-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U5K50hq+kPdQEwUqX1OAiCintlOPAl4X7kfR82FBIld6769KsYDkVMigk0+oGILf n8s5m8j3PquepOxWgon5Lw== 0000806085-01-000038.txt : 20010417 0000806085-01-000038.hdr.sgml : 20010417 ACCESSION NUMBER: 0000806085-01-000038 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010228 FILED AS OF DATE: 20010416 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEHMAN BROTHERS HOLDINGS INC CENTRAL INDEX KEY: 0000806085 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 133216325 STATE OF INCORPORATION: DE FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09466 FILM NUMBER: 1603519 BUSINESS ADDRESS: STREET 1: AMERICAN EXPRESS TWR STREET 2: 3 WORLD FINANCIAL CNTR CITY: NEW YORK STATE: NY ZIP: 10285 BUSINESS PHONE: 2125267000 MAIL ADDRESS: STREET 1: AMERICAN EXPRESS TOWER 15TH FL STREET 2: 2 WORLD TRADE CENTER CITY: NEW YORK STATE: NY ZIP: 10048 FORMER COMPANY: FORMER CONFORMED NAME: SHEARSON LEHMAN HUTTON HOLDINGS INC DATE OF NAME CHANGE: 19901017 10-Q 1 0001.txt LEHMAN BROTHERS HOLDINGS INC. FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended February 28, 2001 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 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 incorporation(I.R.S.Employer Identification No.) or organization) 3 World Financial Center New York, New York 10285 (Address of principal (Zip Code) executive offices) (212) 526-7000 (Registrant's telephone number, including area code) 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 |_| As of March 31, 2001, 246,491,672 shares of the Registrant's Common Stock, par value $0.10 per share, were outstanding. LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED FEBRUARY 28, 2001 INDEX Part I. FINANCIAL INFORMATION Page Number Item 1. Financial Statements - (unaudited) Consolidated Statement of Income - Three Months Ended February 28, 2001 and February 29, 2000.............................. 3 Consolidated Statement of Financial Condition - February 28, 2001 and November 30, 2000.............................. 4 Consolidated Statement of Cash Flows - Three Months Ended February 28, 2001 and February 29, 2000.............................. 6 Notes to Consolidated Financial Statements........................... 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 15 Part II. OTHER INFORMATION Item 1. Legal Proceedings.......................................... 27 Item 4. Submission of Matters to a Vote of Security Holders......... 28 Item 6. Exhibits and Reports on Form 8-K............................ 29 Signature ..................................................... 31 EXHIBIT INDEX ..................................................... 32 Exhibits 2 LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES CONSOLIDATED STATEMENT of INCOME (Unaudited) (In millions) Three months ended ------------------------------------- February 28 February 29 2001 2000 ---------------- ---------------- Revenues Principal transactions $ 998 $ 1,114 Investment banking 483 602 Commissions 278 229 Interest and dividends 4,981 4,313 Other 12 82 ---------- ------------- Total revenues 6,752 6,340 Interest expense 4,869 4,138 ------------ --------------- Net revenues 1,883 2,202 ------------ --------------- Non-interest expenses Compensation and benefits 960 1,145 Technology and communications 112 84 Brokerage and clearance 77 58 Business development 50 35 Professional fees 47 32 Occupancy 41 30 Other 23 24 ------------ --------------- Total non-interest expenses 1,310 1,408 ------------ --------------- Income from operations before taxes and dividends on trust preferred securities 573 794 Provision for income taxes 172 239 Dividends on trust preferred securities 14 14 ------------ --------------- Net income $ 387 $ 541 ============ =============== Net income applicable to common stock $ 375 $ 482 ============ =============== Earnings per common share Basic $ 1.52 $ 1.96 ============ =============== Diluted $ 1.39 $ 1.84 ============ =============== See notes to consolidated financial statements. 3 LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES CONSOLIDATED STATEMENT of FINANCIAL CONDITION (Unaudited) (In millions)
February 28 November 30 2001 2000 ------------------ ------------------ ASSETS Cash and cash equivalents $ 2,535 $ 5,160 Cash and securities segregated and on deposit for regulatory and other purposes 3,288 2,434 Securities and other financial instruments owned: Governments and agencies 29,320 27,381 Mortgages and mortgage-backed 29,049 24,670 Corporate equities 24,583 24,042 Corporate debt and other 17,634 16,098 Derivatives and other contractual agreements 12,154 9,583 Certificates of deposit and other money market instruments 1,676 3,433 ------------------ ------------------ 114,416 105,207 ------------------ ------------------ Collateralized short-term agreements: Securities purchased under agreements to resell 80,521 81,242 Securities borrowed 18,801 17,618 Receivables: Brokers, dealers and clearing organizations 2,969 1,662 Customers 9,636 7,585 Others 1,145 1,135 Property, equipment and leasehold improvements (net of accumulated depreciation and amortization of $865 in 2001and $855 in 2000) 755 671 Other assets 2,044 1,826 Excess of cost over fair value of net assets acquired (net of accumulated amortization of $141 in 2001 and $138 in 2000) 177 180 ------------------ ------------------ Total assets $ 236,287 $ 224,720 ================== ==================
See notes to consolidated financial statements. 4 LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES CONSOLIDATED STATEMENT of FINANCIAL CONDITION - (Continued) (Unaudited) (In millions, except share data)
February 28 November 30 2001 2000 ----------------- ------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Commercial paper and short-term debt $ 4,871 $ 5,800 Securities and other financial instruments sold but not yet purchased: Governments and agencies 14,801 14,998 Corporate equities 13,441 6,623 Derivatives and other contractual agreements 10,765 8,568 Corporate debt and other 5,749 5,096 ----------------- ------------------ 44,756 35,285 ----------------- ------------------ Collateralized short-term financing: Securities sold under agreements to repurchase 106,895 110,225 Securities loaned 10,139 7,242 Payables: Brokers, dealers and clearing organizations 2,126 1,922 Customers 14,237 11,637 Accrued liabilities and other payables 8,494 8,735 Long-term debt: Senior notes 33,374 32,106 Subordinated indebtedness 2,938 3,127 ----------------- ------------------ Total liabilities 227,830 216,079 ----------------- ------------------ Commitments and contingencies Preferred securities subject to mandatory redemption 710 860 STOCKHOLDERS' EQUITY Preferred stock 700 700 Common stock, $0.10 par value; 300,000,000 shares authorized; Shares issued: 253,647,415 in 2001 and 251,629,126 in 2000; Shares outstanding: 247,321,056 in 2001 and 236,395,332 in 2000 25 25 Additional paid-in capital 3,059 3,589 Accumulated other comprehensive income (net of tax) (10) (8) Retained earnings 4,069 3,713 Other stockholders' equity, net 312 597 Common stock in treasury, at cost: 6,326,359 shares in 2001 and 15,233,794 shares in 2000 (408) (835) ----------------- ------------------ Total stockholders' equity 7,747 7,781 ----------------- ------------------ Total liabilities and stockholders' equity $236,287 $224,720 ================= ==================
See notes to consolidated financial statements. 5 LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES CONSOLIDATED STATEMENT of CASH FLOWS (Unaudited) (In millions)
Three months ended -------------------------------------- February 28 February 29 2001 2000 ----------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITES Net income $ 387 $ 541 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 38 24 Compensation payable in common stock 127 77 Other adjustments 17 12 Net change in: Cash and securities segregated (854) (1,188) Securities and other financial instruments owned (8,377) (3,509) Securities borrowed (1,183) (4,542) Receivables from brokers, dealers and clearing organizations (1,307) 181 Receivables from customers (2,051) (520) Securities and other financial instruments sold but not yet purchased 9,471 12,268 Securities loaned 2,897 380 Payables to brokers, dealers and clearing organizations 204 470 Payables to customers 2,600 1,810 Accrued liabilities and other payables (249) 1,208 Other operating assets and liabilities, net (128) (213) ----------------- ---------------- Net cash provided by operating activities $ 1,592 $ 6,999 ----------------- ----------------
See notes to consolidated financial statements. 6 LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES CONSOLIDATED STATEMENT of CASH FLOWS (Continued) (Unaudited) (In millions)
Three months ended ------------------------------------- February 28 February 29 2001 2000 ---------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITES Proceeds from issuances of senior notes $ 2,485 $ 3,776 Principal payments of senior notes (2,059) (1,914) Principal payments of sub debt (194) - Net payments from commercial paper and short-term debt (929) 349 Resale agreements net of repurchase agreements (2,609) (11,317) Payments for treasury stock purchases (679) (112) Dividends paid (30) (73) Issuances of common stock 26 - Redemption of preferred stock (100) (88) Issuances of trust preferred securities, net of issuance costs ---------------- ---------------- Net cash used in financing activities (4,089) (9,379) ---------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, equipment and leasehold improvements (128) (17) ---------------- ---------------- Net cash used in investing activities (128) (17) ---------------- ---------------- Net change in cash and cash equivalents (2,625) (2,397) ---------------- ---------------- Cash and cash equivalents, beginning of period 5,160 5,186 ---------------- ---------------- Cash and cash equivalents, end of period $ 2,535 $ 2,789 ================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions) Interest paid totaled $5,006 and $4,226 for the three months ended February 28, 2001 and February 29, 2000, respectively. Income taxes paid totaled $137 and $59 for the three months ended February 28, 2001 and February 29, 2000, respectively. See notes to consolidated financial statements. 7 LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation: The consolidated financial statements include the accounts of Lehman Brothers Holdings Inc. ("Holdings") and subsidiaries (collectively, the "Company" or "Lehman Brothers"). Lehman Brothers is one of the leading global investment banks serving institutional, corporate, government and high-net-worth individual clients and customers. The Company's worldwide headquarters in New York and regional headquarters in London and Tokyo are complemented by offices in additional locations in North America, Europe, the Middle East, Latin America and the Asia Pacific Region. The Company is engaged primarily in providing financial services. The principal U.S. subsidiary of Holdings is Lehman Brothers Inc. ("LBI"), a registered broker-dealer. All material intercompany accounts and transactions have been eliminated in consolidation. The Company's financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the "SEC") with respect to the Form 10-Q and reflect all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Pursuant to such rules and regulations, certain footnote disclosures which are normally required under generally accepted accounting principles have been omitted. It is recommended that these consolidated financial statements be read in conjunction with the audited consolidated financial statements incorporated by reference in the Company's Annual Report on Form 10-K for the twelve months ended November 30, 2000 (the "Form 10-K"). The Consolidated Statement of Financial Condition at November 30, 2000 was derived from the audited financial statements. The nature of the Company's business is such that the results of any interim period may vary significantly from quarter to quarter and may not be indicative of the results to be expected for the fiscal year. Certain prior period amounts reflect reclassifications to conform to the current period's presentation. 2. Long-Term Debt: During the three months ended February 28, 2001, the Company issued $2,485 million of long-term debt (all of which were senior notes). Of the total issuances during the period, $1,028 million were U.S. dollar fixed rate, $714 million were U.S. dollar floating rate, $11 million were foreign currency denominated fixed rate, and $733 million were foreign currency denominated floating rate. These issuances were primarily utilized to refinance current maturities of long-term debt in 2001 and to increase total capital (stockholders' equity, long-term debt and preferred securities subject to mandatory redemption). The Company's floating rate new issuances contain contractual interest rates based primarily on London Interbank Offered Rates ("LIBOR"). All of the Company's fixed rate new issuances were effectively converted to floating rate obligations through the use of interest rate swaps. Of the foreign denominated new issuances totaling $744 million, $477 million were effectively swapped to U.S. Dollars, with the remainder match funding foreign currency denominated capital needs. The Company had $2,253 million of long-term debt mature during the three months ended February 28, 2001. 3. Capital Requirements: The Company operates globally through a network of subsidiaries, with several being subject to regulatory requirements. In the United States, LBI, as a registered broker-dealer, is subject to SEC Rule 15c3-1, the Net Capital Rule, which requires LBI to maintain net capital of not less than the greater of 2% of aggregate debit items arising from customer transactions, as defined, or 4% of funds required to be segregated for customers' regulated commodity accounts, as defined. At February 28, 2001, LBI's regulatory net capital, as defined, of $2,038 million exceeded the minimum requirement by $1,895 million. 8 Lehman Brothers International (Europe) ("LBIE"), a United Kingdom registered broker-dealer and subsidiary of Holdings, is subject to the capital requirements of the Securities and Futures Authority ("SFA") of the United Kingdom. Financial resources, as defined, must exceed the total financial resources requirement of the SFA. At February 28, 2001, LBIE's financial resources of approximately $2,361 million exceeded the minimum requirement by approximately $544 million. Lehman Brothers Japan Inc.'s Tokyo branch, a regulated broker-dealer, is subject to the capital requirements of the Financial Services Agency and at February 28, 2001, had net capital of approximately $348 million which was approximately $105 million in excess of the specified levels required. Lehman Brothers Bank, FSB (the "Bank"), the Company's thrift subsidiary is regulated by the Office of Thrift Supervision ("OTS"). The Bank exceeds all regulatory capital requirements and is considered well capitalized by the OTS. Certain other non-U.S. subsidiaries are subject to various securities, commodities and banking regulations and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. At February 28, 2001, these other subsidiaries were in compliance with their applicable local capital adequacy requirements. In addition, the Company's "AAA" rated derivatives subsidiaries, Lehman Brothers Financial Products Inc. ("LBFP") and Lehman Brothers Derivative Products Inc. ("LBDP"), have established certain capital and operating restrictions which are reviewed by various rating agencies. At February 28, 2001, LBFP and LBDP each had capital which exceeded the requirement of the most stringent rating agency by approximately $51 million and $25 million, respectively. The regulatory rules referred to above, and certain covenants contained in various debt agreements may restrict Holdings' ability to withdraw capital from its regulated subsidiaries, which in turn could limit its ability to pay dividends to shareholders. 4. Derivative Financial Instruments: Effective December 1, 2000, the Company adopted Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," which requires that all derivative instruments be reported on the consolidated statement of financial condition at fair value and establishes criteria for designation and effectiveness of hedging relationships. The adoption of SFAS No. 133 did not have a material effect on the Company's consolidated statement of financial condition or the results of operations. Most of the Company's derivative transactions are entered into for trading related activities for which the adoption of SFAS No. 133 had no accounting impact. The Company's trading related derivative activities are marked-to-market through earnings as a component of Principal Transactions revenues. The Company also utilizes derivatives for non-trading purposes as an end user to modify the market risk exposures of certain assets and liabilities. In this regard, the Company primarily enters into fair value hedges utilizing interest rate swaps to convert a substantial portion of the Company's fixed rate long-term debt and certain term fixed rate secured financing activities to a floating interest rate. The ineffective portion of the fair value hedges were included in "Interest Expense" on the consolidated statement of income and were immaterial for the three months ended February 28, 2001. Market or fair value for trading-related instruments is generally determined by either quoted market prices (for exchange-traded futures and options) or pricing models (for over-the-counter swaps, forwards and options). Pricing models utilize a series of market inputs to determine the present value of future cash flows, with adjustments, as required for credit risk and liquidity risk. Further valuation adjustments may be recorded, as deemed appropriate for new or complex products or for positions with significant concentrations. These adjustments are integral components of the mark-to-market process. Credit-related 9 valuation adjustments represent estimates of expected losses which incorporate business and economic conditions, historical experience, concentrations, and the character, quality and performance of credit sensitive financial instruments. Unrealized gains and losses on derivative contracts are recorded on a net basis in the Consolidated Statement of Financial Condition for those transactions with counterparties executed under a legally enforceable master netting agreement and are netted across products when such provisions are stated in the master netting agreement. Listed in the following table is the fair value of the Company's trading-related derivative activities. Assets and liabilities represent net unrealized gains (amounts receivable from counterparties) and net unrealized losses (amounts payable to counterparties), respectively.
