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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
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-9466
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LEHMAN BROTHERS HOLDINGS INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-3216325
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
3 WORLD FINANCIAL CENTER 10285
NEW YORK, NEW YORK (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 526-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
Common Stock, $.10 par value New York Stock Exchange
Pacific Exchange
Depositary Shares representing 5.94% Cumulative Preferred Stock,
Series C New York Stock Exchange
Depositary Shares representing 5.67% Cumulative Preferred Stock,
Series D New York Stock Exchange
8% Trust Preferred Securities, Series I of Subsidiary Trust (and
Registrant's guarantee thereof) New York Stock Exchange
Global Telecommunications Stock Upside Note Securities(SM) Due 2000 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
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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 (Section 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 and nonvoting common equity held by
non-affiliates of the Registrant at February 9, 1999 was approximately
$5,822,446.36. 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 9, 1999,
119,411,161 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. 1998 Annual Report to Stockholders (the "1998
Annual Report")-- Incorporated in part in Parts II and IV.
(2) Lehman Brothers Holdings Inc. Proxy Statement for its 1999 Annual Meeting of
Stockholders (the "Proxy Statement")--Incorporated in part in 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," the
"Firm" or "Lehman Brothers," and Lehman Brothers Inc., a Delaware corporation
and the principal subsidiary of Holdings, 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, Paris 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 years ended November 30, 1998, November 30, 1997 and November 30, 1996,
including the amount of revenue contributed by each class 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 1998 Annual Report and is incorporated
herein by reference. Information with respect to the Company's operations by
geographic area is set forth in Note 15 to the Notes to Consolidated Financial
Statements on pages 90-91 of the 1998 Annual Report 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.
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LEHMAN BUSINESSES
Lehman Brothers is a leading underwriter and market-maker 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
Lehman Brothers' 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, geographic and product coverage
groups, enabling individual bankers to develop specific expertise in particular
industries and markets. Industry coverage groups include Financial Institutions,
Health Care, Industrial/Consumer, Media/Telecommunications, Natural Resources,
Power, Real Estate, Retailing and Technology. Where appropriate, specialized
product groups are partnered with the global industry and geographic groups to
provide tailor-made solutions for Lehman Brothers' clients. These product groups
include Equity Capital Markets, which includes equity and equity-related
securities and derivatives; Debt Capital Markets, which incorporates expertise
in syndicate, liability management, derivatives and private placements; Mergers
and Acquisitions; Leveraged Finance, which includes high yield debt and bank
loan syndication; Private Placements; and Financial Sponsors, which structures
and executes leveraged acquisitions. Geographically, Lehman Brothers maintains
investment banking offices in five cities in the U.S. and in twenty cities in
Europe, the Middle East, Asia and Latin America.
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 and tax
optimization strategies. During 1998, the Company expanded its global mergers
and acquisitions presence, advising on 66 cross-border transactions. Linkages
between strategic advisory services and the Firm's foreign exchange, derivatives
and leveraged financing products are widely utilized.
FIXED INCOME
Lehman Brothers actively participates in all key fixed income markets
worldwide and maintains a 24-hour trading presence in global fixed income
securities. The Company combines professionals from the distribution, research
and trading areas of the Fixed Income Division, 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 is also a
preeminent market-maker 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:
GOVERNMENT AND AGENCY OBLIGATIONS. Lehman Brothers is one of the leading
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 is active in France as a reporting dealer and in Italy as a
super-primary dealer.
CORPORATE DEBT SECURITIES. Lehman Brothers engages in the underwriting and
market making of fixed and floating rate investment grade debt 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.
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HIGH YIELD SECURITIES AND BANK LOANS. The Company also underwrites and
makes markets in non-investment grade debt securities and bank loans. The
Company provides "one-stop" leveraged finance solutions for corporate and
financial acquirers and high yield issuers, including multi-step, multiproduct
acquisition financing.
MONEY MARKET PRODUCTS. Lehman Brothers holds dominant market positions in
the origination and distribution of medium-term notes and commercial paper. The
Company is an appointed dealer for over 600 active commercial paper programs on
behalf of companies and government agencies worldwide.
MORTGAGE AND ASSET-BACKED SECURITIES. The Company is a leading underwriter
of and market-maker in residential and commercial mortgage- and asset-backed
securities and is active in all areas of secured lending, structured finance and
securitized products. 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.
EMERGING MARKET SECURITIES. The Company engages in the trading, structuring
and underwriting of Latin American, Eastern European, and Asian dollar and local
currency instruments.
FINANCING. The Company's Financing unit engages in three primary functions:
managing the Company's matched book activities, supplying secured financing to
customers, and providing funding for the Company's activities. Matched book
funding involves lending cash on a short-term basis to institutional customers
collateralized by marketable securities, typically government or government
agency securities. The Company enters into these agreements in various
currencies and seeks to generate profits from the difference between interest
earned and interest paid. The Financing unit works with the Company's
institutional sales force to identify customers that have cash to invest and/or
securities to pledge to meet the financing and investment objectives of the
Company and its customers. Financing also coordinates with the Company's
Treasury area to provide collateralized financing for a large portion of the
Company's securities and other financial instruments owned. In addition to its
activities on behalf of its U.S. clients and customers, the Company 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 response to the worldwide convergence of the cash and derivative
markets.
FOREIGN EXCHANGE. Lehman Brothers' global foreign exchange operations
provide market access and liquidity in all currencies for spot, forward and
over-the-counter options markets on a 24-hour-per-day basis. 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 collaboration with the Firm's emerging markets unit,
the Firm's foreign exchange activities have diversified into Latin American,
Eastern European 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 currencies for its own account.
