Back to GetFilings.com
1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
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
NEW YORK, NEW YORK 10285
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 298-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ----------------------------------------------- -----------------------------------------------
$55 Million Serial Zero Coupon Senior Notes American Stock Exchange
Due May 16, 1998
FT-SE Eurotrack 200 Index Call Warrants American Stock Exchange
Expiring June 4, 1996
Japanese Yen Bear Warrants American Stock Exchange
Expiring September 15, 1995
7 1/4% Oracle Yield Enhanced Equity Linked Debt American Stock Exchange
Securities(SM) Due 1996
6 1/2% Amgen Yield Enhanced Equity Linked Debt American Stock Exchange
Securities Due 1997
Japanese Yen Bear Warrants American Stock Exchange
Expiring March 5, 1996
8 3/4% Notes Due 2002 New York 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 /X/.
As of March 31, 1994, 168,235,284 shares of the registrant's Common Stock,
$.10 par value per share were issued and outstanding.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
J(1)(A) AND (B) OF FORM 10-K AND THEREFORE IS FILING THIS FORM WITH A PORTION OF
THE REDUCED DISCLOSURE CONTEMPLATED THEREBY.
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
PART I
ITEM 1. BUSINESS
GENERAL
As used herein, "Holdings" or the "Registrant" means Lehman Brothers
Holdings Inc., a Delaware corporation, incorporated on December 29, 1983.
American Express Company, a New York corporation ("American Express"), owns 100
percent of the outstanding common stock of Holdings, which represents
approximately 93 percent of Holdings' issued and outstanding voting stock. The
remainder of Holdings' voting stock, the 5% Cumulative Convertible Voting
Preferred Stock, Series A (the "Series A Preferred Stock"), is owned by Nippon
Life Insurance Company ("Nippon Life"). Assuming the exercise by Nippon Life of
a warrant to purchase shares of Holdings' common stock, American Express'
ownership percentage of Holdings' voting stock would be 88 percent. 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) 298-2000.
Distribution of Holdings Common Stock
On January 24, 1994, American Express announced plans to issue a special
dividend to its common shareholders consisting of all the common stock of
Holdings (the "Distribution"). Prior to the Distribution, which is subject to
certain conditions, an additional equity investment of approximately $1.25
billion will be made in Holdings, most significantly by American Express.
Holdings currently expects to file a Registration Statement on Form S-1 (the
"Registration Statement") with the Securities and Exchange Commission (the
"Commission") with respect to the Distribution during the second quarter of
1994.
Change of Fiscal Year
On March 28, 1994, the Board of Directors of Holdings approved, subject to
the Distribution, a change in the Company's fiscal year end from December 31 to
November 30. Such a change to a non-calendar cycle will shift certain year-end
administrative activities to a time period that conflicts less with the business
needs of the Company's institutional customers.
Reduction in Personnel
During the first quarter of 1994, the Company completed a review of
personnel needs, which will result in the termination of certain personnel. The
Company anticipates that it will record a severance charge of approximately $30
million pre-tax in the first quarter of 1994 as a result of these terminations.
The Primerica Transaction
On July 31, 1993, pursuant to an asset purchase agreement (the "Primerica
Agreement"), the Company completed the sale (the "Primerica Transaction") of
LBI's domestic retail brokerage business (except for such business conducted
under the Lehman Brothers name) and substantially all of its asset management
business (collectively, "Shearson") to Primerica Corporation (now known as
Travelers Corporation) ("Travelers") and its subsidiary Smith Barney, Harris
Upham & Co. Incorporated ("Smith Barney"). Also included in the Primerica
Transaction were the operations and data processing functions that support these
businesses, as well as certain of the assets and liabilities related to these
operations.
LBI received approximately $1.2 billion in cash and a $586 million interest
bearing note from Smith Barney which was repaid in January 1994 (the "Smith
Barney Note"). The Smith Barney Note was issued as
1
3
partial payment for certain Shearson assets in excess of $600 million which were
sold to Smith Barney. The proceeds received at July 31, 1993, were based on the
estimated net assets of Shearson, which exceeded the minimum net assets of $600
million prescribed in the Primerica Agreement. As further consideration for the
sale of Shearson, Smith Barney agreed to pay future contingent amounts based
upon the combined performance of Smith Barney and Shearson, consisting of up to
$50 million per year for three years based on revenues, plus 10% of after-tax
profits in excess of $250 million per year over a five-year period (the
"Participation Rights"). In contemplation of the Distribution, American Express
received the first Participation Right payment in the first quarter of 1994. It
is anticipated that all of the Participation Rights will be assigned to American
Express prior to the Distribution. As further consideration for the sale of
Shearson, the Company received 2,500,000 shares of 5.50% Convertible Preferred
Stock, Series B, of Travelers and a warrant to purchase 3,749,466 shares of
common stock of Travelers at an exercise price of $39.00 per share. In August
1993, American Express purchased such preferred stock and warrant from LBI for
aggregate consideration of $150 million.
The Company recognized a 1993 first quarter loss related to the Primerica
Transaction of approximately $630 million after-tax ($535 million pre-tax),
which amount includes a reduction in goodwill of $750 million and
transaction-related costs such as relocation, systems and operations
modifications and severance.
The Mellon Transaction
On May 21, 1993, pursuant to a stock purchase agreement (the "Mellon
Agreement") between Lehman Brothers and Mellon Bank Corporation ("Mellon Bank"),
LBI sold to Mellon Bank (the "Mellon Transaction") The Boston Company, Inc.
("The Boston Company") which through subsidiaries is engaged in the private
banking, trust and custody, institutional investment management and mutual fund
administration businesses. Under the terms of the Mellon Agreement, LBI received
approximately $1.3 billion in cash, 2,500,000 shares of Mellon Bank common stock
and ten year warrants to purchase an additional 3,000,000 shares of Mellon
Bank's common stock at an exercise price of $50.00 per share. In June 1993, such
shares and warrants were sold by LBI to American Express for an aggregate
purchase price of $169 million. After accounting for transaction costs and
certain adjustments, the Company recognized a 1993 first quarter after-tax gain
of $165 million.
Shearson Lehman Hutton Mortgage Corporation Transaction
LBI completed the sale of its wholly owned subsidiary, Shearson Lehman
Hutton Mortgage Corporation ("SLHMC"), to GE Capital Corporation on August 31,
1993. The sales price, net of proceeds used to retire indebtedness of SLHMC, was
approximately $70 million. During the first quarter of 1993, the Company
provided $120 million of pre-tax reserves in anticipation of the sale of SLHMC.
After accounting for these reserves, the sale did not have a material effect on
the Company's results of operations.
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 19 additional
locations in the United States, 11 in Europe and the Middle East, four in Latin
and South America and seven in 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.
2
4
Since 1990, Lehman Brothers has followed 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 capabilities and
generates a majority of the Company's revenues and profits. 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
sales professionals work together with global products and services
professionals to identify and develop lead relationships with priority clients
and customers worldwide. 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 securities industry.
Lehman Brothers' strategy consists of the following four key elements:
(1) Focused coverage of major issuing clients and institutional and high
net worth individual investing customers. The Company's Investment Banking and
Sales areas develop and maintain relationships with clients and customers to
understand and meet their financial needs. Business volume generated through
these relationships accounts for the majority of Lehman Brothers' business.
(2) Comprehensive product and service capabilities. Lehman Brothers has
built capabilities in major product and service categories to enable the Company
to develop lead relationships with its clients and customers, meet their diverse
needs and increase the Company's overall volume of business. Each of these
product and service capabilities is provided to clients and customers by
Investment Banking and Sales.
(3) Global scope of business activities. Lehman Brothers pursues a global
strategy in order to: (i) enhance the Company's product and service
capabilities; (ii) position the Company to increase its flow of business as the
international markets continue to expand; (iii) leverage the Company's
infrastructure to benefit from economies of scale; and (iv) geographically
diversify the Company's revenues.
(4) Organizational structure that enables and encourages the Company's
business units to act in a coordinated fashion as "One Firm." The Company is
organized to provide the delivery of products and services through teams
comprised of professionals with specialized expertise focused on meeting the
financial objectives of the Company's clients and customers.
Lehman Brothers also engages in activities such as arbitrage and
proprietary trading which leverage the Company's expertise and infrastructure
and provide attractive profit opportunities, but generally entail a higher
degree of risk as the Company makes investments for its own account.
FOCUSED CLIENT AND CUSTOMER COVERAGE
Investment Banking
Lehman Brothers is a leading underwriter of equity and equity-related
securities in the equity capital markets and of taxable and tax-exempt fixed
income securities denominated in U.S. dollars and other currencies in the fixed
income markets. The Company also engages in project and real estate financings
around the world. According to Securities Data Company, Inc., Lehman Brothers
was the third ranked underwriter of debt and equity securities worldwide in
1993, compared to a ranking of eighth in 1990. During 1993, Lehman Brothers lead
managed 784 offerings of debt and equity securities worldwide with a total
volume of $129.4 billion.
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 and geographic coverage groups, enabling individual
bankers to develop specific expertise in particular industries and markets.
Industry coverage groups include consumer products, financial institutions,
health care, industrial, media, merchandising, natural resources, real estate,
technology, telecommunications, transportation and utilities. Where appropriate,
professionals with specialized expertise in Strategic Advisory,
3
5
Equities, Fixed Income, Foreign Exchange, Commodities, Derivatives 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 Strategic Advisory Group works closely
with industry and geographic coverage investment bankers and product specialists
around the world. As mergers and acquisitions activity has become increasingly
global, Lehman Brothers has maintained its position as a leader in cross-border
transactions. In 1993, Lehman Brothers was ranked fourth in terms of mergers and
acquisitions transactions worldwide according to Securities Data Company, Inc.,
the same ranking it held in 1990. In 1993, the Company advised clients worldwide
on transactions totaling $23.2 billion.
Lehman Brothers has increased its international presence during the past
few years in recognition of the current and anticipated growth in international
markets. Most recently, in 1993 the Company strengthened its presence in
Germany, initiated banking coverage of the People's Republic of China, and in
early 1994, opened an office in Beijing. During 1993, Lehman Brothers also
brought together resources from around the world to advise on a complete range
of financial and strategic issues in other emerging markets such as Mexico and
Turkey.
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 750 sales professionals in 19 locations around the world. Institutional
Sales focuses on the major 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 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.
High Net Worth and Middle Market Sales
The Company's Financial Services Division serves the investment needs of
high net worth individual investors and small and mid-sized institutions. This
division has one of the largest sales forces of its kind among major investment
banks, with over 500 investment representatives located in seven offices in the
major financial centers of the United States and 19 offices in major financial
centers in Latin America, Europe, the Middle East and the Asia Pacific region.
The Company's investment representatives provide investing customers with ready
access to Lehman Brothers' equity and fixed income research, execution
capabilities and global product offerings. The Financial Services Division also
enables the Company's issuing clients to access a diverse investor base
throughout the world.
The global network of investment representatives is supported by the
Investor Services Group located in New York, London and Hong Kong. This group
provides an integrated, global approach to transaction execution, marketing
support, asset allocation strategies, and product development. The Investor
Services Group also works closely with Lehman Brothers Global Asset Management
to develop proprietary product offerings for investing customers.
4
6
Through Lehman Brothers Bank (Switzerland) S.A. (the "Bank"), the Financial
Services Division provides high net worth investors the traditional personalized
services of a Swiss bank, combined with the global resources of a leading
securities company. The Bank's services include deposit facilities,
international investment products, multi-currency secured lending and global
custodial services.
COMPREHENSIVE PRODUCT AND SERVICE CAPABILITIES
Lehman Brothers provides equity, fixed income, foreign exchange,
commodities, asset management and merchant banking products and services to
clients and customers worldwide. Each area is organized on a global basis, and
professionals are integrated into teams, supported by a dedicated administrative
and operations staff, to provide the highest quality products and services.
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 integrated nature of the Company's global operations and the
equity expertise delivered through the Company's client and customer teams
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. According to Securities Data Company, Inc., Lehman
Brothers ranked fourth in lead managed equity and equity-related securities
offerings worldwide in 1993, compared to a ranking of sixth in 1990. During
1993, the Company lead managed 138 equity offerings worldwide totaling $10.6
billion.
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 Depository 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. During 1993, Lehman Brothers made markets in the
top 300 NASDAQ stocks as measured by volume. The Company also makes markets in
almost all major European large capitalization stocks. In addition, the
Company's convertible securities trading professionals make markets in nearly
300 convertible debenture issues and 100 convertible preferred stock issues
around the world.
Derivative Products. Lehman Brothers offers equity derivative capabilities
across a wide spectrum of products and currencies, including listed options and
futures, portfolio trading, OTC options, equity swaps, warrants and similar
products. In 1993, Lehman Brothers developed and marketed several innovative
products designed to help investors establish or hedge positions in global
markets and currencies. These included products such as certain call and put
warrants that use major stock indices as a benchmark, including the Hang Seng,
the FT-SE Eurotrack 200, the Mexican Bolsa, and the Nikkei Index. Warrants were
also issued on baskets of stocks, including the Company's Ten Uncommon Valuessm,
which is based on the recommendations of Lehman Brothers' equity research
analysts. In addition, Lehman Brothers lead managed the largest ever stand-alone
U.S. corporate warrant issue in 1993.
Equities Research. The Equities 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 Equities research
department is comprised of regional teams staffed by industry specialists,
covering more than 50 industry sectors and 1,000 companies worldwide from
locations in New York, London, Hong Kong and Tokyo. During 1993, the Company
expanded its global economics coverage and technical market analysis
capabilities.
5
7
Equity Finance. Lehman Brothers operates a comprehensive equity finance
business to support the funding, sales and trading activities of the Company and
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 finance group. This group also engages in a conduit
business, whereby the Company seeks to earn a positive net spread on matched
security borrowing and lending activities.
Fixed Income
Lehman Brothers actively participates in all major fixed income product
areas 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 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. According to
Securities Data Company, Inc., Lehman Brothers ranked third in lead managed
fixed income securities offerings worldwide in 1993, compared to a ranking of
ninth in 1990. During 1993, the Company lead managed 646 offerings worldwide for
a total of $118.8 billion of fixed income securities.
Fixed Income products consist of dollar and non-dollar government,
sovereign and supranational agency obligations; money market products; 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 central funding operation 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 leading
39 primary dealers in U.S. Government securities, as designated by the Federal
Reserve Bank of New York, and participates in the underwriting of, and maintains
positions in, 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.
Money Market Products. Lehman Brothers is a global market leader in the
origination and distribution of short-term debt obligations, including
commercial paper, short-term notes, preferred stock and Money Market Preferred
Stock(R). The Company is an appointed dealer for approximately 600 commercial
paper programs on behalf of companies and government agencies worldwide.
Corporate Debt Securities. Lehman Brothers is a leader in the underwriting
and market making of fixed, floating dollar and non-dollar investment grade debt
worldwide and trades in approximately $2.0 billion of these securities on a
daily basis. According to Securities Data Company, Inc., during 1993, Lehman
Brothers ranked third in new issue domestic investment grade debt. The Company
also underwrites and makes markets in non-investment grade debt securities and
bank loans. Lehman Brothers trades in excess of $2.0 billion of high yield
securities on a monthly basis.
Mortgage and Asset-Backed Securities. The Company is a leading underwriter
of and market maker in mortgage and asset-backed securities. Lehman Brothers
makes markets and trades in the full range of U.S. agency-backed mortgage
products, as well as public and private collateralized mortgage obligations and
whole loan products. The Company's trading activity in the secondary mortgage
market exceeds $4.0 billion on a daily basis. According to Securities Data
Company, Inc., the Company ranked second with $39.9 billion of residential,
commercial and multi-family mortgage securities underwritten on a lead managed
basis in 1993.
Emerging Market Securities. The Company is a leader in the trading,
structuring and underwriting of Latin American, Eastern European, and Asian
dollar and local currency instruments. In 1993, the emerging markets group lead
managed over $1 billion of new issues and traded over $150 billion of loans and
Brady bonds.
Municipal and Tax-Exempt Securities. Lehman Brothers is a leading dealer
in municipal and tax-exempt securities, including general obligation and revenue
bonds, notes issued by states, counties, cities, and
6
8
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. The
Company's Public Finance group advises state and local governments on the
issuance of municipal securities, and works closely with the municipal sales and
trading area to underwrite both negotiated and competitive short-and long-term
offerings. According to Securities Data Company, Inc., Lehman Brothers ranked
third in lead managed municipal securities offerings in 1993 with a total volume
of $29.3 billion.
Derivative Products. The Company offers a broad range of derivative
product services in more than 15 currencies on a 24-hour basis in nine major
financial centers. Derivatives professionals are integrated into all of the
Company's major fixed income product areas. In 1993, Lehman Brothers assisted
over 1,000 clients and customers worldwide, in the execution of over 3,900
transactions aggregating over $265 billion (notional amount).
In 1993, the Company introduced several new derivative products to meet the
needs of both issuers and investors, including Step-Up Recovery Floating Rate
Notes and Range Floaters. These innovative products are designed to offer
issuers and investors the opportunity to diversify their investment and
liability portfolios. In late 1993, Lehman Brothers incorporated Lehman Brothers
Financial Products Inc. ("LBFP"), a separately capitalized triple-A rated
derivatives subsidiary. Lehman Brothers established LBFP to increase the volume
of its derivatives business and capture additional underwriting and trading
business. It is expected that LBFP will commence its derivatives activities in
the third quarter of 1994.
Central Funding. The central funding unit engages in two major activities,
matched book funding and secured financing. Matched book funding involves
lending cash on a short-term basis to institutional customers collateralized by
marketable securities, typically government or government agency securities.
These arrangements are classified on the Company's balance sheet as "securities
purchased under agreements to resell." The Company may also enter into
short-term contractual agreements, referred to as "securities sold under
agreements to repurchase," whereby securities are pledged as collateral in
exchange for cash. The Company enters into these agreements in various
currencies and seeks to generate profits from the difference between interest
earned and interest paid.
Central funding 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.
Central funding 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.
Fixed Income Research. Fixed Income research at Lehman Brothers
encompasses a broad 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. Fixed Income research specialists are based in New York, London,
Tokyo and Hong Kong. Their expertise includes U.S. government and agency
securities, sovereign and supranational issues, corporate securities, high
yield, asset and mortgage-backed securities and emerging market debt. Fixed
Income research expanded its quantitative capabilities and its coverage of the
commercial real estate market during 1993.
Foreign Exchange
According to a leading market research firm, Lehman Brothers is one of the
top two global investment banks that trade foreign exchange for clients and
customers. 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, and Hong Kong, engages in trading activities in
all major currencies and maintains a 24-hour foreign exchange market making
capability for clients and customers worldwide. In 1993, Lehman Brothers
enhanced its foreign exchange capabilities by becoming the first U.S. investment
bank to join the Electronic Broking Service in
7
9
Europe. 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 in three
business lines: market making in metals and energy, exchange futures execution
services, and managed futures. To service the needs of the Company's clients and
customers in the energy industry, Lehman Brothers is an active market maker in
energy-related refined products. The Company seeks to provide clients and
customers with innovative investment and hedging strategies to satisfy their
investing and risk management objectives. In 1993, professionals from
Commodities, Investment Banking and Equities worked together to structure and
issue gold-denominated preferred stock, which was the first commodity-linked
equity security to be listed on the New York Stock Exchange.
Asset Management
Lehman Brothers Global Asset Management ("LBGAM") provides discretionary
and non-discretionary investment management services to institutional and high
net worth investors worldwide. LBGAM's asset management philosophy combines
fundamental research with quantitative techniques to identify investment
opportunities that span the global equity, fixed income and currency markets.
Established in late 1992, LBGAM's assets under management were over $12 billion
at December 31, 1993. During 1993, LBGAM launched the Lehman Brothers
Institutional Funds, a family of money market funds directed toward U.S.
institutional investors, and expanded its offshore mutual funds directed toward
non-U.S. investors and its managed futures funds for investors throughout the
world. LBGAM serves its customers from four principal locations in New York,
Boston, London and Tokyo.
Merchant Banking Fund Management
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. Merchant banking activities have consisted principally of making 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 include both publicly traded and privately held companies
diversified on a geographic and industry basis.
The 1989 Partnerships have a 10 year life with capital available for
investment for only the first five years, which period ended in March 1994.
Accordingly, during the remaining life of the 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 is currently considering the establishment of a new
merchant banking fund and participation in other merchant banking opportunities.
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
8
10
a manner consistent with the Company's expectations, the Company is subject to
the risk that the value of these investments will decline in value. 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).
ADMINISTRATION AND OPERATIONS
The Company's administration and operations staff supports its businesses
through the processing of certain securities and commodities transactions;
receipt, identification and delivery of funds and securities; internal financial
controls; safeguarding of customers' securities; and compliance with regulatory
and legal requirements. In addition, this staff is responsible for information
systems, communications, facilities, legal, internal audit, treasury, tax,
accounting and other support functions.
In response to the needs of certain of its domestic and international
businesses, the Company has acquired sophisticated data processing and
telecommunications equipment. The Company believes such acquisition was
necessary to provide the high level of technological and analytical support
required to process, settle and account for transactions in a worldwide
marketplace. Automated systems also provide sophisticated decision support which
enhances trading capability and the management of the Company's cash and
collateral resources. There is considerable fluctuation within each year and
from year to year in the volume of business that the Company must process, clear
and settle.
GLOBAL SCOPE OF BUSINESS ACTIVITIES
Through its network of offices in 44 cities around the world, Lehman
Brothers pursues a global strategy to meet more effectively the needs of clients
and customers and to generate increased business volume for the Company. The
Company's headquarters in New York and regional headquarters located in London
and Tokyo provide support for and are closely linked to the Company's other
regional offices. Because Lehman Brothers' global strategy is based on a unified
team approach to serving the financial needs of its clients and customers, the
Company's regional offices enable Investment Banking and Sales to more
effectively develop relationships and deliver products and services to clients
and customers whose businesses are located in a given area or who predominantly
transact business in that region. Based on the growth in international business
activities over the past several years and the continued development of a more
integrated global financial economy, Lehman Brothers expects international
business activities to continue to grow in the future. The Company believes that
its global presence and operating strategy position it to continue to increase
the Company's flow of business, and thereby continue to realize greater benefits
from economies of scale.
ORGANIZATION
The organization and culture of Lehman Brothers represent the fourth
element of the Company's overall strategy. This strategy requires close
integration of investment bankers and sales professionals and product and
service professionals to maximize the Company's effectiveness in developing
client and customer relationships. To effect this strategy, Lehman Brothers is
managed as an integrated global operation. Business planning and execution is
coordinated between regional locations and product heads. The Company's
18-member Operating Committee is the principal governing body of Lehman
Brothers, and is comprised of representatives from every major area of the
organization, including the senior managers from the Company's operations in the
9
11
European and Asia Pacific regions. This structure promotes communication and
cooperation, enabling Lehman Brothers to rapidly identify and address
opportunities and issues on a global, firm-wide level. The Operating Committee
facilitates management's ability to run the business as a whole, as opposed to
managing the business units separately.
This structure is reinforced with a culture and operating practices that
promote integration through the implementation and communication of
organizational values and principles consistent with the Company's "One Firm"
philosophy. An example of one of these operating practices is the Company's
approach to compensation, whereby employees are compensated to a significant
extent on the overall performance of the Company and to a lesser extent on the
performance of any individual business area.
RISK MANAGEMENT
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.
Market Risk
In its trading, market making and underwriting activities, Lehman Brothers
is subject to risks relating to fluctuations in market prices and liquidity of
specific securities, instruments and derivative products, as well as volatility
in market conditions in general. The markets for these securities and products
are affected by many factors, including the financial performance and prospects
of specific companies and industries, domestic and international economic
conditions (including inflation, interest and currency exchange rates and
volatility), the availability of capital and credit, political events (including
proposed and enacted legislation) and the perceptions of participants in these
markets.
Lehman Brothers has developed a multi-level approach for monitoring and
managing its market risk. The base level control is at the trading desks where
various risk management functions are performed, including daily mark to market
by traders and on-going monitoring of inventory aging and pricing by trading
desk managers, product area management and the independent risk managers for
each product area. The next level of management of market risk occurs in the
Trade Analysis department, which independently reviews the prices of the
Company's trading positions and regularly monitors the aging of inventory
positions.
The final level of the risk management process is the Senior Risk
Management Committee, which is composed of senior management from the various
product areas and from credit, trade analysis and risk management. In addition,
when appropriate, Lehman Brothers employs hedging strategies to reduce its
exposure to fluctuations in market prices of securities and volatility in
interest or foreign exchange rates.
Credit or Counterparty Risks
Lehman Brothers is exposed to credit risks in its trading activities 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. The responsibility for
managing these credit risks rests with the Corporate Credit department which has
operations in New York, London, Frankfurt, Tokyo and Hong Kong. The department,
which is organized along both industry and geographic lines, is independent from
any of Lehman Brothers' product areas. Corporate Credit manages the Company's
credit risks by establishing and monitoring counterparty limits, structuring and
approving specific transactions, actively managing credit exposures and
participating in the new product review process. In addition, Lehman Brothers,
when appropriate, may require collateral from the counterparty to secure its
obligations to the Company or seek some other form of credit enhancement (such
as financial covenants, guarantees or letters of credit) to support the
counterparty's contractual commitment.
10
12
Transaction Risk
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.
Each proposed transaction involving the underwriting or placement of
securities by Lehman Brothers is reviewed by the Company's Commitment Committee.
The Commitment Committee is staffed by senior members of the Company with
extensive experience in the securities industry. The principal function of the
Commitment Committee is to determine whether Lehman Brothers should participate
in a transaction in which the Company's capital and reputation will be at risk.
Fairness opinions and valuation letters to be delivered by Lehman Brothers
must be reviewed and approved by the Company's Fairness Opinion Committee, which
is composed of senior investment bankers who provide an independent evaluation
of the opinions and conclusions to be rendered to the Company's clients.
In connection with its investment banking or merchant banking activities,
the Company may from time to time make proprietary investments in securities
that are not readily marketable. These investments primarily result from the
Company's efforts to help clients achieve their financial and strategic
objectives. Any such proposed investment which falls within established criteria
with respect to the amount of capital invested, the anticipated holding period
and the degree of liquidity of the securities must be reviewed and approved by
the Company's Investment Committee, which is composed of senior investment
bankers. The Investment Committee reviews in detail the proposed investment and
applies relevant valuation methodologies to evaluate the risk of loss of capital
compared to the anticipated returns from the investment and determine whether to
proceed with the transaction.
Lehman Brothers recently established a New Products and Business Committee
(the "NPBC") for new products developed by Lehman Brothers or new businesses to
be entered into by the Company. The NPBC will work in cooperation with the
originators or sponsors of a new product or business to evaluate its
feasibility, assess its potential risks and liabilities and analyze its costs
and benefits.
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, certain bridge
loans 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 December 31, 1993, the
Company's Non-Core Assets decreased from $2.3 billion in 1990 to approximately
$481 million in 1993, with Non-Core Assets defined as 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.
RELATIONSHIP WITH SMITH BARNEY
On July 31, 1993, the Company completed the sale of Shearson which
consisted of LBI's domestic retail brokerage business (except for such business
conducted under the Lehman Brothers name), substantially all of its asset
management business, the operations and data processing functions that supported
those businesses and certain related assets and liabilities.
11
13
Securities Clearing, Data Services and General Services Agreements
Pursuant to a clearing agreement (the "Clearing Agreement"), Smith Barney
carries and clears, on a fully disclosed basis, all accounts introduced to it by
Lehman Brothers, and performs all clearing and settlement functions for
equities, municipal securities and corporate debt which were previously
performed by Shearson. Lehman Brothers also conducts certain securities lending
activities as agent for Smith Barney under the Clearing Agreement. Pursuant to
Data Services and General Services Agreements, Smith Barney provides to the
Company all of the same data processing and related services that it previously
received from Shearson. Charges for services under these three agreements are
generally calculated using the intercompany transfer pricing methodology in
effect prior to the Primerica Transaction. These agreements expire on December
31, 1994, but may be extended for up to an additional six months upon payment by
the Company of up to $5 million. The Company has been reviewing alternative
clearing, data processing and other servicing arrangements to take effect after
the expiration of its arrangements with Smith Barney.
Certain Arrangements
Revolving Cash Subordination Agreement. The Company has agreed to lend to
Smith Barney up to $150 million to cover capital charges in excess of $50
million incurred by Smith Barney as a result of carrying LBI's customer and
proprietary positions (the "Lehman Capital Charges"). The Company will lend
additional amounts to Smith Barney in the event that the Lehman Capital Charges
increase above $200 million. As of March 28, 1994, $150 million was outstanding.
