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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-9466
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LEHMAN BROTHERS HOLDINGS INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-3216325
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3 WORLD FINANCIAL CENTER 10285
NEW YORK, NEW YORK (Zip Code)
(Address of principal executive
offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 526-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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
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
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
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
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
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
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
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:
EXHIBIT
NO.
- ---------------------
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).
16
EXHIBIT
NO.
- ---------------------
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).
17
EXHIBIT
NO.
- ---------------------
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.*
- ------------------------
(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
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
FORM 10-K ANNUAL REPORT
PAGE
----
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
F-1
SCHEDULE I
LEHMAN BROTHERS HOLDINGS INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF OPERATIONS
(PARENT COMPANY ONLY)
(IN MILLIONS)
TWELVE MONTHS
ENDED
NOVEMBER 30
---------------------------------
1999 1998 1997
-------- ----------- --------
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
====== ====== ======
See notes to condensed financial information of Registrant.
F-2
SCHEDULE I
LEHMAN BROTHERS HOLDINGS INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
(PARENT COMPANY ONLY)
(IN MILLIONS, EXCEPT PER SHARE DATA)
NOVEMBER 30
-------------------
1999 1998
-------- --------
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
======= =======
See notes to condensed financial information of Registrant.
F-3
SCHEDULE I
LEHMAN BROTHERS HOLDINGS INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS
(PARENT COMPANY ONLY)
(IN MILLIONS)
TWELVE MONTHS
ENDED
NOVEMBER 30
------------------------------
1999 1998 1997
-------- -------- --------
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
======== ======= ========
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
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
NON-U.S.
U.S. DOLLAR DOLLAR NOVEMBER 30
------------------- -------- -------------------
FIXED FLOATING FIXED
(IN MILLIONS) RATE RATE RATE 1999 1998
- ------------- -------- -------- -------- -------- --------
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
======= ====== ==== ======= =======
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
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:
NOVEMBER 30
NON U.S. CROSS -------------------
(IN MILLIONS) U.S. DOLLAR DOLLAR CURRENCY 1999 1998
- ------------- ----------- -------- -------- -------- --------
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%
- ------------------------
(1) Weighted-average interest rates were calculated utilizing non-U.S. dollar
interest rates, where applicable.
F-6
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:
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
---------- ---------- ----------- --------------
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%
======= ======= ==== ====
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
---------- ---------- ----------- --------------
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%
======= ======= ==== ====
- ------------------------
(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
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
LEHMAN BROTHERS HOLDINGS INC.
(REGISTRANT)
FEBRUARY 28, 2000 BY: /S/ JENNIFER MARRE
-----------------------------------------
Title: VICE PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
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