-----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, L6pAo+KeuTPTqZCHg17BeiuXxHHj2c8OFd2TTOkQQIuiPZ9bN1WBYjJ4Lkkk4BON 92sMaKcyoHIyPPXoU49Ifg== 0000912057-01-006912.txt : 20010307 0000912057-01-006912.hdr.sgml : 20010307 ACCESSION NUMBER: 0000912057-01-006912 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20001130 FILED AS OF DATE: 20010228 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-K405 SEC ACT: SEC FILE NUMBER: 001-09466 FILM NUMBER: 1557681 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-K405 1 a2039885z10-k405.txt 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2000 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 (I.R.S. Employer Identification No.) incorporation or organization) 3 WORLD FINANCIAL CENTER NEW YORK, NEW YORK 10285 (Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 526-7000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - ------------------- ------------------------- Common Stock, $.10 par value New York Stock Exchange Pacific Exchange Depositary Shares representing 5.94% Cumulative Preferred New York Stock Exchange Stock, Series C Depositary Shares representing 5.67% Cumulative Preferred New York Stock Exchange Stock, Series D Depositary Shares representing Fixed/Adjustable Rate New York Stock Exchange Cumulative Preferred Stock, Series E 8% Trust Preferred Securities, Series I, of Subsidiary Trust New York Stock Exchange (and Registrant's guarantee thereof) 7.875% Trust Preferred Securities, Series J, of Subsidiary New York Stock Exchange Trust (and Registrant's guarantee thereof) Dow Jones Internet Index Stock Upside Note Securities Due American Stock Exchange 2004 10 Uncommon Values Index Basket Adjusting Structured Equity American Stock Exchange Securities Notes Due 2004 10 Uncommon Values Index Basket Adjusting Structured Equity American Stock Exchange Securities Notes Series B, Due 2004 10 Uncommon Values Index Basket Adjusting Structured Equity American Stock Exchange Securities Notes Due 2003 10 Uncommon Values Index Structured Equity Securities Notes American Stock Exchange Due 2001 Notes due November 14, 2007--Performance Linked to Marsh & American Stock Exchange McLennan Companies, Inc. (MMC) Common Stock Notes due November 14, 2007--Performance Linked to Pfizer American Stock Exchange Inc. (PFE) Common Stock 8 3/4% Notes Due 2002 New York Stock Exchange 8.30% Quarterly Income Capital Securities Series A, Due New York Stock Exchange December 31, 2035
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ The aggregate market value of the voting and nonvoting common equity held by non-affiliates of the Registrant at February 12, 2001, was approximately $19,891,400,000. For purposes of this information, the outstanding shares of common stock owned by directors of the Registrant were deemed to be shares of common stock held by affiliates. As of February 12, 2001, 250,170,237 shares of the Registrant's Common Stock, $.10 par value per share, were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE: (1) Lehman Brothers Holdings Inc. 2000 Annual Report to Stockholders (the "2000 Annual Report")--Incorporated in part in Parts I, II and IV. (2) Lehman Brothers Holdings Inc. Definitive Proxy Statement for its 2001 Annual Meeting of Stockholders (the "Proxy Statement")--Incorporated in part in Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS GENERAL DEVELOPMENT OF BUSINESS As used herein, "Holdings" or the "Registrant" means Lehman Brothers Holdings Inc., a Delaware corporation, incorporated on December 29, 1983. Holdings and its subsidiaries are collectively referred to as the "Company," the "Firm" or "Lehman Brothers," and Lehman Brothers Inc., a Delaware corporation and the principal subsidiary of Holdings, is referred to herein as "LBI." The Company is one of the leading global investment banks, serving institutional, corporate, government and high-net-worth individual clients and customers. Its executive offices are located at 3 World Financial Center, New York, New York 10285, and its telephone number is (212) 526-7000. FORWARD-LOOKING STATEMENTS Some of the statements contained in this report, 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 Firm'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 Firm's actual results and financial condition may differ, perhaps materially, from the anticipated results and financial condition in any such forward-looking statements. For more information concerning the risks and other factors that could affect the Firm's future results and financial condition, see "Management's Discussion and Analysis of Financial Condition and Results of Operation" on pages 37-52 of the 2000 Annual Report. The Company undertakes no obligation to update any forward- looking statements, whether as a result of new information, future events or otherwise. LEHMAN BROTHERS Lehman Brothers is one of the leading global investment banks, serving institutional, corporate, government and high-net-worth individual clients and customers. The Company's worldwide headquarters in New York and regional headquarters in London and Tokyo are complemented by offices in additional locations in the United States, Europe, the Middle East, Latin America and the Asia Pacific region. The Company is engaged primarily in providing financial services. Other businesses in which the Company is engaged represent less than 10 percent of consolidated assets, revenues or pre-tax income. The Company's business includes capital raising for clients through securities underwriting and direct placements, corporate finance and strategic advisory services, private equity investments, securities sales and trading, research, and the trading of foreign exchange, derivative products and certain commodities. The Company acts as a market-maker in all major equity and fixed income products in both the domestic and international markets. Lehman Brothers is a member of all principal securities and commodities exchanges in the United States, as well as the National Association of Securities Dealers, Inc. ("NASD"), and holds memberships or associate memberships on several principal international securities and commodities exchanges, including the London, Tokyo, Hong Kong, Frankfurt, Paris and Milan stock exchanges. Lehman Brothers provides a full array of capital market products and advisory services worldwide. Through the Company's banking, research, trading, structuring and distribution capabilities of equity and fixed income products the Company continues its focus of building its client/customer business model. These "customer flow" activities represent a majority of the Company's revenues. In addition to its customer flow activities, the Company also takes proprietary positions, the success of which is dependent on its ability to anticipate economic and market trends. The Company believes its customer flow orientation mitigates its overall revenue volatility. The Company operates in three business segments (each of which is described below): Investment Banking, Capital Markets and Client Services. Financial information concerning the Company for the fiscal years ended November 30, 2000, November 30, 1999, and November 30, 1998, including the amount of net revenue contributed by each segment in such periods, is set forth in the Consolidated Financial Statements and the Notes thereto in the 2000 Annual Report and is incorporated herein by reference. Information with respect to the Company's operations by segment and net revenues by geographic area is set forth in Note 15 of the Notes to Consolidated Financial Statements on pages 85-86 of the 2000 Annual Report and is incorporated herein by reference. INVESTMENT BANKING Lehman Brothers' Investment Banking professionals are responsible for developing and maintaining relationships with issuing clients, gaining a thorough understanding of their specific needs and bringing together the full resources of Lehman Brothers to accomplish their financial objectives. Investment Banking is organized into industry, geographic and product coverage groups, enabling individual bankers to develop specific expertise in particular industries and markets. Industry coverage groups include Chemicals, Communications/Media, Consumer/Retailing, Financial Institutions, Healthcare, Industrial, Natural Resources, Power, Real Estate and Technology. Where appropriate, specialized product groups are partnered with the global industry and geographic groups to provide tailor-made solutions for Lehman Brothers' clients. These product groups include Equity Capital Markets, which consists of equity and equity-related securities and derivatives, Fixed Income Capital Markets, which incorporates expertise in syndicate, liability management, derivatives, private placements, high yield debt and bank loan syndication, and Mergers and Acquisitions/Strategic Advisory Services. Geographically, Lehman Brothers maintains investment banking offices in eight cities in the U.S. and in nineteen cities in Europe, the Middle East, Asia and Latin America. The high degree of integration between the Company's industry, product and geographic groups has allowed Lehman Brothers to become a leading source of one-stop financial solutions for its global clients. MERGERS AND ACQUISITIONS/STRATEGIC ADVISORY. Lehman Brothers has a long history of providing strategic advisory services to corporate, institutional and government clients around the world on a wide range of financial matters, including mergers and acquisitions, restructurings and spin-offs, targeted stock transactions, share repurchase strategies, government privatization programs, takeover defenses and tax optimization strategies. During 2000, the Company continued to expand its activities world-wide, serving as financial advisor on $335 billion of completed transactions world-wide. UNDERWRITING. The Company is a leading underwriter of initial public and secondary offerings of equity and fixed income securities, including listed and over-the-counter securities, government and agency securities and mortgage- and asset-backed securities. CAPITAL MARKETS Lehman Brothers combines professionals from the sales, trading and research areas of its Equities and Fixed Income Divisions, together with investment bankers, into teams to serve the financial needs of the Company's clients and customers. This integrated approach enables Lehman Brothers to structure and execute global transactions for clients and to provide worldwide liquidity in marketable securities. EQUITIES The Equities group is responsible for the Company's equity operations and all dollar and non-dollar equity and equity-related products worldwide. These products include listed and over-the-counter ("OTC") securities, American Depositary Receipts, convertibles, options, warrants and derivatives. 2 EQUITY CASH PRODUCTS. Lehman Brothers makes markets in equity and equity-related securities, and executes block trades on behalf of clients and customers. The Company participates in the global equity and equity-related markets in all major currencies through its worldwide presence and membership in major stock exchanges, including, among others, those in New York, London, Tokyo, Hong Kong, Frankfurt, Paris and Milan. EQUITY DERIVATIVES. Lehman Brothers offers equity derivative capabilities across a wide spectrum of products and currencies, including domestic and international program trading, listed options and futures and structured derivatives. The Firm's equity derivatives business is organized into two major product areas: a global volatility business, encompassing options-related products, and a global portfolio trading business that specializes in index arbitrage, agency/risk baskets and other structured products. EQUITY FINANCE. Lehman Brothers maintains an integrated Equity Financing and Prime Broker business to provide liquidity to its clients and customers and supply a source of secured financing for the Firm. Equity Financing provides financing in all markets on a margin basis for customer purchases of equities and other capital markets products as well as securities lending and short-selling facilitation. The Prime Broker business also engages in full operations, clearing and processing services for that unit's customers. ARBITRAGE. Lehman Brothers engages in a variety of arbitrage activities including "riskless" arbitrage, where the Company seeks to benefit from temporary price discrepancies that occur when a security is traded in two or more markets, and "risk" arbitrage activities, which involve the purchase of securities at discounts from the expected values that would be realized if certain proposed or anticipated corporate transactions (such as mergers, acquisitions, recapitalizations, exchange offers, reorganizations, bankruptcies, liquidations or spin-offs) were to occur. To the extent that these anticipated transactions do not materialize in a manner consistent with the Company's expectations, the Company is subject to the risk that the value of these investments will decline. Lehman Brothers' arbitrage activities benefit from the Company's presence in the global capital markets, access to advanced information technology, in-depth market research, proprietary risk management tools and general experience in assessing rapidly changing market conditions. FIXED INCOME Lehman Brothers actively participates in all key fixed income markets worldwide and maintains a 24-hour trading presence in global fixed income securities. The Company is a preeminent market-maker in new issue and other fixed income securities. Fixed Income businesses include the following: GOVERNMENT AND AGENCY OBLIGATIONS. Lehman Brothers is one of the leading primary dealers in U.S. government securities, as designated by the Federal Reserve Bank of New York, participating in the underwriting and market-making of U.S. Treasury bills, notes and bonds, and securities of federal agencies. The Company is also a market-maker in the government securities of all G7 countries, and participates in other major European and Asian government bond markets. CORPORATE DEBT SECURITIES. Lehman Brothers makes markets in fixed and floating rate investment grade debt worldwide. The Company is also a major participant in the preferred stock market, managing numerous offerings of long-term and perpetual preferreds and auction rate securities. HIGH YIELD SECURITIES AND LEVERAGED BANK LOANS. The Company also makes markets in non-investment grade debt securities and bank loans. Lehman Brothers provides "one-stop" leveraged financing solutions for corporate and financial acquirers and high yield issuers, including multi-tranche, multi-product acquisition financing. The Company remains one of the leading investment banks in the syndication of leveraged loans. 3 MONEY MARKET PRODUCTS. Lehman Brothers holds leading market positions in the origination and distribution of medium-term notes and commercial paper. The Company is an appointed dealer for over 690 active commercial paper programs on behalf of companies and government agencies worldwide. MORTGAGE AND ASSET-BACKED SECURITIES. The Company is a leading underwriter of and market-maker in residential and commercial mortgage- and asset-backed securities and is active in all areas of secured lending, structured finance and securitized products. Lehman Brothers underwrites and makes markets in the full range of U.S. agency-backed mortgage products, mortgage-backed securities, asset-backed securities and whole loan products. It is a leader in the global market for mortgage and asset-backed securities, leases, mortgages, multi-family financing and commercial loans. The Company also originates mortgage loans directly through its subsidiary savings bank, Lehman Brothers Bank, FSB. In addition, Lehman Brothers engages in select investments in commercial and residential properties. MUNICIPAL AND TAX-EXEMPT SECURITIES. Lehman Brothers is a major dealer in municipal and tax-exempt securities, including general obligation and revenue bonds, notes issued by states, counties, cities, and state and local governmental agencies, municipal leases, tax-exempt commercial paper and put bonds. FINANCING. The Company's Financing unit engages in three primary functions: managing the Company's matched book activities, supplying secured financing to customers, and providing funding for the Company's activities. Matched book funding involves borrowing and lending cash on a short-term basis to institutional customers collateralized by marketable securities, typically government or government agency securities. The Company enters into these agreements in various currencies and seeks to generate profits from the difference between interest earned and interest paid. The Financing unit works with the Company's institutional sales force to identify customers that have cash to invest and/or securities to pledge to meet the financing and investment objectives of the Company and its customers. Financing also coordinates with the Company's Treasury area to provide collateralized financing for a large portion of the Company's securities and other financial instruments owned. In addition to its activities on behalf of its U.S. clients and customers, the Company is a major participant in the European and Asian repurchase agreement markets, providing secured financing for the Firm's customers in those regions. FIXED INCOME DERIVATIVES. The Company offers a broad range of derivative product services in all major currencies on a 24-hour-per-day global basis. Derivatives professionals are integrated into all of the Company's fixed income areas in response to the worldwide convergence of the cash and derivative markets. FOREIGN EXCHANGE. Lehman Brothers' global foreign exchange operations provide market access and liquidity in all currencies for spot, forward and over-the-counter options markets on a 24-hour-per-day basis. Lehman Brothers offers its customers superior execution, market intelligence, analysis and hedging capabilities, utilizing foreign exchange as well as foreign exchange options and derivatives. Lehman Brothers also provides advisory services to central banks, corporations, and investors worldwide, structuring innovative products to fit their specific needs. The Firm makes extensive use of its worldwide macroeconomics research to advise clients on the appropriate strategies to minimize interest rate and currency risk. GLOBAL DISTRIBUTION Lehman Brothers' institutional sales organizations encompass distinct global sales forces that have been integrated into the Fixed Income and Equities businesses to provide investors with the full array of products and research offered by the Firm. Lehman Brothers has a strategic alliance with Fidelity Investments that provides the Firm access to Fidelity's retail brokerage customers and a distribution channel for new issue and secondary products and research to individual investors on-line. During 2000, the Firm entered into similar alliances with FINECO Online in Italy and Consors Discount-Broker in 4 Germany. Lehman Brothers also formed an alliance with ANZ Investment Bank to provide capital markets access to their institutional clients in Australia and New Zealand. EQUITY SALES. Lehman Brothers' institutional Equity sales force provides an extensive range of services to institutional investors through locations in the U.S., Europe and Asia. The Equity sales organization focuses on developing long-term relationships though a comprehensive understanding of customers' investment objectives, while providing proficient execution and consistent liquidity in a wide range of global equity securities and derivatives. FIXED INCOME SALES. Lehman Brothers' Fixed Income sales force is one of the most productive in the industry, serving the investing and liquidity needs of major institutional investors. Employing a relationship management approach that provides superior information flow and product opportunities for the Firm's customers, the Fixed Income sales organization covers the major share of the buying power in the global fixed income markets. RESEARCH EQUITY RESEARCH. The Equity Research department is integrated with the Company's investment banking, sales and trading activities. To ensure in-depth expertise within various markets, Equity Research has established regional teams on a worldwide basis that are staffed with industry and strategy specialists. The department follows more than 1,500 companies in 70 industries worldwide. FIXED INCOME RESEARCH. Fixed Income research at Lehman Brothers encompasses the full range of research disciplines: quantitative, economic, strategic, credit, relative value and market-specific analysis. Fixed Income research is integrated with the Company's investment banking, sales and trading activities. The department's specialists provide expertise in U.S., European and Asian government and agency securities, derivatives, sovereign issues, corporate securities, high yield, asset- and mortgage-backed securities, emerging market debt and municipal securities. CLIENT SERVICES Client Services includes the Company's Private Client Services group, a retail-based organization which primarily serves the investment needs of wealthy individuals, and its Private Equity Division, which manages assets through a series of private equity funds. PRIVATE CLIENT SERVICES The Company's Private Client Services group of approximately 450 professionals serves the investment needs of private investors with substantial assets as well as over 2,200 mid-sized institutional accounts worldwide. The group has a global presence, with investment representatives located in 21 offices worldwide. Among other services, investment professionals provide their clients with direct access to fixed income, equity, foreign exchange and derivative products, as well as the Firm's research and execution capabilities, thereby serving as a valuable extension of the Firm's institutional sales force. In October 2000, Lehman Brothers acquired SG Cowen's high-net-worth group of 92 investment representatives. The Firm also provides asset management services, including Investment Consulting Services, a wrap-fee series of third party managed products, management of multiple manager funds onshore and offshore and a managed futures advisory business. The Firm also has dealer agreements with a large number of mutual fund families. PRIVATE EQUITY The Company currently has over $4.5 billion in Private Equity assets under management in four areas: Merchant Banking, Venture Capital, Communications and Real Estate. The primary goal of each area is to 5 make investments that provide superior returns to investors, including institutions, high-net-worth individuals, the Firm and certain employees of the Firm. MERCHANT BANKING. Lehman Brothers' merchant banking activities include making principal investments in established companies worldwide, often in partnership with clients of the Firm, and managing these investments until they are realized. The group partners with proven operating teams which have a compelling business strategy or vision, with the aim of deriving long-term value for our investors. VENTURE CAPITAL. Lehman Brothers manages investments in venture capital via its North American and European focused venture capital funds. The primary investment objective of the Firm's venture capital activities is to make growth-oriented equity or equity-related investments in privately held companies. Specifically, the venture capital funds focus on investing in companies capable of turning innovative technology and management solutions into successful businesses. Accordingly, investment preference is not confined to particular industries, but instead is directed to any industry capable of rapid growth through the provision of innovative technology and/or services. COMMUNICATIONS. Lehman Brothers Communications Partners raised and closed an $800 million fund in 2000. The Communications Fund seeks to invest in early stage, growth-oriented communications service providers. This is the first industry-focused fund Lehman Brothers has raised, and it will leverage the expertise and contacts of Lehman Brothers' Communications/Media Investment Banking Group. REAL ESTATE. Lehman Brothers has closed on $590 million of commitments to a real estate fund as of November 30, 2000. This fund is focused on making equity investments in properties, real estate companies and related service businesses. Commitments for all of the Firm's private equity funds are raised in private placements not requiring registration under the Securities Act of 1933. TECHNOLOGY AND E-COMMERCE The Firm is committed to developing a technology platform to deliver a full range of capital markets information and services to its institutional and high-net-worth client base. The Firm-wide e-Commerce Committee, which brings together senior management from all of the Firm's global business areas, has developed the Firm's overall e-commerce strategy, approves all e-commerce investments and provides a forum to share e-commerce knowledge and new developments across the Firm's businesses and geographies. The Firm's e-commerce strategy focuses on client and markets connectivity, content and strategic ventures. During 2000, Lehman Brothers rolled out its integrated client web site, LehmanLIVE. The Firm also played a leading role in the advent of e-syndicates in the Fixed Income area, co-lead-managing the first such deal; to date over $50 billion of new issue bonds have been co-lead-managed by the Firm in this format. Lehman Brothers has made many strategic investments and is a participant in a number of institutional trading networks in the U.S., Europe and Asia. Notable investments include TradeWeb, Market Axess and Securities.Hub in Fixed Income, and TheMarkets.com in Equities. Additionally, Lehman Brothers supported the global expansion of NASDAQ with an investment in its U.S. and Japanese ventures. 