Under certain circumstances, Travelers is required to purchase all or part of
Smith Barney's indebtedness to the Company under the facility up to $250
million. The Company is only required to fund in excess of $250 million under
this facility if Travelers agrees to a corresponding increase in its purchase
obligation; provided that, without such agreement, the Company may not engage in
any activity which results in the Lehman Capital Charges exceeding $300 million.
Revolving Credit Agreements. Pursuant to a Revolving Credit Agreement,
Smith Barney may borrow funds from LBI secured by securities having a market
value equal to not less than 130% of the aggregate unpaid principal amount
borrowed for the purpose of funding customer margin debits carried by Smith
Barney. As of March 28, 1994, there were no amounts outstanding under this
facility. Pursuant to an Unsecured Revolving Credit Agreement, Holdings has
agreed to advance funds to Smith Barney in order to finance, in part, certain of
the cash demands of the securities lending activities conducted under the
Clearing Agreement. As of March 28, 1994, $756 million was outstanding under
this facility. These facilities will terminate upon the termination of the
Clearing Agreement.
Non-Solicitation. In connection with the Primerica Transaction, both LBI
and Smith Barney agreed that they would refrain from soliciting each other's
employees and certain customers for varying periods of time after July 31, 1993.
The majority of the customer-related non-solicitation provisions have expired.
Shearson Related Litigation. LBI and Smith Barney agreed to a division of
litigation relating to Shearson pursuant to which, subject to certain
exceptions, Smith Barney is liable for such litigations arising after April 11,
1993. With respect to matters arising on or before April 11, 1993, LBI
transferred to Smith Barney a $50 million reserve. If that reserve is exhausted,
the parties have agreed to share liability on the matters arising on or before
April 11, 1993. LBI retained liability for regulatory matters.
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.
12
14
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 advisers 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 adviser, its officers or employees.
LBI is registered with the CFTC as a futures commission merchant and is
subject to regulation as such by the CFTC and various domestic boards of trade
and other commodity exchanges. The Company's U.S. commodity futures and options
business is also regulated by the National Futures Association, a not-for-profit
membership corporation which has been designated as a registered futures
association by the CFTC.
The Company does business in the international fixed income, equity and
commodity markets and undertakes investment banking activities through its
London subsidiaries. The U.K. Financial Services Act of 1986 (the "Financial
Services Act") governs all aspects of the United Kingdom investment business,
including regulatory capital, sales and trading practices, use and safekeeping
of customer funds and securities, record keeping, margin practices and
procedures, registration standards for individuals, periodic reporting and
settlement procedures. Pursuant to the Financial Services Act, the Company is
subject to regulations administered by The Securities and Futures Authority
Limited, a self regulatory organization of financial services companies (which
regulates the Company's equity, fixed income, commodities and investment banking
activities) and the Bank of England (which regulates its wholesale money market,
bullion and foreign exchange businesses).
Holdings' subsidiary, Lehman Brothers Japan Inc., is a licensed securities
company in Japan and a member of the Tokyo Stock Exchange, the Osaka Stock
Exchange and the Tokyo Financial Futures Exchange and, as such, is regulated by
the Japanese Ministry of Finance, the Japan Securities Dealers Association and
such exchanges.
The Company believes that it is in material compliance with regulations
described herein.
The Company anticipates regulation of the securities and commodities
industries to increase at all levels and for compliance therewith to become more
difficult. Monetary penalties and restrictions on business activities by
regulators resulting from compliance deficiencies are also expected to become
more severe.
CAPITAL REQUIREMENTS
As registered broker-dealers LBI and Lehman Government Securities Inc.
("LGSI"), a wholly owned subsidiary of LBI, are subject to the Commission's net
capital rule (Rule 15c3-1, the "Net Capital Rule") promulgated under the
Exchange Act. The NYSE and the NASD monitor the application of the Net Capital
Rule by LBI and LGSI, respectively. LBI and LGSI compute net capital under the
alternative method of the Net Capital Rule which requires the maintenance of
minimum net capital, as defined. A broker-dealer may be required to reduce its
business if its net capital is less than 4% of aggregate debit balances and may
also be prohibited from expanding its business or paying cash dividends if
resulting net capital would be less than 5% of aggregate debit balances. In
addition, the Net Capital Rule does not allow withdrawal of subordinated capital
if net capital would be less than 5% of such debit balances.
The Net Capital Rule also limits the ability of broker-dealers to transfer
large amounts of capital to parent companies and other affiliates. Under the Net
Capital Rule, equity capital cannot be withdrawn from a broker-dealer without
the prior approval of the Commission when net capital after the withdrawal would
be less than 25% of its securities position haircuts (which are deductions from
capital of certain specified percentages of the market value of securities to
reflect the possibility of a market decline prior to disposition). In addition,
the Net Capital Rule requires broker-dealers to notify the Commission and the
appropriate self-
13
15
regulatory organization two business days before a withdrawal of excess net
capital if the withdrawal would exceed the greater of $500,000, or 30% of the
broker-dealer's excess net capital, and two business days after a withdrawal
that exceeds the greater of $500,000, or 20% of excess net capital. Finally, the
Net Capital Rule authorizes the Commission to order a freeze on the transfer of
capital if a broker-dealer plans a withdrawal of more than 30% of its excess net
capital and the Commission believes that such a withdrawal would be detrimental
to the financial integrity of the Company or would jeopardize the
broker-dealer's ability to pay its customers. Certain of LBI's other
subsidiaries are also subject to the Net Capital Rule.
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 18 of Notes to
Consolidated Financial Statements.
EMPLOYEES
As of December 31, 1993 the Company employed approximately 9,300 persons,
including 6,900 in the U.S. and 2,400 internationally. The Company considers its
relationship with its employees to be good.
ITEM 2. PROPERTIES
The Company's headquarters occupy approximately 915,000 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. The Company expects to relocate in or about August 1994,
certain administrative personnel from 388 and 390 Greenwich Street to five
floors in the World Financial Center which are currently occupied by
subsidiaries of American Express. These five floors will be added to the
Company's interest in the World Financial Center, resulting in total occupancy
of approximately 1,147,000 square feet.
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 will be used by systems, operations, and certain
administrative personnel and contains certain back-up trading facilities. The
lease term is approximately 16 years and is expected to commence in August 1994.
The Company occupies 14 floors at 388 and 390 Greenwich Street which it
expects to vacate by July 31, 1994 and will relocate the personnel to the
Operations Center and the World Financial Center.
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.
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
14
16
the aggregate, have a material adverse effect on the business or consolidated
financial condition of the Company.
General Acquisition, Inc. et al. v. GenCorp, Inc. et al. v. Wagner & Brown, et
al. and
Shearson Lehman Brothers Inc. and Shearson Lehman Brothers Holdings Inc.
This litigation in the United States District Court for the Southern
District of Ohio (the "Ohio Court") arose out of the Company's representation of
Wagner & Brown and AFG Industries, Inc. ("AFG") in connection with their effort
to acquire GenCorp, Inc. ("GenCorp") in March 1986. In response to the tender
offer and the litigation commenced by Wagner & Brown and AFG on March 17, 1986,
GenCorp amended its answer and counterclaims on April 2, 1986 to assert claims
against LBI and the Company. Only GenCorp's counterclaims against LBI remain
pending. GenCorp asserted common law claims for breach of fiduciary duty, fraud,
negligence and unjust enrichment against LBI. The claims are based on prior
contacts between LBI and GenCorp and LBI's subsequent role in advising and
assisting Wagner & Brown and AFG with respect to the tender offer. GenCorp seeks
$258 million in damages and the imposition of a constructive trust on the fees
and profits the Company earned in the transaction. On or about October 2, 1992,
the Ohio Court granted LBI's motion for summary judgment and dismissed GenCorp's
claim for compensatory damages. GenCorp has appealed this decision to the United
States Court of Appeals for the Sixth Circuit. No decision has been rendered.
GenCorp's claim for disgorgement of the fees that LBI received has been stayed
pending the appeal.
Bamaodah v. E.F. Hutton & Company Inc.
In April 1986, Ahmed and Saleh Bamaodah commenced an action against E.F.
Hutton & Company Inc. ("EFH"), a subsidiary of The E.F. Hutton Group Inc.
("Hutton"), 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.
FDIC v. Cheng, et al.
On or about February 16, 1990, the Federal Deposit Insurance Corporation
(the "FDIC"), as manager of the Federal Savings and Loan Insurance Corporation
("FSLIC") Resolution Fund (the "FSLIC Resolution Fund"), which is the receiver
of Guaranty Federal Savings and Loan Association ("Guaranty Federal"), filed a
complaint in the U.S. District Court for the Northern District of Texas (the
"Texas District Court") in an action entitled Federal Deposit Insurance
Corporation v. Paul Sau-Ki Cheng, et al. On or about February 2, 1993, the FDIC
served a Third Amended Complaint naming EFH, Holdings, LBI, four former EFH
brokers, Drexel Burnham Lambert Inc. and a subsidiary of it (collectively
"Drexel"), a former Drexel broker, Paul Sau-Ki Cheng and Simon Edward Heath,
both former directors and co-chairmen of the board of directors of Guaranty
Federal and certain other parties not affiliated with LBI as defendants. On or
about February 11, 1993, the Company filed its answer to the Third Amended
Complaint, denying all material allegations and asserting several affirmative
defenses. The FDIC's claims related to trading losses and other alleged damages
suffered by Guaranty Federal, its creditors, stockholders and depositors, the
FSLIC and the FSLIC Resolution Fund as a result of U.S. government bond trading
by Cheng and Heath through EFH and Drexel, as well as alleged violations of the
Commodities Exchange Act. As a result, the FDIC sought $129,980,000 in alleged
actual damages against all defendants and $387.6 million in punitive damages
against all defendants except EFH, Holdings and LBI. On October 25, 1993, the
Company and the FDIC entered into a settlement agreement, and on November 16,
1993, the Texas District Court entered an order and dismissed all claims with
prejudice.
15
17
Paul Williams and Beverly Kennedy, et al. v. Balcor Pension Investors et al.
In February 1990, a purported class action complaint was filed in the
United States District Court for the Northern District of Illinois. The
complaint names eight separate limited partnerships originated by The Balcor
Company ("Balcor"), which was then a wholly owned subsidiary of LBI, known as
the Balcor Pension Investors series. Also named as defendants were the general
partner of each named limited partnership, including Balcor, and Balcor
Securities Co., LBI and American Express. The complaint which was amended on
October 10, 1990 alleges that the named entities violated certain federal
securities laws with regard to the adequacy and accuracy of disclosure of
information in connection with the offering of limited partnership interests.
The complaint also alleges breach of fiduciary duty, fraud, negligence and
violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO").
The complaint seeks compensatory damages and punitive damages. Defendants'
Amended Counterclaim filed on September 19, 1990, asserts common law claims of
fraud and breach of warranty against plaintiffs. Defendants seek to recover for
the alleged damage to their reputation and business as well as their costs and
attorneys fees in defending against the claims brought by plaintiffs. On
November 29, 1990, W.B. Copeland, Trustee, Ploof Truck Lines, Inc. Profit
Sharing Plan and Allan Hirschfield filed a class action counterclaim against
defendants which is identical to the Amended Complaint seeking, among other
things, leave to join this action as named plaintiffs.
On September 8, 1993, the plaintiffs filed a Third Amended Complaint adding
additional named plaintiffs and an amended motion for class certification which
motions had previously been denied. No plaintiff class has yet been certified
and no judicial determination has been made. No merits discovery has been
conducted.
Ralph Majeski, et al. v. Balcor Entertainment Company, Ltd. et al.;
Robert Eckstein, et al. v. Balcor Film Investors, et al.
These two actions were filed in United States District Court for the
Eastern District of Wisconsin (the "Wisconsin District Court"). LBI is a
defendant only in the Majeski case. Plaintiffs allege that the named defendants
in the lawsuits violated certain federal securities laws with regard to the
adequacy and accuracy of disclosure of information in respect of the offering of
limited partnership interests in Balcor Film Investors, a partnership of which a
Balcor subsidiary is the general partner. The Majeski complaint also alleges, in
general, breach of fiduciary duty, common law fraud, misrepresentation, breach
of contract and a cause of action in the nature of a derivative action. On
January 18, 1991, the Wisconsin District Court entered an order certifying a
plaintiffs class of all persons who purchased or currently own interests in the
Partnership which were purchased from January 8, 1985 through December 31, 1985.
The Wisconsin District Court also consolidated the Eckstein and Majeski actions
for the remainder of the pretrial proceedings and trial, but did not merge such
actions. On March 11, 1992, the Wisconsin District Court granted defendants'
motions to dismiss on statute of limitations grounds in both actions.
In August 1993, the U.S. Court of Appeals for the Seventh Circuit (the
"Court of Appeals") issued an opinion which reversed the order of the Wisconsin
District Court and remanded the cases to such court for further proceedings. The
defendants sought a writ of certiorari in the U.S. Supreme Court which was
denied in January 1994. Upon remand to the Wisconsin District Court, plaintiffs
filed a motion to amend the complaint to assert a RICO claim; defendants opposed
this amendment, and the motion is pending. In addition, defendants have renewed
their motions to dismiss. These motions are pending before the Wisconsin
District Court.
On or about March 8, 1993, the Majeski plaintiffs filed an action in the
Circuit Court for Milwaukee County, Wisconsin. The allegations, including
damages, in this complaint are essentially the same as in their federal court
action, described above. Plaintiff's counsel has represented that this state
court action will be dismissed.
Glynwill Investment, Ltd. v. Shearson Lehman Brothers Inc.
Glynwill Investment, Ltd. ("Glynwill"), a corporation chartered in Curacao,
N.A., commenced an action against LBI "as successor in interest to E.F. Hutton &
Co., Inc." in May of 1990 in the Supreme Court of the State of New York (the
"New York Court"), alleging fraud and breach of contract on the part of EFH in
overcharging Glynwill for foreign exchange transactions executed for Glynwill.
The New York Court, on
16
18
LBI's motion to dismiss, held that the release signed by Glynwill after
Glynwill's repayment of approximately one half of the $10 million unsecured
debit created in Glynwill's account was not a general release encompassing the
claims raised by Glynwill in this action and denied LBI's motion. Discovery is
ongoing.
Sanford F. Kaplan v. The E.F. Hutton Group Inc., et al; Christopher J. Harris v.
The E.F. Hutton
Group Inc., et al.
On or about December 30, 1987 and January 11, 1988, the Kaplan and Harris
complaints were filed as purported class actions. The complaints in these two
actions, brought in New York State Supreme Court (the "State Court") and the
United States District Court for the Southern District of New York (the
"District Court"), respectively, name as defendants Hutton, LBI and SLBP
Acquisition Corp., and purport to be brought on behalf of classes of certain
holders of nonvested employee stock options or equity grants awarded under
Hutton's Equity Ownership Plan (the "Plan"). Plaintiffs alleged, among other
things, that as a result of the execution of the Agreement and Plan of Merger
between Hutton, SLBP Acquisition Corp. and LBI and the acquisition by LBI of a
majority of the shares of Hutton, their stock options and equity grants vested.
They sought compensatory damages, declaratory relief and, in the case of Kaplan,
injunctive relief. Classes were certified in each action.
On December 29, 1993, the District Court issued a final judgment and order
approving a settlement and dismissing the Harris action. On January 13, 1993,
the State Court issued a final judgment and order approving the settlement and
dismissing the Kaplan case.
Actions Relating To First Capital Holdings Inc.
FCH 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 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, William L. Mack and Jerome H. Miller (collectively,
the "Outside Directors"), and Michael Milken. The complaints allege 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 seek damages for losses suffered by FCH, punitive damages and
attorneys' fees. The actions have been stayed pursuant to the bankruptcy of FCH.
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, LBI and American Express as
defendants (individually or collectively, as the case may be, the "American
Express Defendants").
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 raise claims under the federal securities laws and allege 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 is brought purportedly on behalf of three classes. The first
class is similar to the Shareholder Class; the second consists of managing
general agents and general agents who marketed various First Capital Life
products from April 2, 1990 to the filing of the suit and to whom it is alleged
misrepresentations were made concerning FCH (the "Agent Class"); and the third
class
17
19
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 raises
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 is 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 Amended
Complaint") was filed on behalf of the Shareholder Class and the Agent Class.
The Third Complaint names as defendants the American Express defendants,
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 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.
The Bankruptcy Court Action. In the FCH bankruptcy, pending in the United
States Bankruptcy Court for the Central District of California (the "Bankruptcy
Court"), on February 11, 1992, the Official Committee of Creditors Holding
Unsecured Claims (the "Creditors' Committee") obtained permission from the
Bankruptcy Court to file an action for and on behalf of FCH and the parent
corporations of the Insurance Subsidiaries. On March 3, 1992, the Creditors'
Committee initiated an adversary proceeding in the Bankruptcy Court, Case No. AD
92-01723, in which they assert claims for breach of fiduciary duty and waste of
corporate assets against Holdings; fraudulent transfer against both Holdings and
LBI; and breach of contract against LBI. Also named as defendants are the
Outside Directors, the Former Outside Directors, Weingarten and Ginsberg.
Holdings and LBI have answered this complaint, denying the material allegations.
Fact discovery has been completed and the contract claim has been dropped by
plaintiffs. No trial date has been set.
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
18
20
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.
In re Computervision Corporation Securities Litigation
In connection with public offerings of notes and common stock of
Computervision, actions were commenced in federal district court in
Massachusetts against Computervision, certain of its executive officers, the
directors of Computervision, LBI, Donaldson, Lufkin & Jenrette Securities
Corporation, The First Boston Corporation and Hambrecht & Quist Incorporated,
the Company and J.H. Whitney & Co. in the United States District Court for the
District of Massachusetts (collectively the "Massachusetts Case"). These actions
have been consolidated in a consolidated amended class action complaint which
alleges in substance that the registration statement and prospectus used in
connection with the offerings contained materially false and misleading
statements and material omissions related to Computervision's anticipated
operating results for 1992 and 1993. The plaintiffs purport to represent a class
of individuals who purchased in the public offering or in the aftermarket. The
complaint seeks damages for negligent misrepresentation and under Sections 11,
12 and 15 of the Securities Act.
In addition, three suits were filed in the United States District Court for
the Southern District of New York. The suits raise claims similar to those in
the Massachusetts Case against the same defendants. The Judicial Panel on
Multidistrict Litigation has ordered these cases consolidated with the
Massachusetts Case.
State Court Action. Lehman Brothers was named as the sole defendant in a
putative class action, Greenwald v. Lehman Brothers Inc., brought in New York
State Supreme Court (the "State Court"). The complaint alleges in substance that
LBI breached a fiduciary duty owed to its customers in selling them the common
stock, senior notes and senior subordinated notes of Computervision during the
class period, as defined in the complaint. The State Court dismissed the
complaint.
Sims v. Shearson Lehman Brothers Hutton Inc.
In March 1990, LBI was sued in the United States District Court for the
Northern District of Texas (the "Texas District Court") on behalf of a purported
class of all purchasers of limited partnership interests in a limited
partnership offering called Kanland Associates. The partnership was sold by EFH
in 1982 and raised approximately $20 million. In 1987, the partnership's
property was lost in a foreclosure. On May 29, 1992, a second Amended Complaint
was filed against LBI alleging claims under Section 10(b) of the Exchange Act,
common law fraud, breach of fiduciary duty and RICO relating to disclosures made
in connection with the sale of the partnership and alleged breaches of fiduciary
duty subsequent to the foreclosure. On August 10, 1992, the Texas District Court
issued an order certifying a class of all persons who purchased limited
partnership interests in Kanland pursuant to the offering materials distributed
by EFH. On November 29, 1993, the Texas District Court signed a final judgment
and order approving the class action settlement agreed to by the parties, and
dismissed the action with prejudice.
CC&F Medford III Investment Company v. The Boston Company, Inc. and
Wellington-Medford III Properties, Inc.
In September 1992, Wellington-Medford Properties, Inc. ("W-M III"), then a
subsidiary of The Boston Company and now a subsidiary of LBI, and The Boston
Company, then a subsidiary of LBI, were sued in Superior Court of the
Commonwealth of Massachusetts by a limited partner in a partnership (the
"Partnership") of which W-M III is the general partner. The Partnership's
principal asset is an office building which is leased to The Boston Company.
Financing in the amount of $74 million provided to the Partnership by The Sanwa
Bank, Ltd. ("Sanwa") is secured by the office building and the lease with The
Boston Company. The financing matured in December 1992 and Sanwa has initiated a
foreclosure process.
19
21
The complaint alleges that W-M III has breached its obligation to secure
successor financing in order to prevent The Boston Company from being required
to pay increased rental pursuant to a rental formula in its lease. The complaint
seeks damages in an unspecified amount and a declaration regarding The Boston
Company's lease obligations and W-M III's obligations to secure successor
financing. W-M III and The Boston Company have answered, denying the material
allegations of the complaint.
In April 1993, The Boston Company filed a third-party complaint against
Sanwa seeking a declaration as to The Boston Company's obligations pursuant to
its lease of the office building. Sanwa answered and asserted claims against The
Boston Company and W-M III, including claims for treble damages based on alleged
breaches of the construction loan agreement.
In December 1993, the parties entered into a stay of proceedings for
purposes of facilitating negotiations of a possible settlement. Those
negotiations are ongoing but have not resulted in agreement. The stay has been
extended and now expires on April 15, 1994, with trial scheduled to commence on
or after May 16, 1994.
Easton & Co. v. Mutual Benefit Life Insurance Co., et al.; Easton & Co. v.
Lehman Brothers Inc.
LBI 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-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 LBI,
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 LBI 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 LBI and the other defendants.
Easton II was commenced on or about May 18, 1992, and names LBI 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 LBI during the
period April 19, 1991 through July 16, 1991. The complaint alleges that LBI
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 New Jersey 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 Holdings' 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
20
22
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. LBIE and PLC have moved
to remand the case back to the Court.
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 a declaration that it is the legal and beneficial owner
of approximately 10.6 million shares of Berlitz common stock, including 1.9
million shares then registered in PLC's name. (The same shares that are at issue
in the Berlitz case in New York discussed above.) After a trial, on December 10,
1993, the High Court of Justice handed down a judgment finding for the Company
on all aspects of its defense and dismissing Macmillan's claims.
MGN Pension Trustees Limited v. Invesco MIM Management Limited, Capel-Cure
Myers Capital Management Limited and Lehman Brothers International
Limited. This action was commenced by issuance of a writ in the High Court of
Justice, London, England on or about June 5, 1992. It was alleged that LBIE knew
or should have known that certain securities received by it as collateral on a
stock loan account held by Bishopsgate Investment Management were in fact
beneficially owned by the Mirror Group Pension Scheme ("MGPS") or by MGN Pension
Trustees Limited (the trustee of MGPS). On this basis, the plaintiff sought a
declaration that LBIE holds or held a portfolio of securities in constructive
trust for plaintiff. According to the writ, LBIE sold certain of these
securities for L32,024,918, and that LBIE still holds certain of these
securities, allegedly worth approximately L1,604,240. The plaintiff sought
return of the securities still held and the value of the securities liquidated
in connection with the stock loan account. On January 31, 1994, the Company,
along with the other defendants, settled the case.
Bishopsgate Investment Management Limited (in liquidation) v. Lehman
Brothers International (Europe) and Lehman Brothers Holdings PLC. In August
1993, Bishopsgate Investment Management Limited ("BIM") served a Writ and
Statement of Claim against LBIE and PLC. The Statement of Claim alleges that
LBIE and PLC knew or should have known that certain securities received by them,
either for sale or as collateral in connection with BIM's stock loan activities,
were in fact, beneficially owned by various pension funds associated with the
Maxwell Group entities. BIM seeks recovery of any securities still held by LBIE
and PLC or recovery of any proceeds from securities sold by them. The total
value of the securities is alleged to be L100 million. BIM also commenced
certain proceedings for summary disposition of its claims relating to certain of
the securities with a value of approximately L30 million. On January 11, 1994,
the parties agreed to a settlement of that portion of the claim relating to
BIM's request for summary disposition with respect to certain securities. Under
this agreement, two securities holdings were delivered to BIM. The Company
continues to defend the balance of BIM's claim for recovery of other assets
alleged to be worth approximately L70 million. The case is scheduled for trial
in April 1995.
Mellon Bank Corporation v. Lehman Brothers Inc., et al.
In September 1993, Mellon Bank filed a complaint in the U.S. District Court
for the Western District of Pennsylvania against LBI and American Express. The
complaint alleges that LBI, through the conduct of Smith Barney and Travelers,
breached certain covenants contained in the Mellon Agreement. The covenants,
which relate to the provision of custodial and administrative services to
certain mutual funds, were assumed by Smith Barney in connection with the
Primerica Transaction. In a separate action Smith Barney and Travelers were also
sued by Mellon Bank in connection therewith. By order dated January 26, 1994,
the action against LBI and American Express was dismissed.
Warren D. Chisum, et al. v. Lehman Brothers Inc. et al.
On February 28, 1994 a purported class action was filed in the United
States District Court for the Northern District of Texas. The complaint names
Lehman Brothers and two former E. F. Hutton & Company Inc. employees as
defendants. The complaint alleges that defendants violated Section 10b of the
Exchange Act and RICO, breached their fiduciary duties and the limited partners'
contract and committed fraud in
21
23
connection with the origination, sale and operation of four EFH net lease real
estate limited partnerships. Plaintiffs seek: (i) to certify a class of all
persons who purchased limited partnership interests in the four partnerships at
issue, (ii) damages in excess of $140 million plus interest or rescission, (iii)
punitive damages and (iv) accounting and attorneys' fees. The Company believes
it has several meritorious defenses and intends to vigorously defend this case.
Other Matters
In connection with the regulatory attention focused on the U.S. treasury
market, LGSI received from the Commission and the U.S. Department of Justice,
Antitrust Division, subpoenas and letters requesting information and testimony
in connection with a review of the activities of various participants in the
government securities market. LGSI has responded to the subpoenas and letters.
The Company continues to cooperate and supply documents and testimony requested.
As of the date hereof, the Company does not believe that the investigations will
have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pursuant to General Instruction J of Form 10-K, the information required by
Item 4 is omitted.
22
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of the outstanding common stock of the Company is owned by American
Express. For dividend information with respect to the Registrant's common stock,
see Consolidated Statement of Operations appearing at page F-4 hereof, which is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Set forth on the following pages is Lehman Brothers Holdings Inc. and
Subsidiaries Selected Consolidated Financial Data.
23
25
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table summarizes certain consolidated financial information
with respect to the Company and is derived from the audited historical financial
statements of the Company. During 1993, the Company completed the sales of three
businesses: The Boston Company on May 21; Shearson on July 31; and SLHMC on
August 31. In the Company's historical financial statements, the operating
results of The Boston Company are accounted for as a discontinued operation
while the operating results of Shearson and SLHMC are included in the Company's
results from continuing operations through their respective sale dates. As a
result, the Company's results of operations for 1993 are not directly comparable
with the results for prior periods or with the pro forma consolidated financial
data. In addition, historical financial information may not be indicative of the
Company's future performance subsequent to the Distribution.