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EQUITIES
Lehman Brothers combines professionals from the sales, trading, investment
banking and research areas of its Equities Division 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, Paris and Milan.
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. The Firm's equity derivatives business is organized into two major
product areas--a global volatility business, encompassing options-related
products, and a global portfolio trading business that specializes in index
arbitrage, agency/risk baskets and other structured products.
EQUITY FINANCE. Lehman Brothers maintains an integrated Equity Financing
and Prime Broker business to provide liquidity to its clients and customers and
supply a source of secured financing for the Firm.
MERCHANT BANKING AND PRIVATE EQUITY
Lehman Brothers' merchant banking activities include making principal
investments in partnership with clients of the Firm, raising capital from
institutional and high-net-worth investors and managing these investments until
they are realized. The Firm's Merchant Banking group has more than 20 dedicated
professionals based in New York and London. Through its merchant banking funds,
the Company invests in established companies worldwide. In 1998, the Company
also formalized its venture capital activities, investing a total of $37 million
in 10 companies across a broad range of industries. In addition, Lehman Brothers
engages in select equity and equity-related investments in commercial and
residential properties. Further information is contained in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Merchant Banking and Related Lending Activities" on page 48 of the
1998 Annual Report.
GLOBAL DISTRIBUTION
Lehman Brothers' institutional and private client sales organizations
encompass distinct global sales forces that have been integrated into the Fixed
Income and Equities 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 most
productive in the industry, with approximately 278 professionals in 12 locations
worldwide, serving the investing and liquidity needs of major institutional
investors. Employing a relationship management approach that provides superior
information flow and product opportunities for the Firm's customers, the Fixed
Income sales organization covers the major share of the buying power in the
global fixed income markets.
EQUITY SALES. Lehman Brothers' institutional Equity sales group of over 345
professionals provides an extensive range of services to institutional investors
through locations in the U.S., Europe and Asia. The
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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.
PRIVATE CLIENT SALES. The Company's Private Client Services group of 293
professionals 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 11
offices worldwide. Among other services, investment professionals provide their
clients with direct access to fixed income, equity, foreign exchange and
derivative products, as well as the Firm's research and execution capabilities,
thereby serving as a valuable extension of the Firm's institutional sales force.
RESEARCH
FIXED INCOME RESEARCH. Fixed Income research at Lehman Brothers encompasses
the full range of research disciplines: quantitative, economic, strategic,
credit, portfolio, relative value and market-specific analysis. Fixed Income
research is integrated with 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 291 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, real estate,
emerging market debt and municipal securities.
EQUITY RESEARCH. The Equity Research department, comprised of 120 analysts,
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.
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.
ASSET MANAGEMENT. The Firm has several asset management related businesses.
These include Investment Consulting Services, a wrap-fee series of third party
managed products and management of multiple manager funds onshore and offshore.
The Firm also has dealer agreements with a large number of mutual fund families.
In addition, the Company packages internally managed product with emphasis on
the various sectors of the private equity markets.
ARBITRAGE. Lehman Brothers engages in a variety of arbitrage activities
including "riskless" arbitrage, where the Company seeks to benefit from
temporary price discrepancies that occur when a security is traded in two or
more markets and "risk" arbitrage activities, which involve the purchase of
securities at discounts from the expected values that would be realized if
certain proposed or anticipated corporate transactions (such as mergers,
acquisitions, recapitalizations, exchange offers, reorganizations, bankruptcies,
liquidations or spin-offs) were to occur. To the extent that these anticipated
transactions do not materialize in a manner consistent with the Company's
expectations, the Company is subject to the risk that the value of these
investments will decline. Lehman Brothers' arbitrage activities benefit from the
Company's presence in the global capital markets, access to advanced information
technology, in-depth market research, proprietary risk management tools and
general experience in assessing rapidly changing market conditions.
PROPRIETARY TRADING. In addition to its customer-flow activities, Lehman
Brothers also takes proprietary positions in interest rates, foreign exchange,
various securities, derivatives and commodities for its own
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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.
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.
TECHNOLOGY AND YEAR 2000 READINESS
During 1998, considerable technology resources were devoted to ensuring the
Company's successful conversion to the Euro and addressing the Year 2000 issue.
The Company's response to the Year 2000 issue is described under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Readiness Disclosure" on pages 53-56 of the 1998 Annual
Report.
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 risk, credit or counterparty risk, 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. A
full description of the Firm's Risk Management procedures is contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Management" on pages 51-53 of the 1998 Annual Report, and is
incorporated herein by reference.
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 other firms, many of whom have significantly greater equity
capital than the Company. Pending legislative and regulatory changes in the
United States may allow commercial banks to enter business previously limited to
investment banks, further increasing competition.
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
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advisors with the Commission and as such are subject to regulation by the
Securities and Exchange Commission (the "SEC") and by self-regulatory
organizations, principally the NASD and national securities exchanges such as
the New York Stock Exchange, which has been designated by the SEC as LBl'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
SEC, self-regulatory organizations and state securities commissions may conduct
administrative proceedings, which may result in censure, fine, the issuance of
cease-and-desist orders or suspension or expulsion of a broker-dealer or an
investment advisor, its officers or employees.
LBI is registered with the Commodity Futures Trading Commission (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 the regulations
described herein.
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 pages 46-47 of the 1998 Annual Report, and
Note 9 of Notes to Consolidated Financial Statements.
EMPLOYEES
As of November 30, 1998 the Company employed approximately 8,873 persons,
including 6,316 in the Americas and 2,557 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 78,000 square feet of which has been
subleased.
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The Company entered into a lease for approximately 400,000 square feet for
offices located at 101 Hudson Street in Jersey City, New Jersey (the "Operations
Center"), of which approximately 67,000 square feet has been subleased. The
Operations Center is used by systems, operations, and certain administrative
personnel and contains certain back-up trading systems. The lease term expires
in December, 2010.
