-----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, I5p5soGuf4cwZbw3PJNfLgrhw2fRAYv3kQNNcD3fdY2kXqj6X/WSX1gVVvWGQEkL DnCXQqyEKUjmutPWPm6YIQ== 0000912057-02-008220.txt : 20020414 0000912057-02-008220.hdr.sgml : 20020414 ACCESSION NUMBER: 0000912057-02-008220 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20011130 FILED AS OF DATE: 20020228 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: 1934 Act SEC FILE NUMBER: 001-09466 FILM NUMBER: 02563180 BUSINESS ADDRESS: STREET 1: LEHMAN BROTHERS STREET 2: 3 WORLD FINANCIAL CENTER CITY: NEW YORK STATE: NY ZIP: 10285 BUSINESS PHONE: 2125267000 MAIL ADDRESS: STREET 1: LEHMAN BROTHERS STREET 2: 3 WORLD FINANCIAL CENTER CITY: NEW YORK STATE: NY ZIP: 10285 FORMER COMPANY: FORMER CONFORMED NAME: SHEARSON LEHMAN HUTTON HOLDINGS INC DATE OF NAME CHANGE: 19901017 10-K405 1 a2071673z10-k405.txt FORM 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, 2001 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-9466
------------------------ LEHMAN BROTHERS HOLDINGS INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 13-3216325 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 745 SEVENTH AVENUE NEW YORK, NEW YORK 10019 (Address of principal executive (Zip Code) offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 526-7000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - ------------------- ----------------------- Common Stock, $.10 par value New York Stock Exchange Pacific Exchange Depositary Shares representing 5.94% Cumulative Preferred Stock, Series C New York Stock Exchange Depositary Shares representing 5.67% Cumulative Preferred Stock, Series D New York Stock Exchange Depositary Shares representing Fixed/Adjustable Rate Cumulative Preferred Stock, Series E New York Stock Exchange 8% Trust Preferred Securities, Series I, of Subsidiary Trust (and Registrant's guarantee thereof) New York Stock Exchange 7.875% Trust Preferred Securities, Series J, of Subsidiary Trust (and Registrant's guarantee thereof) New York Stock Exchange Dow Jones Internet Index Stock Upside Note Securities Due 2004 American Stock Exchange 10 Uncommon Values Index Basket Adjusting Structured Equity Securities Notes Due 2004 American Stock Exchange 10 Uncommon Values Index Basket Adjusting Structured Equity Securities Notes Series B, Due 2004 American Stock Exchange 10 Uncommon Values Index Basket Adjusting Structured Equity Securities Notes Due 2003 American Stock Exchange Notes due November 14, 2007-Performance Linked to Marsh & McLennan Companies, Inc. (MMC) Common Stock American Stock Exchange Notes due November 14, 2007-Performance Linked to Pfizer Inc. (PFE) Common Stock American Stock Exchange 8 3/4% Notes Due 2002 New York Stock Exchange NASDAQ-100 Index 109% Minimum Redemption Stock Upside Note Securities Due April 26, 2004 American Stock Exchange NASDAQ-100 Index Risk Adjusting Equity Range Securities Plus Notes Due January 24, 2003 American Stock Exchange Prudential Research Universe Diversified Equity Notes Due December 29, 2004 American Stock Exchange 10 Uncommon Values Index Stock Upside Note Securities Notes Due July 3, 2004 American Stock Exchange 10 Uncommon Values Index Risk Adjusting Equity Range Securities Plus Notes Due July 3, 2003 American Stock Exchange Portfolio Risk Adjusting Equity Range Securities Notes Due August 14, 2003, Based Upon a Basket of Ten Stocks American Stock Exchange Prudential Research Universe Diversified Equity Notes Due July 2, 2006, Linked to a Basket of Healthcare Stocks American Stock Exchange Return Accelerated Portfolio Debt Securities Notes Due November 5, 2002 American Stock Exchange 8% Yield Enhanced Equity Linked Debt Securities Plus Due November 13, 2003, Based Upon a Basket of Five Technology Stocks American Stock Exchange S&P 500 Index Stock Upside Note Securities Due December 26, 2006 American Stock Exchange S&P 500 Index Stock Upside Note Securities Due February 5, 2007 American Stock Exchange
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 January 31, 2002, was approximately $14,873,500,000. 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 January 31, 2002, 236,999,678 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. 2001 Annual Report to Stockholders (the "2001 Annual Report")--Incorporated in part in Parts I, II and IV. (2) Lehman Brothers Holdings Inc. Definitive Proxy Statement for its 2002 Annual Meeting of Stockholders (the "Proxy Statement")--Incorporated in part in Parts III and IV. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 745 Seventh Avenue, New York, New York 10019, 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 and liquidity risks include changes in interest and foreign exchange rates and securities and commodities valuations, the availability and cost of capital and credit, changes in investor sentiment, global economic and political trends and industry competition. Legal risks include legislative and regulatory developments in the United States and throughout the world. 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, and, accordingly, readers are cautioned not to place undue reliance on such 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 Operations" on pages 38 - 57 of the 2001 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 and 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 investment banking, research, trading, structuring and distribution capabilities in 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, 2001, November 30, 2000, and November 30, 1999, 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 2001 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 17 of the Notes to Consolidated Financial Statements on pages 91 - 92 of the 2001 Annual Report and is incorporated herein by reference. EVENTS OF SEPTEMBER 11 Lehman Brothers' world headquarters and other facilities had occupied space that was owned and leased in the World Financial Center and the World Trade Center in downtown New York City. As a result of the terrorist attacks of September 11, 2001, the World Financial Center offices were damaged and the World Trade Center space was destroyed. The United States debt and equity financial markets were temporarily closed. All Lehman Brothers employees (approximately 6,400 persons) and operations in downtown Manhattan were displaced. Key business activities and necessary support functions were relocated to the Company's back-up facilities in Jersey City, New Jersey, and to various other temporary sites. In November 2001, the Company purchased a new 1,000,000 square-foot office tower at 745 Seventh Avenue in New York, New York, to serve as the Firm's new world headquarters. The Company began occupying the new building in January 2002 and expects to have substantially occupied the space by the summer of 2002. Also in the wake of September 11, the Company leased additional office and data center space in Manhattan and in Jersey City. The Company has been informed that the facilities in the World Financial Center complex can be repaired; however, the damage to many of the floors at Three World Financial Center ("3WFC"), which is owned jointly with American Express Company, is significant. A repair and remediation plan is currently underway, although a completion date has not been finalized. As a result, the Company is currently evaluating its space needs and exploring its alternatives with respect to 3WFC and the other downtown New York facilities. Lehman Brothers has significant levels of insurance in place to cover losses resulting from the terrorist attack, including a policy covering damage to the core and shell of 3WFC and a separate policy covering the property damage to the World Trade Center and World Financial Center facilities, losses resulting from business interruption and extra expenses associated with the Company's relocation to, and occupancy of, the temporary facilities. During the fourth quarter of fiscal 2001, Lehman Brothers recognized a pretax special charge of $127 million ($71 million after-tax) associated with the net losses (after offsetting estimated insurance recoveries) stemming from the events of September 11. The charge does not reflect any loss resulting from the damage to the core and shell of 3WFC, as this amount is not yet known. However, the Company believes that any loss will be fully recoverable under the Company's insurance policy. The displacement and relocation of the Company's New York workforce, the closure of markets for certain periods following the terrorist attack and other issues directly related to the September 11 tragedy have negatively impacted the Company's business. The Company is in the process of pursuing a business interruption claim with its insurance carriers for lost revenue and related damages. As of November 30, 2001, the Company has not given any accounting recognition to the anticipated business interruption recovery. 2 For more information concerning the effects of September 11, the special charge and the Firm's facilities, see Item 2, Properties, on pages 9 - 10 of this report; "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 38 - 57 of the 2001 Annual Report; and Note 2 of the Notes to Consolidated Financial Statements on pages 69 - 70 of the 2001 Annual Report. INVESTMENT BANKING Lehman Brothers' Investment Banking professionals are responsible for developing and maintaining relationships with issuer 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 Communications & Media, Consumer/Retailing, Financial Institutions, Financial Sponsors, 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 six cities in the U.S. and in twenty-one 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. UNDERWRITING. The Company is a leading underwriter of initial and other public and private 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 the skills from the sales, trading and research areas of its Equities and Fixed Income Divisions 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 securities, American Depositary Receipts, convertibles, options, warrants and derivatives. 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. 3 EQUITY DERIVATIVES. Lehman Brothers offers equity derivative capabilities across a wide spectrum of products and currencies, including domestic and international portfolio trading, listed options and futures and over-the-counter 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 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. 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. 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 or agent for numerous active commercial paper and medium-term note 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 4 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, interest rate and credit products and services. 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 around the clock. 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 global 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. 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 5 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 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. 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 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 that 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 has a staff of approximately 980, including approximately 475 investment representatives who serve 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 18 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. 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 $5.6 billion in Private Equity assets under management, primarily in three asset classes: Merchant Banking, Venture Capital and Real Estate. The primary goal of each asset class is to make investments that provide attractive 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. Merchant banking seeks to partner with proven operating teams that have a compelling business strategy or vision, with the aim of creating long-term value for investors. VENTURE CAPITAL. Lehman Brothers manages investments in venture capital focused on technology, communications and healthcare companies. The primary investment objective of the Firm's venture capital investment activities is to make growth-oriented equity or equity-related investments in privately held 6 companies. Venture capital investments focus on companies capable of turning innovative technology and management solutions into successful businesses. REAL ESTATE. Lehman Brothers' Real Estate 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 Lehman Brothers is committed to maintaining 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 organization, 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. Lehman Brothers has an integrated client and employee web site, LehmanLive, which serves as a complete suite of services, including pre-trade (research and analytics), trade and post-trade (clearing and settlement information, risk management and prime brokerage) information and employee applications. LehmanLive was an important element in the Firm's recovery after the terrorist attacks of September 11, 2001. 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, MarketAxess and SecuritiesHub in Fixed Income, and TheMarkets.com, EquiLend, Redi/Arca and NYFIX Millennium in Equities. Additionally, Lehman Brothers has supported the global expansion of NASDAQ with an investment in its U.S., European and Japanese ventures. 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 designed 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 proprietary 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 53 - 55 of the 2001 Annual Report, and is incorporated herein by reference. 7 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 traditional and online 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 been acquired by or merged into other firms. These developments have increased competition from other firms, many of which have significantly greater equity capital than the Company. 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 has further increased competition. REGULATION The securities industry in the United States is subject to extensive regulation under both federal and state laws. LBI is registered as a broker-dealer, and LBI and certain other subsidiaries of Holdings are registered as 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, 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 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 and equity markets and undertakes international investment banking activities, principally through its regional headquarters in London and Tokyo. The U.K. Financial Services and Markets Act 2000 (the "FSMA") 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, approval standards for individuals, periodic reporting and settlement procedures. Pursuant to the FSMA, 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 Limited, the Osaka Stock Exchange Limited and the Tokyo Financial Futures Exchange and, as such, is regulated by the Financial Services 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. 8 CAPITAL REQUIREMENTS LBI, Lehman Brothers International (Europe), the Tokyo branch of Lehman Brothers Japan Inc. and others 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 10 of the Notes to Consolidated Financial Statements on page 80 of the 2001 Annual Report, which is incorporated herein by reference. EMPLOYEES As of November 30, 2001, the Company employed approximately 13,100 persons, including 8,500 in North America and 4,600 internationally. The Company considers its relationship with its employees to be good. ITEM 2. PROPERTIES As a result of the terrorist attacks of September 11, 2001, Lehman Brothers was forced to relocate its employees and operations from downtown Manhattan. In November 2001 the Company purchased a new 1,000,000 square-foot office tower at 745 Seventh Avenue in New York City. This building is the Firm's new world headquarters. The Company began occupying the new building in January 2002 and expects to have substantially occupied the space by the summer of 2002. In October 2001, the Company leased approximately 437,000 square feet of office space at 399 Park Avenue and 56,000 square feet of data center space at another location in New York City, each with a term extending until 2016. The Company's former world headquarters at Three World Financial Center in downtown New York City, occupying approximately 1.1 million square feet, which the Company owns under a tenancy-in-common arrangement with American Express Company, suffered significant damage in the terrorist attacks. A repair and remediation plan is currently underway, although a completion date has not been finalized. The Company had leased approximately 160,000 square feet of space at One World Trade Center in New York City, which was destroyed in the September 11 attacks. The Company exercised its right to terminate this lease effective February 2002. This lease was due to expire in 2015. Lehman Brothers also leases space at One World Financial Center in the same office complex as Three World Financial Center. This space suffered some damage in the attacks and is currently unoccupied. Prior to September 11, the Company had occupied 100,000 square feet of the One World Financial Center space, which was scheduled ultimately to consist of approximately 715,000 square feet. Approximately 95,000 square feet were to be occupied during 2001 after September 11, and 520,000 square feet were to be occupied in stages thereafter. The lease terms at One World Financial Center expire at various dates from December 2015 through 2025, with the exception of a lease for 148,000 square feet, which expires in 2006. The Company is currently evaluating its space needs and exploring its alternatives with respect to its downtown New York City facilities. In September 2001, Lehman Brothers assumed a 409,000 square foot lease for additional office space in Jersey City, New Jersey, with a term extending until 2016. Approximately 256,000 square feet of the premises have been subleased to a third-party tenant. The Company also leases approximately 400,000 square feet of office space in a nearby building (the "Operations Center"), of which approximately 32,000 square feet have 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. 9 The Company's European headquarters in London, England, occupy approximately 450,000 square feet of leased office space in the Broadgate complex. These leases expire at various dates to 2017. Approximately 60,000 square feet have been subleased to two third-party tenants. In March 2001, the Company agreed to lease up to 1,000,000 square feet of space in a new tower at the Canary Wharf development, to the east of the City of London. The Company expects to relocate to this location during late 2003. The Company's Asian headquarters occupy approximately 100,000 square feet of leased office space in the ARK Mori Building in central Tokyo, Japan. The Tokyo lease expires in December 2002. Facilities occupied by the Company and its subsidiaries (or to be occupied as described above) are believed to be adequate for the purposes for which they are or are to be used, and the occupied facilities 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 generally 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 it intends to defend vigorously each such case. 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 of the Company but may be material to the Company's operating results for any particular period, depending on the level of the Company's income for such period. LEHMAN BROTHERS COMMERCIAL CORPORATION AND LEHMAN BROTHERS SPECIAL FINANCING INC. V. MINMETALS INTERNATIONAL NON-FERROUS METALS TRADING COMPANY On November 15, 1994, a Holdings subsidiary, Lehman Brothers Commercial Corporation ("LBCC"), and an LBI subsidiary, 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. A non-jury trial began on December 10, 2001, and testimony was completed on February 15, 2002. The court has the case under submission. 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 10 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. 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 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. The case is on appeal to the U.S. Court of Appeals for the Second Circuit. IN RE ISSUER PLAINTIFF INITIAL PUBLIC OFFERING FEE ANTITRUST LITIGATION By order dated April 10, 2001, the United States District Court for the Southern District of New York consolidated four actions pending before the court brought by bankrupt issuers of IPO securities against more than 20 underwriter defendants (including LBI): (1) CHS ELECTRONICS, INC. V. CREDIT SUISSE FIRST BOSTON CORP., ET AL.; (2) EQUALNET COMMUNICATIONS CORP. V. GOLDMAN SACHS GROUP, INC., ET AL.; (3) MDCM HOLDINGS, INC. F/K/A MORTGAGE.COM, INC. BY LEWIS B. FREEMAN, ASSIGNEE FOR THE BENEFIT OF CREDITORs; and (4) JEFFREY A. WEINMAN, AS TRUSTEE OF THE BANKRUPTCY ESTATE OF WESTERN PACIFIC AIRLINES V. SALOMON SMITH BARNEY INC., ET AL. On July 6, 2001, the plaintiffs filed a consolidated class action complaint seeking unspecified compensatory damages and injunctive relief for alleged violations of the antitrust laws based on the theory that the defendant underwriters fixed and maintained fees for underwriting certain IPO securities at supra-competitive levels. CHS Electronics voluntarily dismissed its claims with prejudice in October 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. In July 2001, plaintiffs filed a Second Amended Complaint. 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 "Exchange Act"). The plaintiffs seek to recover 11 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 interest payments. IPO ALLOCATION CASES LBI has been named as a defendant in approximately 192 purported securities class actions that were filed between March and December 2001 in the United States District Court for the Southern District of New York. The actions, which allege improper IPO allocation practices, have been brought by persons who, either directly or in the aftermarket, purchased IPO securities during the period between March 1997 and December 2000. The plaintiffs allege that Lehman and other IPO underwriters required persons receiving allocations of IPO shares to pay excessive commissions on unrelated trades and to purchase shares in the aftermarket at specified escalating prices. The plaintiffs, who seek unspecified compensatory damages, claim that these alleged practices violated various provisions of the federal securities laws, specifically, sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (the "Securities Act"), section 10(b) of the Exchange Act, Rule 10b-5 promulgated thereunder, and section 20(a) of the Exchange Act. The 192 actions in which LBI was named a defendant have been consolidated into 83 cases, each involving a distinct offering. Those 83 consolidated cases, and approximately 240 others in which LBI is not named as a defendant, have been coordinated for pretrial purposes before a single judge. On January 2, 2002, a separate consolidated class action, entitled IN RE INITIAL PUBLIC OFFERING ANTITRUST LITIGATION, was filed against LBI, among other underwriters, alleging violations of federal and state antitrust laws. The complaint alleges that the underwriter defendants conspired to require customers who wanted IPO allocations to pay back to the underwriters a percentage of their IPO profits in the form of commissions on unrelated trades, to purchase other, less attractive securities and to buy shares in the aftermarket at predetermined escalating prices. Originally filed as twelve separate class actions in three different courts, the consolidated antitrust action is now pending before a single judge--different from the one hearing the securities cases--in the United States District Court for the Southern District of New York. The antitrust plaintiffs seek unspecified treble damages. FRED KAUFMAN V. ROGER S. BERLIND, ET AL. In June 2001 a shareholder of Holdings filed a derivative action in the United States District Court for the Southern District of New York against Holdings and Holdings' board of directors for the purported benefit of Holdings and its shareholders. The action alleges that the board members breached their fiduciary duties of loyalty and good faith and failed to exercise their duties of due care and due diligence by failing to maintain systems to alert them to the alleged improper IPO allocation practices challenged in the IPO ALLOCATION CASES (see above) and by failing to become informed of the alleged practices. The action seeks unspecified compensatory damages based on the alleged damages that Holdings may suffer if it is found liable in the pending IPO ALLOCATION CASEs. Pursuant to a Stipulation and Order of Dismissal, agreed to by the parties and approved by the court, the case was dismissed without prejudice in November 2001. YOUNG, ET AL. V. DREISBACH, ET AL. On November 1, 2001, this purported class action was filed in the United States District Court for the Northern District of California. The action is brought on behalf of a purported class of investors who purchased the common stock of Metricom, Inc., during the period from June 21, 1999, to July 2, 2001. Plaintiffs name various officers, directors and selling shareholders of Metricom, along with LBI and the four other co-managing underwriters of an offering of Metricom common stock on February 3, 2000. Prior to the commencement of this action, Metricom filed for protection under the federal bankruptcy code. The February 2000 offering raised approximately $500 million. Against the underwriters, plaintiffs allege violations of Sections 11 and 12(2) of the Securities Act and of Section 10(b) of the Exchange Act. The complaint alleges that the prospectus and registration statement for the offering failed to disclose material facts concerning, among other things, Metricom's flawed business plan and marketing strategy. The 12 complaint seeks class action status, damages and "statutory compensation", and attorneys' fees and other costs. ACTIONS REGARDING FRANK GRUTTADAURIA The Company discovered in January 2002 that Frank Gruttadauria, the former branch manager of the Company's Cleveland office, which was acquired in October 2000 from SG Cowen Securities Corporation ("SG Cowen") as part of the purchase by the Company of certain accounts and related assets belonging to SG Cowen's private client group, has apparently been involved in creating false account statements for clients of that office and may have caused unauthorized transfers of funds from client accounts. This conduct has allegedly taken place for a number of years and began well prior to the acquisition of this office by Lehman Brothers. Lehman Brothers continues to investigate the situation and cooperate with law enforcement authorities. Under the terms of the purchase agreement, SG Cowen retained liability for activities arising out of the conduct or operation of the business while owned by SG Cowen. ROBERT FAZIO ET AL. V. FRANK GRUTTADAURIA, LEHMAN BROTHERS INC., LEHMAN BROTHERS HOLDINGS INC. ET AL. In February 2002, LBI and Holdings were served with an amended complaint in the United States District Court for the Northern District of Ohio, Eastern Division. The amended complaint alleges violations of section 10(b) of the Exchange Act and Rule 10b-5 thereunder; violations of various NASD and New York Stock Exchange rules; violations of the Racketeer Influenced and Corrupt Organizations Act (RICO); violations of Ohio laws; common law fraud; breach of fiduciary duty; failure to supervise and respondeat superior liability. Plaintiffs seek the amounts in their accounts from various times, alleged as approximately $18.5 million, plus appreciation on that amount, plus all income taxes plaintiffs paid on any non-existent gains; treble damages on the foregoing amounts; statutory relief; punitive damages; pre- and post-judgment interest; attorneys fees and costs and any other relief the court deems appropriate. EUNICE POST MELTZER V. LEHMAN BROTHERS INC. AND SG COWEN SECURITIES CORPORATION. In January 2002, LBI was served with a complaint in the United States District Court for the Northern District of Illinois, Eastern Division. The complaint alleges theft, embezzlement and negligent and reckless failure to supervise and that plaintiff has been damaged in excess of $1 million. Plaintiff seeks delivery of all assets allegedly stolen plus interest and dividends, punitive damages, attorneys fees and costs and any other relief the court deems appropriate. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 13 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 23,030 at February 15, 2002. Information concerning the market for the Registrant's common equity, dividends and related stockholder matters is set forth under the captions "Selected Financial Data" on page 94 of the 2001 Annual Report and "Other Stockholder Information" on page 96 of the 2001 Annual Report, and is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The Selected Financial Data contained on page 94 of the 2001 Annual Report 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 38 - 57 of the 2001 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 58 - 93 of the 2001 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 53 - 55 of the 2001 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 2001 Annual Report on pages 58 - 93 and are incorporated herein by reference. Condensed unconsolidated financial information of Holdings and notes thereto are set forth in Schedule I beginning on Page F-2 of this report and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 14 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 I Directors to Serve until the 2005 Annual Meeting of Stockholders", "Class II Directors Whose Terms Continue until the 2004 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 page 9 of the Proxy Statement, and is incorporated herein 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", "Employment Contracts, Termination of Employment and Change of Control Arrangements" and "Performance Graph" on pages 8 and 12 - 17 of the Proxy Statement and is incorporated herein 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 10 of the Proxy Statement and is 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" and "Certain Transactions and Agreements with American Express and Subsidiaries" on pages 18 - 20 of the Proxy Statement and is incorporated herein by reference. 15 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 incorporated by reference herein and filed as an exhibit hereto are listed on page F-1 hereof by reference to the corresponding page numbers in the 2001 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. - --------------------- 3.01 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) 3.02 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 SEC on May 13, 1998) 3.03 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 SEC on July 23, 1998) 3.04 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 SEC on March 30, 2000) 3.05 Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant, dated April 9, 2001 (incorporated by reference to Exhibit 3.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended February 28, 2001) 3.06 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) 4.01 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)) 4.02 Indenture with respect to 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)) 4.03 First Supplemental Indenture with respect to senior debt securities (incorporated by reference to Exhibit 4(m) to the Registrant's Registration Statement on Form S-3 (Reg. No. 33-25797)) 4.04 Second Supplemental Indenture with respect to senior debt securities (incorporated by reference to Exhibit 4(e) to the Registrant's Registration Statement on Form S-3 (Reg. No. 33-49062)) 4.05 Third Supplemental Indenture with respect to senior debt securities (incorporated by reference to Exhibit 4(f) to the Registrant's Registration Statement on Form S-3 (Reg. No. 33-46146))
16
EXHIBIT NO. - --------------------- 4.06 Fourth Supplemental Indenture with respect to 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) 4.07 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)) 4.08 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)) 4.09 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. 10.01 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) 10.02 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) 10.03+ 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)) 10.04+ 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)) 10.05 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) 10.06+ Amended and Restated Lehman Brothers Holdings Inc. 1994 Management Ownership Plan as of April 3, 2001 (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended February 28, 2001) 10.07+ Amended and Restated Lehman Brothers Holdings Inc. 1996 Management Ownership Plan, as of March 31, 2001 (including amendments to Section 3(a) and to Exhibit A(c))* 10.08+ 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)
- ------------------------ * 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) 17
EXHIBIT NO. - --------------------- 10.09+ 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+ Amended and Restated Lehman Brothers Holdings Inc. Employee Incentive Plan, as amended through March 31, 2001 (including amendments to Section 3(a) and to Exhibit A(c))* 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) 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 pages 15 and 16 of the Proxy Statement and is incorporated herein by reference. 10.15 Purchase and Sale Agreement dated as of October 19, 2001, between MSDW 745, LLC, as seller, and LB 745 LLC, as purchaser* 10.16 Amendment to Purchase and Sale Agreement dated as of the October 19, 2001, between MSDW 745, LLC, as seller, and LB 745 LLC, as purchaser* 10.17 JV Option Agreement dated November 19, 1998, between Rock-Forty-Ninth LLC and LB 745 LLC (as assignee of MSDW 745, LLC)* 12 Computations in support of ratio of earnings to fixed charges and ratio of earnings to combined fixed charges and preferred stock dividends* 13 The following portions of the Company's 2001 Annual Report to Stockholders, which are incorporated by reference herein: "Management's Discussion and Analysis of Financial Condition and Results of Operations", pages 38 - 57*; "Consolidated Financial Statements", pages 58 - 93*; "Selected Financial Data", page 94*; 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) 18 (b) Reports on Form 8-K 1. Form 8-K dated September 25, 2001, Items 5 and 7 Financial Statements: Exhibit 99.2 Consolidated Statement of Income (Three Months Ended August 31, 2001) (Preliminary and Unaudited) Exhibit 99.3 Consolidated Statement of Income (Nine Months Ended August 31, 2001) (Preliminary and Unaudited) Exhibit 99.4 Segment Net Revenue Information (Three and Nine Months Ended August 31, 2001) (Preliminary and Unaudited) Exhibit 99.5 Selected Statistical Information (Preliminary and Unaudited)
2. Form 8-K dated October 2, 2001, Item 7 3. Form 8-K dated October 5, 2001, Item 7 4. Form 8-K dated November 13, 2001, Item 7 19 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, 2002 By: /s/ DAVID GOLDFARB ----------------------------------------- David Goldfarb Chief Financial Officer and Senior 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 ---------- ----- ---- Chief Executive Officer and /s/ RICHARD S. FULD, JR. Chairman of the Board of ------------------------------------------- Directors (principal February 28, 2002 Richard S. Fuld, Jr. executive officer) Chief Financial Officer and /s/ DAVID GOLDFARB Senior Vice President ------------------------------------------- (principal financial and February 28, 2002 David Goldfarb accounting officer) /s/ MICHAEL L. AINSLIE Director ------------------------------------------- February 28, 2002 Michael L. Ainslie /s/ JOHN F. AKERS Director ------------------------------------------- February 28, 2002 John F. Akers /s/ ROGER S. BERLIND Director ------------------------------------------- February 28, 2002 Roger S. Berlind /s/ THOMAS H. CRUIKSHANK Director ------------------------------------------- February 28, 2002 Thomas H. Cruikshank /s/ HENRY KAUFMAN Director ------------------------------------------- February 28, 2002 Henry Kaufman /s/ JOHN D. MACOMBER Director ------------------------------------------- February 28, 2002 John D. Macomber /s/ DINA MERRILL Director ------------------------------------------- February 28, 2002 Dina Merrill
20 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.............................. 58 Consolidated Statement of Income for the Twelve Months Ended November 30, 2001, 2000, and 1999......................... 59 Consolidated Statement of Financial Condition at November 30, 2001 and 2000......................................... 60 - 61 Consolidated Statement of Changes in Stockholders' Equity for the Twelve Months Ended November 30, 2001, 2000, and 1999...................................................... 62 - 63 Consolidated Statement of Cash Flows for the Twelve Months Ended November 30, 2001, 2000 and 1999.................... 64 Notes to Consolidated Financial Statements.................. 65 - 93 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 -------------------------------------- 2001 2000 1999 -------- -------- -------- Revenues Interest and dividends.................................... $4,162 $2,667 $2,218 Principal transactions and other.......................... 404 247 (128) ------ ------ ------ Total revenues........................................ 4,566 2,914 2,090 Interest expense.......................................... 4,364 2,813 2,200 ------ ------ ------ Net revenues.......................................... 202 101 (110) Equity in net income of subsidiaries........................ 1,628 1,894 1,418 Non-interest expenses....................................... 333 455 350 Special charge.............................................. 76 -- -- ------ ------ ------ Income before taxes......................................... 1,421 1,540 958 Provision/(benefit) for income taxes...................... 166 (235) (174) ------ ------ ------ Net income.................................................. $1,255 $1,775 $1,132 ====== ====== ====== Net income applicable to common stock....................... $1,161 $1,679 $1,037 ====== ====== ======
See notes to condensed financial information of Registrant. F-2 SCHEDULE I LEHMAN BROTHERS HOLDINGS INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEET (PARENT COMPANY ONLY) (IN MILLIONS, EXCEPT FOR PER SHARE DATA)
NOVEMBER 30 ----------------------- 2001 2000 -------- -------- ASSETS Cash and cash equivalents................................... $ 566 $ 450 Securities and other financial instruments owned (including $7,057 million of securities pledged during 2001)......... 11,296 7,512 Securities purchased under agreements to resell............. 5,899 16,113 Equity in net assets of subsidiaries........................ 7,982 7,577 Receivables and accrued interest............................ 494 828 Due from subsidiaries....................................... 35,930 23,708 Other assets................................................ 2,535 1,796 ------- ------- Total assets............................................ $64,702 $57,984 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Commercial paper and short-term debt........................ $ 1,858 $ 4,168 Securities and other financial instruments sold but not yet purchased................................................. 984 244 Securities sold under agreements to repurchase.............. 10,061 7,316 Accrued liabilities, due to subsidiaries and other payables.................................................. 12,426 9,882 Senior notes................................................ 29,982 27,511 Subordinated indebtedness................................... 932 932 ------- ------- Total liabilities....................................... 56,243 50,053 ------- ------- Commitments and contingencies Preferred securities subject to mandatory redemption........ -- 150 Stockholders' equity: Preferred stock........................................... 700 700 Common stock, $0.10 par value; shares authorized: 600,000,000 in 2001 and 300,000,000 in 2000; shares issued: 256,178,907 in 2001 and 251,629,126 in 2000; shares outstanding: 237,534,091 in 2001 and 236,395,332 in 2000................................................. 25 25 Additional paid-in capital................................ 3,562 3,589 Accumulated other comprehensive income (net of tax)....... (10) (8) Retained earnings......................................... 4,798 3,713 Other stockholders' equity, net........................... 746 597 Common stock in treasury, at cost: 18,644,816 shares in 2001 and 15,233,794 shares in 2000...................... (1,362) (835) ------- ------- Total stockholders' equity.............................. 8,459 7,781 ------- ------- Total liabilities and stockholders' equity.............. $64,702 $57,984 ======= =======
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 ------------------------------ 2001 2000 1999 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income.................................................. $ 1,255 $ 1,775 $ 1,132 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in net income of subsidiaries...................... (1,628) (1,894) (1,418) Dividends received........................................ 1,252 634 145 Tax benefit from issuance of stock based awards........... 549 373 90 Amortization of deferred stock compensation............... 544 520 363 Special charge............................................ 127 -- -- Other adjustments......................................... 103 (104) 244 Net change in: Securities and other financial instruments owned.......... (2,998) 278 1,992 Accounts receivable and accrued interest, due from subsidiaries and other assets........................... (12,627) 2,734 4,580 Securities and other financial instruments sold but not yet purchased........................................... 740 24 139 Accrued liabilities, due to subsidiaries and other payables................................................ 2,677 664 4,504 -------- ------- -------- Net cash provided by (used in) operating activities..... (10,006) 5,004 11,771 -------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of senior notes...................... 6,794 10,020 5,843 Principal payments of senior notes.......................... (5,163) (6,629) (4,680) Proceeds from issuance of subordinated indebtedness......... -- -- 732 Net proceeds from (payments for) commercial paper and short-term debt........................................... (2,310) 81 (1,016) Resale agreements net of repurchase agreements.............. 12,959 (8,456) (11,259) Payments for repurchase of preferred stock.................. (100) (88) (220) Payments for treasury stock purchases....................... (1,676) (1,203) (256) Dividends paid.............................................. (163) (149) (139) Issuances of common stock................................... 54 99 8 Issuances of preferred stock, net of issuance costs......... -- 250 -- -------- ------- -------- Net cash provided by (used in) financing activities..... 10,395 (6,075) (10,987) -------- ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, equipment and leasehold improvements, net....................................................... (103) -- -- Equity in net assets of subsidiaries........................ (29) (7) (280) Capital distributions received.............................. -- 244 95 Capital infusions paid...................................... (141) (197) (270) -------- ------- -------- Net cash provided by (used in) investing activities..... (273) 40 (455) -------- ------- -------- Net change in cash and cash equivalents................. 116 (1,031) 329 Cash and cash equivalents, beginning of period.............. 450 1,481 1,152 -------- ------- -------- Cash and cash equivalents, end of period.................. $ 566 $ 450 $ 1,481 ======== ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN MILLIONS) Interest paid totaled $3,138 in 2001, $2,151 in 2000 and $2,177 in 1999. Income taxes received totaled $481 in 2001, $418 in 2000 and $332 in 1999. NON-CASH INVESTING AND FINANCING ACTIVITIES IN 2000 (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 LEHMAN BROTHERS HOLDINGS INC. NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) 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 (collectively, the "Company") and the notes thereto. Certain amounts reflect reclassifications to conform to the current period's presentation. NOTE 2. SPECIAL CHARGE As a result of the September 11, 2001 terrorist attack, Holdings' leased facilities in the World Trade Center ("WTC") were destroyed and its leased and owned facilities in the World Financial Center ("WFC") complex (including the 3 World Financial Center building owned jointly with American Express) were significantly damaged. All employees and operations in the downtown New York area were displaced. Key business activities and necessary support functions were quickly relocated to back-up facilities in New Jersey and to various other temporary sites. Holdings and the Company have been informed that the facilities in the World Financial Center complex can be repaired; however, the damage to many of the floors that had been occupied by the Company at the 3 WFC location is significant. A repair and remediation plan is currently underway although a completion date has not been finalized. Consequently, Holdings purchased a new one million square foot building at 745 Seventh Avenue in New York City during the fourth quarter and is relocating its principal executive and operating offices to this site in 2002. New long-term lease agreements were also executed for other space in midtown Manhattan. As a result, the Company is currently evaluating its space needs and exploring alternatives with respect to 3 WFC and the other downtown New York facilities. The Company has significant levels of insurance in place to cover the losses resulting from the terrorist attacks including a policy covering damage to the core and shell of the 3 WFC building and a separate policy covering the property damage of the WTC and WFC facilities, losses resulting from business interruption and extra expenses associated with the Company's relocation to, and occupancy of, the temporary facilities. Consequently, Holdings' recognized a pre-tax special charge of $76 million ($42 million after-tax) associated with the net losses stemming from the events of September 11, 2001. The losses and costs include the write-off of property damaged, destroyed or abandoned at the Company's downtown facilities (approximately $127 million), compensation paid to employees in lieu of utilizing external consultants for business recovery efforts and to employees for the time they were idled (approximately $39 million), and other costs associated with redeployment of the Company's workforce to the temporary facilities (approximately $30 million). The losses and costs were offset by estimated insurance recoveries of $120 million. The charge does not reflect any loss resulting from the damage to the core and shell of the Company's 3 WFC facility, as this amount is not yet known. However, the Company believes that any loss will be fully recoverable under the Company's building core and shell insurance policy. The insurance recovery recorded through November 30, 2001 has been limited to the net historical book value of assets believed damaged, destroyed or abandoned and the out-of-pocket costs for certain extra expenses incurred during the period. F-5 LEHMAN BROTHERS HOLDINGS INC. NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) (PARENT COMPANY ONLY) NOTE 3. LONG-TERM DEBT
U.S. DOLLAR NON-U.S. DOLLAR NOVEMBER 30 ------------------- ------------------- ------------------- FIXED FLOATING FIXED FLOATING RATE RATE RATE RATE 2001 2000 -------- -------- -------- -------- -------- -------- (IN MILLIONS) Senior Notes Maturing in Fiscal 2001......................... $ 4,394 Maturing in Fiscal 2002......................... $ 1,667 $2,987 $ 381 $ 756 $ 5,791 5,186 Maturing in Fiscal 2003......................... 2,309 2,252 572 510 5,643 4,810 Maturing in Fiscal 2004......................... 1,742 1,103 967 553 4,365 3,346 Maturing in Fiscal 2005......................... 2,348 550 127 531 3,556 3,521 Maturing in Fiscal 2006......................... 3,036 55 457 269 3,817 1,252 December 1, 2006 and thereafter................. 5,704 40 909 157 6,810 5,002 ------- ------ ------ ------ ------- ------- Senior Notes.................................. 16,806 6,987 3,413 2,776 29,982 27,511 ------- ------ ------ ------ ------- ------- Subordinated Indebtedness December 1, 2005 and thereafter............... 932 932 932 ------- ------ ------ ------ ------- ------- Long-Term Debt.................................. $17,738 $6,987 $3,413 $2,776 $30,914 $28,443 ======= ====== ====== ====== ======= =======
Of the Company's long-term debt outstanding as of November 30, 2001, $648 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 2002 to fiscal 2003, rather than at their contractual maturities, which range from fiscal 2004 to fiscal 2026. In addition, $1,303 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, 2001, the Company's U.S. dollar debt portfolio included approximately $533 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 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 and currency swaps. At November 30, 2001 and 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 interest rate swaps as an end-user to modify the interest rate characteristics of its long-term debt portfolio and certain secured financing activities. Effective 2001, the Company adopted SFAS No. 133, and as such all end-user derivatives at November 30, 2001 are recorded at fair value on the balance sheet (see Note 1 to the Company's Consolidated Financial Statements for more information). The Company adjusted the carrying value of a substantial portion of the Company's fixed rate debt to a modified mark-to-market value in accordance with SFAS No. 133, as the debt was designated as the hedged item in a fair value hedge. F-6 LEHMAN BROTHERS HOLDINGS INC. NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) (PARENT COMPANY ONLY) At November 30, 2001 and November 30, 2000, the notional values of the Company's interest rate and currency swaps related to its long-term debt obligations were approximately $25.9 billion and $21.2 billion, respectively. In terms of notional amounts outstanding, these derivative products mature as follows:
FAIR VALUE HEDGE OTHER(2) NOVEMBER 30 ------------------- ------------------- ------------------- NON- NON- U.S. U.S. CROSS- U.S. U.S. DOLLAR DOLLAR CURRENCY DOLLAR DOLLAR 2001 2000 -------- -------- -------- -------- -------- -------- -------- (IN MILLIONS) Maturing in Fiscal 2001.......... $ 2,519 Maturing in Fiscal 2002.......... $ 1,263 $ 394 $ 414 $ 987 $ 255 $ 3,313 3,447 Maturing in Fiscal 2003.......... 2,198 570 110 948 69 3,895 3,519 Maturing in Fiscal 2004.......... 1,460 716 733 1,138 66 4,113 2,568 Maturing in Fiscal 2005.......... 2,153 91 718 45 -- 3,007 3,010 Maturing in Fiscal 2006.......... 2,900 447 486 90 177 4,100 1,333 December 1, 2006 and thereafter..................... 5,552 862 866 59 180 7,519 4,851 ------- ------ ------ ------ ----- ------- ------- Total............................ $15,526 $3,080 $3,327 $3,267 $ 747 $25,947 $21,247 ======= ====== ====== ====== ===== ======= ======= Weighted-average rate(1) Receive rate..................... 7.48% 4.67% 4.24% 2.91% 4.44% 5.93% 6.72% Pay rate......................... 3.15% 3.83% 2.93% 2.57% 4.04% 3.03% 7.26%
- ------------------------ (1) Weighted-average interest rates were calculated utilizing non-U.S. dollar interest rates, where applicable. (2) Other derivatives include basis swaps and hedges of embedded derivatives. F-7 LEHMAN BROTHERS HOLDINGS INC. NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) (PARENT COMPANY ONLY) 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, 2001 ------------------------ LONG-TERM DEBT WEIGHTED-AVERAGE(1) ----------------------- ---------------------------- BEFORE AFTER EFFECTIVE RATE END END CONTRACTUAL AFTER END USER USER INTEREST USER ACTIVITIES ACTIVITIES RATE ACTIVITIES ---------- ---------- ----------- -------------- (IN MILLIONS) USD Obligations Fixed Rate..................................... $17,738 $ 1,158 Floating Rate.................................. 6,987 26,950 ------- ------- 24,725 28,108 Non-USD Obligations................................ 6,189 2,806 ------- ------- Total.............................................. $30,914 $30,914 5.39% 2.96% ======= ======= ==== ====
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 ---------- ---------- ----------- -------------- (IN MILLIONS) USD Obligations Fixed Rate..................................... $15,604 $ 1,104 Floating Rate.................................. 7,402 24,964 ------- ------- 23,006 26,068 Non-USD Obligations................................ 5,437 2,375 ------- ------- Total.............................................. $28,443 $28,443 6.83% 7.23% ======= ======= ==== ====
- ------------------------ (1) Weighted-average interest rates were calculated utilizing non-US dollar interest rates, where applicable. F-8 LEHMAN BROTHERS HOLDINGS INC. NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) (PARENT COMPANY ONLY) NOTE 4. SECURITIES PLEDGED AS COLLATERAL The Company enters into secured borrowing and lending transactions to finance trading inventory positions, obtain securities for settlement, and meet customers' needs. The Company primarily receives collateral in connection with resale agreements. The Company is generally permitted to sell or repledge these securities held as collateral and use the securities to secure repurchase agreements or deliver to counterparties to cover short positions. At November 30, 2001, the fair value of securities received as collateral that have not been sold or repledged totaled approximately $2.1 billion. The gross fair value of securities received as collateral where the Company was permitted to sell or repledge the securities was approximately $6.1 billion. Of this collateral, approximately $4.0 billion has been sold or repledged, generally as collateral under repurchase agreements or to cover securities and other financial instruments sold but not yet purchased. A reconciliation of the amount of unencumbered securities and other financial instruments owned at November 30, 2001 follows:
NOVEMBER 30, 2001 ------------------------------------- SECURITIES AND OTHER FINANCIAL INSTRUMENTS AMOUNT OWNED PLEDGED NET --------------- -------- -------- (IN MILLIONS) Securities and other financial instruments owned: Mortgages and mortgaged-backed............................ $ 8,355 $6,853 $1,502 Derivatives and other contractual agreements.............. 1,722 -- 1,722 Corporate debt and other.................................. 1,219 204 1,015 ------- ------ ------ Total....................................................... $11,296 $7,057 $4,239 ======= ====== ======