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1993 1992 1991 1990 1989
------- ------- ------ ------- -------
(in millions, except per share data)
STATEMENT OF OPERATIONS DATA: (a)
Revenues
Market making and principal transactions.......... $ 1,967 $ 1,697 $1,696 $ 1,199 $ 1,269
Investment banking................................ 972 892 674 553 949
Commissions....................................... 1,316 1,677 1,649 1,508 1,858
Interest and dividends............................ 5,840 5,661 5,239 4,927 6,022
Other............................................. 491 684 572 563 678
------- ------- ------ ------- -------
Total revenues............................. 10,586 10,611 9,830 8,750 10,776
Interest expense.................................. 5,368 5,185 4,925 4,734 5,884
------- ------- ------ ------- -------
Net revenues............................... 5,218 5,426 4,905 4,016 4,892
------- ------- ------ ------- -------
Non-interest expenses
Compensation and benefits......................... 2,989 3,310 2,899 2,451 2,856
Other expenses(b)................................. 1,515 2,118 1,712 1,707 1,929
Loss on sale of Shearson.......................... 535 -- -- -- --
Reserves for non-core businesses(c)............... 152 -- -- -- --
Other charges(d).................................. -- 245 144 607 --
------- ------- ------ ------- -------
Total non-interest expenses................ 5,191 5,673 4,755 4,765 4,785
------- ------- ------ ------- -------
Income (loss) from continuing operations before
taxes and cumulative effect of changes in
accounting principles............................. 27 (247) 150 (749) 107
Provision for (benefit from) income taxes........... 318 (54) (47) (57) 39
------- ------- ------ ------- -------
Income (loss) from continuing operations before
cumulative effect of changes in accounting
principles........................................ (291) (193) 197 (692) 68
------- ------- ------ ------- -------
Income (loss) from discontinued operations, net of
taxes
Income (loss) from operations..................... 24 77 10 (117) 42
Gain on disposal.................................. 165 -- -- -- --
------- ------- ------ ------- -------
189 77 10 (117) 42
------- ------- ------ ------- -------
Income (loss) before cumulative effect of changes in
accounting principles............................. (102) (116) 207 (809) 110
Cumulative effect of changes in accounting
principles(e)..................................... -- (7) -- (157) --
------- ------- ------ ------- -------
Net income (loss)................................... (102) (123) 207 (966) 110
Preferred stock dividends........................... 48 48 48 48 25
------- ------- ------ ------- -------
Net income (loss) applicable to Common Stock........ $ (150) $ (171) $ 159 $(1,014) $ 85
------- ------- ------ ------- -------
------- ------- ------ ------- -------
AS OF DECEMBER 31,
-------------------------------------------------------
1993 1992 1991 1990 1989
------- ------- ------- ------- -------
(in millions)
BALANCE SHEET DATA:
Total assets....................................... $80,474 $85,232 $59,742 $55,081 $52,372
Long-term indebtedness(f).......................... 9,899 7,680 5,731 5,472 6,766
Total stockholders' equity......................... 2,052 2,361 2,348 2,027 2,200
OTHER FINANCIAL DATA:
Total assets excluding matched book(g)............. $54,428 $58,866 $44,056 $41,892 $39,710
Ratio of total assets to total stockholders'
equity........................................... 39.2x 36.1x 25.4x 27.2x 23.8x
Ratio of total assets excluding matched book to
total stockholders' equity(g).................... 26.5x 24.9x 18.8x 20.7x 18.1x
24
26
- ---------------
(a) Certain revenue and expense amounts for each of the years prior to 1993 have
been reclassified to conform to the current period's presentation.
(b) 1992 amount includes $90 million in litigation reserves and a $162 million
write-down of the carrying value of certain real estate investments. Other
expenses in 1991 includes $32 million write-down of the Company's equity
investment in DR Holdings Inc., the former parent company of Computervision
Corporation.
(c) Includes $32 million of reserves for certain non-core partnership
syndication activities in which the Company is no longer actively engaged
and $120 million of reserves related to the sale of SLHMC.
(d) Amounts reflect a write-down of the carrying value of the Company's holdings
of Computervision Corporation in 1992, the write-off of the Company's
investment in First Capital Holdings Corporation in 1991 and charges
associated with the restructuring of the Company in 1990.
(e) Effective January 1, 1992, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 106, "Employers' Accounting for
Post-Retirement Benefits Other Than Pensions," for the Company's retiree
health and other benefit plans. The cumulative effect of adopting SFAS No.
106 reduced 1992 net income by $76 million (net of taxes of $52 million). Of
this amount, $5 million (net of taxes of $3 million) related to discontinued
operations. The Company adopted SFAS No. 109 "Accounting for Income Taxes,"
as of January 1, 1992 and recorded a $69 million increase in consolidated
net income from the cumulative effect of a change in accounting principle,
$64 million of which related to discontinued operations. Effective as of
January 1, 1990, the Company adopted the policy of expensing the cost of all
internally developed software as incurred. The cumulative effect of the
change for periods prior to January 1, 1990 increased the 1990 net loss by
$157 million, $58 million of which related to discontinued operations.
(f) Long-term indebtedness includes senior notes and subordinated indebtedness.
(g) Matched book represents a short-term interest rate arbitrage collateralized
primarily by U.S. government and agency securities. Several nationally
recognized rating agencies consider "securities purchased under agreements
to resell" ("reverse repos") a proxy for matched book assets. These rating
agencies consider reverse repos to have a low risk profile, and when
evaluating the Company's capital strength and financial ratios, exclude
reverse repos in the calculation of total assets divided by total equity.
Although there are other assets with similar risk characteristics on the
Company's balance sheet, the exclusion of reverse repos from total assets in
this calculation reflects the fact that these assets are matched against
liabilities of a similar nature, and therefore require minimal amounts of
capital support. Accordingly, the Company believes the ratio of total assets
excluding matched book to total stockholders' equity to be a more meaningful
measure of the Company's leverage.
25
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Set forth on the following pages is Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended December 31,
1993.
BUSINESS ENVIRONMENT
The Company's principal business activities, investment banking and
securities trading and sales are, by their nature, subject to volatility,
primarily due to changes in interest and foreign exchange rates, global economic
and political trends and industry competition. As a result, revenues and
earnings may vary significantly from quarter to quarter and from year to year.
In 1993, the Company's operating results were achieved in an environment of
declining interest rates in the United States, mixed economic trends around the
world and continued globalization of the capital markets.
The general decline in interest rates in the United States, which began in
1990, continued in 1993 with interest rates declining to their lowest levels in
more than 10 years. Investors, seeking higher returns, reduced their holdings of
short-term fixed income securities in favor of longer term debt and equity
securities in U.S. and non-U.S. markets. Corporate issuers took advantage of
this environment and the pools of capital available for investment to
restructure their balance sheets through the issuance of equity, repayment of
debt and refinancing of debt at lower interest rates. These factors resulted in
record levels of debt and equity issuances in 1993.
In addition, though the U.S. economy grew slowly in 1993, and the economies
of Europe and Japan continued to stagnate, many emerging market economies,
particularly in Asia and Latin America, grew more rapidly. Increasing ease of
cross-border capital movement, due to lessening of currency and investment
restrictions, enhanced the ability of investors and issuers to participate in
the international capital markets.
RESULTS OF OPERATIONS
During 1993, the Company completed the sales of three businesses: The
Boston Company on May 21; Shearson on July 31; and SLHMC on August 31. In the
Company's audited historical consolidated financial statements, the operating
results of The Boston Company are accounted for as a discontinued operation
while the operating results of Shearson and SLHMC are included in the Company's
results from continuing operations through their respective sale dates.
Because of the significant sale transactions completed during 1993, the
Company's historical financial statements are not fully comparable for all years
presented. To facilitate an understanding of the Company's results, the
following discussion is segregated into three sections and provides financial
tables that serve as the basis for the review of results. These sections are as
follows:
- Historical Results: the results of the Company's ongoing businesses; the
results of Shearson and SLHMC through their respective sale dates; the
loss on the sale of Shearson; the reserves for non-core businesses; the
results of The Boston Company (accounted for as a discontinued
operation); and the cumulative effect of changes in accounting
principles.
- The Lehman Businesses: the results of the ongoing businesses of the
Company.
- The Businesses Sold: the results of Shearson and SLHMC; the loss on the
sale of Shearson; and the reserves for non-core businesses related to the
sale of SLHMC.
26
28
HISTORICAL RESULTS (CONTINUING, SOLD AND DISCONTINUED BUSINESSES)
YEAR ENDED DECEMBER 31,
----------------------------
1993 1992 1991
------ ------ ------
(in millions)
Net revenues............................................. $5,218 $5,426 $4,905
Total non-interest expenses.............................. 5,191 5,673 4,755
------ ------ ------
Income (loss) from continuing operations before taxes.... 27 (247) 150
Provision for (benefit from) income taxes................ 318 (54) (47)
------ ------ ------
Income (loss) from continuing operations................. (291) (193) 197
Income from discontinued operations, net of taxes........ 189 77 10
------ ------ ------
Income (loss) before cumulative effect of changes in
accounting principles.................................. (102) (116) 207
Cumulative effect of changes in accounting principles.... (7)
------ ------ ------
Net income (loss)........................................ $ (102) $ (123) $ 207
------ ------ ------
------ ------ ------
HISTORICAL RESULTS (CONTINUING, SOLD AND DISCONTINUED BUSINESSES)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
Net revenues decreased 4% to $5,218 million in 1993 from $5,426 million in
1992 due to the sale of Shearson and SLHMC, offset in part by a 25% increase in
net revenues of the Lehman Businesses. Net revenues of $5,426 million in 1992
increased 11% over 1991 net revenues of $4,905 million with net revenues of the
Lehman Businesses and the Businesses Sold increasing by 11% and 10%,
respectively.
Non-interest expenses decreased 8% to $5,191 million in 1993 from $5,673
million in 1992 due to the sale of Shearson and SLHMC and to a decrease in
non-interest expenses of the Lehman Businesses. Non-interest expenses of $5,673
million in 1992 increased 19% over 1991 non-interest expenses of $4,755 million
due primarily to $497 million of write-downs and reserves taken in 1992 and a
15% increase in compensation and benefits expenses related to the Businesses
Sold.
The Company reported a net loss of $102 million for the year ended December
31, 1993 compared to a net loss of $123 million in 1992 and net income of $207
million in 1991. Included in the 1993 net loss of $102 million was an after-tax
loss on the sale of Shearson of $630 million ($535 million pre-tax) and an
after-tax charge of $100 million ($152 million pre-tax) related to certain
non-core businesses, including a $79 million ($120 million pre-tax) charge
related to the sale of SLHMC and a $21 million ($32 million pre-tax) charge
related to certain partnership syndication activities in which the Company is no
longer actively engaged. The 1993 net loss also included income from
discontinued operations of The Boston Company of $189 million, which included an
after-tax gain of $165 million on the sale and after-tax operating earnings of
$24 million. The 1992 net loss of $123 million included charges totaling $316
million ($497 million pre-tax) consisting of $59 million ($90 million pre-tax)
of additional litigation reserves, a $107 million ($162 million pre-tax) write-
down in the carrying value of certain real estate investments, and a $150
million ($245 million pre-tax) charge related to the Company's holdings of
Computervision Corporation ("Computervision"). Also included in the 1992 results
were income from discontinued operations of $77 million and a charge of $7
million related to the cumulative effect of the changes in accounting for
non-pension postretirement benefits and income taxes. Net income of $207 million
in 1991 included a $144 million (pre-tax and after-tax) write-off of the
Company's investment in First Capital Holdings Corporation ("FCH"), a $32
million (pre-tax and after-tax) write-down of the Company's equity-related
investment in DR Holdings Inc., the former parent company of Computervision,
income from discontinued operations of $10 million, and a $122 million tax
benefit on previously reported losses for which no financial statement benefit
had been permitted.
27
29
Included in the table below are the specific revenue and expense categories
comprising the historical results as segregated between the Lehman Businesses
and the Businesses Sold. The historical amounts for the Lehman Businesses do not
include pro forma adjustments for the effects of the Distribution and,
therefore, differ in some respects from the pro forma financial statements
included in the Financial Statements.
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------------
1993 1992 1991
---------------------------------- ---------------------------------- ----------------------------------
LEHMAN BUSINESSES LEHMAN BUSINESSES LEHMAN BUSINESSES
(IN MILLIONS) BUSINESSES SOLD HISTORICAL BUSINESSES SOLD HISTORICAL BUSINESSES SOLD HISTORICAL
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Revenues:
Market making and
principal
transactions.... $1,644 $ 323 $1,122 $ 575 $1,146 $ 550
Investment
banking......... 802 170 674 218 468 206
Commissions....... 488 828 446 1,231 495 1,154
Interest and
dividends....... 5,679 161 5,404 257 4,909 330
Other............. 79 412 65 619 50 522
---------- ---------- ---------- ---------- ---------- ----------
Total
revenues...... 8,692 1,894 7,711 2,900 7,068 2,762
Interest
expense......... 5,225 143 4,928 257 4,569 356
---------- ---------- ---------- ---------- ---------- ----------
Net revenues.... 3,467 1,751 $5,218 2,783 2,643 $5,426 2,499 2,406 $4,905
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Non-interest
expenses:
Compensation and
benefits...... 1,825 1,164 1,551 1,759 1,370 1,529
Other
expenses...... 1,045 470 1,341 777 900 812
Loss on sale of
Shearson...... 535
Reserves and
other
charges....... 32 120 245 144
---------- ---------- ---------- ---------- ---------- ----------
Total
non-interest
expenses.... 2,902 2,289 5,191 3,137 2,536 5,673 2,414 2,341 4,755
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
continuing
operations
before taxes and
cumulative
effect of
changes in
accounting
principles...... 565 (538) 27 (354) 107 (247) 85 65 150
Provision for
(benefit from)
income taxes.... 210 108 318 (109) 55 (54) (84) 37 (47)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
continuing
operations
before
cumulative
effect of
changes in
accounting
principles...... $ 355 $ (646) $ (291) $ (245) $ 52 $ (193) $ 169 $ 28 $ 197
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
THE LEHMAN BUSINESSES
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1992
Summary. For the Lehman Businesses, income from continuing operations
before the cumulative effect of changes in accounting principles was $355
million in 1993 consisting of $376 million of income from the continuing
businesses and a $21 million reserve ($32 million pre-tax) for certain non-core
partnership syndication activities in which the Company is no longer actively
engaged. The loss of $245 million in 1992 from the Lehman Businesses includes
charges totaling $316 million ($497 million pre-tax), as described above in
"Historical Results."
Net Revenues. Net revenues increased 25% to $3,467 million in 1993 from
$2,783 million in 1992. Revenues related to market making and principal
transactions and investment banking were the primary sources of the increase.
Net revenues increased both domestically and internationally with revenues
associated with international products and services increasing 63% to $850
million in 1993 from $520 million in 1992. The Company estimates that
approximately $300 million in 1993 revenues that were associated with domestic
products and services resulted from relationships with international clients and
customers. These international results reflect the Company's strategy to
increase the global scope of its business activities.
28
30
Market Making and Principal Transactions. Market making and principal
transactions include the results of the Company's market making and trading
related to customer activities, as well as proprietary trading for the Company's
own account. Revenues from these activities encompass net realized and mark-to-
market gains and (losses) on securities and other financial instruments owned as
well as securities and other financial instruments sold but not yet purchased.
The Company utilizes various hedging strategies as it deems appropriate to
minimize its exposure to significant movements in interest and foreign exchange
rates and the equity markets. Market making and principal transactions revenues
increased 47% to $1,644 million in 1993 from $1,122 million in 1992, reflecting
greater activity and strong customer order flow across all business lines. The
following discussion provides an analysis of the Company's market making and
principal transactions revenues based upon the various product groups which
generated these revenues.
Market Making & Principal Transactions Revenues (in millions):
YEAR ENDED DECEMBER 31,
----------------------------
1993 1992 1991
------ ------ ------
Fixed income................................... $ 759 $ 671 $ 643
Equity......................................... 338 243 338
Derivative products............................ 399 136 85
Foreign exchange and commodities............... 148 72 80
------ ------ ------
$1,644 $1,122 $1,146
------ ------ ------
------ ------ ------
Fixed income revenues increased 13% to $759 million in 1993 from $671
million in 1992. This increase was due principally to increased revenues from
several products, particularly emerging markets, high yield and corporate debt
instruments.
Equity revenues include net gains on market making and trading in listed
and over-the-counter equity securities. Equity revenues increased 39% to $338
million in 1993 from $243 million in 1992, primarily as a result of higher
revenues from the Company's proprietary trading activities.
Derivative products revenues, which include revenues from fixed income
derivative products and equity derivative products, increased 193% to $399
million in 1993 from $136 million in 1992.
Fixed income derivative products revenues include net revenues from the
trading and market making activities of the Company's fixed income derivative
products business. These products include interest rate and currency swaps,
caps, collars, floors and similar instruments. Fixed income derivative products
revenues increased 197% to $318 million in 1993 from $107 million in 1992,
representing 40% of the total increase in market making and principal
transactions revenues. The increased revenues were primarily a result of
increased Company activity in these markets and increased usage of these
products by the Company's clients and customers. At December 31, 1993, the
notional value of the Company's fixed income derivatives contracts increased to
over $260 billion from approximately $105 billion at December 31, 1992. Notional
amounts do not represent a quantification of the market or credit risk of the
positions; rather, notional amounts represent the amounts used to calculate
contractual cash flows to be exchanged and are generally not actually paid or
received. During 1994, the Company will commence derivative trading and market
making activities through Lehman Brothers Financial Products Inc., a separately
capitalized triple-A rated derivatives subsidiary. This subsidiary is expected
to increase the Company's customer base and the volume of activity in its fixed
income derivatives business and capture additional underwriting business.
Equity derivative products revenues include net revenues from the trading
and market making activities of the Company's equity derivative products
business. Such revenues increased 179% to $81 million in 1993 from $29 million
in 1992. The Company's equity derivatives business expanded during 1993 due to
the Company's increased emphasis on equity derivative products and the Company's
activity in the equities business generally. At December 31, 1993, the notional
value of equity derivatives contracts was approximately $24 billion. Notional
amounts for 1992 and 1991 were not material.
Foreign exchange and commodities revenues include revenues derived from
market making and trading in spot and forward foreign currency contracts,
foreign currency futures contracts, and energy and other
29
31
commodity futures contracts. Revenues from these sources increased 106% to $148
million in 1993 from $72 million in 1992. Included in these results were foreign
exchange revenues of $115 million and $62 million for 1993 and 1992,
respectively, reflecting an increase of 85%. This increase was due primarily to
increased customer-related and proprietary trading activities throughout 1993.
Revenues from commodity trading activities increased 154% to $33 million in 1993
from $10 million in 1992, due primarily to increased customer-related trading
activities throughout 1993. Foreign exchange contracts outstanding, including
forward commitments to purchase and forward commitments to sell, at December 31,
1993 and 1992 were $230 billion and $104 billion, respectively.
Investment Banking. Investment banking revenues increased 19% to $802
million in 1993 from $674 million in 1992. The 1993 results were driven
primarily by a 40% increase in underwriting revenues to $523 million in 1993
from $373 million in 1992. Underwriting revenues increased as a result of
significantly higher underwriting volumes in both domestic equity and fixed
income products, with the increase in equity underwriting the primary component.
Also included within these results were merchant banking revenues which
decreased 10% to $105 million in 1993 from $117 million in 1992. Such revenues
include net realized gains, net unrealized changes in the value of merchant
banking investments and advisory fees.
Commissions. Commission revenues increased 9% to $488 million in 1993 from
$446 million in 1992, primarily as a result of higher volumes of customer
trading of securities and commodities on exchanges. Commission revenues are
generated from the Company's agency activities on behalf of corporations,
institutions and high net worth individuals.
Interest and Dividends. Interest and dividend revenues increased 5% to
$5,679 million in 1993 from $5,404 million in 1992. Net interest and dividend
income decreased 5% to $454 million in 1993 from $476 million in 1992. Net
interest and dividend revenue amounts are closely related to the Company's
trading activities. A significant portion of net interest revenue is due to
trading decisions and strategies, the results of which are reflected in market
making and principal transactions. The Company evaluates these strategies on a
total return basis. Therefore, changes in net interest revenue from period to
period should not be viewed in isolation but should be viewed in conjunction
with revenues from market making and principal transactions.
Other Revenues. Other revenues increased 22% to $79 million in 1993 from
$65 million in 1992. Asset management fees were the principal component of this
increase. Asset management and related advisory fees increased 25% to $35
million in 1993 from $28 million in 1992, as assets under management increased
substantially to over $12 billion in 1993 from $3 billion in 1992.
Non-interest Expense. Compensation and benefits expense increased 18% to
$1,825 million in 1993 from $1,551 million in 1992, reflecting higher
compensation due to increases in revenues and profitability. However,
compensation and benefits expense as a percentage of net revenues decreased to
52.6% in 1993 from 55.7% in 1992 due to improvements in productivity.
Excluding compensation and benefits expense, non-interest expenses
decreased 32% to $1,077 million in 1993 from $1,586 million in 1992. Included in
the 1993 amount was a charge of $32 million ($21 million after-tax) related to
certain non-core partnership syndication activities in which the Company is no
longer actively engaged. The 1992 results included a series of charges totaling
$497 million ($316 million after-tax) which consisted of a charge of $90 million
($59 million after-tax) for additional litigation reserves, a $162 million ($107
million after-tax) write-down of the carrying value of certain real estate
investments, and a $245 million ($150 million after-tax) charge related to the
Company's holdings of Computervision. Excluding these charges, as well as
compensation and benefits, non-interest expenses declined 4% to $1,045 million
in 1993 from $1,089 million in 1992. This decrease was due primarily to lower
levels of provisions for legal settlements and bad debts and reduced operating
expenses.
30
32
Distribution of Holdings Common Stock
On January 24, 1994, American Express announced the Distribution. Prior to
the Distribution, which is subject to certain conditions, an additional equity
investment of approximately $1.25 billion will be made in Holdings, most
significantly by American Express. Holdings currently expects to file the
Registration Statement with the Commission with respect to the Distribution
during the second quarter of 1994.
Cost Reduction Effort. In August 1993, the Company announced an expense
reduction program with the objective of reducing costs by $200 million on an
annualized basis by the end of the first quarter of 1994. The Company's expense
structure for the first half of 1993, adjusted for changes in the volume and mix
of revenues as well as for additional costs due to external factors such as
inflation or new legislation, is the basis against which these goals are being
measured. As of March 31, 1994, the Company had taken the following actions
which it believes will result in $200 million of cost reductions on an
annualized basis: (i) reduced certain purchased costs by lowering the volume of
goods and services purchased, renegotiating rates with vendors and strengthening
internal compliance with established policies and procedures; (ii) consolidated
certain administrative and support functions; (iii) strengthened compliance and
control functions; and (iv) completed its annual review of personnel, the
objective of which is to upgrade personnel and eliminate positions to improve
the Company's overall productivity.
During the first quarter of 1994, the Company completed a review of
personnel needs, which will result in the termination of certain personnel. The
Company anticipates that it will record a severance charge of approximately $30
million pre-tax in the first quarter of 1994 as a result of these terminations.
In addition to these actions, the Company has identified a variety of
actions that are expected to reduce expenses further, such as (i) additional
reductions in certain purchased expenses and (ii) the relocation in the summer
of 1994 of certain administrative, operations and other support personnel to
newly leased facilities in New Jersey. See "Properties."
THE LEHMAN BUSINESSES
FOR THE YEARS ENDED DECEMBER 31, 1992 AND 1991
Summary. In 1992, the Company reported a loss from continuing operations
before the cumulative effect of changes in accounting principles of $245 million
compared to net income of $169 million in 1991. The 1992 results included
charges of $316 million ($497 million pre-tax) as described above. Income of
$169 million in 1991 included $313 million of income from the continuing core
businesses, reduced by a charge of $144 million (pre-and after-tax) related to
the write-off of the Company's investment in FCH. The 1991 income from the
continuing core businesses also included a tax benefit of $122 million from the
recognition of tax benefits under SFAS No. 96.
Net Revenues. Net revenues increased 11% to $2,783 million in 1992 from
$2,499 million in 1991. Investment banking revenues were the primary source of
the improvement, increasing 44% to $674 million in 1992 from $468 million in
1991. Net revenues from domestic products and services accounted for most of the
increase rising 14% to $2,263 million in 1992. Net revenues from international
products and services increased 2% to $520 million in 1992. The Company
estimates that approximately $100 million of 1992 net revenues associated with
domestic products and services resulted from relationships with international
clients and customers.
Market Making and Principal Transactions. Market making and principal
transactions include the results of the Company's market making and trading
related to customer activities and proprietary trading for the Company's own
account. Revenues from these activities encompass net realized and
mark-to-market gains (losses) on securities and other financial instruments
owned as well as securities and other financial instruments sold but not yet
purchased. The Company uses various hedging strategies to minimize its exposure
to significant movements in interest and foreign exchange rates and the equity
markets as it deems
31
33
appropriate. Market making and principal transactions revenues decreased 2% in
1992 to $1,122 million from $1,146 million in 1991. The following discussion
provides an analysis of the Company's market making and principal transactions
revenues based upon the various product groups which generated these revenues.
Revenues from fixed income products increased 4% to $671 million in 1992
from $643 million in 1991, with money market products and government securities
contributing most of the increase.
Equity revenues include net gains on market making and trading in listed
and over-the-counter equity securities. Equity revenues decreased 28% to $243
million in 1992 from $338 million in 1991, primarily as a result of lower
revenues from the Company's proprietary trading activities.
Derivative products revenues, which include revenues from fixed income
derivative products and equity derivative products increased 60% to $136 million
in 1992 from $85 million in 1991.
Fixed income derivative products revenues include net revenues from the
trading and market making activities of the Company's fixed income derivatives
business. These products include interest rate and currency swaps, caps,
collars, floors and similar instruments. Fixed income derivative products
revenues increased 84% to $107 million in 1992 from $58 million in 1991,
primarily as a result of increased Company activity in these markets and
increased usage of these products by the Company's clients and customers. At
December 31, 1992, the notional value of the Company's fixed income derivatives
contracts increased to approximately $105 billion from approximately $45 billion
at December 31, 1991.
Equity derivative products revenues increased 7% to $29 million in 1992
from $27 million for 1991. The notional value of the Company's equity
derivatives contracts was not material at December 31, 1992 and 1991.
Foreign exchange and commodities revenues include revenues derived from
market making and trading in spot and forward foreign currency contracts,
foreign currency futures contracts and energy and other commodity futures
contracts. Revenues from these sources decreased 10% to $72 million in 1992 from
$80 million in 1991. Foreign exchange revenues increased 27% to $62 million in
1992 from $49 million in 1991, primarily due to an expansion of the Company's
proprietary trading activities during 1992. Commodity trading revenues decreased
to $10 million in 1992 from approximately $31 million in 1991. Foreign exchange
contracts outstanding, including forward commitments to purchase and forward
commitments to sell, at December 31, 1992 and 1991 were $104 billion and $60
billion, respectively.
Investment Banking. Investment banking revenues increased 44% to $674
million in 1992 from $468 million in 1991. This increase was due to increased
underwriting revenues and improved merchant banking results. Underwriting
revenues increased 57% to $373 million in 1992 from $238 million in 1991, while
merchant banking revenues increased 92% to $117 million in 1992 from $61 million
in 1991. Merchant banking revenues include net realized gains, net unrealized
changes in the value of the Company's merchant banking investments and advisory
fees.
Commissions. Commission revenues decreased 10% to $446 million in 1992
from $495 million in 1991. This decrease was due primarily to the strategic
deemphasis of the Company's institutional futures sales activities in 1992.
Commission revenues are generated from the Company's agency activities on behalf
of corporations, institutions and high net worth individuals.
Interest and Dividends. Interest and dividend revenues increased 10% to
$5,404 million in 1992 from $4,909 million in 1991. Net interest and dividend
income increased 40% to $476 million in 1992 from $340 million in 1991. Net
interest and dividend revenue amounts are closely related to the Company's
trading activities. A significant portion of net interest revenue results from
trading decisions and strategies, the results of which are reflected in market
making and principal transactions. The Company evaluates these strategies on a
total return basis. Therefore, changes in net interest revenue from period to
period should not be viewed in isolation but should be viewed in conjunction
with revenues from market making and principal transactions.
Other Revenues. Other revenues increased 30% to $65 million in 1992 from
$50 million in 1991. The growth in asset management fees was the primary source
of this increase. Asset management and related
32
34
advisory fees increased 33% to $28 million in 1992 from $21 million in 1991 due
to an increase in assets under management.
Non-interest Expense. Compensation and benefits expense increased 13% to
$1,551 million in 1992 from $1,370 million in 1991. Compensation and benefits
expense as a percent of net revenues was 55.7% in 1992 versus 54.8% in 1991, as
a result of competitive pressures which caused compensation and benefits expense
to increase at a faster rate than revenues.
Excluding compensation and benefits, non-interest expenses increased 52% to
$1,586 million in 1992 from $1,044 million in 1991. As previously discussed,
1992 results included a series of charges totaling $497 million while 1991
results included a charge of $144 million related to the write-off of the
Company's investment in FCH. Excluding these charges, as well as compensation
and benefits expense, other non-interest expenses increased 21% to $1,089
million in 1992 from $900 million in 1991. The increase in expenses was due
primarily to higher provisions for legal settlements and bad debts as well as
increased operating expenses related to the Company's investments in the
expansion of its international, foreign exchange and derivatives businesses.
