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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1995
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [No Fee Required]
Commission File Number 1-9466
Lehman Brothers Holdings Inc.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-3216325
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 WORLD FINANCIAL CENTER 10285
NEW YORK, NEW YORK (Zip Code)
(Address of principal executive offices)
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 Stock Exchange
AMEX Hong Kong 30 Index Call Warrants Expiring January 23, 1998 American Stock Exchange
6 1/2% Amgen Yield Enhanced Equity Linked Debt Securities Due 1997 American Stock Exchange
FT-SE Eurotrack 200 Index Call Warrants Expiring June 4, 1996 American Stock Exchange
Global Telecommunications Stock Upside Note SecuritiesSM Due 2000 American Stock Exchange
Regional Bank Stock Upside Note Securities Due 1996 American Stock Exchange
Japanese Yen Bear Warrants Expiring March 5, 1996 American Stock Exchange
9 1/8% Micron Yield Enhanced Equity Linked Debt Securities Due 1997 American Stock Exchange
8 3/4% Notes Due 2002 New York Stock Exchange
8.30% Quarterly Income Capital Securities Series A, Due December 31, 2035 New York Stock Exchange
$55 Million Serial Zero Coupon Senior Notes Due May 16, 1998 American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Sec.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Aggregate market value of the voting stock held by non-affiliates of the
Registrant at January 31, 1996 was approximately $2,663,944,404. For purposes of
this information, the outstanding shares of common stock owned by certain
executive officers of the registrant were deemed to be shares of common stock
held by affiliates.
As of January 31, 1996, 104,524,039 shares of the registrant's Common Stock,
$.10 par value per share were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
(1) Lehman Brothers Holdings Inc. 1995 Annual Report to
Stockholders--Incorporated in part in Form 10-K, Parts II and IV.
(2) Lehman Brothers Holdings Inc. Proxy Statement for its 1996 Annual Meeting of
Stockholders--Incorporated in part in Form 10-K, Parts I and III.
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
As used herein, "Holdings" or the "Registrant" means Lehman Brothers
Holdings Inc., a Delaware corporation, incorporated on December 29, 1983.
Holdings and its subsidiaries are collectively referred to as the "Company" or
"Lehman Brothers," and the principal subsidiary of Holdings, Lehman Brothers
Inc., a Delaware corporation, is referred to herein as "LBI".
The Company is one of the leading global investment banks serving
institutional, corporate, government and high-net-worth individual clients and
customers. Its executive offices are located at 3 World Financial Center, New
York, New York 10285 and its telephone number is (212) 526-7000.
LEHMAN BROTHERS
Lehman Brothers is one of the leading global investment banks serving
institutional, corporate, government and high-net-worth individual clients and
customers. The Company's worldwide headquarters in New York and regional
headquarters in London and Tokyo are complemented by offices in additional
locations in the United States, Europe, the Middle East, Latin and South America
and the Asia Pacific region. The Company is engaged primarily in providing
financial services. Other businesses in which the Company is engaged represent
less than 10 percent of consolidated assets, revenues or pre-tax income.
The Company's business includes capital raising for clients through
securities underwriting and direct placements; corporate finance and strategic
advisory services; merchant banking; securities sales and trading; asset
management; research; and the trading of foreign exchange, derivative products
and certain commodities. The Company acts as a market-maker in all major equity
and fixed income products in both the domestic and international markets. Lehman
Brothers is a member of all principal securities and commodities exchanges in
the United States, as well as the National Association of Securities Dealers,
Inc. ("NASD"), and holds memberships or associate memberships on several
principal international securities and commodities exchanges, including the
London, Tokyo, Hong Kong, Frankfurt and Milan stock exchanges.
The Company's business activities are highly integrated and constitute a
single industry segment. Financial information concerning the Company for the
fiscal year ended November 30, 1995, the eleven months ended November 30, 1994
and the fiscal year ended December 31, 1993, including the amount of revenue
contributed by classes of similar products or services that accounted for 10% or
more of the Company's consolidated revenues in any one of those periods, is set
forth in the Consolidated Financial Statements and the Notes thereto in the 1995
Annual Report to Stockholders and is incorporated herein by reference.
Information with respect to the Company's operations by geographic area are set
forth in Note 19 to the Notes to Consolidated Financial Statements on page 84 of
the 1995 Annual Report to Stockholders and is incorporated herein by reference.
Since 1990, Lehman Brothers has focused on a "client/customer-driven"
strategy. Under this strategy, Lehman Brothers concentrates on serving the needs
of major issuing and advisory clients and investing customers worldwide to build
an increasing "flow" of business that leverages the Company's research,
underwriting and distribution capabilities. Customer flow continues to be the
primary source of the Company's net revenues. Developing lead relationships with
issuing clients and investing customers is a central premise of the Company's
client/customer-driven strategy. Based on management's belief that each client
and customer directs a majority of its financial transactions to a limited
number of investment banks, Lehman Brothers' investment banking and
institutional and private client sales professionals focus on a targeted group
of clients and customers worldwide to identify and develop
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lead relationships. The Company believes that such relationships position Lehman
Brothers to receive a substantial portion of its clients' and customers'
financial business and lessen the volatility of revenues generally associated
with the financial services industry.
LEHMAN BUSINESSES
INVESTMENT BANKING
Lehman Brothers is a leading underwriter of global equity and fixed income
securities in the public and private markets. The Company is also a prominent
advisor for corporations and governments around the world.
Investment Banking professionals are responsible for developing and
maintaining relationships with issuing clients, gaining a thorough understanding
of their specific needs and bringing together the full resources of Lehman
Brothers to accomplish their financial objectives. Investment Banking is
organized into industry, product and geographic coverage groups, enabling
individual bankers to develop specific expertise in particular industries and
markets. Industry coverage groups include Consumer Products, Financial Services,
Financial Sponsors, Health Care, Industrials, Merchandising, Natural Resources,
Real Estate and Mortgage Finance, Technology, Media and Telecommunications,
Transportation and Utilities. Where appropriate, specialized product groups such
as Equity Capital Markets, Debt Capital Markets, Mergers and Acquisitions,
Private Placements, Leveraged Finance, Derivatives, Liability Management and
Project Finance are integrated into the client coverage teams.
Lehman Brothers has a long history of providing strategic advisory services
to corporate, institutional and government clients around the world on a wide
range of financial matters, including mergers and acquisitions, divestitures,
leveraged transactions, takeover defenses, spin-offs, corporate reorganizations
and recapitalizations, tender and exchange offers, privatizations, opinion
letters and valuations. The Company's Mergers and Acquisitions group works
closely with product, industry and geographic coverage bankers around the world.
Geographically, Lehman Brothers maintains investment banking offices in seven
cities within the U.S. and in sixteen cities in Europe, the Middle East, Asia
and Latin America. In 1995, the Company opened new offices in Sao Paolo and New
Delhi to broaden the geographic scope of its operations.
Merchant Banking. Through its Merchant Banking group, the Company makes
equity and certain other investments in merger, acquisition, restructuring and
leveraged capital transactions, including leveraged buyouts, either
independently or in partnership with the Company's clients. Current merchant
banking investments held by the Company include both publicly traded and
privately held companies diversified on a geographic and industry basis.
Since 1989, the Company's principal method of making merchant banking
investments has been through a series of partnerships (the "1989 Partnerships"),
for which the Company acts as general partner, and in some cases as a limited
partner. During the remaining life of the 1989 Partnerships, the Company's
merchant banking activities, with respect to investments made by the 1989
Partnerships, will be directed toward selling or otherwise monetizing such
investments. The Company continues to pursue merchant banking opportunities that
target certain industries and geographical areas in both the U.S. and non-U.S.
markets. For example, during 1995 the Company established a $75 million fund
specifically designed to invest in the oil tanker industry.
FIXED INCOME
Lehman Brothers actively participates in all key fixed income markets
worldwide and maintains a 24-hour trading presence in global fixed income
securities. The Company combines professionals from the sales, trading,
financing, derivatives and research areas of Fixed Income, together with
investment bankers, into teams to serve the financial needs of the Company's
clients and customers. The Company
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is a leading underwriter of new issues, and also makes markets in these and
other fixed income securities. The Company's global presence facilitates client
and customer transactions and provides liquidity in marketable fixed and
floating rate debt securities.
Fixed Income products consist of dollar and non-dollar government, sovereign
and supranational agency obligations; money market products; dollar and
non-dollar corporate debt securities; mortgage and asset-backed securities;
emerging market securities; municipal and tax-exempt securities; derivative
products and research. In addition, the Company's financing unit provides global
access to cost efficient debt financing sources, including repurchase
agreements, for the Company and its clients and customers.
Government and Agency Obligations. Lehman Brothers is one of the leaders
among the 37 primary dealers in U.S. government securities, as designated by the
Federal Reserve Bank of New York, participating in the underwriting and
market-making of U.S. Treasury bills, notes and bonds, and securities of federal
agencies. The Company is also a market-maker in the government securities of all
G7 countries, and participates in other major European and Asian government bond
markets. The Company has significantly increased its activities in France as a
reporting dealer and in Italy as a super-primary dealer. The Company has also
expanded its activities in the Canadian market with the opening of its Toronto
office in 1995.
Money Market Products. Lehman Brothers holds dominant market positions in
the origination and distribution of medium-term notes and commercial paper. The
Company has received global
medium-term note mandates for 1,125 programs with a borrowing capacity of $1.6
trillion. The Company is an appointed dealer for approximately 750 commercial
paper programs on behalf of companies and government agencies worldwide. The
Company is also a major participant in the preferred stock market.
Corporate Debt Securities. Lehman Brothers engages in the underwriting and
market making of fixed and floating rate investment grade debt worldwide.
High Yield Securities and Bank Loans. The Company also underwrites and makes
markets in non-investment grade debt securities and bank loans. In 1995, the
Company expanded its high yield, debt business from both a strategic and an
operational perspective. The Company now provides a "one-stop" leveraged finance
solution for corporate and financial acquirers and high yield issuers.
Mortgage and Asset-Backed Securities. The Company is a leading underwriter
of and market maker in mortgage and asset-backed securities. Lehman Brothers
underwrites and makes markets in the full range of U.S. agency-backed mortgage
products, mortgage-backed securities, asset-backed securities and whole loan
products. Internationally, the firm has expanded its capabilities in mortgage-
and asset-backed securities, leases, mortgages, multi-family financing and
commercial loans.
Emerging Market Securities. The Company is active in the trading,
structuring and underwriting of Latin American, Eastern European, and Asian
dollar and local currency instruments. The Company maintains investment banking
offices in Mexico City and Buenos Aires and has opened offices in Brazil and
India over the course of 1995.
Municipal and Tax-Exempt Securities. Lehman Brothers is a major dealer in
municipal and tax-exempt securities, including general obligation and revenue
bonds, notes issued by states, counties, cities, and state and local
governmental agencies, municipal leases, tax-exempt commercial paper and put
bonds. Lehman Brothers is also a leader in the structuring, underwriting and
sale of tax-exempt and taxable securities and derivative products for city,
state, not-for-profit and other public sector clients.
Derivative Products. The Company offers a broad range of derivative product
services in more than 20 currencies on a 24-hour basis. Derivatives
professionals are integrated into all of the Company's
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major fixed income product areas to develop optimal issuance structures and
investment products for the Company's clients.