Fair Value* Fair Value* February 28, 2001 November 30, 2000 --------------------------------- ---------------------------------- (in millions) Assets Liabilities Assets Liabilities - -------------------------------------------------------- -------------- -- --------------- -------------- --- --------------- Interest rate and currency swaps and options (including caps, collars and floors) $ 6,004 $ 4,711 $ 4,349 $ 3,390 Foreign exchange forward contracts and options 1,195 1,401 902 1,361 Other fixed income securities contracts (including options and TBAs) 387 350 496 418 Equity contracts (including equity swaps, warrants and options) 4,568 4,303 3,836 3,399 -------------- -- --------------- -------------- --- --------------- Total $ 12,154 $ 10,765 $ 9,583 $ 8,568 -------------- -- --------------- -------------- --- ---------------
* Amounts represent carrying value (exclusive of collateral) and do not include receivables or payables related to exchange-traded futures contracts. Assets included in the table above represent the Company's net receivable/payable for derivative financial instruments before consideration of collateral. Included within the $12,154 million fair value of assets at February 28, 2001 was $10,348 million related to swaps and other OTC contracts and $1,806 million related to exchange-traded option and warrant contracts. Included within the $9,583 million fair value of assets at November 30, 2000 was $8,643 million related to swaps and other OTC contracts and $940 million related to exchange-traded option and warrant contracts. With respect to OTC contracts, including swaps, the Company views its net credit exposure to be $7,566 million at February 28, 2001, representing the fair value of the Company's OTC contracts in an unrealized gain position, after consideration of collateral. Presented below is an analysis of the Company's net credit exposure at February 28, 2001 for OTC contracts based upon actual ratings made by external rating agencies or by equivalent ratings established and utilized by the Company's Credit Risk Management Department. Counterparty S&P/Moody's Net Credit Risk Rating Equivalent Exposure ----------- ---------- -------- 1 AAA/Aaa 18% 2 AA-/Aa3 or higher 29% 3 A-/A3 or higher 31% 4 BBB-/Baa3 or higher 15% 5 BB-/Ba3 or higher 6% 6 B+/B1 or lower 1% 10 The Company is also subject to credit risk related to its exchange-traded derivative contracts. Exchange-traded contracts, including futures and certain options, are transacted directly on the exchange. To protect against the potential for a default, all exchange clearinghouses impose net capital requirements for their membership. Additionally, exchange clearinghouses require counterparties to futures contracts to post margin upon the origination of all contracts and for any changes in the market value of the contracts on a daily basis (certain foreign exchanges provide for settlement within three days). Therefore, the potential for losses from exchange-traded products is limited. For a further discussion of the Company's derivative related activities, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Off-Balance Sheet Financial Instruments and Derivatives" and Notes 1 and 12 to the Consolidated Financial Statements, incorporated by reference in the Form 10-K. 5. Other Commitments and Contingencies: In connection with its financing activities, the Company had outstanding commitments under certain lending arrangements of approximately $3.2 billion at February 28, 2001 and November 30, 2000. These commitments require borrowers to provide acceptable collateral, as defined in the agreements, when amounts are drawn under the lending facilities. Advances made under the above lending arrangements are typically at variable interest rates and generally provide for over-collateralization based upon the borrowers' creditworthiness. In addition, the Company, through its high grade and high yield sales, trading and underwriting activities, makes commitments to extend credit in loan syndication transactions and then participates out a significant portion of these commitments. The Company had lending commitments to high grade borrowers of $5.4 billion and $4.4 billion at February 28, 2001 and November 30, 2000, respectively. In addition, lending commitments to high yield borrowers totaled $1.1 billion and $1.3 billion at February 28, 2001 and November 30, 2000, respectively. All of these commitments and any related draw downs of these facilities are typically secured against the borrowers' assets, have fixed maturity dates, and are generally contingent upon certain representations, warranties and contractual conditions applicable to the borrower. Total commitments are not indicative of actual risk or funding requirements, as the commitments may not be drawn or fully utilized, and the Company will continue to syndicate and/or sell these commitments. At February 28, 2001 and November 30, 2000, the Company had commitments to invest up to $609 million and $357 million, respectively, directly and through partnerships in private equity related investments. These commitments will be funded as required through the end of the respective investment periods, principally expiring in 2004. In the normal course of its business, the Company has been named a defendant in a number of lawsuits and other legal proceedings. Although there can be no assurances 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, and intends to defend vigorously each such case, and based on information currently available and established reserves, the Company believes that the eventual outcome of the actions against it will not, in the aggregate, have a material adverse effect on the consolidated financial position or results of operations of the Company. As a leading global investment bank, risk is an inherent part of all of the Company's businesses and activities. The extent to which the Company properly and effectively identifies, assesses, monitors and manages each of the various types of risks involved in its trading (including derivatives), brokerage, and investment banking activities is critical to the success and profitability of the Company. The principal types 11 of risks involved in the Company's activities are market risk, credit or counterparty risk and transaction risk. Management has developed a control infrastructure throughout the Company to monitor and manage these risks on a global basis. For further discussion of these matters, refer to Note 14 to the Consolidated Financial Statements, incorporated by reference in the Form 10-K. 6. Segments The Company operates in three segments: Investment Banking, Capital Markets and Client Services. The Investment Banking Division provides advice to corporate, institutional and government clients throughout the world on mergers, acquisitions and other financial matters. The Division also raises capital for clients by underwriting public and private offerings of debt and equity securities. The Capital Markets Division includes the Company's institutional sales, trading, research and financing activities in equity and fixed income cash and derivatives products. Through the Division, the Company is a global market-maker in numerous equity and fixed income products, including U.S., European and Asian equities, government and agency securities, money market products, corporate high grade, high yield and emerging market securities, mortgage- and asset-backed securities, municipal securities, bank loans, foreign exchange and derivatives products. The Division also includes the Company's risk arbitrage and secured financing businesses, as well as, realized and unrealized gains and losses related to the Company's direct private equity investments. The financing business manages the Company's equity and fixed income matched book activities, supplies secured financing to institutional clients and customers, and provides secured funding for the Company's inventory of equity and fixed income products. Client Services revenues reflect earnings from the Company's private client and private equity businesses. Private client revenues reflect the Company's high-net-worth retail customer flow activities as well as asset management fees earned from these clients. Private equity revenues include the management and incentive fees earned in the Company's role as general partner for twenty-four private equity partnerships. Certain prior period segment information has been reclassified to conform to the current period presentation. The Company's segment information for the first quarter of 2001 and 2000 is presented below and was developed consistent with the accounting policies used to prepare the Company's consolidated financial statements.
(in millions) Investment Capital Client Banking Markets Services Total ------------------ -------------- ----------------- ------------------ February 28, 2001 Net revenue $ 471 $ 1,208 $ 204 $ 1,883 ================== ============== ================= ================== Earnings before taxes (1) $ 75 $ 451 $ 47 $ 573 ================== ============== ================= ================== Segment assets (billions) $1.4 $ 226.8 $ 8.1 $ 236.3 ================== ============== ================= ================== February 29, 2000 Net revenue $ 593 $ 1,339 $ 270 $ 2,202 ================== ============== ================= ================== Earnings before taxes (1) $ 179 $ 506 $ 109 $ 794 ================== ============== ================= ================== Segment assets (billions) $0.8 $ 204.9 $ 8.2 $ 213.9 ================== ============== ================= ==================
(1) And before dividends on preferred securities. 12 The following are net revenues by geographic region: February 28 February 29 (in millions) 2001 2000 ------------------ ------------------- Americas $ 1,232 $ 1,245 Europe 519 704 Asia Pacific and other 132 253 ------------------ ------------------- Total $ 1,883 $ 2,202 ================== =================== The following information describes the Company's methods of allocating consolidated net revenues to geographic regions. Net revenues, if syndicate, trading or sales related, have been distributed based upon the location where the primary or secondary position was fundamentally risk managed; if fee-related, by the location of the senior coverage banker. In addition, certain revenues associated with domestic products and services which resulted from relationships with international clients and customers have been reclassified as international revenues using an allocation consistent with the Company's internal reporting. 7. Incentive Plans: In February of 2001, the Company transferred 16.0 million shares of its common stock held in treasury into the RSU Trust. The RSU Trust is included in the Consolidated Statement of Financial Condition as a component of other stockholders' equity. The transfer had no impact on the total stockholders' equity of the Company, as the decrease in treasury stock was offset by a corresponding decrease in additional paid-in capital and other stockholders' equity. At February 28, 2001 and November 30, 2000, 57.5 million and 42.4 million outstanding shares, respectively, were held in the RSU Trust. 13 8. Earnings Per Common Share: Earnings per share was calculated as follows (in millions, except for per share data):
Three Months Ended -------------------------------------- February 28 February 29 2001 2000 Numerator: Net income $387 $541 Preferred stock dividends (12) (59) ----------------- ----------------- Numerator for basic earnings per share-income available to common stockholders 375 482 Convertible preferred stock dividends - 2 ----------------- ----------------- Numerator for diluted earnings per share-income available to common stock-holders (adjusted for assumed conversion of preferred stock) $375 $484 ================= ================= Denominator: Denominator for basic earnings per share - weighted-average shares 246.2 246.1 Effect of dilutive securities: Employee stock options 17.3 9.8 Employee restricted stock units 7.2 4.1 Preferred shares assumed converted into common - 2.4 ----------------- ----------------- Dilutive potential common shares 24.5 16.3 ----------------- ----------------- Denominator for diluted earnings per share - adjusted weighted-average shares 270.7 262.4 ================= ================= Basic earnings per share $1.52 $1.96 ================= ================= Diluted earnings per share $1.39 $1.84 ================= =================
For February 29, 2000, Convertible Voting Preferred shares were convertible into common shares at a conversion price of approximately $61.50 per share. However, for purposes of calculating diluted earnings per share, preferred shares were assumed to be converted into common shares when basic earnings per share exceeds preferred dividends per share obtainable upon conversion (approximately $0.77 on a quarterly basis). During December 2000, the Company redeemed all outstanding Convertible Voting Preferred shares. 14 LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS Business Environment The principal business activities of Lehman Brothers Holdings Inc. ("Holdings") and subsidiaries (collectively, the "Company" or "Lehman Brothers") are investment banking and securities trading and sales, which by their nature are subject to volatility, primarily due to changes in interest and foreign exchange rates and security valuations, global economic and political trends and industry competition. As a result, revenues and earnings may vary significantly from quarter to quarter and from year to year. The marketplace uncertainties experienced in the second half of 2000 continued into the first quarter of 2001 as slower consumer spending and recessionary fears resulted in generally weak market conditions. In response to these conditions and to stimulate growth, the Federal Reserve lowered interest rates during the first week of January by half of a percentage point and by a further half of a percentage point during the last week of January. Subsequent to quarter-end, interest rates were again lowered an additional half of a percentage point on March 20, 2001. In U.S. equity markets, weak earnings reported by corporations across most market sectors led to significantly lower returns during the fiscal first quarter of 2001 when compared to the same period a year ago. The Standard & Poor's 500 Index was down 9% from the end of the fiscal first quarter of 2000 and 6% from the end of fiscal year 2000. The NASDAQ experienced even greater volatility, closing the fiscal first quarter of 2001 at its lowest level in 26 months, down 54% from a year ago and 17% from November 30, 2000. Internationally, world markets experienced the same slowing of growth as well as intervention by the major regional central banks. The Bank of England cut interest rates during the period by a quarter of a percentage point, the first reduction in almost two years. In addition, the Bank of Japan cut key interest rates at the end of February 2001 in response to continued slow growth and a declining stock market, which closed the quarter at a 28-month low. Global equity new issuances felt the impact of the market downturns during the quarter. Only nine initial public offerings ("IPO") were priced during the quarter, the lowest number in almost 10 years. IPO proceeds for the fiscal first quarter of 2001 were $3.9 billion, with two deals accounting for more than 75% of the amount, according to Thomson Financial Securities Data Corp. ("TFSD"). This compares with 57 companies that raised $7.5 billion during the same period a year ago. U.S. fixed income markets were strong during the fiscal first quarter of 2001, as falling stock markets and lower interest rates led investors to interest rate based and credit sensitive products. Yields on all U.S. Treasury maturities, which move inversely to price, were at or near two-year lows. Credit spreads generally tightened during the quarter. Spreads at first widened during the quarter, then narrowed across most sectors as the quarter progressed, even as higher defaults loomed. European fixed income market activity experienced mixed trading conditions during the first fiscal quarter of 2001. Markets began the quarter weak as credit spreads widened on continued market weakness but rebounded later in the quarter as the European economy experienced much steadier growth than the U.S. and Japan. Although analysts predicted the European Central Bank (ECB) would reduce rates during the first quarter, no action was actually taken, as Europe's economy was steady and inflation remained above the ECB's short-term target of 2%. Global debt new issuances were very strong during the quarter. Activity was bolstered by the Federal Reserve's aggressive rate cuts, as absolute interest rates for borrowing companies were very attractive. 