THE LEHMAN BUSINESSES
INCOME TAXES -- FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
In 1993, the Lehman Businesses had an income tax provision of $210 million
which consisted of a provision of $221 million for continuing businesses and a
tax benefit of $11 million related to non-core business reserves. The effective
tax rate for the continuing businesses was 37%, which is greater than the
statutory U.S. federal income tax rate principally due to state and local income
taxes partially offset by benefits attributable to income subject to
preferential tax treatment and increased foreign profits. During the third
quarter of 1993, the statutory U.S. federal income tax rate was increased to 35%
from 34%, effective January 1, 1993. The Company's 1993 tax provision includes a
one-time benefit of approximately $10 million from the impact of the federal
rate change on the Company's net deferred tax assets. The Company's effective
tax rate for continuing businesses is expected to increase slightly in 1994,
subject to changes in the level and geographic mix of the Company's profits.
The Company's net deferred tax assets decreased in 1993 to $265 million
from $338 million in 1992. The decrease was primarily related to the utilization
of net operating loss carryforwards ("NOLs") which resulted in cash savings to
the Company. It is anticipated that the remaining deferred tax asset will be
realized through future earnings.
In addition, the Company had, as of December 31, 1993, approximately $175
million of tax NOLs available to offset future taxable income, the benefits of
which have not yet been reflected in the financial statements. Although the
benefit related to these NOLs does not currently meet the recognition criteria
of SFAS No. 109, strategies are being implemented to increase the likelihood of
realization. It is anticipated that approximately $35 million of these NOLs will
be transferred to American Express in connection with the Distribution.
In 1992, the Lehman Businesses had an income tax benefit of $109 million
which consisted of a provision of $72 million from continuing businesses and a
tax benefit of $181 million related to the special charges previously discussed.
Excluding the tax benefit, the effective tax rate for the continuing businesses
was 50%, which was higher than the statutory U.S. federal income tax rate
primarily due to state and local taxes and the impact of certain non-deductible
foreign losses. The effective rate on the benefit for special charges was 36%.
Effective January 1, 1992, the Company adopted SFAS No. 109, "Accounting
for Income Taxes." Previously, the Company accounted for income taxes in
accordance with SFAS No. 96. As a result of the adoption, the Company recorded a
$69 million increase in consolidated net income from the cumulative effect of
this change in accounting principle, $64 million of which related to
discontinued operations. In addition, the Company reduced goodwill by $258
million related to the recognition of deferred tax benefits attributable to the
Company's 1988 acquisition of The E. F. Hutton Group Inc. The Company
established a deferred tax
33
35
asset of $327 million in the first quarter of 1992 related to tax benefits
previously unrecorded under SFAS No. 96.
The 1991 tax benefit of $84 million includes $122 million for the
recognition of benefits on previously reported losses for which no financial
statement benefit had been permitted. Excluding the recognition of these
benefits, the 1991 effective tax rate was 45%, which was higher than the
statutory U.S. federal income tax rate due primarily to state and local income
taxes and the non-deductibility of goodwill amortization.
THE BUSINESSES SOLD
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1992
This discussion is provided to analyze the operating results of the
Businesses Sold. For purposes of this discussion, the amounts described as the
Businesses Sold include the results of operations of Shearson and SLHMC, the
loss on sale of Shearson and the reserve for non-core businesses related to the
sale of SLHMC. All 1993 amounts for the Businesses Sold include results through
their dates of sale and therefore reported results for 1993 are not fully
comparable with prior years' results.
Net revenues related to the Businesses Sold were $1,751 million in 1993 and
$2,643 in 1992. Excluding the loss on the sale of Shearson and the reserve for
non-core businesses related to SLHMC, non-interest expenses of the Businesses
Sold were $1,634 million in 1993 and $2,536 million in 1992. Compensation and
benefits expense were $1,164 million in 1993 and $1,759 million in 1992.
The Businesses Sold recorded a net loss of $646 million in 1993 compared to
net income of $52 million in 1992. The 1993 results include a loss on sale of
Shearson of $630 million and a $79 million charge recorded in the first quarter
as a reserve for non-core businesses in anticipation of the sale of SLHMC. The
loss on the sale of Shearson included a reduction in goodwill of $750 million
and transaction-related costs such as relocation, systems and operations
modifications and severance. Excluding the $630 million after-tax loss on sale,
Shearson's net income was $63 million in 1993 compared to $55 million in 1992.
Excluding the $79 million after-tax charge discussed above, SLHMC operations
were break-even in 1993 compared to a net loss of $3 million in 1992.
THE BUSINESSES SOLD
FOR THE YEARS ENDED DECEMBER 31, 1992 AND 1991
Net revenues related to the Businesses Sold increased 10% to $2,643 million
in 1992 from $2,406 million in 1991, due primarily to increases in other
revenues and commissions. The growth in other revenues was due to increases in
investment advisory and custodial fees, reflecting growth in the Company's
managed asset products. An increase in the volume of customer directed trading
activity was the primary source of the increased level of commission revenues.
Non-interest expenses of the Businesses Sold increased 8% to $2,536 million in
1992 from $2,341 million in 1991. Compensation and benefits increased 15% to
$1,759 million in 1992 from $1,529 million in 1991, reflecting higher
compensation due to increased revenues.
Net income for the Businesses Sold increased 86% to $52 million in 1992
from $28 million in 1991. Shearson net income was $55 million in 1992 and $29
million in 1991.
THE BUSINESSES SOLD
INCOME TAXES -- FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
The 1993 tax provision included $108 million for Businesses Sold included
(i) expenses of $54 million related to the operating results of Shearson; (ii)
an expense of $95 million from the sale of Shearson and (iii) a tax benefit of
$41 million related to the $120 million reserve for non-core businesses recorded
in anticipation of the sale of SLHMC. The provision related to the sale of
Shearson primarily resulted from the write-off of $750 million of goodwill which
was not deductible for tax purposes. For 1992 and 1991 the tax expense related
principally to the Shearson operations. The effective tax rate for the
Businesses Sold was 51% in 1992 and 57% in 1991, with the excess over the
statutory U.S. federal income tax rate primarily resulting from state and local
taxes and the non-deductibility of goodwill amortization.
34
36
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1993, total assets were $80.5 billion, compared to $85.2
billion at December 31, 1992. The composition of the Company's assets changed
significantly during 1993 due to the sales of The Boston Company, Shearson and
SLHMC. The Company's asset base now consists primarily of cash and cash
equivalents, and assets which can be sold within one year, including securities
and other financial instruments owned, collateralized short-term agreements and
receivables. At December 31, 1993, these assets comprised approximately 95% of
the Company's balance sheet. Long-term assets consist primarily of other
receivables, which include a $945 million interest-bearing receivable from
American Express due in 1996, property, equipment and leasehold improvements,
deferred expenses and other assets, and excess of cost over fair value of net
assets acquired.
Daily Funding Activities. The Company finances its short-term assets
primarily on a secured basis through the use of securities sold under agreements
to repurchase, securities loaned, securities and other financial instruments
sold but not yet purchased and other collateralized liability structures.
Repurchase agreements and other types of collateralized borrowings historically
have been a more stable financing source under all market conditions. Because of
their secured nature, these collateralized financing sources are less credit
sensitive and also provide the Company access to lower cost funding.
The Company uses short-term unsecured borrowing sources to fund short-term
assets not financed on a secured basis. The Company's primary sources of
short-term, unsecured general purpose funding include commercial paper and
short-term debt, including master notes and bank borrowings under uncommitted
lines of credit. Commercial paper and short-term debt outstanding totalled $11.2
billion at December 31, 1993, compared to $13.4 billion at December 31, 1992. Of
these amounts, commercial paper outstanding totalled $2.6 billion at December
31, 1993, with an average maturity of 31 days, compared to $6.8 billion at
December 31, 1992, with an average maturity of 22 days. The 1993 year-end
balances reflected the repayment of commercial paper and short-term debt
obligations with the proceeds from the sales of The Boston Company, Shearson and
SLHMC. As of December 31, 1993, the Company had $1.6 billion of unused committed
bank credit lines, provided by 35 banks, to support its commercial paper
programs.
To reduce liquidity risk, the Company carefully manages its commercial
paper and master note maturities to avoid large refinancings on any given day.
In addition, the Company limits its exposure to any single commercial paper
investor to avoid concentration risk. The Company's and LBI's access to
short-term and long-term debt financing is highly dependent on their debt
ratings. Holdings' current long-term/short-term senior debt ratings are as
follows: S&P A/A-1; Moody's A3/P-2; IBCA A-/A1; and Thomson BankWatch --/ TBW-1.
As of the Distribution Date, the Company expects to receive long-term/short-term
debt ratings from Fitch Investor Services of A/F-1. LBI's long-term and
short-term debt ratings are generally comparable to, or in certain instances
higher, than those of Holdings.
The Company's uncommitted lines of credit provide an additional source of
short-term financing. As of December 31, 1993, the Company had in excess of
$10.8 billion in uncommitted lines of credit, provided by 158 banks and
institutional lenders, consisting of facilities that the Company has been
advised are available but for which no contractual lending obligation exists.
Long-term assets are financed with a combination of long-term debt and
equity. The Company's long-term funding sources are unsecured senior notes and
subordinated indebtedness. The Company maintains long-term debt in excess of its
long-term assets to provide additional liquidity, which the Company uses to meet
its short-term funding requirements and reduce its reliance on commercial paper
and short-term debt.
During 1993, the Company issued $4.2 billion in long-term debt, compared to
$3.5 billion in 1992. In addition to refinancing long-term debt, these issuances
strengthened the Company's capital base, which consists of long-term debt plus
equity. The Company staggers the maturities of its long-term debt to minimize
refunding risk. At December 31, 1993, the Company had long-term debt outstanding
of $9.9 billion with an average life of 3.1 years, compared to $7.7 billion
outstanding at December 31, 1992, with an average life of 3.8 years. For
long-term debt with a maturity of greater than one year, the Company had $7.4
billion
35
37
outstanding with an average life of 4.0 years at December 31, 1993, compared to
$6.0 billion outstanding with an average life of 4.7 years at December 31, 1992.
As of December 31, 1993, the Company had $3.2 billion available for
issuance of debt securities under various shelf registrations. In July 1993, the
Company initiated a $1 billion Euro medium-term note program, which is not
registered under the Securities Act. As of December 31, 1993, $560 million of
issuance availability remained under this program.
The Company anticipates that 1994 long-term debt issuances will be below
that of prior years due to the previously described changes in its asset
composition and the pre-funding in 1993 of a portion of the Company's long-term
debt maturing in 1994. The cash proceeds to the Company from the Offerings and
the Preferred Stock Purchases, which will total approximately $1,193 million,
will be used to reduce commercial paper and short-term debt and to pay related
fees and expenses estimated to be $20 million.
The Company enters into a variety of financial and derivative products
agreements as an end user to hedge and/or modify its exposure to foreign
exchange and interest rate risk of certain assets and liabilities. These
agreements are not part of the Company's trading portfolio of derivative
products. The Company primarily enters into interest rate swaps and caps to
modify the interest characteristics of its long-term debt obligations. The
Company recognizes the net interest expense or income related to these
agreements on an accrual basis, including the amortization of premiums, over the
life of the contracts.
At December 31, 1993 and 1992, the Company had outstanding interest rate
swap and cap agreements for the above purposes of approximately $4.5 billion and
$3.8 billion, respectively. Included in these amounts were approximately $2.3
billion of interest rate swaps and caps, maturing in 1995 and 1997, which serve
to reduce the Company's overall fixed rate debt to a lower fixed rate. Of the
remaining interest rate swaps, the most significant serve to convert a portion
of the Company's debt to either a fixed rate or a floating rate. The Company has
matched substantially all of the maturities of its remaining interest rate swaps
to the terms of its underlying borrowings.
The $4.5 billion of notional amount of interest rate swap and cap
agreements mature as follows:
(IN MILLIONS)
1994..................................................... $ 845
1995..................................................... 1,540
1996..................................................... 345
1997..................................................... 910
1998..................................................... 320
1999 and thereafter...................................... 540
-------------
$ 4,500
-------------
-------------
The effect of interest rate swap and cap agreements was to decrease
interest expense by approximately $56 million, $57 million and $15 million in
1993, 1992 and 1991, respectively. At December 31, 1993, the unrecorded net loss
on these agreements was approximately $5 million compared to a net unrecorded
gain of $64 million at December 31, 1992. The Company has no deferred gains or
losses related to terminated agreements.
The Company expects to continue using interest rate swap and cap agreements
to modify the effective interest cost associated with its long-term
indebtedness. The $2.3 billion of interest rate swaps and caps described above,
which reduce the Company's rate on its fixed rate debt to a lower fixed rate,
will lower 1994 and 1995 interest expense by approximately $25 million and $15
million, respectively. The effect of the remaining interest rate swaps is
dependent on the level of interest rates in the future.
Liquidity Management. The maintenance of the liability structure and
balance sheet liquidity as discussed above is achieved through the daily
execution of the following financing policies: (i) match funding the Company's
assets and liabilities; (ii) maximizing the use of collateralized borrowing
sources; and (iii) diversifying and expanding borrowing sources.
36
38
(i) The Company's first financing policy focuses on funding the
Company's assets with liabilities which have maturities similar to the
anticipated holding period of the assets to minimize refunding risk. The
anticipated holding period of assets financed on an unsecured basis is
determined by the expected time it would take to obtain financing for these
assets on a collateralized basis.
(ii) The Company's second financing policy is to maximize that portion
of its balance sheet that is funded through collateralized borrowing
sources, which include repurchase agreements, securities loaned, securities
sold but not yet purchased and other collateralized liability structures.
The Company currently funds over 60% of its assets on a collateralized
basis. As discussed above, repurchase agreements and other types of
collateralized borrowings historically have been a more reliable financing
source under all market conditions.
(iii) The Company's third financing policy is to diversify and expand
its borrowing sources in an effort to maximize liquidity and reduce
concentration risk. Through its institutional sales force, the Company
seeks financing from a global investor base with the goal of broadening the
availability of its funding sources. The Company accesses both the
unsecured and collateralized debt markets through its operations in New
York, London, Tokyo, Hong Kong, Frankfurt and Geneva. In addition to
maintaining geographic diversification, the Company also utilizes a broad
range of debt instruments, which it issues in varying maturities. Where the
Company deems it to be appropriate, foreign currency denominated assets are
financed with corresponding foreign currency denominated liabilities.
The Company incorporates these policies in its liquidity contingency
planning process, which is designed to enhance the availability of alternative
sources of funding in a period of financial stress. Financial stress is defined
as any event which severely constrains the Company's access to unsecured funding
sources. The Company's liquidity contingency plan is based on an estimate of its
ability to meet its funding requirements with collateralized financing. To help
achieve this objective, the Company would rely on the additional liquidity
created by its policy of issuing long-term debt in excess of long-term assets
and its ability to pledge its unencumbered marketable securities as collateral
to obtain financing rather than on a sale of these securities.
The Company's liquidity contingency plan assumes no draw-down of committed
bank credit lines. The plan's assumptions are continually reviewed and updated
as the Company's asset/liability mix and liquidity requirements change. The
Company believes that these policies, combined with the maintenance of
sufficient capital levels, position the Company to meet its liquidity
requirements in periods of financial stress.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS AND DERIVATIVES
In addition to financial instruments recorded on the consolidated balance
sheet, the Company enters into off-balance sheet financial instruments primarily
consisting of derivative contracts and credit-related arrangements. Derivative
products include futures, forwards, swaps, options, caps, collars, floors,
swaptions, forward rate agreements, foreign exchange contracts and similar
instruments.
Derivative products are generally based on notional amounts, while
credit-related arrangements are based upon contractual amounts. The notional
values of these instruments are generally not recorded on the balance sheet.
Off-balance-sheet treatment is generally considered appropriate when the
exchange of the underlying asset or liability has not occurred or is not
assured, or where the notional amounts are utilized solely as a basis for
determining cash flows to be exchanged. Therefore, the notional amounts of these
instruments do not reflect the Company's market or credit risk amount.
The Company conducts its derivative activities through wholly owned
subsidiaries. In late 1993, the Company established a new subsidiary, Lehman
Brothers Financial Products Inc., a separately capitalized triple-A rated
derivatives subsidiary. This subsidiary, which is expected to commence
activities during the third quarter of 1994, was established to increase the
volume of the Company's derivatives business related to customer-driven
derivative activities.
The Company records derivatives from dealer-related and proprietary trading
activities at market or fair value, with unrealized gains and losses recognized
in the consolidated statement of operations as market making and principal
transactions revenue. While the notional value of these instruments is not
reflected in the
37
39
consolidated balance sheet, the mark to market value of trading-related
derivatives is reflected on a net basis in the December 31, 1993 and 1992
balance sheets as securities and other financial instruments owned or securities
and other financial instruments sold but not yet purchased, as applicable.
Derivative products, like all financial instruments, include various
elements of risk which must be actively managed. General types of risk from
derivative products include market risk, liquidity risk and credit risk.
Market risk from derivatives results from the potential for changes in
interest and foreign exchange rates and fluctuations in commodity or equity
prices. The market risk for derivatives is similar to that of cash instruments.
The Company may employ hedging strategies to reduce its exposure to fluctuations
in market prices of securities and volatility in interest or foreign exchange
rates.
Liquidity risk from derivatives represents the cost to the Company of
adjusting its positions in times of high volatility and financial stress. The
liquidity of derivative products is highly related to the liquidity of the
underlying cash instruments. As with on-balance sheet financial instruments, the
Company's valuation policies for derivatives include consideration of liquidity
factors.
Credit risk from derivatives relates to the potential for a counterparty
defaulting on its contractual agreement. The Company manages its counterparty
credit risk through a process similar to its other trading-related activities.
This process includes an evaluation of the counterparty's credit worthiness at
the inception of the transaction, periodic review of credit standing and various
credit enhancements in certain circumstances. In addition, the Company attempts
to execute master netting agreements which provide for net settlement of
contracts with the same counterparty in the event of cancellation or default
when appropriate or when allowable under relevant law.
For a discussion of the Company's policies and procedures regarding risk,
see "Business -- Risk Management."
Cash Flows. Cash and cash equivalents increased $692 million in 1993 to
$1,333 million, as the net cash provided by investing activities exceeded the
net cash used in operating and financing activities. In addition, cash and cash
equivalents for discontinued operations increased $42 million in 1993. Net cash
used in operating activities of $1,361 million included the loss from continuing
operations adjusted for non-cash items of approximately $677 million for the
year ended December 31, 1993. Net cash used in financing activities was $372
million in 1993. Net cash provided by investing activities of $2,467 million in
1993 included cash proceeds from the sales of The Boston Company, Shearson and
SLHMC of $2,570 million.
Cash and cash equivalents decreased $250 million in 1992 to $641 million,
as the net cash used in operating activities exceeded the net cash provided by
financing and investing activities. In addition, cash and cash equivalents for
discontinued operations decreased $1,082 million and the effect of exchange rate
changes on cash was an increase of $9 million. Net cash used in operating
activities of $6,277 million included the loss from continuing operations
adjusted for non-cash items of approximately $733 million for the year ended
December 31, 1992. Net cash provided by financing and investing activities was
$4,913 million and $23 million, respectively.
Cash and cash equivalents decreased $299 million in 1991 to $891 million.
In addition, cash and cash equivalents for discontinued operations increased
$706 million and the effect of exchange rate changes on cash was an increase of
$4 million. Net cash used in operating activities of $3,111 million included
income from continuing operations adjusted for non-cash items of approximately
$804 million for the year ended December 31, 1991. Net cash provided by
financing and investing activities was $157 million and $3,357 million,
respectively.
SPECIFIC BUSINESS ACTIVITIES AND TRANSACTIONS
The following sections include information on specific business activities
of the Company which affect overall liquidity and capital resources:
Merchant Banking Partnerships. At December 31, 1993, the Company's
investment in merchant banking partnerships was $381 million, which included
$168 million in one employee-related partnership in
38
40
which the Company, as general partner, is entitled to a priority return. At
December 31, 1993, the Company had commitments to make investments through
merchant banking partnerships of approximately $120 million of which
approximately $66 million expired in March 1994. The Company's policy is to
carry its interests in merchant banking partnerships at fair value based upon
the Company's assessment of the underlying investments. The Company's merchant
banking investments, made primarily through the 1989 Partnerships (as defined
under "Business"), are, consistent with the terms of the 1989 Partnerships,
expected to be sold or otherwise monetized during the remaining term of the
Partnerships.
Westinghouse. In May 1993, the Company and Westinghouse Electric
Corporation ("Westinghouse") entered into a partnership to facilitate the
disposition of Westinghouse's commercial real estate portfolio valued at
approximately $1.1 billion, which will be accomplished substantially by
securitizations and asset sales. The Company invested approximately $154 million
in the partnership, and also made collateralized loans to the partnership of
$752 million. During the third quarter of 1993, Lennar Inc. was appointed
portfolio servicer and purchased a 10% limited partnership interest from the
Company and Westinghouse.
At December 31, 1993, the carrying value of the Company's investment in the
partnership was $154 million and the outstanding balance of the collateralized
loan, including accrued interest, was $539 million. The remaining loan balance
is expected to be repaid in 1994 through a combination of mortgage remittances,
securitizations, asset sales and refinancings by third parties.
High Yield Securities. The Company underwrites, trades, invests and makes
markets in high yield corporate debt securities. The Company also syndicates,
trades and invests in loans to below investment grade companies. For purposes of
this discussion, high yield debt securities are defined as securities or loans
to companies rated below BBB- by S&P and below Baa3 by Moody's, as well as
non-rated securities or loans which, in the opinion of management, are
non-investment grade. High yield debt securities are carried at market value and
unrealized gains or losses for these securities are reflected in the Company's
Consolidated Statement of Operations. The Company's portfolio of such securities
at December 31, 1993 and 1992 included long positions with an aggregate market
value of approximately $1 billion and $920 million, respectively, and short
positions with an aggregate market value of approximately $75 million and $50
million, respectively. The portfolio may from time to time contain concentrated
holdings of selected issues. The Company's two largest high yield positions were
$179 million and $82 million at December 31, 1993 and $180 million and $123
million at December 31, 1992.
Change in Facilities. In 1993, the Company agreed to lease approximately
392,000 square feet of office space located at 101 Hudson Street in Jersey City,
New Jersey (the "Operations Center"). The lease term will commence in August
1994 and provides for minimum rental payments of approximately $87 million over
its 16-year term. Concurrently, the Company announced it would relocate certain
administrative employees to five additional floors at 3 World Financial Center
in New York, New York. These floors will be purchased from American Express for
approximately $44 million, with the Company financing the purchase through the
issuance of notes to American Express. In connection with the relocation to the
Operations Center and the additional space at the World Financial Center, the
Company anticipates incremental fixed asset additions of approximately $112
million which is expected to be funded from the issuance of long-term debt. The
relocation is expected to be completed in the summer of 1994.
Non-Core Activities and Investments. In March 1990, the Company
discontinued the origination of partnerships (whose assets are primarily real
estate) and investments in real estate. Currently, the Company acts as a general
partner for approximately $4.2 billion of partnership investment capital and
manages a real estate investment portfolio with an aggregate investment basis of
approximately $322 million. The Company provided additional reserves for these
activities of $32 million and $162 million in 1993 and 1992, respectively. At
December 31, 1993 and 1992, the Company had remaining net exposure to these
investments (defined as the remaining unreserved investment balance plus
outstanding commitments and contingent liabilities under guarantees and credit
enhancements) of $252 million and $329 million, respectively. In certain
circumstances, the Company provides financial and other support and assistance
to such investments to maintain investment values. Except as described above,
there is no contractual requirement that the Company continue to provide this
support. Although a decline in the real estate market or the economy in general
or a change in the
39
41
Company's disposition strategy could result in additional real estate reserves,
the Company believes that it is adequately reserved.
The Company holds $98 million of long-term subordinated indebtedness and
equity securities of American Marketing Industries Holding Inc. ("AMI"). The
subordinated debt, as amended, matures in 1997, and includes certain provisions
which limit cash interest payments and provides for payment-in-kind securities
above such cash interest payments. The AMI loan is current in payment in
accordance with its terms.
The Company has other equity, partnership and debt investments unrelated to
its ongoing businesses. At December 31, 1993, the total carrying value of the
AMI loan and these other investments was $229 million. Management's intention
with regard to non-core assets is the prudent liquidation of these investments
as and when possible. See "Business -- Non-Core Assets."
Change of Fiscal Year
On March 28, 1994, the Board of Directors of Holdings approved, subject to
the Distribution, a change in the Company's fiscal year end from December 31 to
November 30. Such a change to a non-calendar cycle will shift certain year-end
administrative activities to a time period that conflicts less with the business
needs of the Company's institutional customers.
EFFECTS OF INFLATION
Because the Company's assets are, to a large extent, liquid in nature, they
are not significantly affected by inflation. However, the rate of inflation
affects the Company's expenses, such as employee compensation, office space
leasing costs and communications charges, which may not be readily recoverable
in the price of services offered by the Company. To the extent inflation results
in rising interest rates and has other adverse effects upon the securities
markets, it may adversely affect the Company's financial position and results of
operations in certain businesses.
NEW ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board Interpretation No. 39, "Offsetting of
Amounts related to Certain Contracts" ("FIN No. 39"), was issued in March 1992.
Effective for balance sheets after January 1, 1994, FIN No. 39 restricts the
current industry practice of offsetting certain receivables and payables.
Although the implementation of this standard is expected to substantially
increase gross assets and liabilities, the Company believes that its results of
operations and overall financial condition will not be affected. The Financial
Accounting Standards Board ("FASB") has instructed its staff to explore
modifying FIN No. 39 to create certain exceptions, which, if enacted, would
substantially mitigate the increase in the Company's gross assets and
liabilities expected to initially result from the implementation of FIN No. 39.
In November 1992, the FASB issued Statement of Financial Standards ("SFAS")
No. 112, "Employers Accounting for Postemployment Benefits." This statement
requires the accrual of obligations associated with services rendered to date
for employee benefits accumulated or vested for which payment is probable and
can be reasonably estimated. The Company will record a charge to reflect a
cumulative effect of a change in accounting principle of approximately $13
million after-tax in the first quarter of 1994.
In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Company records substantially
all its securities at market value. No adjustment is anticipated to be recorded
as a result of this accounting pronouncement.
RISK MANAGEMENT
Risk management is an integral part of the Company's business. The Company
has established extensive policies and procedures to identify, monitor, assess
and manage risk effectively. For a discussion of these policies and procedures,
see "Business -- Risk Management."
40
42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information required
by this Item and included in this Report are listed in the Index to Financial
Statements and Schedules appearing on page F-1 and are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
41
43
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction J of Form 10-K, the information required by
Item 10 is omitted.
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to General Instruction J of Form 10-K, the information required by
Item 11 is omitted.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to General Instruction J of Form 10-K, the information required by
Item 12 is omitted.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction J of Form 10-K, the information required by
Item 13 is omitted.
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
See Index to Historical and Pro Forma Consolidated Financial
Statements appearing on page F-1.
2. Financial Statement Schedules:
See Index to Historical and Pro Forma Consolidated Financial
Statements appearing on page F-1.
3. Exhibits
EXHIBIT
NO.
- -------
3.1 Restated Certificate of Incorporation of the Registrant dated April 10, 1987
(incorporated by reference to Exhibit 3.1 of the Registrant's Registration
Statement on Form S-1 (Reg. No. 33-12976)).
3.2 Certificate of Amendment to Restated Certificate of Incorporation of the Registrant
dated May 9, 1988 (incorporated by reference to Exhibit 3.2 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1988).
3.3 Certificate of Amendment to Restated Certificate of Incorporation of the Registrant
dated September 20, 1990 (incorporated by reference to Exhibit 3.3 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1990).
3.4 Certificate of Amendment to Restated Certificate of Incorporation of the Registrant
dated August 2, 1993 (incorporated by reference to Exhibit 3 of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1993).
3.5 Certificate of Designation of Money Market Cumulative Preferred Stock of the
Registrant dated December 27, 1989 (incorporated by reference to Exhibit 3.4 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1990).
3.6 Certificate of the Designation, Powers, Preferences and Rights of Convertible
Exchangeable Preferred Stock of the Registrant dated March 27, 1990 (incorporated
by reference to Exhibit 3.6 of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1989).
3.7 Certificate of the Designation, Powers, Preferences and Rights of Adjustable Rate
Preferred Stock of the Registrant dated March 27, 1990 (incorporated by reference
to Exhibit 3.6 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1989).
42
44
EXHIBIT
NO.
- -------
3.8 Amended Certificate of the Designation, Powers, Preferences and Rights of the
Cumulative Convertible Voting Preferred Stock, Series A, of the Registrant dated
August 10, 1990 (incorporated by reference to Exhibit 3.7 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1990).