NOTE 5. COMMITMENTS AND CONTINGENCIES The Company has guaranteed certain of its subsidiaries' unsecured lines of credit and other contractual obligations. NOTE 6. RELATED PARTY TRANSACTIONS In the normal course of business, Holdings engages in various securities trading and financing activities with many of its subsidiaries (the "Related Parties"). Various charges, such as compensation and benefits, occupancy, administration and computer processing are allocated between the Related Parties, based upon specific identification and allocation methods. Included in non-interest expenses were management fees paid to Holdings of approximately $98 million, $29 million and $57 million for 2001, 2000 and 1999, respectively. In addition, Holdings and subsidiaries of Holdings raise money through short- and long-term funding in capital markets, which is used to fund the operations of certain of the Company's wholly owned subsidiaries. Advances from Holdings to affiliates were approximately $35.9 billion and $23.7 billion at November 30, 2001 and 2000, respectively. In addition, Holdings had advances from subsidiaries aggregating $10.7 billion and $7.0 billion at November 30, 2001 and 2000, respectively. F-9 LEHMAN BROTHERS HOLDINGS INC. NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) (PARENT COMPANY ONLY) At November 30, 2001, Holdings had $5.7 billion of securities purchased under agreements to resell and $8.7 billion of securities sold under agreements to repurchase with Related Parties. Holdings believes that amounts arising through related party transactions, including those allocated expenses referred to above, are reasonable and approximate the amounts that would have been recorded if Holdings operated as an unaffiliated entity. Dividends and capital distributions declared to Holdings by its subsidiaries and affiliates were $1,252 million in 2001, $878 million in 2000 and $240 million in 1999. F-10 EX-10.07 3 a2071673zex-10_07.txt EXHIBIT 10.07 EXHIBIT 10.07 LEHMAN BROTHERS HOLDINGS INC. 1996 MANAGEMENT OWNERSHIP PLAN AS AMENDED THROUGH MARCH 31, 2001 SECTION 1 -- PURPOSE The purpose of the Lehman Brothers Holdings Inc. 1996 Management Ownership Plan (the "Plan") is to strengthen Lehman Brothers Holdings Inc. (the "Company") by providing selected employees of the Company with the opportunity to acquire a proprietary and vested interest in the growth and performance of the Company, thus generating an increased incentive to contribute to the Company's future success and prosperity, enhancing the value of the Company for the benefit of stockholders, and enhancing the Company's ability to attract and retain individuals of exceptional talent. The purposes of the Plan are to be achieved through the grant of various types of stock-based awards. SECTION 2 -- DEFINITIONS For purposes of the Plan, the capitalized terms shall have the meanings ascribed to them in Exhibit A hereof. SECTION 3 -- SHARES SUBJECT TO THE PLAN (a) Shares of Common Stock which may be issued under the Plan may be either authorized and unissued shares of Common Stock or authorized and issued shares of Common Stock held in the Company's treasury, or any combination thereof. Subject to adjustment as provided in Section 14, the number of shares of Common Stock with respect to which Awards (whether distributable in shares of Common Stock or in cash) may be granted under the Plan shall be 42 million shares. The maximum number of shares of Common Stock available for stock options, stock appreciation rights or Other Stock-based Awards that may be granted to a Participant during a calendar year shall not exceed two million. (b) Notwithstanding the last sentence of Section 3(a), to the extent that the number of shares of Common Stock with respect to which Awards may be granted under the Plan to an individual in any calendar year exceeds the number of shares of Common Stock with respect to which Awards were granted under the Plan during that calendar year, such excess shall be available for grant under the Plan in succeeding calendar years. (c) In the event that any other Award subject to repurchase or forfeiture rights is reacquired by the Company or if any Award is canceled, terminates or expires unexercised (except with respect to a stock option which terminates on the exercise of a stock appreciation right) for any reason under the Plan, any Common Stock allocated in connection with such Award shall thereafter again be available for grant pursuant to the Plan. SECTION 4 -- ELIGIBILITY Members of the Corporate Management Committee and the Operating Committee (and successor entities of such committees), all Senior Vice Presidents, all Managing Directors and officers holding a title senior to Managing Director are eligible to be Participants in the Plan. SECTION 5 -- ADMINISTRATION The Plan shall be administered by the Committee, which shall have the power to select those Participants who shall receive Awards and to determine the terms of such Awards. As to the selection of, and the terms of Awards granted to, Participants who are not Executive Officers, the Committee may delegate any or all of its responsibilities to officers or employees of the Company. With respect to any "Covered Employee" (as such term is defined in Section 162(m) of the Code), the Committee shall administer the Plan in such a manner as to comply with the requirements for deductibility under Section 162(m) of the Code. The Committee's authority hereunder shall include, without limitation, the establishment of vesting schedules or exercisability in installments with respect to Awards. The Committee may, in its sole discretion, accelerate or waive vesting or exercise periods or the lapse of restrictions on all or any portion of any Award, or extend the exercisability (including to extend or provide for post-termination exercisability) of stock options or stock appreciation rights; provided that such exercisability shall not extend past ten years from the date of grant of any incentive stock options. Subject to the provisions of the Plan, the Committee shall be authorized to interpret the Plan, to establish, amend and rescind any rules and regulations relating to the Plan, to determine the terms and provisions of any agreements entered into hereunder, and to make all other determinations necessary or advisable for the administration of the Plan. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or in any Award in the manner and to the extent it shall deem desirable to carry the Plan or any such Award into effect. The determinations of the Committee in the administration of the Plan, as described herein, shall be final and conclusive. The validity, construction and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of Delaware and applicable Federal law. SECTION 6 -- STOCK OPTIONS (a) Any stock options granted under the Plan shall be in such form as the Committee may from time to time approve and shall be subject to the terms and conditions provided herein and such additional terms and conditions not inconsistent with the terms of the Plan as the Committee shall deem desirable. (b) Stock options may be granted to any Participant. Each grant of stock options shall specify whether the underlying options are intended to be incentive stock options or non-incentive stock options. In the case of incentive stock options, the terms and conditions of such grants shall be subject to and comply with such requirements as may be prescribed by Section 422(b) of the Code, as from time to time amended, and any implementing regulations, including, but not limited to, the requirement that such stock options are exercisable during the Participant's lifetime only by such Participant. The Committee shall establish the option price at the time each stock option is granted, which price shall not be less than 100 percent of the Fair Market Value of the Common Stock on the date of grant. (c) No stock options may be exercisable later than ten years after their date of grant. The option price of each share of Common Stock as to which a stock option is exercised shall be paid in full at the time of such exercise. Such payment may be made at the sole discretion of the Committee, pursuant to and in accordance with criteria and guidelines established by the Committee (which criteria and guidelines may be different for Executive Officers and for other Participants), as the same may be modified from time to time, (i) in cash, (ii) by tender of shares of Common Stock already owned by the Participant, valued at Fair Market Value as of the date of exercise, (iii) if authorized by the Committee, by withholding pursuant to the election of the Participant, which election is subject to the disapproval of the Committee, from those shares that would otherwise be obtained upon exercise of the option a number of shares having a Fair Market Value equal to the option price, (iv) if authorized by the Committee, and in combination with services rendered by the exercising Participant, by delivery of a properly executed exercise notice together with irrevocable instructions to a securities broker (or, in the case of pledges, lender) approved by the Company to, (a) sell shares of Common Stock subject to the option and to deliver promptly to the Company a portion of the proceeds of such sale transaction on behalf of the exercising Participant to pay the option price, or (b) pledge shares of Common Stock subject to the option to a margin account maintained with such broker or lender, as security for a loan, and such broker or lender, pursuant to irrevocable instructions, delivers to the Company the loan proceeds, at the time of exercise to pay the option price, (v) by any combination of (i), (ii), (iii) or (iv) above or (vi) by other means that the Committee deems appropriate. 2 (d) A stock option holder may, in the discretion of the Committee, have the right to surrender a stock option or any portion thereof to the Company within 30 days following a Change in Control and to receive from the Company in exchange therefor a cash payment in an amount equal to (a) the number of unexercised shares of Common Stock under the option which are being surrendered multiplied by (b) the excess of (i) the greater of (A) the highest price per share of Common Stock paid in connection with the Change in Control or (B) the highest Fair Market Value per share of Common Stock in the 90-day period preceding such Change in Control, over (ii) the purchase price of the option as set forth in the underlying option agreement (the foregoing, a "Limited SAR"). SECTION 7 -- STOCK APPRECIATION RIGHTS (a) Stock appreciation rights may be granted independent of any stock option or in conjunction with all or any part of any stock option granted under the Plan, either at the same time as the stock option is granted or at any later time during the term of the option. Stock appreciation rights shall be subject to such terms and conditions as determined by the Committee, not inconsistent with the provisions of the Plan. (b) Upon exercise, a stock appreciation right shall entitle the Participant to receive from the Company an amount equal to the excess of the Fair Market Value of a share of Common Stock on the date of exercise of the stock appreciation right over the per share grant or option price, as applicable (or such lesser amount as the Committee may determine at the time of grant), multiplied by the number of shares of Common Stock with respect to which the stock appreciation right is exercised. Upon the exercise of a stock appreciation right granted in connection with a stock option, the stock option shall be canceled to the extent of the number of shares as to which the stock appreciation right is exercised, and upon the exercise of a stock option granted in connection with a stock appreciation right or the surrender of such stock option, the stock appreciation right shall be canceled to the extent of the number of shares as to which the stock option is exercised or surrendered. The Committee shall determine whether the stock appreciation right shall be settled in cash, Common Stock or a combination of cash and Common Stock. (c) A holder of a stock appreciation right may, in the discretion of the Committee, have the right to surrender the stock appreciation right or any portion thereof to the Company within 30 days following a Change in Control and to receive from the Company in exchange therefor a cash payment in an amount equal to (a) the number of shares of Common Stock under the stock appreciation right which are being exercised, multiplied by (b) the excess of (i) the greater of (A) the highest price per share of Common Stock paid in connection with the Change in Control or (B) the highest Fair Market Value per share of Common Stock in the 90 day period preceding such Change in Control, over (ii) the per share grant price of the stock appreciation right as set forth in the underlying agreement. SECTION 8 -- OTHER STOCK-BASED AWARDS (a) Other Awards of Common Stock and Awards that are valued in whole or in part by reference to, or otherwise based on, the Fair Market Value of Common Stock (all such Awards being referred to herein as "Other Stock-based Awards"), may be granted under the Plan in the discretion of the Committee. Other Stock-based Awards shall be in such form as the Committee shall determine, including without limitation, (i) the right to purchase shares of Common Stock, (ii) shares of Common Stock subject to restrictions on transfer until the completion of a specified period of service, the occurrence of an event or the attainment of performance objectives, each as specified by the Committee, and (iii) shares of Common Stock issuable upon the completion of a specified period of service, the occurrence of an event or the attainment of performance objectives, each as specified by the Committee. Other Stock-based Awards may be granted alone or in addition to any other Awards made under the Plan. All references in the preceding sentence to "specified period of service," in the case of Other Stock-based Awards which (i) are not in lieu of cash compensation to employees generally, (ii) are not paid to recruit a new employee in an amount of less than 5% of the total awards available for grant under the Plan or (iii) are not subject to the attainment of performance objectives, shall provide that vesting, restrictions on transfer or some other comparable restriction which incents continued performance of the recipient, will be for a period of not less than three years (although vesting or lapsing may occur in tranches over the three years), unless there is a Change in Control or the recipient retires, becomes disabled or dies. Subject to the provisions of the Plan, the 3 Committee shall have sole and absolute discretion to determine to whom and when such Other Stock-based Awards will be made, the number of shares of Common Stock to be awarded under (or otherwise related to) such Other Stock-based Awards and all other terms and conditions of such Awards. The Committee shall determine whether Other Stock-based Awards shall be settled in cash, Common Stock or a combination of cash and Common Stock. (b) With respect to any restricted stock units granted under the Plan, the obligations of the Company or any Subsidiary are limited solely to the delivery of shares of Common Stock on the date when such shares of Common Stock are due to be delivered under each Agreement, and in no event shall the Company or any Subsidiary become obligated to pay cash in respect of such obligation (except that the Company or any Subsidiary may pay to Participants amounts in cash in respect of a restricted stock unit equal to cash dividends paid to a holder of shares of Common Stock, for fractional shares or for any amounts payable in cash upon the occurrence of a Change in Control). (c) The Committee shall establish the performance objective that must be attained in order for the Company to grant other Other Stock-based Awards. Accordingly, unless the Committee determines at the time of grant not to qualify the award as performance based compensation under Section 162(m) of the Code, the performance objectives for awards made under the Plan will be based upon one or more of the following criteria: (i) before or after tax net income; (ii) earnings per share; (iii) book value per share; (iv) stock price; (v) return on Stockholders' equity; (vi) the relative performance of peer group companies; (vii) expense management; (viii) return on investment; (ix) improvements in capital structure; (x) profitability of an identifiable business unit or product; (xi) profit margins; (xii) budget comparison; and (xiii) total return to Stockholders. Participants who have primary responsibility for a business unit of the Company may be measured on business unit operating profit, business unit operating profit as a percent of revenue, and/or measures related to business unit profitability above its cost of capital, in place of some or all of the corporate performance measures. The Committee must certify as to the attainment of the applicable performance goals prior to payment of any Other Stock-based Awards and may reduce the amount of any Other Stock-based Award. SECTION 9 -- DIVIDENDS, EQUIVALENTS AND VOTING RIGHTS Awards other than stock options and stock appreciation rights may, at the discretion of the Committee, provide the Participant with dividends or dividend equivalents and voting rights prior to either vesting or earnout. SECTION 10 -- AWARD AGREEMENTS Each Award under the Plan shall be evidenced by an agreement setting forth the terms and conditions, not inconsistent with the provisions of the Plan, as determined by the Committee, which shall apply to such Award. SECTION 11 -- WITHHOLDING The Company shall have the right to deduct from all amounts paid to any Participant in cash (whether under this Plan or otherwise) any taxes required by law to be withheld therefrom. In the case of payments of Awards in the form of Common Stock, at the Committee's discretion, the Participant may be required to pay to the Company the amount of any taxes required to be withheld with respect to such Common Stock, or, in lieu thereof, the Company shall have the right to retain the number of shares of Common Stock the Fair Market Value of which equals the amount required to be withheld. Without limiting the foregoing, the Committee may, in its discretion and subject to such conditions as it shall impose, permit share withholding to be done at the Participant's election. SECTION 12 -- NON-TRANSFERABILITY No Award shall be assignable or transferable, and no right or interest of any Participant in any Award shall be subject to any lien, obligation or liability of the Participant, except by will, the laws of descent and 4 distribution, or as otherwise set forth in the Award agreement. SECTION 13 -- NO RIGHT TO EMPLOYMENT OR CONTINUED PARTICIPATION IN PLAN/NO RIGHTS AS STOCKHOLDERS (a) No person shall have any claim or right to the grant of an Award, and the grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Company or to be eligible for any subsequent Awards. Further, the Company expressly reserves the right at any time to dismiss a Participant free from any liability or any claim under the Plan, except as provided herein or in any agreement entered into hereunder. (b) The grant of an Award shall not be construed as giving a Participant the rights of a stockholder of Common Stock unless and until shares of Common Stock have been issued to Participants pursuant to Awards hereunder. SECTION 14 -- ADJUSTMENT OF AND CHANGES IN COMMON STOCK In the event of any change in the outstanding shares of Common Stock by reason of any Common Stock dividend or split, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other corporate exchange, or any distribution to stockholders of Common Stock other than regular cash dividends, the Committee shall make a substitution or adjustment to the number or kind of shares of Common Stock or other securities issued or reserved for issuance pursuant to the Plan, and to outstanding Awards, as well as the option price or other affected terms of such Awards as in its judgment shall be necessary to preserve the Participant's rights substantially proportionate to the rights existing prior to such event. Unless otherwise provided in an award agreement, after a merger of one or more corporations into the Company or after a consolidation of the Company and one or more corporations (a "Merger Event") in which the Company shall be the surviving or resulting corporation, an Award holder shall, where applicable, at the same cost, be entitled upon the exercise of an Award, to receive (subject to any action required by Stockholders) such securities of the surviving or resulting corporation as shall be equivalent to the shares underlying such Award as nearly as practicable to the nearest whole number and class of shares of stock or other securities. Unless otherwise provided in an award agreement, if the Company enters into any agreement with respect to any transaction which would, if consummated, result in a Merger Event in which the Company will not be the surviving corporation, the Committee in its sole discretion and without liability to any person shall determine what actions shall be taken with respect to outstanding Awards, if any, including, without limitation, the payment of a cash amount in exchange for the cancellation of an Award or the requiring of the issuance of substitute Awards that will substantially preserve the value, rights and benefits of any affected Awards previously granted hereunder as of the date of the consummation of the Merger Event. SECTION 15 -- AMENDMENT The Committee or the Board may amend, suspend or terminate the Plan or any portion hereof at any time, provided that no amendment shall be made without approval of the stockholders of the Company which shall (i) increase (except as provided in Section 14 hereof) the total number of shares or the percentage of shares reserved for issuance pursuant to the Plan; (ii) change the class of Employees eligible to be Participants; or (iii) extend the date after which Awards cannot be granted under the Plan. SECTION 16 -- UNFUNDED STATUS OF PLAN The Plan is intended to constitute an "unfunded" plan for long-term incentive compensation. With respect to any payments not yet made to a Participant, including any Participant optionee, by the Company, nothing herein contained shall give any Participant any rights that are greater than those of a general 5 creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Common Stock or payments in lieu thereof or with respect to options, stock appreciation rights and other Awards under the Plan; provided, however, that the existence of such trusts or other arrangements is consistent with the unfunded status of the Plan. SECTION 17 -- EFFECTIVE DATE Subject to approval of the Stockholders of the Company, in accordance with Rule 16b-3 under the Securities Exchange Act of 1934, and Code Sections 162(m) and 422, this Plan shall be effective on April 10, 1996. No Awards may be granted under the Plan on or after January 10, 2006. 6 EXHIBIT A (a) "Award" shall mean any type of stock-based award granted pursuant to the Plan. (b) "Board" shall mean the Board of Directors of the Company; provided, however, that any action taken by a duly authorized committee of the Board within the scope of authority delegated to such committee by the Board shall be considered an action of the Board for purposes of this Plan. (c) "Change in Control" shall mean the occurrence during the term of the Plan of: a) The commencement (within the meaning of Rule 14d-2 under the Securities Exchange Act of 1934 (the "Exchange Act")) of a tender offer for more than 20% of the Company's outstanding shares of capital stock having ordinary voting power in the election of directors (the "Voting Securities"); b) An acquisition (other than directly from the Company) of any voting securities of the Company by any "Person" (as the term person is used for purposes of Section 13(d) or 14(d) of the Exchange Act) immediately after which such Person has "Beneficial Ownership" (within, the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the combined voting power of the Company's then outstanding Voting Securities; provided, however, in determining whether a Change in Control has occurred, Voting Securities which are acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. A "Non-Control Acquisition" shall mean an acquisition by (i) an employee benefit plan (or a trust forming a part thereof or a trustee thereof acting solely in its capacity as trustee) maintained by (A) the Company or (B) any corporation or other Person of which a majority of its voting power or its voting equity securities or equity interest is owned, directly or indirectly, by the Company (for purposes of this definition, a "Subsidiary"), (ii) the Company or its Subsidiaries, or (iii) any Person who files in connection with such acquisition a Schedule 13D which expressly disclaims any intention to seek control of the Company and does not expressly reserve the right to seek such control; provided, however, that any amendment to such statement of intent which either indicates an intention or reserves the right to seek control shall be deemed an "acquisition" of the securities of the Company reported in such filing as beneficially owned by such Person for purposes of this paragraph (b); c) The individuals who, as of the effective date of the 1994 initial public trading in Company shares, are members of the Board (the "Incumbent Board"), ceasing for any reason to constitute at least a majority of the members of the Board; provided, however, that if the election, or nomination for election by the Company's common Stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Plan, be considered as a member of the Incumbent Board; provided further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the Exchange Act or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or d) Approval by Stockholders of the Company of: (i) A merger, consolidation or reorganization involving the Company, unless such merger, consolidation or reorganization is a "Non-Control Transaction"; i.e., meets each of the requirements described in (A), (B) and (C) below: (A) the Stockholders of the Company, immediately before such merger, consolidation or reorganization, own, directly or indirectly, immediately following such merger, consolidation or reorganization, at least the Applicable Minimum Percentage (as defined below) of the combined voting power of the outstanding voting securities of the corporation resulting from such merger or consolidation or reorganization (the "Surviving Corporation") in substantially 7 the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization; (B) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least the Applicable Minimum Proportion (as defined below) of the members of the board of directors of the Surviving Corporation immediately following the consummation of such merger, consolidation or reorganization; and (C) no Person other than the Company, any Subsidiary, any employee benefit plan (or any trust forming a part thereof or a trustee thereof acting solely in its capacity as trustee) maintained by the Company, the Surviving Corporation, or any Subsidiary, or any Person who, immediately prior to such merger, consolidation or reorganization had Beneficial Ownership of 20% or more of the then outstanding Voting Securities has Beneficial Ownership of 20% or more of the combined voting power of the Surviving Corporation's then outstanding voting securities immediately following the consummation of such merger, consolidation or reorganization; (ii) A complete liquidation or dissolution of the Company; or (iii) An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary). With respect to paragraph (d)(i) above, "Applicable Minimum Percentage" means (1) eighty percent (80%) with respect to Awards made prior to December 11, 2000, and (2) fifty percent (50%) with respect to Awards made on or after December 11, 2000; and "Applicable Minimum Proportion" means (1) two-thirds with respect to Awards made prior to December 11, 2000, and (2) a majority with respect to Awards made on or after December 11, 2000. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the outstanding Voting Securities as a result of the acquisition of Voting Securities by the Company which, by reducing the number of Voting Securities outstanding, increases the proportional number of shares Beneficially Owned by the Subject Persons, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Securities by the Company, and thereafter such Beneficial Owner acquires any additional Voting Securities which increases the percentage of the then outstanding Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur. (d) "Code" shall mean the Internal Revenue Code of 1986, as from time to time amended. (e) "Committee" shall mean the Compensation and Benefits Committee of the Company. (f) "Common Stock" shall mean the common stock of the Company, $.10 par value. (g) "Company" shall mean Lehman Brothers Holdings Inc. and, except as otherwise specified in this Plan in a particular context, any successor thereto, whether by merger, consolidation, purchase of substantially all its assets or otherwise. (h) "Executive Officer" shall mean a Participant who is subject to the requirements of Sections 16(a) and 16(b) of the Securities Exchange Act of 1934. (i) "Fair Market Value" on any date means the closing price of the shares on such date on the principal national securities exchange on which such shares are listed or admitted to trading (or, if such exchange is not open on such date, the immediately preceding date on which such exchange is open), the arithmetic mean of the per share closing bid price and per share closing asked price on such date as quoted 8 on the National Association of Securities Dealers Automated Quotation System, or such other market in which such prices are regularly quoted, or, if there have been no published bid or asked quotations with respect to such shares on such date, the Fair Market Value shall be the value established by the Committee in good faith and, in the case of an incentive stock option, in accordance with Section 422 of the Code. (j) "Other Stock-based Award" shall mean any of those Awards described in Section 8 hereof. (k) "Participant" shall mean a member of the Corporate Management Committee or the Operating Committee (and successor entities of such committees), a Senior Vice President, a Managing Director or an officer holding a title senior to Managing Director who is selected by the Committee to receive an Award under the Plan. (l) "Subsidiary" shall mean any corporation which at the time qualifies as a subsidiary of the Company under the definition of "subsidiary corporation" in Section 424(f) of the Code, as amended from time to time. 9 EX-10.10 4 a2071673zex-10_10.txt EXHIBIT 10.10 EXHIBIT 10.10 LEHMAN BROTHERS HOLDINGS INC. EMPLOYEE INCENTIVE PLAN AS AMENDED THROUGH MARCH 31, 2001 SECTION 1 -- PURPOSE The purpose of the Lehman Brothers Holdings Inc. Employee Incentive Plan (the "Plan") is to strengthen Lehman Brothers Holdings Inc. (the "Company") by providing selected employees of the Company with the opportunity to acquire a proprietary and vested interest in the growth and performance of the Company, thus generating an increased incentive to contribute to the Company's future success and prosperity, enhancing the value of the Company for the benefit of stockholders, and enhancing the Company's ability to attract and retain individuals of exceptional talent. The purposes of the Plan are to be achieved through the grant of various types of stock-based awards. SECTION 2 -- DEFINITIONS For purposes of the Plan, the capitalized terms shall have the meanings ascribed to them in Exhibit A hereof. SECTION 3 -- SHARES SUBJECT TO THE PLAN (a) Shares of Common Stock which may be issued under the Plan may be either authorized and unissued shares of Common Stock or authorized and issued shares of Common Stock held in the Company's treasury, or any combination thereof. Subject to adjustment as provided in Section 14, the number of shares of Common Stock with respect to which Awards (whether distributable in shares of Common Stock or in cash) may be granted under the Plan shall be 156 million shares. The maximum number of shares of Common Stock available for stock options, stock appreciation rights or Other Stock-based Awards that may be granted to a Participant during a calendar year shall not exceed two million. (b) Notwithstanding the last sentence of Section 3(a), to the extent that the number of shares of Common Stock with respect to which Awards may be granted under the Plan to an individual in any calendar year exceeds the number of shares of Common Stock with respect to which Awards were granted under the Plan during that calendar year, such excess shall be available for grant under the Plan in succeeding calendar years. (c) In the event that any other Award subject to repurchase or forfeiture rights is reacquired by the Company or if any Award is canceled, terminates or expires unexercised (except with respect to a stock option which terminates on the exercise of a stock appreciation right) for any reason under the Plan, any Common Stock allocated in connection with such Award shall thereafter again be available for grant pursuant to the Plan. SECTION 4 -- ELIGIBILITY Selected employees, officers, directors and consultants to the Company and its subsidiaries are eligible to be Participants in the Plan. SECTION 5 -- ADMINISTRATION The Plan shall be administered by the Committee, which shall have the power to select those Participants who shall receive Awards and to determine the terms of such Awards. As to the selection of, and the terms of Awards granted the Committee may delegate any or all of its responsibilities to officers or employees of the Company. The Committee's authority hereunder shall include, without limitation, the establishment of vesting schedules or exercisability in installments with respect to Awards. The Committee may, in its sole discretion, accelerate or waive vesting or exercise periods or the lapse of restrictions on all or any portion of any Award, or extend the exercisability (including to extend or provide for post-termination exercisability) of stock options or stock appreciation rights; provided that such exercisability shall not extend past ten years from the date of grant of any incentive stock options. Subject to the provisions of the Plan, the Committee shall be authorized to interpret the Plan, to establish, amend and rescind any rules and regulations relating to the Plan, to determine the terms and provisions of any agreements entered into hereunder, and to make all other determinations necessary or advisable for the administration of the Plan. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or in any Award in the manner and to the extent it shall deem desirable to carry the Plan or any such Award into effect. The determinations of the Committee in the administration of the Plan, as described herein, shall be final and conclusive. The validity, construction and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of Delaware and applicable Federal law. SECTION 6 -- STOCK OPTIONS (a) Any stock options granted under the Plan shall be in such form as the Committee may from time to time approve and shall be subject to the terms and conditions provided herein and such additional terms and conditions not inconsistent with the terms of the Plan as the Committee shall deem desirable. (b) Stock options may be granted to any Participant. Each grant of stock options shall specify whether the underlying options are intended to be incentive stock options or non-incentive stock options. In the case of incentive stock options, the terms and conditions of such grants shall be subject to and comply with such requirements as may be prescribed by Section 422(b) of the Code, as from time to time amended, and any implementing regulations, including, but not limited to, the requirement that such stock options are exercisable during the Participant's lifetime only by such Participant. The Committee shall establish the option price at the time each stock option is granted, which price shall not be less than 100 percent of the Fair Market Value of the Common Stock on the date of grant. (c) No stock options may be exercisable later than ten years after their date of grant. The option price of each share of Common Stock as to which a stock option is exercised shall be paid in full at the time of such exercise. Such payment may be made at the sole discretion of the Committee, pursuant to and in accordance with criteria and guidelines established by the Committee (which criteria and guidelines may be different for executive officers and for other Participants), as the same may be modified from time to time, (i) in cash, (ii) by tender of shares of Common Stock already owned by the Participant, valued at Fair Market Value as of the date of exercise, (iii) if authorized by the Committee, by withholding pursuant to the election of the Participant, which election is subject to the disapproval of the Committee, from those shares that would otherwise be obtained upon exercise of the option a number of shares having a Fair Market Value equal to the option price, (iv) if authorized by the Committee, and in combination with services rendered by the exercising Participant, by delivery of a properly executed exercise notice together with irrevocable instructions to a securities broker (or, in the case of pledges, lender) approved by the Company to, (a) sell shares of Common Stock subject to the option and to deliver promptly to the Company a portion of the proceeds of such sale transaction on behalf of the exercising Participant to pay the option price, or (b) pledge shares of Common Stock subject to the option to a margin account maintained with such broker or lender, as security for a loan, and such broker or lender, pursuant to irrevocable instructions, delivers to the Company the loan proceeds, at the time of exercise to pay the option price, (v) by any combination of (i), (ii), (iii) or (iv) above or (vi) by other means that the Committee deems appropriate. (d) A stock option holder may, in the discretion of the Committee, have the right to surrender a stock option or any portion thereof to the Company within 30 days following a Change in Control and to receive from the Company in exchange therefor a cash payment in an amount equal to (a) the number of unexercised shares of Common Stock under the option which are being surrendered multiplied by (b) the 2 excess of (i) the greater of (A) the highest price per share of Common Stock paid in connection with the Change in Control or (B) the highest Fair Market Value per share of Common Stock in the 90-day period preceding such Change in Control, over (ii) the purchase price of the option as set forth in the underlying option agreement (the foregoing, a "Limited SAR"). SECTION 7 -- STOCK APPRECIATION RIGHTS (a) Stock appreciation rights may be granted independent of any stock option or in conjunction with all or any part of any stock option granted under the Plan, either at the same time as the stock option is granted or at any later time during the term of the option. Stock appreciation rights shall be subject to such terms and conditions as determined by the Committee, not inconsistent with the provisions of the Plan. (b) Upon exercise, a stock appreciation right shall entitle the Participant to receive from the Company an amount equal to the excess of the Fair Market Value of a share of Common Stock on the date of exercise of the stock appreciation right over the per share grant or option price, as applicable (or such lesser amount as the Committee may determine at the time of grant), multiplied by the number of shares of Common Stock with respect to which the stock appreciation right is exercised. Upon the exercise of a stock appreciation right granted in connection with a stock option, the stock option shall be canceled to the extent of the number of shares as to which the stock appreciation right is exercised, and upon the exercise of a stock option granted in connection with a stock appreciation right or the surrender of such stock option, the stock appreciation right shall be canceled to the extent of the number of shares as to which the stock option is exercised or surrendered. The Committee shall determine whether the stock appreciation right shall be settled in cash, Common Stock or a combination of cash and Common Stock. (c) A holder of a stock appreciation right may, in the discretion of the Committee, have the right to surrender the stock appreciation right or any portion thereof to the Company within 30 days following a Change in Control and to receive from the Company in exchange therefor a cash payment in an amount equal to (a) the number of shares of Common Stock under the stock appreciation right which are being exercised, multiplied by (b) the excess of (i) the greater of (A) the highest price per share of Common Stock paid in connection with the Change in Control or (B) the highest Fair Market Value per share of Common Stock in the 90 day period preceding such Change in Control, over (ii) the per share grant price of the stock appreciation right as set forth in the underlying agreement. SECTION 8 -- OTHER STOCK-BASED AWARDS (a) Other Awards of Common Stock and Awards that are valued in whole or in part by reference to, or otherwise based on, the Fair Market Value of Common Stock (all such Awards being referred to herein as "Other Stock-based Awards"), may be granted under the Plan in the discretion of the Committee. Other Stock-based Awards shall be in such form as the Committee shall determine, including without limitation, (i) the right to purchase shares of Common Stock, (ii) shares of Common Stock subject to restrictions on transfer until the completion of a specified period of service, the occurrence of an event or the attainment of performance objectives, each as specified by the Committee, and (iii) shares of Common Stock issuable upon the completion of a specified period of service, the occurrence of an event or the attainment of performance objectives, each as specified by the Committee. Other Stock-based Awards may be granted alone or in addition to any other Awards made under the Plan. All references in the preceding sentence to "specified period of service," in the case of Other Stock-based Awards which (i) are not in lieu of cash compensation to employees generally, (ii) are not paid to recruit a new employee in an amount of less than 5% of the total awards available for grant under the Plan or (iii) are not subject to the attainment of performance objectives, shall provide that vesting, restrictions on transfer or some other comparable restriction which incents continued performance of the recipient, will be for a period of not less than three years (although vesting or lapsing may occur in tranches over the three years), unless there is a Change in Control or the recipient retires, becomes disabled or dies. Subject to the provisions of the Plan, the Committee shall have sole and absolute discretion to determine to whom and when such Other Stock-based Awards will be made, the number of shares of Common Stock to be awarded under (or otherwise related to) such Other Stock-based Awards and all other terms and conditions of such Awards. The Committee shall determine whether Other Stock-based Awards shall be settled in cash, Common Stock or a 3 combination of cash and Common Stock. (b) With respect to any restricted stock units granted under the Plan, the obligations of the Company or any Subsidiary are limited solely to the delivery of shares of Common Stock on the date when such shares of Common Stock are due to be delivered under each Agreement, and in no event shall the Company or any Subsidiary become obligated to pay cash in respect of such obligation (except that the Company or any Subsidiary may pay to Participants amounts in cash in respect of a restricted stock unit equal to cash dividends paid to a holder of shares of Common Stock, for fractional shares or for any amounts payable in cash upon the occurrence of a Change in Control). SECTION 9 -- DIVIDENDS, EQUIVALENTS AND VOTING RIGHTS Awards other than stock options and stock appreciation rights may, at the discretion of the Committee, provide the Participant with dividends or dividend equivalents and voting rights prior to either vesting or earnout. SECTION 10 -- AWARD AGREEMENTS Each Award under the Plan shall be evidenced by an agreement setting forth the terms and conditions, not inconsistent with the provisions of the Plan, as determined by the Committee, which shall apply to such Award. SECTION 11 -- WITHHOLDING The Company shall have the right to deduct from all amounts paid to any Participant in cash (whether under this Plan or otherwise) any taxes required by law to be withheld therefrom. In the case of payments of Awards in the form of Common Stock, at the Committee's discretion, the Participant may be required to pay to the Company the amount of any taxes required to be withheld with respect to such Common Stock, or, in lieu thereof, the Company shall have the right to retain the number of shares of Common Stock the Fair Market Value of which equals the amount required to be withheld. Without limiting the foregoing, the Committee may, in its discretion and subject to such conditions as it shall impose, permit share withholding to be done at the Participant's election. SECTION 12 -- NON-TRANSFERABILITY No Award shall be assignable or transferable, and no right or interest of any Participant in any Award shall be subject to any lien, obligation or liability of the Participant, except by will, the laws of descent and distribution, or as otherwise set forth in the Award agreement. SECTION 13 -- NO RIGHT TO EMPLOYMENT OR CONTINUED PARTICIPATION IN PLAN/NO RIGHTS AS STOCKHOLDERS (a) No person shall have any claim or right to the grant of an Award, and the grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Company or to be eligible for any subsequent Awards. Further, the Company expressly reserves the right at any time to dismiss a Participant free from any liability or any claim under the Plan, except as provided herein or in any agreement entered into hereunder. (b) The grant of an Award shall not be construed as giving a Participant the rights of a stockholder of Common Stock unless and until shares of Common Stock have been issued to Participants pursuant to Awards hereunder. SECTION 14 -- ADJUSTMENT OF AND CHANGES IN COMMON STOCK In the event of any change in the outstanding shares of Common Stock by reason of any Common Stock dividend or split, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or 4 other corporate exchange, or any distribution to stockholders of Common Stock other than regular cash dividends, the Committee shall make a substitution or adjustment to the number or kind of shares of Common Stock or other securities issued or reserved for issuance pursuant to the Plan, and to outstanding Awards, as well as the option price or other affected terms of such Awards as in its judgment shall be necessary to preserve the Participant's rights substantially proportionate to the rights existing prior to such event. Unless otherwise provided in an award agreement, after a merger of one or more corporations into the Company or after a consolidation of the Company and one or more corporations (a "Merger Event") in which the Company shall be the surviving or resulting corporation, an Award holder shall, where applicable, at the same cost, be entitled upon the exercise of an Award, to receive (subject to any action required by Stockholders) such securities of the surviving or resulting corporation as shall be equivalent to the shares underlying such Award as nearly as practicable to the nearest whole number and class of shares of stock or other securities. Unless otherwise provided in an award agreement, if the Company enters into any agreement with respect to any transaction which would, if consummated, result in a Merger Event in which the Company will not be the surviving corporation, the Committee in its sole discretion and without liability to any person shall determine what actions shall be taken with respect to outstanding Awards, if any, including, without limitation, the payment of a cash amount in exchange for the cancellation of an Award or the requiring of the issuance of substitute Awards that will substantially preserve the value, rights and benefits of any affected Awards previously granted hereunder as of the date of the consummation of the Merger Event. SECTION 15 -- AMENDMENT The Committee or the Board may amend, suspend or terminate the Plan or any portion hereof at any time. SECTION 16 -- UNFUNDED STATUS OF PLAN The Plan is intended to constitute an "unfunded" plan for long-term incentive compensation. With respect to any payments not yet made to a Participant, including any Participant optionee, by the Company, nothing herein contained shall give any Participant any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Common Stock or payments in lieu thereof or with respect to options, stock appreciation rights and other Awards under the Plan; provided, however, that the existence of such trusts or other arrangements is consistent with the unfunded status of the Plan. SECTION 17 -- EFFECTIVE DATE This Plan shall be effective on April 5, 1995. No Awards may be granted under the Plan on or after April 4, 2005. 5 EXHIBIT A (a) "Award" shall mean any type of stock-based award granted pursuant to the Plan. (b) "Board" shall mean the Board of Directors of the Company; provided, however, that any action taken by a duly authorized committee of the Board within the scope of authority delegated to such committee by the Board shall be considered an action of the Board for purposes of this Plan. (c) "Change in Control" shall mean the occurrence during the term of the Plan of: a) The commencement (within the meaning of Rule 14d-2 under the Securities Exchange Act of 1934 (the "Exchange Act")) of a tender offer for more than 20% of the Company's outstanding shares of capital stock having ordinary voting power in the election of directors (the "Voting Securities"); b) An acquisition (other than directly from the Company) of any voting securities of the Company by any "Person" (as the term person is used for purposes of Section 13(d) or 14(d) of the Exchange Act) immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the combined voting power of the Company's then outstanding Voting Securities; provided, however, in determining whether a Change in Control has occurred, Voting Securities which are acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. A "Non-Control Acquisition" shall mean an acquisition by (i) an employee benefit plan (or a trust forming a part thereof or a trustee thereof acting solely in its capacity as trustee) maintained by (A) the Company or (B) any corporation or other Person of which a majority of its voting power or its voting equity securities or equity interest is owned, directly or indirectly, by the Company (for purposes of this definition, a "Subsidiary"), (ii) the Company or its Subsidiaries, or (iii) any Person who files in connection with such acquisition a Schedule 13D which expressly disclaims any intention to seek control of the Company and does not expressly reserve the right to seek such control; provided, however, that any amendment to such statement of intent which either indicates an intention or reserves the right to seek control shall be deemed an "acquisition" of the securities of the Company reported in such filing as beneficially owned by such Person for purposes of this paragraph (b); c) The individuals who, as of the effective date of the 1994 initial public trading in Company shares, are members of the Board (the "Incumbent Board"), ceasing for any reason to constitute at least a majority of the members of the Board; provided, however, that if the election, or nomination for election by the Company's common Stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Plan, be considered as a member of the Incumbent Board; provided further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the Exchange Act or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or d) Approval by Stockholders of the Company of: (i) A merger, consolidation or reorganization involving the Company, unless such merger, consolidation or reorganization is a "Non-Control Transaction"; i.e., meets each of the requirements described in (A), (B) and (C) below: (A) the Stockholders of the Company, immediately before such merger, consolidation or reorganization, own, directly or indirectly, immediately following such merger, consolidation or reorganization, at least the Applicable Minimum Percentage (as defined below) of the combined voting power of the outstanding voting securities of the corporation resulting from such merger or consolidation or reorganization (the "Surviving Corporation") in substantially the same proportion 6 as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization; (B) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least the Applicable Minimum Proportion (as defined below) of the members of the board of directors of the Surviving Corporation immediately following the consummation of such merger, consolidation or reorganization; and (C) no Person other than the Company, any Subsidiary, any employee benefit plan (or any trust forming a part thereof or a trustee thereof acting solely in its capacity as trustee) maintained by the Company, the Surviving Corporation, or any Subsidiary, or any Person who, immediately prior to such merger, consolidation or reorganization had Beneficial Ownership of 20% or more of the then outstanding Voting Securities has Beneficial Ownership of 20% or more of the combined voting power of the Surviving Corporation's then outstanding voting securities immediately following the consummation of such merger, consolidation or reorganization; (ii) A complete liquidation or dissolution of the Company; or (iii) An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary). With respect to paragraph (d)(i) above, "Applicable Minimum Percentage" means (1) eighty percent (80%) with respect to Awards made prior to November 14, 2000, and (2) fifty percent (50%) with respect to Awards made on or after November 14, 2000; and "Applicable Minimum Proportion" means (1) two-thirds with respect to Awards made prior to November 14, 2000, and (2) a majority with respect to Awards made on or after November 14, 2000. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the outstanding Voting Securities as a result of the acquisition of Voting Securities by the Company which, by reducing the number of Voting Securities outstanding, increases the proportional number of shares Beneficially Owned by the Subject Persons, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Securities by the Company, and thereafter such Beneficial Owner acquires any additional Voting Securities which increases the percentage of the then outstanding Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur. (d) "Code" shall mean the Internal Revenue Code of 1986, as from time to time amended. (e) "Committee" shall mean the Compensation and Benefits Committee of the Company. (f) "Common Stock" shall mean the common stock of the Company, $.10 par value. (g) "Company" shall mean Lehman Brothers Holdings Inc. and, except as otherwise specified in this Plan in a particular context, any successor thereto, whether by merger, consolidation, purchase of substantially all its assets or otherwise. (h) "Fair Market Value" on any date means the closing price of the shares on such date on the principal national securities exchange on which such shares are listed or admitted to trading (or, if such exchange is not open on such date, the immediately preceding date on which such exchange is open), the arithmetic mean of the per share closing bid price and per share closing asked price on such date as quoted on the National Association of Securities Dealers Automated Quotation System, or such other market in which such prices are regularly quoted, or, if there have been no published bid or asked quotations with respect to such shares on such date, the Fair Market Value shall be the value established by the Committee in good faith and, in the case of an incentive stock option, in accordance with Section 422 of the Code. 7 (i) "Other Stock-based Award" shall mean any of those Awards described in Section 8 hereof. (j) "Participant" shall mean an employee, officer, director or consultant of the Company. (k) "Subsidiary" shall mean any corporation which at the time qualifies as a subsidiary of the Company under the definition of "subsidiary corporation" in Section 424(f) of the Code, as amended from time to time. 8 EX-10.15 5 a2071673zex-10_15.txt EXHIBIT 10.15 Exhibit 10.15 EXECUTION COPY PURCHASE AND SALE AGREEMENT Between MSDW 745, LLC, SELLER, and LB 745 LLC PURCHASER. PREMISES: 745 Seventh Avenue New York, New York October 19, 2001 TABLE OF CONTENTS Page ---- 1. DEFINITIONS...........................................................1 2. PURCHASE AND SALE.....................................................4 3. ACCESS TO PREMISES....................................................5 4. PURCHASE PRICE AND DEPOSIT............................................7 5. STATUS OF THE TITLE...................................................8 6. TITLE INSURANCE; LIENS................................................9 7. APPORTIONMENTS........................................................12 8. PROPERTY NOT INCLUDED IN SALE.........................................14 9. CERTAIN COVENANTS OF SELLER...........................................14 10. ASSIGNMENTS BY SELLER AND ASSUMPTIONS BY PURCHASER; EMPLOYEES.........15 11. REPRESENTATIONS.......................................................16 12. DAMAGE AND DESTRUCTION................................................21 13. CONDEMNATION..........................................................22 14. BROKERS AND ADVISORS..................................................24 15. TAX REDUCTION PROCEEDINGS.............................................24 16. TRANSFER TAXES, RECORDING CHARGES AND SALES TAXES.....................25 17. CONDITIONS OF CLOSING; DELIVERIES TO BE MADE ON THE CLOSING DATE......26 18. CLOSING DATE..........................................................30 19. NOTICES...............................................................31 20. DEFAULT BY PURCHASER OR SELLER........................................32 21. FIRPTA COMPLIANCE.....................................................33 -i- Page ---- 22. ENTIRE AGREEMENT......................................................33 23. AMENDMENTS............................................................34 24. WAIVER................................................................34 25. PARTIAL INVALIDITY....................................................34 26. SECTION HEADINGS......................................................34 27. GOVERNING LAW.........................................................34 28. PARTIES; ASSIGNMENT AND RECORDING.....................................34 29. CONFIDENTIALITY AND PRESS RELEASES....................................35 30. FURTHER ASSURANCES....................................................36 31. THIRD PARTY BENEFICIARY...............................................36 32. JURISDICTION AND SERVICE OF PROCESS...................................36 33. WAIVER OF TRIAL BY JURY...............................................37 34. MISCELLANEOUS.........................................................37 35. ORGANIZATIONAL REPRESENTATIONS........................................38 36. CERTAIN GROUND LEASE PROVISIONS.......................................38 37. CONDITION OF PREMISES AT CLOSING......................................40 38. LIMITATION ON EMPLOYMENT..............................................41 -ii- Schedules A. Description of the Land B. Easements, Conditions, Restrictions and Encumbrances C. Assumed Contracts D. Building Plans E. Interior Improvement Plans F. FF&E Specifications G. Hoist Related Work H. Employees I. Litigation Schedule J. Insurance Schedule K. IT Equipment Specifications L. Exterior Signs Specifications M. Notice to Landlord N. [Intentionally Deleted] O. Global IT Agreements Exhibits 1. Form of Deed 2. Form of Assignment and Assumption of Ground Lease 3. Form of Bill of Sale 4. Form of FIRPTA Affidavit 5. Form of Assignment and Assumption of JV Option Agreement 6. Form of Assignment of Option to Lease Space Agreement 7. Form of Assignment and Assumption of Contracts 8. Form of General Assignment and Assumption Agreement 9. Form of Substitute Guaranty 10. Form of Opinion 11. Form of Assignment of Management Agreement 12. Form of Assignment of Plaza Agreement 13. Form of Assignment of Publicity Agreement 14. Form of Assignment of Rental Agency Agreement 15. Agreement as to Post Closing Obligations -iii- PURCHASE AND SALE AGREEMENT (this "AGREEMENT") made as of the 19day of October, 2001 between MSDW 745, LLC, a Delaware limited liability company, having an address at 1633 Broadway, New York, N.Y. 10036 ("SELLER") and LB 745 LLC, a Delaware limited liability company, having an address at 101 Hudson Street, Jersey City, New Jersey 07302 ("PURCHASER"). W I T N E S S E T H : - - - - - - - - - - WHEREAS, Seller is (i) the tenant under a ground lease (the "GROUND LEASE") dated November 19, 1998 between Rock-Forty-Ninth LLC ("LESSOR"), as landlord, and Seller, as tenant, of certain plots, pieces and parcels of land ("Land") more particularly described in SCHEDULE A annexed hereto and known as 745 Seventh Avenue, New York, New York (the Land and Seller's interest therein under the Ground Lease, the "GROUND LEASEHOLD"), (ii) the owner of the building and other improvements (collectively, the "BUILDING") located on the Land, (iii) the owner of certain interior improvements affixed to and located on the floors of the Building (the "INTERIOR IMPROVEMENTS"), (iv) the owner of certain furniture fixtures and equipment located or to be located in the Building upon the completion of the Interior Improvements (the "FF&E"), (v) the owner of certain technological equipment (the "IT EQUIPMENT"), and (vi) the owner of certain exterior signage (the "EXTERIOR SIGNS") (the Ground Leasehold, the Building, the Interior Improvements and the Exterior Signs are hereinafter sometimes collectively referred to as the "PREMISES" and the FF&E and IT Equipment are sometimes collectively hereinafter referred to as the "PERSONAL PROPERTY"); WHEREAS, Seller desires to cause the sale, assignment, transfer and conveyance of its interests in and to the Premises and the Personal Property to Purchaser in accordance with the terms and provisions of this Agreement, and Purchaser desires to purchase such interests from Seller upon the terms more particularly set forth in this Agreement; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, the parties hereto covenant and agree as follows: l. DEFINITIONS. 2001/2002 Tax Year Section 15 AAA Section 12(c) Adjourned Closing Date Section 6(a) Agreement Preamble Apportionment Date Section 7(a) Approvals Section 37 -1- Approved Commitment Items Section 5(b) Assumed Contract Section 10(a)(ii) Base Building Punchlist Section 37(b) Broker Section 14(a) Building Recitals Building Plans Section 11(c)(ii) business day Section 4(c) Cap Amount Section 11(c)(xiii) Certification Section 17(a)(ii) Closing Section 18 Closing Date Section 18 Commitment Section 6(a) Company Section 6(a) Confidentiality Agreement Section 29(a) Contractors Section 3 Damages Section 11(c)(xiii) Deposit Section 4(a) Development Agreement Section 36(b) Disclosed Survey Items Section 5(a) Employment Contacts Section 10(b) Escrow Agent Section 4(a) Excluded Personalty Section 8 Exculpated Parties Section 11(a) Existing Guaranty Section 17(c)(iii) Exterior Signs Recitals FF&E Recitals FF&E Contracts Section 10(a)(ii) FF&E Specifications Section 11(c)(iv) Final Closing Statement Section 7(e) FIRPTA Section 21 Full Stop Election Section 37(b) Global Agreements Section 8 Ground Lease Recitals Ground Leasehold Recitals Hoist Related Work Section 37(a) Interference Damages Section 20(a) Interior Improvement Plans Section 11(c)(iii) Interior Improvements Recitals IT Contracts Section 10(a)(ii) IT Equipment Recitals JV Option Agreement Section 2 Land Recitals -2- Landlord Section 11(c)(viii) Later Closing Date Section 18 Lessor Recitals Letter Agreement Section 2 LHI Section 17(c)(iii) Management Agreement Section 2 Manager Section 10(b) MS Section 2 MSDW Section 17(c)(iii) New Closing Notice Section 6(d) Notices Section 19 Non-Objectionable Encumbrances Section 6(a) Operative Documents Section 2 Objection Date Section 6(a) Option to Lease Space Agreement Section 2 Outside Date Section 11 Percentage Share Section 16(a) Permitted Encumbrances Section 5 Plans Section 37(a) Plaza Agreement Section 2 Pledge Section 2 Post Closing Agreement Section 4(b)(ii) Premises Recitals Preliminary Closing Statement Section 7(e) Proceeding Section 11(c)(xiii) Project Section 37(a) Project Personnel Section 38 Property Section 2 Property Taxes Section 7(a)(ii) Publicity Agreement Section 2 Purchaser Preamble Purchase Price Section 4 Purchaser's Representatives Section 3(a) REBNY Section 12(c) Rental Agency Agreement Section 2 RET Section 16(a) RFN Section 2 ROFO Section 36(a) RP Section 2 RPT Section 16(a) Rep Claim Section 11(c)(xiii) Representation Section 11(c) -3- Scheduled Closing Date Section 18 Seller Preamble Seller Knowledge Individuals Section 11(c)(xiii) Seller Related Parties Section 3(c) Stop Work Notice Section 37(b) Subway Agreement Section 6(a) Subway Work Section 37(a) Taking Section 13(a) Termination Event Section 10(b) Termination Payment Section 10(b) Title Cure Notice Section 6(a) Title Cure Period Section 6(a) Turner Section 37(b) Update Objections Section 6(a) Utilities Section 7(c) 2. PURCHASE AND SALE. Seller agrees to sell, assign and convey to Purchaser, and Purchaser agrees to purchase from Seller, subject to the terms and conditions of this Agreement, all of Seller's right, title and interest, if any, in and to and under (i) the Ground Leasehold, (ii) the Building; (iii) the Interior Improvements; (iv) the FF&E; (v) the IT Equipment; (vi) the Exterior Signs; (vii) the JV Option Agreement between Landlord and Seller dated November 19, 1998 (the "JV OPTION AGREEMENT") and Purchaser shall assume same from and after the Closing Date; (viii) the Option to Lease Space Agreement (the "OPTION TO LEASE SPACE AGREEMENT") between Landlord, Seller and Morgan Stanley & Co. Incorporated ("MS") dated November 19, 1998 and Purchaser shall assume same from and after the Closing Date, (ix) the Management Agreement dated November 19, 1998 between Seller and Rockefeller Center Management Corporation (the "MANAGEMENT AGREEMENT") and Purchaser shall assume same from and after the Closing Date; (x) the Plaza Agreement dated November 19, 1998 between Seller and Landlord (the "PLAZA AGREEMENT") and Purchaser shall assume same from and after the Closing Date; (xi) the Publicity Agreement dated November 19, 1998 between Seller, Rockefeller Center Management Corporation, Rockefeller Group Development Corporation, Rockefeller Forty-Ninth LLC and Rockefeller Group, Inc. (the "PUBLICITY AGREEMENT") and Purchaser shall assume same from and after the Closing Date; (xii) the Rental Agency Agreement dated March 1, 2001 between Seller and the Rockefeller Group Development Corporation (the "RENTAL AGENCY AGREEMENT") and Purchaser shall assume from and after the Closing Date, (xiii) the Pledge and Security Agreement dated November 19, 1998, by Rock-Forty-Ninth, Inc. ("RFN") and Rock-Plaza, Inc. ("RP") in favor of Seller (the "PLEDGE") and Purchaser shall assume same from and after the Closing Date and the "PLEDGED COLLATERAL" (as defined in the Pledge) thereunder; (xiv) the Letter Agreement between -4- Rockefeller Group, Inc. and Seller dated November 19, 1998 with respect to the use of the name "Rockefeller" (the "Letter Agreement") and Purchaser shall assume same from and after the Closing Date; (xv) the Assumed Contracts and Purchaser shall assume same from and after the Closing Date, (xvi) any strips and gores pertaining to the Premises; (xvii) all easements, rights of way, reservations, privileges and appurtenances of Seller pertaining to the Premises; and (xviii) the Plans, (the documents set forth in (vii), (viii), (ix), (x), (xi) and (xii) shall be collectively referred to as the "OPERATIVE DOCUMENTS"). The items described in clauses (i) through (xviii) above shall be referred to herein collectively as the "PROPERTY". The Property shall also include all of the right, title and interest of MS under the Option to Lease Space Agreement. 