6 CORPORATE The Company's Corporate division provides support to its businesses through the processing of certain securities and commodities transactions; receipt, identification and delivery of funds and securities; safeguarding of customers' securities; risk management; and compliance with regulatory and legal requirements. In addition, this staff is responsible for technology infrastructure and systems development, treasury operations, financial control and analysis, tax planning and compliance, internal audit, expense management, career development and recruiting and other support functions. RISK MANAGEMENT As a leading global investment banking company, risk is an inherent part of the Company's businesses. Global markets, by their nature, are prone to uncertainty and subject participants to a variety of risks. Lehman Brothers 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. As part of the Company's customer-flow activities, Lehman Brothers takes positions in interest rates, foreign exchange, and various securities, derivatives and commodities. Although the Company seeks to mitigate risk associated with such positions through hedging activities, consistent with its expectations of future events, it is subject to the risk that actual market events may differ from the Company's expectations, which may result in losses associated with such positions. Lehman Brothers has developed a control infrastructure to monitor and manage each type of risk on a global basis throughout the Company. A full description of the Firm's Risk Management procedures is contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Risk Management" on pages 49 - 51 of the 2000 Annual Report, and is incorporated herein by reference. COMPETITION All aspects of the Company's business are highly competitive. The Company competes in domestic and international markets directly with numerous other brokers and dealers in securities and commodities, including online internet, securities brokerage firms, investment banking firms, investment advisors and certain commercial banks and, indirectly for investment funds, with insurance companies and others. The financial services industry has become considerably more concentrated as numerous securities firms have either ceased operations or have been acquired by or merged into other firms. In addition, several small and specialized securities firms have been successful in raising significant amounts of capital for their merger and acquisition activities and merchant banking investment vehicles and for their own accounts. These developments have increased competition from other firms, many of whom have significantly greater equity capital than the Company. Recent legislative and regulatory changes in the United States allow commercial banks to enter businesses previously limited to investment banks, and several combinations between commercial banks and investment banks have occurred, which may further increase competition. REGULATION The securities industry in the United States is subject to extensive regulation under both federal and state laws. LBI and certain other subsidiaries of Holdings are registered as broker-dealers and investment advisors with the Securities and Exchange Commission (the "SEC") and as such are subject to regulation by the SEC and by self-regulatory organizations, principally the NASD and national securities exchanges such as the New York Stock Exchange, which has been designated by the SEC as LBI's primary regulator, and the Municipal Securities Rulemaking Board. Securities firms are also subject to regulation by state securities administrators in those states in which they conduct business. LBI is a registered broker-dealer in all 50 states, the District of Columbia and the Commonwealth of Puerto Rico. The SEC, self-regulatory organizations and state securities commissions may conduct administrative proceedings, which may result 7 in censure, fine, the issuance of cease-and-desist orders or suspension or expulsion of a broker-dealer or an investment advisor, its officers or employees. LBI is also registered with the Commodity Futures Trading Commission (the "CFTC") as a futures commission merchant and is subject to regulation as such by the CFTC and various domestic boards of trade and other commodity exchanges. The Company's U.S. commodity futures and options business is also regulated by the National Futures Association, a not-for-profit membership corporation which has been designated as a registered futures association by the CFTC. The Company does business in the international fixed income, equity and commodity markets and undertakes international investment banking activities, principally through its regional headquarters in London and Tokyo. The U.K. Financial Services Act of 1986 (the "Financial Services Act") governs all aspects of the United Kingdom investment business, including regulatory capital, sales and trading practices, use and safekeeping of customer funds and securities, record keeping, margin practices and procedures, registration standards for individuals, periodic reporting and settlement procedures. Pursuant to the Financial Services Act, certain subsidiaries of Holdings are subject to regulations promulgated and administered by the Financial Services Authority. Holdings' subsidiary, Lehman Brothers Japan Inc., is a licensed securities company in Japan and a member of the Tokyo Stock Exchange and the Tokyo Financial Futures Exchange and, as such, is regulated by the Financial Supervisory Agency, the Japan Securities Dealers Association and such exchanges. Lehman Brothers Bank, FSB, the Company's thrift subsidiary, is regulated by the Office of Thrift Supervision. Lehman Brothers Bankhaus A.G. is regulated by the German Federal Banking Authority. The Company believes that it is in material compliance with the regulations described herein. CAPITAL REQUIREMENTS LBI, Lehman Brothers International (Europe), the Tokyo branch of Lehman Brothers Japan Inc. and other of Holdings' subsidiaries are subject to various securities, commodities and banking regulations and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. Reference is made to Note 9 of the Notes to Consolidated Financial Statements on page 74 of the 2000 Annual Report. EMPLOYEES As of November 30, 2000, the Company employed approximately 11,300 persons, including 7,400 in North America and 3,900 internationally. The Company considers its relationship with its employees to be good. ITEM 2. PROPERTIES The Company's headquarters occupy approximately 1.1 million square feet of space at Three World Financial Center in New York, New York, which the Company occupies under a tenancy-in-common arrangement with American Express Company and various American Express Company subsidiaries. Approximately 78,000 square feet of the Company's space at Three World Financial Center has been subleased to a third-party tenant. The Company's headquarters also include leased space at One World Financial Center and at One World Trade Center in New York. Located in the same office complex as Three World Financial Center, the One World Financial Center space will ultimately consist of approximately 700,000 square feet, of which the Company currently occupies 100,000 square feet. Approximately 90,000 square feet will be occupied during 2001, and 510,000 square feet will be occupied in stages beginning in 2004. The lease terms at One World Financial Center expire at various dates from December 2015 through 2024, with the exception of a lease for 140,000 square feet, which expires in 2006. The space at One World Trade Center consists of approximately 115,000 square feet with a lease expiration date in 2015. 8 The Company leases approximately 400,000 square feet at 101 Hudson Street in Jersey City, New Jersey (the "Operations Center"), of which approximately 67,000 square feet has been subleased to a third-party tenant. The Operations Center is used by systems, operations, and certain administrative personnel. The lease term expires in 2011. The Company's European headquarters occupy approximately 450,000 square feet of leased office space in the Broadgate complex and nearby vicinity in London, England, of which approximately 40,000 square feet has been subleased to a third-party tenant. The London leases expire at various dates from 2013 through 2017. The Company expects to relocate its European headquarters in late 2003 to approximately 1,000,000 square feet of leased office space under construction in the Canary Wharf development in London. The Company's Asian headquarters occupy approximately 82,000 square feet of leased office space in the ARK Mori Building in central Tokyo, Japan. The Tokyo lease expires at various dates from September 2001 through August 2002. Facilities occupied by the Company and its subsidiaries are believed to be adequate for the purposes for which they are currently used and are well maintained. ITEM 3. LEGAL PROCEEDINGS The Company is involved in a number of judicial, regulatory and arbitration proceedings concerning matters arising in connection with the conduct of its business. Such proceedings include actions brought against the Company and others with respect to transactions in which the Company acted as an underwriter or financial advisor, actions arising out of the Company's activities as a broker or dealer in securities and commodities and actions brought on behalf of various classes of claimants against many securities and commodities firms, 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. ACTIONS RELATING TO THE SALES AND MARKETING OF LIMITED PARTNERSHIPS Under the terms of an agreement between American Express and Holdings, American Express has agreed to indemnify Holdings for liabilities which it may incur in connection with any action relating to any business conducted by The Balcor Company, a former Holdings subsidiary ("Balcor"), in which Holdings is named as a parent company or control person of Balcor. Holdings believes that the allegations in the action described below are covered by this indemnity. BRUSS, ET AL. V. LEHMAN BROTHERS INC., ET AL. On January 25, 1999, a purported class action complaint was filed in the Superior Court of New Jersey, Law Division: Essex County, on behalf of investors in certain specified limited partnerships sponsored by Balcor and sold by various entities, including, among others, retail branches formerly owned by LBI and certain of its affiliates. After dismissal of Plaintiffs' original complaint in September, 1999, Plaintiffs filed an amended complaint on November 30, 1999. That complaint names as defendants LBI, various affiliates of LBI, Smith Barney Holdings, Inc., Balcor, a number of Balcor-originated limited partnerships and an individual and entities affiliated with Balcor. The complaint alleges claims in connection with the marketing, sale and operation of the limited partnerships for common law fraud and deceit, equitable fraud, negligent misrepresentation, and violation of certain New Jersey statutes relating to the sale of securities. The complaint seeks compensatory damages for lost principal and interest, general damages and punitive damages, and costs and attorneys' fees. LBI has moved to dismiss the amended complaint. 9 LEHMAN BROTHERS COMMERCIAL CORPORATION AND LEHMAN BROTHERS SPECIAL FINANCING INC. V. MINMETALS INTERNATIONAL NON-FERROUS METALS TRADING COMPANY On November 15, 1994, two Lehman Brothers subsidiaries, Lehman Brothers Commercial Corporation ("LBCC") and Lehman Brothers Special Financing Inc. ("LBSF"), commenced an action against Minmetals International Non-Ferrous Metals Trading Company ("Minmetals") and China National Metals and Minerals Import and Export Company ("CNM") in the United States District Court for the Southern District of New York alleging breach of contract against Minmetals and breach of guarantee against CNM. The litigation arose from the refusal by Minmetals and CNM to honor their obligations with respect to certain foreign exchange and swap transactions. LBCC and LBSF seek to recover approximately $52.5 million from Minmetals and/or CNM. Minmetals filed counterclaims against Lehman entities based on violations of federal securities and commodities laws and rules, and theories of fraud, breach of fiduciary duty and conversion. Discovery is complete; no trial date has been set. AIA HOLDING SA ET AL. V. LEHMAN BROTHERS INC. AND BEAR STEARNS & CO., INC. On July 9, 1997, LBI was served with a complaint in the United States District Court for the Southern District of New York in which 277 named plaintiffs assert 24 causes of action against LBI and Bear Stearns & Co., Inc. The amount of damages claimed is unspecified. The claims arise from the activities of an individual named Ahmad Daouk, who was employed by an introducing broker which introduced accounts to LBI between 1988 and 1992. Daouk allegedly perpetrated a fraud upon the claimants, who are mostly investors of Middle Eastern origin, and the complaint alleges that LBI breached various contractual and common law duties owed to the investors. On March 27, 1998, the District Court dismissed without prejudice 18 of the 24 counts pleaded in the complaint. On July 3, 1998, the plaintiffs served their First Amended Complaint containing 18 causes of action against LBI and/or Bear Stearns. The Court has ordered the plaintiffs divided into 14 groups of 20 for trial purposes. No trial date has been set. MCNAMARA ET AL. V. BRE-X MINERALS LTD. ET AL. On July 25, 1997, an Amended Class Action Complaint was filed in the United States District Court for the Eastern District of Texas against 16 defendants, including LBI, which seeks unspecified compensatory damages, interest, costs and attorneys' fees on behalf of purchasers of Bre-X common stock and/or Bresea common stock. The Complaint raises claims under the federal securities laws and the common law of fraud and negligent misrepresentation. The Complaint's stated basis for naming LBI is that one of its securities analysts published research on Bre-X. On January 6, 1999, the Court dismissed the claims of Canadian plaintiffs who bought their shares on Canadian exchanges. On July 13, 1999, the District Court dismissed the case against LBI and certain other defendants. The plaintiffs filed a Third Amended Complaint, and then a Fourth Amended Complaint, which was filed on June 14, 2000. A motion to dismiss that Complaint is pending. HAROLD GILLET, ET AL. V. GOLDMAN SACHS & CO., ET AL.; YAKOV PRAGER, ET AL. V. GOLDMAN, SACHS & CO., ET AL.; DAVID HOLZMAN, ET AL. V. GOLDMAN, SACHS & CO., ET AL. Beginning in November 1998, three class actions were filed in the United States District Court for the Southern District of New York against in excess of 25 underwriters of initial public offering ("IPO") securities, including LBI. Plaintiffs, alleged purchasers of securities issued in certain IPOs, seek compensatory and injunctive relief for alleged violations of the antitrust laws based on the theory that the defendants fixed and maintained fees for underwriting certain IPO securities at supra-competitive levels. On March 15, 1999, plaintiffs filed a Consolidated Amended Complaint. On April 29, 1999, LBI and the other defendants moved to dismiss the Consolidated Amended Complaint. By order dated November 17, 1999, a fourth purported class action, also brought on behalf of purchasers, was consolidated with the existing actions. By memorandum and order dated February 9, 2001 (the "Order"), the Court granted defendants' motion to dismiss the Consolidated Amended Complaint and denied plaintiffs' request for leave to file a 10 Second Amended Complaint. In the Order, the Court concluded that the purchaser plaintiffs lacked standing under the antitrust laws to assert the claims. The Court indicated in the Order that its decision did not apply to any claims brought on behalf of issuers of IPO securities. On October 13, 2000, a related case was filed in the United States District Court for the Southern District of New York by a bankrupt issuer of IPO securities. That case, WEINMAN V. SALOMON SMITH BARNEY, ET AL., does not name LBI as a defendant. However, another related case, entitled CHS ELECTRONICS, INC. V. CREDIT SUISSE FIRST BOSTON CORP., ET AL., was transferred to the Southern District of New York from the United States District Court for the Southern District of Florida by order dated December 20, 2000. The CHS ELECTRONICS case (discussed below) is brought by a bankrupt issuer of securities and names LBI, among others, as a defendant. The Order did not dispose of the CHS ELECTRONICS or WEINMAN cases, which are still pending. CHS ELECTRONICS, INC. V. CREDIT SUISSE FIRST BOSTON CORP., ET AL. On August 3, 2000, a class action was filed in the United States District Court for the Southern District of Florida against 18 underwriters of IPO securities, including LBI. Plaintiff, a bankrupt issuer of IPO securities, seeks the same relief, based on the same theories, as in the GILLET case above. With consent of the parties, the case was transferred, by order dated January 4, 2001, to the United States District Court for the Southern District of New York. By order dated January 12, 2001, the case was consolidated with the GILLET case. MEXPO, S.A. V. LEHMAN BROTHERS INC., ET AL. In August 1999, Mexpo, S.A. filed an arbitration claim with the National Association of Securities Dealers, naming as respondents LBI, Lehman Brothers International (Europe), Lehman Brothers Securities, Holdings, and Lehman Brothers Global Finance Limited. Mexpo alleges that respondents engaged in unauthorized transactions, made unsuitable recommendations, failed to follow client instructions and engaged in deceptive conduct in connection with Mexpo's trading in emerging markets bonds, structured notes and other securities. The legal claims asserted by Mexpo include various common law contractual and tort claims as well as alleged violations of federal securities and commodities laws. Mexpo seeks $28 million in compensatory damages, plus punitive damages, interest, attorneys' fees and costs. A hearing is scheduled to start in May 2001. ISLAND VENTURE CORPORATION, ET AL. V. LEHMAN BROTHERS INC. AND LEHMAN BROTHERS SECURITIES ASIA, LTD. On February 9, 2001, Island Venture Corporation, Continental Resources Corporation, Recola Investment Corporation, Grand Concord Corporation and Goodwell Industrial Corporation filed a First Amended Complaint in the United States District Court for the District of New Jersey against LBI and Lehman Brothers Securities Asia, Ltd. The complaint arises in connection with the plaintiffs' purchase of various promissory notes issued by Indonesian companies in 1997 and upon which the issuers have defaulted. It also asserts claims relating to an alleged unauthorized liquidation for $8.5 million of a $10 million Asia Investment Grade Default Note ("Basket Note") issued by Lehman Brothers Holdings PLC. The complaint seeks rescission and damages under various common law theories of mutual mistake, breach of contract, breach of fiduciary duty, negligence, negligent misrepresentation and constructive fraud, as well as asserting claims under Section 10(b) of the Securities Exchange Act of 1934. The plaintiffs seek to recover damages of approximately $60 million on all the notes they purchased and the difference between the liquidation price and the face value of the Basket Note plus lost coupon payments. The plaintiffs served the complaint on LBI on February 22, 2001, but have not yet served Lehman Brothers Securities Asia, Ltd. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The approximate number of holders of record of the Registrant's Common Stock was 22,580 at February 12, 2001. Information concerning the market for the Registrant's common equity and related stockholder matters is set forth on page 96 of the 2000 Annual Report and is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA Selected financial data contained on page 88 of the 2000 Annual Report is deemed a part of this Annual Report on Form 10-K and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations is set forth under the same caption on pages 37 - 52 of the 2000 Annual Report. Such information is incorporated herein by reference and should be read in conjunction with the Consolidated Financial Statements and the Notes thereto contained on pages 54 - 87 of the 2000 Annual Report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations--Risk Management" on pages 49 - 51 of the 2000 Annual Report is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements of the Registrant and its Subsidiaries together with the Notes thereto and the Report of Independent Auditors thereon required by this Item are contained in the 2000 Annual Report on pages 53 - 87 and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 12 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information relating to Directors of the Registrant is set forth under the captions "Nominees for Election as Class II Directors to Serve until the 2004 Annual Meeting of Stockholders", "Class I Directors Whose Terms Continue until the 2002 Annual Meeting of Stockholders" and "Class III Directors Whose Terms Continue until the 2003 Annual Meeting of Stockholders" on pages 4-6 of the Proxy Statement and information relating to Executive Officers of the Registrant is set forth under the caption "Executive Officers of the Company" on pages 9 and 10 of the Proxy Statement and is hereby incorporated by reference. ITEM 11. EXECUTIVE COMPENSATION Information relating to executive compensation is set forth under the captions "Compensation of Directors", "Compensation and Benefits Committee Interlocks and Insider Participation", "Compensation of Executive Officers", "Pension Benefits" and "Employment Contracts, Termination of Employment and Change of Control Arrangements" on pages 8, 13 and 14-18 of the Proxy Statement and is hereby incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information relating to security ownership of certain beneficial owners and management is set forth under the caption "Security Ownership of Principal Stockholders" on page 3 of the Proxy Statement and the caption "Security Ownership of Directors and Executive Officers" on page 11 of the Proxy Statement and is hereby incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information relating to certain relationships and related transactions is set forth under the captions "Certain Transactions and Agreements with Directors and Executive Officers", "Certain Transactions and Agreements with American Express and Subsidiaries" and "Certain Transactions with Other Institutional Investors and Their Subsidiaries" on pages 19-21 of the Proxy Statement and is hereby incorporated herein by reference. 13 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements: The Financial Statements and the Notes thereto and the Report of Independent Auditors thereon and filed as a part hereof are listed on page F-1 hereof by reference to the corresponding page number in the Annual Report. 2. Financial Statement Schedules: The financial statement schedule and the notes thereto filed as a part hereof are listed on page F-1 hereof. 3. Exhibits:
EXHIBIT NO. - ----------------------- 3.1 Restated Certificate of Incorporation of the Registrant dated May 27, 1994 (incorporated by reference to Exhibit 3.1 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 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) 4.1 Standard multiple series indenture provisions with respect to the senior and subordinated debt securities (incorporated by reference to Exhibit 4(a) to Post-Effective Amendment No. 1 to the Registrant's Registration Statement on Form S-3 (Reg. No. 33-16141)) 4.2 Indenture with respect to the senior debt securities (incorporated by reference to Exhibit 4(b) to Post-Effective Amendment No. 1 to the Registrant's Registration Statement on Form S-3 (Reg. No. 33-16141)) 4.3 First Supplemental Indenture with respect to the senior debt securities (incorporated by reference to Exhibit 4(m) to the Registrant's Registration Statement on Form S-3 (Reg. No. 33-25797)) 4.4 Second Supplemental Indenture with respect to the senior debt securities (incorporated by reference to Exhibit 4(e) to the Registrant's Registration Statement on Form S-3 (Reg. No. 33-49062)) 4.5 Third Supplemental Indenture with respect to the senior debt securities (incorporated by reference to Exhibit 4(f) to the Registrant's Registration Statement on Form S-3 (Reg. No. 33-46146)) 4.6 Fourth Supplemental Indenture with respect to the senior debt securities (incorporated by reference to Exhibit 4(f) to Registrant's Registration Statement on Form 8-A filed with the SEC on October 7, 1993)
14
EXHIBIT NO. - ----------------------- 4.7 Fifth Supplemental Indenture with respect to the senior debt securities (incorporated by reference to Exhibit 4(h) to Post-Effective Amendment No. 1 to the Registrant's Registration Statement on Form S-3 (Reg. No. 33-56615)) 4.8 Sixth Supplemental Indenture with respect to the senior debt securities (incorporated by reference to Exhibit 4(h) to the Registrant's Registration Statement on Form S-3 (No. 333-38227)) 4.9 The other instruments defining the rights of holders of the long-term debt securities of the Registrant and its subsidiaries are omitted pursuant to section (b)(4)(iii)(A) of Item 601 of Regulation S-K. The Registrant hereby agrees to furnish copies of these instruments to the Securities and Exchange Commission upon request. 10.1 Agreement of Tenants-In-Common by and among American Express Company, American Express Bank Ltd., American Express Travel Related Services Company, Inc., Shearson Lehman Brothers Inc., Shearson Lehman Government Securities, Inc. and Shearson Lehman Commercial Paper Incorporated (incorporated by reference to Exhibit 10.1 to the Registrant's Transition Report on Form 10-K for the eleven months ended November 30, 1994) 10.2 Tax Allocation Agreement between Shearson Lehman Brothers Holdings Inc. and American Express Company (incorporated by reference to Exhibit 10.2 to the Registrant's Transition Report on Form 10-K for the eleven months ended November 30, 1994) 10.3+ Lehman Brothers Inc. Executive and Select Employees Plan (incorporated by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-1 (Reg. No. 33-12976)) 10.4+ Lehman Brothers Holdings Inc. Deferred Compensation Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.11 to the Registrant's Registration Statement on Form S-1 (Reg. No. 33-12976)) 10.5 Amended and Restated Agreements of Limited Partnership of Shearson Lehman Hutton Capital Partners II (incorporated by reference to Exhibit 10.48 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988) 10.6+ Lehman Brothers Holdings Inc. 1994 Management Ownership Plan (incorporated by reference to Exhibit 10.25 to the Registrant's Registration Statement on Form S-1 (Reg. No. 33-52977)) 10.7+ Lehman Brothers Holdings Inc. 1996 Management Ownership Plan (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended August 31, 1996) 10.8+ Lehman Brothers Holdings Inc. Short-Term Executive Compensation Plan (incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended August 31, 1996) 10.9+ Lehman Brothers Holdings Inc. 1996 Short-Term Executive Compensation Plan (incorporated by reference to Exhibit 10.26 to the Registrant's Registration Statement on Form S-1 (Reg. No. 33-52977)) 10.10 Option Agreement, dated May 27, 1994, by and among American Express Company, American Express Bank Ltd., American Express Travel Related Services Company, Inc., Lehman Brothers Inc., Lehman Government Securities, Inc. and Lehman Commercial Paper Incorporated (incorporated by reference to Exhibit 10.31 to the Registrant's Transition Report Form 10-K for the Eleven Months ended November 30, 1994) 10.11+ Lehman Brothers Holdings Inc. Cash Award Plan. (incorporated by reference to Exhibit 10.36 to the Registrant's Transition Report on Form 10-K for the Eleven Months ended November 30, 1994)
15
EXHIBIT NO. - ----------------------- 10.12 Amended and Restated Agreement of Limited Partnership of Lehman Brothers Capital Partners III, L.P. (incorporated by reference to Exhibit 10.27 to the Registrant's Annual Report on Form 10-K for the fiscal year ended November 30, 1995) 10.13 Agreement of Limited Partnership of Lehman Brothers Capital Partners IV, L.P. (incorporated by reference to Exhibit 10.30 to the Registrant's Annual Report on Form 10-K for the fiscal year ended November 30, 1997) 10.14 A description of the Lehman Brothers Supplemental Executive Retirement Plan is contained under the caption "Pension Benefits" on page 17 of the Proxy Statement and is incorporated herein by reference. 12 Computation in support of ratio of earnings to fixed charges, combined fixed charges and preferred dividends* 13 The following portions of the Company's 2000 Annual Report to Stockholders, which are incorporated by reference herein: "Management's Discussion and Analysis of Financial Condition and Results of Operations", pages 37 - 52;* "Consolidated Financial Statements", pages 53 - 87;* "Selected Financial Data", page 88;* and "Other Stockholder Information", page 96.* 21 List of the Registrant's Subsidiaries* 23 Consent of Ernst & Young LLP* 24 Powers of Attorney*
- ------------------------ * Filed herewith + Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) (b) Reports on Form 8-K 1. Form 8-K dated September 20, 2000, Item 7 2. Form 8-K dated September 20, 2000, Items 5 and 7 Financial Statements: Exhibit 99.2 Consolidated Statement of Income (Three Months Ended August 31, 2000) (Preliminary and Unaudited) Exhibit 99.3 Consolidated Statement of Income (Nine Months Ended August 31, 2000) (Preliminary and Unaudited) Exhibit 99.4 Segment Net Revenue Information (Three and Nine Months Ended August 31, 2000) (Preliminary and Unaudited) Exhibit 99.5 Selected Statistical Information (Preliminary and Unaudited) 3. Form 8-K dated November 14, 2000, Item 7 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. LEHMAN BROTHERS HOLDINGS INC. (Registrant) February 28, 2001 By: /s/ JEFFREY A. WELIKSON ----------------------------------------- Jeffrey A. Welikson VICE PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE ---------- ----- ---- /s/ RICHARD S. FULD, JR. Chief Executive Officer and Chairman of ------------------------------- the Board of Directors February 28, 2001 Richard S. Fuld, Jr. (principal executive officer) Chief Financial Officer and Senior /s/ DAVID GOLDFARB Vice President ------------------------------- (principal financial and accounting February 28, 2001 David Goldfarb officer) /s/ MICHAEL L. AINSLIE ------------------------------- Director February 28, 2001 Michael L. Ainslie /s/ JOHN F. AKERS ------------------------------- Director February 28, 2001 John F. Akers /s/ ROGER S. BERLIND ------------------------------- Director February 28, 2001 Roger S. Berlind /s/ THOMAS H. CRUIKSHANK ------------------------------- Director February 28, 2001 Thomas H. Cruikshank /s/ HENRY KAUFMAN ------------------------------- Director February 28, 2001 Henry Kaufman /s/ JOHN D. MACOMBER ------------------------------- Director February 28, 2001 John D. Macomber /s/ DINA MERRILL ------------------------------- Director February 28, 2001 Dina Merrill
*By: -------------------------- Jeffrey A. Welikson FEBRUARY 28, 2001 (ATTORNEY-IN-FACT)
17 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
PAGE ------------------------- FORM 10-K ANNUAL REPORT --------- ------------- FINANCIAL STATEMENTS Report of Independent Auditors.............................. 53 Consolidated Statement of Income for the Twelve Months Ended 54 November 30, 2000, 1999, and 1998......................... Consolidated Statement of Financial Condition at November 55 - 56 30, 2000 and 1999.................................................. Consolidated Statement of Changes in Stockholders' Equity 57 - 58 for the Twelve Months Ended November 30, 2000, 1999, and 1998..... Consolidated Statement of Cash Flows for the Twelve Months 59 Ended November 30, 2000, 1999, and 1998................... Notes to Consolidated Financial Statements.................. 61 - 87 FINANCIAL STATEMENT SCHEDULE Schedule I--Condensed Financial Information of Registrant... F-2
F-1 SCHEDULE I LEHMAN BROTHERS HOLDINGS INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT OF OPERATIONS (PARENT COMPANY ONLY) (IN MILLIONS)
TWELVE MONTHS ENDED NOVEMBER 30 ------------------------------ 2000 1999 1998 -------- -------- -------- Revenues Interest and dividends.................................... $2,667 $2,218 $2,254 Principal transactions and other.......................... 247 (128) (114) ------ ------ ------ Total revenues.......................................... 2,914 2,090 2,140 Interest expense.......................................... 2,813 2,200 2,252 ------ ------ ------ Net revenues............................................ 101 (110) (112) Equity in net income of subsidiaries........................ 1,894 1,418 942 Non-interest expenses....................................... 455 350 270 ------ ------ ------ Income before taxes......................................... 1,540 958 560 Benefit for income taxes.................................. 235 174 176 ------ ------ ------ Net income.................................................. $1,775 $1,132 $ 736 ====== ====== ====== Net income applicable to common stock....................... $1,679 $1,037 $ 649 ====== ====== ======
