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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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 1-6862
DONALDSON, LUFKIN & JENRETTE, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 13-1898818
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) (Identification No.)
277 Park Avenue, New York, New York 10172
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (212) 892-3000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, par value $0.10 per share New York Stock Exchange
Series A Fixed/Adjustable Rate Cumulative
Preferred Stock, $50 liquidation
preference per share New York Stock Exchange
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 than 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 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].
Cover Page 1 of 2
As of March 21, 1997, the latest practicable date, there were 54,504,664 shares
of Common Stock, $0.10 par value, outstanding.
At March 21, 1997 the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $461.9 million. For purposes
of this information, the outstanding shares of Common Stock owned by directors
and executive officers of the registrant were deemed to be shares of Common
Stock held by affiliates.
DOCUMENTS INCORPORATED BY REFERENCE:
The information required to be furnished pursuant to Part III of this Form 10-K
is set forth in, and incorporated by reference from, the registrant's
definitive proxy statement for the annual meeting of stockholders to be held
April 16, 1997, which definitive proxy statement (the "Proxy Statement") was
filed by the registrant with the Securities and Exchange Commission on March
11, 1997 not later than 120 days after the year ended December 31, 1996.
Cover Page 2 of 2
PART I
ITEM 1. BUSINESS
Donaldson, Lufkin & Jenrette, Inc. (the "Company") is a leading
integrated investment and merchant bank that serves institutional, corporate,
governmental and individual clients both domestically and internationally. The
Company is a holding company which conducts its business through various
subsidiaries including its principal broker-dealer subsidiary, Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJSC"). The business of the Company
includes securities underwriting; sales and trading; merchant banking;
financial advisory services; investment research; correspondent brokerage
services; and asset management.
Founded in 1959, the Company initially focused on providing in-depth
investment research to institutional investors. In 1970, the Company became the
first member firm of the New York Stock Exchange ("NYSE") to be owned publicly.
Fifteen years later, the Company was purchased by The Equitable Life Assurance
Society of the United States ("Equitable Life"). Prior to October 1995 the
Company was an independently operated indirect wholly owned subsidiary of The
Equitable Companies Incorporated ("Equitable"). After the completion of an
initial public offering in October 1995, Equitable's ownership in the Company
was reduced from 100% to 80.2%. At December 31, 1996, following a sale by
Equitable to AXA of 85,000 shares of DLJ stock, the Equitable owned 79.9% of
DLJ's issued and outstanding common stock. Equitable is a diversified financial
services organization and one of the world's largest investment management
organizations. AXA, a French holding company for an international group of
insurance and related financial services companies, is Equitable's largest
stockholder, beneficially owning, at December 31, 1996, $392.2 million of
Equitable's Series E convertible preferred stock and approximately 60.8% of
Equitable's outstanding common stock (without giving effect to the conversion
of the Series E convertible preferred stock beneficially owned by AXA).
The Company's business activities are highly integrated and constitute
a single industry segment. The assets and revenues related to the Company's
foreign operations are not significant, however the Company has begun expanding
its activities abroad.
The Company conducts its business through three principal operating
groups: the Banking Group, which includes the Company's Investment Banking,
Merchant Banking and Emerging Markets Groups; the Capital Markets Group,
consisting of the Company's Fixed Income, Institutional Equities and Equity
Derivatives Divisions, Autranet, a distributor of investment research products,
as well as Sprout, its venture capital affiliate; and the Financial Services
Group, comprised of the Pershing Division, the Investment Services Group and
the Asset Management Group.
Banking Group. The Company's Banking Group is a major participant in
the raising of capital and the providing of financial advice to companies
throughout the U.S. and has significantly expanded its activities abroad.
Through its Investment Banking Group, the Company manages and underwrites
public offerings of securities, arranges private placements and provides
advisory and other services in connection with mergers, acquisitions,
restructurings and other financial transactions. Its Merchant Banking Group
pursues direct investments in a variety of areas through a number of investment
vehicles funded with capital provided primarily by institutional investors, the
Company and its employees. The Emerging Markets Group specializes in client
advisory services for mergers, acquisitions and financial restructurings, as
well as merchant banking and the underwriting, placement and trading of equity,
debt and derivative securities in Latin America, Asia and Eastern Europe.
Capital Markets Group. The Capital Markets Group encompasses a broad
range of activities including trading, research, origination and distribution
of equity and fixed-income securities, private equity investments and venture
capital. Its Fixed Income Division provides institutional clients with
research, trading and sales services for a broad range of fixed-income
products, including high-yield corporate, investment-grade corporate, U.S.
government and mortgage-backed securities. The Institutional Equities Division
provides institutional clients with research, trading and sales services in
U.S. listed and over-the counter ("OTC") equity securities. In addition, the
Company's Equity Derivatives Division provides a broad range of equity and
index option products. Autranet is the oldest and most successful distributor
of research and investment material. Sprout is one of the oldest and largest
groups in the private equity investment and venture capital industry.
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Financial Services Group. The Financial Services Group provides a
broad array of services to individual investors and the financial
intermediaries which represent them. Pershing is a leading provider of
correspondent brokerage services, clearing transactions for over 550 U.S.
brokerage firms which collectively maintain over 1.4 million client accounts.
The Company's Investment Services Group provides high-net-worth individuals and
medium to smaller sized institutions with access to the Company's equity and
fixed-income research, trading services and underwriting. Through its Asset
Management Group the Company provides cash management, investment advisory and
trust services primarily to high-net-worth individual and institutional
investors.
The following table illustrates the Company's revenue breakdown by its
principal operating groups, net of all interest. Net revenues, however, are not
necessarily indicative of the profitability of each group.
NET REVENUES BY OPERATING GROUP:
- --------------------------------
YEARS ENDED DECEMBER 31,
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(in millions)
Banking Group............. $ 428.4 $ 491.8 $ 390.0 $ 689.2 $ 935.8
Capital Markets Group..... 713.0 994.6 638.1 780.0 1,015.2
Financial Services Group.. 336.9 455.3 458.2 619.5 827.6
Other..................... (26.5) (38.1) 18.6 (10.7) (21.1)
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Total net revenues........ $1,451.8 $1,903.6 $1,504.9 $2,078.0 $2,757.5
======== ======== ======== ======== ========
The Company currently conducts its operations through 17 offices in 14
locations in the U.S., including Atlanta, Austin, Boston, Chicago, Dallas,
Houston, Jersey City, Los Angeles, Menlo Park, Miami, New York, Oak Brook,
Philadelphia and San Francisco. The Company also has 11 international offices
located in 10 cities, including Bangalore, Buenos Aires, Geneva, Hong Kong,
London, Lugano, Mexico City, Paris, Sao Paulo and Tokyo and conducts business
through a joint venture in South Africa.
BANKING GROUP
The Company's Banking Group is a major participant in the raising of
capital, the investing of capital and the providing of financial advice to
companies throughout the U.S. and has significantly expanded its activities
abroad, through its Investment Banking Group, Merchant Banking Group and
Emerging Markets Group. The Banking Group's approximately 600 professionals
operate from nine of the Company's domestic offices and six of its
international offices.
INVESTMENT BANKING
The Company's Investment Banking Group provides a full range of
capital raising and financial advisory services to its clients. The Investment
Banking Group underwrites public offerings of securities and arranges private
placements and has a particular focus on capital raising transactions in the
public equity and high-yield debt markets.
The Company's investment banking strategy is to concentrate a major
portion of its business development efforts within those industries in which
the Company has established a leadership position in providing investment
banking services. Industry specialty groups include chemicals, energy,
entertainment, environmental, financial services, forest products, gaming,
health care, industrial, insurance, media/communications, oil and gas, real
estate finance, retailing, satellite, technology and utilities. These groups
are responsible for initiating, developing and maintaining client relationships
and for executing transactions involving these clients. The Investment Banking
Group has focused primarily on those industries in which the Company also has a
strong research capability.
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In addition to being structured according to distinct industry groups,
the Company has a number of professionals who specialize in specific types of
transactions. These include mergers and acquisitions ("M&A"), equity offerings,
high-yield securities and other transaction specialties.
Mergers and Acquisitions. The Company is active in arranging various
M&A transactions for its clients. The Company participates in a broad range of
domestic and international assignments including acquisitions, divestitures,
strategic restructurings, proxy contests, leveraged buyouts and defenses
against unsolicited takeovers.
Equity Offerings. The equity capital markets group focuses on
providing financing for issuers of equity and convertible equity securities in
the public markets. The group assists in the origination, and is responsible
for the structuring and execution of transactions for a broad range of Banking
Group clients.
High-Yield Securities. The high-yield securities group focuses on
providing financing in the public and private capital markets. The group is
responsible for originating, structuring and executing high-yield transactions
across a wide range of companies and industries, as well as managing client
relationships with both high-yield corporate issuers and financial sponsors of
leveraged transactions. In 1996, for the fourth consecutive year, DLJ was the
number one ranked underwriter of high-yield bonds.
Other Transaction Specialties. The Company is also active in a variety
of other transaction specialties which provide capital raising and advisory
services for its clients. The private capital placements group raises capital
within the private debt and equity markets. Formed in 1994, the Company's
private fund group raises private limited partnership capital, primarily from
institutional investors, for direct investment by domestic and international
investment firms and for certain of the Company's merchant banking activities.
The private fund group raised over $7.0 billion in private capital in 1996. The
project finance group raises non-recourse financing for a diverse client base
of publicly and privately held companies for specific projects. Additionally,
the Company's restructuring group provides advisory services to financially
distressed companies. The counter-cyclical nature of the restructuring
business acts as a balance to other investment banking activities. The Company
also participates in the structured finance industry through its asset-backed
transactions group, and specializes in securitizing cash flow generating assets
through public or private offerings of debt or pass-through certificates.
In January 1997, the Company reached an agreement to acquire (the
"Acquisition") a London based financial advisory firm, Phoenix Group Limited
(Phoenix). Phoenix is an international financial advisory and investment
management business with offices in London and Hong Kong. It has two principal
operations, a corporate finance and advisory business and a private equity fund
management business investing in unquoted securities. It also makes investments
as principal. As a portion of the total consideration paid in connection with
the Acquisition, the Company issued on March 26, 1997, $28,779,000 aggregate
principal amount of 5% Junior Subordinated Convertible Debentures due 2004 (the
"Convertible Debentures") to the current shareholders of Phoenix, pursuant to
Regulation S under the Securities Act of 1933, as amended. The Convertible
Debentures are convertible into Common Stock of the Company beginning 40 days
after issuance at a conversion price of $42.00 per share. The Acquisition
does not have a material effect on the Company's results of operations.