Lehman Brothers Financial Products Inc. ("LBFP"), the Company's triple-A
rated derivatives subsidiary, commenced trading with counterparties in July
1994. It exceeded expectations in 1995 in terms of notional volumes and number
of counterparties. This entity also received rating agency approval to double
the amount of products eligible for inclusion in the subsidiary.
Financing. The Company's Financing unit engages in three primary functions:
managing the Company's matched book activities, supplying secured financing to
customers, and providing funding for the Company's inventory positions. Matched
book funding involves lending cash on a short-term basis to institutional
customers collateralized by marketable securities, typically government or
government agency securities. The Company enters into these agreements in
various currencies and seeks to generate profits from the difference between
interest earned and interest paid. The Financing unit works with the Company's
institutional sales force to identify customers that have cash to invest and/or
securities to pledge to meet the financing and investment objectives of the
Company and its customers. Financing also coordinates with the Company's
treasury area to provide collateralized financing for a large portion of the
Company's securities and other financial instruments owned. In addition to its
activities on behalf of its U.S. clients and customers, the Company is a major
participant in the European repurchase agreement market, transacting daily
volume in nine major currencies. In Asia, the Financing unit is active in
providing secured financing for the Company's customers in the region. The
European and Asian repurchase agreement markets have witnessed dramatic growth,
and the Company has worked with various central banks to encourage the further
development of these markets.
Fixed Income Research. Fixed Income research at Lehman Brothers encompasses
the full range of research disciplines: quantitative, economic, strategic,
credit, portfolio and market-specific analysis. Fixed Income research is
integrated with and supports the Company's investment banking, sales and trading
activities. An important objective of Fixed Income research is to have in place
high quality research analysts covering industry, geographic and economic
sectors that support the activities of the Company's clients and customers. The
department's 200 specialists are based in New York, Toronto, London, Tokyo and
Hong Kong. Their expertise includes U.S., European and Asian government and
agency securities, derivatives, sovereign issues, corporate securities, high
yield, asset- and mortgage-backed securities, commercial real estate, emerging
market debt and municipal securities.
Foreign Exchange. Through its foreign exchange operations, Lehman Brothers
seeks to provide its clients and customers with superior trading execution,
price protection and hedging strategies to manage volatility. The Company,
through operations in New York, London, Hong Kong, Singapore, and Tokyo engages
in trading activities in all major currencies and maintains a 24-hour foreign
exchange market-making capability for clients and customers worldwide. In
addition to the Company's traditional client/customer-driven foreign exchange
activities, Lehman Brothers also trades foreign exchange for its own account.
Commodities and Futures. Lehman Brothers engages in commodities and futures
trading through its market-making activities in metals and energy derivatives
products, as well as the Company's activities in exchange futures execution for
its institutional and private clients. The Company provides its clients with
global market-making and execution through its commodities and futures
operations in New York, London, Frankfurt, Singapore, Hong Kong and Tokyo.
Lehman Brothers is particularly active as a market-maker in energy-related
products, including natural gas, crude oil, refined products and electricity.
The Company's electricity trading activities have been expanded through Citizens
Lehman Power L.P., a joint venture established with Citizens Corporation.
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EQUITIES
Lehman Brothers combines professionals from the sales, trading, financing,
derivatives and research areas of Equities, together with investment bankers,
into teams to serve the financial needs of the Company's equity clients and
customers. The Company's equity expertise and the integrated nature of the
Company's global operations enable Lehman Brothers to structure and execute
global equity transactions for clients worldwide. The Company is a leading
underwriter of initial public and secondary offerings of equity and
equity-related securities. Lehman Brothers also makes markets in these and other
securities, and executes block trades on behalf of clients and customers. The
Company also actively participates in assisting governments around the world in
raising equity capital as part of their privatization programs.
The Equities product group is responsible for the Company's equity
operations and all dollar and non-dollar equity and equity-related products
worldwide. These products include listed and over-the-counter ("OTC")
securities, American Depositary Receipts, convertibles, options, warrants and
derivatives. The Company participates in the global equity and equity-related
markets in all major currencies through its worldwide presence and membership in
major stock exchanges, including among others, those in New York, London, Tokyo,
Hong Kong, Frankfurt and Milan.
Derivative Products. Lehman Brothers offers equity derivative capabilities
across a wide spectrum of products and currencies, including domestic and
international program trading, listed options and futures, structured
derivatives and convertible products.
Equity Research. The Equity Research department is integrated with and
supports the Company's investment banking, sales and trading activities. An
important objective of Equities research is to have in place high quality
research analysts covering industry and geographic sectors that support the
activities of the Company's clients and customers. The Equity Research
department is comprised of 250 professionals covering 26 industry sectors and
over 1,100 companies worldwide from locations in New York, London, Hong Kong and
Tokyo.
Equity Finance. Lehman Brothers operates a comprehensive Equity Financing
and Prime Broker business to provide liquidity to its clients and customers.
Margin lending for the purchase of equities and equity derivatives, securities
lending and short sale facilitation are among the main functions of the Equity
Financing group. The Prime Broker business engages in full operations, clearing
and processing services for that unit's customers.
ASSET MANAGEMENT
The Company's asset management activities provide investment management
services to institutional investors, individuals and small to mid-sized
institutions. At November 30, 1995, the division had over $10 billion in assets
under management. The Company plans to focus on sponsoring and distributing
sophisticated strategic funds attractive to high-net-worth individuals and
institutions. The Asset Management division also has developed individually
customized investment services through the Company's Private Client Services
group.
INSTITUTIONAL SALES
Institutional Sales serves the investing and liquidity needs of major
institutional investors worldwide and provides the distribution mechanism for
new issues and secondary market securities. Lehman Brothers maintains a network
of over 500 sales professionals in major locations around the world.
Institutional Sales focuses on the large institutional investors that constitute
the major share of global buying power in the financial markets. Lehman
Brothers' goal is to be considered one of the top three investment banks by such
institutional investors. By serving the needs of these customers, the Company
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also gains insight into investor sentiment worldwide regarding new issues and
secondary products and markets, which in turn benefits the Company's issuing
clients.
Institutional Sales is organized into four distinct sales forces, operating
globally and specialized by the following product types: Equities, Fixed Income,
Foreign Exchange/Commodities and Asset Management. Institutional Sales
professionals work together to coordinate coverage of major institutional
investors through customer teams. Depending on the size and investment
objectives of the institutional investor, a customer team can be comprised of
from two to five sales professionals, each specializing in a specific product.
This approach positions Lehman Brothers to understand and to deliver the full
resources of the Company to its customer base.
PRIVATE CLIENT SERVICES
The Company's Private Client Services Group serves the investment needs of
private investors with substantial assets as well as small and mid-sized
institutions. The group has a global presence with investment representatives
located in seven offices in North America and additional offices in major
financial centers in South America, Europe, the Middle East and Asia. The
Company's investment representatives provide investing customers with direct
access to Lehman Brothers' equity and fixed income product and research,
including capabilities in new issue and secondary product, foreign exchange and
derivatives. The Private Client Services group also enables the Company's
issuing clients to access a diverse, high-net-worth investor base throughout the
world. The group employs portfolio strategists within their organization to
optimize asset allocation requirements and to manage the specific asset classes
of their private clients.
OTHER BUSINESS ACTIVITIES
While Lehman Brothers concentrates on its client/customer-driven strategy,
the Company also participates in business opportunities such as arbitrage and
proprietary trading that leverage the Company's expertise, infrastructure and
resources. These businesses may generate substantial revenues but generally
entail a higher degree of risk as the Company trades for its own account.
Arbitrage. Lehman Brothers engages in a variety of arbitrage activities. In
traditional or "riskless" arbitrage, the Company seeks to benefit from temporary
price discrepancies that occur when a security is traded in two or more markets,
or when a convertible or derivative security is trading at a price disparate
from its underlying security. The Company's "risk" arbitrage activities involve
the purchase of securities at discounts from the expected values that would be
realized if certain proposed or anticipated corporate transactions (such as
mergers, acquisitions, recapitalizations, exchange offers, reorganizations,
bankruptcies, liquidations or spin-offs) were to occur. To the extent that these
anticipated transactions do not materialize in a manner consistent with the
Company's expectations, the Company is subject to the risk that the value of
these investments will decline. Lehman Brothers' arbitrage activities benefit
from the Company's presence in the global capital markets, access to advanced
information technology, in-depth market research, proprietary risk management
tools and general experience in assessing rapidly changing market conditions.
Proprietary Trading. Lehman Brothers engages in the trading of various
securities, derivatives, currencies and commodities for its own account. The
Company's proprietary trading activities bring together various research and
trading disciplines allowing it to take market positions, which at times may be
significant, consistent with the Company's expectations of future events (such
as movements in the level of interest rates, changes in the shape of yield
curves and changes in the value of currencies). The Company is subject to the
risk that actual market events will be different from the Company's
expectations, which may result in significant losses associated with such
proprietary positions. The Company's proprietary trading activities are
generally carried out in consultation with personnel from the relevant major
product area (e.g., mortgages, derivatives and foreign exchange).
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TRADING SERVICES AND CORPORATE
The Company's Trading Services and Corporate divisions provide support to
its businesses through the processing of certain securities and commodities
transactions; receipt, identification and delivery of funds and securities;
safeguarding of customers' securities; and compliance with regulatory and legal
requirements. In addition, this staff is responsible for technology
infrastructure and systems development, treasury operations, financial control
and analysis, tax planning and compliance, internal audit, expense management,
career development and recruiting and other support functions.
In 1995, the Company made broad enhancements to its technology environment,
including the implementation of improved funding, credit, market risk and sales
support systems. The Company also made significant investments in its employees
through management training and career development initiatives and an expanded
recruitment program for analysts and associates.
On October 12, 1994, the Company and Bear Stearns Securities Corp. ("BSSC")
entered into an agreement pursuant to which BSSC agreed to process the
transactions previously cleared by Smith Barney (the "BSSC Agreement"). As a
result, the Company is now self-clearing, and the accounts previously carried by
Smith Barney are carried on the Company's books. The BSSC Agreement took effect
on February 17, 1995 and will run for a term of five years.
ONGOING COST REDUCTION EFFORT
The Company continued its cost reduction efforts announced at year-end 1994.
Throughout 1995, the Company achieved its cost reduction goals in personnel
costs, non-personnel costs and interest and tax expense. With respect to
personnel costs, the Company's total number of employees was reduced from
approximately 8,500 at fiscal year-end 1994 to approximately 7,800 at fiscal
year-end 1995. Non-personnel cost reductions were achieved as a result of a
systematic and comprehensive global review of all major expense categories.
Through the fourth quarter of 1995, the Company reduced total expenses by
approximately $326 million on an annualized basis compared to the third quarter
of 1994.
RISK MANAGEMENT
As a leading global investment company, risk is an inherent part of all of
Lehman Brothers' businesses and activities. The extent to which Lehman Brothers
properly and effectively identifies, assesses, monitors and manages each of the
various types of risks involved in its trading, brokerage and investment banking
activities is critical to the success and profitability of the Company. The
principal types of risk involved in Lehman Brothers' activities are market
risks, credit or counterparty risks and transaction risks. Lehman Brothers has
developed a control infrastructure to monitor and manage each type of risk on a
global basis throughout the Company.
