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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1999
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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COMMISSION FILE NUMBER 1-9466
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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 Identification No.)
incorporation or organization)
3 WORLD FINANCIAL CENTER 10285
NEW YORK, NEW YORK (Zip Code)
(Address of principal executive
offices)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 526-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.10 par value New York Stock Exchange
Pacific Exchange
Depositary Shares representing 5.94% Cumulative Preferred New York Stock Exchange
Stock, Series C
Depositary Shares representing 5.67% Cumulative Preferred New York Stock Exchange
Stock, Series D
8% Trust Preferred Securities, Series I of Subsidiary Trust New York Stock Exchange
(and Registrant's guarantee thereof)
7.875% Trust Preferred Securities, Series J of Subsidiary New York Stock Exchange
Trust (and Registrant's guarantee thereof)
Global Telecommunications Stock Upside Note Securities (SM) American Stock Exchange
Due 2000
Dow Jones Internet Index Stock Upside Note Securities (SM) American Stock Exchange
Due 2004
10 Uncommon Values Index Basket Adjusting Structured Equity American Stock Exchange
Securities Notes Due 2004
10 Uncommon Values Index Basket Adjusting Structured Equity American Stock Exchange
Securities Notes, Series B, Due 2004
8 3/4% Notes Due 2002 New York Stock Exchange
8.30% Quarterly Income Capital Securities Series A, Due New York Stock Exchange
December 31, 2035
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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. / /
The aggregate market value of the voting and nonvoting common equity held by
non-affiliates of the Registrant at February 15, 2000 was approximately
$7,578,317,144. For purposes of this information, the outstanding shares of
common stock owned by directors and certain executive officers of the Registrant
were deemed to be shares of common stock held by affiliates. As of February 15,
2000, 120,798,286 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. 1999 Annual Report to Stockholders (the "1999
Annual Report")--Incorporated in part in Parts II and IV.
(2) Lehman Brothers Holdings Inc. Proxy Statement for its 2000 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.
FORWARD-LOOKING STATEMENTS
Some of the statements discussed in this report, including those relating to
the Company's strategy and other statements that are predictive in nature, that
depend or refer to future events or conditions or that include words such as
"expects," "anticipates," "intends," "plans," "believes," "estimates" and
similar expressions are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. The Company also has made,
and from time to time may otherwise make, in its press releases, discussions
with Company management and other public filings additional forward-looking
statements. Forward-looking statements are based on our current expectations and
are subject to risks and uncertainties, including those described under "Risk
Management" and elsewhere in this report. The Company undertakes no obligation
to update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
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, private equity investments, 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.
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, 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
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its clients' and customers' financial business and lessen the volatility of
revenues generally associated with the financial services industry.
The Company's business is broken down into three segments: Investment
Banking, Capital Markets, and Client Services. Financial information concerning
the Company for the fiscal years ended November 30, 1999, November 30, 1998 and
November 30, 1997, including the amount of net revenue contributed by each
segment in such periods, is set forth in the Consolidated Financial Statements
and the Notes thereto in the 1999 Annual Report and is incorporated herein by
reference. Information with respect to the Company's operations by segment and
net revenues by geographic area is set forth in Note 15 to the Notes to
Consolidated Financial Statements on pages 93-94 of the 1999 Annual Report and
is incorporated herein by reference.
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,
Healthcare, Industrial/Consumer, Internet, Communications/Media, 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, Fixed Income Capital Markets which
incorporates expertise in syndicate, liability management, derivatives, private
placements, high yield debt and bank loan syndication. Geographically, Lehman
Brothers maintains investment banking offices in six cities in the U.S. and in
eighteen cities in Europe, the Middle East, Asia and Latin America. The high
degree of integration between the Company's industry, product and geographic
groups has allowed Lehman Brothers to become a leading source of one stop
financial solutions for its global clients.
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 1999, the Company continued to expand its
activities world-wide, serving as financial advisor on $311 billion of announced
transactions world-wide.
UNDERWRITING. The Company is a leading underwriter of initial public and
secondary offerings of equity and fixed income securities, including listed and
over-the-counter securities, government and agency securities and mortgage- and
asset-backed securities.
CAPITAL MARKETS
Lehman Brothers combines professionals from the sales, trading and research
areas of its Equities and Fixed Income Divisions, together with investment
bankers, into teams to serve the financial needs of the Company's clients and
customers. The Company's expertise and the integrated nature of the Company's
global operations enable Lehman Brothers to structure and execute global
transactions for clients and to provide worldwide liquidity in marketable
securities.
EQUITIES
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.
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EQUITY CASH PRODUCTS. Lehman Brothers makes markets in equity and equity
related 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 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. Equity Financing provides
financing in all markets on a margin basis for customer purchases of equities
and other capital markets products as well as securities lending and
short-selling facilitation. The Prime Broker business also engages in full
operations, clearing and processing services for that unit's customers.
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.
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 is a preeminent market-maker in new issue and other
fixed income 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
CORPORATE DEBT SECURITIES. Lehman Brothers makes markets in 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.
HIGH YIELD SECURITIES AND BANK LOANS. The Company also makes markets in
non-investment grade debt securities and bank loans. The Company provides
"one-stop" leveraged financing solutions for corporate and financial acquirers
and high yield issuers, including multi-tranche, multiproduct acquisition
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financing. The Company remains one of the leading investment banks in the
syndication of leveraged loans.
MONEY MARKET PRODUCTS. Lehman Brothers holds leading market positions in
the origination and distribution of medium-term notes and commercial paper. The
Company is an appointed dealer for over 640 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. In 1999, the Company acquired
the Delaware Savings Bank, now Lehman Brothers Bank, FSB, to give the Company
wider access to loan product. The Firm has expanded its global activities in the
areas of mortgage and asset-backed securities, leases, mortgages, multi-family
financing and commercial loans. In addition, Lehman Brothers engages in select
investments in commercial and residential properties.
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.
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 borrowing and 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. Lehman Brothers also provides advisory services to
central banks, corporations, and 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.
GLOBAL DISTRIBUTION
Lehman Brothers' institutional 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
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products and research offered by the Firm. In addition, during 1999 Lehman
Brothers entered into a strategic alliance with Fidelity Investments that
provides access to its retail brokerage customers and provides the Firm a
distribution channel for new issue and secondary product to individual investors
on-line.
EQUITY SALES. Lehman Brothers' institutional Equity sales force of 320
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.
FIXED INCOME SALES. The Firm's Fixed Income sales force is one of the most
productive in the industry, with approximately 260 professionals in 11 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.
RESEARCH
EQUITY RESEARCH. The Equity Research department, comprised of 280
professionals, 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 department follows
more than 1,400 companies in 50 industries worldwide.
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. The department's 300 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.
CLIENT SERVICES
Client Services includes the Company's Private Client Services group, a
retail-based organization which primarily serves the investment needs of wealthy
individuals, and its Private Equity Division, which manages assets through a
series of private equity funds.
PRIVATE CLIENT SERVICES
The Company's Private Client Services group of over 320 professionals serves
the investment needs of private investors with substantial assets as well as
over 1,200 mid-sized institutional accounts worldwide. The group has a global
presence with investment representatives located in 12 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.
The Firm also provides asset management services, including Investment
Consulting Services, a wrap-fee series of third party managed products,
management of multiple manager funds onshore and offshore and a managed futures
advisory business. The Firm also has dealer agreements with a large number of
mutual fund families.
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PRIVATE EQUITY
The Company currently has over $2.5 billion in funds under management.
MERCHANT BANKING. Lehman Brothers' merchant banking activities include
making principal investments in partnership with clients of the Firm, and
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.
VENTURE CAPITAL. In 1999, the Company continued its venture capital
activities, launching Lehman Brothers Venture Capital Partners in the second
quarter of 1999, with total capital commitments of $350 million. In addition to
the Firm investing directly in this fund, other investors include third party
clients of Lehman Brothers and key employees of the Firm. The primary investment
objective of Lehman Brothers Venture Capital Partners is to make growth-oriented
equity or equity-related investments in privately held companies. Specifically,
the Venture fund focuses on investing in companies capable of turning innovative
technology and management solutions into successful businesses. Accordingly,
investment preference is not confined to particular industries, but instead to
any industry capable of rapid growth through the provision of innovative
technology and/or services. The Venture Capital Group currently has invested
more than $130 million in companies across a broad range of industries. Further
information is contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Client Services" on page 44 of the 1999
Annual Report.
TECHNOLOGY AND E-COMMERCE
During 1999, considerable technology resources were devoted to addressing
the Year 2000 issue. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000" on page 57 of the 1999 Annual
Report.
The Firm has also been committed to developing a technology platform to
deliver a full range of capital markets information and services to its
institutional client base. The Firm-wide E-Commerce Committee, which brings
together senior management from all of the Firm's global business areas, has
developed the Firm's overall e-commerce strategy, approves all e-commerce
investments and provides a forum to share e-commerce knowledge and new
developments across the Firm's businesses and geographies. Lehman Brothers is
implementing a three-part strategy through active investments, joint ventures
and in-house development efforts. Lehman Brothers has made strategic investments
and is a participant in a number of institutional Internet-related securities
dealers and trading networks in the U.S. and Europe, including Redibook, Strike
and NYFIX/Millennium in equity trading and TradeWeb, BrokerTec, EBS and CoreDeal
in fixed income. The Firm has also made strategic acquisitions of and
investments in a number of e-commerce businesses closely related to its own core
businesses.
CORPORATE
The Company's Corporate division provides 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; risk management; 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.
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
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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. As part of the Company's
customer-flow activities, Lehman Brothers takes positions in interest rates,
foreign exchange, various securities, derivatives and commodities. Although the
Company seeks to mitigate risk associated with such positions through hedging
activities, consistent with its expectations of future events, it is subject to
the risk that actual market events may differ from the Company's expectations,
which may result in significant losses associated with such positions.
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 53-56 of the 1999 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, including online internet,
securities brokerage firms, 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. Recent legislative and regulatory changes in the
United States allow commercial banks to enter businesses previously limited to
investment banks, which may further increase 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 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 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 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
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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, 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 and the Tokyo
Financial Futures Exchange and, as such, is regulated by the Financial
Supervisory Agency, the Japan Securities Dealers Association and such exchanges.
Lehman Brothers Bank, FSB, the Company's thrift subsidiary, is regulated by
the Office of Thrift Supervision. Lehman Brothers Bankhaus A.G. is regulated by
the German Federal Banking Authority.
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 49-50 of the 1999 Annual Report, and
Note 9 of Notes to Consolidated Financial Statements.
EMPLOYEES
As of November 30, 1999 the Company employed approximately 8,900 persons,
including 6,000 in North America and 2,900 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.
The Company has 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 January, 2011.
The Company leases approximately 338,000 square feet of office space in
London, England of which approximately 89,000 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
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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 case has been adjourned to April 23, 2000 for judgment.
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, LBI 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.
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 named Holdings and Robert I. Weingarten, Gerry R. Ginsberg and
Leonard Gubar, former directors 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
against Holdings under the federal securities laws and common law claims
including fraud, negligence and breach of fiduciary duty and alleged violations
of the Virginia Securities Act. 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 the Judgment Order. The appeal was argued in January, 2000.
10
<PAGE>
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 the action described below are covered
by this indemnity.
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. After dismissal of Plaintiffs'
original complaint in September, 1999, Plaintiffs filed an amended complaint on
November 30, 1999. That complaint names as defendants LBI, various affiliates of
LBI, Smith Barney Holdings, Inc., Balcor, a number of Balcor-originated limited
partnerships and an individual 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, 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, and costs and
attorneys' fees. LBI has moved to dismiss the amended complaint.
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. 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.
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. The Court has
ordered the plaintiffs divided into 14 groups of 20 for trial purposes. The
first trial is scheduled to commence in the third quarter of 2000.
11
<PAGE>
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
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 January 6, 1999,
the Court issued an order dismissing the claims of Canadian plaintiffs who
bought their shares on Canadian exchanges. On July 13, 1999, the District Court
issued an opinion dismissing the case against LBI and certain other defendants.
The court allowed the plaintiffs to file a Third Amended Complaint, which was
filed on August 19, 1999. On September 17, 1999, LBI moved to dismiss it. That
motion is 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
determination of the Motion to Dismiss in the MCNAMARAcase referred to above.
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 was not named as a
defendant. The complaint alleged that the underwriters violated Sections 11 and
12 of the Securities Act. Plaintiffs sought rescission and unspecified
compensatory damages. On February 7, 2000, the Court orally approved a
settlement of the action and indicated that it would enter a Final Judgment and
Order upon presentation by the parties.
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. On
March 15, 1999, plaintiffs filed a Consolidated Amended Complaint.
12
<PAGE>
CORPORACION NACIONAL DEL COBRE DE CHILE V. LEHMAN BROTHERS INC., LEHMAN BROTHERS
COMMERCIAL CORP., LEHMAN BROTHERS COMMODITIES LTD. AND LEHMAN BROTHERS
HOLDINGS INC.
On August 25, 1999, Corporacion Nacional del Cobre de Chile ("Codelco")
filed its Second Amended Statement of Claim against Holdings and certain of its
subsidiaries in a proceeding before the American Arbitration Association. In
connection with the metals trading conducted by Codelco's chief metals trader,
Juan Pablo Davila, the Second Amended Statement of Claim asserts the following
claims against Lehman Brothers: common law fraud, aiding and abetting fraud,
breach of fiduciary duty, aiding and abetting a breach of fiduciary duty, breach
of contract, and breach of duty of good faith and fair dealing. By order dated
November 8, 1999, the arbitration panel dismissed the breach of contract claims
against Lehman Brothers Commodities Ltd. and Holdings. The Second Amended
Statement of Claim seeks damages in the amount of $48 million for Codelco's
alleged trading losses with Lehman Brothers, plus punitive damages, costs and
attorneys' fees.
PAMAHI INVESTMENT CORP., ET AL. V. LEHMAN BROTHERS INC., ET AL.
In July 1999, Pamahi Investment Corp. and eight other sets of claimants
filed an arbitration claim before the National Association of Securities
Dealers, naming as respondents LBI and two of its former brokers and a former
branch manager from its Santiago, Chile office. The claim alleges that
respondents sold unsuitable, unauthorized and/or misrepresented securities in
the form of emerging markets bonds, structured notes and subordinated notes.
Claimants seek compensatory damages of $31.6 million, plus punitive damages,
interest, and attorneys' fees and costs. Claimants voluntarily dismissed the two
former brokers. LBI and its former branch manager answered, moved to sever the
arbitration into a separate case for each set of claimants, and filed certain
counterclaims and third-party claims.
MEXPO, S.A. V. LEHMAN BROTHERS INC., ET AL.
In August 1999, Mexpo, S.A. filed an arbitration claim with the National
Association of Securities Dealers, naming as respondents LBI, Lehman Brothers
International (Europe), Lehman Brothers Securities, Holdings, and Lehman
Brothers Global Finance Limited. Mexpo alleges that respondents engaged in
unauthorized transactions, made unsuitable recommendations, failed to follow
client instructions and engaged in deceptive conduct in connection with Mexpo's
trading in emerging markets bonds, structured notes and other securities. The
legal claims asserted by Mexpo include various common law contractual and tort
claims as well as alleged violations of federal securities and commodities laws.
Mexpo seeks $28 million in compensatory damages, plus punitive damages,
interest, attorneys' fees and costs.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
<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 26,845 at February 15, 2000. Information concerning the market for the
Registrant's common equity and related stockholder matters is set forth on page
100 of the 1999 Annual Report and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data contained on page 96 of the 1999 Annual Report is
deemed a part of this Annual Report on Form 10-K and is 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 39-57 of the 1999 Annual
Report. Such information is incorporated herein by reference and should be read
in conjunction with the Consolidated Financial Statements and the Notes thereto
contained on pages 59-95 of the 1999 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 53-56
of the 1999 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 1999 Annual Report on pages 58-95 and
are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
<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 5-9 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 9 and 10 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 8, 9 and 12-17 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 11 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 19-21 of the Proxy Statement and is
hereby incorporated herein by reference.
15
<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).
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).
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO.
- ---------------------
<C> <S>
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).
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).
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO.
- ---------------------
<C> <S>
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, combined fixed charges and preferred dividends.*
13. The following portions of the Company's 1999 Annual Report
to Stockholders, which are incorporated by reference herein:
"Management's Discussion and Analysis of Financial Condition
and Results of Operations", pages 39-57;* "Consolidated
Financial Statements", pages 58-99;* and "Other Stockholder
Information", page 100.*
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 23, 1999, Items 5 and 7.
2. Form 8-K dated November 10, 1999, Item 7.
* Filed herewith.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K pursuant to Item 14(c)
** To be filed by amendment.
18
<PAGE>
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
FORM 10-K ANNUAL REPORT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS
Report of Independent Auditors.............................. 58
Consolidated Statement of Income for the Twelve Months Ended 59
November 30, 1999, 1998, and 1997.........................
Consolidated Statement of Financial Condition at November 60-61
30, 1999 and 1998.........................................
Consolidated Statement of Changes in Stockholders' Equity 62-63
for the Twelve Months Ended November 30, 1999, 1998, and
1997......................................................
Consolidated Statement of Cash Flows for the Twelve Months 64-65
Ended November 30, 1999, 1998, and 1997...................
Notes to Consolidated Financial Statements.................. 67-95
FINANCIAL STATEMENT SCHEDULE
Schedule I Condensed Financial Information of Registrant.... F-2
</TABLE>
F-1
<PAGE>
SCHEDULE I
LEHMAN BROTHERS HOLDINGS INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF OPERATIONS
(PARENT COMPANY ONLY)
(IN MILLIONS)
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED
NOVEMBER 30
---------------------------------
1999 1998 1997
-------- ----------- --------
<S> <C> <C> <C>
Revenues
Interest and dividends.................................... $2,218 $2,254 $1,271
Principal transactions and other.......................... (128) (114) 341
------ ------ ------
Total revenues........................................ 2,090 2,140 1,612
Interest expense.......................................... 2,200 2,252 1,304
------ ------ ------
Net revenues............................................ (110) (112) 308
Equity in net income of subsidiaries........................ 1,203 942 492
Non-interest expenses....................................... 135 270 201
------ ------ ------
Income before taxes......................................... 958 560 599
Benefit from income taxes................................. 174 176 48
------ ------ ------
Net income.................................................. $1,132 $ 736 $ 647
====== ====== ======
Net income applicable to common stock....................... $1,037 $ 649 $ 572
====== ====== ======
</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 PER SHARE DATA)
<TABLE>
<CAPTION>
NOVEMBER 30
-------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 1,481 $ 1,152
Securities and other financial instruments owned............ 8,569 10,561
Securities purchased under agreements to resell............. 8,434 244
Equity in net assets of subsidiaries........................ 6,417 5,174
Accounts receivable and accrued interest.................... 599 490
Due from subsidiaries....................................... 17,978 23,149
Other assets................................................ 1,612 1,137
------- -------
Total assets.......................................... $45,090 $41,907
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper and short-term debt........................ $ 2,580 $ 3,596
Securities and other financial instruments sold but not yet
purchased................................................. 220 81
Securities sold under agreeements to repurchase............. 8,093 11,162
Accrued liabilities, due to subsidiaries and other
payables.................................................. 9,042 4,718
Senior notes................................................ 17,940 16,737
Subordinated indebtedness................................... 932 200
------- -------
Total liabilities..................................... 38,807 36,494
======= =======
Commitments and Contingencies
Stockholders' equity:
Preferred stock........................................... 688 908
Common stock, $0.10 par value; 300,000,000 shares
authorized; Shares issued: 122,619,460 in 1999 and
121,801,123 in 1998; Shares outstanding: 119,912,810 in
1999 and 113,657,877 in 1998............................ 12 12
Additional paid-in capital................................ 3,387 3,534
Accumulated other comprehensive income (net of tax)....... (2) 15
Retained earnings......................................... 2,094 1,105
Other stockholders' equity, net........................... 254 269
Common stock in treasury, at cost: shares 2,706,650 in
1999 and 8,143,246 shares in 1998....................... (150) (430)
------- -------
Total stockholders' equity............................ 6,283 5,413
------- -------
Total liabilities and stockholders' equity............ $45,090 $41,907
======= =======
</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
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 1,132 $ 736 $ 647
Adjustments to reconcile net income to net cash provided by
(used in)operating activities:
Equity in net income of subsidiaries...................... (1,203) (942) (492)
Dividends received from subsidiaries...................... 145 118 201
Compensation payable in common stock...................... 363 221 162
Other adjustments......................................... 29 178 24
Net change in:
Securities and other financial instruments owned.......... 1,992 (1,810) (5,211)
Accounts receivable and accrued interest, due from
subsidiaries and other assets........................... 4,580 (6,261) (6,380)
Securities and other financial instruments sold but not
yet purchased........................................... 139 (41) (76)
Accrued liabilities, due to subsidiaries and other
payables................................................ 4,324 2,978 770
-------- ------- --------
Net cash provided by (used in) operating activities... 11,501 (4,823) (10,355)
======== ======= ========
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes...................... 5,843 8,298 3,925
Principal payments of senior notes.......................... (4,680) (3,101) (1,689)
Proceeds from issuance of subordinated indebtedness......... 732
Payments for commercial paper and short-term debt, net...... (1,016) (876) 1,297
Resale agreements net of repurchase agreements.............. (11,259) 2,160 6,140
Payments for repurchase of preferred stock.................. (220) (50)
Payments for treasury stock purchases....................... (256) (411) (77)
Dividends paid.............................................. (139) (122) (58)
Issuances of common stock................................... 8 61 23
Issuances of preferred stock................................ 444
-------- ------- --------
Net cash provided by (used in) financing activities... (10,987) 6,403 9,561
======== ======= ========
CASH FLOWS FROM INVESTING ACTIVITIES
Capital contributions to subsidiaries....................... (280) (451) 16
Capital distributions received from subsidiaries............ 95 23 103
-------- ------- --------
Net cash provided by (used in) investing activities....... (185) (428) 119
-------- ------- --------
Net change in cash and cash equivalents................... 329 1,152 (675)
Cash and cash equivalents, beginning of period.............. 1,152 675
-------- ------- --------
Cash and cash equivalents, end of period.................. $ 1,481 $ 1,152 $ 0
======== ======= ========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN MILLIONS)
Interest paid totaled $2,177 in 1999, $2,121 in 1998 and $1,277 in 1997. Income
taxes (received) paid totaled $(332) in 1999, $(91) in 1998 and $33 in 1997.