MERCHANT BANKING
The Company entered the merchant banking investment business in 1985
and believes that it has one of the most consistently successful records in
this area over the past 10 years. Through the Merchant Banking Group, the
Company has grown to become a major participant in the asset management
business by pursuing direct investments in a variety of industries and managing
capital provided primarily by pension funds, endowments, charitable
organizations, high-net-worth individuals, the Company and its employees. The
Merchant Banking Group is closely integrated with other parts of the Company
drawing upon all of its resources including debt and equity research and
high-yield financing as well as the industry specialty groups within the
Investment Banking Group.
3
The Merchant Banking Group manages seven distinct capital funds with
total committed capital of approximately $8.0 billion. These funds include DLJ
Merchant Banking Partners, L.P. and affiliated entities ("DLJMBP"), which
focuses primarily on equity investments in leveraged transactions, the DLJ
Bridge Fund (as described below), a leader in domestic bridge financing, DLJ
Investment Partners, L.P., which focuses on opportunities in lower risk
investments in debt or equity mezzanine securities and corporate joint
ventures, DLJ Real Estate Capital Partners, L.P., which makes investments in
public and private debt and equity in the real estate markets and DLJ Global
Retail Partners, L.P., which pursues investment opportunities in early stage
retailers. During 1996, the Group closed DLJ Merchant Banking Partners II,
L.P., a $3.0 billion fund that will begin making private equity investments in
1997 and the $900 million DLJ Senior Debt Fund. Through the Senior Debt Fund,
the Company arranges and syndicates financing primarily to non-investment
grade borrowers. Such financings involve significant risks based upon the
underlying credit of the borrower and overall market conditions. The Company
is also considering expanding its fund management in the future to include
additional areas of investment. Future funds may include an emerging markets
merchant banking fund, which will target investment opportunities across a
variety of industries in Latin America and Asia; and industry-specific funds
in sectors where the Company possesses industry expertise or has a history of
successful client relationships.
Leveraged Equity Investing. In 1992, the Company established DLJMBP, a
dedicated $1 billion fund which includes commitments of up to $300 million by
the Company and its employees. Employee participation ranges from approximately
30% to 40% of the Company's and its affiliates' overall investment in each
transaction. Since it was established, the fund has invested $865 million in 31
companies with an aggregate transaction value of $7.4 billion. Prior to 1992,
the Company raised funds on a transaction by transaction basis. DLJMBP makes
investments in equity and mezzanine securities arising from leveraged
acquisitions, leveraged recapitalizations, restructurings of over-leveraged
companies and other similar types of transactions which generally involve
significant financial leverage. DLJ Merchant Banking, Inc., a wholly owned
subsidiary of the Company, is the General Partner of DLJMBP.
DLJ Bridge Fund. One of the Company's strengths has been its bridge
lending business. Established in 1987, DLJ Bridge Finance, Inc., a wholly owned
subsidiary of the Company, manages a $1.28 billion bridge facility (the "DLJ
Bridge Fund") that provides short-term loans in connection with merchant
banking transactions for the Company's clients and the Company's own merchant
banking activities. The DLJ Bridge Fund includes a $750 million commitment of
subordinated debt from Equitable and a $500 million commitment of senior
revolving debt by a commercial bank syndicate. Commitments by Equitable and the
commercial bank syndicate are subject to approval by each of Equitable and the
commercial bank syndicate, as the case may be, on a transaction by transaction
basis. Such commitments will expire December 31, 1997. Equitable's commitment
is also subject to annual review and approval by the State of New York
Insurance Department. In addition, the Company has committed to invest up to
$31.3 million through an equity commitment of 2-1/2% of the DLJ Bridge Fund.
Since the Company began making bridge commitments in 1985, over $15.5 billion
of bridge loans have been committed to facilitate 109 transactions.
Approximately $5.9 billion of such commitments have been funded. At December
31, 1996, the DLJ Bridge Fund had a $189 million bridge loan outstanding.
The Company has agreed to pay Equitable the first $25 million of
aggregate principal losses incurred by Equitable with respect to all bridge
loans outstanding on September 30, 1995 and the first $25 million of aggregate
principal losses incurred by Equitable with respect to bridge loans made after
September 30, 1995. To the extent such payments by the Company do not fully
cover any such losses incurred by Equitable, Equitable is entitled to receive
all other distributions otherwise payable to the Company with respect to DLJ
Bridge Fund activities until such losses have been recovered. The Company has
also agreed to pay Equitable the amount, if any, by which any principal loss on
an individual loan exceeds $150 million. In addition, Equitable is entitled to
one-third of any equity securities obtained in connection with any bridge loan.
Pursuant to arrangements between the Company and the commercial bank syndicate,
the Company is at risk for a significant portion of any bank loans funded by
such banks. However, substantially all of the bridge loans have been made
without using the bank commitment.
Bridge lending involves significant risk based upon both the
underlying credit of the borrower and market conditions governing refinancing
of the loan. The DLJ Bridge Fund has outstanding a bridge loan made prior to
September 30, 1995 aggregating $189 million (including interest) to a borrower
which is experiencing financial difficulties. The Company has reserved for any
expected
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loss to it from such bridge loan. If the amount of the loss from such bridge
loan is in excess of $25 million, distributions to the Company with respect to
DLJ Bridge Fund activities would be eliminated until such loss has been
recovered. In October 1996, a planned acquisition of such company was
announced, which if completed, would result in the realization by the Company
of amounts previously reserved, plus interest. The transaction is expected to
close in the second quarter of 1997. The Company does not believe that the loss
of future income from DLJ Bridge Fund activities would have a material adverse
impact on its results of operations or financial condition.
DLJ Investment Partners. DLJ Investment Partners, L.P. commenced
operation in December 1995 to pursue investments primarily in debt or equity
mezzanine securities and corporate joint ventures. The fund has committed
capital of $250 million of which $50 million will be provided by the Company
and its employees.
DLJ Real Estate Capital Partners. DLJ Real Estate Capital Partners,
L.P., focuses on debt and equity investments in a broad range of real estate
and real estate-related assets. The fund has committed capital of approximately
$650 million from its general and limited partners, including $100 million from
the Company and its employees.
Global Retail Partners. Global Retail Partners, which commenced
operation in February 1996, pursues investment opportunities in early stage
retailers. The fund has committed capital of approximately $150 million.
EMERGING MARKETS
The Emerging Markets Group is a growing participant in the financial
services industry in certain developing economies in Latin America, Asia,
Eastern Europe and South Africa. The group combines specialized market and
geographic knowledge and experience with the traditional strengths and skills
of the Company. The group employs approximately 100 professionals who are
responsible for originating and executing transactions in their respective
areas of expertise, maintaining client relationships and building the Company's
presence in targeted markets where the Company believes it can be a leading
financial services provider or investor.
In Latin America, the group has four principal lines of business:
investment banking, which focuses on international capital raising and
financial advisory services; merchant banking, which utilizes the Company's
expertise in this area to target growth companies and other specific investment
opportunities; sales and trading, which is involved primarily in principal
trading of Latin American debt securities, with an emphasis on Brady Bonds,
local debt instruments and Latin American equity securities; and Latin American
derivatives, in particular, the structuring, placement and trading of products,
which are based on Latin American securities, currencies and indices.
In Europe the group is also involved in sales and trading of Eastern
European debt securities with emphasis on local debt instruments in Russia and
derivatives, in particular, the structuring, placement and trading of products
based on Russian loans.
The group is also active in the Asia-Pacific region and offers
investment banking services through the Company's Hong Kong office which is
dedicated to building the Company's capital raising, financial advisory and
merchant banking presence in this region.
In addition, the Company has invested approximately $7 million in
Pleiade Investments, a South African merchant bank affiliated with New Africa
Investment Ltd. The Company believes that this alliance will enhance its
ability to develop investment banking relationships in the region.
CAPITAL MARKETS GROUP
The Capital Markets Group encompasses a broad range of activities
including trading, research, origination and distribution of equity and
fixed-income securities, private equity investments and venture capital through
its Fixed Income Division, Institutional Equities Division,
5
Autranet, Equity Derivatives Division and Sprout. The Company's focus is
primarily client-driven, in contrast to that of many other securities firms
which emphasize proprietary trading. The Capital Markets Group has
approximately 1,500 professionals.
FIXED INCOME
The Fixed Income Division with its 600 professionals provides
institutional clients with research, trading and sales services for a broad
range of fixed-income products, and distributes fixed-income securities in
connection with offerings underwritten by the Company. Its principal areas of
activity are in high-yield corporate, investment-grade corporate, U.S.
government and mortgage-backed securities. The Fixed Income Division's research
professionals include credit analysis teams knowledgeable in high-yield
corporate, investment-grade corporate and mortgage-backed securities as well as
quantitative and economic research.
High-Yield Securities. The High-Yield Securities department provides
institutional clients with research, trading and sales services and distributes
non-investment-grade securities in connection with offerings underwritten by
the Company.
Investment-Grade Corporate Bonds. The Company has been a major
participant in the secondary trading and distribution of investment-grade
corporate debt instruments and has consistently ranked as one of the top
providers of credit research on those securities. While its emphasis has
traditionally been on trading and distributing secondary issues, the Corporate
Bond department has played an increasing role in the distribution of primary
issues.
Government Bonds. The Company is a primary dealer in U.S. government
securities designated by the Federal Reserve Bank of New York. The Government
Bond department's activities include making secondary markets in, and
participating in the underwriting of U.S. Treasury bills, notes and bonds, and
securities of Federal agencies. The Company is a member of every major agency
underwriting group, including Federal National Mortgage Association ("Fannie
Mae"), Federal Farm Credit, Federal Home Loan Bank and Student Loan Mortgage
Association ("Sallie Mae"). The Company also engages in the "stripping" of
government and government-guaranteed bonds to create zero-coupon securities. It
also trades treasury futures and options and develops hedging programs for its
clients. The Government Bond department also maintains a money desk which
provides financing for its daily trading inventory positions, and to a lesser
extent those of other fixed-income departments through the use of repurchase
agreements and also acts as an intermediary between borrowers and lenders of
short-term funds utilizing repurchase and reverse repurchase agreements. The
department's economic research group provides analyses and forecasts of
macroeconomic and government policy trends, together with advice on
interest-rate fluctuations, for the benefit of institutional clients and the
Company's trading operations.
Mortgage Securities. The Company trades and makes markets in
Government National Mortgage Association securities, Federal Home Loan Mortgage
Corporation participation certificates, Fannie Mae obligations, non-agency
mortgage-backed securities, and various asset-backed securities. The Mortgage
Securities department also issues, trades and makes markets in Collateralized
Mortgage Obligations ("CMOs"), which are debt obligations secured by the cash
flow from a pool of mortgages or mortgage securities, as well as in other
mortgage-related derivative products. In addition, the Company's wholly owned
subsidiary, DLJ Mortgage Capital, Inc. ("DLJMC"), purchases fixed-rate and
adjustable-rate residential, multifamily and commercial whole loans to
securitize into rated or non-rated mortgage pass-through securities both as a
principal and as an agent.
