996).
10.16+ Lehman Brothers Holdings Inc. Short-Term Executive Compensation Plan (incorporated by
reference to Exhibit 10.2 of the Registrant's Quarterly Report on Form 10-Q for the
quarter ended August 31, 1996).
10.17+ Lehman Brothers Holdings Inc. 1996 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 on Form 10-K for the Eleven Months ended
November 30, 1994).
</TABLE>
17
<PAGE> 19
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<C> <S>
10.27 Amended and Restated Agreement of Limited Partnership of Lehman Brothers Capital
Partners III, L.P. (incorporated by reference to Exhibit 10.27 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended November 30, 1995).
10.28+ Lehman Brothers Holdings Inc. Merchant Banking Long-Term Incentive Plan (for U.S.
participants).*
10.29+ Lehman Brothers Holdings Inc. Merchant Banking Discretionary Incentive Compensation
Plan (for non-U.S. participants).*
11. Computation of per share Earnings.*
12.(a) Computation in support of ratio of earnings to fixed charges.*
12.(b) Computation in support of ratio of earnings to combined fixed charges and preferred
dividends.*
13. The following portions of the Company's 1996 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 32-51.*
13.2 "Consolidated Financial Statements", pages 53-84.*
13.3 "Market for Registrant's Common Equity and Related Stockholder Matters", page 88.*
21. List of the Registrant's Subsidiaries*.
23. Consent of Ernst & Young LLP.*
24. Powers of Attorney.*
27. Financial Data Schedule.*
</TABLE>
(b) Reports on Form 8-K.
<TABLE>
<C> <S>
1. Form 8-K dated January 4, 1996, Items 5 and 7.
2. Form 8-K dated February 8, 1996, Item 7.
3. Form 8-K dated June 20, 1996, Item 7.
4. Form 8-K dated September 25, 1996, Item 7.
5. Form 8-K dated January 7, 1997, Items 5 and 7.
</TABLE>
- ---------------
* 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).
18
<PAGE> 20
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, 1997
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>
SIGNATURES TITLE DATE
- ------------------------------------- ------------------------------------ ------------------
<S> <C> <C>
Chief Executive Officer and,
* Chairman of the Board of
- ------------------------------------- Directors
Richard S. Fuld, Jr. (principal executive officer) February 28, 1997
* Chief Financial Officer
- ------------------------------------- (principal financial and accounting
Charles B. Hintz officer) February 28, 1997
*
- -------------------------------------
Michael L. Ainslie Director February 28, 1997
*
- -------------------------------------
John F. Akers Director February 28, 1997
*
- -------------------------------------
Roger S. Berlind Director February 28, 1997
*
- -------------------------------------
Thomas H. Cruikshank Director February 28, 1997
*
- -------------------------------------
Katsumi Funaki Director February 28, 1997
*
- -------------------------------------
Henry Kaufman Director February 28, 1997
*
- -------------------------------------
John D. Macomber Director February 28, 1997
*
- -------------------------------------
Dina Merrill Director February 28, 1997
*
- -------------------------------------
Masataka Shimasaki Director February 28, 1997
*By: /s/ KAREN M. MULLER
- -------------------------------------
Karen M. Muller
(Attorney-in-Fact)
February 28, 1997
</TABLE>
19
<PAGE> 21
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
-------------------------
FINANCIAL STATEMENTS FORM 10-K ANNUAL REPORT
- ---------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Report of Independent Auditors........................................ 52
Consolidated Statement of Operations for the Twelve Months Ended
November 30, 1996, Twelve Months Ended November 30, 1995, and for
the Eleven Months Ended November 30, 1994........................... 53
Consolidated Statement of Financial Condition at November 30, 1996,
and November 30, 1995............................................... 54
Consolidated Statement of Changes in Stockholders' Equity for the
Twelve Months Ended November 30, 1996, for the Twelve Months Ended
November 30, 1995, and for the Eleven Months Ended November 30,
1994................................................................ 56
Consolidated Statement of Cash Flows for the Twelve Months Ended
November 30, 1996, for the Twelve Months Ended November 30, 1995,
and for the Eleven Months Ended November 30, 1994................... 57
Notes to Consolidated Financial Statements............................ 59
FINANCIAL STATEMENT SCHEDULES
- ----------------------------------------------------------------------
Schedule III -- Condensed Financial Information....................... F-2
</TABLE>
F-1
<PAGE> 22
SCHEDULE III
LEHMAN BROTHERS HOLDINGS INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF OPERATIONS
(PARENT COMPANY ONLY)
(IN MILLIONS)
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS ELEVEN MONTHS
ENDED ENDED ENDED
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Revenues
Principal transactions.............................. $ 23 $ 152 $ 145
Investment banking.................................. 90 90 75
Interest and dividends.............................. 882 804 482
Other............................................... 6 1 10
------ ------ -----
Total revenues................................... 1,001 1,047 712
Interest expense.................................... 966 899 663
------ ------ -----
Net revenues..................................... 35 148 49
------ ------ -----
Non-interest expenses
Compensation and benefits........................... 64 70 20
Other............................................... 105 87 57
Management fees..................................... (81) (94) (53)
Severance charge.................................... 50 6
Restructuring charge................................ 27
Spin-off expenses................................... 15
------ ------ -----
Total non-interest expenses...................... 138 90 45
------ ------ -----
Income (loss) before taxes............................ (103) 58 4
Provision for (benefit from) income taxes........... (65) 47 (12)
------ ------ -----
Income (loss) before equity in net income of
subsidiaries........................................ (38) 11 16
Equity in net income of subsidiaries................ 454 231 97
------ ------ -----
Net income............................................ $ 416 $ 242 $ 113
====== ====== =====
Net income applicable to common stock................. $ 378 $ 200 $ 75
====== ====== =====
</TABLE>
See notes to condensed financial information of Registrant.
F-2
<PAGE> 23
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,
-------------------
1996 1995
------- -------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................................ $ 675 $ 18
Securities and other financial instruments owned......................... 3,540 2,595
Equity in net assets of subsidiaries..................................... 3,755 3,734
Accounts receivable and accrued interest................................. 513 1,048
Due from subsidiaries.................................................... 11,048 9,249
Other assets............................................................. 586 574
------- -------
Total assets........................................................... $20,117 $17,218
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper and short-term debt..................................... $ 3,175 $ 2,102
Securities and other financial instruments sold but not yet purchased.... 198 176
Securities sold under agreements to repurchase........................... 2,618 2,073
Accrued liabilities, due to subsidiaries and other payables.............. 766 825
Senior notes............................................................. 9,286 8,344
Subordinated indebtedness................................................ 200
------- -------
Total liabilities................................................... 16,243 13,520
------- -------
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 in
1995; $25.00 liquidation preference per share....................... 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: 106,793,538 in 1996 and 105,684,565 in 1995; shares
outstanding: 100,449,144 in 1996 and 104,565,875 in 1995............ 11 11
Common Stock issuable.................................................. 326 211
Additional paid-in capital............................................. 3,198 3,172
Foreign currency translation adjustment................................ 20 9
Accumulated deficit.................................................... (43) (397)
Common Stock in treasury at cost: 6,344,394 in 1996 and 1,118,690 in
1995................................................................ (146) (16)
------- -------
Total stockholders' equity.......................................... 3,874 3,698
------- -------
Total liabilities and stockholders' equity.......................... $20,117 $17,218
======= =======
</TABLE>
See notes to condensed financial information of Registrant.
F-3
<PAGE> 24
SCHEDULE III
LEHMAN BROTHERS HOLDINGS INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS
(PARENT COMPANY ONLY)
(IN MILLIONS)
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS ELEVEN MONTHS
ENDED ENDED ENDED
NOVEMBER 30 NOVEMBER 30 NOVEMBER 30
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... $ 416 $ 242 $ 113
Adjustments to reconcile net income (loss) to net cash (used
in) provided by operating activities:
Equity in net income of subsidiaries...................... (454) (231) (97)
Severance charge.......................................... 50
Restructuring charge...................................... 27
Other adjustments......................................... 151 127 107
Net change in:
Securities and other financial instruments owned.......... (945) (778) (1,530)
Accounts receivable and accrued interest, due from
subsidiaries and other assets.......................... (1,262) 945 (3,510)
Securities and other financial instruments sold but not
yet purchased and Securities sold under agreements to
repurchase............................................. 567 858 1,249
Accrued liabilities, due to subsidiaries and other
payables............................................... (84) (576) 1,076
Dividends and capital distributions received.............. 609 851 820
------- ------- -------
Net cash (used in) provided by operating activities.... (952) 1,465 (1,772)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes...................... 2,686 4,226 2,799
Principal payments of senior notes.......................... (1,778) (3,196) (1,875)
Proceeds from issuance of subordinated indebtedness......... 200
Principal payments of subordinated indebtedness............. (150)
Payments for commercial paper and short-term debt, net...... 1,073 (1,670) (89)
Proceeds from spin-off...................................... 1,193
Payment for repurchase of preferred stock................... (200)
Payment for treasury stock purchases........................ (130) (1) (15)
Dividends paid.............................................. (55) (64) (99)
------- ------- -------
Net cash provided by (used in) financing activities.... 1,796 (855) 1,914
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in investments in affiliates....................... (187) (610) (173)
Other....................................................... 20
------- ------- -------
Net cash used in investing activities.................. (187) (610) (153)
------- ------- -------
Net change in cash and cash equivalents................ 657 (11)
Cash and cash equivalents, beginning of period.............. 18 18 29
------- ------- -------
Cash and cash equivalents, end of period............... $ 675 $ 18 $ 18
======= ======= =======
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN MILLIONS)
Interest paid totaled $933 in 1996, $884 in 1995 and $612 in 1994. Income
taxes (received) paid totaled $(48) in 1996, $(163) in 1995 and $(103) in 1994.
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> 25
SCHEDULE III
NOTE 1. BASIS OF PRESENTATION
The condensed financial statements of Lehman Brothers Holdings Inc.
("Holdings") should be read in conjunction with the consolidated financial
statements of Lehman Brothers Holdings Inc. and subsidiaries and the notes
thereto.
Certain amounts reflect reclassifications to conform to the current
period's presentation.
NOTE 2. LONG-TERM DEBT
<TABLE>
<CAPTION>
U.S. DOLLAR NON-U.S. DOLLAR
------------------- ------------------ NOVEMBER 30,
FIXED FLOATING FIXED FLOATING -----------------
RATE RATE RATE RATE 1996 1995
------ -------- ----- -------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
SENIOR NOTES
Maturing in Fiscal 1996............... $1,696
Maturing in Fiscal 1997............... $ 618 $ 816 $ 64 $128 $1,626 1,110
Maturing in Fiscal 1998............... 1,538 366 68 79 2,051 1,330
Maturing in Fiscal 1999............... 1,136 242 682 22 2,082 1,528
Maturing in Fiscal 2000............... 1,096 92 41 1,229 794
Maturing in Fiscal 2001............... 41 50 91 32
December 1, 2001 and thereafter....... 2,181 26 2,207 1,854
------ ------ ---- ---- ------ ------
Senior Notes........................ $6,610 $1,566 $ 881 $229 $9,286 $8,344
====== ====== ==== ==== ====== ======
Subordinated Indebtedness maturing in
Fiscal 2035......................... $ 200 $ 200
====== ====== ==== ==== ====== ======
Long-Term Debt........................ $6,810 $1,566 $ 881 $229 $9,486 $8,344
====== ====== ==== ==== ====== ======
</TABLE>
Of the Company's long-term debt outstanding as of November 30, 1996, $604
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 1997 to fiscal 2002, rather than at their contractual
maturities, which range from fiscal 2005 to fiscal 2023. In addition, $447
million of the Company's long-term debt is redeemable at par at the option of
the Company upon specified dates from 2000 through 2035 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, 1996, the Company's U.S. dollar and non-U.S. dollar debt
portfolios included approximately $156 million and $63 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.
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.
F-5
<PAGE> 26
At November 30, 1996 the notional values of the Company's interest rate and
currency swaps related to its long-term debt obligations were approximately $8.6
billion. In terms of notional amounts outstanding, these derivative products
mature as follows:
<TABLE>
<CAPTION>
NON-U.S. CROSS
U.S. DOLLAR DOLLAR CURRENCY TOTAL
----------- -------- -------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Maturing in Fiscal 1997.................................. $ 1,110 $ 97 $ 95 $1,302
Maturing in Fiscal 1998.................................. 1,648 125 1,773
Maturing in Fiscal 1999.................................. 1,310 682 1,992
Maturing in Fiscal 2000.................................. 1,071 9 32 1,112
Maturing in Fiscal 2001.................................. 56 56
December 1, 2001 and thereafter.......................... 2,315 4 22 2,341
------ ---- ---- ------
Total............................................... $ 7,510 $ 110 $ 956 $8,576
====== ==== ==== ======
Weighted average rate at November 30, 1996
Receive rate(1).......................................... 7.31% 1.35% 4.13% 6.88%
Pay rate(1).............................................. 6.29% 3.43% 6.14% 6.24%
</TABLE>
- ---------------
(1) Weighted average interest rates were calculated utilizing non-U.S. dollar
interest rates, where applicable.
The Company's end user derivative activities resulted in the following
changes to the Company's mix of fixed and floating rate debt and effective
weighted average rates of interest:
<TABLE>
<CAPTION>
NOVEMBER 30, 1996
--------------------------------------------------
LONG-TERM DEBT WEIGHTED AVERAGE(1)
------------------- ----------------------------
BEFORE AFTER CONTRACTUAL EFFECTIVE RATE
END USER END USER INTEREST AFTER END USER
ACTIVITIES ACTIVITIES RATE ACTIVITIES
-------- -------- ----------- --------------
<S> <C> <C> <C> <C>
USD Obligations
Fixed Rate........................................ $6,810 $ 122 7.77% 9.22%
Floating Rate..................................... 1,566 9,210 5.79% 6.39%
------ ------ ---- ----
8,376 9,332 7.40% 6.42%
Non-USD Obligations................................. 1,110 154 3.73% 2.74%
------ ------ ---- ----
Total.......................................... $9,486 $9,486 6.97% 6.36%
====== ====== ==== ====
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30, 1995
--------------------------------------------------
WEIGHTED AVERAGE(1)
LONG-TERM DEBT ----------------------------
-------------------
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........................................ $5,355 $ 619 8.02% 7.36%
Floating Rate..................................... 1,822 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%
====== ====== ==== ====
</TABLE>
- ---------------
(1) Weighted average interest rates were calculated utilizing non-US dollar
interest rates, where applicable.
NOTE 3. DIVIDENDS
Dividends and capital distributions declared to Holdings by its
subsidiaries and affiliates were $609 million in 1996, $851 million in 1995, and
$820 million in 1994.
F-6
<PAGE> 27
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. OTHER CHARGES
1996 Severance Charge
In the fourth quarter of 1996, Lehman Brothers Holdings Inc. and
subsidiaries (collectively, "LBHI") recorded an $84 million severance charge
($50 million aftertax) related to certain strategic actions taken to improve
on-going profitability. The 1996 severance charge reflected the culmination of
LBHI's worldwide business unit economic performance review which was undertaken
in the fourth quarter of 1996 to focus LBHI on its core investment banking,
equity and fixed income, sales and trading areas. The charge resulted from
personnel reductions across a number of underperforming fixed income and
equities businesses, including exiting the precious metals business in the U.S.,
Europe and Asia; exiting energy trading in the U.S. and Europe, consolidating
Asian fixed income risk management activities into one center in Tokyo;
refocusing foreign exchange trading activities and combining the Firm's New York
Private Client Services offices. Additionally, the charge reflects various other
strategic personnel reductions which were aimed at delayering management. The
Company recorded a $50 million severance charge ($30 million aftertax) in the
fourth quarter of 1996 related to these actions.
1995 Restructuring Charge
During the fourth quarter of 1995, the Company recorded a charge of $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. MANAGEMENT FEES
The Company incurs charges including occupancy, administration and computer
processing, which are related to its activities and that of certain of its
subsidiaries (the "Related Parties"). Such charges are allocated between the
Related Parties, based upon specific identification and allocation methods. The
allocation of such charges to other affiliates is recognized as management fees.
NOTE 7. COMMITMENTS AND CONTINGENCIES
The Company has fully guaranteed certain of its subsidiaries and guaranteed
certain unsecured lines of credit and other contractual obligations of other
subsidiaries.
F-7
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- -------------------------------------------------------------------------- ------------
<C> <S> <C>
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 September 24, 1996.*
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 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)).
10.6 Letter, dated March 23, 1987, from Nippon Life Insurance 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)).
10.7 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).
10.8 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).
10.9 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).
</TABLE>
<PAGE> 29
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
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<C> <S> <C>
10.10 Lease dated as of October 13, 1993 between 101 Hudson Leasing Associates
and Lehman Brothers Holdings Inc. (incorporated by reference to Exhibit 10
of Holdings' Quarterly Report on Form 10-Q for the quarter ended September
30, 1993).
10.11 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)).
10.12 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)).
10.13 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).
10.14 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)).
10.15 Lehman Brothers Holdings Inc. 1996 Management Ownership Plan (incorporated
by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended August 31, 1996).
10.16+ Lehman Brothers Holdings Inc. Short-Term Executive Compensation Plan
(incorporated by reference to Exhibit 10.2 of the Registrant's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1996).
10.17+ Lehman Brothers Holdings Inc. 1996 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)).
</TABLE>
<PAGE> 30
<TABLE>
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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 on 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. (incorporated by reference to Exhibit 10.27 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
November 30, 1995).
10.28+ Lehman Brothers Holdings Inc. Merchant Banking Long-Term Incentive Plan
(for U.S. participants).*
10.29+ Lehman Brothers Holdings Inc. Merchant Banking Discretionary Incentive
Compensation Plan (for non-U.S. participants).*
11. Computation of per share Earnings.*
12.(a) Computation in support of ratio of earnings to fixed charges.*
12.(b) Computation in support of ratio of earnings to combined fixed charges and
preferred dividends.*
13. The following portions of the Company's 1996 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 32-51.*
13.2 "Consolidated Financial Statements", pages 53-84.*
13.3 "Market for Registrant's Common Equity and Related Stockholder Matters",
page 88.*
21. List of the Registrant's Subsidiaries*.
23. Consent of Ernst & Young LLP.*
24. Powers of Attorney.*
27. Financial Data Schedule.*
</TABLE>
(b) Reports on Form 8-K.
<TABLE>
<C> <S> <C>
1. Form 8-K dated January 4, 1996, Items 5 and 7.
2. Form 8-K dated February 8, 1996, Item 7.
3. Form 8-K dated June 20, 1996, Item 7.
4. Form 8-K dated September 25, 1996, Item 7.
5. Form 8-K dated January 7, 1997, Items 5 and 7.
</TABLE>
- ---------------
* 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).
<PAGE> 1
Exhibit 3.2
Amended and Restated
By-Laws
Effective: September 24, 1996
LEHMAN BROTHERS HOLDINGS INC.
Incorporated Under the Laws of the
State of Delaware
BY-LAWS
ARTICLE I
OFFICES
Lehman Brothers Holdings Inc. (the "Corporation") shall maintain a
registered office in the State of Delaware. The Corporation may also have other
offices at such places, either within or without the State of Delaware, as the
Board of Directors may from time to time designate or the business of the
Corporation may require.
ARTICLE II
STOCKHOLDERS
Section 1. Place of Meetings. Meetings of the stockholders for
the election of directors or for any other purpose shall be held on such date,
at such time and at such place, either within or without the State of Delaware,
as shall be designated from time to time by the Board of Directors and stated in
the notice of the meeting or in a duly executed waiver of notice thereof.
Section 2. Annual Meeting. The Annual Meeting of Stockholders
shall be held on such date and at such time as shall be designated from time to
time by the Board of Directors and stated in the notice of the meeting, at which
meeting the stockholders shall elect by a plurality vote a Board of Directors
and transact only such other business as is properly brought before the meeting
in accordance with these By-Laws. Written notice of the Annual Meeting stating
the place, date and hour of the meeting shall be given as permitted by law to
each stockholder entitled to vote at such meeting not less than ten (10) nor
more than sixty (60) days before the date of the meeting.
Section 3. Special Meetings. Unless otherwise prescribed by
law or the Restated Certificate of Incorporation (such Certificate, as amended
from time to time, including resolutions adopted from time to time by the Board
of Directors establishing the designation, rights, preferences and other terms
of any class or series of capital stock, the "Certificate of Incorporation"),
special meetings of the stockholders may be called only by the Chairman of the
Board, the Chief Executive Officer, the President in the absence or disability
of the Chairman of the Board and the Chief Executive Officer, or the Secretary
at the request
<PAGE> 2
of the Board of Directors. Written notice of a Special Meeting stating the
place, date and hour of the meeting and the purposes for which the meeting is
called shall be given not less than ten (10) nor more than sixty (60) days
before the date of the meeting to each stockholder entitled to vote at such
meeting. Only such business as is specified in the notice of special meeting
shall come before such meeting.
Section 4. Quorum. Except as otherwise provided by law or by
the Certificate of Incorporation, the holders of a majority of the shares of
capital stock issued and outstanding and entitled to vote thereat ("Voting
Stock"), present in person or represented by proxy, shall constitute a quorum at
all meetings of the stockholders for the transaction of business. If, however,
such quorum shall not be present or represented at a meeting of the
stockholders, the stockholders entitled to vote thereat, present or represented
by proxy, shall have the power to adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present
or represented. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally noticed. If the adjournment is for more than thirty
(30) days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder entitled to vote at the meeting. When a quorum is once present, it
is not broken by the subsequent withdrawal of any stockholder.
Section 5. Appointment of Inspectors of Election. The Board of
Directors shall, in advance of sending to the stockholders any notice of a
meeting of the holders of any class of shares, appoint one or more inspectors of
election ("inspectors") to act at such meeting or any adjournment or
postponement thereof and make a written report thereof. The Board of Directors
may designate one or more persons as alternate inspectors to replace any
inspector who fails to act. If no inspector or alternate is so appointed or if
no inspector or alternate is able to act, the Chairman of the Board shall
appoint one or more inspectors to act at such meeting. Each inspector, before
entering upon the discharge of such inspector's duties, shall take and sign an
oath faithfully to execute the duties of inspector with strict impartiality and
according to the best of such inspector's ability. The inspectors shall not be
directors, officers or employees of the Corporation.
Section 6. Voting. Except as otherwise provided by law or by
the Certificate of Incorporation, each stockholder of record of any class or
series of stock having a preference over the Common Stock of the Corporation as
to dividends or upon liquidation shall be entitled on each matter submitted to a
vote at each meeting of stockholders to such number of votes for each share of
such stock as may be fixed in the Certificate of Incorporation, and each
stockholder of record of Common Stock shall be entitled at each meeting of
stockholders to one vote for each share of such stock, in each case, registered
in such stockholder's name on the books of the Corporation on the date fixed
pursuant to Section 5 of Article VI of these By-Laws as the record date for the
determination of stockholders entitled to notice of and to vote at such meeting,
or if no such record date shall have been so fixed, then at the close of
business on the day next preceding the day on which notice of such meeting is
given, or if
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<PAGE> 3
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held.
Each stockholder entitled to vote at any meeting may vote
either in person or by proxy, duly appointed by an instrument in writing
executed by such stockholder and bearing a date not more than three years prior
to said meeting, unless said proxy provides for a longer period. Any such proxy
shall be delivered to the Secretary of such meeting at or prior to the time
designated for holding such meeting, but in any event not later than the time
designated in the order of business for so delivering such proxies.
At all meetings of stockholders all matters, except as
otherwise provided by law, the Certificate of Incorporation, or these By-Laws
shall be determined by a majority vote of the stockholders present in person or
by proxy and entitled to vote thereat, and where a separate vote by class is
required, a majority of the votes cast by the stockholders of such class present
in person or by proxy, shall be the act of such class.
The vote on any matter, including the election of directors,
shall be by written ballot. Each ballot shall be signed by the stockholder
voting, or by such stockholder's proxy, and shall state the number of shares
voted. All proxies, ballots and vote tabulations that identify the particular
vote of a stockholder shall be kept confidential, except that disclosure of the
particular vote may be made: (i) to allow the inspectors to certify the results
of the vote; (ii) as necessary under applicable legal requirements, including
the pursuit or defense of judicial actions; (iii) when such disclosure is
expressly requested by such stockholder; and (iv) except where such vote is
included in a comment written on a proxy, consent or ballot, and disclosure is
necessary, in the opinion of the inspector, for an understanding of the comment.
Proxy cards shall be returned in envelopes addressed to the
inspectors, who shall receive, inspect and tabulate the proxies. Comments
written on proxies, consents or ballots shall be transcribed and provided to the
Secretary with the name and address of the stockholder.
Nothing in this Section 6 shall prohibit the inspector from
making available to the Corporation, during the period prior to any annual or
special meeting, information as to which stockholders have not voted and
periodic status reports on the aggregate vote.
Section 7. List of Stockholders Entitled to Vote. The officer
of the Corporation who has charge of the stock ledger of the Corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order and showing the address of each stockholder and the number of
shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be
3
<PAGE> 4
held. The list shall also be produced and kept at the time and place of the
meeting during the whole time thereof and may be inspected by any stockholder of
the Corporation who is present.
Section 8. Stock Ledger. The stock ledger of the Corporation
shall be the only evidence as to who are the stockholders entitled to examine
the stock ledger, the list required by Section 6 of this Article II or the books
of the Corporation, or to vote in person or by proxy at any meeting of
stockholders.
Section 9. Advance Notice of Stockholder-Proposed Business at
Annual Meeting. To be properly brought before the Annual Meeting, business must
be either (a) specified in the notice of meeting (or any supplement thereto)
given by or at the direction of the Board of Directors, (b) otherwise properly
brought before the meeting by or at the direction of the Board of Directors or
(c) otherwise properly brought before the meeting by a stockholder. For business
to be properly brought before an Annual Meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the Secretary of
the Corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the Corporation not
less than ninety (90) nor more than one hundred twenty (120) days prior to the
one year anniversary of the date of the Annual Meeting of the previous year;
provided, however, that in the event that the Annual Meeting is called for a
date that is not within thirty (30) days before or after such anniversary date,
notice by the stockholder in order to be timely must be so received not earlier
than one hundred twenty (120) days prior to such Annual Meeting and not later
than the close of business on the tenth (10th) day following the day on which
notice of the date of the Annual Meeting was mailed or public disclosure of the
date of the annual meeting was made, whichever first occurs. A stockholder's
notice to the Secretary shall set forth as to each matter the stockholder
proposes to bring before the Annual Meeting (i) a brief description of the
business desired to be brought before the Annual Meeting and the reasons for
conducting such business at the Annual Meeting, (ii) the name and address, as
they appear on the Corporation's books, of the stockholder proposing such
business, (iii) the class and number of shares of the Corporation that are
beneficially owned by the stockholder, (iv) any material interest of the
stockholder in such business and (v) any other information relating to the
person or the proposal that is required to be disclosed pursuant to Regulation
14A under the Securities Exchange Act of 1934, as amended (or any successor
provision or law) or applicable law.
Notwithstanding anything in these By-Laws to the contrary, no
business shall be conducted at an Annual Meeting except in accordance with the
procedures set forth in this Section 9; provided, however, that nothing in this
Section 9 shall be deemed to preclude discussion by any stockholder of any
business properly brought before the Annual Meeting. The Chairman of an Annual
Meeting shall, if the facts warrant, determine and declare to the meeting that
business was not properly brought before the meeting in accordance with the
provisions of this Section 9 and if he should so determine, he shall so declare
to the meeting and any such business not properly brought before the meeting
shall not be transacted.
4
<PAGE> 5
Section 10. Nomination of Directors; Advance Notice of
Stockholder Nominations. Only persons who are nominated in accordance with the
procedures set forth in this Section 10 shall be eligible for election as
directors. Nominations of persons for election to the Board of Directors of the
Corporation at the Annual Meeting or at any special meeting of stockholders
called in the manner set forth in Article II, Section 3 hereof for the purpose
of electing directors may be made at a meeting of stockholders by or at the
direction of the Board of Directors, by any nominating committee or person
appointed for such purpose by the Board of Directors, or by any stockholder of
the Corporation entitled to vote for the election of directors at the meeting
who complies with the notice procedures set forth in this Section 10. Such
nominations, other than those made by, or at the direction of, or under the
authority of the Board of Directors, shall be made pursuant to timely notice in
writing to the Secretary of the Corporation. To be timely, a stockholder's
notice shall be delivered to or mailed and received at the principal executive
offices of the Corporation (a) in the case of an Annual Meeting, not less than
ninety (90) nor more than one hundred twenty (120) days prior to the one year
anniversary of the date of the Annual Meeting of the previous year; provided,
however, that in the event that the Annual Meeting is called for a date that is
not within thirty (30) days before or after such anniversary date, notice by the
stockholder in order to be timely must be so received not earlier than one
hundred twenty (120) days prior to such Annual Meeting and not later than the
close of business on the tenth (10th) day following the day on which notice of
the date of the annual meeting was mailed or public disclosure of the date of
the Annual Meeting was made, whichever first occurs; and (b) in the case of a
special meeting of stockholders called in the manner set forth in Article II,
Section 3 hereof for the purpose of electing directors, not earlier than one
hundred twenty (120) days prior to such special meeting and not later than the
close of business on the tenth (10th) day following the day on which notice of
the date of the special meeting was mailed or public disclosure of the date of
the special meeting was made, whichever first occurs. Such stockholder's notice
to the Secretary shall set forth (a) as to each person whom the stockholder
proposes to nominate for election or re-election as a director, (i) the name,
age, business address and residence address of the person, (ii) the principal
occupation or employment of the person, (iii) the class and number of shares of
capital stock of the Corporation, if any, which are beneficially owned by the
person and (iv) any other information relating to the person that is required to
be disclosed in solicitations for proxies for election of directors pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (or any
successor provision or law) or applicable law; and (b) as to the stockholder
giving the notice (i) the name and record address of the stockholder and (ii)
the class and number of shares of capital stock of the Corporation which are
beneficially owned by the stockholder.
The Chairman of the meeting shall, if the facts warrant,
determine and declare to the meeting that a nomination was not made in
accordance with the foregoing procedures and, if he should so determine, he
shall so declare to the meeting and the defective nomination shall be
disregarded.
5
<PAGE> 6
ARTICLE III
DIRECTORS
Section 1. Number; Resignation; Removal. Except as otherwise
required by the Certificate of Incorporation, the number of directors which
shall constitute the whole Board of Directors shall be fixed from time to time
by resolution of the Board of Directors, but shall not be less than six (6) nor
more than twenty-four (24). Except as provided in Section 2 of this Article III
and in the Certificate of Incorporation, directors shall be elected by a
plurality of the votes cast at the Annual Meeting of Stockholders. The directors
shall be divided into three classes, designated Class I, Class II and Class III,
as provided in the Certificate of Incorporation. A director may resign at any
time upon notice to the Corporation. A director may be removed only for cause.
Section 2. Vacancies. Vacancies and newly created
directorships resulting from any increase in the authorized number of directors
may be filled by a majority of the remaining directors then in office, though
less than a quorum, or by a sole remaining director, and the directors so
elected shall hold office until the next election for such class and until their
successors are duly elected and qualified, or until their earlier resignation or
removal. If there are no directors in office, then an election of directors may
be held in the manner provided by the General Corporation Law of the State of
Delaware. No decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
Section 3. Duties and Powers. The business of the Corporation
shall be managed by or under the direction of the Board of Directors which may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by statute or by the Certificate of Incorporation or by these
By-Laws directed or required to be exercised or done solely by the stockholders.
Section 4. Meetings. The Board of Directors of the Corporation
may hold meetings, both regular and special, either within or without the State
of Delaware. Regular meetings of the Board of Directors may be held without
notice at such time and at such place as may from time to time be determined by
the Board of Directors. Special meetings of the Board of Directors may be called
by the Chairman of the Board, the Chief Executive Officer, the President or any
director. Notice thereof stating the place, date and hour of the meeting shall
be given to each director either (i) by mail or courier not less than
forty-eight (48) hours before the date of the meeting or (ii) by telephone,
telegram or facsimile transmission, not less than twenty-four (24) hours before
the time of the meeting or on such shorter notice as the person or persons
calling such meeting may deem necessary or appropriate in the circumstances
(provided that notice of any meeting need not be given to any director who shall
either, before or after such meeting, submit a signed waiver of notice or
attends the meeting without protesting, prior to its commencement, the lack of
notice).
6
<PAGE> 7
Section 5. Quorum. Except as may be otherwise provided by law,
the Certificate of Incorporation or these By-Laws, a majority of the entire
Board of Directors shall be necessary to constitute a quorum for the transaction
of business, and the vote of a majority of the directors present at a meeting at
which a quorum is present shall be the act of the Board of Directors. If a
quorum is not present at a meeting of the Board of Directors, a majority of the
directors present may adjourn the meeting to such time and place as they may
determine without notice other than an announcement at the meeting until enough
directors to constitute a quorum shall attend.
Section 6. Action Without A Meeting. Unless otherwise provided
by the Certificate of Incorporation or these By-Laws, any action required or
permitted to be taken by the Board of Directors or any committee thereof may be
taken without a meeting if all members of the Board of Directors or the
committee consent in writing to the adoption of a resolution authorizing the
action. The resolution and the written consents thereto by the members of the
Board of Directors or committee shall be filed with the minutes of the
proceedings of the Board of Directors or such committee.
Section 7. Participation By Telephone. Unless otherwise
provided by the Certificate of Incorporation or these By-Laws, any one or more
members of the Board of Directors or any committee thereof may participate in a
meeting of the Board of Directors or such committee by means of a conference
telephone or similar communications equipment allowing all persons participating
in the meeting to hear each other. Participation by such means shall constitute
presence in person at the meeting.
Section 8. Compensation. The directors may be paid their
expenses, if any, for attendance at each meeting of the Board of Directors or
any committee thereof and may be paid compensation as a director, committee
member or chairman of any committee and for attendance at each meeting of the
Board of Directors or committee thereof. No such payment shall preclude any
director from serving the Corporation in any other capacity and receiving
compensation therefore or entering into transactions otherwise permitted by the
Certificate of Incorporation, these By-Laws or applicable law.
Section 9. Resignation. Any director may resign at any time.
Such resignation shall be made in writing and shall take effect at the time
specified therein, or, if no time be specified, at the time of its receipt by
the Chairman of the Board, or if none, by the Chief Executive Officer, President
or the Secretary. The acceptance of a resignation shall not be necessary to make
it effective unless so specified therein.
ARTICLE IV
COMMITTEES
Section 1. Committees. The Board of Directors may designate
one or more committees, each committee to consist of one or more of the
directors of the Corporation. The Board of Directors may designate one or more
directors as alternate members of any
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<PAGE> 8
committee, who may replace any absent or disqualified member at any meeting of
any such committee. In the absence or disqualification of a member of a
committee, and in the absence of a designation by the Board of Directors of an
alternate member to replace the absent or disqualified member, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not such member or member constitute a quorum, may by unanimous vote appoint
another member of the Board of Directors to act at the meeting in the place of
any absent or disqualified member. Any committee, to the extent allowed by law
and provided in the resolution establishing such committee or in the By-Laws,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the Corporation,
including the power to adopt a certificate of ownership and merger pursuant to
Section 253 of the Delaware General Corporation Law, the authority to issue
shares, and the authority to declare a dividend, except as limited by Delaware
General Corporation Law or other applicable law, but no such committee shall
have the power or authority in reference to the following matters: (i) approving
or adopting, or recommending to the stockholders, any action or matter expressly
required by the Delaware General Corporation Law to be submitted to stockholders
for approval or (ii) adopting, amending or repealing any By-Law of the
Corporation. All acts done by any committee within the scope of its powers and
duties pursuant to these By-Laws and the resolutions adopted by the Board of
Directors shall be deemed to be, and may be certified as being, done or
conferred under authority of the Board of Directors. The Secretary or any
Assistant Secretary is empowered to certify that any resolution duly adopted by
any such committee is binding upon the Corporation and to execute and deliver
such certifications from time to time as may be necessary or proper to the
conduct of the business of the Corporation.
Section 2. Resignation. Any member of a committee may resign
at any time. Such resignation shall be made in writing and shall take effect at
the time specified therein, or, if no time be specified, at the time of its
receipt by the Chairman of the Board, or if none, by the Chief Executive
Officer, President or the Secretary. The acceptance of a resignation shall not
be necessary to make it effective unless so specified therein.
Section 3. Quorum. A majority of the members of a committee
shall constitute a quorum. The vote of a majority of the members of a committee
present at any meeting at which a quorum is present shall be the act of such
committee.
Section 4. Record of Proceedings. Each committee shall keep a
record of its acts and proceedings, and shall report the same to the Board of
Directors when and as required by the Board of Directors.