See notes to condensed financial information of Registrant. F-2 SCHEDULE I LEHMAN BROTHERS HOLDINGS INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEET (PARENT COMPANY ONLY) (IN MILLIONS, EXCEPT FOR PER SHARE DATA)
NOVEMBER 30 ------------------- 2000 1999 -------- -------- ASSETS Cash and cash equivalents................................... $ 450 $ 1,481 Securities and other financial instruments owned............ 7,512 8,569 Securities purchased under agreements to resell............. 16,113 8,434 Equity in net assets of subsidiaries........................ 7,577 6,417 Accounts receivable and accrued interest.................... 828 599 Due from subsidiaries....................................... 23,708 17,978 Other assets................................................ 1,796 1,612 ------- ------- Total assets............................................ $57,984 $45,090 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Commercial paper and short-term debt........................ $ 4,168 $ 2,580 Securities and other financial instruments sold but not yet purchased................................................. 244 220 Securities sold under agreements to repurchase.............. 7,316 8,093 Accrued liabilities, due to subsidiaries and other payables.................................................. 9,882 9,042 Senior notes................................................ 27,511 17,940 Subordinated indebtedness................................... 932 932 ------- ------- Total liabilities....................................... 50,053 38,807 ------- ------- Commitments and Contingencies Preferred securities subject to mandatory redemption........ 150 Stockholders' equity: Preferred stock........................................... 700 688 Common stock, $0.10 par value; 300,000,000 shares authorized; Shares issued: 251,629,126 in 2000 and 245,238,920 in 1999; Shares outstanding: 236,395,332 in 2000 and 239,825,620 in 1999............................ 25 25 Additional paid-in capital................................ 3,589 3,374 Accumulated other comprehensive income (net of tax)....... (8) (2) Retained earnings......................................... 3,713 2,094 Other stockholders' equity, net........................... 597 254 Common stock in treasury, at cost: 15,233,794 shares in 2000 and 5,413,300 shares in 1999....................... (835) (150) ------- ------- Total stockholders' equity.............................. 7,781 6,283 ------- ------- Total liabilities and stockholders' equity.............. $57,984 $45,090 ======= =======
See notes to condensed financial information of Registrant. F-3 SCHEDULE I LEHMAN BROTHERS HOLDINGS INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT OF CASH FLOWS (PARENT COMPANY ONLY) (IN MILLIONS)
TWELVE MONTHS ENDED NOVEMBER 30 --------------------------------- 2000 1999 1998 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income.................................................. $ 1,775 $ 1,132 $ 736 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in net income of subsidiaries...................... (2,031) (1,203) (942) Dividends received........................................ 634 145 118 Compensation payable in common stock...................... 520 363 221 Other adjustments......................................... (746) 29 178 Net change in: Securities and other financial instruments owned.......... 1,057 1,992 (1,810) Accounts receivable and accrued interest, due from subsidiaries and other assets........................... 2,734 4,580 (6,261) Securities and other financial instruments sold but not yet purchased........................................... 24 139 (41) Accrued liabilities, due to subsidiaries and other payables................................................ 840 4,324 2,978 ------- -------- ------- Net cash provided by (used in) operating activities..... 4,807 11,501 (4,823) ------- -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of senior notes...................... 10,020 5,843 8,298 Principal payments of senior notes.......................... (6,629) (4,680) (3,101) Proceeds from issuance of subordinated indebtedness......... 732 Payments for commercial paper and short-term debt, net...... 81 (1,016) (876) Resale agreements net of repurchase agreements.............. (8,456) (11,259) 2,160 Payments for repurchase of preferred stock.................. (88) (220) (50) Payments for treasury stock purchases....................... (1,203) (256) (411) Dividends paid.............................................. (149) (139) (122) Issuances of common stock................................... 99 8 61 Issuances of preferred stock................................ 250 444 ------- -------- ------- Net cash provided by (used in) financing activities..... (6,075) (10,987) 6,403 ------- -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Equity in net assets of subsidiaries........................ (7) (280) (451) Capital distributions received.............................. 244 95 23 ------- -------- ------- Net cash provided by (used in) investing activities..... 237 (185) (428) ------- -------- ------- Net change in cash and cash equivalents................. (1,031) 329 1,152 Cash and cash equivalents, beginning of period.............. 1,481 1,152 ------- -------- ------- Cash and cash equivalents, end of period................ $ 450 $ 1,481 $ 1,152 ======= ======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN MILLIONS) Interest paid totaled $2,151 in 2000, $2,177 in 1999 and $2,121 in 1998. Income taxes received totaled $418 in 2000, $332 in 1999 and $91 in 1998. NON-CASH INVESTING AND FINANCING ACTIVITIES (IN MILLIONS) Assets assumed from affiliate............................... $8,185 Liabilities assumed from affiliate.......................... 8,836
See notes to condensed financial information of Registrant. F-4 SCHEDULE I NOTE 1. BASIS OF PRESENTATION The condensed financial statements of Lehman Brothers Holdings Inc. ("Holdings") should be read in conjunction with the consolidated financial statements of Lehman Brothers Holdings Inc. and subsidiaries and the notes thereto. Certain amounts reflect reclassifications to conform to the current period's presentation. NOTE 2. LONG-TERM DEBT
U.S. DOLLAR NON-U.S. DOLLAR NOVEMBER 30 ------------------- ------------------- ------------------- FIXED FLOATING FIXED FLOATING (IN MILLIONS) RATE RATE RATE RATE 2000 1999 - ------------- -------- -------- -------- -------- -------- -------- SENIOR NOTES Maturing in Fiscal 2000......................... $ 4,929 Maturing in Fiscal 2001......................... $ 1,336 $2,469 $ 304 $ 285 $ 4,394 2,201 Maturing in Fiscal 2002......................... 1,665 2,483 392 647 5,186 2,560 Maturing in Fiscal 2003......................... 2,265 1,501 626 418 4,810 2,709 Maturing in Fiscal 2004......................... 1,670 388 773 515 3,346 1,899 Maturing in Fiscal 2005......................... 2,217 515 120 669 3,521 227 December 1, 2005 and thereafter................. 5,519 46 558 131 6,254 3,415 ------- ------ ------ ------ ------- ------- Senior Notes.................................. 14,672 7,402 2,773 2,665 27,511 17,940 ------- ------ ------ ------ ------- ------- Subordinated Indebtedness December 1, 2005 and thereafter................. 932 932 932 ------- ------ ------ ------ ------- ------- LONG-TERM DEBT.................................. $15,604 $7,402 $2,773 $2,665 $28,443 $18,872 ======= ====== ====== ====== ======= =======
Of the Company's long-term debt outstanding as of November 30, 2000, $454 million is repayable prior to maturity at the option of the holder, at par value. These obligations are reflected in the above table at their put dates, which range from fiscal 2001 to fiscal 2002, rather than at their contractual maturities, which range from fiscal 2004 to fiscal 2015. In addition, $2,292 million of the Company's long-term debt is redeemable prior to maturity at the option of the Company under various terms and conditions. These obligations are reflected in the above table at their contractual maturity dates. As of November 30, 2000, the Company's U.S. dollar debt portfolio included approximately $677 million of debt for which the interest rates and/or redemption values have been linked to various indices including industry baskets of stocks or commodities. Generally, such rates are issued as floating rate notes or the interest rates on such index notes are effectively converted to floating rates based primarily on LIBOR through the use of interest rate and currency swaps. At November 30, 2000, Subordinated Indebtedness includes $710 million, which has been classified as "Preferred Securities subject to Mandatory Redemption" on the Company's Consolidated Statement of Financial Condition. END USER DERIVATIVE ACTIVITIES The Company utilizes a variety of derivative products including interest rate and currency swaps, and swaptions as an end user to modify the interest rate characteristics of its long-term debt portfolio. The Company actively manages the interest rate exposure on its long-term debt portfolio to more closely match the terms of its debt portfolio to the assets being funded and to minimize interest rate risk. In addition, the Company utilizes cross-currency swaps to hedge its exposure to foreign currency risk as a result of its non-U.S. dollar debt obligations, after consideration of non-U.S. dollar assets which are funded with long-term debt obligations in the same currency. In certain instances, two or more derivative contracts may F-5 be utilized by the Company to manage the interest rate nature and/or currency exposure of an individual long-term debt issuance. In these cases, the notional value of the derivative contracts may exceed the carrying value of the related long-term debt issuance. At November 30, 2000 and November 30, 1999, the notional values of the Company's interest rate and currency swaps related to its long-term debt obligations were approximately $21.2 billion and $16.4 billion, respectively. In terms of notional amounts outstanding, these derivative products mature as follows:
NOVEMBER 30 U.S. NON-U.S. CROSS ------------------- (IN MILLIONS) DOLLAR DOLLAR CURRENCY 2000 1999 - ------------- -------- -------- -------- -------- -------- Maturing in Fiscal 2000......................... $ 4,616 Maturing in Fiscal 2001......................... $ 1,958 $ 61 $ 500 $ 2,519 1,779 Maturing in Fiscal 2002......................... 2,621 404 422 3,447 1,934 Maturing in Fiscal 2003......................... 2,773 692 54 3,519 2,634 Maturing in Fiscal 2004......................... 1,741 62 765 2,568 1,947 Maturing in Fiscal 2005......................... 2,222 90 698 3,010 217 December 1, 2005 and thereafter................. 5,440 192 552 6,184 3,268 ------- ------ ------ ------- ------- Total........................................... $16,755 $1,501 $2,991 $21,247 $16,395 ======= ====== ====== ======= ======= Weighted-average rate(1) Receive rate.................................... 7.27% 3.34% 5.20% 6.72% 6.71% Pay rate........................................ 7.48% 4.03% 7.48% 7.26% 6.36%
- ------------------------ (1) Weighted-average interest rates were calculated utilizing non-U.S. dollar interest rates, where applicable. F-6 The Company's end user derivative activities resulted in the following changes to the Company's mix of fixed and floating rate debt and effective weighted-average rates of interest:
NOVEMBER 30, 2000 ------------------------------------------------------ LONG-TERM DEBT WEIGHTED-AVERAGE(1) ----------------------- ---------------------------- BEFORE AFTER EFFECTIVE RATE END END CONTRACTUAL AFTER END USER USER INTEREST USER ACTIVITIES ACTIVITIES RATE ACTIVITIES ---------- ---------- ----------- -------------- USD Obligations Fixed Rate......................... $15,604 $ 1,104 Floating Rate...................... 7,402 24,964 ------- ------- 23,066 26,068 Non-USD Obligations................ 5,437 2,375 ------- ------- ---- ---- Total.............................. $28,443 $28,443 6.83% 7.23% ======= ======= ==== ====
NOVEMBER 30, 1999 ------------------------------------------------------ LONG-TERM DEBT WEIGHTED-AVERAGE(1) ----------------------- ---------------------------- BEFORE AFTER EFFECTIVE RATE END END CONTRACTUAL AFTER END USER USER INTEREST USER ACTIVITIES ACTIVITIES RATE ACTIVITIES ---------- ---------- ----------- -------------- USD Obligations Fixed Rate......................... $14,341 $ 1,102 Floating Rate...................... 4,107 17,765 ------- ------- 18,448 18,867 Non-USD Obligations................ 424 5 ------- ------- ---- ---- Total.............................. $18,872 $18,872 6.85% 6.52% ======= ======= ==== ====
- ------------------------ (1) Weighted-average interest rates were calculated utilizing non-US dollar interest rates, where applicable. NOTE 3. DIVIDENDS Dividends and capital distributions declared to Holdings by its subsidiaries and affiliates were $878 million in 2000, $240 million in 1999 and $141 million in 1998. NOTE 4. COMMITMENTS AND CONTINGENCIES The Company has guaranteed certain of its subsidiaries' unsecured lines of credit and other contractual obligations. F-7 EX-12 2 a2039885zex-12.txt EXHIBIT 12 EXHIBIT 12 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (DOLLARS IN MILLIONS) (UNAUDITED)
FOR THE TWELVE MONTHS ENDED NOVEMBER 30 ---------------------------------------------------- 1996 1997 1998 1999 2000 -------- -------- -------- -------- -------- Pre-tax earnings from continuing operations........... $ 637 $ 937 $ 1,052 $ 1,631 $ 2,579 Add: Fixed charges (excluding capitalized interest)... 10,852 13,043 15,813 13,681 18,778 ------- ------- ------- ------- ------- Pre-tax earnings before fixed charges................. 11,489 13,980 16,865 15,312 21,357 ======= ======= ======= ======= ======= Fixed charges: Interest............................................ 10,816 13,010 15,781 13,649 18,740 Other(a)............................................ 50 41 47 71 57 ------- ------- ------- ------- ------- Total fixed charges................................. 10,866 13,051 15,828 13,720 18,797 ------- ------- ------- ------- ------- Preferred stock dividend requirements................. 58 109 124 174 195 ------- ------- ------- ------- ------- Total combined fixed charges and preferred stock dividends........................................... $10,924 $13,160 $15,952 $13,894 $18,992 ======= ======= ======= ======= ======= RATIO OF EARNINGS TO FIXED CHARGES.................... 1.06 1.07 1.07 1.12 1.14 RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS........................... 1.05 1.06 1.06 1.10 1.12
- ------------------------ (a) Other fixed charges consist of the interest factor in rentals and capitalized interest. EX-13 3 a2039885zex-13.txt EXHIBIT 13
TABLE OF CONTENTS Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Summary--Fiscal 2000 37 Business Environment 37 Results of Operations 39 Geographic Diversification 42 Non-Interest Expenses 43 Income Taxes 43 Liquidity, Funding and Capital Resources 43 Managing Liquidity, Funding and Capital Resources 45 Total Capital 45 Back-Up Credit Facilities 46 Balance Sheet 46 Financial Leverage 46 Credit Ratings 47 High Yield Securities 47 Private Equity 47 Off-Balance Sheet Financial Instruments and Derivatives 47 Overview 47 Lehman Brothers' Use of Derivative Instruments 48 Risk Management 49 Credit Risk 49 Market Risk 49 Value-at-Risk 50 New Accounting Developments 51 Effects of Inflation 52 Report of Independent Auditors 53 Consolidated Financial Statements 54 Notes to Consolidated Financial Statements 61 Selected Financial Data 88
36 MD&A FINANCIAL SUMMARY--FISCAL 2000 o Net revenue growth of 44% o Net income increased 57% o Pretax margin of 33.5% o ROE of 27.4%(1) (1) Before redeemable preferred dividend For 2000, Lehman Brothers Holdings Inc. ("Holdings") and subsidiaries (collectively, the "Company" or "Lehman Brothers") reported its 6th consecutive year of record financial performance. Net income of $1,775 million increased 57% over 1999 while earnings per share of $6.38 grew approximately 56% over last year. These results reflect the continued successful execution of the Company's strategy to grow its high margin investment banking and equities businesses; increase its presence in certain businesses in Europe; and, at the same time, maintain a strict discipline with regard to its expenses and risk management. Net revenues increased to a record $7,707 million from $5,340 million in 1999 as the Company achieved record revenues in each major business segment and region in which it operates. The Company's emphasis on high margin businesses and disciplined approach to expense management supported an increase in the Company's pretax operating margin to 33.5% in 2000 from 30.5% in 1999. Revenues in each of the Company's three segments grew by over 30% compared to last year and return on equity increased to 27.4% from 21.8% a year ago. As a result of the Company's continued emphasis on expense discipline, non-personnel expenses increased only 19%, compared with an overall increase of 44% in net revenues. The Company's compensation and benefits ratio increased slightly to 51.0% of net revenues from 50.7% in 1999 as the Company continued to increase headcount, making significant additions in areas where the Company is focusing its growth. The Company reported net income of $1,132 million and earnings per share of $4.08 for 1999. Net revenues increased 30% from 1998 to $5.3 billion. The Company's pretax operating margin was 30.5% for 1999 and 25.6% for 1998. The compensation and benefits ratio was 50.7% of net revenues and non-personnel expenses as a percentage of revenues was 18.8% compared to 23.7% in 1998. These results reflected the continued implementation of the strategy to grow high margin businesses while managing expenses carefully. For 1998, the Company reported net income of $736 million and earnings per share of $2.60. BUSINESS ENVIRONMENT The principal business activities of the Company 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 favorable market and economic conditions experienced during 1999 continued into the first half of 2000, boosted by a wealth effect stemming from previous gains in the stock market and strong consumer spending. In response to strong growth and rising inflation fears, the Federal Reserve raised the Federal Funds rate by a total of 100 basis points to 6.50% over the first half of 2000, with the last increase occurring on May 16, 2000. In the second half of the year, marketplace uncertainties combined with slower consumer spending, higher borrowing costs and recessionary fears resulted in weaker market conditions, prompting the Federal Reserve to adopt an easing bias by year-end. - -------------------------------------------------------------------------------- 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. 37 As a result of this changing economic climate, the U.S. equity markets were very volatile during the year, posting lower returns when compared to the previous several years. By the middle of January 2000, in anticipation of further Federal Reserve Board rate hikes, the Dow Jones Industrial Average ("DJIA") started to decline, falling briefly below the 10,000 level before recovering through the end of August. Following the Federal Reserve Board's fifty basis point tightening in May, equity analysts started to lower their forecasts for the late 2000 and early 2001 quarters, a pattern that would continue through the end of the fiscal year. In October, the DJIA again slipped below the 10,000 level before recovering to 10,415 at November 30, 2000, a 4% decrease from fiscal year-end 1999. The NASDAQ Composite experienced even greater volatility, climbing 40% to an all-time high of 5,049 in early March, before slipping almost 50% during the second half of the year. The NASDAQ close of 2,598, represented a 22% decline for the year-ended November 30, 2000, the worst full year performance since its inception in the early 1970s. The S&P 500 also closed lower, marking the first time in a decade that all three major indexes would finish the year with losses. Europe was the only major region to register positive returns on equities for the twelve months ended November 30, 2000. However, the 6% return in local currency terms (FTSE World Europe Index) disguised a sharp sectoral divide. The technology and telecommunications sectors had wide swings, rising 50% in value during the three months ended February 2000, before losing 40% of their value in the next three-quarters. Meanwhile, the rest of the market recorded a much steadier performance, although the fourth quarter was weak across all sectors as regional growth expectations began to deteriorate. Trading volumes were very strong in the early months of the year, but dropped off significantly during the second half of the year. Asian Pacific markets were particularly weak for the year-ended November 30, 2000. The capital-weighted index of all shares listed on the Tokyo Stock Exchange ("TOPIX index") lost 17% of its value during the year as the cyclical recovery in Japan began losing momentum. Outside of Japan, Asian markets also fell sharply during the year as the FTSE World Pacific Basin index was down 10% for the year. Equity new issuances reached record levels during the year with volumes up 23% over the same period last year. Fueling the growth in the U.S. equity market was increased IPO volume and continued equity raising in the technology, telecommunication and new media sectors. Fourth quarter origination volumes, however, were off significantly from the first nine months of the year as the equity markets began to feel the affects of the market's downturn. Overall, the fixed income market environment was sub-optimal in 2000. The U.S. Treasury market was the lone exception, as it benefitted from many factors, including the turbulence in the equity markets, increased U.S. Treasury buybacks, lower volume of U.S. corporate debt issuance and revised forecasts for higher future U.S. budget surpluses. This led to a strong performance in the government bond sector during the second half of 2000. The credit market environment was very difficult for virtually the entire year. Interest rates were rising, the yield curve was inverted and credit spreads widened significantly toward the end of the year due to uncertainty over the interest rate environment and increased concerns over corporate credit quality and defaults. This was most prominently seen in the high yield market, where spreads widened to their highest levels since 1991. European corporate bond market activity slowed significantly during the second half of the year, primarily as a result of continued concerns around corporate credit quality. Credit spreads widened moderately by year-end, leading to underperformance of corporate bonds compared to government securities. Trading activities also slowed, affected by volatile trading conditions in high profile sectors such as telecommunications. Global debt new issuances were dampened by the inversion of the yield curve and the anticipation of future interest rate hikes by the Federal Reserve. However, as it became apparent that the Federal Reserve was no longer aggressively raising interest rates, market fundamentals improved in the second half of the year. Overall, debt new issuances for the year were down approximately 15% from 1999. However, the high yield new issue market was down significantly, approximately 50% from 1999, due to the spread widening in this sector. Merger and acquisition advisory activities on a global basis reached record levels in 2000, although fourth quarter results were significantly slower than the rest of the year as volatility in equity markets affected the pace of announced transactions. Overall, the volume of completed transactions for the year soared to a record $3.4 trillion in 2000, which included the completion of the highest ever number of deals greater than $1 billion. The increase was influenced by activity involving European 38 companies and cross-border mergers and acquisitions as the forces of consolidation, deregulation and globalization across industry sectors continued to drive strategic combinations. RESULTS OF OPERATIONS The Company is segregated into the following three business segments (each of which are described below): Investment Banking, Capital Markets and Client Services. Each segment represents a grouping 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.) NET REVENUE DIVERSITY BY DIVISION Presented is a pie chart illustrating Lehman Brothers revenue diversity by division as follows: Investment Banking 28% Capital Markets: Equities 34% Fixed Income 27% Client Services 11%
Investment Banking and Equities generated 62% of net revenues in 2000 compared with 39% in 1997. TWELVE MONTHS ENDED NOVEMBER 30, 2000
Principal Transactions, Commissions and Investment (in millions) Net Interest Banking Other Total - ---------------------------------------------------------------------------------- Investment Banking $2,179 $2,179 Capital Markets $4,660 $ 29 4,689 Client Services 697 37 105 839 - ---------------------------------------------------------------------------------- Total $5,357 $2,216 $134 $7,707 ==================================================================================
TWELVE MONTHS ENDED NOVEMBER 30, 1999
Principal Transactions, Commissions and Investment (in millions) Net Interest Banking Other Total - ---------------------------------------------------------------------------------- Investment Banking $1,664 $1,664 Capital Markets $3,071 $22 3,093 Client Services 523 18 42 583 - ---------------------------------------------------------------------------------- Total $3,594 $1,682 $64 $5,340 ==================================================================================
TWELVE MONTHS ENDED NOVEMBER 30, 1998
Principal Transactions, Commissions and Investment (in millions) Net Interest Banking Other Total - ---------------------------------------------------------------------------------- Investment Banking $1,401 $1,401 Capital Markets $2,175 $(62) 2,113 Client Services 472 40 87 599 - ---------------------------------------------------------------------------------- Total $2,647 $1,441 $ 25 $4,113 - ----------------------------------------------------------------------------------
39 Lehman Brothers provides a full array of capital market products and advisory services worldwide. Through the Company's banking, research, trading, structuring and distribution capabilities of equity and fixed income products the Company continues its focus of building its client/customer business model. These "customer flow" activities represent a majority of the Company's revenues. In addition to its customer flow activities, the Company also takes proprietary positions, the success of which is dependent upon its ability to anticipate economic and market trends. The Company believes its customer flow orientation mitigates its overall revenue volatility. The Company, through its subsidiaries, is a market-maker in all major equity and fixed income products in both the domestic and international markets. In order to facilitate its trading activities, the Company is a member of all principal securities and commodities exchanges in the United States and holds memberships or associate memberships on several principal international securities and commodities exchanges, including the London, Tokyo, Hong Kong, Frankfurt, Milan and Paris stock exchanges. As part of its market-making customer flow activities, the Company maintains inventory positions of varying amounts across a broad range of financial instruments, which are marked-to-market on a daily basis and, along with any proprietary trading positions, give rise to principal transactions revenues. Net revenues from the Company's market-making, sales and trading activities in the capital markets are recognized as either principal transactions, commissions or net interest revenues, depending upon the method of execution, financing and/or hedging related to specific inventory positions. The Company evaluates its sales and trading strategies on an overall profitability basis, which combines principal transactions revenues, commissions and net interest. INVESTMENT BANKING o Net revenues increased 31% for the year o Record merger and acquisition advisory fees of $777 million, up over 50% from a year ago o Record equity underwriting revenues of $817 million, up 79% from 1999 on record lead managed underwriting volume of $14 billion INVESTMENT BANKING - NET REVENUES Presented is a bar graph illustrating Lehman Brothers Investment Banking Net Revenues for the past three years as follows: 1998 $1,401 million 1999 $1,664 million 2000 $2,179 million
Also displayed is the cumulative annual growth rate from 1998 to 2000 of 25%. 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 increased 31% in 2000 to $2,179 million from $1,664 million in 1999 and $1,401 million in 1998, due principally to an increase in equity underwriting and merger and acquisition advisory activities. This increase in net revenues reflects the progress the Company has made in its strategy to build its global investment banking franchise.