INSTITUTIONAL EQUITIES
The Institutional Equities Division provides institutional clients
with research, trading and sales services in U.S. listed and OTC equities, and
distributes equity securities in connection with offerings underwritten by the
Banking Group.
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Domestic Institutional Sales and Listed Equity Trading. The Company's
equity trading operations and sales coverage of major U.S. institutions are
conducted by over 70 traders and institutional equity salespeople from nine of
the Company's domestic offices. Smaller U.S. institutions are covered by
account executives in the regional offices of the Investment Services Group,
which is part of the Company's Financial Services Group.
In listed equity securities, the Company acts as both an agent and
principal in executing trades in the secondary market. Much of the Company's
institutional business consists of large block trades of 10,000 or more shares.
In such transactions, the Company frequently provides its clients with
liquidity by taking a long or short position as a principal to facilitate the
client's purchase or sale of stock in the event that a counterparty buyer or
seller is not immediately available.
International Sales. The Company's international equity sales
organization consists of approximately 45 salespeople operating from five of
the Company's international offices and one domestic office.
OTC Trading. The Company makes markets in approximately 400 securities
traded on the National Association of Securities Dealers ("NASD") Automated
Quotation System ("Nasdaq"). The Company conducts these activities as a dealer,
buying and selling the securities as a principal. The Company's market-making
is concentrated in stocks that are followed by the equity research department
or underwritten by the Company. The Company's market-making strengths are in
the communications, consumer, entertainment, financial services, health care
and technology sectors.
Equity Research. The Company's equity research department consists of
approximately 110 professional investment research analysts and associates who
are engaged in the analysis of economic trends and a broad range of industries
and companies. The department produces publications, studies and forecasts on
economic conditions, financial markets, portfolio strategy, quantitative
analysis, industry developments and individual companies.
The Company's equity research analysts are also utilized as important
resources in obtaining investment banking business and assessing merchant
banking transactions, as well as developing and maintaining banking
relationships with clients through continued involvement after the execution of
specific transactions.
AUTRANET
Autranet Inc., a registered broker-dealer and member firm of the NYSE
is active in the distribution of investment research products purchased from
approximately 430 sources known as "independent originators." Independent
originators are research specialists, not primarily employed by securities
firms, and range in size and scope from large economic consulting firms to
individual freelance analysts. Autranet generates its revenues from a client
base of over 400 domestic and international institutions.
EQUITY DERIVATIVES
The Equity Derivatives Division provides institutional clients with
research, trading and sales services in a broad range of equity options
products and in convertible securities.
Equity Options. The Company's activities in equity derivative products
have focused primarily on product innovations in the design and origination of
custom-tailored OTC options to meet the specific needs of customers rather than
on the assumption of trading risk or an emphasis on execution volume. The
Company now offers options based on U.S. equities and equity indices; 15
foreign currencies; equities from 12 European and Asian countries; commodities
and precious metals; and over 30 various fixed-income instruments in both
domestic and international markets. The Company has expanded its sales effort
for its proprietary options and futures products into Europe in recent years.
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Convertible Securities. The Company is a market-maker in convertible
securities, dealing primarily with an expanding base of institutional clients.
While its emphasis has been in trading and distributing secondary issues, the
Company has also been effective in the primary distribution of convertible
securities underwritten by the Company.
SPROUT
Founded in 1969, Sprout is one of the oldest and largest groups in the
private equity investment and venture capital industry. Since the
capitalization of Sprout's first fund at $11.5 million, nine major investment
partnerships have been formed primarily for large institutional investors.
Present funds under management have original capital of approximately $1
billion, and include, among others, Sprout VII, a multi-stage venture fund; and
Sprout Growth II, a late-stage equity fund.
Sprout's investors are major public and corporate pension funds,
endowments, insurance companies and wealthy individuals. To accommodate their
growing interest, Sprout has committed to significant leadership positions in
the industries in which it concentrates: health care, technology, retail and
other services.
FINANCIAL SERVICES GROUP
The Financial Services Group is comprised of Pershing, a leading
provider of correspondent brokerage services, the Investment Services Group,
which provides the full range of the Company's investment products and services
to high-net-worth individuals and medium to smaller sized institutions, and the
Asset Management Group which acts as a cash manager and investment counselor
primarily to high-net-worth individuals and institutions. The Financial
Services Group's 1,200 professionals operate out of 17 of the Company's
domestic offices and two of the Company's international offices.
PERSHING DIVISION
Pershing is one of the leading providers of correspondent brokerage
services to the world's financial institutions. Founded in 1939 and acquired by
the Company in 1977, Pershing operates out of seven of the Company's domestic
offices and London. Pershing provides execution and clearance services to over
550 correspondent U.S. brokerage firms, ranging from small investment boutiques
to large financial institutions, which collectively maintain over 1.4 million
client accounts holding more than $140 billion of assets at December 31, 1996.
During 1996, Pershing participated in over 10% of the trading volume on the
NYSE. Pershing maintains broad execution coverage of all U.S. securities
exchanges, supported by extensive in-house trading desks for institutional
block and retail orders, as well as OTC securities, all fixed-income products,
mutual funds and money market funds. As a wholesaler of trading, execution,
clearing and information management activities, Pershing offers its service on
a fee-for-services basis.
Through their affiliation with Pershing, correspondent firms also have
access to a broad selection of investment products for their customers,
including investment related insurance products, retirement plans, a precious
metals storage program, central asset accounts, and managed wrap accounts. In
addition, Pershing makes available to its correspondents information and
recommendations provided through its own research analysts' action-oriented
opinions and advice.
Sophisticated communications and information management are a
cornerstone of Pershing's service. Pershing's computer-directed communications
system provides Pershing's correspondents with a link to major financial
markets around the world. Pershing's proprietary software systems allow on-line
order entry and reporting. Pershing also maintains extensive operational and
informational systems for its correspondents.
Pershing's PC Financial Network, which began operations in 1989,
provides securities transaction services to the subscribers of PRODIGY, America
On-Line, Reuters Money Network, Apple's e-World and On-Line Resources'
Screenphone, and has become the nation's largest on-line discount broker.
8
INVESTMENT SERVICES GROUP
The Investment Services Group offers a full range of investment and
portfolio services to high-net-worth individual investors and medium to smaller
size financial institutions, corporations and professional investors. These
services are provided by approximately 300 account executives located in 10 of
the Company's domestic offices. In 1997, the group expanded overseas and opened
an office in London, as part of the Company's London broker-dealer subsidiary.
Due to the close working relationships between account executives and
the Company's research analysts and traders, the group's clients are provided
with the same comprehensive coverage that characterizes the Company's
traditional institutional businesses. The group also offers the "Portfolio
Advisory Service" to its clients, a wrap fee account based solely on the
Company's research, which has over $680 million in assets under management at
December 31, 1996.
ASSET MANAGEMENT GROUP
The Asset Management Group consists of DLJ Investment Management
Corporation and Wood Struthers and Winthrop. The group specializes in
individual and institutional investment management.
DLJ Investment Management Corporation was established in 1996 to
manage funds for institutional clients. At December 31, 1996, the Company had
approximately $1 billion of assets dedicated to its strategic cash managment
discipline.
Wood, Struthers and Winthrop Management Corp., founded in 1871 and
acquired by the Company in 1977, is a growing asset manager, managing over $5.0
billion in assets at December 31, 1996. Wood, Struthers & Winthrop targets
sophisticated individual investors, as well as charitable endowments,
foundations and trusts, corporations and Employee Retirement Income Security
Act of 1974 ("ERISA") plans. Wood, Struthers & Winthrop manages portfolios of
both stocks and bonds, balancing risk and return to meet a client's objectives
for growth and capital preservation. The 43 person professional staff of Wood,
Struthers & Winthrop is experienced in portfolio management, investment
research, tax advice, financial planning and in providing personalized service
to all of its clients. Through its Wood Struthers and Winthrop Capital Inc.
subsidiary the firm manages a $1 billion portfolio of private placements which
it originated.
Wood, Struthers & Winthrop is the investment advisor to the Company's
Winthrop Focus Funds, a domestic family of diversified open-end mutual funds
which are distributed principally through the Company and Equitable. The Focus
Funds consist of three U.S. equity funds and two fixed-income funds and
aggregate approximately $534 million. In addition, Wood, Struthers & Winthrop
is the advisor to the Winthrop Opportunity Funds, a family of diversified
open-end international mutual funds. These funds consist of a developing
markets equity fund and an established markets equity fund, and will be
distributed through the Company and Equitable.
Wood, Struthers & Winthrop has a limited purpose trust company
subsidiary, Winthrop Trust Company, which to provides tax, financial planning,
custody and personal fiduciary services to its high-net-worth individual and
family clients. At December 31, 1996, Winthrop Trust Company had received
fiduciary appointments aggregating in excess of $600 million.
COMPETITION
The Company encounters significant competition in all aspects of the
securities business and competes worldwide directly with other domestic and
foreign securities firms, a number of which have greater capital, financial and
other resources than the Company. In addition to competition from firms
currently in the securities business, there has been increasing competition
from other sources, such as commercial banks and investment boutiques. As a
result of pending legislative and regulatory initiatives in the U.S. to remove
or relieve certain restrictions on commercial banks, it is anticipated that
competition in some markets currently dominated by investment banks may
increase in the near future. Such competition could also affect the Company's
ability to attract and retain highly skilled individuals to conduct its various
businesses. The principal competitive factors influencing the Company's
business are its professional staff, the firm's reputation in the
9
marketplace, its existing client relationships, the ability to commit capital
to client transactions and its mix of market capabilities. The Company's
ability to compete effectively in securities brokerage and investment banking
activities will also be influenced by the adequacy of its capital levels.
EMPLOYEES
At December 31, 1996, the Company had approximately 5,900 employees.
Professional personnel receive salary as well as incentive compensation in the
form of bonus and, in certain instances, through long-term incentive and/or
other compensation plans. Most of the Company's securities sales force
personnel receive a percentage of their gross revenues or a percentage of a
specified revenue pool as compensation. Other employees receive a salary and,
in certain cases, overtime compensation and compensation in the form of profit
sharing. None of the Company's employees is represented by a labor union.