See notes to condensed financial information of Registrant.
F-4
<PAGE>
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>
NON-U.S.
U.S. DOLLAR DOLLAR NOVEMBER 30
------------------- -------- -------------------
FIXED FLOATING FIXED
(IN MILLIONS) RATE RATE RATE 1999 1998
- ------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SENIOR NOTES
Maturing in Fiscal 1999......................... $ 4,697
Maturing in Fiscal 2000......................... $ 3,160 $1,769 $ 4,929 4,932
Maturing in Fiscal 2001......................... 1,220 981 2,201 1,625
Maturing in Fiscal 2002......................... 1,649 911 2,560 1,544
Maturing in Fiscal 2003......................... 2,310 383 $ 16 2,709 2,058
Maturing in Fiscal 2004......................... 1,868 31 1,899 582
December 1, 2004 and thereafter................. 3,202 63 377 3,642 1,299
------- ------ ---- ------- -------
Senior Notes................................ 13,409 4,107 424 17,940 16,737
------- ------ ---- ------- -------
Subordinated Indebtedness
December 1, 2004 and thereafter................. 932 932 200
------- ------ ---- ------- -------
LONG-TERM DEBT.................................. $14,341 $4,107 $424 $18,872 $16,937
======= ====== ==== ======= =======
</TABLE>
Of the Company's long-term debt outstanding as of November 30, 1999,
$570 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 2000 to fiscal 2002, rather than at their contractual
maturities, which range from fiscal 2000 to fiscal 2015. In addition,
$1,705 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, 1999, the Company's U.S. dollar debt portfolio included
approximately $307 million 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.
At November 30, 1999, Subordinated Indebtedness includes $710 million which
has been classified as "Trust Preferred Securities Subject to Mandatory
Redemption" on the Company's Consolidated Statement of Financial Condition.
END USER DERIVATIVE ACTIVITIES
The Company utilizes a variety of derivative products including interest
rate and currency swaps, and swaptions as an end user to modify the interest
rate characteristics of its long-term debt portfolio. The Company actively
manages the interest rate exposure on its long-term debt portfolio to more
closely match the terms of its debt 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
F-5
<PAGE>
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, 1999 and November 30, 1998, the notional values of the
Company's interest rate and currency swaps related to its long-term debt
obligations were approximately $16.4 billion and $15.3 billion, respectively. In
terms of notional amounts outstanding, these derivative products mature as
follows:
<TABLE>
<CAPTION>
NOVEMBER 30
NON U.S. CROSS -------------------
(IN MILLIONS) U.S. DOLLAR DOLLAR CURRENCY 1999 1998
- ------------- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Maturing in Fiscal 1999....................... $ 3,488
Maturing in Fiscal 2000....................... $ 4,616 $ 4,616 4,741
Maturing in Fiscal 2001....................... 1,779 1,779 1,579
Maturing in Fiscal 2002....................... 1,934 1,934 1,609
Maturing in Fiscal 2003....................... 2,618 $ 5 $ 11 2,634 1,983
Maturing in Fiscal 2004....................... 1,915 32 1,947 582
December 1, 2004 and thereafter............... 3,427 58 3,485 1,395
------- ----- ---- ------- -------
Total......................................... $16,289 $ 5 $101 $16,395 $15,377
======= ===== ==== ======= =======
Weighted-average rate (1)
Receive rate.................................. 6.64% 3.32% 3.37% 6.71% 6.44%
Pay rate...................................... 6.63% 0.40% 6.42% 6.36% 5.86%
</TABLE>
- ------------------------
(1) Weighted-average interest rates were calculated utilizing non-U.S. dollar
interest rates, where applicable.
F-6
<PAGE>
The Company's end user derivative activities resulted in the following
changes to the Company's mix of fixed and floating rate debt and effective
weighted-average rates of interest:
<TABLE>
<CAPTION>
NOVEMBER 30, 1999
------------------------------------------------------
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...................................... $14,341 $ 1,102
Floating Rate................................... 4,107 17,765
------- -------
18,448 18,867
Non-USD Obligations............................... 424 5
------- ------- ---- ----
Total............................................. $18,872 $18,872 6.85% 6.52%
======= ======= ==== ====
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30, 1998
------------------------
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...................................... $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-US dollar
interest rates, where applicable.
NOTE 3. DIVIDENDS
Dividends and capital distributions received by Holdings from its
subsidiaries and affiliates were $240 million in 1999, $141 million in 1998, and
$304 million in 1997.
NOTE 4. COMMITMENTS AND CONTINGENCIES
The Company has guaranteed certain of its subsidiaries' unsecured lines of
credit and other contractual obligations.
F-7
<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.
<TABLE>
<S> <C> <C>
LEHMAN BROTHERS HOLDINGS INC.
(REGISTRANT)
FEBRUARY 28, 2000 BY: /S/ JENNIFER MARRE
-----------------------------------------
Title: VICE PRESIDENT
</TABLE>
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
---------- ----- ----
<C> <S> <C>
RICHARD S. FULD, JR. Chief Executive Officer and Chairman
--------------------------------- of the Board of Directors February 28, 2000
Richard S. Fuld, Jr. (principal executive officer)
JOHN L. CECIL Chief Financial and Administrative
--------------------------------- Officer (principal financial and February 28, 2000
John L. Cecil accounting officer)
MICHAEL L. AINSLIE
--------------------------------- Director February 28, 2000
Michael L. Ainslie
JOHN F. AKERS
--------------------------------- Director February 28, 2000
John F. Akers
ROGER S. BERLIND
--------------------------------- Director February 28, 2000
Roger S. Berlind
THOMAS H. CRUIKSHANK
--------------------------------- Director February 28, 2000
Thomas H. Cruikshank
HENRY KAUFMAN
--------------------------------- Director February 28, 2000
Henry Kaufman
HIDEICHIRO KOBAYASHI
--------------------------------- Director February 28, 2000
Hideichiro Kobayashi
JOHN D. MACOMBER
--------------------------------- Director February 28, 2000
John D. Macomber
DINA MERRILL
--------------------------------- Director February 28, 2000
Dina Merrill
---------------------------------
(ATTORNEY-IN-FACT) Director February 28, 2000
Jennifer Marre
February 28, 2000
</TABLE>
<PAGE>
EXHIBIT 12
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE FOR THE FOR THE
TWELVE TWELVE TWELVE TWELVE TWELVE
MONTHS MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED
NOVEMBER 30 NOVEMBER 30 NOVEMBER 30 NOVEMBER 30 NOVEMBER 30
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Pre-tax earnings from continuing
operations...................... $ 369 $ 637 $ 937 $ 1,052 $ 1,631
Add: Fixed charges (excluding
capitalized interest)........... 10,449 10,852 13,043 15,813 13,681
------- ------- ------- ------- -------
Pre-tax earnings before fixed
charges......................... 10,818 11,489 13,980 16,865 15,312
======= ======= ======= ======= =======
Fixed charges:
Interest........................ 10,405 10,816 13,010 15,781 13,649
Other(a)........................ 72 50 41 47 71
------- ------- ------- ------- -------
Total fixed charges............. 10,477 10,866 13,051 15,828 13,720
------- ------- ------- ------- -------
Preferred stock dividend
requirements.................... 64 58 109 124 174
------- ------- ------- ------- -------
Total combined fixed charges and
preferred stock dividends....... $10,541 $10,924 $13,160 $15,952 $13,894
======= ======= ======= ======= =======
RATIO OF EARNINGS TO FIXED
CHARGES......................... 1.03 1.06 1.07 1.07 1.12
RATIO OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED
STOCK DIVIDENDS................. 1.03 1.05 1.06 1.06 1.10
</TABLE>
- ------------------------
(a) Other fixed charges consist of the interest factor in rentals and
capitalized interest.
<PAGE>
Exhibit 13
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 sales and trading, 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.
Economic growth in the United States remained very strong at the beginning of
1999, and led to a sharp rise in U.S. bond yields, notwithstanding successive
external trade and financial shocks in many developing countries. While wage and
price inflation continued to be low, the risk of rising inflationary pressures,
emanating from a tightening labor market, caused the Federal Reserve to raise
the Federal Funds rate three times, each by 25 basis points, on June 30, August
24, and November 16, 1999. Mounting evidence of the persistent strength of
economic growth triggered a rise in ten-year Treasury yields of approximately
1.5 percentage points over the year, to 6.2% at the end of November. Real Gross
Domestic Product growth ended the year at a stronger level than it had begun,
increasing to 5.7% in the third and fourth quarter of 1999 from 4.0% for all of
1998.
Unlike conditions in the U.S., European growth weakened in late 1998, as
consumer demand failed to offset fully the effects of a growing trade imbalance.
However, by the end of 1999, the overall European economy was clearly showing
improvement. In the euro area, official interest rates were cut in December 1998
and the European Central Bank's key repo rate was cut by a further 50 basis
points to 2.5% on April 8. For several months thereafter, European bond yields
remained within a narrow trading range. However, by May, the rise in U.S.
Treasury yields, combined with increasing evidence of a strong cyclical
recovery, led to a rise in European yields. By the end of November, the ten-year
German government bond yield had risen 1.1 percentage points to 5.1%. On
November 4, the European Central Bank, in a move acknowledging the improved
economic outlook, raised the key repo rate back to 3%. As the year ended, the
European economy was growing at an annualized rate of approximately 4%.
From its creation at the beginning of January 1999, the euro fell in a straight
line by nearly 13% vis-a-vis the U.S. dollar, to reach $1.02/euro by early July.
Previous expectations of a positive start to the EMU experiment were not
achieved. The main reasons for the decline appear to have been the very
different cyclical positions of the U.S. and European economies, as well as
fears that Europe was not dealing with its structural and fiscal problems.
Stronger European growth in the third quarter briefly caused a recovery to
$1.08/euro, before drifting back down to $1.02/euro by the end of November.
While the value of the euro remained weak, the introduction of the new currency
allowed for a favorable development of a large and liquid corporate bond market
in Europe.
The recovery from the credit crisis of 1998 buoyed the U.S. equity markets in
1999. The S&P 500 index was up 19% for the fiscal year ended November 30, 1999.
Technology stocks were in the forefront, and the NASDAQ index was up an even
more impressive 71%. Increasingly, technology stocks continued to drive the
performance of U.S. equity markets as they captured a bigger share of the
market. While benchmark 30 year treasury bond yields correspondingly rose from
5% to 61/4%, causing negative returns in the bond market, the equity markets
benefited from good earnings growth and, among the major industry sectors,
expansion in price to earnings multiples as well. Performance, however, was
narrow with the Technology sector performing the best among the major industry
sectors. A large number of Internet stocks had their initial public offerings
during the year and many of these were among the top performers during the year.
The first two Internet stock additions to the S&P 500 were also announced during
the year: America Online and Yahoo! Moreover, Microsoft and Intel were added to
the Dow Jones Industrial Average in 1999.
<PAGE>
Non-U.S. stock markets also generated strong returns in the 12 months ended
November 30, 1999, outperforming U.S. equities in local currency terms. Despite
a correction during the third quarter, European equities returned 22% (FT/S&P
Europe), underpinned by the recovery in economic activity across the region,
combined with an accommodative monetary stance. Trading volumes were little
changed from the previous year, but there was a sharp acceleration in European
merger and acquisition activity, with the number of corporate deals in
continental Europe increasing by over 35% in 1999.
Even stronger stock market returns were recorded in Japan and the other Asian
markets, with the FT/S&P Pacific Basin index gaining 37% for the year in local
currency terms. The sharp cyclical turnaround across the region was a key driver
behind this performance. Progress on recapitalizing the Japanese banking sector
was also supportive and, outside of Japan, stock markets benefited from sharp
falls in interest rates and the gains in competitiveness deriving from the yen's
appreciation.
Corporate Finance Advisory activities on a global basis continued at record
levels in 1999. Industrywide, the volume of announced transactions soared to
$3.7 trillion. Fiscal 1999 also reflected a steady advance of merger and
acquisition activity involving European companies and cross-border mergers and
acquisitions. Merger and acquisition activities continued to reflect the trends
of consolidation, deregulation and globalization across industry sectors and
across borders.
- --------------------------------------------------------------------------------
Note: Except for the historical information contained herein, this Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements that are based on current expectations,
estimates and projections about the industries in which the Company operates.
These statements are not guarantees of future performance and involve certain
risks, uncertainties and assumptions which are difficult to predict. 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
summary For 1999, the Company reported record net revenues, net income, return
on equity and earnings per share. Net income of $1,132 million increased 54%
over 1998 while earnings per share of $8.15 for 1999 was up approximately 57%
over last year. These results reflect the continued successful execution of the
Company's strategy to grow its high margin investment banking and equities
businesses; increase its presence in certain strategic businesses in Europe; and
maintain a strict discipline with regard to its expenses. The Company's strategy
is based on the belief that: (1) these businesses generate higher returns on
equity because they are less capital intensive; and (2) their rapid growth
accelerates the Company's overall rate of growth; and (3) they help reduce
earnings volatility by diversifying the Company's revenue base. The Company's
shift in revenue mix in favor of these high margin businesses helped to increase
the Company's operating margin to 30.5% in 1999 from 25.6% in 1998. Also
contributing to these record results was the Company's continued aggressive
management of expenses. Non-personnel expenses increased only 3% in 1999,
despite a 30% increase in net revenues. The compensation and benefits ratio
remained constant at 50.7% of net revenues.
The Company reported net income of $736 million and earnings per share of $5.19
for 1998. The Company's operating margin was 25.6% in 1998. The compensation and
benefits ratio was 50.7 percent of net revenue and non-personnel expenses were
relatively flat even though net revenues increased 6%. These results reflected
the continued implementation of the strategy to grow certain high margin
businesses while managing expenses carefully.
<PAGE>
For 1997, the Company reported net income of $647 million and earnings per share
of $4.72, as the Company began to realize the benefits associated with its
strategy to grow certain high margin businesses. These results were achieved in
worldwide markets, which were extremely favorable during the early portion of
the year and became volatile in the latter portion of the year.
net revenues Net revenues reached record levels in each of the past three
years and were $5,340 million for 1999, $4,113 million for 1998 and $3,873
million for 1997. During 1999, the Company continued to execute its growth
strategy. For 1999, combined equities and banking revenues comprised 58% of
total net revenues compared to 51% in 1998. The increase in net revenues was
driven by an increase in equity and debt underwriting as well as significant
growth in institutional customer flow activities.
In 1998, the increase in net revenues from 1997 levels reflected the Company's
continued execution of its long-term strategy of growing high margin businesses,
such as investment banking, equities and private client services. These
businesses enjoyed strong results and helped to offset a difficult fixed income
environment in the second half of 1998. The increase in net revenues in 1997
reflected an increase in all of the major business units over the prior year led
by increased customer flow activity, a strong global market for mergers and
acquisitions and increased levels of worldwide debt and equity underwriting.
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. This "customer flow" business 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. The Company believes its customer flow
orientation has historically mitigated the level of net trading revenue
volatility.
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, Milan
and Paris 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.
Net revenues from the Company's market-making, sales and trading activities in
the capital markets are recognized as either principal transactions, commissions
or net interest revenues, depending upon the method of execution, financing
and/or hedging related to specific inventory positions. The Company evaluates
its sales and trading strategies on an overall profitability basis, which
combines principal transactions revenues, commissions and net interest.
In the following tables, the Company has been segregated into three business
segments, which are described below: Investment Banking, Capital Markets and
Client Services. Each segment represents a grouping of activities and products
with similar characteristics. These business activities result in revenues from
both institutional and high-net-worth retail clients and are recognized in
multiple revenue categories contained in the Company's Consolidated
<PAGE>
Statement of Income. (Net revenues by segment contain certain internal
allocations, including funding costs, which are centrally managed.)
TWELVE MONTHS ENDED NOVEMBER 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL
TRANSACTIONS,
COMMISSIONS INVESTMENT
[in millions] AND NET INTEREST BANKING OTHER TOTAL
<S> <C> <C> <C> <C>
Investment Banking $1,664 $1,664
Capital Markets $3,071 $ 22 3,093
Client Services 523 18 42 583
------ ------ ------ ------
Total $3,594 $1,682 $ 64 $5,340
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
TWELVE MONTHS ENDED NOVEMBER 30, 1998
<TABLE>
<CAPTION>
PRINCIPAL
TRANSACTIONS,
COMMISSIONS INVESTMENT
[in millions] AND NET INTEREST BANKING OTHER TOTAL
<S> <C> <C> <C> <C>
Investment Banking $ 1,401 $ 1,401
Capital Markets $ 2,175 $ (62) 2,113
Client Services 472 40 87 599
------- ------- -------- -------
Total $ 2,647 $ 1,441 $ 25 $ 4,113
------- ------- -------- -------
------- ------- -------- -------
</TABLE>
TWELVE MONTHS ENDED NOVEMBER 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
TRANSACTIONS,
COMMISSIONS INVESTMENT
[in millions] AND NET INTEREST BANKING OTHER TOTAL
<S> <C> <C> <C> <C>
Investment Banking $1,050 $1,050
Capital Markets $2,074 $ 23 2,097
Client Services 435 225 66 726
------ ------ ------ ------
Total $2,509 $1,275 $ 89 $3,873
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
The following discussion provides an analysis of the Company's net revenues
based upon the various segments that generated these revenues.
INVESTMENT BANKING This segment's net revenues result from fees earned by the
Company for underwriting public and private offerings of fixed income and equity
securities, raising capital and advising clients on merger and acquisition
activities and other services. Investment Banking's net revenues increased 19%
in 1999 to $1,664 million from $1,401 million in 1998, and from $1,050 million
in 1997, principally as a result of an increase in equity and investment grade
debt underwriting. The increased revenues reflects the Company's ongoing efforts
to grow its Investment Banking franchise. In 1999, the Company was able to
integrate its expertise in debt and equity underwriting as well as financial
advisory to complete several significant multiple product transactions for key
clients.