INVESTMENT BANKING NET REVENUES: (in millions) 2000 1999 1998 - -------------------------------------------------------------------------------- Equity Underwriting $ 817 $ 456 $ 309 Debt Underwriting 585 704 581 Merger and Acquisition Advisory 777 504 511 - -------------------------------------------------------------------------------- $2,179 $1,664 $1,401
Equity underwriting revenues increased 79% to $817 million driven by increased issuances as well as the Company's improvement in lead-managed global equity issuances and corresponding improvement in the competitive rankings per Thomson Financial Securities Data Corp. ("TFSD"). Merger and acquisition advisory revenues increased 54% to a record $777 million. These record results were driven by an increase in the Company's market share for completed mergers and acquisition transactions from 7.6% in 1999 to 9.8% in 2000, per TFSD. 40 Debt underwriting revenues decreased 17% to $585 million as a result of challenging market conditions as rising interest rates led to decreased underwriting volume across most fixed income products, most notably in the high yield market where spreads were at their widest levels since 1991. Overall market volumes for global debt underwriting and high yield issuances were down 14% and 52%, respectively, according to TFSD. The increase in net revenues in Investment Banking in 1999 from 1998 reflected the ongoing success in building-out this segment, as evidenced by the Company's ability to execute several significant multiple product transactions for key clients in equity and investment grade debt underwriting. In addition, the Company also met a key strategic initiative in improving its ranking in lead-managed initial public offerings and European-related transactions during the year. CAPITAL MARKETS o Net revenues up 52% for the year o Equities revenues increased 84% over 1999 results o Fixed income revenues up 24% from a year ago EQUITIES - NET REVENUES Presented is a bar graph illustrating Lehman Brothers Capital Markets - Equities Net Revenues for the past three years as follows: 1998 $717 million 1999 $1,425 million 2000 $2,629 million
Also displayed is the cumulative annual growth rate from 1998 to 2000 of 91%. FIXED INCOME - NET REVENUES Presented is a bar graph illustrating Lehman Brothers Capital Markets - Fixed Income Net Revenues for the past three years as follows: 1998 $1,396 million 1999 $1,668 million 2000 $2,060 million
Also displayed is the cumulative annual growth rate from 1998 to 2000 of 21%. This segment's net revenues reflect institutional flow activities and secondary trading and financing activities related to a broad spectrum of equity and fixed income products. These products include a wide range of cash, derivative, secured financing and structured instruments. Capital Markets' net revenues were $4,689 million for 2000, $3,093 million for 1999 and $2,113 million for 1998. The 52% increase in net revenues in 2000 is primarily attributable to a significant increase in customer flow activities as overall transaction volumes almost doubled 1999 levels.
CAPITAL MARKETS NET REVENUES: (in millions) 2000 1999 1998 - -------------------------------------------------------------------------------- Equities $2,629 $1,425 $ 717 Fixed Income 2,060 1,668 1,396 - -------------------------------------------------------------------------------- $4,689 $3,093 $2,113
Net revenues from the equity component of Capital Markets increased 84% to $2,629 million from $1,425 million in 1999. This performance reflects the success of the continued development of the Company's equity franchise, a key component of the Company's strategic focus on building high margin businesses. Revenues benefited from strong customer flow activity across all equity products and regions, in particular equity derivative and cash products. Also contributing to the increase were higher revenues related to the Company's Private Equity Investments. Net revenues from the fixed income component of Capital Markets increased 24% to $2,060 million from $1,668 million in 1999. The Company generated this year-over-year increase in an extremely difficult market environment due to strong activity across most fixed income instruments, especially in higher margin structured products. Certain products, particularly high yield instruments, experienced reduce flow activity due to the widening of spreads resulting from ongoing credit concerns. These concerns led many institutional investors toward more liquid types of fixed income products, such as government and mortgage-backed securities. 41 The increase in net revenues in Capital Markets from 1998 to 1999 was primarily due to significantly increased institutional customer flow activity across most equity and fixed income products as the Company continued to invest in high margin product areas. CLIENT SERVICES o Net revenues up 44% for the year o Private equity assets under management grew 51% in 2000 o Private Client's investment representatives increased over 40% during the year PRIVATE EQUITY ASSETS UNDER MANAGEMENT Presented is a bar graph illustrating Lehman Brothers Private Equity Assets Under Management for the past three years as follows: 1998 $2.8 billion 1999 $3.0 billion 2000 $4.5 billion
NUMBER OF INVESTMENT REPRESENTATIVES Presented is a bar graph showing the number of Investment Representatives Lehman Brothers has for the past three years as follows: 1998 284 1999 308 2000 450
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 private equity banking partnerships.
CLIENT SERVICES NET REVENUES: (in millions) 2000 1999 1998 - -------------------------------------------------------------------------------- Private Client $795 $573 $523 Private Equity 44 10 76 - -------------------------------------------------------------------------------- $839 $583 $599
Client Services' net revenues for 2000 were $839 million compared to $583 million for 1999 and $599 million for 1998. The 44% increase in 2000 was driven by record customer activity as the Company successfully increased the headcount and productivity of its investment representatives. In October of 2000, the Company acquired SG Cowen's high-net-worth group of 92 investment representatives. This, combined with the Company's own hiring initiatives, increased the number of investment representatives to 450 as of November 30, 2000. In addition, Private Equity management fees increased significantly as the Company's assets under management increased 51% to $4.5 billion. This growth is part of the Company's strategic expansion of its high margin businesses. In 1999, Private Client revenues increased 10% to a record $573 million due to increased productivity of its sales force which offset a reduction in realized gains and incentive fees from the liquidation of private equity investments. GEOGRAPHIC DIVERSIFICATION In fiscal 2000, the Company continued to strategically expand its international franchise, with a particular focus in Europe. This expansion enabled the Company to benefit from the continued globalization of financial markets driven by the increase in cross-border transactions and client demand for global investment products. International net revenues represented 42% of total net revenues in 2000, compared with only 28% in 1997. During the year, the Company continued to invest significant resources in expanding its European franchise as it expanded headcount by approximately 40%. Since 1997, European headcount has nearly doubled. This growth is based on the Company's belief that the European economy will continue the transformation toward a more capital markets driven environment. Overall European revenues increased 45% versus 1999 to approximately $2.4 billion, as the region experienced significant growth in all business lines, particularly equity cash and derivative products and the growth of investment banking. The Company also saw increased revenues in the Asian Pacific region across most equity and fixed income products. 42
NON-INTEREST EXPENSES Twelve months ended November 30 (in millions) 2000 1999 1998 - -------------------------------------------------------------------------------- Compensation and benefits $3,931 $2,707 $2,086 Nonpersonnel 1,197 1,002 975 - -------------------------------------------------------------------------------- Total non-interest expenses $5,128 $3,709 $3,061 ================================================================================ Compensation and benefits/Net revenues 51.0% 50.7% 50.7% Nonpersonnel expenses/Net revenues 15.5% 18.8% 23.7% ================================================================================
NON-INTEREST EXPENSE AS A PERCENTAGE OF NET REVENUES Presented is a bar graph illustrating non-interest expense as a percentage of net revenues for the past three years as follows: 1998 74.4% 1999 69.5% 2000 66.5%
NONPERSONNEL EXPENSE AS A PERCENTAGE OF NET REVENUES Presented is a bar graph illustrating nonpersonnel expense as a percentage of net revenues for the past three years as follows: 1998 23.7% 1999 18.8% 2000 15.5%
Non-interest expenses in 2000 totaled $5,128 million, up 38% over 1999's non-interest expenses of $3,709 million. The increase in non-interest expenses was more than offset by the 44% increase in net revenues, highlighting the Company's continued disciplined approach to expense management. This ongoing focus on expenses is a key attribute of the Company's strategic objective of increasing pretax operating margins. Nonpersonel expenses as a percentage of net revenues decreased from 18.8% in 1999 to 15.5% in fiscal 2000. Compensation and benefits expense as a percentage of net revenues increased slightly to 51.0% compared to 50.7% in 1999. The increase reflects the Company's continued expansion of its investment banking, equities and European franchises as well as its investment in technology and e-commerce capabilities. Compensation and benefits expense includes the cost of salaries, incentive compensation and employee benefit plans as well as the amortization of deferred stock compensation awards. INCOME TAXES Lehman Brothers 2000 income tax provision of $748 million represented a 29% effective tax rate. In 1999 and 1998, income tax provisions were $457 million and $316 million, respectively, resulting in effective tax rates of 28% in 1999 and 30% in 1998. The effective tax rate increased in 2000 due to an overall increase in the level of pretax income, which lessened the relative impact of certain tax preference items. The increase was partially offset by a decrease in the state and local effective tax rate. Additional information about the Company's income taxes can be found in Note 11 to the Consolidated Financial Statements. 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 overestimate 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. 43 The Company's Funding Framework incorporates these principles and mitigates liquidity risk wherever 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. The model incorporates that the following must be funded with cash capital: o Secured funding "haircuts," to reflect the estimated value of cash that would be advanced to the Company by counterparties during a stress environment. o Fixed assets and goodwill. o Operational cash at banks and unpledged assets independent of collateral quality; the Company assumes that it will not be able to operate with lower requirements in a stress environment than the Company currently operates with in a normal environment. The Company operates with a surplus of cash capital sources over cash capital uses. To ensure that the Company is always operating "within its means," the businesses operate within strict cash capital limits. This limit culture has been institutionalized and this policy engages the entire Company in managing liquidity. 2. The Reliable Secured Funding Model ("RSFM")--which forecasts the reliable sources of overnight secured funding available to the Company. The RSFM represents our assessment of the reliable secured funding capacity, by asset class, that we would anticipate in a liquidity event. The Company pays careful attention to validating this capacity through a periodic counterparty by counterparty, product by product review which draws upon the Company's understanding of the financing franchise and experience. In cases where a business has inventory at a level above its RSFM, the Company requires the excess to be funded on a term basis with a maturity in excess of three months. If this is not feasible, the Company will then provide for this in its liquidity cushion--a cash amount with a remaining term in excess of 90 days. The cost of maintaining the liquidity cushion is borne by the business and encourages the development of secured funding capacity in line with balance sheet growth. The Company has increased RSFM for certain asset classes through the use of favorable legal entity structures, such as Lehman Brothers Bank (Thrift) and Lehman Brothers Bankhaus. These entities operate in a deposit protected environment and are therefore able to source low cost unsecured funds that are insulated from a companywide or market specific event, while providing reliable funding for mortgage products and other loan assets. 3. The Maximum Cumulative Outflow ("MCO")--which estimates the size of the added liquidity requirement necessary to fund contingent cash outflows expected from a stress environment. The MCO model reflects our posture of constant liquidity readiness. On an ongoing basis, the Company projects, for our regulated and unregulated entities, the amount of cash we would have over the next three months, assuming that we immediately experience a very severe liquidity stress environment. The MCO assumptions, which presume a very severe liquidity stress environment, include the following: o The Company is temporarily unable to replace maturing commercial paper and long-term debt. o Collateral posting requirements increase as counterparties call for additional collateral. o Contingent commitments are drawn as other liquidity-impacted institutions draw on their contractual facilities. o The Company does not have to draw on its committed back-stop facilities. o Secured funding consumes additional cash as haircuts widen to reflect stress levels. The Company's MCO standard is to operate in such a manner that even if a severe liquidity event ensues, three months forward the Company retains a substantial level of cash in both its regulated and unregulated subsidiaries. 44 4. The Contingency Funding Plan--which represents a detailed action plan to manage a stress liquidity event within the Company. The Company has developed a comprehensive Funding Action Plan to manage liquidity risk and communicate effectively with creditors, investors and customers during a funding crisis. The main focus of the plan is to detail how, in practice, we would manage our liquidity in a real situation, using the three components discussed above. 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 4% of adjusted total assets and less than 15% of total debt. Lehman Brothers has lowered its Short-Term Debt to Adjusted Total Assets and its Short-Term Debt to Total ratios over the past four years to lessen the impact short-term dislocations in unsecured funding markets. Lehman Brothers has considerably lower ratios than its peer group. SHORT-TERM DEBT TO ADJUSTED ASSETS Presented is a bar graph illustrating Short-term Debt to Adjusted Assets for the last four years as follows: 1997 7.23% 1998 5.97% 1999 4.21% 2000 4.04%
SHORT-TERM DEBT TO TOTAL DEBT Presented is a bar graph illustrating Short-term Debt to Total Debt for the last four years as follows: 1997 27.84% 1998 19.58% 1999 15.14% 2001 14.13%
MANAGING LIQUIDITY, FUNDING AND CAPITAL RESOURCES The Company's Finance Committee is responsible for developing, implementing and enforcing the liquidity, funding and capital policies. These policies include recommendations for capital and balance sheet size as well as the allocation of capital and balance sheet to the business units. Through the establishment and enforcement of capital and funding limits, the Company's Finance Committee seeks to ensure compliance throughout the organization so that the Company is not exposed to undue risk. TOTAL CAPITAL The Company's Total Capital (defined as long-term debt, preferred securities subject to mandatory redemption and stockholders' equity) increased 16% to $43.9 billion at November 30, 2000, compared to $37.7 billion at November 30, 1999. The increase in Total Capital resulted from a net increase in long-term debt, the retention of earnings, the net impact of various stock-based employee awards and the issuance of $250 million of Series E Preferred Stock. These were partially offset by repurchases of common stock (to fund stock-based employee awards) and $88 million of convertible Series B Preferred Stock.
November 30 (in millions) 2000 1999 1998 - -------------------------------------------------------------------------------- Long-term Debt Senior Notes $32,106 $27,375 $23,873 Subordinated Indebtedness 3,127 3,316 3,468 - -------------------------------------------------------------------------------- 35,233 30,691 27,341 Preferred Securities 860 710 Stockholders' Equity Preferred Equity 700 688 908 Common Equity 7,081 5,595 4,505 - -------------------------------------------------------------------------------- 7,781 6,283 5,413 - -------------------------------------------------------------------------------- Total Capital $43,874 $37,684 $32,754 ================================================================================
LONG-TERM DEBT Presented is a bar graph displaying Lehman Brothers Long-Term Debt for the past three years as follows: 1998 $27.3 billion 1999 $30.7 billion 2000 $35.2 billion
45 During 2000, the Company issued $14.2 billion in long-term debt, which was $5.7 billion in excess of its maturing debt. Long-term debt increased to $35.2 billion at November 30, 2000 from $30.7 billion at November 30, 1999, with a weighted- average maturity of 3.8 years at November 30, 2000 and 3.7 years at November 30, 1999. The Company operates in many regulated businesses that require various minimum levels of capital. These businesses are also subject to regulatory requirements that may restrict the free flow of funds to affiliates. Regulatory approval is generally required for paying dividends in excess of certain established levels, making affiliated investments and entering into management and service agreements with affiliated companies. Additional information about the Company's capital requirements can be found in Note 9 to the Consolidated Financial Statements. 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 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, which require, among other things that the Company maintain specified levels of liquidity and tangible net worth. In July 2000, the Company entered into a $1 billion Committed Securities Repurchase Facility (the "Facility") for Lehman Brothers International (Europe) ("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 convenants that 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 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 $224.7 billion at November 30, 2000 from $192.2 billion at November 30, 1999. 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 $143.5 billion at November 30, 2000 compared to $130.0 billion at November 30, 1999. 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 a higher level of securities owned associated with increased customer flow activities across the Capital Markets businesses, principally in the Company's equity 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 leverage ratios based on adjusted total assets were 16.6x and 18.6x as of November 30, 2000 and 1999, 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 November 30, 2000 principally due to the sub-optimal market environment at year-end. 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 year-end or quarter-end amounts. 46 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. On November 3, 2000, Moody's Investors Service upgraded Holdings senior debt from A3 to A2 and commercial paper from P-2 to P-1. As of November 30, 2000 the short- and long-term debt ratings of Holdings and Lehman Brothers Inc. ("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 HIGH YIELD SECURITIES The Company underwrites, trades, invests and makes markets in high yield corporate debt securities. The Company also syndicates, trades and invests in loans to below investment grade-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 relatively 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 November 30, 2000 and 1999 included long positions with an aggregate market value of approximately $3.5 billion and $3.0 billion, respectively, and short positions with an aggregate market value of approximately $745 million and $290 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 14 to the Consolidated Financial Statements. PRIVATE EQUITY The Company has investments in twenty private equity partnerships, for which the Company acts as general partner, as well as related direct investments. At November 30, 2000 and 1999, the Company's investment in these partnerships totaled $149 million and $134 million, respectively, and direct investments totaled $678 million and $375 million, respectively. 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 14 to the Consolidated Financial Statements. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS AND DERIVATIVES OVERVIEW Derivatives are financial instruments, which include swaps, options, futures, forwards and warrants, whose value is based upon an underlying asset (e.g., treasury bond), index (e.g., S&P 500) or reference rate (e.g., LIBOR). A derivative contract may be traded on an exchange or negotiated in the over-the-counter markets. Exchange-traded derivatives are standardized and include futures, warrants and certain option contracts listed on an exchange. Over-the-counter ("OTC") derivative contracts are individually negotiated between contracting parties and include forwards, swaps and certain options, including caps, collars and floors. The use of derivative financial instruments has expanded significantly over the past decade. One reason for this expansion is that derivatives provide a cost-effective alternative for managing market risk. In this regard, derivative contracts provide a reduced funding alternative for managing market risk since derivatives are based upon notional amounts, which are generally not exchanged, but rather are used merely as a basis for exchanging cash flows during the duration of the contract. Derivatives are also utilized extensively as highly effective tools that enable users to adjust risk profiles, 47 such as interest rate, currency, or other market risks, since OTC derivative instruments can be tailored to meet individual client needs. Additionally, derivatives provide users with access to market risk management tools that are often unavailable in traditional cash instruments. Derivatives can also be used to take proprietary trading positions. Derivatives are subject to various risks similar to non-derivative financial instruments including market, credit and operational risk. Market risk is the potential for a financial loss due to changes in the value of derivative financial instruments due to market changes, including changes in interest rates, foreign exchange rates and equity and commodity prices. Credit risk results from the possibility that a counterparty to a derivative transaction may fail to perform according to the terms of the contract. Therefore, the Company's exposure to credit risk is represented by its net receivable from derivative counterparties, after consideration of collateral. Operational risk is the possibility of financial loss resulting from a deficiency in the Company's systems for executing derivative transactions. In addition to these risks, counterparties to derivative financial instruments may also be exposed to legal risks related to derivative activities, including the possibility that a transaction may be unenforceable under applicable law. The risks of derivatives should not be viewed in isolation but rather should be considered on an aggregate basis along with the Company's other trading-related activities. As derivative products have continued to expand in volume, so has market participation and competition. As a result, additional liquidity has been added into the markets for conventional derivative products, such as interest rate swaps. Competition has also contributed to the development of more complex products structured for specific clients. It is this rapid growth and complexity of certain derivative products, which has led to the perception, by some, that derivative products are unduly risky to users and the financial markets. In order to remove the public perception that derivatives may be unduly risky and to ensure ongoing liquidity of derivatives in the marketplace, the Company supports the efforts of the regulators in striving for enhanced risk management disclosures which consider the effects of both derivative products and cash instruments. In addition, the Company supports the activities of regulators that are designed to ensure that users of derivatives are fully aware of the nature of risks inherent within derivative transactions. As evidence of this support, the Company is an active participant in the Derivative Policy Group and has been actively involved with the various regulatory and accounting authorities in the development of additional enhanced reporting requirements related to derivatives. The Company strongly believes that derivatives provide significant value to the financial markets and is committed to providing its clients with innovative products to meet their financial needs. LEHMAN BROTHERS' USE OF DERIVATIVE INSTRUMENTS In the normal course of business, the Company enters into derivative transactions both in a trading capacity and as an end user. As an end user, the Company utilizes derivative products to adjust the interest rate nature of its funding sources from fixed to floating interest rates, and to change the index upon which floating interest rates are based (e.g., Prime to LIBOR) (collectively, "End User Derivative Activities"). For a further discussion of the Company's End User Derivative Activities, see Note 12 to the Consolidated Financial Statements. The Company utilizes derivative products in a trading capacity both as a dealer to satisfy the financial needs of its clients and in each of its trading businesses (collectively, "Trading-Related Derivative Activities"). The Company's use of derivative products in its trading businesses is combined with cash instruments to fully execute various trading strategies. The Company conducts its derivative activities through a number of wholly-owned subsidiaries. The Company's fixed income derivative products business is conducted through its special purpose subsidiary, Lehman Brothers Special Financing Inc., and separately capitalized "AAA" rated subsidiaries, Lehman Brothers Financial Products Inc. and Lehman Brothers Derivative Products Inc. The Company's equity derivative product business is conducted through Lehman Brothers Finance S.A. In addition, as a global investment bank, the Company is also a market-maker in a number of foreign currencies and actively trades in the global commodity markets. Counterparties to the Company's derivative product transactions are primarily financial intermediaries (U.S. and foreign banks), securities firms, corporations, governments and their agencies, finance companies, insurance companies, investment companies and pension funds. The Company manages the risks associated with derivatives on an aggregate basis, along with the risks associated with its non-derivative trading and market-making activities in cash instruments, as part of its firmwide risk management policies. For a further discussion of the Company's risk management policies refer to the discussion which follows. 48 See Notes 1 and 12 to the Consolidated Financial Statements for a description of the Company's accounting polices and a further discussion of the Company's Trading-Related Derivative Activities. 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 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 49 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. 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. 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 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. 50 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 of 500 trading days. The Company's average value-at-risk for each component of market risk, and in total was as follows (in millions):
2000 1999 - -------------------------------------------------------------------------------- Interest rate risk $12.8 $21.6 Equity price risk 11.2 11.9 Foreign exchange risk 2.1 3.2 Diversification benefit (5.3) (5.8) - -------------------------------------------------------------------------------- Total Company $20.8 $30.9 ================================================================================
During 2000, the Company's value-at-risk varied from a high of $23.7 million to a low of $18.4 million. During 1999, the Company's value-at-risk varied from a high of $36.2 million to a low of $19.0 million. Average value-at-risk decreased in 2000 compared to 1999 due to the effects on the 1999 value-at-risk related to the extreme market volatility experienced during the August-October 1998 period. Excluding the data points during this volatile time period, the adjusted average value-at-risk was $18.9 million during 1999. Value-at-risk at November 30, 2000 and 1999 was $23.7 million and $19.2 million, respectively. Value-at-risk is one measure 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 the 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 June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which requires all derivatives to be recorded on the balance sheet at fair value. In June 1999, the FASB issued FASB No. 137 which extended the implementation date of SFAS No. 133 by one year. In June 2000, the FASB issued SFAS No. 138, which amended SFAS 133. The Company will adopt SFAS 133 as amended on December 1, 2000 (Fiscal Year 2001). SFAS 133 will not affect the accounting for the Company's trading-related derivative activities, as such derivatives are already recognized on a mark-to-market basis through earnings. Rather, SFAS 133 will affect the accounting for derivatives utilized as hedging instruments as part of the Company's end-user activities. As an end user, the Company primarily utilizes derivatives to modify the interest rate characteristics of its long-term debt and secured financing activities ("end-user derivative activities"). The Company currently accounts for its end-user derivative activities on an accrual basis provided that the derivative is deemed a highly effective hedge. SFAS 133 generally will require the Company to recognize its end-user derivatives at fair value through earnings, with an offset recognized through earnings for changes in the fair value of the hedged item. Any ineffectiveness in a hedging relationship generally will require immediate earnings recognition. In addition to these changes, SFAS 133 will result in certain derivatives no longer qualifying for hedge accounting, requiring such derivatives to be marked-to-market through earnings without offset. Derivatives that will not qualify for hedge accounting under SFAS 133 include U.S. dollar and foreign currency basis swaps. 51 The Company has devoted significant resources to prepare for the adoption of SFAS 133. The adoption of SFAS 133 will not have a material impact to the Company's financial position or results of operations. 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 collateral accounting and disclosure rules are effective for the financial statement period ending after December 15, 2000. The adoption of SFAS 140 is not expected to have a material impact to the Company's financial position or results of operations. EFFECTS OF INFLATION Because the Company's assets are, to a large extent, liquid in nature, they are not significantly affected by inflation. However, the rate of inflation affects the Company's expenses, such as employee compensation, office space leasing costs and communications charges, which may not be readily recoverable in the price of services offered by the Company. To the extent inflation results in rising interest rates and has other adverse effects upon the securities markets, it may adversely affect the Company's financial position and results of operations in certain businesses. 52 Report of Independent Auditors The Board of Directors and Stockholders of Lehman Brothers Holdings Inc. We have audited the accompanying consolidated statement of financial condition of Lehman Brothers Holdings Inc. and Subsidiaries (the "Company") as of November 30, 2000 and 1999, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended November 30, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States.Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lehman Brothers Holdings Inc. and Subsidiaries at November 30, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended November 30, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP New York, New York January 4, 2001 53 Consolidated Statement of Income