REGULATION
The Company's business and the securities industry in general are
subject to extensive regulation in the U.S. at both the Federal and state
level, as well as by industry Self Regulatory Organizations ("SRO's"). A number
of Federal regulatory agencies are charged with safeguarding the integrity of
the securities and other financial markets and with protecting the interests of
customers participating in those markets. The Securities and Exchange
Commission (the "Commission") is the Federal agency that is primarily
responsible for the regulation of broker-dealers and investment advisors doing
business in the U.S., and the Commodity Futures Trading Commission ("CFTC") is
primarily responsible for the regulation of futures commission merchants. In
addition, the Department of the Treasury and the Municipal Securities
Rulemaking Board have the authority to promulgate regulations relating to U.S.
government and agency securities and to municipal securities, respectively, and
the Board of Governors of the Federal Reserve System promulgates regulations
applicable to securities credit transactions involving broker-dealers and
certain other U.S. institutions. Broker-dealers and investment advisers are
subject to registration and regulation by state securities regulators in those
states in which they conduct business. Industry SRO's, each of which has
authority over the firms that are its members, include the NASD, the NYSE, and
other securities exchanges, the National Futures Association ("NFA") and the
commodities exchanges.
Each of DLJSC, Pershing Trading Company, L.P. ("Pershing Trading") and
Autranet (collectively, the "U.S. Broker-Dealers") is registered as a
broker-dealer with the Commission and is a member of, and subject to regulation
by, a number of securities industry SRO's, including the NYSE and the NASD.
Both DLJSC and Pershing Trading are, in addition to being NYSE members, members
of most other major U.S. securities exchanges. DLJSC is also registered as a
broker-dealer in all 50 states and the District of Columbia, as a futures
commission merchant with the CFTC, as an investment advisor with the Commission
and in certain states, is also designated a primary dealer in U.S. government
securities by the Federal Reserve Bank of New York. In connection with its
business as a futures commission merchant, DLJSC is also a member of, and
subject to regulation by, the NFA and the Chicago Board of Trade ("CBOT"). Both
Pershing Trading and Autranet are registered as broker-dealers in a number of
states. Wood, Struthers & Winthrop Management Corp. and DLJ Investment
Partners, Inc. are registered with the Commission and, in certain states as an
investment adviser. The Company also has certain other direct and indirect
subsidiaries that are registered with the Commission and certain states or with
other regulatory authorities as broker-dealers or investment advisers. Winthrop
Trust Company is regulated by the New York State Banking Department.
As a result of registration and SRO memberships, the U.S.
Broker-Dealers are subject to overlapping schemes of regulation which cover all
aspects of their securities business. Such regulations cover matters including
capital requirements, the use and safekeeping of customers' funds and
securities, recordkeeping and reporting requirements, supervisory and
organizational procedures intended to assure compliance with securities laws
and rules of the SRO's and to prevent the improper trading on "material
nonpublic" information, employee-related matters, limitations on extensions of
credit in securities transactions, and clearance and settlement procedures. A
particular focus of the applicable regulations concerns the relationship
between broker-dealers and their customers. As a result, the U.S.
Broker-Dealers in some instances may be
10
required to make "suitability" determinations as to certain customer
transactions, are limited in the amounts that they may charge customers, cannot
trade ahead of their customers and must make certain required disclosures to
their customers.
As investment advisers registered with the Commission, Wood, Struthers
& Winthrop Management Corp. and DLJSC are subject to the requirements of the
Investment Advisers Act of 1940 and the Commission's regulations thereunder.
Such requirements relate to, among other things, limitations on the ability of
investment advisers to charge performance-based or non-refundable fees to
clients, recordkeeping and reporting requirements, disclosure requirements,
limitations on principal transactions between an adviser or its affiliates and
advisory clients, as well as general anti-fraud prohibitions. The state
securities law requirements applicable to registered investment advisers are in
certain cases more comprehensive than those imposed under the Federal
securities laws.
DLJSC, as a registered futures commission merchant, is subject to the
capital and other requirements of the CFTC under the Commodity Exchange Act.
These requirements include the provision of certain disclosure documents,
prohibitions against trading ahead of customers and other fraudulent trading
practices, provisions as to the handling of customer funds and reporting and
recordkeeping requirements.
The U.S. Broker-Dealers are also subject to "Risk Assessment Rules"
imposed by the Commission and, in the case of DLJSC, by the CFTC. These rules
require, among other things, that certain broker-dealers and futures commission
merchants maintain and preserve certain information, describe risk management
policies and procedures and report on the financial condition of certain
affiliates whose financial and securities activities are reasonably likely to
have a material impact on the financial and operational condition of the
broker-dealers or futures commission merchants. Affiliates of the U.S.
Broker-Dealers and the activities conducted by such affiliates may not be
subject to regulation by the Commission or the CFTC. However, the possibility
exists that, on the basis of the information that they obtain from the Risk
Assessment Rules, the Commission or CFTC could seek legislative or regulatory
changes in order to expand their authority over the Company's unregulated
subsidiaries either directly or through their existing authority over the
Company's regulated subsidiaries.
In addition to being regulated in the U.S., the Company's business is
subject to regulation by various foreign governments and regulatory bodies. The
Company does business in the international equity and fixed income markets and
undertakes investment banking activities through several of its London
subsidiaries. These broker-dealer subsidiaries that are subject to regulation
by the Securities and Futures Authority of the United Kingdom pursuant to the
United Kingdom Financial Services Act of 1986, which governs all aspects of a
United Kingdom investment business, including regulatory capital, sales and
trading practices, use and safekeeping of customer funds and securities,
recordkeeping, margin practices and procedures, registration standards for
individuals, periodic reporting and settlement procedures. In addition, the
Company has subsidiaries that are broker-dealers subject to regulation,
including capital requirements imposed by the Securities and Futures Commission
of Hong Kong and the Ontario Securities Commission.
Additional legislation and regulations, including those relating to
the activities of affiliates of broker-dealers, changes in rules promulgated by
the Commission, the CFTC or other U.S. or foreign governmental regulatory
authorities and SRO's or changes in the interpretation or enforcement of
existing laws and rules may adversely affect the manner of operation and
profitability of the Company.
The Company's businesses may be materially affected not only by
regulations applicable to it as a financial market intermediary, but also by
regulations of general application. For example, the volume of the Company's
underwriting, merger and acquisition and merchant banking businesses in any
year could be affected by, among other things, existing and proposed tax
legislation, antitrust policy and other governmental regulations and policies
(including the interest rate policies of the Federal Reserve Board) and changes
in interpretation or enforcement of existing laws and rules that affect the
business and financial communities. From time to time, various forms of
anti-takeover legislation and legislation that could affect the benefits
associated with financing leveraged transactions with high-yield securities
have been proposed that, if
11
enacted, could adversely affect the volume of merger and acquisition and
merchant banking business, which in turn could adversely affect the Company's
underwriting, advisory and trading revenues related thereto.
The Company believes that it is in material compliance with the
regulations described herein.
In addition, several states, including New York, which is Equitable
Life's state of domicile, regulate transactions between an insurer and its
affiliates under insurance holding company acts. Under such laws and an
undertaking submitted by Equitable Life to the New York State Insurance
Department, certain transactions between the Company, on the one hand, and
Equitable Life and its subsidiaries on the other, may be subject to prior
notice or approval of the New York State Insurance Department depending on the
size of such transactions.
CAPITAL REQUIREMENTS
As broker-dealers registered with the Commission and member firms of
the NYSE, each of DLJSC, Pershing Trading and Autranet is subject to the
capital requirements of the Commission and of the NYSE. These capital
requirements specify minimum levels of capital, computed in accordance with
regulatory requirements ("net capital"), that the U.S. Broker-Dealers are
required to maintain and also limit the amount of leverage that the U.S.
Broker-Dealers are able to obtain in their businesses. As a futures commission
merchant, DLJSC is also subject to the capital requirements of the CFTC and the
CBOT.
Each of the U.S. Broker-Dealers has elected to compute its net capital
requirement under the "alternative method" permitted by the Commission. Under
this alternative method, each U.S. Broker-Dealer is required by the Commission
to maintain minimum regulatory net capital, computed in accordance with the
Commission's regulations, equal to the greater of $250,000 or 2% of the
aggregate debit balances arising from customer transactions calculated in
accordance with Commission regulations. The NYSE imposes certain more stringent
capital requirements on its member firms than those imposed by the Commission.
Further, under CFTC and CBOT capital regulations, DLJSC must maintain capital
in an amount equal to at least 4% of the funds required to be segregated under
the Commodity Exchange Act.
The aggregate debit balances referred to in the preceding paragraph
are the money owed to a broker-dealer by its customers and certain other
customer-related assets. "Net capital" is essentially defined as net worth
(assets minus liabilities, as determined under generally accepted accounting
principles), plus qualifying subordinated borrowings, less the value of all of
a broker-dealer's assets that are not readily convertible into cash (such as
goodwill, furniture, prepaid expenses, exchange seats and unsecured
receivables), and further reduced by certain percentages (commonly called
"haircuts") of the market value of a broker-dealer's positions in securities
and other financial instruments.
A failure by a U.S. Broker-Dealer to maintain its minimum required
capital would require it to cease executing customer transactions until it
returned to capital compliance, and could cause it to lose its membership on an
exchange, its right to registration with the Commission or CFTC, or require its
liquidation. Further, the decline in a U.S. Broker-Dealer's net capital below
certain "early warning levels," even though above minimum capital requirements,
could cause material adverse consequences to the firm. For example, the
Commission's capital regulations prohibit payment of dividends, redemption of
stock and the prepayment of subordinated indebtedness if a broker-dealer's net
capital thereafter would be less than 5% of aggregate debit items (or 7% of the
funds required to be segregated pursuant to the Commodity Exchange Act ("CEA"))
and prohibit principal payments in respect of subordinated indebtedness if a
broker-dealer's net capital thereafter would be less than 5% of aggregate debit
items (or 6% of the funds required to be segregated pursuant to the CEA). Under
NYSE Rule 326, a broker-dealer that is a NYSE member is required to reduce its
business if its net capital (after giving effect to scheduled maturities of
subordinated indebtedness or other planned withdrawals of regulatory capital
during the following six months) is less than 4% of aggregate debit items (or
6% of the funds required to be segregated pursuant to the CEA) for 15
consecutive business days. NYSE Rule 326 also prohibits the expansion of a
member's business if its net capital (after giving effect to scheduled
maturities of subordinated indebtedness or other planned withdrawals of
regulatory capital during the following
12
six months) is less than 5% of aggregate debit items (or 7% of the funds
required to be segregated pursuant to the CEA) for 15 consecutive business
days.
The Commission's capital rules also (i) require that the U.S.
Broker-Dealers notify the Commission and the NYSE and, in the case of DLJSC,
the CFTC, in writing, two business days prior to making withdrawals or other
distributions of equity capital or lending money to certain related persons, if
those withdrawals would exceed, in any 30 day period, 30% of the
broker-dealer's excess net capital and that they provide such notice within two
business days after any such withdrawal or loan that would exceed, in any 30
day period, 20% of the broker-dealer's excess net capital, (ii) prohibit a U.S.