The Company leases approximately 338,000 square feet of office space in
London, England of which approximately 105,000 square feet has been subleased
and which lease expires in January 2017. 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,
including the Company.
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 was appointed, who returned a report favorable to EFH. The Court
ordered a review of additional documents and has set an April 1999 hearing date.
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 and Fidelity Bankers Life
Insurance Company ("Fidelity Bankers Life"), a number of lawsuits were
commenced, naming one or more of Holdings, Lehman Brothers and American Express
as defendants. Most of these actions have been subsequently settled and/or
dismissed. The only material matter still pending is described below.
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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 Complaint
alleged 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 asserted claims under the federal
securities laws and asserts common law claims including fraud, negligence and
breach of fiduciary duty and alleged violations of the Virginia Securities laws
by Holdings. It sought no less than $220 million in damages to Fidelity Bankers
Life and its present and former policyholders and creditors and punitive
damages. On May 21, 1998, after trial, the Court entered a Judgment Order in
accord with the jury verdict, ordering that the plaintiffs recover nothing and
dismissing the complaint. On July 7, 1998, the Commissioner filed a Notice of
Appeal to the United States Court of Appeals for the Fourth Circuit from such
Judgment Order.
EASTON & CO. V. MUTUAL BENEFIT LIFE INSURANCE CO., ET AL., EASTON & CO. V.
LEHMAN BROTHERS INC.
Lehman Brothers was named as a defendant in two consolidated class action
complaints pending in the United States District Court for the District of New
Jersey (the "N.J. District Court"). Easton & Co. v. Mutual Benefit Life
Insurance Co., et al. ("Easton I"), and EASTON & CO. V. LEHMAN BROTHERS INC.
("Easton II"). The plaintiff in both of these actions is Easton & Co., which is
a broker-dealer located in Fort Lee, New Jersey. Both of these actions allege
federal securities law claims and pendent common law claims in connection with
the sale of certain municipal bonds as to which Mutual Benefit Life Insurance
Company ("MBLI") has guaranteed the payment of principal and interest. MBLI is
an insurance company which was placed in rehabilitation proceedings under the
supervision of the New Jersey Insurance Department on or about July 16, 1991.
Easton I was commenced on or about September 17, 1991. The litigation was
purportedly brought on behalf of a class consisting of all persons and entities
who purchased DeKalb, Georgia Housing Authority MultiFamily Housing Revenue
Refunding Bonds (North Hill Ltd. Project), Series 1991, due November 30, 1994
(the "DeKalb Bonds") during the period from May 3, 1991 (when the DeKalb bonds
were issued) through July 16, 1991. Lehman Brothers acted as underwriter for
this bond issue, which was in the aggregate principal amount of $18.7 million.
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. 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.
ACTIONS RELATING TO THE SALES AND MARKETING OF LIMITED PARTNERSHIPS
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 first consolidated and amended class action complaint 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 various public, proprietary limited
partnerships organized by Shearson or E.F. Hutton & Co. or operated by
affiliates of those entities between 1981 and the present (with certain
exceptions). Defendants are LBI and 56
9
<PAGE>
Lehman-affiliated general partners. The complaint alleges that defendants
breached their fiduciary duties or aided and abetted such a breach by allegedly
misrepresenting and or failing to disclose the nature of the risks and the
status and financial condition of the partnerships; collecting excessive fees;
failing to exercise due care in selecting investments for the partnerships; and
recommending and selling the partnerships as suitable investments. The complaint
seeks, among other things (1) to certify the case as a class action; (2) to
declare that defendants breached their duties; (3) to enjoin defendants from
operating the partnerships for their own benefit, (4) to account for all profits
and impose a constructive trust on them; and (5) to award compensatory damages,
costs and expenses and attorneys' fees.
KLEIN, ET AL. V. LEHMAN BROTHERS, INC., ET AL. On January 15, 1998, a
purported third amended class action complaint was filed in the Superior Court
of New Jersey, Law Division: Union County on behalf of investors in certain
specified limited partnerships sponsored by Balcor and sold by various entities,
including, among others, Shearson and certain of its affiliates. Named as
defendants are LBI, various affiliates of LBI, American Express Company, Smith
Barney Holdings, Inc., Balcor, a number of Balcor-originated limited
partnerships and various individuals and entities affiliated with Balcor. 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. On September 24, 1998, the Court filed an opinion dismissing
the complaint, and plaintiffs have appealed that dismissal.
BRUSS, ET AL. V. LEHMAN BROTHERS INC., ET AL. On January 25, 1999 a
purported class action complaint was filed in the Superior Court of New Jersey,
Law Division: Essex County on behalf of investors in certain specified limited
partnerships sponsored by Balcor and sold by various entities, including, among
others, Shearson and certain of its affiliates. The complaint mirrors the claims
raised, the relief sought and the defendants named in KLEIN, ET AL. V. LEHMAN
BROTHERS, INC., ET AL.
COUNTY OF ORANGE ET AL. V. BEAR STEARNS & CO. ET AL.
On December 6, 1996, the County of Orange, California (the "County") filed a
complaint in the United States Bankruptcy Court for the Central District of
California (the "Complaint"), naming 15 broker-dealers, along with various
subsidiaries, including LBI, Lehman Brothers International (Europe), Lehman
Capital Corp and Lehman Commercial Paper, Inc. (the "Lehman defendants"), as
defendants. The Complaint alleges that defendants sold the County unsuitable
securities and entered into unsuitable reverse repurchase transactions with the
County that were ULTRA VIRES. The County seeks a declaration that the reverse
repurchase agreements are void and unenforceable and violated the California
Constitution and Government Code, and it claims that the defendants violated the
California Constitution and Government Code and committed negligence. No damages
are specified, and restitution is sought. Immediately after filing the
Complaint, the parties entered into a stay of the action.