Twelve months ended November 30 (in millions, except per share data) 2000 1999 1998 - --------------------------------------------------------------------------------------------- REVENUES Principal transactions $ 3,713 $ 2,341 $ 1,373 Investment banking 2,216 1,682 1,441 Commissions 944 651 513 Interest and dividends 19,440 14,251 16,542 Other 134 64 25 - --------------------------------------------------------------------------------------------- Total revenues 26,447 18,989 19,894 Interest expense 18,740 13,649 15,781 - --------------------------------------------------------------------------------------------- Net revenues 7,707 5,340 4,113 - --------------------------------------------------------------------------------------------- NON-INTEREST EXPENSES Compensation and benefits 3,931 2,707 2,086 Technology and communications 341 327 316 Brokerage and clearance 264 232 239 Professional fees 184 115 109 Business development 182 122 109 Occupancy 135 116 113 Other 91 90 89 - --------------------------------------------------------------------------------------------- Total non-interest expenses 5,128 3,709 3,061 - --------------------------------------------------------------------------------------------- Income before taxes and dividends on trust preferred securities 2,579 1,631 1,052 Provision for income taxes 748 457 316 Dividends on trust preferred securities 56 42 - --------------------------------------------------------------------------------------------- Net income $ 1,775 $ 1,132 $ 736 - --------------------------------------------------------------------------------------------- Net income applicable to common stock $ 1,679 $ 1,037 $ 649 - --------------------------------------------------------------------------------------------- Earnings per common share Basic $ 6.89 $ 4.27 $ 2.68 Diluted $ 6.38 $ 4.08 $ 2.60 =============================================================================================
See Notes to Consolidated Financial Statements. 54 Consolidated Statement of Financial Condition
November 30 (in millions) 2000 1999 - -------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 5,160 $ 5,186 Cash and securities segregated and on deposit for regulatory and other purposes 2,434 1,989 Securities and other financial instruments owned: Governments and agencies 27,381 29,959 Mortgages and mortgage-backed 24,670 22,643 Corporate equities 24,042 12,790 Corporate debt and other 16,098 11,096 Derivatives and other contractual agreements 9,583 10,306 Certificates of deposit and other money market instruments 3,433 2,265 - -------------------------------------------------------------------------------------------- 105,207 89,059 - -------------------------------------------------------------------------------------------- Collateralized short-term agreements: Securities purchased under agreements to resell 81,242 62,222 Securities borrowed 17,618 19,397 Receivables: Brokers, dealers and clearing organizations 1,662 1,674 Customers 7,585 9,332 Others 1,135 1,354 Property, equipment and leasehold improvements (net of accumulated depreciation and amortization of $855 in 2000 and $903 in 1999) 671 485 Other assets 1,826 1,408 Excess of cost over fair value of net assets acquired (net of accumulated amortization of $138 in 2000 and $129 in 1999) 180 138 - -------------------------------------------------------------------------------------------- Total assets $224,720 $192,244 ============================================================================================
See Notes to Consolidated Financial Statements. 55 Consolidated Statement of Financial Condition (continued)
November 30 (in millions, except share data) 2000 1999 - ------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Commercial paper and short-term debt $ 5,800 $ 5,476 Securities and other financial instruments sold but not yet purchased: Governments and agencies 14,998 22,396 Derivatives and other contractual agreements 8,568 9,582 Corporate equities 6,623 12,344 Corporate debt and other 5,096 2,288 - ------------------------------------------------------------------------------------------------- 35,285 46,610 - ------------------------------------------------------------------------------------------------- Collateralized short-term financing: Securities sold under agreements to repurchase 110,225 81,083 Securities loaned 7,242 4,568 Payables: Brokers, dealers and clearing organizations 1,922 1,184 Customers 11,637 10,971 Accrued liabilities and other payables 8,735 4,668 Long-term debt: Senior notes 32,106 27,375 Subordinated indebtedness 3,127 3,316 - ------------------------------------------------------------------------------------------------- Total liabilities 216,079 185,251 - ------------------------------------------------------------------------------------------------- Commitments and contingencies Preferred securities subject to mandatory redemption 860 710 STOCKHOLDERS' EQUITY Preferred stock 700 688 Common stock, $0.10 par value; 300,000,000 shares authorized; Shares issued: 251,629,126 in 2000 and 245,238,920 in 1999; Shares outstanding: 236,395,332 in 2000 and 239,825,620 in 1999 25 25 Additional paid-in capital 3,589 3,374 Accumulated other comprehensive income (net of tax) (8) (2) Retained earnings 3,713 2,094 Other stockholders' equity, net 597 254 Common stock in treasury, at cost: 15,233,794 shares in 2000 and 5,413,300 shares in 1999 (835) (150) - ------------------------------------------------------------------------------------------------- Total stockholders' equity 7,781 6,283 - ------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 224,720 $ 192,244 =================================================================================================
See Notes to Consolidated Financial Statements. 56 Consolidated Statement of Changes in Stockholders' Equity
Twelve months ended November 30 (in millions) 2000 1999 1998 - -------------------------------------------------------------------------------------------- PREFERRED STOCK 5% Cumulative Convertible Voting, Series A: Beginning balance $ 1 $ 1 Series A exchanged for Series B (1) - -------------------------------------------------------------------------------------------- Ending balance 1 - -------------------------------------------------------------------------------------------- 5% Cumulative Convertible Voting, Series B: Beginning balance $ 238 457 507 Series A exchanged for Series B 1 Shares subject to redemption (150) Shares repurchased (88) (220) (50) - -------------------------------------------------------------------------------------------- Ending balance 238 457 - -------------------------------------------------------------------------------------------- 5.94% Cumulative, Series C: Beginning balance 250 250 Shares issued 250 - -------------------------------------------------------------------------------------------- Ending balance 250 250 250 - -------------------------------------------------------------------------------------------- 5.67% Cumulative, Series D: Beginning balance 200 200 Shares issued 200 - -------------------------------------------------------------------------------------------- Ending balance 200 200 200 - -------------------------------------------------------------------------------------------- 7.115% Cumulative, Series E: Beginning balance Shares issued 250 - -------------------------------------------------------------------------------------------- Ending Balance 250 - -------------------------------------------------------------------------------------------- Redeemable Voting: Beginning and ending balance - -------------------------------------------------------------------------------------------- Total Preferred Stock, ending balance 700 688 908 - -------------------------------------------------------------------------------------------- COMMON STOCK(1) Beginning balance 25 25 25 - -------------------------------------------------------------------------------------------- Ending balance 25 25 25 - -------------------------------------------------------------------------------------------- ADDITIONAL PAID-IN CAPITAL(1) Beginning balance 3,374 3,521 3,423 RSUs exchanged for Common Stock (54) (63) Employee stock-based awards 101 9 37 Shares issued to RSU Trust (210) (181) Tax benefits from the issuance of stock-based awards 373 90 59 Other, net 5 (2) 2 - -------------------------------------------------------------------------------------------- Ending balance $ 3,589 $ 3,374 $ 3,521 - --------------------------------------------------------------------------------------------
(1) Amounts have been retroactively adjusted to give effect for the two-for-one common stock split, effected in the form of a 100% stock dividend, which became effective on October 20, 2000. See Notes to Consolidated Financial Statements. 57 Consolidated Statement of Changes in Stockholders' Equity (continued)
Twelve months ended November 30 (in millions) 2000 1999 1998 - --------------------------------------------------------------------------------------------------------- ACCUMULATED OTHER COMPREHENSIVE INCOME Beginning balance $ (2) $ 15 $ 12 Translation adjustment, net(2) (6) (17) 3 - --------------------------------------------------------------------------------------------------------- Ending balance (8) (2) 15 - --------------------------------------------------------------------------------------------------------- RETAINED EARNINGS Beginning balance 2,094 1,105 498 Net income 1,775 1,132 736 Dividends declared: 5% Cumulative Convertible Voting Series A and B Preferred Stock (9) (20) (25) 5.94% Cumulative, Series C Preferred Stock (15) (15) (8) 5.67% Cumulative, Series D Preferred Stock (11) (10) (4) 7.115% Cumulative, Series E Preferred Stock (12) Redeemable Voting Preferred Stock (50) (50) (50) Common Stock (59) (48) (37) Other (5) - --------------------------------------------------------------------------------------------------------- Ending balance 3,713 2,094 1,105 - --------------------------------------------------------------------------------------------------------- COMMON STOCK ISSUABLE Beginning balance 1,768 1,318 911 RSUs exchanged for Common Stock (247) (83) (10) Deferred stock awards granted 1,003 533 417 - --------------------------------------------------------------------------------------------------------- Ending balance 2,524 1,768 1,318 - --------------------------------------------------------------------------------------------------------- COMMON STOCK HELD IN RSU TRUST Beginning balance (717) (422) (325) Shares issued to RSU Trust (231) (441) (107) RSUs exchanged for Common Stock 301 146 10 - --------------------------------------------------------------------------------------------------------- Ending balance (647) (717) (422) - --------------------------------------------------------------------------------------------------------- DEFERRED STOCK COMPENSATION Beginning balance (797) (627) (431) Deferred stock awards granted (1,003) (533) (417) Amortization of deferred compensation, net 520 363 221 - --------------------------------------------------------------------------------------------------------- Ending balance (1,280) (797) (627) - --------------------------------------------------------------------------------------------------------- COMMON STOCK IN TREASURY, AT COST Beginning balance (150) (430) (98) Treasury stock purchased (1,203) (353) (469) Employee stock-based awards 77 11 30 Shares issued to RSU Trust 441 622 107 - --------------------------------------------------------------------------------------------------------- Ending balance (835) (150) (430) - --------------------------------------------------------------------------------------------------------- Total stockholders' equity $ 7,781 $ 6,283 $ 5,413 =========================================================================================================
(2) Net of income taxes of $(8) in 2000, $(11) in 1999, and $2 in 1998. See Notes to Consolidated Financial Statements. 58 Consolidated Statement of Cash Flows
Twelve months ended November 30 (in millions) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 1,775 $ 1,132 $ 736 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 102 88 91 Deferred tax provision (benefit) (169) (145) (284) Amortization of deferred stock compensation 520 363 221 Other adjustments 65 (129) 80 Net change in: Cash and securities segregated and on deposit (445) (806) (34) Securities and other financial instruments owned (16,148) (12,059) (138) Securities borrowed 1,779 (3,056) (2,195) Receivables from brokers, dealers and clearing organizations 12 624 (105) Receivables from customers 1,747 (1,574) 1,347 Securities and other financial instruments sold but not yet purchased (11,325) 17,807 (1,277) Securities loaned 2,674 1,403 (4,681) Payables to brokers, dealers and clearing organizations 738 (138) (833) Payables to customers 666 1,768 (2,499) Accrued liabilities and other payables 4,041 377 (152) Other operating assets and liabilities, net (765) 686 (279) - ------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) operating activities (14,733) 6,341 (10,002) - ------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of senior notes 14,225 9,753 11,091 Principal payments of senior notes (8,353) (6,037) (4,298) Proceeds from issuance of subordinated indebtedness 200 600 Principal payments of subordinated indebtedness (192) (370) (356) Net proceeds from (payments for) commercial paper and short-term debt 324 (1,181) (1,161) Resale agreements net of repurchase agreements 10,122 (6,488) 5,751 Payments for repurchases of preferred stock (88) (220) (50) Payments for treasury stock purchases (1,203) (353) (469) Dividends paid (149) (139) (122) Issuances of common stock 99 8 61 Issuance of preferred stock, net of issuance costs 250 444 Issuance of trust preferred securities, net of issuance costs 690 - ------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities 15,035 (4,137) 11,491 - ------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, equipment and leasehold improvements, net (287) (73) (119) Acquisition, net of cash acquired (41) - ------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (328) (73) (119) - ------------------------------------------------------------------------------------------------------------------ Net change in cash and cash equivalents (26) 2,131 1,370 - ------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents, beginning of period 5,186 3,055 1,685 - ------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents, end of period $ 5,160 $ 5,186 $ 3,055 - ------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN MILLIONS) Interest paid totaled $18,500 in 2000, $13,513 in 1999 and $15,473 in 1998. Income taxes paid totaled $473 in 2000, $103 in 1999 and $541 in 1998. ==================================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 59
TABLE OF CONTENTS Note 1 Summary of Significant Accounting Policies 61 - ----------------------------------------------------------------------------- Note 2 Short-term Financings 64 - ----------------------------------------------------------------------------- Note 3 Long-term Debt 65 - ----------------------------------------------------------------------------- Note 4 Preferred Securities Subject to Mandatory Redemption 67 - ----------------------------------------------------------------------------- Note 5 Preferred Stock 68 - ----------------------------------------------------------------------------- Note 6 Common Stock 69 - ----------------------------------------------------------------------------- Note 7 Incentive Plans 70 - ----------------------------------------------------------------------------- Note 8 Earnings Per Common Share 73 - ----------------------------------------------------------------------------- Note 9 Capital Requirements 74 - ----------------------------------------------------------------------------- Note 10 Employee Benefit Plans 75 - ----------------------------------------------------------------------------- Note 11 Income Taxes 76 - ----------------------------------------------------------------------------- Note 12 Derivative Financial Instruments 78 - ----------------------------------------------------------------------------- Note 13 Fair Value of Financial Instruments 83 - ----------------------------------------------------------------------------- Note 14 Other Commitments and Contingencies 84 - ----------------------------------------------------------------------------- Note 15 Segments 85 - ----------------------------------------------------------------------------- Note 16 Quarterly Information (Unaudited) 87 - -----------------------------------------------------------------------------
60 Notes - -------------------------------------------------------------------------------- NOTE 1 / SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 in the U.S. All material intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements are prepared in conformity with generally accepted accounting principles which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management believes that the estimates utilized in preparing its financial statements are reasonable and prudent. Actual results could differ from these estimates. The Company uses the trade date basis of accounting. Certain prior period amounts reflect reclassifications to conform to the current period's presentation. SECURITIES AND OTHER FINANCIAL INSTRUMENTS Securities and other financial instruments owned and securities and other financial instruments sold but not yet purchased are valued at market or fair value, as appropriate, with unrealized gains and losses reflected in Principal transactions in the Consolidated Statement of Income. Market value is generally based on listed market prices. If listed market prices are not available, fair value is determined based on other relevant factors, including broker or dealer price quotations and valuation pricing models which take into account time value and volatility factors underlying the financial instruments. DERIVATIVE FINANCIAL INSTRUMENTS A derivative is typically defined as an instrument whose value is "derived" from an underlying instrument, index or rate, such as a future, forward, swap, or option contract, or other financial instrument with similar characteristics. A derivative contract generally represents future commitments to exchange interest payment streams or currencies based on the contract or notional amount or to purchase or sell other financial instruments at specified terms on a specified date. Derivatives utilized for trading purposes are recorded at market or fair value in the Consolidated Statement of Financial Condition on a net by counterparty basis where a legal right of set-off exists and are netted across products when such provisions are stated in the master netting agreement. The market or fair value related to swap and forward transactions, as well as options and warrants, is reported in the Consolidated Statement of Financial Condition as an asset or liability in Derivatives and other contractual agreements, as appropriate. Margin on futures contracts is included in receivables and payables, as applicable. Changes in fair values of derivatives are recorded as principal transactions revenues in the current period. 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 valuation adjustments incorporate business and economic conditions, historical experience, concentrations, estimates of expected losses and the character, quality and performance of credit sensitive financial instruments. 61 The Company enters into various derivative financial instruments for non-trading purposes as an end user to modify the market risk exposures of certain assets and liabilities. In this regard, the Company utilizes interest rate and currency swaps to modify the interest rate and foreign currency exposure of existing assets and liabilities. The Company also utilizes equity derivatives to hedge its exposure to equity price risk embedded in certain of its debt obligations. In addition to modifying the interest rate and foreign currency exposure of existing assets and liabilities, the Company utilizes derivative financial instruments as an end user to modify the interest rate characteristics of certain anticipated transactions related to its secured financing activities, where there is a high degree of certainty that the Company will enter into such contracts. Derivatives that have been designated as non-trading related positions are accounted for on an accrual basis. Under the accrual basis, interest is accrued into income or expense over the life of the contract, resulting in the net interest impact of the derivative and the underlying hedged item being recognized in income throughout the hedge period. Related unrealized receivables or payables due from or to counterparties are included in receivables from or payables to brokers, dealers and clearing organizations. The Company also utilizes foreign exchange forward contracts to manage the currency exposure related to its net monetary investment in non-U.S. dollar functional currency operations. The gain or loss from revaluing these contracts is deferred and reported within Accumulated other comprehensive income in stockholders' equity. The related unrealized receivables or payables due from or to counterparties are included in receivables from or payables to brokers, dealers and clearing organizations. In the event that a hedge is no longer effective, the derivative transaction is no longer accounted for as a hedge on an accrual basis. Instead, the Company immediately recognizes the market or fair value of the derivative financial instrument through earnings. Changes in the fair value of such derivative contracts would then be accounted for as a derivative used for trading purposes as discussed above. Realized gains or losses on early terminations of derivatives that were classified as hedges are deferred and amortized to interest income or interest expense over the remaining life of the instrument being hedged. REPURCHASE AND RESALE AGREEMENTS Securities purchased under agreements to resell and securities sold under agreements to repurchase, which are treated as financing transactions for financial reporting purposes, are collateralized primarily by government and government agency securities and are carried net by counterparty, when permitted, at the amounts at which the securities will be subsequently resold or repurchased plus accrued interest. It is the policy of the Company to take possession of securities purchased under agreements to resell. The Company monitors the market value of the underlying positions on a daily basis as compared to the related receivable or payable balances, including accrued interest. The Company requires counterparties to deposit additional collateral or return collateral pledged as necessary, to ensure that the market value of the underlying collateral remains sufficient. Securities and other financial instruments owned that are financed under repurchase agreements are carried at market value with changes in market value reflected in the Consolidated Statement of Income. SECURITIES BORROWED AND LOANED Securities borrowed and securities loaned are carried at the amount of cash collateral advanced or received plus accrued interest. It is the Company's policy to value the securities borrowed and loaned on a daily basis, and to obtain additional cash as necessary to ensure such transactions are adequately collateralized. PRIVATE EQUITY INVESTMENTS The Company carries its private equity investments, including its partnership interests, at fair value based upon the Company's assessment of the underlying investments. INVESTMENT BANKING Underwriting revenues and fees for merger and acquisition advisory services are recognized when services for the transactions are determined to be completed. Underwriting expenses are deferred and recognized at the time the related revenues are recorded. INCOME TAXES The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." The Company recognizes the current and deferred tax consequences of all transactions that have been recognized in the financial statements using the provisions of the enacted tax laws. In this regard, deferred tax assets are recognized for temporary differences that will result in deductible amounts in future years and for tax loss carry-forwards, if in the opinion of management, it is more likely than not that the deferred tax asset will be realized. SFAS 109 requires companies to set up a valuation allowance for that component of net deferred tax assets which 62 does not meet the "more likely than not" criterion for realization. Deferred tax liabilities are recognized for temporary differences that will result in taxable income in future years. TRANSLATION OF FOREIGN CURRENCIES Assets and liabilities of foreign subsidiaries having non-U.S. dollar functional currencies are translated at exchange rates at the statement of financial condition date. Revenues and expenses are translated at average exchange rates during the period. The gains or losses resulting from translating foreign currency financial statements into U.S. dollars, net of hedging gains or losses and taxes, are included in Accumulated other comprehensive income, a separate component of stockholders' equity. Gains or losses resulting from foreign currency transactions are included in the Consolidated Statement of Income. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements are recorded at historical cost, net of accumulated depreciation and amortization. Depreciation is recognized on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the lesser of their economic useful lives or the terms of the underlying leases. Internal use software which qualifies for capitalization under AICPA Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," is capitalized and subsequently amortized over the softwares' estimated useful life. GOODWILL Excess of cost over fair value of net assets acquired ("goodwill") is amortized using the straight-line method over periods not exceeding 35 years. Goodwill is evaluated periodically for impairment and also is reduced upon the recognition of certain acquired net operating loss carryforward benefits. STOCK-BASED AWARDS SFAS No. 123, "Accounting for Stock-Based Compensation," established financial accounting and reporting standards for stock-based employee compensation plans. SFAS No. 123 permits companies to either continue accounting for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 ("APB 25") or using the fair value method prescribed by SFAS No. 123. The Company continues to follow APB 25 and its related interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation expense has been recognized for stock option awards because the exercise price was at or above the fair market value of the Company's common stock on the grant date. STATEMENT OF CASH FLOWS For purposes of the Consolidated Statement of Cash Flows, the Company defines cash equivalents as highly liquid investments with original maturities of three months or less, other than those held for sale in the ordinary course of business. EARNINGS PER COMMON SHARE The Company computes earnings per common share in accordance with SFAS No. 128, "Earnings per Share." Basic earnings per share is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the assumed conversion of all dilutive securities. All share and per share amounts have been restated for the two-for-one common stock split, effected in the form of a 100% stock dividend, which became effective October 20, 2000. See Notes 6 and 8 of Notes to Consolidated Financial Statements for more information. 63 NOTE 2 / SHORT-TERM FINANCINGS The Company obtains short-term financing on both a secured and unsecured basis. The secured financing is obtained through the use of repurchase agreements and securities loaned agreements, which are primarily collateralized by government, agency and equity securities. The unsecured financing is generally obtained through short-term debt and the issuance of commercial paper. The Company's commercial paper and short-term debt financing is comprised of the following:
November 30 (in millions) 2000 1999 - -------------------------------------------------------------------------------- Commercial paper $3,643 $3,642 Short-term debt Bank loans 320 238 Payables to banks 687 575 Other short-term debt(1) 1,150 1,021 - -------------------------------------------------------------------------------- Total $5,800 $5,476 ================================================================================
The Company's weighted-average interest rates were as follows:
November 30 2000 1999 - -------------------------------------------------------------------------------- Commercial paper(2) 6.5% 5.5% Short-term debt(3) 5.5% 4.0% Securities sold under agreements to repurchase 6.0% 5.2%
(1) Includes master notes, corporate loans and other short-term financings. (2) Includes weighted-average interest rates of 6.9% and 3.0% as of November 30, 2000 and 6.0% and 2.8% as of November 30, 1999 related to U.S. dollar and non-U.S. dollar obligations, respectively. (3) Includes $587 million and $770 million of short-term debt with weighted-average interest rates of 3.3% and 1.4% as of November 30, 2000 and 1999, respectively, related to non-U.S. dollar obligations. 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 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, which require, among other things that the Company maintain specified levels of liquidity and tangible net worth. In July 2000, the Company entered into a $1 billion Committed Securities Repurchase Facility (the "Facility") for Lehman Brothers International (Europe) ("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 that 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 Company has maintained compliance with the applicable covenants for both the Credit Agreement and the Facility at all times. 64 NOTE 3 / LONG-TERM DEBT