15 Reflecting this improving market, investment grade debt new issuances and high yield new issuances for the quarter were up 16% and 19%, respectively, versus prior year first quarter activity. The value of merger and acquisition advisory "deal completions" increased during the fiscal first quarter of 2001 when compared to the same period a year ago. These results did not reflect the significant deterioration that occurred in the marketplace for "deal announcements" during the quarter. The value of worldwide announced mergers and acquisitions fell 57% from the year-earlier period, according to TFSD, primarily as a result of the deteriorating equity markets. - -------------------------------------------------------------------------------- Some of the statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations, including those relating to the Company's strategy and other statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as "expects," "anticipates," "intends," "plans," "believes," "estimates" and similar expressions, are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These statements are not historical facts but instead represent only the Company's expectations, estimates and projections regarding future events. These statements are not guarantees of future performance and involve certain risks and uncertainties that are difficult to predict, which may include market, credit or counterparty, liquidity, legal and operational risks. Market risks include changes in interest and foreign exchange rates and securities valuations, global economic and political trends and industry competition. The Company's actual results and financial condition may differ, perhaps materially, from the anticipated results and financial condition in any such forward-looking statements. The Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. 16 Results of Operations For the Three Months Ended February 28, 2001 and February 29, 2000 The Company reported net income of $387 million for the quarter ended February 28, 2001, representing a decrease of 29% from record net income of $541 million for the quarter ended February 29, 2000. Earnings per common share (diluted) was $1.39 for the first quarter of 2001 compared to $1.84 for the first quarter of 2000. Net revenues of $1,883 million represented the Company's 3rd highest quarterly revenues ever reported. The Company believes these results are relatively strong, given the very difficult market environment experienced during the quarter, and demonstrates the growing breadth of the franchise. During the first quarter of 2001, the Company continued to selectively grow its high margin investment banking and equities businesses through increased headcount and product offerings. In addition, through the Company's continued emphasis on expense discipline, non-personnel expenses increased only 4% compared to the fourth quarter of 2000 versus an 11% in net revenues over the same period. The Company is segregated into the following three business segments (each of which is described below): Investment Banking, Capital Markets and Client Services. Each segment represents a group of activities and products with similar characteristics. These business activities result in revenues from both institutional and high-net-worth retail clients which are recognized across the different revenue categories contained in the Company's Consolidated Statement of Income. (Net revenues by segment also contain certain internal allocations, including funding costs, which are centrally managed.) Three Months Ended February 28, 2001 and February 29, 2000 (in millions) Net Revenues for the Three Months Ended ---------------------------------- Feb 28 Feb 29 2001 2000 --------------- --------------- Investment Banking $ 471 $ 593 Capital Markets 1,208 1,339 Client Services 204 270 --------------- --------------- Total $ 1,883 $ 2,202 =============== =============== 17 The following discussion provides an analysis of the Company's net revenues for the periods above. Investment Banking This segment's net revenues result from fees earned by the Company for underwriting public and private offerings of fixed income and equity securities, and advising clients on merger and acquisition activities and other services. Investment Banking's net revenues decreased 21% during the Investment Banking Net Revenues first quarter to $471 million from $593 million in the first quarter of 2000, reflecting the weak market conditions for equity origination, partially offset by stronger fixed income underwriting activity. Equity origination revenues were significantly down compared to the year-ago period, consistent with an overall decline in common stock underwriting in the global marketplace as a result of the deterioration in the equity markets. Investment Banking Net Revenues ----------------------- ------------------------------ (in millions) Three Months Ended February 28 February 29 2001 2000 ----------------------- --------------- -------------- Equity Underwriting $ 105 $ 261 Debt Underwriting 183 153 Merger and Acqui- sition Advisory 183 179 ----------------------- --------------- -------------- $ 471 $ 593 ----------------------- --------------- -------------- Much of the equity capital raised during the quarter was in the form of convertible securities, which is a more conservative investment class and generally carries smaller underwriting fees. However, the benefits of the Company's growth strategy in investment banking and equities were evidenced by a higher global equity origination volume share which increased during the quarter. Debt underwriting revenues totaled $183 million for the first quarter of 2001, a 20% increase over the prior year's comparable period as fees from high grade and high yield originations were both up compared to last year's first quarter. Fixed income origination benefited this quarter from the actions of the Federal Reserve, tightening credit and swap spreads, a steepening of the yield curve to a more normal shape and issuers' move to raise lower-coupon long-term debt to replace some of their short-term debt. In addition, contributing to these results was the increase in the Company's global market share for high yield underwriting, which grew significantly as compared to full year 2000, from 5.0% for calendar-year 2000 to 7.2% for the fiscal first quarter of 2001, combined with a 19% increase in market volume during the period, according to TFSD. Merger and acquisition advisory revenues for the first quarter of 2001 were $183 million, up slightly versus the first quarter of 2000. Contributing to these results were record European merger and acquisition advisory revenues, which more than doubled from last year's first quarter, reflecting the success of the Company's growth initiative in this region. Capital Markets This segment's net revenues reflect institutional flow activities and secondary trading and financing activities related to fixed income and equity products. These products include a wide range of cash, derivative, secured financing and structured instruments. Capital Markets' net revenues were $1,208 million for the first quarter of 2001, down 10% from the first quarter of 2000. Excluding a $150 million realized gain from a single private equity related principal investment during the first quarter of 2000 net revenues increased slightly, during a quarter which experienced volatile markets and a broad devaluation of equity securities. Capital Market Net Revenues ---------------------- --------------------------------- (in millions) Three Months Ended February 28 February 29 2001 2000 ---------------------- -------------- ------------------ Equities $ 685 $ 868 Fixed Income 523 471 ---------------------- -------------- ------------------ $ 1,208 $ 1,339 ---------------------- -------------- ------------------ 18 The overall consistency of Capital Markets' revenues during these difficult market conditions demonstrates the strength of the Company's institutional "customer flow" business. This customer flow business provides the Company with a relatively stable form of revenues as customers rebalance their portfolio across market cycles with the full array of capital market products that are provided by the Company. Net revenues from the equity component of Capital Markets were $685 million in the first quarter of 2001, relatively unchanged from the first quarter of 2000, after adjusting first quarter 2000 results for the private equity gain described above. Despite significant declines in the major market indices, the Company's institutional market volumes were up versus the year-ago period. This activity led to strong returns from equity cash businesses both in the U.S. and Europe, convertible securities and equity derivative activities. Net revenues from the fixed income component of Capital Markets increased 11% from the first quarter of 2000 as the yield curve began to return to a more normal slope and credit spreads tightened. Increases were driven by improved institutional flow in credit products, particularly high grade and high yield bonds, and municipals. Given the heightened level of global uncertainty, foreign exchange revenues from customer flow activities also increased. Client Services Client Services net revenues reflect earnings from the Company's private client and private equity businesses. Private client net revenues reflect the Company's high-net-worth retail customer flow activities as well as asset management fees. Private equity net revenues include the management and incentive fees earned in the Company's role as general partner for twenty-four private equity partnerships. Client Services' net revenues were $204 million in the first quarter of 2001 compared to $270 million in the first quarter of 2000. Excluding a special performance-based asset management fee of $73 million, from the year-ago period, Client Services' results improved slightly as the Company's high-net-worth retail sales force had its strongest production quarter ever. Client Service Net Revenues (in millions) Three Months Ended February 28 February 29 2001 2000 ---------------------- -------------- ------------------ Private Client $ 192 $ 260 Private Equity 12 10 ---------------------- -------------- ------------------ $ 204 $ 270 ---------------------- -------------- ------------------ Non-Interest Expenses Non-interest expenses were $1,310 million for the first quarter of 2001 compared to $1,408 million for the first quarter of 2000. Compensation and benefits expense as a percentage of net revenues decreased to 51.0% for the quarter compared to the prior year first quarter of 52.0%. The compensation accrual percentage is consistent with the Company's fiscal 2000 level and reflects the Company's continued expansion of its investment banking, equities and European franchises. Nonpersonnel expenses were $350 million for the first quarter of 2001, $338 million for the fourth quarter of 2000 and $263 million for the first quarter of 2000. The increase in nonpersonnel expenses from the first quarter of 2000 is consistent with a 32% increase in headcount and also reflects the Company's continued investment in technology. Compared to the fiscal fourth quarter of 2000, nonpersonnel expenses grew by only 4% as revenues increased by 11%. Income Taxes The Company's income tax provision was $172 million for the first quarter of 2001 versus $239 million for the first quarter of 2000. The effective tax rate was 30% for the first quarter of 2001, unchanged from the first quarter of 2000. 19 Liquidity, Funding and Capital Resources Liquidity Risk Management Liquidity risk management is of critical importance to the Company, providing a framework which seeks to ensure that the Company maintains sufficient liquid financial resources to continually fund its balance sheet and meet all of its funding obligations in all market environments. The Company's liquidity framework has been structured so that even in a severe liquidity event the balance sheet does not have to be reduced purely for liquidity reasons (although we may choose to do so for risk reasons). This allows the Company to continue to maintain its customer franchise and debt ratings during a liquidity event. The Company's liquidity management philosophy incorporates the following principles: o Liquidity providers are credit and market sensitive. Consequently, firms must be in a state of constant liquidity readiness. o Firms should not rely on asset sales to generate cash or believe that they can increase unsecured borrowings or funding efficiencies in a liquidity crisis. o During a liquidity event, certain secured lenders may require higher quality collateral. Firms must therefore not over-estimate the availability of secured financing, and must fully integrate their secured and unsecured funding strategies. o A firm's legal entity structure may constrain liquidity. Regulatory requirements can restrict the flow of funds between regulated and unregulated group entities and this must be accounted for in liquidity planning. The Company's Funding Framework incorporates these principles and mitigates liquidity risk whenever possible. This Framework comprises four major components: (1) The Cash Capital Model - which evaluates the amount of long-term liabilities - with remaining maturities of over one year - that are required to fund the Company. (2) The Reliable Secured Funding Model - which forecasts the reliable sources of overnight secured funding available to the Company. (3) The Maximum Cumulative Outflow - which estimates the size of the added liquidity requirement necessary to fund contingent cash outflows expected from a stress environment. (4) The Contingency Funding Plan - which represents a detailed action plan to manage a stress liquidity event within the Company. For further discussion of these principles refer to the Liquidity, Funding and Capital Resources section of Management's Discussion and Analysis of Financial Condition and Results of Operations incorporated by reference in the Form 10-K. As a consequence of implementing its Funding Framework, the Company has generally shifted to longer-term funding over the past several years. As a result, the Company has reduced its reliance on short-term unsecured debt, which represents only 3% of adjusted total assets and less than 12% of total debt. 20 Total Capital Total Capital (defined as long-term debt, preferred securities subject to mandatory redemption and stockholders' equity) was $44.8 billion at February 28, 2001 compared to $43.9 billion at November 30, 2000. The net increase in Total Capital resulted from a net increase in long-term debt, the retention of earnings, and amortization associated with RSU awards. These were partially offset by repurchases of common stock (to fund restricted stock units and option awards) and the redemption of the Cumulative Convertible Voting Preferred Stock for $150 million.