Section 5. Organization, Meetings, Notices. A committee may
hold its meetings at the principal office of the Corporation, or at any other
place upon which a majority of the committee may at any time agree. Each
committee may make such rules as it may deem expedient for the regulation and
carrying on of its meetings and proceedings.
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<PAGE> 9
ARTICLE V
OFFICERS
Section 1. General. The officers of the Corporation shall be
elected by the Board of Directors and shall consist of a Chairman of the Board,
Chief Executive Officer, a President, a Chief Financial Officer, one or more
Senior Executive Vice Presidents, one or more Executive Vice Presidents, one or
more Senior Vice Presidents, one or more First Vice Presidents, one or more Vice
Presidents, a Secretary, a Treasurer and a Controller. The Board of Directors,
in its discretion, may also elect and specifically identify as officers of the
Corporation one or more Vice Chairmen of the Board, one or more Assistant Vice
Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers
and one or more Assistant Controllers as in its judgment may be necessary or
desirable. Any number of offices may be held by the same person, unless
otherwise prohibited by law, the Certificate of Incorporation or these By-Laws.
The officers of the Corporation need not be stockholders or directors of the
Corporation.
Section 2. Election; Removal; Remuneration. The Board of
Directors at its first meeting held after each Annual Meeting of Stockholders
shall elect the officers of the Corporation who shall hold their offices for
such terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the Board of Directors and may elect additional
officers and may fill vacancies among the officers previously elected at any
subsequent meeting of the Board of Directors; and all officers of the
Corporation shall hold office until their successors are chosen and qualified,
or until their earlier resignation or removal. Any officer elected by the Board
of Directors may be removed at any time, either for or without cause, by the
affirmative vote of a majority of the Board of Directors. The compensation of
all officers of the Corporation shall be fixed by the Board of Directors or a
committee thereof.
Section 3. Voting Securities Owned by the Corporation. Powers
of attorney, proxies, waivers of notice of meetings, consents and other
instruments relating to securities owned by the Corporation may be executed in
the name of and on behalf of the Corporation by the Chairman of the Board, Chief
Executive Officer, the President, Secretary or any Senior Executive Vice
President, Executive Vice President, Senior Vice President, First Vice
President, Vice President or Assistant Secretary and any such officer may, in
the name and on behalf of the Corporation, take all such action as any such
officer may deem advisable to vote in person or by proxy at any meeting of
security holders of any corporation in which the Corporation may own securities
and at any such meeting shall possess and may exercise any and all rights and
powers incident to the ownership of such securities and which, as the owner
thereof, the Corporation might have exercised and possessed if present. The
Board of Directors may, by resolution, from time to time confer like powers upon
any other person or persons.
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Section 4. Chairman of the Board. The Chairman of the Board
may be, but need not be, a person other than the Chief Executive Officer of the
Corporation. The Chairman of the Board may be, but need not be, an officer or
employee of the Corporation. The Chairman of the Board shall preside at meetings
of the Board of Directors and shall establish agendas for such meetings. In
addition, the Chairman of the Board shall assure that matters of significant
interest to stockholders and the investment community are addressed by
management. The Chairman of the Board shall be an ex-officio member of each
standing committee of the Board to which the Board of Directors has not
specifically designated him as a member.
Section 5. Chief Executive Officer. The Chief Executive
Officer shall, subject to the direction of the Board of Directors, have general
and active control of the affairs and business of the Corporation and general
supervision of its officers, officials, employees and agents. The Chief
Executive Officer shall preside at all meetings of the stockholders and shall
preside at all meetings of the Board of Directors and any committee thereof of
which he is a member, unless the Board of Directors or such committee shall have
chosen another chairman. The Chief Executive Officer shall see that all orders
and resolutions of the Board are carried into effect, and in addition, the Chief
Executive Officer shall have all the powers and perform all the duties generally
appertaining to the office of the chief executive officer of a corporation. The
Chief Executive Officer shall designate the person or persons who shall exercise
his powers and perform his duties in his absence or disability and the absence
or disability of the President.
Section 6. President. The President shall have such powers and
perform such duties as are prescribed by the Chief Executive Officer or the
Board of Directors, and in the absence or disability of the Chief Executive
Officer, the President shall have the powers and perform the duties of the Chief
Executive Officer, except to the extent the Board of Directors shall have
otherwise provided. In addition, the President shall have such powers and
perform such duties generally appertaining to the office of the president of a
corporation, except to the extent the Chief Executive Officer or the Board of
Directors shall have otherwise provided.
Section 7. Vice Chairmen of the Board. The Vice Chairmen of
the Board shall be members of the Board of Directors and shall perform such
duties and have such powers as may be prescribed by the Board of Directors, the
Chairman of the Board or these By-Laws.
Section 8. Senior Executive Vice Presidents. The Senior
Executive Vice Presidents of the Corporation shall perform such duties and have
such powers as may, from time to time, be assigned to them by these By-Laws, the
Board of Directors, the Chairman of the Board, the Chief Executive Officer or
the President.
Section 9. Executive Vice Presidents. The Executive Vice
Presidents of the Corporation shall perform such duties and have such powers as
may, from time to time, be assigned to them by these By-Laws, the Board of
Directors, the Chairman of the Board, the Chief Executive Officer, the President
or a Senior Executive Vice President.
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Section 10. First Vice Presidents. The First Vice Presidents
of the Corporation shall perform such duties and have such powers as may, from
time to time, be assigned to them by these By-Laws, the Board of Directors, the
Chairman of the Board, the Chief Executive Officer, the President, a Senior
Executive Vice President or an Executive Vice President.
Section 11. Vice Presidents. The Vice Presidents of the
Corporation shall perform such duties and have such powers as may, from time to
time, be assigned to them by these By-Laws, the Board of Directors, the Chairman
of the Board, the Chief Executive Officer, the President, a Senior Executive
Vice President, an Executive Vice President or a First Vice President.
Section 12. Secretary. The Secretary shall attend all meetings
of the Board of Directors and of the stockholders and record all votes and the
minutes of all proceedings in a book to be kept for that purpose, and shall
perform like duties for any committee appointed by the Board of Directors. The
Secretary shall keep in safe custody the seal of the Corporation and affix it to
any instrument when so authorized by the Board of Directors. The Secretary shall
give or cause to be given, notice of all meetings of stockholders and special
meetings of the Board of Directors and shall perform generally all the duties
usually appertaining to the office of secretary of a corporation and shall
perform such other duties and have such other powers as may be prescribed by the
Board of Directors or these By-Laws. The Board of Directors may give general
authority to any other officer to affix the seal of the Corporation and to
attest the affixing by his signature.
Section 13. Assistant Secretaries. The Assistant Secretaries
shall be empowered and authorized to perform all of the duties of the Secretary
in the absence or disability of the Secretary and shall perform such other
duties and have such other powers as may be prescribed by the Board of
Directors, the Secretary or these By-Laws.
Section 14. Chief Financial Officer. The Chief Financial
Officer shall have responsibility for the administration of the financial
affairs of the Corporation and shall exercise supervisory responsibility for the
performance of the duties of the Treasurer and the Controller. The Chief
Financial Officer shall render to the Board of Directors, at its regular
meetings, or when the Board of Directors so requires, an account of all of the
transactions effected by the Treasurer and Controller and of the financial
condition of the Corporation. The Chief Financial Officer shall generally
perform all the duties usually appertaining to the affairs of a chief financial
officer of a corporation and shall perform such other duties and have such other
powers as may be prescribed by the Board of Directors or these By-Laws.
Section 15. Treasurer. The Treasurer shall have the custody of
the corporate funds and securities and shall cause to be kept full and accurate
accounts of receipts and disbursements in books belonging to the Corporation and
shall deposit all monies and other valuable effects in the name and to the
credit of the Corporation in such depositories as may be designated by persons
authorized by the Board of Directors. The Treasurer shall disburse the
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funds of the Corporation as may be ordered by the Board of Directors, taking
proper vouchers for such disbursements, and shall render to the Chairman of the
Board, the President and the Board of Directors whenever they may require it, an
account of all of the transactions effected by the Treasurer and of the
financial condition of the Corporation. The Treasurer may be required to give a
bond for the faithful discharge of his or her duties. The Treasurer shall
generally perform all duties appertaining to the office of treasurer of a
corporation and shall perform such other duties and have such other powers as
may be prescribed by the Board of Directors or these By-Laws.
Section 16. Assistant Treasurers. The Assistant Treasurers
shall be empowered and authorized to perform all the duties of the Treasurer in
the absence or disability of the Treasurer and shall perform such other duties
and have such other powers as may be prescribed by the Board of Directors, the
Treasurer or these By-Laws.
Section 17. Controller. The Controller shall prepare and have
the care and custody of the books of account of the Corporation. The Controller
shall keep a full and accurate account of all monies, received and paid on
account of the Corporation, and shall render a statement of the Controller's
accounts whenever the Board of Directors shall require. The Controller shall
generally perform all the duties usually appertaining to the affairs of the
controller of a corporation and shall perform such other duties and have such
other powers as may be prescribed by the Board of Directors, the Chief Financial
Officer or these By-Laws. The Controller may be required to give a bond for the
faithful discharge of his or her duties.
Section 18. Assistant Controllers. The Assistant Controllers
shall in the absence or disability of the Controller perform the duties and
exercise the powers of the Controller and shall perform such other duties and
have such other powers as may be prescribed by the Board of Directors, the
Controller or these By-Laws.
Section 19. Additional Powers and Duties. In addition to the
foregoing especially enumerated duties and powers, the several officers of the
Corporation shall perform such other duties and exercise such further powers as
the Board of Directors may, from time to time, determine or as may be assigned
to them by any superior officer.
Section 20. Other Officers. The Board of Directors may
designate such other officers having such duties and powers as it may specify
from time to time.
ARTICLE VI
CAPITAL STOCK
Section 1. Form of Certificate. Every holder of stock in the
Corporation shall be entitled to have a certificate signed in the name of the
Corporation (i) by the Chairman of the Board, the Chief Executive Officer, the
President or any Vice President and (ii) by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary, certifying the number of
shares owned by such holder in the Corporation.
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Section 2. Signatures. Any signature required to be on a
certificate may be a facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
Section 3. Lost, Stolen or Destroyed Certificates. The Board
of Directors may direct a new certificate to be issued in place of any
certificate theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate, or his legal
representative, to advertise the same in such manner as the Board of Directors
shall require and/or to give the Corporation a bond in such sum as it may direct
as indemnity against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen or destroyed.
Section 4. Transfers. Stock of the Corporation shall be
transferable in the manner prescribed by law and in these By-Laws. Transfers of
stock shall be made on the books of the Corporation only by the holder of record
or by such person's attorney duly authorized upon surrender and cancellation of
certificates for a like number of shares properly endorsed and the payment of
all taxes due thereon.
Section 5. Record Date. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to express consent to
corporate action, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty (60) days nor less than ten (10) days before
the date of such meeting, nor more than sixty (60) days prior to any other
action. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
Section 6. Beneficial Owners. The Corporation shall be
entitled to recognize the exclusive right of the person registered on its books
as the owner of a share to receive dividends and to vote as such owner, and to
hold liable for calls and assessments a person registered on its books as the
owner of shares, and shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by law.
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Section 7. Dividends. Subject to the provisions of the
Certificate of Incorporation or applicable law, dividends upon the capital stock
of the Corporation, if any, may be declared by the Board of Directors at any
regular or special meeting, and may be paid in cash, in property, or in shares
of capital stock. Before payment of any dividend, there may be set aside out of
any funds of the Corporation available for dividends such sum or sums as the
Board of Directors from time to time, in its absolute discretion, deems proper
as a reserve or reserves to meet contingencies, or for equalizing dividends, or
for repairing or maintaining any property of the Corporation or for any proper
purpose, and the Board of Directors may modify or abolish any such reserve.
ARTICLE VII
INDEMNIFICATION
Section 1. Indemnification Respecting Third Party Claims. (a)
The Corporation, to the full extent and in a manner permitted by Delaware law as
in effect from time to time, shall indemnify, in accordance with the provisions
of this Article, any person (including the heirs, executors, administrators or
estate of any such person) who was or is made a party to or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding
(including any appeal thereof), whether civil, criminal, administrative,
regulatory or investigative in nature (other than an action by or in the right
of the Corporation), by reason of the fact that such person is or was a director
or officer of the Corporation, or, at a time when he was a director or officer
of the Corporation, is or was either serving at the request of the Corporation
as a director, officer, partner, trustee, fiduciary, employee or agent (a
"Subsidiary Officer") of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise (an "Associated Entity"), against
expenses (including attorneys' fees and disbursements), costs, judgments, fines,
penalties and amounts paid in settlement actually and reasonably incurred by
such person in connection with such action, suit or proceeding if such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful; provided, however, that (i) the Corporation shall not be obligated
to indemnify a person who is or was a director or officer of the Corporation
against expenses incurred in connection with an action, suit, proceeding or
investigation to which such person is threatened to be made a party but does not
become a party unless the incurring of such expenses was authorized by or under
the authority of the Board of Directors and (ii) the Corporation shall not be
obligated to indemnify against any amount paid in settlement unless the Board of
Directors has consented to such settlement. The termination of any action, suit
or proceeding by judgment, order, settlement or conviction or upon a plea of
nolo contendere or its equivalent shall not, of itself, create a presumption
that the person did not act in good faith and in a manner which such person
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, that such
person had reasonable cause to believe that his conduct was unlawful.
Notwithstanding anything to the contrary in the foregoing provisions of this
Section 1(a), a person shall not be entitled, as a matter of right, to
indemnification pursuant to this Section 1(a) against costs or expenses
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incurred in connection with any action, suit or proceeding commenced by such
person against the Corporation or any Associated Entity or any person who is or
was a director, officer, fiduciary, employee or agent of the Corporation or a
Subsidiary Officer of any Associated Entity, but such indemnification may be
provided by the Corporation in a specific case as permitted by Section 6 below
in this Article.
(b) The Corporation may indemnify any employee or agent of the
Corporation in the manner and to the same extent as it is required to indemnify
any director or officer under Section 1(a) above in this Article.
Section 2. Indemnification Respecting Derivative Claims. (a)
The Corporation, to the full extent and in a manner permitted by Delaware law as
in effect from time to time, shall indemnify, in accordance with the provisions
of this Article, any person (including the heirs, executors, administrators or
estate of any such person) who was or is made a party to or is threatened to be
made a party to any threatened, pending or completed action or suit (including
any appeal thereof) brought in the right of the Corporation to procure a
judgment in its favor by reason of the fact that such person is or was a
director or officer of the Corporation, or, at a time when he was a director or
officer of the Corporation, is or was serving at the request of the Corporation
as a Subsidiary Officer of an Associated Entity against expenses (including
attorneys' fees and disbursements) and costs actually and reasonably incurred by
such person in connection with the defense or settlement of such action or suit
if such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the Corporation,
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
Corporation unless, and only to the extent that the Board of Directors or a
court having jurisdiction with respect shall determine that, despite the
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses and
costs as the Board of Directors or such court shall deem proper; provided,
however, that the Corporation shall not be obligated to indemnify a director or
officer of the Corporation against expenses incurred in connection with an
action or suit to which such person is threatened to be made a party but does
not become a party unless the incurrence of such expenses was authorized by or
under the authority of the Board of Directors. Notwithstanding anything to the
contrary in the foregoing provisions of this Section 2(a), a person shall not be
entitled, as a matter of right, to indemnification pursuant to this Section 2(a)
against costs and expenses incurred in connection with any action or suit in the
right of the Corporation commenced by such person, but such indemnification may
be provided by the Corporation in any specific case as permitted by Section 6
below in this Article.
(b) The Corporation may indemnify any employee or agent of the
Corporation in the manner and to the same extent as it is required to indemnify
any director or officer under Section 2(a) above in this Article.
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Section 3. Determination of Entitlement to Indemnification.
Any indemnification to be provided under any of Section 1(a), 1(b), 2(a) or 2(b)
above in this Article (unless ordered by a court of competent jurisdiction)
shall be made by the Corporation only as authorized in the specific case upon a
determination that indemnification is proper under the circumstances because
such person had met the applicable standard of conduct set forth in such section
of this Article. Such determination shall be made (i) by the Board of Directors
by a majority vote of a quorum consisting of directors who were not parties to
the action, suit or proceeding in respect of which indemnification is sought or
by majority vote of the members of a committee of the Board of Directors
composed of at least two members each of whom is not a party to such action,
suit or proceeding, or (ii) if such a quorum is not obtainable and/or such a
committee is not established or available, or, even if such a quorum is
obtainable or committee available, if a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (iii) by action
of the stockholders taken as permitted by law. In the event a request for
indemnification is made by any person referred to in paragraph 1(a) or 2(a)
above in this Article, the Corporation shall use its reasonable best efforts to
cause such determination to be made not later than sixty (60) days after such
request is made.
Section 4. Right to Indemnification upon Successful Defense
and for Service as a Witness. (a) Notwithstanding the other provisions of this
Article, to the extent that a director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in any of Section 1(a), 1(b), 2(a) or
2(b) above in this Article, or in defense of any claim, issue or matter therein,
such person shall be indemnified against expenses (including attorneys' fees and
disbursements) and costs actually and reasonably incurred by such person in
connection therewith.
(b) To the extent any person who is or was a director or
officer of the Corporation in office on the effective date of this Article or
thereafter has served or prepared to serve as a witness in, but is not a party
to, any action, suit or proceeding (whether civil, criminal, administrative,
regulatory or investigative in nature), including any investigation by any
legislative body or any securities or commodities exchange of which the
Corporation or an Associated Entity is a member or to the jurisdiction of which
it is subject, by reason of his or her services as a director or officer of the
Corporation or his or her service as a Subsidiary Officer of an Associated
Entity at a time when he or she was a director or officer of the Corporation
(assuming such person is or was, as evidenced by a writing to such effect,
serving at the request of, or to represent the interests of, the Corporation as
a Subsidiary Officer of such Associated Entity), the Corporation may indemnify
such person against expenses (including attorneys' fees and disbursements) and
out-of-pocket costs actually and reasonably incurred by such person in
connection therewith and shall use its reasonable best efforts to provide such
indemnity within sixty (60) days after receipt by the Corporation from such
person of a statement requesting such indemnification, averring such service and
reasonably evidencing such expenses and costs; it being understood, however,
that the Corporation shall have no obligation under this Article to compensate
such person for such person's time or efforts so expended. The Corporation shall
indemnify any employee or agent of the
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Corporation in the manner and to the same extent as it is required to indemnify
any director or officer of the Corporation pursuant to the foregoing sentence of
this Section 4(b).
Section 5. Advance of Expenses. (a) Expenses and costs
incurred by any person referred to in Section 1(a) or 2(a) above in this Article
in defending a civil, criminal, administrative, regulatory or investigative
action, suit or proceeding shall be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking in writing by or on behalf of such person to repay such amount if it
shall ultimately be determined that such person is not entitled to be
indemnified in respect of such costs and expenses by the Corporation as
authorized by this Article.
(b) Expenses and costs incurred by any person referred to in
Section 1(b) or 2(b) above in this Article in defending a civil, criminal,
administrative, regulatory or investigative action, suit or proceeding may be
paid by the Corporation in advance of the final disposition of such action, suit
or proceeding as authorized by or under the authority of the Board of Directors
upon receipt of an undertaking in writing by or on behalf of such person to
repay such amount if it shall ultimately be determined that such person is not
entitled to be indemnified by the Corporation in respect of such costs and
expenses as authorized by this Article and subject to any limitations or
qualifications provided by or under the authority of the Board of Directors.
Section 6. Indemnification Not Exclusive. The provision of
indemnification to or the advancement of expenses and costs to any person under
this Article, or the entitlement of any person to indemnification or advancement
of expenses and costs under this Article, shall not limit or restrict in any way
the power of the Corporation to indemnify or advance expenses and costs to such
person in any other way permitted by law or be deemed exclusive of, or
invalidate, any right to which any person seeking indemnification or advancement
of expenses and costs may be entitled under any law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in such
person's capacity as an officer, director, employee or agent of the Corporation
and as to action in any other capacity.
Section 7. Corporate Obligations; Reliance. The provisions of
Sections 1 through 6 above of this Article shall be deemed to create a binding
obligation on the part of the Corporation to the officers and directors of the
Corporation on the effective date of this Article and persons thereafter elected
as officers and directors (including persons who served as officers and
directors on or after such date but who are no longer officers and directors at
the time they present claims for advancement of expenses or indemnity), and such
persons in acting in their capacities as officers or directors of the
Corporation or Subsidiary Officers of any Associated Entity shall be entitled to
rely on such provisions of this Article, without giving notice thereof to the
Corporation.
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Section 8. Successors. The right of any person who is or was a
director, officer, employee or agent of the Corporation to indemnification or
advancement of expenses under Sections 1 through 7 above in this Article shall
continue after he shall have ceased to be a director, officer, employee or agent
and shall inure to the benefit of the heirs, distributees, executors,
administrators and other legal representatives of such person.
Section 9. Insurance. The Corporation may purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of, or
to represent the interests of, the Corporation as a Subsidiary Officer of any
Associated Entity, against any liability asserted against such person and
incurred by such person in any capacity, or arising out of such person's status
as such, whether or not the Corporation would have the power to indemnify such
person against such liability under the provisions of this Article or applicable
law.
Section 10. Definitions of Certain Terms. (a) For purposes of
this Article, references to the "Corporation" shall include, in addition to the
resulting corporation, any constituent corporation (including any constituent of
a constituent) absorbed into the Corporation after the effective date of this
Article in a consolidation or merger if such corporation would have been
permitted (if its corporate existence had continued) under applicable law to
indemnify its directors, officers, employees or agents, so that any person who
is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request, or to represent the interests
of, such constituent corporation as a director, officer, employee or agent of
any Associated Entity shall stand in the same position under the provisions of
Sections 1 through 9 above in this Article with respect to the resulting or
surviving corporation as such person would have with respect to such constituent
corporation if its separate existence had continued; provided, however, that, no
such person shall be entitled to indemnity from the Corporation in respect of
his service to such constituent corporation, or at the request or to represent
the interests of such constituent corporation, pursuant to Section 1(a) or 2(a)
above but may be indemnified by the Corporation in respect thereof as permitted
by Section 1(b) or 2(b) above.
(b) For purposes of this Article, references to "fines" shall
include any excise taxes assessed on a person with respect to any employee
benefit plan; references to "serving at the request of the Corporation" shall
include any service as a director, officer, trustee, fiduciary, employee or
agent of the Corporation or any Associated Entity which service imposes duties
on, or involves services by, such director, officer, trustee, fiduciary,
employee or agent with respect to any employee benefit plan, its participants,
or beneficiaries; and a person who acted in good faith and in a manner such
person reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Corporation" as referred to in
this Article.
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ARTICLE VIII
GENERAL
Section 1. Fiscal Year. The fiscal year of the Corporation
shall be such date as shall be fixed by resolution of the Board of Directors
from time to time.
Section 2. Corporate Seal. The corporate seal shall have
inscribed thereon the name of the Corporation, the year of its organization and
the words "Corporate Seal, Delaware" The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise upon any
paper, certificate or document.
Section 3. Disbursements. All checks, drafts or demands for
money out of the funds of the Corporation and all notes and other evidences of
indebtedness of the Corporation shall be signed by such officer or officers or
such other person or persons as the Board of Directors may from time to time
designate.
Section 4. Amendments. These By-Laws may be altered, amended
or repealed, in whole or in part, or new By-Laws may be adopted by the
stockholders or by the Board of Directors at any meeting thereof; provided,
however, that notice of such alteration, amendment, repeal or adoption of new
By-Laws shall be contained in the notice of such meeting of stockholders or in a
notice of such meeting of the Board of Directors, as the case may be. Unless a
higher percentage is required by the Certificate of Incorporation as to any
matter which is the subject of these By-Laws, all such amendments must be
approved by either the holders of at least a majority of the outstanding capital
stock entitled to vote thereon or by a majority of the entire Board of Directors
then in office.
Section 5. Definitions. As used in this Article and in these
By-Laws generally, the term "entire Board of Directors" means the total number
of directors which the Corporation would have if there were no vacancies.
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Exhibit 10.28
LEHMAN BROTHERS HOLDINGS INC.
MERCHANT BANKING LONG-TERM
INCENTIVE PLAN
SECTION 1 - DEFINITIONS
For purposes of the Plan, the capitalized terms shall have the
meanings ascribed to them in Exhibit A hereof.
SECTION 2 - PURPOSE
The purpose of the Plan is to strengthen and promote the
interests of the Company by providing Eligible Employees with additional
incentives, under the terms and conditions below, to put forth maximum efforts
for the success of the business of the MBG and to continue in the employ of the
Company, thereby enhancing the Company's value for the benefit of its
stockholders. The purpose of the Plan is to be achieved through the grant of
various types of unfunded bonus awards. This Plan is a bonus plan not subject to
the provisions of the Employee Retirement Income Security Act of 1974, as
amended.
SECTION 3 - ADMINISTRATION
(a) The Plan shall be administered by the Committee, which
shall have the power to select those Eligible Employees who shall receive
Awards, and to determine the terms of such Awards.
(b) Subject to the provisions of the Plan, the Committee shall
be authorized to interpret the Plan, to establish, amend, and rescind any rules
and regulations relating to the Plan, to determine the terms and provisions of
any agreements entered into hereunder, and to make all other determinations
necessary or advisable for the administration of the Plan. The Committee may
correct any defect, supply any omission or reconcile any inconsistency in the
Plan or in any Award in the manner and to the extent it shall deem desirable to
carry the Plan or any such Award into effect. The determinations of the
Committee in the administration of the Plan, as described herein, shall be final
and conclusive.
(c) The validity, construction and effect of the Plan and any
rules and regulations relating to the Plan shall be determined in accordance
with the laws of the State of Delaware.
(d) The books and records to be maintained for the Plan's
purpose shall be maintained by the officers and employees of the Company at its
expense and subject to the supervision and control of the Committee. All
expenses of administering the Plan shall be paid by the Company.
<PAGE> 2
2
(e) No member of the Committee or the Participation Committee
and no director, officer or employee of the Company shall be liable to any
person for any action taken or omitted in connection with the administration of
this Plan unless attributable to his or her own fraud or willful misconduct; nor
shall the Company be liable to any person for any such action unless
attributable to fraud or willful misconduct on the part of a director, officer
or employee of the Company.
SECTION 4 - DETERMINATION OF AWARDS
(a) Each Award shall entitle a Participant, subject to the
terms and conditions of the Award, to an incentive payment based on the
performance of Qualifying Investments made during the calendar year for which
the Award is made. The aggregate amount of such Qualifying Investments
attributable to Awards for that year, as determined in the sole discretion of
the Committee, shall comprise the Aggregate Award Fund for that year.
(b) After the end of each calendar year during the existence
of this Plan, the Committee shall, in its sole discretion:
(i) identify from among the Eligible Employees those
individuals who shall participate in the Plan for such calendar year;
(ii) subject to paragraphs (c) and (d) below, determine the
size of the Aggregate Award Fund for such calendar year and allocate it among
all Participants for such calendar year by making Awards to such Participants;
(iii) determine the portion of each Participant's bonus for
such calendar year that will be required to be deferred and allocated for
participation in the Plan (the Deferred Compensation portion of the Award); and
(iv) designate, for each Participant, the Leveraged Amount of
such Participant's Award.
(c) In the event that the aggregate amount of Awards in any
calendar year would exceed the Aggregate Award Fund for such year, Participants
who are members of the MBG shall first be granted Awards until their aggregate
Deferred Compensation and Leveraged Amounts have been satisfied in full, and the
remaining portion of the Aggregate Award Fund, if any, shall be allocated pro
rata to the other Participants on the basis of their respective Awards. In the
event that the aggregate amount of Awards for Participants who are members of
the MBG for any calendar year would exceed the Aggregate Award Fund for such
year, Awards shall be allocated pro rata to such Participants on the basis of
their respective Awards, up to the amount of such Aggregate Award Fund.
<PAGE> 3
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(d) At any time (and from time to time), the Committee may, in
its sole discretion (i) reissue any portion of an Award that has been forfeited
or otherwise negatively adjusted pursuant to Section 5, and (ii) grant
additional Awards to Eligible Employees in respect of any calendar year. In each
case, the Committee shall determine, in its sole discretion (A) the purchase
price of the Award (which may reflect any appreciation in the value of the
Qualifying Investments represented by the Award as determined by the Committee),
(B) the Deferred Compensation portion of the Award and the manner in which it is
to be funded and (C) the Leveraged Amount of the Award.
SECTION 5 - VESTING OF AWARDS
(a) Each Participant's Award shall, subject to the remainder
of this Section 5, vest in accordance with a vesting schedule prescribed by the
Committee at the time the Award is granted. Unless otherwise prescribed by the
Committee, upon a Participant's termination of employment with the Company prior
to any vesting date, the portion of his or her Award that is then unvested shall
be forfeited or otherwise negatively adjusted as set forth in such Participant's
Award Agreement. The portion of a Participant's Award that is forfeited or
otherwise negatively adjusted pursuant to this Section 5 shall be deemed to
remain outstanding, but solely for the Company's benefit.
(b) The Committee may at any time and from time to time
accelerate the vesting of a Participant's Award.
(c) Upon an actual or potential Change in Control, the CMC may
determine that any or all Participants' Awards shall automatically become vested
either immediately or upon the occurrence of such events as the CMC shall
determine; provided that this Section 5(c) shall not have the effect of
restoring to a Participant prior forfeitures or negative adjustments made
pursuant to Section 5(a).
SECTION 6 - PAYMENT WITH RESPECT TO AWARDS
(a) The Committee shall cause an account to be kept in the
name of each Participant. As amounts are realized with respect to a particular
calendar year's Qualifying Investments, the Committee shall determine the
Participant's share of such amounts, based on the Participant's relative level
of deemed participation in such investments (determined by comparing the amount
of the Participant's Award (after giving effect to any forfeitures of or other
negative adjustments to such Participant's Award pursuant to Section 5), to the
amount of all Awards for that calendar year, including any Awards (or portions
thereof) deemed to be for the benefit of the Company under Section 5(a)).
(b) The Participant's share of all amounts realized with
respect to the Qualifying Investments covered by that
<PAGE> 4
4
calendar year's Award shall first be credited and paid to the Company until the
Company has been credited with an amount equal, in the aggregate, to the
Leveraged Amount of such Award plus the Company Return thereon and, in the case
of a Participant employed in the MBG at any time during the calendar year for
which the Award was made (an "MBG Participant"), with an additional amount
equal, in the aggregate, to the Leveraged Amounts of the previous calendar
year's Award (if any, and only if such Participant was employed in the MBG at
any time during the previous calendar year), and the next succeeding calendar
year's Award (if any), in each case plus the Company Return thereon. With
respect to the Leveraged Amount of any particular year's Award, amounts shall
first be credited to the Company Return and then to the Leveraged Amount.
Thereafter, all amounts shall be credited to the Participant's account for the
calendar year in which such realized Qualifying Investments were made; provided,
however, that if the Participant's Award for the next succeeding calendar year
has not been granted as of any date on which any amounts are to be credited to
the Participant's account pursuant to this Section 6(b), the Company may, in its
discretion, hold back an amount (the "Holdback Amount") equal to 20% of the
total amount that would otherwise be credited to the Participant's account on
such date in the absence of this proviso. Any such Holdback Amount(s) (together
with any earnings thereon) shall be credited against the Leveraged Amount of the
Participant's Award for the next succeeding calendar year at the time such
award, if any, is granted. If the Participant is not granted an Award for such
calendar year, or if the aggregate Holdback Amount(s) otherwise exceed the
Participant's Leveraged Amount for such calendar year, any such excess Holdback
Amount (together with any earnings thereon) shall be credited to the
Participant's account. Any Holdback Amount(s) shall be credited with interest at
a rate equal to the Cost of Funds Rate plus 0.50%.
(c) At any time (and from time to time) after the
Participant's account with respect to an Award has been credited with an amount
pursuant to Section 6(b) above, the Committee may direct that the Participant
shall receive, in cash, all or a portion of his or her account; provided,
however, that any such payment may be made in kind (whether in the form of
marketable securities or otherwise) if and to the extent set forth in the
Participant's Award Agreement.
(d) Each Participant shall have the right to designate
beneficiaries who are to succeed to his or her right to receive future payments
hereunder in the event of his or her death. In case of a failure of designation
or the death of a designated beneficiary without a designated successor,
distribution shall be made to the Participant's estate. No designation of
beneficiaries shall be valid unless such designation is made in writing, signed
by the Participant, dated, and filed with the Committee. Beneficiaries may be
changed without the consent of any prior beneficiaries.
<PAGE> 5
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SECTION 7 - AWARD AGREEMENTS
Each Award under the Plan shall be evidenced by an Award
Agreement setting forth the terms and conditions, not inconsistent with the
Plan's provisions, as determined by the Committee, which shall apply to such
Award.
SECTION 8 - WITHHOLDING
The Company shall have the right to deduct from all amounts
payable to any Participant any taxes required by law to be withheld therefrom.
SECTION 9 - NON-TRANSFERABILITY
No Award or account balance shall be assignable or
transferable, and no right or interest of any Participant in any Award or
account thereunder shall be subject to any lien, obligation or liability of the
Participant, except by will, the laws of descent and distribution, or as
otherwise set forth in the Award Agreement.
SECTION 10 - NO RIGHT TO EMPLOYMENT OR
CONTINUED PARTICIPATION IN PLAN
No person shall have any claim or right to the grant of an
Award, and the grant of an Award shall not be construed as giving a Participant
the right to be retained in the employ of the Company or to be eligible for any
subsequent Awards. Further, the Company expressly reserves the right at any time
to terminate a Participant free from any liability or any claim under the Plan,
except as provided herein or in any Award Agreement entered into hereunder.
SECTION 11 - AMENDMENT
The Board may amend, suspend or terminate the Plan or any
portion hereof at any time, except that no such amendment, suspension or
termination shall reduce the amounts otherwise payable to a Participant under
the terms of an Award Agreement entered into hereunder prior to such amendment,
suspension or termination.
SECTION 12 - UNFUNDED STATUS OF PLAN
The Plan is intended to constitute an "unfunded" incentive
compensation plan. With respect to any payments not yet made to a Participant by
the Company, nothing herein contained shall give any Participant any rights that
are greater than those of a general creditor of the Company. In its sole
discretion, the Committee may authorize the creation of trusts or other
arrangements to meet the obligations created under the Plan to distribute
amounts under the Plan; provided, however, that the
<PAGE> 6
6
existence of such trusts or other arrangements shall not alter the unfunded
status of the Plan.
SECTION 13 - WAIVER
No failure on the part of a person to exercise, and no delay
in exercising, any right or power under this Plan shall operate as a waiver of
any such right or power; nor shall any single or partial exercise preclude any
other or further exercise of a right or power or the exercise of any other right
or power.
SECTION 14 - EFFECTIVE DATE
This Plan shall be effective as of June 27, 1996 and shall
continue until terminated by the Board.
<PAGE> 7
EXHIBIT A
(a) "Aggregate Award Fund" shall mean, for each calendar year,
the total dollar amount available for allocation to Participants under the Plan
for such year.
(b) "Award" shall mean an award granted pursuant to the Plan.
(c) "Award Agreement" shall mean the agreement evidencing any
Award under the Plan.
(d) "Board" shall mean the Board of Directors of the Company;
provided, however, that any action taken by a duly authorized committee of the
Board within the scope of authority delegated to such committee by the Board
shall be considered an action of the Board for this Plan's purposes.
(e) "Change in Control" shall mean the occurrence of any of
the following:
(i) The commencement (within the meaning of Rule 14d-2
under the Securities Exchange Act of 1934 (the "Exchange Act")) of a
tender offer for more than 20% of the Company's outstanding shares of
capital stock having ordinary voting power in the election of directors
(the "Voting Securities").
(ii) An acquisition (other than directly from the Company)
of any Voting Securities by any "Person" (as the term person is used
for purposes of Section 13(d) or 14(d) of the Exchange Act) immediately
after which such Person has "Beneficial Ownership" (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the
combined voting power of the Company's then outstanding Voting
Securities; provided, however, in determining whether a Change in
Control has occurred, Voting Securities which are acquired in a
"Non-Control Acquisition" (as hereinafter defined) shall not constitute
an acquisition which would cause a Change in Control. A "Non-Control
Acquisition" shall mean an acquisition by:
(A) an employee benefit plan (or a trust forming a
part thereof or a trustee thereof acting solely in its
capacity as trustee) maintained by:
(I) the Company; or
(II) any corporation or other Person of which a
majority of its voting power or its voting equity
securities or equity interest is owned, directly or
indirectly, by the Company (for purposes of this
definition, a "Subsidiary");
<PAGE> 8
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(B) the Company or its Subsidiaries; or
(C) any Person who files in connection with such
acquisition a Schedule 13D which expressly disclaims any
intention to seek control of the Company and does not
expressly reserve the right to seek such control; provided,
however, that any amendment to such statement of intent which
either indicates an intention or reserves the right to seek
control shall be deemed to be an "acquisition" of the
securities of the Company reported in such filing as
beneficially owned by such Person for purposes of this
paragraph (ii).