On July 1, 1998, the case was transferred to the United States District
Court for the Central District of California, and on August 21, 1998 the stay
was lifted. On November 10, 1998 the Lehman defendants answered the Complaint,
denying its material allegations. On December 21, 1998, the County moved to
amend the Complaint to add breach of fiduciary duty and aiding and abetting
breach of fiduciary duty claims, and the Court has ruled that plaintiff may file
the amended complaint (the "Amended Complaint"). On January 5, 1999, the Court
entered an order granting summary judgment for defendants on the ULTRA VIRES
claims.
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
10
<PAGE>
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 complete, and summary judgment motions are
pending before the court.
ACTIONS RELATING TO NATIONAL ASSOCIATION OF SECURITIES DEALERS AUTOMATED
QUOTATIONS SYSTEM ("NASDAQ") MARKET MAKER ANTITRUST AND SECURITIES LITIGATION.
Beginning in May, 1994, several class actions were filed in various state
and federal courts against various broker-dealers making markets in NASDAQ
securities, including LBI. Plaintiffs in these cases alleged violations of the
antitrust laws, securities laws and have pled a variety of other statutory and
common law claims. All of these actions were 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 I 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.
On December 23, 1997, LBI settled the class action along with 29 other
broker-dealers. The Court entered a Final Judgment and Order of Dismissal on
November 9, 1998.
AIA HOLDING SA ET AL. V. LEHMAN BROTHERS INC. AND BEAR STEARNS & CO., INC.
On July 9, 1997, LBI was served with a complaint in the U.S. District Court
for the Southern District of New York in which 277 named plaintiffs assert 24
causes of action against LBI and Bear Stearns & Co., Inc. The amount of damages
claimed is unspecified. The claims arise from the activities of an individual
named Ahmad Daouk, who was employed by an introducing broker which introduced
accounts to Shearson Lehman Hutton between 1988 and 1992. Daouk allegedly
perpetrated a fraud upon the claimants, who are mostly investors of Middle
Eastern origin, and the complaint alleges that Shearson breached various
contractual and common law duties owed to the investors. On March 27, 1998, the
District Court dismissed without prejudice 18 of the 24 counts pleaded in the
complaint. On July 3, 1998 the plaintiffs served their First Amended Complaint
containing 18 causes of action against LBI and/or Bear Stearns.
ACTIONS RELATING TO BRE-X MINERALS LTD.
MCNAMARA ET AL. V. BRE-X MINERALS LTD. ET AL. On July 25, 1997, an Amended
Class Action Complaint was filed in the United States District Court for the
Eastern District of Texas against 16 defendants, including LBI, which seeks
unspecified compensatory damages, interest, costs and attorney's fees on behalf
11
<PAGE>
of purchasers of Bre-X common stock and/or Bresea common stock. The Complaint
raises claims under the federal securities laws and the common law of fraud and
negligent misrepresentation. The Complaint's stated basis for naming LBI is that
one of its securities analysts published research on Bre-X. On or about November
21, 1997, several defendants, including LBI, moved to dismiss the Complaint, or,
in the alternative, to transfer venue to the Southern District of New York.
Plaintiffs have also filed a motion for class certification, which is stayed
pending resolution of the motions to dismiss. On January 6, 1999, the Court
issued an order dismissing the claims of Canadian plaintiffs who bought their
shares on Canadian exchanges. The remaining motions to dismiss are still
pending.
KLAASEN V. LEHMAN BROTHERS INC. ET AL. On October 2, 1997, William L.
Klaasen, "individually and for all those similarly situated within the State of
California," filed a Complaint against LBI in the Superior Court for the State
of California in and for the County of San Diego. The Complaint raises a claim
for common law negligence, and seeks, on behalf of California purchasers of
Bre-X and Bresea stock, class certification, rescission, interest, compensatory
and punitive damages, disgorgement and restitution of profits and compensation
received by LBI, and costs. The action is currently stayed by consent until the
earlier of April 1, 1998 or 30 days following the decision on the motion to
dismiss in the MCNAMARA case.
CHOW ET AL. V. BRE-X MINERALS LTD. ET AL. On October 10, 1997, 125 named
plaintiffs filed an action in the Court of Queen's Bench of Alberta, in Calgary,
Canada, against 35 named defendants, including LBI. Plaintiffs claim against
LBI, which has not yet been served, is for common law negligence.
IN RE MOBILEMEDIA SECURITIES LITIGATION
LBI was named as a defendant in several purported class actions filed in
December, 1996 in the United States District Court for the District of New
Jersey in connection with (I) a November 7, 1995 offering of common stock of
MobileMedia Corporation; and (ii) a November 7, 1995 offering of 9 3/8% senior
subordinated notes of MobileMedia Communications Inc. due in 2007. On November
3, 1997, a consolidated amended class action complaint was filed naming certain
of MobileMedia Corporation's officers and directors and the four co-lead
underwriters of these offerings, including LBI. MobileMedia filed for Chapter 11
bankruptcy protection on January 30, 1997, and therefore is not named as a
defendant. The complaint alleges that the underwriters violated Sections 11 and
12 of the Securities Act. Plaintiffs seek rescission and unspecified
compensatory damages.
HAROLD GILLET, ET AL. V. GOLDMAN SACHS & CO., ET AL., YAKOV PRAGER, ET AL. V.
GOLDMAN, SACHS & CO., ET AL., DAVID HOLZMAN, ET AL. V. GOLDMAN, SACHS & CO.,
ET AL.