February 28 November 30 (in millions) 2001 2000 - ---------------------------------------- -------------------------------------- ------------------------------- Long-term Debt Senior Notes $ 33,374 $ 32,106 Subordinated Indebtedness 2,938 3,127 -------- -------- 36,312 35,233 Preferred Securities 710 860 Stockholders' Equity Preferred Equity 700 700 Common Equity 7,047 7,081 -------- -------- 7,747 7,781 - ---------------------------------------- -------------------------------------- -------------------------------------- Total Capital $ 44,769 $ 43,874 - ---------------------------------------- -------------------------------------- --------------------------------------
During the first quarter of 2001, the Company issued $2.5 billion in long-term debt, which was $200 million in excess of maturing debt. Long-term debt increased to $36.3 billion at February 28, 2001 from $35.2 billion at November 30, 2000, with a weighted-average maturity of 3.9 years at February 28, 2001 and 3.8 years at November 30, 2000. Back-Up Credit Facilities Holdings maintains a Revolving Credit Agreement (the "Credit Agreement") with a syndicate of banks. Under the terms of the Credit Agreement, the banks have committed to provide up to $2 billion (at quarter end) for up to 364 days. Any loans outstanding on the commitment termination date may be extended for up to an additional year at the option of Holdings. The Credit Agreement contains covenants that require, among other things, that the Company maintain a specified level of tangible net worth. Subsequent to quarter end, the Company elected to reduce the committed amount under the Credit Agreement to $1 billion. The reduction reflects the Company's belief that its liquidity position is stronger as a result of the implementation of the Funding Framework, and the Company's desire to utilize its credit in forms that are more suitable to its needs. In July 2000, the Company entered into a $1 billion Committed Securities Repurchase Facility (the "Facility") for LBIE, the Company's major operating entity in Europe. The Facility provides secured multi-currency financing for a broad range of collateral types. Under the terms of the Facility, the bank group will agree to provide funding for up to one year on a secured basis. Any loans outstanding on the commitment termination date may be extended for up to an additional year at the option of LBIE. The Facility contains covenants which require, among other things, that LBIE maintain specified levels of tangible net worth. There are no borrowings outstanding under either the Credit Agreement or the Facility. The Company may use the Credit Agreement and the Facility for general corporate purposes from time to time. The 21 Company has maintained compliance with the applicable covenants for both the Credit Agreement and the Facility at all times. Balance Sheet The Company's total assets increased to $236.3 billion at February 28, 2001 from $224.7 billion at November 30, 2000. The Company's adjusted total assets, defined as total assets less the lower of securities purchased under agreements to resell or securities sold under agreements to repurchase, were $155.8 billion at February 28, 2001 compared to $143.5 billion at November 30, 2000. The Company believes adjusted total assets is a more effective measure of evaluating balance sheet usage when comparing companies in the securities industry. The increase in adjusted total assets reflects higher levels of securities owned associated with increased customer flow activities across the Capital Markets businesses. The Company's balance sheet consists primarily of cash and cash equivalents, securities and other financial instruments owned, and collateralized short-term financing agreements. The liquid nature of these assets provides the Company with flexibility in financing and managing its business. The majority of these assets are funded on a secured basis through collateralized short-term financing agreements. Financial Leverage Balance sheet leverage ratios are one measure used to evaluate the capital adequacy of a company. Leverage ratios are commonly calculated using either total assets or adjusted total assets divided by total stockholders' equity and preferred securities subject to mandatory redemption. The Company believes that the adjusted leverage ratio is a more effective measure of financial risk when comparing companies in the securities industry. The Company's adjusted leverage ratio based on adjusted total assets was 18.4x and 16.6x as of February 28, 2001 and November 30, 2000, respectively. Consistent with maintaining a single A credit rating, the Company targets an adjusted leverage ratio of approximately 20.0x. The Company operated below this level at February 28, 2001 due to the sub-optimal market environment during the quarter. Due to the nature of the Company's sales and trading activities, the overall size of the Company's balance sheet fluctuates from time to time and at specific points in time may be higher than the fiscal quarter ends or the quarterly average. Credit Ratings The Company, like other companies in the securities industry, relies on external sources to finance a significant portion of its day-to-day operations. The Company's access to and cost of funding is generally dependent upon its short- and long- term debt ratings. As of February 28, 2001 the short- and long-term debt ratings of Holdings and LBI were as follows:
Holdings LBI ----------------------------------- ----------------------------------- Short-term Long-term Short-term Long-term** - ------------------------------------------- ---------------- ------------------ --- --------------- ------------------- Fitch IBCA, Inc. F-1 A F-1 A/A- Moody's P-1 A2 P-1 A1*/A2 Standard & Poor's Corp. A-1 A A-1 A+*/A Thomson BankWatch TBW-1 A TBW-1 A+/A
* Provisional ratings on shelf registration ** Senior/subordinated 22 Other The Company underwrites, trades, invests and makes markets in high yield corporate debt securities. The Company also syndicates, trades and invests in loans to below investment grade-rated companies. For purposes of this discussion, high yield debt instruments are defined as securities or loans to companies rated BB+ or lower, or equivalent ratings by recognized credit rating agencies, as well as non-rated securities or loans which, in the opinion of management, are non-investment grade. Non-investment grade securities generally involve greater risks than investment grade securities due to the issuer's creditworthiness and the liquidity of the market for such securities. In addition, these issuers have higher levels of indebtedness, resulting in an increased sensitivity to adverse economic conditions. The Company recognizes these risks and aims to reduce market and credit risk through the diversification of its products and counterparties. High yield debt instruments are carried at fair value, and unrealized gains or losses for these securities are recognized in the Company's Consolidated Statement of Income. Such instruments at February 28, 2001 and November 30, 2000 included long positions with an aggregate market value of approximately $3.6 billion and $3.5 billion, respectively, and short positions with an aggregate market value of approximately $840 million and $745 million, respectively. The Company mitigates its aggregate and single-issuer net exposure through the use of derivatives, sole-recourse securitization financing and other financial instruments. Additional information about the Company's high yield securities and lending activities, including related commitments, can be found in Note 5 to the Consolidated Financial Statements (Other Commitments and Contingencies). The Company has investments in twenty-four private equity partnerships, for which the Company acts as general partner, as well as related direct investments. At February 28, 2001, the Company's private equity related investments were $838 million. The Company's policy is to carry its investments, including the appreciation of its general partnership interests, at fair value based upon the Company's assessment of the underlying investments. Additional information about the Company's private equity activities, including related commitments, can be found in Note 5 to the Consolidated Financial Statements (Other Commitments and Contingencies). For a discussion of the Company's use of derivative instruments and the risks related thereto, see Note 4 to the Consolidated Financial Statements (Derivative Financial Instruments) and the Off-Balance Sheet Financial Instruments and Derivatives section of Management's Discussion and Analysis of Financial Condition and Results of Operations incorporated by reference in the Form 10-K. Risk Management As a leading global investment banking company, risk is an inherent part of the Company's businesses. Global markets, by their nature, are prone to uncertainty and subject participants to a variety of risks. The Company has developed policies and procedures to identify, measure and monitor each of the risks involved in its trading, brokerage and investment banking activities on a global basis. The principal risks of Lehman Brothers are market, credit, liquidity, legal and operational risks. Risk Management is considered to be of paramount importance. Consequently, the Company devotes significant resources across all of its worldwide trading operations to the measurement, management and analysis of risk, including investments in personnel and technology. The Company seeks to reduce risk through the diversification of its businesses, counterparties and activities in geographic regions. The Company accomplishes this objective by allocating the usage of capital to each of its businesses, establishing trading limits for individual products and traders and setting 23 credit limits for individual counterparties, including regional concentrations. The Company seeks to achieve adequate returns from each of its businesses commensurate with the risks that they assume. Overall risk management policy is established by a Risk Management Committee (the "Committee") comprised of the Chief Executive Officer, the Global Risk Manager, the Chief Financial Officer, the Chief Administrative Officer, and the Heads of Capital Markets and Investment Banking. The Committee brings together senior management with the sole intent of discussing risk-related issues and provides an effective forum for managing risk at the highest levels within the Company. The Committee meets on a monthly basis, or more frequently if required, to discuss, among other matters, significant market exposures, concentrations of positions (e.g., counterparty, market risk), potential new transactions or positions and risk limit exceptions. The Global Risk Management Group (the "Group") supports the Committee, is independent of the trading areas and reports directly to the Chief Executive Officer. The Group combines two departments, credit risk management and market risk management, into one unit. This facilitates the analysis of counterparty credit and market risk exposures and leverages personnel and information technology resources in a cost-efficient manner. The Group maintains staff in each of the Company's regional trading centers and has daily contact with trading staff at all levels within the Company. These discussions include a review of trading positions and risk exposures. Credit Risk Credit risk represents the possibility that a counterparty will be unable to honor its contractual obligations to the Company. Credit risk management is therefore an integral component of the Company's overall risk management framework. The Credit Risk Management Department ("CRM Department") has global responsibility for implementing the Company's overall credit risk management framework. The CRM Department manages the credit exposure related to trading activities by giving initial credit approval for counterparties, establishing credit limits by counterparty, country and industry group and by requiring collateral in appropriate circumstances. In addition, the CRM Department strives to ensure that master netting agreements are obtained whenever possible. The CRM Department also considers the duration of transactions in making its credit decisions, along with the potential credit exposure for complex derivative transactions. The CRM Department is responsible for the continuous monitoring and review of counterparty credit exposure and creditworthiness and recommending valuation adjustments where appropriate. Credit limits are reviewed periodically to ensure that they remain appropriate in light of market events or the counterparty's financial condition. Market Risk Market risk represents the potential change in value of a portfolio of financial instruments due to changes in market rates, prices and volatilities. Market risk management also is an essential component of the Company's overall risk management framework. The Market Risk Management Department ("MRM Department") has global responsibility for implementing the Company's overall market risk management framework. It is responsible for the preparation and dissemination of risk reports, developing and implementing the firmwide Risk Management Guidelines and evaluating adherence to these guidelines. These guidelines provide a clear framework for risk management decision-making. To that end the MRM Department identifies and quantifies risk exposures, develops limits, and reports and monitors these risks with respect to the approved limits. The identification of material market risks inherent in positions includes, but is not limited to, interest rate, equity and foreign exchange risk exposures. In addition to these risks, the MRM Department also evaluates liquidity risks, credit and sovereign concentrations. 24 The MRM Department utilizes qualitative as well as quantitative information in managing trading risk, believing that a combination of the two approaches results in a more robust and complete approach to the management of trading risk. Quantitative information is developed from a variety of risk methodologies based upon established statistical principles. To ensure high standards of qualitative analysis, the MRM Department has retained seasoned risk managers with the requisite experience and academic and professional credentials. Market risk is present in cash products, derivatives, and contingent claim structures that exhibit linear as well as non-linear profit and loss sensitivity. The Company's exposure to market risk varies in accordance with the volume of client-driven market-making transactions, the size of the Company's proprietary and arbitrage positions and the volatility of financial instruments traded. The Company seeks to mitigate, whenever possible, excess market risk exposures through the use of futures and option contracts and offsetting cash market instruments. The Company participates globally in interest rate, equity, and foreign exchange markets. The Company's Fixed Income division has a broadly diversified market presence in U.S. and foreign government bond trading, emerging market securities, corporate debt (investment and non-investment grade), money market instruments, mortgages and mortgage-backed securities, asset-backed securities, municipal bonds, and interest rate derivatives. The Company's Equities division facilitates domestic and foreign trading in equity instruments, indices and related derivatives. The Company's foreign exchange businesses are involved in trading currencies on a spot and forward basis as well as through derivative products and contracts. The Company incurs short-term interest rate risk when facilitating the orderly flow of customer transactions through the maintenance of government and high-grade corporate bond inventories. Market-making in high yield instruments exposes the Company to additional risk due to potential variations in credit spreads. Trading in international markets exposes the Company to spread risk between the term structure of interest rates in differing countries. Mortgages and mortgage-related securities are subject to prepayment risk and changes in the level of interest rates. Trading in derivatives and structured products exposes the Company to changes in the level and volatility of interest rates. The Company actively manages interest rate risk through the use of interest rate futures, options, swaps, forwards and offsetting cash market instruments. Inventory holdings, concentrations and agings are monitored closely and used by management to selectively hedge or liquidate undesirable exposures. The Company is a significant intermediary in the global equity markets through its market-making in U.S. and non-U.S. equity securities, including common stock, convertible debt, exchange-traded and OTC equity options, equity swaps and warrants. These activities expose the Company to market risk as a result of price and volatility changes in its equity inventory. Inventory holdings are also subject to market risk resulting from concentrations and liquidity that may adversely impact market valuation. Equity market risk is actively managed through the use of index futures, exchange-traded and OTC options, swaps and cash instruments. The Company enters into foreign exchange transactions in order to facilitate the purchase and sale of non-dollar instruments, including equity and interest rate securities. The Company is exposed to foreign exchange risk on its holdings of non-dollar assets and liabilities. The Company is active in many foreign exchange markets and has exposure to the euro, Japanese yen, British pound, Swiss franc, and Canadian dollar as well as a variety of developed and emerging market currencies. The Company hedges its risk exposures primarily through the use of currency forwards, swaps, futures and options. 