(iii) The individuals who, as of the effective date of the
1994 initial public trading in Company shares, are members of the Board
(the "Incumbent Board"), ceasing for any reason to constitute at least
a majority of the members of the Board; provided, however, that if the
election, or nomination for election by the Company's common
stockholders, of any new director was approved by a vote of at least
two-thirds of the Incumbent Board, such new director shall, for
purposes of this Plan, be considered as a member of the Incumbent
Board; provided further, however, that no individual shall be
considered a member of the Incumbent Board if such individual initially
assumed office as a result of either an actual or threatened "Election
Contest" (as described in Rule 14a-11 promulgated under the Exchange
Act) or other actual or threatened solicitation of proxies or consents
by or on behalf of a Person other than the Board (a "Proxy Contest")
including by reason of any agreement intended to avoid or settle any
Election Contest or Proxy Contest; or
(iv) Approval by stockholders of the Company of:
(A) A merger, consolidation or reorganization
involving the Company, unless such merger, consolidation or
reorganization is a "Non-Control Transaction"; i.e., meets
each of the requirements described in (I), (II), and (III)
below:
(I) the stockholders of the Company,
immediately before such merger, consolidation or
reorganization, own, directly or indirectly
immediately following such merger, consolidation or
reorganization, at least 80% of the combined voting
power of the outstanding voting securities of the
corporation resulting from such merger or
consolidation or reorganization (the "Surviving
Corporation") in substantially the same proportion as
their ownership of the Voting Securities immediately
before such merger, consolidation or reorganization;
<PAGE> 9
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(II) the individuals who were members of the
Incumbent Board immediately prior to the execution of
the agreement providing for such merger,
consolidation or reorganization constitute at least
two-thirds of the members of the board of directors
of the Surviving Corporation immediately following
the consummation of such merger, consolidation or
reorganization; and
(III) no Person other than the Company, any
Subsidiary, any employee benefit plan (or any trust
forming a part thereof or a trustee thereof acting
solely in its capacity as trustee) maintained by the
Company, the Surviving Corporation, or any
subsidiary, or any Person who, immediately prior to
such merger, consolidation or reorganization had
Beneficial Ownership of 20% or more of the then
outstanding Voting Securities, has Beneficial
Ownership of 20% or more of the combined voting power
of the Surviving Corporation's then outstanding
voting securities immediately following the
consummation of such merger, consolidation or
reorganization.
(B) A complete liquidation or dissolution of the
Company; or
(C) An agreement for the sale or other disposition of
all or substantially all of the assets of the Company to any
Person (other than a transfer to a Subsidiary).
Notwithstanding the foregoing, a Change in Control shall not
be deemed to occur solely because any Person (the "Subject Person") acquired
Beneficial Ownership of more than the permitted amount of the outstanding Voting
Securities as a result of the acquisition of Voting Securities by the Company
which, by reducing the number of Voting Securities outstanding, increases the
proportional number of shares Beneficially Owned by the Subject Persons,
provided that if a Change in Control would occur (but for the operation of this
sentence) as a result of the acquisition of Voting Securities by the Company,
and after such Beneficial Owner of any additional Voting Securities which
increases the percentage of the then outstanding Voting Securities Beneficially
Owned by the Subject Person, then a Change in Control shall occur.
(f) "CMC" shall mean the Company's Corporate Management
Committee, which is comprised of executive officers of the Company and includes
the Chairman and Chief Executive Officer, the President, the Chief
Administrative Officer, the Chief Legal Officer and the Chief Financial Officer.
<PAGE> 10
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(g) "Committee" shall mean the Compensation Committee of the
Board, or one or more officers of the Company or its subsidiaries designated by
the Compensation Committee to which it has delegated such of its rights and
responsibilities hereunder as it shall determine in its sole discretion.
(h) "Company" shall mean Lehman Brothers Holdings Inc. and,
except as otherwise specified in this Plan in a particular context, any
successor thereto, whether by merger, consolidation, purchase of substantially
all its assets or otherwise.
(i) "Company Return" shall mean a cumulative (but not
compounded) annual return to the Company with respect to the Leveraged Amount of
any Award, at a rate of return on such Leveraged Amount equal to the Cost of
Funds Rate plus 0.50% per annum.
(j) "Cost of Funds Rate" shall mean a cumulative (but not
compounded) annual return at a daily rate equal to the daily rate posted by the
Company to all of its subsidiaries for their borrowings.
(k) "Eligible Employee" shall mean any Managing Director,
Senior Vice President and Vice President of the MBG, and any key employee of the
Company and its subsidiaries.
(l) "Leveraged Amount" shall mean that portion of an Award
determined by the Committee in its discretion to be attributable to funds deemed
to be advanced by the Company in connection with the Award, and with respect to
which the Company is entitled to repayment of such funds plus the Company Return
thereon.
(m) "MBG" shall mean the Company's Merchant Banking Group.
(n) "Participant" shall mean an Eligible Employee who is
selected by the Committee to receive an Award under the Plan.
(o) "Participation Committee" shall mean the committee
comprised of certain Participants designated by the Company to approve
investments proposed by the Company for inclusion as Qualifying Investments.
(p) "Plan" shall mean the Lehman Brothers Holdings Inc.
Merchant Banking Long-Term Incentive Plan.
(q) "Qualifying Investments" shall mean each investment made
by the Company or any of its affiliates that is proposed by the Company to be
included for purposes of determining incentive payments in respect of Awards
granted for a particular calendar year and that prior to, or within a reasonable
period of time after, the making of such investment has been approved for
inclusion by the Participation Committee.
<PAGE> 11
1996 TRUST UNDER LEHMAN BROTHERS HOLDINGS INC.
MERCHANT BANKING LONG-TERM INCENTIVE PLAN
This Agreement made this 20th day of December, 1996, by and
between Lehman Brothers Holdings Inc. (the "Company") and The Northern Trust
Company (the "Trustee");
WHEREAS, Company and certain of its subsidiaries have adopted
a nonqualified deferred compensation plan, the Lehman Brothers Holdings Inc.
Merchant Banking Long-Term Incentive Plan (the "Plan");
WHEREAS, Company has incurred or expects to incur liability
under the terms of the Plan with respect to the individuals participating in the
Plan (the "Participants");
WHEREAS, Company wishes to establish a trust (the "Trust") and
to contribute to the Trust assets that shall be held therein, subject to the
claims of Company's (and, to the extent the Plan benefits employees of a
subsidiary of Company, such subsidiary's) creditors in the event of insolvency,
as herein defined, until paid to Plan Participants and their beneficiaries in
such manner and at such times as specified in the Plan;
WHEREAS, it is the intention of the parties that this Trust
shall constitute an unfunded arrangement and shall not affect the status of the
Plan as an unfunded plan maintained for the purpose of providing deferred
compensation for a select group of management or highly compensated employees
for purposes of Title I of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), if applicable;
WHEREAS, it is the intention of Company to make contributions
and advances to the Trust to provide itself with a source of funds to assist it
in the meeting of its liabilities under the Plan;
WHEREAS, it is the intention of Company to utilize the Trust
to hold proprietary co-investments with Company, through the medium of a
partnership, limited liability company or other investment vehicle, and to
restrict the Trust's investments to such types of investments;
WHEREAS, analysis of such proprietary investments requires
specialized knowledge; and
WHEREAS, Company has designated certain individuals possessing
such special knowledge to serve as members of the Lehman Brothers Holdings Inc.
Merchant Banking Long-Term Incentive Plan Participation Committee (the
"Participation
<PAGE> 12
2
Committee"), to authorize Trustee to invest in investments proposed by Company
as Qualifying Investments;
NOW, THEREFORE, the parties do hereby establish the Trust and
agree that the Trust shall be comprised, held and disposed of as follows:
SECTION 1. ESTABLISHMENT OF TRUST.
(a) Company hereby deposits with Trustee in trust the cash and
other property set forth in Schedule 1 hereto, which shall become the principal
of the Trust to be held, administered and disposed of by Trustee as provided in
this Trust Agreement.
(b) The Trust hereby established shall be irrevocable by
Company, unless and until the Plan is determined to be "funded" under ERISA, or
maintenance of the Trust has a material adverse effect on Company as a result of
the Trust's status for tax or accounting purposes or otherwise. If such a
determination is made, or maintenance of the Trust has such an effect, then the
Trust shall be revocable. If the Trust is revoked, then Trustee shall be
required to return the Trust's assets to Company.
(c) The Trust is intended to be a grantor trust, of which
Company is the grantor, within the meaning of subpart E, part I, subchapter J,
chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and
shall be construed accordingly.
(d) The principal of the Trust, and any earnings thereon,
shall be held separate and apart from other funds of Company and shall be used
exclusively for the uses and purposes of Plan Participants and general creditors
as herein set forth. Plan Participants and their beneficiaries shall have no
preferred claim on, or any beneficial ownership interest in, any assets of the
Trust. Any rights created under the Plan and this Trust Agreement shall be mere
unsecured contractual rights of Plan Participants and their beneficiaries
against Company. Any assets held by the Trust will be subject to the claims of
Company's (and, to the extent the Plan benefits employees of a subsidiary of
Company, such subsidiary's) general creditors under federal and state law in the
event of insolvency, as defined in Section 3(a) herein.
(e) Company, in its sole discretion, may at any time, or from
time to time, subject to the approval of the Participation Committee, make
additional deposits of cash or other property in trust with Trustee to augment
the principal to be held, administered and disposed of by Trustee as provided in
this Trust Agreement. None of Trustee, the Participation Committee, or any Plan
Participant or beneficiary shall have any right to compel such additional
deposits.
<PAGE> 13
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(f) Company, in its sole discretion, may at any time, or from
time to time, subject to the approval of the Participation Committee, make
advances of cash or other property to the Trust, to be held in trust with
Trustee, and administered and disposed of by Trustee as provided in this Trust
Agreement, which advances may be represented by one or more notes issued by the
Trust to Company. Such advances shall be made at an interest rate (cumulative,
but not compounded) equal to the daily rate posted by Company to all of its
subsidiaries for their borrowings plus 0.50% per annum. None of Trustee, the
Participation Committee, any Plan Participant or beneficiary shall have any
right to compel such advances. Company may reduce the amount payable in respect
of any such advance (and the related note or notes, if any) at any time or from
time to time and shall notify Trustee of any such reduction.
SECTION 2. PAYMENTS TO PLAN PARTICIPANTS AND THEIR
BENEFICIARIES.
(a) Company shall deliver to Trustee, from time to time, a
schedule (the "Payment Schedule") that indicates (i) the amounts then payable in
respect of each Participant (and his or her beneficiaries), (ii) the form in
which such amounts are to be paid (as provided for or available under the Plan),
(iii) the amount of any federal, state, local or foreign taxes that may be
required to be withheld with respect to such payments, and (iv) the time of
commencement for payment of such amounts. On behalf of Trustee, Company shall,
out of the assets of the Trust, (x) make payments to the Plan Participants and
their beneficiaries and (y) pay amounts withheld to the appropriate taxing
authorities, each in accordance with such Payment Schedule, as amended from time
to time. Company shall also be responsible for all withholding related filings
and reports.
(b) The entitlement of a Plan Participant or his or her
beneficiaries to benefits under the Plan shall be determined by Company or such
party as it shall designate under the Plan, and any claim for such benefits
shall be considered and reviewed under the procedures set out in the Plan.
(c) Trustee shall notify Company when principal and earnings
are not sufficient to make a payment then due under the Payment Schedule. If the
principal of the Trust, and any earnings thereon, are not sufficient to make
payments of benefits in accordance with the terms of the Plan, Company shall
make the balance of each such payment as it falls due.
(d) Notwithstanding anything elsewhere in the Plan or the
Trust, no payment shall be made to a Participant or beneficiary while any
advance to the Trust from Company with respect to such Participant's Plan
account remains outstanding for 1996, or, if the Participant is employed in
Company's merchant banking group at any time during calendar year 1996, while an
advance (if any) from Company to any trust established
<PAGE> 14
4
under the Plan for 1997 with respect to such Participant's account remains
outstanding. Company shall be responsible for the maintenance of Participant
Plan accounts, for determining whether any of the conditions described in this
Section 2(d) exist and for making any modifications to the Payment Schedule that
are required to satisfy the provisions of this Section 2(d).
SECTION 3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTS
TO TRUST BENEFICIARY WHEN COMPANY OR SUBSIDIARY IS INSOLVENT.
(a) Subject to Section 3(b) hereof, Trustee shall cease
payment of benefits to Plan Participants employed by Company and their
beneficiaries if Company is insolvent, and shall cease payment of benefits to
Plan Participants employed by a subsidiary of Company and their beneficiaries if
such subsidiary is insolvent. Company (or a subsidiary) shall be considered
"insolvent" for purposes of this Trust Agreement if (i) Company (or subsidiary)
is unable to pay its debts as they become due, or (ii) Company (or subsidiary)
is subject to a pending proceeding as a debtor under the United States
Bankruptcy Code.
(b) At all times during the continuance of this Trust, as
provided in Section 1(d) hereof, the principal and income of the Trust shall be
subject to claims of general creditors of Company (and, to the extent
attributable to employees of any of Company's subsidiaries, to claims of general
creditors of such subsidiary) under federal and state law as set forth below:
(1) The Board of Directors and the Chief Executive Officer of
Company shall have the duty to inform Trustee in writing of Company's
(or a subsidiary's) insolvency. If a person claiming to be a creditor
of Company (or subsidiary) alleges in writing to Trustee that Company
(or subsidiary) has become insolvent, Trustee shall determine whether
Company (or subsidiary) is insolvent and, pending such determination,
Trustee shall discontinue payment of benefits to affected Plan
Participants or their beneficiaries.
(2) Unless Trustee has actual knowledge of Company's (or a
subsidiary's) insolvency, or has received notice from Company (or
subsidiary) or a person claiming to be a creditor alleging that Company
(or subsidiary) is insolvent, Trustee shall have no duty to inquire
whether Company (or subsidiary) is insolvent. Trustee may in all events
rely on such evidence concerning Company's (or subsidiary's) solvency
as may be furnished to Trustee and that provides Trustee with a
reasonable basis for making a determination concerning Company's (or
subsidiary's) solvency. In no event shall "actual knowledge" be deemed
to include knowledge of Company's (or a subsidiary's) credit status
held by banking officers or banking employees of Trustee which is not
permitted to be disclosed to the administrator of the Trust account or
any other knowledge which is not
<PAGE> 15
5
actually possessed by such administrator. Trustee may appoint an
independent accounting or consulting firm to make any determination of
insolvency required by Trustee under this Section 3. In such event,
Trustee may conclusively rely upon the determination of such firm and
shall be responsible only for the prudent selection of such firm.
(3) If at any time Trustee has determined that Company (or
subsidiary) is insolvent, Trustee shall discontinue payments to
affected Plan Participants or their beneficiaries and shall hold the
assets of the Trust for the benefit of Company's (or subsidiary's)
general creditors. Nothing in this Trust Agreement shall in any way
diminish any rights of Plan Participants or their beneficiaries to
pursue their rights as general creditors of Company (or subsidiary)
with respect to benefits due under the Plan or otherwise.
(4) Trustee shall resume the payment of benefits to Plan
Participants or their beneficiaries in accordance with Section 2 of
this Trust Agreement only after Trustee has determined that Company (or
subsidiary) is not insolvent (or is no longer insolvent).
(c) Provided that there are sufficient assets, if Trustee
discontinues the payment of benefits from the Trust pursuant to Section 3(b)
hereof and subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to
affected Plan Participants or their beneficiaries under the terms of the Plan
for the period of such discontinuance, less the aggregate amount of any payments
made to affected Plan Participants or their beneficiaries by Company in lieu of
the payments provided for hereunder during any such period of discontinuance.
However, any payment to a Participant shall not be made until the advances from
Company to the Trust with respect to such Participant's account are satisfied,
and, with respect to all Participants employed in Company's merchant banking
group at any time during calendar year 1996, until any advances from Company to
the 1997 trust established under the Plan with respect to such Participant's
account are also satisfied. Company shall be responsible for making any
modifications in the Payment Schedule that are required to satisfy the
provisions of this Section 3(c).
SECTION 4. PAYMENTS TO COMPANY.
(a) Company shall deliver to Trustee, from time to time, a
schedule (the "Leveraged Amount Schedule") that indicates the outstanding
advance to the Trust in respect of each Participant and any amounts then payable
to Company in respect of each such advance. Except as otherwise provided herein,
Trustee shall make payments to Company in accordance with such Leveraged Amount
Schedule, as amended from time to time.
<PAGE> 16
6
(b) Company shall have the right to be repaid all funds it
advances to this Trust in respect of leveraged amounts of awards, and interest
thereon (calculated in accordance with Section 1(f)). Company shall also be
entitled to receive any payments to which it is entitled as a result of
obtaining interests in the Trust in respect of any Participants. Otherwise,
except as provided in Section 1(b) and 3 hereof, Company shall have no right or
power to direct Trustee to return to Company or to divert to others any of the
Trust assets before all payments of benefits have been made to the Plan
Participants and their beneficiaries pursuant to the Plan's terms, provided
(with respect to all Participants) no advance (principal and accrued interest)
to the Trust from Company remains outstanding with respect to his or her 1996
Plan account, and (with respect to all Participants employed in Company's
merchant banking group at any time during calendar year 1996) no advance (if
any) from Company to the 1997 trust established under the Plan (with respect to
his or her 1997 Plan account) remains outstanding. In any direction to Trustee
to return Trust assets to Company pursuant to this Section 4, Company shall
certify to Trustee that the conditions for such return have been met, and
Trustee may conclusively rely upon such certification.
SECTION 5. INVESTMENT AUTHORITY.
Trustee shall invest, directly or indirectly through an
investment vehicle, in proprietary investments designated by Company. Company
shall obtain the approval of the Participation Committee with respect to each
proprietary investment it directs Trustee to make and Trustee shall assume that
such approval has been obtained. Trustee shall invest and reinvest any cash on
hand pending distribution pursuant to Sections 2 and 4 hereof as directed by
Company or pursuant to guidelines issued to Trustee by Company. Except to the
extent that Trustee is granted discretion pursuant to any such guidelines,
Trustee shall have no investment review responsibility with respect to any such
investments. All rights associated with assets of the Trust shall be exercised
by Trustee or the person designated by Trustee, and shall in no event be
exercisable by or rest with Participants. Company shall have the right at any
time, and from time to time in its sole discretion, to substitute an asset or
assets for any asset held by the Trust, subject to the Participation Committee's
consent. This right is exercisable by Company in a nonfiduciary capacity without
the approval or consent of any person in a fiduciary capacity. Trustee shall
have no responsibility for determining whether such right has been properly
exercised or for any investment loss that may result from its exercise.
SECTION 6. DISPOSITION OF INCOME.
During the term of this Trust, all income received by the
Trust, net of expenses and taxes, shall be accumulated and reinvested in
accordance with Section 5 hereof, until paid out to
<PAGE> 17
7
Participants, beneficiaries or Company, in accordance with Sections 2 and 4
hereof.
SECTION 7. ACCOUNTING BY TRUSTEE.
Company shall keep, and supply Trustee with, accurate and
detailed records of all investments, receipts, disbursements, and all other
transactions required to be made, including such specific records as shall be
agreed upon in writing between Company and Trustee. Within 60 days following the
close of each calendar year and within 60 days after the removal or resignation
of Trustee, Trustee shall deliver to Company a written account of its
administration of the Trust during such year or during the period from the close
of the last preceding year to the date of such removal or resignation, setting
forth all investments, receipts, disbursements and other transactions effected
by it, including a description of all securities and investments purchased and
sold with the cost or net proceeds of such purchases or sales (accrued interest
paid or receivable being shown separately), and showing all cash, securities and
other property held in the Trust at the end of such year or as of the date of
such removal or resignation, as the case may be. In the absence of written
notice to Trustee by Company of exceptions or objections to any such account
within 90 days of its receipt of such account from Trustee, Company shall be
deemed to have approved such account. In such case, or upon the written approval
by Company of any such account, Trustee shall be released, relieved and
discharged with respect to all matters set forth in such account as though such
account had been settled by the decree of a court of competent jurisdiction.
SECTION 8. RESPONSIBILITY OF TRUSTEE.
(a) If Trustee undertakes or defends any litigation arising in
connection with this Trust, Company agrees to indemnify Trustee against
Trustee's costs, expenses and liabilities (including, without limitation,
attorneys' fees and expenses) relating thereto and to be primarily liable for
such payments. If Company does not pay such costs, expenses and liabilities in a
reasonably timely manner, Trustee may obtain payment from the Trust.
(b) Trustee may consult with legal counsel (who may also be
counsel for Company generally) with respect to any of its duties or obligations
hereunder.
(c) Trustee may hire agents, accountants, actuaries,
investment advisors, financial consultants or other professionals to assist in
performing any of its duties or obligations hereunder.
(d) Trustee shall have, without exclusion, all powers
conferred on trustees by applicable law, unless expressly provided otherwise
herein, provided, however, that if an
<PAGE> 18
8
insurance policy is held as an asset of the Trust, Trustee shall have no power
to name a beneficiary of the policy other than the Trust, to assign the policy
(as distinct from conversion of the policy to a different form) other than to a
successor Trustee, or to loan to any person the proceeds of any borrowing
against such policy and shall act with respect to any such policy only as
directed by Company.
(e) Notwithstanding any powers granted to Trustee pursuant to
this Trust Agreement or to applicable law, Trustee shall not have any power that
could give this Trust the objective of carrying on a business and dividing the
gains therefrom, within the meaning of Section 301.7701-2 of the Procedure and
Administrative Regulations promulgated pursuant to the Internal Revenue Code.
(f) Company shall indemnify, defend and hold harmless Trustee
from and against any and all liabilities, claims, losses, suits or expenses
(including attorneys' fees) of whatever kind and nature that may be imposed
upon, asserted against or incurred by Trustee at any time by reason of its
provision of services under this Agreement or its status as Trustee, except to
the extent that any such liability, claim, loss, suit or expense arises directly
from Trustee's (or Trustee's officers, employees or agents) gross negligence or
willful misconduct in the performance of responsibilities specifically allocated
to it under this Agreement. This Section 8(f) shall survive the termination of
this Agreement.
SECTION 9. COMPENSATION AND EXPENSES OF TRUSTEE.
Company shall pay all reasonable fees and expenses incurred by
Trustee in administering the Trust. If not so paid, such fees and expenses shall
be paid from the Trust.
SECTION 10. RESIGNATION AND REMOVAL OF TRUSTEE.
(a) Trustee may resign at any time by written notice to
Company, which shall be effective 30 days after receipt of such notice unless
Company and Trustee agree otherwise.
(b) Trustee may be removed by Company on 10 days notice or
upon shorter notice accepted by Trustee.
(c) Upon a Change of Control, as defined in the Plan, Trustee
may not be removed by Company for two years.
(d) If Trustee resigns within two years after a Change of
Control, as defined in the Plan, Company shall apply to a court of competent
jurisdiction for the appointment of a successor Trustee or for instructions.
(e) Upon resignation or removal of Trustee and appointment of
a successor Trustee, all assets shall subsequently
<PAGE> 19
9
be transferred to the successor Trustee. The transfer shall be completed within
30 days after receipt of notice of resignation, removal or transfer, unless
Company extends the time limit.
(f) If Trustee resigns or is removed, a successor shall be
appointed, in accordance with Section 11 hereof, by the effective date of
resignation or removal under paragraphs (a) or (b) of this Section . If no such
appointment has been made, Trustee may apply to a court of competent
jurisdiction for appointment of a successor or for instructions. All expenses of
Trustee in connection with the proceeding shall be allowed as administrative
expenses of the Trust.
SECTION 11. APPOINTMENT OF SUCCESSOR.
(a) If Trustee resigns or is removed in accordance with
Section 10(a) or (b) hereof, Company may appoint any third party, such as a bank
trust department or other party that may be granted corporate trustee powers
under state law, as a successor to replace Trustee upon resignation or removal.
The appointment shall be effective when accepted in writing by the new Trustee,
who shall have all of the rights and powers of the former Trustee, including
ownership rights in the Trust assets. The former Trustee shall execute any
instrument necessary or reasonably requested by Company or the successor Trustee
to evidence the transfer.
(b) The successor Trustee need not examine the records and
acts of any prior Trustee and may retain or dispose of existing Trust assets,
subject to the Participation Committee's Consent. The successor Trustee shall
not be responsible for and Company shall indemnify and defend the successor
Trustee from any claim or liability resulting from any action or inaction of any
prior Trustee or from any other past event, or any condition existing at the
time it becomes successor Trustee.
SECTION 12. AMENDMENT OR TERMINATION.
(a) This Trust may be amended by a written instrument executed
by Trustee and Company. Notwithstanding the foregoing, no such amendment shall
conflict with the terms of the Plan or shall make the Trust revocable, except in
accordance with the express terms hereof.
(b) The Trust shall not terminate until the date on which Plan
Participants and their beneficiaries are no longer entitled to benefits pursuant
to the terms of the Plan, unless sooner revoked in accordance with Section 1(b)
hereof. Upon termination of the Trust any assets remaining in the Trust shall be
returned to Company.
(c) Upon written approval of Participants or beneficiaries
entitled to payment of benefits pursuant to the terms of the Plan (excluding
Company) holding a majority of the
<PAGE> 20
10
interests in the Plan with respect to this Trust (excluding Company's
interests), Company may terminate this Trust prior to the time all benefit
payments under the Plan have been made. All assets in the Trust at termination
shall be returned to Company.
SECTION 13. MISCELLANEOUS.
(a) Any provision of this Trust Agreement prohibited by law
shall be ineffective to the extent of any such prohibition, without invalidating
the remaining provisions hereof.
(b) Benefits payable to Plan Participants and their
beneficiaries under this Trust Agreement may not be anticipated, assigned
(either at law or in equity), alienated, pledged, encumbered or subjected to
attachment, garnishment, levy, execution or other legal or equitable process.
(c) This Trust Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
SECTION 14. EFFECTIVE DATE.
The effective date of this Trust Agreement shall be December
31, 1996.
<PAGE> 21
11
IN WITNESS WHEREOF, the parties hereto have executed this
Trust Agreement as of the date first above written.
LEHMAN BROTHERS HOLDINGS INC.
By: _______________________
Name:
Title:
THE NORTHERN TRUST COMPANY
By: _______________________
Name:
Title:
<PAGE> 22
MBG FORM
LEHMAN BROTHERS HOLDINGS INC.
MERCHANT BANKING LONG-TERM
INCENTIVE PLAN
AGREEMENT EVIDENCING
A GRANT OF AN AWARD
TO
- -------------------------------------------------------------------------------
NAME
December 31, 1996 Deferred Compensation $________
Date of Grant Leveraged Amount $________
Award $________
1. DEFINITIONS. For purposes of this Agreement, the capitalized terms shall have
the meanings ascribed to them in the Lehman Brothers Holdings Inc. Merchant
Banking Long-Term Incentive Plan (the "Plan") or in Exhibit A hereof.
2. GRANT OF AWARD. Pursuant to the Plan, which is incorporated herein by
reference and attached hereto, the Company hereby grants you an Award, as of
December 31, 1996 (the "Date of Grant"). Your Award will entitle you to
payments, as further described below, based on the performance of those
Qualifying Investments made during 1996 (as set forth on Exhibit B), and subject
to all of the terms and conditions set forth in the Plan.
3. PLAN STRUCTURE.
(a) The Company is granting a portion of your annual bonus
(the Deferred Compensation amount specified above) and the annual bonuses of
other Participants, in the form of Awards under the Plan. In addition, the
Company is providing a portion of your Award (the Leveraged Amount specified
above). The amount of your Award has been transferred by the Company to a trust
(the "Trust") that has made, directly or indirectly, investments in the
Qualifying Investments referred to in Section 2.
(b) The Company has designated certain Participants possessing
special knowledge and expertise with respect to the Company's proprietary
investments to serve on a committee to approve investments proposed by the
Company for inclusion as
<PAGE> 23
2
Qualifying Investments (the "Participation Committee"). The Participation
Committee has reviewed the Qualifying Investments and authorized the trustee of
the Trust (the "Trustee") to invest in the Qualifying Investments.
4. ALLOCATION OF AMOUNTS REALIZED.
(a) As amounts are realized with respect to the Qualifying
Investments referred to in Section 2, the Committee will determine your share of
such amounts, based on your level of deemed participation in such investments
(determined by comparing your Award (less any forfeitures or other negative
adjustments) to the amount of all Awards granted for 1996, including any Awards
(or portions thereof) deemed to be for the benefit of the Company pursuant to
Section 5(a) of the Plan). Your share of such realized amounts will first be
credited and paid to the Company until the Company has been credited with an
amount equal, in the aggregate, to the Leveraged Amounts of your Awards for 1996
and 1997 (if you receive an Award in 1997), plus the Company Return thereon.
With respect to amounts credited and paid to the Company, such amounts shall
first be credited to the Company Return and then to the Leveraged Amount.
Thereafter, any further amounts will be credited to an account established in
your name for 1996 and will become payable to you pursuant to Section 6 hereof;
provided, however, that if your Award for 1997 has not been granted as of any
date on which amounts are to be credited to your 1996 account, the Company may,
in its discretion, hold back an amount (the "Holdback Amount") equal to 20% of
the total amount that would otherwise be credited to your 1996 account on such
date in the absence of this proviso. Any such Holdback Amount(s) (together with
any earnings thereon) shall be credited against the Leveraged Amount of your
1997 Award at the time such award, if any, is granted to you. If you are not
granted an Award for 1997, or if the aggregate Holdback Amount(s) otherwise
exceed your 1997 Leveraged Amount, any such excess Holdback Amount (together
with any earnings thereon) will be credited to your 1996 account and will become
payable to you pursuant to Section 6 hereof. Any Holdback Amount(s) will be
credited with interest at a rate equal to the Cost of Funds Rate plus 0.50%.
(b) Except to the extent of your Deferred Compensation, with
respect to which you will be fully at risk and will not receive any payments
until the Company has been paid an amount equal, in the aggregate, to the
Leveraged Amounts of your Awards for 1996 and 1997 (plus the Company Return
thereon), no recourse shall be had to you for the payment of such Leveraged
Amounts or Company Return thereon and you shall have no personal liability to
the Company or otherwise be responsible for any claim based upon the repayment
of such Leveraged Amounts or Company Return thereon. Also, you will not be
liable for any debts, liabilities, contracts or other obligations of the
Company, the Plan or any other entity with respect to such Qualifying
Investments, or for the debts or liabilities of any
<PAGE> 24
3
other Participant or the Company (or its subsidiaries or affiliates).
5. EFFECT OF TERMINATION OF EMPLOYMENT; CHANGE IN CONTROL.
(a) If prior to December 31, 1999, your employment with the
Company and its subsidiaries terminates for any reason (other than termination
of employment by the Company or a subsidiary without Cause or due to your death,
Disability or Retirement) or the Committee determines that you have engaged in
Competitive Activity (other than following termination of your employment by the
Company without Cause) or Detrimental Activity, then the Company shall have the
right, exercisable in its sole discretion by written notice sent by certified
mail (or its equivalent) or via overnight courier ("Notice") to you within 30
days following such termination of employment or determination, to pay you an
amount in respect of the unvested portion of your Award. If the Company
exercises its right of payment in respect of the unvested portion of your Award,
your Award and the related Leveraged Amount will be reduced by an amount equal
to the product of your Award (and the Leveraged Amount, respectively) and your
then unvested percentage (as specified below), and the unvested portion of your
Award shall thereafter be for the Company's benefit. Any such reduction of the
Leveraged Amount shall also reduce proportionately that portion of the Leveraged
Amount that shall be deemed for purposes of Section 4(a) to have been credited
and paid to the Company.
(b) Your Award will vest according to the following schedule
(the "Vesting Schedule"):
If termination/determination occurs:
<TABLE>
<CAPTION>
Cumulative
Vesting Unvested
On or After But Prior to Percentage Percentage
- ----------- ------------ ---------- ----------
<S> <C> <C> <C>
Date of Grant 12/31/97 25% 75%
12/31/97 12/31/98 50% 50%
12/31/98 12/31/99 75% 25%
12/31/99 100% 0%
</TABLE>
provided that upon the termination of your employment due to your death or
Disability, your Award will immediately become fully vested and provided,
further, that the Committee shall have authority to accelerate (but not
otherwise modify) the Vesting Schedule at any time, for any or all of the
Participants, in its sole discretion. In addition, upon an actual or potential
Change in Control, the CMC may determine that your Award shall automatically
become vested either immediately or upon the occurrence of such events as the
CMC shall determine.
<PAGE> 25
4
(c) The amount paid by the Company in cash in respect of the
unvested portion of your Award pursuant to paragraph (a) shall be equal to (i)
your unvested percentage (according to the Vesting Schedule) multiplied by the
Deferred Compensation portion of your Award, plus (ii) a rate of return on the
amount determined in clause (i) equal to the Cost of Funds Rate plus 0.50% from
the Date of Grant to (but not including) the date the Company exercises its
right of payment in respect of the unvested portion of your Award. The Company
will make such payment in cash as soon as practicable but in no event later than
30 days following the date of the Notice.
(d) If the Company does not exercise its right of payment in
respect of the unvested portion of your Award, then your Award will remain
subject to, and continue to vest in accordance with, the Vesting Schedule and,
if at any time following termination of your employment the Committee determines
in good faith that you have engaged in any Competitive Activity (other than
following termination of your employment by the Company without Cause) or
Detrimental Activity, whether before or after such termination, the Committee
will promptly deliver to you a Notice of its determination, and thereafter the
Company will have the right to pay you an amount in respect of the unvested
portion of your Award, if any, as of the date of such Notice, upon the same
terms and with the same effects described in paragraphs (a), (b) and (c) hereof.
(e) In the case of your termination of employment by the
Company or its subsidiary without Cause or due to your Retirement, (i) the
Company shall not have the right to make payment in respect of the unvested
portion of your Award as provided in paragraph (a) hereof, and (ii) your Award
will remain subject to, and continue to vest in accordance with, the Vesting
Schedule. If at any time following any such termination of employment without
Cause or due to your Retirement the Committee determines in good faith that you
engaged in any Detrimental Activity, whether before or after such termination of
employment, or following your Retirement the Committee determines in good faith
that you engaged in any Competitive Activity, then the Committee will promptly
deliver to you a Notice of its determination, and thereafter the Company will
have the right to pay you an amount in respect of the unvested portion of your
Award, if any, as of the date of such Notice, upon the same terms and with the
same effects described in paragraphs (a), (b) and (c) hereof.
(f) To the extent your Award has vested, you will be entitled
to continue to share in amounts realized with respect to the Qualifying
Investments.
(g) The Company in its sole discretion may assign all or any
part of its right to make payment in respect of the unvested portion of your
Award to any of its affiliates.
<PAGE> 26
5
6. PAYMENT.
(a) Notwithstanding that your Award (less any forfeitures or
other negative adjustments) may not have fully vested, at such time as amounts
are credited to your account pursuant to Section 4 hereof, you shall receive,
subject to Section 6(b) hereof, a cash payment equal to the amount calculated
pursuant to the Plan; provided, however, that any such payment may, at the
Company's option, be made in kind (whether in the form of marketable securities
or otherwise) (i) if and to the extent that the Trust receives any in kind
distribution and (ii) in connection with the dissolution and winding up of the
Trust.
(b) In the event that you are, at the time payment is
otherwise due to you, a "covered employee" within the meaning of Section 162(m)
of the Internal Revenue Code of 1986, as amended, the Committee may delay any
payments under the Plan if payment of the Award would not result in a tax
deduction for the Company and its subsidiaries. In such event, your unpaid
account balance will be credited with interest at a rate equal to the Cost of
Funds Rate plus 0.50%, pending reinvestment.
7. NON-ASSIGNMENT. No direct or indirect sale, exchange, transfer, assignment,
pledge, creation of a security interest in, or encumbrance on, or other
disposition by you, either voluntary or involuntary, of all or any portion of
your Award or any economic interest therein (including without limitation by
means of any participation or swap transaction) shall be made, except by will or
the laws of descent and distribution. If you or anyone claiming under or through
you attempts to violate this Section 7 such attempted violation shall be null
and void and without effect.