Beginning in November, 1998, three class actions were filed in the United
States District Court for the Southern District of New York against in excess of
25 underwriters of IPO securities including LBI. Plaintiffs in these cases seek
compensatory and injunctive relief for alleged violations of the antitrust laws
based on the theory that the defendant underwriters fixed and maintained fees
for underwriting certain IPO securities at supracompetitive levels. Plaintiffs
plan to file a Consolidated Amended Complaint.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
<PAGE>
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 28,137 at February 9, 1999. Information concerning the market for the
Registrant's common equity and related stockholder matters is set forth on page
96 of the 1998 Annual Report and is hereby incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data contained on pages 93-94 of the 1998 Annual Report
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 35-57 of the 1998 Annual
Report. 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 59-92 of the 1998 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Risk Management" on pages 51-53
of the 1998 Annual Report is incorporated herein by reference.
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 1998 Annual Report on pages 58-92 and
are hereby incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
13
<PAGE>
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 5-8 of the Proxy Statement and
information relating to Executive Officers of the Registrant is set forth under
the caption "Executive Officers of the Company" on pages 10 and 11 of the Proxy
Statement and is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is set forth under the
captions "Compensation of Directors", "Compensation Committee Report on
Executive Officer Compensation", "Compensation of Executive Officers", "Pension
Benefits" and "Employment Contracts, Termination of Employment and Change of
Control Arrangements" on pages 9 and 13-18 of the Proxy Statement and 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 12 of the Proxy Statement and is
hereby incorporated herein 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" and "Certain Transactions with Other Institutional
Investors and Their Subsidiaries" on pages 20-22 of the Proxy Statement and is
hereby incorporated herein by reference.
14
<PAGE>
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
The Financial Statements and the Notes thereto and the Report of Independent
Auditors thereon and filed as a part hereof are listed on page F-1 hereof by
reference to the corresponding page number in the Annual Report.
2. Financial Statement Schedules:
The financial statement schedule and the notes thereto filed as a part
hereof are listed on page F-1 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 Certificate of Designations with respect to the Registrant's 5.94% Cumulative Preferred Stock, Series C
(incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed with the
Commission on May 13, 1998)
3.3 Certificate of Designations with respect to the Registrant's 5.67% Cumulative Preferred Stock, Series D
(incorporated by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K filed with the
Commission on July 23, 1998)
3.4 By-Laws of the Registrant, amended as of March 26, 1997 ((incorporated by reference to Exhibit 10 of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended February 28, 1997).
4.1 The instruments defining the rights of holders of the long-term debt securities of the Registrant and its
subsidiaries are omitted pursuant to section (b) (4) (iii) (A) of Item 601 of Regulation S-K. The
Registrant hereby agrees to furnish copies of these instruments to the Securities and Exchange Commission
upon request.
10.1 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 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>
15
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO.
- - -----------
<C> <S>
10.4 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).
10.5 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)).
10.6 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)).
10.7 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).
10.8 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)).
10.9 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).
10.10+ 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).
10.11+ 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)).
10.12+ 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)).
10.13 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).
10.14+ 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)).
10.15+ 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)).
10.16+ 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)).
10.17+ 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>
16
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO.
- - -----------
<C> <S>
10.18 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).
10.19+ Lehman Brothers Holdings Inc. Merchant Banking Long-Term Incentive Plan (for U.S. participants)
(incorporated by reference to Exhibit 10.28 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended November 30, 1996).
10.20+ Lehman Brothers Holdings Inc. Merchant Banking Discretionary Incentive Compensation Plan (for non-U.S.
participants) (incorporated by reference to Exhibit 10.29 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended November 30, 1996).
10.21 Agreement of Limited Partnership of Lehman Brothers Capital Partners IV, L.P. (incorporated by reference
to Exhibit 10.30 to the Registrant's Annual Report on Form 10-K for the fiscal year ended November 30,
1997)
12.1 Computation in support of ratio of earnings to fixed charges.*
12.2 Computation in support of ratio of earnings to combined fixed charges and preferred dividends.*
13. The following portions of the Company's 1998 Annual Report to Stockholders, which are incorporated by
reference herein:
13.1 "Management's Discussion and Analysis of Financial Condition and Results of Operations", pages 35-57.*
13.2 "Consolidated Financial Statements", pages 59-92.*
13.3 "Market for Registrant"s Common Equity and Related Stockholder Matters", page 96.*
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.
1. Form 8-K dated September 4, 1997, Item 7.
2. Form 8-K dated September 23, 1998, Items 5 and 7.
3. Form 8-K dated September 28, 1998, Items 5 and 7.
4. Form 8-K dated October 5, 1998, Items 5 and 7.
- - ------------------------
* Previously filed.
+ Management contract or compensatory plan or arrangement reqired to be filed
as an exhibit to this Form 10-K pursuant to Item 14(c)
** Filed herewith.
17
<PAGE>
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
LEHMAN BROTHERS HOLDINGS INC.
(REGISTRANT)
MARCH 5, 1999
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.