Broker-Dealer from withdrawing or otherwise distributing equity capital or
making related party loans if after such distribution or loan, the U.S.
Broker-Dealer has net capital of less than 5% of aggregate debit items (or 7%
of the funds required to be segregated pursuant to the CEA) and in certain
other circumstances (iii) provide that the Commission may, by order, prohibit
withdrawals of capital from the U.S. Broker-Dealers for a period of up to 20
business days, if the withdrawals would exceed, in any 30 day period, 30% of
the broker-dealer's excess net capital and the Commission believes such
withdrawals would be detrimental to the financial integrity of the firm or
would unduly jeopardize the broker-dealer's ability to pay its customer claims
or other liabilities.
Compliance with regulatory capital requirements could limit those
operations of the U.S. Broker Dealers that require the intensive use of
capital, such as DLJSC's underwriting and trading activities, and the financing
of customer account balances, and also could restrict the Company's ability to
withdraw capital from the U.S. Broker-Dealers, which in turn could limit the
Company's ability to pay dividends, pay interest, repay debt and redeem or
purchase shares of its outstanding capital stock.
The Company believes that at all times the U.S. Broker-Dealers have
been in compliance in all material respects with the applicable minimum capital
rules of the Commission, the NYSE, the CFTC and the CBOT. As of December 31,
1996, DLJSC was required to maintain minimum "net capital," in accordance with
Commission and CFTC rules, of approximately $70.1 million and had total net
capital of approximately $654.1 million (including $305.3 million of
subordinated debt borrowed under various agreements), or approximately $584.0
million in excess of 2% of aggregate debit items and approximately $489.1
million in excess of 5% of aggregate debit items.
ITEM 2. PROPERTIES
The Company's principal executive offices are presently located at 277
Park Avenue, New York, New York and occupy approximately 793,000 square feet
under a lease expiring in 2016. The Company also leases space at 120 Broadway,
New York, New York, aggregating approximately 94,000 square feet. This lease
expires in 2006.
Pershing also leases approximately 440,000 square feet in Jersey City,
New Jersey, under leases which expire at various dates through 2009.
The Company also purchased land and a building with approximately
133,000 square feet in Florham Park, New Jersey in February 1996.
The Company leases an aggregate of approximately 500,000 square feet
for its domestic and international regional offices, the leases for which
expire at various dates through 2014. Other domestic offices are located in
Atlanta, Austin, Boston, Chicago, Dallas, Houston, Jersey City, Los Angeles,
Menlo Park, Miami, Oak Brook, Philadelphia and San Francisco. Its foreign
office locations are Bangalore, Buenos Aires, Geneva, Hong Kong, London,
Lugano, Mexico City, Paris, Sao Paulo and Tokyo. In 1996, the Company's
principal London subsidiary entered into a lease for approximately 76,000
square feet to accommodate the expansion of its international operations. Such
lease expires in 2008.
The Company believes that its present facilities are adequate for its
current needs.
13
ITEM 3. LEGAL PROCEEDINGS
Beginning on March 25, 1991, Dayton Monetary Associates and Charles
Davison, along with more than 200 other plaintiffs, filed several complaints
against DLJSC and a number of other financial institutions and several
individuals in the U.S. District Court for the Southern District of New York.
The plaintiffs allege that DLJSC and other defendants violated civil provisions
of RICO by inducing plaintiffs to invest over $40 million during the years 1978
through 1982 in The Securities Groups, a number of tax shelter limited
partnerships. The plaintiffs seek recovery of the loss of their entire
investment and an approximately equivalent amount of tax-related damages.
Judgments for damages under RICO are subject to trebling. Discovery is complete
and motions for summary judgement are pending. No trial date has been set by
the court. DLJSC believes that it has meritorious defenses to the complaints
and is contesting the suits vigorously. Although there can be no assurance, the
Company does not believe that the ultimate outcome of this litigation will have
a material adverse effect on its consolidated financial condition. Due to the
early stage of such litigation, based upon the information currently available
to it, management cannot make an estimate of loss, if any, or predict whether
or not such litigation will have a material adverse effect on the Company's
results of operations in any particular period.
In October 1995, DLJSC was named as a defendant in a purported class
action filed in a Texas State Court on behalf of the holders of $550 million
principal amount of subordinated redeemable discount debentures of National
Gypsum Corporation ("NGC") canceled in connection with a Chapter 11 plan of
reorganization for NGC consummated in July 1993. The State Court named
plaintiff also filed an adversary proceeding in the Bankruptcy Court for the
Northern District of Texas seeking a declaratory judgment that the confirmed
NGC plan of reorganization does not bar the class action claims. Subsequent to
the consummation of NGC's plan of reorganization, NGC's shares traded for
values substantially in excess of, and in 1995 NGC was acquired for a value
substantially in excess of, the values upon which NGC's plan of reorganization
was based. The two actions arise out of DLJSC's activities as financial advisor
to NGC in the course of NGC's Chapter 11 reorganization proceedings. The class
action complaint alleges that the plan of reorganization submitted by NGC was
based upon projections by NGC and DLJSC which intentionally understated
forecasts, and provided misleading and incorrect information in order to hide
NGC's true value and that defendants breached their fiduciary duties by, among
other things, providing false, misleading or incomplete information to
deliberately understate the value of NGC. The class action complaint seeks
compensatory and punitive damages purportedly sustained by the class. DLJSC
intends to defend itself vigorously against all of the allegations contained in
the complaint. Although there can be no assurance, the Company does not believe
that the ultimate outcome of this litigation will have a material adverse
effect on its consolidated financial condition. Due to the early stage of such
litigation, based upon the information currently available to it, management
cannot make an estimate of loss, if any, or predict whether or not such
litigation will have a material adverse effect on the Company's results of
operations in any particular period.
In November and December 1995, DLJSC, along with various other
parties, was named as a defendant in a number of purported class actions filed
in the U.S. District Court for the Eastern District of Louisiana. The
complaints allege violations of the Federal securities laws arising out of a
public offering in 1994 of $435 million of first mortgage notes of Harrah's
Jazz Company and Harrah's Jazz Finance Corp. The complaints seek to hold DLJSC
liable for various alleged misstatements and omissions contained in the
prospectus dated November 9, 1994. On February 26, 1997, the parties have
agreed to a settlement of these actions, subject to the District Court's
approval.
On January 26, 1996, a purported purchaser of certain notes and
warrants to purchase shares of common stock of Rickel Home Centers, Inc.
("Rickel") filed a class action complaint against DLJSC and certain other
defendants for unspecified compensatory and punitive damages in the United
States District Court for the Southern District of New York. The suit was
brought on behalf of the purchasers of 126,457 units consisting of $126,457,000
aggregate principal amount of 13 1/2% senior notes due 2001 and 126,457
warrants to purchase shares of common stock of Rickel (the "Units") issued by
Rickel in October 1994. The complaint alleges violations of federal securities
laws and common law fraud against DLJSC, as the underwriter of the Units and as
an owner of 7.3% of the common stock of Rickel, Eos Partners, L.P. and General
Electric Capital
14
Corporation, each as owners of 44.2% of the common stock of Rickel, and members
of the Board of Directors of Rickel, including a DLJSC Managing Director. The
complaint seeks to hold DLJSC liable for alleged misstatements and omissions
contained in the prospectus and registration statement filed in connection with
the offering of the Units, alleging that the defendants knew of financial
losses and a decline in value of Rickel in the months prior to the offering and
did not disclose such information. The complaint also alleges that Rickel
failed to pay its semi-annual interest payment due on the Units on December 15,
1995, and that Rickel filed a voluntary petition for reorganization pursuant to
Chapter 11 of the United States Bankruptcy Code on January 10, 1996. DLJSC
intends to defend itself vigorously against all of the allegations contained in
the complaint. Although there can be no assurance, the Company does not believe
that the outcome of this litigation will have a material adverse effect on its
consolidated financial condition. Due to the early stage of this litigation,
based on the information currently available to it, management cannot make an
estimate of loss, if any, or predict whether or not such litigation will have a
material adverse effect on the Company's results of operations in any
particular period.
In addition to the matters described above, the Company has been named
as a defendant in various civil actions and arbitrations arising out of its
activities as a broker-dealer in securities, as an underwriter and as an
employer and arising out of alleged employee misconduct. The Company is also
involved, from time to time, in proceedings with, and investigations by,
governmental agencies and SRO's. See "Regulation." In particular, the Company
has been a defendant in various lawsuits filed in connection with certain
mortgage related securities previously structured and/or underwritten by the
Company and two of its subsidiaries are the subject of an investigation by the
Commission with respect to these transactions. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition--Liquidity and
Capital Resources." The Company does not believe that any such matters, claims
or investigations will have a material adverse effect on its results of
operations or its consolidated financial condition.
DLJSC has consented to the entry of certain administrative orders,
pursuant to which it has been ordered to permanently cease and desist from
committing or causing any current or future violation of certain Federal
securities laws. In particular, on September 22, 1992, the Commission initiated
an administrative proceeding pursuant to Section 8A of the Securities Act and
Sections 15(b), 19(h) and 21C of the Exchange Act, against DLJSC, as
respondent, relating to the 1986 initial public offering of common stock of
Matthews & Wright Group Inc. ("M&W"), in which DLJSC acted as a co-managing
underwriter. Simultaneously, without admitting or denying the Commission's
findings, and prior to a hearing pursuant to the Commission's Rules of
Practice, DLJSC settled the proceeding by consenting to the entry of the
administrative order finding that in light of all the information known and
available to DLJSC, DLJSC failed to adequately and reasonably investigate
certain aspects of M&W's business activities and therefore did not have a
reasonable basis to believe that certain representations in the registration
statement regarding bond offerings underwritten by M&W and closed by M&W in
December 1985 and August 1986 were accurate and complete. The administrative
order censured DLJSC and ordered that DLJSC permanently cease and desist from
committing or causing any violation, and from committing or causing any future
violation, of Section 17(a) and Section 10(b) of the Exchange Act and Rule
10b-5 thereunder. As part of the settlement, DLJSC applied for and received a
determination that the entry of the administrative order would not disqualify
DLJSC from the exemptions under Commission Regulations A, B, D and E
promulgated under the Securities Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1996, no matters were submitted to a vote of
security holders.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET AND DIVIDEND INFORMATION
The principal market for trading DLJ Common Stock is the New York Stock
Exchange. Its stock symbol is "DLJ."