8. UNFUNDED PLAN. The obligations set forth under the Plan shall be unfunded.
The Company has, however, placed funds in a trust (the "Trust") to facilitate
the operation of the Plan. While your rights shall remain those of a general
creditor of the Company (or, if you are an employee of a subsidiary of the
Company, such subsidiary) in the event of bankruptcy or insolvency, and you
shall have no beneficial ownership interest in the Trust, it is anticipated that
payment of all amounts due pursuant to the Award will be made by the trustee of
the Trust.
9. NO RIGHT TO CONTINUED EMPLOYMENT OR SUBSEQUENT AWARDS. The grant of an Award
shall not confer on you any right to be retained in the employ of the Company
and its subsidiaries, or to receive subsequent Awards under the Plan. The right
of the Company or the relevant subsidiary to terminate your employment at any
time or as otherwise provided by any agreement between the Company or any
subsidiary and you is specifically reserved.
10. BINDING ACTIONS. Any action taken or decision made by the Committee or its
delegates arising out of or in connection with the construction, administration,
interpretation or effect of the
<PAGE> 27
6
Plan or this Agreement shall lie within its sole and absolute discretion, and
shall be final, conclusive and binding on you and all persons claiming under or
through you. By accepting this grant or other benefit under the Plan, you and
each person claiming under or through you shall be conclusively deemed to have
indicated acceptance and ratification of, and consent to, any action taken under
the Plan by the Committee or its delegates.
11. WITHHOLDING. The Company shall have the right to deduct from all amounts
payable to you any taxes required by law to be withheld therefrom.
12. SEVERABILITY. Each section, clause and provision of this Agreement will be
interpreted in such manner as to be valid and effective but if any section,
clause or provision shall be ruled invalid or unenforceable by any court of
competent jurisdiction, the invalidity or unenforceability of such section,
clause or provision shall not affect any of the remaining sections, clauses or
provisions of this Agreement and the invalid term shall be deemed to be replaced
by a valid term which most closely reflects the intent of the Plan and this
Agreement.
<PAGE> 28
7
LEHMAN BROTHERS HOLDINGS INC.
BY__________________________
[Title]
____________________________
[Name of Employee]
<PAGE> 29
EXHIBIT A
(a) "Cause" shall mean termination of employment of a
Participant by the Company (or a subsidiary) due to a material breach by a
Participant of his or her employment contract with the Company (or a
subsidiary), failure by a Participant to devote substantially all business time
exclusively to the performance of his or her employment duties for the Company
(or a subsidiary), willful misconduct or material dishonesty, conviction of a
felony, serious crime or other crime material to the Participant's employment
with the Company (or a subsidiary) (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 the Company (or
a subsidiary).
(b) "Competitive Activity" shall mean involvement, at any time
between the date of termination of the Participant's employment with the Company
(or a subsidiary) and December 31, 1999, 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 the
Company and its affiliates at such time, as determined in the sole discretion of
the Committee.
(c) "Cost of Funds Rate" shall mean a cumulative (but not
compounded) annual return at a daily rate equal to the daily rate posted by the
Company to all of its subsidiaries for their borrowings.
(d) "Detrimental Activity" shall mean (i) using information
that was received by or disclosed to such Participant during his or her
employment with the Company (or a subsidiary) relating to the business affairs
of the Company or its subsidiaries or any of its clients, in breach of his or
her undertakings to keep such information confidential or (ii) directly or
indirectly by any means persuading or attempting to persuade any employee of the
Company or its subsidiaries to terminate his or her employment or any customer
or client of the Company or its subsidiaries to terminate or curtail its
business relationship with the Company or its subsidiaries or to breach any term
of any agreement with the Company or its subsidiaries or (iii) any activity
deemed to be detrimental to the Company or its subsidiaries, in each case as
determined in the sole discretion of the Committee.
(e) "Disability" shall mean a disability which meets the
criteria under both the Lehman Brothers Group Long Term Disability Plan and the
Social Security Disability Act.
(f) "Retirement" shall mean termination of employment with the
Company or a subsidiary which meets the criteria for retirement under the
qualified defined benefit pension plan of
<PAGE> 30
2
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 the Company or any
subsidiary, with the advance written approval of the Company or the subsidiary
sponsoring or contributing to the relevant plan, if the Participant is entitled
to benefits under such other pension plan.
<PAGE> 1
Exhibit 10.29
LEHMAN BROTHERS HOLDINGS INC.
MERCHANT BANKING DISCRETIONARY
INCENTIVE COMPENSATION PLAN
SECTION 1 - DEFINITIONS
For purposes of the Plan, the capitalized terms shall have the
meanings ascribed to them in Exhibit A hereof.
SECTION 2 - PURPOSE
The purpose of the Plan is to strengthen and promote the
interests of the Company by providing Eligible Employees with additional
incentives, under the terms and conditions below, to put forth maximum efforts
for the success of the business of the MBG and to continue in the employ of the
Company, thereby enhancing the Company's value for the benefit of its
stockholders. The purpose of the Plan is to be achieved through the grant of a
portion of Participants' discretionary compensation in the form of awards under
the Plan. This Plan is a bonus plan not subject to the provisions of the
Employee Retirement Income Security Act of 1974, as amended.
SECTION 3 - ADMINISTRATION
(a) The Plan shall be administered by the Committee, which
shall have the power to select those Eligible Employees who shall receive
Awards, and to determine the terms of such Awards.
(b) Subject to the provisions of the Plan, the Committee shall
be authorized to interpret the Plan, to establish, amend, and rescind any rules
and regulations relating to the Plan, to determine the terms and provisions of
any agreements entered into hereunder, and to make all other determinations
necessary or advisable for the administration of the Plan. The Committee may
correct any defect, supply any omission or reconcile any inconsistency in the
Plan or in any Award in the manner and to the extent it shall deem desirable to
carry the Plan or any such Award into effect. The determinations of the
Committee in the administration of the Plan, as described herein, shall be final
and conclusive.
(c) The validity, construction and effect of the Plan and any
rules and regulations relating to the Plan shall be determined in accordance
with the laws of the State of Delaware.
(d) The books and records to be maintained for the Plan's
purpose shall be maintained by the officers and employees of the Company at its
expense and subject to the supervision and
<PAGE> 2
2
control of the Committee. All expenses of administering the Plan shall be paid
by the Company.
(e) No member of the Committee or the Participation Committee
and no director, officer or employee of the Company shall be liable to any
person for any action taken or omitted in connection with the administration of
this Plan unless attributable to his or her own fraud or willful misconduct; nor
shall the Company be liable to any person for any such action unless
attributable to fraud or willful misconduct on the part of a director, officer
or employee of the Company.
SECTION 4 - DETERMINATION OF AWARDS
(a) Each Award shall entitle a Participant, subject to the
terms and conditions of the Award, to an incentive payment based on the
performance of Qualifying Investments made during the calendar year for which
the Award is made. The aggregate amount of such Qualifying Investments
attributable to Awards for that year, as determined in the sole discretion of
the Committee, shall comprise the Aggregate Award Fund for that year.
(b) After the end of each calendar year during the existence
of this Plan, the Committee shall, in its sole discretion:
(i) identify from among the Eligible Employees those
individuals who shall participate in the Plan for such calendar year;
(ii) subject to paragraphs (c) and (d) below, determine the
size of the Aggregate Award Fund for such calendar year and allocate it among
all Participants for such calendar year by making Awards to such Participants;
(iii) determine the portion of each Participant's
discretionary compensation for such calendar year that will be allocated for
participation in the Plan (the Initial Award Value of the Award); and
(iv) designate, for each Participant, the Leveraged Amount of
such Participant's Award.
(c) In the event that the aggregate amount of Awards in any
calendar year would exceed the Aggregate Award Fund for such year, Participants
who are members of the MBG shall first be granted Awards until their aggregate
Initial Award Values and Leveraged Amounts have been satisfied in full, and the
remaining portion of the Aggregate Award Fund, if any, shall be allocated pro
rata to the other Participants on the basis of their respective Awards. In the
event that the aggregate amount of Awards for Participants who are members of
the MBG for any calendar year would exceed the Aggregate Award Fund for such
year, Awards shall be allocated pro rata to such Participants on
<PAGE> 3
3
the basis of their respective Awards, up to the amount of such Aggregate Award
Fund.
(d) At any time (and from time to time), the Committee may, in
its sole discretion (i) reissue any portion of an Award that has been forfeited
or otherwise negatively adjusted pursuant to Section 5, and (ii) grant
additional Awards to Eligible Employees in respect of any calendar year. In each
case, the Committee shall determine, in its sole discretion (A) the purchase
price of the Award (which may reflect any appreciation in the value of the
Qualifying Investments represented by the Award as determined by the Committee),
(B) the Initial Award Value of the Award and the manner in which it is to be
funded and (C) the Leveraged Amount of the Award.
SECTION 5 - VESTING OF AWARDS
(a) Each Participant's Award shall, subject to the remainder
of this Section 5, vest in accordance with a vesting schedule prescribed by the
Committee at the time the Award is granted.
Unless otherwise prescribed by the Committee, upon a
Participant's termination of employment with the Company prior to any vesting
date, the portion of his or her Award that is then unvested shall be forfeited
or otherwise negatively adjusted as set forth in such Participant's Award
Agreement. The portion of a Participant's Award that is forfeited or otherwise
negatively adjusted pursuant to this Section 5 shall be deemed to remain
outstanding, but solely for the Company's benefit.
(b) The Committee may at any time and from time to time
accelerate the vesting of a Participant's Award.
(c) Upon an actual or potential Change in Control, the CMC may
determine that any or all Participants' Awards shall automatically become vested
either immediately or upon the occurrence of such events as the CMC shall
determine; provided that this Section 5(c) shall not have the effect of
restoring to a Participant prior forfeitures or negative adjustments made
pursuant to Section 5(a).
SECTION 6 - PAYMENT WITH RESPECT TO AWARDS
(a) The Committee shall cause a notional account to be kept in
the name of each Participant. As amounts are realized with respect to a
particular calendar year's Qualifying Investments, then subject to the
satisfaction of any conditions specified in the Award the Committee shall
determine the Participant's share of such amounts, based on the Participant's
relative level of deemed participation in such investments (determined by
comparing the amount of the Participant's Award (after giving effect to any
forfeitures of or other negative adjustments to such Participant's Award
pursuant to Section 5),
<PAGE> 4
4
to the amount of all Awards for that calendar year, including any Awards (or
portions thereof) deemed to be for the benefit of the Company under Section
5(a)).
(b) The Participant's share of all amounts realized with
respect to the Qualifying Investments covered by that calendar year's Award
shall first be credited and paid to the Company until the Company has been
credited with an amount equal, in the aggregate, to the Leveraged Amount of such
Award plus the Company Return thereon and, in the case of a Participant employed
in the MBG at any time during the calendar year for which the Award was made (an
"MBG Participant"), with an additional amount equal, in the aggregate, to the
Leveraged Amounts of the previous calendar year's Award (if any, and only if
such Participant was employed in the MBG at any time during the previous
calendar year), and the next succeeding calendar year's Award (if any), in each
case plus the Company Return thereon. With respect to the Leveraged Amount of
any particular year's Award, amounts shall first be credited to the Company
Return and then to the Leveraged Amount. Thereafter, all amounts shall be
credited to the Participant's account for the calendar year in which such
realized Qualifying Investments were made; provided, however, that if the
Participant's Award for the next succeeding calendar year has not been granted
as of any date on which any amounts are to be credited to the Participant's
account pursuant to this Section 6(b), the Company may, in its discretion, hold
back an amount (the "Holdback Amount") equal to 20% of the total amount that
would otherwise be credited to the Participant's account on such date in the
absence of this proviso. Any such Holdback Amount(s) (together with any earnings
thereon) shall be credited against the Leveraged Amount of the Participant's
Award for the next succeeding calendar year at the time such award, if any, is
granted. If the Participant is not granted an Award for such calendar year, or
if the aggregate Holdback Amount(s) otherwise exceed the Participant's Leveraged
Amount for such calendar year, any such excess Holdback Amount (together with
any earnings thereon) shall be credited to the Participant's account. Any
Holdback Amount(s) shall be credited with interest at a rate equal to the Cost
of Funds Rate plus 0.50%.
(c) At any time (and from time to time) after the
Participant's account with respect to an Award has been credited with an amount
pursuant to Section 6(b) above, the Committee may direct that the Participant
shall receive, in cash, or in kind, all or a portion of his or her account.
(d) Each Participant shall have the right to designate
beneficiaries who are to succeed to his or her right to receive future payments
hereunder in the event of his or her death. In case of a failure of designation
or the death of a designated beneficiary without a designated successor,
distribution shall be made to the Participant's estate. No designation of
beneficiaries shall be valid unless such designation is made in writing, signed
by the Participant, dated, and filed with the
<PAGE> 5
5
Committee. Beneficiaries may be changed without the consent of any prior
beneficiaries.
SECTION 7 - AWARD AGREEMENTS
Each Award under the Plan shall be evidenced by an Award
Agreement setting forth the terms and conditions, not inconsistent with the
Plan's provisions, as determined by the Committee, which shall apply to such
Award.
SECTION 8 - WITHHOLDING
The Company shall have the right to deduct from all amounts
payable to any Participant any taxes required by law to be withheld therefrom.
SECTION 9 - NON-TRANSFERABILITY
No Award or account balance shall be assignable or
transferable, and no right or interest of any Participant in any Award or
account thereunder shall be subject to any lien, obligation or liability of the
Participant, except by will, the laws of descent and distribution, or as
otherwise set forth in the Award Agreement.
SECTION 10 - NO RIGHT TO EMPLOYMENT OR
CONTINUED PARTICIPATION IN PLAN
No person shall have any claim or right to the grant of an
Award, and the grant of an Award shall not be construed as giving a Participant
the right to be retained in the employ of the Company or to be eligible for any
subsequent Awards. Further, the Company expressly reserves the right at any time
to terminate a Participant free from any liability or any claim under the Plan,
except as provided herein or in any Award Agreement entered into hereunder.
SECTION 11 - AMENDMENT
The Board may amend, suspend or terminate the Plan or any
portion hereof at any time, except that no such amendment, suspension or
termination shall reduce the amounts otherwise payable to a Participant under
the terms of an Award Agreement entered into hereunder prior to such amendment,
suspension or termination.
SECTION 12 - UNFUNDED STATUS OF PLAN
The Plan is intended to constitute an "unfunded" discretionary
incentive compensation plan. With respect to any payments not yet made to a
Participant by the Company, nothing herein contained shall give any Participant
any rights that are greater than those of a general creditor of the Company.
<PAGE> 6
6
SECTION 13 - WAIVER
No failure on the part of a person to exercise, and no delay
in exercising, any right or power under this Plan shall operate as a waiver of
any such right or power; nor shall any single or partial exercise preclude any
other or further exercise of a right or power or the exercise of any other right
or power.
SECTION 14 - EFFECTIVE DATE
This Plan shall be effective as of June 27, 1996 and shall
continue until terminated by the Board.
<PAGE> 7
EXHIBIT A
(a) "Aggregate Award Fund" shall mean, for each calendar year,
the total dollar amount available for allocation to Participants under the Plan
for such year.
(b) "Award" shall mean an award granted pursuant to the Plan.
(c) "Award Agreement" shall mean the agreement evidencing any
Award under the Plan.
(d) "Board" shall mean the Board of Directors of the Company;
provided, however, that any action taken by a duly authorized committee of the
Board within the scope of authority delegated to such committee by the Board
shall be considered an action of the Board for this Plan's purposes.
(e) "Change in Control" shall mean the occurrence of any of
the following:
(i) The commencement (within the meaning of Rule 14d-2
under the Securities Exchange Act of 1934 (the "Exchange Act")) of a
tender offer for more than 20% of the Company's outstanding shares of
capital stock having ordinary voting power in the election of directors
(the "Voting Securities").
(ii) An acquisition (other than directly from the Company)
of any Voting Securities by any "Person" (as the term person is used
for purposes of Section 13(d) or 14(d) of the Exchange Act) immediately
after which such Person has "Beneficial Ownership" (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the
combined voting power of the Company's then outstanding Voting
Securities; provided, however, in determining whether a Change in
Control has occurred, Voting Securities which are acquired in a
"Non-Control Acquisition" (as hereinafter defined) shall not constitute
an acquisition which would cause a Change in Control. A "Non-Control
Acquisition" shall mean an acquisition by:
(A) an employee benefit plan (or a trust forming a
part thereof or a trustee thereof acting solely in its
capacity as trustee) maintained by:
(I) the Company; or
(II) any corporation or other Person of which a
majority of its voting power or its voting equity
securities or equity interest is owned, directly or
indirectly, by the Company (for purposes of this
definition, a "Subsidiary");
<PAGE> 8
2
(B) the Company or its Subsidiaries; or
(C) any Person who files in connection with such
acquisition a Schedule 13D which expressly disclaims any
intention to seek control of the Company and does not
expressly reserve the right to seek such control; provided,
however, that any amendment to such statement of intent which
either indicates an intention or reserves the right to seek
control shall be deemed to be an "acquisition" of the
securities of the Company reported in such filing as
beneficially owned by such Person for purposes of this
paragraph (ii).
(iii) The individuals who, as of the effective date of the
1994 initial public trading in Company shares, are members of the Board
(the "Incumbent Board"), ceasing for any reason to constitute at least
a majority of the members of the Board; provided, however, that if the
election, or nomination for election by the Company's common
stockholders, of any new director was approved by a vote of at least
two-thirds of the Incumbent Board, such new director shall, for
purposes of this Plan, be considered as a member of the Incumbent
Board; provided further, however, that no individual shall be
considered a member of the Incumbent Board if such individual initially
assumed office as a result of either an actual or threatened "Election
Contest" (as described in Rule 14a-11 promulgated under the Exchange
Act) or other actual or threatened solicitation of proxies or consents
by or on behalf of a Person other than the Board (a "Proxy Contest")
including by reason of any agreement intended to avoid or settle any
Election Contest or Proxy Contest; or
(iv) Approval by stockholders of the Company of:
(A) A merger, consolidation or reorganization
involving the Company, unless such merger, consolidation or
reorganization is a "Non-Control Transaction"; i.e., meets
each of the requirements described in (I), (II), and (III)
below:
(I) the stockholders of the Company,
immediately before such merger, consolidation or
reorganization, own, directly or indirectly
immediately following such merger, consolidation or
reorganization, at least 80% of the combined voting
power of the outstanding voting securities of the
corporation resulting from such merger or
consolidation or reorganization (the "Surviving
Corporation") in substantially the same proportion as
their ownership of the Voting Securities immediately
before such merger, consolidation or reorganization;
<PAGE> 9
3
(II) the individuals who were members of the
Incumbent Board immediately prior to the execution of
the agreement providing for such merger,
consolidation or reorganization constitute at least
two-thirds of the members of the board of directors
of the Surviving Corporation immediately following
the consummation of such merger, consolidation or
reorganization; and
(III) no Person other than the Company, any
Subsidiary, any employee benefit plan (or any trust
forming a part thereof or a trustee thereof acting
solely in its capacity as trustee) maintained by the
Company, the Surviving Corporation, or any
subsidiary, or any Person who, immediately prior to
such merger, consolidation or reorganization had
Beneficial Ownership of 20% or more of the then
outstanding Voting Securities, has Beneficial
Ownership of 20% or more of the combined voting power
of the Surviving Corporation's then outstanding
voting securities immediately following the
consummation of such merger, consolidation or
reorganization.
(B) A complete liquidation or dissolution of the
Company; or
(C) An agreement for the sale or other disposition of
all or substantially all of the assets of the Company to any
Person (other than a transfer to a Subsidiary).
Notwithstanding the foregoing, a Change in Control shall not
be deemed to occur solely because any Person (the "Subject Person") acquired
Beneficial Ownership of more than the permitted amount of the outstanding Voting
Securities as a result of the acquisition of Voting Securities by the Company
which, by reducing the number of Voting Securities outstanding, increases the
proportional number of shares Beneficially Owned by the Subject Persons,
provided that if a Change in Control would occur (but for the operation of this
sentence) as a result of the acquisition of Voting Securities by the Company,
and after such Beneficial Owner of any additional Voting Securities which
increases the percentage of the then outstanding Voting Securities Beneficially
Owned by the Subject Person, then a Change in Control shall occur.
(f) "CMC" shall mean the Company's Corporate Management
Committee, which is comprised of executive officers of the Company and includes
the Chairman and Chief Executive Officer, the President, the Chief
Administrative Officer, the Chief Legal Officer and the Chief Financial Officer.
<PAGE> 10
4
(g) "Committee" shall mean the Compensation Committee of the
Board, or one or more officers of the Company or its subsidiaries designated by
the Compensation Committee to which it has delegated such of its rights and
responsibilities hereunder as it shall determine in its sole discretion.
(h) "Company" shall mean Lehman Brothers Holdings Inc. and,
except as otherwise specified in this Plan in a particular context, any
successor thereto, whether by merger, consolidation, purchase of substantially
all its assets or otherwise.
(i) "Company Return" shall mean a cumulative (but not
compounded) annual return to the Company with respect to the Leveraged Amount of
any Award, at a rate of return on such Leveraged Amount equal to the Cost of
Funds Rate plus 0.50% per annum.
(j) "Cost of Funds Rate" shall mean a cumulative (but not
compounded) annual return at a daily rate equal to the daily rate posted by the
Company to all of its subsidiaries for their borrowings.
(k) "Eligible Employee" shall mean any Managing Director,
Senior Vice President and Vice President of the MBG, and any key employee of the
Company and its subsidiaries, provided such individual is not employed within
the United States.
(l) "Initial Award Value" shall mean the portion of a
Participant's discretionary compensation made the subject of an Award.
(m) "Leveraged Amount" shall mean that portion of an Award
determined by the Committee in its discretion to be attributable to funds deemed
to be advanced by the Company in connection with the Award, and with respect to
which the Company is entitled to repayment of such funds plus the Company Return
thereon.
(n) "MBG" shall mean the Company's Merchant Banking Group.
(o) "Participant" shall mean an Eligible Employee who is
selected by the Committee to receive an Award under the Plan.
(p) "Participation Committee" shall mean the committee
comprised of certain Participants designated by the Company to approve
investments proposed by the Company for inclusion as Qualifying Investments.
(q) "Plan" shall mean the Lehman Brothers Holdings Inc.
Merchant Banking Discretionary Incentive Compensation Plan.
<PAGE> 11
5
(r) "Qualifying Investments" shall mean each investment made
by the Company or any of its affiliates that is proposed by the Company to be
included for purposes of determining incentive payments in respect of Awards
granted for a particular calendar year and that prior to, or within a reasonable
period of time after, the making of such investment has been approved for
inclusion by the Participation Committee.
<PAGE> 12
MBG FORM
LEHMAN BROTHERS HOLDINGS INC.
MERCHANT BANKING DISCRETIONARY
INCENTIVE COMPENSATION PLAN
AGREEMENT EVIDENCING
A GRANT OF AN AWARD
TO
- --------------------------------------------------------------------------------
NAME
December 31, 1996 Initial Award Value $_________
Date of Grant Leveraged Amount $
==========
Award $_________
1. DEFINITIONS. For purposes of this Agreement, the capitalized terms shall have
the meanings ascribed to them in the Lehman Brothers Holdings Inc. Merchant
Banking Discretionary Incentive Compensation Plan (the "Plan") or in Exhibit A
hereof.
2. GRANT OF AWARD. Pursuant to the Plan, which is incorporated herein by
reference and attached hereto, the Company hereby grants you an Award, as of
December 31, 1996 (the "Date of Grant"). You will become entitled to payments
under your Award, as further described below, based on the performance of those
Qualifying Investments made during 1996 (as set forth on Exhibit B), and subject
to all of the terms and conditions set forth in the Plan.
3. PLAN STRUCTURE.
(a) The Company is granting a portion of your annual
discretionary compensation (the Initial Award Value specified above) and the
discretionary compensation of other Participants, in the form of Awards under
the Plan. In addition, the Company is providing a portion of your Award (the
Leveraged Amount specified above).
(b) The Company has designated certain Participants possessing
special knowledge and expertise with respect to the Company's proprietary
investments to serve on a committee to approve investments proposed by the
Company for inclusion as Qualifying Investments (the "Participation Committee").
The
<PAGE> 13
2
Participation Committee has reviewed and approved the Qualifying Investments.
4. ALLOCATION OF AMOUNTS REALIZED.
(a) As amounts are realized with respect to the Qualifying
Investments referred to in Section 2, the Committee will determine your share of
such amounts, based on your level of deemed participation in such investments
(determined by comparing your Award (less any forfeitures or other negative
adjustments) to the amount of all Awards granted for 1996, including any Awards
(or portions thereof) deemed to be for the benefit of the Company pursuant to
Section 5(a) of the Plan). Your share of such realized amounts will first be
credited and paid to the Company until the Company has been credited with an
amount equal, in the aggregate, to the Leveraged Amounts of your Awards for 1996
and 1997 (if you receive an Award in 1997), plus the Company Return thereon.
With respect to amounts credited and paid to the Company, such amounts shall
first be credited to the Company Return and then to the Leveraged Amount.
Thereafter, any further amounts realized will be credited to a notional account
established for the purposes of the Plan in your name for 1996 and will become
payable to you pursuant to Section 6 hereof; provided, however, that if your
Award for 1997 has not been granted as of any date on which amounts are to be
credited to your 1996 account, the Company may, in its discretion, hold back an
amount (the "Holdback Amount") equal to 20% of the total amount that would
otherwise be credited to your 1996 account on such date in the absence of this
proviso. Any such Holdback Amount(s) (together with any earnings thereon) shall
be credited against the Leveraged Amount of your 1997 Award at the time such
award, if any, is granted to you. If you are not granted an Award for 1997, or
if the aggregate Holdback Amount(s) otherwise exceed your 1997 Leveraged Amount,
any such excess Holdback Amount (together with any earnings thereon) will be
credited to your 1996 account and will become payable to you pursuant to Section
6 hereof. Any Holdback Amount(s) will be credited with interest at a rate equal
to the Cost of Funds Rate plus 0.50%.
(b) Except to the extent of your Initial Award Value, with
respect to which you will be fully at risk and will not become entitled to
receive any payments until the Company has been paid an amount equal, in the
aggregate, to the Leveraged Amounts of your Awards for 1996 and 1997 (plus the
Company Return thereon), no recourse shall be had to you for the payment of such
Leveraged Amounts or Company Return thereon and you shall have no personal
liability to the Company or otherwise be responsible for any claim based upon
the repayment of such Leveraged Amounts or Company Return thereon. Also, you
will not be liable for any debts, liabilities, contracts or other obligations of
the Company, the Plan or any other entity with respect to such Qualifying
Investments, or for the debts or liabilities of any other Participant or the
Company (or its subsidiaries or affiliates).
<PAGE> 14
3
5. EFFECT OF TERMINATION OF EMPLOYMENT; CHANGE IN CONTROL.
(a) If prior to December 31, 1999, your employment with the
Company and its subsidiaries terminates for any reason (other than termination
of employment by the Company or a subsidiary without Cause or due to your death,
Disability or Retirement) or the Committee determines that you have engaged in
Competitive Activity (other than following termination of your employment by the
Company without Cause) or Detrimental Activity, then the Company shall have the
right, exercisable in its sole discretion by written notice sent by certified
mail (or its equivalent) or via overnight courier ("Notice") to you within 30
days following such termination of employment or determination, to pay you an
amount in respect of the unvested portion of your Award. If the Company
exercises its right of payment in respect of the unvested portion of your Award,
your Award and the related Leveraged Amount will be reduced by an amount equal
to the product of your Award (and the Leveraged Amount, respectively) and your
then unvested percentage (as specified below), and the unvested portion of your
Award shall thereafter be for the Company's benefit. Any such reduction of the
Leveraged Amount shall also reduce proportionately that portion of the Leveraged
Amount that shall be deemed for purposes of Section 4(a) to have been credited
and paid to the Company.
(b) Your Award will vest according to the following schedule
(the "Vesting Schedule"):
If termination/determination occurs:
<TABLE>
<CAPTION>
Cumulative
Vesting Unvested
On or After But Prior to Percentage Percentage
- ----------- ------------ ---------- ----------
<S> <C> <C> <C>
Date of Grant 12/31/97 25% 75%
12/31/97 12/31/98 50% 50%
12/31/98 12/31/99 75% 25%
12/31/99 100% 0%
</TABLE>
provided that upon the termination of your employment due to your death or
Disability, your Award will immediately become fully vested and provided,
further, that the Committee shall have authority to accelerate (but not
otherwise modify) the Vesting Schedule at any time, for any or all of the
Participants, in its sole discretion. In addition, upon an actual or potential
Change in Control, the CMC may determine that your Award shall automatically
become vested either immediately or upon the occurrence of such events as the
CMC shall determine.
(c) The amount paid by the Company in cash in respect of the
unvested portion of your Award pursuant to paragraph (a) shall be equal to (i)
your unvested percentage (according to the
<PAGE> 15
4
Vesting Schedule) multiplied by the Initial Award Value portion of your Award,
plus (ii) a rate of return on the amount determined in clause (i) equal to the
Cost of Funds Rate plus 0.50% from the Date of Grant to (but not including) the
date the Company exercises its right of payment in respect of the unvested
portion of your Award. The Company will make such payment in cash as soon as
practicable but in no event later than 30 days following the date of the Notice.
(d) If the Company does not exercise its right of payment in
respect of the unvested portion of your Award, then your Award will remain
subject to, and continue to vest in accordance with, the Vesting Schedule and,
if at any time following termination of your employment the Committee determines
in good faith that you have engaged in any Competitive Activity (other than
following termination of your employment by the Company without Cause) or
Detrimental Activity, whether before or after such termination, the Committee
will promptly deliver to you a Notice of its determination, and thereafter the
Company will have the right to pay you an amount in respect of the unvested
portion of your Award, if any, as of the date of such Notice, upon the same
terms and with the same effects described in paragraphs (a), (b) and (c) hereof.
(e) In the case of your termination of employment by the
Company or its subsidiary without Cause or due to your Retirement, (i) the
Company shall not have the right to make payment in respect of the unvested
portion of your Award as provided in paragraph (a) hereof, and (ii) your Award
will remain subject to, and continue to vest in accordance with, the Vesting
Schedule. If at any time following any such termination of employment without
Cause or due to your Retirement the Committee determines in good faith that you
engaged in any Detrimental Activity, whether before or after such termination of
employment, or following your Retirement the Committee determines in good faith
that you engaged in any Competitive Activity, then the Committee will promptly
deliver to you a Notice of its determination, and thereafter the Company will
have the right to pay you an amount in respect of the unvested portion of your
Award, if any, as of the date of such Notice, upon the same terms and with the
same effects described in paragraphs (a), (b) and (c) hereof.
(f) To the extent your Award has vested, you will be entitled
to continue to share in amounts realized with respect to the Qualifying
Investments.
(g) The Company in its sole discretion may assign all or any
part of its right to make payment in respect of the unvested portion of your
Award to any of its affiliates.
6. PAYMENT. At such time as the Award becomes payable under the Plan as the
result of amounts realized with respect to such Qualifying Investments, you
shall become entitled to receive a
<PAGE> 16
5
cash or in kind payment equal to the amount calculated pursuant to the Plan, and
you shall thereby become entitled to share in amounts realized with respect to
Qualifying Investments provided that up to and at the date of such realization:
(a) You are employed by the Company or one or more of its
subsidiaries and you have not engaged in Competitive Activity or Detrimental
Activity; or
(b) Your employment with the Company and its subsidiaries has
been terminated without Cause and you have not engaged in Detrimental Activity;
or
(c) In any other case, you have not engaged in Competitive
Activity or Detrimental Activity.
7. NON-ASSIGNMENT. No direct or indirect sale, exchange, transfer, assignment,
pledge, creation of a security interest in, or encumbrance on, or other
disposition by you, either voluntary or involuntary, of all or any portion of
your Award or any economic interest therein (including without limitation by
means of any participation or swap transaction) shall be made, except by will or
the laws of descent and distribution. If you or anyone claiming under or through
you attempts to violate this Section 8 such attempted violation shall be null
and void and without effect.
8. UNFUNDED PLAN. The obligations set forth under the Plan shall be unfunded.
9. NO RIGHT TO CONTINUED EMPLOYMENT OR SUBSEQUENT AWARDS. The grant of an Award
shall not confer on you any right to be retained in the employ of the Company
and its subsidiaries, or to receive subsequent Awards under the Plan. The right
of the Company or the relevant subsidiary to terminate your employment at any
time or as otherwise provided by any agreement between the Company or any
subsidiary and you is specifically reserved.
10. BINDING ACTIONS. Any action taken or decision made by the Committee or its
delegates arising out of or in connection with the construction, administration,
interpretation or effect of the Plan or this Agreement shall lie within its sole
and absolute discretion, and shall be final, conclusive and binding on you and
all persons claiming under or through you. By accepting this grant or other
benefit under the Plan, you and each person claiming under or through you shall
be conclusively deemed to have indicated acceptance and ratification of, and
consent to, any action taken under the Plan by the Committee or its delegates.
11. WITHHOLDING. The Company shall have the right to deduct from all amounts
payable to you any taxes required by law to be withheld therefrom.
<PAGE> 17
6
12. SEVERABILITY. Each section, clause and provision of this Agreement will be
interpreted in such manner as to be valid and effective but if any section,
clause or provision shall be ruled invalid or unenforceable by any court of
competent jurisdiction, the invalidity or unenforceability of such section,
clause or provision shall not affect any of the remaining sections, clauses or
provisions of this Agreement and the invalid term shall be deemed to be replaced
by a valid term which most closely reflects the intent of the Plan and this
Agreement.
LEHMAN BROTHERS HOLDINGS INC.
BY
---------------------------
[Title]
-----------------------------
[Name of Employee]
<PAGE> 18
EXHIBIT A
(a) "Cause" shall mean termination of employment of a
Participant by the Company (or a subsidiary) due to a material breach by a
Participant of his or her employment contract with the Company (or a
subsidiary), failure by a Participant to devote substantially all business time
exclusively to the performance of his or her employment duties for the Company
(or a subsidiary), willful misconduct or material dishonesty, conviction of a
felony, serious crime or other crime material to the Participant's employment
with the Company (or a subsidiary) (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 the Company (or
a subsidiary).
(b) "Competitive Activity" shall mean involvement, at any time
between the date of termination of the Participant's employment with the Company
(or a subsidiary) and December 31, 1999, 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 the
Company and its affiliates at such time, as determined in the sole discretion of
the Committee.
(c) "Cost of Funds Rate" shall mean a cumulative (but not
compounded) annual return at a daily rate equal to the daily rate posted by the
Company to all of its subsidiaries for their borrowings.
(d) "Detrimental Activity" shall mean (i) using information
that was received by or disclosed to such Participant during his or her
employment with the Company (or a subsidiary) relating to the business affairs
of the Company or its subsidiaries or any of its clients, in breach of his or
her undertakings to keep such information confidential or (ii) directly or
indirectly by any means persuading or attempting to persuade any employee of the
Company or its subsidiaries to terminate his or her employment or any customer
or client of the Company or its subsidiaries to terminate or curtail its
business relationship with the Company or its subsidiaries or to breach any term
of any agreement with the Company or its subsidiaries or (iii) any activity
deemed to be detrimental to the Company or its subsidiaries, in each case as
determined in the sole discretion of the Committee.
(e) "Disability" shall mean a disability which meets the
criteria under both the Lehman Brothers Group Long Term Disability Plan and the
Social Security Disability Act.
(f) "Retirement" shall mean termination of employment with the
Company or a subsidiary which meets the criteria for retirement under the
qualified defined benefit pension plan of
<PAGE> 19
2
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 the Company or any
subsidiary, with the advance written approval of the Company or the subsidiary
sponsoring or contributing to the relevant plan, if the Participant is entitled
to benefits under such other pension plan.