SIGNATURES TITLE DATE
- - ------------------------------ --------------------------- -------------------
Chief Executive Officer and
* Chairman of the Board of
- - ------------------------------ Directors (principal March 5, 1999
Richard S. Fuld, Jr. executive officer)
Chief Financial and
* Administrative Officer
- - ------------------------------ (principal financial and March 5, 1999
John L. Cecil accounting officer)
* Director
- - ------------------------------ March 5, 1999
Michael L. Ainslie
* Director
- - ------------------------------ March 5, 1999
John F. Akers
* Director
- - ------------------------------ March 5, 1999
Roger S. Berlind
* Director
- - ------------------------------ March 5, 1999
Thomas H. Cruikshank
* Director
- - ------------------------------ March 5, 1999
Henry Kaufman
18
<PAGE>
SIGNATURES TITLE DATE
- - ------------------------------ --------------------------- -------------------
* Director
- - ------------------------------ March 5, 1999
Hideichiro Kobayashi
* Director
- - ------------------------------ March 5, 1999
John D. Macomber
* Director
- - ------------------------------ March 5, 1999
Dina Merrill
/s/ KAREN M. MULLER Director
- - ------------------------------
Karen M. Muller March 5, 1999
(ATTORNEY-IN-FACT)
March 5, 1999
19
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
PAGE
----------------------------------
FORM 10-K ANNUAL REPORT
------------- -------------------
<S> <C> <C>
FINANCIAL STATEMENTS
Report of Independent Auditors........................................................ 58
Consolidated Statement of Income for the Twelve Months Ended November 30, 1998, 1997,
and 1996............................................................................ 59
Consolidated Statement of Financial Condition at November 30, 1998 and 1997........... 60
Consolidated Statement of Changes in Stockholders' Equity for the Twelve Months Ended
November 30, 1998, 1997, and 1996................................................... 62
Consolidated Statement of Cash Flows for the Twelve Months Ended November 30, 1998,
1997, and 1996...................................................................... 64
Notes to Consolidated Financial Statements............................................ 66
FINANCIAL STATEMENT SCHEDULE
Schedule I--Condensed Financial Information........................................... F-2
</TABLE>
F-1
<PAGE>
SCHEDULE I
LEHMAN BROTHERS HOLDINGS INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF INCOME
(PARENT COMPANY ONLY)
(IN MILLIONS)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
NOVEMBER 30
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues
Investment banking........................................................ $ 37 $ 140 $ 90
Principal transactions.................................................... (80) 193 23
Interest and dividends.................................................... 2,254 1,271 882
Other..................................................................... (71) 8 6
--------- --------- ---------
Total revenues........................................................ 2,140 1,612 1,001
Interest expense.......................................................... 2,252 1,304 966
--------- --------- ---------
Net revenues.......................................................... (112) 308 35
--------- --------- ---------
Equity in net income of subsidiaries........................................ 942 492 454
--------- --------- ---------
Non-interest expenses
Compensation and benefits................................................. 135 113 64
Other..................................................................... 121 116 105
Management fees........................................................... 14 (28) (81)
Severance charge.......................................................... 50
--------- --------- ---------
Total non -interest expenses.......................................... 270 201 138
--------- --------- ---------
Income before taxes......................................................... 560 599 351
Benefit from income taxes................................................. 176 48 65
--------- --------- ---------
Net income.................................................................. $ 736 $ 647 $ 416
--------- --------- ---------
--------- --------- ---------
Net income applicable to common stock....................................... $ 649 $ 572 $ 378
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to condensed financial information of Registrant.
F-2
<PAGE>
SCHEDULE I
LEHMAN BROTHERS HOLDINGS INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
(PARENT COMPANY ONLY)
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOVEMBER 30
--------------------
<S> <C> <C>
1998 1997
--------- ---------
ASSETS
Cash and cash equivalents................................................................... $ 1,152
Securities and other financial instruments owned............................................ 10,561 $ 8,751
Securities purchased under agreements to resell............................................. 244
Equity in net assets of subsidiaries........................................................ 5,174 3,922
Accounts receivable and accrued interest.................................................... 490 596
Due from subsidiaries....................................................................... 23,149 17,230
Other assets................................................................................ 1,137 693
--------- ---------
Total assets............................................................................ $ 41,907 $ 31,192
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper and short-term debt........................................................ $ 3,596 $ 4,472
Securities and other financial instruments sold but not yet purchased....................... 81 122
Securities sold under agreeements to repurchase............................................. 11,162 8,758
Accrued liabilities, due to subsidiaries and other payables................................. 4,718 1,586
Senior notes................................................................................ 16,737 11,531
Subordinated indebtedness................................................................... 200 200
--------- ---------
Total liabilities....................................................................... 36,494 26,669
--------- ---------
Commitments and Contingencies
Stockholders' equity:
Preferred stock........................................................................... 908 508
Common stock, $0.10 par value; 300,000,000 shares authorized; Shares issued: 121,801,123
in 1998 and 119,513,337 in 1997; Shares outstanding: 113,657,877 in 1998 and 116,612,074
in 1997................................................................................. 12 12
Additional paid-in capital................................................................ 3,534 3,436
Accumulated other comprehensive income (net of tax)....................................... 15 12
Retained earnings......................................................................... 1,105 498
Other stockholders' equity, net........................................................... 269 155
Common stock in treasury, at cost: 8,143,246 shares in 1998 and 2,901,263 shares in
1997.................................................................................... (430) (98)
--------- ---------
Total stockholders' equity.............................................................. 5,413 4,523
--------- ---------
Total liabilities and stockholders' equity.............................................. $ 41,907 $ 31,192
--------- ---------
</TABLE>
See notes to condensed financial information of Registrant.