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In its its trading, market-making and underwriting activities, Lehman
Brothers is subject to risks relating to fluctuations in market prices and
liquidity of specific securities, instruments and derivative products, as well
as volatility in market conditions in general. The markets for these securities
and products are affected by many factors, including the financial performance
and prospects of specific companies and industries, domestic and international
economic conditions (including inflation, interest and currency exchange rates
and volatility), the availability of capital and credit, political events
(including proposed and enacted legislation) and the perceptions of participants
in these markets.
Lehman Brothers' exposure to credit risks in its trading activities arise
from the possibility that a counterparty to a transaction could fail to perform
under its contractual commitment, resulting in Lehman Brothers incurring losses
in liquidating or covering its position in the open market.
In connection with its investment banking and product origination
activities, Lehman Brothers is exposed to risks relating to the merits of
proposed transactions. These risks involve not only the market and credit risks
associated with underwriting securities and developing derivative products, but
also potential liabilities under applicable securities and other laws which may
result from Lehman Brothers' role in the transaction.
The Company aims to reduce risk through the diversification of its products,
counterparties and activities in geographic regions. The Company accomplishes
this objective through allocating the usage of capital to each of its
businesses, establishing trading limits for individual products and traders, and
the approval of credit limits for individual counterparties including regional
concentrations. In addition, the Company is committed to employing qualified
personnel with expertise in each of its various businesses who are responsible
for the establishment of risk management policies and the continued review and
evaluation of these policies in light of changes in market conditions,
counterparty credit status, and the long- and short-term goals of the Company.
Senior management plays a critical role in the ongoing evaluation of risks,
including credit, market, operational and liquidity risks and makes necessary
changes in risk management policies in light of these factors.
The Company's risk management strategy is based on a multi-tier approach to
risk which includes many independent groups (i.e., risk management, finance,
legal, front office senior management, credit) being included in the risk
monitoring process. The Company's risk management department independently
reviews the Company's trading portfolios on a daily basis from a market risk
perspective which includes value at risk and other quantitative and qualitative
risk measurements and analyses. The risk management department has full time
professionals dedicated to each of the trading and geographic areas. The
Company's trade analysis department performs independent verification of the
prices of trading positions, regularly monitors the aging of inventory, and
performs daily review and analysis of the Company's profitability, by business
unit. The corporate credit department, which has operations in New York, London,
Frankfurt, Tokyo and Hong Kong has the responsibility for establishing and
monitoring counterparty limits, structuring and approving specific transactions,
and establishing collateral requirements or other credit enhancement features
(such as financial covenants, guarantees or letters of credit), when deemed
necessary, to secure the Company's position. The Company's Commitment Committee
has the responsibility for reviewing and approving proposed transactions
involving the underwriting or placement of securities by Lehman Brothers, while
the Investment Committee performs a similar function in reviewing and approving
proposed transactions related to investments of capital in connection with the
Company's investment banking and merchant banking activities. Additionally, the
Company employs an internal audit department that reports directly to the
Company's Audit Committee and the Board of Directors. This group performs
periodic reviews to evaluate compliance with established control processes.
These reviews include performing tests on the accuracy of inventory prices,
compliance with established credit and trading limits, and compliance with
securities and other laws. The Company's control structure and various control
mechanisms are also subject to periodic reviews as a result of examinations by
the Company's external auditors as well as various regulatory authorities.
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The Company seeks to ensure that it achieves adequate returns from each of
its business units commensurate with the risks assumed. To achieve this
objective, the Company periodically re-allocates capital to each of its
businesses based upon their ability to obtain returns consistent with
established guidelines as well as perceived opportunities in the marketplace and
the Company's long-term strategy.
NON-CORE ASSETS
Prior to 1990, the Company participated in a number of activities that are
not central to its current business as an institutional investment banking firm.
As a result of these activities, the Company carries on its balance sheet a
number of relatively illiquid assets (the "Non-Core Assets"), including a number
of individual real estate assets, limited partnership interests and a number of
smaller investments. Subsequent to their purchase, the values of certain of
these Non-Core Assets declined below the recorded values on the Company's
balance sheet, which necessitated the write-down of the carrying values of these
assets and corresponding charges to the Company's income statement. Certain of
these activities have resulted in various legal proceedings.
Since 1990, management has devoted substantial resources to reducing the
Company's Non-Core Assets. Between December 31, 1990 and November 30, 1995, the
Company's Non-Core Assets decreased from $2.3 billion in 1990 to approximately
$236 million in 1995. The value of the Company's Non-Core Assets includes
carrying value plus contingent exposures net of reserves. Management's intention
with regard to these Non-Core Assets is the prudent liquidation of these
investments as and when possible.
COMPETITION
All aspects of the Company's business are highly competitive. The Company
competes in domestic and international markets directly with numerous other
brokers and dealers in securities and commodities, investment banking firms,
investment advisors and certain commercial banks and, indirectly for investment
funds, with insurance companies and others.
The financial services industry has become considerably more concentrated as
numerous securities firms have either ceased operations or have been acquired by
or merged into other firms. In addition, several small and specialized
securities firms have been successful in raising significant amounts of capital
for their merger and acquisition activities and merchant banking investment
vehicles and for their own accounts. These developments have increased
competition from firms, many of whom have significantly greater equity capital
than the Company.
REGULATION
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. LBI and certain other subsidiaries
of Holdings are registered as broker-dealers and investment advisors with the
Commission and as such are subject to regulation by the Commission and by
self-regulatory organizations, principally the NASD and national securities
exchanges such as the NYSE, which has been designated by the Commission as LBI's
primary regulator, and the Municipal Securities Rulemaking Board. Securities
firms are also subject to regulation by state securities administrators in those
states in which they conduct business. LBI is a registered broker-dealer in all
50 states, the District of Columbia and the Commonwealth of Puerto Rico. The
Commission, self-regulatory organizations and state securities commissions may
conduct administrative proceedings, which may result in censure, fine, the
issuance of cease-and-desist orders or suspension or expulsion of a
broker-dealer or an investment advisor, its officers or employees.
LBI is registered with the CFTC as a futures commission merchant and is
subject to regulation as such by the CFTC and various domestic boards of trade
and other commodity exchanges. The Company's U.S. commodity futures and options
business is also regulated by the National Futures
9
Association, a not-for-profit membership corporation which has been designated
as a registered futures association by the CFTC.
The Company does business in the international fixed income, equity and
commodity markets and undertakes investment banking activities through its
London subsidiaries. The U.K. Financial Services Act of 1986 (the "Financial
Services Act") governs all aspects of the United Kingdom investment business,
including regulatory capital, sales and trading practices, use and safekeeping
of customer funds and securities, record keeping, margin practices and
procedures, registration standards for individuals, periodic reporting and
settlement procedures. Pursuant to the Financial Services Act, the Company is
subject to regulations administered by The Securities and Futures Authority
Limited, a self regulatory organization of financial services companies (which
regulates the Company's equity, fixed income, commodities and investment banking
activities) and the Bank of England (which regulates its wholesale money market,
bullion and foreign exchange businesses).
Holdings' subsidiary, Lehman Brothers Japan Inc., is a licensed securities
company in Japan and a member of the Tokyo Stock Exchange, the Osaka Stock
Exchange and the Tokyo Financial Futures Exchange and, as such, is regulated by
the Japanese Ministry of Finance, the Japan Securities Dealers Association and
such exchanges.
The Company believes that it is in material compliance with regulations
described herein.
The Company anticipates regulation of the securities and commodities
industries to increase at all levels and for compliance therewith to become more
difficult. Monetary penalties and restrictions on business activities by
regulators resulting from compliance deficiencies are also expected to become
more severe.
CAPITAL REQUIREMENTS
As a registered broker-dealer, LBI is subject to the Commission's Rule
15c3-1, (the "Net Capital Rule") promulgated under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). The Net Capital Rule requires LBI to
maintain net capital of not less than the greater of 2% of aggregate debit items
arising from customer transactions, as defined, or 4% of funds required to be
segregated for customers' regulated commodities accounts, as defined.
Compliance with the Net Capital Rule could limit those operations of LBI
that require the intensive use of capital, such as underwriting and trading
activities and the financing of customer account balances, and also could
restrict the ability of Holdings to withdraw capital from LBI, which in turn
could limit the ability of Holdings to pay dividends, repay debt and redeem or
purchase shares of its outstanding capital stock. See Footnote 11 of Notes to
Consolidated Financial Statements.
Lehman Brothers International (Europe) ("LBIE"), Lehman Brothers Japan Inc.
("LBJ") and other of Holdings' subsidiaries are subject to various securities,
commodities and banking regulations and capital adequacy requirements
promulgated by the regulatory and exchange authorities of the countries in which
they operate. At November 30, 1995, LBIE, LBJ and such other subsidiaries were
in compliance with the applicable local capital adequacy requirements.
EMPLOYEES
As of November 30, 1995 the Company employed approximately 7,800 persons,
including 5,600 in the U.S. and 2,200 internationally. The Company considers its
relationship with its employees to be good.
ITEM 2. PROPERTIES
The Company's headquarters occupy approximately 1,147,000 square feet of
space at 3 World Financial Center in New York, New York, which is owned by the
Company as tenants-in-common with American Express and various other American
Express subsidiaries.
10
The Company entered into a lease for approximately 392,000 square feet for
offices located at 101 Hudson Street in Jersey City, New Jersey (the "Operations
Center"). The Operations Center is used by systems, operations, and certain
administrative personnel and contains certain back-up trading systems. The lease
term is approximately 16 years and commenced in August 1994.
The Company leases approximately 344,000 square feet of office space in
London, England. The Company consolidated most of its London operations into
this space in 1987. Most of the Company's other offices are located in leased
premises, the leases for which expire at various dates through the year 2007.
During 1995, the Company conducted a global review of its real estate
requirements, and took an occupancy-related real estate charge. See Note 20 to
Consolidated Financial Statements. The Company intends to sublet certain of
these leased premises.
Facilities owned or occupied by the Company and its subsidiaries are
believed to be adequate for the purposes for which they are currently used and
are well maintained.
ITEM 3--LEGAL PROCEEDINGS
The Company is involved in a number of judicial, regulatory and arbitration
proceedings concerning matters arising in connection with the conduct of its
business. Such proceedings include actions brought against the Company and
others with respect to transactions in which the Company acted as an underwriter
or financial advisor, actions arising out of the Company's activities as a
broker or dealer in securities and commodities and actions brought on behalf of
various classes of claimants against many securities and commodities firms of
which the Company is one.
Although there can be no assurance as to the ultimate outcome, the Company
has denied, or believes it has a meritorious defense and will deny, liability in
all significant cases pending against it including the matters described below,
and intends to defend vigorously each such case. Although there can be no
assurance as to the ultimate outcome, based on information currently available
and established reserves, the Company believes that the eventual outcome of the
actions against it, including the matters described below, will not, in the
aggregate, have a material adverse effect on the consolidated financial
condition of the Company.
Bamaodah v. E.F. Hutton & Company Inc.
In April 1986, Ahmed and Saleh Bamaodah commenced an action against E.F.