3. ACCESS TO PREMISES. (a) Subject to the provisions of SECTION 3(B), Purchaser and its agents, employees, consultants, inspectors, appraisers, engineers and vendors (collectively "PURCHASER'S REPRESENTATIVES") shall have the right, from time to time, upon at least one business day's prior notice as required pursuant to SECTION 3(B), to enter upon and pass through the Premises during normal business hours to examine and inspect the same and to meet with the Contractors (as defined in the Post Closing Agreement) to discuss the Project. Seller shall reasonably cooperate with Purchaser to accommodate Seller's request but shall be able to reschedule the time, provided the rescheduled time is within a reasonable time from the time of Purchaser's original request, when Purchaser and Purchaser's Representatives may enter the Premises or meet with the Contractors upon notice to Purchaser. Notwithstanding any such inspection of the Premises or discussions with the Contractors, Purchaser shall have no right to terminate this Agreement or to obtain any reduction of the Purchase Price as a result of any matters discovered by any such inspection. (b) In conducting any activity described in SECTION 3(A) above, neither Purchaser nor any of Purchaser's Representatives shall (i) contact or have any discussions with any of Seller's or Seller Related Parties' employees, agents, contractors, consultants or representatives or the Contractors unless in each case Purchaser obtains the prior consent of Seller, which consent shall not be unreasonably withheld or delayed, it being agreed that all such contacts or discussions shall, pending any such approval, be directed to John Pierce or Kevin Murray, (ii) interfere with the construction of the Project or (iii) damage the Premises or any portion thereof. In conducting any inspection or any meeting or discussion, Purchaser and Purchaser's Representatives shall at all times comply with, and shall be subject to, all other terms, covenants and conditions of this Agreement. Seller may from time to time establish reasonable rules of conduct for Purchaser and Purchaser's Representatives in furtherance of the foregoing. Purchaser shall schedule and coordinate all inspections, meetings and discussions with Seller and shall give Seller at least one (1) business day prior notice thereof. Seller shall be entitled -5- to have a representative of Seller be present at all times during each such inspection, meeting or discussion. Notwithstanding the foregoing, if Purchaser delivers a Full Stop Election, then, prior to Closing, Purchaser shall have the right to meet with Turner, the FF&E Vendors and the IT Vendors without a Seller representative being present, provided that such unsupervised meetings shall not occur on the Premises. Purchaser agrees to pay to Seller, on demand, the cost of repairing and restoring any damage or disturbance which Purchaser or Purchaser's Representatives shall cause to the Premises or any portion thereof. All inspection fees, appraisal fees, engineering fees and other costs and expenses of any kind incurred by Purchaser or Purchaser's Representatives relating to such inspection of the Premises and its review thereof shall be at the sole expense of Purchaser. Purchaser shall deliver to Seller, at no cost to Seller, copies of all written reports of tests, reports and inspections of the Premises made and conducted by Purchaser or Purchaser's Representatives or for Purchaser's benefit. In the event that the Closing hereunder shall not occur for any reason whatsoever, then, promptly following the termination hereof, Purchaser shall deliver to Seller, at no cost to Seller, the originals (or copies, if the originals are not in Purchaser's possession) of all written tests, reports and inspections of the Premises made and conducted by Purchaser or Purchaser's Representatives or for Purchaser's benefit which are in the possession or control of Purchaser or Purchaser's Representatives. Purchaser and Purchaser's Representatives shall not be permitted to conduct borings of the Premises or drilling in or on the Premises in connection with the preparation of any environmental audit or in connection with any other inspection of the Premises without the consent of Seller (which consent shall not be unreasonably withheld or delayed). The provisions of this SECTION 3(B) shall survive the Closing or any termination of this Agreement. (c) Purchaser agrees to indemnify and hold Seller and its direct and indirect shareholders, officers, directors, partners, principals, members, employees, agents, contractors, and any successors or assigns of the foregoing (collectively with Seller, "SELLER RELATED PARTIES") harmless from and against any and all losses, costs, damages, liens, claims, liabilities or expenses (including, but not limited to, reasonable attorneys' fees, court costs and disbursements) incurred by any of Seller's Related Parties arising from or by reason of Purchaser's and/or Purchaser's Representatives' access to, or inspection of, the Premises, or any tests, inspections or other due diligence conducted in or about Premises pursuant to this Agreement. The provisions of this SECTION 3(C) shall survive the Closing or any termination of this Agreement. (d) Purchaser shall maintain or cause to be maintained, at Purchaser's expense, a policy of commercial general liability coverage, with a broad form contractual liability endorsement covering Purchaser's indemnification obligations contained in Section 3(c) above, with a combined single limit of not less than $5,000,000 per occurrence for bodily injury and property damage insuring Purchaser, Seller and Seller Related Parties, as additional insureds against any injuries or damages to persons or property that may result -6- from or are related to (i) Purchaser's or Purchaser's Representatives entry upon the Premises; (ii) any investigations or other activities conducted thereon, and (iii) any and all other activities undertaken by Purchaser or Purchaser's Representatives with respect to the Premises, all of which insurance shall be on an "occurrence form" and otherwise in such form and with an insurance company reasonably acceptable to Seller. Such insurance may be maintained under a blanket policy. Purchaser shall deliver a copy of the insurance certificate evidencing such insurance to Seller prior to Purchaser's entry on the Premises. 4. PURCHASE PRICE AND DEPOSIT. The purchase price to be paid by Purchaser to Seller for the Property (the "PURCHASE PRICE") is Seven Hundred Fifty Three Million Dollars ($753,000,000). The Purchase Price shall be allocated between: (a) Ground Leasehold - $463,852,685, (b) Building and Interior Improvements - $153,947,315 and (c) FF&E - $135,200,000. The Purchase Price shall be payable as follows: (a) Simultaneously with the execution of this Agreement by Purchaser, Purchaser is delivering directly to Fried, Frank, Harris, Shriver & Jacobson, as escrow agent ("ESCROW AGENT") by wire transfer the amount of One Hundred Million Dollars ($100,000,000) (the "DEPOSIT"). The Deposit shall be held in an interest bearing escrow account by Escrow Agent in accordance with an escrow agreement between Seller, Purchaser and Escrow Agent, executed simultaneously herewith. The Deposit shall be delivered by Escrow Agent to Seller or Purchaser as hereinafter provided in this AGREEMENT and the Escrow Agreement. All references to this Agreement to the Deposit shall mean the Deposit and all interest accrued thereon. (b) At the Closing, Escrow Agent shall deliver the Deposit to Seller (it being understood that any interest on the Deposit shall not be credited to the Purchase Price) and Purchaser shall deliver the balance of the Purchase Price as follows: (i) $615,500,000, subject to adjustment as provided in ARTICLE 7 to Seller; and (ii) $37,500,000 to Escrow Agent, or such other party agreed to by the parties, as escrow agent, to be held and disbursed pursuant to the Agreement as to Post Closing Obligations, attached hereto as EXHIBIT 15 (the "POST CLOSING AGREEMENT"). (c) All monies payable by Purchaser under this Agreement, unless otherwise specified in this Agreement, shall be paid by wire transfer of immediately available federal funds for credit to such bank account or accounts specified by Seller, and divided into such amounts as may be required to consummate the transactions contemplated by this Agreement. -7- As used in this Agreement, the term "BUSINESS DAY" shall mean every day other than Saturdays, Sundays, all days observed by the federal or New York State government as legal holidays and all days on which commercial banks in New York State are required by law to be closed. (d) Except as otherwise specified in SECTIONS 6(B), 12(A)(II), 13(A)(II) and 20(B) of this Agreement, the Deposit shall be non-refundable. The provisions of this SECTION 4(D) shall survive the termination of this Agreement. 5. STATUS OF THE TITLE. All Personal Property to be conveyed by Seller hereunder shall be free of liens. Subject to the terms and provisions of this Agreement, Seller's interest in the Premises shall be sold, assigned and conveyed by Seller to Purchaser, and Purchaser shall accept same, subject only to the following (collectively, the "PERMITTED ENCUMBRANCES"): (a) the state of facts disclosed on the survey prepared by Montrose Surveying Co., LLP, dated October 12, 2001 (the "DISCLOSED SURVEY ITEMS") and any further state of facts which are not Disclosed Survey Items as a current survey of the Premises or a personal inspection would disclose provided such facts would not (i) have a material adverse affect on the use of the Building for a commercial office building or (ii) make it impossible to comply, in whole or in part, with a requirement in the zoning applicable to the Building that requires a portion of the Building to be used for a particular purpose; (b) the standard printed exclusions from coverage contained in the ALTA form of owners title policy currently in use in New York, with the standard New York endorsement, and the easements, conditions, restrictions, agreements, encumbrances and rights of others to, and matters relating to, party walls, as set forth on SCHEDULE B annexed hereto (collectively, the "APPROVED COMMITMENT ITEMS"); (c) Non-Objectionable Encumbrances (as hereinafter defined); and any liens, encumbrances or other title exceptions approved or waived by Purchaser as provided in SECTION 6; (d) real estate taxes, sewer rents and taxes, water rates and charges, vault charges and taxes and business improvement district taxes and any other governmental taxes or charges levied or assessed against the Premises subject to apportionment in accordance with Section 7 hereof; (e) any laws, rules, regulations, statutes, ordinances, orders, permits or other legal requirements affecting the Premises, including, without limitation, those relating to zoning and land use; -8- (f) recorded and unrecorded utility company rights, easements and franchises for electricity, water, steam, gas, telephone or other service or the right to use and maintain poles, lines, wires, cables, pipes, boxes and other fixtures and facilities in, over, under and upon the Premises, provided that, in the case of any of the foregoing items which shall not be of record, the same do not materially adversely affect the use or occupancy of the Premises as an office building; (g) any installment not yet due and payable of assessments first imposed after the date hereof affecting the Premises or any portion thereof; (h) all violations of laws, rules, regulations, statutes, ordinances, orders or other legal requirements affecting the Premises, now or hereafter issued or noted provided that Seller shall, post closing, pursuant to the Post-Closing Agreement, cure and remove of record any violations that exist of record as of the Closing Date; and (i) obligations imposed under the Emergency Repairs provisions of the New York City Administrative Code. 6. TITLE INSURANCE; LIENS. (a) Purchaser shall be required to purchase not less than twenty-five percent (25%) of the title insurance obtained by Purchaser in connection with its acquisition of the Premises from Title Associates, Inc., as agent for Chicago Title Insurance Company. Title to be conveyed hereunder shall be as set forth in the pro-forma policy attached hereto as SCHEDULE B (the "COMMITMENT") and subject to the terms of that certain agreement between the New York City Trust Authority, Rock-Forty-Ninth LLC and Seller dated October 18, 1999 (the "SUBWAY AGREEMENT") that has or is about to be recorded and that certain Termination of Agreement between the New York City Transit Authority, Rock-Forty-Ninth, Inc. and Rock-Forty-Ninth LLC, dated as of October 18, 1999 that has or is about to be recorded. If the Subway Agreement has not been recorded as of the Closing Date, Seller shall deliver a recordable copy of same to the Company for recording. The Subway Agreement and all matters set forth in the Commitment shall constitute Permitted Encumbrances. Purchaser has engaged First American Title Insurance Company of New York to issue a portion of the title insurance with respect to the Premises and will direct same to furnish Seller with a copy of the commitment issued by it and copies of all updates or revisions to such commitment. Title Associates and First American Title Insurance Company of New York are hereinafter collectively referred to as the "COMPANY." Upon receipt of any further updates or revisions to the Commitment from the Company, Seller shall furnish copies thereof to Purchaser. Purchaser shall, on or before the Objection Date, furnish to Seller a written statement setting forth such exceptions to title appearing on such revisions or updates which were not set forth in the Commitment and which Purchaser claims are not Permitted Encumbrances (the "UPDATE OBJECTIONS"); it being agreed that Purchaser shall have no -9- right to object to the Permitted Encumbrances. "OBJECTION DATE" means the Scheduled Closing Date; PROVIDED, that if Seller gives to Purchaser any such update or revision accompanied by a notice in bold capital letters stating in substance that Purchaser's failure to deliver a statement of Update Objections with respect to such update or revision within five (5) business days after the giving of such notice, then the Objection Date shall be such 5th business day. If Purchaser does not deliver such written statement by the Objection Date, Purchaser shall be deemed to have waived its right to object to such additional exceptions to title appearing on such revisions or updates (and the same shall not constitute Update Objections but shall be deemed Permitted Encumbrances). Purchaser shall not be entitled to object to, and shall be deemed to have approved, any liens, encumbrances or other title exceptions (and the same shall not constitute Update Objections but shall be deemed Permitted Encumbrances) (i) over which the Company is willing to insure or against which the Company is willing to provide affirmative insurance (in either case without additional cost to Purchaser); PROVIDED, the aggregate amount of Update Objections under this CLAUSE (I) does not exceed $5,000,000, or (ii) which will be extinguished upon the transfer of the Property (collectively the "NON-OBJECTIONABLE ENCUMBRANCES"). Notwithstanding anything to the contrary contained herein, if Seller is unable to eliminate the Update Objections by the Scheduled Closing Date, unless the same are waived by Purchaser without any abatement in the Purchase Price, Seller may, upon at least two (2) days' prior notice ("TITLE CURE NOTICE") to Purchaser (except with respect to matters first disclosed during the two (2) day period prior to the Scheduled Closing Date, as to which matters notice may be given at any time through and including the Scheduled Closing Date) adjourn the Scheduled Closing Date (the date to which Seller adjourns the Scheduled Closing Date is herein referred to as the "ADJOURNED CLOSING DATE"), for a period not to exceed ninety (90) days ("TITLE CURE PERIOD") in order to attempt to eliminate such exceptions. (b) If Seller is unable to eliminate the Update Objections within the Title Cure Period, unless the same are unconditionally waived by Purchaser, then, Purchaser may (i) accept the Property subject to such Update Objections without abatement of the Purchase Price, in which event (x) such Update Objections shall be deemed to be, for all purposes, Permitted Encumbrances, (y) Purchaser shall close hereunder notwithstanding the existence of same, and (z) Seller shall have no obligations whatsoever after the Closing Date with respect to Seller's failure to cause such Update Objections to be eliminated, or (ii) terminate this Agreement by notice given to Seller within ten (10) business days following receipt of notice from Seller that it was unable to eliminate the Update Objections within the Title Cure Period, time being of the essence, in which event Purchaser shall be entitled to a return of the Deposit. If Purchaser shall fail to deliver the termination notice described in clause (ii) within the 10 business day period described therein, time being of the essence, Purchaser shall be deemed to have made the election under CLAUSE (II) as of the last day of such 10 business day period. Upon the timely giving of any termination notice under clause (ii), or if Purchaser is deemed to have made such -10- election as aforesaid, this Agreement shall terminate and neither party hereto shall have any further rights or obligations hereunder other than those which are expressly provided to survive the termination hereof. (c) It is expressly understood that, except as provided in this CLAUSE (C), in no event shall Seller be required to bring any action or institute any proceeding, or to otherwise incur any costs or expenses in order to attempt to eliminate the Update Objections or to otherwise cause title in the Premises to be in accordance with the terms of this Agreement on the Closing Date. Notwithstanding the preceding sentence, Seller shall be obligated, at Closing, (i) to discharge or remove, of record, any mortgages or consensual liens created by Seller; (ii) to bond, discharge or otherwise satisfy any liens or cause the Company to insure over any liens (subject, in the case of liens that are insured over but not bonded to the $5,000,000 "cap" set forth in Section 6(a)(i) which are the result of work performed by Seller, or on its behalf, and which can be so bonded, discharged or otherwise satisfied solely by the payment of a liquidated sum and bond to the extent same are bondable or satisfy any judgments against Seller; and (iv) to discharge any restrictive covenants, declarations, easements or other similar instruments which are executed and acknowledged by Seller prior to the Closing Date and recorded against the Premises, which are not Permitted Encumbrances. (d) If Seller shall have adjourned the Scheduled Closing Date in order to cure Update Objections in accordance with the provisions of this SECTION 6, Seller shall, upon the satisfactory cure thereof, promptly reschedule the Scheduled Closing Date, upon at least five (5) business days' prior notice to Purchaser (the "NEW CLOSING NOTICE"). If any matters which are Update Objections arise between the date the New Closing Notice is given and the rescheduled Scheduled Closing Date, Seller may again adjourn the Closing for a reasonable period or periods, in order to attempt to cause such exceptions to be eliminated by sending Purchaser a Title Cure Notice. Seller shall not be entitled to adjourn the Scheduled Closing Date pursuant to this SECTION 6 for a period or periods in excess of ninety (90) days in the aggregate. (e) If the Commitment or any update or revision thereto discloses judgments, bankruptcies or other returns against other persons having names the same as, or similar to, that of Seller, Seller, upon request, shall deliver to the Company affidavits showing that such judgments, bankruptcies or other returns are not against Seller in order to induce the Company to omit exceptions with respect to such judgments, bankruptcies or other returns or to insure over same. -11- 7. APPORTIONMENTS. (a) The following shall be apportioned between Seller and Purchaser as of the close of business on the day immediately preceding the Closing Date (the "APPORTIONMENT DATE"): (i) all Fixed Annual Rent and Additional Rent payable under the Ground Lease provided that Seller shall be responsible for the payment of the "Start-Up Fee" described in Section 3.6.2 of the Ground Lease; (ii) real estate taxes, business improvement district charges, sewer rents and taxes, water rates and charges (to the extent not accounted for pursuant to CLAUSE (I) above and (III) below), vault charges and taxes, and any other governmental taxes or charges levied or assessed against the Premises (collectively, "PROPERTY TAXES"), on the basis of the respective periods for which each is assessed or imposed, to be apportioned in accordance with SECTION 7(C) hereof; (iii) water rates and charges and sewer rents and taxes (to the extent not accounted for pursuant to CLAUSE (I) above), if any, based on meter readings to be apportioned in accordance with SECTION 7(C) hereof; (iv) fuel, if any, as estimated by Seller's supplier not more than five (5) days prior to the Closing Date, at current cost, together with any sales taxes payable in connection therewith, if any (a letter from Seller's fuel supplier shall be conclusive evidence as to the quantity of fuel on hand and the current cost therefor); (v) prepaid fees for assignable licenses and other permits (other than construction permits for portions of the Project for which Seller is responsible under the Post-Closing Agreement) assigned to Purchaser at the Closing; (vi) any amounts prepaid or payable by Seller under the Assumed Contracts (as defined in SECTION 10(A)(II)); (vii) amounts payable under the Management Agreement, including, without limitation, wages and fringe benefits (including, without limitation, vacation pay, sick days, health, welfare, pension and disability benefits) and other compensation payable to all personnel, if any, employed at the Building at Closing; and (viii) amounts required to be paid by the owner of the Premises under any instruments recorded against the Premises as shown on -12- Schedule B except to the extent that such amounts are part of the work to be performed by Seller pursuant to the Post Closing Agreement. (b) If there are water meters at the Premises, the unfixed water rates and charges and sewer rents and taxes covered by meters, if any, shall be apportioned (i) on the basis of an actual reading done within thirty (30) days prior to the Apportionment Date, or (ii) if such reading has not been made, on the basis of the last available reading. If the apportionment is not based on an actual current reading, then upon the taking of a subsequent actual reading, such apportionment shall be readjusted and Seller shall promptly deliver to Purchaser or Purchaser shall promptly deliver to Seller, as the case may be, the amount determined to be due upon such readjustment. (c) Charges for all electricity, steam, gas and other utility services (collectively, "UTILITIES") shall be billed to Seller's account up to the Apportionment Date and, from and after the Apportionment Date, all utilities shall be billed to Purchaser's account. If for any reason such changeover in billing is not practicable as of the Closing Date, as to any Utility, such Utility shall be apportioned on the basis of actual current readings or, if such readings have not been made, on the basis of the most recent bills that are available. If any apportionment is not based on an actual current reading, then upon the taking of a subsequent actual reading, such apportionment shall be readjusted and Seller shall promptly deliver to Purchaser, or Purchaser shall promptly deliver to Seller, as the case may be, the amount determined to be due upon such adjustment. (d) If the computation of the aforementioned apportionments shows that a net amount is owed by Seller to Purchaser, such amount shall be credited against the Purchase Price payable by Purchaser on the Closing Date. If such computation shows that a net amount is owed by Purchaser to Seller, such amount shall be added to the Purchase Price payable by Purchaser on the Closing Date. (e) At or prior to the Closing, Seller and Purchaser and/or their respective agents or designees will jointly prepare a preliminary closing statement reasonably satisfactory to Seller and Purchaser in form and substance (the "PRELIMINARY CLOSING STATEMENT") which will show the net amount due either to Seller or to Purchaser as the result of the adjustments and prorations provided for herein, and such net due amount will be added to or subtracted from the Purchase Price to be paid to Seller at the Closing pursuant to SECTION 4 hereof. Within sixty (60) days following the Closing Date, Seller and Purchaser and/or their respective agents or designees will jointly prepare a final closing statement reasonably satisfactory to Seller and Purchaser in form and substance (the "FINAL CLOSING STATEMENT") setting forth the final determination of the adjustments and prorations provided for herein and setting forth any items which are not capable of being determined at such time (and the manner in which such items shall be determined and paid). The net amount due Seller or Purchaser, if any, by reason of adjustments to the Preliminary Closing Statement as shown in the Final Closing Statement, shall be paid in -13- cash by the party obligated therefor within ten (10) days following that party's receipt of the approved Final Closing Statement. The adjustments, prorations and determinations agreed to by Seller and Purchaser in the Final Closing Statement shall be conclusive and binding on the parties hereto except for any items which are not capable of being determined at the time the Final Closing Statement is agreed to by Seller and Purchaser, which items shall be determined and paid in the manner set forth in the Final Closing Statement and except for other amounts payable hereunder pursuant to provisions which survive the Closing (including, without limitation, tax refunds pursuant to SECTION 15). Prior to and following the Closing Date, each party shall provide the other with such information as the other shall reasonably request (including, without limitation, access to the books, records, files, ledgers, information and data with respect to the Property during normal business hours upon reasonable advance notice) in order to make the preliminary and final adjustments and prorations provided for herein. (f) The provisions of this SECTION 7 shall survive the Closing. 8. PROPERTY NOT INCLUDED IN SALE. Notwithstanding anything to the contrary contained herein, it is expressly agreed by the parties hereto that none of Seller's (a) proprietary technology and any intellectual property rights therein, proprietary signs and the proprietary content thereof or proprietary fixtures, (b) trademarks, service marks, logos, trade names and corporate names, (c) telephone numbers and Internet Protocol ("IP") addresses, (d) Extended Carrier Agreements and systems, (e) market data provider hardware and/or service contracts, (f) certain used furniture shown on the Plans as being relocated from other facilities of Seller (g) certain contracts that provide IT Equipment and services for the Building and other facilities of Seller as identified on Schedule O hereto (the "Global Contracts") (the items in clauses (a) through (g) are collectively, "EXCLUDED PERSONALTY"), shall be included in the Property to be sold to Purchaser hereunder. This SECTION 8 shall survive the Closing. 9. CERTAIN COVENANTS OF SELLER. (a) During the period from the date hereof until the Closing Date: (i) Seller shall maintain in full force and effect the insurance policies, a schedule of which is attached hereto as SCHEDULE J, currently in effect with respect to the Premises; (ii) Seller shall not convey, or enter into any agreement to convey, any development rights, "air" rights or comparable rights appurtenant to the Premises; (iii) Seller shall not enter into any lease or other agreement for the occupancy of the Premises; -14- (iv) Seller shall not amend or modify (other than non-material amendments or modifications) or renew any of the Assumed Contracts without Purchaser's consent; and (v) Seller shall not enter into any new contracts other than market rate contracts with entities not affiliated with Seller relating to the operation or maintenance of the Building, unless such contract may be terminated by the owner of the Premises without penalty on not more than thirty (30) days prior notice each of which shall be an Assumed Contract. Seller will provide Purchaser with copies of all such new contracts upon execution thereof. The foregoing shall not be deemed to preclude Seller from entering into new contracts for the completion of the Project as contemplated by ARTICLE 37 hereof provided that Purchaser shall have no obligation under such contract unless Purchaser has specifically consented thereto. (b) Whenever in SECTION 9(A) hereof Seller is required to obtain Purchaser's approval or consent with respect to any transaction described therein, Purchaser shall, within three (3) business days after receipt of Seller's request therefore, together with a complete copy of all relevant documents, notify Seller of its approval or disapproval of same and, if Purchaser fails to notify Seller of its disapproval within said three (3) business day period, Purchaser shall in all events be deemed to have disapproved same. 10. ASSIGNMENTS BY SELLER AND ASSUMPTIONS BY PURCHASER; EMPLOYEES. (a) Effective as of the Closing Date, Seller agrees to assign to Purchaser, without recourse, representation or warranty (except as set forth herein), all of Seller's right, title and interest in, and Purchaser agrees to assume Seller's obligations accruing on and after the Closing Date, the documents described in clauses (i), (ii), (iii) and (iv) below: (i) the Ground Lease; (ii) the service, maintenance, supply and other agreements relating to the operation of the Premises, together with all modifications and amendments thereof and supplements relating thereto which are set forth on SCHEDULE C attached hereto and any other service, maintenance, supply and other agreements (or amendments or modifications) approved by Purchaser or otherwise permitted hereunder other than the Construction Contracts and the contracts to purchase the FF&E (the "FF&E CONTRACTS") and the Contracts to purchase the IT Equipment (the "IT CONTRACTS") (collectively, "ASSUMED CONTRACTS"), in each case to the extent then in effect; -15- (iii) the transferable permits and licenses, if any, relating to the Premises and the other intangible personalty; and (iv) the Operative Documents. (b) Purchaser agrees that, effective as of the date hereof, the employees as set forth on Schedule H hereto (it being understood that the list is of job descriptions and compensation, not individuals), are engaged in the operation, maintenance cleaning or security of the Building as employees of Rockefeller Center Management Corporation ("MANAGER"). Such employees and any additional personnel that may be hired by Manager in accordance with the Management Agreement shall be union employees who shall, as of the Closing Date, be offered the same employment by Manager under their then current employment contracts or agreements, including any collective bargaining agreements or other union contracts (the "EMPLOYMENT CONTRACTS"). Seller shall not consent to the hiring of additional employees prior to Closing without the consent of Purchaser, not to be unreasonably withheld, except to the extent Seller is required to do so under the Management Agreement. Purchaser acknowledges that in the event it (or Manager) either (i) terminates any of such union employees, (ii) terminates any cleaning contractor, security contractor or other service provider to the Premises employing union personnel or requires any such service provider to reduce their employees at the Premises and, as a result, any of the union employees engaged by such service provider are terminated (each of the events described in (i) and (ii), a "TERMINATION EVENT"), certain severance payments and other termination benefits (collectively, "TERMINATION PAYMENTS") may be payable with respect to such terminated employees. Purchaser agrees that it shall be liable for the payment of all such Termination Payments and hereby agrees to indemnify and hold harmless Seller and the other Seller Related Parties from and against any loss, cost, damage, liability or expense (including, without limitations, reasonable attorneys' fees, court costs and disbursements) incurred by Seller or any other Seller Related Party arising from or by reason of (1) the occurrence of a Termination Event, (2) Purchaser's failure to pay such Termination Payments as and when due and payable, (3) Purchaser's failure to comply with the preceding provisions of this SECTION 10(C) or (4) Purchaser's failure to comply with the obligations under the Employment Contracts required to be performed by the owner of the Premises and which accrue from and after the Closing Date (it being agreed that the obligation to make Termination Payments shall be deemed an obligation which accrues after the Closing Date). (c) The provisions of this SECTION 10 shall survive the Closing. 11. REPRESENTATIONS. (a) Purchaser expressly acknowledges that, except as expressly set forth in this Agreement, neither Seller, nor any person acting on behalf of Seller, nor any person or entity which prepared or provided any of the materials reviewed by Purchaser in -16- conducting its due diligence, nor any direct or indirect officer, director, partner, shareholder, employee, agent, representative, accountant, advisor, attorney, principal, affiliate, consultant, contractor, successor or assign of any of the foregoing parties (Seller, and all of the other parties described in the preceding portions of this sentence (other than Purchaser and any unrelated (to Seller) third parties to Agreements being assigned to Purchaser hereunder) shall be referred to herein collectively as the "EXCULPATED PARTIES") has made any oral or written representations or warranties, whether express or implied, by operation of law or otherwise, with respect to the design and construction of the Property, the zoning and other laws, regulations and rules applicable thereto or the compliance by the Property therewith, the revenues and expenses generated by or associated with the Property, or otherwise relating to the Property or the transactions contemplated herein. Purchaser further acknowledges that, except as specifically set forth in this Agreement, all materials which have been provided by any of the Exculpated Parties have been provided without any warranty or representation, expressed or implied as to their content, suitability for any purpose, accuracy, truthfulness or completeness and, except as specifically set forth in this Agreement, Purchaser shall not have any recourse against Seller or any of the other Exculpated Parties in the event of any errors therein or omissions therefrom. Without any disclaimer as to any representations made hereunder, Purchaser acknowledges that Purchaser has conducted its own independent investigations with respect to the Premises, including but not limited to environmental, structural, mechanical and architectural inspections, and is thoroughly acquainted with all matters related to the Premises. Without any disclaimer as to any representations made hereunder, Purchaser is acquiring the Property based solely on its own independent investigation and inspection of the Property and not in reliance on any information provided by Seller, or any of the other Exculpated Parties. (b) Subject to Seller's obligations with respect to the Project as set forth in ARTICLE 37 hereof, Purchaser acknowledges and agrees that it is purchasing the Property based solely upon its inspection and investigations of the Property and that Purchaser is purchasing the Property "AS IS" and "WITH ALL FAULTS", based upon the condition of the Property as of the date of this Agreement, reasonable wear and tear and, subject to the provisions of SECTIONS 12 and 13 of this Agreement, loss by condemnation or fire or other casualty excepted. The foregoing shall not be deemed to waive any rights to warranties or guaranties under the Construction Contracts assigned to Purchaser pursuant to the Post Closing Agreement. Purchaser acknowledges and agrees that its obligations under this Agreement shall not be subject to any financing contingency or other contingencies or satisfaction of conditions of any kind whatsoever and Purchaser shall have no right to terminate this Agreement or receive a return of the Deposit except as expressly provided for in SECTIONS 6(B), 12(A)(II), 13(A)(II) and 20(B) of this Agreement. (c) Seller hereby represents and warrants to Purchaser as of the date hereof as follows (each a "REPRESENTATION"): -17- (i) Attached hereto as SCHEDULE C is a list of the Assumed Contracts in effect as of the date hereof which is true and complete in all material respects (taking into account the Project as a whole). (ii) Seller has made available to Purchaser for Purchaser's review all of the plans and specifications pursuant to which the Building is being constructed, a list of which plans and specifications which is true and complete in all material respects (taking into account the Project as a whole) dated as of October 3, 2001 is attached hereto as Schedule D (the "BUILDING PLANS"), it being acknowledged by Purchaser that the Building Plans may not reflect so-called "field changes" made in the ordinary course of construction of the Building. (iii) Seller has made available to Purchaser for Purchaser's review all of the plans and specifications pursuant to which the Interior Improvements are being constructed, a list of which plans and specifications which is true and complete in all material respects (taking into account the Project as a whole) as of October 12, 2001 is attached hereto as Schedule E (the "INTERIOR IMPROVEMENT PLANS"), it being acknowledged by Purchaser that the Interior Improvement Plans may not reflect so-called "field changes" made in the ordinary course of construction of the Building. (iv) Seller has made available to Purchaser for Purchaser's review all of the specifications for the FF&E installed or to be installed in the Building, a list of which specifications which is true and complete in all material respects (taking into account the Project as a whole) as of October 12, 2001 is attached hereto as Schedule F (the "FF&E SPECIFICATIONS"), it being acknowledged by Purchaser that Seller may substitute items of comparable quality for items in the FF&E Specifications. (v) Seller has made available for Purchaser's review all of the specifications of the IT Equipment, a list of which specifications which is true and complete in all material respects (taking into account the Project as a whole) as of October 8, 2001 is attached hereto as Schedule K, it being acknowledged by Purchaser that Seller may substitute items of comparable quality for items constituting IT Equipment. (vi) Seller has made available for Purchaser's review all of the Specifications for Exteriors Signs to be installed on the exterior of the Building, a list of specifications which is true and complete in all material respects (taking into account the Project as a whole) as of September 15, 1999 is attached hereto as Schedule L, it being acknowledged by Purchaser that Seller shall be entitled to modify the Exterior Signs and content thereof to remove any proprietary content, software or images of Seller and Seller Related Parties. -18- (vii) There are no condemnation or eminent domain proceedings pending or, to Seller's knowledge, threatened, against the Premises. (viii) Seller has not granted to any other party any purchase option or right of first refusal with respect to the purchase of the Premises or any part thereof, any interest direct or indirect therein which remains in effect except for the Right of First Offer in Favor of Rock-Forty-Ninth LLC ("LANDLORD") pursuant to Article 38 of the Ground Lease. (ix) There is no action, suit or proceeding pending or, to Seller's knowledge, threatened against or affecting the Premises, except as set forth on SCHEDULE I. In the event any such proceeding is initiated prior to Closing, Seller shall promptly advise Purchaser of same and shall defend or cause to be defended, without cost to Purchaser, and shall indemnify Purchaser from and against all loss, liability and expense including reasonable attorneys' fees and disbursements, incurred by Purchaser by reason of such action, suit or proceeding. (x) Seller has not entered into any lease, license or other agreement for the use or occupancy of the Premises or any portion thereof except as set forth in the Commitment, the Subway Agreement, the Operative Documents or as otherwise set forth in this Agreement. (xi) Seller has delivered to Purchaser a true and complete copy of the Ground Lease. The Ground Lease is in full force and effect, all Fixed Annual Rent and Additional Rent due and payable under the Ground Lease have been paid, and no notice of default has been given by the Landlord thereunder which remains uncured. (xii) Seller has delivered to Purchaser true and complete copies of the Management Agreement, Plaza Agreement, Publicity Agreement, Rental Agency Agreement, the Letter Agreement and the Subway Agreement. To the best of Seller's knowledge, such documents are in full force and effect, Seller has not given any notices to the parties thereto of a default thereunder and no notice of material default by Seller has been given to Seller by the parties under such agreements which remains uncured. (xiii) The JV Option Agreement and the Option to Lease Space Agreement are in full force and effect, Seller has not given any notice of default to the "Land Owner" and no notice of default has been given by the "Land Owner" under either such agreement which remains uncured and no notice has been given under either such agreement of the exercise of any option granted thereunder. Any and all uses of the phrase, "to the best of the Seller's knowledge" or other references to Seller's knowledge in this Agreement shall mean the actual, present, conscious knowledge of David Arena, Nan Molofsky and John Pierce, representatives of Seller (the -19- "SELLER KNOWLEDGE INDIVIDUALS"), as to a fact at the time given without investigation or inquiry. Neither the actual, present, conscious knowledge of any other individual or entity, nor the constructive knowledge of the Seller Knowledge Individuals or of any other individual or entity, shall be imputed to the Seller Knowledge Individuals. The representations and warranties of Seller contained in this Section 11(c) shall survive the Closing for two hundred seventy (270) days following the Closing Date. Each such representation and warranty shall automatically be null and void and of no further force and effect on the 270th day following the Closing Date unless, prior to such 270th day, Purchaser shall have delivered a written notice to Seller alleging that Seller shall be in breach of such representation or warranty, that Purchaser did not have actual knowledge of such breach on or prior to the Closing Date and that Purchaser shall have suffered actual damages as a result thereof (a "REP CLAIM"). Notwithstanding anything to the contrary contained herein, in no event shall Purchaser be entitled to make a Rep Claim (or prosecute a proceeding) unless the aggregate amount of all Rep Claims exceeds $500,000 in the aggregate. If a Rep Claim shall timely be made by Purchaser as aforesaid and shall not be resolved by the parties by the 180th day following the date Purchaser gave Seller notice of the Rep Claim (each, an "OUTSIDE DATE"), then each such representation and warranty as to which such Rep Claim shall have been made shall automatically be null and void and of no further force or effect on the applicable Outside Date unless, prior to such Outside Date, Purchaser shall have commenced a legal proceeding against Seller making the same allegations as are set forth in such Rep Claim (a "PROCEEDING"). If Purchaser shall have timely commenced a Proceeding and a court of competent jurisdiction shall, pursuant to a final, non-appealable order in connection with such Proceeding, determine that (1) Seller was in breach of any of the applicable representation or warranty as of the date of this Agreement and (2) Purchaser suffered actual damages (the "DAMAGES") by reason of such breach and (3) Purchaser did not have actual knowledge or constructive knowledge of such breach on or prior to the Closing Date then, Purchaser shall be entitled to receive an amount equal to the Damages; provided, that, in no event shall Purchaser be entitled to consequential or punitive damages. Any such Damages shall be refunded within thirty (30) days following the entry of such final, non-appealable order and delivery of a copy thereof to Seller. Purchaser acknowledges and agrees that, in the event that Seller shall be in breach of any of the Representations, Purchaser shall have no recourse to the property or other assets of Seller or any of the other Exculpated Parties (excluding the proceeds), and Purchaser's sole remedy, in such event, shall be to receive a refund from the net sales proceeds received by Seller from Purchaser at the Closing in the amount of the Damages. (d) The foregoing right of Purchaser to pursue a Rep Claim shall be null and void to the extent that Seller or Seller Related Parties have delivered or made available to Purchaser any leases, contracts or other information with respect to the Property at any time prior to the Closing Date, such leases, contracts or other information contain -20- provisions that disclose that any of the Representations are untrue and Purchaser had actual knowledge of such provisions; it being agreed that any such Representations shall be deemed modified to conform to such provisions, and to the extent that any information provided to Purchaser or acquired by it is information which is available to or provided by Seller or Seller Related Parties, such information discloses that any of the Representations herein are untrue and Purchaser has actual knowledge of such information, such representations shall be modified to conform to such information. (e) The provisions of SECTIONS 11(A), (B), (C), AND (D) shall survive the Closing but such survival shall be limited, in the case of the representations and warranties set forth in SECTION 11(C), to the extent set forth therein. 12. DAMAGE AND DESTRUCTION. (a) If all or any part of the Building is damaged by fire or other casualty occurring following the date hereof and prior to the Closing Date, whether or not such damage affects a material part of the Building, then: (i) if the estimated cost of repair or restoration is less than or equal to $75,000,000 and if the estimated time to complete such repair or restoration is six (6) months or less, then (1) neither party shall have the right to terminate this Agreement and the parties shall nonetheless consummate this transaction in accordance with this Agreement, without any abatement of the Purchase Price or any liability or obligation on the part of Seller by reason of said destruction or damage, and (2) all of the casualty (and other) insurance proceeds received under the casualty (and other) insurance policies in effect covering physical damage or destruction of the Building shall be used for the restoration and repair of the Building; it being agreed that Seller shall be responsible to restore the work covered by the Building Plans and Purchaser shall be responsible to restore the work covered by the Interior Improvement Plans, the FF&E Specifications and the IT Specifications. (ii) if the estimated cost of repair or restoration exceeds $75,000,000 or if the estimated time to complete such repair or restoration exceeds six (6) months, Purchaser shall have the option, exercisable within ten (10) days after receipt of the estimates referred to in Section 12(b) (or, if later, the determination of the arbitrator under Section 12(c)), time being of the essence, to terminate this Agreement by delivering notice thereof to Seller, whereupon the Deposit shall be returned to Purchaser and this Agreement shall be deemed canceled and of no further force or effect, and neither party shall have any further rights or liabilities against or to the other except for such provisions which are expressly provided in this Agreement to survive the termination hereof. If a fire or other casualty described in this CLAUSE (II) shall occur and Purchaser shall not timely elect to terminate this Agreement, then (1) Purchaser and Seller shall consummate this transaction in accordance with this Agreement, without any abatement of the -21- Purchase Price or any liability or obligation on the part of Seller by reason of said destruction or damage, and (2) all of the casualty (and other) insurance proceeds received under the casualty (and other) insurance policies in effect covering physical damage or destruction of the Building shall be used for the restoration and repair of the Building; it being agreed that Seller shall be responsible to restore the work covered by the Building Plans and Purchaser shall be responsible to restore the work covered by the Interior Improvement Plans, the FF&E Specifications and the IT Specifications. (b) The estimated cost to repair and/or restore and the estimated time to complete contemplated in SUBSECTION (A) above, the amount of insurance proceeds allocable for the restoration of the work covered by the Building Plans, Interior Improvement Plans, FF&E Specifications and IT Specifications and an equitable allocation of any shortfall between the insurance proceeds and the cost to restore the work covered by the Base Building Plans and Interior Improvement Plans, shall be established by estimates obtained by Seller from independent contractors, subject to Purchaser's review and reasonable approval of the same and the provisions of SECTION 12(C) below. (c) The provisions of this SECTION 12 supersede the provisions of Section 5-1311 of the General Obligations Law of the State of New York. Any disputes under this SECTION 12 as to the cost of repair or restoration or the time for completion of such repair or restoration shall be resolved by expedited arbitration before a single arbitrator acceptable to both Seller and Purchaser in their reasonable judgment in accordance with the rules of the American Arbitration Association ("AAA"); provided that if Seller and Purchaser fail to agree on an arbitrator within five days after a dispute arises, then either party may request the Real Estate Board of New York, Inc. ("REBNY"), to designate an arbitrator. Such arbitrator shall be an independent architect or engineer having at least ten (10) years of experience in the construction of first-class office buildings in Manhattan. The determination of the arbitrator shall be conclusive and binding upon the parties. The costs and expenses of such Arbitrator shall be borne equally by Seller and Purchaser. 13. CONDEMNATION. (a) If, prior to the Closing Date, any part of the Premises is taken (other than a temporary taking), or if Seller shall receive an official notice from any governmental authority having eminent domain power over the Premises of its intention to take, by eminent domain proceeding, any part of the Premises (a "TAKING"), then: (i) if such Taking involves less than or equal to twenty percent (20%) of the rentable area of the Building as determined by an independent architect chosen by Seller (subject to Purchaser's review and reasonable approval of such determination and the provisions of SECTION 13(B) below), then (1) neither party shall have any right to terminate this Agreement, and the parties shall nonetheless consummate this transaction -22- in accordance with this Agreement, without any abatement of the Purchase Price or any liability or obligation on the part of Seller by reason of such Taking, provided, however, that Seller shall, on the Closing Date, assign and remit to Purchaser and Purchaser shall be entitled to receive and keep the net proceeds of any condemnation award or other proceeds of such Taking and applicable to the Premises (less all reasonable expenses incurred by Seller in connection with such Taking) or (2) if no award or other proceeds shall have been collected, deliver to Purchaser an assignment of Seller's right to such award or other proceeds which may be payable to Seller as a result of such Taking and Purchaser shall reimburse Seller for the reasonable expenses incurred by Seller in connection with such Taking. (ii) if such Taking involves more than twenty percent (20%) of the rentable area of the Building as determined by an independent architect chosen by Seller (subject to Purchaser's review and reasonable approval of such determination and the provisions of SECTION 13(B) below), Purchaser shall have the option, exercisable within twenty (20) business days after receipt of notice of such Taking, time being of the essence, to terminate this Agreement by delivering notice thereof to Seller, whereupon the Deposit (together with any interest earned thereon) shall be returned to Purchaser and this Agreement shall be deemed canceled and of no further force or effect, and neither party shall have any further rights or liabilities against or to the other except pursuant to the provisions of this Agreement which are expressly provided to survive the termination hereof. If a Taking described in this CLAUSE (II) shall occur and Purchaser shall not timely elect to terminate this Agreement, then (1) Purchaser and Seller shall consummate this transaction in accordance with this Agreement, without any abatement of the Purchase Price or any liability or obligation on the part of Seller by reason of such Taking, assign and remit to Purchaser and Purchaser shall be entitled to receive and keep the proceeds of any condemnation award or other proceeds of such Taking and applicable to the Premises (less all reasonable expenses incurred by Seller in connection with such Taking) or (2) if no award or other proceeds shall have been collected, deliver to Purchaser an assignment of Seller's right to such award or other proceeds which may be payable to Seller as a result of such Taking and Purchaser shall, within 30 days after the receipt of such award or proceeds, reimburse Seller for the reasonable expenses incurred by Seller in connection with such Taking. (b) The provisions of this SECTION 13 supersede the provisions of Section 5-1311 of the General Obligations Law of the State of New York. Any disputes under this SECTION 13 as to whether the Taking involves more than twenty percent (20%) of the rentable area of the Building shall be resolved by expedited arbitration before a single arbitrator acceptable to both Seller and Purchaser in their reasonable judgment in accordance with the rules of the AAA; provided that if Seller and Purchaser fail to agree on an arbitrator within five days after a dispute arises, then either party may request the REBNY designate an arbitrator. Such arbitrator shall be an independent architect having -23- at least ten (10) years of experience in the construction of first-class office buildings in Manhattan. The costs and expenses of such Arbitrator shall be borne equally by Seller and Purchaser. 14. BROKERS AND ADVISORS. (a) Purchaser represents and warrants to Seller that it has not dealt or negotiated with, or engaged on its own behalf or for its benefit, any broker, finder, consultant, advisor, or professional in the capacity of a broker or finder (each a "BROKER") in connection with this Agreement or the transactions contemplated hereby. Purchaser hereby agrees to indemnify, defend and hold Seller and the other Seller Related Parties harmless from and against any and all claims, demands, causes of action, losses, costs and expenses (including reasonable attorneys' fees, court costs and disbursements) arising from any claim for commission, fees or other compensation or reimbursement for expenses made by any Broker engaged by or claiming to have dealt with Purchaser in connection with this Agreement or the transactions contemplated hereby. (b) Seller represents and warrants to Purchaser that it has not dealt or negotiated with, or engaged on its own behalf or for its benefit, any Broker in connection with this Agreement or the transactions contemplated hereby. Seller hereby agrees to indemnify, defend and hold Purchaser and its direct and indirect shareholders, officers, directors, partners, principals, members, employees, agents, contractors and any successors or assigns of the foregoing, harmless from and against any and all claims, demands, causes of action, losses, costs and expenses (including reasonable attorneys' fees, court costs and disbursements) arising from any claim for commission, fees or other compensation or reimbursement for expenses made by or any Broker engaged by or claiming to have dealt with Seller in connection with this Agreement or the transactions contemplated hereby. (c) The provisions of this SECTION 14 shall survive the termination of this Agreement or the Closing. 15. TAX REDUCTION PROCEEDINGS. Seller has settled its appeal for the reduction of the assessed valuation of the Premises for real estate taxes for the New York City fiscal year July 1, 2001 to June 30, 2002 (the "2001/2002 TAX YEAR"). The amount of any tax refunds (net of attorneys' fees and other costs of obtaining such tax refunds) with respect to any portion of the Premises shall be apportioned between Seller and Purchaser as of the Apportionment Date and the party receiving such refund from the taxing authority shall pay to the other party any amount thereof which the other party is entitled to receive within ten (10) business days following receipt of the funds resulting from such refund. If, in lieu of a tax refund, a tax credit is received with respect to any portion of the Premises for the tax year in which the -24- Apportionment Date occurs, then (x) within thirty (30) days after receipt by Seller or Purchaser, as the case may be, of evidence of the actual amount of such tax credit (net of attorneys' fees and other costs of obtaining such tax credit), the tax credit apportionment shall be recalculated between Seller and Purchaser, and (y) within ten (10) business days following realization by Purchaser of a tax savings on account of such credit, Purchaser shall pay to Seller an amount equal to the savings realized (as apportioned). All refunds, credits or other benefits applicable to any fiscal period prior to the Tax Year during which the Closing Date shall occur shall belong solely to Seller (and Purchaser shall have no interest therein) and, if the same shall be paid to Purchaser or anyone acting on behalf of Purchaser, same shall be paid to Seller within five (5) business days following receipt thereof and, if not timely paid, with interest thereon from the fifth business day following such receipt until paid to Seller at a rate equal to the prime rate of interest announced by Citibank, N.A. from time to time plus three percent (3%). At Closing, Seller shall deliver a letter from the law firm representing Seller in the tax appeal which letter shall set forth the fee arrangement between Seller and such counsel or the tax appeal for the 2001/2002 Tax Year and the status of the tax appeal proceedings affecting the Premises (the "TAX COUNSEL LETTER"). The provisions of this SECTION 15 shall survive the Closing. 16. TRANSFER TAXES, RECORDING CHARGES AND SALES TAXES. (a) At the Closing, Seller and Purchaser shall execute, acknowledge, deliver and file all such returns as may be necessary to comply with Article 31 of the Tax Law of the State of New York and the regulations applicable thereto, as the same may be amended from time to time (the "RET") and the New York City Real Property Transfer Tax (Admin. Code Article 21) and the regulations applicable thereto, as the same may be amended from time to time (the "RPT"). On the Closing Date, Seller shall pay 48.67% and Purchaser shall pay 51.33% (the "Percentage Share") of the amounts payable under the RET and RPT, if any. Purchaser and Seller agree that to the extent there are any refunds or a shortfall of RET and RPT taxes paid, Purchaser and Seller shall each be entitled to receive or obligated to pay, as appropriate, their Percentage Share of such amounts. Notwithstanding the foregoing, Purchaser shall be obligated to pay the RET and RPT taxes attributable to the RET and RPT taxes paid by Purchaser on Seller's behalf. (b) Notwithstanding anything to the contrary contained herein, upon written request of Seller at least one (1) business days prior to the Closing Date, Purchaser shall either (i) bring to the Closing separate certified or bank checks in the amount of the taxes due with respect to the RET and the RPT, if any, or (ii) on the Closing Date, wire transfer to the Company such amount (with the Company agreeing in writing to make payment thereof directly to the appropriate governmental authorities). (c) Purchaser shall be liable for the payment of all fees, expenses, recording charges and taxes in connection with the conveyance of the Property to Purchaser -25- (including, without limitation, the cost of all title related expenses and title insurance purchased by Purchaser in connection with the Closing). (d) Seller and Purchaser agree to cooperate reasonably with one another to minimize the amount of RET and RPT payable in connection with this transaction. (e) Purchaser shall pay all sales and use taxes, if any, in connection with the transfer of the Property to Purchaser. Purchaser and Seller shall reasonably cooperate with one another to minimize the amount of such sales and use tax payable in connection with this transaction. (f) By reason of arrangements with the New York City Industrial Development Agency, dated as of November 1, 2000, certain purchases of materials and equipment incorporated into or located with the Building were exempt from New York State and New York City sales and use taxes. The estimated amount of such exempted taxes is $18,000,000. Purchaser believes that, as a result of the sale of the Property, repayment may be made of such taxes, together with interest thereon, and any penalties that may be assessed by the taxing authorities. In the event Seller repays all or any portion of such taxes, interest and penalties, Purchaser shall reimburse Seller for fifty percent (50%) of such amount so paid within fifteen (15) days of receipt of evidence of such payments, provided that Purchaser's obligation shall not exceed $9,000,000. The parties agree to cooperate with each other to minimize the amount of the recapture obligations. (g) The provisions of this SECTION 16 shall survive the Closing. 