U.S. DOLLAR NON-U.S. DOLLAR ------------------------------------- FIXED FLOATING FIXED FLOATING November 30 (in millions) RATE RATE RATE RATE 2000 1999 - -------------------------------------------------------------------------------------------- SENIOR NOTES Maturing in Fiscal 2000 $ 7,852 Maturing in Fiscal 2001 $ 1,929 $3,731 $ 789 $ 333 $ 6,782 3,588 Maturing in Fiscal 2002 1,698 2,587 887 701 5,873 4,448 Maturing in Fiscal 2003 2,290 1,501 754 444 4,989 3,736 Maturing in Fiscal 2004 1,757 388 883 554 3,582 3,308 Maturing in Fiscal 2005 2,217 575 234 733 3,759 385 December 1, 2005 and thereafter 5,418 74 1,070 559 7,121 4,058 - -------------------------------------------------------------------------------------------- Senior Notes 15,309 8,856 4,617 3,324 32,106 27,375 - -------------------------------------------------------------------------------------------- SUBORDINATED INDEBTEDNESS Maturing in Fiscal 2000 198 Maturing in Fiscal 2001 194 6 200 194 Maturing in Fiscal 2002 450 38 488 488 Maturing in Fiscal 2003 475 475 475 Maturing in Fiscal 2004 190 190 190 Maturing in Fiscal 2005 94 7 101 101 December 1, 2005 and thereafter 1,516 150 7 1,673 1,670 - -------------------------------------------------------------------------------------------- Subordinated Indebtedness 2,919 194 14 3,127 3,316 - -------------------------------------------------------------------------------------------- Long-term Debt $18,228 $9,050 $4,631 $3,324 $35,233 $30,691 ============================================================================================
Of the Company's long-term debt outstanding as of November 30, 2000, $654 million is repayable prior to maturity at the option of the holder, at par value. These obligations are reflected in the above table as maturing at their put dates, which range from fiscal 2001 to fiscal 2008, rather than at their contractual maturities, which range from fiscal 2004 to fiscal 2026. In addition, $1,732 million of the Company's long-term debt is redeemable prior to maturity at the option of the Company under various terms and conditions. These obligations are reflected in the above table at their contractual maturity dates. The Company's interest in 3 World Financial Center was financed with U.S. dollar fixed-rate senior notes totaling $224 million as of November 30, 2000. These notes were unconditionally guaranteed by American Express and collateralized by a first mortgage on the property. During the first quarter of 2001, these notes were redeemed on their contractual maturity date. 65 As of November 30, 2000, the Company had approximately $10.5 billion available for the issuance of debt securities under various shelf registrations and debt programs, which includes $4.9 billion of issuance availability under the Company's Euro medium-term note program. As of November 30, 2000, the Company's U.S. dollar and non-U.S. dollar debt portfolios included approximately $849 million and $769 million, respectively, of debt for which the interest rates and/or redemption values or maturity have been linked to the performance of various indices including industry baskets of stocks or commodities or events. Generally such notes are issued as floating rate notes or the interest rates on such index notes are effectively converted to floating rates based primarily on LIBOR through the use of interest rate, currency and equity swaps. END-USER DERIVATIVE ACTIVITIES The Company utilizes a variety of derivative products including interest rate, currency and equity swaps as an end user to modify the interest rate characteristics of its long-term debt portfolio. The Company actively manages the interest rate exposure on its long-term debt portfolio through the use of interest rate and currency swaps to more closely match the terms of the assets being funded and to minimize interest rate risk. In addition, the Company utilizes cross-currency swaps to hedge its exposure to foreign currency risk as a result of its non-U.S. dollar debt obligations, after consideration of non-U.S. dollar assets which are funded with long-term debt obligations in the same currency. In certain instances, two or more derivative contracts may be utilized by the Company to manage the interest rate nature and/or currency exposure of an individual long-term debt issuance. In these cases, the notional amount of the derivative contracts may exceed the carrying value of the related long-term debt issuance. At November 30, 2000 and 1999, the notional amounts of the Company's interest rate, currency and equity swaps related to its long-term debt obligations were approximately $26.9 billion and $27.1 billion, respectively. In terms of notional amounts outstanding, these derivative products mature as follows:
U.S. NON- CROSS- November 30 (in millions) DOLLAR U.S. DOLLAR CURRENCY 2000 1999 - ------------------------------------------------------------------------------------------------------------ Maturing in Fiscal 2000 $ 6,935 Maturing in Fiscal 2001 $ 2,171 $ 206 $ 887 $ 3,264 3,059 Maturing in Fiscal 2002 3,140 746 630 4,516 4,178 Maturing in Fiscal 2003 3,273 806 94 4,173 3,778 Maturing in Fiscal 2004 2,018 143 816 2,977 3,225 Maturing in Fiscal 2005 2,371 276 698 3,345 475 December 1, 2005 and thereafter 6,959 989 685 8,633 5,424 - ------------------------------------------------------------------------------------------------------------ Total $19,932 $ 3,166 $ 3,810 $26,908 $27,074 - ------------------------------------------------------------------------------------------------------------ Weighted-average interest rate at November 30(1): Receive rate 7.27% 3.93% 4.54% 6.54% 6.15% Pay rate 7.47% 4.01% 7.39% 7.13% 6.05%
(1) Weighted-average interest rates were calculated utilizing non-U.S. dollar interest rates, where applicable. 66 On an overall basis, the Company's long-term debt-related end-user derivative activities resulted in an increase (decrease) in interest expense of approximately $35 million, $(67) million and $(84) million in 2000, 1999 and 1998, respectively. In addition, the Company's end-user derivative activities resulted in the following changes to the Company's mix of fixed and floating rate debt and effective weighted-average rates of interest:
November 30, 2000 LONG-TERM DEBT WEIGHTED-AVERAGE(1) ---------------------- ---------------------------- BEFORE AFTER CONTRACTUAL EFFECTIVE RATE END USER END USER INTEREST AFTER END USER (in millions) ACTIVITIES ACTIVITIES RATE ACTIVITIES - ----------------------------------------------------------------------------------------- USD Obligations Fixed rate $18,228 $ 726 Floating rate 9,050 30,792 - ----------------------------------------------------------------------------------------- 27,278 31,518 - ----------------------------------------------------------------------------------------- Non-USD Obligations 7,955 3,715 - ----------------------------------------------------------------------------------------- Total $35,233 $35,233 6.68% 7.13% =========================================================================================
November 30, 2000 Long-Term Debt Weighted-Average(1) ---------------------- ---------------------------- Before After Contractual Effective Rate End User End User Interest After End User (in millions) Activities Activities Rate Activities - ----------------------------------------------------------------------------------------- USD Obligations Fixed rate $16,977 $ 353 Floating rate 7,653 27,902 - ----------------------------------------------------------------------------------------- 24,630 28,255 - ----------------------------------------------------------------------------------------- Non-USD Obligations 6,061 2,436 - ----------------------------------------------------------------------------------------- Total $30,691 $30,691 6.30% 6.19% =========================================================================================
(1) Weighted-average interest rates were calculated using non-U.S. dollar interest rates, where applicable. NOTE 4 / PREFERRED SECURITIES SUBJECT TO MANDATORY REDEMPTION Preferred securities subject to mandatory redemption is composed of the following issues:
November 30 (in millions) 2000 1999 - ------------------------------------------------------------------------------------- Lehman Brothers Holdings Capital Trust I $325 $325 Lehman Brothers Holdings Capital Trust II 385 385 - ------------------------------------------------------------------------------------- Trust Preferred Securities Subject to Mandatory Redemption 710 710 Cumulative Convertible Voting, Series A and Series B 150 - ------------------------------------------------------------------------------------- Total $860 $710 =====================================================================================
67 TRUST PREFERRED SECURITIES SUBJECT TO MANDATORY REDEMPTION During 1999, the Company formed two Delaware business trusts for the purposes of: (a) issuing trust securities representing ownership interests in the assets of the trust; (b) investing the gross proceeds of the trust securities in junior subordinated debentures of the Company; and (c) engaging in activities necessary or incidental thereto. Two such trusts have issued securities to date, having an aggregate liquidation value of $710 million. The following table summarizes the financial structure of each such trust at November 30, 2000:
Lehman Brothers Holdings Lehman Brothers Holdings Capital Trust I Capital Trust II - --------------------------------------------------------------------------------------------------------------- ISSUANCE DATE JANUARY 1999 APRIL 1999 Trust Securities Preferred securities issued 13,000,000 SERIES I 15,400,000 SERIES J Liquidation preference per security $25 $25 Liquidation value (in millions) $325 $385 Coupon rate 8% 7.875% Distributions payable QUARTERLY QUARTERLY Distributions guaranteed by LEHMAN BROTHERS HOLDINGS INC. LEHMAN BROTHERS HOLDINGS INC. Mandatory redemption date MARCH 31, 2048 JUNE 30, 2048 Redeemable by issuer on or after MARCH 31, 2004 JUNE 30, 2004 - --------------------------------------------------------------------------------------------------------------- JUNIOR SUBORDINATED DEBENTURES Principal amount outstanding (in millions) $325 $385 Coupon rate 8% 7.875% Interest payable QUARTERLY QUARTERLY Maturity date MARCH 31, 2048 JUNE 30, 2048 Redeemable by issuer on or after MARCH 31, 2004 JUNE 30, 2004 - ---------------------------------------------------------------------------------------------------------------
CUMULATIVE CONVERTIBLE VOTING, SERIES A AND SERIES B The Convertible Voting Preferred Shares had a liquidation preference of $39.10 per share. The Series A was issued in 1987. The Series B was issued in an exchange offer for the Series A on July 11, 1997. During the first quarter of 2000, Holdings repurchased 2,258,311 of the Series B for an aggregate cost of $88 million. During the fourth quarter, the Company exercised its option to redeem the shares of Cumulative Convertible Voting Preferred Stock, Series A and Series B (together the "Convertible Voting Preferred") effective December 15, 2000. As of that date the Convertible Voting Preferred Shares were no longer outstanding. As of November 30, 2000, 1,900 shares of the Series A and 3,834,058 shares of the Series B were outstanding. Given the Company's intention to redeem the remaining Convertible Voting Preferred, the $150 million aggregate redemption value was transferred on the Company's Statement of Financial Condition from Preferred stock to Preferred securities subject to mandatory redemption. NOTE 5 / PREFERRED STOCK Holdings is authorized to issue a total of 38,000,000 shares of preferred stock. At November 30, 2000 and 1999, Holdings had 4,426,958 and 6,635,624, respectively, of shares authorized, issued and outstanding under various series as described below and under "Cumulative Convertible Preferred Shares" in Note 4. All preferred stock has a dividend preference over Holdings' common stock in the paying of dividends and a preference in the liquidation of assets. SERIES C On May 11, 1998, Holdings issued 5,000,000 Depository Shares, each representing 1/10th of a share of 5.94% Cumulative Preferred Stock, Series C ("Series C Preferred Stock"), $1.00 par value. These shares have a redemption price of $500 per share, together with accrued and unpaid dividends. Holdings may redeem any or all of the outstanding shares of Series C Preferred Stock beginning on May 31, 2008. The $250 million redemption value of the shares outstanding at November 30, 2000 is classified on the Company's Consolidated Statement of Financial Condition as a component of Preferred stock. 68 SERIES D On July 21, 1998, Holdings issued 4,000,000 Depository Shares, each representing 1/100th of a share of 5.67% Cumulative Preferred Stock, Series D ("Series D Preferred Stock"), $1.00 par value. These shares have a redemption price of $5,000 per share, together with accrued and unpaid dividends. Holdings may redeem any or all of the outstanding shares of Series D Preferred Stock beginning on August 31, 2008. The $200 million redemption value of the shares outstanding at November 30, 2000 is classified on the Company's Consolidated Statement of Financial Condition as a component of Preferred stock. SERIES E On March 28, 2000, Holdings issued 5,000,000 Depository Shares, each representing 1/100th of a share of Fixed/Adjustable Rate Cumulative Preferred Stock, Series E ("Series E Preferred Stock"), $1.00 par value. The initial cumulative dividend rate on the Series E Preferred Stock is 7.115% per annum through May 31, 2005; thereafter the rate will be the higher of either the three-month U.S. Treasury Bill rate, the 10-year Treasury constant maturity rate or the 30-year U.S. Treasury constant maturity rate, in each case plus 1.15%, but in any event not less than 7.615% nor greater than 13.615%. These shares have a redemption price of $5,000 per share, together with accrued and unpaid dividends. Holdings may redeem any or all of the outstanding shares of Series E Preferred Stock beginning on May 31, 2005. The $250 million redemption value of the shares outstanding at November 30, 2000 is classified on the Company's Consolidated Statement of Financial Condition as a component of Preferred stock. REDEEMABLE VOTING In 1994, Holdings issued the Redeemable Voting Preferred Stock to American Express and Nippon Life for $1,000. The holders of the Redeemable Voting Preferred Stock are entitled to receive annual dividends through May 31, 2002 in an amount equal to 50% of the amount, if any, by which the Company's net income for the preceding year exceeds $400 million, up to a maximum of $50 million, prorated in the case of the last dividend period, which runs from December 1, 2001 to May 31, 2002. For the years ended November 30, 2000 and 1999, the Company's net income of $1,775 million and $1,132 million, respectively, resulted in the recognition of dividends in each year in the amount of $50 million on the Redeemable Voting Preferred Stock. Holdings may not redeem shares of the Redeemable Preferred Stock prior to the final dividend payment. However, in the event of a change of control of the Company, holders of the Redeemable Preferred Stock will have the right to require Holdings to redeem all of the stock for an aggregate redemption price equal to $50 million if such change of control occurs prior to November 30, 2001. If a change of control is not approved by a majority of Holdings' Board of Directors, the funds for redemption must be raised by an offering of Holdings' equity securities which are not redeemable. The Redeemable Preferred Stock is not convertible into common stock. NOTE 6 / COMMON STOCK On September 20, 2000, Lehman Brothers' Board of Directors declared a two-for-one common stock split, to be effected in the form of a 100% stock dividend, which became effective on October 20, 2000. The par value of the common stock remained at $0.10 per share. Accordingly, a transfer from paid-in capital to common stock of $12.5 million was made to preserve the par value of the post-split shares. All share and per share amounts have been restated for the effect of the split. Changes in shares of Holdings' common stock (the "Common Stock") outstanding are as follows:
November 30 2000 1999 1998 - -------------------------------------------------------------------------------------------------- Shares outstanding, beginning of period 239,825,620 227,315,754 233,224,148 Exercise of stock options and other share issuances 10,015,048 1,925,642 6,259,766 Treasury stock purchases (25,245,336) (12,415,776) (17,168,160) Issuances of shares to the RSU Trust 11,800,000 23,000,000 5,000,000 - -------------------------------------------------------------------------------------------------- Shares outstanding, end of period 236,395,332 239,825,620 227,315,754 ==================================================================================================
The Company had reserved for issuance approximately 2.4 million shares of Common Stock for conversion of the Convertible Voting Preferred. 69 During the years ended November 30, 2000, 1999 and 1998, the Company repurchased or acquired shares of its Common Stock at an aggregate cost of approximately $1,203 million, $353 million and $469 million, respectively. These shares were acquired in the open market and from employees who had tendered mature shares to pay for the exercise cost of stock options and related tax withholding obligations. These shares are being reserved for future issuances under employee stock-based compensation plans. In 1997, the Company established an irrevocable grantor trust (the "RSU Trust") in order to provide common stock voting rights to employees who hold outstanding restricted stock units and to encourage employees to think and act like owners. The RSU Trust was initially funded in 1997 with a total of 32.0 million shares consisting of 10.0 million treasury shares for restricted stock unit ("RSU") awards under the Employee Incentive Plan and 22.0 million new issue shares of Common Stock for RSU awards under the 1994 Management Ownership Plan. In 2000, 1999 and 1998, 11.8 million, 23.0 million and 5.0 million treasury shares, respectively, were transferred into the RSU Trust. At November 30, 2000, approximately 42.4 million shares were held in the RSU Trust with a total value of approximately $647 million. For accounting purposes, these shares are valued at weighted-average grant prices. Shares transferred to the RSU Trust do not impact the total number of shares used in the computation of earnings per common share because the Company considers the RSUs as common stock equivalents for purposes of this computation. Accordingly, the establishment of the RSU Trust has had no effect on the total equity, net income or earnings per share of the Company. NOTE 7 / INCENTIVE PLANS EMPLOYEE STOCK PURCHASE PLAN The Employee Stock Purchase Plan (the "ESPP") allows employees to purchase Common Stock at a 15% discount from market value, with a maximum of $25,000 in annual aggregate purchases by any one individual. The number of shares of Common Stock authorized for purchase by eligible employees is 12.0 million. As of November 30, 2000 and 1999, 5.2 million shares and 4.8 million shares, respectively, of Common Stock had been purchased by eligible employees through the ESPP. 1994 INCENTIVE PLANS The 1994 Management Replacement Plan (the "Replacement Plan") provided awards similar to the American Express common shares granted to Company employees which were canceled as of the date of the spin-off from American Express. Through November 30, 2000, a total of 3.9 million awards had been granted under the Replacement Plan, including both stock options and restricted stock; 0.4 million were outstanding at November 30, 2000. No future awards will be granted under this plan. The Lehman Brothers Holdings Inc. 1994 Management Ownership Plan (the "1994 Plan") provides for the issuance of RSUs, performance stock units ("PSUs"), stock options and other equity awards for a period of up to ten years to eligible employees. A total of 33.3 million shares of Common Stock may be granted under the 1994 Plan. At November 30, 2000, RSU and stock option awards with respect to 31.3 million shares of Common Stock have been made under the 1994 Plan of which 2.9 million are outstanding and 28.4 million have been converted to freely transferable Common Stock. The Company will utilize the remaining authorization of 2.0 million shares to satisfy dividend reinvestment requirements for outstanding awards and to fund the annual RSU awards for the Company's non-employee directors. 1996 MANAGEMENT OWNERSHIP PLAN During 1996, the Company's stockholders approved the 1996 Management Ownership Plan (the "1996 Plan") under which awards similar to those of the 1994 Plan may be granted, and under which up to 42.0 million shares of Common Stock may be subject to awards. At November 30, 2000, RSU, PSU and stock option awards with respect to 29.7 million shares of Common Stock have been made under the 1996 Plan of which 21.5 million are outstanding and 8.2 million have been converted to freely transferable Common Stock. EMPLOYEE INCENTIVE PLAN The Employee Incentive Plan ("EIP") has provisions similar to the 1994 Plan and the 1996 Plan, and authorization for up to 156.0 million shares of Common Stock which may be subject to awards. At November 30, 2000, awards with respect to 125.9 million shares of Common Stock have been made under the EIP of which 112.5 million are outstanding and 13.4 million have been converted to freely transferable Common Stock. Approximately 72.5 million of the outstanding awards consist of RSUs and PSUs which have vesting and transfer restrictions extending through the year 2006. 70 The following is a summary of RSUs outstanding under Holdings' stock-based incentive plans: RESTRICTED STOCK UNITS
1994 1996 Plan Plan EIP Total - ----------------------------------------------------------------------------------------------------- Balance, November 30, 1997 23,796,350 2,385,758 31,977,174 58,159,282 - ----------------------------------------------------------------------------------------------------- Granted 167,732 1,222,800 22,800,302 24,190,834 Canceled (85,468) (224,954) (806,598) (1,117,020) Exchanged for stock without restrictions (487,582) (211,128) (180,634) (879,344) - ----------------------------------------------------------------------------------------------------- Balance, November 30, 1998 23,391,032 3,172,476 53,790,244 80,353,752 - ----------------------------------------------------------------------------------------------------- Granted 386,422 2,376,634 13,960,994 16,724,050 Canceled (122,826) (59,734) (3,678,534) (3,861,094) Exchanged for stock without restrictions (9,375,418) (41,758) (733,752) (10,150,928) - ----------------------------------------------------------------------------------------------------- Balance, November 30, 1999 14,279,210 5,447,618 63,338,952 83,065,780 - ----------------------------------------------------------------------------------------------------- Granted 56,503 2,730,011 19,434,315 22,220,829 Canceled (180,445) (490,009) (2,746,069) (3,416,523) Exchanged for stock without restrictions (11,760,416) (7,487,129) (19,247,545) - ----------------------------------------------------------------------------------------------------- Balance, November 30, 2000 2,394,852 7,687,620 72,540,069 82,622,541 =====================================================================================================
Eligible employees receive RSUs as a portion of their total compensation in lieu of cash. There is no further cost to employees associated with the RSU awards. The Company measures compensation cost for RSUs based on the market value of its Common Stock at the grant date and amortizes this amount to expense over the applicable vesting periods. RSU awards made to employees have various vesting provisions and generally convert to unrestricted freely transferable Common Stock five years from the grant date. Holdings accrues a dividend equivalent on each RSU outstanding (in the form of additional RSUs), based on dividends declared on its Common Stock. In the third quarter of 2000, the Company delivered 11.5 million shares of its Common Stock to current and former employees in satisfaction of RSUs awarded in 1995. Substantially all of the shares delivered were funded from the RSU Trust. The Company also received 3.6 million shares from current and former employees in satisfaction of applicable tax withholding requirements. Shares received were recorded as treasury stock at an aggregate value of $168 million. Of the RSUs outstanding at November 30, 2000, approximately 23.5 million RSUs were vested, approximately 14.0 million RSUs will vest during fiscal 2001, and the remaining RSUs will vest subsequent to November 30, 2001. At November 30, 2000, approximately 42.4 million shares of the Company's Common Stock were held in the RSU Trust. In addition to the RSUs included in the previous table, the Company has awarded PSUs under the EIP to certain senior officers. The number of PSUs which may be earned is dependent upon the achievement of certain performance levels within predetermined performance periods. At the end of a performance period, any PSUs earned will convert one-for-one to RSUs which then vest in three, four or five years. As of December 31, 2000, approximately 6.9 million PSUs have been earned to date, subject to vesting and transfer restrictions. The compensation cost for the RSUs payable in satisfaction of PSUs is accrued over the combined performance and vesting periods. Total compensation cost recognized during 2000, 1999 and 1998 for the Company's stock-based awards was approximately $520 million, $363 million and $221 million, respectively. 71 STOCK OPTIONS
Weighted- Average 1994 Replace- 1996 Exercise Expiration Plan ment Plan Plan EIP Total Price Dates - -------------------------------------------------------------------------------------------------------------------------------- Balance, November 30, 1997 4,251,280 1,257,788 6,150,000 6,100,000 17,759,068 $11.82 1/98-5/04 - -------------------------------------------------------------------------------------------------------------------------------- Granted 14,424 6,950,000 14,748,340 21,712,764 $24.86 12/02-11/08 Exercised (1,978,802) (312,648) (2,550,330) (1,412,000) (6,253,780) $11.59 Canceled (834) (7,893,000) (7,893,834) $30.24 - -------------------------------------------------------------------------------------------------------------------------------- Balance, November 30, 1998 2,286,902 944,306 10,549,670 11,543,340 25,324,218 $17.32 2/99-11/08 - -------------------------------------------------------------------------------------------------------------------------------- Granted 56,238 4,300,000 16,881,168 21,237,406 $27.16 Exercised (889,598) (330,568) (234,560) (1,454,726) $11.10 Canceled (34,560) (3,670) (200,000) (589,912) (828,142) $22.12 - -------------------------------------------------------------------------------------------------------------------------------- Balance, November 30, 1999 1,418,982 610,068 14,649,670 27,600,036 44,278,756 $22.15 6/00-11/09 - -------------------------------------------------------------------------------------------------------------------------------- Granted 37,520 6,600,000 18,469,555 25,107,075 $34.89 Exercised (805,600) (257,500) (5,139,586) (3,273,872) (9,476,558) $17.04 Canceled (165,600) (238) (2,300,000) (2,875,796) (5,341,634) $24.89 - -------------------------------------------------------------------------------------------------------------------------------- Balance, November 30, 2000 485,302 352,330 13,810,084 39,919,923 54,567,639 $28.62 2/01-11/10 ================================================================================================================================
At November 30, 2000 and 1999, approximately 18.0 million and 19.4 million stock options, respectively, were exercisable at weighted-average prices of $22.49 and $17.28, respectively. The weighted-average remaining contractual life of the stock options outstanding at November 30, 2000 is 5.28 years. The exercise price for all stock options awarded has been equal to the market price of Common Stock on the day of grant. The following table provides further details relating to Holdings' stock options outstanding as of November 30, 2000:
Options Outstanding Options Exercisable ---------------------------------------------- ---------------------------------------------- Weighted- Weighted- Average Average Weighted- Remaining Weighted- Remaining Range Of Number Average Contractual Number Average Contractual Exercise Prices Outstanding Exercise Price Life (in years) Exercisable Exercise Price Life (in years) - ------------------------------------------------------------------------------------------------------------------- $ 9.00-$ 9.99 729,688 $ 9.00 2.18 729,688 $ 9.00 2.18 $10.00-$19.99 4,472,094 $ 14.17 .95 4,433,084 $ 14.12 .88 $20.00-$29.99 25,407,604 $ 23.19 4.76 8,278,578 $ 22.56 2.68 $30.00-$39.99 17,809,838 $ 33.52 5.66 4,532,806 $ 32.72 4.22 $40.00-$49.99 5,998,415 $ 49.53 10.00 $50.00-$59.99 150,000 $ 55.56 4.97 - ------------------------------------------------------------------------------------------------------------------- 54,567,639 $ 28.62 5.28 17,974,156 $ 22.49 2.60 ===================================================================================================================
The disclosure requirements of SFAS No. 123 require companies which elect not to record the fair value of stock-based compensation awards in the Consolidated Statement of Income to provide pro forma disclosures of net income and earnings per share in the notes to the consolidated financial statements as if the fair value of stock-based compensation had been recorded. The Company utilized the Black-Scholes option-pricing model to quantify the pro forma effects on net income and earnings per common share of the fair value of the stock options granted and outstanding during 2000, 1999 and 1998. Based on the results of the model, the weighted-average fair value of the stock options granted was $9.91, $6.99 and $6.18 for 2000, 1999 and 1998, respectively. The weighted-average assumptions which were used for 2000, 1999 and 1998 included risk-free interest rates of 6.27%, 5.25% and 5.01%, an expected life of 3.6 years, 3.5 years and 4.0 years, and expected volatility of 35%, 35% and 30%, respectively. In addition, annual dividends of $0.22, $0.18 and $0.15 were assumed for the 2000, 1999 and 1998 options, respectively. 72 The Company's 2000, 1999 and 1998 pro forma net income would have been $1,725 million, $1,091 million and $723 million, respectively, compared to actual net income of $1,775 million, $1,132 million and $736 million, respectively. Pro forma earnings per common share for 2000, 1999 and 1998 would have been $6.32, $3.99 and $2.55, respectively, compared to actual earnings per common share of $6.38, $4.08 and $2.60, respectively. The pro forma amounts reflect the effects of the Company's stock option grants and the 15% purchase discount from market value offered to the Company's employees who participate in the ESPP. NOTE 8 / EARNINGS PER COMMON SHARE Earnings per share was calculated as follows (in millions, except for per share data):