Hutton & Company Inc., ("EFH") to recover all losses the Bamaodahs had incurred
since May 1981 in the trading of commodity futures contracts in a
nondiscretionary EFH trading account. The Dubai Civil Court ruled that the
trading of commodity futures contracts constituted illegal gambling under
Islamic law and that therefore the brokerage contract was void. In January 1987,
a judgment was rendered against EFH in the amount of $48,656,000. On January 5,
1991, the Dubai Court of Appeals affirmed the judgment. On March 22, 1992, the
Court of Cassation, Dubai's highest court, revoked and quashed the decision of
the Court of Appeals and ordered that the case be remanded to the Court of
Appeals for a further review. On April 26, 1994, the Dubai Court of Appeals
again affirmed the judgment of the Dubai Civil Court. The Company appealed the
judgment to the Court of Cassation, which reversed the Court of Appeals on
November 27, 1994 and ordered that a new expert be appointed to review the case.
A new expert has been appointed, with instructions to report back to the Court
of Cassation.
Actions Relating To First Capital Holdings Inc.
Derivative Actions. On or about March 29, 1991, two identical purported
shareholder derivative actions were filed, entitled Mentch v. Weingarten, et al.
and Isaacs v. Weingarten, et al. The complaints in these two actions, pending in
the Superior Court of the State of California, County of Los Angeles, are filed
allegedly on behalf of and naming as a nominal defendant First Capital Holdings
Inc. ("FCH"). Other defendants include Holdings, two former officers and
directors of FCH, Robert Weingarten and Gerry Ginsberg, the four outside
directors of FCH, Peter Cohen, Richard DeScherer,
11
William L. Mack and Jerome H. Miller (collectively, the "Outside Directors"),
and Michael Milken. The complaints alleged generally breaches of fiduciary duty,
gross corporate mismanagement and waste of assets in connection with FCH's
purchase of non-rated bonds underwritten by Drexel Burnham Lambert Inc. and
sought damages for losses suffered by FCH, punitive damages and attorneys' fees.
On January 30, 1996, these two actions were dismissed.
Concurrent with the bankruptcy filing of FCH and the conservatorship and
receivership of its two life insurance subsidiaries, First Capital Life
Insurance Company ("First Capital Life") and Fidelity Bankers Life Insurance
Company ("Fidelity Bankers Life") (First Capital Life and Fidelity Bankers Life
collectively, the "Insurance Subsidiaries"), a number of additional actions were
instituted, naming one or more of Holdings, Lehman Brothers and American Express
as defendants (individually or collectively, as the case may be, the "American
Express Defendants").
Under the terms of an agreement between American Express and Holdings,
Holdings has agreed to indemnify American Express for liabilities which it may
incur in connection with any action (including any derivative action) relating
to FCH. In connection therewith, Holdings' indemnification obligation extends to
the below described actions.
FCH Shareholder and Agent Actions. Three actions were commenced in the
United States District Courts for the Southern District of New York and the
Central District of California allegedly as class actions on behalf of the
purchasers of FCH securities during certain specified periods, commencing no
earlier than May 4, 1988 and ending no later than May 31, 1991 (the "Shareholder
Class"). The complaints are captioned Larkin, et al. v. First Capital Holdings
Corp., et al., amended on May 15, 1991 to add American Express as a defendant,
Zachary v. American Express Company, et al., filed on May 20, 1991, and Morse v.
Weingarten, et al., filed on June 13, 1991 (the "Shareholder Class Actions").
The complaints raised claims under the federal securities laws and alleged that
the defendants concealed adverse material information regarding the finances,
financial condition and future prospects of FCH and made material misstatements
regarding these matters.
On July 1, 1991 an action was filed in the United States District Court for
the Southern District of Ohio entitled Benndorf v. American Express Company, et
al. The action was brought purportedly on behalf of three classes. The first
class is similar to the Shareholder Class; the second consisted of managing
general agents and general agents who marketed various First Capital Life
products from April 2, 1990 to the present and to whom it is alleged
misrepresentations were made concerning FCH (the "Agent Class"); and the third
class consists of Agents who purchased common stock of FCH through the First
Capital Life Non Qualified Stock Purchase Plan ("FSPP") and who have an interest
in the Stock Purchase Account under the FSPP (the "FSPP Class"). The complaint
raised claims similar to those asserted in the other Shareholder Class Actions,
along with additional claims relating to the FSPP Class and the Agent Class
alleging damages in marketing the products. In addition, on August 15, 1991,
Kruthoffer v. American Express Company, et al. was filed in the United States
District Court for the Eastern District of Kentucky, whose complaint was nearly
identical to the Benndorf complaint (collectively the "Agent Class Actions").
On November 14, 1991, the Judicial Panel on Multidistrict Litigation issued
an order transferring and coordinating for all pretrial purposes all related
actions concerning the sale of FCH securities, including the Shareholder Class
Action and Agent Class Actions, and any future filed "tag-along" actions, to
Judge John G. Davies of the United States District Court for the Central
District of California (the "California District Court"). The cases are
captioned In Re: First Capital Holdings Corporation Financial Products
Securities Litigation. MDL Docket No.-901 (the "MDL Action").
On January 18, 1993, an amended consolidated complaint (the "Third
Complaint") was filed on behalf of the Shareholder Class and the Agent Class.
The Third Complaint names as defendants American Express, Holdings, Lehman
Brothers, Weingarten and his wife, Palomba Weingarten, Ginsberg, Philip A.
Fitzpatrick (FCH's Chief Financial Officer), the Outside Directors and former
FCH outside directors Jeffrey B. Lane and Robert Druskin (the "Former Outside
Directors"), Fred
12
Buck (President of First Capital Life) and Peat Marwick. The complaint raises
claims under the federal securities law and the common law of fraud and
negligence. On March 10, 1993, the American Express defendants answered the
Third Amended Complaint, denying its material allegations.
On March 11, 1993, the California District Court entered an order granting
class certification to the Shareholder Class. The class consists of all persons,
except defendants, who purchased FCH common stock, preferred stock and
debentures during the period May 4, 1988 to and including May 10, 1991. It also
issued an order denying class certification to the Agent Class. The FSPP Class
action had been previously dropped by the plaintiffs.
The American Express Shareholder Action. On or about May 20, 1991, a
purported class action was filed on behalf of all shareholders of American
Express who purchased American Express common shares during the period beginning
August 16, 1990 to and including May 10, 1991. The case is captioned Steiner v.
American Express Company, et al. and was commenced in the United States District
Court for the Eastern District of New York. The defendants are Holdings,
American Express, James D. Robinson, III, Howard L. Clark, Jr., Harvey Golub and
Aldo Papone. The complaint alleges generally that the defendants failed to
disclose material information in their possession with respect to FCH which
artificially inflated the price of the common shares of American Express from
August 16, 1990 to and including May 10, 1991 and that such nondisclosure
allegedly caused damages to the purported shareholder class. The action has been
transferred to California and is now part of the MDL Action. The defendants have
answered the complaint, denying its material allegations.
American Express Derivative Action. On June 6, 1991, a purported shareholder
derivative action was filed in the United States District Court for the Eastern
District of New York, entitled Rosenberg v. Robinson, et al., against all of the
then-current directors of American Express. In January 1992, this action was
transferred by stipulation to be part of the MDL action. The complaint alleged
that the Board of Directors of American Express should have required Holdings to
divest its investment in FCH and to write down such investment sooner. In
addition, the complaint alleged that the failure to act constituted a waste of
corporate assets and caused damage to American Express' reputation. The
complaint sought a judgment declaring that the directors named as defendants
breached their fiduciary duties and duties of loyalty and requiring the
defendants to pay money damages to American Express, and remit their
compensation for the period in which the duties were breached, to pay attorneys'
fees and costs and other relief. The parties to the American Express Shareholder
Action and the American Express Derivative Action have entered into a settlement
agreement, subject to approval by the Court.
The Virginia Commissioner of Insurance Action. On December 9. 1992, a
complaint was filed in federal court in the Eastern District of Virginia by
Steven Foster, the Virginia Commissioner of Insurance as Deputy Receiver of
Fidelity Bankers Life. The Complaint names Holdings and Weingarten, Ginsberg and
Leonard Gubar, a former director of FCH and Fidelity Bankers Life, as
defendants. The action was subsequently transferred to California to be part of
the MDL Action. The Complaint alleges that Holdings acquiesced in and approved
the continued mismanagement of Fidelity Bankers Life and that it participated in
directing the investment of Fidelity Bankers Life assets. The complaint asserts
claims under the federal securities laws and asserts common law claims including
fraud, negligence and breach of fiduciary duty and alleges violations of the
Virginia Securities laws by Holdings. It allegedly seeks no less than $220
million in damages to Fidelity Bankers Life and its present and former
policyholders and creditors and punitive damages. Holdings has answered the
complaint, denying its material allegations.
Easton & Co. v. Mutual Benefit Life Insurance Co., et al.; Easton & Co. v.
Lehman Brothers Inc.
Lehman Brothers has been named as a defendant in two consolidated class
action complaints pending in the United States District Court for the District
of New Jersey (the "N.J. District Court"). Easton & Co. v. Mutual Benefit Life
Insurance Co., et al. ("Easton I"), and Easton & Co. v. Lehman Brothers Inc.
("Easton II"). The plaintiff in both of these actions is Easton & Co., which is
a broker-
13
dealer located in Fort Lee, New Jersey. Both of these actions allege federal
securities law claims and pendent common law claims in connection with the sale
of certain municipal bonds as to which Mutual Benefit Life Insurance Company
("MBLI") has guaranteed the payment of principal and interest. MBLI is an
insurance company which was placed in rehabilitation proceedings under the
supervision of the New Jersey Insurance Department on or about July 16, 1991. In
the Matter of the Rehabilitation of Mutual Benefit Life Insurance Company, (Sup.
Ct. N.J. Mercer County.)
Easton I was commenced on or about September 17, 1991. In addition to Lehman
Brothers, the defendants named in this complaint are MBLI, Henry E. Kates
(MBLI's former Chief Executive Officer) and Ernst & Young (MBLI's accountants).
The litigation is purportedly brought on behalf of a class consisting of all
persons and entities who purchased DeKalb, Georgia Housing Authority Multi-
Family Housing Revenue Refunding Bonds (North Hill Ltd. Project), Series 1991,
due November 30, 1994 (the "DeKalb Bonds") during the period from May 3, 1991
(when the DeKalb bonds were issued) through July 16, 1991. Lehman Brothers acted
as underwriter for this bond issue, which was in the aggregate principal amount
of $18.7 million. The complaint alleges that Lehman Brothers violated Section
10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, and seeks
damages in an unspecified amount or rescission. The complaint also alleges a
common law negligent misrepresentation claim against Lehman Brothers and the
other defendants.
Easton II was commenced on or about May 18, 1992, and names Lehman Brothers
as the only defendant. Plaintiff purports to bring this second lawsuit on behalf
of a class composed of all persons who purchased "MBLI-backed Bonds" from Lehman
Brothers during the period April 19, 1991 through July 16, 1991. The complaint
alleges that Lehman Brothers violated Section 10(b) and Rule 10b-5, and seeks
monetary damages in an unspecified amount, or rescission pursuant to Section
29(b) of the Exchange Act. The complaint also contains a common law claim of
alleged breach of duty and negligence.
On or about February 9, 1993, the N.J. District Court granted plaintiffs'
motion for class certification in Easton I. The parties have agreed to
certification of a class in Easton II for purchases of certain fixed-rate
MBLI-backed bonds during the class period.