17. CONDITIONS OF CLOSING; DELIVERIES TO BE MADE ON THE CLOSING DATE. (a) It shall be a condition precedent to Seller's obligation to close hereunder that Seller shall have received a release from the Landlord of all obligations of Seller under the Ground Lease and of Seller and MS under the Existing Guaranty and the other Operative Documents accruing from and after the Closing Date in form acceptable to Seller. It shall be a condition precedent of Seller's and Purchaser's obligation to close hereunder that Seller shall have received a written waiver of Landlord's ROFO or, in lieu thereof, the Negotiation Period shall have expired without, (x) Landlord and Seller having entered into a Purchase and Sale Agreement and (y) Seller having received the certification (the "CERTIFICATION") from Landlord contemplated by Section 38.1.6 of the Ground Lease confirming that except as otherwise provided in Section 3.8.2 and the terms of Section 38.17 of the Ground Lease the Landlord has no further rights to purchase the Property. (b) SELLER'S DOCUMENTS AND DELIVERIES: On the Closing Date, Seller shall deliver or cause to be delivered to Purchaser the following: -26- (i) A duly executed and acknowledged Bargain and Sale Deed Without Covenant Against Grantor's Acts with respect to the Building and Interior Improvements in the form attached hereto as EXHIBIT 1; (ii) A duly executed Bill of Sale in the form attached hereto as EXHIBIT 3; (iii) Originals, if available, or true and complete copies of the Assumed Contracts; (iv) A duly executed certification as to Seller's nonforeign status as prescribed in SECTION 21 hereof, if appropriate, in the form attached hereto as EXHIBIT 4; (v) an assignment of all of Seller's rights under (A) the Pledge of RFN's and RP's respective interests in Landlord and (B) the Agreement and Acknowledgement of Pledge, dated November 19, 1998, acknowledging the pledges of RFN and RP of their membership interests in Landlord together with appropriate UCC transfer instruments to be filed in the appropriate governmental offices. (vi) Originals if available, or true and complete copies of all licenses, certificates and permits then in effect with respect to the operation of the Premises; (vii) The Plans; (viii) Good standing Certificate for Seller issued by the State of Delaware, evidence of Seller's authority to do business in the State of New York, an incumbency certificate and a resolution of Seller authorizing the transactions contemplated hereby; (ix) A certification stating that the representations and warranties made by Seller in SECTION 11(C) hereof remain true and correct in all material respects as if made on the Closing Date (or, if not the case, describing in reasonable detail, any changes thereto, provided that such changes do not have a material adverse affect on Purchaser's ability to use the Project for its intended purpose or a material adverse affect on the value of the Project, in each case taking into account any ongoing obligations of Seller which, upon performance of such obligations, will eliminate such material adverse effect); (x) An assignment of the Letter Agreement; (xi) The jointly executed documents referenced in SECTION 17(D); (xii) An Estoppel Certificate from the Landlord in the form provided in Section 26.1 of the Ground Lease (subject to (a) non-material modifications thereof, (b) Landlord noting as defaults by Seller any matters which Seller is obligated to discharge hereunder or otherwise agrees to discharge, and (c) modifications thereof to conform the same to other information previously delivered to Purchaser or made available for its -27- review) or, if an Estoppel Certificate from Landlord is not delivered by Seller, a indemnity from Seller in favor of Purchaser and LHI from any loss, liability cost, damage or expense under the Ground Lease or Guaranty arising prior to the date of Closing. Seller's obligation to indemnify under this section shall be guaranteed by MSDW at Closing. Notwithstanding the foregoing, if following Closing Seller is able to obtain an Estoppel Certificate from Landlord, Seller shall be entitled to substitute the Estoppel Certificate and receive a release of its indemnity and the guaranty thereof by MSDW; (xiii) An estoppel certificate from the New York City Transit Authority, to the extent contemplated by the Subway Agreement, provided however that Seller's failure to deliver such certificate shall not be a breach of this Agreement, or a failure of a condition to close and Purchaser shall be obligated to close hereunder notwithstanding the non-delivery of such an estoppel certificate. (xiv) The Tax Counsel Letter; (xv) All keys or combinations for the Property, to the extent in Seller's possession and control; (xvi) A title affidavit in customary and reasonable form, provided that such title affidavit shall not increase or modify any representations made by Seller hereunder; (xvii) At Closing, Purchaser shall receive a credit against the Purchaser Price in the amount, as reasonably estimated by Seller, of the aggregate costs that Seller estimates will be required to complete Seller's original scope of work contemplated by the work to be performed by consultants and service providers listed on Schedule O annexed hereto with respect to the post-Closing installation (through user acceptance testing) of all IT Equipment, including without limitation such installation of the IT Equipment described in Schedule K annexed hereto. If Purchaser disputes the amount of this credit at Closing, Purchaser shall receive at Closing the proposed amount and the appropriate amount of the credit shall be determined by arbitration pursuant to the arbitration provisions in the Post-Closing Agreement. (xviii) To the extent that Landlord is unwilling to eliminate from the Substitute Guaranty (x) the obligation to pay the Start Up Fee, (y) the obligations of Seller under the Development Agreement and (y) the obligations of tenant under the Ground Lease for matters arising prior to the Closing Date, Seller shall deliver an indemnity of MSDW from any loss, liability, cost, damage or expense incurred by Purchaser arising out of Seller's failure to pay the Start Up Fee, perform its obligations under the Ground Lease or other agreements covered by such guaranty prior to the Closing Date or perform its obligations under the Development Agreement; and -28- (xix) title to the IT Equipment. (c) PURCHASER'S DOCUMENTS AND DELIVERIES: On the Closing Date, Purchaser, shall deliver or cause to be delivered to Seller or Landlord, as indicated below, the following: (i) payment of the balance of the Purchase Price payable at the Closing, in the manner required under this Agreement; (ii) the jointly executed documents referenced in Section 17(d); (iii) delivery to Landlord of a guaranty of payment and performance in the form required by Section 22.4.2.2 of the Ground Lease from Lehman Brothers Holding Inc. ("LHI"), or if LHI does not meet the credit rating requirements set forth below, another entity rated A by Standard & Poors or A2 by Moody's sufficient to obtain the release of Seller and Morgan Stanley Dean Witter & Co. ("MSDW") from any further obligations under the Ground Lease or the Guaranty of even date therewith (the "EXISTING GUARANTY") executed by MS in favor of Landlord; (iv) an indemnity from LHI in favor of MSDW, Seller and all Seller Related Parties from any loss, liability, cost, damage, or expense, under the Ground Lease or the Guaranty arising from after the date of Closing; (v) a certification executed by Purchaser stating that representations and warranties made by Purchaser in SECTION 36 hereof remain true and correct in all material respect as of the Closing Date as are being made by Purchaser in SECTION 36 hereof; (vi) Resolution of Purchaser authorizing the transactions contemplated hereby, a copy of a good standing certificate for Purchaser issued by the State of Delaware, evidence of Purchaser's authority to do business in the State of New York and an incumbency certificate by Purchaser. (d) JOINTLY EXECUTED DOCUMENTS: Seller and Purchaser shall, on the Closing Date, each execute, acknowledge (as appropriate) and exchange the following documents: (i) The returns required under the RET, the RPT and any other tax laws applicable to the transactions contemplated herein; (ii) An Assignment and Assumption of Ground Lease in the form attached hereto as EXHIBIT 2; (iii) An Assignment and Assumption of JV Option Agreement in the form attached hereto as EXHIBIT 5; -29- (iv) An Assignment and Assumption of Option to Lease Space Agreement in the form attached hereto as EXHIBIT 6 (it being understood that Seller shall cause MS to execute, acknowledge and deliver such Assignment and Assumption as an additional assignor thereunder); (v) An Assignment and Assumption of the Assumed Contracts in the form attached hereto as EXHIBIT 7; (vi) A General Assignment and Assumption Agreement in the form attached hereto as EXHIBIT 8; (vii) An Assignment and Assumption of the Management Agreement in the form attached hereto as EXHIBIT 11; (viii) An Assignment and Assumption of the Plaza Agreement in the form attached hereto as EXHIBIT 12; (ix) An Assignment and Assumption of the Publicity Agreement in the form attached hereto as EXHIBIT 13; (x) An Assignment and Assumption of the Rental Agency Agreement in the form attached hereto as EXHIBIT 14; (xi) The Agreement - Post Closing Obligations in the form attached hereto as EXHIBIT 15 and the escrow agreement and all other documents contemplated thereunder; and (xii) Any other affidavit, document or instrument required to be delivered by Seller or Purchaser on the Closing Date pursuant to the terms of this Agreement. 18. CLOSING DATE The closing (the "CLOSING") of the transactions contemplated hereunder shall occur at 10:00 a.m. on November 13, 2001 (such date, or the date Seller sets for the Closing if Seller shall elect to extend this date pursuant to SECTION 6 hereof, is herein referred to as the "SCHEDULED CLOSING DATE"; the actual date of the Closing is herein referred to as the "CLOSING DATE"), at the offices of Sellers' attorneys, Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, New York 10004. Time is of the essence as to Purchaser's obligation to close the transactions contemplated hereunder on the Scheduled Closing Date. Notwithstanding the foregoing, Purchaser shall have a one time right on written notice, to adjourn the Scheduled Closing Date for up to three (3) business days (the "LATER CLOSING DATE"), time being of the essence for Purchaser to close the transaction on the Later Closing Date. -30- 19. NOTICES. All notices, demands, requests or other communications (collectively, "NOTICES") required to be given or which may be given hereunder shall be in writing and shall be sent by (a) national overnight delivery service, or (b) personal delivery, addressed as follows: (i) If to Seller: Morgan Stanley & Co. Incorporated 1633 Broadway New York, New York 10019 Attention: David Arena, Managing Director with a copy to: Morgan Stanley & Co. Incorporated 1633 Broadway New York, New York 10019 Attention: Nan Molofsky Executive Director and a copy to: Fried, Frank, Harris, Shriver & Jacobson One New York Plaza New York, New York 10004 Attention: Jonathan L. Mechanic, Esq. (ii) If to Purchaser: Lehman Brothers, Inc. 101 Hudson Street Jersey City, New Jersey 07302 Attention: Mark J. Marcucci and a copy to: Office of the General Counsel Lehman Brothers, Inc. 101 Hudson Street Jersey City, New Jersey 07302 Attention: Joseph Polizzotto, Esq. with a copy to: -31- Weil, Gotshal & Manges LLP 767 5th Avenue New York, New York 10153 Attention: Alan A. Lascher, Esq. Any Notice so sent by national overnight delivery service or personal delivery shall be deemed given on the date of receipt or refusal as indicated on the return receipt, or the receipt of the national overnight delivery service or personal delivery service. A Notice may be given either by a party or by such party's attorney. Seller or Purchaser may designate, by not less than five (5) business days' notice given to the others in accordance with the terms of this SECTION 19, additional or substituted parties to whom Notices should be sent hereunder. The provisions of this Section 19 shall survive the termination hereof or the Closing. 20. DEFAULT BY PURCHASER OR SELLER. (a) If Purchaser shall default in the payment of the Purchase Price or if Purchaser shall default in the performance of any of its other obligations to be performed on the Closing Date, Seller's sole remedy by reason thereof shall be to terminate this Agreement and, upon such termination, Seller shall be entitled to retain the Deposit as liquidated damages for Purchaser's default hereunder, it being agreed that the damages by reason of Purchaser's default are difficult, if not impossible, to ascertain, and thereafter Purchaser and Seller shall have no further rights or obligations under this Agreement except for those that are expressly provided in this Agreement to survive the termination hereof. If Seller terminates this Agreement pursuant to a right given to it hereunder and Purchaser takes any action which interferes with Seller's ability to sell, exchange, transfer, lease, dispose of or finance the Property or take any other actions with respect thereto (including, without limitation, the filing of any lis pendens or other form of attachment against the Property), then the named Purchaser (and any assignee of Purchaser's interest hereunder) shall be liable for all loss, cost, damage, liability or expense (including, without limitation, reasonable attorneys' fees, court costs and disbursements and consequential damages) incurred by Seller by reason of such action to contest by Purchaser (collectively, "INTERFERENCE DAMAGES"); provided that the named Purchaser (and any such assignee) shall have no such liability for such Interference Damages if it shall be determined by a final order of a court of competent jurisdiction that Seller shall not have been entitled to terminate this Agreement. (b) If Seller shall default in any of its obligations to be performed on the Closing Date Purchaser as its sole remedy by reason thereof (in lieu of prosecuting an action for damages (whether direct or consequential) or proceeding with any other legal course of conduct, the right to bring such actions or proceedings being expressly and voluntarily waived by Purchaser, to the extent legally permissible, following and upon -32- advice of its counsel) shall have the right subject to the other provisions of this SECTION 20(B) (i) to seek to obtain specific performance of Seller's obligations hereunder, provided that any action for specific performance shall be commenced within sixty (60) days after such default (failing which Purchaser shall be deemed to have waived such remedy) or (ii) to terminate this Agreement (by delivering notice thereof to Seller) and to receive a return of the Deposit. If Purchaser fails to commence an action for specific performance within sixty (60) days after such default, Purchaser's sole remedy shall be to receive a return of the Deposit. Upon such return and delivery, this Agreement shall terminate and neither party hereto shall have any further obligations hereunder except for those that are expressly provided in this Agreement to survive the termination hereof. Notwithstanding the foregoing, Purchaser shall have no right to seek specific performance if Seller shall be prohibited from performing its obligations hereunder by reason of any law, regulation, or other legal requirement applicable to Seller. (c) The provisions of this SECTION 20 shall survive the termination hereof. 21. FIRPTA COMPLIANCE. Seller shall comply with the provisions of the Foreign Investment in Real Property Tax Act, Section 1445 of the Internal Revenue Code of 1986 (as amended), as the same may be amended from time to time, or any successor or similar law (collectively, "FIRPTA"). Seller acknowledges that Section 1445 of the Internal Revenue Code provides that a transferee of a United States real property interest must withhold tax if the transferor is a foreign person. To inform Purchaser that withholding of tax is not required upon the disposition of a United States real property interest by Seller, Seller hereby represents and warrants that Seller is not a foreign person as that term is defined in the Internal Revenue Code and Income Tax Regulations. On the Closing Date, Seller shall deliver to Purchaser a certification as to Seller's non-foreign status in the form attached hereto as EXHIBIT 4, and shall comply with any temporary or final regulations promulgated with respect thereto and any relevant revenue procedures or other officially published announcements of the Internal Revenue Service of the U.S. Department of the Treasury in connection therewith. 22. ENTIRE AGREEMENT. Except as set forth in SECTION 29 hereof, this Agreement, including all schedules and exhibits hereto, contains all of the terms agreed upon between Seller and Purchaser with respect to the subject matter hereof, and all prior agreements, understandings, representations and statements, oral or written, between Seller and Purchaser are merged into this Agreement. The provisions of this SECTION 22 shall survive the Closing or the termination hereof. -33- 23. AMENDMENTS. This Agreement may not be changed, modified or terminated, except by an instrument executed by Seller and Purchaser. The provisions of this SECTION 23 shall survive the Closing or the termination hereof. 24. WAIVER. No waiver by either party of any failure or refusal by the other party to comply with its obligations shall be deemed a waiver of any other or subsequent failure or refusal to so comply. The provisions of this SECTION 24 shall survive the Closing or the termination hereof. 25. PARTIAL INVALIDITY. If any term or provision of this Agreement or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Agreement shall be valid and shall be enforced to the fullest extent permitted by law. The provisions of this SECTION 25 shall survive the Closing or the termination hereof. 26. SECTION HEADINGS. The headings of the various sections of this Agreement have been inserted only for the purposes of convenience, and are not part of this Agreement and shall not be deemed in any manner to modify, explain, expand or restrict any of the provisions of this Agreement. The provisions of this SECTION 26 shall survive the Closing or the termination hereof. 27. GOVERNING LAW. This Agreement shall be governed by the laws of the State of New York without giving effect to conflict of laws principles thereof. The provisions of this SECTION 27 shall survive the Closing or the termination hereof. 28. PARTIES; ASSIGNMENT AND RECORDING. (a) This Agreement and the various rights and obligations arising hereunder shall inure to the benefit of and be binding upon Seller and Purchaser and their respective successors and permitted assigns. -34- (b) Purchaser may not assign or otherwise transfer this Agreement or any of its rights or obligations hereunder or any of the direct or indirect ownership interests in Purchaser, without first obtaining Seller's consent thereto, which consent Seller may grant or withhold in its sole and absolute discretion. Notwithstanding the foregoing, Purchaser shall have the right to assign this Agreement to (1) one or more affiliates of Purchaser, (2) an entity or entities established by Purchaser for the purpose of providing synthetic lease or other financing, or (3) an entity or entities established in order to obtain governmental economic benefits for the Premises provided that (i) any such assignment shall be subject to the provisions of the Ground Lease; (ii) LHI shall execute and deliver the Substitute Guaranty and (iii) Purchaser shall have provided Seller with reasonable notice of such proposed assignment no later than five (5) days prior to Closing. (c) Neither this Agreement nor any memorandum hereof shall be recorded. (d) The provisions of SECTION 28(A) and 28(C) shall survive the Closing or the termination hereof. The provisions of SECTION 28(B) shall survive the termination hereof. 29. CONFIDENTIALITY AND PRESS RELEASES. (a) Purchaser shall continue to comply with the provisions of the confidentiality agreement, dated October 5, 2001 (the "CONFIDENTIALITY AGREEMENT") heretofore executed by or on behalf of Purchaser and shall maintain as confidential all "Information" (including, without limitation, all information obtained in connection with Purchaser's access and inspection of the Premises under SECTION 3 hereof) in accordance with the provisions thereof. Notwithstanding the foregoing, the provisions of paragraph 6 of the Confidentiality Agreement are deemed of no further force and effect and are superceded by the provisions of this Agreement. (b) Between the date hereof through and including the Closing Date and except as otherwise expressly provided in clause (c) below, Purchaser and Seller shall not (and shall cause their respective agents, employees, attorneys and advisors including, without limitation, financial institutions to not) disclose, make known, divulge, disseminate or communicate the Purchase Price or any of the terms of this Agreement or this transaction or any agreement, document or understanding pertinent to the instant transaction without the consent of the other party, except (i) as required by law (including, without limitation, in connection with any securities filings), (ii) to Purchaser's and Seller's directors, employees and advisors (including those of its affiliates) involved in the transaction, (iii) to Purchaser's prospective lenders or investors. (c) Prior to the Closing, Seller and Purchaser shall confer and agree upon a press release disclosing the transaction and shall jointly issue such release at an appropriate time, agreed to by Seller and Purchaser, following the Closing. After the Closing, subject to the terms of the Publicity Agreement, Seller and Purchaser may issue -35- additional press releases which do not contain confidential information and which do not make reference to the other party (unless the other party consents thereto). (d) Except as may be required by any law, rule or regulation of a governmental authority, by court order or by applicable accounting standards, Seller shall not publicly describe the transaction other than as a reflection of the approximate cost that Seller has or intends to spend on the Property. (e) The provisions of SECTION 29(A) shall survive the termination of this Agreement and the provisions of SECTION 29(B) and SECTION 29(C) shall survive the termination hereof or the Closing. 30. FURTHER ASSURANCES. Seller and Purchaser will do, execute, acknowledge and deliver all and every such further acts, deeds, conveyances, assignments, notices, transfers and assurances as may be reasonably required by the other party, for the better assuring, conveying, assigning, transferring and confirming unto Purchaser the Property and for carrying out the intentions or facilitating the consummation of this Agreement. The provisions of this SECTION 30 shall survive the Closing. 31. THIRD PARTY BENEFICIARY. This Agreement is an agreement solely for the benefit of Seller and Purchaser (and their permitted successors and/or assigns). No other person, party or entity shall have any rights hereunder nor shall any other person, party or entity be entitled to rely upon the terms, covenants and provisions contained herein. The provisions of this SECTION 31 shall survive the Closing or the termination hereof. 32. JURISDICTION AND SERVICE OF PROCESS. The parties hereto agree to submit to personal jurisdiction in the State of New York in any action or proceeding arising out of this Agreement and, in furtherance of such agreement, the parties hereby agree and consent that without limiting other methods of obtaining jurisdiction, personal jurisdiction over the parties in any such action or proceeding may be obtained within or without the jurisdiction of any court located in New York and that any process or notice of motion or other application to any such court in connection with any such action or proceeding may be served upon the parties by registered or certified mail to or by personal service at the last known address of the parties, whether such address be within or without the jurisdiction of any such court. The provisions of this SECTION 32 shall survive the Closing or the termination hereof. -36- 33. WAIVER OF TRIAL BY JURY. SELLER AND PURCHASER HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR COUNTERCLAIM ARISING IN CONNECTION WITH, OUT OF OR OTHERWISE RELATING TO THIS AGREEMENT. THE PROVISIONS OF THIS SECTION 33 SHALL SURVIVE THE CLOSING OR THE TERMINATION HEREOF. 34. MISCELLANEOUS. (a) Whenever in this Agreement it is provided that Purchaser's successors and/or transferees and/or assignees shall have any rights or obligations, such phrase shall be deemed to include all designees of Purchaser as well as all of the transferees, successors and assigns of Purchaser and such designees. (b) This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and together constitute one and the same instrument. (c) Any consent or approval to be given hereunder (whether by Seller or Purchaser) shall not be effective unless in writing. Except as otherwise expressly provided herein, any consent or approval requested of Seller or Purchaser shall not be unreasonably withheld by Seller or Purchaser. (d) The provisions of this SECTION 34 shall survive the Closing or the termination hereof. (e) This Agreement shall not be assignable by Seller. (f) The submission of this document and all subsequent drafts by Seller or its attorneys shall not be deemed an offer by Seller to sell or Purchaser to purchase the Property on the terms set forth in such drafts and such document or draft may be withdrawn or modified by Seller or its agent at any time or for any reason. Neither this document nor any draft shall be effective nor shall either party have any rights or obligations with respect to the Property or under this Agreement unless and until Seller and Purchaser shall have executed this document and delivered same to the other and all the conditions to the effectiveness hereof contained herein shall have been met. (g) The provisions of this Section 34 shall survive the Closing or the termination hereof. -37- 35. ORGANIZATIONAL REPRESENTATIONS. (a) Seller hereby represents and warrants to Purchaser that (i) Seller is a duly organized limited liability company which is in valid existence under the laws of the State of Delaware, (ii) Seller is in good standing and authorized to do business in the State of New York and (iii) Seller's execution of this Agreement and the performance of its obligations hereunder have been duly authorized by all necessary limited liability company action. (b) Purchaser hereby represents and warrants to Seller that (i) Purchaser is a duly organized corporation which is in valid existence and in good standing under the laws of the State of Delaware, (ii) Purchaser is in good standing and authorized to do business in the state of New York and (ii) Purchaser's execution of this Agreement and the performance of its obligations hereunder have been duly authorized by all necessary corporate action. (c) The provisions of this SECTION 35 shall survive the Closing. 36. CERTAIN GROUND LEASE PROVISIONS. (a) Purchaser acknowledges that pursuant to Article 38 of the Ground Lease Landlord has a right of first offer ("ROFO") with respect to any sale of the Property. Seller has requested that Landlord waive such ROFO in writing; provided, however, that Seller shall incur no liability if Landlord fails to do so. Notwithstanding the foregoing, Seller has sent Landlord a notice (a copy of which is attached hereto as Schedule M) as required under the Ground Lease. If Landlord fails timely to give a Negotiation Notice (as defined in the Ground Lease) to Seller, the parties shall proceed to close the transaction as contemplated hereby. If Landlord gives a Negotiation Notice, then the Scheduled Closing Date shall be postponed until the end of the 60-day Negotiation Period. If such Negotiation Period shall expire without Landlord and Seller entering into a Purchase and Sale Agreement and Seller receives the Certification or waives the requirements for such Certification, then Seller shall notify Purchaser and the parties shall promptly proceed to Closing. If Landlord and Seller shall enter into a purchase and Sale Agreement pursuant to the ROFO, then Seller shall have the right to terminate this Agreement and close on the sale to Landlord pursuant to the terms of such purchase and sale agreement. In such event, the Deposit shall be returned to Purchaser and neither Purchaser nor Seller shall have any further obligations to other except those, if any, as are expressly stated herein to survive such termination. (b) Seller and Purchaser agree to cooperate with one another in all respects in order to comply with the requirements of Article 22 of the Ground Lease to effect, as of the Closing Date, a permitted "Restricted Transfer" of the Seller's interest in the Ground Lease (as such term is defined in the Ground Lease) and to obtain (i) confirmation from -38- Landlord that Seller has complied with the provisions of Article 22 and (ii) a release of Tenant and Guarantor (as defined in the Ground Lease) from any further obligations under the Ground Lease, the Existing Guaranty and other Operative Documents accruing from and after the date of such assignment. Notwithstanding the foregoing, Seller and MS shall remain responsible for all of the monetary obligations of Seller under the Development Agreement between Seller and Rockefeller Group Development Corporation dated November 19, 1998 (the "DEVELOPMENT AGREEMENT"). The execution and delivery by Landlord of the confirmation and release referred to in clauses (i) and (ii) above shall be a condition to Seller's obligation to close hereunder. (ii) Immediately after the execution of this Agreement, pursuant to Section 22.4.5 of the Ground Lease, Seller and Purchaser shall submit to Landlord (A) the notice of the proposed transaction contemplated by ss. 22.4.5, (B) certified financial statements for the substitute guarantor LHI prepared in accordance with GAAP for the three (3) full years prior to the proposed transfer, (C) a form of substitute guaranty to be executed by LHI as required by Section 22.4.2.2.1 of the Ground Lease substantially in the form attached hereto as Exhibit 9, (D) a copy of the proposed instrument(s) of assignment of the Ground Lease containing, INTER ALIA, the name, address and telephone number of the assignee substantially in the form attached hereto as Exhibit 2, (E) a copy of the proposed instrument(s) of assumption by Purchaser containing, INTER ALIA, the name, address and telephone number of the assignee substantially in the form attached hereto as Exhibit 2, (F) if the assignee is not a Public Company, the affidavit required pursuant to ss. 22.4.5.5 of the Ground Lease, and (G) Purchaser shall also deliver an opinion of counsel of LHI as to the power and authority of LHI to execute and deliver such substitute guaranty which opinion shall be substantially in the form attached hereto as Exhibit 10. (iii) The parties will cooperate with one another to seek to obtain the confirmation and release contemplated under paragraph (b) above including, without limitation, if appropriate in Seller's reasonable judgment, the commencement of any arbitration proceeding contemplated by Article 22 of the Ground Lease. (iv) At Seller's election, Seller may, in its sole and absolute discretion, accept in lieu of all or a portion of the release provided for in paragraph (b)(ii) above, an indemnity from LHI against any loss, liability, cost, damages or expense including, without limitation, all reasonable legal fees and disbursements, arising out of any obligation under the Existing Guaranty or the Operative Documents which is not released by Landlord and which accrues at any time from and after the date of Closing except to the extent the same relates to the Development Agreement which shall in all events remain the liability of Seller and MS. -39- 37. CONDITION OF PREMISES AT CLOSING. (a) Pursuant to this Agreement, Seller is conveying to Purchaser, the Building, the Interior Improvements, the FF&E, the IT Equipment and the Exterior Signs being installed in the Building presently under construction on the Land pursuant to the Base Building Plans, the Interior Improvement Plans, the FF&E Specifications, the IT Equipment Specifications, the Exterior Signs Specifications and all specifications, drawings and sketches underlying so-called change orders to the foregoing (collectively, the "PLANS"). Seller also has certain obligations to complete in accordance with the Plans and the approvals granted Seller by local governmental authorities ("APPROVALS"), certain site improvements as set forth on SCHEDULE G hereto (the "HOIST RELATED WORK"), certain work required by the Subway Agreement, (the "SUBWAY WORK") and to dedicate, in accordance with the Approvals, certain space in the Building for entertainment use to comply with the entertainment requirement of the district within which the Premises are located (the "DEDICATION REQUIREMENT"). Subject to Section (b) below, Seller agrees, following the Closing Date, to substantially complete the work contemplated by the Plans (the "PROJECT"), including the Hoist Related Work and the Subway Work and to satisfy the Dedication Requirement, subject to and in accordance with the provisions of the terms of the Post Closing Agreement. (b) Notwithstanding the provisions of SECTION 37(a) above Purchaser shall have the one-time right, exercisable on or before November 1, 2001, TIME BEING OF THE ESSENCE, to notify Seller that Purchaser elects to have Seller cease, as of the Closing Date, to perform any Interior Improvements and to deliver and install any FF&E and IT Equipment (i) on one or more, but less than all, of the floors of the Building (a "STOP WORK NOTICE") or (ii) in the entire Building (a "FULL STOP ELECTION"). Upon receipt of a Stop Work Notice or Full Stop Election, Seller shall notify the respective Contractors responsible for the substantial completion of the work on the floor or floors for which a Stop Work Notice or a Full Stop Election has been given and obtain from such Contractors a determination of the amount of credit, if any, that will be given by such Contractor(s) as a result thereof. Purchaser and Seller agree that as to any floor or floor for which a Stop Work Notice has been received, Seller shall deliver such floor to Purchaser on the Closing Date in its then "as is" condition and credit Purchaser, at Closing, with an amount equal to the credits actually given to Seller by those Contractors whose work has been stopped or cancelled on such floor or floors. In the event Purchaser delivers a Full Stop Election, any credit shall be determined as provided in paragraph 10(b) of the Post Closing Agreement. Upon receipt of a Full Stop Election, Seller shall notify Turner Construction ("TURNER") and obtain from Turner a determination of the amount then due and payable under Turner's agreement with Seller to perform the Interior Improvements. In the event of a Full Stop Election, (A) Seller shall deliver to Purchaser on the Closing Date the entire Building in its then "as is" condition (except for Seller's remaining obligations with respect to Base Building Work and obtaining the Zero -40- Occupancy TCO), (B) [INTENTIONALLY DELETED] and (C) Seller shall assign to Purchaser at Closing all of the FF&E Contracts and the IT Contracts, as such terms are defined in the Post Closing Agreement, other than any thereof providing for Excluded Personalty or which Seller would otherwise not be obligated to perform for Purchaser under the Post Closing Agreement in the absence of any Stop Work Notice or Full Stop Election. In no event shall the agreement between seller and Turner by assigned to Purchaser without Turner's consent. (c) The provisions of this Article 37 shall survive Closing. 38. LIMITATION ON EMPLOYMENT. So as not to interfere with the timely completion of the Improvements, Purchaser agrees on behalf of itself and its affiliates that it shall not solicit for employment, hire or otherwise utilize the services of any individual or entity directly or indirectly, who has performed or hereafter performs services relating to the design, development, construction or operation of the Premises for or on behalf of MSDW, MS or any Seller Related Parties, directly or indirectly (the "PROJECT PERSONNEL") without Seller's prior consent (which may be written or oral, but if oral, thereafter confirmed in writing), which consent may be withheld if in MSDW's reasonable discretion MSDW believes that such employment shall have an adverse affect on the final completion of the Premises. This restriction shall terminate on the date Purchaser acknowledges in writing that final completion of the Premises has occurred. Notwithstanding the foregoing, Purchaser shall not be precluded from continuing its relationships with such entities or persons employed thereby with whom Purchaser has an existing relationship and may engage Hines as an Advisor provided that the employees of Hines acting on behalf of Purchaser shall be subject to the limitations of this Section. Prior to final completion of the Project, subject to a written agreement between the parties Seller may assign and Purchaser assume one or more of the contracts relating to the final completion of the Project, at which time this restriction shall no longer be applicable to such contractor and its employees. The provisions of this Article 38 shall survive Closing. -41- IN WITNESS WHEREOF, Seller and Purchaser have caused this Agreement to be executed the day and year first above written. SELLER: ------- MSDW 745, LLC By: MS Financing, Inc. By: /s/ Roger Hochschild ---------------------------- Name: Roger Hochschild Title: Vice President PURCHASER: ---------- LB 745 LLC By: /s/ Joseph M. Gregory --------------------------------- Name: Joseph M. Gregory Title: Chief Administrative Officer -42- [Schedules and Exhibits Omitted] EX-10.16 6 a2071673zex-10_16.txt EXHIBIT 10.16 EXHIBIT 10.16 AMENDMENT TO PURCHASE AND SALE AGREEMENT AMENDMENT TO PURCHASE AND SALE AGREEMENT (this "AGREEMENT") made as of the 19th day of October, 2001 between MSDW 745, LLC, a Delaware limited liability company, having an address at 1633 Broadway, New York, N.Y. 10036 ("SELLER") and LB 745 LLC, a Delaware limited liability company, having an address at 101 Hudson Street, Jersey City, New Jersey 07302 ("PURCHASER"). W I T N E S S E T H : - - - - - - - - - - WHEREAS, Purchaser and Seller entered into a Purchase and Sale Agreement dated as of October 19, 2001(the "PSA"); and WHEREAS, Purchaser and Seller desire to amend the PSA as set for herein. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, the parties hereto covenant and agree as follows: Section 4 of the PSA is deleted in its entirety and the following is substituted in its place and stead: "4. PURCHASE PRICE AND DEPOSIT. The purchase price to be paid by Purchaser to Seller for the Property (the "PURCHASE PRICE") is Seven Hundred Forty Eight Million Dollars ($748,000,000). The Purchase Price shall be allocated between: (a) Ground Leasehold - $458,852,685, (b) Building and Interior Improvements - $153,947,315 and (c) FF&E - $135,200,000. The Purchase Price shall be payable as follows: (a) Simultaneously with the execution of this Agreement by Purchaser, Purchaser is delivering directly to Fried, Frank, Harris, Shriver & Jacobson, as escrow agent ("ESCROW AGENT") by wire transfer the amount of One Hundred Million Dollars ($100,000,000) (the "DEPOSIT"). The Deposit shall be held in an interest bearing escrow account by Escrow Agent in accordance with an escrow agreement between Seller, Purchaser and Escrow Agent, executed simultaneously herewith. The Deposit shall be delivered by Escrow Agent to Seller or Purchaser as hereinafter provided in this Agreement and the Escrow Agreement. All references in this Agreement to the Deposit shall mean the Deposit and all interest accrued thereon. (b) At the Closing, Escrow Agent shall deliver the Deposit to Seller (it being understood that any interest on the Deposit shall not be credited to the Purchase Price) and Purchaser shall deliver the balance of the Purchase Price as follows: (i) $619,500,000, subject to adjustment as provided in ARTICLE 7 to Seller; and (ii) $28,500,000 to Escrow Agent, or such other party agreed to by the parties, as escrow agent, to be held and disbursed pursuant to the Agreement as to Post Closing Obligations, attached hereto as EXHIBIT 15 (the "POST CLOSING AGREEMENT"). (c) All monies payable by Purchaser under this Agreement, unless otherwise specified in this Agreement, shall be paid by wire transfer of immediately available federal funds for credit to such bank account or accounts specified by Seller, and divided into such amounts as may be required to consummate the transactions contemplated by this Agreement. As used in this Agreement, the term "BUSINESS DAY" shall mean every day other than Saturdays, Sundays, all days observed by the federal or New York State government as legal holidays and all days on which commercial banks in New York State are required by law to be closed. (d) Except as otherwise specified in Sections 6(b), 12(a)(ii), 13(a)(ii) and 20(b) of this Agreement, the Deposit shall be non-refundable. The provisions of this Section 4(d) shall survive the termination of this Agreement." Except as herein modified, the PSA is in full force and effect. IN WITNESS WHEREOF, Seller and Purchaser have caused this Agreement to be executed as of the day and year first above written. SELLER: MSDW 745, LLC By: MS Financing, Inc. By: /s/ Nan Molofsky -------------------------- Name: Nan Molofsky Title: Vice President PURCHASER: LB 745 LLC By: /s/ Mark Marcucci ----------------------------- Mark Marcucci Authorized Signatory EX-10.17 7 a2071673zex-10_17.txt EXHIBIT 10.17 Exhibit 10.17 JV OPTION AGREEMENT ROCK-FORTY-NINTH LLC Landlord -with- MSDW 745, LLC Tenant Dated: November 19, 1998 Premises: Land known as 745 Seventh Avenue, New York, New York THIS JV OPTION AGREEMENT MAY NOT BE MODIFIED OR AMENDED EXCEPT IN ACCORDANCE WITH SECTION 12 (b) HEREOF. TABLE OF CONTENTS Agreement Page - --------- ---- 1. Certain Definitions. ................................................1 2. Exercise of Option....................................................2 3. Assignment............................................................5 4. Arbitration; Disputes.................................................6 5. Notices; Jurisdiction.................................................7 6. Costs and Expenses....................................................8 7. Name of Joint Venture.................................................9 8. Continuing Leases.....................................................9 9. Default...............................................................9 10. Lease Options........................................................10 11. Shared Capital Improvements. .......................................13 12. Miscellaneous Provisions.............................................18 13. Bankruptcy Remote Entity.............................................19 1. Defined Terms; Section References. ................................A-1 2. Co-Venturers........................................................A-1 3. Purpose.............................................................A-2 4. Principal Office....................................................A-2 5. Initial Capital Contributions; Percentage Interests; Apportionments......................................................A-2 6. Additional Capital Contributions; Advances to the Joint Venture.....A-9 7. Distributions; Profits and Losses. ...............................A-10 i 8. Control and Management.............................................A-11 9. Duration...........................................................A-17 10. Transfer of Interests..............................................A-17 11. Disputes; Buy-Sell. ..............................................A-25 12. Withdrawal or Bankruptcy...........................................A-29 13. Tax Matters........................................................A-29 14. Borrowing..........................................................A-30 15. Outside Transactions...............................................A-30 16. Fair Market Value..................................................A-30 17. Limit of Liability.................................................A-32 18. Leasing Agent......................................................A-32 19. Affiliate Contracts................................................A-34 20. Events of Default; Remedies........................................A-34 21. Estoppel Certificates. ...........................................A-37 22. Cooperation by Venturers...........................................A-37 23. Other Terms........................................................A-37 ii JV OPTION AGREEMENT THIS JV OPTION AGREEMENT (this "AGREEMENT") made as of the 19th day of November, 1998 between ROCK-FORTY-NINTH LLC, a Delaware limited liability company, having an office c/o Rockefeller Group, Inc., 1221 Avenue of the Americas, New York, New York 10022 (and its permitted successors and assigns, "LAND OWNER"), and MSDW 745, LLC, a Delaware limited liability company (and its permitted successors and assigns, "BUILDING OWNER"), having an office at 1585 Broadway, New York, New York 10036. W I T N E S S E T H : - - - - - - - - - - WHEREAS, Land Owner and Building Owner have, on the date hereof, entered into a Ground Lease (as amended, restated, supplemented or otherwise modified from time to time, the "GROUND LEASE") for the lease of certain land known as 745 Seventh Avenue, New York, New York (the "LAND") upon the terms and conditions more particularly set forth in the Ground Lease; WHEREAS, subject to the terms of the Ground Lease, Building Owner shall construct, maintain and operate the Building (as defined in the Ground Lease) on the Land; WHEREAS, Land Owner and Building Owner have agreed that each party shall have an option, exercisable in the manner set forth below, to cause Land Owner to contribute and convey the Land and all of Land Owner's interest in the Ground Lease to Building Owner on January 1, 2032 (the "OPTION EFFECTIVE DATE") in exchange for Land Owner being admitted as a fifty percent (50%) owner in Building Owner; WHEREAS, if Land Owner or Building Owner exercises such option, from and after the Option Effective Date, Land Owner and Building Owner Member (as defined in Exhibit A hereto) shall be equal co-venturers in the Joint Venture (hereinafter defined), all upon the terms more particularly set forth herein. NOW, THEREFORE, for good and valuable consideration, the sufficiency of which the parties hereby acknowledge, the parties agree as follows: 1. CERTAIN DEFINITIONS. 1. Certain capitalized terms used herein and in EXHIBIT A annexed hereto shall be defined on the pages indicated on Annex I hereto, which is hereby incorporated by reference. 2. All other capitalized terms used herein without definition shall have the respective meanings ascribed to them in the Ground Lease. 3. For all purposes in this Agreement (including EXHIBIT A hereto), the term "BUILDING OWNER" shall mean MSDW 745, LLC (and its successors and assigns permitted hereunder) as of any date prior to the Option Effective Date and the formation of the Joint Venture and the term "JOINT VENTURE" shall refer to MSDW 745, LLC (and its successors and assigns permitted hereunder) as such name may be modified in accordance with the terms hereof or the JVA as of any date on and after the Option Effective Date. 4. The term "PROJECT" shall mean all of the Land Owner's and Building Owner's respective interests in the Land, the Building and the Ground Lease. 2. EXERCISE OF OPTION. The options set forth herein shall be exercised as follows: 1. On or after December 1, 2027, but prior to June 1, 2028, time being of the essence with respect thereto, Land Owner shall have the option, upon written notice to Building Owner, to require Building Owner to admit Land Owner as a fifty percent (50%) owner in Building Owner in exchange for the conveyance by Land Owner of the Land and all of Land Owner's interest in the Ground Lease to Building Owner, subject to and in accordance with the terms of this Agreement. Failure to so timely elect shall be deemed a waiver of Land Owner's option to so elect. 2. If Land Owner has not exercised its option as set forth in SECTION 2(A), on or after September 1, 2028, but prior to March 1, 2029, time being of the essence with respect thereto, Building Owner shall have the option, upon written notice to Land Owner to require Land Owner to convey the Land and all of Land Owner's interest in the Ground Lease to Building Owner in exchange for the admission of Land Owner as a fifty (50%) owner in Building Owner, subject to and in accordance with the terms of this Agreement. Failure to so timely elect shall be deemed a waiver of Building Owner's option to so elect. 3. Within ninety (90) days after the exercise of either of the options set forth in SECTIONS 2(A) or 2(B), above, unless the parties agree otherwise, Building Owner shall deliver to Land Owner a form of amended and restated Operating Agreement for Building Owner (the "JVA") setting forth the terms upon which the Joint Venture shall be operated from and after the Option Effective Date. The JVA shall incorporate the terms and conditions set forth on EXHIBIT A annexed hereto, and such other terms which are mutually agreeable to the parties or which are determined by arbitration as provided herein. Within such ninety (90) day period, Building Owner shall also deliver to Land Owner, to the extent not previously provided to Land Owner or its Affiliates, copies of the documents described in clauses (i) and (ii) below together with schedules or statements containing the information described in clauses (iii), (iv) and (v) below (collectively, the "DUE DILIGENCE DOCUMENTS"): 2 1. Unaudited copies of the most recent financial statements of Building Owner, certified by Building Owner, or, if previously prepared by or for Building Owner, audited copies of such financial statements (it being understood that Building Owner shall be under no obligation to cause audited financial statements to be prepared), together with statements of cash flow as well as such other information about the operations and financial condition of Building Owner as Land Owner shall reasonably request and as shall be in Building Owner's possession or control (collectively, the "FINANCIAL STATEMENTS"). Each of the Financial Statements shall be dated as of a date which is not more than twelve (12) months prior to the date the same are delivered to Land Owner. 2. All material contracts, abstracts of insurance policies (abstracting all terms and conditions relating to the Project) and other material documents and agreements to which Building Owner is a party, or which benefit or burden Building Owner or the Building and are in Building Owner's possession or control, and which will not be terminated as of the Option Effective Date. 3. A description of all litigation and arbitration, pending or threatened in writing, to Building Owner's knowledge, against Building Owner or the Building. 4. A list of employees of Building Owner and their positions and salaries. 5. A statement as to the organizational structure of the Building Owner. The Due Diligence Documents shall be accompanied by a certificate of Building Owner, dated as of the date on which the Due Diligence Documents are delivered (a "DUE DILIGENCE CERTIFICATE") stating that (x) the Financial Statements required to be delivered to Land Owner pursuant to clause (i) above are, to Building Owner's best knowledge, true, accurate and complete in all material respects as of the date made (which date shall not be more than twelve (12) months prior to the date the same are delivered to Land Owner) and that, to Building Owner's best knowledge, there have been no material adverse changes to the matters set forth therein since the date thereof (or alternatively, setting forth any such material adverse change in reasonable detail), (y) that the schedules and other information required to be delivered to Land Owner pursuant to clauses (iii), (iv) and (v) above are true, accurate and complete in all material respects, and (z) Building Owner has delivered to Land Owner true and complete copies of all documents required to be delivered to Land Owner pursuant to clause (ii) above. 4. Building Owner shall deliver to Land Owner annually, within ten (10) Business Days after the anniversary of the date on which either of the options in Section 2(a) or Section 2(b) was exercised but not after the Option Effective Date, updated Financial Statements, dated not more than twelve (12) months prior to the date of delivery, and other Due Diligence Documents to the extent not previously 3 delivered or necessary to reflect changes to prior Due Diligence Documents previously delivered, and an updated Due Diligence Certificate with respect to the items so delivered. In addition to the annual updates referred to in the previous sentence, on the Option Effective Date, Building Owner shall deliver updated Financial Statements, dated not more than twelve (12) months prior to the date of delivery, and other Due Diligence Documents to the extent not previously delivered or necessary to reflect changes to prior Due Diligence Documents previously delivered and an updated Due Diligence Certificate, and thereafter, within ninety (90) days after the Option Effective Date, Building Owner shall deliver Financial Statements as of the Option Effective Date accompanied by a Due Diligence Certificate with respect to such Financial Statements dated as of the date that such Financial Statements are delivered. Notwithstanding anything contained herein to the contrary, Land Owner shall be under no obligation to transfer its interest in the Land to Building Owner as provided herein until Building Owner has delivered to Land Owner all material Due Diligence Documents and Due Diligence Certificates required pursuant to Section 2(c) above and this Section 2(d) to the extent required to be delivered on or before the Option Effective Date (it being understood and agreed that Building Owner shall not be in default hereunder and Land Owner shall be not be entitled to refuse to transfer its interest in the Land by reason of any previous failure of Building Owner to timely deliver such Due Diligence Documents and Due Diligence Certificates as required hereunder unless Land Owner notified Building Owner of such failure and such failure has not been remedied on or prior to the Option Effective Date). 5. Land Owner and Building Owner shall, in the ninety (90) day period succeeding the date of delivery of the JVA pursuant to SECTION 2(C), negotiate in good faith the terms of the JVA, subject to the terms of this Agreement and EXHIBIT A hereto. Any dispute relating to the terms and provisions of the JVA which is not resolved by the end of such ninety (90) day period shall be submitted to arbitration for resolution pursuant to SECTION 4, below. 6. On the Option Effective Date, the following shall simultaneously occur 1. Land Owner shall convey the Land and all of Land Owner's interest in the Ground Lease to Building Owner by Bargain and Sale Deed with Covenant against Grantor's Acts; 2. The JVA shall be executed and delivered by Land Owner and Building Owner Member and Land Owner shall be admitted pursuant thereto as a 50% owner in the Joint Venture in accordance with the terms of this Agreement and the JVA; 4 3. Land Owner and Building Owner shall prepare, execute and deliver such transfer tax and other forms and documents which are reasonably required to effect the transaction contemplated hereby; and 4. Land Owner and Building Owner shall each pay their respective costs and expenses pursuant to SECTION 6 below. 3. ASSIGNMENT. 1. This Agreement shall not be assigned by either party hereto, except that this Agreement shall be assigned by the respective party hereto (and shall be assumed by the party accepting such assignment) in connection with an assignment made in accordance with the terms of the Ground Lease of all of Land Owner's or Building Owner's respective interest in the Land, the Building and the Ground Lease, it being understood that this Agreement and the terms, conditions, covenants, provisions and undertakings herein contained shall at all times be binding solely upon and inure solely to the benefit of Land Owner and Building Owner, and any subsequent Landlord and Tenant under the Ground Lease, except as provided in clause (b) below. 2. Notwithstanding anything contained in SECTION 3(A), above, in the event that the interest of Land Owner in the Land or the interest of Building Owner in the Building is, at any time, acquired by the holder of a lien on such interest, whether through foreclosure, deed-in-lieu of foreclosure, power of sale or other such proceedings, or is acquired by any other purchaser at or in connection with such foreclosure or other proceedings, the option set forth in SECTION 2 hereof of the party whose interest is so acquired shall automatically and without notice terminate, and such holder or other purchaser, and its successors or assigns, shall not succeed to the right to exercise such option upon acquiring such interest, it being understood that the party whose interest is not so acquired shall continue to have the right to exercise its option under SECTION 2 hereof, and such holder or other purchaser, and its successors and assigns, shall be bound by the terms, conditions, covenants provisions and undertakings herein contained to be performed or observed by the party whose interest is so acquired. 4. ARBITRATION; DISPUTES. Any dispute relating to the terms and provisions of the JVA shall be resolved by arbitration in the Borough of Manhattan, City and State of New York, pursuant to the Commercial Arbitration Rules then prevailing for the American Arbitration Association, or any successor organization ("AAA") and pursuant to the procedure below: 1. Within ten (10) Business Days following the giving of a demand for arbitration, Land Owner and Building Owner shall each give notice to the other setting forth the name and address of an arbitrator designated by the party giving such notice. 5 The two arbitrators shall conduct a hearing and then issue a joint determination within thirty (30) days after the appointment of both arbitrators. If either party fails to give notice of its designation within said ten (10) Business Days, and such failure continues beyond five (5) Business Days after notice from the non-failing party stating in boldface capitalized letters that such failure to designate an arbitrator within such five (5) Business Day period will result in the non-failing party's right to seek the appointment by AAA or a court of a single arbitrator who will resolve the dispute, then the non-failing party may apply to AAA for the designation of a single arbitrator and if AAA fails to designate such single arbitrator within ten (10) Business Days after a request therefor, such non-failing party may apply to the Supreme Court in New York County or to any other court having jurisdiction for the designation of such arbitrator and the determination of such single appointed arbitrator shall control. 2. If the two designated arbitrators are unable to agree upon resolution of the dispute within such thirty (30) day period, then the two arbitrators shall designate a third impartial arbitrator. If the two arbitrators shall fail to agree upon the designation of a third arbitrator within five (5) days after the expiration of such thirty (30) day period, then either party may apply to the AAA for the designation of the third arbitrator and if the AAA is unable or refuses to designate such third arbitrator within ten (10) Business Days after application to the AAA for such designation, then either party may apply to the Supreme Court in New York County or to any other court having jurisdiction for the designation of such arbitrator. 3. The parties shall then conduct a hearing before all three arbitrators, not to exceed ten (10) days. The dispute shall be resolved by a majority of the three (3) arbitrators within thirty (30) days after termination of the hearing, but if two (2) arbitrators cannot agree, then the third impartial arbitrator's determination shall prevail. 4. The determination as specified herein shall be binding upon the parties, and a judgment thereon may be entered in and enforced by any court of competent jurisdiction, provided that any decision rendered in any arbitration held pursuant to this SECTION shall be final and binding upon Land Owner and Building Owner, whether or not a judgment shall be entered in any court. 5. All of the arbitrators selected pursuant to this SECTION shall be lawyers having at least ten (10) years current experience in negotiating operating agreements, partnership agreements or joint venture agreements for the ownership, of first-class office space in New York County. 6. Each party shall pay the fees and expenses of its own legal counsel, witnesses, experts and consultants, and the costs relating to the submission of its evidence, if any, in connection with any arbitration under this SECTION, including the expenses and fees of any arbitrator selected by it in accordance with the provisions of this 6 SECTION, and the parties shall share equally all other expenses and fees of any third arbitrator. 7. The arbitrators shall be instructed that their determination of any dispute relating to additional JVA terms and provisions not set forth in EXHIBIT A annexed hereto shall be based solely on what is then customarily included in a joint venture agreement for a joint venture owning a first-class office building in Manhattan which is comparable to the Building, between joint venturers with equal interests therein and consistent with the intent of this Agreement. The arbitrators shall be bound by the provisions of this Agreement and shall not add to, subtract from, or otherwise modify this Agreement. 5. NOTICES; JURISDICTION. 1. All notices (collectively, "NOTICES" and individually, a "NOTICE") which are required or desired to be given by either party to the other shall be in writing. All notices by either party to the other shall be sent by nationally recognized overnight carrier to the other party at its address set forth below or personally delivered (with receipt acknowledged) to such address or at such other or additional address as it may from time to time designate in a notice to the other party, but in no event shall a party be required to deliver notices to more than two (2) addressees. If to Building Owner: MSDW 745, LLC c/o Morgan Stanley & Co. Incorporated 1633 Broadway New York, New York 10019 Attention: Principal, Corporate Real Estate and Facilities Management With a copy to: Morgan Stanley & Co. Incorporated 1633 Broadway New York, New York 10019 Attention: Vice President, Corporate Real Estate and Facilities Management If to Land Owner: Rock-Forty-Ninth LLC c/o The Rockefeller Group 1221 Avenue of the Americas New York, New York 10020 Attention: President 7 With a copy to: Rock-Forty-Ninth LLC c/o The Rockefeller Group 1221 Avenue of the Americas New York, New York 10020 Attention: Secretary 2. Notices which are served upon Land Owner, Building Owner in the manner aforesaid shall be deemed to have been given or served for all purposes hereunder on the date of actual receipt as evidenced by a receipt therefor, and in the event of a failure to deliver by reason of changed address of which no notice was given or refusal to accept delivery, as of the date of such failure. All notices to Guarantor must be given in accordance with the Guaranty. 3. The parties hereby confer exclusive jurisdiction upon the Supreme Court of New York, New York County (or any successor court of similar jurisdiction) with respect to any judicial action or proceeding arising out of this Agreement. 6. COSTS AND EXPENSES. If Land Owner or Building Owner exercises its option provided in SECTION 2 above, the parties shall share equally the cost of any transfer and similar taxes, title insurance and a then current "ALTA" survey for the Project in connection with the exercise of such option, the transfer of the fifty percent (50%) interest in Building Owner to Land Owner and the transfer of the Land and all of Land Owner's interest in the Ground Lease to Building Owner. Each party shall individually bear all of its other costs incurred in connection with the consummation of the transactions contemplated by the exercise of such option, including, without limitation, any costs expended by the respective parties in complying with the terms of SECTION 5(A) and (5)(B) of EXHIBIT A. Moreover, each party shall bear the cost of its own counsel in connection with the preparation and execution of the JVA. 7. NAME OF JOINT VENTURE. If Land Owner or Building Owner exercises its option provided in SECTION 2 above, upon the Option Effective Date the Joint Venture shall change its name to a name mutually acceptable to Land Owner and Building Owner, which name shall reflect that Land Owner and Building Owner Member are equal co-venturers in the Joint Venture, provided, however, that at the election of either Land Owner or Building Owner Member the name of the Joint Venture shall not reflect the name of either of Land Owner or Building Owner Member, or in any way be more favorable to one Venturer than to the other Venturer. 8. CONTINUING LEASES. Any Sublease of space in the Building, or any modification or extension thereof, which has a term, including any renewal options, which extends beyond the Option Effective Date shall be subject to the prior consent of Land Owner, which consent shall not be unreasonably withheld provided said Sublease is on market terms, demises at least one full floor of the Building and the proposed subtenant has 8 financial strength reasonably adequate to perform its obligations under said Sublease (or reasonable security or guaranties are provided) consistent with current practices in the marketplace for Comparable Buildings. Notwithstanding the foregoing, Land Owner's rejection of a Sublease to a Governmental Authority shall be deemed reasonable. Land Owner's consent shall be given or denied within fifteen (15) Business Days of its receipt of a term sheet describing the material economic terms in reasonable detail and reasonably acceptable evidence of the Subtenant's or a guarantor's financial strength (unless reasonable security is provided). Provided Land Owner fails to respond in such fifteen (15) Business Day period, Building Owner shall have the right to deliver a Deemed Approval Notice, and if Land Owner shall fail to respond within five (5) Business Days thereafter, such Sublease shall be deemed approved. (Any such Sublease approved, or deemed approved, by Land Owner pursuant to this SECTION 8 is hereby referred to individually, as a "CONTINUING LEASE," and collectively, the "CONTINUING LEASES"). 