<PAGE> 1
EXHIBIT 11
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED ELEVEN MONTHS
NOVEMBER 30, ENDED
---------------------------- NOVEMBER 30,
1996 1995 1994
----------- ----------- -------------
<S> <C> <C> <C>
PRIMARY:
Weighted average shares outstanding:
Common stock.................................... 101,548,947 104,535,218 105,436,860
Common stock issuable........................... 13,779,315 8,420,122 2,532,543
Common stock equivalents........................ 1,045,323 459,344 61,389
----------- ----------- -----------
Total........................................... 116,373,585 113,414,684 108,030,792
=========== =========== ===========
Income before cumulative effect of change in
accounting principle............................ $ 415.8 $ 242.2 $ 125.2
Cumulative effect of change in accounting
principle....................................... (12.7)
----------- ----------- -----------
Net income........................................ 415.8 242.2 112.5
Preferred dividends............................... (38.2) (42.3) (37.6)
----------- ----------- -----------
Net income applicable to common stock............. $ 377.6 $ 199.9 $ 74.9
=========== =========== ===========
Earnings Per Common Share:
Income before cumulative effect of change in
accounting principle............................ $ 3.24 $ 1.76 $ 0.81
Cumulative effect of change in accounting
principle....................................... (0.12)
----------- ----------- -----------
Earnings per common share......................... $ 3.24 $ 1.76 $ 0.69
=========== =========== ===========
FULLY DILUTED:
Weighted average shares outstanding:
Common stock.................................... 101,548,947 104,535,218 105,436,860
Common stock issuable........................... 13,779,315 8,420,122 2,532,543
Common stock equivalents........................ 1,252,138 551,936 61,389
----------- ----------- -----------
Total........................................... 116,580,400 113,507,276 108,030,792
=========== =========== ===========
Income before cumulative effect of change in
accounting principle............................ $ 415.8 $ 242.2 $ 125.2
Cumulative effect of change in accounting
principle....................................... (12.7)
----------- ----------- -----------
Net income........................................ 415.8 242.2 112.5
Preferred dividends............................... (38.2) (42.3) (37.6)
----------- ----------- -----------
Net income applicable to common stock............. $ 377.6 $ 199.9 $ 74.9
=========== =========== ===========
Earnings Per Common Share:
Income before cumulative effect of change in
accounting principle............................ $ 3.24 $ 1.76 $ 0.81
Cumulative effect of change in accounting
principle....................................... (0.12)
----------- ----------- -----------
Earnings per common share......................... $ 3.24 $ 1.76 $ 0.69
=========== =========== ===========
</TABLE>
<PAGE> 1
EXHIBIT 12.A
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
COMPUTATION IN SUPPORT OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
FOR THE YEAR ELEVEN MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
--------------- ------------- ------------- -------------
1992 1993 1994 1995 1996
------ ------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Fixed Charges:
Interest expense:
Subordinated indebtedness............. $ 150 $ 144 $ 158 $ 206 $ 220
Bank loans and other borrowings*...... 5,035 5,224 6,294 10,199 10,596
Interest component of rentals of
office and equipment............... 74 76 42 44 34
Other adjustments**................... 2 7 4 28 16
------ ------ ------ ------- -------
Total (A).......................... $5,261 $5,451 $ 6,498 $10,477 $10,866
====== ====== ====== ======= =======
Earnings:
Pretax income (loss) from continuing
operations......................... $ (247) $ 27 $ 193 $ 369 $ 637
Fixed charges......................... 5,261 5,451 6,498 10,477 10,866
Other adjustments***.................. (6) (4) (28) (14)
------ ------ ------ ------- -------
Total (B).......................... $5,014 $5,472 $ 6,687 $10,818 $11,489
====== ====== ====== ======= =======
(B/A)................................... **** 1.00 1.03 1.03 1.06
</TABLE>
- ---------------
* Includes amortization of long-term debt discount.
** Other adjustments include capitalized interest and debt issuance costs and
amortization of capitalized interest.
*** Other adjustments include adding the net loss of affiliates accounted for
at equity whose debt is not guaranteed by the Company and subtracting
capitalized interest and debt issuance costs and undistributed net income
of affiliates accounted for at equity.
**** Earnings were inadequate to cover fixed charges and would have had to
increase $247 million in 1992 in order to cover the deficiencies.
<PAGE> 1
EXHIBIT 12.B
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 FOR THE TWELVE
FOR THE YEAR ELEVEN MONTHS TWELVE MONTHS MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
--------------- ------------- ------------- ------------
1992 1993 1994 1995 1996
------ ------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Combined Fixed Charges and
Preferred Dividends:
Interest expense:
Subordinated indebtedness....... $ 150 $ 144 $ 158 $ 206 $ 220
Bank loans and other
borrowings*.................. 5,035 5,224 6,294 10,199 10,596
Interest component of rentals of
office and equipment......... 74 76 42 44 34
Other adjustments**............... 2 7 4 28 16
------ ------ ------ ------- -------
Total fixed charges............... 5,261 5,451 6,498 10,477 10,866
Preferred dividends (tax
equivalent basis)............... 48 48 58 64 58
------ ------ ------ ------- -------
Total (A).................... $5,309 $5,499 $ 6,556 $10,541 $ 10,924
====== ====== ====== ======= =======
Earnings:
Pretax income (loss) from
continuing operations........ $ (247) $ 27 $ 193 $ 369 $ 637
Fixed charges................... 5,261 5,451 6,498 10,477 10,866
Other adjustments***............ (6) (4) (28) (14)
------ ------ ------ ------- -------
Total (B).................... $5,014 $5,472 $ 6,687 $10,818 $ 11,489
====== ====== ====== ======= =======
(B/A)............................. **** **** 1.02 1.03 1.05
</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 $295 million in 1992 and $27 million in 1993 in
order to cover the deficiencies.
<PAGE> 1
Exhibit 13
FINANCIAL REVIEW
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 32
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
REPORT OF INDEPENDENT AUDITORS 52
CONSOLIDATED FINANCIAL STATEMENTS 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 59
LEHMAN BROTHERS 1996 ANNUAL REPORT 31
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 and security valuations, global economic and political trends, and
industry competition. As a result, revenues and earnings may vary significantly
from quarter to quarter and from year to year.
The favorable market environment experienced during the second half of 1995
continued through 1996. The 1995 environment was characterized by declining
interest rates and improving investor demand as world markets rebounded from
higher 1994 interest rates and the Mexican peso crisis. The market environment
in 1996 reflected improved valuations and strong investor demand in worldwide
equity markets, record levels of corporate finance advisory activities, and
near-record underwriting volumes.
The 1996 U.S. fixed income markets were more volatile than in 1995. The U.S.
bond market began 1996 with a strong rally, with the 30-year U.S. Treasury
trading just under 6%, as investors reacted favorably to the prospects of a
deficit-reduction package and controlled inflation. In March the U.S. fixed
income market experienced a significant correction as market data suggested
unexpected strength in the U.S. economy leading to concern that the U.S. Federal
Reserve Board ("Fed") would increase short-term rates. Most U.S. interest rates
reached a peak in July of 1996, when a surprisingly strong unemployment report
was released. In the third quarter a series of conflicting data on economic
growth and inflation led to more volatile market conditions and weakened
investor activity, as investors were unsure of the future direction of interest
rates. In the fourth quarter investors became convinced by market data that the
economy was growing slowly and that the Fed would not raise rates, which
resulted in a strong rally in the U.S. bond market with heavy trading activity
and a decrease in interest rates. While absolute bond market returns were lower
in 1996 than 1995, customer trading activities were generally strong. The
strength in customer trading activities was fueled by the bond market rallies
experienced in the first and fourth quarter as well as higher trading activities
in emerging market bonds and high-yield corporate bonds. These asset classes
benefited from improved economic conditions in many emerging market economies
and heightened demand as investors sought sectors with higher potential returns.
The European bond markets performed particularly well in 1996. This strength was
most apparent in the peripheral European economies, as these markets reacted
favorably to the growing realization that European Monetary Union would take
place and the significant strides made by these countries in cutting budget
deficits and inflation. These
LEHMAN BROTHERS 1996 ANNUAL REPORT 32
<PAGE> 3
factors led to a decreasing rate environment and brisk trading in 1996.
Additionally, the peripheral European economies saw a significant convergence of
the yields to core European markets.
In Japan, bond markets suffered in both 1996 and 1995 from weak investor
activity and declining yields as a result of continued slow economic growth. At
the outset of 1996, Asian fixed income markets (excluding Japan) were adversely
affected by relatively tight central bank stances on monetary policy in response
to concerns about economic overheating. These markets improved toward the end of
1996, as moderate economic growth and lower inflation buoyed customer trading
activities.
The U.S. equity market saw all major stock indices reach record levels in both
1995 and 1996. Over the two year period ended November 30, 1996, the Dow Jones
Industrial Average increased 74%, closing at 6,522. Listed U.S. equity trading
volumes were strong in both years, with the average daily trading volume on the
New York Stock Exchange reaching record levels in both 1996 and 1995. While
experiencing a brief correction in July in response to concerns over increasing
interest rates, the U.S. equity market, in 1996, was favorably impacted by
record flows of capital into equity funds, low inflation levels, and favorable
earnings prospects in the wake of the downsizing of many U.S. corporations. In
1995, the U.S. equity markets posted significant returns as valuations rebounded
from the 1994 lows and investor demand strengthened in response to favorable
earnings prospects and the declining interest rate environment.
The European equity markets, while underperforming the U.S. equity market, were
generally strong, with the Financial Times-Stock Exchange Eurotrack 100 Index
returning 11% in 1996 and 19% in 1995. Equity trading remained brisk and
valuations increased due to the declining interest rate environment and
favorable prospects in light of the proposed European Monetary Union.
In Japan, the Nikkei 225 Index rose 12% in 1996 after declining slightly in
1995; however, trading volumes weakened from 1995 levels. The Japanese equity
markets benefited in the first half of 1996, as investors contributed
significant amounts of overseas capital into the Japanese equity markets on
expectations of stronger growth in both the economy and corporate profits.
However, in the second half of 1996, investor activity weakened as bullish
expectations failed to become realized and concerns grew regarding the
sustainability of Japan's economic recovery into 1997. In Asia (excluding
Japan), market performance was mixed: Hong Kong, Malaysia, the Philippines and
Indonesia produced high double-digit returns, while markets in Thailand, Korea
and India were uncharacteristically bearish.
Latin American emerging market economies realized a broad recovery in 1996,
after experiencing a downturn in 1995 in the wake of the Mexican peso crisis.
Tighter monetary and fiscal policies adopted in 1995 led to a rebound in these
markets in 1996, with bond markets performing extremely well as evidenced by the
Lehman Brothers Emerging Americas Index returning over 36 percent in fiscal
1996.
Worldwide underwriting volumes in both fixed income and equities strengthened
significantly in 1996 from the mixed performance in 1995. Equity underwriting
volumes were positively impacted by a number of factors, including favorable
equity valuations on worldwide exchanges, heightened investor demand resulting
from record flows of capital into equity mutual funds, and the increased level
of global issuers accessing the capital markets. Fixed income underwriting
volumes improved in 1996 as the robust merger and acquisition environment made
new issuers less interest sensitive, while capital was needed to finance newly
emerging companies. Additionally, 1996 saw a significant increase in non-U.S.
corporate and sovereign issuers accessing the U.S. fixed income markets, to fund
growth.
Corporate Finance Advisory activities reached record levels in 1996 after a
strong performance in 1995. The increase in merger and acquisition activities
reflected the continuing trend of increased consolidation and globalization
across industry sectors and the overall strength in the global capital markets.
In 1997, the pace of strategic merger and acquisition activity driven by global
competition is expected to continue at extremely strong levels.
While fiscal 1996 was characterized by strong financial markets, nevertheless,
the financial services industry is cyclical. As a result the Company's
businesses are evaluated across the market cycles for operating profitability
and their
LEHMAN BROTHERS 1996 ANNUAL REPORT 33
<PAGE> 4
contribution to the Company's long-term strategic objectives. The Company
strives to minimize the effects of economic downturns through its diversified
product base, its global presence and its risk management practices.
At the outset of 1997, U.S. bond markets have experienced a general rise in the
level of interest rates due to inflationary concerns; this environment has
encouraged heavier debt issuance in anticipation of higher rates, but somewhat
more difficult trading conditions. Equity valuation levels and trading volumes
on worldwide exchanges have remained generally favorable, due to strong
corporate earnings reports and positive investment flows. The strong level of
corporate finance advisory activities experienced in 1996 have continued into
1997.
Note: Except for the historical information contained herein, this Management's
Discussion and Analysis of Financial Condition and Results of Operations contain
forward-looking statements that discuss the risks and uncertainties involved in
the Company's business. The Company undertakes no obligation to update publicly
any forward-looking statements, whether as a result of new information, future
events or otherwise.
[RESULTS OF OPERATIONS GRAPH]
RESULTS OF OPERATIONS
SUMMARY The Company's 1996 net income was $416 million, including a $50 million
aftertax severance charge. Excluding the charge, net income was $466 million for
1996. The Company's 1996 results reflect strong performances across all of the
Company's core businesses. Fixed income sales and trading and investment banking
business activities were responsible for the majority of the increased net
income and net revenues compared to 1995. The Company's results were positively
affected by favorable market conditions, which led to near record underwriting
volumes, record highs in many worldwide equity indices and a record year in
worldwide merger and acquisition activity. 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 when compared to 1994. The Company benefited from the continuing
increase in merger and acquisition activity throughout 1995 and from a stronger
market climate beginning in the second quarter of the year.
For 1994, the Company reported net income of $113 million, including a $13
million aftertax charge for the cumulative effect of a change in accounting for
postemployment benefits, an $18 million aftertax severance charge recorded in
the first quarter of 1994 related to the Company's ongoing review of its
personnel needs, and a $12 million aftertax charge related to the spin-off from
American Express on May 31, 1994. The 1994 results reflected a difficult market
environment for many of the Company's principal businesses.
NET REVENUES Net revenues were $3,444 million for 1996, $3,071 million for 1995
and $2,738 million for 1994. The increase in net revenues in 1996 reflected a
general strengthening in customer flow and trading activities in a number of
fixed income product areas, increased levels of worldwide debt and equity
underwriting, and improved corporate finance advisory results. During the fourth
quarter of 1996, the Company recorded net revenues of $1,068 million, its
highest quarterly level of net revenues in the post spin-off period. Net
revenues in 1995, excluding a special revenue item 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
LEHMAN BROTHERS 1996 ANNUAL REPORT 34
<PAGE> 5
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.
Net revenues from international sources as a percentage of total net revenues
(excluding Omnitel in 1995) were 41% for 1996, 44% for 1995 and 42% for 1994,
reflecting the global scope of the Company's business activities. This includes
approximately $363 million, $368 million and $337 million of revenues that were
associated with domestic products and services in 1996, 1995 and 1994,
respectively, that the Company estimates resulted from relationships with
international clients and customers.
Since 1990, Lehman Brothers has focused on a "client/customer-driven" strategy.
Under this strategy, Lehman Brothers concentrates on serving the needs of major
issuing and advisory clients and investing customers worldwide to build an
increasing "flow" of business that leverages the Company's research,
underwriting and distribution capabilities. Customer flow continues to be the
primary source of the Company's net revenues. In addition to its customer flow
activities, the Company also takes proprietary positions based upon expected
movements in interest rate, foreign exchange, equity and commodity markets in
both the short-and long-term. The Company's success in this area is dependent
upon its ability to anticipate economic and market trends and to develop trading
strategies that capitalize on these anticipated changes. Consistent with the
Company's client/customer-driven strategy, proprietary trading activities
accounted for approximately 14% of net revenues in 1996, 9% in 1995 and 6% in
1994. Proprietary trading is not anticipated to grow significantly.
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. In 1996, net interest revenues increased 26% to
$482 million from $383 million in 1995. The increased net interest revenues in
1996 resulted from a shift in the composition of the Company's fixed income
portfolio, an increase in net dividend revenue related to certain structured
transactions in equity derivatives, and improved spreads on certain higher
margin matched book financing transactions, partially offset by higher interest
expenses resulting from the Company's increased level of long-term debt
outstanding.
During 1995, net interest revenues 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.
LEHMAN BROTHERS 1996 ANNUAL REPORT 35
<PAGE> 6
The following table of net revenues by business unit and the accompanying
discussion have been prepared in order to present the Company's net revenues in
a format that reflects the manner in which the Company manages its businesses.
For internal management purposes, the Company has been segregated into four
major business units: Fixed Income, Equity, Corporate Finance Advisory and
Merchant Banking. Each business unit represents a grouping of financial
activities and products with similar characteristics. These business activities
result in revenues that are recognized in multiple revenue categories contained
in the Company's Consolidated Statement of Operations. Net revenues by business
unit contain certain internal allocations, including funding costs, which are
centrally managed.
TWELVE MONTHS ENDED NOVEMBER 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL
TRANSACTIONS AND INVESTMENT
NET INTEREST COMMISSIONS BANKING OTHER TOTAL
==============================================================================================
<S> <C> <C> <C> <C> <C>
Fixed Income $1,793 $ 57 $307 $ 8 $2,165
Equity 275 286 280 3 844
Corporate Finance Advisory 249 249
Merchant Banking (18) 138 120
Other 11 19 7 29 66
- ----------------------------------------------------------------------------------------------
$2,061 $362 $981 $40 $3,444
- ----------------------------------------------------------------------------------------------
</TABLE>
TWELVE MONTHS ENDED NOVEMBER 30, 1995
<TABLE>
<CAPTION>
PRINCIPAL
TRANSACTIONS AND INVESTMENT
NET INTEREST* COMMISSIONS BANKING OTHER TOTAL
===============================================================================================
<S> <C> <C> <C> <C> <C>
Fixed Income $1,373 $ 92 $178 $14 $1,657
Equity 418 330 215 1 964
Corporate Finance Advisory 231 231
Merchant Banking (26) 172 146
Other 11 28 5 29 73
- -----------------------------------------------------------------------------------------------
$1,776 $450 $801 $44 $3,071
- -----------------------------------------------------------------------------------------------
</TABLE>
* 1995 equity revenues include $129 million from the sale of Omnitel.
ELEVEN MONTHS ENDED NOVEMBER 30, 1994
<TABLE>
<CAPTION>
PRINCIPAL
TRANSACTIONS AND INVESTMENT
NET INTEREST COMMISSIONS BANKING OTHER TOTAL
==============================================================================================
<S> <C> <C> <C> <C> <C>
Fixed Income $1,419 $103 $ 72 $18 $1,612
Equity 235 312 182 11 740
Corporate Finance Advisory 180 180
Merchant Banking (8) 136 128
Other 8 30 2 38 78
- ----------------------------------------------------------------------------------------------
$1,654 $445 $572 $67 $2,738
- ----------------------------------------------------------------------------------------------
</TABLE>
The following discussion provides an analysis of the Company's net revenues
based upon the various business units which generated these revenues.
FIXED INCOME The Company's fixed income revenues reflect customer flow
activities (both institutional and high-net-worth retail), secondary trading,
debt underwriting, syndicate and financing activities related to fixed income
products. Fixed income products include dollar and non-dollar government
securities, mortgage- and asset-backed securities, money
LEHMAN BROTHERS 1996 ANNUAL REPORT 36
<PAGE> 7
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 fixed income products.
Fixed income revenues were $2,165 million for 1996, $1,657 million for 1995 and
$1,612 million for 1994. During 1996, fixed income revenues increased from 1995,
primarily as a result of stronger customer trading volumes reflecting a
strengthening in the global economy, a reduced U.S. federal deficit and
relatively low levels of inflation. The improved market conditions in both the
U.S. and Europe led to a significant increase in worldwide debt underwriting
revenues and greater contributions from customer flow and trading activities in
a number of fixed income products including mortgages, emerging markets, fixed
income derivatives and high yield and high-grade corporate bonds. The improved
performance in the mortgage business was led by the commercial and nonperforming
loan areas. The Company's emerging markets and high yield revenues increased
during 1996, primarily as a result of increased debt underwritings compared to
1995. Fixed income derivative revenues in 1996 were driven by improved results
in Europe, as the Company continued to benefit from its concerted effort to
globalize this business. Financing revenues increased in 1996 due to increased
net interest spreads in certain of the matched book portfolios. Lehman ranked #2
in lead-managed fixed income offerings worldwide in 1996 and 1995 with
underwritings of $104 billion and $77 billion in 1996 and 1995, respectively,
based on Securities Data Company information.
Reduced interest rates and a strengthening U.S. dollar contributed to a
favorable market environment in 1995, particularly during the second half of the
Company's year. The improved market environment contributed to a stronger debt
syndicate calendar and increased customer flow activities for many of the
Company's fixed income products, including high-grade corporates, municipals and
foreign exchange. The most significant component of the increase in fixed income
revenues was investment banking, due to a strengthening in origination volumes
and an improved mix of underwriting revenues compared to the depressed 1994
levels.
EQUITY Equity net revenues reflect customer flow activities (both institutional
and high-net-worth retail), secondary trading, equity underwriting, equity
finance, equity derivatives and arbitrage activities.
Equity revenues were $844 million for 1996, $964 million for 1995 and $740
million for 1994. 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 $835 million for 1995.
Equity revenues increased slightly in 1996 (as compared to the 1995 amount
excluding Omnitel) as a result of improved underwriting results combined with
increased contributions from the equity derivative business, convertible
securities and international equities. The improved underwriting volumes
reflected the favorable global economic environment in 1996, with generally
increased trading volumes on most major domestic and international listed
exchanges and record flows of capital into U.S. equity mutual funds. The
improved equity derivatives results in 1996 were primarily from the Company's
Asian business activities, reflecting the continued emphasis on the
globalization of certain high margin businesses. During the second half of 1996,
the Company's efforts to reposition its equity business resulted in the
realization of stronger results as it lead-managed transactions valued at over
$5 billion, representing an 87% increase over the comparable amount for the
first half of 1996. The Company ranked third in total NYSE listed trading volume
throughout all of 1996 and 1995.
Revenues in 1995 reflected a stronger 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,
LEHMAN BROTHERS 1996 ANNUAL REPORT 37
<PAGE> 8
partially offset by reduced market trading volumes on certain Asian and European
exchanges. Equity derivative revenues in 1995 were up substantially compared to
1994, 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.
CORPORATE FINANCE ADVISORY Corporate finance advisory net revenues, classified
in the Consolidated Statement of Operations as a component of investment banking
revenues, result primarily from fees earned by the Company in its role as
strategic advisor to its clients. This role primarily consists of advising
clients on mergers and acquisitions, divestitures, leveraged buyouts, financial
restructurings, and a variety of cross-border transactions. The net revenues for
corporate finance advisory increased in 1996 to $249 million from $231 million
in 1995 and from $180 million in 1994. The increased revenues reflected a strong
merger and acquisition environment throughout 1996 and 1995, as companies
concentrated on cost cutting and creating greater economies of scale via
acquisitions, asset sales, and corporate restructurings on a global basis.
During 1996, the Company ranked sixth, based on the value of completed merger
and acquisition assignments worldwide, advising on 153 completed transactions
valued at approximately $98 billion, based on Securities Data Company
information. Reflecting the international nature of the Company's corporate
finance advisory business, 42 of the transactions completed in 1996 were
cross-border in nature.
MERCHANT BANKING The Company is the general partner for six merchant banking
partnerships. Current merchant banking investments held by the partnerships
include both publicly traded and privately held companies diversified on a
geographic and industry basis. Merchant banking net revenues primarily represent
the Company's proportionate share of net realized and net unrealized gains and
losses from the sale and revaluation of investments held by the partnerships.
Such amounts are classified in the Consolidated Statement of Operations as a
component of investment banking revenues. Merchant banking net revenues also
reflect the net interest expense relating to the financing of the Company's
investment in the partnerships. Merchant banking net revenues were $120 million,
$146 million and $128 million for 1996, 1995 and 1994, respectively.
For 1996, merchant banking revenues resulting from the participation in the
partnerships decreased 20% to $138 million from $172 million for 1995. This
decrease was principally due to a reduction in the net gains recognized on the
publicly traded investments held by the partnerships. During 1995, merchant
banking revenues increased to $172 million from $136 million for 1994 due to
increases in the value of several publicly traded investments.
NON-INTEREST EXPENSES
During 1996, the Company's non-interest expenses totaled $2,807 million,
including a severance charge of $84 million. 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 for 1994, including a $33 million
severance charge and a $15 million spin-off charge.
Excluding these special charges, non-interest expenses were $2,723 million for
1996, $2,555 million for 1995 and $2,497 million for 1994.
<TABLE>
<CAPTION>
TWELVE MONTHS ELEVEN MONTHS
ENDED ENDED
NOVEMBER 30 NOVEMBER 30
------------------ -------------
(IN MILLIONS) 1996 1995(1) 1994
===========================================================================
<S> <C> <C> <C>
Compensation and benefits expense $1,747 $1,494 $1,413
Compensation and benefits/net revenues 50.7% 50.8% 51.6%
Nonpersonnel expenses:
Excluding severance and other charges $ 976 $1,061 $1,084
Severance and other charges 84 97 48
- ---------------------------------------------------------------------------
Total nonpersonnel expenses $1,060 $1,158 $1,132
- ---------------------------------------------------------------------------
Nonpersonnel expenses(2)/net revenues 28.3% 36.1% 39.6%
- ---------------------------------------------------------------------------
</TABLE>
(1) 1995 amounts exclude revenues and expenses related to the Omnitel
transaction.
(2) Nonpersonnel expenses excluding severance and other charges.
LEHMAN BROTHERS 1996 ANNUAL REPORT 38
<PAGE> 9
Compensation and benefits expense declined as a percentage of net revenues to
50.7% for 1996 from 50.8% for 1995 (excluding Omnitel). Excluding special
charges, nonpersonnel expenses decreased $85 million to $976 million for 1996
from $1,061 million for 1995. Additionally, nonpersonnel expenses (excluding
severance and other charges) as a percentage of net revenues decreased to 28.3%
in 1996 from 36.1% in 1995. The decline in nonpersonnel expenses in 1996
resulted from cost savings realized from the 1995 restructuring charge and the
Company's continued focus on improving productivity and reducing costs.
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 do not include the $24 million of cost savings attributable to the 1995
real estate restructuring charge.
The Company implemented further cost reduction efforts in 1996, with the goal of
achieving additional nonpersonnel cost savings in excess of $50 million by the
end of 1996. The Company achieved this objective by the third quarter of 1996.
Nonpersonnel expenses decreased to $240 million in the third quarter of 1996 as
compared to $254 million in the fourth quarter of 1995 (excluding the
restructuring charge), which translated into annualized savings of $56 million.
These savings were achieved across numerous expense categories as a result of
the continuing systematic and comprehensive global review of all major expense
categories. In the fourth quarter of 1996, nonpersonnel expenses totaled $247
million as certain revenue-sensitive expenses increased in response to a
significant rise in revenues.
The Company believes that while the absolute level of its expense base may
increase in response to related increases in revenue levels (due to the
variability of certain expenses), the cost savings achieved as a result of its
cost reduction efforts are permanent.
1996 SEVERANCE CHARGE The Company recorded an $84 million severance charge ($50
million aftertax) in the fourth quarter of 1996 related to certain strategic
actions taken to improve on-going profitability. The 1996 severance charge
reflected the culmination of a worldwide business unit economic performance
review which was undertaken in the fourth quarter of 1996 to focus the Company
on its core investment banking, equity and fixed income sales and trading areas.
The charge resulted from personnel reductions across a number of underperforming
fixed income and equity businesses, including exiting the precious metals
business in the U.S., Europe and Asia; exiting energy trading in the U.S. and
Europe; consolidating Asian fixed income risk management activities into one
center in Tokyo; refocusing foreign exchange trading activities and combining
the Company's New York Private Client Services offices. Additionally, the charge
reflects various other strategic personnel reductions which were aimed at
delayering management. The Company intends to redirect nonpersonnel expense and
compensation expense savings into certain core businesses to expedite the
Company's strategic initiatives; and it is expected that these actions in the
aggregate will result in improved operating performance in future periods.
1995 RESTRUCTURING CHARGE The restructuring charge in 1995 included 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 included costs to write-down the carrying value of leasehold
improvements, as well as projected shortfalls of sublease rentals versus
expected operating costs related to the Company's excess capacity. The excess
real estate capacity resulted from headcount reductions associated with the
Company's
LEHMAN BROTHERS 1996 ANNUAL REPORT 39
<PAGE> 10
cost reduction efforts. The severance component of the charge related to
payments made to terminated personnel arising from a formalized fourth quarter
business unit productivity review. The Company realized approximately $24
million of reduced occupancy and depreciation expenses in 1996 as a result of
these actions.
INCOME TAXES
The Company had an income tax provision of $221 million, $127 million and $67
million for 1996, 1995 and 1994, respectively. The effective tax rate for the
Company was 35% for 1996, 34% for 1995 and 35% for 1994. The higher tax rate in
1996 versus 1995 reflects a decrease in tax-exempt interest and dividends
partially offset by benefits generated from the restructuring of certain legal
entities to assure that the Company is operating in the most tax efficient
manner. The 1996 income tax provision includes a provision of $255 million for
continuing businesses and a tax benefit of $34 million related to the 1996
severance charge. The lower rate in 1995 versus 1994 reflects the utilization of
certain previously nondeductible foreign losses and the elimination of the
charge related to the nondeductible portion of the spin-off expenses in 1994,
partially offset by an increase in state taxes and a decrease in tax-exempt
interest and dividends. The 1995 income tax provision includes a provision of
$134 million for continuing businesses, a $32 million provision related to the
sale of the Company's investment in Omnitel and a tax benefit of $39 million
related to the restructuring charge.
The Company's net deferred tax asset decreased by $55 million to $254 million at
November 30, 1996 from $309 million at November 30, 1995. It is anticipated that
the remaining net deferred tax asset will be realized through future earnings.
The Company's net deferred tax asset increased by $89 million to $309 million at
November 30, 1995 from $220 million at November 30, 1994.
As of November 30, 1996, the Company had approximately $92 million of net
operating losses available to offset future taxable income.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW As a leading global investment bank that actively participates in the
global capital markets, the Company has large and diverse capital requirements.
Many of the businesses in which the Company operates are capital intensive.
Capital is required to finance, among other things, the Company's securities
inventories, underwriting activities, principal investments, merchant banking
activities and investments in fixed assets.
The Company's total assets were $128.6 billion at November 30, 1996 compared to
$115.3 at November 30, 1995. The Company's balance sheet is highly liquid and
consists primarily of cash and cash equivalents, securities and other financial
instruments owned which are marked-to-market daily and collateralized short-term
financing agreements. As the Company's primary activities are based on customer
flow transactions, the Company experiences a rapid asset turnover rate. In
addition, the highly liquid nature of these assets provides the Company with
flexibility in financing and managing its business. The overall size of the
Company's total assets and liabilities fluctuates from time to time and at
specific points in time (such as calendar quarter ends) may be higher than
fiscal quarter ends.
FUNDING AND CAPITAL POLICIES The Company's Finance Committee, which includes
senior officers from key areas of the Company, is responsible for establishing
and managing the funding and liquidity policies of the Company. The Finance
Committee's funding and liquidity policies include recommendations for capital
and balance sheet size as well as the allocation of capital and balance sheet to
product areas. In addition, the Finance Committee works with the Regional Asset
and Liability Committees to ensure coordination of global funding efforts. The
Regional Asset and Liability Committees are aligned with the Company's
geographic funding centers and are responsible for implementing funding
strategies consistent with the direction set by the Finance Committee and for
monitoring and managing liquidity for the region.
LEHMAN BROTHERS 1996 ANNUAL REPORT 40
<PAGE> 11
The primary goal of the Company's funding policies is to provide sufficient
liquidity and availability of funding sources at all times and throughout all
market environments. There are five key elements to the Company's funding
strategy which are:
(1) To maintain an appropriate Total Capital structure to support the business
activities in which the Company is engaged.
The Company is one of the most highly capitalized global investment banking
firms with $19.8 billion in Total Capital. The Company manages Total Capital,
defined as long-term debt, preferred stock and common stockholders' equity, on a
business and product level. The determination of the amount of Total Capital
assigned to each business and product is a function of asset quality, market
risk, liquidity and regulatory capital requirements. The Company reallocates its
capital to businesses based upon their ability to obtain targeted returns,
perceived opportunities in the marketplace and the Company's long-term strategy.
The Company strives to have sufficient Total Capital to meet its anticipated
long-term capital needs which include cash capital (liquidity), regulatory
capital and market and credit risk requirements, and continually monitors its
Total Capital needs by using market, credit and liquidity risk sensitivity
analyses.
[TOTAL CAPITAL GRAPH]
(2) To minimize liquidity and refinancing risk by funding the Company's assets
on a global basis with liabilities which have maturities similar to the
anticipated holding period of the assets.
The Company continually reviews its mix of long- and short-term borrowings as it
relates to maturity matching and the availability of secured and unsecured
financing. In general, the Company finances its equity investments in its
subsidiaries with stockholders' equity and the subordinated capital of
subsidiaries are financed with a combination of subordinated debt and
longer-dated senior debt. Inventories and other short-term assets are financed
with a combination of short-term funding, floating rate long-term debt and
stockholders' equity. Fixed assets, property, plant and equipment are generally
financed with longer-dated fixed rate debt.
Where the Company deems it to be appropriate and to minimize currency risks,
foreign currency denominated assets are financed with corresponding foreign
currency denominated liabilities.
(3) To maintain sufficient liquidity during a period of financial stress through
a combination of collateralized short-term financings and Total Capital.
Financial stress is defined as any event which severely constrains the Company's
access to unsecured funding sources.
To achieve this objective, the Company strives to maximize its use of global
collateralized borrowing sources and reduce its reliance upon short-term
unsecured borrowings. In addition, the Company's liquidity policies include
maintaining sufficient excess unencumbered securities to use as collateral, if
necessary, to obtain secured financing to meet maturities of short-term
unsecured liabilities as well as current maturities of long-term debt. Also, the
Company strives to maintain a sufficient amount of Total Capital to enable the
Company to support all assets not readily pledgeable to counterparties and to
meet secured borrowing haircut requirements as determined by reference to the
Company's bank lenders, should unsecured sources of borrowings no longer be
available. In this regard, the Company believes that increasing Total Capital
will provide additional liquidity to cover periods of financial stress and
further advance the Company's liquidity management objectives. Lastly, the
Company periodically tests its secured and unsecured credit facilities to ensure
availability and operational readiness. These policies position the Company to
meet its liquidity requirements in all periods including those of financial
stress.
LEHMAN BROTHERS 1996 ANNUAL REPORT 41
<PAGE> 12
Additionally, during 1996, the Company further expanded its contingency funding
strategy by providing a comprehensive one-year action plan in the event of
severe financial stress. The plan, which was approved by the Company's Finance
Committee in 1996, will be subject to updating, review and ratification by the
Finance Committee annually.
(4) To obtain diversified funding through a global investor base which maximizes
liquidity and reduces concentration risk.
The Company obtains global funding from both the banking community and short-
and long-term investors 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 issues both commercial paper and other short-term debt instruments,
including master notes, corporate and retail deposits, and bank borrowings under
uncommitted lines of credit and other uncommitted arrangements. To reduce
liquidity and concentration risk, the Company carefully manages its maturities
to avoid large refinancings on any one given day, and limits its exposure to any
single investor or type of investor.
(5) Maintain funding availability well in excess of actual utilization.
The Company maintains sizable uncommitted lines of credit from a broad range of
banks and financial institutions from which it draws funds in a variety of
currencies and which provide an additional source of liquidity. Uncommitted
lines consist of facilities that the Company has been advised are available but
for which no contractual lending obligations exists.
Additionally, the Company maintains secured and unsecured committed revolving
credit facilities which at November 30, 1996, totaled $3 billion.
SHORT-TERM FUNDING The Company strives to maximize the portion of the Company's
balance sheet that is funded through collateralized borrowing sources which in
turn minimizes the reliance placed upon unsecured short-term debt.
Collateralized borrowing sources include securities and other financial
instruments sold but not yet purchased, as well as collateralized short-term
financings, defined as securities sold under agreements to repurchase ("repos")
and securities loaned. Because of their secured nature, repos and other types of
collateralized borrowing sources are less credit-sensitive and have historically
been a more stable financing source under adverse market conditions. Also,
collateralized borrowing sources generally provide the Company with access to
lower cost funding.
The amount of the Company's collateralized borrowing activities will vary
reflecting changes in the mix and overall levels of securities and other
financial instruments owned and global market conditions. However, at all times,
the vast majority of the Company's assets are funded with collateralized
borrowing sources. At November 30, 1996 and 1995, $89 billion and $83 billion,
respectively, of the Company's total balance sheet was financed using
collateralized borrowing sources.
At November 30, 1996, 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 covenants which require, among other things, that the Company maintain
specified levels of liquidity, consolidated capital and tangible net worth, as
defined.
In addition, the Company maintains 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. Any loans outstanding on the commitment termination date may mature
on the first anniversary of the commitment termination date at the option of
LBIE. The loans provided by the bank group are available in several currencies,
including U.S. dollar, British pound sterling, Deutsche mark, ECU, French
LEHMAN BROTHERS 1996 ANNUAL REPORT 42
<PAGE> 13
franc, and Italian lira, as well as many other currencies as requested. The
credit agreement contains covenants which require, among other things, that LBIE
maintain specified levels of tangible net worth, and regulatory capital, and
that the Company maintain specified levels of consolidated stockholders' equity
and tangible net worth, as defined.
There were no borrowings outstanding under the Facility as of November 30, 1996
or under the Revolving Credit Agreement; however, the Company uses the Facility
for general corporate purposes from time to time. The Company has been in
compliance with restrictive covenants for both the Revolving Credit Agreement
and the Facility at all times.