Maxwell Related Litigation
Certain of the Company's subsidiaries are defendants in several lawsuits
arising out of transactions entered into with the late Robert Maxwell or
entities controlled by Maxwell interests. These actions are described below.
Berlitz International Inc. v. Macmillan Inc. et al. This interpleader action
was commenced in Supreme Court, New York County (the "Court") on or about
January 2, 1992, by Berlitz International Inc. ("Berlitz") against Macmillan
Inc. ("Macmillan"), Lehman Brothers Holdings PLC ("PLC"), Lehman Brothers
International Limited (now known as Lehman Brothers International (Europe),
("LBIE") and seven other named defendants. The interpleader complaint seeks a
declaration of the rightful ownership of approximately 10.6 million shares of
Berlitz common stock, including 1.9 million shares then registered in PLC's
name, alleging that Macmillan claimed to be the beneficial owner of all 10.6
million shares, while the defendants did or might claim ownership to some or all
of the shares. As a result of its bankruptcy filing, MacMillan sought to remove
this case to the Bankruptcy Court for the Southern District of New York. On the
motion of LBIE and PLC, the case was remanded back to the Court. Following the
remand, the parties entered into a stipulation pursuant to which all proceedings
have been stayed pending the outcome of the appeal in Macmillan v. Bishopsgate
Investment Trust et al., referred to below.
14
Macmillan, Inc. v. Bishopsgate Investment Trust, Shearson Lehman Brothers
Holdings PLC et al. This action was commenced by issuance of a writ in the High
Court of Justice in London, England on or about December 9, 1991. In this
action, Macmillan sought relief virtually identical to that sought in the
Berlitz action, described above. Specifically, Macmillan sought a declaration
that it is the legal and beneficial owner of the disputed 10.6 million shares of
Berlitz common stock, including the 1.9 million shares then held by PLC. After a
trial, on December 10, 1993, the High Court of Justice handed down a judgment
finding for the Company on all aspect of its defense and dismissing MacMillan's
claims. On November 2, 1995, the Court of Appeal issued a preliminary judgment
dismissing MacMillan s appeal. MacMillan has sought leave to appeal to the House
of Lords.
MCC Proceeds Inc. v. Lehman Brothers International (Europe) This action was
commenced by issuance of a writ in the High Court of Justice in London, England
on July 14, 1995. In this action, MCC Proceeds Inc., as successor to Macmillan,
Inc., seeks relief identical to that sought in the Berlitz action described
above, but based on a legal theory which was initially pleaded but ultimately
abandoned by the plaintiff in Berlitz. The High Court granted LBIE's application
to dismiss the proceeding and assessed costs against MCC Proceeds.
Lehman Brothers Commercial Corporation and Lehman Brothers Special Financing
Inc. v. China International United Petroleum and Chemical Co., Ltd.
On November 15, 1994, two Lehman Brothers subsidiaries, Lehman Brothers
Commercial Corporation ("LBCC") and Lehman Brothers Special Financing Inc.
("LBSF"), commenced an action against China International United Petroleum and
Chemicals Company ("Unipec") in the United States District Court for the
Southern District of New York alleging breach of contract. The litigation arose
from the refusal by Unipec to honor its obligations with respect to certain
foreign exchange and swap transactions. LBCC and LBSF seek to recover
approximately $44 million from Unipec. Unipec asserted fifteen counterclaims
against Lehman entities based on violations of federal securities and
commodities laws and rules and theories of fraud, breach of fiduciary duty,
conversion and business torts. Unipec seeks $8 million in compensatory damages,
as well as punitive damages. The Court granted the motion of the Lehman
counterclaim defendants in part, and dismissed the counterclaims based on
business tort theories. Discovery is progressing.
Lehman Brothers Commercial Corporation and Lehman Brothers Special Financing
Inc. v. Minmetals International Non-Ferrous Metals Trading Company
On November 15, 1994, LBCC and LBSF commenced an action against Minmetals
International Non-Ferrous Metals Trading Company ("Minmetals") and China
National Metals and Minerals Import and Export Company ("CNM") in the United
States District Court for the Southern District of New York alleging breach of
contract against Minmetals and breach of guarantee against CNM. The litigation
arose from the refusal by Minmetals and CNM to honor their obligations with
respect to certain foreign exchange and swap transactions. LBCC and LBSF seek to
recover approximately $53.5 million from Minmetals and/or CNM. On June 26, 1995,
the court granted CNM's motion to dismiss the claims against it, but also
granted LBCC and LBSF leave to replead. Minmetals filed fourteen counterclaims
against Lehman entities based on violations of federal securities and
commodities laws and rules, and theories of fraud, breach of fiduciary duty and
conversion. The court denied a motion by the Lehman counterclaim defendants to
dismiss the six fraud-based counterclaims. On February 7, 1996, LBCC and LBSF
sought leave to file an amended complaint naming CNM as an additional defendant.
Discovery is progressing.
Sinochem(USA) Inc. v. Lehman Brothers Inc. et al.
On January 4, 1996, a complaint was filed in the United States District
Court for the Southern District of New York by Sinochem (USA) Inc. ("Sinochem")
against Lehman Brothers Inc., Lehman
15
Special Financing and Sheng Yan, a former Lehman salesperson. The complaint
alleges that Sinochem has been exposed to losses of approximately $20 million by
entering into unsuitable investments, namely interest rate swaps and repurchase
transactions, with the defendants. The complaint, which includes claims based on
fraud, breach of fiduciary duty, breach of contract and alleged violations of
federal securities and commodities laws and rules, seeks return of the capital
Sinochem invested, a declaration that the transactions are void, and punitive
damages. The defendants intend to file an answer denying the material
allegations of the complaint and to assert counterclaims against Sinochem and
its parent corporation, China National Chemicals Import & Export Corporation
("Sinochem Beijing"), to recover all amounts due and owing from Sinochem and
Sinochem Beijing.
Actions Relating to National Association of Securities Dealers Automated
Quotations System ("NASDAQ") Market Maker Antitrust and Securities Litigation.
Beginning in May, 1994, several class actions were filed in various state
and federal courts against various broker-dealers making markets in NASDAQ
securities. With respect to a number of those actions LBI was either
specifically named as a defendant or was not specifically named as a defendant
but could be deemed to be a member of the defendant class as defined in the
complaints. Plaintiffs in these cases have alleged violations of the antitrust
laws, securities laws and have pled a variety of other statutory and common law
claims. All of these actions are based on the theory that because odd-eighth
quotes occur less often than quarter quotes, NASDAQ market makers must be
colluding wrongfully to maintain a wider spread.
By Order filed October 14, 1994, the Judicial Panel on Multidistrict
Litigation consolidated these actions in the Southern District of New York and
ordered that all related actions be transferred and coordinated for all pretrial
purposes. The case is captioned In Re NASDAQ Market-Makers Antitrust Litigation,
MDL No. 1023.
On December 16, 1994, plaintiffs served a consolidated Amended Complaint
naming 33 defendants including LBI. Plaintiffs claim violations of the federal
antitrust laws including Section 1 of the Sherman Antitrust Act. Plaintiffs seek
unspecified compensatory damages trebled in accordance with the antitrust laws,
costs including attorneys' fees as well as injunctive relief. The court
dismissed the action with leave to replead, stating that the complaint failed to
identify the securities involved with sufficient specificity. The plaintiffs
replied and the defendants answered the amended complaint on November 17, 1995.
Discovery has commenced.
Leetate Smith, et al. v. Merrill Lynch, et al.
On February 28, 1995 a First Amended Consolidated Class Action Complaint for
Violations of the Federal Securities Laws and the California Corporations Code
(the Complaint ) was filed in the United States District Court for the Central
District of California amending a previously filed complaint and adding, among
other defendants, LBI. The Complaint is purportedly brought on behalf of
purchasers of bonds, notes and other securities during the period July 1, 1992
through December 6, 1994 (the "Class Period") that were issued by Orange County
or by other public entities which had funds invested in Orange County's
Investment Pool (collectively the "County"). Also named as defendants are eight
other broker-dealers who are, like LBI, alleged to have acted as underwriters of
the County's debt securities and the five financial advisors who allegedly
advised the County during the Class Period. The Complaint alleges violations of
Section 10b of the Exchange Act of 1934 and various sections of the California
Corporations Code based on alleged misstatements and omissions in the Official
Statements of the debt offerings by the County primarily relating to the
County's creditworthiness and ability to repay the debts. The Complaint seeks
(i) to certify the action as a class action; (ii) unspecified damages plus
interest; and (iii) attorneys fees.
16
Sonnenfeld v. The City and County of Denver, Colorado, et al.
On August 4, 1995, a Consolidated Amended Class Action Complaint (the
"Complaint") was filed in the United States District Court for the District of
Colorado, consolidating and amending previously filed complaints and adding,
among other defendants, LBI. The Complaint is purportedly brought on behalf of
all persons, other than defendants, who purchased Denver Airport System Revenue
Bonds during the period February 27, 1992 through May 3, 1994 that were issued
by the City and County of Denver (the "Bonds") and who were damaged by their
investments. Also named as defendants are seven other broker-dealers who acted
as underwriters or financial advisors in connection with the issuances of the
Bonds and the City and County of Denver. The Complaint alleges violations of
Section 10b of the Exchange Act of 1934 and the Colorado Securities Act and
common law fraud based on alleged misstatements and omissions in the Official
Statements for the Bonds primarily relating to status of the design and
construction of the new Denver International Airport (the "Airport"), the amount
of revenues it would likely generate and the risks posed to the timely opening
of the Airport by the installation of an automated baggage system. The Complaint
seeks (i) to certify the action as a class action; (ii) unspecified damages; and
(iii) costs and attorneys fees.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The approximate number of holders of record of the Registrant's Common Stock
was 32,799 at January 31, 1996. Information concerning the market for the
Registrant's common equity and related stockholder matters in this set forth on
page 93 of the 1995 Annual Report to Stockholders and is hereby incorporated
herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data contained on pages 89 and 90 of the 1995 Annual
Report to Stockholders is deemed a part of this Annual Report on Form 10-K and
is hereby incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations is set forth under the same caption on pages 30 to 51 of the 1995
Annual Report to Stockholders. Such information is hereby incorporated herein by
reference and should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto contained on pages 53-88 of such Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Registrant and its Subsidiaries
together with the Notes thereto and the Report of Independent Auditors thereon
required by this Item are contained in the 1995 Annual Report to Stockholders on
pages 52-88 and such information is hereby incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to Directors of the Registrant is set forth under the
caption "Election of Directors" on pages 4-7 of the Proxy Statement of the
Registrant for its 1995 Annual Meeting of Stockholders and information relating
to Executive Officers of the Registrant is set forth under the caption
"Executive Officers of the Company" on pages 9 and 10 of the Proxy Statement of
the Registrant for its 1996 Annual Meeting of Stockholders and such information
is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is set forth under the
captions "Compensation of Current Directors", "Compensation Committee Report of
Executive Compensation", Summary Compensation Table, "Pension Benefits" and
"Employment Contracts and other Arrangements with Executive Officers" on pages
8-16 of the Proxy Statement of the Registrant for its 1996 Annual Meeting of
Stockholders and such information is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to security ownership of management and certain
beneficial owners is set forth under the caption "Security Ownership of
Directors and Executive Officers" on page 10 of the Proxy Statement of the
Registrant for its 1996 Annual Meeting of Stockholders and such information is
hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related transactions is
set forth under the captions "Certain Transactions and Agreements with Directors
and Executive Officers", "Certain Transactions and Agreements with American
Express and Subsidiaries", Certain Transactions and Agreements with Nippon Life
and "Certain Transactions and Agreements among the Company, American Express and
Nippon Life" on pages 17-21 of the Proxy Statement of the Registrant for its
1996 Annual Meeting of Stockholders and such information is hereby incorporated
by reference.