9. DEFAULT. If either party shall default in the performance of its obligations under this Agreement, it shall be liable to the other party for all damages, losses, liabilities, costs and expenses suffered or incurred by the other party by reason of such default, including, without limitation, reasonable attorney's fees and disbursements. In addition to seeking damages, either party may pursue any other remedy that may be available to such party at law or in equity, including without limitation the remedy of specific performance. 10. LEASE OPTIONS. 1. Land Owner, Building Owner and Morgan Stanley & Co. Incorporated ("MS") have, simultaneously herewith, entered into an Option to Lease Space (the "MS LEASE OPTION"), whereby MS or its Affiliate has the option to lease space in all or a portion of the Building from the Joint Venture upon the formation thereof, all as more particularly described in the MS Lease Option (any such lease entered into by MS or an Affiliate of MS pursuant to the MS Lease Option being referred to as the "MS LEASE"). 2. Land Owner, or, at Land Owner's election, an Affiliate of Land Owner, is hereby granted an option ("LAND OWNER'S LEASE OPTION"), which may be exercised only if MS has affirmatively exercised its right to lease space in the Building pursuant to the MS Lease Option, to lease one (1) full floor or two (2) full floors of space available in the Building, all on the terms set forth below: 1. Land Owner's Lease Option may be exercised within ninety (90) days after the Election Withdrawal Date (I.E. June 30, 2029, as such date is defined in, and may be extended pursuant to, the MS Lease Option), time being of the essence with respect thereto. During such period Land Owner may elect to exercise Land Owner's Lease Option by written notice to the Building Owner identifying the space (subject to CLAUSES (ii)(1) and (2) below) and the proposed term of such lease (subject to CLAUSE (ii)(3) 9 below). Land Owner shall not be deemed to have permanently waived its right to exercise the option contemplated by this SECTION 10(B) unless and until (A) Land Owner fails to timely exercise Land Owner's Lease Option as set forth above and (B) either (x) the Initial Election Notice (as such term is defined in the MS Lease Option) contains in boldface capitalized letters a reminder that "LAND OWNER'S FAILURE TO TIMELY EXERCISE ITS OPTION TO LEASE SPACE PURSUANT TO SECTION 10(B) OF THE JV OPTION AGREEMENT WITHIN NINETY (90) DAYS FOLLOWING THE ELECTION WITHDRAWAL DATE WILL RESULT IN THE WAIVER OF LAND OWNER'S RIGHTS UNDER THAT SECTION" or (y) Building Owner delivers a separate reminder notice to Land Owner at any time after the giving of the Initial Election Notice which contains the language set forth in clause (x) above and Land Owner fails to affirmatively exercise its option under this SECTION 10(B) on or before the later of (I) ninety (90) days after the Election Withdrawal Date and (II) if Building Owner delivers the reminder notice pursuant to clause (y) above (as opposed to clause (x)), five (5) Business Days after delivery of that reminder notice. 2. The Land Owner's Lease Option shall be: (1) for one (1) or two (2) full floors of space in the Building which floors (if Land Owner exercises its option with respect to two (2) floors) shall be contiguous to the extent available, except as otherwise reasonably required by Building Owner, subject to Building Owner's reasonable approval of the location of such space, it being understood that if such space consists of two (2) floors, to the extent available and practicable, Building Owner Member shall endeavor to locate such two (2) floors in the same elevator bank; (2) subject to the availability of space in the Building at the time Land Owner exercises Land Owner's Lease Option (provided that Building Owner shall be entitled to deem space to be unavailable if it is vacant or is reasonably anticipated by Building Owner to become vacant more than six (6) months prior to the Option Effective Date); and (3) for a lease term of between five (5) and fifteen (15) years, commencing on the Option Effective Date (but in no event shall such term extend beyond the term of the MS Lease), subject to any then existing future possessory or expansion right of MS, an Affiliate of MS or any third party. 10 3. Building Owner shall send Land Owner a notice within thirty (30) days after the exercise by Land Owner of Land Owner's Lease Option either confirming that the floor(s) selected by Land Owner pursuant to clause (i) above are available for lease by Land Owner and approved by Building Owner or stating that one or both of such floors are not available for lease by Land Owner or not reasonably approved by Building Owner and indicating which floor(s), if any, are available for lease by Land Owner and approved by Building Owner. If Building Owner fails to send such notice within said thirty (30) day period, Land Owner shall be entitled to send a reminder notice to Building Owner containing the same information as is required to be contained in Landlord's notice exercising its Land Owner's Lease Option, with a statement, in bold capitalized letters, that the floor(s) selected by Land Owner shall be deemed approved by Building Owner unless Building Owner notifies Land Owner of its objections within five (5) Business Days. If Building Owner fails to so notify Land Owner of its objections within said five (5) Business Day period, the floor(s) selected by Land Owner shall be deemed to have been approved by Building Owner. In the event that Building Owner notifies Land Owner that one or both of the floor(s) selected by Land Owner are not available or not reasonably approved by Building Owner, Land Owner shall, within ten (10) Business Days after Building Owner so notifies Land Owner of the location of the available floor(s), give a notice to Building Owner stating that it either (x) accepts the floor(s) offered by Building Owner (or if Land Owner exercised its option for two (2) floors and Building Owner identified two (2) floors which were available and approved, Land Owner shall indicate that it accepts both, or if the floors indicated by Building Owner are not contiguous, either of such floors, or if Building Owner has given Land Owner more than one alternative, Land Owner shall indicate which floor(s) it has elected to take), (y) rejects the floor(s) offered by Building Owner and withdraws the exercise of its Land Owner's Lease Option (in which event Land Owner shall have no more rights pursuant to this SECTION 10(B)), or (z) disputes Building Owner's position that one or both of the floors selected by Land Owner is unavailable or that Building Owner has acted reasonably in disapproving Land Owner's indicated floor(s), in which case such dispute shall be resolved in accordance with the provisions of SECTION 10(B)(V) above. If the dispute is arbitrated and Building Owner prevails, Land Owner shall not be entitled to withdraw its exercise of Land Owner's Lease Option and shall be required to lease the space designated by Building Owner. 4. Any lease entered into by Land Owner (or its Affiliate) pursuant to Land Owner's Lease Option shall have a rental equal to 95% of the then fair market rent for the space and shall be upon such other terms and conditions as set forth in the MS Lease Option, except that (x) Land Owner (or its Affiliate) shall only be entitled to those additional services 11 and rights which, under the MS Lease Option, would have been provided to a tenant which is leasing and/or occupying the amount of space which Land Owner (or its Affiliate) will lease and/or occupy, (y) the level of services and rights granted to Land Owner (or its Affiliate), as tenant, shall at Land Owner's election be less than that required by MS under the MS Lease, and (z) the provisions set forth in SECTION 2(A) of the MS Lease Option and the provisions of SECTION 17, SECTION 26 and the last sentence of SECTION 27 of Exhibit A of the MS Lease Option shall not apply to Land Owner (or its Affiliate). 5. Any dispute concerning the terms of the lease with Land Owner (or its Affiliate) which has not been resolved within thirty (30) days after the delivery of Land Owner's notice set forth in SECTION 10(b)(i), above shall be resolved by arbitration pursuant to the terms of SECTION 6 of the MS Lease Option. 6. Though the Land Owner's Lease Option set forth herein shall be self-operative, upon either party's request, Land Owner and Building Owner shall execute and deliver, with respect thereto, an instrument confirming the terms thereof, a recordable memorandum of the same, and any further documents reasonably in furtherance of the terms of this SECTION 10(B). 7. In no event shall the Leasing Agent be entitled to any commission or other fee in connection with space leased by Land Owner or its Affiliate in the Building pursuant to this SECTION 10(B) or otherwise. 8. Fair market rent shall be determined in the same manner as provided in the MS Lease Option. Pending any determination of fair market rent, Land Owner shall pay, as rent, an amount based upon the rent per square foot of rentable area payable under the MS Lease, subject to adjustment in the same manner as provided in the MS Lease Option. 11. SHARED CAPITAL IMPROVEMENTS. 1. Building Owner Member shall be entitled to reimbursement for a portion of certain capital improvements made to the Building by Building Owner in accordance with the provisions of this SECTION 11. 2. Subject to the terms of this SECTION 11, Land Owner shall reimburse Building Owner Member for fifty percent (50%) of the Reimbursable Amount (as hereinafter defined) for Shared Capital Improvements to the extent paid for by Building Owner prior to the Option Effective Date. Subject to the terms of this SECTION 11, in the case of any Shared Capital Improvements which are commenced prior to the Option Effective Date and not completed prior thereto ("INCOMPLETE SHARED CAPITAL IMPROVEMENTS"), the Reimbursable Amount for 12 such Incomplete Shared Capital Improvements shall mean the amount of costs actually paid by Building Owner to perform the same on or prior to the Option Effective Date and the Joint Venture shall be responsible for the completion of such Incomplete Shared Capital Improvements and the costs incurred by the Joint Venture to do so shall constitute Joint Venture expenses. 3. The following terms shall have the meanings set forth below: 1. "DEPRECIABLE LIFE" shall mean the period (which is not in violation of any Legal Requirements) which is the greater of (i) the period over which said Shared Capital Improvement was or will actually be depreciated on Building Owner's annual tax returns or (ii) the period over which said Shared Capital Improvement was or will actually be depreciated on Building Owner's financial books. 2. "SHARED CAPITAL IMPROVEMENT" shall mean any capital improvement, repair or replacement to the Project (i) which has an individual cost exceeding an amount equal to $1,000,000 (such amount, as increased pursuant to the further provisions hereof, is the "THRESHOLD AMOUNT"), increased by a fraction, the numerator of which is the CPI on the date of the installation of such Shared Capital Improvement and the denominator of which is the CPI on the date of this Agreement, but in no event shall such Threshold Amount exceed $5,000,000; (ii) the installation of which is commenced within the seven (7) Lease Years prior to the Option Effective Date; and (iii) which is reasonably required to comply with Building Owner's obligations, as Tenant, under SECTION 8.2 and SECTION 11.1 of the Ground Lease. 4. The cost of any Shared Capital Improvement (other than any Incomplete Shared Capital Improvement), subject to Land Owner's right to dispute the reasonableness thereof as set forth below, shall be amortized over its Depreciable Life from the date of completion of such Shared Capital Improvement with interest at the Prime Rate. The portion, if any, of the cost of such Shared Capital Improvement (with interest as provided above) which has not been amortized pursuant to the preceding sentence as of the Option Effective Date as agreed to (or deemed agreed to) between Land Owner and Building Owner or as determined by arbitration pursuant to SECTION 11(D)(II) below shall be herein referred to as the "REIMBURSABLE AMOUNT": 1. Building Owner shall provide Land Owner written notice of the proposed Shared Capital Improvement, which notice (the "REIMBURSEMENT NOTICE") may be given before or after the commencement of any Shared Capital Improvement, but no later than the Option Effective Date, and shall include (a) a description of the improvement, (b) preliminary specifications for such improvement, (c) the reason for such improvement, 13 (d) for informational purposes only, the estimated cost of undertaking the improvement and (e) for informational purposes only, an estimate of the improvement's Depreciable Life. 2. Land Owner shall have the right to give a notice to Building Owner within thirty (30) days after its receipt of any Reimbursement Notice objecting to the same only if Land Owner believes in good faith that the improvement described therein does not satisfy the definition of Shared Capital Improvement. Any such notice from Land Owner shall specify in reasonable detail the reasons for Land Owner's objection. If Land Owner fails to give such objection notice within such thirty (30) day period, Building Owner shall have the right to deliver to Land Owner a Deemed Approval Notice, and if Land Owner shall fail to respond within five (5) Business Days thereafter, the improvement described in such Reimbursement Notice and Deemed Approval Notice shall be deemed to be a Shared Capital Improvement. If Land Owner timely gives such objection notice, and the dispute is not resolved within thirty (30) days after the giving of such objection notice, the dispute shall be submitted to arbitration in accordance with the provisions set forth in ARTICLE 33 of the Ground Lease, and the resulting determination shall be binding on the Land Owner and Building Owner. 3. Following the completion of the Shared Capital Improvement, other than any Incomplete Shared Capital Improvement, Building Owner shall provide Land Owner with notice (the "COST NOTICE"), which Cost Notice shall include (a) the cost of the improvement, (b) the actual Depreciable Life over which the Shared Capital Improvement is being or will be depreciated on the Building Owner's annual tax returns or on the Building Owner's financial books, and (c) Building Owner's proposed Reimbursable Amount for such Shared Capital Improvement (it being understood that Land Owner cannot object to the Depreciable Life). On the Option Effective Date, Building Owner shall also notify Land Owner in a Cost Notice of the actual cost paid by Building Owner to date for any Incomplete Shared Capital Improvements. 4. Land Owner shall have the right to give a notice (the "COST OBJECTION") to Building Owner within thirty (30) days after its receipt of any Cost Notice objecting to the same only if Land Owner believes in good faith that the cost of such improvement as specified in the Cost Notice is more than five percent (5%) in excess of the reasonable cost which should have been reasonably incurred to complete such improvement (or in the case of any Incomplete Shared Capital Improvement, if Land Owner believes in good faith that the costs set forth in the applicable Cost Notice were not actually paid by Building Owner, or that the contracted costs for the Incomplete Shared Capital Improvement (i.e. contracted costs paid to date plus 14 contracted cost to complete) is more than 5% in excess of the reasonable cost which should have been reasonably contracted therefor) or that Building Owner has made a mathematical mistake in calculating the Reimbursable Amount. Any Cost Objection shall specify in reasonable detail the reasons for Land Owner's objection (including, without limitation, (x) with respect to Shared Capital Improvements other than Incomplete Shared Capital Improvements the amount that Land Owner believes in good faith is the reasonable cost which should have been reasonably incurred to complete such improvement, and (y) with respect to any Incomplete Shared Capital Improvement, the amount that Land Owner believes in good faith was actually paid by Building Owner for such Incomplete Shared Capital Improvement on or prior to the Option Effective Date or, if applicable, the cost that should have been reasonably contracted for such Incomplete Shared Capital Improvement). 5. (A) In the case of any Shared Capital Improvement other than any Incomplete Shared Capital Improvements, the difference between the cost of the improvement as specified in the Cost Notice and Land Owner's good faith determination of the reasonable cost of the improvement as set forth in the Cost Objection or (B) in the case of any Incomplete Shared Capital Improvement, the difference between the actual costs paid by Building Owner as specified in the Cost Notice and the amount that Land Owner believes in good faith was actually paid, in either case shall be referred to herein as the "DISPUTED AMOUNT" and any dispute concerning the Disputed Amount which is not resolved within thirty (30) days after the delivery of the Cost Objection shall be submitted to arbitration for resolution pursuant to the provisions of Article 33 of the Ground Lease. 6. If Land Owner fails to deliver a Cost Objection within such thirty (30) day period, Building Owner shall have the right to deliver to Land Owner a Deemed Approval Notice, and if Land Owner shall fail to respond within five (5) Business Days thereafter, the Cost Notice shall be deemed approved by Land Owner. 7. (A) If Land Owner fails to timely deliver a Cost Objection in accordance with clauses (iv) and (vi) above with respect to a Shared Capital Improvement, then Land Owner shall reimburse Building Owner Member for 50 % of the Reimbursable Amount for such Shared Capital Improvement on the later of (x) the Option Effective Date and (y) ten (10) Business Days after the expiration of the five (5) Business Day Period after a Deemed Approval Notice has been delivered by Building Owner in accordance with clause (vi) above. (B) If Land Owner timely delivers a Cost Objection in accordance with clause (iv) or (vi) above with respect to any Shared Capital Improvement, 15 then Land Owner shall reimburse Building Owner Member for 50% of the Reimbursable Amounts, less any Disputed Amounts, in respect of such Shared Capital Improvement on the later of (x) the Option Effective Date and (y) ten (10) Business Days after the date the applicable Cost Objection is timely given. If Land Owner timely delivers a Cost Objection with respect to any Shared Capital Improvement and the dispute is not resolved within ten (10) Business Days after the giving of such Cost Objection, either party may submit the dispute to arbitration in accordance with the provisions set forth in ARTICLE 33 of the Ground Lease and the resulting determination shall be binding on Land Owner and Building Owner. Any amounts determined to be payable by the resolved arbitration shall be payable to Building Owner Member on the later of (1) the Option Effective Date or (2) the date which is ten (10) Business Days after the resolution of the arbitration, together with interest thereon at the Prime Rate from the date on which such amount would otherwise have been paid. (C) If Land Owner timely delivers a Cost Objection with respect to any Incomplete Shared Capital Improvement objecting that Land Owner believes in good faith that the contracted costs for such Incomplete Shared Capital Improvement are more than 5% in excess of the reasonable cost which should have been reasonably contracted therefor (which Cost Objection includes the cost that Land Owner believes in good faith should have been reasonably contracted therefor) and such dispute is not resolved within thirty (30) days after the delivery of such Cost Objection, such dispute shall be submitted to arbitration for resolution pursuant to the provisions of ARTICLE 33 of the Ground Lease. If pursuant to such arbitration it is determined that the amount that should have been reasonably contracted for such Incomplete Shared Capital Improvement exceeds the actual contracted costs for such Incomplete Shared Capital Improvement pursuant to Building Owner's contracts therefor entered into prior to the Option Effective Date (the amount of such excess with respect to any such Incomplete Shared Capital Improvement is called a "CONTRACT EXCESS"), upon the completion of such Incomplete Shared Capital Improvement and the payment by the Joint Venture of all costs for such completion, the Land Owner shall be entitled to a credit in an amount equal to 50% of the Contract Excess for such Incomplete Shared Capital Improvement, which credit shall be paid in accordance with SECTION 7 of EXHIBIT A attached hereto. 5. Nothing in this SECTION shall be deemed to affect Building Owner's right to perform any improvement, repair or replacement it may desire to perform (subject to the terms of the Ground Lease) without giving any Reimbursement Notice or Cost Notice to Land Owner. Further, if Building Owner does elect to give a Reimbursement Notice or Cost Notice to Land Owner with respect to any such 16 improvement, repair or replacement and Land Owner timely objects to the same in accordance with this SECTION, nothing in this SECTION shall be deemed to affect Building Owner's right to perform the same without waiting for the resolution of such dispute. 6. For informational purposes only, Building Owner shall deliver to Land Owner true copies of the Building's capital budget for each Lease Year in which neither RCMC nor any other Affiliate of Land Owner was the property manager of the Project commencing with the thirty-second (32nd) Lease Year. 12. MISCELLANEOUS PROVISIONS. 1. The failure of either party to insist in any one or more cases upon the strict performance of any of the terms, covenants, conditions, provisions or agreements of this Agreement, or to exercise any option herein contained, shall not be construed as a waiver or a relinquishment for the future of any such term, covenant, condition, provision, agreement or option. 2. This Agreement may not be changed or terminated orally but only by an agreement in writing signed by the party against whom enforcement of the change or termination is sought. THE GUARANTY PROVIDES IN PART THAT GUARANTOR IS NOT BOUND BY ANY MODIFICATION OR AMENDMENT TO THIS AGREEMENT OR THE JVA WHICH INCREASE THE OBLIGATIONS OR DECREASE THE RIGHTS OF BUILDING OWNER OR BUILDING OWNER MEMBER HEREUNDER UNLESS GUARANTOR SHALL HAVE CONSENTED TO SUCH MODIFICATION OR AMENDMENT IN WRITING. 3. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York and without aid of any canon or rule of law requiring construction against the party drawing or causing this Agreement or any provision thereof to be drawn. 4. All terms and words used in this Agreement, regardless of the number or gender in which they are used, shall be deemed to include any other number, or any other gender, as the context may require. 5. The terms "herein," "hereby," "hereof," "hereunder," and words of similar import, shall be construed to refer to this Agreement as a whole, and not to any particular Article or SECTION, unless expressly so stated. 6. The provisions of this Agreement shall not be construed for the benefit of any third party, except as otherwise provided herein. 17 7. THE PARTIES HERETO HEREBY KNOWINGLY WAIVE ANY RIGHT TO A TRIAL BY JURY FOR ANY DISPUTE ARISING IN CONNECTION WITH THIS AGREEMENT. 8. The section headings of this Agreement (including EXHIBIT A annexed hereto) are for convenience and reference only, and in no way define, limit or describe the scope or intent of this Agreement, nor in any way affect this Agreement. 9. Each of the options provided in SECTIONS 2(A) and 2(B) hereof are being granted in connection with the Ground Lease and therefore the parties believe such options are not subject to the Rule Against Perpetuities (the "RULE"). Nonetheless, the parties agree that to avoid any violation of such Rule, to the extent either option is deemed subject thereto, each such option must be exercised, if at all, on or before the date which is 21 years following the death of the last to die of Governor Hugh Carey and the descendants of John D. Rockefeller, Jr. and any of their respective descendants who are lives in being as of the date of this Agreement. 13. BANKRUPTCY REMOTE ENTITY. Each of the covenants and agreements contained in Sections 1.4, 3.1, 3.2, 3.5, 3.6 and 7.1 of the Limited Liability Company Agreement of Land Owner, Paragraphs 3, 4, 5 and 6 of the Amended and Restated Certificate of Formation of Land Owner, Articles 2, 6, 7 and 8 of the Certificate of Incorporation of Rock-Forty-Ninth, Inc., as amended by the Certificate of Amendment of the Certificate of Incorporation of Rock-Forty-Ninth Inc., and Articles 2, 6, 7 and 8 of the Certificate of Incorporation of Rock-Plaza, Inc. (collectively, the "SPE Covenants") are hereby incorporated herein by reference as if fully set forth herein for the benefit of Building Owner. Each of Land Owner, Rock-Forty-Ninth, Inc. and Rock-Plaza, Inc. hereby covenant and agree to comply, at all times, with the SPE Covenants contained in their respective organizational documents and Rock-Forty-Ninth, Inc. and Rock-Plaza, Inc. further covenant and agree to cause Land Owner to comply, at all times, with the SPE Covenants contained in the Limited Liability Company Agreement and Amended and Restated Certificate of Formation of Land Owner. Land Owner shall not, at any time prior to the termination of the Landlord Pledge, without Building Owner's prior consent, amend or modify or permit the amendment or modification of any of the so-called "separateness covenants" contained in the organizational documents of Land Owner and Land Owner's respective members or any other provisions contained therein which would impair the ability of Building Owner to enforce its rights as pledgee under the Landlord Pledge. 18 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. LAND OWNER: ROCK-FORTY-NINTH LLC By: Rock-Forty-Ninth, Inc., its Member By: /s/ Gwen A. Rowden -------------------------------------- Name: Gwen A. Rowden Title: Vice President BUILDING OWNER: MSDW 745, LLC By: MS Financing Inc., Member By: /s/ Owen D. Thomas -------------------------------------- Name: Owen D. Thomas Title: Vice President IF BUILDING OWNER OR LAND OWNER EXERCISES ITS OPTION IN ACCORDANCE WITH SECTION 2 OF THIS AGREEMENT, BUILDING OWNER MEMBER AGREES TO CAUSE LAND OWNER TO BE ADMITTED AS A 50% OWNER IN BUILDING OWNER IN ACCORDANCE WITH THE TERMS OF THIS AGREEMENT, INCLUDING THE EXECUTION AND DELIVERY OF THE JVA BY BUILDING OWNER MEMBER. BUILDING OWNER MEMBER: MS FINANCING INC. By: /s/ Owen D. Thomas ----------------------- Name: Owen D. Thomas Title: Vice President THE UNDERSIGNED ENTITIES AGREE TO BE BOUND BY THE PROVISIONS OF SECTION 13 HEREOF: ROCK-FORTY-NINTH, INC. ROCK-PLAZA, INC. By: /s/ Gwen A. Rowden By: /s/ Gwen A. Rowden ------------------------ -------------------------- 19 EXHIBIT A MATERIAL TERMS OF JVA 14. DEFINED TERMS; SECTION REFERENCES. 1. Terms used in this EXHIBIT A without definition shall have the respective meanings ascribed to them in the Agreement to which this EXHIBIT A is annexed (the "AGREEMENT"), or if not so defined, as such terms are defined in the Ground Lease. 2. Any section references contained in this Exhibit A shall refer to other sections in this EXHIBIT A, unless specifically stated otherwise. 15. CO-VENTURERS. The sole initial parties (individually, a "VENTURER," and collectively, the "VENTURERS") of the Joint Venture shall be Land Owner and the owner(s) of all of the interests in Building Owner immediately prior to the Option Effective Date (the "BUILDING OWNER MEMBER") (or their successors and assigns permitted hereunder). No Venturer nor the Joint Venture shall be responsible or liable for any indebtedness or obligation of the other Venturer incurred either before or after the execution of the JVA, except that the Joint Venture shall be bound by and be responsible for the following matters (collectively, the "CONTINUING PROJECT OBLIGATIONS"): 1. any joint responsibilities, liabilities, indebtedness or obligations incurred pursuant to and as limited by the terms of the JVA; and 2. obligations arising on or after the Option Effective Date under all of the following: (a) Continuing Leases, brokerage agreements and construction and other contracts relating thereto; (b) the MS Lease, if any; (c) the Ground Lease; (d) any contracts entered into by Building Owner prior to the Option Effective Date so long as the same are terminable upon not more than thirty (30) days' notice without payment of any penalty or otherwise approved in writing by Land Owner; (e) any customary union contracts affecting the Project; (f) any lease entered into by Land Owner or an Affiliate of Land Owner pursuant to the Land Owner's Lease Option; (g) the Permitted Exceptions and other easements, permits, approvals, covenants and restrictions entered into by Building Owner in accordance with the terms of the Ground Lease; (h) construction and other contracts and other obligations relating to Incomplete Shared Capital Improvements; and (i) any other obligation or agreement approved by Land Owner in writing as being a Continuing Project Obligation. A-1 16. PURPOSE. The purpose of the Joint Venture will be to own, manage, lease, mortgage, operate, alter and dispose of the Project and to engage in such other activities, and to enter into such agreements, as may be necessary or advisable in connection with the promotion or conduct of the business of the Joint Venture or the Project. The Joint Venture shall not engage in any other business without the consent of all of the Venturers. 17. PRINCIPAL OFFICE. The principal place of business of the Joint Venture shall be located at the principal office of the Operating Venturer in New York City. 18. INITIAL CAPITAL CONTRIBUTIONS; PERCENTAGE INTERESTS; APPORTIONMENTS. 1. On the Option Effective Date, Land Owner shall contribute to the Joint Venture its fee interest in the Land and all of its right, title and interest in, to and under the Ground Lease and all rights relating to the Land and the Ground Lease, free and clear of all liens, claims and encumbrances, subject only to the Permitted Exceptions, the Ground Lease and any matters created or otherwise consented to in writing by Building Owner. 2. On the Option Effective Date, Building Owner shall cause the Building, the Building Equipment and all rights relating thereto to be free and clear of all liens, claims and encumbrances, subject only to the Continuing Project Obligations and such other matters created or otherwise consented to in writing by Land Owner. The following additional provisions shall apply to the Building: 1. On the Option Effective Date, Building Owner shall cause the Building to be in compliance in all material respects with all Requirements (other than any Requirements then being contested in accordance with the Ground Lease) and otherwise in working order, condition and repair in accordance with the standard set forth in Section 11.1 of the Ground Lease, subject only to reasonable wear and tear. With respect to any non-compliance with the Requirements which is not material as of the Option Effective Date (other than any Requirements then being contested in accordance with the Ground Lease), Building Owner Member shall, promptly after the Option Effective Date, at its sole cost and expense, take whatever action may be reasonably necessary to cure such non-compliance; provided, however, that if such non-compliance would not exist but for the existence of an Incomplete Shared Capital Improvement, the completion of such Incomplete Shared Capital Improvement shall be the responsibility of the Joint Venture and the costs incurred in connection therewith shall be expenses of the Joint Venture other than any fines and penalties arising as a result of the late commencement or delayed prosecution thereof prior to the Option Effective Date which shall be paid by Building Owner Member (unless such fines and penalties resulted from delays caused by force majeure, in which case they shall be borne by the Joint Venture). Building Owner Member shall have the right to continue contesting any such A-2 contested Requirements and, if it is determined that the Joint Venture must comply with the same, Building Owner Member shall, at its sole cost and expense, take whatever action may be reasonably necessary to comply therewith. The Joint Venture and Land Owner shall, at Building Owner Member's sole cost and expense, reasonably cooperate with Building Owner Member in connection with this clause. Any tenant improvements constructed by or on behalf of Building Owner, any machinery, apparatus and equipment excluded from "Building Equipment" pursuant to clause (i) of the definition of "Building Equipment" in the Ground Lease, all personal property of Building Owner and all licenses, permits, guaranties, warranties, plans, specifications, and other intangible property of Building Owner which are not required for the operation of the Building or the Building Equipment and all cash on hand and any other claims, awards, proceeds and accounts receivable which are not apportioned in accordance with SECTION 5(B)(II) hereof, any rights or claims of Building Owner against Land Owner or its Affiliates under the Affiliate Contracts or the Ground Lease and any other obligations of Building Owner which do not constitute Continuing Project Obligations shall be transferred and assigned by Building Owner to, and assumed by, Building Owner Member or its Affiliates without any liability to Land Owner or the Joint Venture. The Joint Venture and Land Owner shall execute such instruments as may be reasonably necessary to effect any such transfer. 2. All rents under the Continuing Leases and all expenses of the Land and the Building shall be apportioned between Building Owner Member and the Joint Venture as of 11:59 p.m. of the day immediately preceding the Option Effective Date. Such prorated expenses shall include without limitation the following: (1) taxes and assessments levied against the Land or the Building; (2) utility charges, such charges to be apportioned on the Option Effective Date on the basis of the most recent meter reading occurring prior to the Option Effective Date (dated not more than thirty (30) days prior to the Option Effective Date) or, if unmetered, on the basis of a current bill for each such utility; (3) inventory and supplies; (4) fees and expenses payable or receivable under any Continuing Project Obligation; and (5) leasing commissions, costs of tenant improvements, work allowances and base building work performed for a tenant relating to the initial term or renewal term in effect on the Option Effective A-3 Date of any Continuing Lease, which have been paid by Building Owner before the Option Effective Date (the "Apportioned Continuing Lease Costs"), each of which shall be amortized over such term on a straight-line basis and apportioned accordingly; provided however, any credit resulting to the Building Owner Member hereunder shall not be paid on the Option Effective Date, but shall be paid in accordance with SECTION 7 hereof. With respect to similar items payable after the Option Effective Date, the same shall be paid by the Joint Venture, and amortized and apportioned in the same manner as provided above, and 50% of any resulting credit to the Joint Venture shall be paid to Land Owner in accordance with SECTION 7 hereof. Notwithstanding the foregoing, any leasing commissions, costs of tenant improvements, work allowances and base building work relating to Continuing Leases and payable with respect to a renewal term commencing after the Option Effective Date or with respect to any expansion space added to the premises after the Option Effective Date or arising out of any amendments, modifications or separate agreements entered into after the Option Effective Date shall be expenses of the Joint Venture and not be part of any credit owed to the Joint Venture. 3. Notwithstanding anything to the contrary contained above: (1) On the Option Effective Date, any security deposits actually held by Building Owner pursuant to any Continuing Leases (to the extent such security deposits have not been applied against delinquent rents or otherwise as provided in the Continuing Leases) shall be transferred to a new bank account established by the Joint Venture for the purpose of holding tenant security deposits. (2) Any taxes paid at or prior to the Option Effective Date shall be prorated based upon the amounts actually paid. If taxes due and payable during the year in which the Option Effective Date occurs have not been paid before the Option Effective Date, Building Owner Member shall be responsible for that portion of such taxes which relates to the period before the Option Effective Date and the Joint Venture shall be responsible for the portion of such taxes which relates to the period from and after the Option Effective Date. Any such apportionment made with respect to a tax year for which the tax rate or assessed valuation, or both, have not yet been fixed shall be based upon the tax rate and/or assessed valuation last fixed. To the extent that the actual taxes for the year of the Option Effective Date differ from the amount apportioned as of the Option Effective Date, the parties shall make all necessary adjustments by A-4 appropriate payments between themselves within thirty (30) days after such amounts are determined following the Option Effective Date. Assessments shall be equitably apportioned between Building Owner Member and the Joint Venture. (3) The following provisions shall apply to any unpaid or delinquent rent under any Continuing Leases: (1) Unpaid and delinquent rent under any Continuing Leases collected by Building Owner Member or the Joint Venture after the Option Effective Date shall be applied as follows: all rent received by Building Owner Member or the Joint Venture after the Option Effective Date shall be applied (A) first, to the month in which the Option Effective Date occurs, which rent shall be apportioned between Building Owner Member and the Joint Venture as provided above; (B) second, to Building Owner Member, all rent accruing within the first thirty (30) days preceding the Option Effective Date; (C) third, to the Joint Venture, any delinquent rents for any period after the month in which the Option Effective Date occurs; and (D) fourth, to Building Owner Member, any delinquent rents for any period prior to the first (30) days preceding the Option Effective Date. Building Owner Member shall be entitled to receive all rents collected by Building Owner Member or the Joint Venture after the Option Effective Date which relate to any leases which expired or were terminated prior to the Option Effective Date. (2) The Joint Venture will make a good faith effort after the Option Effective Date to collect all rents in the usual course of the Joint Venture's operation of the Building. Building Owner may attempt to collect any delinquent rents owed Building Owner and may institute any lawsuit or collection procedures, but may not evict any tenant. In the event that there shall be any rents or other charges under any leases which, although relating to a period prior to the Option Effective Date, do not become due and payable until after the Option Effective Date or are paid prior to the Option Effective Date but are subject to adjustment after the Option Effective Date (such as year end common area expense reimbursements and the like), then any rents or charges of such type received by the Joint Venture or its agents or Building Owner Member or its agents subsequent to the Option Effective Date shall, to the extent applicable A-5 to a period extending through the Option Effective Date, be prorated between Building Owner Member and the Joint Venture as of the Option Effective Date and Building Owner Member's portion thereof shall be remitted promptly to Building Owner Member by the Joint Venture and the Joint Venture's portion thereof, if received by the Building Owner Member, shall be remitted promptly to the Joint Venture by the Building Owner Member. (3) If Building Owner Member collects any unpaid or delinquent rent for the Building, Building Owner Member shall, within fifteen (15) days after the receipt thereof, deliver to the Joint Venture any such rent which the Joint Venture is entitled to hereunder and if the Joint Venture collects any unpaid or delinquent rent for the Building, the Joint Venture shall, within fifteen (15) days after the receipt thereof, deliver to Building Owner Member any such rent which Building Owner Member is entitled to hereunder. (4) Building Owner Member may file an appeal of the real property tax assessment in respect of the Project, and may take related action which Building Owner Member deems appropriate in connection therewith for any tax year through and including the tax year in which the Option Effective Date occurs; provided, however, (x) from and after the Option Effective Date, the Joint Venture shall have the right and obligation to continue diligently to prosecute any contest commenced by Building Owner for the reduction of real property taxes or assessments relating to the Project for the tax year in which the Option Effective Date occurs (the "PRESENT TAX CONTEST"), and (y) subject to Building Owner Member's approval, not to be unreasonably withheld or delayed (and which approval shall be deemed given if Building Owner Member shall not object thereto within fifteen (15) Business Days after request therefor by the Joint Venture and the Joint Venture gives a Deemed Approval Notice to Building Owner Member after said fifteen (15) Business Day period, and Building Owner Member shall not object thereto within five (5) Business Days after the giving of said Deemed Approval Notice), the Joint Venture shall have the right to settle or discontinue the Present Tax Contest. If there shall be any refund of the taxes which are the subject of such pending Present Tax Contest, such refund, together with any interest thereon paid by the taxing authority, shall be paid first, to Building Owner Member and the Joint Venture in respect of the expenses incurred by the Building Owner prior to the Option Effective Date and by the Joint Venture after the Option Effective A-6 Date in obtaining such refund, second to tenants in respect of refunds payable to tenants of the Building pursuant to their leases and third, the balance of such refund shall be apportioned between the Joint Venture and Building Owner Member. Subject to the terms set forth below, Building Owner Member shall own and hold all right, title and interest in and to any appeal and refund of real property taxes paid with respect to any tax year prior to the tax year in which the Option Effective Date occurs and the Joint Venture and Land Owner shall execute such instruments as may be necessary or reasonably desirable to transfer such right, title and interest to Building Owner Member. After the Option Effective Date, Building Owner Member shall not settle any contest for the reduction of real property taxes or assessments relating to the Project for any tax year prior to the tax year in which the Option Effective Date occurs without the Land Owner's prior consent, which consent shall not be unreasonably withheld or delayed and shall be deemed granted if, within fifteen (15) business days after Building Owner Member's delivery of a notice requesting such approval, the Land Owner shall fail to object by notice to Building Owner Member and such failure shall continue for an additional five (5) Business Days after a Deemed Approval Notice is given to the Land Owner. Any refund attributable to tax years prior to the tax year in which the Option Effective Date occurs shall be the sole property of the Building Owner Member. Any dispute under this clause (4) shall be settled by arbitration. (5) Except as otherwise provided herein, any revenue or expense amount which cannot be ascertained with certainty as of the Option Effective Date shall be prorated on the basis of the parties' reasonable estimates of such amount, and shall be the subject of a final proration within one hundred eighty (180) days after the Option Effective Date, or as soon thereafter as the precise amounts can be ascertained. The Joint Venture shall promptly notify Building Owner Member when it becomes aware that any such estimated amount has been ascertained. Once all revenue and expense amounts have been ascertained, the Joint Venture shall prepare, and certify as correct, a final proration statement which shall be subject to Building Owner Member's approval, such approval not to be unreasonably withheld or delayed. Upon Building Owner Member's acceptance and approval of any final proration statement submitted by the Joint Venture, such statement shall be conclusively deemed to be accurate and final. (6) If pursuant to the apportionments provided herein, a net amount is owed by Building Owner Member, then Building Owner Member A-7 shall pay such amount to the Joint Venture on the Option Effective Date, or if a net amount is owed by the Joint Venture, then Land Owner shall pay to Building Owner Member 50% of such net amount on the Option Effective Date. This CLAUSE (6) shall not apply to credits derived under SECTION 5(B)(II)(5), which shall be paid in accordance with SECTION 7(A) below. (7) The JVA shall contain provisions whereby Building Owner Member shall indemnify the Joint Venture (and its officers, directors, members, shareholders, partners, trustees, beneficiaries, agents and employees) from and against any and all claims, demands, causes of action, liabilities, losses, deficiencies and damages, as well as costs and expenses (including reasonable attorneys' fees and court costs), interest and penalties related thereto, asserted against, or incurred by any such indemnified party by reason of or resulting or arising from (A) the ownership, leasing, maintenance and/or operation of the Building during Building Owner's ownership thereof (other than expenses to be apportioned pursuant to Section 5(b) above and payment of Land Owner's share of Shared Capital Improvements under SECTION 11 of the Agreement and Continuing Project Obligations), and (B) the ownership, leasing, maintenance and/or operation of other properties and any other activities, operations, businesses, concerns or other matters engaged in or performed by Building Owner or for which Building Owner is or may be deemed to be liable or responsible, including without limitation any pledges, security agreements, mortgages and other obligations and liabilities arising therefrom. The foregoing is not intended to affect the rights of Building Owner or Land Owner or their respective Affiliates under the Affiliate Contracts. In no event shall Building Owner Member be liable to Land Owner for consequential damages. (8) The JVA shall contain provisions whereby the Joint Venture shall indemnify Building Owner Member (and its respective officers, directors, members, shareholders, partners, trustees, beneficiaries, agents and employees) from and against any and all claims, demands, causes of action, liabilities, losses, deficiencies and damages, as well as costs and expenses (including reasonable attorneys' fees and court costs), interest and penalties related thereto, asserted against, or incurred by any such indemnified party by reason of or resulting or arising from the ownership, leasing, maintenance and/or operation of the Building during the Joint Venture's period of ownership thereof, including for Continuing Project Obligations. The foregoing is not intended to affect the rights of Building Owner or Land Owner or their respective Affiliates under the A-8 Affiliate Contracts. In no event shall the Joint Venture be liable to Building Owner Member for consequential damages. 4. The capital account of each Venturer shall be credited with one-half of the Fair Market Value of the Project as of the Option Effective Date. 5. Each Venturer shall, additionally, contribute fifty (50%) percent of the working capital requirements of the Joint Venture as set forth in the First Budget. 3. The initial respective interests of the Venturers in and to all real and personal property, moneys and profits of the Joint Venture, and their respective shares of all losses, expenses, obligations and liabilities of the Joint Venture (the "PERCENTAGE INTERESTS") shall be as follows: Land Owner 50% Building Owner Member 50% 19. ADDITIONAL CAPITAL CONTRIBUTIONS; ADVANCES TO THE JOINT VENTURE. 1. The JVA shall contain provisions for either Venturer to call upon each Venturer to provide funds (the "REQUESTED AMOUNT") within thirty (30) days (unless a shorter time period is reasonably required under the circumstances), if such Venturer reasonably determines that funds are required (i) for the operation of the business of the Joint Venture in accordance with the Budget, (ii) to cure any default under any debt of the Joint Venture or (iii) to pay the costs of improvements in order to comply with any Requirements if the failure to pay the same would have an immediate material adverse affect on the Project. Such advances shall be made as capital contributions to the Joint Venture by both Venturers unless otherwise agreed upon in writing by both Venturers. Each Venturer shall contribute its Percentage Interest of the Requested Amount. 2. If a Venturer ( the "WITHHOLDING VENTURER") fails to advance its Percentage Interest of the Requested Amount within the time period provided in SECTION 6(A) above, and such failure continues for five (5) Business Days after a reminder notice is delivered to such Venturer from the other Venturer, the other Venturer (the "NON-WITHHOLDING VENTURER") shall have the right to (i) contribute to the Joint Venture for its own capital account the Percentage Interest of the Requested Amount due from the Withholding Venturer (the "DEFICIENCY"), in which event the respective Percentage Interests shall be recalculated as set forth in SECTION 6(C) below, or (ii) make a loan to the Withholding Venturer (a "DEFICIT LOAN"). 3. If the Non-Withholding Venturer advances the Deficiency as a capital contribution pursuant to SECTION 6(B)(I) above or converts a Deficit Loan to a A-9 capital contribution pursuant to SECTION 6(D) below, then the Percentage Interests of the Venturers shall be recalculated so that (i) the Percentage Interest of the Withholding Venturer shall be reduced by subtracting therefrom the product of (A) the Withholding Venturer's then Percentage Interest in the Joint Venture, multiplied by (B) a fraction, the numerator of which shall be 1.25 times the Deficiency and the denominator of which shall be the sum of all capital contributions theretofore made by such Withholding Venturer plus the Withholding Venturer's Percentage Interest of such Requested Amount, and (ii) the Percentage Interest of the Non-Withholding Venturer shall be increased by the same amount. 4. Deficit Loans shall bear interest at the Prime Rate plus four percent (4%) per annum and, at the option of the Non-Withholding Venturer, shall be converted to a capital contribution with the subsequent recalculation of Percentage Interest of the Venturers as provided in SECTION 6(C) above. Any interest due in any fiscal year on any Deficit Loan which is not paid shall be added to the principal amount of said Loan at the end of such fiscal year. All Deficit Loans shall automatically become due and payable upon the transfer by the Withholding Venturer or the Non-Withholding Venturer of its interest in the Joint Venture. All distributions to any Withholding Venturer shall be paid to the Non-Withholding Venturer first towards payment of interest, then principal under any Deficit Loan, until the same is paid in full. 20. DISTRIBUTIONS; PROFITS AND LOSSES. 1. The Joint Venture shall distribute to the Venturers quarterly within thirty (30) days after the close of each fiscal quarter, an amount equal to the Joint Venture's net cash flow (I.E., cash receipts less cash expenses) as of the end of such fiscal quarter, subject to reserves set forth in the Budget. Net cash flow distributions shall be distributed to the Venturers in accordance with their respective Percentage Interests except that (i) to the extent there is a Building Owner Member credit pursuant to SECTION 5(B)(II)(5) above, prior to either Venturer receiving any distributions which it would otherwise be entitled to receive under this SECTION 7, such distributions shall first be paid to Building Owner Member until such time as 100% of such credit has been paid in full to Building Owner Member, (ii) to the extent there is a Joint Venture credit pursuant to SECTION 5(b)(ii)(5) as a result of payments with respect to Continuing Leases made after the Option Effective Date, prior to Building Owner Member receiving any distributions which it would otherwise be entitled to receive under this SECTION 7, such distributions otherwise payable to Building Owner Member hereunder shall first be paid to Land Owner until such time as 50% of such credit has been paid in full to Land Owner and (iii) to the extent Land Owner is entitled to a credit pursuant to Section 11(d)(vii)(C) of the Agreement as a result of any Contract Excess with respect to any Incomplete Shared Capital Improvement, prior to Building Owner Member receiving any distributions which it would otherwise be A-10 entitled to receive under this SECTION 7, such distributions shall first be paid to Land Owner until such time as such credit has been paid in full. Net proceeds resulting from sales, financings, Joint Venture liquidation and other extraordinary events shall be distributed to the Venturers in accordance with their respective Percentage Interests, except that (i) to the extent there is a Building Owner Member credit pursuant to SECTION 5(B)(II)(5), prior to either Venturer receiving any distributions which it would otherwise be entitled to receive under this SECTION 7, such distributions shall first be paid to Building Owner Member until such time as 100% of such credit has been paid in full to Building Owner Member, (ii) to the extent there is a Joint Venture credit pursuant to SECTION 5(B)(II)(5) hereof as a result of payments with respect to Continuing Leases made after the Option Effective Date, prior to Building Owner Member receiving any distributions which it would otherwise be entitled to receive under this SECTION 7, such distributions otherwise payable to Building Owner Member hereunder shall first be paid to Land Owner until such time as such 50% of such credit has been paid in full to Land Owner and (iii) to the extent Land Owner is entitled to a credit pursuant to SECTION 11(D)(VII)(C) of the Agreement as a result of any Contract Excess with respect to any Incomplete Shared Capital Improvement, prior to Building Owner Member receiving any distributions which it would otherwise be entitled to receive under this SECTION 7, such distributions shall first be paid to Land Owner until such time as such credit has been paid in full. 2. Profits and losses shall be allocated to the Venturers in accordance with their respective Percentage Interests. 21. CONTROL AND MANAGEMENT. 1. The Joint Venture shall be operated and governed collectively by the Venturers, as set forth in this SECTION 8. Actions by the Joint Venture which constitute Major Decisions shall require the affirmative votes of the Venturer or Venturers holding at least fifty-five (55%) percent of the Percentage Interests in the Joint Venture (the "CONTROLLING BLOCK"). 2. Land Owner shall be responsible for the day to day operation and ordinary and usual business and affairs of the Joint Venture which do not constitute Major Decisions; provided however, if either (x) Land Owner shall become a Defaulting Venturer pursuant to SECTION 20(B) below and Building Owner Member is not then also a Defaulting Venturer or (y) the RCMC Management Agreement shall have been terminated by reason of the manager's default thereunder, then in either of those cases, Building Owner Member shall have the right to elect to have such responsibility (the actual Venturer having such day to day responsibilities being referred to as the "OPERATING VENTURER"). Subject to the approval by the Controlling Block and subject to the following sentence, the Operating Venturer A-11 shall have the right to hire a manager to perform property management services with respect to the Project. Provided the conditions set forth below have been satisfied, RCMC or its Affiliate shall be the managing agent for the Joint Venture pursuant to a management agreement on fair market financial terms and substantially incorporating the non-monetary terms set forth in the Management Agreement dated as of the date of this Agreement between Building Owner and RCMC (the "RCMC MANAGEMENT AGREEMENT") and otherwise reasonably acceptable to Building Owner Member (and such Management Agreement may be terminated if, at any time, such conditions do not continue to be satisfied): 1. Rock-Forty-Ninth LLC or its Wholly-Owned Affiliate maintains at least a twenty-five percent (25%) interest in the Joint Venture; 2. RCMC (or such managing Affiliate) is a Wholly-Owned Affiliate of RGI and (A) 25% or more of the beneficial ownership in RGI is not directly or indirectly owned by a single Competitor of Building Owner Member and (B) 37.5% or more of the beneficial ownership in RGI is not directly or indirectly owned by one or more Competitors of Building Owner Member who, directly or through their Affiliates, are in the same primary line of business (and that line of business is in competition with a primary line of business of Building Owner Member or an Affiliate of Building Owner Member), whether or not such Competitors are Affiliated with each other and (C) RGI is not directly or indirectly controlled by any single Competitor of Building Owner Member or two or more Competitors of the Building Owner Member acting in concert with each other. In the event the conditions set forth in this clause (ii) are satisfied, but a Competitor of Building Owner Member owns a direct or indirect interest in RGI (which does not rise to the levels specified in CLAUSES (A) through (C), above), RGI and RCMC (or such managing Affiliate) shall provide an agreement reasonably satisfactory to Building Owner Member in which RGI and RCMC (or such managing Affiliate) agree in writing not to disclose any information regarding the business of the Building Owner Member or any of its Affiliates (as opposed to the financial or physical operation of the Project) to such Competitor or Affiliates of such Competitor; and 3. the RCMC Management Agreement has not been previously terminated by reason of RCMC's default thereunder. The direct or indirect beneficial ownership interests in RGI owned or controlled by any Competitor of Building Owner Member shall be aggregated for all purposes of clause (ii) above (including any "control" test). 3. The following Joint Venture Decisions ("MAJOR DECISIONS") shall be made only upon the approval by the Controlling Block: A-12 1. The sale or lease of all or substantially all of the Project. 2. The financing or refinancing of the Project, or any portion thereof, provided that Morgan Stanley Dean Witter ("MSDW") and its Affiliates shall have a right of first offer with respect to the same and, in such event, so long as MSDW and any Affiliate of MSDW who is generally in the financing business have at least a 25% interest in the Joint Venture and the Joint Venture elects to retain an agent to obtain such financing, MSDW or its Affiliate will be retained by the Joint Venture at market rates as the exclusive agent to obtain any such financing. 3. The acquisition of real property or development rights. 4. Office leases of at least one (1) full floor of rentable square feet in the Project and any modification or termination thereof. 5. All other leases, licenses and other use and occupancy agreements for a term, including extensions, exceeding five (5) years. 6. All retail and signage leases. 7. Annual leasing guidelines. 8. Any lease, license or other use and occupancy agreement which is inconsistent with leasing guidelines approved by all Venturers on an annual basis or other than substantially in the form of the approved lease form. 9. The Budget. 10. Changes in tax treatment of the Joint Venture. 11. The entering into of any agreement between the Joint Venture and a Venturer or an Affiliate of a Venturer, other than the agreements entered into pursuant to SECTION 8(B), SECTION 8(C)(II), and SECTION 18 hereof. 12. The entering into any agreement by the Joint Venture which has a term exceeding one year (other than leases which do not require the approval of the Controlling Block as set forth herein) unless such agreement is terminable without penalty upon not more than thirty (30) days' notice. 13. Expenditure of any amounts exceeding (a) 3% for any line items in the Budget or (b) 1% of the total Budget in the aggregate with respect to expenditures for any line items in the Budget and any expenditures for any items not included in the Budget. A-13 14. The dissolution or voluntary bankruptcy of the Joint Venture. 15. The initiation or settlement of litigation (other than actions relating to leases for which approval of the Controlling Block is not required) which involve individual claims exceeding $100,000 (or such higher minimum amount which is then customary). 16. Redesign, alteration, improvement or reconstruction of the Building to the extent not approved in the Budget or permitted under clause (xiii) above. 17. The demolition or abandonment of any portion of the Project (unless set forth in the Budget or in connection with approved tenant improvements under leases permitted hereunder). 18. Except as provided in SECTION 10 below, the admission of new Venturers. 19. The appointment of a manager, the services to be performed by such manager and the terms of the management agreement other than pursuant to the RCMC Management Agreement pursuant to SECTION 8(B) above and other than the replacement of RCMC by reason of default by RCMC and resulting termination of the RCMC Management Agreement. 20. Granting of any easement or encumbrance affecting the Project. 21. Casualty settlements in excess of $100,000. 22. Condemnation settlements. 23. Determination of reserves during the term of the Joint Venture or upon dissolution. 24. All, except de minimis, environmental matters. 25. Form of lease. 26. The appointment of a leasing agent, the services to be performed by such leasing agent and the terms of the leasing agency agreement, other than pursuant to the RCMC Leasing Agreement and other than by reason of the default and resulting termination of the RCMC Leasing Agreement. 