25 Value at Risk For purposes of Securities and Exchange Commission ("SEC") risk disclosure requirements, the Company discloses an entity-wide value-at-risk for virtually all of its trading activities. In general, value-at-risk measures the potential loss of revenues at a given confidence level over a specified time horizon. Value-at-risk over a one-day holding period measured at a 95% confidence level implies that potential loss of daily trading revenue will be at least as large as the value-at-risk amount on one out of every 20 trading days. The Company's methodology estimates a reporting day value-at-risk using actual daily trading revenues over the previous 250 trading days. This estimate is measured as the loss, relative to the median daily trading revenue. The Company also estimates an average value-at-risk measure over 250 rolling reporting days, thus looking back a total 500 trading days. Average value-at-risk computed in this manner was $22.2 million and $20.8 million for the periods ended February 28, 2001 and November 30, 2000, respectively. Value-at-risk at February 28, 2001 and November 30, 2000 was $24.7 million and $23.7 million, respectively. Value-at-risk is one measurement of potential loss in trading revenues that may result from adverse market movements over a specified period of time with a selected likelihood of occurrence. As with all measures of value-at-risk, the Company's estimate has substantial limitations due to its reliance on historical performance, which is not necessarily a predictor of the future. Consequently, this value-at-risk estimate is only one of a number of tools the Company utilizes in its daily risk management activities. As discussed throughout Management's Discussion and Analysis, the Company seeks to reduce risk through the diversification of its businesses and a focus on customer flow activities. This diversification and focus, combined with the Company's risk management controls and processes, helps mitigate the net revenue volatility inherent in the Company's trading activities. Although historical performance is not necessarily indicative of future performance, the Company believes its focus on business diversification and customer flow activities should continue to help mitigate the volatility of future net trading revenues. New Accounting Developments In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--a replacement of FASB No. 125" ("SFAS 140"). SFAS 140 carries over the fundamental control premise of SFAS No. 125, which requires an entity to recognize only assets it controls and to derecognize assets only when control has been surrendered. SFAS 140 amends the control framework of SFAS 125 by revising the criteria to be used for evaluating whether a financial asset is controlled and providing new criteria necessary to meet the definition of a Qualifying Special Purpose Entity ("QSPE"). A QSPE is a limited-purpose vehicle often used for asset securitizations. SFAS 140 will also change the accounting for collateral. SFAS 140 will no longer require entities to recognize controlled collateral as an asset on the balance sheet. Rather, SFAS 140 will require entities to separately classify financial assets owned and pledged. SFAS 140 also requires new disclosures for collateral and retained interests in securitizations. SFAS 140 has multiple effective dates. The accounting for new transfers of financial assets will begin March 31, 2001 unless grandfathering provisions have been met. The new collateral accounting rules will be effective for the Company as of November 30, 2001. The adoption of SFAS 140 is not expected to have a material impact to the Company's financial position or results of operations. 26 LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES PART II - OTHER INFORMATION ITEM 1 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, including the Company. Although there can be no assurance as to the ultimate outcome, the Company has denied, or believes it has a meritorious defense and will deny, liability in all significant cases pending against it including the matters described below, and intends to defend vigorously each such case, and based on information currently available and established reserves, the Company believes that the eventual outcome of the actions against it, including the matters described below, will not, in the aggregate, have a material adverse effect on the consolidated financial position or results of operations of the Company. McNamara et al. v. Bre-X Minerals Ltd. et al. (Reported in Holdings' 2000 Annual Report on Form 10-K) On March 30, 2001, the Court filed a Memorandum Opinion and Order, dismissing the claims against LBI with prejudice. Harold Gillet, et al. v. Goldman Sachs & Co., et al.; Yakov Prager, et al. v. Goldman, Sachs & Co., et al.; David Holzman, et al. v. Goldman, Sachs & Co., et al. (Reported in Holdings' 2000 Annual Report on Form 10-K) On March 15, 2001, another related class action was filed in the United States District Court for the Southern District of New York. That case, captioned Equalnet Communications Corp. v. Goldman Sachs Group, Inc., et al., is brought by a bankrupt issuer of securities. The complaint in Equalnet names over 25 underwriter defendants, including LBI, and is substantially identical to the Gillet complaint. 27 LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES PART II - OTHER INFORMATION ITEM 4 Submission of Matters to a Vote of Security Holders At the annual meeting of stockholders of the Company held on April 3, 2001, the following matters were submitted to a vote of security holders: A) A proposal was submitted for the election of all Class II Directors. The results for the nominees were: Roger S. Berlind - 223,925,117 votes for, 3,529,591 votes withheld; and Dina Merrill - 223,809,774 votes for, 3,644,934 votes withheld. Mr. Berlind and Ms. Merrill were elected to serve until the Annual Meeting in 2004 and until a successor is elected and qualified. B) A proposal was submitted for the ratification of the Company's selection of Ernst & Young LLP as the Company's independent auditors for the 2001 fiscal year. The results were 226,094,088 votes for, 237,395 against and 1,123,225 abstaining, and the proposal was adopted. C) A proposal was submitted for the adoption of an amendment to the Company's Restated Certificate of Incorporation to increase the aggregate number of authorized shares of Common Stock, par value $0.10 per share, from 300 million to 600 million. The results were 211,106,018 votes for, 14,969,185 against and 1,379,505 abstaining, and the proposal was adopted. 28 LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES PART II - OTHER INFORMATION ITEM 6 Exhibits and Reports on Form 8-K (a) Exhibits: The following exhibits are filed as part of this Quarterly Report, or where indicated, were heretofore filed and are hereby incorporated by reference: 3.1 Restated Certificate of Incorporation of the Registrant dated May 27, 1994 (Incorporated by reference to Exhibit 3.1 to the Registrant's Transition Report on Form 10-K for the eleven months ended November 30, 1994) 3.2 Certificate of Designations with respect to the Registrant's 5.94% Cumulative Preferred Stock, Series C (Incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed with the Commission on May 13, 1998) 3.3 Certificate of Designations with respect to the Registrant's 5.67% Cumulative Preferred Stock, Series D (Incorporated by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K filed with the Commission on July 23, 1998) 3.4 Certificate of Designations with respect to the Registrant's Fixed/Adjustable Rate Cumulative Preferred Stock, Series E (Incorporated by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K filed with the Commission on March 30, 2000) 3.5 Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant, dated April 9, 2001 (Filed herewith) 3.6 By-Laws of the Registrant, amended as of March 26, 1997 (incorporated by reference to Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended February 28, 1997) 10.1 Amended and Restated Lehman Brothers Holdings Inc. 1994 Management Ownership Plan, as of April 3,2001 (including amendment to Section 9.4) (Filed herewith) 11.1 Computation of Per Share Earnings (Omitted in accordance with section (b)(11) of Item 601 of Regulation S-K. The calculation of per share earnings is set forth in Part I, Item 1, in Note 8 to the Consolidated Financial Statements (Earnings Per Common Share).) 12.1 Computation of Ratios of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends (Filed herewith) 29 LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES PART II - OTHER INFORMATION (b) Reports on Form 8-K: The following reports on Form 8-K were filed during the quarter for which this Quarterly Report is filed: 1. Form 8-K dated February 26, 2001, Item 7. 2. Form 8-K dated January 5, 2001, Item 7. 3. Form 8-K dated January 4, 2001, Items 5 and 7. Financial Statements: Exhibit 99.2 Consolidated Statement of Income (Three Months Ended November 30, 2000) (Preliminary and Unaudited) Exhibit 99.3 Consolidated Statement of Income (Twelve Months Ended November 30, 2000) (Preliminary and Unaudited) Exhibit 99.4 Segment Net Revenue Information (Three and Twelve Months Ended November 30, 2000) (Preliminary and Unaudited) Exhibit 99.5 Selected Statistical Information (Preliminary and Unaudited) 30 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LEHMAN BROTHERS HOLDINGS INC. (Registrant) Date: April 16, 2001 By: /s/ David Goldfarb ------------------------------------------------- Chief Financial Officer and Senior Vice President (principal financial and accounting officer) 31 EXHIBIT INDEX Exhibit No. Exhibit Exhibit 3.5 Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant, dated April 9, 2001 Exhibit 10.1 Amended and Restated Lehman Brothers Holdings Inc. 1994 Management Ownership Plan, as of April 3, 2001 (including amendment to Section 9.4) Exhibit 12.1 Computation of Ratios of Earnings to Fixed Charges and to Combined Fixed Charges and Preferred Stock Dividends (filed herewith) 32 EX-3.5 2 0002.txt EXHIBIT 3.5 Exhibit 3.5 CERTIFICATE OF AMENDMENT OF THE RESTATED CERTIFICATE OF INCORPORATION OF LEHMAN BROTHERS HOLDINGS INC. Lehman Brothers Holdings Inc., a Delaware corporation (the "Corporation"), having its registered office at The Prentice-Hall Corporation System, Inc., 2711 Centerville Road, in the City of Wilmington, in the County of New Castle, hereby certifies to the Secretary of State of the State of Delaware that: FIRST: The first paragraph of Article 4.1 of the Restated Certificate of Incorporation of the Corporation is hereby amended in its entirety to read as follows: "4.1 Authorized Shares. The total number of shares of capital stock which the Corporation shall have authority to issue is six hundred million (600,000,000) shares of common stock with one vote per share, $0.10 par value per share (the "Common Stock"), and thirty-eight million (38,000,000) shares of preferred stock, $1.00 par value per share (the "Preferred Stock"). Shares of Preferred Stock may be issued from time to time in one or more classes or series, each of which class or series shall have such distinctive designation or title as shall be fixed by the Board of Directors of the Corporation (the "Board of Directors") or any committee thereof established by resolution of the Board of Directors pursuant to the By-Laws prior to the issuance of any shares thereof. Each such class or series of Preferred Stock shall have such voting powers, full or limited, or no voting powers, and such preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof, as shall be stated in such resolution or resolutions providing for the issue of such class or series of Preferred Stock as may be adopted from time to time by the Board of Directors prior to the issuance of any shares thereof pursuant to the authority hereby expressly vested in it, all in accordance with the laws of the State of Delaware." SECOND: The Board of Directors of the Corporation by requisite vote adopted a resolution which sets forth the foregoing amendment to the Restated Certificate of Incorporation, in accordance with Section 242 of the General Corporation Law of the State of Delaware, declaring that the amendment to the Restated Certificate of Incorporation as proposed was advisable and directing that it be considered at the next annual meeting of the stockholders of the Corporation. THIRD: The amendment has been consented to and authorized and approved by a majority of the outstanding stock entitled to vote thereon, and a majority of the outstanding stock of each class entitled to vote thereon as a class, and has been duly adopted in accordance with Section 242 of the General Corporation Law of the State of Delaware. FOURTH: This Certificate of Amendment of the Restated Certificate of Incorporation shall be effective on filing. IN WITNESS WHEREOF, Lehman Brothers Holdings Inc. has caused this Certificate to be signed on this 9th day of April 2001 in its name and on its behalf by Jeffrey A. Welikson, its Secretary, pursuant to Section 103 of the General Corporation Law of the State of Delaware. LEHMAN BROTHERS HOLDINGS INC. By: /s/ Jeffrey A Welikson ----------------------------------------- Jeffrey A. Welikson Secretary 2 EX-10.1 3 0003.txt EXHIBIT 10.1 Exhibit 10.1 Amended and Restated as of 4/3/01 LEHMAN BROTHERS HOLDINGS INC. 1994 MANAGEMENT OWNERSHIP PLAN 1. Purpose The purpose of this Plan is to strengthen Lehman Brothers Holdings Inc. (the "Company") by providing an incentive to its officers, employees, consultants and directors and thereby encouraging them to devote their abilities to increase shareholder value and to sustain excellence. It is intended that this be achieved by extending to Eligible Individuals of the Company and its subsidiaries an added long-term incentive for high levels of performance and unusual efforts through the grant of Incentive Stock Options, Non-qualified Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Units and Performance Shares (as each term is hereinafter defined). 2. Administration 2.1 The Plan shall be administered by the Committee which shall hold meetings at such times as may be necessary for the proper administration of the Plan. The Committee shall keep minutes of its meetings. A quorum shall consist of not less than three members of the Committee and a majority of a quorum may authorize any action. Any decision or determination reduced to writing and signed by a majority of all of the members shall be as fully effective as if made by a majority vote at a meeting duly called and held. Each member of the Committee shall be a Disinterested Director. No member of the Committee shall be liable for any action, failure to act, determination or interpretation made in good faith with respect to this Plan or any transaction hereunder. The Company hereby agrees to indemnify each member of the Committee as permitted by applicable law, for any liability incurred in connection with defending against, responding to, negotiation for the settlement of or otherwise dealing with any claim, cause of action or dispute of any kind arising in connection with any actions in administering this Plan or in authorizing or denying authorization to any transaction hereunder. 2.2 Subject to the express terms and conditions set forth herein, the Committee shall have the power from time to time to: (a) determine those individuals to whom Options shall be granted under the Plan and the number of Incentive Stock Options and/or Non-qualified Stock Options to be granted to each Eligible Individual and to prescribe the terms and conditions (which need not be identical) of each Option, including the purchase price per Share subject to each Option, and make any amendment or modification to any Agreement consistent with the terms of the Plan; and (b) select those Eligible Individuals to whom Awards shall be granted under the Plan and to determine the number of Stock Appreciation Rights, Performance Units, Performance Shares, and/or Shares of Restricted Stock or Restricted Stock Units to be granted pursuant to each Award, the terms and conditions of each Award, including the restrictions or performance criteria relating to such Units or Shares, the maximum value of each Performance Unit and Performance Share and make any amendment or modification to any Agreement consistent with the terms of the Plan. 2.3 Subject to the express terms and conditions set forth herein, the Committee shall have the power from time to time: (a) to construe and interpret the Plan and the Options and Awards granted thereunder and to establish, amend and revoke rules and regulations for the administration of the Plan, including, but not limited to, correcting any defect or supplying any omission, or reconciling any inconsistency in the Plan or in any Agreement, in the manner and to the extent it shall deem necessary or advisable to make the Plan fully effective; (b) to determine the duration and purposes for leaves of absence which may be granted to an Optionee or Grantee on an individual basis without constituting a termination of employment or service for purposes of the Plan; and (c) to resolve all questions of interpretation arising under or in connection with the administration of the Plan, to exercise its discretion with respect to the powers and rights granted to it as set forth in the Plan, and generally, to exercise such powers and to perform such acts as are deemed necessary or advisable to promote the best interests of the Company with respect to the Plan. 2.4 All decisions and determinations by the Committee in the exercise of the powers conferred upon it under the Plan shall be final, binding and conclusive upon the Company, its Subsidiaries, Eligible Individuals, Optionees, Grantees and all other persons having any interest therein. 3. Stock Subject to the Plan 3.1 The maximum number of Shares that may be made the subject of Options and Awards granted under the Plan (other than Restricted Stock Units to be granted to Non-employee Directors pursuant to Section 9.4) is 16,500,000 for all Eligible Individuals. The maximum number of Shares that may be made the subject of Restricted Stock Units to be granted to Non-employee Directors pursuant to Section 9.4 is 150,000. Upon a Change in Capitalization the maximum number of Shares available on an aggregate and Eligible Individual basis shall be adjusted in number and kind pursuant to Section 11. The Company shall reserve for the purposes of the Plan, out of its authorized but unissued Shares or out of Shares held in the Company's treasury, or partly out of each, such number of Shares as shall be determined by the Board. The maximum number of Shares available for Options Stock Appreciation Rights or other Awards that may be granted to an Eligible Individual shall not exceed 1,650,000 over the life of the Plan. 2 3.2 Upon the granting of an Option or an Award, the number of Shares available under Section 3.1 for the granting of further Options and Awards shall be reduced as follows: (a) In connection with the granting of an Option or an Award (other than the granting of a Performance Unit denominated in dollars), the number of Shares shall be reduced by the number of Shares in respect of which the Option or Award is granted or denominated. (b) Notwithstanding Section 3.2(a), the exercise of a Stock Appreciation Right granted in tandem with an Option shall be treated, for purposes of this Section 3, solely as though the Option had been exercised through the purchase of Shares, with the result that the number of Shares shall be reduced by the number of Shares so purchased. No other reduction in the number of Shares shall be made on account of such Stock Appreciation Right exercise. (c) In connection with the granting of a Performance Unit denominated in dollars, the number of Shares shall be reduced by an amount equal to the quotient of (i) the dollar amount in which the Performance Unit is denominated, divided by (ii) the Fair Market Value of a Share on the date the Performance Unit is granted. 