<PAGE>
During 1999, the Company also met a key strategic initiative in improving its
ranking in lead-managed initial public offerings to fifth from fourteenth in
1998. In addition, the Company improved its standing in lead-managed league
tables for European-related transactions. For completed European M&A
transactions, Lehman improved its ranking from thirteenth to ninth, while the
ranking for European Equity transactions improved from sixteenth to tenth for
the 1999 calendar year.
INVESTMENT BANKING NET REVENUES
<TABLE>
<CAPTION>
[in millions] 1999 1998 1997
<S> <C> <C> <C>
Equity Underwriting $456 $ 309 $ 342
Debt Underwriting 704 581 380
Financial Advisory 504 511 328
------ ------ ------
$1,664 $1,401 $1,050
</TABLE>
The increase in revenues in Investment Banking in 1998 from 1997 reflected a
significant increase in financial advisory fees driven by the Company's decision
to invest additional resources in this business as well as continued strength in
the overall merger and acquisition market environment. In addition, the Company
benefited from improved performance in high yield syndicate activity, driven by
the increased volume of lead-managed underwritings in this area.
CAPITAL MARKETS This segment's net revenues reflect institutional flow
activities and secondary trading and financing activities related to a broad
spectrum of fixed income and equity products. These products include dollar and
non-dollar government securities, mortgages, mortgage- and asset-backed
securities, money market products, dollar and non-dollar corporate debt
securities, emerging market securities, municipal securities, foreign exchange,
fixed income and equity related derivatives, convertible securities and common
and preferred equity securities.
Capital Markets' revenues were $3,093 million for 1999, $2,113 million for 1998
and $2,097 million for 1997. The 46% increase in revenues in 1999 is
attributable to significantly increased institutional customer flow activity
across most equity and fixed income products. Revenues increased slightly in
1998 from 1997 due to the successful redirection of the Company's resources into
higher margin businesses, such as equity derivatives and high yield corporates,
partially offset by less favorable performance in certain fixed income
businesses due to severe spread widening in core U.S. fixed income products in
the latter part of the fiscal year.
Revenues from the equity component of Capital Markets almost doubled to $1,425
million in 1999 from $717 million in 1998 and $471 million in 1997. Revenues
benefited in 1999 from significantly increased institutional customer flow
activity in cash and derivative products as well as contributions from the
equity arbitrage business. On a regional basis and consistent with its overall
strategy, the Company also experienced significant growth and improved
performance in its European franchise.
Revenues from the fixed income component of Capital Markets were $1,668 million
in 1999, $1,396 million in 1998 and $1,626 million in 1997. The increase in
revenues in 1999 was primarily driven by strong institutional customer flow
activity and improved trading results across a wide range of products,
especially mortgages, governments and derivatives. Revenues from fixed income
activities decreased in 1998 from 1997 due to severe spread widening in core
U.S. fixed income products in the latter part of the fiscal year.
CAPITAL MARKETS NET REVENUES
<TABLE>
<CAPTION>
[in millions] 1999 1998 1997
<S> <C> <C> <C>
Equities $1,425 $ 717 $ 471
Fixed Income 1,668 1,396 1,626
------ ------ ------
$3,093 $2,113 $2,097
</TABLE>
<PAGE>
CLIENT SERVICES Client Services revenues reflect earnings from the Company's
private client and private equity businesses. Private client revenues reflect
the Company's high-net-worth retail customer flow activities as well as asset
management fees earned from these clients. Private equity revenues include the
management and incentive fees earned in the Company's role as General Partner
for eleven merchant banking and venture capital partnerships. In addition, these
revenues also include the appreciation of its general partnership interests.
CLIENT SERVICES NET REVENUES
<TABLE>
<CAPTION>
[in millions] 1999 1998 1997
<S> <C> <C>
Private Client $573 $ 523 $ 438
Private equity 10 76 288
----- ----- -----
$ 583 $ 599 $ 726
</TABLE>
Client Services revenues were $583 million in 1999, $599 million in 1998, and
$726 million in 1997. Private client revenues increased approximately 10% in
1999 and 19% in 1998 as the Company benefited from increased productivity of its
sales force. Private equity revenues have decreased over the past several years
due to a reduction in realized gains and incentive fees from the liquidation of
private equity investments.
non-interest expenses During 1999, the Company's non-interest expenses
totaled $3,709 million, an increase of 21% over 1998's non-interest expenses of
$3,061 million. Non-interest expenses were $2,936 million for 1997.
<TABLE>
Twelve months ended November 30
-------------------------------
[in millions] 1999 1998 1997
<S> <C> <C> <C>
Compensation and benefits $2,707 $2,086 $1,964
Nonpersonnel 1,002 975 972
------- ------- -------
Total non-interest expenses $3,709 $3,061 $2,936
------- ------- -------
Compensation and benefits/Net revenues 50.7% 50.7% 50.7%
------- ------- -------
Nonpersonnel expenses/Net revenues 18.8% 23.7% 25.1%
------- ------- -------
</TABLE>
Compensation and benefits expense includes the cost of salaries, incentive
compensation and employee benefit plans as well as the amortization of deferred
stock compensation awards.
The Company has maintained its compensation and benefits expense to net revenue
ratio at 50.7% for each of the last three years. Nonpersonnel expenses were
$1,002 million, $975 million and $972 million for 1999, 1998 and 1997,
respectively. The ratio of total nonpersonnel expenses to net revenues declined
to 18.8% in 1999 from 23.7% in 1998, reflecting the Company's continued
commitment to aggressively manage its expenses. This discipline is an integral
part of enhancing the Company's operating leverage and overall profitability.
income taxes The Company had an income tax provision of $457 million, $316
million and $290 million for 1999, 1998 and 1997, respectively. The effective
tax rates for the Company were 28% for 1999, 30% for 1998 and 31% for 1997. The
decrease in the effective tax rate relates primarily to a favorable change in
the geographic mix of earnings and an increase in income and transactions that
are subject to preferential tax treatment.
The Company's net deferred tax assets increased to $781 million at November 30,
1999 from $596 million at November 30, 1998. Additional information about the
Company's deferred tax assets can be found in Note 11 to the Consolidated
Financial Statements (Income Taxes).
<PAGE>
funding, capital resources and liquidity
funding and capital policies The Company's Finance Committee is responsible
for establishing and managing the funding and liquidity policies of the Company.
These policies include recommendations for capital and balance sheet size as
well as the allocation of capital and balance sheet to product areas. Members of
the Company's treasury department and business unit financing groups work with
the Finance Committee to ensure coordination of global funding efforts and
implementation of the funding and liquidity policies. Regional asset and
liability committees in the Company's principal operating centers are
responsible for implementing funding strategies for their respective regions.
The primary goal of the Company's funding policies is to provide sufficient
liquidity and availability of funding sources to meet the needs of the Company's
businesses. The key elements of these policies are to:
1. Maintain a Total Capital structure that supports the business activities in
which the Company is engaged.
The Company is one of the most highly capitalized global investment banking
firms with $37.7 billion in Total Capital. The Company manages Total Capital,
defined as long-term debt, trust preferred securities and 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 maintains sufficient Total Capital to meet its
anticipated long-term capital needs which are driven by cash capital
(liquidity), regulatory capital and market and credit risk requirements.
[GRAPH]
2. Finance the Company's assets, primarily on a secured basis.
The Company maintains a market leadership position in repurchase and reverse
repurchase financing, which is underscored by its success in developing all
forms of secured funding.
Together with Total Capital, secured funding provides a stable funding base and
enables the Company to minimize its reliance on short-term unsecured debt. 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. To the extent practicable, the Company seeks to maximize its use of
secured funding. Inventories and other short-term assets are financed primarily
with a combination of secured funding, long-term debt and stockholders' equity.
Where the Company deems it to be appropriate, foreign currency denominated
assets are financed with corresponding foreign currency denominated liabilities.
In general, the Company finances its equity investments in its subsidiaries with
stockholders' equity and the subordinated capital of subsidiaries is financed
with a combination of subordinated and senior long-term debt.
3. Maintain funding availability in excess of actual utilization and obtain
diversified funding through a global investor base which increases liquidity and
reduces concentration risk.
The Company maintains sizable uncommitted credit facilities 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
<PAGE>
credit facilities consist of facilities that the Company has been advised are
available but for which no contractual lending obligations exist. Additionally,
the Company maintains secured and unsecured committed revolving credit
facilities as discussed in the following section.
The Company obtains global funding from both the banking community and short-and
long-term investors through its centers in New York, London, Tokyo 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, and bank borrowings under uncommitted lines of credit
and other uncommitted arrangements. To reduce liquidity and concentration risk,
the Company limits its exposure to any single investor.
4. Maintain sufficient financial resources to enable the Company to meet its
obligations in periods of financial stress, defined as any event that severely
constrains the Company's access to unsecured funding sources.
To achieve this objective, the Company maximizes its use of global
collateralized borrowing sources. In addition, the Company has increased Total
Capital providing additional liquidity to cover periods of financial stress and
further advance the Company's liquidity management objectives. As such, the
Company has reduced its reliance upon short-term unsecured borrowings. 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.
total capital During 1999, the Company continued to increase its capital base.
Total Capital was $37.7 billion at November 30, 1999, 15% higher when compared
to $32.8 billion at November 30, 1998. Over the last two years, total capital
has increased at a compounded annual growth rate of 23%. The net increase in
Total Capital during 1999 resulted from a net increase in long-term debt of $3.4
billion, the issuance of $710 million of Trust Preferred Securities, the
retention of net earnings and the issuance of restricted stock awards to
employees. These were offset by repurchases of common stock (to fund restricted
stock units and option awards) and preferred stock ($220 million of convertible
Series B).
<TABLE>
<CAPTION>
November 30
-------------------------------
[in millions] 1999 1998 1997
<S> <C> <C> <C>
LONG-TERM DEBT
Senior Notes $27,375 $23,873 $17,049
Subordinated Indebtedness 3,316 3,468 3,212
------- ------- -------
30,691 27,341 20,261
TRUST PREFERRED SECURITIES 710
STOCKHOLDERS' EQUITY
Preferred Equity 688 908 508
Common Equity 5,595 4,505 4,015
------- ------- -------
6,283 5,413 4,523
------- ------- -------
Total Capital $37,684 $32,754 $24,784
======= ======= =======
</TABLE>
<PAGE>
During 1999, the Company issued $10.0 billion in long-term debt, which was $3.5
billion in excess of its maturing debt. Long-term debt increased to $30.7
billion at November 30, 1999 from $27.3 billion at November 30, 1998 with a
weighted-average maturity of 3.7 years at November 30, 1999 and 3.5 years at
November 30, 1998.
At November 30, 1999, the Company had approximately $16 billion available for
the issuance of debt securities under various shelf registrations and debt
programs.
[GRAPH]
During 1999, trusts wholly owned by the Company issued $710 million of preferred
securities which are subject to mandatory redemption. Additional information
about the Trust Preferred Securities can be found in Note 4 to the Consolidated
Financial Statements (Trust Preferred Securities Subject to Mandatory
Redemption).
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 7.1 million, 5.9 million and 3.8 million RSUs were amortized into
stockholders' equity in 1999, 1998 and 1997, respectively. RSU amortization was
$363 million, $221 million and $162 million in 1999, 1998 and 1997,
respectively, net of cancellations. During 1999 and 1998, the Company
repurchased or acquired shares of its Common Stock at an aggregate cost of $353
million and $469 million (approximately 6.2 million shares and 8.6 million
shares, respectively). These shares are being reserved for future issuances
under employee stock-based compensation plans.
In January 2000, the Company's Board of Directors authorized the repurchase of
approximately 8.3 million common shares during the fiscal year, to offset
dilution due to employee stock plans. Also announced was a 22% increase in the
Company's dividend to $0.44 per share from $0.36 per share.
secured funding The Company strives to maximize the portion of the Company's
balance sheet that is funded on a secured basis. Secured funding includes
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, OECD government repos and other investment grade types of
collateralized borrowings are less credit-sensitive and have historically been a
stable financing source irrespective of market conditions. At November 30, 1999
and 1998, $123 billion and $92 billion, respectively, of the Company's total
balance sheet of $192 billion and $154 billion at November 30, 1999 and 1998,
respectively, were financed using collateralized borrowing sources.
By maximizing its use of secured funding, the Company minimizes its reliance on
unsecured funding. As of November 30, 1999 and 1998, commercial paper and
short-term debt outstanding was $5.5 billion and $6.7 billion, respectively. Of
these amounts, commercial paper outstanding was $3.6 billion as of November 30,
1999 and 1998.
back-up credit facilities In April 1999, Holdings entered into a Revolving
Credit Agreement (the "Credit Agreement") with a syndicate of banks. Under the
terms of the Credit Agreement, the banks have committed to provide up to
<PAGE>
$2 billion for up to 364 days. Any loans outstanding on the commitment
termination date may be extended for up to an additional year at the option of
Holdings. The Credit Agreement contains covenants which require, among other
things, that the Company maintain specified levels of liquidity and tangible net
worth, as defined.
In July 1999, the Company entered into a $1 billion Committed Securities
Repurchase Facility (the "Facility") for Lehman Brothers International (Europe)
("LBIE"), the Company's major operating entity in Europe. The Facility provides
secured multi-currency financing for a broad range of collateral types. Under
the terms of the Facility, the bank group will agree to provide funding for up
to one year on a secured basis. Any loans outstanding on the commitment
termination date may be extended for up to an additional year at the option of
LBIE. The Facility contains covenants which require, among other things, that
LBIE maintain specified levels of tangible net worth.
There were no borrowings outstanding under either the Credit Agreement or the
Facility at November 30, 1999. The Company may use the Credit Agreement and the
Facility for general corporate purposes from time to time. The Company has
maintained compliance with the applicable covenants for both the Credit
Agreement and the Facility at all times.
balance sheet The Company's total assets increased to $192 billion at November
30, 1999 from $154 billion at November 30, 1998. The Company's adjusted total
assets, defined as total assets less the lower of securities purchased under
agreements to resell or securities sold under agreements to repurchase were $130
billion at November 30, 1999 compared to $112 billion at November 30, 1998. The
Company believes adjusted total assets is a more effective measure of evaluating
balance sheet usage when comparing companies in the securities industry. The
increase in adjusted total assets reflects increases in government and agency
and corporate equity inventory levels associated with expanded customer flow
activities. The remaining increase in total assets was driven by a higher level
of secured customer financing activities.
The Company's balance sheet consists primarily of cash and cash equivalents,
securities and other financial instruments owned, and collateralized short-term
financing agreements. The liquid nature of these assets provides the Company
with flexibility in financing and managing its business. The majority of these
assets are funded on a secured basis through collateralized short-term financing
agreements with the remaining assets being funded through short-term unsecured
financing and Total Capital, defined as long-term debt, trust preferred
securities and stockholders' equity.
financial leverage Balance sheet leverage ratios are one measure used to
evaluate the capital adequacy of a company. Leverage ratios are commonly
calculated using either total assets or adjusted total assets divided by total
stockholders' equity and trust preferred securities. The Company believes that
the adjusted leverage ratio is a more effective measure of financial risk when
comparing companies in the securities industry. The Company's adjusted leverage
ratios based on adjusted total assets were 18.6x and 20.6x for the quarters
ended November 30, 1999 and 1998, respectively. The Company is operating at
lower levels of adjusted leverage as a result of increased growth in its equity
base relative to adjusted total assets. Due to the nature of the Company's sales
and trading activities, the overall size of the Company's assets and liabilities
fluctuates from time to time and at specific points in time may be higher than
the fiscal quarter ends.
[GRAPH]
<PAGE>
credit ratings The Company, like other companies in the securities industry,
relies on external sources to finance a significant portion of its operations.
The Company's access to and cost of funding is generally dependent upon its
short- and long-term debt ratings. On August 5, 1999, Moody's upgraded Holdings
senior debt from Baa1 to A3, its long-term debt issuer rating from Baa1 to A3,
its subordinated debt from Baa3 to Baa1, its junior subordinated debt from Baa3
to Baa2 and its preferred stock from baa3 to baa1. Moody's also upgraded LBI's
senior debt from (P)A3 to (P)A2, its subordinated debt from Baa1 to A3 and its
commercial paper from Prime-2 to Prime-1. As of November 30, 1999 the short- and
long-term debt ratings of Holdings and 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 IBCA, Inc. F-1 A F-1 A/A-
Moody's P-2 A3 P-1 A2*/A3
Standard & Poor's Corp. A-1 A A-1 A+*/A
Thomson BankWatch TBW-1 A TBW-1 A+/A
</TABLE>
- --------------------------------------------------------------------------------
* Provisional ratings on shelf registration
** Senior/subordinated
regulatory capital The Company operates globally through a network of
subsidiaries with several subject to regulatory requirements. In the United
States, LBI, as a registered broker-dealer, is subject to the Securities and
Exchange Commission ("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, 1999, LBI's regulatory net capital, as defined, of
$1,563 million exceeded the minimum requirement by $1,457 million.
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
$1,245 million and $1,332 million at November 30, 1999 and 1998, 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.
LBIE 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,
1999, LBIE's financial resources of approximately $1,727 million exceeded the
minimum requirement by approximately $499 million. Lehman Brothers Japan Inc.'s
Tokyo branch, a regulated broker-dealer, is subject to the capital requirements
of the Financial Supervisory Agency and at November 30, 1999, had net capital of
approximately $388 million which was approximately $122 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, 1999, these other subsidiaries
were in compliance with their applicable local capital adequacy requirements.
The Company's "AAA" rated derivatives subsidiaries, LBFP and LBDP, have
established certain capital and operating restrictions which are reviewed by
various rating agencies. At November 30, 1999, LBFP and LBDP each had capital
which exceeded the requirement
<PAGE>
of the most stringent rating agency by approximately $12 million and $16
million, respectively. Lehman Brothers Bank, FSB (the "Bank"), is the Company's
thrift subsidiary and is regulated by the Office of Thrift Supervision ("OTS").
The Bank exceeds all regulatory capital requirements and is considered well
capitalized by the OTS.
The regulatory rules referred to above, and certain covenants contained in
various debt agreements may restrict Holdings' ability to withdraw capital from
its regulated subsidiaries, which in turn could limit its ability to pay
dividends to shareholders. At November 30, 1999, approximately $4.4 billion of
net assets of subsidiaries were restricted as to the payment of dividends to
Holdings.
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 instruments 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. The Company recognizes these risks and aims to reduce market and
credit risk through the diversification of its products and counterparties. High
yield debt instruments are carried at market value, and unrealized gains or
losses for these securities are reflected in the Company's Consolidated
Statement of Income. The Company's portfolio of such instruments at November 30,
1999 and 1998 included long positions with an aggregate market value of
approximately $3.0 billion and $2.3 billion, respectively, and short positions
with an aggregate market value of approximately $290 million and $217 million,
respectively. The Company may, from time to time, mitigate its net exposure to
any single issuer through the use of derivatives and other financial
instruments.
The Company, through its high grade and high yield sales, trading and
underwriting activities, makes commitments to extend credit in loan syndication
transactions and then participates out a significant portion of these
commitments. The Company had lending commitments to high grade borrowers of $2.9
billion and $675 million at November 30, 1999 and 1998, respectively. In
addition, lending commitments to high yield borrowers totaled $1.4 billion and
$2.0 billion at November 30, 1999 and 1998, respectively. All of these
commitments and any related draw downs of these facilities are typically secured
against the borrower's assets, have fixed maturity dates and are generally
contingent upon certain representations, warranties and contractual conditions
applicable to the borrower. Total commitments are not indicative of actual risk
or funding requirements as the commitments may not be drawn or fully utilized
and the Company will continue to syndicate and/or sell these commitments.
In addition to these specific commitments, the Company had various other
commitments of approximately $300 million and $335 million at November 30, 1999
and 1998, respectively.
private equity The Company's private equity activities include investments in
eleven merchant banking and venture capital related partnerships, for which the
Company acts as general partner, as well as direct investments. At November 30,
1999 and 1998, investments in these partnerships totaled $205 million and $245
million, respectively, while direct investments totaled $375 million and $207
million, respectively. 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.
<PAGE>
At November 30, 1999 and 1998, the Company had commitments to invest up to an
additional $411 million and $379 million, respectively, directly and through
partnerships, in private equity related investments. These commitments will be
funded as required through the end of the respective investment periods,
principally expiring in 2004.