QUARTERS
1996 1st 2nd 3rd 4th
---- --- --- --- ---
High..................... 33 1/2 34 3/4 35 1/8 36
Low...................... 28 5/8 30 3/8 27 5/8 32 1/8
Common dividends......... $0.125 $0.125 $0.125 $0.125
QUARTERS
1995 1st 2nd 3rd 4th
---- --- --- --- ---
High.................... - - - 33 1/2
Low..................... - - - 28 7/8
Common dividends........ $0.163 $ - $ - $0.125
The approximate number of holders of DLJ Common Stock at March 5,
1997, was 6,500. Information on market price of the Company's Common
Stock is from the date of the completion of the Initial Public
Offering ("IPO"), October 30, 1995. Effective with the IPO, the
Company established a policy of paying quarterly dividends on its
common shares at the annual rate of $0.50 per year.
16
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In millions, except share and per share data and financial ratios)
INCOME STATEMENT DATA:
REVENUES
Commissions..................... $ 573.3 $ 460.2 $ 376.1 $ 358.8 $ 289.7
Underwritings................... 714.2 441.5 261.1 574.6 350.3
Fees............................ 470.0 369.1 281.3 211.3 158.1
Interest, net (1)............... 1,074.2 904.1 791.9 657.3 381.7
Principal transactions-net:
Trading........................ 435.4 364.9 165.7 381.5 272.0
Investment..................... 163.0 163.7 97.6 79.9 195.9
Other........................... 60.7 55.1 35.0 21.9 16.4
-------- -------- -------- -------- --------
Total revenues................ 3,490.8 2,758.6 2,008.7 2,285.3 1,664.1
-------- -------- -------- -------- --------
COSTS AND EXPENSES
Compensation and benefits....... 1,538.8 1,261.4 897.8 1,200.4 886.6
Compensation expense-
restricted stock units ........ - 6.2 - - -
Interest........................ 733.2 680.6 503.8 381.7 212.3
Brokerage, clearing, exchange
fees and other................. 201.3 168.1 135.6 133.8 114.1
Occupancy and equipment ........ 159.3 127.1 90.1 80.0 71.2
Communications.................. 53.7 42.8 36.6 31.9 28.7
Other operating expenses........ 330.7 173.9 139.8 155.5 106.2
-------- -------- -------- -------- --------
Total costs and expenses...... 3,017.0 2,460.1 1,803.7 1,983.3 1,419.1
-------- -------- -------- -------- --------
Income before provision for
income taxes......... 473.8 298.5 205.0 302.0 245.0
Provision for income taxes........ 182.5 119.4 82.0 115.9 98.0
-------- -------- -------- -------- --------
Net income........................ $ 291.3 $ 179.1 $ 123.0 $ 186.1 $ 147.0
======== ======== ======== ======== ========
Dividends on preferred stock...... $ 18.7 $ 19.9 $ 21.0 $ - $ -
======== ======== ======== ======== ========
Earnings applicable to
common shares................... $ 272.6 $ 159.2 $ 102.0 $ 186.1 $ 147.0
======== ======== ======== ======== ========
Weighted average common
shares outstanding (2). ........ 59,918 51,657
======== ========
Earnings per common share (2)..... $ 4.55 $ 3.08
======== ========
Pro forma weighted average
common shares outstanding (3)... 51,475
========
Pro forma earnings per
common share (3)................ $ 1.98
========
17
YEARS ENDED DECEMBER 31,
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(In millions, except share and per share data and financial ratios)
BALANCE SHEET DATA (AT END OF PERIOD):
Securities purchased under
agreements to resell and
securities borrowed.................. $29,954.2 $27,793.1 $19,166.9 $21,575.2 $14,378.4
Total assets........................... 55,503.7 44,576.5 33,261.6 38,766.7 24,436.2
Securities sold under agreements to
repurchase and securities loaned..... 32,103.1 29,369.0 20,385.4 24,116.7 14,732.4
Long-term borrowings (4,5)............. 1,541.6 983.4 539.9 549.0 478.6
Redeemable preferred stock (5)......... 200.0 225.0 225.0 225.0 -
Stockholders' equity (6). ............. 1,647.2 1,198.7 820.3 750.3 454.6
OTHER FINANCIAL DATA (AT END OF PERIOD):
Book value per common share
outstanding.......................... $ 24.79 $ 20.50 $ 16.41 $ 15.01 $ 9.09
Ratio of net assets to
stockholders' equity (7)............. 15.51x 14.00x 17.18x 22.91x 22.12x
Ratio of long-term borrowings
to total capitalization (8).......... 0.44 0.37 0.30 0.34 0.51
Return on average equity (9)........... 20.6% 17.1% 13.1% 30.5% 36.8%
Ratio of earnings to fixed charges..... 1.16x 1.11x 1.10x 1.20x 1.21x
Ratio of earnings to combined fixed
charges and preferred stock
dividends (10)....................... 1.16x 1.10x 1.09x - -
(1) Interest is net of interest expense to finance U.S. government and agency
instruments of $2.1 billion, $2.0 billion, $1.6 billion, $1.1 billion and
$0.9 billion, respectively.
(2) Earnings per common share has been calculated by dividing earnings
applicable to common shares (net income less preferred dividends) by the
weighted average number of common shares and common share equivalents
outstanding. Common share equivalents include shares of common stock
issuable under the Restricted Stock Unit Plan and the dilutive effect of
options under the treasury stock method. Weighted average common shares
and common share equivalents outstanding are substantially the same for
both primary and fully diluted earnings per common share.
(3) Pro forma earnings per common share are calculated by dividing earnings
applicable to common shares, (net income less preferred dividends) by the
pro forma weighted average number of common shares and common share
equivalents outstanding. Pro forma common shares outstanding represent
actual historical shares outstanding adjusted for the dilutive effect of
the Restricted Stock Units (RSUs) using the treasury stock method.
(4) In February 1996, the Company issued $250 million of 5 5/8% Medium-Term
Notes due February 15, 2016. The notes are repayable by the Company, in
whole or in part, at the option of the holders on February 15, 2001.
(5) In the third quarter of 1996, the Company and its wholly owned Trust
completed an offering from a shelf registration of $200 million of the
Trust's 8.42% mandatorily redeemable preferred stock which is fully and
unconditionally guaranteed by the Company. The preferred stock is
redeemable, in whole or in part, at the option of the Company on or after
August 31, 2001. The only assets of the Trust are the 8.42% Junior
Subordinated Debentures of the Company due 2046 (See Note 11 to the
Consolidated Financial Statements).
In October 1996, the Company exercised its option under the terms of the
$8.83 Cumulative Preferred Stock agreement to exchange all 2.25 million
shares outstanding for $225 million in aggregate principal amount of 9.58%
Subordinated Exchange Notes due October 15, 2003. The notes are
redeemable, in whole or in part, at the option of the Company at any time.
(6) In November 1996, the Company issued 4.0 million shares of
Fixed/Adjustable Rate Cumulative Preferred Stock, Series A, with a
liquidation preference of $50 per share.
(7) Net assets are total assets excluding securities purchased under
agreements to resell and securities borrowed.
(8) Long-term borrowings and total capitalization (the sum of long-term
borrowings, preferred stock and stockholders' equity) exclude current
maturities of long-term borrowings.
(9) After payment of dividends on the Company's Cumulative Exchangeable $8.83
Preferred Stock.
(10) For the purpose of calculating the ratio of earnings to combined fixed
charges and preferred stock dividends (i) earnings consist of income
before the provision for income taxes and fixed charges and (ii) fixed
charges consist of interest expense and one-third of rental expense which
is deemed representative of an interest factor. No preferred dividends
were paid until 1994.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS ENVIRONMENT
The Company's principal business activities, investment and merchant
banking, securities sales and trading and correspondent brokerage services are,
by their nature, highly competitive and subject to general market conditions,
volatile trading markets and fluctuations in the volume of market activity.
Consequently, the Company's net income and revenues have been and are likely to
continue to be, subject to wide fluctuations, reflecting the impact of many
factors beyond the Company's control, including securities market conditions,
the level and volatility of interest rates, competitive conditions and the size
and timing of transactions.
The strong market conditions that existed in 1995 continued to improve
during 1996 resulting in higher levels of underwriting and merger and
acquisition activity. Record levels were achieved by major stock indices, such
as the Dow Jones Industrial Average, the Standard & Poor's 500 Index and the
NASDAQ composite. These favorable market conditions combined with rising stock
prices created a robust investment banking atmosphere.
RECENT DEVELOPMENTS
In October 1996, the Company exercised its option under the terms of
the $8.83 Cumulative Preferred Stock agreement to exchange all 2.25 million
shares outstanding for $225 million in aggregate principal amount of 9.58%
Subordinated Exchange Notes due October 15, 2003. The notes are redeemable, in
whole or in part, at the option of the Company at any time.
In November 1996, the Company issued 4.0 million shares of
Fixed/Adjustable Rate Cumulative Preferred Stock, Series A, with a liquidation
preference of $50 per share.
During the third quarter of 1995, the Company provided $28.8 million
for a potential loss with respect to a bridge loan aggregating $150 million to
a company experiencing financial difficulties. In October 1996, a planned
acquisition of such company was announced, which, if completed, would result in
the realization by the Company of amounts previously reserved, plus interest.
The transaction is expected to close in early 1997.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Total revenues for 1996 were $3.5 billion, an increase of $732.1
million or 26.5% over 1995. Revenues increased in most of the Company's major
areas of activity during 1996.
Commission revenues increased by $113.1 million or 24.6% to $573.3
million due to increased business in all areas, and is generally consistent
with the overall growth in listed share volume on major equity exchanges.
Underwriting revenues increased by $272.6 million or 61.7% to $714.2
million. The Company experienced increases in all areas of underwriting during
1996.
Fee revenues increased by $100.9 million or 27.3% to $470.0 million.
Overall, merger and acquisition ("M&A"), asset management and other advisory
services activities have increased during 1996. In 1996, the Company closed DLJ
Merchant Banking Partners II, L.P. and related investment entities with total
committed capital in excess of $3.0 billion. At December 31, 1996, the Company
has approximately $8.0 billion of committed capital related to its merchant
banking activities.
19
Interest, net of interest expense to finance U.S. government, agency
and mortgage-backed securities, increased by $170.1 million or 18.8% to $1.1
billion. Higher levels of foreign fixed income securities in the Company's
Emerging Markets business accounted for approximately one half of the increase.
The remaining increase was due to higher levels of inventory in the Fixed
Income Division and increased margin balances at Pershing.
Principal transactions, trading revenues increased by $70.5 million or
19.3% to $435.4 million. Most of the increase took place in the Fixed Income
Division due to improved trading results in high-grade corporates and
high-yield securities.
Principal transactions, investment revenues decreased by $0.7 million
or 0.4% to $163.0 million. Realized gains on investments were $213.3 million.
Net unrealized carrying values decreased by $50.3 million, which includes the
elimination of net unrealized appreciation of $47.6 million on investments sold
and a decrease in net unrealized appreciation of $2.7 million on retained
investments.
Other revenues, consisting primarily of dividends and miscellaneous
transaction revenues, increased by $5.5 million or 10.0% to $60.7 million due
to increased business activity.