27. The amounts and types of insurance. Any Venturer (the "PROPOSING VENTURER") shall have the right to propose that action be taken regarding a Major Decision. The other Venturer (the A-14 "RESPONDING VENTURER") shall approve or deny any Major Decision within thirty (30) days after request in writing for approval from the Proposing Venturer. If approval is not granted by the Responding Venturer within such thirty (30) day period, the Responding Venturer shall be deemed to have denied its approval of such Major Decision. If the Venturers do not jointly approve any Major Decision, then neither the Joint Venture nor any Venturer individually shall have the right to take any action with respect to such Major Decision and, provided that the Proposing Venturer first delivers to the Responding Venturer a Deemed Approval Notice and the Responding Venturer fails to deliver a notice to the Proposing Venturer that it consents to the action proposed by the Proposing Venturer set forth in the Proposing Venturer's initial notice within five (5) Business Days following the delivery of the foregoing Deemed Approval Notice, each Venturer shall have the right to exercise the buy-sell option described below. In the event either Venturer so elects, the buy-sell mechanism shall be the sole remedy of such Venturer with respect to such Major Decision. Notwithstanding anything to the contrary contained herein, if the Responding Venturer exercises its buy-sell option as provided below, the Proposing Venturer shall be entitled to withdraw its proposal regarding the Major Decision that gave rise to the Responding Venturer's right to exercise the buy-sell option by giving written notice to the Responding Venturer of such withdrawal within five (5) Business Days after the Proposing Venturer's receipt of the Buy-Sell Offering Notice (as hereinafter defined), time of the essence. If the Proposing Venturer exercises its buy-sell option as provided below, the Responding Venturer shall be entitled to thereafter approve the Major Decision that gave rise to the Proposing Venturer's right to exercise the buy-sell option by giving written notice to the Proposing Venturer of such approval within five (5) Business Days after the Responding Venturer's receipt of the Buy-Sell Offering Notice, time of the essence. If the Proposing Venturer withdraws its proposal or the Responding Venturer approves the Major Decision, each in the manner provided above, the Responding Venturer's or the Proposing Venturer's, as the case may be, exercise of the buy-sell option relating thereto shall be void and of no force and effect, and the Venturers shall be restored to their respective positions prior to the making of the proposal by the Proposing Venturer with respect to the Major Decision. Notwithstanding anything contained to the contrary above, if a single Venturer constitutes the Controlling Block such Controlling Block Venturer shall have the sole right to make all Major Decisions and no other Venturer shall have the right to be a Proposing Venturer. 4. The Joint Venture shall insure the Project through a reputable insurer or insurers licensed to do business in the State of New York and having a credit rating of not less than A-/X (or the then equivalent by Best's or its successor). 5. Each Venturer shall have the right to reject the other Venturer's customarily retained outside accountants or attorneys as serving as the accountants or attorneys for the Joint Venture. A-15 6. So long as an Affiliate of MSDW is a Venturer having at least a 50% Percentage Interest in the Joint Venture and is not a Defaulting Venturer, Building Owner Member (or such Affiliate) shall have the right to designate a bank or banks which shall maintain the Joint Venture accounts, provided in any event said bank or banks shall (i) not be an Affiliate of Building Owner Member (or such Affiliate), (ii) be based in New York City and (iii) have reasonably appropriate capital. 7. The management agreement shall contain provisions whereby RCMC (or any other property manager for the Joint Venture) shall, at least three (3) months prior to each calendar year (including the calendar year in which the Option Effective Date occurs), establish operating and capital budgets for the Project for the Joint Venture's approval. Each of the budgets approved by the Joint Venture in accordance with the terms hereof shall be referred to as a "BUDGET." The first such budgets for the calendar year 2032 shall be referred to as the "FIRST BUDGET". The following provisions shall apply to the Budgets: 1. If the First Budget is not timely established, until such time as the First Budget is established, the Project shall be operated in accordance with a budget consisting of (i) all amounts for non-discretionary items such as real estate taxes, Building employees and any indebtedness of the Joint Venture and (ii) 102% of all other amounts included in Building Owner's budget for the prior year, except that there shall be no capital items other than continuing capital projects approved or deemed approved by both Venturers, any capital projects constituting Continuing Project Obligations and any Incomplete Shared Capital Improvements. 2. If any year's Budget (subsequent to the First Budget) is not timely established, until such time as the new Budget is established, the Project shall be operated in accordance with a budget consisting of (i) all amounts for non-discretionary items and (ii) 102% of all other amounts included in the prior year's Budget, except that there shall be no capital items other than continuing capital projects approved in a prior Budget. 3. Each operating budget shall include a detailed breakdown of all operating costs and each capital budget shall include a detailed breakdown of capital improvements, required reserves, projected requirements for additional capital contributions and tenant improvements. 4. Each Venturer shall approve or disapprove a proposed budget within thirty (30) days after submission of the same to such Venturer by the managing agent. If any Venturer shall not respond within such thirty (30) day period, its approval shall be deemed denied. A-16 5. The Operating Venturer shall use reasonable efforts to cause the Project to be operated in accordance with the Budget. The Operating Venturer shall receive no compensation for the performance of its duties under the JVA. 8. All Venturers shall receive copies of all notices, reports and other items delivered under any management and leasing agreements, as well as copies of all tax returns. 22. DURATION.The Joint Venture shall continue until the earliest to occur of (i) December 31, 2100, (ii) the agreement of the Venturers to terminate, or (iii) the date when termination is otherwise provided by law or by the JVA. 23. TRANSFER OF INTERESTS. 1. Except as set forth in this SECTION 10, no Venturer (nor any direct or indirect parent of any Venturer) shall Transfer any interest in the Joint Venture, directly or indirectly, voluntarily or involuntarily without the consent of the other Venturer which may be withheld in each Venturer's respective absolute discretion. 2. No Venturer shall have the right to Transfer less than all of its direct interest in the Joint Venture, nor shall any of its Single-Asset Holding Companies (as hereinafter defined) have the right to transfer less than all of its indirect interest in the Joint Venture (a "Prohibited Transfer"). If either Venturer wishes to Transfer all of its direct interest in the Joint Venture or in any of its Single Asset Holding Companies other than in connection with a Permitted Transfer (a "Direct Transfer"), the following right of first offer provisions shall apply: 1. The offering Venturer (the "OFFEROR") shall give notice (a "SALE NOTICE") to the other Venturer (the "OFFEREE") of its desire so to do, which Sale Notice shall state the price, measured in dollars and payable solely in cash, for which it intends to sell its direct interest in the Joint Venture (the "OFFER PRICE"). The Offer Price shall not include the amounts required to be paid pursuant to SECTION 10(B)(II)(2) below. The Offeree shall, within thirty (30) days after receipt of such Sale Notice, notify the Offeror by written notice (the "PURCHASE NOTICE") whether or not the Offeree will purchase the interest at the Offer Price, payable in cash, on a closing date not less than sixty (60) days after the date of the Purchase Notice. If the Offeree does not respond within said thirty (30) day period, time being of the essence with respect thereto, the Offeree shall be deemed to have declined to purchase the interest. 2. If the Offeree elects to purchase the interest, the notices given by the Offeror and the Offeree pursuant to paragraph (i) above shall constitute a binding agreement of purchase and sale between the Offeror and the Offeree. Concurrently with the delivery of the Purchase Notice, the A-17 Offeree shall deposit into an escrow account with the Offeror's attorney, a sum equal to ten percent (10%) of the Offer Price (the "DEPOSIT") as security for the purchase, which deposit shall be paid to the Offeror at the closing of such purchase as part of the purchase price. Any interest on the Deposit shall be credited to the Offeree unless the Offeree defaults, in which event the interest shall go to the Offeror. Whichever entity receives the interest shall pay all income taxes thereon. On a date and at a place in New York, New York specified by the Offeror, within the time parameters specified above: (1) the Offeror shall deliver to the Offeree a duly executed and acknowledged instrument of assignment conveying the interest of Offeror to the Offeree or its designee, free and clear of all liens and encumbrances, which instrument shall contain surviving representations concerning the absence of such liens and encumbrances and that the Offeror has not taken any action on behalf of the Joint Venture in violation of the JVA and shall contain a provision indemnifying and holding the Offeree harmless from any loss, cost or expense (including reasonable attorneys' fees) it may incur by reason of any breach of any such representations. Notwithstanding anything to the contrary contained in SECTION 17 hereof, Offeree shall have the right to look to Offeror and the direct and indirect owners of Offeror for any breach of such representations, but only to the extent of the proceeds of such sale; (2) the Offeror shall pay all transfer, stamp, gains or similar taxes due in connection with the conveyance of its interest; (3) the Offeree shall pay the Offer Price (less the Deposit and as adjusted by the credits and apportionments herein set forth) in cash; (4) net cash flow to the date of closing shall be distributed in accordance with the provisions of the JVA, the benefit of which provisions shall survive any closing pursuant hereto for purposes of making or correcting any customary closing adjustments; and (5) the Venturers shall execute all amendments to fictitious name or similar certificates necessary to reflect the withdrawal of the Offeror from the Joint Venture, the admission of any new Venturer to the Joint Venture and, if applicable, the termination of the Joint Venture. A-18 3. If the Offeree fails to close the purchase and sale contemplated hereby by reason of its default after a binding agreement of purchase and sale has been formed under paragraph (i) above, then the Offeror may (A) retain the Deposit and all interest accrued thereon as liquidated damages and/or (B) exercise the buy-sell option pursuant to SECTION 11 below. Notwithstanding the remedies afforded the Offeror in the immediately preceding clauses (A) and (B) above, if the Offeree fails to close the purchase and sale by reason of its default after a binding agreement of purchase and sale has been formed under paragraph (i) above, Offeror shall have the right to effect a Transfer to any Qualified Third Party (including a Competitor of the Offeree) within the twenty-four (24) month period following the date of Offeree's default without complying with, or being bound by any of the terms, conditions or restrictions of this SECTION 10. 4. If the Offeror fails to close the purchase and sale contemplated hereby by reason of its default after a binding agreement of purchase and sale has been formed under paragraph (i) above, then the Offeree (A) shall be entitled to a return of the Deposit, together with all interest accrued thereon and (B) may (I) seek specific performance or otherwise pursue its remedies at law or in equity with respect to the binding agreement of purchase and sale formed pursuant to such paragraph (i) and/or (II) exercise the buy-sell option pursuant to SECTION 11 below. 5. In the event that the Offeree does not timely deliver a Purchase Notice, then, subject to the terms of SECTION 10(C) below, the Offeror may effect the proposed transfer to a "Qualified Third Party" within twelve (12) months after the expiration of the thirty (30) day period following the delivery of the Sale Notice, for consideration in cash or cash equivalent and on other economic terms having a present cash value of not less than ninety-five (95%) of the Offer Price. 6. A "QUALIFIED THIRD PARTY" shall mean a Person not an Affiliate of either Venturer which is a reputable person of good character and business dealings. Within thirty (30) days after any Venturer notifies the other Venturer of the name and other reasonable information concerning the nature of the business and ownership of any proposed transferee (or, if such other Venturer reasonably requests additional information regarding such proposed transferee within such thirty (30) day period, thirty (30) days after such additional information is delivered to such other Venturer), such other Venturer shall confirm whether or not such proposed transferee constitutes a Qualified Third Party. If such other Venturer fails to respond within such thirty (30) day period, such proposed transferee shall be deemed to constitute a Qualified Third Party. Any dispute regarding any Qualified Third Party will be subject to arbitration and, if A-19 any party elects at any time after a proposed Qualified Third Party has been identified, the arbitration procedure set forth in SECTION 13.18 of the Ground Lease will be put in place to resolve any such dispute. 7. If a Qualified Third Party transfer pursuant to this SECTION 10(B) is not consummated within such twelve (12) month period or if the Offeror desires to effect such a transfer for consideration in cash or cash equivalent and on other economic terms having a present cash value of less than ninety-five (95%) of the Offer Price, the Offeror must once again comply with these right of first offer provisions. 3. Notwithstanding anything contained herein to the contrary, if Offeree has waived or deemed to have waived its rights to purchase Offeror's interest in the Joint Venture in accordance with the terms of SECTION 10(B) set forth above, Offeror shall still have no right to effect a Direct Transfer to a Competitor of Offeree unless and until it has complied with the provisions set forth below: 1. Offeror shall provide written notice to Offeree that it is in serious good faith negotiations to effect the Transfer of its direct interest in the Joint Venture to a Competitor of Offeree, and such written notice (the "COMPETITOR SALE NOTICE") shall include a certification by Offeror as to (a) the name of the proposed transferee and (b) the basic terms of the transaction, and that such basic terms are substantially agreed upon in principle by Offeror and such Competitor. All information contained in the Competitor Sale Notice, to the extent such information is not generally available in the marketplace, shall be kept in strict confidence by Offeree. 2. Offeree shall have ten (10) Business Days after its receipt of the Competitor Sale Notice to elect by notice to Offeror (the "COMPETITOR SALE RESPONSE") whether or not it elects to purchase Offeror's interest upon the terms set forth in the Competitor Sale Notice. Concurrently with the delivery of a Competitor Sale Response in which Offeree elects to purchase Offeror's interest upon the terms set forth in the Competitor Sale Notice, Offeree shall deposit into an escrow account with the Offeror's attorney, a sum equal to ten percent (10%) of the purchase price set forth in the Competitor Sale Notice as security for the purchase, which deposit shall be paid to the Offeror at the closing of such purchase as part of the purchase price. Any interest on the deposit shall be credited to the Offeree unless the Offeree defaults, in which event interest shall go to the Offeror. Whichever entity receives the interest shall pay all income taxes thereon. If Offeree does not deliver the Competitor Sale Response within such ten (10) Business Day period electing to so purchase Offeror's interest and upon the expiration of such ten (10) Business Day period, Offeror delivers a Deemed Approval Notice to Offeree and Offeree fails to deliver such Competitor Sale Response within three (3) Business Days after receipt of A-20 such Deemed Approval Notice, Offeree shall be deemed to have waived its rights hereunder with respect to a sale of the Offeror's interest on the terms and to the Competitor set forth in the Competitor Sale Notice, and Offeror may consummate a sale to the third party Competitor of Offeree set forth in the Competitor Sale Notice in accordance with SECTION 10(B)(V) within twelve (12) months of the giving of the Competitor Sale Notice (but in any event the ultimate cash or cash equivalent consideration shall be not less than ninety-five (95%) of that stated in the Competitor Sale Notice ). 3. If Offeree affirmatively elects to purchase Offeror's interest in the Competitor Sale Response, the Competitor Sale Notice and the Competitor Sale Response shall, taken together, constitute a binding agreement for the purchase and sale of Offeror's interest, and the terms of SECTION 10(B)(II), (III) AND (IV) shall apply, except that for purposes of this SECTION 10(C), (1) the term Competitor Sale Notice shall be substituted for the term Sale Notice; (2) the term Competitor Sale Response shall be substituted for the term Purchase Notice and (3) the Offer Price shall be deemed to be the price which the Competitor offered to pay for Offeror's interest in the Joint Venture as set forth in the Competitor Sale Notice. 4. Each Venturer and its Affiliates shall have the right to effect any Transfer which does not constitute (x) a Prohibited Transfer or (y) a Restricted Transfer (as defined below) the following Transfers without the consent of the other Venturer, including the following Transfers: (a) a Transfer to a Wholly-Owned Affiliate of either Venturer; (b) a Transfer of any shares or interests in any person (other than in such Venturer or in any person whose assets consist entirely or almost entirely of a direct or indirect ownership interest in such Venturer (a "SINGLE ASSET HOLDING COMPANY")) owning a direct or indirect interest in the Joint Venture; (c) a Transfer by reason of an initial public offering of a person (but not such Venturer or any of its Single Asset Holding Companies) owning a direct or indirect interest in the Joint Venture; (d) a Transfer effected by the merger, reorganization or recapitalization of or with MSDW or an Affiliate of MSDW or RGI or an Affiliate of RGI (but not in any Venturer or any of its Single Asset Holding Companies) or by the purchase of all or substantially all of the assets or ownership interests of RGI or an Affiliate of RGI or MSDW or an Affiliate of MSDW (but not of any Venturer or any of its Single Asset Holding Companies) or otherwise in connection with another corporate transaction involving RGI or an Affiliate of RGI or MSDW or an Affiliate of MSDW (but not of any Venturer or any of its Single Asset Holding Companies) or (e) an Upstream Competitor Transfer (defined below) which does not constitute a Prohibited Transfer or a Restricted Transfer, provided that any such Transfer (including the cases (a) through (e) above) is for a legitimate business purpose and is not solely intended to Transfer such Venturer's interest in the Joint Venture, and provided further that any Transfer referred to above does not constitute a Prohibited A-21 Transfer or a Restricted Transfer. The Transfers identified in the foregoing clauses (a) through (d) above are hereinafter referred to individually as a "PERMITTED TRANSFER", and collectively as "PERMITTED TRANSFERS". The following additional provisions shall apply to Upstream Competitor Transfers: 1. An "UPSTREAM COMPETITOR TRANSFER" shall mean a Transfer with respect to a transferring Venturer (excluding Transfers of shares or interests in Public Companies) which results in any direct or indirect beneficial ownership in such transferring Venturer being owned or controlled by any Competitor of the non-transferring Venturer. 2. In the case of any Upstream Competitor Transfer which does not constitute a Restricted Upstream Competitor Transfer, prior to or contemporaneously with such Transfer (but in no event later than five (5) Business Days after the earlier of the occurrence of such Transfer or the issuance of any press release or other public statement made by the Venturer seeking to effect such Transfer or the Competitor in question or their respective Affiliates concerning the Upstream Competitor Transfer and the parties involved), such Venturer shall provide written notice thereof to the non-transferring Venturer, which written notice shall include (a) a certification by the transferring Venturer (i) of the name of the Competitor in question and (ii) that the Transfer does not constitute a Restricted Upstream Competitor Transfer and (b) a confidentiality agreement in customary form whereby the transferring Venturer and such Competitor agree that any information regarding the business of the non-transferring Venturer or any of its Affiliates (as opposed to the financial or physical operation of the Premises and the Joint Venture) shall be kept in strict confidence by the transferring Venturer and shall not be disclosed in any manner to such Competitor or its Affiliates. 3. "RESTRICTED TRANSFER" shall mean any Direct Transfer or Restricted Upstream Competitor Transfer. 5. Notwithstanding the foregoing, the following provisions shall apply to Upstream Competitor Transfers and Restricted Upstream Competitor Transfers, as defined below: 1. "RESTRICTED UPSTREAM COMPETITOR TRANSFER" shall mean a Transfer with respect to a Venturer, excluding Transfers of shares or interests in Public Companies, which, together with and aggregating the effect of any prior Transfers (A) would result in 25% or more of the beneficial ownership in the direct or indirect parent of such Venturer being directly or indirectly owned by a single Competitor of the other Venturer or (B) would result in 37.5% or more of the beneficial ownership in the direct or indirect parent of such transferring Venturer being directly or indirectly owned by one or A-22 more Competitors of the non-transferring Venturer who, directly or through their Affiliates, are in the same primary line of business (and that line of business is in competition with a primary line of business of the non-transferring Venturer or an Affiliate of the non-transferring Venturer), whether or not such Competitors are Affiliated or (C) actually results in either Venturer being directly or indirectly controlled by any single Competitor of the non-transferring Venturer or two or more Competitors of the non-transferring Venturer acting in concert with each other. The direct or indirect beneficial ownership interest in any Venturer owned or controlled by a Competitor of the other Venturer and Affiliates of such Competitor shall be aggregated for all purposes of this Section (including any "control" test). 2. A Venturer seeking to effect a Restricted Upstream Competitor Transfer (an "UPSTREAM OFFEROR") shall provide written notice (the "UPSTREAM NOTICE") to the other Venturer (an "UPSTREAM OFFEREE") prior to or contemporaneously with the effectiveness of a Upstream Competitor Transfer (but in no event later than five (5) Business Days after the earlier of the occurrence of such Restricted Upstream Competitor Transfer and the issuance of any press release or other public statement made by the transferring Venturer or the Competitor in question or their respective Affiliates concerning the Restricted Upstream Competitor Transfer and the parties involved), and such written notice shall include a certification by Upstream Offeror of (a) the name of the proposed transferee, (b) the aggregate percentage direct or indirect beneficial ownership in the transferring Venturer owned or controlled by such Competitor (and such Competitor's Affiliates) and (c) the existence or non-existence of any agreement by such Competitor (or any of its Affiliates) to act in concert with any other Competitor of the non-transferring Venturer (or such Competitor's Affiliates). All information contained in the Upstream Notice, to the extent such information is not generally available in the marketplace, shall be kept in strict confidence by the Upstream Offeree. Prior to or contemporaneously with the effective date of any Restricted Upstream Competitor Transfer (provided the Upstream Offeree has not theretofore acquired the Upstream Offeror's interest in the Joint Venture in accordance with the provisions set forth below), the Upstream Offeror shall deliver to the Upstream Offeree a customary confidentiality agreement whereby the Upstream Offeror and the Competitor referred to in the Upstream Notice agree that any information regarding the business of the Upstream Offeree or any of its Affiliates (as opposed to the financial or physical operation of the Joint Venture or the Project) shall be kept in strict confidence by the Upstream Offeror and shall not be disclosed in any manner to the Competitor or its Affiliates. A-23 3. The Upstream Offeree shall have thirty (30) days after its receipt of the Upstream Notice to elect by notice to the Upstream Offeror (the "UPSTREAM RESPONSE") whether or not it elects to purchase Upstream Offeror's entire interest in the Joint Venturer (such interest being the "UPSTREAM OFFEROR'S INTEREST"), upon the terms set forth below. If the Upstream Offeree does not timely so affirmatively elect in the Upstream Response or, upon the expiration of such thirty (30) day period, does not timely deliver an Upstream Sale Response within three (3) Business Days after Upstream Offeror delivers an additional Deemed Approval Notice to Upstream Offeree , it shall be deemed to have waived its rights hereunder to purchase the Upstream Offeror's interest in the Joint Venture with respect to that Upstream Notice and the Competitor referred to therein. The Upstream Offeree shall, within ten (10) days after request by the Upstream Offeror, deliver a certification to the Upstream Offeror confirming that the Upstream Offeree has no further right to purchase the Upstream Offeror's interest in the Joint Venture and the Restricted Upstream Competitor Transfer referred to in the Upstream Notice shall be free of all rights of the Upstream Offeree under this SECTION 10, but no such certification shall be necessary to make the terms hereof effective. 4. If the Upstream Offeree shall have timely and affirmatively elected, in the Upstream Response, to purchase the Upstream Offeror's Interest, the Upstream Offeror shall then have ten (10) Business Days from the delivery of the Upstream Response by notice to the Upstream Offeree (the "UPSTREAM RESCISSION NOTICE") to rescind the Upstream Offer, in which event, the Upstream Offeror shall have no right to effect the Restricted Upstream Competitor Transfer and the Upstream Offeree shall have not right to acquire the Upstream Offeror's Interest in accordance with this SECTION 10(D). 5. If the Upstream Offeree affirmatively elects in the Upstream Response to purchase the Upstream Offeror's Interest, in the Upstream Response, and the Upstream Offeror has not timely delivered the Upstream Rescission Notice then the Upstream Notice and the Upstream Response shall, taken together, constitute a binding agreement for the purchase and sale of the Upstream Offeror's interest. In that event, the terms of this SECTION 10(B)(II), (III) AND (IV) shall apply, except that for purposes of this SECTION 10(E)(V), (1) the term Upstream Notice shall be substituted for the term Sale Notice; (2) the term Upstream Response shall be substituted for the term Purchase Notice, (3) the Offer Price shall be the Fair Market Value of the Upstream Offeror's interest in the Joint Venture, as determined pursuant to SECTION 16 hereof and (4) the Deposit shall be $10,000,000. A-24 6. Except as set forth in this SECTION 10, no party shall be admitted as an additional Venturer to the Joint Venture without the consent of both Venturers. 7. No Venturer shall have the right to pledge, encumber or grant any security interest in its interest in the Joint Venture, except for the security interest granted to the other Venturer in accordance with SECTION 20(C) below. 24. DISPUTES; BUY-SELL. 1. If (I) any Venturer denies consent (or is deemed to have denied its consent) to any Major Decision and the Venturers do not resolve the dispute within thirty (30) days after such denial or deemed denial, or (II) any Venturer becomes a Defaulting Venturer, or (III) at any time on or prior to the Option Effective Date, Land Owner's interest in the Land or the Ground Lease, or Building Owner's interest in the Building or the Ground Lease, is transferred by operation of law or otherwise, other than in accordance with ARTICLES 22, 38 AND 46 of the Ground Lease, then in the case of clause (I) above, each Venturer, subject to the last paragraph of SECTION 8(C) above, shall have the right, to be exercised within sixty (60) days after the expiration of the foregoing thirty (30) day period, or, in the case of clause (II) above, the Venturer that is not the Defaulting Venturer shall have the right at any time, or, in the case of clause (III) above, the other party shall have the right, to be exercised within sixty (60) days after the Option Effective Date, to purchase from or sell to the other Venturer its interest in the Joint Venture in the manner set forth below. It is expressly understood that in no event shall a Defaulting Venturer be entitled to initiate its buy-sell right under this SECTION 11: 1. The Venturer (the "BUY-SELL OFFEROR") may serve upon the other Venturer (the "BUY-SELL OFFEREE") a notice (the "BUY-SELL OFFERING NOTICE") stating its intent to exercise the buy-sell and the dollar amount (the "VALUATION") which the Buy-Sell Offeror as a third party would be willing to pay for the Project as of the date of the Buy-Sell Offering Notice assuming the Project is free of all debt. 2. The Buy-Sell Offeree shall have the option to elect to do one of the following, and such option may be exercised by notice (the "RESPONSE NOTICE") to the Buy-Sell Offeror at any time within ninety (90) days after its receipt of the Buy-Sell Offering Notice to either: (1) sell its full interest in the Joint Venture to the Buy-Sell Offeror for an amount, determined by the Joint Venture's accountant, equal to the amount the Buy-Sell Offeree would have been entitled to receive if the Project had been sold for the Valuation and the proceeds of such sale were distributed in accordance with the terms of the JVA regarding the liquidation of the Joint Venture A-25 (reflecting, among other things, the repayment of any Deficit Loans), net of reasonable transaction expenses which would have been incurred if the Project had been sold for the Valuation; or (2) purchase the full interest in the Joint Venture of the Offeror for an amount, determined by the Joint Venture's accountant, equal to the amount the Offeror would have been entitled to receive if the Project had been sold for the Valuation and the proceeds of such sale were distributed in accordance with the terms of the JVA regarding the liquidation of the Joint Venture (reflecting, among other things, the repayment of any Deficit Loans), net of reasonable transaction expenses which would have been incurred if the Project had been sold for the Valuation. (3) If the Buy-Sell Offeree shall not exercise either of its options within such ninety (90) day period, then it shall be deemed to have exercised its option to sell its full interest in the Joint Venture to the Buy-Sell Offeror pursuant to SECTION 11(A)(II)(1) above. 3. The purchasing Venturer shall deposit into an escrow account with the selling Venturer's attorney, a sum equal to ten percent (10%) of the purchase price (the "BUY-SELL DEPOSIT") for the selling Venturer's interest as determined above within five (5) days following the Response Notice or deemed election pursuant to SECTION 11(A)(II)(3) above as security for the purchase, which Buy-Sell Deposit shall be paid to the selling Venturer at the closing of such purchase as part of the purchase price. Notwithstanding the foregoing, if the buy-sell is triggered by the non-Defaulting Venturer by reason of the other Venturer becoming a Defaulting Venturer, such non-Defaulting Venturer shall not be required to provide the Buy-Sell Deposit if it is the purchasing Venturer. Any interest on the Buy-Sell Deposit shall be credited to the purchasing Venturer unless such purchasing Venturer defaults in which event the interest shall go to the selling Venturer. Whichever entity receives the interest shall pay all income taxes thereon. 4. The closing shall occur on the date which is one hundred fifty (150) days following the Buy-Sell Offering Notice. If either Venturer (the "NON-CLOSING VENTURER") fails to close the purchase and sale contemplated above on the closing date described herein then the other Venturer (the "CLOSING VENTURER") shall be entitled, (A) if the Non-Closing Venturer is the seller, to the return of the Buy-Sell Deposit and any accrued interest thereon, and/or to seek specific performance or otherwise pursue its remedies at law or in equity with respect to the purchase and sale contemplated by such Buy-Sell Offering Notice and Response Notice and (B) if the Non-Closing Venturer is the purchaser, to keep the Buy-Sell A-26 Deposit as liquidated damages, to sell its interest in the Joint Venture to any Qualified Third Party (including a Competitor of the Non-Closing Venturer) at any time within twenty-four (24) months after the default of the Non-Closing Venturer without complying with the provisions of this Section 10 and without the consent of such Non-Closing Venturer and/or to sell the Project on behalf of the Joint Venture to be sold without the consent of the Non-Closing Venturer and the net proceeds of any such sale shall be distributed first to the Closing Venturer in an amount equal to all losses, costs, expenses and damages suffered by the Closing Venturer by reason of such failure of the Non-Closing Venturer or in connection with such sale and the remaining proceeds shall be distributed in accordance with the provisions of the JVA regarding liquidation of the Joint Venture; provided, however, that if the Non-Closing Venturer is the non-Defaulting Venturer, the Closing Venturer (I.E., the Defaulting Venturer) shall have no rights or remedies under this SECTION 11(A)(IV). 5. On the closing date described above and at the selling Venturer's attorneys' office in New York, New, York, (1) the selling Venturer shall deliver to the purchasing Venturer a duly executed and acknowledged instrument of assignment conveying the interest of the selling Venturer to the purchasing Venturer or their designee, free and clear of all liens and encumbrances, which instrument shall contain surviving representations concerning the absence of such liens and encumbrances and that the selling Venturer has not taken any action on behalf of the Joint Venture in violation of the JVA and shall contain a provision indemnifying and holding the purchasing Venturer harmless from any loss, cost or expense (including reasonable attorneys' fees) it may incur by reason of any breach of such representations. Notwithstanding anything to the contrary contained in SECTION 17 hereof, the purchasing Venturer shall have the right to look to the selling Venturer and the direct and indirect owners of the selling Venturer for any breach of such representations, but only to the extent of the proceeds of such sale; (2) the selling Venturer shall pay all transfer, stamp, gains or similar taxes due in connection with the conveyance of its Interest; (3) the purchasing Venturer shall pay the purchase price for the selling Venturer's interest as determined above (less the Buy-Sell Deposit and as adjusted by the credits and apportionments herein set forth) in cash; A-27 (4) net cash flow to the date of closing shall be distributed in accordance with the provisions of the JVA, the benefit of which provisions shall survive any closing pursuant hereto for purposes of making or correcting any customary closing adjustments; and (5) the Venturers shall execute all amendments to fictitious name or similar certificates necessary to reflect the withdrawal of the selling Venturer from the Joint Venture, the admission of any new Venturer to the Joint Venture and, if applicable, the termination of the Joint Venture. 2. Disputes arising from any Major Decisions for which neither Venturer timely delivers a Buy-Sell Offering Notice shall be submitted to arbitration for resolution with thirty (30) days after the expiration of the sixty (60) day period referred to in SECTION 11(A)(I), above. 25. WITHDRAWAL OR BANKRUPTCY. 1. No Venturer shall withdraw from the Joint Venture except in the case of a Permitted Transfer or termination of the Joint Venture. 2. If any Venturer (herein called the "FAILED VENTURER") shall at any time admit or be adjudicated to be insolvent, file or have filed a petition in bankruptcy, make an assignment for the benefit of creditors, suffer or permit the appointment of a receiver or trustee, dissolve, liquidate or fail to do business for any reason, then the other Venturer shall have the right and option, exercisable by notice in writing to the Failed Venturer, its successors or representatives, to acquire the Joint Venture interest of the Failed Venturer at a price equal to the amount, determined by the Joint Venture's accountants, the Failed Venturer would have been entitled to receive if the Project had been sold for its Distress FMV, net of reasonable transaction expenses which would have been incurred if the Project had been sold for such Appraised FMV (reflecting among other things, the repayment of any Deficit Loans). "APPRAISED FMV" means the fair market value of the Project as determined by a qualified reputable appraiser chosen by the non-Failed Venturer provided that any such appraisal shall be approved by a bankruptcy court having proper jurisdiction where such approval is required by the court. The reasonable costs of such appraisal and any other costs incurred in connection with such appraisal and court approval shall be deducted from the price payable for the Failed Venturer's interest. 26. TAX MATTERS. 1. For federal, state and local income tax purposes, all items of taxable income, deduction, credit and loss of the Joint Venture for each fiscal year of the Joint Venture shall be allocated to each Venturer in accordance with the allocation of A-28 the corresponding item of profits and losses, except as may otherwise be required under SECTION 13(D) below. The Joint Venture shall be treated as a partnership for all such tax purposes. 2. The Joint Venture shall, if requested by either Venturer, make the election under Section 754 of the Internal Revenue Code of 1986, as the same may be amended from time to time (the "CODE"). 3. Building Owner Member shall be the "Tax Matters" partner as defined in Section 6231(a)(7) of the Code, it being understood that all tax decisions and elections for the Joint Venture shall be agreed upon by both of the Venturers (except as provided in SECTION 13(B) above). 4. If any property of the Joint Venture shall be reflected in the capital accounts of the Joint Venture at a value that differs from its adjusted basis for federal income tax purposes, the profits and losses of the Joint Venture and items of income, loss, deduction and gain shall be allocated among the Venturers in a manner that eliminates such difference in accordance with Section 704(c) of the Code and the Treasury Regulations issued thereunder (and pursuant to Reg. ss. 1.704-1(b)(4)(i)) using the traditional method specified in Treasury Regulations issued under Section 704(c) of the Code. 27. BORROWING. Except as may be approved as a Major Decision, neither the Joint Venture, nor any Venturer on behalf of the Joint Venture, shall directly, or indirectly, borrow money or become obligated upon or liable for any monies borrowed, and shall not, as a Venturer, cause the Joint Venture to assume, guarantee or act as surety for any obligation or liability (whether for borrowed money or otherwise) of any other person without, in each case, the prior written consent of the Controlling Block. 28. OUTSIDE TRANSACTIONS. Either Venturer may engage in or possess an interest in other business ventures of any nature or description, independently or with others, whether presently existing or hereafter created, including, but not limited to, the commercial and residential real estate businesses in all of their phases, which shall include, without limitation, the ownership, leasing, operation, management, syndication, servicing and/or development of commercial and residential real property, including property competitive with the Project, and neither Venturer shall have any rights in or to such independent ventures or the income or profits derived therefrom. Notwithstanding the foregoing, the Operating Venturer shall have a fiduciary duty to the other Venturer for the performance of its obligations under the JVA. 29. FAIR MARKET VALUE. For purposes of determining "Fair Market Value" of the Project pursuant to SECTIONS 5(B)(IV) OR 10(E)(V) above or SECTION 20(B)(V) below, the same, if not otherwise agreed upon by the Venturers, shall be submitted to and determined by binding "baseball" arbitration, as follows: A-29 1. Each Venturer shall, within ten (10) days after a dispute arises, (a) appoint a disinterested person who is a reputable MAI (or its successor organization) appraiser (an "APPRAISER") with at least 10 years experience in appraising major office buildings in the Borough of Manhattan and (b) give notice of such appointment to the other Venturer. 2. Such Appraisers shall either (i) within forty-five (45) days after the later of the notices referred to in clause (a) have been delivered, determine and promptly report to each Venturer in writing the Fair Market Value of the Project, or (ii) if they cannot agree within such forty-five (45) day period, deliver separate reports to each Venturer within fifteen (15) days of the expiration of such forty-five (45) day period. 3. If the two Appraisers cannot agree within the time frame set forth in CLAUSE (B)(I) above, then they shall promptly jointly appoint a third Appraiser who shall determine the Fair Market Value of the Project by selecting either Venturer's designated Appraiser's Fair Market Value determination according to whichever of the two valuations is closer to the actual Fair Market Value in the opinion of such third Appraiser (I.E. the third Appraiser shall not choose a third determination). 4. If the two Appraisers shall fail to agree upon the designation of a third Appraiser within thirty (30) days from the expiration of the time frame set forth in clause (b)(i), then either Venturer may apply to the AAA for the designation of such Appraiser and if the AAA is unable or fails to designate a third Appraiser within ten (10) Business Days after a request therefor, then either Venturer may apply to the Supreme Court in New York County or to any other court having jurisdiction for the designation of such Appraiser. 5. If a Venturer who shall have a right to appoint an Appraiser fails or refuses to do so within the time frame specified herein and such failure continues for five (5) Business Days after notice from the non-failing Venturer stating in boldface capitalized letters that such failure to appoint such Appraiser within such five (5) Business Day period will result in the non-failing Venturer's right to seek the appointment by AAA or a court of a single Appraiser who will determine the Fair Market Value, then the non-failing Venturer may apply to AAA for the designation of a single Appraiser and if AAA is unable or fails to designate such Appraiser within ten (10) Business Days after a request therefor, such non-failing Venturer may apply to the Supreme Court in New York County or to any other court having jurisdiction for the designation of such Appraiser and the determination of such single appointed Appraiser alone shall control. 6. The appraisal shall be conducted in the City of New York. A-30 7. The expense of the arbitration and the fees and disbursements of the third Appraiser shall be shared equally by the Venturers, but each Venturer shall be responsible for the fees and disbursements of the Appraiser it appoints and its own attorneys and the expenses of its own proof. The Venturers shall execute, acknowledge and deliver such other and further documents and instruments as may be necessary to submit such dispute to arbitration. 8. The Appraisers shall have no power to modify any of the provisions of the JVA or this Agreement and their jurisdiction is limited accordingly. Each Appraiser shall be an independent real estate appraiser who is a member of the American Institute of Appraisers (or any successor organization) having at least ten (10) years then current experience in the appraisal of land and commercial buildings in the Borough of Manhattan, New York City. 9. The Venturers promptly shall execute, acknowledge and deliver an agreement confirming the Fair Market Value of the Project, as so determined, but their failure to do so shall not affect such determination. 30. LIMIT OF LIABILITY. Each Venturer shall look solely to the interest of the other Venturer in and to the Joint Venture in the event of breach or default by the other Venturer pursuant to the provisions of the Joint Venture Agreement; PROVIDED, HOWEVER, that the foregoing provisions of this SECTION shall not be deemed or construed to limit (i) any of the rights or options granted to a Non-Withholding Venturer pursuant to SECTION 6 hereof, (ii) the liability of either Venturer to the other for any negligent act or omission or any wrongful act, (iii) any claims asserted by any third party or third parties against the Joint Venture or either Venturer and the right of the Venturers to contribution from each other in respect of any such claims, (vi) the liability of Building Owner Member for its indemnification obligations pursuant to SECTION 5(B)(III)(7) hereof; (vii) the liability of the Offeror for the breach of the representations pursuant to SECTION 10(B)(II)(1) hereof; (viii) the liability of the selling Venturer for the breach of the representations pursuant to SECTION 11(A)(V)(1) hereof; (ix) the liability of the Offeror for the breach of the representations provided in SECTION 10(B)(II)(1) hereof as such representations relate to a Transfer to a Competitor pursuant to SECTION 10(C)(III) hereof or the liability of the Upstream Offeror for the breach of the representations provided in SECTION 10(B)(II)(1) hereof as such representations relate to Upstream Competitor Transfer pursuant to SECTION 10(E) hereof; (x) the rights of either Venturer to the Deposit pursuant to SECTION 10(b) hereof, the deposit with respect to Transfers to Competitors pursuant to SECTION 10(C) hereof, the deposit with respect to Restricted Upstream Competitor Transfers pursuant to SECTION 10(E) hereof or the Buy-Sell Deposit pursuant to SECTION 11(A) hereof; and (xi) rights under the Guaranty or the Pledge. 31. LEASING AGENT. 1. Provided the conditions set forth in SECTION 18(B) below have been satisfied, then RCMC, or its Affiliate shall be the leasing agent (the "LEASING AGENT") for the A-31 Joint Venture other than with respect to signage pursuant to a leasing agreement on fair market financial terms taking into account, among other things, RCMC's (or such Affiliate's) then market share and expertise in the leasing of commercial space in Manhattan and otherwise substantially incorporating the non-monetary terms of any leasing agreement with RCMC (or such Affiliate) entered into by Building Owner in accordance with the Ground Lease, or if such leasing agreement shall not have been entered into, otherwise on commercially reasonable terms and in all cases in form and substance satisfactory to the Building Owner Member (the "RCMC LEASING AGREEMENT"). 2. The Joint Venture shall have no obligation to enter into the RCMC Leasing Agreement unless the following conditions are satisfied (and the RCMC Leasing Agent may be terminated if, at any time, such conditions do not continue to be satisfied): 1. Rock-Forty-Ninth LLC or another Wholly Owned Affiliate of RGI shall maintain at least a twenty-five percent (25%) interest in the Joint Venture; 2. no prior leasing agreement or management agreement with respect to the Project shall have been terminated due to a default by RCMC (or any Affiliate of RGI); 3. RCMC (or such managing Affiliate) is a Wholly-Owned Affiliate of RGI and (A) 25% or more of the beneficial ownership in RGI is not directly or indirectly owned by a single Competitor of Building Owner Member and (B) 37.5% or more of the beneficial ownership in RGI is not directly or indirectly owned by one or more Competitors of Building Owner Member who, directly or through their Affiliates, are in the same primary line of business (and that line of business is in competition with a primary line of business of Building Owner Member or an Affiliate of Building Owner Member), whether or not such Competitors are Affiliated with each other and (C) RGI is not directly or indirectly controlled by any single Competitor of Building Owner Member or two or more Competitors of the Building Owner Member acting in concert with each other. In the event the conditions set forth in this clause (iii) are satisfied, but a Competitor of Building Owner Member owns a direct or indirect interest in RGI (which does not rise to the levels specified in clauses (A) through (C), above), RGI and RCMC (or such leasing agent Affiliate) shall provide an agreement reasonably satisfactory to Building Owner Member in which RGI and RCMC (or such leasing agent Affiliate) agree in writing not to disclose any information regarding the business of the Building Owner Member or any of its Affiliates (as opposed to the financial or physical operation of the Project) to such Competitor or Competitors of Building Owner Member; A-32 4. RCMC (or such leasing agent Affiliate) is the leasing agent of at least 4 million square feet of commercial space in Manhattan (exclusive of the Building); and 5. the Joint Venture owns the Project. 3. The direct or indirect of beneficial ownership interest in RGI owned or controlled by a Competitor of Building Owner Member and Affiliates of such Competitor shall be aggregated for all purposes of clause (iii) above (including any "control" test). Any dispute over the terms of the RCMC Leasing Agreement which has not been resolved within sixty (60) days after Building Owner Member on behalf of the Joint Venture has delivered to Land Owner a form of such agreement, shall be resolved by arbitration in accordance with SECTION 4 of the Agreement. 32. AFFILIATECONTRACTS. In the event the Joint Venture enters into any agreement with a Venturer or an Affiliate of a Venturer (subject to the consent of the Controlling Block to any such agreement) except for those agreements specifically provided for and consented to in this Agreement, including, without limitation, the RCMC Management Agreement, the RCMC Leasing Agreement, the MS Lease Option, or any space lease executed in connection therewith and the Land Owner's Lease Option, or any space lease executed in connection therewith (any such agreement being referred to as an "AFFILIATE CONTRACT"), then the following provisions shall apply with respect to such Affiliate Contract: 1. In case of any default under an Affiliate Contract or any dispute or matter requiring an interpretation on behalf of the Joint Venture under an Affiliate Contract: 1. the other Venturer shall have the sole right to enforce such Affiliate Contract and to exercise all remedies under such Affiliate Contract without the consent of the Affiliated Venturer and to make any such interpretation and resolve any such dispute; and 2. in the case of the RCMC Management Agreement or RCMC Leasing Agreement, or any other management agreement, leasing agreement or other service or material supply contract, the Venturer not Affiliated with such party shall have the right, upon the termination thereof, to enter into a replacement agreement with third party not an Affiliate of either Venturer and on such fair market terms and conditions as such non-Affiliate Venturer may determine in its sole good faith discretion, without the consent of such Affiliated Venturer. 2. The terms and conditions of each Affiliate Contract, any modification thereof, and the negotiation of such Affiliate Contracts and any arbitration arising out of the terms thereof, or waiver of any obligation of a party to such agreement, and any A-33 direction, consent and approval required thereunder, shall be subject to the reasonable approval of the non-Affiliated Venturer. 33. EVENTS OF DEFAULT; REMEDIES. 1. Each of the following events, and with respect to CLAUSES (I) and (II) below only, if the same shall continue for three (3) Business Days after an additional notice is delivered from the Venturer not committing the act set forth below to the Venturer which committed said act, shall constitute an "Event of Default" hereunder: 1. if any Venturer fails to make any contribution or payment which it is required to make under this Agreement within ten (10) Business Days after notice from the other Venturer that such Venturer failed to make such contribution or payment on the due date therefor; provided however that (a) any such failure to make a payment or contribution shall not constitute a default or Event of Default, if, in accordance with SECTION 6(B)(I) hereof, the Non-Withholding Venturer contributes for its own capital account the amount of any such Deficiency with respect to such payment or contribution not so made by the Withholding Venturer or (b) if the Non-Withholding Venturer makes a Deficit Loan in accordance with SECTION 6(B)(II) hereof with respect to such payment or contribution not so made by the Withholding Venturer, and provided the non-Defaulting Venturer has not delivered a Buy-Sell Offering Notice in accordance with SECTION 11(A) hereof, then any such default or Event of Default shall be deemed cured from and after the date upon which any such Deficit Loan (and all interest accrued thereon) is paid in full by the Withholding Venturer; 2. if any Venturer defaults in the observance or performance of any term, covenant or condition of this Agreement, other than a default in making a contribution or payment and such default continues for thirty (30) days after such Venturer receives notice thereof from another Venturer (or, if such default cannot reasonably be cured within such thirty (30) day period by virtue of the nature of such default, such Venturer does not commence to cure such default within such period and thereafter diligently prosecute such cure to completion); or 3. if any act or omission of a Venturer causes an event of default (beyond applicable notice and grace periods) to occur under any indebtedness of the Joint Venture; or 4. any default by a Venturer under the right of first offer or buy-sell option contained herein; or 5. if any Venturer withdraws from the Joint Venture or becomes a Failed Venturer. A-34 2. If a Venturer (the "DEFAULTING VENTURER") has caused an Event of Default hereunder, then the other Venturer (the "NON-DEFAULTING VENTURER") may exercise any one or more of the remedies described below: 1. institute suit in any court of competent jurisdiction to obtain (i) specific performance of the obligations of the Defaulting Venturer under this Agreement, (ii) reimbursement for all costs of court and reasonable attorneys' fees thereby incurred and (iii) damages, if any, resulting to the Joint Venture or the Non-Defaulting Venturer from such Event of Default by the Defaulting Venturer plus interest thereon at the Lease Interest Rate from the date incurred until the date paid; 2. cure the Event of Default, in which case the Defaulting Venturer shall pay to the Non-Defaulting Venturer, on demand, the cost of such cure (including any interest on funds borrowed for the purpose) together with interest thereon at the Lease Interest Rate from the date incurred until the date paid; 3. elect to terminate the Joint Venture; 4. exercise the buy-sell option pursuant to SECTION 11 hereof; and/or 5. exercise the right to purchase the Defaulting Venturer's interest for an amount equal to the amount, determined by the Joint Venture's accountants, the Defaulting Venturer would have been entitled to receive if the Project had been sold for its Fair Market Value determined in accordance with SECTION 16 hereof (reflecting, among other things, the repayment of Deficit Loans), less the costs of the appraisal and any other costs incurred by the Non-Defaulting Venturer in connection with the appraisal and less all losses, costs, expenses and damages suffered by the Non-Defaulting Venturer by reason of such default of the Defaulting Venturer. 3. Each of the Venturers hereby assigns and grants to the other Venturer a first priority lien upon, and a security interest in, the interest of such Venturer in the Joint Venture and all amounts, payments and proceeds becoming distributable or payable to such Venturer by the Joint Venture, as collateral security for the payment and performance of such Venturer's obligations under the JVA (including, without limitation, all of such Venturer's obligations with respect to the right of first offer and buy-sell provision herein). Each Venturer shall execute such financing statements as the other Venturer shall reasonably request in order to perfect and maintain the perfection of the lien and security interest herein granted. Any transfer of the Joint Venture interest of a Venturer shall be subject to such lien and security interest. Each Venturer shall notify each other Venturer A-35 within thirty (30) days of any change in its chief executive offices from that set forth in the JVA. 4. If (and only if) a Venturer becomes a Defaulting Venturer, all amounts, payments and proceeds which may become distributable or payable by the Joint Venture to such Defaulting Venturer which are secured by a security interest created pursuant to the above paragraph, shall be paid to the Non-Defaulting Venturer until all amounts due to the Non-Defaulting Venturer have been paid in full, but shall nevertheless be deemed to have been distributed to the Defaulting Venturer. 34. ESTOPPEL CERTIFICATES. 1. Each Venturer agrees at any time and from to time, upon not less than ten (10) days' prior request by the other Venturer to execute, acknowledge and deliver to such Venturer a statement in writing certifying (a) that the JVA is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications), (b) the Percentage Interests of the Venturers and (c) whether or not, to the best knowledge of the Venturer giving such certificate, there is any existing default or Event of Default under the JVA on the part of the other Venturer and, if so, specifying each such default or Event of Default, it being intended that any such statement delivered pursuant to this SECTION 21 may be relied upon the Venturer requesting such statement and by any prospective purchaser of such Venturer's interest in the Joint Venture. 2. If a Venturer shall fail or refuse to execute, acknowledge and deliver the statement required under this SECTION 21 within twenty (20) days after request from the other Venturer, the requesting Venturer shall have the right to send a Deemed Approval Notice with the certifications set forth below, and if such failure or refusal continues for five (5) Business Days after such Deemed Approval Notice, it shall be deemed that such Venturer has certified that (i) the JVA is unmodified and in full force and effect and (ii) to the best of its knowledge there are no existing defaults or Events of Default on the part of the other Venturer to the JVA. 35. COOPERATION BY VENTURERS. Each Venturer shall reasonably cooperate with the other Venturer in connection with any transfer of such Venturer's interest in accordance with SECTION 10 hereof (including the right of first offer provisions thereof), SECTION 20(B)(V) hereof, the exercise of the buy-sell right in accordance with SECTION 11 hereof or the exercise of the right to purchase any Failed Venturer's interest in accordance with SECTION 12 hereof and shall cause the Joint Venture's accountants to provide the determinations of net cash flow, buy-sell prices and the purchase price under said SECTION 12 to be determined within the time frames contemplated under said SECTIONS 10, 11 and 12. A-36 36. OTHER TERMS. The JVA shall contain such other reasonable additional terms, conditions and provisions agreed to by the parties which are not inconsistent with the terms of this EXHIBIT A, including, without limitation, the incorporation of additional provisions, mechanisms and procedures in furtherance of the terms hereof. A-37 ANNEX I CERTAIN DEFINED TERMS Term Page - ---- ---- AAA ..........................................................................6 Affiliate Contract.........................................................A-34 Agreement ....................................................................1 Apportioned Continuing Lease Costs..........................................A-4 Appraiser .................................................................A-30 Budget ....................................................................A-16 Building Owner ...............................................................1 Building Owner Member.......................................................A-1 Buy-Sell Deposit ..........................................................A-27 Buy-Sell Offeree ..........................................................A-26 Buy-Sell Offering Notice...................................................A-26 Buy-Sell Offeror ..........................................................A-26 Closing Venturer ..........................................................A-27 Code ......................................................................A-29 Competitor Sale Notice.....................................................A-20 Competitor Sale Response...................................................A-21 Continuing Lease .............................................................9 Continuing Leases ............................................................9 Continuing Project Obligations..............................................A-1 Contract Excess .............................................................17 Controlling Block .........................................................A-11 Cost Notice .................................................................15 Cost Objection ..............................................................15 Defaulting Venturer........................................................A-35 Deficiency ................................................................A-10 Deficit Loan ..............................................................A-10 Deposit ...................................................................A-18 Depreciable Life ............................................................13 Direct Transfer ...........................................................A-17 Disputed Amount .............................................................16 Distress FMV ..............................................................A-29 Due Diligence Certificate.....................................................3 Due Diligence Documents.......................................................3 Failed Venturer ...........................................................A-29 Fair Market Value .........................................................A-30 Financial Statements..........................................................3 First Budget ..............................................................A-16 Ground Lease .................................................................1 Incomplete Shared Capital Improvements.......................................13 i Joint Venture ................................................................2 JV Option Agreement.........................................................A-1 JVA ..........................................................................2 Land .........................................................................1 Land Owner ...................................................................1 Land Owner's Lease Option....................................................10 Leasing Agent .............................................................A-32 Major Decisions ...........................................................A-13 MS ..........................................................................10 MS Lease ....................................................................10 MS Lease Option .............................................................10 MSDW ......................................................................A-13 Non-Closing Venturer.......................................................A-27 Non-Defaulting Venturer....................................................A-35 Non-Withholding Venturer...................................................A-10 notice .......................................................................7 Offer Price ...............................................................A-18 Offeree ...................................................................A-18 Offeror ...................................................................A-18 Operating Venturer.........................................................A-12 Option Effective Date.........................................................1 Percentage Interests........................................................A-9 Present Tax Contest.........................................................A-6 Prohibited Transfer........................................................A-17 Project ......................................................................2 Proposing Venturer.........................................................A-15 Purchase Notice ...........................................................A-18 Qualified Third Party......................................................A-20 RCMC Leasing Agreement.....................................................A-32 RCMC Management Agreement..................................................A-12 Reimbursable Amount..........................................................14 Reimbursement Notice.........................................................14 Requested Amount ...........................................................A-9 Responding Venturer........................................................A-15 Response Notice ...........................................................A-26 Rule ........................................................................19 Sale Notice ...............................................................A-18 Shared Capital Improvement...................................................13 Threshold Amount ............................................................14 Upstream Notice ...........................................................A-23 Upstream Offeree ..........................................................A-23 Upstream Offeror ..........................................................A-23 Upstream Offeror's Interest................................................A-24 ii Upstream Recission Notice..................................................A-25 Upstream Response .........................................................A-24 Valuation .................................................................A-26 Venturer ...................................................................A-1 Venturers ..................................................................A-1 Withholding Venturer........................................................A-9 iii EX-12 8 a2071673zex-12.txt EXHIBIT 12 EXHIBIT 12 LEHMAN BROTHERS HOLDINGS INC. AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (DOLLARS IN MILLIONS) (UNAUDITED)