In addition, at November 30, 1999, the Company had no direct short-term bridge
financings outstanding.
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 amounts,
which are generally not exchanged, but rather are used merely as a basis for
exchanging cash flows during the duration of the contract. Derivatives are also
utilized extensively as highly effective tools that enable users to adjust risk
profiles, such as interest rate, currency, or other market risks, or to take
proprietary trading positions, since OTC derivative instruments can be tailored
to meet individual client needs. Additionally, derivatives provide users with
access to market risk management tools which are often 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
<PAGE>
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 to change the index upon which floating interest
rates are based (e.g., 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 separately capitalized "AAA" rated subsidiaries, Lehman
Brothers Financial Products Inc. and Lehman Brothers Derivative Products Inc.
The Company's equity derivative product business is conducted through Lehman
Brothers Finance S.A. 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.
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 53-56.
The Company's Trading-Related Derivative Activities have increased during the
current year to a notional amount of $2,896 billion at November 30, 1999 from
$2,398 billion at November 30, 1998, primarily as a result of growth in the
Company's activities as a dealer in fixed income derivative products. Notional
amounts are not recorded on the balance sheet and are not indicative of actual
or 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 active counterparties to be $6,252 million at November 30,
1999, representing the fair value of the Company's OTC contracts in an
unrealized gain position, after consideration of collateral and master netting
agreements. Collateral held related to OTC contracts generally includes cash and
U.S. government and federal agency securities. At November 30, 1999,
approximately 75% of the Company's net credit risk exposure related to OTC
contracts was with counterparties rated "A-" or better.
<PAGE>
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
clearinghouse is a counterparty to the futures contracts and options. As a
clearing member firm, the Company is required by the exchange clearinghouse 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 clearinghouses 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 clearinghouses impose capital requirements for their
membership. Therefore, the potential for losses from exchange-traded products is
limited. As of November 30, 1999, the Company had approximately $2,180 million
on deposit with futures exchanges consisting of cash and securities (customer
and proprietary), and had posted approximately $447 million of letters of
credit.
See Notes 1 and 12 to the Consolidated Financial Statements for a description of
the Company's accounting policies and a further discussion of the Company's
Trading-Related Derivative Activities.
risk management
As a leading global investment banking company, risk is an inherent part of the
Company's businesses. Global markets, by their nature, are prone to uncertainty
and subject participants to a variety of risks. The Company has developed
policies and procedures to identify, measure and monitor each of the risks
involved in its sales, trading 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. The Company devotes significant resources across all of its
worldwide trading operations to the measurement, management and analysis of
risk, including investments in personnel and technology.
The Company seeks to reduce risk through the diversification of its businesses,
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 that they assume.
Overall risk management policy is established by a Risk Management Committee
(the "Committee") comprised of the Chief Executive Officer, the Global Risk
Manager, the Chief Financial and Administrative Officer, the Head of Equities,
the Head of Fixed Income, the Head of Global Sales and Research and the Co-Heads
of Investment Banking. The Committee brings together senior management with the
sole intent of discussing risk related issues and provides an effective forum
for managing risk at the highest levels within the Company. The Committee meets
on a monthly 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.
<PAGE>
The Global Risk Management Group (the "Group") supports the Committee, is
independent of the trading areas and reports directly to the Chief Executive
Officer. The Group combines two departments, credit risk management and market
risk management, into one unit. This facilitates the analysis of counterparty
credit and market risk exposures and leverages personnel and information
technology resources in a cost-efficient manner. The Group maintains staff in
each of the Company's regional trading centers and has daily contact with
trading staff at all levels within the Company. These discussions include a
review of trading positions and risk exposures.
credit risk Credit risk represents the possibility that a counterparty will be
unable to honor its contractual obligations to the Company. Credit risk
management is therefore an integral component of the Company's overall risk
management framework. The Credit Risk Management Department ("CRM Department")
has global responsibility for implementing the Company's overall credit risk
management framework.
The CRM Department manages the credit exposure related to 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 creditworthiness and
recommending, where appropriate, credit reserves. Credit limits and reserves are
reviewed periodically to ensure that they remain appropriate in light of market
events or the counterparty's financial condition.
market risk Market risk represents the potential change in value of a
portfolio of financial instruments due to changes in market rates, prices, and
volatilities. Market risk management also is an essential component of the
Company's overall risk management framework. The Market Risk Management
Department ("MRM Department") has global responsibility for implementing the
Company's overall market risk management framework. It is responsible for the
preparation and dissemination of risk reports, developing and implementing the
firmwide Risk Management Guidelines and evaluating adherence to these
guidelines. 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, and foreign
exchange risk exposures. In addition to these risks, the MRM Department also
evaluates liquidity risks, credit and sovereign concentrations.
The MRM Department utilizes qualitative as well as quantitative information in
managing trading risk, believing that a combination of the two approaches
results in a more robust and complete approach to the management of trading
risk. Quantitative information is developed from a variety of risk methodologies
based upon established statistical principles. To ensure high standards of
qualitative analysis, the MRM Department has retained seasoned risk managers
with the requisite experience and academic and professional credentials.
Market risk is present in cash products, derivatives, and contingent claim
structures that exhibit linear as well as non-linear profit and loss
sensitivity. The Company's exposure to market risk varies in accordance with the
volume of client driven market-making transactions, the size of the Company's
proprietary and arbitrage positions, and the volatility
<PAGE>
of financial instruments traded. The Company seeks to mitigate, whenever
possible, excess market risk exposures through the use of futures and option
contracts and offsetting cash market instruments.
The Company participates globally in interest rate, equity, and foreign exchange
markets. The Company's Fixed Income division has a broadly diversified market
presence in U.S. and foreign government bond trading, emerging market
securities, corporate debt (investment and non-investment grade), money market
instruments, mortgages and mortgage-backed securities, asset-backed securities,
municipal bonds, and interest rate derivatives. The Company's Equities division
facilitates domestic and foreign trading in equity instruments, indices, and
related derivatives. The Company's foreign exchange businesses are involved in
trading currencies on a spot and forward basis as well as through derivative
products and contracts.
The Company incurs short-term interest rate risk when facilitating the orderly
flow of customer transactions through the maintenance of government and high
grade corporate bond inventories. Market-making in high yield instruments
exposes the Company to additional risk due to potential variations in credit
spreads. Trading in international markets exposes the Company to spread risk
between the term structure of interest rates in differing countries. Mortgages
and mortgage-related securities are subject to prepayment risk and changes in
the level of interest rates. Trading in derivatives and structured products
exposes the Company to changes in the level and volatility of interest rates.
The Company actively manages interest rate risk through the use of interest rate
futures, options, swaps, forwards, and offsetting cash market instruments.
Inventory holdings, concentrations, and agings are monitored closely and used by
management to selectively hedge or liquidate undesirable exposures.
The Company is a significant intermediary in the global equity markets by making
markets in U.S. and non-U.S. equity securities, including common stock,
convertible debt, exchange-traded and OTC equity options, equity swaps and
warrants. These activities expose the Company to market risk as a result of
price and volatility changes in its equity inventory. Inventory holdings are
also subject to market risk resulting from concentrations, aging and liquidity
that may adversely impact its market valuation. Equity market risk is actively
managed through the use of index futures, exchange-traded and OTC options, swaps
and cash instruments. Equity risk exposures are aggregated and reported to
management on a regular basis.
The Company enters into foreign exchange transactions in order to facilitate the
purchase and sale of non-dollar instruments, including equity and interest rate
securities. The Company is exposed to foreign exchange risk on its holdings of
non-dollar assets and liabilities. The Company is active in many foreign
exchange markets and has exposure to the euro, Japanese yen, British pound,
Swiss franc, and Canadian dollar as well as a variety of developed and emerging
market currencies. The Company hedges its risk exposures primarily through the
use of currency forwards, swaps, futures, and options.
value at risk For purposes of Securities and Exchange Commission risk
disclosure requirements, the Company discloses an entity-wide value at risk
analysis of virtually all of the Company's trading activities. The value at risk
calculation measures the potential loss in expected revenues with a 95%
confidence level. The methodology incorporates actual trading revenues over a
standardized 250-day historical period. A confidence level of 95% implies, on
average, that
<PAGE>
daily trading revenues or losses will exceed daily expected trading revenues by
an amount greater than value at risk one out of every 20 trading days.
Value at risk is one measurement of potential losses in revenues that may result
from adverse market movements over a specified period of time with a selected
likelihood of occurrence. Value at risk has substantial limitations, including
its reliance on historical performance and data as valid predictors of the
future. Consequently, value at risk is only one of a number of tools the Company
utilizes in its daily risk management activities.
The Company's average value at risk for each component of market risk, and in
total was as follows:
<TABLE>
<CAPTION>
[in millions] 1999 1998
<S> <C> <C>
Interest rate risk $ 21.6 $ 15.0
Equity price risk 11.9 9.5
Foreign exchange risk 3.2 3.9
Diversification benefit (5.8) (9.8)
-------- --------
Total Company $ 30.9 $ 18.6
-------- --------
-------- --------
</TABLE>
During 1999, the Company's value at risk varied from a high of $36.2 million to
a low of $19.0 million. During 1998, the Company's value at risk varied from a
high of $32.8 million to a low of $14.2 million.
Average value at risk increased in 1999 compared to 1998 because of the extreme
market volatility during the August-October 1998 period. Excluding the effects
of this volatile time period, average value at risk was $18.9 million during
1999. Value at risk at November 30, 1999 and 1998 was $19.2 million and $31.7
million, respectively.
As discussed throughout Management's Discussion and Analysis, the Company seeks
to reduce risk through the diversification of its businesses and a focus on
customer flow activities. This diversification and focus, combined with the
Company's risk management controls and processes, helps mitigate the net revenue
volatility inherent in the Company's trading activities. Although historical
performance is not necessarily indicative of future performance, the Company
believes its focus on business diversification and customer flow activities
should continue to help mitigate the volatility of future net trading revenues.
<PAGE>
year 2000
Financial markets were essentially unaffected by the Y2K issue, reporting only a
few minor technical problems. The Company and its counterparties were not
adversely affected. The Company's success can be attributed to its high level of
preparedness and the early level of support the project received from the
highest levels of the Company, beginning in 1996. Remediation and testing were
given a high priority, and Lehman emerged as one of the financial industry's
leaders in targeting and fixing all possible components of the problem. Lehman
spent approximately $85 million on Y2K related issues, including systems
testing, updating and replacement and consultant fees.
new accounting developments
In September 1999, the FASB issued an Exposure Draft, "Business Combinations and
Intangible Assets." The proposal would eliminate the use of the
pooling-of-interests method and require that all business combinations be
accounted for using the purchase method. The Exposure Draft would also require
goodwill arising from the application of the purchase method to be written off
over a maximum 20-year amortization period, which is shorter than the current
40-year period. The provisions of the Exposure Draft related to business
combinations is expected to be applied only for those business combinations
initiated after the issuance of a final statement, projected to be late in 2000.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires all derivatives to be
recorded on the balance sheet at fair value. In June 1999, the FASB extended the
implementation date of SFAS No. 133 by one year. As a result, SFAS No. 133 will
now be effective for the Company on December 1, 2000 (Fiscal Year 2001). The
expected impact of adoption on the Company's results of operations has not yet
been determined, however it is not likely to be material since most of the
Company's derivatives are carried at fair value.
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.
<PAGE>
- -------------------------------------------------------------------------------
report 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, 1999 and 1998, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for each of the three years in
the period ended November 30, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended November 30, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
New York, New York
January 6, 2000
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Twelve months ended November 30
[in millions, except per share data] 1999 1998 1997
<S> <C> <C> <C>
REVENUES
Principal transactions $ 2,341 $ 1,373 $ 1,461
Investment banking 1,682 1,441 1,275
Commissions 651 513 423
Interest and dividends 14,251 16,542 13,635
Other 64 25 89
------- ------- -------
Total revenues 18,989 19,894 16,883
Interest expense 13,649 15,781 13,010
------- ------- -------
Net revenues 5,340 4,113 3,873
------- ------- -------
NON-INTEREST EXPENSES
Compensation and benefits 2,707 2,086 1,964
Technology and communications 327 316 311
Brokerage and clearance 232 239 235
Business development 122 109 95
Occupancy 116 113 114
Professional fees 115 109 108
Other 90 89 109
------- ------- -------
Total non-interest expenses 3,709 3,061 2,936
------- ------- -------
Income before taxes and dividends on trust preferred securities 1,631 1,052 937
Provision for income taxes 457 316 290
Dividends on trust preferred securities 42
------- ------- -------
Net income $ 1,132 $ 736 $ 647
------- ------- -------
Net income applicable to common stock $ 1,037 $ 649 $ 572
------- ------- -------
Earnings per common share
Basic $ 8.53 $ 5.37 $ 4.84
Diluted $ 8.15 $ 5.19 $ 4.72
======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLDIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
November 30
[in millions] 1999 1998
<S> <C> <C>
Assets
Cash and cash equivalents $ 5,186 $ 3,055
Cash and securities segregated and on deposit
for regulatory and other purposes 1,989 1,183
Securities and other financial instruments owned:
Governments and agencies 29,959 22,778
Mortgages and mortgage-backed 22,643 23,680
Corporate equities 12,790 8,217
Derivatives and other contractual agreements 10,306 9,883
Corporate debt and other 11,096 11,160
Certificates of deposit and other money market instruments 2,265 1,282
-------- --------
89,059 77,000
-------- --------
Collateralized short-term agreements:
Securities purchased under agreements to resell 62,222 42,381
Securities borrowed 19,397 16,341
Receivables:
Brokers, dealers and clearing organizations 1,674 2,298
Customers 9,332 7,758
Others 1,354 1,909
Property, equipment and leasehold improvements
(net of accumulated depreciation and amortization
of $889 in 1999 and $810 in 1998) 485 505
Other assets 1,408 1,297
Excess of cost over fair value of net assets acquired
(net of accumulated amortization
of $129 in 1999 and $120 in 1998) 138 163
-------- --------
Total assets $192,244 $153,890
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (CONTINUED)
<TABLE>
<CAPTION>
November 30
[in millions except share data] 1999 1998
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper and short-term debt $ 5,476 $ 6,657
Securities and other financial instruments sold but not yet purchased:
Governments and agencies 22,396 14,963
Corporate equities 12,344 3,828
Derivatives and other contractual agreements 9,582 8,064
Corporate debt and other 2,288 1,948
--------- ---------
46,610 28,803
--------- ---------
Collateralized short-term financing:
Securities sold under agreements to repurchase 81,083 67,730
Securities loaned 4,568 3,165
Payables:
Brokers, dealers and clearing organizations 1,184 1,322
Customers 10,971 9,203
Accrued liabilities and other payables 4,668 4,256
Long-term debt:
Senior notes 27,375 23,873
Subordinated indebtedness 3,316 3,468
--------- ---------
Total liabilities 185,251 148,477
--------- ---------
Commitments and contingencies
Trust preferred securities subject to mandatory redemption 710
STOCKHOLDERS' EQUITY
Preferred stock 688 908
Common stock, $0.10 par value; 300,000,000 shares authorized;
Shares issued: 122,619,460 in 1999 and 121,801,123 in 1998;
Shares outstanding: 119,912,810 in 1999 and 113,657,877 in 1998 12 12
Additional paid-in capital 3,387 3,534
Accumulated other comprehensive income (net of tax) (2) 15
Retained earnings 2,094 1,105
Other stockholders' equity, net 254 269
Common stock in treasury, at cost: 2,706,650 shares in 1999
and 8,143,246 shares in 1998 (150) (430)
--------- ---------
Total stockholders' equity 6,283 5,413
--------- ---------
Total liabilities and stockholders' equity $ 192,244 $ 153,890
========= =========
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Twelve months ended November 30
[in millions] 1999 1998 1997
<S> <C> <C> <C>
PREFERRED STOCK
5% Cumulative Convertible Voting, Series A:
Beginning balance $ 1 $ 1 $ 508
Series A exchanged for Series B (1) (507)
------- ------- -------
Ending balance -- 1 1
------- ------- -------
5% Cumulative Convertible Voting, Series B:
Beginning balance 457 507
Series A exchanged for Series B 1 507
Repurchase (220) (50)
------- ------- -------
Ending balance 238 457 507
------- ------- -------
5.94% Cumulative, Series C:
Beginning balance 250
Shares issued 250
------- ------- -------
Ending balance 250 250
------- ------- -------
5.67% Cumulative, Series D:
Beginning balance 200
Shares issued 200
------- ------- -------
Ending balance 200 200
------- ------- -------
Redeemable Voting:
Beginning and ending balance
------- ------- -------
Total Preferred Stock, ending balance 688 908 508
------- ------- -------
COMMON STOCK
Beginning balance 12 12 11
Shares issued to RSU Trust 1
------- ------- -------
Ending balance 12 12 12
------- ------- -------
ADDITIONAL PAID-IN CAPITAL
Beginning balance 3,534 3,436 3,198
RSUs exchanged for Common Stock (63) 8
Employee stock-based awards 22 96 30
Shares issued to RSU Trust (181) 199
Tax benefits from stock-based awards, net 77
Other, net (2) 2 1
------- ------- -------
Ending balance 3,387 3,534 3,436
------- ------- -------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Beginning balance 15 12 20
Translation adjustment, net(1) (17) 3 (8)
------- ------- -------
Ending balance (2) 15 12
------- ------- -------
------- ------- -------
</TABLE>
(1) Net of income taxes of $(11) in 1999, $2 in 1998, and $8 in 1997.
See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
Twelve months ended November 30
[in millions] 1999 1998 1997
<S> <C> <C> <C>
RETAINED EARNINGS [ACCUMULATED DEFICIT]
Beginning balance $ 1,105 $ 498 $ (43)
Net income 1,132 736 647
Dividends declared:
5% Cumulative Convertible Voting Series A and B
Preferred Stock (20) (25) (25)
5.94% Cumulative, Series C Preferred Stock (15) (8)
5.67% Cumulative, Series D Preferred Stock (10) (4)
Redeemable Voting Preferred Stock (50) (50) (50)
Common Stock (48) (37) (31)
Other (5)
------- ------- -------
Ending balance 2,094 1,105 498
------- ------- -------
COMMON STOCK ISSUABLE
Beginning balance 1,318 911 532
RSUs exchanged for Common Stock (83) (10) (8)
Deferred stock awards granted 533 417 387
------- ------- -------
Ending balance 1,768 1,318 911
------- ------- -------
COMMON STOCK HELD IN RSU TRUST
Beginning balance (422) (325)
Shares issued to RSU Trust (441) (107) (325)
Shares issued from RSU Trust 146 10
------- ------- -------
Ending balance (717) (422) (325)
------- ------- -------
DEFERRED STOCK COMPENSATION
Beginning balance (627) (431) (206)
Deferred stock awards granted (533) (417) (387)
Amortization of deferred compensation, net 363 221 162
------- ------- -------
Ending balance (797) (627) (431)
------- ------- -------
COMMON STOCK IN TREASURY, AT COST
Beginning balance (430) (98) (146)
Treasury stock purchased (353) (469) (77)
Employee stock-based awards 11 30
Shares issued to RSU Trust 622 107 125
------- ------- -------
Ending balance (150) (430) (98)
------- ------- -------
Total Stockholders' Equity $ 6,283 $ 5,413 $ 4,523
======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Twelve months ended November 30
[in millions] 1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,132 $ 736 $ 647
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 88 91 86
Provisions for losses and other reserves 35 37 52
Deferred tax provision (benefit) (145) (284) (60)
Amortization of deferred stock compensation 363 221 162
Other adjustments (164) 43 (212)
Net change in:
Cash and securities segregated and on deposit (806) (34) (461)
Securities and other financial instruments owned (12,059) (138) (15,409)
Securities borrowed (3,056) (2,195) 6,505
Receivables from brokers, dealers and clearing organizations 624 (105) 685
Receivables from customers (1,574) 1,347 (3,292)
Securities and other financial instruments sold but
not yet purchased 17,807 (1,277) 3,716
Securities loaned 1,403 (4,681) 1,550
Payables to brokers, dealers and clearing organizations (138) (833) 1,151
Payables to customers 1,768 (2,499) 4,120
Accrued liabilities and other payables 377 (152) 782
Other operating assets and liabilities, net 589 (337) (286)
-------- -------- --------
Net cash provided by (used in) operating activities $ 6,244 $(10,060) $ (264)
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Twelve months ended November 30
[in millions] 1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes $ 9,753 $ 11,091 $ 7,242
Principal payments of senior notes (6,037) (4,298) (2,548)
Proceeds from issuance of subordinated indebtedness 200 600 407
Principal payments of subordinated indebtedness (370) (356) (550)
Net proceeds from (payments for) commercial paper and
short-term debt (1,181) (1,161) (384)
Resale agreements net of repurchase agreements (6,488) 5,751 (4,181)
Payments for repurchases of preferred stock (220) (50)
Payments for treasury stock purchases (256) (411) (77)
Dividends paid (139) (122) (58)
Issuances of common stock 8 61 23
Issuance of preferred stock, net of issuance costs 444
Issuance of trust preferred securities, net of issuance costs 690
-------- -------- --------
Net cash provided by (used in) financing activities (4,040) 11,549 (126)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold improvements, net (73) (119) (74)
-------- -------- --------
Net cash used in investing activities (73) (119) (74)
-------- -------- --------
Net change in cash and cash equivalents 2,131 1,370 (464)
-------- -------- --------
Cash and cash equivalents, beginning of period 3,055 1,685 2,149
-------- -------- --------
Cash and cash equivalents, end of period $ 5,186 $ 3,055 $ 1,685
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION [IN MILLIONS]
Interest paid totaled $13,513 in 1999, $15,473 in 1998
and $12,900 in 1997. Income taxes paid totaled $103 in 1999,
$541 in 1998 and $371 in 1997 .