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
The financial statements are listed on page F-1 hereof by reference to the
corresponding page number in the Annual Report.
2. Financial Statement Schedules:
The financial statement schedule required to be filed hereunder is listed on
page F-1 hereof and the schedule included herewith appears on pages F-2
through F-7 hereof.
18
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 By-Laws of the Registrant, amended as of October 24, 1995 (incorporated by reference
to Exhibit 3(b) of the Registrant's Registration Statement on Form S-3 (Reg. No. 33-
64899)).
4.1 The instruments defining the rights of holders of the long-term debt securities of
the Registrant and its subsidiaries are omitted pursuant to section (b)(4)(iii)(A)
of Item 601 of Regulation S-K. The Registrant hereby agrees to furnish copies of
these instruments to the Securities and Exchange Commission upon request.
10.1 Agreement of Tenants-In-Common by and among American Express Company, American
Express Bank Ltd., American Express Travel Related Services Company, Inc., Shearson
Lehman Brothers Inc., Shearson Lehman Government Securities, Inc. and Shearson
Lehman Commercial Paper Incorporated (incorporated by reference to Exhibit 10.1 of
the Registrant's Transition Report on Form 10-K for the eleven months ended November
30, 1994).
10.2 Tax Allocation Agreement between Shearson Lehman Brothers Holdings Inc. and American
Express Company (incorporated by reference to Exhibit 10.2 of the Registrant's
Transition Report on Form 10-K for the eleven months ended November 30, 1994).
10.3 Intercompany Agreement between American Express Company and Shearson Lehman Brothers
Holdings Inc. (incorporated by reference to Exhibit 10.3 of the Registrant's
Transition Report on Form 10-K for the eleven months ended November 30, 1994).
10.4 Investment Agreement among American Express Company, Shearson Lehman Brothers
Holdings Inc. and Nippon Life Insurance Company (incorporated by reference to
Exhibit 10.21 of the Registrant's Registration Statement on Form S-1 (Reg. No.
33-12976)).
10.5 Registration Rights Agreement between Nippon Life Insurance Company and Shearson
Lehman Brothers Holdings Inc. (incorporated by reference to Exhibit 10.22 of the
Registrant's Registration Statement on Form S-1 (Reg. No. 33-12976)).
10.6 Business Association Agreement by and among American Express Company, Shearson
Lehman Brothers Holdings Inc. and Nippon Life Insurance Company (incorporated by
reference to Exhibit 10.23 of the Registrant's Registration Statement on Form S-1
(Reg. No. 33-12976)).
10.7 Letter, dated March 23, 1987, from Nippon Life Insurance Company to American Express
Company and Shearson Lehman Brothers Holdings Inc. (incorporated by reference to
Exhibit 10.24 of the Registrant's Registration Statement on Form S-1 (Reg. No.
33-12976)).
10.8 1990 Agreement, dated as of June 12, 1990, by and between American Express Company
and Nippon Life Insurance Company (incorporated by reference to Exhibit 10.25 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1990).
10.9 Letter, dated August 10, 1990, from Shearson Lehman Brothers Holdings Inc. to Nippon
Life Insurance Company and American Express Company (incorporated by reference to
Exhibit 10.26 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1990).
10.10 Warrant, dated August 10, 1990, issued by Shearson Lehman Brothers Holdings Inc. to
Nippon Life Insurance Company (incorporated by reference to Exhibit 3.1 of the
Registrant's Transition Report on Form 10-K for the eleven months ended November 30,
1994).
10.11 Transaction Support Services Agreement dated as of September 30, 1994 by and between
Bear, Stearns Securities Corp. and Lehman Brothers Inc. (incorporated by reference
to Exhibit 10.15 of the Registrant's Transition Report on Form 10-K for the eleven
months ended November 30, 1994).
10.12 Lease dated as of October 13, 1993 between 101 Hudson Leasing Associates and Lehman
Brothers Holdings Inc. (incorporated by reference to Exhibit 10 of Holdings'
Quarterly Report on Form 10-Q for the quarter ended September 30, 1993).
19
EXHIBIT
NO.
- -------
10.13 Lehman Brothers Inc. Executive and Select Employees Plan (incorporated by reference
to Exhibit 10.4 of the Registrant's Registration Statement on Form S-1 (Reg. No. 33-
12976)).
10.14 Lehman Brothers Holdings Inc. Deferred Compensation Plan for Non-Employee Directors
(incorporated by reference to Exhibit 10.11 of the Registrant's Registration
Statement on Form S-1 (Reg. No. 33-12976)).
10.15 Amended and Restated Agreements of Limited Partnership of Shearson Lehman Hutton
Capital Partners II (incorporated by reference to Exhibit 10.48 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1988).
10.16 Lehman Brothers Holdings Inc. 1994 Management Ownership Plan (incorporated by
reference to Exhibit 10.25 of the Registrant's Registration Statement on Form S-1
(Reg. No. 33-52977))
10.17+ Lehman Brothers Holdings Inc. Short-Term Executive Compensation Plan (incorporated
by reference to Exhibit 10.26 of the Registrant's Registration Statement on Form S-1
(Reg. No. 33-52977)).
10.18+ Lehman Brothers Holdings Inc. 1994 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.27 of the Registrant's Registration Statement on Form S-1
(Reg. No. 33-52977))
10.19 Purchase and Exchange Agreement dated April 28, 1994, between the Registrant and
American Express Company (incorporated by reference to Exhibit 10.29 of the
Registrant's Transition Report Form 10-K for the Eleven Months ended November 30,
1994).
10.20 Registration Rights Agreement, dated as of May 27, 1994, between American Express
Company and the Registrant (incorporated by reference to Exhibit 10.30 of the
Registrant's Transition Report Form 10-K for the Eleven Months ended November 30,
1994).
10.21 Option Agreement, dated May 27, 1994, by and among American Express Company,
American Express Bank Ltd., American Express Travel Related Services Company, Inc.,
Lehman Brothers Inc., Lehman Government Securities, Inc. and Lehman Commercial Paper
Incorporated. (incorporated by reference to Exhibit 10.31 of the Registrant's
Transition Report Form 10-K for the Eleven Months ended November 30, 1994).
10.22 1994 Agreement, dated April 27, 1994, between the Registrant and Nippon Life
Insurance Company. (incorporated by reference to Exhibit 10.32 of the Registrant's
Transition Report Form 10-K for the Eleven Months ended November 30, 1994).
10.23 Lehman Brothers Inc. Voluntary Deferred Compensation Plan (For Select Executives)
(incorporated by reference to Exhibit 10.33 of the Registrant's Registration
Statement on Form S-1 (Reg. No. 33-52977)).
10.24+ Lehman Brothers Inc. Voluntary Deferred Compensation Plan (For Transferred
Participants' Vested Amounts as of July 31 1993) (incorporated by reference to
Exhibit 10.34 of the Registrant's Registration Statement on Form S-1 (Reg. No.
33-52977)).
10.25+ Lehman Brothers Inc. Executive and Select Employees Plan (For Transferred
Participants) (incorporated by reference to Exhibit 10.35 of the Registrant's
Registration Statement on Form S-1 (Reg. No. 33-52977)).
10.26+ Lehman Brothers Holdings Inc. Cash Award Plan. (incorporated by reference to Exhibit
10.36 of the Registrant's Transition Report Form 10-K for the Eleven Months ended
November 30, 1994).
10.27 Amended and Restated Agreement of Limited Partnership of Lehman Brothers Capital
Partners III, L.P.*
11. Computation of per share Earnings.*
12. Computation in support of ratio of earnings to fixed charges and preferred stock
dividends.*
13. The following portions of the Company's 1995 Annual Report to Stockholders, which
are incorporated by reference in this Annual Report on Form 10-K:
13.1 "Management's Discussion and Analysis of Financial Condition and Results of
Operations", pages 30-51.
13.2 "Consolidated Financial Statements", pages 53-88.
13.3 "Market for Registrant's Common Equity and Related Stockholder Matters", page 93.
21. Pursuant to General Instruction J of Form 10-K, the list of the Registrant's
Subsidiaries is omitted.
23. Consent of Ernst & Young LLP.*
24. Powers of Attorney.*
27. Financial Data Schedule.*
20
EXHIBIT
NO.
- -------
(b) Reports on Form 8-K.
1. Form 8-K dated January 5, 1995, Items 5 and 7.
2. Form 8-K dated March 21, 1995, Items 5 and 7.
3. Form 8-K dated June 21, 1995, Item 7 only.
4. Form 8-K dated September 9, 1995, Item 7.
5. Form 8-K dated January 4, 1996, Items 5 and 7.
- ------------
* Filed herewith.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-K pursuant to Item 14(c).
21
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
LEHMAN BROTHERS HOLDINGS INC.
(Registrant)
February 28, 1996
By: /s/ KAREN M. MULLER
..................................
Title: Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
- ----------------------------------- ----------------------------------- ------------------
* Chief Executive Officer and February 28, 1996
................................... Chairman of the Board of
Richard S. Fuld, Jr. Directors (principal executive
officer)
* Chief Operating Officer, February 28, 1996
................................... President and Director
T. Christopher Pettit
* Chief Financial Officer February 28, 1996
................................... (principal financial officer)
Robert Matza
* Controller February 28, 1996
................................... (principal accounting officer)
David Goldfarb
* Director February 28, 1996
...................................
John F. Akers
* Director February 28, 1996
...................................
Roger S. Berlind
* Director February 28, 1996
...................................
Katsumi Funaki
* Director February 28, 1996
...................................
Henry Kaufman
* Director February 28, 1996
...................................
John D. Macomber
* Director February 28, 1996
...................................
Dina Merrill
* Director February 28, 1996
...................................
Masataka Shimasaki
* Director February 28, 1996
...................................
Malcolm Wilson
*By: /s/ KAREN M. MULLER
....................