TOTAL CAPITAL In accordance with the Company's liquidity policies, the Company
strengthened its Total Capital base in 1996 to $19.8 billion at November 30,
1996 from $16.5 billion at November 30, 1995 and increased the average maturity
of the long-term debt portfolio. Total Capital increased primarily due to an
increase in long-term debt.
TOTAL CAPITAL
<TABLE>
<CAPTION>
NOVEMBER 30
---------------------------
(IN MILLIONS) 1996 1995 1994
==========================================================================
<S> <C> <C> <C>
LONG-TERM DEBT
Senior Notes $12,571 $10,505 $ 9,107
Subordinated Indebtedness 3,351 2,260 2,214
15,922 12,765 11,321
STOCKHOLDERS' EQUITY
Preferred Equity 508 708 708
Common Equity 3,366 2,990 2,687
- --------------------------------------------------------------------------
3,874 3,698 3,395
- --------------------------------------------------------------------------
Total Capital $19,796 $16,463 $14,716
- --------------------------------------------------------------------------
</TABLE>
During 1996, the Company issued $5.8 billion in long-term debt, which was $3.1
billion in excess of its maturing debt. Long-term debt increased to $15.9
billion at November 30, 1996 from $12.8 billion at November 30, 1995 with the
weighted average maturity increasing to 4.1 years at November 30, 1996 from 3.7
years at November 30, 1995.
[LONG-TERM DEBT/WEIGHTED AVERAGE MATURITY GRAPH]
The increase in Total Capital also reflects an increase in stockholders' equity
to $3.9 billion at November 30, 1996 from $3.7 billion at November 30, 1995. The
net increase in stockholders' equity was primarily due to the retention of
earnings and the recognition of common stock issuable under the Company's stock
award plans, partially offset by the repurchase of $200 million of 8.44%
Cumulative Preferred Stock, the repurchase of treasury stock and the payment of
dividends.
To broaden and increase the level of employee ownership in Holdings, the Company
utilizes several stock-based compensation plans. Since 1994, the Company has
made Restricted Stock Unit ("RSU") awards to its employees as a portion of total
compensation in lieu of cash, subject to vesting and transfer restrictions.
Approximately 7.6 million, 10.1 million and 5.2 million RSUs were awarded to
employees in 1996, 1995 and 1994, respectively. As a result of the RSU awards,
stockholders' equity increased by approximately $115 million, $124 million and
$87 million in 1996, 1995 and 1994, respectively, net of cancellations. During
1996, the Company repurchased approximately 5.2 million shares (approximately
$130 million) related to its stock awards. The repurchase of these shares, as
well as any additional share repurchases in future years, will be allocated to
fund certain stock awards made under the Company's incentive plans.
LEHMAN BROTHERS 1996 ANNUAL REPORT 43
<PAGE> 14
The Company repurchased the $200 million of 8.44% Cumulative Preferred Stock
owned by American Express with the proceeds from the issuance of $200 million of
Quarterly Income Capital Securities Series A Subordinated Debenture ("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
Series A QUICS are subordinated to all senior and subordinated debt of the
Company. As a result of these transactions, Preferred Stockholders' Equity
decreased to $508 million at November 30, 1996 from $708 million at November 30,
1995; however, Total Capital remained unchanged.
At November 30, 1996, the Company had approximately $7.6 billion available for
the issuance of debt securities under various shelf registrations and debt
programs.
[PRIMARY DOUBLE LEVERAGE GRAPH]
CAPITAL RESOURCES AND CAPITAL ADEQUACY Balance sheet leverage ratios are one
methodology utilized to evaluate the capital adequacy of a company relative to
the financial risk inherent in the balance sheet. The Company's leverage ratios
computed as the ratio of year-end assets to year-end stockholders' equity were
33.2x and 31.2x at November 30, 1996 and 1995, respectively. However, the
Company's adjusted leverage, a better measure of market risk, defined as total
assets less the lower of securities purchased under agreements to resell or
securities sold under agreements to repurchase divided by stockholders' equity,
was 24.8x and 21.4x as of November 30, 1996 and 1995, respectively. The ratio
continues to be in line with the period end adjusted leverage ratios of the
Company's competitors.
The Company also closely monitors its primary double leverage ratio. A double
leverage ratio in excess of 1.0 arises from the funding of equity investments in
subsidiaries with the debt of the parent. The Company's objectives are to
maintain its primary double leverage ratio at no more than 1.0. Primary double
leverage, defined as Holdings' investment in subsidiaries divided by Holdings'
stockholders' equity, was 0.97 at November 30, 1996 compared to 1.01 at November
30, 1995. These levels represent a marked improvement from prior years when
primary double leverage was 1.10 at November 30, 1994 and 2.06 at December 31,
1993.
CREDIT RATINGS The Company, like other companies in the securities industry,
relies on external sources to finance a significant portion of its day-to-day
operations. The Company's access and cost of funding is generally dependent upon
its short- and long-term debt ratings. As of November 30, 1996, the current
short- and long-term senior debt ratings of Holdings and Lehman Brothers Inc.
("LBI") were 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
LEHMAN BROTHERS 1996 ANNUAL REPORT 44
<PAGE> 15
REGULATORY CAPITAL The Company operates globally through a network of
subsidiaries with each subsidiary requiring various levels of capital to conduct
business. The Company's subsidiaries may be regulated or unregulated, with
various regulatory authorities promulgating specific capital rules and minimum
requirements. Regulated entities include: LBI, LBIE, the Tokyo branch of Lehman
Brothers Japan Inc. ("LBJTB"), as well as various others. Regulatory capital
requirements generally consist of maintaining sufficient amounts of equity
capital and subordinated debt, with specific limits as to the amount of capital
which can be held in the form of subordinated debt. Regulatory capital
requirements may be met through the parent company's infusion of equity or
subordinated debt to its regulated subsidiaries. Therefore, the Company is
subject to certain rules and restrictions which limit its ability to withdraw
capital from regulated entities. At November 30, 1996, the Company is in
compliance with all such regulatory capital requirements.
At November 30, 1996, LBI's net capital, as defined by regulatory authorities,
aggregated $1,634 million, and was $1,524 million in excess of the minimum
regulatory requirements. At November 30, 1996, LBIE and LBJTB exceeded the
minimum regulatory requirements, as defined, by approximately $366 million and
$132 million, respectively. As of November 30, 1996, all other Holdings
subsidiaries were in compliance with the applicable local capital adequacy
requirements. In addition, the Company's triple-A rated, derivatives subsidiary,
Lehman Brothers Financial Products, Inc., has established certain capital and
operating restrictions necessary to maintain its triple-A rating, which are
reviewed by various rating agencies.
At November 30, 1996, $3,049 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.
CASH FLOWS Cash and cash equivalents increased $1,275 million in 1996 to $2,149
million, as the net cash provided by financing activities exceeded the net cash
used in operating and investing activities. Net cash used in operating
activities of $3,391 million included income from continuing operations adjusted
for non-cash items of $868 million for 1996. Net cash provided by financing
activities was $4,724 million and net cash used in investing activities was $58
million.
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 $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 $639 million for 1994. Net cash provided by financing activities was
$1,202 million, and net cash used in investing activities was $176 million.
HIGH YIELD SECURITIES The Company underwrites, trades, invests and makes markets
in high yield corporate debt securities. The Company also syndicates, trades and
invests in loans to below investment grade-rated companies. For purposes of this
discussion, high yield debt securities are defined as securities or loans to
companies rated BB+ or lower, or equivalent ratings by recognized credit rating
agencies, as well as non-rated securities or loans which, in the opinion of
management, are 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.
LEHMAN BROTHERS 1996 ANNUAL REPORT 45
<PAGE> 16
The Company recognizes these risks and aims to reduce market and credit risk
through the diversification of its products and counterparties. High yield debt
securities are carried at market value and unrealized gains or losses for these
securities are reflected in the Company's consolidated statement of operations.
The Company's portfolio of such securities at November 30, 1996 and 1995
included long positions with an aggregate market value of approximately $1.7
billion and $1.2 billion, respectively, and short positions with an aggregate
market value of approximately $127 million and $172 million, respectively. The
portfolio may, from time to time, contain concentrated holdings of selected
issues. The Company's largest high yield position was $80 million at November
30, 1996, and $73 million at November 30, 1995.
MERCHANT BANKING ACTIVITIES The Company's merchant banking activities include
investments in six partnerships, for which the Company acts as general partner,
as well as direct investments. At November 30, 1996, the investment in merchant
banking partnerships was $329 million. The Company's policy is to carry its
investments, including its partnership interests, at fair value based upon the
Company's assessment of the underlying investments.
The Company has a commitment to invest up to $199 million in one of its merchant
banking employee investment vehicles. The Company has no remaining commitments
to the other five merchant banking partnerships or other direct investments.
During 1996, the Company began the process of establishing a new institutional
fund for which it will act as general partner. This prospective fund is expected
to total $1.5 billion, a portion of which may be contributed by the Company
either directly or through an employee investment vehicle.
NON-CORE ACTIVITIES AND INVESTMENTS In March 1990, the Company discontinued the
origination of partnerships (the assets of which are primarily real estate) and
investments in real estate. Currently, the Company acts as a general partner for
approximately $3.9 billion of partnership investment capital and manages the
remaining real estate investment portfolio. At November 30, 1996, the Company
had $19 million of investments in these real estate activities, as well as $53
million of commitments and contingent liabilities under guarantees and credit
enhancements, both net of applicable reserves. The Company believes any exposure
under these commitments and contingent liabilities has been adequately reserved.
In certain circumstances, the Company provides financial and other support and
assistance to such investments to maintain investment values. There is no
contractual requirement that the Company continue to provide this support.
The Company also has equity, partnership and debt investments made in previous
years that are unrelated to its ongoing businesses. 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 $79 million at November 30, 1996.
Non-core activities and investments have declined 36% since November 30, 1995.
This decline is the result of the sale of certain real estate investments and
the expiration of commitments, which had no material effect on the financial
condition of the Company. Management's intention with regard to non-core assets
is the prudent liquidation of these investments as and when possible.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS AND DERIVATIVES
OVERVIEW Derivatives are financial instruments, which include swaps, options,
futures, forwards and warrants, whose value is based upon an underlying asset
(e.g., treasury bond), index (e.g., S&P 500) or reference rate (e.g., LIBOR). A
derivative contract may be traded on an exchange or negotiated in the
over-the-counter markets. Exchange-traded derivatives are standardized and
include futures, warrants and certain option contracts listed on an exchange.
Over-the-counter ("OTC") derivative contracts are individually negotiated
between contracting parties and include forwards, swaps and certain options,
including caps, collars and floors. The use of derivative financial instruments
has expanded significantly over the past decade. One reason for this expansion
is that derivatives provide a cost-effective alternative for managing market
risk. In this regard, derivative contracts provide a reduced funding alternative
for managing market risk since derivatives are based upon notional values, which
are generally not exchanged, but rather are used merely as a basis for
exchanging cash flows during the duration of the contract. Derivatives are also
utilized extensively as
LEHMAN BROTHERS 1996 ANNUAL REPORT 46
<PAGE> 17
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 unavailable in traditional cash instruments.
Derivatives are subject to various risks similar to non-derivative financial
instruments including market, credit and operational risk. Market risk is the
potential for a financial loss due to changes in the value of derivative
financial instruments due to market changes, including changes in interest
rates, foreign exchange rates and equity and commodity prices. Credit risk
results from the possibility that a counterparty to a derivative transaction may
fail to perform according to the terms of the contract. Therefore, the Company's
exposure to credit risk is represented by its net receivable from derivative
counterparties, after consideration of collateral. Operational risk is the
possibility of financial loss resulting from a deficiency in the Company's
systems for executing derivative transactions. In addition to these risks,
counterparties to derivative financial instruments may also be exposed to legal
risks related to derivative activities, including the possibility that a
transaction may be unenforceable under applicable law. The risks of derivatives
should not be viewed in isolation but rather should be considered on an
aggregate basis along with the Company's other trading-related activities.
As derivative products have continued to expand in volume, so has market
participation and competition. As a result, additional liquidity has been added
into the markets for conventional derivative products, such as interest rate
swaps. Competition has also contributed to the development of more complex
products structured for specific clients. It is this rapid growth and complexity
of certain derivative products which has led to the perception, by some, that
derivative products are unduly risky to users and the financial markets. In
order to remove the public perception that derivatives may be unduly risky and
to ensure ongoing liquidity of derivatives in the marketplace, the Company
supports the efforts of the regulators in striving for enhanced risk management
disclosures which consider the effects of both derivative products and cash
instruments. In addition, the Company supports the activities of regulators
which are designed to ensure that users of derivatives are fully aware of the
nature of risks inherent within derivative transactions. As evidence of this
support, the Company is an active participant in the Derivative Policy Group and
has been actively involved with the various regulatory and accounting
authorities in the development of additional enhanced reporting requirements
related to derivatives. The Company strongly believes that derivatives provide
significant value to the financial markets and is committed to providing its
clients with innovative products to meet their financial needs.
LEHMAN BROTHERS' USE OF DERIVATIVE INSTRUMENTS In the normal course of business,
the Company enters into derivative transactions both in a trading capacity and
as an end user. As an end user, the Company utilizes derivative products to
adjust the interest rate nature of its funding sources from fixed to floating
interest rates and vice versa, and to change the index upon which floating
interest rates are based (i.e., Prime to LIBOR) (collectively, "End User
Derivative Activities"). For a further discussion of the Company's End User
Derivative Activities see Note 12 to the Consolidated Financial Statements.
The Company utilizes derivative products in a trading capacity both as a dealer
to satisfy the financial needs of its clients and in each of its trading
businesses (collectively, "Trading-Related Derivative Activities"). The
Company's use of derivative products in its trading businesses is combined with
cash instruments to fully execute various trading strategies.
The Company conducts its derivative activities through a number of wholly owned
subsidiaries. The Company's fixed income derivative products business is
conducted through its special purpose subsidiary, Lehman Brothers Special
Financing Inc., and a separately capitalized triple-A rated subsidiary, Lehman
Brothers Financial Products Inc. The Company's equity derivative product
business is conducted through Lehman Brothers Finance S.A. ("LBF"). In addition,
as a global investment bank, the Company is also a market-maker in a number of
foreign currencies and actively trades in the global commodity markets.
Counterparties to the Company's derivative product transactions are primarily
financial intermediaries (U.S. and foreign banks), securities firms,
corporations, governments and their agencies, finance companies, insurance
companies, investment companies and pension funds.
LEHMAN BROTHERS 1996 ANNUAL REPORT 47
<PAGE> 18
The Company manages the risks associated with derivatives on an aggregate basis,
along with the risks associated with its proprietary trading and market-making
activities in cash instruments, as part of its firmwide risk management
policies. For a further discussion of the Company's risk management policies
refer to Management's Discussion and Analysis pages 49-51.
The Company's Trading-Related Derivative Activities have increased during the
current year to a notional value of $1,517 billion at November 30, 1996 from
$1,209 billion at November 30, 1995, primarily as a result of growth in the
Company's activities as a dealer in fixed income derivative products. Notional
values are not recorded on the balance sheet and are not indicative of potential
risk, but rather they provide a measure of the Company's involvement with such
instruments.
As a result of the Company's Trading-Related Derivative activities, the Company
is subject to credit risk. With respect to OTC derivative contracts, the
Company's credit exposure is directly with its counterparties and extends
through the duration of the derivative contracts. The Company views its net
credit exposure to be $4,487 million at November 30, 1996, representing the fair
value of the Company's OTC contracts in an unrealized gain position, after
consideration of collateral. Collateral held related to OTC contracts generally
includes cash and U.S. government and federal agency securities. At November 30,
1996 approximately 83% of the Company's net credit risk exposure related to OTC
contracts was with counterparties rated single-A or better.
Additionally, the Company is exposed to credit risk related to its
exchange-traded derivative contracts. Exchange-traded derivative contracts
include futures contracts, warrants and certain options. Futures contracts and
options on futures are transacted on the respective exchange. The exchange
clearing house is a counterparty to the futures contracts and options. As a
clearing member firm, the Company is required by the exchange clearing house to
deposit cash or other securities as collateral for its obligation upon the
origination of the contract and for any daily changes in the market value of
open futures contracts. Unlike OTC derivatives which involve numerous
counterparties, the number of counterparties from exchange-traded derivatives
includes only those exchange clearing houses of which the Company is a clearing
member firm or other member firms the Company utilizes as agents. Substantially
all of the Company's exchange-traded derivatives are transacted on exchanges of
which the Company is a clearing member firm. To protect against the potential
for a default, all exchange clearing houses impose net capital requirements for
their membership. Therefore, the potential for losses from exchange-traded
products is limited. As of November 30, 1996, the Company had approximately
$1,337 million on deposit with futures exchanges consisting of cash and
securities (customer and proprietary), and had posted approximately $313 million
of letters of credit and bank guarantees. Included within these amounts was $392
million and $945 million of cash and securities related to domestic and foreign
futures exchanges, respectively, and $217 million and $96 million of letters of
credit and bank guarantees to domestic and foreign exchanges, respectively. As
of November 30, 1996, the following cash and securities were on deposit with
foreign futures exchanges: $389 million with the Tokyo Stock Exchange, $142
million with the Singapore International Monetary Exchange, $124 million with
the Osaka Securities Exchange, $104 million with Deutsche Termin Borse, and $73
million with the Marche a Terme International de France. In addition, the
Company had letters of credit of approximately $54 million on deposit with the
London Clearing House.
See Note 12 to the Consolidated Financial Statements for a further discussion of
the Company's Trading-Related Derivative Activities.
ACCOUNTING AND VALUATION
The Company's accounting methodology for derivatives depends on both the type
and purpose of the derivative instrument. The Company records its
Trading-Related Derivative Activities on a mark-to-market or fair value basis.
Under mark-to-market or fair value accounting, gains and losses are recognized
currently in Principal Transactions, and
LEHMAN BROTHERS 1996 ANNUAL REPORT 48
<PAGE> 19
resulting assets and liabilities are recorded in the Consolidated Statement of
Financial Condition as Derivatives and other Contractual Agreements, as
applicable. Derivative assets and liabilities are netted by counterparty, when
permitted under a legally enforceable master netting agreement. Derivatives
utilized in conjunction with the Company's End User Derivative Activities are
generally recorded on an accrual basis. Interest is accrued into income or
expense over the life of the contract, resulting in the net interest impact of
the derivative and the underlying hedged item being recognized in income
throughout the hedge period.
Market or fair value for Trading-Related Derivative Activities is generally
determined by pricing models. Pricing models utilize a series of market inputs
to determine the present value of future cash flows, with adjustments, as
required, for credit, liquidity, and ongoing costs. Further valuation
adjustments may be recorded, as deemed appropriate, for new or complex products
or for significant positions. These adjustments are integral components of the
mark-to-market process.
RISK MANAGEMENT
As a leading global investment banking company, risk is an inherent part of the
Company's businesses. The Company has developed policies and procedures to
identify, measure and monitor each of the risks involved in its trading,
brokerage and investment banking activities on a global basis. The principal
risks of Lehman Brothers are market, credit, liquidity, legal and operational
risks. Risk Management is considered to be of paramount importance, and efforts
to further enhance this core competency are ongoing, and will include a
significant investment in information technology infrastructure and systems over
the next two years.
The Company aims to reduce risk through the diversification of its products,
counterparties and activities in geographic regions. The Company accomplishes
this objective by allocating the usage of capital to each of its businesses,
establishing trading limits for individual products and traders and setting
credit limits for individual counterparties including regional concentrations.
The Company seeks to achieve adequate returns from each of its businesses
commensurate with the risks which they assume. The Company periodically
reallocates capital to its businesses based on their ability to obtain returns
consistent with the established guidelines, opportunities in the marketplace and
the Company's long-term strategy.
The Company's risk management strategy is headed by a Risk Management Committee
comprised of the Chief Executive Officer, Global Equity Division Head, Global
Fixed Income Division Head, London Senior Manager, Asian Senior Manager, Chief
Financial Officer, Chief Credit Officer and Global Risk Manager. This committee
reviews risk exposures, ratifies division risk limits and signs off on Risk
Management guidelines. The Risk Management Committee meets on a weekly basis, or
more frequently if required, to discuss, among other matters, significant market
exposures, concentrations of positions (e.g., counterparty, market risk),
potential new transactions or positions and risk limit exceptions.
Overall risk management is based on a multi-tiered approach which includes many
independent groups (i.e., the Risk Management Committee, the Market and Credit
Risk Management Departments, Audit, Finance, Legal and Treasury) that assist in
the identification, assessment and control of risk. Senior representatives from
these groups meet formally on a biweekly basis and on an ad hoc basis as
necessary. Senior management plays a critical role in the ongoing evaluation of
risks and adjusts risk management policies when necessary.
MARKET RISK MANAGEMENT DEPARTMENT The Market Risk Management Department ("MRM
Department") is independent of the trading areas and reports directly to the
Chief Executive Officer. The group functions as the executive branch of the Risk
Management Committee. Staff is located in New York, London and Tokyo. The
international staff has a matrix reporting responsibility to local senior
non-trading management in addition to the Global Risk Manager.
The MRM Department is responsible for the preparation and dissemination of risk
reports, developing and implementing the firm-wide Risk Management Guidelines
and evaluating adherence to these guidelines. The purpose of market
LEHMAN BROTHERS 1996 ANNUAL REPORT 49
<PAGE> 20
risk management guidelines is to address the review and approval of risk limits,
the monitoring and reporting of risks against such limits, the reporting of risk
limit exceptions, the review and approval of risk limit exceptions, as well as
identifying the requisite authorities governing these processes. These
guidelines provide a clear framework for risk management decision-making. To
that end, the MRM Department identifies and quantifies risk exposures, develops
limits, and reports and monitors these risks with respect to the approved
limits. The identification of material market risks inherent in positions
includes, but is not limited to, interest rate, equity, FX, and commodity risk
exposures. In addition to these risks, the MRM Department also evaluates
liquidity risks, credit and sovereign concentrations.
The MRM Department is also responsible for the development of standards and
methodologies for the quantification and evaluation of market risk. Risk
quantification methodologies include Value-at-Risk (VAR) and quantitative
measures that take into consideration the portfolio effects of risk across
positions, as well as stress testing and scenario analysis based on historical
market data and potential market changes. As the development and evaluation of
these market risk measures requires personnel with specific industry,
technological and quantitative skills, the MRM Department has an analysis group
comprised of individuals with specific expertise in these areas. The Company is
committed to ensuring that individuals within the risk management area are
qualified with the skills necessary to assess Lehman's risk exposures.
The MRM Department establishes measurable risk limits for all significant market
risk exposures by exposure type (e.g., delta, gamma, vega) or based on VAR; risk
limits are set at varying levels of trading activity (e.g., strategy and
trader). Analysts in the MRM Department, in a joint effort with the Finance
Department, establish appropriate limits for the business units and communicate
these limits to senior risk management members ensuring that these limits are
appropriate on an aggregate basis and consistent with the Company's overall risk
management goals. To accomplish this objective the MRM Department also maintains
a reporting group, which works closely with the analysis group, that is
responsible for reporting the daily exposures from a singular to an aggregate
level.
In addition to independently monitoring and reporting market risks to the
businesses and to senior management, the MRM Department ensures that risk
reports adequately present the risks they are intended to report and that the
limitations of such reports are made known to the users of such reports. This is
achieved by the MRM Department's periodic review of the risk reporting
methodologies with risk report users. Risk Management documents the methods used
in the risk reports, which are available for user review.
CREDIT RISK MANAGEMENT DEPARTMENT Credit risk management is an integral
component of the Company's overall risk management framework. The Credit Risk
Management Department ("CRM Department") has global responsibility for
establishing credit risk standards and defining the Company's overall credit
risk management framework. The Company recognizes that the credit "risk
appetite" is a finite resource and emphasizes the importance of allocating this
resource in such a way as to maximize the Company's profitability.
The CRM Department is independent from the business units and reports directly
to the Global Risk Manager, who, in turn, reports to the Chief Executive
Officer. Corporate Credit is a global department centered in and managed from
New York, with credit officers operating in London, Tokyo, Hong Kong and
Singapore.
The CRM Department manages the credit exposure related to its trading activities
by giving initial credit approval for counterparties, establishing credit limits
by counterparty, country and industry group and by requiring collateral in
appropriate circumstances. In addition, the CRM Department strives to ensure
that master netting agreements are obtained whenever possible. The CRM
Department also considers the duration of transactions in making its credit
decisions, along with the potential credit exposure for complex derivative
transactions. The CRM Department is responsible for the continuous monitoring
and review of counterparty credit exposure and counterparty creditworthiness.
Credit limits are reviewed periodically to ensure that they remain appropriate
in the light of market events or the counterparty's financial condition.
LEHMAN BROTHERS 1996 ANNUAL REPORT 50
<PAGE> 21
[DISTRIBUTION OF WEEKLY REVENUES GRAPH]
As discussed throughout Management's Discussion and Analysis, the Company's
primary focus in its sales and trading businesses is customer flow. Due to this
customer flow focus, combined with the Company's risk management controls and
processes, the Company's net revenues experience relatively low levels of
volatility. This is illustrated by the weekly summary of its underwriting, sales
and trading net revenues for fiscal years 1996, 1995 and 1994. Although
historical performance is not necessarily indicative of future performance, the
Company's focus on customer flow activities should continue to provide similar
results across the cycle.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"), which is effective for
transactions occurring after December 31, 1996. In December 1996, the FASB
issued SFAS No. 127, deferring the effective date for one year for certain
provisions of SFAS No. 125.
It is likely that when fully adopted SFAS No. 125 will require the Company to
recognize additional assets and liabilities on its Consolidated Statement of
Financial Condition from transactions where the Company is deemed to have
control over certain financial assets. This will have the effect of increasing
the amount of assets and liabilities recognized on the balance sheet but will
have no material effect on the equity or financial condition of the Company.
EFFECTS OF INFLATION
Because the Company's assets are, to a large extent, liquid in nature, they are
not significantly affected by inflation. However, the rate of inflation affects
the Company's expenses, such as employee compensation, office space leasing
costs and communications charges, which may not be readily recoverable in the
price of services offered by the Company. To the extent inflation results in
rising interest rates and has other adverse effects upon the securities markets,
it may adversely affect the Company's financial position and results of
operations in certain businesses.
LEHMAN BROTHERS 1996 ANNUAL REPORT 51
<PAGE> 1
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
LEHMAN BROTHERS HOLDINGS INC.
We have audited the accompanying consolidated statement of financial condition
of Lehman Brothers Holdings Inc. and Subsidiaries (the "Company") as of November
30, 1996 and 1995, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for each of the two years in the
period ended November 30, 1996 and for the eleven month period ended November
30, 1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Lehman Brothers
Holdings Inc. and Subsidiaries at November 30, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the two
years in the period ended November 30, 1996 and for the eleven month period
ended November 30, 1994, in conformity with generally accepted accounting
principles.
As discussed in Note 17 to the consolidated financial statements, in 1994 the
Company changed its method of accounting for postemployment benefits.
/s/ Ernst & Young LLP
New York, New York
January 7, 1997
LEHMAN BROTHERS 1996 ANNUAL REPORT 53
<PAGE> 2
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS ELEVEN MONTHS
ENDED ENDED ENDED
NOVEMBER 30 NOVEMBER 30 NOVEMBER 30
(IN MILLIONS, EXCEPT PER SHARE DATA) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Principal transactions $ 1,579 $ 1,393 $1,345
Investment banking 981 801 572
Commissions 362 450 445
Interest and dividends 11,298 10,788 6,761
Other 40 44 67
- ---------------------------------------------------------------------------------------------------
Total revenues 14,260 13,476 9,190
Interest expense 10,816 10,405 6,452
- ---------------------------------------------------------------------------------------------------
Net revenues 3,444 3,071 2,738
NON-INTEREST EXPENSES
Compensation and benefits 1,747 1,544 1,413
Brokerage, commissions and clearance fees 241 241 243
Occupancy and equipment 151 174 160
Professional services 150 159 166
Communications 147 180 184
Business development 101 110 116
Depreciation and amortization 91 105 116
Other 95 92 99
Severance charge 84 33
Restructuring charge 97
Spin-off expenses 15
- ---------------------------------------------------------------------------------------------------
Total non-interest expenses 2,807 2,702 2,545
Income before taxes and cumulative
effect of change in accounting principle 637 369 193
Provision for income taxes 221 127 67
- ---------------------------------------------------------------------------------------------------
Income before cumulative effect of change
in accounting principle 416 242 126
Cumulative effect of change in accounting principle,
net of taxes (13)
Net income $ 416 $ 242 $ 113
- ---------------------------------------------------------------------------------------------------
Net income applicable to common stock $ 378 $ 200 $ 75
Number of shares used in earnings
per common share computation 116.4 113.4 108.0
Earnings per common share:
Income before cumulative effect of change
in accounting principle $ 3.24 $ 1.76 $ 0.81
Cumulative effect of change in accounting principle (0.12)
- ---------------------------------------------------------------------------------------------------
Net income $ 3.24 $ 1.76 $ 0.69
- ---------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
LEHMAN BROTHERS 1996 ANNUAL REPORT 53
<PAGE> 3
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
NOVEMBER 30 NOVEMBER 30
(IN MILLIONS) 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,149 $ 874
Cash and securities segregated and on deposit for regulatory
and other purposes 688 945
Securities and other financial instruments owned:
Governments and agencies 26,638 22,773
Corporate stocks 6,937 6,270
Corporate debt and other 8,821 8,679
Mortgages and mortgage-backed 8,314 6,847
Derivatives and other contractual agreements 6,909 5,384
Certificates of deposit and other money market instruments 3,834 3,068
61,453 53,021
- ------------------------------------------------------------------------------------------
Collateralized short-term agreements:
Securities purchased under agreements to resell 32,340 36,234
Securities borrowed 20,651 16,290
Receivables:
Brokers, dealers and clearing organizations 2,878 1,560
Customers 5,813 3,477
Others 1,253 1,434
Property, equipment and leasehold improvements
(net of accumulated depreciation and amortization
of $668 in 1996 and $585 in 1995) 477 495
Deferred expenses and other assets 722 793
Excess of cost over fair value of net assets acquired
(net of accumulated amortization of $103
in 1996 and $95 in 1995) 172 180
- ------------------------------------------------------------------------------------------
Total assets $128,596 $115,303
</TABLE>
See Notes to Consolidated Financial Statements
LEHMAN BROTHERS 1996 ANNUAL REPORT 54
<PAGE> 4
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
NOVEMBER 30 NOVEMBER 30
(IN MILLIONS, EXCEPT PER SHARE DATA) 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper and short-term debt $ 8,202 $ 6,235
Securities and other financial instruments sold but not yet purchased:
Governments and agencies 13,202 11,613
Corporate stocks 4,971 3,420
Corporate debt and other 1,375 1,509
Derivatives and other contractual agreements 6,816 5,272
26,364 21,814
- -------------------------------------------------------------------------------------------------------
Collateralized short-term financing:
Securities sold under agreements to repurchase 56,119 59,035
Securities loaned 6,296 1,966
Payables:
Brokers, dealers and clearing organizations 1,004 1,103
Customers 7,582 5,761
Accrued liabilities and other payables 3,233 2,926
Long-term debt:
Senior notes 12,571 10,505
Subordinated indebtedness 3,351 2,260
Total liabilities 124,722 111,605
- -------------------------------------------------------------------------------------------------------
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
in 1995; $25.00 liquidation preference per share 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: 106,793,538 in 1996 and 105,684,565 in 1995;
shares outstanding: 100,449,144 in 1996 and 104,565,875 in 1995 11 11
Common Stock issuable 326 211
Additional paid-in capital 3,198 3,172
Foreign currency translation adjustment 20 9
Accumulated deficit (43) (397)
Common Stock in treasury at cost: 6,344,394 shares in 1996
and 1,118,690 shares in 1995 (146) (16)
- -------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,874 3,698
- -------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 128,596 $ 115,303
</TABLE>
See Notes to Consolidated Financial Statements
LEHMAN BROTHERS 1996 ANNUAL REPORT 55
<PAGE> 5
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS ELEVEN MONTHS
ENDED ENDED ENDED
NOVEMBER 30 NOVEMBER 30 NOVEMBER 30
(IN MILLIONS) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<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
MMP Exchange (250)
Ending balance
- ----------------------------------------------------------------------------------------------------------------------
8.44% Cumulative Voting:
Beginning balance 200 200
Repurchase (200)
Shares issued to American Express 200
Ending balance 200 200
- ----------------------------------------------------------------------------------------------------------------------
Redeemable Voting:
Beginning and ending balance
- ----------------------------------------------------------------------------------------------------------------------
Total Preferred Stock, ending balance 508 708 708
- ----------------------------------------------------------------------------------------------------------------------
COMMON STOCK
Beginning balance 11 11 17
Reverse Stock Split (11)
American Express Common Stock purchase 4
MMP Exchange 1
Ending balance 11 11 11
COMMON STOCK ISSUABLE
Beginning balance 211 87
RSUs awarded, net of cancellations 115 124 87
- ----------------------------------------------------------------------------------------------------------------------
Ending balance 326 211 87
- ----------------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Beginning balance 3,172 3,172 1,871
Exchange RSUs for Common Stock 21
Exercise of stock options 6 1
Employee stock purchase plan (3) (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 2 (5)
Ending balance 3,198 3,172 3,172
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Beginning balance 9 6 (12)
Translation adjustment, net(1) 11 3 18
- ----------------------------------------------------------------------------------------------------------------------
Ending balance 20 9 6
- ----------------------------------------------------------------------------------------------------------------------
ACCUMULATED DEFICIT
Beginning balance (397) (574) (582)
Net income 416 242 113
Dividends declared:
5% Cumulative Convertible Voting Preferred Stock (25) (25) (19)
Money Market Cumulative Preferred Stock (6)
8.44% Cumulative Voting Preferred Stock (3) (17) (9)
Redeemable Voting Preferred Stock (8)
Common Stock (24) (23) (71)
Premium for repurchase of 8.44% Cumulative Voting Preferred Stock (2)
- ----------------------------------------------------------------------------------------------------------------------
Ending balance (43) (397) (574)
COMMON STOCK IN TREASURY
Beginning balance (16) (15)
Purchases of treasury stock (130) (1) (15)
Ending balance (146) (16) (15)
- ----------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity $ 3,874 $ 3,698 $ 3,395
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net of income taxes of $(11) in 1996, $(2) in 1995, and $(15) in 1994
See Notes to Consolidated Financial Statements
LEHMAN BROTHERS 1996 ANNUAL REPORT 56
<PAGE> 6
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS ELEVEN MONTHS
ENDED ENDED ENDED
NOVEMBER 30 NOVEMBER 30 NOVEMBER 30
(IN MILLIONS) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income before cumulative effect of change
in accounting principle $ 416 $ 242 $ 126
Adjustments to reconcile income to net cash
(used in) provided by operating activities:
Depreciation and amortization 91 105 116
Severance charge 84
Restructuring charge 80
Provisions for losses and other reserves 42 38 37
Deferred tax provision (benefit) 72 (195) 167
Other adjustments 163 169 193
Net change in:
Cash and securities segregated 257 475 (347)
Receivables from brokers, dealers and clearing organizations (1,318) 3,374 125
Receivables from customers (2,336) (683) (148)
Securities purchased under agreements to resell 3,894 1,256 (11,444)
Securities borrowed (4,361) (5,673) (6,245)
Securities and other financial instruments owned (8,432) (5,548) (11,774)
Payables to brokers, dealers and clearing organizations (99) (1,494) 1,212
Payables to customers 1,821 2,368 (1,070)
Accrued liabilities and other payables 217 165 (506)
Securities sold under agreements to repurchase (2,916) 616 19,228
Securities loaned 4,330 339 511
Securities and other financial instruments sold
but not yet purchased 4,550 4,784 8,717
Other operating assets and liabilities, net 134 1,437 (293)
Net cash (used in) provided by operating activities $(3,391) $ 1,855 $ (1,395)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
LEHMAN BROTHERS 1996 ANNUAL REPORT 57
<PAGE> 7
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS ELEVEN MONTHS
ENDED ENDED ENDED
NOVEMBER 30 NOVEMBER 30 NOVEMBER 30
(IN MILLIONS) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes $ 4,455 $ 5,033 $ 3,365
Principal payments of senior notes (2,411) (3,725) (1,982)
Proceeds from issuance of subordinated indebtedness 1,330 258 540
Principal payments of subordinated indebtedness (246) (214) (451)
Proceeds from spin-off 1,193
Net proceeds from (payments for) commercial paper and short-term debt 1,981 (3,180) (1,349)
Payment for repurchase of preferred stock (200)
Payments for treasury stock purchases (130) (1) (15)
Dividends paid (55) (64) (99)
Net cash provided by (used in) financing activities 4,724 (1,893) 1,202
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, equipment and leasehold improvements (58) (52) (176)
- -----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (58) (52) (176)
- -----------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 1,275 (90) (369)
Cash and cash equivalents, beginning of period 874 964 1,333
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 2,149 $ 874 $ 964
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN MILLIONS)
Interest paid totaled $10,852 in 1996, $10,372 in 1995 and $6,257 in 1994.