3.3 Whenever any outstanding Option or Award or portion thereof expires, is canceled or is otherwise terminated for any reason without having been exercised or payment having been made in respect of the entire Option or Award, the Shares allocable to the expired, canceled or otherwise terminated portion of the Option or Award shall again be available for grant pursuant to Options or Awards granted hereunder to the fullest extent permitted by Rule 16b-3 under the Exchange Act. In addition, during the period that any Options and Awards remain outstanding under the Plan, the Committee may make good faith adjustments upon a Change in Capitalization with respect to the number of Shares attributable to such Options and Awards for purposes of calculating the maximum number of Shares available for the granting of future Options and Awards under the Plan, provided that following such adjustments the exemptions provided pursuant to Rule 16b-3 under the Exchange Act, and the exceptions provided pursuant to Section 162(m) of the Code, will not be adversely affected thereby. 4. Option Grants for Eligible Individuals 4.1 Authority of Committee. Subject to the provisions of the Plan, the Committee shall have full and final authority to select those Eligible Individuals who will receive Options, the terms and conditions of which shall be set forth in an Agreement; provided, however, that no person shall receive any Incentive Stock Options unless he or she is an employee of the Company, a Parent or a Subsidiary at the time the Incentive Stock Option is granted. 4.2 Purchase Price. The purchase price or the manner in which the purchase price is to be determined for Shares under each Option shall be determined by the Committee and set forth in the Agreement; provided, however, that the purchase price per Share under each Incentive Stock Option shall not be less than 100% of the Fair Market Value of a Share on the date the Incentive Stock Option is granted (110% in the case of an Incentive Stock Option 3 granted to a Ten-Percent Stockholder) and the purchase price per Share under each Non-qualified Stock Option shall not be less than 100% of the Fair Market Value of a Share on the date the Non-qualified Stock Option is granted. 4.3 Maximum Duration. Options granted hereunder shall be for such term as the Committee shall determine, provided that an Incentive Stock Option shall not be exercisable after the expiration of ten (10) years from the date it is granted (five (5) years in the case of an Incentive Stock Option granted to a Ten-Percent Stockholder) and a Non-qualified Stock Option shall not be exercisable after the expiration of ten (10) years from the date it is granted. The Committee may, subsequent to the granting of any Option, extend the term thereof but in no event shall the term as so extended exceed the maximum term provided for in the preceding sentence. 4.4 Vesting. Each Option shall become exercisable in such installments (which need not be equal) and at such times as may be designated by the Committee and set forth in the Agreement. To the extent not exercised, installments shall accumulate and be exercisable, in whole or in part, at any time after becoming exercisable, but not later than the date the Option expires. The Committee may accelerate the exercisability of any Option or portion thereof at any time. 4.5 $100,000 Limitation. If the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by any Optionee during a calendar year (under all plans of the Company and its Parents and Subsidiaries) exceeds $100,000, such Incentive Stock Options shall be treated, to the extent of such excess, as Non-qualified Stock Options. For purposes of the preceding sentence, the Fair Market Value of the Shares shall be determined at the time the Incentive Stock Options covering such Shares were granted. 5. Terms and Conditions Applicable to All Options 5.1 Method of Exercise. The exercise of an Option shall be made only by a written notice delivered in person, by facsimile transmission or by mail to the Secretary of the Company at the Company's principal executive office, specifying the number of Shares to be purchased and accompanied by payment therefor and otherwise in accordance with the Agreement pursuant to which the Option was granted. The purchase price for any Shares purchased pursuant to the exercise of an Option shall be paid in full upon such exercise by any one or a combination of the following: (i) cash, (ii) transferring Shares to the Company upon such terms and conditions as determined by the Committee or (iii) transferring Awards to the Company if permitted by, and upon such terms and conditions as determined by, the Committee. Notwithstanding the foregoing, the Committee shall have discretion to determine at the time of grant of each Option or at any later date (up to and including the date of exercise) the form of payment acceptable in respect of the exercise of such Option. The written notice pursuant to this Section 5.1 may also provide instructions from the Optionee to the Company that upon receipt of the purchase price in cash from the Optionee's broker or dealer, designated as such on the written notice, in payment for any Shares purchased pursuant to the exercise of an Option, the Company shall issue such 4 Shares directly to the designated broker or dealer. Any Shares transferred to the Company as payment of the purchase price under an Option shall be valued at their Fair Market Value on the date of exercise of such Option. If requested by the Committee, the Optionee shall deliver the Agreement evidencing the Option to the Secretary of the Company who shall endorse thereon a notation of such exercise and return such Agreement to the Optionee. No fractional Shares (or cash in lieu thereof) shall be issued upon exercise of an Option and the number of Shares that may be purchased upon exercise shall be rounded to the nearest number of whole Shares. 5.2 Rights of Optionees. No Optionee shall be deemed for any purpose to be the owner of any Shares subject to any Option unless and until (i) the Option shall have been exercised pursuant to the terms thereof, (ii) the Company shall have issued and delivered the Shares to the Optionee and (iii) the Optionee's name shall have been entered as a stockholder of record on the books of the Company. Thereupon, the Optionee shall have full voting, dividend and other ownership rights with respect to such Shares. 5.3 Limited Rights. An Optionee may, in the discretion of the Committee, have the right (a "Limited Right") to surrender the Option or any portion thereof to the Company within 30 days following a Change in Control and to receive from the Company in exchange therefor a cash payment in an amount equal to (a) the number of unexercised Shares under the Option which are being surrendered multiplied by (b) the excess of (i) the greater of (A) the highest price per Share paid in connection with the Change in Control or (B) the highest Fair Market Value per Share in the 90 day period preceding such Change in Control, over (ii) the purchase price of the Option as set forth in the Agreement. 6. Stock Appreciation Rights 6.1 Authority of Committee. The Committee may, in its discretion, either alone or in connection with the grant of an Option, grant Stock Appreciation Rights in accordance with the Plan and the terms and conditions of which shall be set forth in an Agreement. If granted in connection with an Option, a Stock Appreciation Right shall cover the same number of Shares covered by the Option (or such lesser number of Shares as the Committee may determine) and shall, except as provided in this Section 6.1, be subject to the same terms and conditions as the related Option. 6.2 Time of Grant. A Stock Appreciation Right may be granted (i) at any time if unrelated to an Option, or (ii) if related to an Option, either at the time of grant, or at any time thereafter during the term of the Option. 6.3 Stock Appreciation Right Related to an Option. --------------------------------------------- (a) Exercise. Subject to Section 6.7, a Stock Appreciation Right granted in connection with an Option shall be exercisable at such time or times and only to the extent that the related Option is exercisable, and will not be transferable except to the extent the related Option may be transferable. 5 (b) Amount Payable. Upon the exercise of a Stock Appreciation Right related to an Option and subject to the provisions of Section 6.6, the Grantee shall be entitled to receive an amount determined by multiplying (A) the excess of the Fair Market Value of a Share on the date of exercise of such Stock Appreciation Right over the per Share purchase price under the related Option, by (B) the number of Shares as to which such Stock Appreciation Right is being exercised. Notwithstanding the foregoing, the Committee may limit in any manner the amount payable with respect to any Stock Appreciation Right by including such a limit in the Agreement evidencing the Stock Appreciation Right at the time it is granted. (c) Treatment of Related Options and Stock Appreciation Rights Upon Exercise. Upon the exercise of a Stock Appreciation Right granted in connection with an Option, the Option shall be canceled to the extent of the number of Shares as to which the Stock Appreciation Right is exercised, and upon the exercise of an Option granted in connection with a Stock Appreciation Right or the surrender of such Option pursuant to Section 6.5, the Stock Appreciation Right shall be canceled to the extent of the number of Shares as to which the Option is exercised or surrendered. 6.4 (a) Stock Appreciation Right Unrelated to an Option. The Committee may grant to Eligible Individuals Stock Appreciation Rights unrelated to Options. Stock Appreciation Rights unrelated to Options shall contain such terms and conditions as to exercisability (subject to Section 6.7), vesting and duration as the Committee shall determine, but in no event shall they have a term of greater than ten (10) years. The Committee may accelerate the exercisability of any Stock Appreciation Right at any time. Upon exercise of a Stock Appreciation Right unrelated to an Option, the Grantee shall be entitled to receive an amount determined by multiplying (A) the excess of the Fair Market Value of a Share on the date of exercise of such Stock Appreciation Right over the Fair Market Value of a Share on the date the Stock Appreciation Right was granted, by (B) the number of Shares as to which the Stock Appreciation Right is being exercised. Notwithstanding the foregoing, the Committee may limit in any manner the amount payable with respect to any Stock Appreciation Right by including such a limit in the Agreement evidencing the Stock Appreciation Right at the time it is granted. (b) Limited SAR Rights. A Grantee may, in the discretion of the Committee, have the right (a "Limited SAR Right") to surrender the Stock Appreciation Right or any portion thereof to the Company within 30 days following a Change in Control and to receive from the Company in exchange therefor a cash payment in an amount equal to (a) the number of Shares under the Stock Appreciation Right which are being exercised, multiplied by (b) the excess of (i) the greater of (A) the highest price per Share paid in connection with the Change in Control or (B) the highest Fair Market Value per Share in the 90 day period preceding such Change in Control, over (ii) the Fair Market Value of a Share on the date the Stock Appreciation Right was granted as set forth in the Agreement. 6.5 Method of Exercise. Stock Appreciation Rights shall be exercised by a Grantee only by a written notice delivered in person, by facsimile transmission, or by mail to the Secretary of the Company at the Company's principal executive office, specifying the number of Shares with respect to which the Stock Appreciation Right is being exercised. If requested by the 6 Committee, the Grantee shall deliver the Agreement evidencing the Stock Appreciation Right being exercised and the Agreement evidencing any related Option to the Secretary of the Company who shall endorse thereon a notation of such exercise and return such Agreement to the Grantee. 6.6 Form of Payment. Payment of the amount determined under Sections 6.3(b) or 6.4 may be made in the discretion of the Committee, solely in whole Shares in a number determined at their Fair Market Value on the date preceding the date of exercise of the Stock Appreciation Right, or solely in cash, or in a combination of cash and Shares. If the Committee decides to make full payment in Shares and the amount payable results in a fractional Share, payment for the fractional Share will be made in cash. 6.7 Restrictions. In the case of any Grantee who may be subject to liability under Section 16(b) of the Exchange Act, no Stock Appreciation Right may be exercised before the date six (6) months after the date it is granted. 7. Restricted Stock 7.1 Grant. The Committee may grant to Eligible Individuals Awards of Restricted Stock, and may issue Shares of Restricted Stock in payment of vested Performance Units (as hereinafter provided in Section 8.2), which shall be evidenced by an Agreement between the Company and the Grantee. Each Agreement shall contain such restrictions, terms and conditions as the Committee may, in its discretion, determine and (without limiting the generality of the foregoing) such Agreements may require that an appropriate legend be placed on Share certificates. Awards of Restricted Stock shall be subject to the terms and provisions set forth below in this Section 7. 7.2 Rights of Grantee. Shares of Restricted Stock granted pursuant to an Award hereunder shall be issued in the name of the Grantee as soon as reasonably practicable after the Award is granted provided that the Grantee has executed an Agreement evidencing the Award, the appropriate blank stock powers and, in the discretion of the Committee, an escrow agreement and any other documents which the Committee may require as a condition to the issuance of such Shares. If a Restricted Stock Award Agreement, appropriate blank stock powers and such other documents which the Committee may require are not executed by the Grantee within the time period prescribed by the Committee at the time the Award is granted, the Award shall be null and void. At the discretion of the Committee, Shares issued in connection with a Restricted Stock Award shall be deposited together with the stock powers with an escrow agent (which may be the Company) designated by the Committee. Unless the Committee determines otherwise and as set forth in the Agreement, upon delivery of the Shares to the escrow agent, the Grantee shall have all of the rights of a stockholder with respect to such Shares, including the right to vote the Shares and to receive all dividends or other distributions paid or made with respect to the Shares. 7.3 Non-transferability. Until any restrictions upon the Shares of Restricted Stock Awarded to a Grantee shall have lapsed in the manner set forth in Section 7.4, such Shares shall 7 not be sold, transferred or otherwise disposed of and shall not be pledged or otherwise hypothecated, nor shall they be delivered to the Grantee. 7.4 Lapse of Restrictions. Restrictions upon Shares of Restricted Stock awarded hereunder shall lapse at such time or times on such terms and conditions as the Committee may determine, which restrictions shall be set forth in the Agreement evidencing the Award. 7.5 Treatment of Dividends. At the time the Award of Shares of Restricted Stock is granted, the Committee may, in its discretion, determine that the payment to the Grantee of dividends, or a specified portion thereof, declared or paid on such Shares by the Company shall be, at the discretion of the Committee, (i) paid in cash to the Grantee or (ii) deferred until the lapsing of the restrictions imposed upon such Shares and held by the Company for the account of the Grantee until such time. In the event that payment of dividends is to be deferred, the Committee shall determine whether such dividends are to be reinvested in shares of Stock (which shall be held as additional Shares of Restricted Stock) or held in cash. If deferred dividends are to be held in cash, there may be credited at the end of each year (or portion thereof) interest on the amount of the account at the beginning of the year at a rate per annum as the Committee, in its discretion, may determine. Payment of deferred dividends in respect of Shares of Restricted Stock (whether held in cash or as additional Shares of Restricted Stock), together with interest accrued thereon, if any, shall be made upon the lapsing of restrictions imposed on the Shares in respect of which the deferred dividends were paid, and any dividends deferred (together with any interest accrued thereon) in respect of any Shares of Restricted Stock shall be forfeited upon the forfeiture of such Shares. 7.6 Delivery of Shares. Upon the lapse of the restrictions on Shares of Restricted Stock, the Committee shall cause a stock certificate to be delivered to the Grantee with respect to such Shares, free of all restrictions hereunder. Notwithstanding the preceding, the Committee may withhold sufficient Shares to pay taxes. 