FOR THE TWELVE MONTHS ENDED NOVEMBER 30 ---------------------------------------------------- 1997 1998 1999 2000 2001 -------- -------- -------- -------- -------- Pre-tax earnings from continuing operations.... $ 937 $ 1,052 $ 1,631 $ 2,579 $ 1,748 Add: Fixed charges (excluding capitalized interest).................................... 13,043 15,813 13,681 18,778 15,724 ------- ------- ------- ------- ------- Pre-tax earnings before fixed charges.......... 13,980 16,865 15,312 21,357 17,472 ======= ======= ======= ======= ======= Fixed charges: Interest..................................... 13,010 15,781 13,649 18,740 15,656 Other(a)..................................... 41 47 71 57 78 ------- ------- ------- ------- ------- Total fixed charges.......................... 13,051 15,828 13,720 18,797 15,734 ------- ------- ------- ------- ------- Preferred stock dividend requirements.......... 109 124 174 195 192 ------- ------- ------- ------- ------- Total combined fixed charges and preferred stock dividends.............................. $13,160 $15,952 $13,894 $18,992 $15,926 ======= ======= ======= ======= ======= RATIO OF EARNINGS TO FIXED CHARGES............. 1.07 1.07 1.12 1.14 1.11 RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS.................... 1.06 1.06 1.10 1.12 1.10
- ------------------------ (a) Other fixed charges consist of the interest factor in rentals and capitalized interest. EX-13 9 a2071673zex-13.txt EXHIBIT 13 EXHIBIT 13 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Summary Fiscal 2001 39 Business Environment 39 Results of Operations 40 Geographic Diversification 44 Non-Interest Expenses 44 Income Taxes 45 Liquidity, Funding and Capital Resources 45 Liquidity Risk Management 45 Managing Liquidity, Funding and Capital Resources 47 Total Capital 48 Back-Up Credit Facilities 48 Balance Sheet 49 Financial Leverage 49 Credit Ratings 49 High Yield Securities 49 Private Equity 50 Summary of Contractual Obligations 50 Off-Balance Sheet Financial Instruments and Derivatives 51 Overview 51 Lehman Brothers' Use of Derivative Instruments 52 Risk Management 53 Credit Risk 53 Market Risk 53 Value-at-Risk 54 Significant Accounting Policies 56 New Accounting Developments 57 Effects of Inflation 57 REPORT OF INDEPENDENT AUDITORS 58 CONSOLIDATED FINANCIAL STATEMENTS 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 65 SELECTED FINANCIAL DATA 94 38 FINANCIAL SUMMARY FISCAL 2001 In 2001, Lehman Brothers Holdings Inc. ("Holdings") and subsidiaries (collectively, the "Company" or "Lehman Brothers") reported its second best year of financial results, surpassed only by last year's record results. This performance, in an extremely difficult market environment and coupled with the direct effects of the September 11 terrorist attack, demonstrates the depth and resiliency of the Company's franchise. During the year, the Company continued to strengthen the depth and breadth of its businesses, achieving top of peer group financial results and making strategic market share gains. Market share for global equity origination increased by 41% and global debt origination increased by 14% year-over-year, respectively, according to Thomson Financial Securities Data Corp. ("TFSD"). Market share gains were also realized in key capital markets' products in 2001, as the Company's market share for listed and NASDAQ average trading volumes increased by 44% and 31%, respectively. The Company also continued to maintain a strict discipline with regard to its core competencies of managing expenses, risk management and capital deployment during the year. BUSINESS ENVIRONMENT The principal business activities of the Company are investment banking and securities sales and trading, 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. Marketplace uncertainties experienced in the second half of 2000 continued into 2001, as lower corporate profits and a slower pace of economic growth resulted in generally weak market conditions. The September 11 terrorist attack hastened the global economic slowdown. In response to these conditions, the Federal Reserve lowered interest rates ten times during the fiscal year, bringing the Federal Funds rate to 2.0%. Reductions in the Federal Funds rate for the fiscal year totaled 450 basis points. In December 2001, the Federal Reserve again cut the Federal Funds rate another 25 basis points, bringing the overnight bank lending rate to its lowest level in nearly 40 years. As a result of these economic conditions, all of the major equity markets posted lower returns when compared to the previous several years. The Dow Jones Industrial Average ("DJIA") finished the year at 9,852, down 5% from fiscal year-end 2000. The NASDAQ Composite and the S&P 500 decreased 26% and 13%, respectively, from the fiscal year-end of 2000. Globally, other world markets experienced the same slowing of economic growth, recessionary fears and declines in equity market indexes. The FTSE 100 decreased 15% during the fiscal year while the DAX decreased 22%. In Asia, the Nikkei was down almost 30%, resulting in its lowest level in the past two decades. To help spur economic growth, stabilize markets and boost consumer confidence, major central banks throughout the world made numerous cuts to their respective lending rates during the year. The European Central Bank and the Bank of England cut rates four and seven times, respectively, during the fiscal year. Equity origination markets continued to feel the effects of the uncertain economic outlook. Market volume for global initial public offerings ("IPOs") was down over 60%, and global equity origination market volume was down over 25% when compared to 2000, according to TFSD. - -------------------------------------------------------------------------------- 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 AND LIQUIDITY RISKS INCLUDE CHANGES IN INTEREST AND FOREIGN EXCHANGE RATES AND SECURITIES AND COMMODITIES VALUATIONS, THE AVAILABILITY AND COST OF CAPITAL AND CREDIT, CHANGES IN INVESTOR SENTIMENT, GLOBAL ECONOMIC AND POLITICAL TRENDS AND INDUSTRY COMPETITION. LEGAL RISKS INCLUDE LEGISLATIVE AND REGULATORY DEVELOPMENTS IN THE U.S. AND THROUGHOUT THE WORLD. 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 AND, ACCORDINGLY, READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. 39 Fixed income markets, however, benefited from declining interest rates. Global debt origination remained strong throughout the year as interest rate cuts by many central banks resulted in very attractive borrowing rates. Reflecting this improving market, investment-grade global debt issuance for the fiscal year was up 45%, according to TFSD. Merger and acquisition advisory activity, which reached record levels in fiscal 2000, slowed significantly in fiscal 2001, as marketplace uncertainties and declining global equity markets led to a reduction in activity. Worldwide completed mergers and acquisitions for fiscal 2001 decreased 33% during the year, according to TFSD. In addition, announced transaction volumes industry-wide decreased approximately 50% when compared to fiscal year 2000. RESULTS OF OPERATIONS Despite the relatively weak market conditions and the disruption to the Company's operations resulting from the events of September 11, the Company reported net revenues of $6,736 million, net income of $1,255 million and earnings per share (diluted) of $4.38, its second best year of financial results. These results demonstrate the diversity of the Company's revenue base, both from a business and a regional perspective. The Company's results in 2001 include the impact of a $127 million pretax special charge stemming from the events of September 11, which resulted in the displacement and relocation of the Company's New York employees located in lower Manhattan. (Additional information about the special charge can be found in Note 2 to the Consolidated Financial Statements.) Excluding the special charge, net income was $1,326 million and earnings per share (diluted) were $4.64 compared to net income of $1,775 million and earnings per share (diluted) of $6.38 for 2000 and net income of $1,132 million and earnings per share (diluted) of $4.08 for 1999. The Company is segregated into three business segments (each of which is described below): Investment Banking, Capital Markets and Client Services. Each segment represents a group of activities and products with similar characteristics. These business activities result in revenues from both institutional and high-net-worth retail clients, which are recognized across all 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 REVENUES
Principal Transactions, Commissions and Investment In millions Net Interest Banking Other Total - ------------------------------------------------------------------------------------------------------ TWELVE MONTHS ENDED NOVEMBER 30, 2001 Investment Banking $ - $1,925 $ - $1,925 Capital Markets 4,011 - 13 4,024 Client Services 673 75 39 787 ----------------------------------------------- Total $4,684 $2,000 $ 52 $6,736 TWELVE MONTHS ENDED NOVEMBER 30, 2000 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 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
40 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 in equity and fixed income products, the Company continues to effectively build its client/customer business model. This model focuses on "customer flow" activities, which 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 helps to mitigate 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 are recorded as either principal transactions, commissions or net interest revenues in the Consolidated Statement of Income, depending upon the method of execution, financing and/or hedging related to specific inventory positions. The majority of these Income Statement categories combine to comprise the Company's capital market business. As such, the Company evaluates its capital markets activities on an overall basis, combining principal transactions revenues, commissions and net interest. INVESTMENT BANKING This segment's net revenues result from fees earned by the Company for underwriting public and private offerings of fixed income and equity securities, and advising clients on merger and acquisition activities and other services. The division is structured into global industry groups--Communications & Media, Consumer/Retailing, Financial Institutions, Financial Sponsors, Healthcare, Industrial, Natural Resources, Power, Real Estate and Technology--where senior bankers deliver industry knowledge and the resources to meet clients' objectives. Specialized product groups within Mergers and Acquisitions, Equity Capital Markets, Debt Capital Markets, Leveraged Finance and Private Placements are partnered with global relationship managers in the industry groups to provide comprehensive solutions for clients. The Firm's specialists in new product development, tax and derivatives also are utilized to offer the expertise to tailor specific structures for clients. During 2001, the Investment Banking division increased its headcount by approximately 11%. Investment Banking net revenues decreased 12% in 2001 to $1,925 million from $2,179 million in 2000 and increased 31% in 2000 from $1,664 million in 1999. Record fixed income underwriting activity in 2001 was more than offset by decreases in equity origination and merger and acquisition activity. INVESTMENT BANKING NET REVENUES In millions 2001 2000 1999 - -------------------------------------------------------------------------------- Debt Underwriting $ 893 $ 585 $ 704 Equity Underwriting 440 817 456 Merger and Acquisition Advisory 592 777 504 ---------------------------------- $1,925 $2,179 $1,664 o Record debt underwriting net revenues of $893 million, up 53% from 2000 on record lead-managed underwriting volume of $232 billion. o Increases in debt underwriting net revenues was more than offset by declines in both equity underwriting and merger and acquisition fees due to industry-wide decreases in volume. o Named "Investment Grade Bond House of the Year" by International Financing Review for the first time ever. o Market share for U.S. merger and acquisition announcements increased during 2001 to 9.2% from 8.4% for 2000. 41 Debt underwriting revenues increased 53% to a record $893 million, as issuers continued to take advantage of lower interest rates to raise long-term debt and replace short-term financing. Contributing to these results was an increase in the Company's global market share for debt origination, which grew to 6.6% in 2001 from 5.8% for 2000, according to TFSD. In 2000, debt underwriting revenues decreased 17% from $704 million in 1999. Equity origination revenues were down 46% compared to a year ago, as industry-wide equity underwriting declined significantly during the year. However, the Company continued to grow its equity underwriting market share during the year. The Company's global equity origination volume share increased over 41% to 4.8% compared to 2000 as the value of lead-managed deals increased to $15.9 billion, according to TFSD. Equity origination revenues increased 79% in 2000 from $456 million in 1999. Merger and acquisition advisory fees decreased 24% compared to last year's record results as industry-wide volumes for completed deals decreased 33%, according to TFSD. For the year, the Company improved its market share in U.S. announced merger and acquisition transactions. Merger and acquisition advisory fees increased 54% in 2000 from $504 million in 1999. The increase in net revenues in Investment Banking in 2000 from 1999 reflected market share gains in equity underwriting and record performance in merger and acquisition advisory activities, which were offset by lower debt underwriting revenues due to decreased volumes. CAPITAL MARKETS CAPITAL MARKETS NET REVENUES In millions 2001 2000 1999 - --------------------------------------------------------------------------- Fixed Income $2,227 $2,060 $1,668 Equities 1,797 2,629 1,425 --------------------------------- $4,024 $4,689 $3,093 o Record fixed income net revenues were more than offset by a 32% decline in equities net revenues. o U.S. fixed income research team ranked #1 and fixed income trading ranked #2 by Institutional Investor. o Both U.S. equity research and equity sales and trading ranked #5 by Institutional Investor in 2001, up from #8 in 2000. This segment's net revenues reflect institutional flow activities and secondary trading and financing activities related to fixed income and equity products. These products include a wide range of cash, derivative, secured financing and structured instruments. Capital Markets net revenues were $4,024 million for 2001, down 14% from 2000. In 2000, Capital Markets net revenues increased 52% from $3,093 million in 1999. Record fixed income results in 2001 were more than offset by lower equities revenues. Overall, the Company continued to have strong institutional customer flow activity across a wide range of products. This customer flow business provides the Company with a relatively stable form of revenues as customers continually rebalance their portfolios across market cycles with the full array of capital market products that are provided by the Company. In fixed income products, the Company remains a preeminent global market-maker in numerous products, including U.S., European and Asian government securities, money market products, corporate high grade and high yield securities, mortgage- and asset-backed securities, preferred stock, municipal securities, bank loans, foreign exchange, financing and derivative products. Net revenues from the fixed income component of Capital Markets increased 8% to a record $2,227 million from $2,060 million in 2000. The increase was principally driven by a strong level of institutional customer flow activity as investors sought more defensive asset classes in 2001. Central bank easings prompted lower interest rates, which led to higher volumes across almost all fixed income products, particularly residential mortgages which was driven by high levels of refinancings and new home sales. Areas that benefited the most from the strength in institutional customer flow included mortgages, high grade debt and municipals. In 2000, fixed income net revenues increased 24% from $1,668 million in 1999. In equities, the Company is one of the largest investment banks for U.S. and pan-European listed trading volume, and the Company maintains a major presence in over-the-counter U.S. stocks, all major European and Asian large capitalization stocks, warrants, convertible debentures and preferred issues. 42 Reflecting the Company's growing client base, the Company continued to grow its two major equity derivative product areas in 2001--the volatility business, encompassing options-related products, and the portfolio business, specializing in agency/risk baskets, index rebalancing and other structured products. Net revenues from the equities component of Capital Markets decreased 32% to $1,797 million from $2,629 million in 2000. Declining global equity markets resulted in less equity origination activity, which in turn resulted in less secondary activity. This factor, combined with a significant decrease in market volatility levels, spread compression beginning in the second quarter of 2001 from NASDAQ decimalization, and declines in revenues from both private equity and risk arbitrage activities led to the decrease in 2001 revenues. These results were partially offset by stronger results in institutional customer flow activity as the Company improved its secondary market share in both listed and NASDAQ stocks. Record results in convertible securities also contributed to strong institutional customer flow revenues, as investors turned to more defensive products. In 2000, net revenues from the equities component of Capital Markets increased 84% from $1,425 million in 1999. The increase in net revenues in Capital Markets from 1999 to 2000 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 CLIENT SERVICES NET REVENUES In millions 2001 2000 1999 - -------------------------------------------------------------------------------- Private Client $711 $795 $573 Private Equity 76 44 10 --------------------------------- $787 $839 $583 o Private Client's investment representatives increased to 475 brokers during 2001. o Private Equity assets under management grew 27% in 2001 to $5.6 billion from $4.4 billion in 2000. 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, where the Company strives to add value to its client base of high-net-worth individuals and mid-sized institutional investors through innovative financial solutions, global access to capital, research, global product depth and personal service and advice. Private Equity net revenues include the management and incentive fees earned in the Company's role as general partner for thirty-three private equity banking partnerships. The Company's objectives in Private Equity are threefold: first, to provide a wide range of alternative investment products to clients; second, to realize significant capital appreciation on these investments; and third, to launch a diversified series of funds, thereby providing a more significant and stable source of earnings to the Company. Private Equity currently operates in three major asset classes: Merchant Banking, Real Estate and Venture Capital. As of year-end 2001, Private Equity had over $5.6 billion of assets under management. Client Services net revenues were $787 million compared to $839 million for 2000 and $583 million for 1999. Excluding a special performance-based asset management fee of $73 million in 2000 and a $20 million merchant banking incentive fee in 2001, Client Services results were relatively flat, as the Company's high-net-worth sales force continued to produce strong results despite the weak equity market environment. The Company has been able to establish a consistent flow of revenues from the high-net-worth sector, as these high-net-worth investors actively rebalanced their portfolios to adjust for changing market conditions. Private Equity net revenues increased from 2000, primarily due to a $15 million increase in management fees from new PRIVATE EQUITY ASSETS UNDER MANAGEMENT [Graphic Omitted--bar graph showing: ] 1999--$2.6 billion 2000--$4.4 billion 2001--$5.6 billion 43 funds sponsored by the Company and a $20 million incentive fee recognized from an individual Merchant Banking investment through the Company's role as general partner. In 2000, Client Services' revenues increased 44% to a record $839 million primarily due to record customer activity as the Company successfully increased the headcount and productivity of its investment representatives. Also contributing to the increase was the $73 million special performance-based asset management fee referred to above. GEOGRAPHIC DIVERSIFICATION In fiscal 2001, the Company continued to strategically expand its international franchise, with a particular focus in Europe. The Company believes this expansion will enable it to benefit from the continued globalization of the financial markets, driven by the growing interest in cross-border transactions, client demand for global investment products and the continued evolution of the capital markets across Europe. International net revenues represented approximately 37% of total net revenues in 2001, compared with 42% in 2000, 41% in 1999 and only 28% in 1997. During the year, the Company continued to invest substantial resources in order to expand its European franchise, increasing its headcount in the region by approximately 17% after growing by approximately 40% in 2000. Overall, European revenues decreased 18% versus 2000, as the region encountered the same weak market conditions experienced in the United States. The Company's Asia Pacific region also experienced difficult market conditions in 2001, which resulted in a 37% decrease in the region's net revenues compared to 2000. NET REVENUE DIVERSITY BY GEOGRAPHIC REGION For the year ended 2001 [Graphic Omitted--pie chart showing:] U.S. 63% Europe 29% | | 37% Asia Pacific and other 8% | o International net revenues represented approximately 37% of total net revenues in 2001, compared with only 28% in 1997. NON-INTEREST EXPENSES In millions - -------------------------------------------------------------------------------- Twelve months ended November 30 2001 2000 1999 Compensation and benefits $3,437 $3,931 $2,707 Nonpersonnel 1,424 1,197 1,002 Special charge 127 - - ---------------------------------- Total non-interest expenses $4,988 $5,128 $3,709 -------------------------------- Compensation and benefits/Net revenues 51.0% 51.0% 50.7% Non-interest expenses in 2001 totaled $4,988 million, down 3% from 2000's non-interest expenses of $5,128 million, as a decrease in compensation and benefits was partially offset by an increase in nonpersonnel expenses. 2001 total non-interest expenses included a special charge of $127 million related to the events of September 11. Excluding the special charge, non-interest expenses were down 5% from 2000. The decrease in non-interest expenses highlights the Company's continued disciplined approach to expense management. This ongoing focus on expenses is a key element of the Company's strategic objectives. 44 Compensation and benefits expense as a percentage of net revenues of 51.0% remained consistent with the Company's level during 2000. 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. Nonpersonnel expenses increased 19% during the year, which was lower than the 26% increase in average headcount in 2001. Technology and communications expenses increased significantly in 2001 due to the Company's continued investment in technology and infrastructure. Brokerage and clearance fees rose during 2001, as increased transaction volumes led to higher execution and clearing costs. Occupancy costs also increased in 2001, to accommodate headcount growth. Business development costs remained substantially unchanged during the year, and professional fees and other expenses decreased during 2001, as the Company focused on reducing discretionary items during the year. During the fourth quarter of 2001, the Company recorded a $127 million special charge relating to the events of September 11. This charge reflects all costs and asset write-offs associated with these events, net of related estimated insurance recoveries. The Company is pursuing a claim with its insurance carriers for the property damage, incremental costs and lost revenues from the business interruption from these events. (Additional information about the special charge can be found in Note 2 to the Consolidated Financial Statements.) In 2000, total non-interest expenses increased 38% from 1999. This increase was driven by higher compensation costs as a result of increased revenues and by investments in technology capabilities. INCOME TAXES. The Company's 2001 income tax provision of $437 million represented an effective tax rate of 25.0%. Excluding the impact of the special charge, the effective tax rate for 2001 was 26.3%. In 2000 and 1999, income tax provisions were $748 million and $457 million, respectively, resulting in effective tax rates of 29.0% in 2000 and 28.0% in 1999. The decrease in the effective tax rate in 2001 was primarily due to a greater impact of permanent differences due to a decrease in the level of pretax income, an increase in tax-exempt income and a higher level of income from foreign operations. Additional information about the Company's income taxes can be found in Note 12 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. 45 The Company's Funding Framework incorporates these principles and mitigates liquidity risk wherever possible. This Framework is comprised of 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 requires 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 against available inventory. 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 the 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 company-wide or market specific event, while providing reliable funding for mortgage products and other loan assets. 46 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 both 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. 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 3% of adjusted total assets and less than 12% of total debt. o Lehman Brothers has lowered its Short-Term Debt to Adjusted Total Assets and its Short-Term Debt to Total Debt ratios over the past five years to lessen the impact of short-term dislocations in the unsecured funding markets. SHORT-TERM DEBT TO ADJUSTED TOTAL ASSETS [Graphic Omitted--bar graph showing: ] 1997 7.2% 1998 6.0% 1999 4.2% 2000 4.0% 2001 3.0% SHORT-TERM DEBT TO TOTAL DEBT [Graphic Omitted--bar graph showing: ] 1997 27.6% 1998 19.6% 1999 15.1% 2000 14.1% 2001 11.3% 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. 47 TOTAL CAPITAL In millions November 30 2001 2000 1999 - ------------------------------------------------------------------------------ LONG-TERM DEBT Senior Notes $35,373 $32,106 $27,375 Subordinated Indebtedness 2,928 3,127 3,316 ---------------------------------- 38,301 35,233 30,691 Preferred Securities 710 860 710 STOCKHOLDERS' EQUITY Preferred Equity 700 700 688 Common Equity 7,759 7,081 5,595 ---------------------------------- 8,459 7,781 6,283 ---------------------------------- TOTAL CAPITAL $47,470 $43,874 $37,684 TOTAL CAPITAL [Graphic Omitted--bar graph showing: ] 1999 $37.7 billion 2000 $43.9 billion 2001 $47.5 billion TOTAL CAPITAL. The Company's Total Capital (defined as long-term debt, preferred securities subject to mandatory redemption and stockholders' equity) increased 8% to $47.5 billion at November 30, 2001, compared to $43.9 billion at November 30, 2000, as the Company continued to strengthen its Balance Sheet. The increase in Total Capital principally resulted from a net increase in long-term debt as well as an increase in equity from the retention of earnings. At November 30, 1999, total capital was $37.7 billion. As a result of the favorable interest rate and credit spread environment, the Company issued $9.9 billion in long-term debt, which was $2.3 billion in excess of its maturing debt. Long-term debt increased to $38.3 billion at November 30, 2001 from $35.2 billion at November 30, 2000 and $30.7 billion at November 30, 1999, with a weighted-average maturity of 3.8 years at November 30, 2001 and 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 and making advancements to affiliated companies. Additional information about the Company's capital requirements can be found in Note 10 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 $1 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 tangible net worth. During the second quarter of 2001, the Company elected to reduce the committed amount under the Credit Agreement to $1 billion from $2 billion. The reduction reflects the Company's desire to utilize its credit in forms that are more suitable to its needs. In October 2001, the Company renegotiated its $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. 48 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 $248 billion at November 30, 2001 from $225 billion at November 30, 2000. The Company's adjusted total assets, defined as total assets less the lower of securities purchased under agreements to resell or securities sold under agreements to repurchase, were $165 billion at November 30, 2001 compared to $143 billion at November 30, 2000. The Company believes adjusted total assets is a more effective measure of evaluating balance sheet usage when comparing companies in the securities industry. The increase in adjusted total assets primarily reflects higher levels of fixed income securities, particularly mortgages and corporate debt, associated with increased customer flow activities within the Company's Capital Markets business. 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 17.9x and 16.6x as of November 30, 2001 and 2000, respectively. Consistent with maintaining a single A credit rating, the Company targets an adjusted leverage ratio of under 20.0x. The Company continues to operate below this level. 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. 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 June 20, 2001, Fitch IBCA, Inc. upgraded Holdings long-term debt from A to A+. Fitch also upgraded LBI's senior debt from A to A+ and its subordinated debt from A- to A. As of November 30, 2001 the short- and long-term debt ratings of Holdings and LBI were as follows: HOLDINGS LBI ---------------- -------------------- Short- Long- Short- Long- term term term 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 * 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, 2001 and 2000 included long positions with an aggregate market value of approximately $3.5 billion for both years, and short positions with an aggregate market value of approximately $1,007 million 49 and $745 million, respectively. The Company mitigates its aggregate and single-issuer net exposure through the use of derivatives, sole-recourse securitization financing, and other financial instruments. PRIVATE EQUITY. The Company has investments in thirty-three private equity-related partnerships, for which the Company acts as general partner, as well as related direct investments. At November 30, 2001 and 2000, the Company's investment in these partnerships totaled $229 million and $149 million, respectively, and direct investments totaled $597 million and $678 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 16 to the Consolidated Financial Statements. SUMMARY OF CONTRACTUAL OBLIGATIONS As of November 30, 2001 and 2000, the Company was contingently liable for $1.1 billion and $2.1 billion, respectively, 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 $2.1 billion and $3.2 billion, at November 30, 2001 and 2000, 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, at November 30, 2001 the Company had commitments to enter into forward starting secured resale and repurchase agreements of $52.3 billion and $26.5 billion, respectively, as compared to $51.9 billion and $17.0 billion, respectively, at November 30, 2000. 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. The Company utilizes various hedging and funding strategies to actively manage its market, credit and liquidity exposures on these commitments. In addition, total commitments are not indicative of actual risk or funding requirements, as the commitments may not be drawn or fully utilized. These commitments and any related draw downs of these facilities typically have fixed maturity dates and are contingent upon certain representations, warranties and contractual conditions applicable to the borrower. At November 30, 2001 and 2000, the Company had net lending commitments to investment grade borrowers of $4.1 billion (gross commitments of $5.9 billion less $1.8 billion of associated hedges) and $4.3 billion ($4.4 billion of gross commitments and $0.1 billion of associated hedges), respectively. Lending commitments to non-investment grade borrowers totaled $1.4 billion and $1.3 billion at November 30, 2001 and 2000, respectively. In addition, at November 30, 2001 and 2000, the Company has pre-arranged funding facilities with third party lenders of $4.9 billion and $3.8 billion, respectively, available to it to fund draw downs against these commitments. These funding facilities contain limits for certain concentrations of counterparty, industry or credit ratings of the underlying loans. As of November 30, 2001 and 2000, the Company had commitments to invest up to $555 million and $357 million, respectively, directly and through partnerships in private equity related investments. These commitments will be funded as required through the end of the respective investment periods, principally expiring in 2004. 50 Aggregate contractual obligations and other commitments as of November 30, 2001 by maturity are as follows:
Total AMOUNT OF COMMITMENT EXPIRATION PER PERIOD ----------------------------------------------- In millions Contractual Less than 1-3 4-5 After 5 November 30, 2001 Amount 1 Year Years Years Years - ------------------------------------------------------------------------------------------------------------------ Lending commitments: High grade $ 4,050 $ 2,720 $ 837 $ 493 $ - High yield 1,432 189 668 329 246 Secured lending transactions, including forward starting resale and repurchase agreements 80,863 35,427 19,169 7,056 19,211 Standby letters of credit 1,128 - 1,128 - - Private equity investments 555 - 543 12 - Operating lease obligations 4,096 138 464 353 3,141 Long-term debt maturities 38,301 8,534 15,247 7,559 6,961 Short-term debt maturities 4,865 4,865 - - -
For additional information on contractual obligations see Note 16 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. A primary 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, 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. 51 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 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 14 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 allow for the execution of 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 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. The Company utilizes industry standard derivative contracts whenever appropriate. These contracts may contain provisions requiring the posting of additional collateral by the Company in certain events, including a downgrade in the Company's credit rating. The Company believes that its funding framework incorporates all reasonably likely collateral requirements related to these provisions. For a further discussion of the Company's risk management policies, refer to the discussion which follows. For a discussion of the Company's liquidity management policies see page 45. See the Notes to the Consolidated Financial Statements for a description of the Company's accounting policies and further discussion of the Company's Trading-Related Derivative Activities. 52 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 in the Company's day-to-day operations. 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 weekly 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, but remains 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 combination facilitates the analysis of counterparty credit and market risk exposures, while leveraging personnel and information technology resources in a cost-efficient manner. The Group maintains staff in each of the Company's regional trading centers and has daily contact with trading staff at all levels within the Company. These discussions include a review of trading positions and risk exposures. CREDIT RISK. Credit risk represents the possibility that a counterparty will be unable to honor its contractual obligations to the Company. Credit risk management is therefore an integral component of the Company's overall risk management framework. The Credit Risk Management Department ("CRM Department") has global responsibility for implementing the Company's overall credit risk management framework. The CRM Department manages the credit exposure related to trading activities by giving initial credit approval for counterparties, establishing credit limits by counterparty, country and industry group, and by requiring collateral in appropriate circumstances. In addition, the CRM Department strives to ensure that master netting agreements are obtained whenever possible. The CRM Department also considers the duration of transactions in making its credit decisions, along with the potential credit exposure for complex derivative transactions. The CRM Department is responsible for the continuous monitoring and review of counterparty credit exposure and creditworthiness and recommending valuation adjustments, where appropriate. Credit limits are reviewed periodically to ensure that they remain appropriate in light of market events or the counterparty's financial condition. MARKET RISK. Market risk represents the potential change in value of a portfolio of financial instruments due to changes in market rates, prices and volatilities. Market risk management also is an essential component of the Company's overall risk management framework. The Market Risk Management Department ("MRM Department") has global responsibility for implementing the Company's overall market risk management framework. It is responsible for the preparation and dissemination of risk reports, developing and implementing the firmwide Risk Management Guidelines, and evaluating adherence to these guidelines. These guidelines provide a clear framework for risk management decision making. To that end, 53 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 different 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, the Company's 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 the 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. 54 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 following table sets forth the daily value-at-risk for each component of market risk as well as total value-at-risk: MARKET RISK
As of As of Year-Ended November 30, 2001 - ------------------------------------------------------------------------------------------------------------------- In millions November 30, 2001 November 30, 2000 Average High Low - ------------------------------------------------------------------------------------------------------------------- Interest rate risk $14.6 $12.6 $12.2 $15.1 $10.3 Equity price risk 15.1 15.1 15.9 17.0 14.5 Foreign exchange risk 1.9 1.5 1.8 1.9 1.5 Diversification benefit (8.3) (5.5) (6.1) (8.9) (3.9) - ------------------------------------------------------------------------------------------------------------------- Total Company $23.3 $23.7 $23.8 $25.1 $22.4
The average, high and low value-at-risk for the year-ended November 30, 2000 were $20.8 million, $23.7 million and $18.4 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. TRADING NET REVENUES DISTRIBUTION. Substantially all of the Company's inventory positions are marked-to-market on a daily basis and changes are recorded in net revenues. The following chart sets forth the frequency distribution for substantially all of the Company's trading net revenues on a weekly basis for the years-ended November 30, 2001 and 2000: TRADING NET REVENUES DISTRIBUTION FOR 2001 AND 2000 [Graphic Omitted--Bar graph showing: ] 2001 Less than $0 2 weeks $0-50 million 9 weeks $50-100 million 18 weeks $100-150 million 18 weeks $150-200 million 5 weeks $200+ million 0 weeks 2000 Less than $0 0 weeks $0-50 million 5 weeks $50-100 million 26 weeks $100-150 million 17 weeks $150-200 million 3 weeks $200+ million 1 weeks Average weekly trading revenues for 2001 and 2000 were approximately $90 million and $100 million, respectively. As discussed throughout Management's Discussion and Analysis, the Company seeks to reduce risk through the diversification of its businesses and a focus on customer flow activities. This diversification and focus, combined with the Company's risk management controls and processes, help to 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 reduce the volatility of future net trading revenues. 55 SIGNIFICANT ACCOUNTING POLICIES The Company's financial statements are prepared in conformity with generally accepted accounting principles many of which require the use of management estimates and assumptions. Management believes that the estimates utilized in preparing its financial statements are reasonable and prudent. Actual results could differ from these estimates. FAIR VALUE. The Company records its inventory positions including Securities and Other Financial Instruments Owned and Securities Sold but not yet Purchased at fair value with unrealized gains and losses reflected in Principal transactions in the Consolidated Statement of Income. Market value is generally based on listed prices. If listed market prices are not available, or if liquidating the Company's position is reasonably expected to affect market prices, fair value is either determined based on internal valuation pricing models which take into account time value and volatility factors underlying the financial instruments, or management's estimate of the amounts that could be realized under current market conditions, assuming an orderly liquidation over a reasonable period of time. TRANSFERS OF FINANCIAL ASSETS. The Company accounts for the transfer of financial assets in accordance with Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--a replacement of FASB No. 125" ("SFAS No. 140"). This statement requires that the transfer of financial assets be accounted for as a sale when control over the asset has been relinquished. Control is deemed to be relinquished when the following conditions are met: i.) the assets have been isolated from the transferor (even in bankruptcy or other receivership), ii.) the transferee has the right to pledge or exchange the assets received and iii.) the transferor has not maintained effective control over the transferred assets. The Company is a market leader in mortgage- and asset-backed securitizations and other structured financing arrangements. In connection with these activities, the Company utilizes special purposes entities principally for (but not limited to) the securitization of commercial and residential mortgages, home equity loans, government and corporate bonds, and lease and trade receivables. The Company derecognizes financial assets transferred in securitizations provided that the Company has relinquished control over such assets. The Company may retain an interest in the financial assets it securitizes ("Retained Interests") which may include assets in the form of residual interests in the special purpose entities established to facilitate the securitization. Any Retained Interests are included in Securities and Other Financial Instruments Owned within the Company's Statement of Financial Condition. The Company records its Securities and Other Financial Instruments Owned, including Retained Interests, at fair value with changes in fair value reported in earnings. For additional information on the Company's significant accounting policies see Note 1 to the Consolidated Financial Statements. 56 NEW ACCOUNTING DEVELOPMENTS Effective December 1, 2000, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" (collectively, "SFAS 133"), which requires that all derivative instruments be reported on the Consolidated Statement of Financial Condition at fair value. SFAS 133 changed the Company's accounting methodology applied to its end-user derivative activities, however, the adoption of SFAS 133 had an immaterial effect on the Company as the majority of the Company's derivatives are trading related and were already recorded on a fair value basis. In addition, the Company adopted SFAS No. 140, which carries over the fundamental control premise of SFAS 125, that requires an entity to recognize only assets it controls and derecognize assets only when control has been surrendered. SFAS 140 also changed the accounting for collateral. SFAS 140 no longer requires entities to recognize controlled collateral as an asset on the balance sheet. Rather, SFAS 140 requires entities to separately classify financial assets owned and pledged. The adoption of SFAS 140 did not have a material impact to the Company's financial position or results of operations. In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS 142, intangible assets with indefinite lives and goodwill will no longer be required to be amortized. Instead, these assets will be evaluated annually for impairment. The Company will adopt the provisions of SFAS 142 at the beginning of fiscal year 2002 and does not expect the adoption to have a material impact to the Company's financial position or its 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. 57 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, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended November 30, 2001, in conformity with accounting principles generally accepted in the United States. Ernst & Young LLP New York, New York January 4, 2002 58 CONSOLIDATED STATEMENT OF INCOME
In millions, except per share data Twelve months ended November 30 2001 2000 1999 - ------------------------------------------------------------------------------------------------------- REVENUES Principal transactions $ 2,779 $ 3,713 $ 2,341 Investment banking 2,000 2,216 1,682 Commissions 1,091 944 651 Interest and dividends 16,470 19,440 14,251 Other 52 134 64 - ------------------------------------------------------------------------------------------------------- Total revenues 22,392 26,447 18,989 - ------------------------------------------------------------------------------------------------------- Interest expense 15,656 18,740 13,649 - ------------------------------------------------------------------------------------------------------- Net revenues 6,736 7,707 5,340 - ------------------------------------------------------------------------------------------------------- NON-INTEREST EXPENSES Compensation and benefits 3,437 3,931 2,707 Technology and communications 501 341 327 Brokerage and clearance 308 264 232 Occupancy 198 135 116 Business development 183 182 122 Professional fees 152 184 115 Other 82 91 90 Special charge 127 - - - ------------------------------------------------------------------------------------------------------- Total non-interest expenses 4,988 5,128 3,709 - ------------------------------------------------------------------------------------------------------- Income before taxes and dividends on trust preferred securities 1,748 2,579 1,631 Provision for income taxes 437 748 457 Dividends on trust preferred securities 56 56 42 - ------------------------------------------------------------------------------------------------------- Net income $ 1,255 $ 1,775 $ 1,132 - ------------------------------------------------------------------------------------------------------- Net income applicable to common stock $ 1,161 $ 1,679 $ 1,037 - ------------------------------------------------------------------------------------------------------- Earnings per common share Basic $ 4.77 $ 6.89 $ 4.27 - ------------------------------------------------------------------------------------------------------- Diluted $ 4.38 $ 6.38 $ 4.08
See Notes to Consolidated Financial Statements. 59 CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
In millions - ---------------------------------------------------------------------------------------------------------------- November 30 2001 2000 - ----------------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 2,561 $ 5,160 Cash and securities segregated and on deposit for regulatory and other purposes 3,289 2,434 Securities and other financial instruments owned: Mortgages and mortgage-backed 33,210 24,670 Governments and agencies 24,101 27,381 Derivatives and other contractual agreements 11,555 9,583 Corporate debt and other 10,918 16,098 Corporate equities 8,302 24,042 Certificates of deposit and other money market instruments 2,759 3,433 ------------------ Subtotal 90,845 105,207 Securities owned pledged as collateral 28,517 - - ----------------------------------------------------------------------------------------------------------------- 119,362 105,207 - ----------------------------------------------------------------------------------------------------------------- Collateralized short-term agreements: Securities purchased under agreements to resell 83,278 81,242 Securities borrowed 17,994 17,618 Receivables: Brokers, dealers and clearing organizations 3,455 1,662 Customers 12,123 7,585 Others 1,479 1,135 Property, equipment and leasehold improvements (net of accumulated depreciation and amortization of $424 in 2001 and $855 in 2000) 1,495 671 Other assets 2,613 1,826 Excess of cost over fair value of net assets acquired (net of accumulated amortization of $151 in 2001 and $138 in 2000) 167 180 - ----------------------------------------------------------------------------------------------------------------- Total assets $247,816 $224,720 - -----------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 60 CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (CONTINUED)
In millions, except per share data November 30 2001 2000 - ------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Commercial paper and short-term debt $ 4,865 $ 5,800 Securities and other financial instruments sold but not yet purchased: Governments and agencies 25,547 14,998 Derivatives and other contractual agreements 10,324 8,568 Corporate equities 8,977 6,623 Corporate debt and other 6,482 5,096 - ------------------------------------------------------------------------------------------------------- 51,330 35,285 - ------------------------------------------------------------------------------------------------------- Collateralized short-term financing: Securities sold under agreements to repurchase 105,079 110,225 Securities loaned 12,541 7,242 Payables: Brokers, dealers and clearing organizations 2,805 1,922 Customers 13,831 11,637 Accrued liabilities and other payables 9,895 8,735 Long-term debt: Senior notes 35,373 32,106 Subordinated indebtedness 2,928 3,127 - ------------------------------------------------------------------------------------------------------- Total liabilities 238,647 216,079 - ------------------------------------------------------------------------------------------------------- Commitments and contingencies Preferred securities subject to mandatory redemption 710 860 - ------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred stock 700 700 Common stock, $0.10 par value; Shares authorized: 600,000,000 in 2001 and 300,000,000 in 2000; Shares issued: 256,178,907 in 2001 and 251,629,126 in 2000; Shares outstanding: 237,534,091 in 2001 and 236,395,332 in 2000 25 25 Additional paid-in capital 3,562 3,589 Accumulated other comprehensive income (net of tax) (10) (8) Retained earnings 4,798 3,713 Other stockholders' equity, net 746 597 Common stock in treasury, at cost: 18,644,816 shares in 2001 and 15,233,794 shares in 2000 (1,362) (835) - ------------------------------------------------------------------------------------------------------- Total stockholders' equity 8,459 7,781 - ------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $247,816 $224,720 - -------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 61 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
In millions Twelve months ended November 30 2001 2000 1999 - ------------------------------------------------------------------------------------------------------- PREFERRED STOCK 5% Cumulative Convertible Voting, Series A: Beginning balance $ 1 Series A exchanged for Series B (1) - ------------------------------------------------------------------------------------------------------- Ending balance - ------------------------------------------------------------------------------------------------------- 5% Cumulative Convertible Voting, Series B: Beginning balance $ 238 457 Series A exchanged for Series B 1 Shares subject to redemption (150) Shares repurchased (88) (220) - ------------------------------------------------------------------------------------------------------- Ending balance 238 - ------------------------------------------------------------------------------------------------------- 5.94% Cumulative, Series C: Beginning balance $ 250 250 250 Shares issued - ------------------------------------------------------------------------------------------------------- Ending balance 250 250 250 - ------------------------------------------------------------------------------------------------------- 5.67% Cumulative, Series D: Beginning balance 200 200 200 Shares issued - ------------------------------------------------------------------------------------------------------- Ending balance 200 200 200 - ------------------------------------------------------------------------------------------------------- 7.115% Cumulative, Series E: Beginning balance 250 Shares issued 250 - ------------------------------------------------------------------------------------------------------- Ending balance 250 250 - ------------------------------------------------------------------------------------------------------- Redeemable Voting: Beginning and ending balance Total Preferred Stock, ending balance 700 700 688 - ------------------------------------------------------------------------------------------------------- COMMON STOCK(1) 25 25 25 - ------------------------------------------------------------------------------------------------------- ADDITIONAL PAID-IN CAPITAL(1) - ------------------------------------------------------------------------------------------------------- Beginning balance 3,589 3,374 3,521 RSUs exchanged for Common Stock (13) (54) (63) Employee stock-based awards 53 101 9 Shares issued to RSU Trust (628) (210) (181) Tax benefits from the issuance of stock-based awards 549 373 90 Other, net 12 5 (2) - ------------------------------------------------------------------------------------------------------- Ending balance $3,562 $3,589 $3,374 - -------------------------------------------------------------------------------------------------------
(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. 62 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
In millions Twelve months ended November 30 2001 2000 1999 - ------------------------------------------------------------------------------------------------------- ACCUMULATED OTHER COMPREHENSIVE INCOME Beginning balance $ (8) $ (2) $ 15 Translation adjustment, net(2) (2) (6) (17) - ------------------------------------------------------------------------------------------------------- Ending balance (10) (8) (2) - ------------------------------------------------------------------------------------------------------- RETAINED EARNINGS Beginning balance 3,713 2,094 1,105 Net income 1,255 1,775 1,132 Dividends declared: 5% Cumulative Convertible Voting Series A and B Preferred Stock (1) (9) (20) 5.94% Cumulative, Series C Preferred Stock (15) (15) (15) 5.67% Cumulative, Series D Preferred Stock (11) (11) (10) 7.115% Cumulative, Series E Preferred Stock (18) (12) - Redeemable Voting Preferred Stock (50) (50) (50) Common Stock (75) (59) (48) - ------------------------------------------------------------------------------------------------------- Ending balance 4,798 3,713 2,094 - ------------------------------------------------------------------------------------------------------- COMMON STOCK ISSUABLE Beginning balance 2,524 1,768 1,318 RSUs exchanged for Common Stock (215) (247) (83) Deferred stock awards granted 624 1,003 533 - ------------------------------------------------------------------------------------------------------- Ending balance 2,933 2,524 1,768 - ------------------------------------------------------------------------------------------------------- COMMON STOCK HELD IN RSU TRUST Beginning balance (647) (717) (422) Shares issued to RSU Trust (403) (231) (441) RSUs exchanged for Common Stock 223 301 146 - ------------------------------------------------------------------------------------------------------- Ending balance (827) (647) (717) - ------------------------------------------------------------------------------------------------------- DEFERRED STOCK COMPENSATION Beginning balance (1,280) (797) (627) Deferred stock awards granted (624) (1,003) (533) Amortization of deferred compensation, net 544 520 363 - ------------------------------------------------------------------------------------------------------- Ending balance (1,360) (1,280) (797) - ------------------------------------------------------------------------------------------------------- COMMON STOCK IN TREASURY, AT COST Beginning balance (835) (150) (430) Treasury stock purchased (1,676) (1,203) (353) RSUs exchanged for Common Stock 5 - - Shares issued for preferred stock conversion 44 - - Employee stock-based awards 69 77 11 Shares issued to RSU Trust 1,031 441 622 - ------------------------------------------------------------------------------------------------------- Ending balance (1,362) (835) (150) - ------------------------------------------------------------------------------------------------------- Total stockholders' equity $ 8,459 $ 7,781 $ 6,283 - ------------------------------------------------------------------------------------------------------- (2) Net of income taxes of $(1) in 2001, $(8) in 2000 and $(11) in 1999.