Total costs and expenses for 1996 were $3,017.0 million, an increase
of $556.8 million or 22.6% over 1995.
Compensation and benefits increased $271.2 million or 21.4% to
$1,538.8 million. Most of the increase was due to increased variable incentive
and production-related compensation, which resulted from higher revenues and
operating results. Incentive and production-related compensation increased by
26.7% in 1996, while base compensation, including benefits and payroll taxes,
increased by 9.6% due to expansion in various business groups. At December 31,
1996, full-time personnel totaled 5,885 compared to 4,918 at December 31, 1995,
an increase of 967 or 19.7%.
Interest expense increased $52.6 million or 7.7% to $733.2 million.
Most of this increase was related to expanded levels of inventory of
fixed-income related products including equity derivatives and foreign local
fixed-income securities.
All other expenses, as noted below, increased by $233.1 million or
45.5% to $745.0 million in 1996.
Brokerage, clearing, exchange fees and other expenses increased by
$33.2 million due to increased share volume, underwriting related expenses and
transaction fee payments. Occupancy and equipment costs increased by $32.2
million as a result of the expansion of the Company's principal office in the
U.S. and the expansion of the Company's other domestic and overseas offices.
Communications costs increased by $10.9 million due to expanded facilities and
growth in professional staff. All other operating expenses increased by $156.8
million. Included therein are data processing, professional fees, travel and
entertainment, and printing and stationery which increased by $82.1 million
reflecting an overall increase in the level of business activity. In addition,
during 1996, $35.7 million of expenses were incurred in connection with
mortgage-related securities previously underwritten by the Company.
The Company's income tax provision for 1996 and 1995 was $182.5
million and $119.4 million, respectively, which represented a 38.5% and 40%
effective tax rate for each period.
Net income for 1996 was $291.3 million, up $112.2 million or 62.6%
from the comparable 1995 period. Earnings per common share using the treasury
stock method were $4.55 and $3.08 for 1996 and 1995, respectively.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Total revenues for 1995 were approximately $2.8 billion, an increase
of $750.0 million or 37.3% over 1994. Revenues increased in all of the
Company's major areas of activity during 1995.
20
Commission revenues increased by $84.1 million or 22.4% to $460.2
million due to increased business in all areas and is generally consistent with
the overall growth in listed share volume on major equity exchanges.
Underwriting revenues increased by $180.5 million or 69.1% to $441.5
million. The Company experienced increases in all areas of underwriting during
1995.
Fee revenues increased by $87.8 million or 31.2% to $369.1 million due
primarily to increased M&A and other advisory fees in the Investment Banking
group.
Interest, net of interest expense to finance U.S. government, agency
and mortgage-backed securities, increased by $112.2 million or 14.2% to $904.1
million. Higher interest rates earned at Pershing on higher levels of customer
margin balances and securities loaned/borrowed activity accounted for most of
the increase which was offset in part by lower interest income earned on
reduced levels of inventory in the Fixed Income Division.
Principal transactions, trading revenues increased by $199.2 million
or 120.2% to $364.9 million. Most of this increase was due to improved trading
results in mortgage-backed and high-yield securities both of which had negative
trading results in 1994.
Principal transactions, investment revenues increased by $66.1 million
or 67.7% to $163.7 million. Realized gains on investments were $261.5 million.
Net changes in unrealized carrying values were reduced by $97.8 million, which
includes the elimination of net unrealized appreciation of $39.2 million on
investments sold and a reduction in net unrealized appreciation of $58.6
million on retained investments. This latter amount includes a provision for an
estimated loss of $28.8 million on a bridge loan. During the third quarter of
1995, the Company provided for the potential loss with respect to this bridge
loan aggregating $150 million to a company experiencing financial difficulties.
This loss was substantially offset by gains from other principal investments.
If the amount of the loss from such bridge loan is in excess of $25 million,
pursuant to the terms of an agreement with Equitable, distribution to the
Company with respect to its $1.25 billion bridge facility would be eliminated
until such loss has been recovered. While there can be no assurance, the
Company does not anticipate incurring any future losses from its current
merchant banking investments which would have a material adverse effect on the
Company's results of operations or financial condition.
Other revenues consisting primarily of dividends and miscellaneous
transaction revenues, increased by $20.1 million or 57.4% to $55.1 million. The
increase consists primarily of dividends received on equity securities.
Total costs and expenses for 1995 were approximately $2.5 billion, an
increase of $656.4 million or 36.4% over 1994.
Compensation and benefits increased $369.8 million or 41.2% to
$1,267.6 million. Most of the increase was due to increased variable incentive
and production-related compensation, which resulted from higher revenues and
operating results. Incentive and production-related compensation increased by
49.3% in 1995, while base compensation, including benefits and all payroll
taxes, increased by 23.6% primarily due to expansion in various business
groups. At December 31, 1995, full-time personnel totaled 4,918 compared to
4,566 at the end of 1994, an increase of 352 or 7.7%.
Interest expense increased $176.8 million or 35.1% to $680.6 million.
Most of this increase was related to business at Pershing. The remaining
increase was attributable to the impact of higher short-term interest rates on
expanded levels of whole loan related products.
Other expenses, as noted below, increased by $109.8 million or 27.3%
to $511.9 million in 1995.
21
Brokerage, clearing, exchange fees and other expenses increased by
$32.5 million due to increased share volume, underwriting related expenses and
transaction fee payments. Occupancy and equipment costs increased by $37.0
million as a result of the decision to relocate certain of the Company's
overseas and U.S. offices. Communications costs increased by $6.2 million and
all other operating expenses, which include data processing, professional fees,
travel and entertainment, and printing and stationery, increased by $34.1
million.
The Company's income tax provision for 1995 and 1994 was $119.4
million and $82.0 million, respectively, which represented a 40% effective tax
rate for both periods.
Net income for 1995 was $179.1 million, up $56.1 million or 45.6% from
the comparable 1994 period. Earnings per common share in 1995 and pro forma
earnings per common share giving effect to the dilutive effect of the
restricted stock units using the treasury stock method were $3.08 and $1.98 for
1995 and 1994, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets are highly liquid with the majority consisting of
securities inventories and collateralized receivables, both of which fluctuate
depending on the levels of proprietary trading and customer business. Such
collateralized receivables consist primarily of resale agreements and
securities borrowed, both of which are secured by U.S. government and agency
securities, and marketable corporate debt and equity securities. In addition,
the Company has significant receivables from customers, brokers and dealers
which turn over frequently. As a securities dealer, the Company may carry
significant levels of trading inventories to meet client needs. As such, the
Company's total assets or the individual components of total assets vary
significantly from period to period because of changes relating to customer
needs, economic and market conditions and proprietary trading strategies. A
relatively small percentage of total assets is fixed or held for a period of
longer than one year. The Company's total assets at December 31, 1996 and 1995
were $55.5 billion and $44.6 billion, respectively.
The majority of the Company's assets are financed through daily
operations by repurchase agreements, securities sold not yet purchased,
securities loaned, bank loans, and through payables to customers and brokers
and dealers. Short-term funding is generally obtained at rates related to
Federal funds, LIBOR and money market rates. Other borrowing costs are
negotiated depending upon prevailing market conditions. The Company monitors
overall liquidity by tracking the extent to which unencumbered marketable
assets exceed short-term unsecured borrowings.
The Company maintains borrowing relationships with a broad range of
banks, financial institutions, counterparties and others aggregating $6.0
billion, at December 31, 1996, in uncommitted and committed bank credit lines
with 50 domestic and international banks. These include $4.0 billion of
uncommitted bank credit lines, $1.28 billion of secured committed bank lines
and $650 million of unsecured committed bank lines.
Certain of the Company's businesses are capital intensive. In addition
to normal operating requirements, capital is required to cover financing and
regulatory charges on securities inventories, merchant banking investments and
investments in fixed assets. The Company's overall capital needs are
continually reviewed to ensure that its capital base can appropriately support
the anticipated needs of its business units as well as the regulatory capital
requirements of subsidiaries. Based upon these analyses, management believes
that the Company's debt and equity base is adequate for current operating
levels. The Company has been active in raising additional long-term financing,
including extending the maturity of its senior subordinated revolving credit
agreement of $250.0 million, and increasing the amount of the credit available
thereunder to $325.0 million in 1995 (of which $206.5 million was outstanding
as of December 31, 1996). The Company increased the amount of credit available
under its unsecured credit facility to $650 million. There were no borrowings
outstanding under this facility at December 31, 1996.
22
Mortgages, other receivables collateralized by real estate assets and
real estate owned, amounting to $405.2 million in 1996 and $466.1 million in
1995, generally represent the Company's interest in mortgages receivable
including certain mortgage-related securities previously underwritten by the
Company which were primarily repurchased in 1994, and are carried at amounts
approximating fair value, determined by, among other things, the discounted
cash flows and/or estimated sales prices of the underlying properties.
The Company issues structured notes which are customized financing
instruments in which the amount of interest or principal paid on the debt
obligation is linked to the return on specific cash market financial
instruments. At December 31, 1996 and 1995, the Company had issued long-term
structured notes with principal amounts of $216.2 million and $24.5 million
outstanding, respectively. The Company expects the volume of this activity to
increase in the future. The Company covers its obligations on structured notes
primarily by purchasing or selling the securities to which the value of its
structured notes are linked.
On October 30, 1995, the Company completed an initial public offering
("IPO") of its shares. The Company's net proceeds from the IPO totaled $81.2
million. Concurrent with the IPO, the Company completed the offering of $500
million aggregate principal amount of 6 7/8% Senior Notes due November 1, 2005
(the "Senior Debt Offering"). The proceeds from the Senior Debt Offering
totaled $493.5 million (net of underwriting discounts and commissions).
On February 12, 1996, a shelf registration statement, which enables
the Company to issue up to $500 million in aggregate public offering price of
Senior Debt Securities and/or Preferred Stock, was declared effective by the
Securities and Exchange Commission. On February 15, 1996, the Company completed
an offering under such shelf registration statement of $250 million aggregate
principal amount of its 5 5/8% Medium-Term Notes due February 15, 2016. The
notes are repayable by the Company, in whole or in part, at the option of the
holders on February 15, 2001. Net proceeds to the Company from this offering
were $248.3 million (net of underwriting discounts and commissions). During the
third quarter of 1996, the Company and its wholly owned Trust completed an
offering from a shelf registration of $200 million of the Trust's 8.42%
mandatorily redeemable preferred stock. The preferred stock is redeemable, in
whole or in part, at the option of the Company on or after August 31, 2001.
In March 1996, the Company moved its principal offices from 140
Broadway to 277 Park Avenue in New York City. The Company financed expenditures
related to the move from available operating capital.