8. Performance Awards 8.1 Performance Objectives. Performance objectives for Performance Awards may be expressed in terms of (i) earnings per Share, (ii) pre-tax profits, (iii) net earnings or net worth, (iv) absolute and/or relative return on equity or assets, (v) any combination of the foregoing, or (vi) any other standard or standards deemed appropriate by the Committee at the time the Award is granted. Performance objectives may be in respect of the performance of the Company and its Subsidiaries (which may be on a consolidated basis), a Subsidiary or a Division. Performance objectives may be absolute and/or relative and may be expressed in terms of a progression within a specified range. Prior to the end of a Performance Cycle, with respect to any Eligible Individual the deductibility of whose Performance Award will not, in the reasonable belief of the Committee, be subject to Section 162(m) of the Code, the Committee may, in its discretion, adjust the performance objectives to reflect a Change in Capitalization, a change in the book tax rate of the Company or any Subsidiary or any other event which may materially affect the performance of the Company, a Subsidiary or a Division, including, but not limited to, market conditions or a significant acquisition or disposition of assets or other property by the Company, 8 a Subsidiary or a Division. With respect to any Eligible Individual the deductibility of whose compensation may, in the reasonable belief of the Committee, be subject to Section 162(m) of the Code, the Committee shall exercise the discretion conferred upon it in the preceding sentence in such manner as shall be approved by the Company's auditors and will not result in loss of deductibility under such Section 162(m). Notwithstanding the foregoing, the Committee shall, in such manner as shall be approved by the Company's auditors, adjust the performance objectives for all Grantees to whom Performance Units have been granted to offset the impact of any change in the applicable corporate tax rate under the Code. 8.2 Performance Units. The Committee, in its discretion, may grant Awards of Performance Units to Eligible Individuals, the terms and conditions of which shall be set forth in an Agreement between the Company and the Grantee. Performance Units may be denominated in Shares or a specified dollar amount and, contingent upon the attainment of specified performance objectives within the Performance Cycle, represent the right to receive payment as provided in Section 8.2(b) of (i) in the case of Share-denominated Performance Units, the Fair Market Value of a Share on the date the Performance Unit was granted, the date the Performance Unit became vested or any other date specified by the Committee, (ii) in the case of dollar-denominated Performance Units, the specified dollar amount or (iii) a percentage (which may be more than 100%) of the amount described in clause (i) or (ii) depending on the level of performance objective attainment; provided, however, that the Committee may at the time a Performance Unit is granted, specify a maximum amount payable in respect of a vested Performance Unit. Each Agreement shall specify the number of the Performance Units to which it relates, the performance objectives which must be satisfied in order for the Performance Units to vest and the Performance Cycle within which such objectives must be satisfied. (a) Vesting and Forfeiture. A Grantee shall become vested with respect to the Performance Units to the extent that the performance objectives set forth in the Agreement are satisfied for the Performance Cycle. (b) Payment of Awards. Payment to Grantees in respect of vested Performance Units shall be made within sixty (60) days after the last day of the Performance Cycle to which such Award relates unless the Agreement evidencing the Award provides for the deferral of payment, in which event the terms and conditions of the deferral shall be set forth in the Agreement. Such payments may be made entirely in Shares valued at their Fair Market Value as of the last day of the applicable Performance Cycle or such other date specified by the Committee, entirely in cash, or in such combination of Shares and cash as the Committee in its discretion shall determine at any time prior to such payment; provided, however, that if the Committee in its discretion determines to make such payment entirely or partially in Shares of Restricted Stock or Restricted Stock Units, the Committee must determine the extent to which such payment will be in Shares of Restricted Stock or Restricted Stock Units and the terms of such Restricted Stock or Restricted Stock Units at the time the Award is granted. 8.3 Performance Shares. The Committee, in its discretion, may grant Awards of Performance Shares to Eligible Individuals, the terms and conditions of which shall be set forth in an Agreement between the Company and the Grantee. Performance Shares shall be 9 denominated in Shares or Restricted Stock Units, as determined by the Committee. Awards of Performance Shares shall be subject to the following terms and provisions: (a) Rights of Grantee. The Committee shall provide at the time an Award of Performance Shares is made, the time or times at which the actual Shares or Restricted Stock Units represented by such Award shall be issued in the name of the Grantee, and the number of such Shares or Restricted Stock Units so issuable at different levels of performance goal attainment. (b) Non-transferability. Until any restrictions upon the Performance Shares awarded to a Grantee shall have lapsed in the manner set forth in Section 8.3(d) such Performance Shares shall not be sold, transferred or otherwise disposed of and shall not be pledged or otherwise hypothecated, nor shall they be delivered to the Grantee. The Committee may also impose such other restrictions and conditions on the Performance Shares, if any, as it deems appropriate. (c) Treatment of Dividend Equivalents. At the time the Award of Performance Shares is granted, the Committee may, in its discretion, determine that the Grantee shall have the right to receive payments equivalent in value to dividends or other distributions paid or made with respect to the underlying Shares (which may include, in the case of Performance Shares denominated in Restricted Stock Units, the Shares underlying such Restricted Stock Units) ("Dividend Equivalents"). The payment to the Grantee of Dividend Equivalents, or a specified portion thereof, shall be, at the discretion of the Committee, (i) paid in cash to the Grantee or (ii) deferred until the lapsing of the restrictions imposed upon such Performance Shares and held by the Company for the account of the Grantee until such time. In the event that payment of Dividend Equivalents is to be deferred, the Committee shall determine whether such Dividend Equivalents are to be reinvested in shares of Stock (which shall be held as additional Performance Shares) or held in cash. If deferred Dividend Equivalents are to be held in cash, there may be credited at the end of each year (or portion thereof) interest on the amount of the account at the beginning of the year at a rate per annum as the Committee, in its discretion, may determine. Payment of deferred Dividend Equivalents in respect of Performance Shares (with interest accrued thereon, if any), shall be made upon the lapsing of restrictions imposed on the Performance Shares in respect to which the deferred Dividend Equivalents were paid, and any Dividend Equivalents deferred (together with any interest accrued thereon) in respect of any Performance Shares shall be forfeited upon the forfeiture of such Performance Shares. (d) Delivery of Shares. Upon the satisfaction of the performance goals on Performance Shares awarded hereunder, the Committee shall cause a stock certificate to be delivered to the Grantee with respect to such Performance Shares, free of all restrictions hereunder. Alternatively, if specified in the Award Agreement, the Committee may determine that earned Performance Shares be conveyed to a Grantee in the form of Restricted Stock Units and/or an amount of cash sufficient to satisfy anticipated tax obligations to be incurred in connection with such Shares. 10 8.4 Non-transferability. No Performance Awards shall be transferable by the Grantee otherwise than by will or the laws of descent and distribution. 8.5 Modification. Subject to the terms of the Plan, the Committee may modify outstanding Performance Awards; provided, however, that no modification may be made with respect to Performance Awards held by Executive Officers (such term is as defined in the Exchange Act). Notwithstanding the foregoing, no modification of a Performance Award shall materially adversely alter or materially impair any rights or obligations under the Agreement without the Grantee's consent. 9. Restricted Stock Units 9.1 Grant. The Committee may grant to Eligible Individuals Awards of Restricted Stock Units which shall be evidenced by an Agreement between the Company and the Grantee. Each Agreement shall contain such restrictions, terms and conditions as the Committee may, in its discretion, determine in accordance with the following provisions of this Section 9. A Restricted Stock Unit shall represent the right to receive one Share upon lapse of the conditions established in the grant. 9.2 Lapse of Restrictions. Restrictions upon Restricted Stock Units awarded hereunder shall lapse at such time or times and on such conditions as the Committee may determine, which restrictions shall be set forth in the Agreement evidencing the Award. Upon such lapse, all Shares represented by such Restricted Stock Unit shall vest and be payable immediately. 9.3 Dividend Equivalents. At the time the Award of Restricted Stock Units is granted, the Committee may, in its discretion, determine that the payment to the Grantee of dividend equivalents declared or paid on Shares by the Company shall be (i) deferred until the lapsing of the restrictions imposed on such Restricted Stock Units and (ii) held by the Company for the account of the Grantee until such time. In the event that the dividend equivalents are to be deferred, the Committee shall determine whether such dividends are to be reinvested in Shares (which shall be held as additional Restricted Stock Units) or held in cash. If deferred dividends are to be held in cash, there may be credited at the end of the year (or portion thereof) interest on the amount of the account at the beginning of the year at a rate per annum as the Committee, in its discretion, may determine. Payment of deferred dividends in respect of Restricted Stock Units (whether held in cash or as additional Restricted Stock Units), together with interest accrued thereon, if any, shall be made upon the lapsing of restrictions imposed on the Restricted Stock Units in respect of which the deferred dividends were paid, and any dividends deferred (together with any interest accrued thereon) in respect of any Restricted Stock Units shall be forfeited upon the forfeiture of such Restricted Stock Unit. 9.4 Units and Options for Non-employee Directors. Notwithstanding anything to the contrary in the Plan, Restricted Stock Units and Options shall be granted to Non-employee Directors of the Company in accordance with the following provisions. Each Non-employee Director shall receive 2,500 Restricted Stock Units on the day of the Company's annual meeting 11 for each year that the Plan is in effect. At the election of each Non-employee Director, Options in an amount equal to three times the number of Restricted Stock Units paid, may be paid in place of the Restricted Stock Units. The Options shall have a ten year term, an exercise price equal to Fair Market Value on the date of payment and shall become exercisable in one-third increments on the first, second and third anniversaries of the date of payment. Restricted Stock Units shall vest immediately upon grant. As of each date a dividend or other distribution is paid or made on Shares, each Non-employee Director holding Restricted Stock Units shall be credited with a number of additional Restricted Stock Units equal to the product of (A) the dividend or other distribution paid on one Share, multiplied by (B) the number of Restricted Stock Units held by the Non-employee Director, divided by (C) the closing price of one Share on the New York Stock Exchange on such date. Such additional Restricted Stock Units shall vest immediately. In the event a Non-employee Director's service terminates, all Options shall become immediately exercisable and remain exercisable through their scheduled term. Restricted Stock Units are payable in shares upon termination of a Non-employee Director's service on the Board. 10. Effect of a Termination of Employment The Agreement evidencing the grant of each Option and each Award shall set forth the terms and conditions applicable to such Option or Award upon a termination or change in the status of the employment of the Optionee or Grantee by the Company, a Subsidiary or a Division (including a termination or change by reason of the sale of a Subsidiary or a Division), as the Committee may, in its discretion, determine at the time the Option or Award is granted or thereafter; provided, however, that the Committee shall have no such discretion with respect to Restricted Stock Units granted to Non-employee Directors pursuant to Section 9.4, the Agreements evidencing which shall contain the provisions regarding termination described in such Section. 11. Adjustment Upon Changes in Capitalization (a) In the event of a Change in Capitalization, the Committee shall conclusively determine the appropriate adjustments, if any, to the (i) maximum number and class of Shares or other stock or securities with respect to which Options or Awards may be granted under the Plan or to any individual, and (ii) the number and class of Shares or other stock or securities which are subject to outstanding Options or Awards granted under the Plan, and the purchase price therefor, if applicable; provided, however, that with respect to Restricted Stock Units granted to Non-employee Directors pursuant to Section 9.4, any such adjustments shall be made only as necessary to maintain the proportionate interest of each Non-employee Director in Shares and preserve, without exceeding, the value of such Restricted Stock Units. (b) Any such adjustment in the Shares or other stock or securities subject to outstanding Incentive Stock Options (including any adjustments in the purchase price) shall be made in such manner as not to constitute a modification as defined by Section 424(h)(3) of the Code and only to the extent otherwise permitted by Sections 422 and 424 of the Code. 12 (c) If, by reason of a Change in Capitalization, a Grantee of an Award shall be entitled to or an Optionee shall be entitled to exercise an Option with respect to, new, additional or different shares of stock or securities, such new, additional or different shares shall thereupon be subject to all of the conditions, restrictions and performance criteria which were applicable to the Shares subject to the Award or Option, as the case may be prior to such Change in Capitalization. (d) The Committee shall apply this Section 11 in a manner consistent with the preservation of the Company's tax deduction for the payment or exercise of Awards under Section 162(m) of the Code. 12. Termination and Amendment of the Plan; Modification of Awards ------------------------------------------------------------- (a) The Plan shall terminate on the day preceding the tenth anniversary of the date of its adoption by the Board and no Option or Award may be granted thereafter. The Board may sooner terminate the Plan and the Board may at any time and from time to time amend, modify or suspend the Plan or any Option or Award; provided, however, that: (i) No such amendment, modification, suspension or termination shall materially impair or materially adversely alter any Options or Awards theretofore granted under the Plan, except with the consent of the Optionee or Grantee, nor shall any amendment, modification, suspension or termination deprive any Optionee or Grantee of any Shares which he or she may have acquired through or as a result of the Plan; and (ii) To the extent necessary to comply with Rule 16b-3 of the Exchange Act and the rules and regulations promulgated thereunder, or to preserve the Company's tax deduction for the payment or exercise of Awards under Section 162(m) of the Code, no amendment shall be effective unless approved by the stockholders of the Company in accordance with applicable law and regulations. (b) Notwithstanding the above, the Committee shall not have the right to modify any outstanding Award to the extent such restriction is necessary to preserve the Company's tax deduction for the payment or exercise of Awards under Section 162(m) of the Code. 13. Non-Exclusivity of the Plan The adoption of the Plan by the Board shall not be construed as amending, modifying or rescinding any previously approved incentive arrangement or as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options otherwise than under the Plan, and such arrangements may be either applicable generally or only in specific cases. 13 14. Limitation of Liability As illustrative of the limitations of liability of the Company, but not intended to be exhaustive thereof, nothing in the Plan shall be construed to: (i) give any person any right to be granted an Option or Award other than at the sole discretion of the Committee; (ii) give any person any rights whatsoever with respect to Shares except as specifically provided in the Plan; (iii) limit in any way the right of the Company to terminate the employment of any person at any time; or (iv) be evidence of any agreement or understanding, expressed or implied, that the Company will employ any person at any particular rate of compensation or for any particular period of time. 15. Regulations and Other Approvals; Governing Law 15.1 Except as to matters of federal law, this Plan and the rights of all persons claiming hereunder shall be construed and determined in accordance with the laws of the State of Delaware without giving effect to conflicts of law principles. 15.2 The obligation of the Company to sell or deliver Shares with respect to Options and Awards granted under the Plan shall be subject to all applicable laws, rules and regulations, including all applicable federal and state securities laws, and the obtaining of all such approvals by governmental agencies as may be deemed necessary or appropriate by the Committee. 15.3 The Plan is intended to comply with Rule 16b-3 promulgated under the Exchange Act and the Committee shall interpret and administer the provisions of the Plan or any Agreement in a manner consistent therewith. Any provisions inconsistent with such Rule shall be inoperative and shall not affect the validity of the Plan. 15.4 The Board may make such changes in the Plan or any Awards as may be necessary or appropriate to comply with the rules and regulations of any government authority, or to obtain for Eligible Individuals granted Incentive Stock Options any tax benefits under the applicable provisions of the Code and regulations promulgated thereunder. 