See Notes to Consolidated Financial Statements. 63 CONSOLIDATED STATEMENT OF CASH FLOWS
In millions Twelve months ended November 30 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 1,255 $ 1,775 $ 1,132 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 174 102 88 Deferred tax provision (benefit) (643) (169) (145) Tax benefit from issuance of stock-based awards 549 373 90 Amortization of deferred stock compensation 544 520 363 Special charge 356 - - Other adjustments (1) 65 (129) Net change in: Cash and securities segregated and on deposit (855) (445) (806) Securities and other financial instruments owned (13,219) (16,148) (12,059) Securities borrowed (376) 1,779 (3,056) Receivables from brokers, dealers and clearing organizations (1,793) 12 624 Receivables from customers (4,538) 1,747 (1,574) Securities and other financial instruments sold but not yet purchased 16,045 (11,325) 17,807 Securities loaned 5,299 2,674 1,403 Payables to brokers, dealers and clearing organizations 883 738 (138) Payables to customers 2,194 666 1,768 Accrued liabilities and other payables 1,130 4,041 377 Other operating assets and liabilities, net (325) (1,138) 596 - -------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 6,679 (14,733) 6,341 - -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of senior notes 9,915 14,225 9,753 Principal payments of senior notes (7,646) (8,353) (6,037) Proceeds from issuance of subordinated indebtedness - - 200 Principal payments of subordinated indebtedness (204) (192) (370) Net proceeds from (payments for) commercial paper and short-term debt(935) 324 (1,181) Resale agreements net of repurchase agreements (7,182) 10,122 (6,488) Payments for repurchases of preferred stock (100) (88) (220) Payments for treasury stock purchases (1,676) (1,203) (353) Dividends paid (163) (149) (139) Issuances of common stock 54 99 8 Issuance of preferred stock, net of issuance costs - 250 - Issuance of trust preferred securities, net of issuance costs - - 690 - -------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (7,937) 15,035 (4,137) - -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, equipment and leasehold improvements, net (1,341) (287) (73) Acquisition, net of cash acquired - (41) - - -------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (1,341) (328) (73) - -------------------------------------------------------------------------------------------------------------------- Net change in cash and cash equivalents (2,599) (26) 2,131 - -------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, beginning of period 5,160 5,186 3,055 - -------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 2,561 $ 5,160 $ 5,186 - -------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions) Interest paid totaled $15,588 in 2001, $18,500 in 2000 and $13,513 in 1999. - -------------------------------------------------------------------------------------------------------------------- Income taxes paid totaled $654 in 2001, $473 in 2000 and $103 in 1999. - --------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 64 Notes to consolidated financial statements Note 1 Summary of Significant Accounting Policies 66 Note 2 Special Charge 69 Note 3 Short-Term Financings 70 Note 4 Long-Term Debt 71 Note 5 Preferred Securities Subject to Mandatory Redemption 73 Note 6 Preferred Stock 74 Note 7 Common Stock 75 Note 8 Incentive Plans 76 Note 9 Earnings Per Common Share 79 Note 10 Capital Requirements 80 Note 11 Employee Benefit Plans 81 Note 12 Income Taxes 82 Note 13 Securities Pledged as Collateral 84 Note 14 Derivative Financial Instruments 84 Note 15 Fair Value of Financial Instruments 88 Note 16 Other Commitments and Contingencies 89 Note 17 Segments 91 Note 18 Quarterly Information (unaudited) 93 65 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. 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 estimates are required to be utilized in determining the valuation of trading inventory particularly in the area of OTC derivatives and private equity securities. Additionally, management estimates are required in assessing the realizability of deferred tax assets, the outcome of litigation and determining the components of the 2001 special charge. 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 for securities transactions. Certain prior period amounts reflect reclassifications to conform to the current year'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, or if liquidating the Company's position is reasonably expected to affect market prices, fair value is either determined based on internal valuation pricing models which take into account time value and volatility factors underlying the financial instruments, or management's estimate of the amounts that could be realized under current market conditions, assuming an orderly liquidation over a reasonable period of time. As of November 30, 2001, all firm-owned securities pledged to counterparties where the counterparty has the right, by contract or custom, to sell or repledge the securities are classified as Securities Owned Pledged as Collateral as required by Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 140 does not require the restatement of prior year balances, therefore, such securities as of November 30, 2000 are classified within their respective inventory categories. 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. Derivatives are often referred to as off-balance-sheet instruments since neither their notional amounts nor the underlying instruments are reflected as assets or liabilities of the Company. Instead, the market or fair value related to the derivative transactions is reported in the Consolidated Statement of Financial Condition as an asset or liability in Derivatives and other contractual agreements, as applicable. Margin on futures contracts is included in receivables and payables from/to brokers, dealers and clearing organizations, 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 66 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. As an end-user, the Company primarily utilizes derivatives to modify the interest rate characteristics of its long-term debt and secured financing activities. The Company also utilizes equity derivatives to hedge its exposure to equity price risk embedded in certain of its debt obligations and foreign exchange forwards to manage the currency exposure related to its net monetary investment in non-U.S. dollar functional currency operations (collectively, "end-user derivative activities"). Effective December 1, 2000, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" (collectively, "SFAS 133"), which requires that all derivative instruments be reported on the consolidated statement of financial condition at fair value. SFAS 133 changed the Company's accounting methodology applied to its end-user derivative activities, however, the adoption of SFAS 133 had no effect on the accounting for the Company's trading-related derivative activities, as such derivatives were already recorded on a fair value basis. Under SFAS 133, the accounting for end-user derivative activities is dependent upon the nature of the hedging relationship. In certain hedging relationships, both the derivative and the hedged item will be marked-to-market through earnings for changes in fair value ("fair value hedge"). In many instances the hedge relationship is fully effective so that the mark-to-market on the derivative and the hedged item will offset. In other hedging relationships, the derivative will be marked-to-market with the offsetting gains or losses recorded in Accumulated Other Comprehensive Income, a component of Stockholder's Equity, until the hedged item is realized in earnings ("cash flow hedge"). SFAS 133 also requires certain derivatives embedded in long-term debt to be bifurcated and marked-to-market through earnings. SFAS 133 changed the accounting treatment for the hedged item in a fair value hedge (e.g., long-term debt or secured financing activities) from what was an accrual basis to a modified mark-to-market value. The hedged item's carrying value may differ from a full mark-to-market value since SFAS 133 requires that the hedged item be adjusted only for changes in fair value associated with the designated risks being hedged during the hedge period. The Company principally utilizes fair value hedges to convert a substantial portion of the Company's fixed rate debt and certain long-term secured financing activities to floating interest rates. Any hedge ineffectiveness in these relationships is recorded as a component of interest expense on the Company's Statement of Income. Gains or losses from revaluing foreign exchange contracts associated with hedging the Company's net investments in foreign affiliates are reported within Accumulated Other Comprehensive Income in Stockholder's Equity. Unrealized receivables/payables resulting from the mark-to-market on end-user derivatives are included in Securities and Other Financial Instruments Owned or Sold but not yet Purchased. The adoption of SFAS 133, as of December 1, 2000, did not have a material effect on the Company's consolidated statement of financial condition or the results of operations, as most of the Company's derivative transactions are entered into for trading-related activities for which the adoption of SFAS 133 had no impact. Prior year amounts have not been restated to conform with the current SFAS 133 accounting treatment. Therefore, end-user derivative activities for all periods prior to December 1, 2001 are recorded on an accrual basis provided that the derivative was designated and deemed to be a highly effective hedge. For periods prior to 2001, realized gains or losses on early terminations of derivatives that were designated as hedges were deferred and amortized to interest income or interest expense over the remaining life of the instrument being hedged. SECURED FINANCING ACTIVITIES 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 67 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. The Company utilizes interest rate swaps as an end-user to modify the interest rate exposure associated with certain fixed rate resale and repurchase agreements. In 2001, and in accordance with SFAS No. 133, the Company adjusted the carrying value of these secured financing transactions that had been designated as the hedge. 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 each underlying investment. As the general partner in its private equity funds, the Company may be entitled to receive a preferred distribution of realized profits. 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 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 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. SECURITIZATIONS. The Company is a market leader in mortgage- and asset-backed securitizations and other structured financing arrangements. In connection with these activities, the Company utilizes special purpose entities principally for (but not limited to) the securitization of commercial and residential mortgages, home equity loans, government and corporate bonds, and lease and trade receivables. The Company derecognizes financial assets transferred in securitizations provided that the Company has relinquished control over such assets. The Company may retain an interest in the financial assets it securitizes ("Retained Interests") which may include assets in the form of residual interests in the special purpose entities established to facilitate the securitization. Any Retained Interests are included in Securities and Other Financial Instruments Owned within the Company's Statement of Financial Condition. The Company records its Securities and Other Financial Instruments Owned, including Retained Interests, at fair value with changes in fair value reported in earnings. Fair value is determined based upon listed market prices, if available. When 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 among other factors. During the fiscal year-ended 2001, the Company securitized approximately $110 billion of financial assets. As of November 30, 2001, the Company had approximately $1.6 billion of non-investment grade retained interests from its securitization activities. The Company records its Retained Interests at fair value and actively manages market risk exposures associated with Retained Interests. 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 68 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 estimated useful life of the software. 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 7 and 9 of Notes to Consolidated Financial Statements for more information. NOTE 2. SPECIAL CHARGE As a result of the September 11, 2001 terrorist attack, the Company's leased facilities in the World Trade Center were destroyed and its leased and owned facilities in the World Financial Center ("WFC") complex (including the 3 World Financial Center building owned jointly with American Express) were significantly damaged. All employees and operations in the downtown New York area were displaced. Key business activities and necessary support functions were quickly relocated to the Company's back-up facilities in New Jersey and to various other temporary sites. The Company has been informed that the facilities in the World Financial Center complex can be repaired; however, the damage to many of the floors that had been occupied by the Company at the 3 WFC location is significant. A repair and remediation plan is currently under way although a completion date has not been finalized. Consequently, the Company purchased a new one million-square-foot building at 745 Seventh Avenue in New York City during the fourth quarter of 2001 and is relocating its principal executive and operating offices to this site in 2002. New long-term lease agreements were also executed for other space in midtown Manhattan. As a result, the Company is currently evaluating its space needs and exploring its alternatives with respect to 3 WFC and the other downtown New York facilities. The Company has significant levels of insurance in place to cover the losses resulting from the terrorist attack including a policy covering damage to the core and shell of the 3 WFC building and a separate policy covering the property damage of the WTC and WFC facilities, losses resulting from business interruption and extra expenses associated with the Company's relocation to, and occupancy of, the temporary facilities. 69 During the fourth quarter, the Company recognized a pretax special charge of $127 million ($71 million after-tax) associated with the net losses stemming from the events of September 11, 2001. These losses and costs include the write-off of property damaged, destroyed or abandoned at the Company's downtown facilities (approximately $340 million), compensation paid to employees in lieu of utilizing external consultants for business recovery efforts and to employees for the time they were idled (approximately $100 million), costs incurred to maintain the facilities while they are unusable (approximately $16 million), and other costs associated with redeployment of the Company's workforce to the temporary facilities (approximately $31 million). The losses and costs were offset by estimated insurance recoveries of $360 million. All expenses associated with the Company's use of temporary facilities during this period have been reflected as part of occupancy or technology and communications expenses in the accompanying consolidated statement of income. The charge does not reflect any loss resulting from the damage to the core and shell of the Company's 3 WFC facility, as this amount is not yet known. However, the Company believes that any loss will be fully recoverable under the Company's building core and shell insurance policy. The insurance recovery recorded through November 30, 2001 has been limited to the net historical book value of assets believed damaged, destroyed or abandoned and the out-of-pocket costs for certain extra expenses incurred during the period. The displacement and relocation of the Company's New York workforce, the closure of certain markets for certain periods following the terrorist attack and other issues directly related to the September 11 tragedy have negatively impacted the Company's business. The Company is in the process of pursing a business interruption claim with its insurance carriers for lost revenue and related damages. As of November 30, 2001, the Company has not given any accounting recognition to the anticipated business interruption recovery. NOTE 3. 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. 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 $1 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 tangible net worth. During 2001, the Company elected to reduce the committed amount under the Credit Agreement to $1 billion from $2 billion. The Company's commercial paper and short-term debt financing, and its weighted-average interest rates, were as follows: In millions November 30 2001 2000 - ---------------------------------------------------------------------------- Commercial paper $1,986 $3,643 Short-term debt Secured bank loans 672 320 Payables to banks 502 687 Other short-term debt(1) 1,705 1,150 - ---------------------------------------------------------------------------- Total $4,865 $5,800 - ---------------------------------------------------------------------------- November 30 2001 2000 Commercial paper 3.0% 6.5%(2) Short-term debt(3) 2.8% 5.5% Securities sold under agreements to repurchase 2.7% 6.0% - ---------------------------------------------------------------------------- (1) Includes master notes, corporate loans and other short-term financings. (2) Includes weighted-average interest rate of 6.9% and 3.0% as of November 30, 2000 related to U.S. dollar and non-U.S. dollar obligations, respectively. (3) Includes $827 million and $587 million of short-term debt with weighted-average interest rates of 3.0% and 3.3% as of November 30, 2001 and 2000, respectively, related to non-U.S. dollar obligations. 70 In October 2001, 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. NOTE 4. LONG-TERM DEBT
U.S. DOLLAR NON-U.S. DOLLAR ------------------ ------------------ In millions Fixed Floating Fixed Floating November 30 Rate Rate Rate Rate 2001 2000 - --------------------------------------------------------------------------------------------------------------------------- SENIOR NOTES Maturing in Fiscal 2001 $ 6,782 Maturing in Fiscal 2002 $ 1,961 $ 4,397 $ 835 $ 858 $ 8,051 5,873 Maturing in Fiscal 2003 2,341 2,322 694 595 5,952 4,989 Maturing in Fiscal 2004 1,755 1,180 1,092 679 4,706 3,582 Maturing in Fiscal 2005 2,360 615 242 605 3,822 3,759 Maturing in Fiscal 2006 3,066 83 522 409 4,080 1,456 December 1, 2006 and thereafter 5,462 505 1,376 1,419 8,762 5,665 - --------------------------------------------------------------------------------------------------------------------------- Senior Notes 16,945 9,102 4,761 4,565 35,373 32,106 - --------------------------------------------------------------------------------------------------------------------------- SUBORDINATED INDEBTEDNESS Maturing in Fiscal 2001 200 Maturing in Fiscal 2002 450 33 - - 483 488 Maturing in Fiscal 2003 475 - - - 475 475 Maturing in Fiscal 2004 191 - - - 191 191 Maturing in Fiscal 2005 94 - 7 - 101 101 Maturing in Fiscal 2006 300 - - - 300 300 December 1, 2006 and thereafter 1,219 152 7 - 1,378 1,372 - --------------------------------------------------------------------------------------------------------------------------- Subordinated Indebtedness 2,729 185 14 - 2,928 3,127 - --------------------------------------------------------------------------------------------------------------------------- Long-Term Debt $19,674 $ 9,287 $ 4,775 $ 4,565 $38,301 $35,233 - ---------------------------------------------------------------------------------------------------------------------------
Of the Company's long-term debt outstanding as of November 30, 2001, $674 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 2002 to fiscal 2008, rather than at their contractual maturities, which range from fiscal 2004 to fiscal 2026. In addition, $1,320 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, 2001, the Company's U.S. dollar and non-U.S. dollar debt portfolios included approximately $1,215 million and $1,801 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. 71 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 primarily utilizes interest rate swaps to convert a substantial portion of the Company's fixed rate debt to floating interest rates to more closely match the terms of 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. Effective 2001, the Company adopted SFAS 133 and as such all end-user derivatives at November 30, 2001 are recorded at fair value on the balance sheet (see Note 1: Significant Accounting Policies-Derivative Financial Instruments). The Company adjusted the carrying value of its hedged fixed rate debt to a modified mark-to-market value in accordance with SFAS 133, as such debt was designated as the hedged item of a fair value hedge. At November 30, 2001 and 2000, the notional amounts of the Company's interest rate, currency and equity swaps related to its long-term debt obligations were approximately $35.1 billion and $26.9 billion, respectively. In terms of notional amounts outstanding, these derivative products mature as follows: NOTIONAL AMOUNTS OF END-USER DERIVATIVE ACTIVITIES
FAIR VALUE HEDGE OTHER(2) -------------------------- ------------------- In millions U.S. Non-U.S. Cross- U.S. Non-U.S. November 30 Dollar Dollar Currency Dollar Dollar 2001 2000 - --------------------------------------------------------------------------------------------------------------------------------- Maturing in Fiscal 2001 $ 3,264 Maturing in Fiscal 2002 $ 1,713 $ 849 $ 625 $ 1,150 $ 347 $ 4,684 4,516 Maturing in Fiscal 2003 2,473 671 174 1,076 186 4,580 4,173 Maturing in Fiscal 2004 1,651 819 869 1,244 148 4,731 2,977 Maturing in Fiscal 2005 2,246 202 722 140 132 3,442 3,345 Maturing in Fiscal 2006 3,200 507 522 126 423 4,778 475 December 1, 2006 and thereafter 6,657 1,319 1,691 757 2,438 12,862 8,158 - --------------------------------------------------------------------------------------------------------------------------------- Total $17,940 $ 4,367 $ 4,603 $ 4,493 $ 3,674 $35,077 $26,908 - --------------------------------------------------------------------------------------------------------------------------------- Weighted-average interest rate at November 30(1): - --------------------------------------------------------------------------------------------------------------------------------- Receive rate 7.46% 4.54% 3.34% 3.43% 4.70% 5.32% 6.54% - --------------------------------------------------------------------------------------------------------------------------------- Pay rate 3.12% 3.77% 2.68% 2.59% 3.84% 2.81% 7.13% - ---------------------------------------------------------------------------------------------------------------------------------
(1) Weighted-average interest rates were calculated utilizing non-U.S. dollar interest rates, where applicable. (2) Other derivatives include basis swaps and hedges of embedded derivatives. 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: EFFECTIVE WEIGHTED-AVERAGE INTEREST RATES OF LONG-TERM DEBT
LONG-TERM DEBT WEIGHTED-AVERAGE(1) - ------------------------------------------------------------------------------------------------------------------- Before After Contractual Effective Rate In millions End-User End-User Interest After End-User November 30, 2001 Activities Activities Rate Activities - ------------------------------------------------------------------------------------------------------------------- USD Obligations Fixed rate $19,674 $ 537 Floating rate 9,287 32,702 - ------------------------------------------------------------------------------------------------------------------- 28,961 33,239 - ------------------------------------------------------------------------------------------------------------------- Non-USD Obligations 9,340 5,062 - ------------------------------------------------------------------------------------------------------------------- Total $38,301 $38,301 5.19% 2.89% - ------------------------------------------------------------------------------------------------------------------- In millions November 30, 2000 - ------------------------------------------------------------------------------------------------------------------- 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% - -------------------------------------------------------------------------------------------------------------------
(1) Weighted-average interest rates were calculated using non-U.S. dollar interest rates, where applicable. 72 NOTE 5. PREFERRED SECURITIES SUBJECT TO MANDATORY REDEMPTION Preferred securities subject to mandatory redemption are composed of the following issues: PREFERRED SECURITIES SUBJECT TO MANDATORY REDEMPTION
In millions November 30 2001 2000 - ------------------------------------------------------------------------------------------ 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 $710 $860 - ------------------------------------------------------------------------------------------
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, 2001:
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 and were redeemed during the first quarter of 2001. 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 of 2000, the Company exercised its option to redeem the remaining shares of Cumulative Convertible Voting Preferred Stock, Series A and B (together the "Convertible Voting Preferred"). 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 announcement of its intention to redeem the Convertible Voting Preferred, the $150 million aggregate redemption value was transferred on the Company's Statement of Financial Condition at November 30, 2000, from Preferred stock to Preferred securities subject to mandatory redemption. The redemption was effective on December 15, 2000, and as of that date the Convertible Voting Preferred Shares were no longer outstanding. 73 NOTE 6. PREFERRED STOCK Holdings is authorized to issue a total of 38,000,000 shares of preferred stock. At November 30, 2001, Holdings had 591,000 shares issued and outstanding under various series as described below. 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, 2001 is classified on the Company's Consolidated Statement of Financial Condition as a component of Preferred stock. 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, 2001 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, 2001 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 each fiscal year exceeds $400 million, up to a maximum of $50 million per year. For the last dividend period, which runs from December 1, 2001 to May 31, 2002, holders are entitled to receive a dividend equal to 50% of the amount, if any, by which the Company's net income for the first six months of fiscal 2002 exceeds $200 million, up to a maximum of $25 million. For the years ended November 30, 2001, 2000 and 1999, the Company's net income resulted in the recognition of dividends in each year in the amount of $50 million on the Redeemable Voting Preferred Stock. Holdings is required to redeem all of the Redeemable Preferred Stock on the final dividend payment, July 15, 2002, for a total of $1,000. In the event of a change of control of the Company, holders of the Redeemable Preferred Stock had 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 occurred prior to November 30, 2001. If a change of control was not approved by a majority of Holdings' Board of Directors, the funds for redemption would have had to be raised by an offering of Holdings' equity securities, which were not redeemable. The Redeemable Preferred Stock is not convertible into common stock. 74 NOTE 7. COMMON STOCK In 2000, Lehman Brothers' Board of Directors declared a two-for-one common split, effected in the form of a 100% stock dividend. All share and per share data presented in this Annual Report to Stockholders reflect the effect of the split. In April 2001, the Company's shareholders approved the adoption of an amendment of the Company's Restated Certificate of Incorporation to increase the aggregate number of authorized shares of common stock from 300 million to 600 million. Changes in shares of Holdings' common stock outstanding are as follows: COMMON STOCK
November 30 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------ Shares outstanding, beginning of period 236,395,332 239,825,620 227,315,754 Exercise of stock options and other share issuances 8,369,721 10,015,048 1,925,642 Treasury stock purchases (23,230,962) (25,245,336) (12,415,776) Issuances of shares to the RSU Trust 16,000,000 11,800,000 23,000,000 - ------------------------------------------------------------------------------------------------------------------ Shares outstanding, end of period 237,534,091 236,395,332 239,825,620 - ------------------------------------------------------------------------------------------------------------------
During the years ended November 30, 2001, 2000 and 1999, the Company repurchased or acquired shares of its Common Stock at an aggregate cost of approximately $1,676 million, $1,203 million and $353 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 2001, 2000 and 1999, 16.0 million, 11.8 million and 23.0 million Treasury shares, respectively, were transferred into the RSU Trust. At November 30, 2001, approximately 45.7 million shares were held in the RSU Trust with a total value of approximately $827 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. 75 NOTE 8. 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, 2001 and 2000, 5.5 million shares and 5.2 million shares, respectively, of Common Stock had cumulatively 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, 2001, a total of 3.9 million awards had been granted under the Replacement Plan, including both stock options and restricted stock; 0.1 million shares were outstanding at November 30, 2001. 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, 2001, RSU, PSU and stock option awards with respect to 31.1 million shares of Common Stock have been made under the 1994 Plan of which 1.5 million are outstanding and 29.6 million have been converted to freely transferable Common Stock. The Company will utilize the remaining authorization of 2.2 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, 2001, RSU, PSU and stock option awards with respect to 31.4 million shares of Common Stock have been made under the 1996 Plan of which 18.9 million are outstanding and 12.5 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 from the Board of Directors for the issuance of up to 196.0 million shares of Common Stock which may be subject to awards. At November 30, 2001, awards with respect to 157.8 million shares of Common Stock have been made under the EIP of which 124.3 million are outstanding and 33.5 million have been converted to freely transferable Common Stock. 76 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, 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 - ----------------------------------------------------------------------------------------------------------------------------------- Granted 6,455 73,093 15,212,899 15,292,447 Canceled (1,049,608) (898,037) (1,321,180) (3,268,825) Exchanged for stock without restrictions (388,967) (662,854) (17,137,271) (18,189,092) - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE, NOVEMBER 30, 2001 962,732 6,199,822 69,294,517 76,457,071 - -----------------------------------------------------------------------------------------------------------------------------------
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 2001, the Company delivered 11.8 million shares of its Common Stock to current and former employees in satisfaction of RSUs awarded in 1996. Substantially all of the shares delivered were funded from the RSU Trust. The Company also received 3.4 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 $257 million. Of the RSUs outstanding at November 30, 2001, approximately 21.9 million RSUs were vested, approximately 14.7 million RSUs will vest during fiscal 2002, and the remaining RSUs will vest subsequent to November 30, 2002. Included in the previous table are PSUs the Company has awarded 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. During the performance period these PSUs are accounted for as variable awards. 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 November 30, 2001, approximately 9.1 million PSUs have been awarded 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 2001, 2000 and 1999 for the Company's stock-based awards was approximately $544 million, $520 million and $363 million, respectively. At November 30, 2001 and 2000, approximately 14.8 million and 18.0 million stock options, respectively, were exercisable at weighted-average prices of $25.04 and $22.49, respectively. 77
STOCK OPTIONS Weighted- Average 1994 Replacement 1996 Exercise Expiration Plan Plan Plan EIP Total Price Dates - ----------------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------------- Granted 49,102 2,550,000 18,930,742 21,529,844 $53.28 Exercised (10,000) (209,234) (3,645,584) (2,396,212) (6,261,030) $16.49 Canceled (4,762) (1,437,477) (1,442,239) $27.01 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE, NOVEMBER 30, 2001 524,404 138,334 12,714,500 55,016,976 68,394,214 $37.53 1/02-11/11 - -----------------------------------------------------------------------------------------------------------------------------------
The weighted-average remaining contractual life of the stock options outstanding at November 30, 2001 is 5.84 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, 2001:
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-$ 9.99 505,454 $ 9.00 1.94 505,454 $ 9.00 1.94 $10.00-$19.99 293,573 $16.21 1.47 254,563 $15.65 0.47 $20.00-$29.99 23,413,598 $23.28 3.78 9,322,884 $22.09 2.91 $30.00-$39.99 17,268,804 $33.52 4.63 4,557,814 $32.75 3.20 $40.00-$49.99 14,295,658 $47.83 9.17 120,014 $49.06 4.62 $50.00-$59.99 4,199,102 $51.37 4.06 $60.00-$69.99 8,418,025 $63.40 9.65 - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, NOVEMBER 30, 2001 68,394,214 $37.53 5.84 14,760,729 $25.04 2.94 - --------------------------------------------------------------------------------------------------------------------------------
78 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 2001, 2000 and 1999. Based on the results of the model, the weighted-average fair value of the stock options granted was $13.54, $9.91 and $6.99 for 2001, 2000 and 1999, respectively. The weighted-average assumptions which were used for 2001, 2000 and 1999 included risk-free interest rates of 4.16%, 6.27% and 5.25%, an expected life of 4.5 years, 3.6 years and 3.5 years, and expected volatility of 30%, 35% and 35%, respectively. In addition, annual dividends of $0.28, $0.22 and $0.18 were assumed for the 2001, 2000 and 1999 options, respectively. The Company's 2001, 2000 and 1999 pro forma net income would have been $1,183 million, $1,725 million and $1,091 million, respectively, compared to actual net income of $1,255 million, $1,775 million and $1,132 million, respectively. Pro forma earnings per common share for 2001, 2000 and 1999 would have been $4.20, $6.32 and $3.99, respectively, compared to actual earnings per common share of $4.38, $6.38 and $4.08, 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 9. EARNINGS PER COMMON SHARE Earnings per share was calculated as follows: EARNINGS PER COMMON SHARE
Three years ended In millions, except for per share data 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------------- NUMERATOR: Net income $1,255 $1,775 $1,132 Preferred stock dividends 94 96 95 - ----------------------------------------------------------------------------------------------------------------------------------- Numerator for basic earnings per share--income available to common stockholders $1,161 $1,679 $1,037 Convertible preferred stock dividends - 8 17 - ----------------------------------------------------------------------------------------------------------------------------------- Numerator for diluted earnings per share--income available to common stockholders (adjusted for assumed conversion of preferred stock) $1,161 $1,687 $1,054 - ----------------------------------------------------------------------------------------------------------------------------------- DENOMINATOR: Denominator for basic earnings per share--weighted-average shares 243.1 243.8 243.0 Effect of dilutive securities: Employee stock options 16.2 13.0 6.2 Restricted stock units 6.0 5.0 3.8 Preferred shares assumed converted into common - 2.4 5.6 Dilutive potential common shares 22.2 20.4 15.6 Denominator for diluted earnings per share--adjusted weighted-average shares 265.3 264.2 258.6 - ----------------------------------------------------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE $ 4.77 $ 6.89 $ 4.27 - ----------------------------------------------------------------------------------------------------------------------------------- DILUTED EARNINGS PER SHARE $ 4.38 $ 6.38 $ 4.08 - -----------------------------------------------------------------------------------------------------------------------------------
79 For 2000 and 1999, 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 exceed preferred dividends per share obtainable upon conversion (approximately $3.08 on an annualized basis). NOTE 10. 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, 2001, LBI's regulatory net capital, as defined, of $1,771 million exceeded the minimum requirement by $1,589 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, 2001, LBIE's financial resources of approximately $2,389 million exceeded the minimum requirement by approximately $703 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, 2001, had net capital of approximately $302 million which was approximately $129 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, 2001, these other subsidiaries were in compliance with their applicable local capital adequacy requirements. In addition, the Company's "AAA" rated derivatives subsidiaries, Lehman Brothers Financial Products Inc. ("LBFP") and Lehman Brothers Derivative Products Inc. ("LBDP"), have established certain capital and operating restrictions which are reviewed by various rating agencies. At November 30, 2001, LBFP and LBDP each had capital which exceeded the requirement of the most stringent rating agency by approximately $68 million and $27 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, 2001, approximately $5.3 billion of net assets of subsidiaries were restricted as to the payment of dividends to Holdings. 80 NOTE 11. 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: EMPLOYEE BENEFIT PLANS
Pension Benefits Postretirement Benefits NOVEMBER 30 NOVEMBER 30 -------------------- -------------------------- In millions, Except for weighted-average 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $667 $654 $ 50 $ 47 Service cost before expenses 15 14 1 1 Interest cost 49 46 3 4 Actuarial (gain) loss 67 (5) 1 Change due to discount rate 4 3 Benefits paid (24) (23) (4) (3) Foreign currency exchange rate changes (2) (19) - ----------------------------------------------------------------------------------------------------------------------------------- Benefit obligation at end of year $776 $667 $ 53 $ 50 - ----------------------------------------------------------------------------------------------------------------------------------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $914 $918 Actual return on plan assets, net of expenses (88) 36 Employer contribution 2 2 Benefits paid (24) (23) Foreign currency exchange rate changes (1) (19) - ----------------------------------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year $803 $914 - ----------------------------------------------------------------------------------------------------------------------------------- Funded (underfunded) status $ 27 $247 $ (53) $(50) Unrecognized net actuarial (gain) loss 284 31 (19) (22) Unrecognized prior service cost (credit) 20 17 (4) (5) - ----------------------------------------------------------------------------------------------------------------------------------- Prepaid (accrued) benefit cost $331 $295 $ (76) $(77) - ----------------------------------------------------------------------------------------------------------------------------------- WEIGHTED-AVERAGE ASSUMPTIONS Discount rate 6.89% 7.42% 7.25% 7.75% Expected return on plan assets 10.81% 10.88% Rate of compensation increase 4.82% 4.96% 5.00% 5.00%
COMPONENTS OF NET PERIODIC BENEFIT COST
Pension Benefits Postretirement Benefits Twelve Months Ended Twelve Months Ended NOVEMBER 30 NOVEMBER 30 ------------------------------- ----------------------------- In millions 2001 2000 1999 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------- Service cost $ 15 $ 14 $ 22 $ 1 $ 1 $ 1 Interest cost 49 46 45 3 4 4 Expected return on plan assets (97) (96) (77) - - - Recognized net actuarial (gain) loss - 1 2 (1) (2) (2) Unrecognized prior service cost (credit) 1 1 2 - ---------------------------------------------------------------------------------------------------------------------------- Net periodic benefit (income) cost $(32) $(34) $ (6) $ 3 $ 3 $ 3 - ----------------------------------------------------------------------------------------------------------------------------
81 For measurement purposes, the annual health care cost trend rate was assumed to be 6.5% for the year ended November 30, 2002. The rate was assumed to decrease 0.5% per year to 5.5% in the year ended November 30, 2004 and remain at that level thereafter. 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 2001 $ 0.3 $(0.3) Effect on postretirement benefit obligation at November 30, 2001 $ 3.4 $(3.4) - ----------------------------------------------------------------------------------------------------------------------------
NOTE 12. 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: INCOME TAXES In millions Twelve months ended November 30 2001 2000 1999 - -------------------------------------------------------------------------------- CURRENT Federal $ 491 $ 295 $ 121 State 148 45 117 Foreign 441 577 364 - -------------------------------------------------------------------------------- 1,080 917 602 - -------------------------------------------------------------------------------- DEFERRED Federal (406) (114) 2 State (65) (54) (54) Foreign (172) (1) (93) - -------------------------------------------------------------------------------- Provision for income taxes $ 437 $ 748 $ 457 - -------------------------------------------------------------------------------- Income before taxes included ($50) million, $1,287 million and $595 million that has also been subject to income taxes of foreign jurisdictions for 2001, 2000 and 1999, respectively. The income tax provision differs from that computed by using the statutory federal income tax rate for the reasons shown below: In millions Twelve months ended November 30 2001 2000 1999 - -------------------------------------------------------------------------------- Federal income taxes at statutory rate $ 612 $ 903 $ 571 State and local taxes 54 (6) 41 Tax-exempt income (176) (130) (109) Amortization of goodwill 2 2 2 Foreign operations (55) (15) (6) Other, net - (6) (42) - -------------------------------------------------------------------------------- (643) (169) (145) - -------------------------------------------------------------------------------- Provision for income taxes $ 437 $ 748 $ 457 - -------------------------------------------------------------------------------- 82 The decrease in the effective tax rate in 2001 was primarily due to a greater impact of permanent differences due to a decrease in the level of pretax income, an increase in tax-exempt income and a higher level of income from foreign operations. Income tax benefit of approximately $549 million, $373 million and $90 million were allocated to Additional paid-in capital related to various employee compensation plans for 2001, 2000 and 1999. In addition, the Company recorded $(1) million, $(8) million and $(11) million of tax (benefits)/provisions from the translation of foreign currencies, which was recorded directly in Accumulated Other Comprehensive Income, for the fiscal years 2001, 2000 and 1999, respectively. These benefits will reduce the amount of current income taxes payable. The Company permanently reinvested its earnings in certain foreign subsidiaries. As of November 30, 2001, $217 million of the Company's accumulated earnings were permanently reinvested. At current tax rates, additional federal income taxes (net of available tax credits) of $70 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. At November 30, 2001 and 2000 the deferred tax assets and liabilities consisted of the following: DEFERRED TAX ASSETS AND LIABILITIES
In millions November 30 2001 2000 - ----------------------------------------------------------------------------------------- DEFERRED TAX ASSETS Liabilities/accruals not currently deductible $ 459 $ 439 Deferred compensation 782 641 Unrealized trading activity 101 75 Foreign tax credits 168 33 Undistributed earnings of foreign subsidiaries (net of credits) 241 12 NOL carryforwards 113 5 Other 103 95 - ----------------------------------------------------------------------------------------- $ 1,967 $ 1,300 Less: Valuation allowance (18) (18) - ----------------------------------------------------------------------------------------- Total deferred tax assets net of valuation allowance $ 1,949 $ 1,282 - ----------------------------------------------------------------------------------------- DEFERRED TAX LIABILITIES Excess tax over financial depreciation $ (119) $ (121) Pension and retirement costs (96) (78) Other (55) (57) - ----------------------------------------------------------------------------------------- Total deferred tax liabilities $ (270) $ (256) - ----------------------------------------------------------------------------------------- Net Deferred Tax Assets $ 1,679 $ 1,026 - -----------------------------------------------------------------------------------------
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, 2001 and 2000 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 $242 million of NOL carryforwards, substantially all of which are scheduled to expire in 2021. The Company also has $168 million of foreign tax credit carryforwards which will expire in 2006. 83 NOTE 13. SECURITIES PLEDGED AS COLLATERAL The Company enters into secured borrowing and lending transactions to finance trading inventory positions, obtain securities for settlement, and meet customers' needs. The company primarily receives collateral in connection with resale agreements, securities borrowed transactions, customer margin loans and other loans. The Company is generally permitted to sell or repledge these securities held as collateral and use the securities to secure repurchase agreements, enter into securities lending transactions or deliver to counterparties to cover short positions. The Company carries secured financing agreements for financial reporting purposes on a net basis when permitted under the provision of Financial Accounting Standards Board Interpretations No. 41 ("FIN 41"). At November 30, 2001, the fair value of securities received as collateral and securities owned that have not been sold or repledged totaled approximately $38 billion. The gross fair value of securities received as collateral where the Company was permitted to sell or repledge the securities was approximately $245 billion. Of this collateral, approximately $234 billion has been sold or repledged, generally as collateral under repurchase agreements or to cover securities and other financial instruments sold but not yet purchased. Securities owned pledged as collateral at November 30, 2001 for which the counterparty has the right to sell or repledge are comprised of the following amounts: In millions November 30 2001 - ----------------------------------------------------------------- Securities and other financial instruments owned: Corporate equities $15,178 Corporate debt and other 10,051 Governments and agencies 2,596 Certificates of deposit and other money market instruments 692 - ----------------------------------------------------------------- Total $28,517 The carrying value of securities and other financial instruments owned that have been pledged to counterparties where those counterparties do not have the right to sell or repledge are as follows: In millions November 30 2001 - ----------------------------------------------------------------- Securities and other financial instruments owned: Mortgages and mortgage-backed $20,776 Governments and agencies 17,672 Corporate debt and other 7,199 Corporate equities 4,098 Certificates of deposit and other money market instruments 2,173 - ----------------------------------------------------------------- Total $51,918 - ----------------------------------------------------------------- NOTE 14. 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"). There is an extensive range 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 84 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, other interest rate option products including caps, collars and floors, and credit default swaps. 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. Credit derivatives are contractual agreements that provide insurance against a credit event of one or more referenced credits. The nature of the credit event is established by the buyer and seller at the inception of the transaction, and such events include bankruptcy, insolvency, rating agency downgrade and failure to meet payment obligations when due. The buyer of the credit derivative pays a periodic fee in return for a contingent payment by the seller (insurer) following a credit event. The Company acts as both a buyer and seller of credit derivatives. 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 physical settling 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, 2001 the Company had approximately $2.6 billion on deposit with futures exchanges consisting of cash and securities (customer and proprietary). 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. 85 Forwards are OTC contractual commitments to purchase or sell a specified amount of a financial instrument, foreign currency or commodity on 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. 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 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. As of November 30, 2001 and 2000, the Company had total notional/contract amounts of trading related derivative activities of $5,394 billion and $3,417 billion, respectively. Of the total notional amounts approximately $4,917 billion and $3,171 billion are over-the-counter and $477 billion and $246 billion are exchange-traded as of November 30, 2001 and 2000, respectively. The total weighted-average maturity at November 30, 2001, for over-the-counter and exchange-traded contracts was 4.39 years and 0.71 years, respectively. Approximately $1,674 billion of the notional/contract amount of the Company's Trading-Related Derivative Activities mature within the year ending November 30, 2002, of which approximately 47% 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 derivative products. Listed in the following table is the fair value of the Company's Trading-Related Derivative Activities as of November 30, 2001 and 2000. Assets and liabilities represent net unrealized gains (amounts receivable from counterparties) and net unrealized losses (amounts payable to counterparties), respectively. FAIR VALUE OF TRADING-RELATED DERIVATIVE FINANCIAL INSTRUMENTS
Fair Value* Fair Value* November 30, 2001** November 30, 2000 In millions Assets Liabilities Assets Liabilities - ----------------------------------------------------------------------------------------------------------------------------------- Interest rate, currency and credit default swaps and options (including caps, collars and floors) $ 6,482 $ 6,485 $ 4,349 $ 3,390 Foreign exchange forward contracts and options 740 1,111 902 1,361 Other fixed income securities contracts (including futures contracts, options and TBAs) 747 226 496 418 Equity contracts (including equity swaps, warrants and options) 3,586 2,502 3,836 3,399 - ----------------------------------------------------------------------------------------------------------------------------------- $11,555 $10,324 $ 9,583 $ 8,568 - -----------------------------------------------------------------------------------------------------------------------------------
* Amounts represent carrying value (exclusive of collateral) and do not include receivables or payables related to exchange-traded futures contracts. ** 2001 information includes end-user derivative activity on a mark-to-market basis in accordance with SFAS No. 133. 86 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, 2001 and 2000 represents the Company's net receivable/payable for derivative financial instruments before consideration of collateral. Included within the $11,555 million fair value of assets at November 30, 2001 was $10,555 million related to swaps and other OTC contracts and $1,000 million related to exchange-traded option and warrant contracts. Included within the $9,583 million fair value of assets at November 30, 2000 was $8,643 million related to swaps and other OTC contracts and $940 million related to exchange-traded option and warrant contracts. 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 third-parties to be $7,909 million at November 30, 2001, representing the fair value of the Company's OTC contracts in an unrealized gain position, after consideration of collateral. 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, 2001 for OTC contracts based upon actual ratings made by external rating agencies or by equivalent ratings established and utilized by the Company's Credit Risk Management Department. Counterparty S&P/ Net Credit Risk Rating Moody's Equivalent Exposure - --------------------------------------------------------------- 1 AAA/Aaa 19% 2 AA-/Aa3 or higher 30% 3 A-/A3 or higher 30% 4 BBB-/Baa3 or higher 16% 5 BB-/Ba3 or higher 3% 6 B+/B1 or lower 2% The Company's OTC contracts credit exposure by maturity is set forth below: Less Greater Counterparty than 2-5 5-10 than Risk Rating 1 Year Years Years 10 Years Total - -------------------------------------------------------------------------------- 1 3% 6% 5% 5% 19% 2 11% 14% 3% 2% 30% 3 9% 12% 3% 6% 30% 4 5% 4% 2% 5% 16% 5 1% 1% - 1% 3% 6 2% - - - 2% - -------------------------------------------------------------------------------- Total 31% 37% 13% 19% 100% - -------------------------------------------------------------------------------- The Company is also subject to credit risk related to its exchange-traded derivative contracts. Exchange-traded contracts, including futures and certain options, are transacted directly on the exchange. To protect against the potential for a default, all exchange clearinghouses impose net capital requirements for their membership. Additionally, exchange clearinghouses require counterparties to futures contracts to post margin upon the origination of the contracts and for any changes in the market value of the contracts on a daily basis (certain foreign exchanges provide for settlement within three days). Therefore, the potential for losses from exchange-traded products is limited. END-USER DERIVATIVE ACTIVITIES. The Company utilizes a variety of derivative products for non-trading purposes as an end-user to modify the interest rate characteristics of its long-term debt portfolio and certain secured financing activities. In this regard, the Company primarily enters into fair value hedges utilizing interest rate swaps to convert a substantial portion of the Company's fixed rate long-term debt and certain term fixed rate secured financing activities to a floating interest rate. The ineffective portion of the fair value hedges were included in Interest Expense on the consolidated statement of income and were not material to the Company's results for the twelve months ended November 30, 2001. At November 30, 2001 and 2000, the notional amounts of the Company's end-user activities related to its long-term debt obligations were approximately $35.1 billion and $26.9 billion, respectively. (For a further discussion of the Company's long-term debt related end-user derivative activities see Note 4.) 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. As with the 87 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. At November 30, 2001 and 2000, the Company, as an end-user, utilized derivative financial instruments with an aggregate notional amount of $8.8 billion and $8.5 billion, respectively, to modify the rate characteristics of its secured financing activities. The total notional amount of these agreements had a weighted-average maturity of 5.1 years and 3.5 years as of November 30, 2001 and 2000, respectively. NOTE 15. 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 values 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. In 2001, the Company's long-term debt is recorded at historical amounts, unless designated as the hedged item in a fair value hedge under SFAS 133. The Company carries such hedged debt on a modified mark-to-market basis, which amount could differ from fair value. In 2000, the Company's long-term debt is recorded at contractual rates. 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. In millions 2001 2000 - ------------------------------------------------------------------------------- Carrying value of long-term debt $38,301 $35,233 Fair value of long-term debt $38,458 $35,193 - ------------------------------------------------------------------------------- Unrecognized net (loss) gain on long-term debt $ (157) $ 40 - ------------------------------------------------------------------------------- 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. As with the Company's long-term debt, its secured financing activities expose the Company to interest rate risk. At November 30, 2001 and 2000, the Company, as an end-user, utilized derivative financial instruments with an aggregate notional amount of $8.8 billion and $8.5 billion, respectively, to modify the interest rate characteristics of its secured financing activities. At November 30, 2001, the carrying value of the secured financing activities designated as a fair value hedge, approximated its fair value. At November 30, 2000, the unrecognized net losses on derivatives associated with certain financing activities were $22 million, which were substantively offset by unrecognized net gains on related secured financing activities. Additionally, at November 30, 2001 and November 30, 2000, the Company had approximately $20 million and $8 million, respectively, of unrecognized losses related to approximately $8.5 billion for both years of long-term fixed rate repurchase agreements. 88 NOTE 16. OTHER COMMITMENTS AND CONTINGENCIES As of November 30, 2001 and 2000, the Company was contingently liable for $1.1 billion and $2.1 billion, respectively, 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 $2.1 billion and $3.2 billion, at November 30, 2001 and 2000, 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. The Company utilizes various hedging and funding strategies to actively manage its market, credit and liquidity exposures on these commitments. In addition, total commitments are not indicative of actual risk or funding requirements, as the commitments may not be drawn or fully utilized. These commitments and any related draw downs of these facilities typically have fixed maturity dates and are contingent upon certain representations, warranties and contractual conditions applicable to the borrower. At November 30, 2001 and 2000, the Company had net lending commitments to investment grade borrowers of $4.1 billion (gross commitments of $5.9 billion less $1.8 billion of associated hedges) and $4.3 billion ($4.4 billion of gross commitments and $0.1 billion of associated hedges), respectively. Lending commitments to non-investment grade borrowers totaled $1.4 billion and $1.3 billion at November 30, 2001 and 2000, respectively. In addition, at November 30, 2001 and 2000, the Company has pre-arranged funding facilities with third party lenders of $4.9 billion and $3.8 billion, respectively, available to it to fund draw downs against these commitments. These funding facilities contain limits for certain concentrations of counterparty, industry or credit ratings of the underlying loans. As of November 30, 2001, the Company had pledged securities, primarily fixed income, having a market value of approximately $31.8 billion, as collateral for securities borrowed having a market value of approximately $31.2 billion. At November 30, 2001, the Company had commitments to enter into forward starting secured resale and repurchase agreements of $52.3 billion and $26.5 billion, respectively, as compared to secured resale and repurchase agreements of $51.9 billion and $17.0 billion, respectively, as of November 30, 2000. 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 the Company's 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, 2001 and 2000, the Company had commitments to invest up to $555 million and $357 million, respectively, directly and through partnerships in private equity related investments. These commitments will be funded as required through the end of the respective investment periods, principally expiring in 2004. 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 89 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 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, but may be material to the Company's operating results for any particular period, depending on the level of income for such period. 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 11% of the Company's total assets at November 30, 2001. In addition, primarily all of the collateral held by the Company for resale agreements represented 34% of total assets at November 30, 2001, 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 Rock 49th LLC covering 745 Seventh Avenue, which extends through 2028, and with the Battery Park City Authority covering 3 World Financial Center, which extends through 2069. Total rent expense for 2001, 2000 and 1999 was $98 million, $47 million and $37 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 $182 million) are as follows: MINIMUM FUTURE RENTAL COMMITMENTS In millions - ----------------------------------------------------------------- Fiscal 2002 $ 138 Fiscal 2003 128 Fiscal 2004 165 Fiscal 2005 171 Fiscal 2006 175 December 1, 2006 and thereafter 3,319 - ----------------------------------------------------------------- $4,096 - ----------------------------------------------------------------- During the year, the Company entered into leases at 399 Park Avenue in New York and Canary Wharf in London which in aggregate total in excess of $2 billion of future rental commitments, which are included in the table above. 90 NOTE 17. 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 business, as well as realized and unrealized gains and losses related to the Company's direct private equity investments. The financing business manages the Company's equity and fixed income matched book activities, supplies secured financing to institutional clients and customers, and provides secured funding for the Company's inventory of equity and fixed income products. Client Services revenues reflect earnings from the Company's private client and private equity businesses. Private Client revenues reflect the Company's high-net-worth retail customer flow activities as well as asset management fees earned from these clients. Private Equity revenues include the management and incentive fees earned in the Company's role as general partner for thirty-three Private Equity partnerships. In addition, these revenues also include the appreciation of its general partnership interests. The Company's segment information for fiscal years 2001, 2000 and 1999 is presented below and was developed consistent with the accounting policies used to prepare the Company's consolidated financial statements. SEGMENTS Investment Capital Client In millions Banking Markets Services Total - -------------------------------------------------------------------------------- NOVEMBER 30, 2001 Net revenue $1,925 $4,024 $ 787 $6,736 Earnings before taxes(1)(2) $ 373 $1,322 $ 180 $1,875 Segment assets (billions) $ 1.7 $240.3 $ 5.8 $247.8 NOVEMBER 30, 2000 Net revenue $2,179 $4,689 $ 839 $7,707 Earnings before taxes(2) $ 499 $1,801 $ 279 $2,579 Segment assets (billions) $ 1.3 $218.3 $ 5.1 $224.7 NOVEMBER 30, 1999 Net revenue $1,664 $3,093 $ 583 $5,340 Earnings before taxes(2) $ 509 $ 978 $ 144 $1,631 Segment assets (billions) $ 0.9 $187.7 $ 3.6 $192.2 (1) Excludes the impact of a special charge of $127 million. (2) And before dividends on preferred securities. 91 NET REVENUES BY GEOGRAPHIC REGION In millions Twelve months ended November 30 2001 2000 1999 - ------------------------------------------------------------------------------- U.S. $4,241 $4,492 $3,160 Europe 1,955 2,389 1,650 Asia Pacific and other 540 826 530 - ------------------------------------------------------------------------------- Total $6,736 $7,707 $5,340 The following information describes the Company's methods of allocating consolidated net revenues to geographic regions. Net revenues, if origination 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. 92 NOTE 18. QUARTERLY INFORMATION (UNAUDITED) The following information represents the Company's unaudited quarterly results of operations for 2001 and 2000. 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. QUARTERLY INFORMATION (UNAUDITED)
In millions 2001 2000 --------------------------------------- ---------------------------------------------- Except per share amounts Nov. 30 Aug. 31 May 31 Feb. 28 Nov. 30 Aug. 31 May 31 Feb. 29 - ----------------------------------------------------------------------------------------------------------------------------------- Total revenues $4,300 $5,057 $6,284 $6,752 $6,414 $7,359 $6,334 $6,340 - ----------------------------------------------------------------------------------------------------------------------------------- Interest expense 3,097 3,429 4,262 4,869 4,716 5,307 4,579 4,138 - ----------------------------------------------------------------------------------------------------------------------------------- Net revenues 1,203 1,628 2,022 1,883 1,698 2,052 1,755 2,202 - ----------------------------------------------------------------------------------------------------------------------------------- Non-interest expenses: - ----------------------------------------------------------------------------------------------------------------------------------- Compensation and benefits 615 830 1,032 960 806 1,067 912 1,145 Other expenses 345 363 365 350 338 312 285 263 Special charge 127 - - - - - - - - ----------------------------------------------------------------------------------------------------------------------------------- Total non-interest expenses 1,087 1,193 1,397 1,310 1,144 1,379 1,197 1,408 - ----------------------------------------------------------------------------------------------------------------------------------- Income before taxes and dividends on trust preferred securities 116 435 625 573 554 673 558 794 - ----------------------------------------------------------------------------------------------------------------------------------- Provision for income taxes (28) 112 181 172 141 202 166 239 - ----------------------------------------------------------------------------------------------------------------------------------- Dividends on trust preferred securities 14 14 14 14 14 14 14 14 - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 130 $ 309 $ 430 $ 387 $ 399 $ 457 $ 378 $ 541 - ----------------------------------------------------------------------------------------------------------------------------------- Net income applicable to common stock $ 119 $ 298 $ 369 $ 375 $ 386 $ 444 $ 366 $ 482 - ----------------------------------------------------------------------------------------------------------------------------------- Weighted-average shares - ----------------------------------------------------------------------------------------------------------------------------------- Basic 241.9 240.4 243.9 246.2 241.9 242.3 246.3 246.1 Diluted 261.5 261.8 266.9 270.7 265.4 265.0 265.3 262.4 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings per common share - ----------------------------------------------------------------------------------------------------------------------------------- Basic $ 0.49 $ 1.24 $ 1.51 $ 1.52 $ 1.60 $ 1.83 $ 1.49 $ 1.96 Diluted $ 0.46 $ 1.14 $ 1.38 $ 1.39 $ 1.46 $ 1.68 $ 1.39 $ 1.84 - ----------------------------------------------------------------------------------------------------------------------------------- Dividends per common share $0.070 $0.070 $0.070 $0.070 $0.055 $0.055 $0.055 $0.055 - ----------------------------------------------------------------------------------------------------------------------------------- Book value per common share (at period end) $31.81 $30.83 $29.93 $28.90 $28.78 $27.58 $25.59 $24.40
93 SELECTED FINANCIAL DATA The following table summarizes certain consolidated financial information included in the audited consolidated financial statements.
In millions, except per share data, other data and financial ratios Twelve months ended November 30 2001 2000 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF INCOME Revenues: Principal transactions $ 2,779 $ 3,713 $ 2,341 $ 1,373 $ 1,461 Investment banking 2,000 2,216 1,682 1,441 1,275 Commissions 1,091 944 651 513 423 Interest and dividends 16,470 19,440 14,251 16,542 13,635 Other 52 134 64 25 89 - ------------------------------------------------------------------------------------------------------------------------------ Total revenues 22,392 26,447 18,989 19,894 16,883 Interest expense 15,656 18,740 13,649 15,781 13,010 - ------------------------------------------------------------------------------------------------------------------------------ Net revenues 6,736 7,707 5,340 4,113 3,873 - ------------------------------------------------------------------------------------------------------------------------------ Non-interest expenses: Compensation and benefits 3,437 3,931 2,707 2,086 1,964 Other expenses 1,424 1,197 1,002 975 972 Special charge 127 - - - - - ------------------------------------------------------------------------------------------------------------------------------ Total non-interest expenses 4,988 5,128 3,709 3,061 2,936 - ------------------------------------------------------------------------------------------------------------------------------ Income before taxes and dividends on trust preferred securities 1,748 2,579 1,631 1,052 937 Provision for income taxes 437 748 457 316 290 Dividends on trust preferred securities 56 56 42 - - - ------------------------------------------------------------------------------------------------------------------------------ Net income $ 1,255 $ 1,775 $ 1,132 $ 736 $ 647 - ------------------------------------------------------------------------------------------------------------------------------ Net income applicable to common stock $ 1,161 $ 1,679 $ 1,037 $ 649 $ 572 - ------------------------------------------------------------------------------------------------------------------------------ CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (AT PERIOD END) Total assets $247,816 $224,720 $192,244 $153,890 $151,705 Total assets excluding matched book(a) 164,538 143,478 130,022 111,509 108,099 Long-term debt(b) 38,301 35,233 30,691 27,341 20,261 Preferred securities (subject to mandatory redemption) 710 860 710 - - Total stockholders' equity 8,459 7,781 6,283 5,413 4,523 Total capital(c) 47,470 43,874 37,684 32,754 24,784 - ------------------------------------------------------------------------------------------------------------------------------ PER SHARE DATA(d) Net income (excluding special charge) $ 4.64 $ 6.38 $ 4.08 $ 2.60 $ 2.36 Dividends declared per common share $ 0.28 $ 0.22 $ 0.18 $ 0.15 $ 0.12 Book value per common share (at period end) $ 31.81 $ 28.78 $ 22.75 $ 18.53 $ 16.70 - ------------------------------------------------------------------------------------------------------------------------------ OTHER DATA (AT PERIOD END) Ratio of total assets to total stockholders' equity and preferred securities 27.0x 26.0x 27.5x 28.4x 33.5x Ratio of total assets excluding matched book to total stockholders' equity and preferred securities(a) 17.9x 16.6x 18.6x 20.6x 23.9x Employees 13,090 11,326 8,893 8,873 8,340 - ------------------------------------------------------------------------------------------------------------------------------ FINANCIAL RATIOS (%) Compensation and benefits/net revenues 51.0 51.0 50.7 50.7 50.7 Pretax operating margin (excluding special charge) 27.8 33.5 30.5 25.6 24.2 Pretax operating margin 26.0 33.5 30.5 25.6 24.2 Effective tax rate (excluding special charge) 26.3 29.0 28.0 30.0 30.9 Effective tax rate 25.0 29.0 28.0 30.0 30.9 Return on average common equity (excluding special charge and redeemable preferred dividend) 17.5 27.4 21.8 16.3 17.0 Return on average common equity 15.9 26.6 20.8 15.2 15.6 - ------------------------------------------------------------------------------------------------------------------------------
(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 2000. 94 [PAGE OMITTED] 95 OTHER STOCKHOLDER INFORMATION COMMON STOCK Ticker Symbol: LEH The common stock of Lehman Brothers Holdings Inc. is listed on the New York Stock Exchange and on the Pacific Exchange. As of January 31, 2002, there were 23,072 holders of record of the Company's common stock. On January 31, 2002, the last reported sales price of Lehman Brothers' common stock was $64.77. ANNUAL MEETING Lehman Brothers' annual meeting of stockholders will be held on Tuesday, April 9, 2002 at 10:30 a.m. at 399 Park Avenue, 12th Floor Auditorium, New York, New York 10022. DIVIDENDS Effective January 2002, Lehman Brothers' Board of Directors increased the fiscal 2002 dividend rate to $0.36 per common share from an annual dividend rate of $0.28 per share in fiscal 2001. Dividends on the Company's common stock are generally payable, following declaration by the Board of Directors, on the last business day of February, May, August and November. REGISTRAR AND TRANSFER AGENT FOR COMMON STOCK Questions regarding dividends, transfer requirements, lost certificates, changes of address, direct deposit of dividends, the direct purchase and dividend reinvestment plan, or other inquiries should be directed to: The Bank of New York E-mail: shareowner-svcs@bankofny.com Shareholders Services Department Website: http://www.stockbny.com P.O. Box 11258 Church Street Station New York, New York 10286-1258 Telephone: (800) 824-5707 (U.S.) (610) 312-5303 (non-U.S.) DIRECT PURCHASE AND DIVIDEND REINVESTMENT PLAN Lehman Brothers' Direct Purchase and Dividend Reinvestment Plan provides both existing stockholders and first-time investors with an alternative means of purchasing the Company's stock. The plan has no minimum stock ownership requirements for eligibility and enrollment. Plan participants may reinvest all or a portion of cash dividends and/or make optional cash purchases up to a maximum of $175,000 per year without incurring commissions or service charges. Additional information and enrollment forms can be obtained from the Company's Transfer Agent listed above. ANNUAL REPORT AND FORM 10-K Lehman Brothers will make available upon request, without charge, copies of this Annual Report and the Annual Report on Form 10-K as filed with the Securities and Exchange Commission. Requests may be directed to: Jeffrey A. Welikson Corporate Secretary 399 Park Avenue New York, New York 10022 Telephone: (212) 526-0858
INDEPENDENT AUDITORS INVESTOR RELATIONS MEDIA RELATIONS WEBSITE ADDRESS Ernst & Young LLP (212) 526-8381 (212) 526-4379 http://www.lehman.com 787 Seventh Avenue New York, New York 10019 Telephone: (212) 773-3000
PRICE RANGE OF COMMON STOCK Three months ended Three months ended 2001 2000 Nov. 30 Aug. 31 May 31 Feb. 28 Nov. 30 Aug. 31 May 31 Feb. 29 High $71.93 $78.26 $82.25 $85.72 $80.00 $72.51 $51.72 $47.50 Low $46.64 $63.90 $55.35 $51.13 $49.50 $40.81 $36.25 $31.06
96 EX-21 10 a2071673zex-21.txt EXHIBIT 21 EXHIBIT 21 LIST OF THE REGISTRANT'S SUBSIDIARIES PURSUANT TO ITEM 601(B)(21)(ii) OF REGULATION S-K, CERTAIN SUBSIDIARIES OF THE REGISTRANT HAVE BEEN OMITTED WHICH, CONSIDERED IN THE AGGREGATE AS A SINGLE SUBSIDIARY, WOULD NOT CONSTITUTE A SIGNIFICANT SUBSIDIARY (AS DEFINED IN RULE 1-02(W) OF REGULATION S-X) AS OF NOVEMBER 30, 2001.
JURISDICTION OF COMPANY INCORPORATION - ------- --------------- Lehman Brothers Holdings Inc................................ Delaware Banque Lehman Brothers S.A.......................... France DA Group Holdings Inc............................... Delaware LBAC Holdings I Inc................................. Delaware Lehman Brothers Asia Capital Company........ Hong Kong LBCCA Holdings I Inc................................ Delaware Falcon Holdings I LLC....................... Delaware Falcon Holdings II Inc.............. Cayman Islands Global Thai Property Fund... Thailand Lehman Brothers Asia Capital Company........ Hong Kong Lehman Brothers Commercial Corporation Asia Limited.................................. Hong Kong LBCCA Holdings II Inc............................... Delaware Falcon Holdings I LLC....................... Delaware Falcon Holdings II Inc.............. Cayman Islands Global Thai Property Fund... Thailand Lehman Brothers Commercial Corporation Asia Limited.................................. Hong Kong Lehman ALI Inc...................................... Delaware Lehman CMBS Funding Inc..................... Delaware LUBS Inc.................................... Delaware Property Asset Management Inc............... Delaware Lehman Syndicated Loan Funding Inc.......... Delaware Lehman Brothers AIM Holding LLC..................... Delaware Lehman Brothers Alternative Investment Management LLC........................... Delaware Lehman Brothers Bancorp Inc......................... Delaware Lehman Brothers Bank, FSB................... Delaware Lehman Brothers Canada Inc.......................... Canada Lehman Brothers Commercial Corporation.............. Delaware Lehman Brothers Finance S.A......................... Switzerland Lehman Brothers Futures Asia Limited................ Hong Kong Lehman Brothers Global Asset Management Inc......... Delaware Lehman Brothers Futures Asset Management Corp..................................... Delaware Lehman Brothers Inc................................. Delaware Lehman Brothers Asia Holdings Limited....... Hong Kong Lehman Brothers Asia Limited........ Hong Kong Lehman Brothers Finance Limited..... Hong Kong Lehman Brothers Nominees (H.K.) Limited........... Hong Kong Lehman Brothers Securities Asia Limited.......... Hong Kong Lehman Brothers Futures Asia Limited.......................... Hong Kong Lehman Brothers Nominees (H.K.) Limited.......................... Hong Kong Lehman Brothers Pte Ltd............. Singapore Lehman Brothers Securities Asia Limited.......................... Hong Kong Lehman Brothers Asia Limited................ Hong Kong Lehman Brothers Derivative Products Inc..... Delaware Lehman Brothers Financial Products Inc...... Delaware Lehman Brothers Futures Asia Limited........ Hong Kong Lehman Brothers Investment Holding Company Inc...................................... Delaware Lehman Brothers Nominees (H.K.) Limited..... Hong Kong Lehman Brothers Special Financing Inc....... Delaware
JURISDICTION OF COMPANY INCORPORATION - ------- --------------- Lehman Commercial Paper Inc................. New York LCPI Properties Inc................. New Jersey LW-LP Inc................... Delaware Lehman CMO Inc...................... Maryland Lehman ABS Corporation.............. Delaware Lehman Asset Backed Caps Inc...................... Delaware Lehman Pass-Through Securities Inc.............................. Delaware Lehman Structured Securities Corp............................. Delaware Lehman Syndicated Loan Inc.......... Delaware Structured Asset Securities Corporation...................... Delaware LB I Group Inc.............................. Delaware DL Mortgage Corp.................... Delaware Lehman Insurance Company............ Arizona Lehman VIP Holdings Inc............. Delaware RIBCO SPC, Inc.............................. Delaware RIBCO LLC........................... Delaware Lehman Brothers Insurance Agency L.L.C.............. Delaware Lehman Brothers International S.A................... Spain Lehman Brothers International SIM SpA............... Italy Lehman Brothers Investments Pte Limited............. Singapore Lehman Brothers Japan Inc........................... Cayman Islands Lehman Brothers (Luxembourg) S.A.................... Luxembourg Lehman Brothers Private Equity Advisers L.L.C....... Delaware Lehman Brothers Realty Corp......................... Delaware Lehman Brothers U.K. Holdings (Delaware) Inc........ Delaware Lehman Brothers Spain Holdings Limited...... United Kingdom Lehman Brothers Luxembourg Investments Sarl................. Luxembourg Lehman Brothers U.K. Holdings Ltd............. United Kingdom Lehman Brothers Holdings Plc..... United Kingdom Lehman Brothers International (Europe).. United Kingdom Lehman Brothers Europe Limited... United Kingdom Lehman Brothers Treasury Co. B.V............ The Netherlands Lehman Brothers Capital GmbH, Co............ Germany Lehman Brothers Verwaltungs-und Beteiligungsgesellschaft mbH........................ Germany Lehman Brothers Bankhaus Aktiengesellschaft....................... Germany Lehman Re Ltd....................................... Bermuda Lehman Risk Advisors Inc............................ Delaware Lehman Structured Assets Inc........................ Delaware
EX-23 11 a2071673zex-23.txt EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this 2001 Annual Report on Form 10-K of Lehman Brothers Holdings Inc. (the "Company") of our report dated January 4, 2002, included in the 2001 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, 333-75723, 333-60474 and 333-61878 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, 2002, 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, 2001. ERNST & YOUNG LLP New York, New York February 28, 2002 EX-24 12 a2071673zex-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, 2001, 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, 2002
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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