Karen M. Muller
(Attorney-in-Fact)
February 28, 1996
22
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
PAGE
--------------------------
FORM
FINANCIAL STATEMENTS 10--K ANNUAL REPORT
- ---------------------------------------------------------------- --------- -------------
Report of Independent Auditors.................................. 52
Consolidated Statement of Operations for the Twelve Months Ended
November 30, 1995, for the Eleven Months Ended November 30,
1994 and for the Twelve Months Ended December 31, 1993.......... 53
Consolidated Statement of Financial Condition at November 30,
1995, and November 30, 1994..................................... 54
Consolidated Statement of Changes in Stockholders' Equity for
the Twelve Months Ended November 30, 1995, for the Eleven
Months Ended November 30, 1994 and for the Twelve Months Ended
December 31, 1993............................................... 56
Consolidated Statement of Cash Flows for the Twelve Months Ended
November 30, 1995, for the Eleven Months Ended November 30,
1994 and for the Twelve Months Ended December 31, 1993.......... 57
Notes to Consolidated Financial Statements...................... 59
FINANCIAL STATEMENT SCHEDULES
- ----------------------------------------------------------------
Schedule III--Condensed Financial Information................... F-2
F-1
SCHEDULE III
LEHMAN BROTHERS HOLDINGS INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF OPERATIONS
(PARENT COMPANY ONLY)
(IN MILLIONS)
TWELVE MONTHS ELEVEN MONTHS TWELVE MONTHS
ENDED ENDED ENDED
NOVEMBER 30, NOVEMBER 30, DECEMBER 31,
1995 1994 1993
------------- ------------- -------------
Revenues
Principal transactions............................. $ 152 $ 145 $ 34
Investment banking................................. 90 75 (31)
Interest and dividends............................. 804 482 381
Other.............................................. 1 10 13
----- ----- ------
Total revenues................................... 1,047 712 397
Interest expense................................... 899 663 592
----- ----- ------
Net revenues..................................... 148 49 (195)
----- ----- ------
Non-interest expenses
Compensation and benefits.......................... 121 69 22
Other.............................................. 87 57 39
Management fees.................................... (145) (102)
Restructuring charge............................... 27
Severance charge................................... 6
Spin-off expenses.................................. 15
----- ----- ------
Total non-interest expenses...................... 90 45 61
----- ----- ------
Income (loss) before taxes........................... 58 4 (256)
Provision for (benefit from) income taxes.......... 47 (12) (85)
----- ----- ------
Income (loss) before equity in net income of
subsidiaries......................................... 11 16 (171)
Equity in net income of subsidiaries............... 231 97 69
----- ----- ------
Net income (loss).................................... $ 242 $ 113 $(102)
----- ----- ------
----- ----- ------
Net income (loss) applicable to common stock......... $ 200 $ 75 $(150)
----- ----- ------
----- ----- ------
See notes to condensed financial information of Registrant.
F-2
SCHEDULE III
LEHMAN BROTHERS HOLDINGS INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
(PARENT COMPANY ONLY)
(IN MILLIONS, EXCEPT PER SHARE DATA)
NOVEMBER 30,
------------------
1995 1994
------- -------
ASSETS
Cash and cash equivalents................................................ $ 18 $ 18
Securities and other financial instruments owned......................... 2,595 1,817
Equity in net assets of subsidiaries..................................... 3,734 3,750
Accounts receivable and accrued interest................................. 1,048 2,123
Due from subsidiaries.................................................... 9,249 9,403
Other assets............................................................. 574 344
------- -------
Total assets........................................................... $17,218 $17,455
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper and short-term debt..................................... $ 2,102 $ 3,746
Securities and other financial instruments sold but not yet purchased.... 176 159
Securities sold under agreeements to repurchase.......................... 2,073 1,232
Accrued liabilities, due to subsidiaries and other payables.............. 825 1,437
Long-term debt:
Senior notes........................................................... 8,344 7,336
Subordinated indebtedness.............................................. 150
------- -------
Total liabilities.................................................... 13,520 14,060
------- -------
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $1 par value; 38,000,000 shares authorized: 5%
Cumulative Convertible Voting, Series A, 13,000,000 shares
authorized, issued and outstanding; $39.10 liquidation preference per
share................................................................ 508 508
8.44% Cumulative Voting, 8,000,000 shares issued and outstanding;
$25.00 liquidation preference per share.............................. 200 200
Redeemable Voting, 1,000 shares issued and outstanding; $1.00
liquidation preference per share.....................................
Common Stock: $.10 par value; 300,000,000 shares authorized; shares
issued: 105,684,565 in 1995 and 105,608,423 in 1994; shares
outstanding: 104,565,875 in 1995 and 104,537,690 in 1994............. 11 11
Common Stock issuable.................................................. 211 87
Additional paid-in capital............................................. 3,172 3,172
Foreign currency translation adjustment................................ 9 6
Accumulated deficit.................................................... (397) (574)
Common Stock in treasury at cost: 1,118,690 in 1995 and 1,070,733 in
1994................................................................. (16) (15)
------- -------
Total stockholders' equity........................................... 3,698 3,395
------- -------
Total liabilities and stockholders' equity........................... $17,218 $17,455
------- -------
------- -------
See notes to condensed financial information of Registrant.
F-3
SCHEDULE III
LEHMAN BROTHERS HOLDINGS INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS
(PARENT COMPANY ONLY)
(IN MILLIONS)
TWELVE MONTHS ELEVEN MONTHS TWELVE MONTHS
ENDED ENDED ENDED
NOVEMBER 30 NOVEMBER 30 DECEMBER 31
1995 1994 1993
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................................... $ 242 $ 113 $ (102)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Equity in net income of subsidiaries............. (231) (97) (69)
Restructuring charge............................. 27
Provision for losses and other reserves.......... 13
Other adjustments................................ 127 107 5
Net change in:
Securities and other financial instruments
owned........................................... (778) (1,530) (212)
Accounts receivable and accrued interest, due
from subsidiaries and other assets............. 945 (3,510) 182
Securities and other financial instruments sold
but not yet purchased and Securities sold under
agreements to repurchase....................... 858 1,249 142
Accrued liabilities, due to subsidiaries and
other payables................................. (576) 1,076 201
Dividends and capital distributions received..... 851 820 587
------ ------ ------
Net cash provided by (used in) operating
activities................................... 1,465 (1,772) 747
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes............... 4,226 2,799 2,827
Principal payments of senior notes................... (3,196) (1,875) (1,090)
Principal payments of subordinated indebtedness...... (150)
Payments for commercial paper and short-term debt.... (1,670) (89) (1,714)
Proceeds from spin-off............................... 1,193
Payment for treasury stock purchases................. (1) (15)
Dividends paid....................................... (64) (99) (213)
------ ------ ------
Net cash (used in) provided by financing
activities................................... (855) 1,914 (190)
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in investments in affiliates................ (610) (173) (545)
Other................................................ 20 (12)
------ ------ ------
Net cash used in investing activities.......... (610) (153) (557)
------ ------ ------
Net change in cash and cash equivalents........ (11)
Cash and cash equivalents, beginning of period....... 18 29 29
------ ------ ------
Cash and cash equivalents, end of period....... $ 18 $ 18 $ 29
------ ------ ------
------ ------ ------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN MILLIONS)
Interest paid totaled $884 in 1995, $612 in 1994 and $682 in 1993. Income
taxes received totaled $163 in 1995, $102 in 1994 and $239 in 1993.
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITY
Holdings' noncash investing and financing activity for all periods presented
was insignificant.
See notes to condensed financial information of Registrant.
F-4
SCHEDULE III
NOTE 1. BASIS OF PRESENTATION
The condensed financial statements of Lehman Brothers Holdings Inc.
("Holdings" or the "Company") should be read in conjunction with the
consolidated financial statements of Lehman Brothers Holdings Inc. and
subsidiaries and the notes thereto.
Certain prior period amounts reflect reclassifications to conform to the
current period's presentation.
NOTE 2. LONG-TERM DEBT
U.S. DOLLAR NON-U.S. DOLLAR
----------------- ----------------- NOVEMBER 30
FIXED FLOATING FIXED FLOATING ---------------
RATE RATE RATE RATE 1995 1994
------ -------- ------ -------- ------ ------
(IN MILLIONS)
Senior Notes
Maturing in Fiscal 1995......................... $2,237
Maturing in Fiscal 1996......................... $ 512 $ 1,184 $1,696 1,166
Maturing in Fiscal 1997......................... 640 266 $ 163 $ 41 1,110 1,004
Maturing in Fiscal 1998......................... 987 145 122 76 1,330 938
Maturing in Fiscal 1999......................... 627 190 670 41 1,528 1,269
Maturing in Fiscal 2000......................... 722 40 32 794 672
December 1, 2000 and thereafter................. 1,864 22 1,886 50
------ -------- ------ -------- ------ ------
Senior Notes.................................. $5,352 $ 1,825 $ 977 $ 190 $8,344 $7,336
------ -------- ------ -------- ------ ------
------ -------- ------ -------- ------ ------
Subordinated Indebtedness maturing in Fiscal
1995............................................ $ 150
------ -------- ------ -------- ------ ------
------ -------- ------ -------- ------ ------
Long-Term Debt.................................. $5,352 $ 1,825 $ 977 $ 190 $8,344 $7,486
------ -------- ------ -------- ------ ------
------ -------- ------ -------- ------ ------
Of the Company's long-term debt outstanding as of November 30, 1995, $629
million is repayable prior to maturity at the option of the holder, at par
value. These obligations are reflected in the above table at their put dates,
which range from fiscal 1996 to fiscal 2002, rather than at their contractual
maturities, which range from fiscal 2003 to fiscal 2023. In addition, $319
million of the Company's long-term debt is redeemable at par at the option of
the Company upon specified dates from 1996 through 2000 or based upon the
occurrence of specified events. These obligations are reflected in the above
table at their contractual maturity dates.
As of November 30, 1995, the Company's fixed and floating rate debt
portfolios included approximately $110 million and $160 million, respectively,
of debt for which the interest rates and/or redemption values have been linked
to various indices including industry baskets of stocks or commodities. The
interest rates on such indexed notes have all been effectively converted to
floating rates based primarily on LIBOR through the use of interest rate and
cross currency swaps.
F-5
END USER DERIVATIVE ACTIVITIES
The Company utilizes a variety of derivative products including interest
rate and currency swaps, and swaptions as an end user to modify the interest
rate characteristics of its portfolio. The Company actively manages the interest
rate exposure on its long-term debt portfolio to more closely match the terms of
its debt to the assets being funded and to minimize interest rate risk. In
addition, the Company utilizes cross currency swaps to hedge its exposure to
foreign currency risk as a result of its non-U.S. dollar debt obligations, after
consideration of non-U.S. dollar assets which are funded with long-term debt
obligations in the same currency. In certain instances, two or more derivative
contracts may be utilized by the Company to manage the interest rate nature
and/or currency exposure of an individual long-term debt issuance. In these
cases, the notional value of the derivative contracts may exceed the carrying
value of the related long-term debt issuance.
At November 30, 1995, the notional values of the Company's interest rate and
currency swaps related to its long-term debt obligations were approximately $6.8
billion. In terms of notional amounts outstanding, these derivative products
mature as follows:
U.S. DOLLAR NON-U.S. DOLLAR CROSS CURRENCY TOTAL
----------- --------------- -------------- ------
(IN MILLIONS)
Maturing in Fiscal 1996..................... $ 775 $ 775
Maturing in Fiscal 1997..................... 861 $ 108 $ 96 1,065
Maturing in Fiscal 1998..................... 1,013 125 1,138
Maturing in Fiscal 1999..................... 641 687 1,328
Maturing in Fiscal 2000..................... 647 647
December 1, 2000 and thereafter............. 1,811 53 1,864
----------- ----- ----- ------
Total....................................... $ 5,748 $ 108 $ 961 $6,817
----------- ----- ----- ------
----------- ----- ----- ------
Weighted average rate at November 30, 1995
Receive rate (1)............................ 6.89% 1.44% 4.21% 6.42%
Pay rate (1)................................ 6.13% 3.82% 6.54% 6.15%
- ------------
(1) Weighted average interest rates were calculated utilizing non-U.S. dollar
interest rates, where applicable.