3.9 By-Laws of the Registrant, amended as of April 21, 1992.
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 Form of 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
10.17 of the Registrant's Registration Statement on Form S-1 (Reg. No. 33-12976)).
10.2 Tax Allocation Agreement between Shearson Lehman Brothers Holdings Inc. and
American Express Company (incorporated by reference to Exhibit 10.19 of the
Registrant's Registration Statement of Form S-1 (Reg. No. 33-12976)).
10.3 Form of Intercompany Agreement between American Express Company and Shearson Lehman
Brothers Holdings Inc. (incorporated by reference to Exhibit 10.20 of the
Registrant's Registration Statement on Form S-1 (Reg. No. 33-12976)).
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 10.27 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1990).
10.11 Stock Purchase Agreement, dated as of September 14, 1992, by and between Mellon
Bank Corporation and Shearson Lehman Brothers Inc. (Incorporated by reference to
Exhibit 10.15 of the Registrant's Annual Report on form 10-K for the year ended
December 31, 1992).
10.12 Asset Purchase Agreement, dated as of March 12, 1993, by and among Primerica
Corporation, Smith Barney, Harris Upham & Co. Incorporated and Shearson Lehman
Brothers Inc. (incorporated by reference to Exhibit 10.16 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1992).
10.13 Amendment No. 1 dated as of July 31, 1993, to Asset Purchase Agreement dated March
12, 1993, by and among Primerica Corporation, Smith Barney, Harris Upham & Co.
Incorporated and Shearson Lehman Brothers Inc. (incorporated by reference to
Exhibit 10.1 of Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1993).
43
45
EXHIBIT
NO.
- -------
10.14 Amendment No. 2 dated as of July 31, 1993, to Asset Purchase Agreement dated March
12, 1993, by and among Primerica Corporation, Smith Barney, Harris Upham & Co.
Incorporated and Shearson Lehman Brothers Inc. (incorporated by reference to
Exhibit 10.2 of Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1993).
10.15 Clearing Agreement dated as of July 31, 1993, by and between Smith Barney, Harris
Upham & Co. Incorporated and Shearson Lehman Brothers Inc. (incorporated by
reference to Exhibit 10.3 of Holdings' Quarterly Report on Form 10-Q for the
quarter ended June 30, 1993).
10.16 Lease dated as of October 13, 1993 between 101 Hudson Leasing Associates and Lehman
Brothers Holdings Inc. (incorporated by reference to Exhibit 10 of Holdings'
Quarterly Report on Form 10-Q for the quarter ended September 30, 1993) .
10.17 Lehman Brothers Holdings Inc. Voluntary Deferred Compensation Plan (incorporated by
reference to Exhibit 10.9 of Lehman Brothers Inc. Annual Report on Form 10-K for
the year ended December 31, 1987).
10.18 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)).
10.19 Lehman Brothers Holding 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)).
10.20 The E.F. Hutton Group Partnership Award Deferred Compensation Plan (incorporated by
reference to Exhibit 1 to Amendment No. 1 of The E.F. Hutton Group Inc.'s
Registration Statement on Form S-8 (Reg. No. 33-02134)).
10.21 Amended and Restated Agreements of Limited Partnership of Shearson Lehman Brothers
Capital Partners I (incorporated by reference to Exhibit 10.47 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1988).
10.22 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).
12. Computation in support of ratio of earnings to fixed charges.*
21. Pursuant to General Instruction J of Form 10-K, the list of the Registrant's
Subsidiaries is omitted.
23. Consent of Ernst & Young.*
24. Powers of Attorney.*
99. Annual Report on Form 11-K for the Lehman Brothers Holdings Inc. Tax Deferred
Savings Plan.**
(b) Reports on Form 8-K.
1. Form 8-K dated February 10, 1993, Items 5 and 7.
2. Form 8-K dated May 7, 1993, Items 5 and 7.
3. Form 8-K dated June 7, 1993, Items 2 and 7.
4. Form 8-K dated October 29, 1993, Items 5 and 7.
5. Form 8-K dated February 24, 1994, Items 5 and 7.
- ---------------
* Filed herewith.
** To be filed by amendment.
44
46
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
LEHMAN BROTHERS HOLDINGS INC.
(Registrant)
March 31, 1994
By: /s/ THOMAS A. RUSSO
------------------------------------
Title: Attorney-in-Fact
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
- ------------------------------------------ --------------------------------- ---------------
* President, Chief Executive March 31, 1994
- ------------------------------------------ Officer and Director (Principal
Richard S. Fuld, Jr. Executive Officer)
* Chief Financial Officer March 31, 1994
- ------------------------------------------ (Principal Financial Officer)
Robert Matza
* (Principal Accounting Officer) March 31, 1994
- ------------------------------------------
Stephen J. Bier
* Director March 31, 1994
- ------------------------------------------
Roger S. Berlind
* Director March 31, 1994
- ------------------------------------------
David M. Culver
* Director March 31, 1994
- ------------------------------------------
Katsumi Funaki
* Director March 31, 1994
- ------------------------------------------
Richard M. Furlaud
* Director March 31, 1994
- ------------------------------------------
Harvey Golub
* Director March 31, 1994
- ------------------------------------------
Masataka Shimasaki
* Director March 31, 1994
- ------------------------------------------
Sherman R. Lewis, Jr.
*By: /s/ THOMAS A. RUSSO
- ------------------------------------------
(Attorney-in-Fact)
March 31, 1994
45
47
NAME TITLE DATE
- ------------------------------------------ --------------------------------- ---------------
Director
- ------------------------------------------
Dina Merrill
* Director March 31, 1994
- ------------------------------------------
Roger S. Penske
* Director March 31, 1994
- ------------------------------------------
Malcolm Wilson
*By: /s/ THOMAS A. RUSSO
- ------------------------------------------
(Attorney-in-Fact)
March 31, 1994
46
48
INDEX TO HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-----
HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Auditors..................................................... F-2
Consolidated Balance Sheet at December 31, 1993 and 1992........................... F-3
Consolidated Statement of Operations for the three years ended December 31, 1993... F-4
Consolidated Statement of Stockholders' Equity for the three years ended
December 31, 1993............................................................... F-5
Consolidated Statement of Cash Flows for the three years ended December 31, 1993... F-6
Notes to Consolidated Financial Statements......................................... F-8
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS:
Pro Forma Consolidated Balance Sheet at December 31, 1993.......................... F-30
Pro Forma Consolidated Statements of Operations for the years ended December 31,
1993 and 1992................................................................... F-32
Notes to Pro Forma Financial Statements............................................ F-34
SCHEDULES:
Schedule II -- Amounts Receivable from Related Parties and Underwriters, Promoters
and Employees Other than Related Parties........................... F-36
Schedule III -- Condensed Financial Information.................................... F-40
Schedule IX -- Short-Term Borrowings............................................... F-45
Schedules other than those listed above are omitted since they are not
required or are not applicable or the information is furnished elsewhere in the
consolidated financial statements or the notes thereto.
F-1
49
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
Lehman Brothers Holdings Inc.
We have audited the accompanying consolidated balance sheet of Lehman
Brothers Holdings Inc. and Subsidiaries as of December 31, 1993 and 1992, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1993.
Our audits also included the financial statement schedules listed in the index
at Item 14(a). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Lehman Brothers
Holdings Inc. and Subsidiaries at December 31, 1993 and 1992, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1993 in conformity with generally
accepted accounting principles. Also, in our opinion the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
As discussed in Note 11 to the consolidated financial statements, in 1992
the Company changed its methods of accounting for postretirement benefits and
income taxes.
Ernst & Young
New York, New York
February 3, 1994, except for Note 2
as to which the date is March 28, 1994
F-2
50
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT SHARE DATA)
DECEMBER 31,
-------------------
1993 1992
------- -------
ASSETS
Cash and cash equivalents................................................ $ 1,333 $ 641
Cash and securities segregated and on deposit for regulatory and other
purposes............................................................... 1,073 1,253
Securities and other financial instruments owned......................... 35,699 33,165
Collateralized short-term agreements:
Securities purchased under agreements to resell........................ 26,046 26,366
Securities borrowed.................................................... 4,372 7,705
Receivables:
Brokers and dealers.................................................... 5,059 2,841
Customers.............................................................. 2,646 6,078
Other.................................................................. 2,693 2,028
Property, equipment and leasehold improvements (net of accumulated
depreciation and amortization of $438 in 1993 and $766 in 1992)........ 529 1,122
Deferred expenses and other assets....................................... 750 1,972
Net assets of discontinued operations.................................... 1,004
Excess of cost over fair value of net assets acquired (net of accumulated
amortization of $107 in 1993 and $272 in 1992)......................... 274 1,057
------- -------
$80,474 $85,232
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper and short-term debt..................................... $11,205 $13,427
Securities and other financial instruments sold but not yet purchased.... 8,313 11,442
Securities sold under agreements to repurchase........................... 39,191 37,437
Securities loaned........................................................ 1,116 2,777
Payables:
Brokers and dealers.................................................... 1,385 2,071
Customers.............................................................. 4,130 5,183
Accrued liabilities and other payables................................... 3,183 2,854
Senior notes............................................................. 7,779 5,468
Subordinated indebtedness................................................ 2,120 2,212
------- -------
Total liabilities.............................................. 78,422 82,871
------- -------
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
Money Market Cumulative, 3,300 shares authorized; 250 shares issued
and outstanding; $1,000,000 liquidation preference per share....... 250 250
Common Stock, $.10 par value; 300,000,000 shares authorized;
168,235,284 shares issued and outstanding in 1993 and 1992.......... 17 17
Additional paid-in capital............................................. 1,871 1,871
Net unrealized securities losses....................................... (13)
Foreign currency translation adjustment................................ (12) (5)
Accumulated deficit.................................................... (582) (267)
------- -------
Total stockholders' equity..................................... 2,052 2,361
------- -------
$80,474 $85,232
------- -------
------- -------
See notes to consolidated financial statements.
F-3
51
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1992 1991
------- ------- -------
Revenues
Market making and principal transactions.................... $ 1,967 $ 1,697 $ 1,696
Investment banking.......................................... 972 892 674
Commissions................................................. 1,316 1,677 1,649
Interest and dividends...................................... 5,840 5,661 5,239
Other....................................................... 491 684 572
------- ------- -------
Total revenues...................................... 10,586 10,611 9,830
Interest expense............................................ 5,368 5,185 4,925
------- ------- -------
Net revenues........................................ 5,218 5,426 4,905
------- ------- -------
Non-interest expenses
Compensation and benefits................................... 2,989 3,310 2,899
Communications.............................................. 318 378 353
Occupancy and equipment..................................... 254 326 300
Professional services....................................... 203 212 169
Advertising and market development.......................... 161 205 164
Depreciation and amortization............................... 157 185 197
Brokerage, commissions and clearance fees................... 140 117 106
Other....................................................... 282 695 423
Loss on sale of Shearson.................................... 535
Reserves for non-core businesses............................ 152
Computervision write-down................................... 245
First Capital Holdings Corp. write-off...................... 144
------- ------- -------
Total non-interest expenses......................... 5,191 5,673 4,755
------- ------- -------
Income (loss) from continuing operations before taxes and
cumulative effect of changes in accounting principles....... 27 (247) 150
Provision for (benefit from) income taxes..................... 318 (54) (47)
------- ------- -------
Income (loss) from continuing operations before cumulative
effect of changes in accounting principles.................. (291) (193) 197
------- ------- -------
Income from discontinued operations, net of taxes:
Income from operations...................................... 24 77 10
Gain on disposal............................................ 165
------- ------- -------
189 77 10
------- ------- -------
Income (loss) before cumulative effect of changes in
accounting principles....................................... (102) (116) 207
Cumulative effect of changes in accounting principles......... (7)
------- ------- -------
Net income (loss)............................................. (102) (123) 207
Preferred stock dividends..................................... 48 48 48
------- ------- -------
Net income (loss) applicable to Common Stock.................. $ (150) $ (171) $ 159
------- ------- -------
------- ------- -------
See notes to consolidated financial statements.
F-4
52
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1993
(IN MILLIONS)
MONEY NET FOREIGN
SERIES A MARKET ADDITIONAL UNREALIZED CURRENCY
PREFERRED PREFERRED COMMON PAID-IN SECURITIES TRANSLATION ACCUMULATED
TOTAL STOCK STOCK STOCK CAPITAL LOSSES ADJUSTMENT DEFICIT
------ --------- --------- ------ ---------- ---------- ---------- -----------
Balance at January 1, 1991.... $2,027 $ 508 $ 250 $ 16 $1,700 $ (174) $(51) $(222)
Net income.................... 207 207
Preferred dividends........... (48) (48)
Net change in unrealized
securities losses........... 119 119
Other......................... 43 (3) 46
------ --------- --------- ------ ---------- ---------- ----- -----------
Balance at December 31,
1991........................ 2,348 508 250 16 1,697 (55) (5) (63)
Net loss...................... (123) (123)
Preferred dividends........... (48) (48)
Common dividends.............. (33) (33)
Net change in unrealized
securities losses........... 42 42
Issuance of Common Stock...... 175 1 174
------ --------- --------- ------ ---------- ---------- ----- -----------
Balance at December 31,
1992........................ 2,361 508 250 17 1,871 (13) (5) (267)
Net loss...................... (102) (102)
Preferred dividends........... (48) (48)
Common dividends.............. (165) (165)
Net change in unrealized
securities losses........... 13 13
Foreign currency translation
adjustment.................. (7) (7)
------ --------- --------- ------ ---------- ---------- ----- -----------
Balance at December 31,
1993........................ $2,052 $ 508 $ 250 $ 17 $1,871 $ $(12) $(582)
------ --------- --------- ------ ---------- ---------- ----- -----------
------ --------- --------- ------ ---------- ---------- ----- -----------
See notes to consolidated financial statements.
F-5
53
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1992 1991
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) from continuing operations before cumulative
effect of changes in accounting principles.................. $ (291) $ (193) $ 197
Adjustments to reconcile income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization............................... 157 185 197
Provisions for losses and other reserves.................... 106 458 181
Loss on sale of Shearson.................................... 535
Non-core business reserves.................................. 152
Deferred tax benefit........................................ (82) (65) (46)
Computervision write-down................................... 245
First Capital Holdings Corp. write-off...................... 144
Other adjustments........................................... 100 103 131
Net change in:
Cash and securities segregated.............................. 180 (44) 273
Receivables from brokers and dealers........................ (2,313) (88) (1,049)
Receivables from customers.................................. (268) (908) (703)
Securities purchased under agreements to resell............. 320 (10,680) (2,497)
Securities borrowed......................................... 3,251 (4,634) 864
Loans originated or purchased for resale.................... (62) (26) (126)
Securities and other financial instruments owned............ (2,228) (10,844) (3,013)
Payables to brokers and dealers............................. (361) 450 676
Payables to customers....................................... 430 (19) 344
Accrued liabilities and other payables...................... 902 (506) 101
Securities sold under agreements to repurchase.............. 1,754 13,905 (368)
Securities loaned........................................... (881) (170) 306
Securities and other financial instruments sold but not yet
purchased................................................ (3,093) 6,081 1,674
Other receivables and other assets.......................... (97) 464 200
------- ------- -------
(1,789) (6,286) (2,514)
Net cash flows provided by (used in) operating activities of
discontinued operations..................................... 428 9 (597)
------- ------- -------
Net cash used in operating activities....................... (1,361) (6,277) (3,111)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes........................ 3,609 3,407 1,663
Principal payments of senior notes............................ (1,346) (1,567) (1,113)
Proceeds from issuance of subordinated indebtedness........... 568 88 214
Principal payments of subordinated indebtedness............... (602) (14) (339)
Issuance of other indebtedness................................ 5,751 4,992 3,996
Principal payments of other indebtedness...................... (6,023) (5,482) (3,853)
Increase (decrease) in commercial paper and short-term debt,
net......................................................... (1,815) 4,048 1,168
Issuance of stock............................................. 175
Dividends paid................................................ (213) (81) (48)
Net cash flows used in financing activities of discontinued
operations.................................................. (301) (653) (1,531)
------- ------- -------
Net cash provided by (used in) financing activities......... $ (372) $ 4,913 $ 157
------- ------- -------
See notes to consolidated financial statements.
F-6
54
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS -- (CONTINUED)
(IN MILLIONS)
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1992 1991
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of buildings, furnishings, equipment and leasehold
improvements................................................ $ (129) $ (108) $ (75)
Proceeds from the sale of:
The Boston Company.......................................... 1,300
Shearson.................................................... 1,200
SLHMC....................................................... 70
Other assets................................................ 607
Balcor loans................................................ 500
Other......................................................... 111 (38) 98
Net cash flows provided by (used in) investing activities of
discontinued operations..................................... (85) (438) 2,834
------- ------- -------
Net cash provided by investing activities................... 2,467 23 3,357
------- ------- -------
Net change in cash and cash equivalents of discontinued
operations.................................................. 42 (1,082) 706
------- ------- -------
Effect of exchange rate changes on cash....................... 9 4
------- ------- -------
Net change in cash and cash equivalents............. 692 (250) (299)
------- ------- -------
Cash and cash equivalents at beginning of year................ 641 891 1,190
------- ------- -------
Cash and cash equivalents at end of year............ $ 1,333 $ 641 $ 891
------- ------- -------
------- ------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN MILLIONS)
(INCLUDING THE BOSTON COMPANY)
Interest paid (net of amount capitalized) totaled $5,591 in 1993; $5,561 in
1992 and $5,535 in 1991. Income taxes (received) paid totaled $28 in 1993; $86
in 1992 and $(47) in 1991.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITY
During 1993, the Company completed the sale of The Boston Company, Shearson
and SLHMC. The cash proceeds related to these sales have been separately
reported in the above statement. Excluded from the statement are the individual
balance sheet changes related to the net assets sold as well as the non cash
proceeds received related to these sales. See notes 3, 4 and 5.
See notes to consolidated financial statements.
F-7
55
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The consolidated financial statements include the accounts of Lehman
Brothers Holdings Inc. (formerly Shearson Lehman Brothers Holdings Inc.,
"Holdings"), (Holdings together with its subsidiaries, the "Company" or "Lehman
Brothers" unless the context otherwise requires) whose principal subsidiary is
Lehman Brothers Inc. (formerly Shearson Lehman Brothers Inc., "LBI"), a
registered broker-dealer. American Express Company ("American Express") owns
100% of Holdings' common stock, par value $.10 per share (the "Common Stock"),
which represents approximately 93% of Holdings' voting stock. The remainder of
Holdings' voting stock is owned by Nippon Life Insurance Company ("Nippon
Life"). See Note 2. All material intercompany transactions and accounts have
been eliminated.
The Consolidated Statement of Operations includes the results of operations
of Shearson and SLHMC, which were sold on July 31, 1993 and August 31, 1993,
respectively. See Notes 4 and 5.
The balance sheet accounts of the Company's foreign subsidiaries are
translated using the exchange rates at the balance sheet date. Revenues and
expenses are translated at average exchange rates during the year. The resulting
translation adjustments, net of hedging gains or losses, are included in
stockholders' equity. Gains or losses resulting from foreign currency
transactions are included in the Consolidated Statement of Operations.
The Company uses the trade date basis of accounting for recording principal
transactions. Customer accounts reflect transactions on a settlement date basis.
Certain amounts reflect reclassifications to conform to the current
period's presentation.
Discontinued Operations
As described in Note 3, the Company completed the sale of The Boston
Company, Inc. ("The Boston Company"), on May 21, 1993. The accompanying
consolidated financial statements and notes to consolidated financial statements
reflect The Boston Company as a discontinued operation.
Securities and Other Financial Instruments
Securities and other financial instruments owned and securities and other
financial instruments sold but not yet purchased, including interest rate and
currency swaps, caps, collars, floors, swaptions, forwards, options and similar
instruments are valued at market or fair value, as appropriate, with unrealized
gains and losses reflected in market making and principal transactions in the
Consolidated Statement of Operations. These amounts also include certain
instruments with multiple characteristics whose principal repayment is
contingent upon the performance of certain stocks, stock indexes or change in
foreign exchange rates. Market value is generally based on listed market prices.
If listed market prices are not available, market value is determined based on
other relevant factors, including broker or dealer price quotations, and
valuation pricing models which take into account time value and volatility
factors underlying the financial instruments.
In addition to trading and market making activities, the Company enters
into a variety of financial instruments and derivative products as an end user
to hedge and/or modify its exposure to foreign exchange and interest rate risk
of certain assets and liabilities. As an end user, the Company primarily enters
into interest rate swaps and caps to modify the interest characteristics of its
long-term debt obligations. The Company recognizes the net interest
expense/revenue related to these instruments on an accrual basis, including the
amortization of premiums, over the life of the contracts. Other than in
connection with its debt related hedging programs, the Company's other hedging
activities are immaterial.
F-8
56
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Repurchase and Resale Agreements
Securities purchased under agreements to resell and Securities sold under
agreements to repurchase, which are treated as financing transactions for
financial reporting purposes, are collateralized primarily by government and
government agency securities and are carried at the amounts at which the
securities will be subsequently resold or repurchased plus accrued interest. It
is the policy of the Company to take possession of securities purchased under
agreements to resell and to value the securities on a daily basis to protect the
Company in the event of default by the counterparty. In addition, provisions are
made to obtain additional collateral if the market value of the underlying
assets is not sufficient to protect the Company. Securities and other financial
instruments owned which are sold under repurchase agreements are carried at
market value with changes in market value reflected in the Consolidated
Statement of Operations.
Securities purchased under agreements to resell and Securities sold under
agreements to repurchase for which the resale/repurchase date corresponds to the
maturity date of the underlying securities are accounted for as purchases and
sales, respectively. At December 31, 1993, such resale and repurchase agreements
aggregated $5.5 billion and $5.2 billion, respectively.
Securities Borrowed and Loaned
Securities borrowed and Securities loaned are carried at the amount of cash
collateral advanced or received plus accrued interest. It is the Company's
policy to value the securities borrowed and loaned on a daily basis, and to
obtain additional cash as necessary to ensure such transactions are adequately
collateralized.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes".
Prior to January 1, 1992, the Company accounted for income taxes under the
provisions of SFAS No. 96.
Fixed Assets and Intangibles
Property and equipment is depreciated on a straight-line basis over the
estimated useful lives of the related assets. Leasehold improvements are
amortized over the lesser of their economic useful lives or the terms of the
underlying leases. The Company capitalizes interest costs during construction
and amortizes the interest costs based on the useful lives of the assets.
Excess of cost over fair value of net assets acquired is amortized using
the straight-line method over a period of 35 years.
Statement of Cash Flows
The Company defines cash equivalents as highly liquid investments with
original maturities of three months or less, other than those held for sale in
the ordinary course of business.
2. SUBSEQUENT EVENTS:
The Distribution
On January 24, 1994, American Express announced plans to issue a special
dividend to its common shareholders consisting of all the common stock of
Holdings (the "Distribution"). Prior to the Distribution, which is subject to
certain conditions, an additional equity investment of approximately $1.25
billion will be made in Holdings, most significantly by American Express.
Holdings currently expects to file a Registration
F-9
57
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Statement on Form S-1 (the "Registration Statement") with the Securities and
Exchange Commission (the "Commission") with respect to the Distribution during
the second quarter of 1994.
Establishment of Long-Term Incentive Plans
Prior and subject to the Distribution, Holdings adopted the Lehman Brothers
Holdings Inc. 1994 Management Ownership Plan (the "1994 Plan"), the Lehman
Brothers Holdings Inc. 1994 Management Replacement Plan (the "Replacement
Plan"), and the Employee Stock Purchase Plan (the "ESPP").
The 1994 Plan provides for the Compensation and Benefits Committee (the
"Compensation Committee") of the Board of Directors to grant stock options,
stock appreciation rights ("SARs"), restricted stock units ("RSUs"), restricted
stock and performance related shares to eligible employees. In addition, the
1994 Plan provides for non-employee directors to receive annual RSUs
representing $30,000 of Common Stock, which vests ratably over a three-year
period. Stock options may be awarded as either incentive stock options or
non-qualified options. The exercise price for any stock option shall not be less
than the market price of Common Stock on the day of the grant. SARs may be
awarded as a single award or in conjunction with a stock option. Vesting
provisions for stock options and SARs are at the discretion of the Compensation
Committee, but in no case may the term of the award exceed 10 years. The 1994
Plan also allows the Compensation Committee to grant restricted stock and
performance shares to eligible employees, with vesting and performance objective
terms at the discretion of the Compensation Committee. The 1994 Plan expires in
ten years. A total of 16,500,000 shares of Common Stock may be subject to awards
under the 1994 Plan and an additional 150,000 shares may be subject to RSUs to
be issued to non-employee directors. No individual may receive options or SARs
over the life of the plan attributable to more than 1,650,000 shares.
The Replacement Plan allows the Compensation Committee to grant stock
options and restricted stock awards to eligible employees. The primary purpose
of the plan is to replace awards relating to American Express common shares
granted to Company employees which will be cancelled as of the date of the
Distribution. A maximum of 3,200,000 shares of Common Stock will be subject to
awards under the Replacement Plan. The number and terms of awards currently
outstanding to individuals, as well as the current stock prices of American
Express and the Company, will determine the actual number of shares awarded
under the Replacement Plan. Awards made under the Replacement Plan will
generally contain the same vesting conditions that apply to the cancelled
awards.
The Compensation Committee adopted, effective June 1, 1994, or such later
date as the Compensation Committee shall designate, and subject to the
Distribution, the ESPP, under which 6,000,000 shares of Common Stock were
reserved for issuance. The ESPP will allow employees to purchase Common Stock at
a 15% discount to market value, with a maximum of $15,000 in annual aggregate
purchases by any one individual.
Change of Fiscal Year-End
On March 28, 1994, the Board of Directors of Holdings approved, subject to
the Distribution, a change in the Company's fiscal year-end from December 31 to
November 30. Such a change to a non-calendar cycle will shift certain year-end
administrative activities to a time period that conflicts less with the business
needs of the Company's institutional customers.
Reduction in Personnel
During the first quarter of 1994, the Company completed a review of
personnel needs, which will result in the termination of certain personnel. The
Company anticipates that it will record a severance charge of approximately $30
million pre-tax in the first quarter of 1994 as a result of these terminations.
F-10
58
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SALE OF THE BOSTON COMPANY:
On May 21, 1993, pursuant to a stock purchase agreement (the "Mellon
Agreement") between Lehman Brothers and Mellon Bank Corporation ("Mellon Bank"),
LBI sold to Mellon Bank (the "Mellon Transaction") The Boston Company, which
through subsidiaries is engaged in the private banking, trust and custody,
institutional investment management and mutual fund administration businesses.
Under the terms of the Mellon Agreement, LBI received approximately $1.3 billion
in cash, 2,500,000 shares of Mellon Bank common stock and ten-year warrants to
purchase an additional 3,000,000 shares of Mellon Bank's common stock at an
exercise price of $50 per share. In June 1993, such shares and warrants were
sold by LBI to American Express for an aggregate purchase price of $169 million.
After accounting for transaction costs and certain adjustments, the Company
recognized a 1993 first quarter after-tax gain of $165 million for the Mellon
Transaction. In connection with the completion of the Mellon Transaction, the
Company received a $300 million dividend from LBI.
As a result of the Mellon Transaction, the Company has treated The Boston
Company as a discontinued operation. Accordingly, the Company's financial
statements segregate the net assets of The Boston Company as of December 31,
1992, and operating results of The Boston Company for the three years ended
December 31, 1993.
Presented below are the results of operations and the gain on disposal of
The Boston Company included in income from discontinued operations (in
millions):
YEAR ENDED DECEMBER 31,
------------------------
1993 1992 1991
---- ---- ------
Discontinued Operations:
Revenues.................................................. $201 $909 $1,157
Expenses.................................................. 159 758 1,145
---- ---- ------
Income before taxes....................................... 42 151 12
Provision for income taxes................................ 18 74 2
---- ---- ------
Income from operations.................................... 24 77 10
Gain on disposal, net of taxes of $37..................... 165
---- ---- ------
Income from discontinued operations, net of taxes......... $189 $ 77 $ 10
---- ---- ------
---- ---- ------
4. SALE OF SHEARSON:
On July 31, 1993, pursuant to an asset purchase agreement (the "Primerica
Agreement"), the Company completed the sale (the "Primerica Transaction") of
LBI's domestic retail brokerage business (except for such business conducted
under the Lehman Brothers name) and substantially all of its asset management
business (collectively, "Shearson") to Primerica Corporation (now known as
Travelers Corporation), ("Travelers") and its subsidiary Smith Barney, Harris
Upham & Co. Incorporated ("Smith Barney"). Also included in the Primerica
Transaction were the operations and data processing functions that support these
businesses, as well as certain of the assets and liabilities related to these
operations.