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
note 01. Summary of Significant Accounting Policies
note 02. Short-term Financings
note 03. Long-term Debt
note 04. Trust Preferred Securities Subject to Mandatory Redemption
note 05. Preferred Stock
note 06. Common Stock
note 07. Incentive Plans
note 08. Earnings Per Common Share
note 09. Capital Requirements
note 10. Employee Benefit Plans
note 11. Income Taxes
note 12. Derivative Financial Instruments
note 13. Fair Value of Financial Instruments
note 14. Other Commitments and Contingencies
note 15. Segments
note 16. Quarterly Information (Unaudited)
<PAGE>
- --------------------------------------------------------------------------------
NOTES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 01. 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 America and the Asia Pacific Region. The Company is engaged
primarily in providing financial services. The principal U.S. subsidiary of
Holdings is Lehman Brothers Inc. ("LBI"), a registered broker-dealer. All
material intercompany accounts and transactions have been eliminated in
consolidation.
The consolidated financial statements are prepared in conformity with generally
accepted accounting principles which require 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.
The Company uses the trade date basis of accounting.
Certain prior period amounts reflect reclassifications to conform to the current
period's presentation.
securities and other financial instruments Securities and other financial
instruments owned and securities and other financial instruments sold but not
yet purchased are valued at market or fair value, as appropriate, with
unrealized gains and losses reflected in Principal transactions in the
Consolidated Statement of Income. Market value is generally based on listed
market prices. If listed market prices are not available, fair value is
determined based on other relevant factors, including broker or dealer price
quotations and valuation pricing models which take into account time value and
volatility factors underlying the financial instruments.
derivative financial instruments A derivative is typically defined as an
instrument whose value is "derived" from an underlying instrument, index or
rate, such as a future, forward, swap, or option contract, or other financial
instrument with similar characteristics. A derivative contract generally
represents future commitments to exchange interest payment streams or currencies
based on the contract or notional amount or to purchase or sell other financial
instruments at specified terms on a specified date.
Derivatives utilized for trading purposes are recorded at market or fair value
in the Consolidated Statement of Financial Condition on a net by counterparty
basis where a legal right of set-off exists and are netted across products when
such provisions are stated in the master netting agreement. The market or fair
value related to swap and forward transactions, as well as options and warrants,
is reported in the Consolidated Statement of Financial Condition as an asset or
liability in Derivatives and other contractual agreements, as appropriate.
Margin on futures contracts is included in receivables and payables, as
applicable. Changes in fair values of derivatives are recorded as principal
transactions revenues in the current period. Market or fair value for trading
related instruments is generally determined by either quoted market prices (for
exchange-traded futures and options) or pricing models (for over-the-counter
swaps, forwards and options). Pricing models utilize a series of market inputs
to determine the present value of future cash flows, with adjustments, as
required for credit risk and liquidity risk. Further valuation adjustments may
be recorded, as deemed appropriate for new or complex products or for positions
with significant concentrations. These adjustments are integral components of
the mark-to-market process. Credit-related valuation adjustments incorporate
business and economic conditions, historical experience, concentrations,
estimates of expected losses and the character, quality and performance of
credit sensitive financial instruments.
<PAGE>
The Company enters into various derivative financial instruments for non-trading
purposes as an end user to modify the market risk exposures of certain assets
and liabilities. In this regard, the Company utilizes interest rate and currency
swaps to modify the interest rate and foreign currency exposure of existing
assets and liabilities. The Company also utilizes equity derivatives to hedge
its exposure to equity price risk embedded in certain of its debt obligations.
In addition to modifying the interest rate and foreign currency exposure of
existing assets and liabilities, the Company utilizes derivative financial
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 as non-trading related positions are
accounted for on an accrual basis. Under the 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. Related unrealized receivables
or payables due from or to counterparties are included in receivables from or
payables to brokers, dealers and clearing organizations.
The Company also utilizes foreign exchange forward contracts to manage the
currency exposure related to its net monetary investment in non-U.S. dollar
functional currency operations. The gain or loss from revaluing these contracts
is deferred and reported within Accumulated other comprehensive income in
stockholders' equity. The related unrealized receivables or payables due from or
to counterparties are included in receivables from or payables to brokers,
dealers and clearing organizations.
In the event that a hedge is no longer effective, the derivative transaction is
no longer accounted for as a hedge on an accrual basis. Instead, the Company
immediately recognizes the market or fair value of the derivative financial
instrument through earnings. Changes in the fair value of such derivative
contracts would then be accounted for as a derivative used for trading purposes
as discussed above. Realized gains or losses on early terminations of
derivatives that were classified as hedges are deferred and amortized to
interest income or interest expense over the remaining life of the instrument
being hedged.
repurchase and resale agreements Securities purchased under agreements to
resell and securities sold under agreements to repurchase, which are treated as
financing transactions for financial reporting purposes, are collateralized
primarily by government and government agency securities and are carried net by
counterparty, when permitted, at the amounts at which the securities will be
subsequently resold or repurchased plus accrued interest. It is the policy of
the Company to take possession of securities purchased under agreements to
resell. The Company monitors the market value of the underlying positions on a
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 financed under repurchase agreements are
carried at market value with changes in market value reflected in the
Consolidated Statement of Income.
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.
private equity investments The Company carries its private equity
investments, including its partnership interests, at fair value based upon the
Company's assessment of the underlying investments.
<PAGE>
investment banking Underwriting revenues and fees for merger and acquisition
advisory services are recognized when services for the transactions are
substantially completed. Underwriting expenses are deferred and recognized at
the time the related revenues are recorded.
stock-based compensation SFAS No. 123, "Accounting for Stock-Based
Compensation," established financial accounting and reporting standards for
stock-based employee compensation plans. SFAS No. 123 permits companies to
either continue accounting for stock-based compensation using the intrinsic
value method prescribed by Accounting Principles Board Opinion No. 25 ("APB 25")
or using the fair value method prescribed by SFAS No. 123. The Company continues
to follow APB 25 and its related interpretations in accounting for its
stock-based compensation plans. Accordingly, no compensation expense has been
recognized for stock option awards because the exercise price was at or above
the fair market value of the Company's common stock on the grant date.
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. Deferred tax liabilities are recognized for temporary differences
that will result in taxable income in future years.
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 taxes, are included in
Accumulated other comprehensive income, a separate component of stockholders'
equity. Gains or losses resulting from foreign currency transactions are
included in the Consolidated Statement of Income.
property, equipment and leasehold improvements 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. Internal use software which qualifies for
capitalization under AICPA Statement of Position 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use" (the "SOP"), is
capitalized and subsequently amortized over the softwares' estimated useful
life. At November 30, 1999 and 1998, the unamortized amount of capitalized
internal use software was $42.4 million and $33.7 million, respectively.
goodwill Excess of cost over fair value of net assets acquired ("goodwill")
is amortized using the straight-line method over periods not exceeding 35 years.
Goodwill is evaluated periodically for impairment and also is 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 The Company computes earnings per common share in
accordance with SFAS No. 128, "Earnings per Share." Basic earnings per share is
computed by dividing income available to common stockholders by
<PAGE>
the weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the assumed conversion of all dilutive securities.
new accounting standards The Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," in fiscal 1999. SFAS
No. 131 redefines how operating segments are determined and requires disclosure
of certain financial and descriptive information about a company's operating
segments. See Note 15 of Notes to Consolidated Financial Statements.
NOTE 02. 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] 1999 1998
<S> <C> <C>
Commercial paper $3,642 $3,550
Short-term debt
Bank loans 238 1,288
Payables to banks 575 1,039
Other short-term debt(1) 1,021 780
------ ------
Total $5,476 $6,657
------ ------
------ ------
</TABLE>
The Company's weighted-average interest rates were as follows:
<TABLE>
<CAPTION>
November 30
1999 1998
<S> <C> <C> <C>
Commercial paper(2) 5.5% 5.5%
Short-term debt(3) 4.0% 5.3%
Securities sold under agreements to repurchase 5.2% 5.2%
</TABLE>
- -------------------------
(1) Includes master notes, corporate loans, and other short-term financings.
(2) Includes weighted-average interest rates of 6.0% and 2.8% as of November
30, 1999 and 5.6% and 2.6% as of November 30, 1998 related to U.S. dollar
and non-U.S. dollar obligations, respectively.
(3) Includes $770 million and $726 million of short-term debt with
weighted-average interest rates of 1.4% and 5.1% as of November 30, 1999
and 1998, respectively, related to non-U.S. dollar obligations.
back-up credit facilities In April 1999, Holdings entered into a Revolving
Credit Agreement (the "Credit Agreement") with a syndicate of banks. Under the
terms of the Credit Agreement, the banks have committed to provide up to $2
billion for up to 364 days. Any loans outstanding on the commitment termination
date may be extended for up to an additional year at the option of Holdings. The
Credit Agreement contains covenants which require, among other things, that the
Company maintain specified levels of liquidity and tangible net worth, as
defined.
<PAGE>
In July 1999, the Company entered into a $1 billion Committed Securities
Repurchase Facility (the "Facility") for LBIE, the Company's major operating
entity in Europe. The Facility provides secured multi-currency financing for a
broad range of collateral types. Under the terms of the Facility, the bank group
will agree to provide funding for up to one year on a secured basis. Any loans
outstanding on the commitment termination date may be extended for up to an
additional year at the option of LBIE. The Facility contains covenants which
require among other things, that LBIE maintain specified levels of tangible net
worth.
There were no borrowings outstanding under either the Credit Agreement or the
Facility at November 30, 1999. The Company may use the Credit Agreement and the
Facility for general corporate purposes from time to time. The Company has
maintained compliance with the applicable covenants for both the Credit
Agreement and the Facility at all times.
NOTE 03. LONG-TERM DEBT
<TABLE>
<CAPTION>
U.S. Dollar Non-U.S. Dollar
Fixed Floating Fixed Floating November 30
[in millions] Rate Rate Rate Rate 1999 1998
<S> <C> <C> <C> <C> <C> <C>
SENIOR NOTES
Maturing in Fiscal 1999 $ 5,335
Maturing in Fiscal 2000 $ 3,265 $ 3,709 $ 585 $ 293 $ 7,852 6,886
Maturing in Fiscal 2001 1,465 1,181 609 333 3,588 2,387
Maturing in Fiscal 2002 1,671 1,609 419 749 4,448 3,073
Maturing in Fiscal 2003 2,310 506 419 501 3,736 2,859
Maturing in Fiscal 2004 1,954 317 992 45 3,308 714
December 1, 2004 and thereafter 3,205 138 793 307 4,443 2,619
------- ------- ------- ------- ------- -------
Senior Notes 13,870 7,460 3,817 2,228 27,375 23,873
------- ------- ------- ------- ------- -------
SUBORDINATED INDEBTEDNESS
Maturing in Fiscal 1999 341
Maturing in Fiscal 2000 192 6 198 192
Maturing in Fiscal 2001 194 194 194
Maturing in Fiscal 2002 450 38 488 292
Maturing in Fiscal 2003 475 475 475
Maturing in Fiscal 2004 190 190 408
December 1, 2004 and thereafter 1,606 149 16 1,771 1,566
------- ------- ------- ------- ------- -------
Subordinated Indebtedness 3,107 193 16 3,316 3,468
------- ------- ------- ------- ------- -------
Long-term Debt $16,977 $ 7,653 $ 3,833 $ 2,228 $30,691 $27,341
======= ======= ======= ======= ======= =======
</TABLE>
Of the Company's long-term debt outstanding as of November 30, 1999, $770
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 2000 to fiscal 2003, rather than at their
contractual maturities, which range from fiscal 2000 to fiscal 2026. In
addition, $2,089 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.
<PAGE>
The Company's interest in 3 World Financial Center is financed with U.S. dollar
fixed rate senior notes totaling $198 million as of November 30, 1999. These
notes are unconditionally guaranteed by American Express and collateralized by a
first mortgage on the property.
As of November 30, 1999, the Company had approximately $16 billion available for
the issuance of debt securities under various shelf registrations and debt
programs, which includes $1.5 billion of issuance availability under the
Company's Euro medium-term note program.
As of November 30, 1999, the Company's U.S. dollar and non-U.S. dollar debt
portfolios included approximately $641 million and $833 million, respectively,
of debt for which the interest rates and/or redemption values or maturity have
been linked to the performance of various indices including industry baskets of
stocks or commodities or events. Generally such notes 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,
currency and equity swaps.
end user derivative activities The Company utilizes a variety of derivative
products including interest rate, currency and equity 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 through the use of interest rate and currency swaps to more closely
match the terms of 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 amount of the derivative contracts may exceed the carrying
value of the related long-term debt issuance.
At November 30, 1999 and 1998, the notional amounts of the Company's interest
rate, currency and equity swaps related to its long-term debt obligations were
approximately $27.1 billion and $24.3 billion, respectively. In terms of
notional amounts outstanding, these derivative products mature as follows:
<TABLE>
<CAPTION>
U.S. Non- Cross- November 30
[in millions] Dollar U.S. Dollar Currency 1999 1998
<S> <C> <C> <C> <C> <C>
Maturing in Fiscal 1999 $ 4,980
Maturing in Fiscal 2000 $ 5,735 $ 492 $ 708 $ 6,935 6,293
Maturing in Fiscal 2001 2,126 93 840 3,059 2,299
Maturing in Fiscal 2002 3,166 431 581 4,178 3,279
Maturing in Fiscal 2003 3,216 401 161 3,778 2,833
Maturing in Fiscal 2004 2,192 110 923 3,225 855
December 1, 2004 and thereafter 4,750 660 489 5,899 3,782
------- ------- ------- ------- -------
Total $21,185 $ 2,187 $ 3,702 $27,074 $24,321
------- ------- ------- ------- -------
Weighted-average interest rate
at November 30(1):
Receive rate 6.72% 4.88% 3.64% 6.15% 6.26%
Pay rate 6.27% 3.77% 6.11% 6.05% 5.72%
</TABLE>
- -------------------------
(1) Weighted-average interest rates were calculated utilizing non-U.S. dollar
interest rates, where applicable.
<PAGE>
On an overall basis, the Company's long-term debt-related end user derivative
activities resulted in reduced interest expense of approximately $67 million,
$84 million and $68 million in 1999, 1998 and 1997, 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, 1999
-----------------
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 $16,977 $ 353
Floating rate 7,653 27,902
------- ------- ---- ----
24,630 28,255
------- ------- ---- ----
Non-USD Obligations 6,061 2,436
------- ------- ---- ----
Total $30,691 $30,691 6.30% 6.19%
======= ======= ==== ====
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30, 1998
-----------------
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 $14,065 $ 420
Floating rate 8,385 24,106
------- ------- ---- ----
22,450 24,526
------- ------- ---- ----
Non-USD Obligations 4,891 2,815
------- ------- ---- ----
Total $27,341 $27,341 6.33% 5.83%
======= ======= ==== ====
</TABLE>
- -----------------------
(1) Weighted-average interest rates were calculated using non-U.S. dollar
interest rates, where applicable.
<PAGE>
NOTE 04. TRUST PREFERRED SECURITIES SUBJECT TO MANDATORY REDEMPTION
During 1999, the Company formed two Delaware business trusts for the purposes
of: (a) issuing trust securities representing ownership interests in the assets
of the trust; (b) investing the gross proceeds of the trust securities in junior
subordinated debentures of the Company; and (c) engaging in activities necessary
or incidental thereto. Two such trusts have issued securities to date, having an
aggregate liquidation value of $710 million. The following table summarizes the
financial structure of each such trust at November 30, 1999:
<TABLE>
<CAPTION>
LEHMAN BROTHERS HOLDINGS LEHMAN BROTHERS HOLDINGS
CAPITAL TRUST I CAPITAL TRUST II
ISSUANCE DATE JANUARY 1999 APRIL 1999
------------------------ ------------------------
<S> <C> <C>
TRUST SECURITIES
Preferred securities issued 13,000,000 Series I 15,400,000 Series J
Liquidation preference per security $ 25 $ 25
Liquidation value [in millions of dollars] $ 325 $ 385
Coupon rate 8% 7.875%
Distributions payable Quarterly Quarterly
Distributions guaranteed by Lehman Brothers Holdings Inc. Lehman Brothers Holdings Inc.
Mandatory redemption date March 31, 2048 June 30, 2048
Redeemable by issuer on or after March 31, 2004 June 30, 2004
-------------- -------------
JUNIOR SUBORDINATED DEBENTURES
Principal amount
outstanding [in millions of dollars] $ 325 $ 385
Coupon rate 8% 7.875%
Interest payable Quarterly Quarterly
Maturity date March 31, 2048 June 30, 2048
Redeemable by issuer on or after March 31, 2004 June 30, 2004
-------------- -------------
</TABLE>
NOTE 05. PREFERRED STOCK
Holdings is authorized to issue a total of 38,000,000 shares of preferred stock.
At November 30, 1999 and 1998, Holdings had 6,634,624 and 12,261,228,
respectively, of such shares authorized, issued and outstanding under various
series as described below. All preferred stock has a dividend preference over
Holdings' common stock in the paying of dividends and a preference in the
liquidation of assets.
cumulative convertible voting, series a and series b Series of Cumulative
Convertible Voting Preferred Stock, Series A and Series B (together the
"Convertible Voting Preferred") have a liquidation preference of $39.10 per
share. The Series A was issued in 1987. The Series B was issued in an exchange
offer for the Series A on July 11, 1997. During 1999, Holdings repurchased
5,626,604 shares of the Series B at an aggregate cost of $220 million. As of
November 30, 1999, 2,300 shares of the Series A and 6,092,324 shares of the
Series B were outstanding. The $238 million aggregate redemption value is
classified on the Company's Consolidated Statement of Financial Condition as a
component of Preferred Stock.
The holders of the Convertible Voting Preferred are entitled to receive
preferred dividends at an annual rate of 5%, on the liquidation preference,
payable quarterly before any dividends are paid to the holders of common stock.
<PAGE>
Holdings has the right to redeem up to 3,836,317 Convertible Voting Preferred
shares at the liquidation price, subject to adjustment and restrictions on
redemption when dividends are in arrears, provided the Company's stock is
trading at or above the conversion price of approximately $123.00 per share.