15.5 Each Option and Award is subject to the requirement that, if at any time the Committee determines, in its discretion, that the listing, registration or qualification of Shares issuable pursuant to the Plan is required by any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the grant of an Option or Award or the issuance of Shares, no Options or Awards shall be granted or payment made or Shares issued, in whole or in part, unless listing, registration, qualification, consent or approval has been effected or obtained free of any conditions as acceptable to the Committee. 14 15.6 Notwithstanding anything contained in the Plan or any Agreement to the contrary, in the event that the disposition of Shares acquired pursuant to the Plan is not covered by a then current registration statement under the Securities Act of 1933, as amended, and is not otherwise exempt from such registration, such Shares shall be restricted against transfer to the extent required by the Securities Act of 1933, as amended, and Rule 144 or other regulations thereunder. The Committee may require any individual receiving Shares pursuant to an Option or Award granted under the Plan, as a condition precedent to receipt of such Shares, to represent and warrant to the Company in writing that the Shares acquired by such individual are acquired without a view to any distribution thereof and will not be sold or transferred other than pursuant to an effective registration thereof under said Act or pursuant to an exemption applicable under the Securities Act of 1933, as amended, or the rules and regulations promulgated thereunder. The certificates evidencing any of such Shares shall be appropriately amended to reflect their status as restricted securities as aforesaid. 15.7 Awards granted under the Plan to persons which the Committee reasonably believes may be subject to Section 162(m) of the Code will not be exercisable, and compensation under the Plan will not be paid, unless and until any necessary shareholder approvals shall have been obtained and the Committee has certified as to the attainment of any applicable performance goals, in each case to the extent required under said Section 162(m). 16. Miscellaneous 16.1 Multiple Agreements. The terms of each Option or Award may differ from other Options or Awards granted under the Plan at the same time, or at some other time. The Committee may also grant more than one Option or Award to a given Eligible Individual during the term of the Plan in addition to Options or Awards previously granted to that Eligible Individual. 16.2 Withholding of Taxes. -------------------- (a) The Company shall have the right to deduct from any distribution of cash to any Optionee or Grantee, an amount equal to the federal, state and local income taxes and other amounts as may be required by law to be withheld (the "Withholding Taxes") with respect to any Option or Award. If an Optionee or Grantee is to experience a taxable event in connection with the receipt of Shares pursuant to an Option exercise or payment of an Award, the Optionee or Grantee shall pay the Withholding Taxes to the Company prior to the issuance, or release from escrow, of such Shares. In satisfaction of the obligation to pay Withholding Taxes to the Company, the Optionee or Grantee may make a written election, which may be accepted or rejected in the discretion of the Committee, to have withheld a portion of the Shares then issuable to him or her having an aggregate Fair Market Value, on the date preceding the date of such issuance, equal to the Withholding Taxes, provided that the Committee shall accept such an election in respect of an Optionee subject to Section 16(b) of the Exchange Act only if such election complies with Rule 16b-3 under the Exchange Act. 15 (b) If an Optionee makes a disposition, within the meaning of Section 424(c) of the Code and regulations promulgated thereunder, of any Share or Shares issued to such Optionee pursuant to the exercise of an Incentive Stock Option within the two-year period commencing on the day after the date of the grant or within the one-year period commencing on the day after the date of transfer of such Share or Shares to the Optionee pursuant to such exercise, the Optionee shall, within ten (10) days of such disposition, notify the Company thereof, by delivery of written notice to the Company at its principal executive office. 16.3 Non-transferability. No Option, Stock Appreciation Right, Performance Unit denominated in Stock or Restricted Stock Unit granted hereunder shall be transferable by the Optionee or Grantee to whom granted otherwise than by will or the laws of descent and distribution or pursuant to a "qualified domestic relations order," as defined by the Code or title I of ERISA, or the rules thereunder, and an Award may be exercised during the lifetime of such Optionee or Grantee only by the Optionee or Grantee, or his or her guardian or legal representative. The terms of such Award shall be final, binding and conclusive upon the beneficiaries, executors, administrators, heirs and successors of the Optionee or Grantee. 16.4 Acceleration of Awards. The Committee may accelerate vesting, exercisability or lapse of restrictions on all or any portion of any Award at any time, other than with respect to: (a) Awards of Restricted Stock Units to Non-employee Directors pursuant to Section 9.4, vesting of which may be accelerated only under such circumstances as will not cause such persons to fail to be "disinterested persons," within the meaning of Rule 16b-3 under the Exchange Act; and (b) Awards other than Options or Stock Appreciation Rights, to the extent that such acceleration would jeopardize, under Section 162(m) of the Code, the Company's tax deduction otherwise available for the payment or exercise of the Awards. 17. Effective Date The effective date of the Plan shall be the date of its adoption by the Board, subject only to (i) the approval by the affirmative vote of the holders of a majority of the securities of the Company present, or represented, and entitled to vote at a meeting of stockholders duly held in accordance with the applicable laws of the State of Delaware or (ii) subject to any other such means of approval which shall satisfy the Exchange Act, within twelve (12) months of such adoption. 18. Definitions For purpose of the Plan: 18.1 "Agreement" means the written agreement between the Company and an Optionee or Grantee or the written document furnished to an Optionee or Grantee by the Company evidencing the grant of an Option or Award and setting forth the terms and conditions thereof. 16 18.2 "Award" means a grant of Incentive Stock Options, Non-qualified Stock Options, Restricted Stock, Restricted Stock Units, Stock Appreciation Rights, Performance Awards or any or all of them. 18.3 "Board" means the Board of Directors of the Company. 18.4 "Change in Capitalization" means any increase or reduction in the number of Shares, or any change (including, but not limited to, a change in value) in the Shares or exchange of Shares for a different number or kind of shares or other securities of the Company, by reason of a reclassification, recapitalization, merger, consolidation, reorganization, spin-off, split-up, issuance of warrants or rights or debentures, stock dividend, stock split or reverse stock split, cash dividend, property dividend, combination or exchange of shares, repurchase of shares, change in corporate structure or otherwise. 18.5 "Change in Control" shall mean the occurrence during the term of the Plan of: (a) An acquisition (other than directly from the Company) of any voting securities of the Company (the "Voting Securities") by any "Person" (as the term person is used for purposes of Section 13(d) or 14(d) of the Exchange Act) immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of thirty percent (30%) or more of the combined voting power of the Company's then outstanding Voting Securities; provided, however, in determining whether a Change in Control has occurred, Voting Securities which are acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. A "Non-Control Acquisition" shall mean an acquisition by (i) an employee benefit plan (or a trust forming a part thereof or a trustee thereof acting solely in its capacity as trustee) maintained by (A) the Company or (B) any corporation or other Person of which a majority of its voting power or its voting equity securities or equity interest is owned, directly or indirectly, by the Company (for purposes of this definition, a "Subsidiary"), (ii) the Company or its Subsidiaries, or (iii) any Person in connection with a "Non-Control Transaction" (as hereinafter defined). (b) The individuals who, as of the effective date of the 1994 initial public trading in Company Shares, are members of the Board (the "Incumbent Board"), ceasing for any reason to constitute at least two-thirds of the members of the Board; provided, however, that if the election, or nomination for election by the Company's common stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Plan, be considered as a member of the Incumbent Board; provided further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the 1934 Act or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or 17 (c) Approval by stockholders of the Company of: (i) A merger, consolidation or reorganization involving the Company, unless such merger, consolidation or reorganization is a "Non-Control Transaction"; i.e., meets each of the requirements described in (A), (B), and (C) below: (A) the stockholders of the Company, immediately before such merger, consolidation or reorganization, own, directly or indirectly immediately following such merger, consolidation or reorganization, at least seventy percent (70%) of the combined voting power of the outstanding voting securities of the corporation resulting from such merger or consolidation or reorganization (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization; (B) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least two-thirds of the members of the board of directors of the Surviving Corporation immediately following the consummation of such merger, consolidation or reorganization; and (C) no Person other than the Company, any Subsidiary, any employee benefit plan (or any trust forming a part thereof or a trustee thereof acting solely in its capacity as trustee) maintained by the Company, the Surviving Corporation, or any Subsidiary, or any Person who, immediately prior to such merger, consolidation or reorganization had Beneficial Ownership of thirty percent (30%) or more of the then outstanding Voting Securities has Beneficial Ownership of thirty percent (30%) or more of the combined voting power of the Surviving Corporation's then outstanding voting securities immediately following the consummation of such merger, consolidation or reorganization. (ii) A complete liquidation or dissolution of the Company; or (iii) An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary). Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the outstanding Voting Securities as a result of the acquisition of Voting Securities by the Company which, by reducing the number of Voting Securities outstanding, increases the proportional number of shares Beneficially Owned by the Subject Persons, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional Voting Securities which increases the percentage of the then outstanding Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur. 18 18.6 "Code" means the Internal Revenue Code of 1986, as amended. 18.7 "Committee" means a committee consisting of at least three (3) Disinterested Directors appointed by the Board to administer the Plan and to perform the functions set forth herein. The authority of the Committee to administer the Plan may be delegated to a subcommittee composed exclusively of two or more individuals who are "outside directors", within the meaning of Section 162(m) of the Code, and proposed or final Treasury Regulations issued thereunder, to the extent required to satisfy the provisions of that Section; provided, however, that at all times such subcommittee shall satisfy the applicable requirements of Rule 16b-3 under the Exchange Act. References to the Committee herein refer to such subcommittee to the extent of such a delegation. 18.8 "Company" means Lehman Brothers Holdings Inc. 18.9 "Disability" means a physical or mental infirmity which impairs the Optionee's or Grantee's ability to perform substantially his or her duties for a period of one hundred eighty (180) consecutive days. 18.10 "Disinterested Director" means a director of the Company who is "disinterested" within the meaning of Rule 16b-3 under the Exchange Act. 18.11 "Dividend Equivalents" has the meaning ascribed to it in Section 8.3(c). 18.12 "Division" means any of the operating units or divisions of the Company designated as a Division by the Committee. 18.13 "Eligible Individual" means any officer, salaried or commission employee, consultant and Non-employee Director of the Company or a Subsidiary, designated by the Committee as eligible to receive Awards subject to the conditions set forth herein. 18.14 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 18.15 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 18.16 "Fair Market Value" on any date means the closing price of the Shares on such date on the principal national securities exchange on which such Shares are listed or admitted to trading (or, if such exchange is not open on such date, the immediately preceding date on which such exchange is open), the arithmetic mean of the per Share closing bid price and per Share closing asked price on such date as quoted on the National Association of Securities Dealers Automated Quotation System or such other market in which such prices are regularly quoted, or, if there have been no published bid or asked quotations with respect to Shares on such date, the Fair Market Value shall be the value established by the Committee in good faith and, in the case of an Incentive Stock Option, in accordance with Section 422 of the Code. Notwithstanding the 19 foregoing, for Awards and Options granted before the commencement of initial 1994 regular way public trading in Shares, Fair Market Value of the Shares means the closing price on the first day on which initial 1994 regular way public trading in the Shares commences. 18.17 "Grantee" means a person to whom an Award has been granted under the Plan. 18.18 "Incentive Stock Option" means an Option satisfying the requirements of Section 422 of the Code and designated by the Committee as an Incentive Stock Option. 18.19 "Non-employee Director" means a director of the Company who is not an employee of the Company or any Subsidiary. 18.20 "Non-qualified Stock Option" means an Option which is not an Incentive Stock Option. 18.21 "Option" means an Incentive Stock Option, a Non-qualified Stock Option, or both of them, as the context requires. 18.22 "Optionee" means a person to whom an Option has been granted under the Plan. 18.23 "Parent" means any corporation which is a parent corporation (within the meaning of Section 424(e) of the Code) with respect to the Company. 18.24 "Performance Awards" means Performance Units, Performance Shares or either or both of them. 18.25 "Performance Cycle" means the time period specified by the Committee at the time a Performance Award is granted during which the performance of the Company, a Subsidiary or a Division will be measured. 18.26 "Performance Shares" means Shares issued or transferred to an Eligible Individual under Section 8.3 hereof. 18.27 "Performance Unit" means Performance Units granted to an Eligible Individual under Section 8.2 hereof. 18.28 "Plan" means the Lehman Brothers Holdings Inc. 1994 Management Ownership Plan. 18.29 "Restricted Stock" means Shares issued or transferred to an Eligible Individual pursuant to Section 7 hereof. 18.30 "Restricted Stock Unit" means an Award granted to an Eligible Individual to receive payment upon the lapse of all restrictions in the form of Shares as provided for in Section 9 hereof. 20 18.31 "Shares" means the common stock, par value $.10 per share, of the Company. 18.32 "Stock Appreciation Right" means a right to receive all or some portion of the increase in the value of the Shares as provided in Section 6 hereof. 18.33 "Subsidiary" means any corporation which is a subsidiary corporation (within the meaning of Section 424(f) of the Code) with respect to the Company. 18.34 "Successor Corporation" means a corporation, or a parent or subsidiary thereof within the meaning of Section 424(a) of the Code, which issues or assumes a stock option in a transaction to which Section 424(a) of the Code applies. 18.35 "Ten-Percent Stockholder" means an Eligible Individual, who, at the time an Incentive Stock Option is to be granted to him or her, owns (within the meaning of Section 422(b)(6) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, or of a Parent or a Subsidiary. 21 EX-12.1 4 0004.txt EXHIBIT 12.1 Exhibit 12.1 LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES COMPUTATION of RATIOS of EARNINGS to FIXED CHARGES and to COMBINED FIXED CHARGES and PREFERRED STOCK DIVIDENDS (Dollars in millions) (Unaudited)
For the Three Months Ended For the twelve months ended November 30 February ------------------------------------------------------------------- ----------- 1996 1997 1998 1999 2000 2000 ---------- ----------- ---------- ---------- ---------- ---------- Pre-tax earnings from continuing operations $ 637 $ 937 $1,052 $1,631 $2,579 $ 573 Add: Fixed charges (excluding capitalized interest ) 10,852 13,043 15,813 13,681 18,778 4,883 ---------- ----------- ---------- ---------- ---------- ---------- Pre-tax earnings before fixed charges 11,489 13,980 16,865 15,312 21,357 5,456 ========== =========== ========== ========== ========== ========== Fixed charges: Interest 10,816 13,010 15,781 13,649 18,740 4,869 Other (a) 50 41 47 71 57 15 ---------- ----------- ---------- ---------- ---------- ---------- Total fixed charges 10,866 13,051 15,828 13,720 18,797 4,884 ---------- ----------- ---------- ---------- ---------- ---------- Preferred stock dividend requirements 58 109 124 174 195 32 ---------- ----------- ---------- ---------- ---------- ---------- Total combined fixed charges and preferred stock dividends $ 10,924 $ 13,160 $ 15,952 $ 13,894 $ 18,992 $ 4,916 ========== =========== ========== ========== ========== ========== RATIO OF EARNINGS TO FIXED CHARGES 1.06 1.07 1.07 1.12 1.14 1.12 RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS 1.05 1.06 1.06 1.10 1.12 1.11
(a) Other fixed charges consist of the interest factor in rentals and capitalized interest. -----END PRIVACY-ENHANCED MESSAGE-----