LBI received approximately $1.2 billion in cash and a $586 million interest
bearing note from Smith Barney which was repaid in January 1994 (the "Smith
Barney Note"). The Smith Barney Note was issued as partial payment for certain
Shearson assets in excess of $600 million which were sold to Smith Barney. The
proceeds received at July 31, 1993, were based on the estimated net assets of
Shearson, which exceeded the minimum net assets of $600 million prescribed in
the Primerica Agreement. As further consideration for the sale of Shearson,
Smith Barney agreed to pay future contingent amounts based upon the combined
performance of Smith Barney and Shearson, consisting of up to $50 million per
year for three years based on revenues, plus 10% of after-tax profits in excess
of $250 million per year over a five-year period (the "Participation Rights").
In contemplation of the Distribution, American Express received the first
Participa-
F-11
59
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tion Right payment in the first quarter of 1994. It is anticipated that all the
Participation Rights will be assigned to American Express prior to the
Distribution. As further consideration for the sale of Shearson, the Company
received 2,500,000 shares of 5.50% Convertible Preferred Stock, Series B, of
Travelers and a warrant to purchase 3,749,466 shares of common stock of
Travelers at an exercise price of $39 per share. In August 1993, American
Express purchased such preferred stock and warrant from the LBI for aggregate
consideration of $150 million.
The Company recognized a 1993 first quarter loss related to the Primerica
Transaction of approximately $630 million after-tax ($535 million pre-tax),
which amount includes a reduction in goodwill of $750 million and
transaction-related costs such as relocation, systems and operations
modifications and severance.
Presented below are the results of operations and the loss on the sale of
Shearson (in millions):
YEAR ENDED DECEMBER 31,
----------------------------
1993 1992 1991
------ ------ ------
Revenues................................................. $1,825 $2,781 $2,601
Expenses................................................. 1,708 2,669 2,535
Loss on sale of Shearson................................. 535
------ ------ ------
Income (loss) before taxes............................... (418) 112 66
Provision for income taxes............................... 149 57 37
------ ------ ------
Net income (loss)........................................ $ (567) $ 55 $ 29
------ ------ ------
------ ------ ------
Shearson operating results reflect allocated interest expense of $72
million, $102 million and $112 million for the years ended December 31, 1993,
1992 and 1991, respectively.
5. SALE OF SHEARSON LEHMAN HUTTON MORTGAGE CORPORATION:
LBI completed the sale of its wholly-owned subsidiary, Shearson Lehman
Hutton Mortgage Corporation ("SLHMC") to GE Capital Corporation on August 31,
1993. The sales price, net of proceeds used to retire debt of SLHMC, was
approximately $70 million. During the first quarter of 1993, the Company
provided $120 million of pre-tax reserves in anticipation of the sale of SLHMC,
which are included in the $152 million of pre-tax reserves for non-core
businesses on the Consolidated Statement of Operations. After accounting for
these reserves, the sale did not have a material effect on the Company's results
of operations.
6. SECURITIES AND OTHER FINANCIAL INSTRUMENTS:
Securities and other financial instruments owned and Securities and other
financial instruments sold but not yet purchased are summarized as follows (in
millions):
DECEMBER 31,
-------------------
1993 1992
------- -------
Securities and other financial instruments owned:
Government obligations................................. $15,065 $15,600
Certificates of deposit and other money market
instruments......................................... 2,051 3,348
Mortgage-backed........................................ 6,127 6,515
Corporate obligations and other contractual
commitments......................................... 10,103 6,330
Corporate stocks and options........................... 2,343 1,342
Spot commodities....................................... 10 30
------- -------
$35,699 $33,165
------- -------
------- -------
F-12
60
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31,
-------------------
1993 1992
------- -------
Securities and other financial instruments sold but not
yet
purchased:
Government obligations................................. $ 5,861 $ 9,706
Mortgage-backed securities............................. 116 322
Corporate obligations and other contractual
commitments......................................... 1,109 167
Corporate stocks and options........................... 947 897
Spot commodities....................................... 280 350
------- -------
$ 8,313 $11,442
------- -------
------- -------
7. CASH AND SECURITIES SEGREGATED AND ON DEPOSIT FOR REGULATORY AND OTHER
PURPOSES:
In addition to amounts presented in the accompanying Consolidated Balance
Sheet as Cash and securities segregated and on deposit for regulatory and other
purposes, securities with a market value of approximately $890 million and $341
million at December 31, 1993 and 1992, respectively, primarily collateralizing
resale agreements, have been segregated in a special reserve bank account for
the exclusive benefit of customers pursuant to the Reserve Formula requirements
of Securities and Exchange Commission Rule 15c3-3.
8. COMMERCIAL PAPER AND SHORT-TERM DEBT:
DECEMBER 31,
-------------------
1993 1992
------- -------
(IN MILLIONS)
Commercial paper......................................... $ 2,648 $ 6,849
Short-term debt.......................................... 8,557 6,578
------- -------
$11,205 $13,427
------- -------
------- -------
Short-term debt consists primarily of bank loans, master notes and payables
to banks. At December 31, 1993 and 1992, unused committed lines of credit
totaled approximately $1.6 billion and $1.7 billion, respectively. The proceeds
from these lines, if utilized, would be used primarily to repay commercial paper
obligations. Commitment fees on the lines supporting the commercial paper
program are 1/8 of 1% on the committed line.
9. SENIOR NOTES:
DECEMBER 31, 1993
-----------------------------------------------------
USD USD
CONTRACTUAL CONTRACTUAL FOREIGN DECEMBER 31,
MATURING IN FIXED RATE FLOATING RATE CURRENCY TOTAL 1992
--------------------------- ----------- ------------- -------- ------ ------------
(IN MILLIONS)
1993....................... $1,146
1994....................... $ 428 $ 1,473 $125 $2,026 848
1995....................... 503 585 6 1,094 518
1996....................... 714 660 98 1,472 742
1997....................... 567 142 19 728 518
1998....................... 803 10 126 939 305
1999 and thereafter........ 1,352 150 18 1,520 1,391
----------- ------------- -------- ------ ------------
$ 4,367 $ 3,020 $392 $7,779 $5,468
----------- ------------- -------- ------ ------------
----------- ------------- -------- ------ ------------
F-13
61
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1993 the Company had $4,367 million of U.S. dollar fixed
rate senior notes outstanding. Contractual interest rates on these notes ranged
from 3.69% to 12.20% as of December 31, 1993, with a contractual weighted
average interest rate of 7.79%.
The Company entered into interest rate swap contracts which effectively
converted $253 million of its U.S. dollar fixed rate senior notes to floating
rates based on the London Interbank Offered Rate ("LIBOR"). Excluding this $253
million, but including the effect of $552 million of U.S. dollar floating rate
senior notes effectively converted to fixed rates through the use of interest
rate swap contracts and $401 million of fixed rate basis swaps, the Company's
U.S. dollar fixed rate senior notes outstanding had an effective weighted
average interest rate of 7.84%.
As of December 31, 1993, the Company had $3,020 million of U.S. dollar
floating rate senior notes outstanding, including $192 million of U.S. dollar
floating rate senior notes on which the interest and/or redemption values have
been linked to movements in various indices. Excluding this $192 million,
contractual rates on the Company's U.S. dollar floating rate senior notes ranged
from 3.48% to 5.75%, with a contractual weighted average interest rate of 3.97%.
The Company entered into interest rate swap contracts which effectively
converted $552 million of its U.S. dollar floating rate senior notes to fixed
rates. Excluding this $552 million, but including the effect of $253 million of
U.S. dollar fixed rate senior notes converted to floating rates through the use
of interest rate swap contracts and $811 million of floating rate basis swaps,
the Company's U.S. dollar floating rate senior notes outstanding had an
effective weighted average interest rate of 3.90%.
As of December 31, 1993 the Company had the equivalent of $392 million of
foreign currency denominated senior notes outstanding of which $107 million were
fixed rate and $285 million were floating rate. Contractual interest rates on
the Company's fixed rate foreign currency denominated senior notes ranged from
2.65% to 5.50% as of December 31, 1993, with a contractual weighted average
interest rate of 4.43%. Contractual interest rates on the Company's floating
rate foreign currency denominated senior notes ranged from 2.43% to 10.06% as of
December 31, 1993, with a contractual weighted average interest rate of 3.51%.
The Company entered into cross currency swap contracts which effectively
converted a portion of its fixed and floating rate foreign currency denominated
senior notes into U.S. dollar obligations. The Company's fixed and floating rate
foreign currency senior notes not converted to U.S. dollar obligations, totaling
$283 million, were used to finance foreign currency denominated assets.
Of the Company's U.S. dollar fixed rate senior notes outstanding as of
December 31, 1993, $158 million are repayable prior to maturity at the option of
the holder. These obligations are reflected in the above table as $78 million,
$25 million, and $55 million maturing in 1994, 1996 and 1997, respectively,
rather than at their contractual maturities in 1998, 2003 and 2023,
respectively. The holders of these notes have the option to redeem them at par
value.
The Company's interest in 3 World Financial Center is financed with U.S.
dollar, fixed rate senior notes totaling $384 million as of December 31, 1993.
Of this amount, $301 million is guaranteed by American Express with a portion of
these notes being collateralized by certain mortgage obligations. The remaining
$83 million of debt supporting the Company's interest in 3 World Financial
Center was loaned to the Company by American Express, the recourse of which is
limited to certain fixed assets.
As of December 31, 1993, the Company had $3.2 billion available for
issuance of debt securities under various shelf registrations. In July 1993, the
Company initiated a $1.0 billion Euro medium-term note program which is not
registered under the Securities Act of 1933. As of December 31, 1993, $560
million of issuance availability remained under this program.
At December 31, 1993, the fair value of the Company's senior notes were
approximately $8,037 million ($5,608 million in 1992) which exceeded the
aggregate carrying value of the notes outstanding by approxi-
F-14
62
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
mately $258 million ($140 million in 1992). For purposes of this fair value
calculation the carrying value of variable rate debt that reprices within a year
and fixed rate debt which matures in less than six months approximates fair
value. For the remaining portfolio, fair value was estimated using either quoted
market prices or discounted cash flow analyses based on the Company's current
borrowing rates for similar types of borrowing arrangements. Unrecognized net
losses on interest rate swaps and other transactions used by the Company to
manage its interest rate risk within the senior notes portfolio were $54 million
and $13 million at December 31, 1993 and 1992, respectively. The unrecognized
net losses on these transactions reflect the estimated amounts the Company would
pay if the agreements were terminated as calculated based upon market rates as
of December 31, 1993 and 1992, respectively.
10. SUBORDINATED INDEBTEDNESS:
DECEMBER 31, 1993
----------------------------------------
CONTRACTUAL CONTRACTUAL DECEMBER 31,
MATURING IN FIXED RATE FLOATING RATE TOTAL 1992
---------------------------------- ----------- ------------- ------ -------------
(IN MILLIONS)
1993.............................. $ 500
1994.............................. $ 313 $ 194 $ 507 469
1995.............................. 145 199 344 150
1996.............................. 256 150 406 296
1997.............................. 191 191 191
1998.............................. 200 200
1999 and thereafter............... 472 472 606
----------- ------ ------ -------------
$ 1,577 $ 543 $2,120 $ 2,212
----------- ------ ------ -------------
----------- ------ ------ -------------
As of December 31, 1993, the Company had $1,577 million of fixed rate
subordinated indebtedness outstanding. Contractual interest rates on this
indebtedness ranged from 5.75% to 12.50% as of December 31, 1993, with an
effective weighted average rate of 9.46%. The Company entered into interest rate
swap contracts which effectively converted $425 million of this debt to floating
rates based on the London Interbank Offered Rate (LIBOR). Exclusive of this $425
million, the Company utilized a series of fixed rate basis swaps totaling $1,949
million to lower the fixed rate of this portfolio to an effective weighted
average interest rate of 7.82% as of December 31, 1993.
As of December 31, 1993, the Company had $543 million of floating rate
subordinated indebtedness outstanding. Contractual interest rates on this
indebtedness are primarily based on LIBOR and ranged from 2.91% to 4.25% as of
December 31, 1993, with an effective weighted average rate of 3.89%. Including
the effect of the $425 million of fixed rate indebtedness swapped to floating
rates at an effective weighted average rate of 3.58%, the effective weighted
average rate of the Company's floating rate subordinated indebtedness was 3.75%.
Of the Company's fixed rate subordinated indebtedness outstanding as of
December 31, 1993, $160 million is repayable prior to maturity at the option of
the holder. This obligation is reflected in the above table as maturing in 1996,
the year in which the holder has the option to redeem the debt at par value,
rather than its contractual maturity of 2003.
Of the Company's floating rate subordinated indebtedness maturing in 1995,
$150 million is redeemable, in whole or in part, at the option of the Company on
each quarterly interest payment date from proceeds of previously designated
equity securities issuances.
As of December 31, 1993, $1,926 million of the total subordinated
indebtedness outstanding was senior subordinated indebtedness.
F-15
63
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1993 the fair value of the Company's subordinated
indebtedness was approximately $2,265 million ($2,329 million in 1992) which
exceeded the aggregate carrying value of the notes outstanding by approximately
$145 million ($117 million in 1992). Unrecognized net gains on interest rate
swaps and other transactions used by the Company to manage its interest rate
risk on the debt was $49 million and $77 million at December 31, 1993 and 1992,
respectively.
11. CHANGES IN ACCOUNTING PRINCIPLES:
Accounting for Postretirement Benefits
Effective January 1, 1992, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," for the Company's
retiree health and other welfare benefit plans. This accounting pronouncement
requires the current recognition of these benefits as expenses based upon
actuarially determined projections of the benefits provided. The cumulative
effect of adopting SFAS No. 106 reduced 1992 net income by $76 million (net of
taxes of $52 million). Of this amount, $5 million (net of taxes of $3 million)
related to discontinued operations. Prior to the adoption of this accounting
principle, the Company recorded these benefits as they were paid.
Accounting for Income Taxes
The Financial Accounting Standards Board ("FASB") issued SFAS No. 109,
"Accounting for Income Taxes," which superseded SFAS No. 96, the accounting
standard that the Company had followed since 1987. The primary difference
between this accounting standard and SFAS No. 96, lies in the manner in which
income tax expense is determined. SFAS No. 96 provided for significantly more
restrictive criteria prior to the recognition of deferred tax assets. Under the
provisions of SFAS No. 109, deferred tax assets are recognized for temporary
differences that will result in deductible amounts in future years and for tax
loss carryforwards, if, in the opinion of management, it is more likely than not
that the tax benefit will be realized. A valuation allowance is recognized, as a
reduction of the deferred tax asset, for that component of the net deferred tax
asset which does not meet the more likely than not criterion for realization.
The Company adopted SFAS No. 109 as of January 1, 1992 and recorded a $69
million increase in consolidated net income from the Cumulative effect of a
change in accounting principle, $64 million of which related to discontinued
operations. In addition, the Company reduced goodwill by $258 million related to
the recognition of deferred tax benefits attributable to the Company's 1988
acquisition of The E.F. Hutton Group Inc. (now known as LB I Group Inc.,
"Hutton").
12. PENSION PLANS:
The Company sponsors several noncontributory defined benefit pension plans.
The cost of pension benefits for eligible employees, measured by length of
service, compensation and other factors, is currently being funded through
trusts established under the plans. Funding of retirement costs for the
applicable plans complies with the minimum funding requirements specified by the
Employee Retirement Income Security Act of 1974, as amended, and other statutory
requirements. Plan assets consist principally of equities and bonds.
F-16
64
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total expense related to pension benefits amounted to $24 million, $27
million and $31 million for the years ended December 31, 1993, 1992 and 1991,
respectively, and consisted of the following components (in millions):
YEAR ENDED DECEMBER 31,
-------------------------------------------
1993 1992 1991
----------- ----------- -----------
Service cost -- benefits earned during the
period.................................... $ 32 $ 33 $ 27
Interest cost on projected benefit
obligation................................ 40 45 40
Actual return on plan assets................ $(73) $(59) $(76)
Net amortization and deferral............... 25 (48) 8 (51) 40 (36)
---- ---- ---- ---- ---- ----
$ 24 $ 27 $ 31
---- ---- ----
---- ---- ----
The following table sets forth the funded status of the Company's defined
benefit plans (in millions):
DECEMBER 31,
---------------
1993 1992
----- -----
Actuarial present value of benefit obligations:
Vested benefit obligation................................. $(370) $(487)
----- -----
----- -----
Accumulated benefit obligation............................ $(377) $(504)
----- -----
----- -----
Projected benefit obligation................................ $(401) $(577)
Plan assets at fair value................................... 430 606
----- -----
Plan assets in excess of projected benefit obligation....... 29 29
Unrecognized net (gain) loss................................ 90 (21)
Unrecognized net obligation (asset)......................... (2) 7
----- -----
Pension asset recognized in the consolidated balance
sheet..................................................... $ 117 $ 15
----- -----
----- -----
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation for the Company's plans ranged
primarily from 7.25% to 7.5% and 8.25% to 9.5% in 1993 and 1992, respectively.
The rate of increase in future compensation levels used ranged primarily from
5.5% to 7% and 6% to 8% in 1993 and 1992, respectively. The expected long-term
rate of return on assets ranged primarily from 9% to 9.75% in 1993 and 9% to 10%
in 1992.
During 1993, the Company incurred a settlement and curtailment with respect
to its domestic pension plan in relation to the Primerica Transaction. The net
gain of approximately $26 million (pre-tax) was included in the loss on sale of
Shearson.
13. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS:
The Company sponsors several defined benefit health care plans that provide
health care, life insurance and other postretirement benefits to retired
employees. The health care plans include participant contributions, deductibles,
co-insurance provisions and service-related eligibility requirements. The
Company funds the cost of these benefits as they are incurred.
Net periodic postretirement benefit cost for the year ending December 31,
1992 and 1993 consisted of the following components (in millions):
YEAR ENDED
DECEMBER 31,
-------------
1993 1992
---- ----
Service cost................................................... $ 2 $ 3
Interest cost.................................................. 8 10
---- ----
Net periodic postretirement benefit cost....................... $10 $13
---- ----
---- ----
F-17
65
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company previously accounted for the cost of these benefits by
expensing the amount the Company paid. For the year ending December 31, 1991
$2.5 million was paid for such benefits.
During 1993, the Company incurred a curtailment with respect to its
postretirement plan, in relation to the Primerica Transaction. The net gain of
approximately $56 million (pre-tax) was included in the loss on sale of
Shearson.
The following table sets forth the amount recognized in the Consolidated
Balance Sheet for the Company's postretirement benefit plans (other than pension
plans) at December 31, 1993 and 1992 (in millions):
DECEMBER 31,
-------------
1993 1992
---- ----
Accumulated postretirement benefit obligation:
Retirees.................................................... $48 $ 43
Fully eligible active plan participants..................... 7 40
Other active plan participants.............................. 7 32
---- ----
62 115
Unrecognized net gain......................................... 12 10
---- ----
Accrued postretirement benefit cost........................... $74 $125
---- ----
---- ----
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% in 1993 and 8.5% in 1992.
The weighted average annual assumed health care cost trend rate is 13% for
1994 and is assumed to decrease at the rate of 1% per year to 7% in 2000 and
remain at that level thereafter. An increase in the assumed health care cost
trend rate by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1993 by approximately $1.4
million.
In November 1992, the FASB issued SFAS No. 112, "Employer's Accounting for
Postemployment Benefits." This statement requires the accrual of obligations
associated with services rendered to date for employee benefits accumulated or
vested for which payment is probable and can be reasonably estimated. The
Company will record a charge to reflect a cumulative effect of a change in
accounting principle of approximately $13 million after-tax in the first quarter
of 1994.
14. INCOME TAXES:
The Company's taxable income is included in the consolidated U.S. federal
income tax return of American Express and in combined state and local tax
returns with other affiliates of American Express. The income tax provision is
computed in accordance with the income tax allocation agreement between the
Company and American Express. Under the agreement, the Company receives income
tax benefits for net operating losses ("NOLs"), future tax deductions and
foreign tax credits that are recognizable on a stand-alone basis, or a share,
derived by formula, of such losses, deductions and credits that are recognizable
on American Express' consolidated income tax return. Intercompany taxes are
remitted to or from American Express when they are otherwise due to or from the
relevant taxing authority. The balances due from American Express at December
31, 1993 and 1992 were $12 million and $117 million, respectively, and are
included in other receivables in the accompanying Consolidated Balance Sheet.
F-18
66
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for (benefit from) income taxes from continuing operations
consists of the following (in millions):
YEAR ENDED DECEMBER
31,
----------------------
1993 1992 1991
---- ---- ----
Current:
Federal..................................................... $220 $(19) $(21)
State....................................................... 130 22 5
Foreign..................................................... 50 8 15
---- ---- ----
400 11 (1)
Deferred:
Federal..................................................... (59) (67) (46)
State....................................................... (23) 2
---- ---- ----
$318 $(54) $(47)
---- ---- ----
---- ---- ----
During the third quarter of 1993, the statutory U.S. federal income tax
rate was increased to 35% from 34%, effective January 1, 1993. The Company's
1993 tax provision includes a one-time benefit of approximately $10 million from
the impact of the rate change on the Company's net deferred tax assets as of
January 1, 1993.
Income from continuing operations before taxes included $318 million, $1
million and $26 million that is subject to income taxes of foreign jurisdictions
for 1993, 1992 and 1991, respectively.
The income tax provision for (benefit from) differs from that computed by
using the statutory federal income tax rate for the reasons shown below (in
millions):
YEAR ENDED DECEMBER 31,
-----------------------
1993 1992 1991
---- ---- -----
Federal income tax provision (benefit) at statutory rate..... $ 9 $(84) $ 51
State and local taxes........................................ 69 16 4
Tax-exempt interest and dividends............................ (20) (4) (2)
Goodwill reduction related to the sale of Shearson........... 263
Amortization of goodwill..................................... 9 14 17
Decrease in unrecognized deferred tax benefits............... (122)
U.S. federal rate change..................................... (10)
Other........................................................ (2) 4 5
---- ---- -----
$318 $(54) $ (47)
---- ---- -----
---- ---- -----
Deferred income tax assets and liabilities result from the recognition of
temporary differences. Temporary differences are differences between the tax
bases of assets and liabilities and their reported amounts in the consolidated
financial statements that will result in differences between income for tax
purposes and income for consolidated financial statement purposes in future
years.
At December 31, 1993 and 1992, the Company's net deferred tax assets from
continuing operations consisted of the following (in millions):
DECEMBER 31,
---------------
1993 1992
----- -----
Deferred tax assets................................................. $ 746 $ 895
Less: Valuation allowance........................................... 149 209
----- -----
Deferred tax assets net of valuation allowance...................... 597 686
Deferred tax liabilities............................................ (332) (348)
----- -----
Net deferred tax assets from continuing operations............. $ 265 $ 338
----- -----
----- -----
F-19
67
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1993 and 1992, deferred tax assets consisted primarily of
reserves not yet deducted for tax purposes of $517 million and $398 million,
respectively, and tax return NOLs of $38 million and $256 million, respectively,
and deferred compensation of $178 million and $149 million, respectively. At
December 31, 1993 and 1992, deferred tax liabilities consisted primarily of
unrealized trading and investment gains of $183 million and $224 million,
respectively, and excess tax over financial depreciation of $68 million and $117
million, respectively. During 1993, the Company increased deferred tax assets by
approximately $65 million related to transactions arising from the sale of The
Boston Company.
The net deferred tax asset is included in Deferred expenses and other
assets in the accompanying Consolidated Balance Sheet. At December 31, 1993, the
valuation allowance recorded against deferred tax assets from continuing
operations was $149 million as compared to $209 million at December 31, 1992.
The reduction in the valuation allowance was primarily attributable to 1993
utilization of tax return NOLs for which a valuation allowance was previously
established. Of the $149 million valuation allowance at December 31, 1993,
approximately $100 million will reduce goodwill if future circumstances permit
recognition.
For tax return purposes, the Company has approximately $175 million of NOL
carryforwards, all of which are attributable to the 1988 acquisition of Hutton.
Substantially all of the NOLs are scheduled to expire in the years 1999 through
2007. A portion of the valuation allowance discussed above relates to these
NOLs. This amount includes approximately $35 million of NOLs which it is
anticipated will be transferred to American Express in connection with the
Distribution discussed in Note 2, the benefit of which had not been reflected in
the financial statements.
15. PREFERRED STOCK:
In 1987, Holdings issued to Nippon Life 13,000,000 shares of Cumulative
Convertible Voting Preferred Stock, Series A ("Series A Preferred Stock"), for a
cash purchase price of $508 million, as adjusted, or $39.10 per share. The
holder of the Series A Preferred Stock is entitled to receive preferred
dividends at an annual rate of 5%, payable quarterly before any dividends are
paid to the holders of Common Stock.
The Company has the right to redeem the shares of Series A Preferred Stock
on any dividend payment date after June 15, 1994, in cumulative annual
increments of 2,600,000 shares, subject to adjustment, and subject to
restrictions on redemptions when dividends are in arrears. Such redemption will
be at a price per share equal to $39.10 and is permitted only if there is a
public market for the Common Stock and the average market price of shares of
Common Stock exceeds the conversion price on the date notice of redemption is
given.
Each share of Series A Preferred Stock is convertible, at any time prior to
the date of redemption, into one share of Common Stock, provided that at least
250,000 shares of Series A Preferred Stock (or such lesser number of such shares
then outstanding) are converted each time. The conversion rate is subject to
adjustment in certain events.
In 1989, the Company issued to American Express Money Market Cumulative
Preferred Stock ("Cumulative Preferred Stock"), with a liquidation preference of
$250 million. The Cumulative Preferred Stock is pari passu with the Series A
Preferred Stock as to dividends and as to distributions upon liquidation. The
Cumulative Preferred Stock dividends are payable quarterly at an annual rate of
9% through the fifth anniversary of their issuance. After such time the dividend
rate will generally be set by auction.
F-20
68
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. COMMON STOCK:
Changes in shares of Common Stock outstanding are as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------
1993 1992 1991
----------- ----------- -----------
Shares outstanding at beginning of year..... 168,235,284 156,568,617 156,568,617
Shares issued to American Express........... 11,666,667
----------- ----------- -----------
Shares outstanding at end of year........... 168,235,284 168,235,284 156,568,617
----------- ----------- -----------
----------- ----------- -----------
The Company has reserved for issuance 13,000,000 shares of Common Stock for
conversion of the Series A Preferred Stock.
On August 10, 1990, the Company issued to Nippon Life a non-transferable
common stock purchase warrant, pursuant to which Nippon Life may purchase
10,398,221 shares of Common Stock with an initial exercise price of $15 per
share and an expiration date of April 15, 1996.
Effective December 31, 1992, the Company sold 11,666,667 shares of Common
Stock to American Express for $175 million.
17. EMPLOYEE STOCK OWNERSHIP PLAN:
During 1993, Lehman Brothers established the Lehman Brothers Inc. Employee
Ownership Plan (the "Employee Ownership Plan") pursuant to which certain key
employees of the Company deferred a percentage of their 1993 salary and bonus
for the purchase of certain Phantom Units of Holdings. Each Phantom Unit is
comprised of a phantom equity interest representing a notional interest in a
share of Common Stock ("Phantom Share") and the right to receive a certain
amount in cash with respect to a Phantom Share ("Cash Right"). The number of
Phantom Units which were available to each participant was determined by the
Finance Committee.
Up to 6,000,000 Phantom Shares were available for "purchase" through
voluntary and mandatory deferrals of 1993 compensation. The price of each
Phantom Unit was $10.00 per Phantom Share and $6.67 for each related Cash Right
and was determined by the Finance Committee in July 1993 using an assumed
capital structure of Holdings for purposes of the program and taking into
account various factors, including market multiples for comparable companies,
the absence of a public market for Holdings, vesting requirements, and the
restrictions on transferability of the Phantom Units. In accordance with the
terms of the Plan, Phantom Units will be converted to the Common Stock
contemporaneously with the Distribution. See Note 2.
The Phantom Units purchased through voluntary deferrals are immediately
vested and non-forfeitable; however, there is a restriction on transferability
of such Units. There is also a restriction on transferability of the Common
Stock which employees will receive upon conversion of the Phantom Shares.