Three Years Ended 2000 1999 1998 - --------------------------------------------------------------------------------------------------------- NUMERATOR: Net income $ 1,775 $ 1,132 $ 736 Preferred stock dividends 96 95 87 - --------------------------------------------------------------------------------------------------------- Numerator for basic earnings per share--income available to common stockholders $ 1,679 $ 1,037 $ 649 Convertible preferred stock dividends 8 17 - --------------------------------------------------------------------------------------------------------- Numerator for diluted earnings per share--income available to common stockholders (adjusted for assumed conversion of preferred stock) $ 1,687 $ 1,054 $ 649 ========================================================================================================= DENOMINATOR: Denominator for basic earnings per share--weighted-average shares 243.8 243.0 241.8 Effect of dilutive securities: Employee stock options 13.0 6.2 4.8 Restricted stock units 5.0 3.8 3.4 Preferred shares assumed converted into common 2.4 5.6 - --------------------------------------------------------------------------------------------------------- Dilutive potential common shares 20.4 15.6 8.2 - --------------------------------------------------------------------------------------------------------- Denominator for diluted earnings per share--adjusted weighted-average shares 264.2 258.6 250.0 ========================================================================================================= BASIC EARNINGS PER SHARE $ 6.89 $ 4.27 $ 2.68 ========================================================================================================= DILUTED EARNINGS PER SHARE $ 6.38 $ 4.08 $ 2.60 =========================================================================================================
Convertible Voting Preferred shares were convertible into common shares at a conversion price of approximately $61.50 per share. However, for purposes of calculating dilutive 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 $3.08 on an annualized basis). 73 NOTE 9 / CAPITAL REQUIREMENTS The Company operates globally through a network of subsidiaries, with several subject to regulatory requirements. In the United States, LBI, as a registered broker-dealer, is subject to the Securities and Exchange Commission ("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 November 30, 2000, LBI's regulatory net capital, as defined, of $1,984 million exceeded the minimum requirement by $1,874 million. 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 November 30, 2000, LBIE's financial resources of approximately $1,897 million exceeded the minimum requirement by approximately $381 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 November 30, 2000, had net capital of approximately $400 million which was approximately $108 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 November 30, 2000, 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 November 30, 2000, LBFP and LBDP each had capital which exceeded the requirement of the most stringent rating agency by approximately $46 million and $26 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. At November 30, 2000, approximately $5.7 billion of net assets of subsidiaries were restricted as to the payment of dividends to Holdings. 74 NOTE 10 / EMPLOYEE BENEFIT PLANS The Company provides various pension plans for the majority of its employees worldwide. In addition, the Company provides certain other postretirement benefits, primarily health care and life insurance, to eligible employees. The following summarizes these plans:
Pension Postretirement Benefits Benefits November 30 November 30 ----------------- ----------------- (in millions, except for weighted-average) 2000 1999 2000 1999 - -------------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 654 $ 673 $ 47 $ 50 Service cost before expenses 14 22 1 1 Interest cost 46 45 4 3 Actuarial (gain) loss (5) (49) 1 (4) Benefits paid (23) (32) (3) (3) Foreign currency exchange rate changes (19) (5) - -------------------------------------------------------------------------------------------- Benefit obligation at end of year $ 667 $ 654 $ 50 $ 47 - -------------------------------------------------------------------------------------------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $ 918 $ 817 Actual return on plan assets, net of expenses 36 123 Employer contribution 2 15 Benefits paid (23) (32) Foreign currency exchange rate changes (19) (5) - -------------------------------------------------------------------------------------------- Fair value of plan assets at end of year $ 914 $ 918 - -------------------------------------------------------------------------------------------- Funded (underfunded) status $ 247 $ 264 $ (50) $ (47) Unrecognized net actuarial (gain) loss 31 (15) (22) (24) Unrecognized prior service cost (credit) 17 17 (5) (6) - -------------------------------------------------------------------------------------------- Prepaid (accrued) benefit cost $ 295 $ 266 $ (77) $ (77) - -------------------------------------------------------------------------------------------- WEIGHTED-AVERAGE ASSUMPTIONS Discount rate 7.42% 7.25% 7.75% 7.75% Expected return on plan assets 10.88% 9.19% Rate of compensation increase 4.96% 4.91% 5.00% 5.00%
For measurement purposes, the annual health care cost trend rate was assumed to be 7.0% for the year ended November 30, 2001. The rate was assumed to decrease at the rate of 0.5% per year to 5.5% in the year ended November 30, 2004 and remain at that level thereafter.
Pension Benefits Postretirement Benefits Twelve Months Ended Twelve Months Ended November 30 November 30 ------------------------ ------------------------ (in millions) 2000 1999 1998 2000 1999 1998 - --------------------------------------------------------------------------------------------------- COMPONENTS OF NET PERIODIC BENEFIT COST Service cost $ 14 $ 22 $ 23 $ 1 $ 1 $ 1 Interest cost 46 45 39 4 4 3 Expected return on plan assets (96) (77) (67) Recognized net actuarial (gain) loss 1 2 (1) (2) (2) (1) Unrecognized prior service cost (credit) 1 2 - --------------------------------------------------------------------------------------------------- Net periodic benefit (income) cost $(34) $ (6) $ (6) $ 3 $ 3 $ 3 ===================================================================================================
Assumed health care cost trend rates have an effect on the amount reported for postretirement benefits. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
(in millions) 1% Point Increase 1% Point Decrease - ---------------------------------------------------------------------------------------------------------------- Effect on total service and interest cost components in fiscal 2000 $0.3 $(0.3) - ---------------------------------------------------------------------------------------------------------------- Effect on postretirement benefit obligation at November 30, 2000 $4.0 $(3.9) ================================================================================================================
NOTE 11 / INCOME TAXES The Company files a consolidated U.S. federal income tax return reflecting the income of Holdings and its subsidiaries. The provision for income taxes consists of the following:
Twelve months ended November 30 (in millions) 2000 1999 1998 - ----------------------------------------------------------- CURRENT Federal $ 295 $ 121 $ 238 State 45 117 63 Foreign 577 364 299 - ----------------------------------------------------------- 917 602 600 - ----------------------------------------------------------- DEFERRED Federal (114) 2 (239) State (54) (54) (6) Foreign (1) (93) (39) - ----------------------------------------------------------- (169) (145) (284) - ----------------------------------------------------------- $ 748 $ 457 $ 316 ===========================================================
76 Income before taxes included $1,287 million, $595 million, and $270 million that has also been subject to income taxes of foreign jurisdictions for 2000, 1999 and 1998, respectively. The income tax provision differs from that computed by using the statutory federal income tax rate for the reasons shown below:
Twelve months ended November 30 (in millions) 2000 1999 1998 - ------------------------------------------------------------------------------------- Federal income taxes at statutory rate $ 903 $ 571 $ 368 State and local taxes (6) 41 37 Tax-exempt income (130) (109) (71) Amortization of goodwill 2 2 3 Foreign operations (15) (6) 3 Other, net (6) (42) (24) - ------------------------------------------------------------------------------------- $ 748 $ 457 $ 316 =====================================================================================
The effective tax rate increased in 2000 due to an overall increase in the level of pretax income, which lessened the relative impact of certain tax preference items. The increase was partially offset by a decrease in the state and local effective tax rate. For the years ended November 30, 2000 and 1999, a net tax benefit of approximately $373 million and $90 million, respectively, relating to stock-based awards was credited to Additional paid-in capital. In addition, the Company recorded $(8) million, $(11) million and $2 million of tax (benefits)/provisions from the translation of foreign currencies, which was recorded directly in Accumulated other comprehensive income, for the fiscal years 2000, 1999 and 1998, respectively. Effective for 2000, the Company permanently reinvested its earnings in certain foreign subsidiaries. As of November 30, 2000, $112 million of the Company's accumulated earnings were permanently reinvested. At current tax rates, additional federal income taxes (net of available tax credits) of $15 million would become payable if such income were to be repatriated. Deferred income taxes are provided for the differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. These temporary differences will result in future income or deductions for income tax purposes and are measured using the enacted tax rates that will be in effect when such items are expected to reverse. The Company provides for deferred income taxes on undistributed earnings of foreign subsidiaries, which are not permanently reinvested. 77 At November 30, 2000 and 1999 the deferred tax assets and liabilities consisted of the following:
November 30 (in millions) 2000 1999 - ------------------------------------------------------------------------------------------- DEFERRED TAX ASSETS Liabilities/accruals not currently deductible $ 439 $ 374 Deferred compensation 641 521 Unrealized trading and investment activity 75 Foreign tax credits 33 25 Undistributed earnings of foreign subsidiaries (net of credits) 12 36 NOL carryforwards 5 5 Other 95 69 - ------------------------------------------------------------------------------------------- $1,300 $1,030 Less: Valuation allowance 18 15 - ------------------------------------------------------------------------------------------- Total deferred tax assets net of valuation allowance $1,282 $1,015 - ------------------------------------------------------------------------------------------- DEFERRED TAX LIABILITIES Excess tax over financial depreciation $ 121 $ 112 Pension and retirement costs 78 60 Unrealized trading and investment activity 51 Other 57 11 - ------------------------------------------------------------------------------------------- Total deferred tax liabilities $ 256 $ 234 - ------------------------------------------------------------------------------------------- Net deferred tax assets $1,026 $ 781 ===========================================================================================
The net deferred tax assets are included in Other assets in the accompanying Consolidated Statement of Financial Condition. The valuation allowance recorded against deferred tax assets at November 30, 2000 and 1999 will reduce goodwill if future circumstances permit recognition. The valuation allowance relates to temporary differences resulting from the 1988 acquisition of E.F. Hutton Group, Inc. (now known as LB I Group Inc.) which are subject to separate company limitations. If future circumstances permit the recognition of the acquired tax benefit, then goodwill will be reduced. The Company has approximately $14 million of NOL carryforwards, substantially all of which are attributable to the acquisition of LB I Group, Inc. NOTE 12 / DERIVATIVE FINANCIAL INSTRUMENTS Derivatives are financial instruments whose value is based upon an underlying asset (e.g., treasury bond), index (e.g., S&P 500) or reference rate (e.g., LIBOR). Over-the-counter ("OTC") derivative products are privately negotiated contractual agreements that can be tailored to meet individual client needs and include forwards, swaps and certain options including caps, collars and floors. Exchange-traded derivative products are standardized contracts transacted through regulated exchanges and include futures and certain option contracts listed on an exchange. In the normal course of business, the Company enters into derivative transactions both in a trading capacity and as an end user. Acting in a trading capacity, the Company enters into derivative transactions to satisfy the needs of its clients and to manage the Company's own exposure to market and credit risks resulting from its trading activities (collectively, "Trading-Related Derivative Activities"). As an end user, the Company primarily enters into interest rate swap and option contracts to adjust the interest rate nature of its funding sources from fixed to floating rates, and to change the index upon which floating interest rates are based (e.g., Prime to LIBOR) (collectively, "End User Derivative Activities"). 78 There is an extensive volume of derivative products available in the marketplace, which can vary from a simple forward foreign exchange contract to a complex derivative instrument with multiple risk characteristics involving the aggregation of the risk characteristics of a number of derivative product types including swap products, options and forwards. Listed below are examples of various derivative product types along with a brief discussion of the performance mechanics of certain specific derivative instruments. SWAP PRODUCTS Interest rate swap products include interest rate and currency swaps, leveraged swaps, swap options, and other interest rate option products including caps, collars and floors. An interest rate swap is a negotiated OTC contract in which two parties agree to exchange periodic interest payments for a defined period, calculated based upon a predetermined notional amount. Interest payments are usually exchanged on a net basis throughout the duration of the swap contract. A currency swap is an OTC agreement to exchange a fixed amount of one currency for a specified amount of a second currency at the outset and completion of the swap term. Leveraged swaps involve the multiplication of the interest rate factor upon which the interest payment streams are based (e.g., Party A pays three times the six-month LIBOR). Caps are contractual commitments that require the writer to pay the purchaser the amount by which an interest reference rate exceeds a defined contractual rate, if any, at specified times during the contract. Conversely, a floor is a contractual commitment that requires the writer to pay the amount by which a defined contractual rate exceeds an interest reference rate at specified times over the life of the contract, if any. Equity swaps are contractual agreements whereby one party agrees to receive the appreciation (or depreciation) value over a strike price on an equity investment in return for paying another rate, which is usually based upon equity index movements or interest rates. Commodity swaps are contractual commitments to exchange the fixed price of a commodity for a floating price (which is usually the prevailing spot price) throughout the swap term. OPTIONS Option contracts provide the option purchaser (holder) with the right but not the obligation to buy or sell a financial instrument, commodity or currency at a predetermined exercise price (strike price) during a defined period (American Option) or at a specified date (European Option). The option purchaser pays a premium to the option seller (writer) for the right to exercise the option. The option seller is obligated to buy (put) or sell (call) the item underlying the contract at a set price, if the option purchaser chooses to exercise. Option contracts also exist for various indices and are similar to options on a security or other instrument except that, rather than settling physical with delivery of the underlying instrument, they are cash settled. As a purchaser of an option contract, the Company is subject to credit risk, since the counterparty is obligated to make payments under the terms of the option contract, if the Company exercises the option. As the writer of an option contract, the Company is not subject to credit risk but is subject to market risk, since the Company is obligated to make payments under the terms of the option contract if exercised. Option contracts may be exchange-traded or OTC. Exchange-traded options are the obligations of the exchange and generally have standardized terms and performance mechanics. In contrast, all of the terms of an OTC option including the method of settlement, term, strike price, premium and security are determined by negotiation of the parties. FUTURES AND FORWARDS Futures contracts are exchange-traded contractual commitments to either receive (purchase) or deliver (sell) a standard amount or value of a financial instrument or commodity at a specified future date and price. Maintaining a futures contract requires the Company to deposit with the exchange an amount of cash or other specified assets as security for its obligation. Therefore, the potential for losses from exchange-traded products is limited. As of November 30, 2000 the Company had approximately $1,505 million on deposit with futures exchanges consisting of cash and securities (customer and proprietary), and had posted approximately $302 million of letters of credit. Additionally, futures exchanges generally require the daily cash settlement of unrealized gains/losses on open contracts with the futures exchange. Therefore, futures contracts provide a reduced funding alternative to purchasing the underlying cash position in the marketplace. Futures contracts may be settled by physical delivery of the underlying asset or cash settlement (for index futures) on the settlement date or by entering into an offsetting futures contract with the futures exchange prior to the settlement date. Forwards are OTC contractual commitments to purchase or sell a specified amount of a financial instrument, foreign currency or commodity at a future date at a predetermined price. TBAs are forward contracts which give the purchaser/seller an obligation to obtain/deliver mortgage securities in the future. Therefore, TBAs subject the holder to both interest rate risk and principal prepayment risk. 79 TRADING-RELATED DERIVATIVE ACTIVITIES Derivatives are subject to various risks similar to other financial instruments including market, credit and operational risk. In addition, the Company may also be exposed to legal risks related to its derivative activities including the possibility that a transaction may be unenforceable under applicable law. The risks of derivatives should not be viewed in isolation, but rather should be considered on an aggregate basis along with the Company's other trading-related activities. The Company manages the risks associated with derivatives on an aggregate basis along with the risks associated with its proprietary trading and market-making activities in cash instruments as part of its firmwide risk management policies. Derivatives are generally based upon notional amounts. Notional amounts are not recorded on-balance sheet, but rather are utilized solely as a basis for determining future cash flows to be exchanged. Therefore, notional amounts provide a measure of the Company's involvement with such instruments, but are not indicative of actual or potential risk. The following table reflects the notional/contract amounts of the Company's Trading-Related Derivative Activities: TRADING-RELATED DERIVATIVE FINANCIAL INSTRUMENTS
Weighted- Notional/ Average Contract Maturity Amounts (in years) -------------------------- NOVEMBER 30 November 30 November 30 (in millions) 2000 1999 2000 - -------------------------------------------------------------------------------------------------------------------- Interest rate and currency swaps and options (including caps, collars and floors) $2,406,501 $2,142,592 5.25 Foreign exchange forward and future contracts and options 458,593 418,481 .46 Other fixed income securities contracts (including futures contracts, options and TBAs) 496,641 254,662 .77 Equity contracts (including equity swaps, futures, warrants and options) 55,355 62,053 .82 Commodity contracts (including swaps, futures, forwards and options) 347 173 1.69 - -------------------------------------------------------------------------------------------------------------------- Total $3,417,437 $2,877,961 3.88 ====================================================================================================================
Of the total notional amounts at November 30, 2000 and 1999, approximately $3,171 billion and $2,706 billion are over-the-counter and $246 billion and $172 billion are exchange-traded, respectively. The total weighted-average maturity at November 30, 2000, for over-the-counter and exchange-traded contracts was 3.88 years and 3.73 years, respectively. Approximately $1,213 billion of the notional/contract amount of the Company's Trading-Related Derivative Activities mature within the year ended November 30, 2001, of which approximately 36% have maturities of less than one month. The Company records its Trading-Related Derivative Activities on a mark-to-market basis with realized and unrealized gains and losses recognized currently in Principal transactions in the Consolidated Statement of Income. 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. The Company offers equity, fixed income and foreign exchange products to its customers. Because of the integrated nature of the market for such products, each product area trades cash instruments as well as related derivative products. 80 Listed in the following table is the fair value of the Company's Trading-Related Derivative Activities as of November 30, 2000 and 1999 as well as the average fair value of these instruments. Average fair values of these instruments were calculated based upon month-end statement of financial condition values, which the Company believes do not vary significantly from the average fair value calculated on a more frequent basis. Variances between average fair values and period-end values are due to changes in the volume of activities in these instruments and changes in the valuation of these instruments due to variations in market and credit conditions. FAIR VALUE OF TRADING-RELATED DERIVATIVE FINANCIAL INSTRUMENTS
AVERAGE FAIR VALUE* FAIR VALUE* TWELVE MONTHS ENDED NOVEMBER 30, 2000 NOVEMBER 30, 2000 --------------------- ------------------- (in millions) ASSETS LIABILITIES ASSETS LIABILITIES - ---------------------------------------------------------------------------------------------------------------- Interest rate and currency swaps and options (including caps, collars and floors) $ 4,349 $ 3,390 $ 4,525 $ 3,051 Foreign exchange forward contracts and options 902 1,361 1,180 961 Other fixed income securities contracts (including options and TBAs) 496 418 1,269 1,113 Equity contracts (including equity swaps, warrants, and options) 3,836 3,399 6,664 5,885 - ---------------------------------------------------------------------------------------------------------------- Total $ 9,583 $ 8,568 $13,638 $11,010 ================================================================================================================
Average Fair Value* Fair Value* Twelve Months Ended November 30, 1999 November 30, 1999 --------------------- ------------------- (in millions) Assets Liabilities Assets Liabilities - ---------------------------------------------------------------------------------------------------------------- Interest rate and currency swaps and options (including caps, collars and floors) $ 4,807 $ 3,633 $ 4,406 $ 3,030 Foreign exchange forward contracts and options 878 1,310 1,226 1,287 Other fixed income securities contracts (including options and TBAs) 254 195 257 240 Equity contracts (including equity swaps, warrants and options) 4,367 4,444 2,478 3,291 Commodity contracts (including swaps, forwards, and options) 15 5 - --------------------------------------------------------------------------------------------------------------- Total $10,306 $ 9,582 $ 8,382 $ 7,853 - ---------------------------------------------------------------------------------------------------------------
* 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 unrealized gains, net of unrealized losses for situations in which the Company has a master netting agreement. Similarly, liabilities represent net amounts owed to counterparties. Therefore, the fair value of assets/liabilities related to derivative contracts at November 30, 2000 represents the Company's net receivable/payable for derivative financial instruments before consideration of collateral. 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. Included within the $10,306 million fair value of assets at November 30, 1999 was $9,002 million related to swaps and other OTC contracts and $1,304 million related to exchange-traded option and warrant contracts. The primary difference in risks related to OTC and exchange-traded contracts is credit risk. OTC contracts contain credit risk for unrealized gains from various counterparties for the duration of the contract, net of collateral. With respect to OTC contracts, including swaps, the Company views its net credit exposure to be $6,304 million at November 30, 2000, representing the fair value of the Company's OTC contracts in an unrealized gain position, after consideration of collateral. 81 Counterparties to the Company's OTC derivative products are primarily financial intermediaries (U.S. and foreign banks), securities firms, corporations, governments and their agencies, finance companies, insurance companies, investment companies and pension funds. Collateral held related to OTC contracts generally includes cash and U.S. government and federal agency securities. Presented below is an analysis of the Company's net credit exposure at November 30, 2000 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 11% 2 AA-/Aa3 OR HIGHER 29% 3 A-/A3 OR HIGHER 39% 4 BBB-/Baa3 OR HIGHER 15% 5 BB-/Ba3 OR HIGHER 3% 6 B+/B1 OR LOWER 3%
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, the exchange clearinghouse requires counterparties to futures contracts to post margin upon the origination of the contract and for any changes in the market value of the contract on a daily basis (certain foreign exchanges provide for settlement within three days). Therefore, the potential for losses from exchange-traded products is limited. END-USER DERIVATIVE ACTIVITIES The Company utilizes a variety of derivative products as an end user to modify the interest rate characteristics of its long-term debt portfolio. The Company actively manages the interest rate exposure on its long-term debt portfolio through the use of interest rate and currency swaps to more closely match the terms of its debt portfolio to the assets being funded and to minimize interest rate risk. At November 30, 2000 and 1999, the notional amounts of the Company's end-user activities related to its long-term debt obligations were approximately $26.9 billion and $27.1 billion, respectively. (For a further discussion of the Company's long-term debt related end-user derivative activities see Note 3.) The Company also utilizes derivative products as an end user to modify its interest rate exposure associated with its secured financing activities, including securities purchased under agreements to resell, securities borrowed, securities sold under agreements to repurchase and securities loaned. At November 30, 2000 and 1999, the Company had $216 billion and $167 billion, respectively, of such secured financing activities. As with the Company's long-term debt, its secured financing activities expose the Company to interest rate risk. The Company, as an end user, manages the interest rate risk related to these activities by utilizing derivative financial instruments, including interest rate swaps and purchased options. The Company designates certain specific derivative transactions against specific assets and liabilities with matching maturities. In addition, the Company manages the interest rate risk of anticipated secured financing transactions with derivative products. The Company actively monitors the level of anticipated secured financing transactions to ensure there is a high degree of certainty that such secured financing transactions will be executed at levels at least equal to the designated derivative product transactions. At November 30, 2000 and 1999, the Company, as an end user, utilized derivative financial instruments with an aggregate notional amount of $8.5 billion and $12.9 billion, respectively, to modify the interest rate characteristics of its secured financing activities. The total notional amount of these agreements had a weighted-average maturity of 3.5 years and 2.3 years as of November 30, 2000 and 1999, respectively. On an overall basis, the Company's secured financing end-user derivative activities (decreased) increased net revenues by approximately $(14) million, $(13) million and $4 million for 2000, 1999 and 1998, respectively. 82 NOTE 13 / FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107 "Disclosures about Fair Value of Financial Instruments" requires the Company to report the fair value of financial instruments, as defined. Assets and liabilities that are carried at fair value include all of the Company's trading assets and liabilities including derivative financial instruments used for trading purposes as described in Note 1, which are recorded as securities and other financial instruments owned and securities and other financial instruments sold but not yet purchased. Assets and liabilities, which are recorded at contractual amounts that approximate market or fair value include cash and cash equivalents, cash and securities segregated and on deposit for regulatory and other purposes, receivables, certain other assets, commercial paper and short-term debt, and payables. The market value of such items are not materially sensitive to shifts in market interest rates because of the limited term to maturity of these instruments and their variable interest rates. Financial instruments which are recorded at amounts that do not necessarily approximate market or fair value include long-term debt, certain secured financing activities and the related financial instruments utilized by the Company as an end user to manage the interest rate risk of these exposures. The Company's long-term debt is recorded at contractual or historical amounts. The following table provides a summary of the fair value of the Company's long-term debt and related end-user derivative activities. The fair value of the Company's long-term debt was estimated using either quoted market prices or discounted cash flow analyses based on the Company's current borrowing rates for similar types of borrowing arrangements. The fair value of the Company's long-term debt is subject to changes in its credit spreads, which fluctuated significantly in 2000 and 1999. The unrecognized net gain (loss) related to the Company's end- user derivative activities reflects estimated fair values based on market rates at November 30, 2000 and 1999, respectively.