Each share of the Convertible Voting Preferred is convertible, at any time prior
to the date of redemption, into 0.3178313 of a share of common stock, equivalent
to the conversion price.
series c On May 11, 1998, Holdings issued 5,000,000 Depository Shares (each
representing 1/10th of a share) of 5.94% Cumulative Preferred Stock, Series C
("Series C Preferred Stock"), $1.00 par value. These shares have a redemption
price of $500 per share, together with accrued and unpaid dividends. Holdings
may redeem any or all of the outstanding shares of Series C Preferred Stock
beginning on May 31, 2008. The $250 million redemption value of the shares
outstanding at November 30, 1999 is classified on the Company's Consolidated
Statement of Financial Condition as a component of Preferred stock.
series d On July 21, 1998, Holdings issued 4,000,000 Depository Shares (each
representing 1/100th of a share) of 5.67% Cumulative Preferred Stock, Series D
("Series D Preferred Stock"), $1.00 par value. These shares have a redemption
price of $5,000 per share, together with accrued and unpaid dividends. Holdings
may redeem any or all of the outstanding shares of Series D Preferred Stock
beginning on August 31, 2008. The $200 million redemption value of the shares
outstanding at November 30, 1999 is classified on the Company's Consolidated
Statement of Financial Condition as a component of Preferred stock.
redeemable voting In 1994, Holdings issued the Redeemable Preferred Stock to
American Express and Nippon Life for $1,000. The holders of the Redeemable
Preferred Stock are entitled to receive annual 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 preceding year exceeds $400 million, up to a maximum of $50 million,
prorated in the case of the last dividend period, which runs from December 1,
2001 to May 31, 2002. For the years ended November 30, 1999 and 1998, the
Company's net income of $1,132 million and $736 million, respectively, resulted
in the recognition of dividends in the amount of $50 million on the Redeemable
Voting Preferred Stock.
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 $100 million if such change of control occurs prior to November 30,
2000, declining by $50 million per year in each of the two years thereafter. If
a change of control is not approved by a majority of Holdings' Board of
Directors, the funds for redemption must be raised by an offering of Holdings'
equity securities which are not redeemable. The Redeemable Preferred Stock is
not convertible into common stock.
<PAGE>
NOTE 06. COMMON STOCK
Changes in shares of Holdings' common stock (the "Common Stock") outstanding are
as follows:
<TABLE>
<CAPTION>
NOVEMBER 30
-----------
1999 1998 1997
<S> <C> <C> <C>
Shares outstanding, beginning of period 113,657,877 116,612,074 100,449,144
Exercise of stock options and other share issuances 962,821 3,129,883 1,719,799
Treasury stock purchases (6,207,888) (8,584,080) (1,556,869)
Issuances of shares to the RSU Trust 11,500,000 2,500,000 16,000,000
----------- ----------- -----------
Shares outstanding, end of period 119,912,810 113,657,877 116,612,074
=========== =========== ===========
</TABLE>
The Company has reserved for issuance approximately 1.2 million shares of Common
Stock for conversion of the Convertible Voting Preferred.
During the years ended November 30, 1999, 1998 and 1997, the Company repurchased
or acquired shares of its Common Stock at an aggregate cost of approximately
$353 million, $469 million and $77 million, respectively. These shares were
acquired in the open market and from employees who had tendered mature shares to
pay for the exercise cost of stock options and related tax withholding
obligations. These shares are being reserved for future issuances under employee
stock-based compensation plans.
In 1997, the Company established an irrevocable grantor trust (the "RSU Trust")
in order to provide common stock voting rights to employees who hold outstanding
restricted stock units and to encourage employees to think and act like owners.
The RSU Trust was initially funded in 1997 with a total of 16 million shares
consisting of 5 million treasury shares for restricted stock unit ("RSU") awards
under the Employee Incentive Plan and 11 million new issue shares of Common
Stock for RSU awards under the 1994 Management Ownership Plan. In 1998 and 1999,
2.5 million and 11.5 million treasury shares, respectively, were transferred
into the RSU Trust. At November 30, 1999, approximately 24.8 million shares were
held in the RSU Trust with a total value of approximately $717 million. For
accounting purposes, these shares are valued at weighted-average grant prices.
Shares transferred to the RSU Trust do not impact the total number of shares
used in the computation of earnings per common share because the Company
considers the RSUs as common stock equivalents for purposes of this computation.
Accordingly, the establishment of the RSU Trust has had no effect on the total
equity, net income or earnings per share of the Company.
NOTE 07. 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, 1999 and 1998, 2.4 million shares and
2.0 million shares, respectively, of Common Stock had been purchased by eligible
employees through the ESPP.
1994 incentive plans The 1994 Management Replacement Plan (the "Replacement
Plan") provided awards similar to the American Express common shares granted to
Company employees which were canceled as of the date of the spin-
<PAGE>
off from American Express. Through November 30, 1999, a total of 2.0 million
awards had been granted under the Replacement Plan, including both stock options
and restricted stock; 0.3 million were outstanding at November 30, 1999. 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 RSUs, performance stock units ("PSUs"),
stock options and other equity awards for a period of up to ten years to
eligible employees. A total of 16.6 million shares of Common Stock may be
granted under the 1994 Plan. At November 30, 1999, RSU and stock option awards
with respect to 16.1 million shares of Common Stock have been made under the
1994 Plan of which 7.8 million are outstanding and 8.3 million have been
converted to freely transferable Common Stock. The Company will utilize the
remaining authorization of 0.5 million shares to satisfy dividend reinvestment
requirements for outstanding awards and to fund the annual RSU awards for the
Company's non-employee directors.
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 15.5 million shares of Common Stock may be subject to awards. At November
30, 1999, RSU, PSU and stock option awards with respect to 11.6 million
shares of Common Stock have been made under the 1996 Plan of which 10.1
million are outstanding and 1.5 million have been converted to freely
transferable Common Stock.
employee incentive plan The Employee Incentive Plan ("EIP") has provisions
similar to the 1994 Plan and the 1996 Plan, and authorization for up to 53
million shares of Common Stock which may be subject to awards. At November 30,
1999, awards with respect to 46.8 million shares of Common Stock have been made
under the EIP of which 45.5 million are outstanding and 1.3 million have been
converted to freely transferable Common Stock. Approximately 31.7 million of the
outstanding awards consist of RSUs and PSUs which have vesting and transfer
restrictions extending through the year 2006.
The following is a summary of RSUs outstanding under Holdings' stock-based
incentive plans:
Restricted Stock Units
<TABLE>
<CAPTION>
1994 1996
PLAN PLAN EIP TOTAL
<S> <C> <C> <C> <C>
Balance, November 30, 1996 11,184,575 8,764,365 19,948,940
---------- --------- ---------- ----------
Granted 1,814,685 1,332,250 8,810,609 11,957,544
Canceled (846,191) (1,530,562) (2,376,753)
Exchanged for stock without restrictions (254,894) (139,371) (55,825) (450,090)
---------- --------- ---------- ----------
Balance, November 30, 1997 11,898,175 1,192,879 15,988,587 29,079,641
---------- --------- ---------- ----------
Granted 83,866 611,400 11,400,151 12,095,417
Canceled (42,734) (112,477) (403,299) (558,510)
Exchanged for stock without restrictions (243,791) (105,564) (90,317) (439,672)
---------- --------- ---------- ----------
Balance, November 30, 1998 11,695,516 1,586,238 26,895,122 40,176,876
---------- --------- ---------- ----------
Granted 193,211 1,188,317 6,980,497 8,362,025
Canceled (61,413) (29,867) (1,839,267) (1,930,547)
Exchanged for stock without restrictions (4,687,709) (20,879) (366,876) (5,075,464)
---------- --------- ---------- ----------
Balance, November 30, 1999 7,139,605 2,723,809 31,669,476 41,532,890
========== ========= ========== ==========
</TABLE>
<PAGE>
Eligible employees receive RSUs as a portion of their total compensation in lieu
of cash. There is no further cost to employees associated with the RSU awards.
The Company measures compensation cost for RSUs based on the market value of its
Common Stock at the grant date and amortizes this amount to expense over the
applicable vesting periods. RSU awards made to employees have various vesting
provisions and generally convert to unrestricted freely transferable Common
Stock five years from the grant date. Holdings accrues a dividend equivalent on
each RSU outstanding (in the form of additional RSUs), based on dividends
declared on its Common Stock.
In the third quarter of 1999, the Company delivered 4.7 million shares of its
Common Stock to current and former employees in satisfaction of RSUs awarded in
1994. Substantially all of the shares delivered were funded from the RSU Trust.
The Company also received 1.4 million shares from current and former employees
in satisfaction of applicable tax withholding requirements. Shares received were
recorded as treasury stock at an aggregate value of $89 million.
Of the RSUs outstanding at November 30, 1999, approximately 14.2 million RSUs
were vested, approximately 5.2 million RSUs will vest during fiscal 2000, and
the remaining RSUs will vest subsequent to November 30, 2000. At November 30,
1999, approximately 24.8 million shares of the Company's Common Stock were held
in the RSU Trust.
Total compensation cost recognized during 1999, 1998 and 1997 for the Company's
stock-based awards was approximately $363 million, $221 million and $162
million, respectively.
In addition to the RSUs included in the previous table, the Company has awarded
PSUs 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 three, four or five
years. As of December 31, 1999, approximately 1.3 million PSUs have been earned
to date, 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.
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, November 30, 1996 2,868,680 1,155,029 825,000 3,200,000 8,048,709 $ 20.58 2/97-5/04
--------- --------- --------- --------- --------- --------- ---------
- ---------------------
Granted 2,250,000 2,250,000 $ 30.52 1/02-3/02
Exercised (743,040) (521,192) (1,264,232) $ 18.85
Canceled (4,943) (150,000) (154,943) $ 23.81
---------- ---------- --------- ---------- ---------- ---------
Balance, November 30, 1997 2,125,640 628,894 3,075,000 3,050,000 8,879,534 $ 23.64 1/98-5/04
Granted 7,212 3,475,000 7,374,170 10,856,382 $ 49.72 12/02-11/08
Exercised (989,401) (156,324) (1,275,165) (706,000) (3,126,890) $ 23.17
Canceled (417) (3,946,500) (3,946,917) $ 60.47
---------- ---------- --------- ---------- ---------- ---------- -----------
Balance, November 30, 1998 1,143,451 472,153 5,274,835 5,771,670 12,662,109 $ 34.64 2/99-11/08
---------- ---------- --------- ---------- ---------- ---------- -----------
Granted 28,119 2,150,000 8,440,584 10,618,703 $ 54.31
Exercised (444,799) (165,284) (117,280) (727,363) $ 22.20
Canceled (17,280) (1,835) (100,000) (294,956) (414,071) $ 44.24
---------- ---------- --------- ---------- ---------- ---------- -----------
Balance, November 30, 1999 709,491 305,034 7,324,835 13,800,018 22,139,378 $ 44.30 6/00-11/09
</TABLE>
<PAGE>
At November 30, 1999 and 1998, approximately 9.7 million and 8.3 million stock
options, respectively, were exercisable at weighted-average prices of $34.56 and
$31.42, respectively. The weighted-average remaining contractual life of the
stock options outstanding at November 30, 1999 is 5.13 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.
The following table provides further details relating to Holdings' stock options
outstanding as of November 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED- WEIGHTED-
WEIGHTED- AVERAGE WEIGHTED- AVERAGE
AVERAGE REMAINING AVERAGE REMAINING
RANGE OF NUMBER EXERCISE CONTRACTUAL NUMBER EXERCISE CONTRACTUAL
EXERCISE PRICES OUTSTANDING PRICELIFE (IN YEARS) EXERCISABLE PRICELIFE (IN YEARS)
<S> <C> <C> <C> <C> <C> <C>
$18.00-$19.99 509,194 $ 18.00 2.63 509,194 $ 18.00 2.63
$20.00-$29.99 2,813,835 $ 22.68 1.14 2,813,835 $ 22.68 1.14
$30.00-$39.99 2,050,000 $ 30.80 2.24 1,900,000 $ 30.53 2.11
$40.00-$49.99 9,014,131 $ 42.86 5.98 4,139,491 $ 45.19 3.48
$50.00-$59.99 5,428,119 $ 51.74 5.05 299,999 $ 52.50 4.37
$70.00-$79.99 2,324,099 $ 76.37 10.00 2,400 $ 74.88 8.34
---------- ------- ----- --------- ------- ----
22,139,378 $ 44.30 5.13 9,664,919 $ 34.56 2.38
========== ======= ===== ========= ======= ====
</TABLE>
The disclosure requirements of SFAS No. 123 require companies which elect not to
record the fair value of stock-based compensation awards in the Consolidated
Statement of Income, 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 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 stock options
granted and outstanding during 1999 and 1998. Based on the results of the model,
the weighted-average fair value of the stock options granted was $13.98 and
$12.36 for 1999 and 1998, respectively. The weighted-average assumptions which
were used for 1999 and 1998 included risk-free interest rates of 5.25% and
5.01%, an expected life of 3.5 years and 4.0 years, and expected volatility of
35% and 30%, respectively. In addition, annual dividends of $0.36 and $0.30 were
assumed for the 1999 and 1998 options, respectively.
The Company's 1999, 1998 and 1997 pro forma net income would have been $1,091
million, $723 million and $629 million, respectively, compared to actual net
income of $1,132 million, $736 million and $647 million, respectively. Pro forma
earnings per common share for 1999, 1998 and 1997 would have been $7.98, $5.09
and $4.57, respectively, compared to actual earnings per common share of $8.15,
$5.19 and $4.72, respectively. The pro forma amounts reflect the effects of the
Company's stock option grants and the 15% purchase discount from market value
offered to the Company's employees who participate in the ESPP.
<PAGE>
NOTE 08. EARNINGS PER COMMON SHARE
Earnings per share was calculated as follows:
<TABLE>
<CAPTION>
THREE YEARS ENDED
-----------------
[in millions, except for per share data] 1999 1998 1997
<S> <C> <C> <C>
NUMERATOR:
Net income $ 1,132 $ 736 $ 647
Preferred stock dividends 95 87 75
------- ------ --------
Numerator for basic earnings per share-
income available to common stockholders $ 1,037 $ 649 $ 572
Convertible preferred stock dividends 17
------- ------ --------
Numerator for diluted earnings per share-
income available to common stockholders (adjusted
for assumed conversion of preferred stock) $ 1,054 $ 649 $ 572
======= ====== ========
DENOMINATOR:
Denominator for basic earnings per share-
weighted-average shares 121.5 120.9 118.2
Effect of dilutive securities:
Employee stock options 3.1 2.4 2.1
Restricted stock units 1.9 1.7 0.8
Preferred shares assumed converted into common 2.8
------- ------ --------
Dilutive potential common shares 7.8 4.1 2.9
------- ------ --------
Denominator for diluted earnings per share--
adjusted weighted-average shares 129.3 125.0 121.1
======= ====== ========
BASIC EARNINGS PER SHARE $ 8.53 $ 5.37 $ 4.84
======= ====== ========
DILUTED EARNINGS PER SHARE $ 8.15 $ 5.19 $ 4.72
======= ====== ========
</TABLE>
Preferred shares are convertible into common shares at a conversion price of
approximately $123 per share. However, for purposes of calculating dilutive
earnings per share, preferred shares are assumed to be converted into common
shares when basic earnings per share exceeds preferred dividends per share
obtainable upon conversion (approximately $6.15 on an annualized basis).
<PAGE>
NOTE 09. CAPITAL REQUIREMENTS
The Company operates globally through a network of subsidiaries with several
subject to regulatory requirements. In the United States, LBI, as a registered
broker-dealer, is subject to the Securities and Exchange Commission ("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, 1999, LBI's
regulatory net capital, as defined, of $1,563 million exceeded the minimum
requirement by $1,457 million.
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
$1,245 million and $1,332 million at November 30, 1999 and 1998, 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, 1999, LBIE's financial resources of approximately
$1,727 million exceeded the minimum requirement by approximately $499 million.
Lehman Brothers Japan Inc.'s Tokyo branch, a regulated broker-dealer, is subject
to the capital requirements of the Financial Supervisory Agency and at November
30, 1999, had net capital of approximately $388 million which was approximately
$122 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,
1999, these other subsidiaries were in compliance with their applicable local
capital adequacy requirements. The Company's "AAA" rated derivatives
subsidiaries, Lehman Brothers Financial Products Inc. ("LBFP") and Lehman
Brothers Derivative Products Inc. ("LBDP"), have established certain capital and
operating restrictions which are reviewed by various rating agencies. At
November 30, 1999, LBFP and LBDP each had capital which exceeded the requirement
of the most stringent rating agency by approximately $12 million and $16
million, respectively. Lehman Brothers Bank, FSB (the "Bank"), is the Company's
thrift subsidiary and is regulated by the Office of Thrift Supervision ("OTS").
The Bank exceeds all regulatory capital requirements and is considered well
capitalized by the OTS.
The regulatory rules referred to above, and certain covenants contained in
various debt agreements may restrict Holdings' ability to withdraw capital from
its regulated subsidiaries, which in turn could limit its ability to pay
dividends to shareholders. At November 30, 1999, approximately $4.4 billion of
net assets of subsidiaries were restricted as to the payment of dividends to
Holdings.
<PAGE>
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:
<TABLE>
<CAPTION>
PENSION POSTRETIREMENT
BENEFITS BENEFITS
NOVEMBER 30 NOVEMBER 30
----------- --------------
[in millions, except for weighted-average] 1999 1998 1999 1998
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 673 $ 569 $ 50 $ 49
Service cost before expenses 22 23 1 1
Interest cost 45 39 3 3
Actuarial (gain) loss (49) 62 (4)
Benefits paid (32) (20) (3) (3)
Foreign currency exchange rate changes (5)
----- ----- ----- -----
Benefit obligation at end of year $ 654 $ 673 $ 47 $ 50
----- ----- ----- -----
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 817 $ 747
Actual return on plan assets, net of expenses 123 82
Employer contribution 15 9
Benefits paid (32) (20)
Foreign currency exchange rate changes (5) (1)
----- ----- ----- -----
Fair value of plan assets at end of year $ 918 $ 817
----- ----- ----- -----
Funded (underfunded) status $ 264 $ 144 $ (47) $ (50)
Unrecognized net actuarial (gain) loss (15) 80 (24) (21)
Unrecognized prior service cost (credit) 17 21 (6) (6)
----- ----- ----- -----
Prepaid (accrued) benefit cost $ 266 $ 245 $ (77) $ (77)
----- ----- ----- -----
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate 7.25% 6.72% 7.75% 6.75%
Expected return on plan assets 9.19% 8.79%
Rate of compensation increase 4.91% 4.96% 5.00% 5.00%
</TABLE>
For measurement purposes, the annual health care cost trend rate was assumed to
be 7.5% for the year ended November 30, 2000. The rate was assumed to decrease
at the rate of 0.5% per year to 5.5% in the year ended November 30, 2004 and
remain at that level thereafter.
<PAGE>
<TABLE>
<CAPTION>
PENSION~BENEFITS POSTRETIREMENT BENEFITS
TWELVE MONTHS ENDED NOVEMBER 30 TWELVE MONTHS ENDED NOVEMBER 30
------------------------------- -------------------------------
[in millions] 1999 1998 1997 1999 1998 1997
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET -
PERIODIC BENEFIT COST
Service cost $ 22 $ 23 $ 22 $ 1 $ 1 $ 1
Interest cost 45 39 36 3 3 3
Expected return on plan assets (77) (67) (63)
Recognized net actuarial
(gain) loss 2 (1) (1) (1) (1) (2)
Unrecognized prior service
cost (credit) 2
---- ---- ---- ---- ---- ----
Net periodic benefit
(income) cost $ (6) $ (6) $ (6) $ 3 $ 3 $ 2
==== ==== ==== ==== ==== ====
</TABLE>
Assumed health care cost trend rates have an effect on the amount reported for
postretirement benefits. A one-percentage-point change in assumed health care
cost trend rates would have the following effects:
<TABLE>
<CAPTION>
[in millions] 1% POINT INCREASE 1% POINT DECREASE
<S> <C> <C>
Effect on total service and interest cost components in fiscal 1999 $ 0.3 $ (0.4)
------ ------
Effect on postretirement benefit obligation at November 30, 1999 $ 4.0 $ (3.9)
====== ======
</TABLE>
NOTE 11. INCOME TAXES
The Company files a consolidated U.S. federal income tax return reflecting the
income of Holdings and its subsidiaries.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED NOVEMBER 30
-------------------------------
[in millions] 1999 1998 1997
<S> <C> <C> <C>
CURRENT
Federal $ 121 $ 238 $ 110
State 117 63 58
Foreign 364 299 182
----- ----- -----
602 600 350
----- ----- -----
DEFERRED
Federal 2 (239) (6)
State (54) (6) (4)
Foreign (93) (39) (50)
----- ----- -----
(145) (284) (60)
----- ----- -----
$ 457 $ 316 $ 290
===== ===== =====
</TABLE>
<PAGE>
Income before taxes included $595 million, $270 million, and $121 million that
has also been subject to income taxes of foreign jurisdictions for 1999, 1998
and 1997, respectively.