Generally, such restriction will lapse ratably over a three year period. The
Phantom Units purchased through mandatory deferrals apply to selected senior
executives and vest in accordance with a schedule established by the Company's
Finance Committee of its Board of Directors and, together with the Common Stock
into which they convert, are also subject to transfer restrictions.
The Company will recognize compensation expense in 1994 equal to (i) the
increase in book value attributable to the Phantom Shares and (ii) the excess,
if any, of the market value of the Common Stock on the Distribution Date issued
pursuant to the Phantom Share conversion over the price paid by employees for
the Phantom Shares.
F-21
69
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. CAPITAL REQUIREMENTS:
As registered broker-dealers, LBI and certain of its subsidiaries are
subject to the Net Capital Rule (Rule 15c3-1, the "Rule") promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The New York
Stock Exchange, Inc. and the National Association of Securities Dealers, Inc.
monitor the application of the Rule by LBI and such subsidiaries, as the case
may be. LBI and such subsidiaries compute net capital under the alternative
method of the Rule which requires the maintenance of minimum net capital, as
defined. A broker-dealer may be required to reduce its business if net capital
is less than 4% of aggregate debit balances or 6% of the funds required to be
segregated pursuant to the Commodity Exchange Act (the "Commodity Act") and the
regulations thereunder, if greater. A broker-dealer may also be prohibited from
expanding its business or paying cash dividends if resulting net capital would
be less than 5% of aggregate debit balances or 7% of the funds required to be
segregated pursuant to the Commodity Act and the regulations thereunder, if
greater. In addition, the Rule does not allow withdrawal of subordinated capital
if net capital would be less than 5% of such debit balances or 7% of the funds
required to be segregated pursuant to the Commodity Act and the regulations,
thereunder, if greater.
The Rule also limits the ability of broker-dealers to transfer large
amounts of capital to parent companies and other affiliates. Under the Rule,
equity capital cannot be withdrawn from a broker-dealer without the prior
approval of the Securities and Exchange Commission (the "Commission") when net
capital after the withdrawal would be less than 25% of its securities positions
haircuts (which are deductions from capital of certain specified percentages of
the market value of securities to reflect the possibility of a market decline
prior to disposition). In addition, the Rule requires broker-dealers to notify
the Commission and the appropriate self-regulatory organization two business
days before the withdrawal of excess net capital if the withdrawal would exceed
the greater of $500,000 or 30% of the broker-dealer's excess net capital, and
two business days after a withdrawal that exceeds the greater of $500,000 or 20%
of excess net capital.
Finally, the Rule authorizes the Commission to order a freeze on the
transfer of capital if a broker-dealer plans a withdrawal of more than 30% of
its excess net capital and the Commission believes that such a withdrawal would
be detrimental to the financial integrity of the firm or would jeopardize the
broker-dealer's ability to pay its customers. At December 31, 1993, LBI's net
capital aggregated $1,339 million and was $1,293 million in excess of minimum
requirement. Also at December 31, 1993, Lehman Government Securities Inc., a
wholly owned subsidiary of LBI, had net capital which aggregated $184 million
and was $161 million in excess of minimum requirement.
The Company is subject to other domestic and international regulatory
requirements. As of December 31, 1993, the Company believes it is in material
compliance with all such requirements.
F-22
70
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. COMMITMENTS AND CONTINGENCIES:
The Company leases office space and equipment and has entered into ground
leases with the City of New York or its agencies. Total rent expense for each of
the years ended December 31, 1993, 1992 and 1991 was $201 million, $283 million
and $269 million, respectively. Minimum future rental commitments under
noncancellable operating leases (net of subleases of $679 million) are as
follows (in millions):
YEAR AMOUNT
--------------------------------------------------- ------
1994............................................... $ 45
1995............................................... 44
1996............................................... 44
1997............................................... 44
1998............................................... 38
1999 and thereafter................................ 425
------
$640
------
------
Certain leases on office space contain escalation clauses providing for
additional rentals based upon maintenance, utility and tax increases.
On October 13, 1993, the Company executed a 16 year lease at 101 Hudson
Street in Jersey City, New Jersey. The lease, which commences in August 1994,
obligates the Company to make minimum lease payments of approximately $87
million over its term. Amounts shown above include this commitment.
In the normal course of its business, the Company has been named a
defendant in a number of lawsuits and other legal proceedings. After considering
all relevant facts, available insurance coverage and the opinions of outside
counsel, in the opinion of the Company such litigation will not, in the
aggregate, have a material adverse effect on the Company's consolidated
financial position.
Financial Instruments with Off-Balance-Sheet Risk
In the normal course of business, the Company enters into financial
instrument transactions to conduct its trading activities, to satisfy the
financial needs of its clients and to manage its own exposure to credit and
market risks. Many of these financial instruments typically have
off-balance-sheet risk resulting from their nature including the terms of
settlement. These instruments can be broadly categorized as interest rate and
currency swaps, caps, collars, floors, swaptions and similar instruments
(collectively "Swap Products"), foreign currency products, equity related
products, commitments and guarantees and certain other instruments.
Market risk arises from the possibility that market changes, including
interest and foreign exchange rate movements, may make financial instruments
less valuable. Credit risk results from the possibility that a loss may occur
from the failure of another party to perform according to the terms of a
contract. The Company has extensive control procedures regarding the extent of
the Company's transactions with specific counterparties, the manner in which
transactions are settled and the ongoing assessment of counterparty
creditworthiness.
The notional or contract amounts disclosed below provide a measure of the
Company's involvement in such instruments but are not indicative of potential
loss. Management does not anticipate any material adverse effect to its
financial position or results of operations as a result of its involvement in
these instruments. In many cases, these financial instruments serve to reduce,
rather than increase, market risk.
F-23
71
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company enters into interest rate contracts as principal in its trading
operations or as an integral part of its interest rate risk management. These
contracts include Swap Products, financial future contracts and forward security
contracts.
The notional or contractual amounts of these instruments are set forth
below (in millions):
NOTIONAL/CONTRACT
AMOUNT
---------------------
1993 1992
-------- --------
Swap Products.................................................. $267,861 $109,695
Financial futures:
To purchase.................................................. 95,333 27,673
To sell...................................................... 56,122 21,974
Forward contracts:
Securities:
To purchase............................................... 52,352 21,457
To sell................................................... 46,729 21,909
Foreign exchange:
To purchase............................................... 107,613 48,980
To sell................................................... 114,238 51,333
Options written:
Securities................................................... 95,672 5,195
Foreign exchange............................................. 7,803 3,495
-------- --------
$843,723 $311,711
-------- --------
-------- --------
The majority of the Company's off-balance-sheet transactions are short-term
in duration with a weighted average maturity of approximately 1.80 years as of
December 31, 1993 and 1.64 years as of December 31, 1992. Presented below is a
maturity schedule for the notional/contractual amounts outstanding for Swap
Products and other off-balance-sheet instruments (in millions):
1994.............................................................. $592,835
1995.............................................................. 76,033
1996.............................................................. 41,640
1997.............................................................. 15,953
1998.............................................................. 82,330
1999 and thereafter............................................... 34,932
--------
$843,723
--------
--------
At December 31, 1993, the replacement cost of contracts in a gain position
not recorded on the Company's Consolidated Balance Sheet is as follows (in
millions):
Swap Products...................................................... $ 1,978
Forward and other contracts........................................ 1,431
-------
3,409
Less: Amounts recorded on the Consolidated Balance Sheet......... (1,461)
-------
Credit exposure not recorded on the Consolidated Balance Sheet..... $ 1,948
-------
-------
As of December 31, 1993 and 1992, the Company was contingently liable for
$1.9 billion of letters of credit primarily used to provide collateral for
securities and commodities borrowed and to satisfy margin deposits at option and
commodity exchanges and other financial guarantees.
As of December 31, 1993 and 1992, the Company had pledged or otherwise
transferred securities, primarily fixed income, having a market value of $34.1
billion and $21.7 billion, respectively, as collateral for securities borrowed
or otherwise received having a market value of $33.8 billion and $21.4 billion,
respectively.
F-24
72
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Securities sold but not yet purchased represent obligations of the Company
to purchase the securities at prevailing market prices. Therefore, the future
satisfaction of such obligations may be for an amount greater or less than the
amount recorded.
The Company's customer activities may expose it to off-balance-sheet credit
risk. The Company may be required to purchase or sell financial instruments at
prevailing market prices in the event of the failure of a customer to settle
trades on their original terms, or in the event cash and securities in customer
accounts are not sufficient to fully cover customer losses. The Company seeks to
control the risks associated with customer activities through the use of systems
and procedures for financial instruments with off-balance-sheet risk.
Subsidiaries of the Company, as general partner, are contingently liable
for the obligations of certain public and private limited partnerships organized
as pooled investment funds or engaged primarily in real estate activities. In
the opinion of the Company, contingent liabilities, if any, for the obligations
of such partnerships will not in the aggregate have a material adverse effect on
the Company's consolidated financial position or results of operations.
Concentrations of Credit Risk
As a major international securities firm, the Company is actively involved
in securities underwriting, brokerage, distribution and trading. These and other
related services are provided on a worldwide basis to a large and diversified
group of clients and customers, including multinational corporations,
governments, emerging growth companies, financial institutions and individual
investors.
A substantial portion of the Company's securities and commodities
transactions is collateralized and is executed with and on behalf of commercial
banks and other institutional investors, including other brokers and dealers.
The Company's exposure to credit risk associated with the non-performance of
these customers and counterparties in fulfilling their contractual obligations
pursuant to securities transactions can be directly impacted by volatile or
illiquid trading markets which may impair the ability of customers and
counterparties to satisfy their obligations to the Company.
Securities and other financial instruments owned by the Company include
U.S. government and agency securities and securities issued by non-U.S.
governments (principally Japan, Germany, Great Britain and Canada) which, in the
aggregate, represented 16.6% of the Company's total assets at December 31, 1993.
In addition, substantially all of the collateral held by the Company for resale
agreements or bonds borrowed, which together represented 37.8% of total assets
at December 31, 1993, consisted of securities issued by the U.S. government,
federal agencies or non-U.S. governments. In addition to these specific
exposures, the Company's most significant concentration is financial
institutions, which include other brokers and dealers, commercial banks and
institutional clients. This concentration arises in the normal course of the
Company's business.
Financial Accounting Standards Board Interpretation No. 39, "Offsetting of
Amounts related to Certain Contracts" ("FIN No. 39"), was issued in March 1992.
Effective for balance sheets after January 1, 1994, FIN No. 39 restricts the
current industry practice of offsetting certain receivables and payables.
Although the implementation of this standard is expected to substantially
increase gross assets and liabilities, the Company believes that its results of
operations and overall financial condition will not be affected. The Financial
Accounting Standards Board has instructed its staff to explore modifying FIN No.
39 to create certain exceptions, which, if enacted, would substantially mitigate
the increase in the Company's gross assets and liabilities expected to initially
result from the implementation of FIN No. 39.
20. FAIR VALUE OF FINANCIAL INSTRUMENTS:
In 1992, the Company adopted SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments," which requires disclosure of the fair values of most on-
and off-balance-sheet financial instruments for which it
F-25
73
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
is practicable to estimate that value. The scope of SFAS No. 107 excludes
certain financial instruments, such as trade receivables and payables when the
carrying value approximates the fair value, employee benefit obligations and all
non-financial instruments, such as land, buildings and equipment and goodwill.
The fair values of the financial instruments are estimates based upon current
market conditions and perceived risks and require varying degrees of management
judgment.
For the majority of the Company's assets and liabilities which fall under
the scope of SFAS No. 107, book value approximates fair value, with the
exception of senior notes and subordinated indebtedness, which are discussed in
Notes 9 and 10, respectively.
21. RELATED PARTY TRANSACTIONS:
The Company has entered into various related party transactions with
American Express. The Company shares certain facilities, primarily the World
Financial Center, and administrative support with American Express for which the
Company is charged based upon specific identification and allocation methods.
The Company believes that amounts arising through related party
transactions, including those allocated expenses referred to above, are
reasonable and approximate the amount that would have been incurred if the
Company operated as an unaffiliated entity.
On June 28, 1991, LBI sold all the issued and outstanding stock (the
"Stock") of its wholly owned subsidiary, the Balcor Company ("Balcor"), to
National Express Company, Inc. ("NEC"), a wholly owned subsidiary of American
Express. In connection therewith, the Company sold to American Express certain
loans (the "Loans") made by the Company to Balcor and one of Balcor's wholly
owned subsidiaries. Pursuant to the terms of the transaction, NEC and American
Express purchased the Stock and the Loans at book value for $1.445 billion in a
combination of $500 million cash and a $945 million promissory note which
matures on June 28, 1996.
22. INTERNATIONAL OPERATIONS:
Although the Company's business activities are highly integrated and
constitute a single industry segment for the purposes of SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise," they can be broadly
categorized into the three major geographic areas in which it conducts
operations: North America, Europe and Asia Pacific.
The Company manages its businesses with the goal of maximizing worldwide
profitability by product line. Activities such as the global distribution of
underwritings and the twenty-four hour risk management of trading positions
render geographic profitability to be highly subjective as it is the result of
numerous estimates and assumptions not normally performed by the Company for
internal management reporting purposes.
The amounts presented below provide a broad indication of each region's
contribution to the consolidated results. The method of allocation is as
follows: Gross and Net Revenues, if syndicate or trading related, have been
distributed based upon the location where the primary or secondary position was
fundamentally risk managed; if fee related, by the location of the senior
coverage banker; if commission related, by the location of the salesman. Income
(Loss) Before Taxes includes expenses both incurred within and allocated to the
region. Identifiable Assets represent essentially those recorded in the legal
entities in which the Company does business within the respective region.
F-26
74
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GROSS NET INCOME (LOSS) IDENTIFIABLE
REVENUES REVENUES BEFORE TAXES ASSETS
-------- -------- ------------- ------------
(IN MILLIONS)
Year ended December 31, 1993
International operations:
Europe............................ $ 988 $ 635 $ 109 $ 17,949
Asia Pacific...................... 267 215 31 1,944
-------- -------- ------------- ------------
Total international.......... 1,255 850 140 19,893
Domestic operations.................. 9,331 4,368 (113) 60,581
-------- -------- ------------- ------------
Total........................ $ 10,586 $5,218 $ 27 $ 80,474
-------- -------- ------------- ------------
-------- -------- ------------- ------------
Year ended December 31, 1992
International operations:
Europe............................ $ 536 $ 362 $ (92) $ 8,188
Asia Pacific...................... 178 158 15 1,006
-------- -------- ------------- ------------
Total international.......... 714 520 (77) 9,194
Domestic operations.................. 9,897 4,906 (170) 76,038
-------- -------- ------------- ------------
Total........................ $ 10,611 $5,426 $(247) $ 85,232
-------- -------- ------------- ------------
-------- -------- ------------- ------------
Year ended December 31, 1991
International operations:
Europe............................ $ 545 $ 362 $ 17 $ 3,413
Asia Pacific...................... 174 149 25 1,128
-------- -------- ------------- ------------
Total international.......... 719 511 42 4,541
Domestic operations.................. 9,111 4,394 108 55,201
-------- -------- ------------- ------------
Total........................ $ 9,830 $4,905 $ 150 $ 59,742
-------- -------- ------------- ------------
-------- -------- ------------- ------------
23. OTHER CHARGES:
Reserves for Non-Core Businesses
During the first quarter of 1993, the Company provided $152 million pre-tax
($100 million after-tax) of non-core business reserves. Of this amount, $32
million pre-tax ($21 million after-tax) relates to certain non-core partnership
syndication activities in which the Company is no longer actively engaged. The
remaining $120 million pre-tax ($79 million after-tax) relates to reserves
recorded in anticipation of the sale of SLHMC. Such sale was completed during
the third quarter of 1993.
Computervision Write-Down
In June 1992, in connection with the recapitalization of Computervision
Corporation ("Computervision") the Company and DR Holdings Inc. of Delaware
agreed to restructure the Company's $500 million subordinated loan (the "Loan")
to Computervision. On June 5, 1992, Computervision filed a Registration
Statement on Form S-1 (the "Registration Statement") with respect to the initial
public offering of its common stock (the "Computervision Stock").
On August 21, 1992, the initial public offering of the Computervision
Stock, for which the LBI was lead underwriter, was completed at a price of $12
per share. The Company received $250 million and 6,200,000 shares of
Computervision Stock as consideration for all notes held by it in connection
with the Loan and, as a result, recognized a second quarter 1992 after-tax
charge to earnings of $84 million ($137 million pre-tax) which reflected a
reduction in the carrying value of the Loan. Following the initial public
offering, LBI purchased and sold Computervision Stock in connection with its
activities as a broker-dealer and underwriter, and on August 28, 1992, sold
approximately 4,300,000 shares of Computervision Stock to Holdings thereby
F-27
75
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
increasing Holding's beneficial ownership of Computervision Stock to 22%. On
September 30, 1992, Holdings recorded a third quarter 1992 after-tax charge to
earnings of $66 million ($108 million pre-tax) which reflected the losses
incurred in connection with the aforementioned trading activities, the number of
shares of Computervision Stock owned by Holdings, the market value ($6.25 per
share) of such Computervision Stock at the close of business on September 30,
1992 and the Company's valuation.
First Capital Holdings Corp. Write-Off
Until December 24, 1992, the Company owned approximately 28% of the
outstanding common stock of First Capital Holdings Corp. ("FCH"), a financial
services holding company which specialized primarily in annuities and other life
insurance products, through two subsidiaries, First Capital Life Insurance
Company ("First Capital Life") and Fidelity Bankers Life Insurance Company
("Fidelity Bankers Life"). In May 1991, First Capital Life and Fidelity Bankers
Life were placed into conservatorship, and an order for bankruptcy relief was
entered with respect to FCH by United States Bankruptcy Court for the Central
District of California. As a result, FCH wrote off the net assets of First
Capital Life and Fidelity Bankers Life, resulting in a significant deficit in
FCH's shareholders' equity. In the second quarter of 1991, the Company recorded
a charge to earnings of approximately $144 million (pre-tax and after-tax)
related to its investment in FCH.
24. QUARTERLY INFORMATION (UNAUDITED):
Quarterly results for the year ended December 31, 1993 were as follows (in
millions):
QUARTER ENDED
-----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
Net revenues................................... $1,587 $ 1,604 $1,150 $ 877
Expenses....................................... 2,108 1,393 976 714
-------- ------- ------------ -----------
Income (loss) from continuing operations
before taxes................................. (521) 211 174 163
Provision for income taxes..................... 119 90 60 49
-------- ------- ------------ -----------
Income (loss) from continuing operations....... (640) 121 114 114
Income (loss) from discontinued operations, net
of taxes
Income from operations....................... 24
Gain on disposal............................. 165
-------- ------- ------------ -----------
189
-------- ------- ------------ -----------
Net income (loss).............................. $ (451) $ 121 $ 114 $ 114
-------- ------- ------------ -----------
-------- ------- ------------ -----------
The results for the first quarter reflect a loss on the Primerica
Transaction of $630 million ($535 million pre-tax) and reserves for non-core
businesses of $100 million ($152 million pre-tax).
F-28
76
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Quarterly results for the year ended December 31, 1992 were as follows (in
millions):
QUARTER ENDED
-----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
Net revenues................................... $1,415 $ 1,459 $1,263 $ 1,289
Expenses....................................... 1,311 1,470 1,314 1,578
-------- ------- ------------ -----------
Income (loss) from continuing operations before
taxes and cumulative effect of changes in
accounting principles........................ 104 (11) (51) (289)
Provision for (benefit from) income taxes...... 52 5 (9) (102)
-------- ------- ------------ -----------
Income (loss) from continuing operations before
cumulative effect of changes in accounting
principles................................... 52 (16) (42) (187)
Income from discontinued operations, net of
taxes........................................ 19 20 17 21
-------- ------- ------------ -----------
Income (loss) before cumulative effect of
changes in accounting principles............. 71 4 (25) (166)
Cumulative effect of changes in accounting
principles................................... (7)
-------- ------- ------------ -----------
Net income (loss).............................. $ 64 $ 4 $ (25) $ (166)
-------- ------- ------------ -----------
-------- ------- ------------ -----------
The results for the fourth quarter reflect $59 million after-tax ($90
million pre-tax) of additional legal provisions and a $107 million after-tax
($162 million pre-tax) write-down in the carrying value of certain real estate
investments.
F-29
77
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
UNAUDITED
(IN MILLIONS)
ASSETS
DECEMBER 31, 1993
----------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
Cash and cash equivalents.................................. $ 1,333 $ $ 1,333
Cash and securities segregated and on deposit for
regulatory and other purposes............................ 1,073 1,073
Securities and other financial instruments owned........... 35,699 35,699
Collateralized short-term agreements:
Securities purchased under agreements to resell.......... 26,046 26,046
Securities borrowed...................................... 4,372 4,372
Receivables:
Brokers and dealers...................................... 5,059 5,059
Customers................................................ 2,646 2,646
Other.................................................... 2,693 2,693
Property, equipment and leasehold improvements (net of
accumulated depreciation and amortization of $438)....... 529 529
Deferred expenses and other assets......................... 750 750
Excess of cost over fair value of net assets acquired (net
of accumulated amortization of $107)..................... 274 274
---------- ----------- ---------
$ 80,474 $ $80,474
---------- ----------- ---------
---------- ----------- ---------
See notes to pro forma financial statements.
F-30
78
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
UNAUDITED
(IN MILLIONS, EXCEPT SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, 1993
----------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
Commercial paper and short-term debt....................... $ 11,205 $(1,193)(a) $10,012
Securities and other financial instruments sold but not yet
purchased................................................ 8,313 8,313
Securities sold under agreements to repurchase............. 39,191 39,191
Securities loaned.......................................... 1,116 1,116
Payables:
Brokers and dealers...................................... 1,385 1,385
Customers................................................ 4,130 4,130
Accrued liabilities and other payables..................... 3,183 (57)(b) 3,126
Senior notes............................................... 7,779 7,779
Subordinated indebtedness.................................. 2,120 2,120
---------- ----------- ---------
Total liabilities..................................... 78,422 (1,250) 77,172
---------- ----------- ---------
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
Money Market Cumulative, 3,300 shares authorized; 250
shares issued and outstanding; $1,000,000
liquidation preference per share.................... 250 (250)(c)
Preferred Stock to be issued and outstanding upon the
Distribution........................................ 200 (d) 200
Common Stock, $.10 par value; 300,000,000 shares
authorized; 168,235,284 shares......................... 17 17
Additional paid-in capital............................... 1,871 1,300 (e) 3,171
Foreign currency translation adjustment.................. (12) (12)
Accumulated deficit...................................... (582) (582)
---------- ----------- ---------
Total stockholders' equity.......................... 2,052 1,250 3,302
---------- ----------- ---------
$ 80,474 $ $80,474
---------- ----------- ---------
---------- ----------- ---------
See notes to pro forma financial statements.
F-31
79
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1993
-------------------------------------------------------------------
ADJUSTMENTS
---------------------------------------
CONCURRENT
HISTORICAL SHEARSON SLHMC TRANSACTIONS PRO FORMA
---------- -------- ----- ----------- ---------
Revenues
Market making and principal
transactions.................. $ 1,967 $ (323)(f) $ 1,644
Investment banking............... 972 (170)(f) 802
Commissions...................... 1,316 (828)(f) 488
Interest and dividends........... 5,840 (148)(f) $(13 )(g) 5,679
Other............................ 491 (356)(f) (56 )(g) 79
---------- -------- ----- ----------- ---------
Total revenues........... 10,586 (1,825) (69 ) 8,692
Interest expense................. 5,368 (116)(f),(h) (7 )(g) (42)(i) 5,203
---------- -------- ----- ----------- ---------
Net revenues............. 5,218 (1,709) (62 ) 42 3,489
---------- -------- ----- ----------- ---------
Non-interest expenses
Compensation and benefits........ 2,989 (1,147)(f) (17 )(g) 1,825
Communications................... 318 (126)(f) (4 )(g) 188
Occupancy and equipment.......... 254 (104)(f) (3 )(g) 147
Professional services............ 203 (40)(f) (2 )(g) 161
Advertising and market
development................... 161 (33)(f) (1 )(g) 127
Depreciation and amortization.... 157 (44)(f) 113
Brokerage, commissions and
clearance fees................ 140 32(f) 172
Other............................ 282 (110)(f) (35 )(g) 137
Loss on sale of Shearson......... 535 (535)(f)
Reserves for non-core
businesses.................... 152 (120 )(j) 32
---------- -------- ----- ----------- ---------
Total non-interest
expenses............... 5,191 (2,107) (182 ) 2,902
---------- -------- ----- ----------- ---------
Income (loss) from continuing
operation before taxes........... 27 398 120 42 587
Provision for (benefit from)
income taxes..................... 318 (157)(f),(k) 41 (j) 17(k) 219
---------- -------- ----- ----------- ---------
Income (loss) from continuing
operations....................... (291) 555 79 25 368
---------- -------- ----- ----------- ---------
Preferred stock dividends.......... 48 (6)(l) 42
---------- -------- ----- ----------- ---------
Income (loss) from continuing
operations applicable to Common
Stock............................ $ (339) $ 555 $ 79 $ 31 $ 326
---------- -------- ----- ----------- ---------
---------- -------- ----- ----------- ---------
See notes to pro forma financial statements.
F-32
80
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(IN MILLIONS)
YEAR ENDED DECEMBER 31, 1992
-------------------------------------------------------------------
ADJUSTMENTS
---------------------------------------
CONCURRENT
HISTORICAL SHEARSON SLHMC TRANSACTIONS PRO FORMA
---------- -------- ----- ----------- ---------
Revenues
Market making and principal
transactions.................. $ 1,697 $ (575)(f) $ 1,122
Investment banking............... 892 (218)(f) 674
Commissions...................... 1,677 (1,231)(f) 446
Interest and dividends........... 5,661 (226)(f) $(31 )(g) 5,404
Other............................ 684 (531)(f) (88 )(g) 65
---------- -------- ----- ----------- ---------
Total revenues........... 10,611 (2,781) (119 ) 7,711
Interest expense................. 5,185 (243)(f),(h) (24 )(g) $ (42)(i) 4,876
---------- -------- ----- ----------- ---------
Net revenues............. 5,426 (2,538) (95 ) 42 2,835
---------- -------- ----- ----------- ---------
Non-interest expenses
Compensation and benefits........ 3,310 (1,736)(f) (23 )(g) 1,551
Communications................... 378 (194)(f) (6 )(g) 178
Occupancy and equipment.......... 326 (183)(f) (4 )(g) 139
Professional services............ 212 (66)(f) (3 )(g) 143
Advertising and market
development................... 205 (84)(f) (2 )(g) 119
Depreciation and amortization.... 185 (89)(f) (1 )(g) 95
Brokerage, commissions and
clearance fees................ 117 52(f) 169
Other............................ 695 (136)(f) (61 )(g) 498
Computervision write-down........ 245 245
---------- -------- ----- ----------- ---------
Total non-interest
expenses............... 5,673 (2,436) (100 ) 3,137
---------- -------- ----- ----------- ---------
Income (loss) from continuing
operations before taxes and
cumulative effect of changes in
accounting principles............ (247) (102) 5 42 (302)
Provision for (benefit from) income
taxes............................ (54) (53)(f),(k) 2 (g) 17(k) (88)
---------- -------- ----- ----------- ---------
Income (loss) from continuing
operations before cumulative
effect of changes in accounting
principles....................... (193) (49) 3 25 (214)
Preferred stock dividends.......... 48 (6)(l) 42
---------- -------- ----- ----------- ---------
Income (loss) from continuing
operations applicable to Common
Stock............................ $ (241) $ (49) $ 3 $ 31 $ (256)
---------- -------- ----- ----------- ---------
---------- -------- ----- ----------- ---------
See notes to pro forma financial statements.
F-33
81
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO PRO FORMA FINANCIAL STATEMENTS
BASIS OF REPORTING
The following pro forma financial data has been prepared by the Company
based on certain adjustments to the audited historical consolidated financial
statements of the Company. The pro forma statement of operations reflects
adjustments for the Concurrent Transactions and the sale during 1993 of The
Boston Company, Shearson and SLHMC as if such transactions had occurred as of
the beginning of the periods presented. These adjustments include (i) the
elimination of revenues and expenses of Shearson and SLHMC, (ii) the elimination
of the loss on the sale of Shearson and the reserves related to the sale of
SLHMC, and (iii) a reduction in net interest expense to reflect the use of
proceeds from the Concurrent Transactions and the sales of The Boston Company,
Shearson and SLHMC to reduce commercial paper and short-term debt and senior
notes. The pro forma balance sheet reflects adjustments for the Concurrent
Transactions as if such transactions had occurred as of December 31, 1993.