November 30 (in millions) 2000 1999 - --------------------------------------------------------------------------------------------- Carrying value of long-term debt $ 35,233 $ 30,691 Fair value of long-term debt 35,193 30,454 - --------------------------------------------------------------------------------------------- Unrecognized net gain (loss) on long-term debt $ 40 $ 237 - --------------------------------------------------------------------------------------------- Unrecognized net gain (loss) on long-term debt end user activities $ (201) $ (439) =============================================================================================
The Company carries its secured financing activities, including securities purchased under agreements to resell, securities borrowed, securities sold under agreements to repurchase, and securities loaned, at their original contract amount plus accrued interest. As the majority of such financing activities are short-term in nature, carrying value approximates fair value. At November 30, 2000 and 1999, the Company had $216 billion and $167 billion, respectively, of such secured financing activities. As with the Company's long-term debt, its secured financing activities expose the Company to interest rate risk. At November 30, 2000 and 1999, the Company, as an end user, utilized derivative financial instruments with an aggregate notional amount of $8.5 billion and $12.9 billion, respectively, to modify the interest rate characteristics of its secured financing activities. The unrecognized net losses related to these derivative financial instruments were $22 million and $11 million at November 30, 2000 and 1999, respectively, which were substantially offset by unrecognized net gains on the Company's secured financing activities, including anticipated transactions during the hedge period. Additionally, at November 30, 2000 the Company had approximately $8 million of unrecognized losses related to approximately $1.4 billion of long-term fixed rate repurchase agreements as compared to unrecognized net gains of approximately $23 million on approximately $2.5 billion of such agreements at November 30, 1999. 83 NOTE 14 / OTHER COMMITMENTS AND CONTINGENCIES As of November 30, 2000 and 1999, the Company was contingently liable for $2.1 billion of letters of credit, primarily used to provide collateral for securities and commodities borrowed and to satisfy margin deposits at option and commodity exchanges, and other guarantees. In connection with its financing activities, the Company had outstanding commitments under certain lending arrangements of approximately $3.2 billion and $4.5 billion, at November 30, 2000 and 1999, respectively. 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 $4.4 billion and $2.9 billion at November 30, 2000 and 1999, respectively. In addition, lending commitments to high yield borrowers totaled $1.3 billion and $1.4 billion at November 30, 2000 and 1999, respectively. All of these commitments and any related draw downs of these facilities are typically secured against the borrower's 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. As of November 30, 2000, the Company had pledged securities, primarily fixed income, having a market value of approximately $30.4 billion, as collateral for securities borrowed having a market value of approximately $28.7 billion. Securities and other financial instruments sold but not yet purchased represent obligations of the Company to purchase the securities at prevailing market prices. Therefore, the future satisfaction of such obligations may be for an amount greater or less than the amount recorded. The ultimate gain or loss is dependent upon the price at which the underlying financial instrument is purchased to settle its obligation under the sale commitment. In the normal course of business, the Company is exposed to off-balance sheet credit and market risk as a result of executing, financing and settling various customer security and commodity transactions. Off-balance sheet risk arises from the potential that customers or counterparties fail to satisfy their obligations and that the collateral obtained is insufficient. In such instances, the Company may be required to purchase or sell financial instruments at unfavorable market prices. The Company seeks to control these risks by obtaining margin balances and other collateral in accordance with regulatory and internal guidelines. At November 30, 2000 and 1999, the Company had commitments to invest up to $357 million and $411 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. Subsidiaries of the Company, as general partner, are contingently liable for the obligations of certain public and private limited partnerships organized as pooled investment funds or engaged primarily in real estate activities. In the opinion of the Company, contingent liabilities, if any, for the obligations of such partnerships will not in the aggregate have a material adverse effect on the Company's consolidated financial position or results of operations. In the normal course of its business, the Company has been named a defendant in a number of lawsuits and other legal proceedings. After considering all relevant facts, available insurance coverage and the advice of outside counsel, in the opinion of the Company such litigation will not, in the aggregate, have a material adverse effect on the Company's consolidated financial position or results of operations. 84 CONCENTRATIONS OF CREDIT RISK As a leading global investment bank, the Company is actively involved in securities underwriting, brokerage, distribution and trading. These and other related services are provided on a worldwide basis to a large and diversified group of clients and customers, including multinational corporations, governments, emerging growth companies, financial institutions and individual investors. A substantial portion of the Company's securities and commodities transactions is collateralized and is executed with, and on behalf of, commercial banks and other institutional investors, including other brokers and dealers. The Company's exposure to credit risk associated with the non-performance of these customers and counterparties in fulfilling their contractual obligations pursuant to securities transactions can be directly impacted by volatile or illiquid trading markets, which may impair the ability of customers and counterparties to satisfy their obligations to the Company. Securities and other financial instruments owned by the Company include U.S. government and agency securities, and securities issued by non-U.S. governments, which in the aggregate, represented 12% of the Company's total assets at November 30, 2000. In addition, primarily all of the collateral held by the Company for resale agreements represented 36% of total assets at November 30, 2000, and consisted of securities issued by the U.S. government, federal agencies or non-U.S. governments. The Company's most significant industry concentration is financial institutions, which include other brokers and dealers, commercial banks and institutional clients. This concentration arises in the normal course of the Company's business. LEASE COMMITMENTS The Company leases office space and equipment throughout the world and is a party to a ground lease with the Battery Park City Authority covering its headquarters at 3 World Financial Center which extends through 2069. Total rent expense for 2000, 1999 and 1998 was $47 million, $37 million and $39 million, respectively. Certain leases on office space contain escalation clauses providing for additional rentals based upon maintenance, utility and tax increases. Minimum future rental commitments under non-cancelable operating leases (net of subleases of $57 million) are as follows:
(in millions) - ------------------------------------------------------------------------------ Fiscal 2001 $ 65 Fiscal 2002 60 Fiscal 2003 55 Fiscal 2004 69 Fiscal 2005 71 December 1, 2005 and thereafter 1,013 - ------------------------------------------------------------------------------ $1,333 ==============================================================================
NOTE 15 / SEGMENTS Lehman Brothers 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. 85 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 private equity partnerships. In addition, these revenues also include the appreciation of its general partnership interests. The Company's segment information for fiscal years 2000, 1999 and 1998 is presented below and was developed consistent with the accounting policies used to prepare the Company's consolidated financial statements.
Investment Capital Client (in millions) Banking Markets Services Total - --------------------------------------------------------------------------------- NOVEMBER 30, 2000 Net revenue $2,179 $4,689 $ 839 $7,707 ================================================================================= Earnings before taxes(1) $ 499 $1,801 $ 279 $2,579 ================================================================================= Segment assets (billions) $ 0.5 $213.8 $ 10.4 $224.7 ================================================================================= NOVEMBER 30, 1999 Net revenue $1,664 $3,093 $ 583 $5,340 ================================================================================= Earnings before taxes(1) $ 509 $ 978 $ 144 $1,631 ================================================================================= Segment assets (billions) $ 0.3 $182.5 $ 9.4 $192.2 ================================================================================= NOVEMBER 30, 1998 Net revenue $1,401 $2,113 $ 599 $4,113 ================================================================================= Earnings before taxes(1) $ 530 $ 359 $ 163 $1,052 ================================================================================= Segment assets (billions) $ 0.6 $141.3 $ 12.0 $153.9 =================================================================================
(1) And before dividends on preferred securities. The following are net revenues by geographic region:
Twelve Months ended November 30 (in millions) 2000 1999 1998 - ---------------------------------------------------------------------- U.S. $4,492 $3,160 $2,692 Europe 2,389 1,650 870 Asia Pacific and other 826 530 551 - ---------------------------------------------------------------------- Total $7,707 $5,340 $4,113 ======================================================================
The following information describes the Company's methods of allocating consolidated net revenues to geographic regions. Net revenues, if syndicated or trading-related, have been distributed based upon the location where the primary or secondary position was fundamentally risk managed: if fee-related, by the location of the senior coverage banker; if commission-related, by the location of the salespeople. 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. 86 NOTE 16 / QUARTERLY INFORMATION (UNAUDITED) The following information represents the Company's unaudited quarterly results of operations for 2000 and 1999. Certain amounts reflect reclassifications to conform to the current period's presentation. These quarterly results reflect all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results. Revenues and earnings of the Company can vary significantly from quarter to quarter due to the nature of the Company's business activities.
2000 1999 -------------------------------------- -------------------------------------- (in millions, except per share amounts) NOV. 30 AUG. 31 MAY 31 FEB. 29 Nov. 30 Aug. 31 May 31 Feb. 28 - ----------------------------------------------------------------------------------------------------------------------------- Total revenues $6,414 $7,359 $6,334 $6,340 $4,701 $4,765 $4,932 $4,591 Interest expense 4,716 5,307 4,579 4,138 3,290 3,409 3,477 3,473 - ----------------------------------------------------------------------------------------------------------------------------- Net revenues 1,698 2,052 1,755 2,202 1,411 1,356 1,455 1,118 Non-interest expenses: Compensation and benefits 806 1,067 912 1,145 715 688 738 567 Other expenses 338 312 285 263 258 251 251 242 - ----------------------------------------------------------------------------------------------------------------------------- Total non-interest expenses 1,144 1,379 1,197 1,408 973 939 989 809 - ----------------------------------------------------------------------------------------------------------------------------- Income before taxes and dividends on trust preferred securities 554 673 558 794 438 417 466 309 Provision for income taxes 141 202 166 239 122 112 126 96 Dividends on trust preferred securities 14 14 14 14 15 15 10 2 - ----------------------------------------------------------------------------------------------------------------------------- Net income $ 399 $ 457 $ 378 $ 541 $ 301 $ 290 $ 330 $ 211 - ----------------------------------------------------------------------------------------------------------------------------- Net income applicable to common stock $ 386 $ 444 $ 366 $ 482 $ 292 $ 279 $ 268 $ 198 - ----------------------------------------------------------------------------------------------------------------------------- Weighted-average shares Basic 241.9 242.3 246.3 246.1 241.5 242.6 244.2 243.8 Diluted 265.4 265.0 265.3 262.4 258.0 258.2 260.8 251.6 - ----------------------------------------------------------------------------------------------------------------------------- Earnings per common share Basic $ 1.60 $ 1.83 $ 1.49 $ 1.96 $ 1.21 $ 1.15 $ 1.10 $ 0.81 Diluted $ 1.46 $ 1.68 $ 1.39 $ 1.84 $ 1.14 $ 1.10 $ 1.05 $ 0.79 - ----------------------------------------------------------------------------------------------------------------------------- Dividends per common share $0.055 $0.055 $0.055 $0.055 $0.045 $0.045 $0.045 $0.045 Book value per common share (at period end) $28.78 $27.58 $25.59 $24.40 $22.75 $21.46 $20.29 $19.36 =============================================================================================================================
87
DATA - ------------------------------------------------------------------------------------------------------------------------------- The following table summarizes certain consolidated financial information included in the audited consolidated financial statements. Twelve Months ended November 30 (in millions, except per share, other data and financial ratios) 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF INCOME Revenues: Principal transactions $ 3,713 $ 2,341 $ 1,373 $ 1,461 $ 1,579 Investment banking 2,216 1,682 1,441 1,275 981 Commissions 944 651 513 423 362 Interest and dividends 19,440 14,251 16,542 13,635 11,298 Other 134 64 25 89 40 - ------------------------------------------------------------------------------------------------------------------------------- Total revenues 26,447 18,989 19,894 16,883 14,260 Interest expense 18,740 13,649 15,781 13,010 10,816 - ------------------------------------------------------------------------------------------------------------------------------- Net revenues 7,707 5,340 4,113 3,873 3,444 - ------------------------------------------------------------------------------------------------------------------------------- Non-interest expenses: Compensation and benefits 3,931 2,707 2,086 1,964 1,747 Other expenses 1,197 1,002 975 972 976 Severance and other charges 84 - ------------------------------------------------------------------------------------------------------------------------------- Total non-interest expenses 5,128 3,709 3,061 2,936 2,807 - ------------------------------------------------------------------------------------------------------------------------------- Income before taxes and dividends on trust preferred securities 2,579 1,631 1,052 937 637 Provision for income taxes 748 457 316 290 221 Dividends on trust preferred securities 56 42 - ------------------------------------------------------------------------------------------------------------------------------- Net income $ 1,775 $ 1,132 $ 736 $ 647 $ 416 - ------------------------------------------------------------------------------------------------------------------------------- Net income applicable to common stock $ 1,679 $ 1,037 $ 649 $ 572 $ 378 - ------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (AT PERIOD END) Total assets $224,720 $192,244 $153,890 $151,705 $128,596 Total assets excluding matched book(a) 143,478 130,022 111,509 108,099 96,256 Long-term debt(b) 35,233 30,691 27,341 20,261 15,922 Preferred securities subject to mandatory redemption 860 710 Total stockholders' equity 7,781 6,283 5,413 4,523 3,874 Total capital(c) 43,874 37,684 32,754 24,784 19,796 - ------------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA(D) Net income $ 6.38 $ 4.08 $ 2.60 $ 2.36 $ 1.62 Dividends declared per common share $ 0.22 $ 0.18 $ 0.15 $ 0.12 $ 0.10 Book value per common share (at period end) $ 28.78 $ 22.75 $ 18.53 $ 16.70 $ 14.42 - ------------------------------------------------------------------------------------------------------------------------------- OTHER DATA (AT PERIOD END) - ------------------------------------------------------------------------------------------------------------------------------- Ratio of total assets to total stockholders' equity and preferred securities 26.0x 27.5x 28.4x 33.5x 33.2x Ratio of total assets excluding matched book to total stockholders' equity and preferred securities(a) 16.6x 18.6x 20.6x 23.9x 24.8x Employees 11,326 8,893 8,873 8,340 7,556 FINANCIAL RATIOS(%): Compensation and benefits/net revenues 51.0 50.7 50.7 50.7 50.7 Pretax operating margin 33.5 30.5 25.6 24.2 18.5 Effective tax rate 29.0 28.0 30.0 30.9 35.4 Return on average common equity(e) 26.6 20.8 15.2 15.6 12.1 ===============================================================================================================================
(a) Matched book represents "securities purchased under agreements to resell" ("reverse repos") to the extent that such balance is less than "securities sold under agreements to repurchase" ("repos") as of the statement of financial condition date. Several nationally recognized rating agencies consider such reverse repos to be a proxy for matched book assets when evaluating the Company's capital strength and financial ratios. Such agencies consider matched book assets to have a low risk profile and exclude such amounts in the calculation of leverage (total assets divided by total stockholders' equity and trust preferred securities). Although there are other assets with similar risk characteristics on the Company's Consolidated Statement of Financial Condition, the exclusion of reverse repos from total assets in this calculation reflects the fact that these assets are matched against liabilities of a similar nature, and therefore require minimal amounts of capital support. Accordingly, the Company believes the ratio of total assets excluding matched book to total stockholders' equity and trust preferred securities to be a more meaningful measure of the Company's leverage. (b) Long-term debt includes senior notes and subordinated indebtedness. (c) Total capital includes long-term debt, stockholders' equity and preferred securities subject to mandatory redemption. (d) All share and per share data have been restated for the two-for-one common stock split effective October 20, 2000. (e) After redeemable preferred dividend. 88 EX-21 4 a2039885zex-21.txt EXHIBIT 21 EXHIBIT 21
JURISDICTION OF COMPANY INCORPORATION - ------- --------------- Banque Lehman Brothers S.A.................................. France DA Group Holdings Inc....................................... Delaware DL Mortgage Corp............................................ Delaware LBCCA Holdings I Inc........................................ Delaware LBCCA Holdings II Inc....................................... Delaware LB I Group Inc.............................................. Delaware Lehman ABS Corporation...................................... Delaware Lehman ALI Inc.............................................. Delaware Lehman Asset Backed Caps Inc................................ Delaware Lehman Brothers Asia Holdings Limited....................... Hong Kong Lehman Brothers Asia Limited................................ Hong Kong Lehman Brothers Bank, FSB................................... United States of America Lehman Brothers Bankhaus Aktiengesellschaft................. Germany Lehman Brothers Canada Inc.................................. Canada Lehman Brothers Capital GmbH................................ Germany Lehman Brothers Commercial Corporation...................... Delaware Lehman Brothers Commercial Corporation Asia Limited......... Hong Kong Lehman Brothers Derivative Products Inc..................... Delaware Lehman Brothers Finance S.A................................. Switzerland Lehman Brothers Financial Products Inc...................... Delaware Lehman Brothers Futures Asset Management Corp............... Delaware Lehman Brothers Global Asset Management Inc................. Delaware Lehman Brothers Holdings Plc................................ United Kingdom Lehman Brothers Inc......................................... Delaware Lehman Brothers International (Europe)...................... United Kingdom Lehman Brothers Investments PTE Limited..................... Singapore Lehman Brothers Japan Inc................................... Cayman Islands Lehman Brothers Merchant Banking Advisors II Inc............ Delaware Lehman Brothers Merchant Banking Advisors Inc............... Delaware Lehman Brothers PTE Ltd..................................... Singapore Lehman Brothers Securities Asia Limited..................... Hong Kong Lehman Brothers Special Financing Inc....................... Delaware Lehman Brothers Treasury Co. B.V............................ The Netherlands Lehman Brothers U.K. Holdings (Delaware) Inc................ Delaware Lehman Brothers U.K. Holdings Ltd........................... United Kingdom Lehman Brothers Verwaltungs-und Beteiligungsgesellschaft Germany mbH....................................................... Lehman CMBS Funding Inc..................................... Delaware Lehman CMO Inc.............................................. Maryland Lehman Commercial Paper Inc................................. New York Lehman Pass- Through Securities Inc......................... Delaware Lehman Re Ltd............................................... Bermuda Lehman Structured Assets Inc................................ Delaware Lehman Structured Securities Corp........................... Delaware Lehman Syndicated Loan Funding Inc.......................... Delaware Lehman Syndicated Loan Inc.................................. Delaware Lehman VIP Holdings Inc..................................... Delaware LUBS Inc.................................................... Delaware Property Asset Management Inc............................... Delaware Structured Asset Securities Corporation..................... Delaware
EX-23 5 a2039885zex-23.txt EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this 2000 Annual Report on Form 10-K of Lehman Brothers Holdings Inc. (the "Company") of our report dated January 4, 2001, included in the 2000 Annual Report to Stockholders of the Company. Our audits also included the financial statement schedule of the Company listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements and Post Effective Amendments of the Company on Form S-3 File Nos. 33-53651, 33-56615, 33-62085, 33-65674, 333-14791, 333-44771, 333-50197 and 333-75723 and on Form S-8 File Nos. 33-53923, 333-07875, 333-57239 and 333-68247 and in the related Prospectuses, of our report dated January 4, 2001 with respect to the consolidated financial statements and financial statement schedule of the Company included or incorporated by reference in this Annual Report on Form 10-K for the year ended November 30, 2000. Ernst & Young LLP New York, New York February 28, 2001 EX-24 6 a2039885zex-24.txt EXHIBIT 24 EXHIBIT 24 KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Thomas A. Russo, Joseph Polizzotto and Jeffrey A. Welikson and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of Lehman Brothers Holdings Inc., for the fiscal year ended November 30, 2000, and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Dated: As of February 28, 2001
SIGNATURES TITLE ---------- ----- /s/ RICHARD S. FULD, JR. Chief Executive Officer and Chairman of the Board of ------------------------------- Directors Richard S. Fuld, Jr. (principal executive officer) /s/ DAVID GOLDFARB ------------------------------- Chief Financial Officer and Senior Vice President David Goldfarb (principal financial and accounting officer) /s/ MICHAEL L. AINSLIE ------------------------------- Director Michael L. Ainslie /s/ JOHN F. AKERS ------------------------------- Director John F. Akers /s/ ROGER S. BERLIND ------------------------------- Director Roger S. Berlind /s/ THOMAS H. CRUIKSHANK ------------------------------- Director Thomas H. Cruikshank /s/ HENRY KAUFMAN ------------------------------- Director Henry Kaufman /s/ JOHN D. MACOMBER ------------------------------- Director John D. Macomber /s/ DINA MERRILL ------------------------------- Director Dina Merrill
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