The income tax provision (benefit) differs from that computed by using the
statutory federal income tax rate for the reasons shown below:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED NOVEMBER 30
-------------------------------
[in millions] 1999 1998 1997
<S> <C> <C> <C>
Federal income taxes at statutory rate $ 571 $ 368 $ 328
State and local taxes 41 37 35
Tax-exempt income (109) (71) (60)
Amortization of goodwill 2 3 3
Foreign operations (6) 3 (3)
Other, net (42) (24) (13)
----- ----- -----
$ 457 $ 316 $ 290
===== ===== =====
</TABLE>
For the year ended November 30, 1999, a net tax benefit of approximately $77
million relating to stock-based awards was credited to Additional paid-in
capital. In addition, the Company recorded $(11) million, $2 million and $8
million of tax provisions/(benefits) from the translation of foreign currencies,
which was recorded directly in Accumulated other comprehensive income, for the
fiscal years 1999, 1998 and 1997, respectively.
Deferred income taxes are provided for the differences between the tax basis 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 for deferred income taxes on undistributed earnings of foreign
subsidiaries.
At November 30, 1999 and 1998 the deferred tax assets and liabilities consisted
of the following:
<TABLE>
<CAPTION>
NOVEMBER 30
-----------
[in millions] 1999 1998
<S> <C> <C>
DEFERRED TAX ASSETS
Reserves not currently deductible $ 374 $ 233
Deferred compensation 521 413
Foreign tax credits 25 92
Undistributed earnings of foreign subsidiaries (net of credits) 36 9
NOL carryforwards 5 9
Other 69 85
------ ------
$1,030 $ 841
Less: Valuation allowance 15 19
------ ------
Total deferred tax assets net of valuation allowance $1,015 $ 822
------ ------
DEFERRED TAX LIABILITIES
Excess tax over financial depreciation $ 112 $ 114
Pension and retirement costs 60 52
Unrealized trading and investment activity 51 39
Other 11 21
Total deferred tax liabilities $ 234 $ 226
------ ------
Net deferred tax assets $ 781 $ 596
====== ======
</TABLE>
<PAGE>
The net deferred tax assets are included in Other assets in the accompanying
Consolidated Statement of Financial Condition.
The valuation allowance recorded against deferred tax assets at November 30,
1999 and 1998 will reduce goodwill if future circumstances permit recognition.
The valuation allowance relates to temporary differences resulting from the 1988
acquisition of E.F. Hutton Group, Inc. (now known as LB I Group Inc.) which are
subject to separate company limitations. If future circumstances permit the
recognition of the acquired tax benefit, then goodwill will be reduced.
The Company has approximately $14 million of NOL carryforwards, substantially
all of which are attributable to the acquisition of LB I Group, Inc.
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 (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 to change the index upon
which floating interest rates are based (e.g., Prime to LIBOR) (collectively,
"End User Derivative Activities").
There is an extensive volume of derivative products available in the
marketplace, which can vary from a simple forward foreign exchange contract to a
complex derivative instrument with multiple risk characteristics involving the
aggregation of the risk characteristics of a number of derivative product types
including swap products, options and forwards. Listed below are examples of
various derivative product types along with a brief discussion of the
performance mechanics of certain specific derivative instruments.
swap products Interest rate swap products include interest rate and currency
swaps, leveraged swaps, swap options, and other interest rate option products
including caps, collars, and floors. An interest rate swap is a negotiated OTC
contract in which two parties agree to exchange periodic interest payments for a
defined period, calculated based upon a predetermined notional amount. Interest
payments are usually exchanged on a net basis throughout the duration of the
swap contract. A currency swap is an OTC agreement to exchange a fixed amount of
one currency for a specified amount of a second currency at the outset and
completion of the swap term. Leveraged swaps involve the multiplication of the
interest rate factor upon which the interest payment streams are based (e.g.,
Party A pays three 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
<PAGE>
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 (put) or sell (call) 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 an amount of cash or other specified assets as security for its
obligation. 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.
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 amounts. Notional amounts 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 actual or potential risk.
<PAGE>
The following table reflects the notional/contract amounts of the Company's
Trading-Related Derivative Activities:
Trading-Related Derivative Financial Instruments
<TABLE>
<CAPTION>
WEIGHTED-
NOTIONAL/ AVERAGE
CONTRACT MATURITY
AMOUNTS NOVEMBER 30
NOVEMBER 30 NOVEMBER 30 1999
[in millions] 1999 1998 [in years]
<S> <C> <C> <C>
Interest rate and currency swaps and options
(including caps, collars and floors) $2,142,592 $1,590,115 4.60
Foreign exchange forward and future
contracts and options 418,481 389,416 .43
Other fixed income securities contracts
(including futures contracts, options~and TBAs) 254,662 328,116 .44
Equity contracts (including equity swaps,
futures, warrants and options) 79,742 88,604 1.27
Commodity contracts (including swaps,
futures, forwards and options) 173 1,544 2.14
---------- ---------- ----
Total $2,895,650 $2,397,795 3.54
========== ========== ====
</TABLE>
Of the total notional amounts at November 30, 1999 and 1998, approximately
$2,717 billion and $2,152 billion are over-the-counter and $179 billion and $246
billion are exchange-traded, respectively. The total weighted-average maturity
at November 30, 1999, for over-the-counter and exchange-traded contracts was
3.73 years and 0.58 years, respectively. Approximately $1,198 billion of the
notional/contract amount of the Company's Trading-Related Derivative Activities
mature within the year ended November 30, 2000, of which approximately 28% 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 and losses recognized
currently in Principal transactions in the Consolidated Statement of Income.
Unrealized gains and losses on derivative contracts are recorded on a net basis
in the Consolidated Statement of Financial Condition for those transactions with
counterparties executed under a legally enforceable master netting agreement and
are netted across products when such provisions are stated in the master netting
agreement. The Company offers equity, fixed income and foreign exchange products
to its customers. Because of the integrated nature of the market for such
products, each product area trades cash instruments as well as related
derivative products.
Listed in the following table is the fair value of the Company's Trading-Related
Derivative Activities as of November 30, 1999 and 1998 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 do not vary significantly from the average fair value
calculated on a more frequent basis. Variances between average fair
<PAGE>
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, 1999 NOVEMBER 30, 1999
[in millions] ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Interest rate and currency swaps and options $ 4,807 $ 3,633 $ 4,406 $ 3,030
(including caps, collars and floors)
Foreign exchange forward contracts and options 878 1,310 1,226 1,287
Other fixed income securities contracts
(including options and TBAs) 254 195 257 240
Equity contracts (including equity swaps, warrants
and options) 4,367 4,444 2,478 3,291
Commodity contracts (including swaps, forwards
and options) 15 5
------- ------- ------- -------
Total $10,306 $ 9,582 $ 8,382 $ 7,853
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AVERAGE FAIR VALUE*
FAIR VALUE* TWELVE MONTHS ENDED
NOVEMBER 30, 1998 NOVEMBER 30, 1998
[in millions] ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Interest rate and currency swaps and options
(including caps, collars and floors) $5,877 $3,240 $5,550 $3,361
Foreign exchange forward contracts and options 1,583 1,367 1,724 1,558
Other fixed income securities contracts
(including options and TBAs) 224 214 288 264
Equity contracts (including equity swaps, warrants
and options) 2,128 3,167 2,218 2,946
Commodity contracts (including swaps, forwards
and options) 71 76 147 146
------ ------ ------ ------
Total $9,883 $8,064 $9,927 $8,275
====== ====== ====== ======
</TABLE>
- --------------------
*Amounts represent carrying value (exclusive of collatera l) 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/liabilities related to derivative contracts
at November 30, 1999 represents the Company's net receivable/payable for
derivative financial instruments before consideration of collateral. Included
within the $10,306 million fair value of assets at November 30, 1999 was $9,002
million related to swaps and other OTC contracts and $1,304 million related to
exchange-traded option and warrant contracts. Included within the $9,883 million
fair value of assets at November 30, 1998 was $9,211 million related to swaps
and other OTC contracts and $672 million related to exchange-traded option and
warrant contracts.
<PAGE>
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 contracts, including swaps, the Company views its net credit
exposure to active counterparties to be $6,252 million at November 30, 1999,
representing the fair value of the Company's OTC contracts in an unrealized gain
position, after consideration of collateral.
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 and pension funds. 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 at November
30, 1999 for OTC contracts based upon actual ratings made by external rating
agencies or by equivalent ratings established and utilized by the Company's
Credit Risk Management Department.
<TABLE>
<CAPTION>
COUNTERPARTY S&P/MOODY'S NET CREDIT
RISK RATING EQUIVALENT EXPOSURE
<S> <C> <C>
1 AAA/Aaa 9%
2 AA-/Aa3 or higher 31%
3 A-/A3 or higher 35%
4 BBB-/Baa3 or higher 18%
5 BB-/Ba3 or higher 4%
6 B+/B1 or lower 3%
</TABLE>
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 clearinghouses impose capital requirements
for their membership. Additionally, the exchange clearinghouse 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 provide for settlement within 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 through the use of interest rate and
currency swaps to more closely match the terms of its debt portfolio to the
assets being funded and to minimize interest rate risk. At November 30, 1999
and 1998, the notional amounts of the Company's end user activities related
to its long-term debt obligations were approximately $27.1 billion and $24.3
billion, respectively. (For a further discussion of the Company's long-term
debt related end user derivative activities see Note 3.)
<PAGE>
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, 1999 and 1998, the Company had $167 billion and $130 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. The Company
actively monitors the level of anticipated secured financing transactions to
ensure there is a high degree of certainty that such secured financing
transactions will be executed at levels at least equal to the designated
derivative product transactions. At November 30, 1999 and 1998, the Company, as
an end user, utilized derivative financial instruments with an aggregate
notional amount of $12.9 billion and $73.4 billion, respectively, to modify the
interest rate characteristics of its secured financing activities. The total
notional amount of these agreements had a weighted-average maturity of 2.3 years
and 1.0 years as of November 30, 1999 and 1998, respectively. On an overall
basis, the Company's secured financing end user derivative activities increased
(decreased) net revenues by approximately $(13) million, $4 million and $(10)
million for 1999, 1998 and 1997, 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, 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 derivative 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 fair value of the Company's long-term debt
is subject to changes in its credit spreads, which fluctuated significantly in
1999 and 1998. The unrecognized net gain (loss) related to the Company's end
user derivative activities reflects estimated fair values based on market rates
at November 30, 1999 and 1998, respectively.
<PAGE>
<TABLE>
<CAPTION>
NOVEMBER 30
[in millions] 1999 1998
<S> <C> <C>
Carrying value of long-term debt $ 30,691 $ 27,341
Fair value of long-term debt 30,454 27,376
-------- --------
Unrecognized net gain (loss) on long-term debt $ 237 $ (35)
-------- --------
Unrecognized net gain (loss) on long-term debt end user activities $ (439) $ 385
======== ========
</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. As the majority of such financing activities are
short-term in nature, carrying value approximates fair value. At November 30,
1999 and 1998, the Company had $167 billion and $130 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, 1999 and 1998, the Company, as an end user, utilized derivative
financial instruments with an aggregate notional amount of $12.9 billion and
$73.4 billion, respectively, to modify the interest rate characteristics of its
secured financing activities. The unrecognized net losses related to these
derivative financial instruments were $11 million and $110 million at November
30, 1999 and 1998, respectively, which were substantially offset by unrecognized
net gains on the Company's secured financing activities, including anticipated
transactions during the hedge period. Additionally, at November 30, 1999 the
Company had approximately $23 million of unrecognized gains related to
approximately $2.5 billion of long-term fixed rate repurchase agreements as
compared to unrecognized net losses of approximately $84 million on
approximately $4.4 billion of such agreements at November 30, 1998.
NOTE 14. OTHER COMMITMENTS AND CONTINGENCIES
As of November 30, 1999 and 1998, the Company was contingently liable for $2.1
billion and $2.9 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.
As of November 30, 1999 and 1998, in connection with its financing activities,
the Company had outstanding commitments under certain lending arrangements of
approximately $4.2 billion and $3.7 billion, respectively. These commitments
require borrowers to provide acceptable collateral, as defined in the
agreements, when amounts are drawn under the lending facilities. Advances made
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, 1999, the Company had pledged securities, primarily fixed
income, having a market value of approximately $23.6 billion, as collateral for
securities borrowed having a market value of approximately $23.0 billion.
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.
<PAGE>
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.
The Company, through its high grade and high yield sales, trading and
underwriting activities, makes commitments to extend credit in loan syndication
transactions and then participates out a significant portion of these
commitments. The Company had lending commitments to high grade borrowers of $2.9
billion and $675 million at November 30, 1999 and 1998, respectively. In
addition, lending commitments to high yield borrowers totaled $1.4 billion and
$2.0 billion at November 30, 1999 and 1998, respectively. All of these
commitments and any related draw downs of these facilities are typically secured
against the borrower's assets, have fixed maturity dates, and are generally
contingent upon certain representations, warranties and contractual conditions
applicable to the borrower. Total commitments are not indicative of actual risk
or funding requirements as the commitments may not be drawn or fully utilized
and the Company will continue to syndicate and/or sell these commitments.
At November 30, 1999 and 1998, the Company had commitments to invest up to $411
million and $379 million, respectively, directly and through partnerships in
private equity related investments. These commitments will be funded as required
through the end of the respective investment periods, principally expiring in
2004.
In addition to these specific commitments, the Company had various other
commitments of approximately $300 million and $335 million at November 30, 1999
and 1998, respectively.
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 leading global investment bank, the
Company is actively involved in securities underwriting, brokerage,
distribution and trading. These and other related services are provided on a
worldwide basis to a large and diversified group of clients and customers,
including multinational corporations, governments, emerging growth companies,
financial institutions and individual investors.
A substantial portion of the Company's securities and commodities transactions
is collateralized and is executed with, and on behalf of, commercial banks and
other institutional investors, including other brokers and dealers. The
Company's exposure to credit risk associated with the non-performance of these
customers and counterparties in fulfilling their contractual obligations
pursuant to securities transactions can be directly impacted by volatile or
illiquid trading markets, which may impair the ability of customers and
counterparties to satisfy their obligations to the Company.
<PAGE>
Securities and other financial instruments owned by the Company include U.S.
government and agency securities, and securities issued by non-U.S. governments
which, in the aggregate, represented 16% of the Company's total assets at
November 30, 1999. In addition, primarily all of the collateral held by the
Company for resale agreements represented 32% of total assets at November 30,
1999, and consisted of securities issued by the U.S. government, federal
agencies or non-U.S. governments. The Company's most significant industry
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 is a party to 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 1999, 1998 and 1997 was $37 million, $39
million and $42 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 non-cancelable operating leases (net of
subleases of $84 million) are as follows:
<TABLE>
<CAPTION>
[in millions]
<S> <C>
Fiscal 2000 $ 39
Fiscal 2001 31
Fiscal 2002 30
Fiscal 2003 28
Fiscal 2004 25
December 1, 2004 and thereafter 412
----
$565
----
----
</TABLE>
NOTE 15. SEGMENTS
Lehman Brothers operates in three segments: Investment Banking, Capital Markets,
and Client Services.
The Investment Banking Division provides advice to corporate, institutional and
government clients throughout the world on mergers, acquisitions, and other
financial matters. The Division also raises capital for clients by underwriting
public and private offerings of debt and equity securities.
The Capital Markets Division includes the Company's institutional sales,
trading, research and financing activities in equity and fixed income cash and
derivatives products. Through the Division, the Company is a global market-maker
in numerous equity and fixed income products, including U.S., European and Asian
equities, government and agency securities, money market products, corporate
high grade, high yield and emerging market securities, mortgage- and
asset-backed securities, municipal securities, bank loans, foreign exchange and
derivatives products. The Division also includes the Company's risk arbitrage
and secured financing businesses. The financing business manages the Company's
equity and fixed income matched book activities, supplies secured financing to
institutional clients and customers, and provides secured funding for the
Company's inventory of equity and fixed income products.
<PAGE>
Client Services revenues reflect earnings from the Company's private client and
private equity businesses. Private client revenues reflect the Company's
high-net-worth retail customer flow activities as well as asset management fees
earned from these clients. Private equity revenues include the management and
incentive fees earned in the Company's role as General Partner for eleven
merchant banking and venture capital partnerships. In addition, these revenues
also include the appreciation of its general partnership interests.
The Company's segment information for fiscal years 1999, 1998 and 1997 is
presented below and was developed consistent with the accounting policies used
to prepare the Company's consolidated financial statements.
<TABLE>
<CAPTION>
INVESTMENT CAPITAL CLIENT
[in millions] BANKING MARKETS SERVICES TOTAL
<S> <C> <C> <C> <C>
NOVEMBER 30, 1999
Net Revenue $1,664 $3,093 $ 583 $5,340
Earnings before taxes(1) $ 508 $ 979 $ 144 $1,631
====== ====== ====== ======
Segment assets [billions] $ 2.3 $180.4 $ 9.5 $192.2
====== ====== ====== ======
NOVEMBER 30, 1998
Net Revenue $1,401 $2,113 $ 599 $4,113
Earnings before taxes(1) $ 530 $ 359 $ 163 $1,052
====== ====== ====== ======
Segment assets [billions] $ 2.7 $139.2 $ 12.0 $153.9
====== ====== ====== ======
NOVEMBER 30, 1997
Net Revenue $1,050 $2,097 $ 726 $3,873
Earnings before taxes(1) $ 307 $ 300 $ 330 $ 937
====== ====== ====== ======
Segment assets [billions] $ 2.7 $133.8 $ 15.2 $151.7
====== ====== ====== ======
</TABLE>
- ----------------
(1) And before dividends on trust preferred securities.
The following are net revenues by geographic region:
<TABLE>
<CAPTION>
NOVEMBER 30 NOVEMBER 30 NOVEMBER 30
[in millions] 1999 1998 1997
<S> <C> <C> <C>
Americas * $3,213 $2,747 $2,779
Europe 1,649 870 812
Asia Pacific 478 496 282
------ ------ ------
Total $5,340 $4,113 $3,873
====== ====== ======
</TABLE>
- -------------------
* Includes non-U.S. revenues of $53 million, $55 million and $67 million in
1999, 1998 and 1997, respectively.
The following information describes the Company's methods of allocating
consolidated net revenues to geographic regions. Net revenues, if syndicated 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. In addition, certain revenues associated with domestic
products and services which resulted from relationships with international
clients and customers have been reclassified as international revenues using an
allocation consistent with the Company's internal reporting.
<PAGE>
NOTE 16. QUARTERLY INFORMATION (UNAUDITED)
The following information represents the Company's unaudited quarterly results
of operations for 1999 and 1998. Certain amounts reflect reclassifications to
conform to the current period's presentation. These quarterly results reflect
all normal recurring adjustments which are, in the opinion of management,
necessary for a fair presentation of the results. Revenues and earnings of the
Company can vary significantly from quarter to quarter due to the nature of the
Company's business activities.