F-3
<PAGE>
SCHEDULE I
LEHMAN BROTHERS HOLDINGS INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS
(PARENT COMPANY ONLY)
(IN MILLIONS)
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED
NOVEMBER 30
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................................................................... $ 736 $ 647 $ 416
Adjustments to reconcile net income to net cash provided by (used in)operating
activities:
Equity in net income of subsidiaries............................................. (942) (492) (454)
Severance charge................................................................. 50
Compensation payable in common stock............................................. 221 162 136
Other adjustments................................................................ 178 24 (5)
Net change in:
Securities and other financial instruments owned................................. (1,810) (5,211) (945)
Accounts receivable and accrued interest, due from subsidiaries and other
assets......................................................................... (6,261) (6,380) (1,262)
Securities and other financial instruments sold but not yet purchased............ (41) (76) 22
Accrued liabilities, due to subsidiaries and other payables...................... 2,978 770 (84)
Dividends and capital distributions received..................................... 141 304 609
--------- --------- ---------
Net cash provided by (used in) operating activities............................ (4,800) (10,252) (1,517)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes............................................. 8,298 3,925 2,686
Principal payments of senior notes................................................. (3,101) (1,689) (1,778)
Proceeds from issuance of subordinated indebtedness................................ 200
Payments for commercial paper and short-term debt, net............................. (876) 1,297 1,073
Resale agreements net of repurchase agreements..................................... 2,160 6,140 545
Payment for repurchase of preferred stock.......................................... (50) (200)
Payment for treasury stock purchases............................................... (411) (77) (130)
Dividends paid..................................................................... (122) (58) (55)
Issuances of common stock.......................................................... 61 23 6
Issuances of preferred stock....................................................... 444
--------- --------- ---------
Net cash provided by (used in) financing activities............................ 6,403 9,561 2,347
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Equity in net assets of subsidiaries............................................... (451) 16 (173)
--------- --------- ---------
Net cash provided by (used in) investing activities............................ (451) 16 (173)
--------- --------- ---------
Net change in cash and cash equivalents........................................ 1,152 (675) 657
Cash and cash equivalents, beginning of period..................................... 675 18
--------- --------- ---------
Cash and cash equivalents, end of period......................................... $ 1,152 $ 0 $ 675
--------- --------- ---------
--------- --------- ---------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN MILLIONS)
Interest paid totaled $2,121 in 1998, $1,277 in 1997 and $933 in 1996. Income
taxes (received) paid totaled $(91) in 1998, $33 in 1997 and $(48) in 1996.
See notes to condensed financial information of Registrant.
F-4
<PAGE>
LEHMAN BROTHERS HOLDINGS INC.
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
SCHEDULE I
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
---------------------- ---------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
FIXED FLOATING FIXED FLOATING
RATE RATE RATE RATE 1998 1997
--------- ----------- --------- ----------- --------- ---------
<CAPTION>
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Senior Notes
Maturing in Fiscal 1998............................. $ 2,069
Maturing in Fiscal 1999............................. $ 1,536 $ 2,518 $ 623 $ 20 $ 4,697 2,612
Maturing in Fiscal 2000............................. 3,086 1,814 32 4,932 2,848
Maturing in Fiscal 2001............................. 1,017 608 1,625 510
Maturing in Fiscal 2002............................. 1,349 195 1,544 1,330
Maturing in Fiscal 2003............................. 1,660 383 15 2,058 489
December 1, 2003 and thereafter..................... 1,792 33 51 5 1,881 1,673
--------- ----------- --------- ----- --------- ---------
Senior Notes...................................... 10,440 5,551 721 25 16,737 11,531
--------- ----------- --------- ----- --------- ---------
Subordinated Indebtedness
December 1, 2003 and thereafter................... 200 200 200
--------- ----------- --------- ----- --------- ---------
Long-Term Debt...................................... $ 10,640 $ 5,551 $ 721 $ 25 $ 16,937 $ 11,731
--------- ----------- --------- ----- --------- ---------
--------- ----------- --------- ----- --------- ---------
</TABLE>
Of the Company's long-term debt outstanding as of November 30, 1998, $600
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 1999 to fiscal 2002, rather than at their contractual
maturities, which range from fiscal 2000 to fiscal 2019. In addition, $920
million of the Company's long-term debt is redeemable prior to maturity at the
option of the Company under various terms and conditions. These obligations are
reflected in the above table at their contractual maturity dates.
As of November 30, 1998, the Company's U.S. dollar and non-U.S. dollar debt
portfolios included approximately $238 million and $54 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. Generally,
such rates are issued as floating rate notes or the interest rates on such index
notes are effectively converted to floating rates based primarily on LIBOR
through the use of interest rate and currency swaps.
END USER DERIVATIVE ACTIVITIES
The Company utilizes a variety of derivative products including interest
rate and currency swaps, and swaptions as an end user to modify the interest
rate characteristics of its long-term debt portfolio. The
F-5
<PAGE>
LEHMAN BROTHERS HOLDINGS INC.
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
(PARENT COMPANY ONLY)
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 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, 1998 and November 30, 1997, the notional values of the
Company's interest rate and currency swaps related to its long-term debt
obligations were approximately $15.3 billion and $10.5 billion, respectively. In
terms of notional amounts outstanding, these derivative products mature as
follows:
<TABLE>
<CAPTION>
NOVEMBER
NON- U.S. CROSS --------------------
U.S. DOLLAR DOLLAR CURRENCY 1998 1997
----------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS)
Maturing in Fiscal 1998..................................... $ 1,760
Maturing in Fiscal 1999..................................... $ 2,864 $ 624 $ 3,488 2,324
Maturing in Fiscal 2000..................................... 4,709 32 4,741 2,454
Maturing in Fiscal 2001..................................... 1,579 1,579 468
Maturing in Fiscal 2002..................................... 1,609 1,609 1,167
Maturing in Fiscal 2003..................................... 1,968 $ 4 11 1,983 489
December 1, 2003 and thereafter............................. 1,921 56 1,977 1,812
----------- --- ----- --------- ---------
Total....................................................... $ 14,650 $ 4 $ 723 $ 15,377 $ 10,474
----------- --- ----- --------- ---------
Weighted-average interest rate at November 30:(1)
Receive rate................................................ 6.54% 3.32% 4.43% 6.44% 6.97%
Pay rate.................................................... 5.85% 0.64% 5.93% 5.86% 6.48%
</TABLE>
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, 1998
----------------------------------------------------
<S> <C> <C> <C> <C>
LONG-TERM DEBT WEIGHTED-AVERAGE(1)
------------------------ --------------------------
<CAPTION>
EFFECTIVE
RATE
BEFORE AFTER CONTRACTUAL AFTER END
END USER END USER INTEREST USER
ACTIVITIES ACTIVITIES RATE ACTIVITIES
----------- ----------- ----------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
USD Obligations
Fixed Rate................................................... $ 10,640 $ 156
Floating Rate................................................ 5,551 16,758
----------- -----------
16,191 16,914
Non-USD Obligations............................................ 746 23
----------- ----------- ----------- ------
Total.......................................................... $ 16,937 $ 16,937 6.47% 5.93%
----------- ----------- ----------- ------
</TABLE>
- - ------------------------
(1) Weighted-average interest rates were calculated utilizing non-U.S. dollar
interest rates, where applicable.