Income taxes paid (received) totaled $79 in 1996, $149 in 1995 and $(39) in
1994.
See Notes to Consolidated Financial Statements.
LEHMAN BROTHERS 1996 ANNUAL REPORT 58
<PAGE> 8
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 4.)
The Company uses the trade date basis of accounting for recording principal
transactions.
Certain prior period amounts reflect reclassifications to conform to the current
period's presentation.
TRANSLATION OF FOREIGN CURRENCIES Assets and liabilities of
foreign subsidiaries having non-U.S. dollar functional currencies are translated
at exchange rates at the statement of financial condition date. Revenues and
expenses are translated at average exchange rates during the period. The gains
or losses resulting from translating foreign currency financial statements into
U.S. dollars, net of hedging gains or losses and related tax effects, are
included in a separate component of 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.
SECURITIES AND OTHER FINANCIAL INSTRUMENTS Securities and othe 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
LEHMAN BROTHERS 1996 ANNUAL REPORT 59
<PAGE> 9
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 in the Consolidated Statement of Financial Condition on a
net by counterparty basis where a legal right of set-off exists. The market or
fair value of swap agreements, caps and floors, and forward contracts in an
unrealized gain position, as well as options owned and warrants held, are
reported in the Consolidated Statement of Financial Condition as assets in
derivatives and other contractual agreements. Similarly, swap agreements, caps
and floors, and forward contracts in an unrealized loss position, as well as
options written and warrants issued, are reported as liabilities in derivatives
and other contractual agreements.
In addition to trading and market-making activities, the Company enters into
various derivative products as an end user to modify the interest rate exposure
of certain assets and liabilities. In this regard, the Company utilizes interest
rate 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
that have been designated and are effective in modifying the interest rate
characteristics of existing assets and liabilities or anticipated transactions
are accounted for on an accrual basis, 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
LEHMAN BROTHERS 1996 ANNUAL REPORT 60
<PAGE> 10
value of the underlying positions on a daily basis as compared to the related
receivable or payable balances, including accrued interest. The Company requires
counterparties to deposit additional collateral or return collateral pledged as
necessary, to ensure that the market value of the underlying collateral remains
sufficient. Securities and other financial instruments owned that are sold under
repurchase agreements are carried at market value with changes in market value
reflected in the Consolidated Statement of Operations.
Securities purchased under agreements to resell and securities sold under
agreements to repurchase for which the resale/repurchase date corresponds to the
maturity date of the underlying securities are accounted for as purchases and
sales, respectively. At November 30, 1996, such resale and repurchase agreements
that had not yet matured aggregated $1.5 billion and $4.3 billion, respectively.
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 earnings per common share calculation includes Common Stock as
of May 31, 1994 for the period January 1, 1994 through May 31, 1994. (See Note
8.)
LEHMAN BROTHERS 1996 ANNUAL REPORT 61
<PAGE> 11
NOTE 2 SHORT-TERM FINANCINGS
The Company obtains short-term financing on both a secured and unsecured basis.
The secured financing is obtained through the use of repurchase agreements and
securities loaned agreements, which are primarily collateralized by government,
agency and equity securities. The unsecured financing is generally obtained
through short-term debt and the issuance of commercial paper.
The Company's commercial paper and short-term debt financing is comprised of the
following:
<TABLE>
<CAPTION>
NOVEMBER 30
(IN MILLIONS) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper $3,074 $ 1,443
Short-term debt
Bank loans 2,278 2,106
Master notes 2,190 1,753
Payables to banks 660 933
Total $8,202 $ 6,235
- --------------------------------------------------------------------------------
</TABLE>
The Company's weighted average interest rates were as follows:
<TABLE>
<CAPTION>
NOVEMBER 30
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper(1) 5.1% 6.0%
Short-term debt(2) 5.2% 5.3%
Securities sold under agreements to repurchase 5.1% 5.7%
- --------------------------------------------------------------------------------
</TABLE>
(1) Including weighted average interest rates of 5.7% and 1.2% as of November
30, 1996 related to U.S. dollar and non-U.S. dollar obligations, respectively.
(2) Including weighted average interest rates of 5.6% and 4.1% as of November
30, 1996 and 6.1% and 3.9% as of November 30, 1995 related to U.S. dollar and
non-U.S. dollar obligations, respectively.
The Company maintains 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 covenants which
require, among other things that the Company maintain specified levels of
liquidity, consolidated capital and tangible net worth, as defined.
In addition, the Company maintains 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 one year 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 requested. The credit agreement
contains covenants which require, among other things that LBIE maintain
specified levels of tangible net worth and regulatory capital, and that the
Company maintain specified levels of consolidated stockholders' equity and
tangible net worth, as defined.
There were no borrowings outstanding under either of the aforementioned
facilities at November 30, 1996; however, the Company uses the Facility for
general corporate purposes from time to time.
LEHMAN BROTHERS 1996 ANNUAL REPORT 62
<PAGE> 12
NOTE 3 LONG-TERM DEBT
<TABLE>
<CAPTION>
U.S. DOLLAR NON-U.S. DOLLAR NOVEMBER 30
FIXED FLOATING FIXED FLOATING
(IN MILLIONS) RATE RATE RATE RATE 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Senior Notes
Maturing in Fiscal 1996 $ 2,503
Maturing in Fiscal 1997 $ 618 $ 937 $ 139 $ 560 $2,254 1,195
Maturing in Fiscal 1998 1,611 531 147 243 2,532 1,598
Maturing in Fiscal 1999 1,157 287 852 122 2,418 1,680
Maturing in Fiscal 2000 1,118 587 130 97 1,932 1,004
Maturing in Fiscal 2001 205 173 65 160 603 193
December 1, 2001
and thereafter 2,184 127 458 63 2,832 2,332
Senior Notes 6,893 2,642 1,791 1,245 12,571 10,505
- -------------------------------------------------------------------------------------------------------------
Subordinated Indebtedness
Maturing in Fiscal 1996 258
Maturing in Fiscal 1997 550 550 741
Maturing in Fiscal 1998 350 10 360 350
Maturing in Fiscal 1999 334 334 179
Maturing in Fiscal 2000 192 192 192
Maturing in Fiscal 2001 200 200 4
December 1, 2001
and thereafter 1,581 127 7 1,715 536
Subordinated Indebtedness 3,207 137 7 3,351 2,260
- -------------------------------------------------------------------------------------------------------------
Long-Term Debt $ 10,100 $2,779 $1,798 $ 1,245 $15,922 $ 12,765
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Of the Company's long-term debt outstanding as of November 30, 1996, $804
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 1997 to fiscal 2003, rather than at their
contractual maturities, which range from fiscal 2005 to fiscal 2026. In
addition, $637 million of the Company's long-term debt is redeemable at par at
the option of the Company upon specified dates from 1997 through 2035 or based
upon the occurrence of speci_ed 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 $218 million as of November 30, 1996. These
notes are unconditionally guaranteed by American Express with a portion of these
notes being collateralized by certain mortgage obligations.
As of November 30, 1996, the Company had $7.6 billion available for the issuance
of debt securities under various shelf registrations and debt programs, which
includes $403 million of issuance availability under the Company's Euro
medium-term note program.
As of November 30, 1996, the Company's U.S. dollar and non-U.S. dollar debt
portfolios included approximately $350 million and $484 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 as an end user to modify the
interest rate characteristics of its long-term debt portfolio. The Company
actively manages the interest rate exposure on its long-term debt portfolio to
more closely match the terms of its debt portfolio to the assets being funded
and to minimize interest rate risk. In 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
LEHMAN BROTHERS 1996 ANNUAL REPORT 63
<PAGE> 13
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, 1996 the notional values of the Company's interest rate and
currency swaps related to its long-term debt obligations were approximately
$15.1 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 1997 $ 2,673 $ 172 $ 518 $ 3,363
Maturing in Fiscal 1998 2,085 7 362 2,454
Maturing in Fiscal 1999 1,700 34 917 2,651
Maturing in Fiscal 2000 1,781 43 184 2,008
Maturing in Fiscal 2001 310 17 208 535
December 1, 2001 and thereafter 3,560 423 106 4,089
Total $ 12,109 $ 696 $2,295 $ 15,100
- -----------------------------------------------------------------------------------------------------------------
Weighted average rate at November 30, 1996(1)
Receive rate 7.18% 5.33% 3.97% 6.61%
Pay rate 6.28% 3.43% 5.99% 6.11%
</TABLE>
(1) Weighted average interest rates were calculated utilizing non-U.S. dollar
interest rates, where applicable.
The Company terminated certain swaps that were used to modify the interest rate
characteristics of the Company's long-term debt issuances. At November 30, 1996,
the Company had deferred gains of approximately $6 million related to such
terminated contracts, which will be amortized to reduce interest expense through
fiscal 1998. On an overall basis, the Company's long-term debt related end user
derivative activities resulted in reduced interest expense of approximately $81
million, $74 million and $30 million in 1996, 1995 and 1994, respectively. In
addition, the Company's end user derivative activities resulted in the following
changes to the Company's mix of fixed and floating rate debt and effective
weighted average rates of interest.
<TABLE>
<CAPTION>
NOVEMBER 30, 1996
LONG-TERM DEBT WEIGHTED AVERAGE (1)
BEFORE AFTER CONTRACTUAL EFFECTIVE RATE
END USER END USER INTEREST AFTER END USER
(IN MILLIONS) ACTIVITIES ACTIVITIES RATE ACTIVITIES
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
USD Obligations
Fixed rate $ 10,100 $ 529 7.84% 8.95%
Floating rate 2,779 14,633 6.02% 6.39%
12,879 15,162 7.45% 6.48%
- -----------------------------------------------------------------------------------------
Non-USD Obligations 3,043 760 4.23% 3.36%
- -----------------------------------------------------------------------------------------
Total $ 15,922 $ 15,922 6.83% 6.33%
</TABLE>
<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 $ 7,738 $ 1,198 8.20% 8.19%
Floating rate 2,703 10,912 6.76% 7.00%
10,441 12,110 7.83% 7.12%
- -------------------------------------------------------------------------------------------
Non-USD Obligations 2,324 655 4.41% 4.73%
Total $ 12,765 $ 12,765 7.21% 6.99%
- -------------------------------------------------------------------------------------------
</TABLE>
(1) Weighted average interest rates were calculated using non-U.S. dollar
interest rates, where applicable.
LEHMAN BROTHERS 1996 ANNUAL REPORT 64
<PAGE> 14
NOTE 4 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
had 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.
NOTE 5 PREFERRED STOCK
CUMULATIVE CONVERTIBLE VOTING, SERIES A The Cumulative Convertible Voting
Preferred Stock, Series A ("Series A Preferred Stock"), has a liquidation
preference of $39.10 per share. The holders of the Series A Preferred Stock are
entitled to receive preferred dividends at an annual rate of 5%, on such
liquidation preference, 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
LEHMAN BROTHERS 1996 ANNUAL REPORT 65
<PAGE> 15
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, 1996 was $123.02.
Nippon Life currently holds 9,163,683 shares of Series A Preferred Stock. The
remaining 3,836,317 shares of Series A Preferred Stock are held by various
institutional investors.
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 through May 31,
2002 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. For the twelve months ended November 30,
1996, the Company's net income of $416 million resulted in a dividend of $8
million on the Redeemable Voting Preferred Stock, which has been reflected in
the Consolidated Statement of Operations.
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 $250 million if such change of control occurs prior to November 30,
1997, declining $50 million per year in each of the five 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.
8.44% CUMULATIVE VOTING On February 15, 1996, pursuant to an agreement with
American Express, Holdings repurchased and retired all of the 8.44% Cumulative
Voting Preferred Stock.
NOTE 6 COMMON STOCK
Changes in shares of Common Stock outstanding are as follows:
<TABLE>
<CAPTION>
NOVEMBER 30
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares outstanding, beginning of period 104,565,875 104,537,690 168,235,284
Reverse Stock Split (114,764,841)
- -------------------------------------------------------------------------------------------------------------
104,565,875 104,537,690 53,470,443
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 1,108,973 76,142
Treasury stock purchases, net (5,225,704) (47,957) (1,070,733)
Shares outstanding, end of period 100,449,144 104,565,875 104,537,690
- -------------------------------------------------------------------------------------------------------------
</TABLE>
LEHMAN BROTHERS 1996 ANNUAL REPORT 66
<PAGE> 16
The Company has reserved for issuance approximately 4.1 million shares of Common
Stock for conversion of the Series A Preferred Stock.
There is a restriction on the transferability of approximately one third of the
Common Stock received under the Employee Ownership Plan. Such restriction will
lapse on May 31, 1997.
During the year ended November 30, 1996, the Company repurchased or acquired
shares of its common stock in the open market and through an odd-lot buy back
program at an aggregate cost of approximately $130 million. These shares are not
being retired but are being reserved for employee stock-based compensation plan
awards.
NOTE 7 INCENTIVE PLANS
EMPLOYEE STOCK PURCHASE PLAN The Employee Stock Purchase Plan (the "ESPP")
allows employees to purchase Common Stock at a 15% discount from market value,
with a maximum of $25,000 in annual aggregate purchases by any one individual.
The number of shares of Common Stock authorized for purchase by eligible
employees is 6 million. As of November 30, 1996 and 1995, 1.2 million shares and
0.7 million shares, respectively, of Common Stock had been purchased by eligible
employees through the ESPP. The Company controls the dilutive impact of the ESPP
through open market purchases.
1994 INCENTIVE PLANS The 1994 Management Replacement Plan provided awards
similar to the American Express common shares granted to Company employees which
were canceled as of the date of the Distribution. Through November 30, 1996, a
total of 2.0 million awards had been granted under the Replacement Plan,
including both stock options and restricted stock; 1.2 million were outstanding
at November 30, 1996. No future awards will be granted under this plan.
The Lehman Brothers Holdings Inc. 1994 Management Ownership Plan (the "1994
Plan") provides for the issuance of stock options, stock appreciation rights,
restricted stock units ("RSUs"), restricted stock, performance shares and
performance stock units ("PSUs") for a period of up to ten years to eligible
employees. A total of 16.65 million shares of Common Stock may be subject to
awards under the 1994 Plan. At November 30, 1996, awards with respect to 14.1
million shares of common stock have been made under the 1994 Plan.
1996 MANAGEMENT OWNERSHIP PLAN During 1996, the Company's stockholders approved
the 1996 Management Ownership Plan (the "1996 Plan") under which awards similar
to those of the 1994 Plan may be granted, and under which, up to 10 million
shares of common stock may be subject to awards. At November 30, 1996, awards
with respect to 0.8 million shares of common stock have been made under the 1996
Plan.
EMPLOYEE INCENTIVE PLAN During 1995, the Board of Directors of Holdings adopted
the Employee Incentive Plan ("EIP"), which has provisions similar to the 1994
Plan, and under which up to 20 million shares of common stock may be subject to
awards. The Company controls the dilutive impact of these awards through open
market purchases. At November 30, 1996, awards with respect to 12.0 million
shares of common stock have been made under the EIP.
LEHMAN BROTHERS 1996 ANNUAL REPORT 67
<PAGE> 17
The following is a summary of Restricted Stock Units awarded under Holdings'
stock-based compensation plans:
RESTRICTED STOCK UNITS
<TABLE>
<CAPTION>
1994
PLAN EIP TOTAL
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1994
Granted 5,279,321 5,279,321
Canceled (674,216) (674,216)
Balance, November 30, 1994 4,605,105 4,605,105
- -------------------------------------------------------------------------------------------------------------
Granted 8,021,784 2,039,220 10,061,004
Canceled (586,092) (586,092)
- -------------------------------------------------------------------------------------------------------------
Balance, November 30, 1995 12,040,797 2,039,220 14,080,017
Granted 419,614 7,130,720 7,550,334
Canceled (801,614) (405,575) (1,207,189)
Exchanged for stock without restrictions (474,222) (474,222)
Balance, November 30, 1996 11,184,575 8,764,365 19,948,940
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Eligible employees receive RSUs as a portion of their total compensation in lieu
of cash. There is no further cost to employees and senior officers associated
with the RSU awards. The Company records compensation expense for RSUs based on
the market value of Common Stock and the applicable vesting provisions.
Generally, RSUs awarded to employees vest 80% one year from the date of the
grant with the remaining 20% vesting five years from the date of grant. In
addition, approximately 1.1 million RSUs were awarded to the Company's managing
directors in November 1996 which vest and convert to common stock in five years
from the grant date. Each RSU outstanding on the respective dates for which 100%
vesting occurs will be exchanged for a share of freely transferable Common
Stock. Holdings pays a dividend equivalent on each RSU outstanding based on
dividends paid on the Common Stock.
Of the RSUs issued and outstanding at November 30, 1996, approximately 9.3
million RSUs were vested, approximately 4.7 million RSUs will vest on July 1,
1997, and the remaining will vest subsequent to July 1, 1997.
In addition to the RSUs included in the above RSU summary, as of December 31,
1996, the Company has awarded RSUs and PSUs under the 1996 Plan to members of
the Company's Corporate Management Committee ("CMC") and under the EIP to
certain senior officers. The number of PSUs which may be earned is dependent
upon the achievement of certain performance levels within predetermined
performance periods. At the end of a performance period, any PSUs earned will
convert one-for-one to RSUs which then vest in five years. Approximately 0.7
million RSUs awarded to members of the CMC as of December 31, 1996, were based
on performance goals satisfied for the period from January 1, 1996 through
December 31, 1996.
As of December 31, 1996, approximately 1.8 million PSUs were earned, subject to
vesting and transfer restrictions. The compensation cost for the RSUs payable in
satisfaction of PSUs is accrued over the combined performance and vesting
periods.
The total compensation cost recognized during 1996 for the Company's stock based
awards was approximately $126 million.
LEHMAN BROTHERS 1996 ANNUAL REPORT 68
<PAGE> 18
STOCK OPTIONS
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
1994 REPLACEMENT 1996 EXERCISE EXPIRATION
PLAN PLAN PLAN EIP TOTAL PRICE DATES
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994
Granted 1,960,720 1,849,769 3,810,489 $18.00 2/95 - 5/04
Canceled (60,000) (60,000) $18.00
- ---------------------------------------------------------------------------------------------------------------------
Balance, November 30, 1994 1,960,720 1,789,769 3,750,489 $18.00 2/95 - 5/04
Granted 1,125,000 1,400,000 2,525,000 $20.875 10/00
Exercised (68,996) (68,996) $18.00
Canceled (7,040) (291,588) (298,628) $18.00
- ---------------------------------------------------------------------------------------------------------------------
Balance, November 30, 1995 3,078,680 1,429,185 1,400,000 5,907,865 $18.68 5/96 - 5/04
- ---------------------------------------------------------------------------------------------------------------------
Granted 825,000 2,650,000 3,475,000 $24.16 3/01 - 5/01
Exercised (93,333) (251,909) (345,242) $18.00
Canceled (116,667) (22,247) (850,000) (988,914) $22.83
Balance, November 30, 1996 2,868,680 1,155,029 825,000 3,200,000 8,048,709 $20.58 2/97 - 5/04
</TABLE>
At November 30, 1996 and 1995, approximately 2.6 million and 2.1 million
options, respectively, were exercisable at a weighted-average price of $18.00.
The weighted average remaining contractual life of the options outstanding at
November 30, 1996 is 3.9 years. The exercise price for all stock options awarded
has been equal to 100% of the market price of Common Stock on the day of grant.
All options awarded in 1994 become exercisable in one-third increments ratably
in the three years following grant date. The options granted in 1995 and 1996
become exercisable in four and one half years following grant date;
exercisability is accelerated ratably in one-third increments as Holdings'
Common Stock meets, or exceeds, specific target prices.
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 SFASNo. 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 Company will continue to follow Accounting Principles Board No. 25 and its
related interpretations in accounting for its stock-based compensation plans.
Accordingly, no compensation cost has been recognized in the Consolidated
Statement of Operations for its stock option awards and employee stock purchase
plan.
The Company utilized the Black-Scholes option-pricing model to quantify the pro
forma effects on net income and earnings per common share of the fair value of
the options granted during 1996. Based on the results of the model, the value of
the options granted during 1996 is $5.41 with the following weighted average
assumptions: an annual dividend rate of $0.20, an expected life of 3 years,
expected volatility of 29%, and a risk-free interest rate of 5.35%.
The Company's 1996 pro forma net income would have been $413 million compared to
actual net income of $416 million and pro forma earnings per common share would
have been $3.22 compared to actual earnings per common share of $3.24. The pro
forma amounts reflect the effects of the 1996 stock option grants and the 15%
purchase discount from market value offered to the Company's employees who
participate in the ESPP. The effects on pro forma net income and earnings per
common share may increase in future years.
LEHMAN BROTHERS 1996 ANNUAL REPORT 69
<PAGE> 19
NOTE 8 EARNINGS PER COMMON SHARE
The weighted average number of shares of common stock and common stock
equivalents included in the calculations of earnings per common share is as
follows:
<TABLE>
<CAPTION>
TWELVE MONTHS ELEVEN MONTHS
ENDED ENDED
NOVEMBER 30 NOVEMBER 30
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Common stock 101,548,947 104,535,218 105,436,860
Common stock issuable 13,779,315 8,420,122 2,532,543
Other share equivalents 1,045,323 459,344 61,389
Total 116,373,585 113,414,684 108,030,792
</TABLE>
NOTE 9 CAPITAL REQUIREMENTS
The Company operates globally through a network of subsidiaries with several
being subject to regulatory requirements. In the United States, LBI, as a
registered broker-dealer, is subject to SEC Rule 15c3-1, the Net Capital Rule,
which requires LBI to maintain net capital of not less than the greater of 2% of
aggregate debit items arising from customer transactions, as defined, or 4% of
funds required to be segregated for customers' regulated commodity accounts, as
defined. At November 30, 1996, LBI's regulatory net capital, as defined, of
$1,634 million exceeded the minimum requirement by $1,524 million. The Company's
triple-A rated derivatives subsidiary, Lehman Brothers Financial Products Inc.,
has established certain capital and operating restrictions which are reviewed by
various rating agencies.
In addition to amounts presented in the accompanying Consolidated Statement of
Financial Condition as cash and securities segregated and on deposit for
regulatory and other purposes, securities with a market value of approximately
$345 million and $320 million at November 30, 1996 and 1995, respectively,
primarily collateralizing securities purchased under agreements to resell, have
been segregated in a special reserve bank account for the exclusive benefit of
customers pursuant to the Reserve Formula requirements of SEC Rule 15c3-3.
Lehman Brothers International (Europe) ("LBIE"), a United Kingdom registered
broker-dealer and subsidiary of Holdings, is subject to the capital requirements
of the Securities and Futures Authority ("SFA") of the United Kingdom. Financial
resources, as defined, must exceed the total financial resources requirement of
the SFA. At November 30, 1996, LBIE's financial resources were $366 million in
excess of regulatory requirements. Lehman Brothers Japan Inc.'s Tokyo branch, a
regulated broker-dealer, is subject to the capital requirements of the Japanese
Ministry of Finance and at November 30, 1996, had net capital of $132 million in
excess of the specified levels required. Certain other non-U.S. 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, 1996, these other
subsidiaries were in compliance with their applicable local capital adequacy
requirements.
At November 30, 1996 $3,049 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.
LEHMAN BROTHERS 1996 ANNUAL REPORT 70
<PAGE> 20
NOTE 10 EMPLOYEE BENEFIT PLANS
The Company provides various pension plans for the majority of its employees
worldwide. In addition, the Company provides certain other postretirement
benefits, primarily health care and life insurance to eligible employees. The
following summarizes these plans:
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 (income) expense related to pension benefits for 1996, 1995 and 1994
consisted of the following components:
<TABLE>
<CAPTION>
TWELVE MONTHS ELEVEN MONTHS
ENDED ENDED
NOVEMBER 30 NOVEMBER 30
(IN MILLIONS) 1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost -- benefits earned during the period $ 18 $ 13 $ 16
Interest cost on projected benefit obligation 34 31 28
Actual return on plan assets (101) (77) (4)
Net amortization and deferral 47 36 (31)
Total (income) expense $ (2) $ 3 $ 9
- ---------------------------------------------------------------------------------------------
</TABLE>
Plan assets within the trust consist principally of equities and bonds. The
actual return on plan assets for 1996 and 1995 reflects the favorable market
environments in those years. In addition, Company contributions increased assets
under investment in 1996 and 1995. Adverse market conditions in 1994 were the
principal reason for the lower return earned in that year.
The following table sets forth the funded status of the Company's defined
benefit plans:
<TABLE>
<CAPTION>
NOVEMBER 30
(IN MILLIONS) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations
Vested benefit obligation $(452) $ (428)
Accumulated benefit obligation $(456) $ (433)
- --------------------------------------------------------------------------------
Projected benefit obligation $(480) $ (452)
Plan assets at fair value 667 564
- --------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 187 112
Unrecognized net loss 20 76
- --------------------------------------------------------------------------------
Prepaid pension asset recognized in the
Consolidated Statement of Financial Condition $ 207 $ 188
- --------------------------------------------------------------------------------
</TABLE>
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 7.25% in 1996 and 1995, respectively. The weighted average rate of
increase in future compensation levels used was 5.0% for 1996 and 1995. The
weighted average expected long-term rate of return on assets was 9.5% in 1996
and 9.75% for 1995 and 1994.
LEHMAN BROTHERS 1996 ANNUAL REPORT 71
<PAGE> 21
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 1996, 1995, and 1994 consisted of
the following components:
<TABLE>
<CAPTION>
TWELVE MONTHS ELEVEN MONTHS
ENDED ENDED
NOVEMBER 30 NOVEMBER 30
(IN MILLIONS) 1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 1 $ 1 $ 1
Interest cost 3 4 5
Amortization of unrecognized net reduction in
prior service cost and unrecognized gain (1) (1) (1)
- --------------------------------------------------------------------------------------------
Net periodic postretirement benefits cost $ 3 $ 4 $ 5
- --------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the amount recognized in the Consolidated
Statement of Financial Condition for the Company's postretirement benefit plans
(other than pension plans):
<TABLE>
<CAPTION>
NOVEMBER 30
(IN MILLIONS) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees $ 36 $ 42
Fully eligible active plan participants 3 4
Other active plan participants 10 6
- --------------------------------------------------------------------------------
49 52
Unrecognized net gain 21 17
Unrecognized net reduction in prior service cost 8 8
Accrued postretirement liability recognized in the
Consolidated Statement of Financial Condition $ 78 $ 77
</TABLE>
The discount rate used in determining the accumulated postretirement benefit
obligation was 7.5% and 7.25% in 1996 and 1995, respectively.
The annual assumed health care cost trend rate is 10% for the year ended
November 30, 1997 and is assumed to decrease at the rate of 1% per year to 6% in
the year ended November 30, 2001 and remain at that level thereafter. An
increase in the assumed health care cost trend rate by one percentage point in
each period would increase the accumulated postretirement benefit obligation as
of November 30, 1996 by approximately $3 million.
NOTE 11 INCOME TAXES
The Company files a consolidated U.S. federal income tax return reflecting the
income of Holdings and its subsidiaries. For the period prior to the spin-off
from American Express on May 31, 1994, the income of the Company was included in
the American Express consolidated U.S. federal income tax return, as it had been
since August of 1990.
LEHMAN BROTHERS 1996 ANNUAL REPORT 72
<PAGE> 22
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, 1996 and 1995 were $12 million and $21 million, respectively.
The provision for income taxes from continuing operations consists of the
following:
<TABLE>
<CAPTION>
TWELVE MONTHS ELEVEN MONTHS
ENDED ENDED
NOVEMBER 30 NOVEMBER 30
(IN MILLIONS) 1996 1995 1994
- -------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $ (20) $ 170 $ (158)
State 36 80 (5)
Foreign 133 72 63
- -------------------------------------------------------------------
149 322 (100)
Deferred
Federal 61 (144) 153
State 11 (51) 14
- -------------------------------------------------------------------
$ 221 $ 127 $ 67
- -------------------------------------------------------------------
</TABLE>
Income from continuing operations before taxes included $335 million, $173
million, and $105 million that is subject to income taxes of foreign
jurisdictions for 1996, 1995 and 1994, 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
ENDED ENDED
NOVEMBER 30 NOVEMBER 30
(IN MILLIONS) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes at statutory rate $ 223 $129 $ 67
State and local taxes 31 18 6
Tax-exempt interest and dividends (10) (17) (21)
Amortization of goodwill 3 2 3
Foreign operations (26) (1) 13
Other, net (4) (1)
$ 221 $127 $ 67
</TABLE>
Deferred income taxes are provided for the differences between the tax bases of
assets and liabilities and their reported amounts in the consolidated financial
statements. These temporary differences will result in future income or
deductions for income tax purposes and are measured using the enacted tax rates
that will be in effect when such items are expected to reverse. The Company
provides deferred income taxes on undistributed earnings of foreign
subsidiaries.
LEHMAN BROTHERS 1996 ANNUAL REPORT 73
<PAGE> 23
At November 30, 1996 and 1995 the deferred tax assets and liabilities consisted
of the following:
<TABLE>
<CAPTION>
NOVEMBER 30
(IN MILLIONS) 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Reserves not currently deductible $ 245 $ 289
Deferred compensation 258 212
Tax return NOLs 66 44
Other 26 7
- -----------------------------------------------------------------------------------------
595 552
Less: Valuation allowance 83 106
- -----------------------------------------------------------------------------------------
Total deferred tax assets $ 512 $ 446
- -----------------------------------------------------------------------------------------
Deferred tax liabilities
Undistributed earnings of foreign subsidiaries (net of credits) $ 23 $ 4
Excess tax over financial depreciation 102 83
Unrealized trading and investment activity 88 4
Pension and retirement costs 41 35
Other 4 11
Total deferred tax liabilities $ 258 $ 137
- -----------------------------------------------------------------------------------------
Net deferred tax asset $ 254 $ 309
- -----------------------------------------------------------------------------------------
</TABLE>
The net deferred tax assets are included in deferred expenses and other assets
in the accompanying Consolidated Statement of Financial Condition. At November
30, 1996, the valuation allowance recorded against deferred tax assets from
continuing operations was $83 million compared to $106 million at November 30,
1995, of which approximately $51 million and $56 million, respectively, will
reduce goodwill if future circumstances permit recognition. The decrease in the
valuation allowance had no impact in the Company's Consolidated Statement of
Operations since it was primarily associated with a corresponding decrease in
the Company's net deferred tax assets.
For tax return purposes, the Company has approximately $92 million of NOL
carryforwards, substantially all of which are attributable to the 1988
acquisition of E.F. Hutton Group, Inc. (now known as LBI Group Inc.).
Substantially, all of the NOLs are scheduled to expire in the years 1999 through
2009.
NOTE 12 DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are financial instruments whose value is based upon an underlying
asset (e.g., treasury bond), index (e.g., S&P 500) or reference rate (e.g.,
LIBOR). Over-the-counter ("OTC") derivative products are privately negotiated
contractual agreements that can be tailored to meet individual client needs and
include forwards, swaps and certain options including caps, collars and floors.
Exchange-traded derivative products are standardized contracts transacted
through regulated exchanges and include futures and certain option contracts
listed on an exchange.
In the normal course of business, the Company enters into derivative
transactions both in a trading capacity and as an end user. Acting in a trading
capacity, the Company enters into derivative transactions to satisfy the needs
of its clients and to manage the Company's own exposure to market and credit
risk resulting from its trading activities in cash instruments (collectively,
"Trading-Related Derivative Activities"). As an end user, the Company primarily
enters into interest rate swap and option contracts to adjust the interest rate
nature of its funding sources from fixed to floating rates and vice versa, and
to change the index upon which floating interest rates are based (i.e., Prime to
LIBOR) (collectively, "End User Derivative Activities").
There is an extensive volume of derivative products available in the marketplace
which can vary from a simple forward foreign exchange contract to a complex
derivative instrument with multiple risk characteristics involving the
LEHMAN BROTHERS 1996 ANNUAL REPORT 74
<PAGE> 24
aggregation of the risk characteristics of a number of derivative product types
including swap products, options and forwards. Listed below are examples of
various derivative products types along with a brief discussion of the
performance mechanics of certain specific derivative instruments.
SWAP PRODUCTS Interest rate swap products include interest rate and currency
swaps, leveraged swaps, swap options, and other interest rate option products
including caps, collars, and floors. An interest rate swap is a negotiated OTC
contract in which two parties agree to exchange periodic interest payments for a
defined period, calculated based upon a predetermined notional amount. Interest
payments are usually exchanged on a net basis throughout the duration of the
swap contract. A currency swap is an OTC agreement to exchange a fixed amount of
one currency for a specified amount of a second currency at the outset and
completion of the swap term. Leveraged swaps involve the multiplication of the
interest rate factor upon which the interest payment streams are based (i.e.,
Party A pays 3 times the six month LIBOR). Caps are contractual commitments that
require the writer to pay the purchaser the amount by which an interest
reference rate exceeds a defined contractual rate, if any, at specified times
during the contract. Conversely, a floor is a contractual commitment that
requires the writer to pay the amount by which a defined contractual rate
exceeds an interest reference rate at specified times over the life of the
contract, if any.
Equity swaps are contractual agreements whereby one party agrees to receive the
appreciation (or depreciation) value over a strike price on an equity investment
in return for paying another rate, which is usually based upon equity index
movements or interest rates. Commodity swaps are contractual commitments to
exchange the fixed price of a commodity for a floating price (which is usually
the prevailing spot price) throughout the swap term.
OPTIONS Option contracts provide the option purchaser (holder) with the right
but not the obligation to buy or sell a financial instrument, commodity or
currency at a predetermined exercise price (strike price) during a defined
period (American Option) or at a specified date (European Option). The option
purchaser pays a premium to the option seller (writer) for the right to exercise
the option. The option seller is obligated to buy (call) or sell (put) the item
underlying the contract at a set price, if the option purchaser chooses to
exercise. Option contracts also exist for various indices and are similar to
options on a security or other instrument except that, rather than settling
physical with delivery of the underlying instrument, they are cash settled. As a
purchaser of an option contract, the Company is subject to credit risk, 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. TBAs are forward contracts which give the purchaser/seller
an obligation to obtain/deliver mortgage securities in the future. Therefore,
TBAs subject the holder to both interest rate risk and principal prepayment
risk.
LEHMAN BROTHERS 1996 ANNUAL REPORT 75
<PAGE> 25
TRADING-RELATED DERIVATIVE ACTIVITIES Derivatives are subject to various risks
similar to other financial instruments including market, credit, and operational
risk. In addition, the Company may also be exposed to legal risks related to its
derivative activities including the possibility that a transaction may be
unenforceable under applicable law. The risks of derivatives should not be
viewed in isolation, but rather should be considered on an aggregate basis along
with the Company's other trading-related activities. The Company manages the
risks associated with derivatives on an aggregate basis along with the risks
associated with its proprietary trading and market-making activities in cash
instruments as part of its firmwide risk management policies.
Derivatives are generally based upon notional values. Notional values are not
recorded on-balance-sheet, but rather are utilized solely as a basis for
determining future cash flows to be exchanged. Therefore, notional amounts
provide a measure of the Company's involvement with such instruments, but are
not indicative of potential risk.
The following table reflects the notional/contract value of the Company's
Trading-Related Derivative Activities:
TRADING-RELATED DERIVATIVE FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
NOTIONAL/CONTRACT VALUE
NOVEMBER 30 NOVEMBER 30 1996
WEIGHTED AVERAGE
(IN MILLIONS) 1996 1995 MATURITY (IN YEARS)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest rate and currency swaps and options
(including caps, collars and floors) $ 690,583 $ 529,724 3.90
Foreign exchange forward and future
contracts and options 378,314 349,248 .26
Other fixed income securities contracts
(including futures contracts and options),
mortgage-backed securities forward
contracts and options 374,048 273,291 .77
Equity contracts (including equity swaps,
futures, warrants and options) 26,931 25,013 .65
Commodity contracts (including swaps,
futures, forwards and options) 46,946 31,717 .59
Total $ 1,516,822 $1,208,993 2.06
- --------------------------------------------------------------------------------------------------------
</TABLE>
Of the total notional value at November 30, 1996 and 1995, approximately $1,186
billion and $968 billion are over-the-counter and $331 billion and $241 billion
are exchange-traded, respectively. The total weighted average maturity at
November 30, 1996, for over-the-counter and exchange-traded contracts was 2.39
years and 0.88 years, respectively. Approximately $843 billion of the
notional/contract value of the Company's Trading-Related Derivative Activities
mature within the year ended November 30, 1997, of which approximately 44% 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 and net interest revenues related
to the Company's fixed income derivative products business were $541 million for
1996, $409 million for 1995 and $381 million for 1994. Principal transactions
and net interest revenues related to the Company's equity derivative products
business were $116 million for 1996, $65 million for 1995 and $31 million for
1994. Principal transactions and net interest revenues related to foreign
exchange and commodity derivatives were $147 million for 1996, $72 million for
1995 and $70 million for 1994.
