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