F-6
<PAGE>
LEHMAN BROTHERS HOLDINGS INC.
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
(PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
NOVEMBER 30, 1997
------------------------------------------------------
<S> <C> <C> <C> <C>
LONG-TERM DEBT WEIGHTED-AVERAGE(1)
------------------------ ----------------------------
<CAPTION>
BEFORE AFTER CONTRACTUAL EFFECTIVE RATE
END USER END USER INTEREST AFTER END USER
ACTIVITIES ACTIVITIES RATE ACTIVITIES
----------- ----------- ----------- ---------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
USD Obligations
Fixed Rate................................................. $ 9,115 $ 86
Floating Rate.............................................. 1,712 11,602
----------- -----------
10,827 11,688
Non-USD Obligations.......................................... 904 43
----------- ----------- ----------- ------
Total........................................................ $ 11,731 $ 11,731 6.93% 6.48%
----------- ----------- ----------- ------
</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 $141 million in 1998, $304 million in 1997, and $609 million
in 1996.
NOTE 4. 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 severance charge reflected the culmination of LBHI's
worldwide business unit economic performance review that was undertaken in the
fourth quarter of 1996 to focus LBHI on its core investment banking, equity and
fixed income sales and trading areas. This formalized review resulted in
personnel reductions of approximately 270 people 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 Firm's New York Private Client Services offices. Additionally, the
charge reflects various other strategic personnel reductions 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. The Company's cash
outlays relating to the charge were approximately $9 million in the fourth
quarter of 1996 and approximately $38 million during fiscal 1997. The remaining
residual payments were paid as deferred payment arrangements were completed.
NOTE 5. 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 6. COMMITMENTS AND CONTINGENCIES
The Company has guaranteed certain of its subsidiaries' unsecured lines of
credit and other contractual obligations.
F-7
<PAGE>
Exhibit 21
COMPANY PLACE OF INCORPORATION
Aurora Loan Services Inc. Delaware
Banque Lehman Brothers S.A. France
DA Group Holdings Inc. Delaware
DL Mortgage Corp. Delaware
LBCCA Holdings I Inc. Delaware
LBCCA Holdings II Inc. Delaware
LB I Group Inc. Delaware
Lehman ABS Corporation Delaware
Lehman ALI Inc. Delaware
Lehman Asset Backed Caps Inc. Delaware
Lehman Brothers Asia Holdings Limited Hong Kong
Lehman Brothers Asia Limited Hong Kong
Lehman Brothers Bankhaus Aktiengesellschaft Germany
Lehman Brothers Canada Inc. Canada
Lehman Brothers Capital GmbH Germany
Lehman Brothers Commercial Corporation Delaware
Lehman Brothers Commercial Corporation
Asia Limited Hong Kong
Lehman Brothers Derivative Products Inc. Delaware
Lehman Brothers Finance S.A. Switzerland
Lehman Brothers Financial Products Inc. Delaware
Lehman Brothers Futures Asset Management Corp. Delaware
Lehman Brothers Global Asset Management Inc. Delaware
Lehman Brothers Holdings Plc United Kingdom
Lehman Brothers Inc. Delaware
Lehman Brothers International (Europe) United Kingdom
Lehman Brothers Investments PTE Limited Singapore
Lehman Brothers Japan Inc. Cayman Islands
Lehman Brothers Merchant Banking Advisors II Inc. Delaware
Lehman Brothers Merchant Banking Advisors Inc. Delaware
Lehman Brothers Merchant Banking Partners Inc. Delaware
Lehman Brothers PTE Ltd. Singapore
Lehman Brothers Securities Asia Limited Hong Kong
Lehman Brothers Special Financing Inc. Delaware
Lehman Brothers Treasury Co. B.V. The Netherlands
Lehman Brothers Trust Company New York
Lehman Brothers U.K. Holdings (Delaware) Inc. Delaware
Lehman Brothers U.K. Holdings Ltd. United Kingdom/Delaware
Lehman Brothers Verwaltungs-und
Beteiligungsgesellschaft GmbH Germany
Lehman CMBS Funding Inc. Delaware
Lehman CMO Inc. Maryland
Lehman Commercial Paper Inc. New York
Lehman Pass-Through Securities Inc. Delaware
Lehman Re Ltd. Bermuda
Lehman Structured Assets Inc. Delaware
Lehman Structured Securities Corp. Delaware
Lehman Syndicated Loan Funding Inc. Delaware
Lehman Syndicated Loan Inc. Delaware
Lehman VIP Holdings Inc. Delaware
LUBS Inc. Delaware
Property Asset Management Inc. Delaware
Structured Asset Securities Corporation Delaware