<TABLE>
<CAPTION>
1999 1998
[in millions, except per share amounts] NOV. 30 AUG. 31 MAY 31 FEB. 28 NOV. 30 AUG. 31 MAY 31 FEB. 28
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues $4,701 $4,765 $4,932 $4,591 $3,797 $5,963 $5,554 $4,580
Interest expense 3,290 3,409 3,477 3,473 3,132 5,033 4,081 3,535
------ ------ ------ ------ ------ ------ ------ ------
Net revenues 1,411 1,356 1,455 1,118 665 930 1,473 1,045
Non-interest expenses:
Compensation and benefits 715 688 738 567 337 472 747 530
Other expenses 258 251 251 242 234 251 250 240
------ ------ ------ ------ ------ ------ ------ ------
Total non-interest expenses 973 939 989 809 571 723 997 770
------ ------ ------ ------ ------ ------ ------ ------
Income before taxes and dividends
on trust preferred securities 438 417 466 309 94 207 476 275
Provision for income taxes 122 112 126 96 20 56 152 88
Dividends on trust preferred
securities 15 15 10 2
------ ------ ------ ------ ------ ------ ------ ------
Net income $ 301 $ 290 $ 330 $ 211 $ 74 $ 151 $ 324 $ 187
------ ------ ------ ------ ------ ------ ------ ------
Net income applicable to
common stock $ 292 $ 279 $ 268 $ 198 $ 62 $ 139 $ 268 $ 180
------ ------ ------ ------ ------ ------ ------ ------
Weighted-average shares
Basic 120.8 121.3 122.1 121.9 120.7 121.5 120.6 120.6
Diluted 129.0 129.1 130.4 125.8 122.5 126.2 126.3 124.8
------ ------ ------ ------ ------ ------ ------ ------
Earnings per common share
Basic $ 2.41 $ 2.30 $ 2.19 $ 1.62 $ 0.51 $ 1.15 $ 2.22 $ 1.49
Diluted $ 2.28 $ 2.20 $ 2.09 $ 1.57 $ 0.51 $ 1.10 $ 2.12 $ 1.44
------ ------ ------ ------ ------ ------ ------ ------
Dividends per common share $ 0.09 $ 0.09 $ 0.09 $ 0.09 $0.075 $0.075 $0.075 $0.075
Book value per common share
(at period end) $45.50 $42.91 $40.58 $38.72 $37.06 $36.35 $35.93 $34.56
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
data
- -------------------------------------------------------------------------------
The following table summarizes certain consolidated financial information
included in the audited consolidated financial statements.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED NOVEMBER 30
-------------------------------
[in millions, except per share, other data and financial ratios] 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME
Revenues:
Principal transactions $ 2,341 $ 1,373 $ 1,461 $ 1,579 $ 1,393
Investment banking 1,682 1,441 1,275 981 801
Commissions 651 513 423 362 450
Interest and dividends 14,251 16,542 13,635 11,298 10,788
Other 64 25 89 40 44
-------- -------- -------- -------- --------
Total revenues 18,989 19,894 16,883 14,260 13,476
Interest expense 13,649 15,781 13,010 10,816 10,405
-------- -------- -------- -------- --------
Net revenues 5,340 4,113 3,873 3,444 3,071
-------- -------- -------- -------- --------
Non-interest expenses:
Compensation and benefits 2,707 2,086 1,964 1,747 1,544
Other expenses 1,002 975 972 976 1,061
Severance and other charges 84 97
-------- -------- -------- -------- --------
Total non-interest expenses 3,709 3,061 2,936 2,807 2,702
-------- -------- -------- -------- --------
Income before taxes and dividends on trust
preferred securities 1,631 1,052 937 637 369
Provision for income taxes 457 316 290 221 127
Dividends on trust preferred securities 42
-------- -------- -------- -------- --------
Net income $ 1,132 $ 736 $ 647 $ 416 $ 242
-------- -------- -------- -------- --------
Net income applicable to common stock $ 1,037 $ 649 $ 572 $ 378 $ 200
-------- -------- -------- -------- --------
CONSOLIDATED STATEMENT OF FINANCIAL
CONDITION (AT PERIOD END)
Total assets $192,244 $153,890 $151,705 $128,596 $115,303
Total assets excluding matched book(a) 130,022 111,509 108,099 96,256 79,069
Long-term debt(b) 30,691 27,341 20,261 15,922 12,765
Total stockholders' equity and trust
preferred securities 6,993 5,413 4,523 3,874 3,698
Total capital(c) 37,684 32,754 24,784 19,796 16,463
-------- -------- -------- -------- --------
PER SHARE DATA
Net income $ 8.15 $ 5.19 $ 4.72 $ 3.24 $ 1.76
Dividends declared per common share $ 0.36 $ 0.30 $ 0.24 $ 0.20 $ 0.20
Book value per common share (at period end) $ 45.50 $ 37.06 $ 33.39 $ 28.84 $ 25.67
-------- -------- -------- -------- --------
OTHER DATA (AT PERIOD END)
Ratio of total assets to total stockholders'
equity and trust preferred securities 27.5x 28.4x 33.5x 33.2x 31.2x
Ratio of total assets excluding matched
book to total stockholders' equity and
trust preferred securities(a) 18.6x 20.6x 23.9x 24.8x 21.4x
Employees 8,893 8,873 8,340 7,556 7,771
FINANCIAL RATIOS (%):
Compensation and benefits/net revenues(d) 50.7 50.7 50.7 50.7 50.8
Pretax operating margin 30.5 25.6 24.2 18.5 12.0
Effective tax rate(d) 28.0 30.0 30.9 35.4 34.5
Return on common equity 20.8 15.2 15.6 12.1 7.1
======== ======== ======== ======== ========
</TABLE>
- -------------------
(a) Matched book represents "securities purchased under agreements to resell"
("reverse repos") to the extent that such balance is less than "securities
sold under agreements to repurchase" ("repos") as of the statement of
financial condition date. Several nationally recognized rating agencies
consider such reverse repos to be a proxy for matched book assets when
evaluating the Company's capital strength and financial ratios. Such
agencies consider matched book assets to have a low risk profile and exclude
such amounts in the calculation of leverage (total assets divided by total
stockholders' equity and trust preferred securities). Although there are
other assets with similar risk characteristics on the Company's Consolidated
Statement of Financial Condition, the exclusion of reverse repos from total
assets in this calculation reflects the fact that these assets are matched
against liabilities of a similar nature, and therefore require minimal
amounts of capital support. Accordingly, the Company believes the ratio of
total assets excluding matched book to total stockholders' equity and trust
preferred securities to be a more meaningful measure of the Company's
leverage.
(b) Long-term debt includes senior notes and subordinated indebtedness.
(c) Total capital includes total stockholders' equity, long-term debt and trust
preferred securities.
(d) For the twelve months ended November 30, 1995, excludes the effect of the
sale of Omnitel.
<PAGE>
board of directors
<TABLE>
<S> <C> <C>
RICHARD S. FULD, JR. ROGER S. BERLIND HIDEICHIRO KOBAYASHI
Chairman and Chief Executive Officer Theatrical Producer Director and General Manager for the
Americas of Nippon Life Insurance Company
MICHAEL L. AINSLIE THOMAS H. CRUIKSHANK
Former President and Chief Executive Retired Chairman and Chief Executive Officer JOHN D. MACOMBER
Officer of Sotheby's Holdings of Halliburton Company Principal of JDM Investment Group
JOHN F. AKERS DR. HENRY KAUFMAN DINA MERRILL
Retired Chairman of International Business President of Henry Kaufman & Company, Inc. Director and Vice Chairman of
Machines Corporation RKO Pictures, Inc. and Actress
</TABLE>
operating committee
<TABLE>
<S> <C> <C>
RICHARD S. FULD, JR.* STEPHEN M. LESSING* MARK RUFEH
Chairman and Chief Executive Officer Managing Director Managing Director
Head of Global Sales & Research Chief Operations Officer
JOHN L. CECIL*
Managing Director KEVIN J. MCGILLOWAY THOMAS A. RUSSO
Chief Financial & Administrative Officer Managing Director Managing Director
Chief Information Officer Chief Legal Officer
JOSEPH M. GREGORY*
Managing Director MICHAEL F. MCKEEVER* JEFFREY VANDERBEEK*
Head of Global Equities Managing Director Managing Director
Head of Private Equity Head of Global Fixed Income
JEREMY M. ISAACS
Managing Director JAMES A. ROSENTHAL JARETT F. WAIT
Chief Executive Officer, Managing Director Managing Director
Lehman Brothers Europe Head of Strategy, Chief Executive Officer,
Human Resources & Recruiting Lehman Brothers Asia
BRADLEY H. JACK*
Managing Director *Member of Lehman Brothers' Executive Committee
Head of Investment Banking
</TABLE>
vice chairmen of lehman brothers inc.
<TABLE>
<S> <C> <C>
HOWARD L. CLARK, JR. ALLAN S. KAPLAN SHERMAN R. LEWIS, JR.
Vice Chairman and Vice Chairman Vice Chairman and
Member of Board of Directors Lehman Brothers Inc. Member of Board of Directors
Lehman Brothers Inc. Lehman Brothers Inc.
HARVEY M. KRUEGER
FREDERICK FRANK Vice Chairman and THOMAS A. RUSSO
Vice Chairman and Member of Board of Directors Vice Chairman
Member of Board of Directors Lehman Brothers Inc. Lehman Brothers Inc.
Lehman Brothers Inc.
</TABLE>
vice chairmen of lehman brothers international (europe)
<TABLE>
<S> <C>
RUGGERO F. MAGNONI RAYMOND G.H. SEITZ
Vice Chairman and Vice Chairman and
Member of Board of Directors Member of Board of Directors
Lehman Brothers International (Europe) Lehman Brothers International (Europe)
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
locations
- -------------------------------------------------------------------------------
the americas
<TABLE>
<S> <C> <C>
WORLD HEADQUARTERS - NEW YORK HATO REY PALM BEACH
3 World Financial Center 270 Munoz Rivera 450 Royal Palm Way
New York, NY 10285~212.526.7000 Hato Rey, PR 00918 Third Floor
787.759.8915 Palm Beach, FL 33480
ATLANTA 800.924.0148
3414 Peachtree Road HOUSTON
Atlanta, GA 30326 600 Travis Street PHILADELPHIA
404.262.4800 Houston, TX 77002 1600 Market Street
713.236.3950 Philadelphia, PA 19103
BERMUDA 215.977.7900
Lehman Re Ltd. IRVINE
Ram Re House 19800 MacArthur Boulevard SAN FRANCISCO
46 Reid Street Suite 500 555 California Street
Hamilton HM12, Bermuda Irvine, CA 92612 San Francisco, CA 94104
441.294.0000 949.724.4577 415.274.5400
BOSTON JERSEY CITY SAO PAULO
260 Franklin Street 101 Hudson Street Av. Brigadeiro Faria Lima
Boston, MA 02110 Jersey City, NJ 07302 1276-ED OS Bandirantes\Unidade 62
617.330.5800 212.526.7000 Sao Paulo, Brazil
5511.867.8545
LOS ANGELES
BUENOS AIRES 601 South Figueroa Street SEATTLE
Torre Alem Plaza Los Angeles, CA 90017 Bank of America Tower
Av. Leandro N. Alem 855 213.362.2500 701 Fifth Avenue
Piso 8 Seattle, WA 98104
1001 Buenos Aires LOS ANGELES 206.344.5870
Argentina Westwood Center
5411.4319.2700 Suite 1100 TORONTO
1100 Glendon Avenue P.O. Box 444
CHICAGO Los Angeles, CA 90024 The Exchange Tower
190 South LaSalle Street 800.582.4904 Suite 3600
Chicago, IL 60603 130 King Street West
312.609.7200 MEXICO CITY Toronto ON M5X 1E4
Av. Paseo de la Reforma 265 416.955.1930
CHICAGO Piso 12
401 South LaSalle Street Col. Cuauhtemoc WASHINGTON, D.C.
Chicago, IL 60605 Mexico City, Mexico 06500 800 Connecticut Avenue NW
312.845.4787 525.242.4900 Washington, D.C. 20006
202.452.4700
DALLAS MIAMI
Texas Commerce Tower 1221 Brickell Avenue WILMINGTON
2200 Ross Avenue Miami, FL 33131 Lehman Brothers Bank, FSB
Dallas, TX 75201 305.789.8700 921 North Orange Street
214.720.5400 Wilmington, DE 19810
MONTEVIDEO 302.654.6179
Rincon 487, Suite 101
Montevideo, Uruguay
5982.402.5716
</TABLE>
<PAGE>
europe & the middle east
<TABLE>
<S> <C> <C>
REGIONAL HEADQUARTERS - LONDON MADRID ROME
One Broadgate Paseo de la Castellana 40-9 Piazza di Spagna n 72/A
London EC2M 7HA England 28046 Madrid, Spain Piano 3
44171.601.0011 341.431.0034 Int. 6
Roma, Italy
DUBAI MILAN
5 & 7 Floors Piazza Del Carmine 4 TEL AVIV
Chamber of Commerce Building 20121 Milan, Italy Asia House
Baniyas Street 392.721581 4 Weizman Street
Dubai Tel Aviv, Israel
PARIS 972.3696.6122
FRANKFURT 21 Rue de Balzac
Lehman Brothers Bankhaus AG 75008 Paris, France ZURICH
Gruneburgweg #18 331.5389.3000 Genferstrasse 24
60322 Frankfurt, Germany P.O. Box 341
4969.153070 8027 Zurich, Switzerland
411.287.8889
</TABLE>
asia pacific
<TABLE>
<S> <C> <C>
REGIONAL HEADQUARTERS - TOKYO BEIJING SEOUL
Ark Mori Building Level 12, Unit 03 Oriental Chemical Building
12-32 Akasaka 1 Chome China World Trade Center 50 Sokong Dong Chung Ku
Minato-ku, Tokyo 107, Japan No. 1 Jianguomenwai Avenue Seoul, Korea
813.5571.7000 Beijing, The People's Republic of 822.5571.3600
China
BANGKOK 8610.6505.0301 SINGAPORE
All Seasons Place Office No. 5 Temasek Boulevard
Mi Thai Tower HONG KONG #11-01 SUNTEC City Tower
87 Wireless Road 38/F, One Pacific Place Singapore 0103
Suite 1004, 10th 88 Queensway, Hong Kong 65.433.6288
Floor 852.2869.3000
Phatumwan, Bangkok 10330 TAIPEI
Thailand JAKARTA Suite 405
622.654.0667 Bapindo Plaza Tower 2 205 Tun Hua North Road
19th Floor Taipei, Taiwan
JL Jend Sudirman Republic of China
Kav 54-55 8862.2545.7900
Jakarta 12190
Indonesia
6221.521.0715
</TABLE>
<PAGE>
other stockholder information
<TABLE>
<S> <C> <C>
COMMON STOCK REGISTRAR AND TRANSFER AGENT ANNUAL REPORT AND FORM 10-K
Ticker Symbol: LEH FOR COMMON STOCK Lehman Brothers will make available upon
The common stock of Lehman Brothers Questions regarding dividends, transfer request copies of this Annual Report and
Holdings Inc. is listed on the New York requirements, lost certificates, changes the Annual Report on Form 10-K as filed
Stock Exchange and on the Pacific of address, direct deposit of dividends, with the Securities and Exchange
Exchange. As of January 21, 2000, there the direct purchase and dividend Commission. Requests may be directed to:
were 22,860 holders of record of the reinvestment plan, or other inquiries
Company's common stock. should be directed to: CORPORATE SECRETARY
Lehman Brothers Holdings Inc.
ANNUAL MEETING THE BANK OF NEW YORK 3 World Financial Center, 24th Floor
The annual meeting of stockholders of SHAREHOLDERS SERVICES DEPARTMENT New York, New York 10285
Lehman Brothers will be held on Tuesday, P.O. Box 11258 Telephone: 212.526.1936
April 4, 2000 at 10:30 a.m at 3 World Church Street Station
Financial Center, 26th Floor, 200 Vesey New York, New York 10286-1258 INDEPENDENT AUDITORS
Street, New York, New York 10285. Telephone: 800.824.5707 Ernst & Young LLP
E-mail: [email protected] 787 Seventh Avenue
DIVIDENDS Website: http://stock.bankofny.com New York, New York 10019
Effective January 2000, Lehman Brothers' 212.773.3000
Board of Directors increased the fiscal DIRECT PURCHASE AND DIVIDEND
2000 dividend rate to $0.44 per common REINVESTMENT PLAN CONTACTS
share from an annual dividend rate of Lehman Brothers' Direct Purchase and Investor Relations
$0.36 per share in fiscal 1999. Dividend Reinvestment Plan provides both 212.526.8381
existing stockholders and first-time
investors with an alternative means of Media Relations
purchasing the company's stock. The plan 212.526.4379
has no minimum stock ownership
requirements for eligibility and WEBSITE ADDRESS
enrollment. Plan participants may http://www.lehman.com
reinvest all or a portion of cash
dividends and/or make optional cash
purchases up to a maximum of $175,000
per year without incurring commissions
or service charges. Additional
information and enrollment forms can be
obtained from the Company's Transfer
Agent listed above.
</TABLE>
price range of common stock
<TABLE>
<CAPTION>
THREE MONTHS ENDED
1999 1998
Nov. 30 Aug. 31 May 31 Feb. 28 Nov. 30 Aug. 31 May 31 Feb. 28
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $ 83 7/8 $62 9/16 $67 1/2 $59 7/8 $ 54 1/2 $ 85 $ 83 7/16 $ 63 1/2
Low $ 53 5/16 $48 1/4 $50 1/16 $40 7/8 $ 24 3/4 $ 39 3/8 $ 62 5/8 $ 47 3/4
</TABLE>
<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
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this 1999 Annual Report on
Form 10-K of Lehman Brothers Holdings Inc. (the "Company") of our report dated
January 6, 2000, included in the 1999 Annual Report to Stockholders of Lehman
Brothers Holdings Inc.
Our audits also included the 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 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. 333-50197,
33-53651, 333-57238, 333-07875 and 33-53923 of Lehman Brothers Holdings Inc. and
in the related Prospectuses, of our report dated January 6, 2000 with respect to
the consolidated financial statements and financial statement schedule of Lehman
Brothers Holdings Inc. included or incorporated by reference in this 1999 Annual
Report on Form 10-K for the year ended November 30, 1999.
[LOGO]
Ernst & Young LLP
New York, New York
February 28, 2000
<PAGE>
EXHIBIT 24
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thomas A. Russo, Joseph Polizzotto and Jennifer
Marre and each of them, his or her true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him or her and in his or
her 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, 1999 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 or she 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, 2000
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
/s/ RICHARD S. FULD JR. Chief Executive Officer and Chairman of the
------------------------------------------- Board of Directors
Richard S. Fuld Jr. (principal executive officer)
/s/ JOHN L. CECIL
------------------------------------------- Chief Financial and Administrative Officer
John L. Cecil (principal financial and accounting officer)
/s/ MICHAEL L. AINSLIE
------------------------------------------- Director
Michael L. Ainslie
/s/ JOHN F. AKERS
------------------------------------------- Director
John F. Akers
/s/ ROGER S. BERLIND
------------------------------------------- Director
Roger S. Berlind
/s/ THOMAS H. CRUIKSHANK
------------------------------------------- Director
Thomas H. Cruikshank
/s/ HENRY KAUFMAN
------------------------------------------- Director
Henry Kaufman
/s/ HIDEICHIRO KOBAYASHI
------------------------------------------- Director
Hideichiro Kobayashi
/s/ JOHN D. MACOMBER
------------------------------------------- Director
John D. Macomber
/s/ DINA MERRILL
------------------------------------------- Director
Dina Merrill
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AT NOVEMBER 30, 1999 AND
THE CONSOLIDATED STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED NOVEMBER 30,
1999 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-30-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> NOV-30-1999
<CASH> 7,175
<RECEIVABLES> 12,360
<SECURITIES-RESALE> 62,222
<SECURITIES-BORROWED> 19,397
<INSTRUMENTS-OWNED> 89,059
<PP&E> 485
<TOTAL-ASSETS> 192,244
<SHORT-TERM> 5,476
<PAYABLES> 12,155
<REPOS-SOLD> 81,083
<SECURITIES-LOANED> 4,568
<INSTRUMENTS-SOLD> 46,610
<LONG-TERM> 30,691
710
688
<COMMON> 12
<OTHER-SE> 5,583
<TOTAL-LIABILITY-AND-EQUITY> 192,244
<TRADING-REVENUE> 2,341
<INTEREST-DIVIDENDS> 14,251
<COMMISSIONS> 651
<INVESTMENT-BANKING-REVENUES> 1,682
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 13,649
<COMPENSATION> 2,707
<INCOME-PRETAX> 1,631
<INCOME-PRE-EXTRAORDINARY> 1,132
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,132
<EPS-BASIC> $8.53
<EPS-DILUTED> $8.15
</TABLE>