In addition, at November 30, 1995 and 1994, the Company had approximately
$250 million and $867 million, respectively, of notional value of written
swaptions outstanding which if exercised would convert an equal amount of the
Company's long-term debt from a fixed rate to a floating rate. As of November
30, 1995, the swaptions had exercise dates ranging from fiscal 1996 to fiscal
1998. The Company accounts for these written swaptions on a mark-to-market
basis.
F-6
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, 1995
---------------------------------------------------------
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...................................... $5,352 $ 619 8.02% 7.36%
Floating Rate................................... 1,825 7,519 6.79% 6.90%
---------- ----------
7,177 8,138 7.71% 6.93%
Non-USD Obligations............................... 1,167 206 3.86% 3.53%
---------- ----------
Total............................................. $8,344 $8,344 7.17% 6.85%
---------- ----------
---------- ----------
NOVEMBER 30, 1994
---------------------------------------------------------
LONG-TERM DEBT WEIGHTED AVERAGE(1)
------------------------ -----------------------------
BEFORE AFTER CONTRACTUAL EFFECTIVE RATE
END USER END USER INTEREST AFTER END USER
ACTIVITIES ACTIVITIES RATE ACTIVITIES
---------- ---------- ----------- --------------
USD Obligations
Fixed Rate...................................... $3,408 $2,334 7.79% 7.98%
Floating Rate................................... 3,614 4,938 6.10% 5.79%
---------- ----------
7,022 7,272 6.92% 6.50%
Non-USD Obligations............................... 464 214 3.82% 3.75%
---------- ----------
Total............................................. $7,486 $7,486 6.73% 6.42%
---------- ----------
---------- ----------
- ------------
(1) Weighted average interest rates were calculated utilizing non-U.S. dollar
interest rates, where applicable.
NOTE 3. DIVIDENDS
Dividends and capital distributions declared to Holdings by its subsidiaries
and affiliates were $851 million in 1995, $820 million in 1994, and $587 million
in 1993.
NOTE 4. NET REVENUES
Net revenues in 1995 include a special revenue gain of $129 million related
to the sale of the Company's interest in Omnitel Sistemi Radiocellullari Italani
S.p.A. ("Omnitel"), recognized in the Statement of Operations in principal
transactions. Following recognition of related compensation and taxes, the
Company recognized a $47 million gain in 1995 related to the Omnitel sale
transaction.
NOTE 5. RESTRUCTURING CHARGE
During the fourth quarter of 1995, the Company recorded a charge of $27
million pretax ($16 million aftertax) for occupancy-related real estate
expenses. This charge resulted from a complete global review of the Company and
its affiliates' real estate requirements at current headcount levels and the
elimination of excess real estate primarily in its New York location. The charge
includes the cost to write-down the carrying value of leasehold improvements as
well as the difference between expected operating costs and projected sublease
recoveries.
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company has guaranteed certain of its subsidiaries' unsecured lines of
credit and other contractual obligations.
F-7
EXHIBIT INDEX
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 By-Laws of the Registrant, amended as of October 24, 1995 (incorporated by reference
to Exhibit 3(b) of the Registrant's Registration Statement on Form S-3 (Reg. No. 33-
64899)).
4.1 The instruments defining the rights of holders of the long-term debt securities of
the Registrant and its subsidiaries are omitted pursuant to section (b)(4)(iii)(A)
of Item 601 of Regulation S-K. The Registrant hereby agrees to furnish copies of
these instruments to the Securities and Exchange Commission upon request.
10.1 Agreement of Tenants-In-Common by and among American Express Company, American
Express Bank Ltd., American Express Travel Related Services Company, Inc., Shearson
Lehman Brothers Inc., Shearson Lehman Government Securities, Inc. and Shearson
Lehman Commercial Paper Incorporated (incorporated by reference to Exhibit 10.1 of
the Registrant's Transition Report on Form 10-K for the eleven months ended November
30, 1994).
10.2 Tax Allocation Agreement between Shearson Lehman Brothers Holdings Inc. and American
Express Company (incorporated by reference to Exhibit 10.2 of the Registrant's
Transition Report on Form 10-K for the eleven months ended November 30, 1994).
10.3 Intercompany Agreement between American Express Company and Shearson Lehman Brothers
Holdings Inc. (incorporated by reference to Exhibit 10.3 of the Registrant's
Transition Report on Form 10-K for the eleven months ended November 30, 1994).
10.4 Investment Agreement among American Express Company, Shearson Lehman Brothers
Holdings Inc. and Nippon Life Insurance Company (incorporated by reference to
Exhibit 10.21 of the Registrant's Registration Statement on Form S-1 (Reg. No.
33-12976)).
10.5 Registration Rights Agreement between Nippon Life Insurance Company and Shearson
Lehman Brothers Holdings Inc. (incorporated by reference to Exhibit 10.22 of the
Registrant's Registration Statement on Form S-1 (Reg. No. 33-12976)).
10.6 Business Association Agreement by and among American Express Company, Shearson
Lehman Brothers Holdings Inc. and Nippon Life Insurance Company (incorporated by
reference to Exhibit 10.23 of the Registrant's Registration Statement on Form S-1
(Reg. No. 33-12976)).
10.7 Letter, dated March 23, 1987, from Nippon Life Insurance Company to American Express
Company and Shearson Lehman Brothers Holdings Inc. (incorporated by reference to
Exhibit 10.24 of the Registrant's Registration Statement on Form S-1 (Reg. No.
33-12976)).
10.8 1990 Agreement, dated as of June 12, 1990, by and between American Express Company
and Nippon Life Insurance Company (incorporated by reference to Exhibit 10.25 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1990).
10.9 Letter, dated August 10, 1990, from Shearson Lehman Brothers Holdings Inc. to Nippon
Life Insurance Company and American Express Company (incorporated by reference to
Exhibit 10.26 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1990).
10.10 Warrant, dated August 10, 1990, issued by Shearson Lehman Brothers Holdings Inc. to
Nippon Life Insurance Company (incorporated by reference to Exhibit 3.1 of the
Registrant's Transition Report on Form 10-K for the eleven months ended November 30,
1994).
10.11 Transaction Support Services Agreement dated as of September 30, 1994 by and between
Bear, Stearns Securities Corp. and Lehman Brothers Inc. (incorporated by reference
to Exhibit 10.15 of the Registrant's Transition Report on Form 10-K for the eleven
months ended November 30, 1994).
10.12 Lease dated as of October 13, 1993 between 101 Hudson Leasing Associates and Lehman
Brothers Holdings Inc. (incorporated by reference to Exhibit 10 of Holdings'
Quarterly Report on Form 10-Q for the quarter ended September 30, 1993).
EXHIBIT INDEX
EXHIBIT
NO.
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10.13 Lehman Brothers Inc. Executive and Select Employees Plan (incorporated by reference
to Exhibit 10.4 of the Registrant's Registration Statement on Form S-1 (Reg. No. 33-
12976)).
10.14 Lehman Brothers Holdings Inc. Deferred Compensation Plan for Non-Employee Directors
(incorporated by reference to Exhibit 10.11 of the Registrant's Registration
Statement on Form S-1 (Reg. No. 33-12976)).
10.15 Amended and Restated Agreements of Limited Partnership of Shearson Lehman Hutton
Capital Partners II (incorporated by reference to Exhibit 10.48 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1988).
10.16 Lehman Brothers Holdings Inc. 1994 Management Ownership Plan (incorporated by
reference to Exhibit 10.25 of the Registrant's Registration Statement on Form S-1
(Reg. No. 33-52977))
10.17+ Lehman Brothers Holdings Inc. Short-Term Executive Compensation Plan (incorporated
by reference to Exhibit 10.26 of the Registrant's Registration Statement on Form S-1
(Reg. No. 33-52977)).
10.18+ Lehman Brothers Holdings Inc. 1994 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.27 of the Registrant's Registration Statement on Form S-1
(Reg. No. 33-52977))
10.19 Purchase and Exchange Agreement dated April 28, 1994, between the Registrant and
American Express Company (incorporated by reference to Exhibit 10.29 of the
Registrant's Transition Report Form 10-K for the Eleven Months Ended November 30,
1994).
10.20 Registration Rights Agreement, dated as of May 27, 1994, between American Express
Company and the Registrant (incorporated by reference to Exhibit 10.30 of the
Registrant's Transition Report Form 10-K for the Eleven Months Ended November 30,
1994).
10.21 Option Agreement, dated May 27, 1994, by and among American Express Company,
American Express Bank Ltd., American Express Travel Related Services Company, Inc.,
Lehman Brothers Inc., Lehman Government Securities, Inc. and Lehman Commercial Paper
Incorporated. (incorporated by reference to Exhibit 10.31 of the Registrant's
Transition Report Form 10-K for the Eleven Months Ended November 30, 1994).
10.22 1994 Agreement, dated April 27, 1994, between the Registrant and Nippon Life
Insurance Company. (incorporated by reference to Exhibit 10.32 of the Registrant's
Transition Report Form 10-K for the Eleven Months Ended November 30, 1994).
10.23 Lehman Brothers Inc. Voluntary Deferred Compensation Plan (For Select Executives)
(incorporated by reference to Exhibit 10.33 of the Registrant's Registration
Statement on Form S-1 (Reg. No. 33-52977)).
10.24+ Lehman Brothers Inc. Voluntary Deferred Compensation Plan (For Transferred
Participants' Vested Amounts as of July 31 1993) (incorporated by reference to
Exhibit 10.34 of the Registrant's Registration Statement on Form S-1 (Reg. No.
33-52977)).
10.25+ Lehman Brothers Inc. Executive and Select Employees Plan (For Transferred
Participants) (incorporated by reference to Exhibit 10.35 of the Registrant's
Registration Statement on Form S-1 (Reg. No. 33-52977)).
10.26+ Lehman Brothers Holdings Inc. Cash Award Plan. (incorporated by reference to Exhibit
10.36 of the Registrant's Transition Report Form 10-K for the Eleven Months Ended
November 30, 1994).
10.27 Amended and Restated Agreement of Limited Partnership of Lehman Brothers Capital
Partners III, L.P.*
11. Computation of per share Earnings.*
12. Computation in support of ratio of earnings to fixed charges and preferred stock
dividends.*
13. The following portions of the Company's 1995 Annual Report to Stockholders, which
are incorporated by reference in this Annual Report on Form 10-K:
13.1 "Management's Discussion and Analysis of Financial Condition and Results of
Operations", pages 30-51.
13.2 "Consolidated Financial Statements", pages 53-88.
13.3 "Market for Registrant's Common Equity and Related Stockholder Matters", page 93.
21. Pursuant to General Instruction J of Form 10-K, the list of the Registrant's
Subsidiaries is omitted.
23. Consent of Ernst & Young LLP.*
24. Powers of Attorney.*
27. Financial Data Schedule.*
EXHIBIT INDEX
EXHIBIT
NO.
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(b) Reports on Form 8-K.
1. Form 8-K dated January 5, 1995, Items 5 and 7.
2. Form 8-K dated March 21, 1995, Items 5 and 7.
3. Form 8-K dated June 21, 1995, Item 7 only.
4. Form 8-K dated September 9, 1995, Item 7.
5. Form 8-K dated January 4, 1996, Items 5 and 7.
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* 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).