The pro forma financial data does not purport to present the financial
position and results of operations of the Company had the Concurrent
Transactions and the sale of The Boston Company, Shearson and SLHMC actually
occurred as of such dates, nor is it necessarily indicative of results of
operations that may be achieved in the future.
It is anticipated that the Company will incur certain costs in connection
with the Distribution that will be charged to operating expenses in the second
quarter of 1994. In addition, the Company will recognize compensation expense in
1994 equal to (i) the increase in book value attributable to the Phantom Shares
and (ii) the excess, if any, of the market value of the Common Stock on the
Distribution Date issued pursuant to the Phantom Shares conversion over the
price paid by employees for the Phantom Shares.
PRO FORMA BALANCE SHEET ADJUSTMENTS:
As the sales of The Boston Company, Shearson and SLHMC were consummated
prior to December 31, 1993, the effects of these transactions are reflected in
the historical December 31, 1993 balance sheet. Accordingly, no further
adjustments relating to these transactions are necessary.
The pro forma adjustments to the balance sheet give effect to the items
described below:
(a) Reflects the repayment of commercial paper and short-term debt
with proceeds from the Distribution.
(b) Reflects the conversion of Phantom Shares into Common Stock as
part of the Distribution (the "Phantom Stock Conversion").
(c) Reflects the exchange of Money Market Cumulative Preferred Stock
of Holdings (the "MMP") held by American Express for Common
Stock as part of the Distribution (the "MMP Exchange").
(d) Reflects the purchases of preferred stock most significantly by
American Express.
(e) Reflects the purchases of Common Stock most significantly by
American Express, the MMP Exchange and the Phantom Stock
Conversion.
PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS:
The pro forma adjustments to the statement of operations give effect to the
items described below:
(f) The elimination of revenues and expenses of Shearson and the
loss on the sale of Shearson in 1993. Also eliminated is the
income tax expense of $149 million and $57 million in 1993 and
1992, respectively, related to these items.
(g) The elimination of revenues and expenses of SLHMC.
F-34
82
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(h) Elimination of interest expense of approximately $52 million
and $112 million in 1993 and 1992, respectively, resulting from
the utilization of cash proceeds from the sales of The Boston
Company, Shearson and SLHMC to reduce the Company's commercial
paper, short-term debt and senior notes, offset by additional
interest expense of $72 million and $102 million in 1993 and
1992, respectively, allocated to Shearson and SLHMC for the
carrying costs of buildings, improvements and equipment and
certain acquisition-related debt, which is not directly
eliminated by the Primerica Transaction or the sale of SLHMC
other than through the utilization of available sales proceeds.
(i) Reduced interest expense of approximately $42 million in both
1993 and 1992 resulting from the utilization of the cash
proceeds to the Company from the Offerings and the Preferred
Stock Purchases.
(j) The elimination of the reserves related to the sale of SLHMC
and the related income tax benefit of $41 million.
(k) Adjustments (h) and (i) above, tax effected at an assumed rate
of 40%.
(l) Elimination of the dividend on the MMP, partially offset by the
addition of an assumed dividend of 8 1/2% on $200 million of
preferred stock. It is also anticipated that the Company will
issue additional preferred stock on which no dividend would
have been payable for 1992 and 1993 because such preferred
stock is expected to pay a participation of 50% of the
Company's net income in excess of $400 million per year (with
a cap of $50 million per year for the eight years following
the Distribution).
F-35
83
SCHEDULE II
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS,
PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES
FOR THE THREE YEARS ENDED DECEMBER 31, 1993
YEAR ENDED DECEMBER 31, 1993
-------------------------------------------------------------
BALANCE AT
BEGINNING OF AMOUNT BALANCE AT
NAME OF DEBTOR PERIOD ADDITIONS COLLECTED END OF PERIOD
- --------------------------------------- ------------ ---------- ----------- -------------
Joel Butler............................ $ 1,087,556 $ 13,625 $ 1,073,931(1)
Michael J. Collins..................... 450,675 450,675(1)
Richard S. Collins..................... 220,600 220,600(10)
Joseph M. Grunfeld..................... 353,625 353,625(1)
Barry Hamerling........................ 400,805 400,805(10)
Ruggero Magnoni........................ 162,750 162,750(1)
Joel Margolies......................... 440,625 440,625(1)
William Taft........................... 782,863 782,863(1)
John Tuosto............................ 51,750 51,750(1)
Edward Bruksch......................... 120,000 30,000 90,000(2)
Fred Farina............................ 100,000 $ 160,000 260,000(3)
Peter Hunt............................. 100,000 100,000(4)
Todd C. Jorn........................... 105,000 105,000(5)
Adam Shafiroff......................... 72,582 22,582 50,000(6)
David Sitzer........................... 60,000 60,000
Kim Sullivan........................... 125,000 125,000
John Tuosto............................ 150,000 93,500 56,500(7)
Helen Van Eeden........................ 73,474 15,341 58,133(3)
Miriam Willard......................... 100,000 100,000(4)
Jacob Worenklein....................... 600,000 600,000(8)
Others................................. 38,697,408 74,160 31,217,866 7,553,702(9)
------------ ---------- ----------- -------------
$ 43,349,713 $1,139,160 $31,577,914 $ 12,910,959
------------ ---------- ----------- -------------
------------ ---------- ----------- -------------
See notes to Schedule II on page F-39
F-36
84
SCHEDULE II
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS,
PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES -- (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1993
YEAR ENDED DECEMBER 31, 1992
------------------------------------------------------------
BALANCE AT
BEGINNING OF AMOUNT BALANCE AT
NAME OF DEBTOR PERIOD ADDITIONS COLLECTED END OF PERIOD
- ---------------------------------------- ------------ ---------- ---------- -------------
Joel Butler............................. $ 1,037,125 $ 119,293 $ 68,862 $ 1,087,556
Michael J. Collins...................... 450,675 450,675
Richard S. Collins...................... 220,600 220,600
Joseph M. Grunfeld...................... 353,625 353,625
Barry Hamerling......................... 400,805 400,805
Ruggero Magnoni......................... 162,750 162,750
Joel Margolies.......................... 440,625 440,625
James J. Stewart........................ 112,944 112,944
William Taft............................ 782,863 782,863
John Tuosto............................. 51,750 51,750
Edward Bruksch.......................... 150,000 30,000 120,000
James Carbone........................... 200,000 200,000
Brian Edmonds........................... 103,000 150,000 253,000
Fred Farina............................. 100,000 100,000
Joseph Gregory.......................... 225,000 225,000
La Brena Martin......................... 270,000 270,000
Gordon Paris............................ 250,000 250,000
Martin Randall.......................... 44,444 44,444
Craig Schiffer.......................... 150,000 150,000
Adam Shafiroff.......................... 145,000 72,418 72,582
David Sitzer............................ 180,000 120,000 60,000
Mark Stevenson.......................... 200,000 200,000
Kim Sullivan............................ 125,000 125,000
John Tuosto............................. 150,000 150,000
Helen Van Eeden......................... 115,000 16,267 57,793 73,474
Samuel Wasserman........................ 225,000 225,000
Richard Zielong......................... 90,000 90,000
Others.................................. 41,485,017 2,929,928 5,717,537 38,697,408
------------ ---------- ---------- -------------
$ 47,496,223 $3,940,488 $8,086,998 $ 43,349,713
------------ ---------- ---------- -------------
------------ ---------- ---------- -------------
F-37
85
SCHEDULE II
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS,
PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES -- (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1993
YEAR ENDED DECEMBER 31, 1991
------------------------------------------------------------
BALANCE AT
BEGINNING OF AMOUNT BALANCE AT
NAME OF DEBTOR PERIOD ADDITIONS COLLECTED END OF PERIOD
- ---------------------------------------- ------------ ---------- ---------- -------------
Joel Butler............................. $ 1,037,125 $ 1,037,125
Michael J. Collins...................... 450,675 450,675
Richard S. Collins...................... 220,600 220,600
Joseph M. Grunfeld...................... 353,625 353,625
Barry Hamerling......................... 400,805 400,805
Theodore Krebsbach...................... 44,584 $ 44,584
Ruggero Magnoni......................... 162,750 162,750
Joel Margolies.......................... 440,625 440,625
James J. Stewart........................ 234,000 121,056 112,944
William Taft............................ 782,863 782,863
John Tuosto............................. 51,750 51,750
Edward Bruksch.......................... $ 150,000 150,000
James Carbone........................... 200,000 200,000
Brian Edmonds........................... 103,000 103,000
Joseph Gregory.......................... 225,000 225,000
La Brena Martin......................... 270,000 270,000
Gordon Paris............................ 250,000 250,000
Martin Randall.......................... 100,000 55,556 44,444
Adam Shafiroff.......................... 175,818 145,000 175,818 145,000
David Sitzer............................ 180,000 180,000
Helen Van Eeden......................... 120,000 15,000 20,000 115,000
Samuel Wasserman........................ 125,000 100,000 225,000
Richard Zielong......................... 120,000 30,000 90,000
Others.................................. 44,766,924 2,720,691 6,002,598 41,485,017
------------ ---------- ---------- -------------
$ 49,467,144 $4,478,691 $6,449,612 $ 47,496,223
------------ ---------- ---------- -------------
------------ ---------- ---------- -------------
F-38
86
SCHEDULE II
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS,
PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES -- (CONTINUED)
FOR THE THREE YEARS ENDED DECEMBER 31, 1993
NOTES TO PAGE F-36 OF SCHEDULE II
(1) The Executive Stock Loan Program provides low interest demand loans, on an
unsecured basis, to assist key employees in acquiring common stock through
open market purchases. Loans under this program bear interest at the lower
of the prime lending rate minus 2% or 11%. Such loans are payable on demand
and mature on December 31, 1996.
(2) Note is payable by March 1994. Interest accrues at the Company's margin
rate.
(3) Notes are payable February 1994 vs. bonus. Interest accrues at the
Company's margin rate.
(4) Note is payable February 1994 vs. bonus. Interest accrues at the Company's
margin rate.
(5) Notes are payable February 1995 vs. bonus. Interest accrues at the
Company's margin rate.
(6) Note is payable by payroll deductions of 10% of gross commissions up to
$50,000 and all net commissions over $50,000, plus deferred compensation
and investment banking fees. Interest accrues at the Company's margin rate.
(7) Note is payable by monthly payments of $1,000 plus 50% of any net bonus
payable February 1994. Interest accrues at the Company's margin rate.
(8) Note is payable February 1994 vs. bonus. Note is noninterest bearing.
(9) Other includes employees who transferred to Smith Barney on July 31, 1993.
In connection with this transfer Smith Barney paid the Company $25,775,013
for loans related to these individuals. The balance in other also
represents loans to individuals who terminated employment and are
outstanding at December 31, 1993.
(10) It is anticipated that American Express will purchase the loans of Mr.
Collins and Mr. Hamerling as part of the Distribution.
F-39
87
SCHEDULE III
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
(PARENT COMPANY ONLY)
(IN MILLIONS EXCEPT SHARE DATA)
ASSETS
DECEMBER 31,
-------------------
1993 1992
------- -------
Cash and cash equivalents................................................ $ 29 $ 29
Securities and other financial instruments owned......................... 287 75
Equity in net assets of subsidiaries and affiliates...................... 4,238 4,193
Accounts receivable and accrued interest................................. 1,843 371
Due from subsidiaries and affiliates..................................... 6,143 7,897
Other assets............................................................. 338 251
------- -------
$12,878 $12,816
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper and short-term debt..................................... $ 3,835 $ 5,549
Securities and other financial instruments sold but not yet purchased.... 142
Accrued liabilities, due to subsidiaries and other payables.............. 418 216
Senior notes............................................................. 6,281 4,540
Subordinated indebtedness................................................ 150 150
------- -------
Total liabilities.............................................. 10,826 10,455
------- -------
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
Money Market Cumulative, 3,300 shares authorized;
250 shares issued and outstanding; $1,000,000 liquidation
preference per share............................................. 250 250
Common stock, $.10 par value; 300,000,000 shares authorized;
168,235,284 shares issued and outstanding in 1993 and 1992.......... 17 17
Additional paid-in capital............................................. 1,871 1,871
Net unrealized securities losses....................................... (13)
Foreign currency translation adjustment................................ (12) (5)
Accumulated deficit.................................................... (582) (267)
------- -------
Total stockholders' equity..................................... 2,052 2,361
------- -------
$12,878 $12,816
------- -------
------- -------
See notes to condensed financial information of Registrant.
F-40
88
SCHEDULE III
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF OPERATIONS
(PARENT COMPANY ONLY)
(IN MILLIONS)
YEAR ENDED DECEMBER 31,
--------------------------
1993 1992 1991
------ ----- -----
Revenues
Market making and principal transactions........................ $ 34 $ (4) $ (10)
Investment banking.............................................. (31) (6) (12)
Interest and dividends.......................................... 381 375 544
Other........................................................... 13 15 3
------ ----- -----
Total revenues............................................... 397 380 525
Interest expense................................................ 592 549 642
------ ----- -----
Net revenues................................................. (195) (169) (117)
------ ----- -----
Non-interest expenses
Compensation and benefits....................................... 22 46 20
Other........................................................... 39 180 46
Computervision write-down....................................... 230
First Capital Holdings Corp. write-off.......................... 144
------ ----- -----
Total non-interest expenses.................................. 61 456 210
------ ----- -----
Income (loss) before taxes and cumulative effect of changes in
accounting principles........................................... (256) (625) (327)
Provision for (benefit from) income taxes......................... (85) (253) (189)
------ ----- -----
Income (loss) before cumulative effect of changes in accounting
principles...................................................... (171) (372) (138)
Cumulative effect of changes in accounting principles........... 28
------ ----- -----
Income (loss) before equity in net loss of subsidiaries and
affiliates...................................................... (171) (344) (138)
Equity in net income of subsidiaries and affiliates............. 69 221 345
------ ----- -----
Net income (loss)................................................. (102) (123) 207
Preferred stock dividends......................................... 48 48 48
------ ----- -----
Net income (loss) applicable to Common Stock...................... $ (150) $(171) $ 159
------ ----- -----
------ ----- -----
See notes to condensed financial information of Registrant.
F-41
89
SCHEDULE III
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS
(PARENT COMPANY ONLY)
(IN MILLIONS)
YEAR ENDED DECEMBER 31,
------------------------------
1993 1992 1991
------ ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................................. $ (102) $ (123) $ 207
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Cumulative effect of changes in accounting principles........ (28)
Equity in net income of subsidiaries......................... (69) (221) (345)
Computervision write-down.................................... 230
Provision for losses and other reserves...................... 13 131
First Capital Holdings Corp. write-off....................... 144
Other adjustments............................................ 5 26 70
Net change in securities owned, accounts receivable and accrued
interest, due from subsidiaries and affiliates and other
assets....................................................... (30) (3,714) 135
Net change in accrued liabilities, due to subsidiaries and
other payables............................................... 343 (287) (51)
Dividends and capital distributions received................... 587 228 87
------ ------- -------
Net cash provided by (used in) operating activities....... 747 (3,758) 247
------ ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of senior notes......................... 2,827 3,187 1,658
Principal payments of senior notes............................. (1,090) (1,062) (940)
Proceeds from issuance of subordinated indebtedness............
Principal payments of subordinated indebtedness................ (100)
Increase (decrease) in commercial paper and short-term debt,
net.......................................................... (1,714) 1,669 (955)
Issuance of stock.............................................. 175
Dividends paid................................................. (213) (81) (48)
------ ------- -------
Net cash provided by (used in) financing activities....... (190) 3,888 (385)
------ ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in investments in affiliates.......................... (545) (337) (254)
Proceeds from sale of Balcor loans............................. 500
Other.......................................................... (12) 21 3
------ ------- -------
Net cash provided by (used in) investing activities....... (557) (316) 249
------ ------- -------
Net change in cash and cash equivalents................... (186) 111
Cash and cash equivalents at beginning of year................. 29 215 104
------ ------- -------
Cash and cash equivalents at end of year.................. $ 29 $ 29 $ 215
------ ------- -------
------ ------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN MILLIONS)
Interest paid (net of amount capitalized) totaled $1,105 in 1993, $543 in
1992 and $642 in 1991. Income taxes paid (received) totaled $28 in 1993, $86 in
1992 and $(47) in 1991.
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-42
90
SCHEDULE III
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
1. SENIOR NOTES:
DECEMBER 31, 1993
---------------------------------------------------
USD USD
CONTRACTUAL CONTRACTUAL FOREIGN DECEMBER 31,
FIXED RATE FLOATING RATE CURRENCY TOTAL 1992
----------- ------------- -------- ------ ------------
(IN MILLIONS)
1993................................. $1,107
1994................................. $ 382 $ 1,433 $ $1,815 812
1995................................. 383 405 6 794 222
1996................................. 505 460 90 1,055 533
1997................................. 525 131 9 665 476
1998................................. 759 10 89 858 296
1999 and Thereafter.................. 1,094 1,094 1,094
----------- ------------- -------- ------ ------------
$ 3,648 $ 2,439 $194 $6,281 $4,540
----------- ------------- -------- ------ ------------
----------- ------------- -------- ------ ------------
As of December 31, 1993 Holdings had $3,648 million of U.S. dollar fixed
rate senior notes outstanding. Contractual interest rates on these notes ranged
from 3.69% to 10.80% as of December 31, 1993, with a contractual weighted
average interest rate of 7.45%.
Holdings entered into interest rate swap contracts which effectively
converted $243 million of its U.S. dollar fixed rate senior notes to floating
rates based on the London Interbank Offered Rate ("LIBOR"). Excluding this $243
million, but including the effect of $542 million of U.S. dollar floating rate
senior notes effectively converted to fixed rates through the use of interest
rate swap contracts and $60 million of fixed rate basis swaps, Holdings' U.S.
dollar fixed rate senior notes outstanding had an effective weighted average
interest rate of 7.65%.
As of December 31, 1993, Holdings had $2,439 million of U.S. dollar
floating rate senior notes outstanding, including $192 million of U.S. dollar
floating rate senior notes on which the interest and/or redemption values have
been linked to movements in various indices. Excluding this $192 million,
contractual rates on Holdings' U.S. dollar floating rate senior notes ranged
from 3.48% to 4.53% with a contractual weighted average interest rate of 3.84%.
Holdings entered into interest rate swap contracts which effectively
converted $542 million of its U.S. dollar floating rate senior notes to fixed
rates. Excluding this $542 million, but including the effect of $243 million of
U.S. dollar fixed rate senior notes converted to floating rates through the use
of interest rate swap contracts and $599 million of floating rate basis swaps,
Holdings' U.S. dollar floating rate senior notes outstanding had an effective
weighted average interest rate of 3.85%.
As of December 31, 1993 Holdings had the equivalent of $194 million of
foreign currency denominated senior notes outstanding, of which $45 million were
fixed rate and $149 million were floating rate. The contractual interest rate on
Holdings' fixed rate foreign currency denominated senior notes was 5.50% as of
December 31, 1993. Contractual interest rates on Holdings' floating rate foreign
currency denominated senior notes ranged from 2.62% to 10.06% as of December 31,
1993, with a contractual weighted average interest rate of 3.04%. Holdings
entered into cross currency swap contracts which effectively converted a portion
of its fixed and floating rate foreign currency denominated senior notes into
U.S. dollar obligations. Holdings' floating rate foreign currency senior notes
not converted to U.S. dollar obligations, totaling $164 million, were used to
finance foreign currency denominated assets.
F-43
91
SCHEDULE III
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Of Holdings' U.S. dollar fixed rate senior notes outstanding as of December
31, 1993, $80 million are repayable prior to maturity at the option of the
holder. These obligations are reflected in the above table as $25 million and
$55 million maturing in 1996 and 1997, respectively, rather than at their
contractual maturities in 2003 and 2023, respectively. The holders of these
notes have the option to redeem them at par value.
As of December 31, 1993, the fair value of Holdings' senior notes were
approximately $6,513 million ($4,635 million in 1992) which exceeds the
aggregate carrying value of the notes outstanding by approximately $232 million
($95 million in 1992). For purposes of this fair value calculation the carrying
value of variable rate debt that reprices within a year and fixed rate debt
which matures in less than six months approximates fair value. For the remaining
portfolio, fair value was estimated using either quoted market prices or
discounted cash flow analyses based on Holdings' current borrowing rates for
similar types of borrowing arrangements. Unrecognized net losses on interest
rate swaps and other transactions used by Holdings to manage its interest rate
risk within the senior notes portfolio were $57 million and $20 million at
December 31, 1993 and 1992, respectively. The unrecognized net losses on these
transactions reflect the estimated amounts the Company would pay if the
agreements were terminated as calculated based upon market rates as of December
31, 1993 and 1992, respectively.
2. SUBORDINATED INDEBTEDNESS:
Subordinated indebtedness at December 31, 1993 consists of $150 million
Capital Notes due 1995 (the "Notes"), with interest based on an index of LIBOR.
The contractual interest rate on this debt was 4.25% as of December 31, 1993.
The Notes are redeemable, in whole or in part, at the option of Holdings on each
quarterly interest payment date from proceeds of previously designated equity
securities issuances.
3. DIVIDENDS:
Dividends and capital distributions declared to Holdings by its
subsidiaries and affiliates were $587 million in 1993, $228 million in 1992 and
$87 million in 1991.
F-44
92
SCHEDULE IX
LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES
SHORT-TERM BORROWINGS
DECEMBER 31, 1993
Information pertaining to aggregate short-term borrowings during each of
the three years in the period ended December 31, 1993 was as follows (dollars in
billions):
MAXIMUM AMOUNT AVERAGE AMOUNT WEIGHTED AVERAGE
WEIGHTED AVERAGE OUTSTANDING OUTSTANDING INTEREST RATE
CATEGORY OF AGGREGATE INTEREST RATE AT DURING THE DURING THE DURING THE
SHORT-TERM BORROWINGS YEAR-END YEAR(1) YEAR(2) YEAR(3)
- ----------------------------- ---------------- -------------- -------------- ----------------
Commercial Paper
1993.................... 3.6% $ 6.8 $ 4.8 3.5%
1992.................... 4.0% $ 6.8 $ 5.0 4.2%
1991.................... 5.6% $ 4.3 $ 3.4 6.3%
Short-term Debt
1993.................... 4.3% $ 10.4 $ 8.3 4.0%
1992.................... 4.4% $ 7.6 $ 6.6 4.7%
1991.................... 5.4% $ 8.1 $ 6.8 7.1%
Securities Sold Under
Agreements to Repurchase
1993.................... 4.4% $ 51.4 $ 45.7 4.1%
1992.................... 4.0% $ 41.3 $ 34.0 4.2%
1991.................... 5.0% $ 34.1 $ 27.3 6.1%
- ---------------
(1) The maximum amount outstanding was based on month end balances.
(2) The average borrowings were computed using the monthly amounts outstanding.
(3) Interest rates were determined by dividing the actual interest expense for
the year by the average monthly amounts outstanding.
F-45
93
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------------------
3.1 Restated Certificate of Incorporation of the Registrant dated April 10, 1987
(incorporated by reference to Exhibit 3.1 of the Registrant's Registration
Statement on Form S-1 (Reg. No. 33-12976)).
3.2 Certificate of Amendment to Restated Certificate of Incorporation of the Registrant
dated May 9, 1988 (incorporated by reference to Exhibit 3.2 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1988).
3.3 Certificate of Amendment to Restated Certificate of Incorporation of the Registrant
dated September 20, 1990 (incorporated by reference to Exhibit 3.3 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1990).
3.4 Certificate of Amendment to Restated Certificate of Incorporation of the Registrant
dated August 2, 1993 (incorporated by reference to Exhibit 3 of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1993).
3.5 Certificate of Designation of Money Market Cumulative Preferred Stock of the
Registrant dated December 27, 1989 (incorporated by reference to Exhibit 3.4 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1990).
3.6 Certificate of the Designation, Powers, Preferences and Rights of Convertible
Exchangeable Preferred Stock of the Registrant dated March 27, 1990 (incorporated
by reference to Exhibit 3.6 of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1989).
3.7 Certificate of the Designation, Powers, Preferences and Rights of Adjustable Rate
Preferred Stock of the Registrant dated March 27, 1990 (incorporated by reference
to Exhibit 3.6 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1989).
3.8 Amended Certificate of the Designation, Powers, Preferences and Rights of the
Cumulative Convertible Voting Preferred Stock, Series A, of the Registrant dated
August 10, 1990 (incorporated by reference to Exhibit 3.7 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1990).
3.9 By-Laws of the Registrant, amended as of April 21, 1992.
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 Form of 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
10.17 of the Registrant's Registration Statement on Form S-1 (Reg. No. 33-12976)).
10.2 Tax Allocation Agreement between Shearson Lehman Brothers Holdings Inc. and
American Express Company (incorporated by reference to Exhibit 10.19 of the
Registrant's Registration Statement of Form S-1 (Reg. No. 33-12976)).
10.3 Form of Intercompany Agreement between American Express Company and Shearson Lehman
Brothers Holdings Inc. (incorporated by reference to Exhibit 10.20 of the
Registrant's Registration Statement on Form S-1 (Reg. No. 33-12976)).
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).
94
EXHIBIT
NO. DESCRIPTION
- ------- -----------
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 10.27 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1990).
10.11 Stock Purchase Agreement, dated as of September 14, 1992, by and between Mellon
Bank Corporation and Shearson Lehman Brothers Inc. (Incorporated by reference to
Exhibit 10.15 of the Registrant's Annual Report on form 10-K for the year ended
December 31, 1992).
10.12 Asset Purchase Agreement, dated as of March 12, 1993, by and among Primerica
Corporation, Smith Barney, Harris Upham & Co. Incorporated and Shearson Lehman
Brothers Inc. (incorporated by reference to Exhibit 10.16 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1992).
10.13 Amendment No. 1 dated as of July 31, 1993, to Asset Purchase Agreement dated March
12, 1993, by and among Primerica Corporation, Smith Barney, Harris Upham & Co.
Incorporated and Shearson Lehman Brothers Inc. (incorporated by reference to
Exhibit 10.1 of Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1993).
10.14 Amendment No. 2 dated as of July 31, 1993, to Asset Purchase Agreement dated March
12, 1993, by and among Primerica Corporation, Smith Barney, Harris Upham & Co.
Incorporated and Shearson Lehman Brothers Inc. (incorporated by reference to
Exhibit 10.2 of Holdings' Quarterly Report on Form 10-Q for the quarter ended June
30, 1993).
10.15 Clearing Agreement dated as of July 31, 1993, by and between Smith Barney, Harris
Upham & Co. Incorporated and Shearson Lehman Brothers Inc. (incorporated by
reference to Exhibit 10.3 of Holdings' Quarterly Report on Form 10-Q for the
quarter ended June 30, 1993).
10.16 Lease dated as of October 13, 1993 between 101 Hudson Leasing Associates and Lehman
Brothers Holdings Inc. (incorporated by reference to Exhibit 10 of Holdings'
Quarterly Report on Form 10-Q for the quarter ended September 30, 1993) .
10.17 Lehman Brothers Holdings Inc. Voluntary Deferred Compensation Plan (incorporated by
reference to Exhibit 10.9 of Lehman Brothers Inc. Annual Report on Form 10-K for
the year ended December 31, 1987).
10.18 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)).
10.19 Lehman Brothers Holding 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)).
10.20 The E.F. Hutton Group Partnership Award Deferred Compensation Plan (incorporated by
reference to Exhibit 1 to Amendment No. 1 of The E.F. Hutton Group Inc.'s
Registration Statement on Form S-8 (Reg. No. 33-02134)).
10.21 Amended and Restated Agreements of Limited Partnership of Shearson Lehman Brothers
Capital Partners I (incorporated by reference to Exhibit 10.47 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1988).
10.22 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).
12. Computation in support of ratio of earnings to fixed charges.*
21. Pursuant to General Instruction J of Form 10-K, the list of the Registrant's
Subsidiaries is omitted.
23. Consent of Ernst & Young.*
24. Powers of Attorney.*
99. Annual Report on Form 11-K for the Lehman Brothers Holdings Inc. Tax Deferred
Savings Plan.**
- ---------------
* Filed herewith.
** To be filed by amendment.