LEHMAN BROTHERS 1996 ANNUAL REPORT 76
<PAGE> 26
Listed in the following table is the fair value of the Company's Trading-Related
Derivative Activities as of November 30, 1996 and 1995 as well as the average
fair value of these instruments. Average fair values of these instruments were
calculated based upon month-end statement of financial condition values, which
the Company believes does not vary significantly from the average fair value
calculated on a more frequent basis. Variances between average fair values and
period-end values are due to changes in the volume of activities in these
instruments and changes in the valuation of these instruments due to variations
in market and credit conditions.
FAIR VALUE OF TRADING-RELATED DERIVATIVE FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
AVERAGE FAIR VALUE *
FAIR VALUE * TWELVE MONTHS ENDED
NOVEMBER 30, 1996 NOVEMBER 30, 1996
(IN MILLIONS) ASSETS LIABILITIES ASSETS LIABILITIES
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate and currency swaps and options
(including caps, collars and floors) $ 4,008 $ 3,185 $3,446 $ 1,945
Foreign exchange forward contracts and options 970 1,206 903 1,200
Options on other fixed income securities,
mortgage-backed securities forward contracts
and options 226 286 239 238
Equity contracts (including equity swaps, warrants
and options) 1,167 1,304 1,118 1,076
Commodity contracts (including swaps, forwards,
and options) 538 835 451 587
Total $ 6,909 $ 6,816 $6,157 $ 5,046
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE FAIR VALUE *
FAIR VALUE * TWELVE MONTHS ENDED
NOVEMBER 30, 1995 NOVEMBER 30, 1995
ASSETS LIABILITIES ASSETS LIABILITIES
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate and currency swaps and options
(including caps, collars and floors) $ 2,680 $ 2,260 $2,729 $ 2,102
Foreign exchange forward contracts and options 1,248 1,428 1,455 1,461
Options on other fixed income securities,
mortgage-backed securities forward contracts
and options 204 188 213 241
Equity contracts (including equity swaps, warrants
and options) 913 962 826 756
Commodity contracts (including swaps, forwards,
and options) 339 434 405 487
Total $ 5,384 $ 5,272 $5,628 $ 5,047
- --------------------------------------------------------------------------------------------------------------
</TABLE>
*Amounts represent carrying value (exclusive of collateral) and do not include
receivables or payables related to exchange-traded futures contracts.
Assets included in the table above represent the Company's unrealized gains, net
of unrealized losses for situations in which the Company has a master netting
agreement. Similarly, liabilities represent net amounts owed to counterparties.
Therefore, the fair value of assets related to derivative contracts at November
30, 1996 represents the Company's net receivable for derivative financial
instruments before consideration of collateral. Included within this amount was
$6,537 million and $372 million, related to OTC contracts and exchange-traded
contracts, respectively.
The primary difference in risks related to OTC and exchange-traded contracts is
credit risk. OTC contracts contain credit risk for unrealized gains from various
counterparties for the duration of the contract, net of collateral.
With respect to OTC instruments, the Company views its net credit exposure to be
$4,487 million at November 30, 1996, representing the fair value of the
Company's OTC contracts in an unrealized gain position, after consideration of
collateral of $2,050 million.
LEHMAN BROTHERS 1996 ANNUAL REPORT 77
<PAGE> 27
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.
<TABLE>
<CAPTION>
1996
COUNTERPARTY S&P/MOODY'S NET CREDIT
RISK RATING EQUIVALENT EXPOSURE
- ----------------------------------------------------------------
<S> <C> <C>
1 AAA/Aaa 22%
2 AA-/Aa3 or higher 23%
3 A-/A3 or higher 38%
4 BBB-/Baa3 or higher 10%
5 BB-/Ba3 or higher 5%
6 B+/B1 or lower 2%
- ----------------------------------------------------------------
</TABLE>
These designations are based on actual ratings made by external rating agencies
or by equivalent ratings established and utilized by the Company's Corporate
Credit Department.
The Company is also subject to credit risk related to its exchange-traded
derivative contracts. Exchange-traded contracts, including futures and certain
options, are transacted directly on the exchange. To protect against the
potential for a default, all exchange clearing houses impose net capital
requirements for their membership. Additionally, the exchange clearing house
requires counterparties to futures contracts to post margin upon the origination
of the contract and for any changes in the market value of the contract on a
daily basis (certain foreign exchanges extend settlement to three days).
Therefore, the potential for losses from exchange-traded products is limited.
END USER DERIVATIVE ACTIVITIES The Company utilizes 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, 1996 and November 30, 1995 the notional value of the Company's end
user activities related to its long-term debt obligations were approximately
$15.1 billion and $11.0 billion, respectively. (For a further discussion of the
Company's long-term debt-related end user activities see Note 3.)
The Company also utilizes derivative products as an end user to modify its
interest rate exposure associated with its secured financing activities,
including securities purchased under agreements to resell, securities borrowed,
securities sold under agreements to repurchase and securities loaned. At
November 30, 1996 and 1995, the Company had $115 billion and $114 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 utilizing derivative financial instruments, including
interest rate swaps and purchased options. The Company designates certain
specific derivative transactions against specific assets and liabilities with
matching maturities. In addition, the Company manages the interest rate risk of
anticipated secured financing transactions with derivative products. These
derivative products are designated against the existing secured financing
transactions for their applicable maturity. The remaining term of these
transactions are designated against the anticipated secured financing
transactions which will replace the existing secured financing transactions at
their maturity. The Company continuously monitors the level of secured financing
transactions to ensure that there is a high degree of certainty that the Company
will enter into the anticipated secured financing transactions at a level in
excess of the designated derivative product transactions. At November 30, 1996
and November 30, 1995, the Company, as an end user, utilized derivative
financial instruments with an aggregate notional amount of $47.6 billion and
$21.5 billion, respectively, to modify the interest rate characteristics of its
secured financing activities. The
LEHMAN BROTHERS 1996 ANNUAL REPORT 78
<PAGE> 28
total notional value of these agreements had a weighted average maturity of 0.5
years and 1.1 years as of November 30, 1996 and November 30, 1995, respectively.
The Company terminated certain swaps designated as hedges of the Company's
secured financing activities. At November 30, 1996, a loss of approximately $32
million from these terminated contracts was deferred and will be amortized to
interest expense over the original period of the hedge. On an overall basis, the
Company's secured financing end user activities increased net interest income by
approximately $16 million, $39 million and $6 million for 1996, 1995 and 1994,
respectively.
NOTE 13 FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 "Disclosures about Fair Value of Financial Instruments" requires
the Company to report the fair value of financial instruments, as defined.
Assets and liabilities that are carried at fair value include all of the
Company's trading assets and liabilities including derivative financial
instruments used for trading purposes as described in Note 1, which are recorded
as securities and other financial instruments owned and securities and other
financial instruments sold but not yet purchased.
Assets and liabilities, which are recorded at contractual amounts that
approximate market or fair value, include cash and cash equivalents, cash and
securities segregated and on deposit for regulatory and other purposes,
receivables, certain other assets and deferred expenses, commercial paper and
short-term debt, and payables. The market value of such items are not materially
sensitive to shifts in market interest rates because of the limited term to
maturity of these instruments and their variable interest rates.
Financial instruments which are recorded at amounts that do not necessarily
approximate market or fair value, include long-term debt, certain secured
financing activities and the related financial instruments utilized by the
Company as an end user to manage the interest rate risk of these exposures. The
Company's long-term debt is recorded at contractual or historical amounts. The
following table provides a summary of the fair value of the Company's long-term
debt and related end user activities. The fair value of the Company's long-term
debt was estimated using either quoted market prices or discounted cash flow
analyses based on the Company's current borrowing rates for similar types of
borrowing arrangements. The unrecognized net gain/(loss) related to the
Company's end user activities reflects the estimated amounts the Company would
receive/(pay) if the derivative financial instruments were terminated based on
market rates at November 30, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
NOVEMBER 30
(IN MILLIONS) 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Carrying value of long-term debt $15,922 $ 12,765
Fair value of long-term debt 16,415 13,270
Unrecognized net gain (loss) on long-term debt $ (493) $ (505)
- --------------------------------------------------------------------------------------------------
Unrecognized net gain (loss) on long-term debt end user activities $ 153 $ 236
- --------------------------------------------------------------------------------------------------
</TABLE>
The Company carries its secured financing activities, including securities
purchased under agreements to resell, securities borrowed, securities sold under
agreements to repurchase and securities loaned, at their original contract
amount plus accrued interest, which for the majority of such financing
activities is an approximation of fair value. At November 30, 1996 and 1995, the
Company had $115 billion and $114 billion, respectively, of such secured
financing activities. As with the Company's long-term debt, its secured
financing activities expose the Company to interest rate risk.
At November 30, 1996 and 1995, the Company, as an end user, utilized derivative
financial instruments with an aggregate notional amount of $47.6 billion and
$21.5 billion, respectively, to modify the interest rate characteristics of its
secured financing activities. The unrecognized net losses related to these
derivative financial instruments of
LEHMAN BROTHERS 1996 ANNUAL REPORT 79
<PAGE> 29
$10 million and $36 million at November 30, 1996 and 1995, respectively, were
offset by unrecognized net gains arising from the Company's secured financing
activities.
NOTE 14 OTHER COMMITMENTS AND CONTINGENCIES
As of November 30, 1996 and 1995, the Company was contingently liable for $3.0
billion and $2.0 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.
At November 30, 1996, the Company has commitments under certain secured lending
arrangements of approximately $2.7 billion. These commitments require borrowers
to provide acceptable collateral, as defined in the agreements, when amounts are
drawn under the lending facilities. Advances under the above lending
arrangements are typically at variable interest rates and generally provide for
over-collateralization based upon the borrowers' creditworthiness.
As of November 30, 1996 and 1995, the Company had pledged or otherwise
transferred securities, primarily fixed income, having a market value of
approximately $37.2 billion and $30.3 billion, respectively, as collateral for
securities borrowed or otherwise received having a market value of approximately
$36.9 billion and $30.1 billion, respectively.
Securities and other financial instruments sold but not yet purchased represent
obligations of the Company to purchase the securities at prevailing market
prices. Therefore, the future satisfaction of such obligations may be for an
amount greater or less than the amount recorded. The ultimate gain or loss is
dependent upon the price at which the underlying financial instrument is
purchased to settle its obligation under the sale commitment.
In the normal course of business, the Company is exposed to off-balance sheet
credit and market risk as a result of executing, financing and settling various
customer security and commodity transactions. Off-balance sheet risk arises from
the potential that customers or counterparties fail to satisfy their obligations
and that the collateral obtained is insufficient. In such instances, the Company
may be required to purchase or sell financial instruments at unfavorable market
prices. The Company seeks to control these risks by obtaining margin balances
and other collateral in accordance with regulatory and internal guidelines.
In addition, the Company is also exposed to off-balance sheet risk as a result
of entering into commitments to extend credit in connection with certain
merchant banking, investment banking and loan syndication transactions. The
Company also provides and will continue to provide margin lending and other
extensions of credit to clients.
Subsidiaries of the Company, as general partner, are contingently liable for the
obligations of certain public and private limited partnerships organized as
pooled investment funds or engaged primarily in real estate activities. In the
opinion of the Company, contingent liabilities, if any, for the obligations of
such partnerships will not in the aggregate have a material adverse effect on
the Company's consolidated financial position or results of operations.
In the normal course of its business, the Company has been named a defendant in
a number of lawsuits and other legal proceedings. After considering all relevant
facts, available insurance coverage and the advice of outside counsel, in the
opinion of the Company such litigation will not, in the aggregate, have a
material adverse effect on the Company's consolidated financial position or
results of operations.
CONCENTRATIONS OF CREDIT RISK As a major international securities firm, the
Company is actively involved in securities underwriting, brokerage, distribution
and trading. These and other related services are provided on a worldwide basis
to a large and diversified group of clients and customers, including
multinational corporations, governments, emerging growth companies, financial
institutions and individual investors.
LEHMAN BROTHERS 1996 ANNUAL REPORT 80
<PAGE> 30
A substantial portion of the Company's securities and commodities transactions
is collateralized and is executed with, and on behalf of, commercial banks and
other institutional investors, including other brokers and dealers. The
Company's exposure to credit risk associated with the non-performance of these
customers and counterparties in fulfilling their contractual obligations
pursuant to securities transactions can be directly impacted by volatile or
illiquid trading markets, which may impair the ability of customers and
counterparties to satisfy their obligations to the Company.
Securities and other financial instruments owned by the Company include U.S.
government and agency securities, and securities issued by non-U.S. governments
(principally Japan, Germany and Italy) which, in the aggregate, represented 21%
of the Company's total assets at November 30, 1996. In addition, substantially
all of the collateral held by the Company for resale agreements or securities
borrowed, which together represented 41% of total assets at November 30, 1996,
consisted of securities issued by the U.S. government, federal agencies or
non-U.S. governments. In addition to these specific exposures, the Company's
most significant concentration is financial institutions, which include other
brokers and dealers, commercial banks and institutional clients. This
concentration arises in the normal course of the Company's business.
LEASE COMMITMENTS The Company leases office space and equipment throughout the
world and has entered into a ground lease with the Battery Park City Authority
covering its headquarters at 3 World Financial Center which extends through
2069. Total rent expense for 1996, 1995 and 1994 was $48 million, $67 million
and $59 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 $541 million) are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) AMOUNT
- ---------------------------------------------------
<S> <C>
Fiscal 1997 $ 49
Fiscal 1998 40
Fiscal 1999 36
Fiscal 2000 34
Fiscal 2001 34
December 1, 2001 and thereafter 523
$ 716
- ---------------------------------------------------
</TABLE>
NOTE 15 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: the Americas,
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, since it is the result
of numerous estimates and assumptions.
The amounts presented below provide a broad indication of each region's
contribution to the consolidated results. The method of allocation is as
follows: Gross and Net Revenues, if syndicate or trading related, have been
distributed based upon the location where the primary or secondary position was
fundamentally risk managed; if fee-related, by the location of the senior
coverage banker; if commission-related, by the location of the salespeople.
Income (Loss) Before Taxes includes expenses 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.
LEHMAN BROTHERS 1996 ANNUAL REPORT 81
<PAGE> 31
<TABLE>
<CAPTION>
INCOME
GROSS NET (LOSS) IDENTIFIABLE
(IN MILLIONS) REVENUES REVENUES BEFORE TAXES ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------------------
Twelve months ended November 30, 1996 International operations:
Europe $ 1,136 $ 735 $ 140 $ 25,553
Asia Pacific 475 329 25 6,829
Total international 1,611 1,064 165 32,382
Domestic operations 12,649 2,380 472 96,214
Total $ 14,260 $ 3,444 $ 637 $ 128,596
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Includes $129 million resulting from the Company's sale of its stake in
Omnitel.
NOTE 16 Other Charges
1996 SEVERANCE CHARGE The Company recorded an $84 million severance charge ($50
million aftertax) in the fourth quarter of 1996 related to certain strategic
actions taken to improve ongoing profitability. The 1996 severance charge
reflected the culmination of a worldwide business unit economic performance
review which was undertaken in the fourth quarter of 1996 to focus the Company
on its core investment banking, equity and fixed income sales and trading areas.
The charge resulted from personnel reductions across a number of underperforming
fixed income and equity businesses, including exiting the precious metals
business in the U.S., Europe and Asia; exiting energy trading in the U.S. and
Europe, consolidating Asian fixed income risk management activities into one
center in Tokyo; refocusing foreign exchange trading activities and combining
the Company's New York Private Client Services offices. Additionally, the charge
reflected various other strategic personnel reductions which were aimed at
delayering management.
1995 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 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 included 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 included a $17 million pretax ($10 million
aftertax) component related to severance payments made during the fourth
quarter. The severance component of the charge related to payments made to
terminated personnel arising from a fourth quarter formalized business unit
productivity review.
LEHMAN BROTHERS 1996 ANNUAL REPORT 82
<PAGE> 32
SPIN-OFF EXPENSES During the second quarter of 1994, the Company recorded a
charge of $15 million pretax ($12 million aftertax) in connection with the
Concurrent Transactions and certain related expenses.
REDUCTION IN PERSONNEL During the first quarter of 1994, the Company 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.
NOTE 17 CHANGES IN ACCOUNTING PRINCIPLES
ACCOUNTING FOR TRANSFERS OF FINANCIAL ASSETS In June 1996, the FASB issued
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No.
125"), which is effective for transactions occurring after December 31, 1996.
SFAS No. 125 provides new accounting guidance for the transfer of financial
assets, including securitizations, repurchase agreements and securities lending
transactions. SFAS No. 125 outlines specific conditions which must be met for
financial asset transfers to obtain either sale or financing treatment. Sale
treatment is generally obtained if the seller meets the specified conditions to
demonstrate that it has surrendered control over the assets; consequently the
counterparty to the sale must recognize the related financial assets received.
Financing treatment is generally obtained if the borrower agrees to repurchase
substantially the same securities prior to maturity of the agreement, while
maintaining adequate collateral levels, provided that control of the securities
is retained by the borrower (i.e. the owner of the securities has the ability to
redeem the collateral on short notice).
In December 1996, the FASB issued SFAS No. 127 deferring the effective date one
year for certain provisions of SFAS No. 125 dealing with repurchase agreements,
dollar repurchase agreements, securities lending and similar financing
transactions.
It is likely that the adoption of SFAS No. 125 will require the Company to
recognize additional assets and liabilities on its Consolidated Statement of
Financial Condition from these transactions. Where the Company is deemed to have
control over certain financial assets, this will have the effect of increasing
the amount of assets and liabilities recognized on the balance sheet but will
have no material effect on the equity or financial condition of the Company.
ACCOUNTING FOR POSTEMPLOYMENT BENEFITS Effective January 1, 1994, the Company
adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits." SFAS
No. 112 requires the accrual of obligations associated with services rendered to
date for employee benefits accumulated or vested for which payment is probable
and can be reasonably estimated. These benefits principally include the
continuation of salary, health care and life insurance costs for employees on
service disability leaves. The Company previously expensed the cost of these
benefits as they were incurred.
The cumulative effect of adopting SFAS No. 112 reduced net income for the first
quarter of 1994 by $13 million aftertax ($23 million pretax). The effect of this
accounting change on the 1994 results of operations was not material, excluding
the cumulative effect.
OFFSETTING OF CERTAIN RECEIVABLES AND PAYABLES During the first quarter of 1994,
the Company adopted the Financial Accounting Standards Board Interpretation No.
39, "Offsetting of Amounts Related to Certain Contracts" ("FIN No. 39"). FIN No.
39 restricts the historical industry practice of offsetting certain receivables
and payables. In January 1995, the Financial Accounting Standards Board issued
Interpretation No. 41, "Offsetting of Amounts Related to 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
LEHMAN BROTHERS 1996 ANNUAL REPORT 83
<PAGE> 33
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 18 QUARTERLY INFORMATION (UNAUDITED)
The following information represents the Company's unaudited quarterly results
of operations for 1996 and 1995. Certain amounts reflect reclassifications to
conform to the current period's presentation. These quarterly results reflect
all normal recurring adjustments which are, in the opinion of management,
necessary for a fair presentation of the results. Revenues and earnings of the
Company can vary significantly from quarter to quarter due to the nature of the
Company's business activities.
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995
NOV. 30 AUG. 31 MAY 31 FEB. 29 NOV. 30 AUG. 31 MAY 31 FEB. 28
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues $3,813 $3,585 $3,476 $3,386 $3,613 $3,453 $3,298 $3,112
Interest expense 2,745 2,863 2,643 2,565 2,729 2,703 2,567 2,405
- --------------------------------------------------------------------------------------------------------------------
Net revenues 1,068 722 833 821 884 750 731 707
Non-interest expenses:
Compensation and
benefits 542 366 422 416 433 380 371 360
Other expenses 247 240 242 246 254 261 270 277
Severance and other charges 84 97
Total non-interest expenses 873 606 664 662 784 641 641 637
- --------------------------------------------------------------------------------------------------------------------
Income before taxes 195 116 169 159 100 109 90 70
Provision for income taxes 68 39 61 55 31 38 32 25
Net income $ 127 $ 77 $ 108 $ 104 $ 69 $ 71 $ 58 $ 45
- --------------------------------------------------------------------------------------------------------------------
Net income applicable to
common stock $ 113 $ 71 $ 102 $ 93 $ 58 $ 60 $ 48 $ 34
Earnings per
common share $ 0.96 $ 0.60 $ 0.89 $ 0.79 $ 0.49 $ 0.52 $ 0.43 $ 0.31
Dividends per
common share $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.05
Book value per common
share (at period end) $28.84 $27.74 $27.29 $26.41 $25.67 $25.23 $25.16 $24.69
Number of shares used
in earnings per common
share computation 116.9 117.2 114.8 116.9 117.1 116.2 110.2 110.2
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
LEHMAN BROTHERS 1996 ANNUAL REPORT 84
<PAGE> 1
- -------------------------------------------------------------------
OTHER STOCKHOLDER INFORMATION
ANNUAL MEETING
The annual meeting of stockholders of Lehman Brothers Holdings Inc. will be held
on Wednesday, March 26, 1997 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 business day of February, May, August and
November. The annual dividend rate for fiscal 1996 was $0.20 per common share.
The Company recently announced an annual common stock dividend policy of $0.24
per 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 program. 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]
INVESTORS 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]
WORLD WIDE WEB
Financial statement filings, stockholder information, press releases and news
about the Company also may be accessed via the World Wide Web at the following
address:
http://www.lehman.com
- ----------------------------------------------------------------------------
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 17, 1997,
there were 30,202 holders of record of the Company's common stock. On January
17, 1997, the last reported sales price of the Company's common stock was
$32.75.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
1996 1995
NOV. 30 AUG. 31 MAY 31 FEB. 29 NOV. 30 AUG. 31 MAY 31 FEB. 28
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $29 3/8 $26 $27 $26 $24 5/8 $23 7/8 $20 7/8 $18 3/4
Low $20 7/8 $21 1/8 $22 1/8 $20 1/4 $20 7/8 $19 1/2 $17 5/8 $13 3/4
</TABLE>
LEHMAN BROTHERS 1996 ANNUAL REPORT 88
<PAGE> 1
Page: 1 of 5
EXHIBIT 21
Subsidiaries of Lehman Brothers Holdings Inc.
COMPANY PLACE OF INCORPORATION
- ------------------------------------------------------------------------------
72nd Street Premises, Inc. Delaware
ALI Inc. Delaware
Americal GP Corp. Delaware
American Entertainment Depositary Corp. Delaware
American Entertainment Depositary Corp. II Delaware
ASAS Investment Company Delaware
Asesoria Empresarial ICC, S.A. de C.V. Mexico
Banque Lehman Brothers S.A. France
BBC Land Company Georgia
Boulevard Investors, Inc. Delaware
Boulevard Real Estate Corp. Delaware
Broad OK Corp. Delaware
Burlington Investors Inc. Delaware
CA Claremont Associates Inc. Delaware
CA Claremont Inc. Delaware
CA Victory Assignor Corp. Delaware
CA Victory Inc. Delaware
CA Village Green Inc. California
Cable Income Services Inc. Delaware
Canyon Terrace Inc. Delaware
Casitas Associates, Inc. California
CG California Commercial Landing Inc. Delaware
CG Realty Funding Inc. Delaware
CG Zero Coupon Depositary Corp. Delaware
Client Account Protection Insurance Company Vermont
Cobex Realty Inc. Texas
Consolidated Real Property Corp. Nevada
Creekside Inc. Delaware
Crescent Gardens Inc. Delaware
DA Group Holdings Inc. Delaware
DAG Group Inc. Delaware
DAG Lending Corp. Delaware
DAG Realty Brokerage Inc. New York
Diogenes Holdings Inc. Delaware
Diogenes Investments Ltd. Bermuda
Diogenes Management Company Inc. Delaware
E.H.P. Depositary Corp. Delaware
F & J Fruit Orchard Limited Delaware
Fiduciaria Lehman Brothers SPA Societa di
Intermediazione Mobiliare Italy
First Dallas Associates Inc. Delaware
Freedom GP Inc. Delaware
GA Wildwood I Inc. Georgia
Grass Valley/Marguerite, Inc. California
Heritage Park II Inc. Delaware
Heritage Park Inc. Delaware
HillCreste Properties Inc. Delaware
Hollywood Partners Inc. Delaware
Indian Oaks Inc. Delaware
<PAGE> 2
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CAD REPORTS FOR SECRETARIAT
User: ebannon PLACE OF INCORPORATION (10K)
Parameters: Company = Lehman Brothers Holdings Inc.
<TABLE>
<CAPTION>
COMPANY PLACE OF INCORPORATION
- --------------------------------------------------------------------------------
<S> <C>
PAMCO (No. 2) Limited United Kingdom
PAMCO (UK) Limited United Kingdom
PAMI Nominee Corporation Delaware
Panagora Asset Management Limited United Kingdom
PDF86 Depositary Corp. Delaware
Platform Finance Limited United Kingdom
Platform Home Loans Limited United Kingdom
Platform Home Mortgage Securities No. 1 Plc United Kingdom
Platform Home Mortgage Securities No. 2 Plc United Kingdom
Platform Home Mortgage Securities No. 4 Limited United Kingdom
Platform Investments England
Platform Mortgage United Kingdom
Playa Blanca Inc. Delaware
Prime Depositary Corp. Delaware
Principal Growth Depositary Corp. Delaware
Principal Growth Mortgage Investors Depositary Corp. Delaware
Principal Growth Realty Funding, Inc. Delaware
Principal Growth Realty Management Inc. Delaware
Promathaus GP Inc. Delaware
Promathaus II Inc. Delaware
Property Asset Management Inc. Delaware
RAIA Depositary Corp. Delaware
Raintree GP Inc. Delaware
Regional Malls Depositary Corp. Delaware
Regional Malls Inc. Delaware
Research Partners Inc. Washington
Rock Hill Investors, Inc. Delaware
Rock Hill Real Estate, Inc. Delaware
Senior Income Depositary, Inc. Delaware
Seton Property Corp. Delaware
Sharpstown Center Inc. New York
SM4 Real Estate Investors, Inc. Texas
SM7 Apartment Investors Inc. Texas
South Cobb Land Inc. Georgia
Stamford Real Estate Corporation Delaware
Stamford Towers Depositary Corp. Delaware
Stamford Towers Inc. Delaware
Storage Inc. Delaware
Sun Distributors, Inc. Pennsylvania
Texas Self Storage Inc. Texas
Tower Investors, Inc. Delaware
Tower Real Estate Corporation Delaware
Trans Orbital Sciences Inc. Delaware
Union Square Depositary Corp. Delaware
Walnut Grove GP Corp. Delaware
Warner Center Inc. Delaware
Warner Center/MGP Inc. Delaware
Warren Atlantic Inc. Delaware
</TABLE>
<PAGE> 3
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PLACE OF INCORPORATION (10K)
Parameters: Company = Lehman Brothers Holdings Inc.
<TABLE>
<CAPTION>
COMPANY PLACE OF INCORPORATION
- ------------------------------------------------------------------------------
<S> <C>
Lehman Brothers Pera Cable Inc. Delaware
Lehman Brothers Pera Inc. Delaware
Lehman Brothers Power Inc. Delaware
Lehman Brothers Realty Corp. Delaware
Lehman Brothers Services SMC France
Lehman Brothers South Asia Limited Hong Kong
Lehman Brothers SpA Societa Di Intermediazione
Mobilare Italy
Lehman Brothers TB Inc. Delaware
Lehman Brothers Treasury Co. B.V. The Netherlands
Lehman Brothers Trust Company New York
Lehman Brothers Trustees S.A. Switzerland
Lehman Brothers U.K. Holdings (Delaware) Inc. Delaware
Lehman Brothers UK Holdings Ltd. Delaware
Lehman Brothers UK Holdings Ltd. England
Lehman Brothers Verwatungs-und
Beteiligungsgesellschaft mbH Germany
Lehman Brothers/FW Inc. Delaware
Lehman Brothers/MBGP Inc. Delaware
Lehman Brothers/MBLP Inc. Delaware
Lehman Brothers/Rosecliff Inc. Delaware
Lehman Housing Capital Inc. Delaware
Lehman Investments Inc. Delaware
Lehman JFK MM Inc. Delaware
Lehman JFK Non-MM Inc. Delaware
Lehman Lending Corp. Delaware
Lehman Ltd I Inc. Delaware
Lehman Management Company (Ireland) Limited Ireland
Lehman Structured Assets Inc. Delaware
Lehman Tax Credit Advisor Inc. Delaware
Lehman/SDI Inc. Delaware
Liberty GP III Inc. Delaware
LIBRO Holdings I Inc. Delaware
LIBRO Holdings II Inc. Delaware
Lowell Investors Inc. Delaware
Lowell Real Estate Corp. Delaware
Malibu Canyon Inc. Delaware
Manhattan Beach Commercial Properties III
Depositary Inc. Delaware
Manhattan Beach Commercial Properties III Inc. Delaware
Medical Office Properties Depositary Inc. Delaware
Medical Office Properties Inc. Delaware
Mossel Nominees Limited United Kingdom
Midwest Centers Depositary Inc. Delaware
Morgan Drive Property Co. Delaware
MTGCO Inc. Delaware
NGP Inc. Delaware
NJ Atlantic Inc. Delaware
NJ Somerset Inc. Delaware
Novacorp Realty/GP Inc. Canada
Pacific Village Inc. Delaware
</TABLE>
<PAGE> 4
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02/27/97 2:09 PM CAD REPORTS FOR SECRETARIAT
User: ebennon PLACE OF INCORPORATION (10K)
Parameters: Company - Lehman Brothers Holdings Inc.
<TABLE>
<CAPTION>
COMPANY PLACE OF INCORPORATION
- ------------------------------------------------------------------------------
<S> <C>
Industrial Holdings Corporation New York
J & F Apple Corporation Delaware
Jackson Capital Inc. Delaware
L Ram I, Inc. Delaware
L Ram II, Inc. Delaware
La Jolla GP Inc. Delaware
Laurel Capital Growth Investors Corporation Delaware
Laurel Centre Depositary Corp. Delaware
LB Energy Inc. Delaware
LB Funding Corp. II Delaware
LB/MMG Inc. Delaware
LBAC Holdings I Inc. Delaware
LBAC Holdings II Inc. Delaware
LBTS1, Inc. Delaware
LBTS2, Inc. Delaware
Lehman Brothers (Luxembourg) S.A. Luxembourg
Lehman Brothers (Taiwan) Ltd. Taiwan
Lehman Brothers (Thailand) Limited Thailand
Lehman Brothers Argentina S.A. Argentina
Lehman Brothers Asia Capital Company Hong Kong
Lehman Brothers Asset Trading Inc. Delaware
Lehman Brothers Bankhaus Aktiengesellschaft Germany
Lehman Brothers Canada Inc. New Brunswick
Lehman Brothers Capital GmbH Germany
Lehman Brothers Commercial Corporation Delaware
Lehman Brothers Commercial Corporation Asia Limited Hong Kong
Lehman Brothers Commodities Far East Inc. Delaware
Lehman Brothers do Brasil Ltda Brazil
Lehman Brothers EBS Limited United Kingdom
Lehman Brothers Finance S.A. Switzerland
Lehman Brothers Futures Asia Limited Hong Kong
Lehman Brothers Futures Asset Management Corp. Delaware
Lehman Brothers Gilts Ltd. United Kingdom
Lehman Brothers Global Asset Management Inc. Delaware
Lehman Brothers Global Finance Limited United Kingdom
Lehman Brothers Global Managers Inc. Delaware
Lehman Brothers Holdings Inc. Delaware
Lehman Brothers Holdings Plc United Kingdom
Lehman Brothers Inc. Delaware
Lehman Brothers International (Europe) United Kingdom
Lehman Brothers International Investments Inc. Delaware
Lehman Brothers International S.A. Spain
Lehman Brothers International S.P.A. Italy
Lehman Brothers Investments PTE Limited Singapore
Lehman Brothers Japan Inc. Delaware
Lehman Brothers Limited United Kingdom
Lehman Brothers Merchant Banking Advisors Inc. Delaware
Lehman Brothers Nominees Limited United Kingdom
</TABLE>
<PAGE> 5
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USER: EBENNON PLACE OF INCORPORATION (10K)
PARAMETERS: COMPANY = LEHMAN BROTHERS HOLDINGS INC.
<TABLE>
<CAPTION>
COMPANY PLACE OF INCORPORATION
- -------------------------------------------------------------------------------
<S> <C>
Warren/GP Corp. Delaware
Wellington-Medford III Properties, Inc. Massachusetts
Winter Garden, Inc. Delaware
Working Interest Inc. Delaware
Company Total: 196
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this 1996 Annual Report on
Form 10-K of Lehman Brothers Holdings Inc. of our report dated January 7, 1997,
included in the 1996 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. 333-14791,
33-64899, 33-62085, 33-56615, 33-65674, 33-53651, 33-58548 and 33-49062 of
Lehman Brothers Holdings Inc. and in the related Prospectuses, of our report
dated January 7, 1997 with respect to the consolidated financial statements and
consolidated financial statement schedule of Lehman Brothers Holdings Inc.
included or incorporated by reference in this 1996 Annual Report on Form 10-K
for the year ended November 30, 1996.
Ernst & Young LLP
New York, New York
February 28, 1997
<PAGE> 1
EXHIBIT 24
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thomas A. Russo, Michael R. Milversted and Karen
M. Muller and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign the Annual Report on Form
10-K of Lehman Brothers Holdings Inc., for the fiscal year ended November 30,
1996 and any and all amendments thereto, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: As of February 28, 1997
<TABLE>
<CAPTION>
SIGNATURES TITLE
- ------------------------------------- ------------------------------------------------------
<S> <C>
Chief Executive Officer and,
/s/ RICHARD S. FULD, JR. Chairman of the Board of
- ------------------------------------- Directors
Richard S. Fuld, Jr. (principal executive officer)
/s/ CHARLES B. HINTZ Chief Financial Officer
- ------------------------------------- (principal financial and accounting
Charles B. Hintz officer)
/s/ MICHAEL L. AINSLIE
- -------------------------------------
Michael L. Ainslie Director
/s/ JOHN F. AKERS
- -------------------------------------
John F. Akers Director
/s/ ROGER S. BERLIND
- -------------------------------------
Roger S. Berlind Director
/s/ THOMAS H. CRUIKSHANK
- -------------------------------------
Thomas H. Cruikshank Director
/s/ KATSUMI FUNAKI
- -------------------------------------
Katsumi Funaki Director
/s/ HENRY KAUFMAN
- -------------------------------------
Henry Kaufman Director
/s/ JOHN D. MACOMBER
- -------------------------------------
John D. Macomber Director
/s/ DINA MERRILL
- -------------------------------------
Dina Merrill Director
/s/ MASATAKA SHIMASAKI
- -------------------------------------
Masataka Shimasaki Director
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Consolidated Statement of Financial Condition at November 30, 1996 and
the Consolidated Statement of Operations for the twelve months ended November
30, 1996 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<CASH> 2,837
<RECEIVABLES> 9,944
<SECURITIES-RESALE> 32,340
<SECURITIES-BORROWED> 20,651
<INSTRUMENTS-OWNED> 61,453
<PP&E> 477
<TOTAL-ASSETS> 128,596
<SHORT-TERM> 8,202
<PAYABLES> 8,586
<REPOS-SOLD> 56,119
<SECURITIES-LOANED> 6,296
<INSTRUMENTS-SOLD> 26,364
<LONG-TERM> 15,922
0
508
<COMMON> 11
<OTHER-SE> 3,355
<TOTAL-LIABILITY-AND-EQUITY> 128,596
<TRADING-REVENUE> 1,579
<INTEREST-DIVIDENDS> 11,298
<COMMISSIONS> 362
<INVESTMENT-BANKING-REVENUES> 981
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 10,816
<COMPENSATION> 1,747
<INCOME-PRETAX> 637
<INCOME-PRE-EXTRAORDINARY> 416
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 416
<EPS-PRIMARY> $3.24
<EPS-DILUTED> $3.24
</TABLE>