On October 23, 1996, the Company exercised its option under the terms
of the $8.83 Cumulative Preferred Stock agreement to exchange all 2.25 million
shares outstanding for $225 million in aggregate principal amount of 9.58%
Subordinated Exchange Notes due October 15, 2003. The notes are redeemable, in
whole or in part, at the option of the Company at any time.
In November 1996, the Company issued 4.0 million shares of
Fixed/Adjustable Rate Cumulative Preferred Stock, Series A, with a liquidation
preference of $50 per share.
The Company's credit ratings of its long-term debt at December 31,
1996 are as follows: Duff & Phelps A; Fitch A; IBCA A; Moody's Baa1; Standard &
Poors A-; and Thomson Bank Watch A+.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC") is
subject to the capital requirements of the Securities and Exchange Commission,
the New York Stock Exchange, Inc., the Commodities Futures Trading Commission
and the Chicago Board of Trade, all of which are supposed to ensure the general
capital adequacy and liquidity of broker-dealers and/or futures commission
merchants. DLJSC has consistently maintained capital substantially in excess of
the minimum requirements of such capital rules. At December 31, 1996, DLJSC had
aggregate regulatory "net capital," after adjustments required by Rule 15c3-1
under the Exchange Act of 1934, of approximately $654.1 million, which exceeded
minimum net capital requirements by $584.0 million and which exceeded the net
capital required by DLJSC's most restrictive debt covenants by $417.0 million.
23
The Company's overall capital and funding needs are continually
reviewed to ensure that its capital base can support the estimated needs of its
business units.
CASH FLOWS
The Company's consolidated statements of cash flows classify cash
flows into three broad categories: cash flows from operating activities,
investing activities and financing activities. The Company's net cash flows are
principally associated with operating and financing activities, which support
the Company's trading, customer and banking activities.
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Cash and cash equivalents at December 31, 1996, 1995 and 1994 totaled
$158.8 million, $107.8 million and $94.9 million, respectively, an increase
(decrease) of $51.1 million, $12.9 million and $(48.0) million, respectively,
for the comparable periods.
Cash (used in) provided by operating activities totaled $(1.7)
billion, $194.4 million and $2.1 billion in 1996, 1995 and 1994, respectively,
and reflects an increase in operating assets and liabilities.
In 1996, there were increases in securities sold not yet purchased of
$2.7 billion, payables to brokers, dealers and other of $2.3 billion and
payables to customers of $1.3 billion. These increases were more than offset by
increases in assets including trading inventories of $4.9 billion, receivables
from brokers, dealers and other of $2.4 billion, and receivables from customers
of $813.3 million. In 1995, there were increases in assets including trading
inventories of $1.8 billion, receivables from customers of $707.3 million and
securities borrowed of $354.5 million. These increases in operating assets were
offset by increases in liabilities, including securities sold not yet purchased
of $1.2 billion, payables to customers of $604.6 million and securities loaned
of $595.5 million. In 1994 there were decreases in operating assets, including
trading inventories of $2.6 billion, securities borrowed of $1.3 billion and
receivables from brokers, dealers and other of $1.0 billion. These decreases
were partially offset by decreases in operating liabilities including
securities loaned of $1.2 billion, payables to brokers, dealers and other of
$864.9 million and securities sold not yet purchased of $470.1 million.
In 1996 and 1995, net cash used in investing activities of $75.0
million and $220.5 million, respectively, consisted primarily of fixed asset
purchases related to the Company's move of its principal offices and purchases
of mortgage receivables collateralized by real estate assets in 1995.
Additionally, in 1996, cash was provided from the sales of long-term corporate
development investments. In 1994, the Company used $267.5 million for investing
activities which was comprised primarily of $162.5 million of increases in
other assets (primarily reflecting receivables and advances acquired relating
to the whole loan securitization business).
In 1996, net cash provided by financing activities totaled $1.9
billion, of which, $1.2 billion was provided by short-term financings. Cash of
$105.5 million was used to repay Swiss Franc Bonds which matured in January
1996, $249.5 million was provided by the issuance of medium-term notes, $200.0
million was provided by the issuance of mandatorily redeemable preferred
securities by the Company's wholly owned Trust, and $200.0 million was provided
by the issuance of Series A Cumulative Preferred Stock of the Company. In 1995
and 1994, cash of $541.8 million and $1.9 billion, respectively, was used to
repay short-term funding (principally repurchase agreements). Additionally, in
1995, $496.8 million was provided from the issuance of Senior Notes, $100
million from the issuance of restricted stock units, $81.2 million from the
issuance of Common Stock in the IPO and $250 million from a secured term loan
agreement. This loan agreement as well as $79.0 million of other long-term debt
was repaid in 1995.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are financial instruments, the payments on which are
linked to the prices, or relationships between prices, of securities or
commodities, interest rates, currency exchange rates or other financial
measures (collectively referred to as "cash market instruments"). Derivatives
enable the Company and its clients to manage their exposure to interest rates
and currency exchange rates, and security and other price risks. Derivatives
include swaps, futures or forward
24
contracts and options. Certain types of derivatives, including forwards and
certain options, are traded in the over the counter ("OTC") markets. Other
types of derivatives, including futures contracts and listed options are traded
on regulated exchanges. The Company's involvement in derivative products is
related primarily to revenue generation through the provision of products to
its clients as opposed to covers of the Company's own positions.
The Company's derivative activities are not as extensive as many of
its competitors. Instead, the Company has focused its derivative activities on
writing OTC options contracts to accommodate its customers' needs, trading in
forward contracts in U.S. government and agency issued or guaranteed securities
and trading in futures contracts on equity-based indices, interest rate
instruments, and foreign currencies, and issuing structured notes. The
Company's involvement in swap contracts, which generally involve greater risk
and volatility, is not significant.
Options:
As part of customer accommodations, the Company writes option contracts
specifically designed to meet customers' needs. As a writer of OTC option
contracts, the Company receives a cash premium at the beginning of the contract
period and bears the risk of unfavorable changes in the value of the financial
instruments underlying the options. Options written do not expose the Company
to credit risk since they obligate the Company (not its counterparty) to
perform. With respect to the financial instruments underlying these options,
the Company makes a determination that credit exposures are appropriate for the
particular counterparty with whom business is conducted. The Company generally
covers its market risk associated with the options business by purchasing or
selling cash or other derivative financial instruments on a proprietary basis
to cover the options written. Such purchases and sales may include debt and
equity securities, futures and forward contracts and options. The Company
reviews the creditworthiness of the counterparties of such covering
transactions. Future cash requirements for options written are equal to the
fair value of the options. Option contracts are typically written for a
duration of less than 13 months and are included in the consolidated statements
of financial condition at fair value. Option premiums are recognized as revenue
over the life of the option contracts on a straight-line basis or are
recognized as revenue through the change in the fair value of the option.
The notional (contract) value of the written options was $8.6 billion and $3.7
billion at December 31, 1996 and 1995, respectively. Such options contracts are
covered by the following financial instruments which the Company has purchased
or sold on a proprietary basis and are reflected in the table below at either
the underlying contract (notional) amounts for derivative instruments or at
market value for cash instruments:
December 31,
1996 1995
------- -------
(In millions)
U.S. government, mortgage-backed
securities and options thereon........... $ 4,679 $ 1,569
Foreign sovereign debt securities........... 2,460 666
Equity swap contracts....................... 70 408
Futures contracts........................... 306 183
Equities and other.......................... 1,097 911
------- -------
Total.............................. $ 8,612 $ 3,737
======= =======
Forwards and Futures Trading:
As part of the Company's trading activities, including trading
activities in the related cash market instruments, the Company enters into
forward and futures contracts primarily involving securities, foreign
currencies, indices and forward rate agreements, as well as options on futures
contracts. Such forward and futures contracts are entered into as part of the
Company's covering transactions and are not used for speculative purposes.
25
Forward contracts generally call for the purchase or sale by the
Company, on a delayed settlement basis, of debt securities or currencies, or
other financial instruments. Futures contracts and options on futures contracts
are exchange traded contracts which settle daily and generally call for the
purchase or sale by the Company of a financial instrument at a specified future
date at a specified price. The Company generally profits when the value of
assets that it has purchased on a delayed settlement basis rises or the value
of assets that it has sold on a delayed settlement basis falls. Conversely, the
Company generally incurs losses when assets purchased for delayed settlement
decline in value or sold assets increase in value. Forward and futures
contracts, unlike cash market transactions in the financial instruments to
which such forwards or futures relate, have both on-and off-balance sheet
implications. The notional contractual value of forward and futures contracts
are treated as off-balance sheet items, while the related unrealized gains and
losses are included in assets and liabilities.
The average monthly net unrealized gains (losses) were approximately
$(10.0) million and $(4.0) million for forward contracts and $2.0 million and
$(6.0) million for futures contracts for the years ended December 31, 1996 and
1995, respectively. Net unrealized gains (losses) of approximately $(3.0)
million and $(3.0) million related to forward contracts and approximately $6.0
million and $0.2 million related to futures contracts at December 31, 1996 and
1995, respectively, were included in the receivables from or payables to
brokers, dealers and other captions in the Company's consolidated statements of
financial condition. Unrealized gains and losses on forward and futures
contracts are recorded in earnings. Net trading gains (losses) on forward
contracts were $39.0 million, $149.0 million and $(157.0) million and net
trading gains (losses) on futures contracts were $8.0 million, $(58.0) million
and $59.0 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
The notional contract and market values of the forward and futures
contracts at December 31, 1996 and 1995 were as follows:
December 31,
1996 1995
---- ----
(In millions)
Forward Contracts:
Purchased at notional (contract) value... $ 14,070 $ 18,186
Sold at notional (contract) value........ 17,917 17,066
Futures Contracts and Options on Future
Contracts:
Purchased at market value................ $ 1,420 $ 1,129
Sold at market value..................... 2,774 1,932
STRUCTURED NOTES:
Structured notes are customized financing instruments in which the
amount of interest or principal paid on a debt obligation is linked to the
return on specific cash market financial instruments. Prior to March 31, 1995,
structured notes were offered only by the Equities Derivatives Division. In
1995, the newly formed Emerging Markets Group also began offering derivatives
in the form of structured notes linked to Latin American sovereign debt and
equity securities. At December 31, 1996 and 1995, the Company had issued
long-term structured notes totaling $216.2 million and $24.5 million,
respectively. The Company expects the volume of this activity to increase in
the future. The Company covers its obligations on structured notes primarily by
purchasing or selling the securities to which the value of its structured notes
are linked.
26
HIGH-YIELD TRANSACTIONS
The Company participates in the underwriting, trading and sales of
high-yield non-investment-grade securities. These securities generally involve
greater risk than investment-grade debt securities due to credit
considerations, liquidity of secondary trading markets and vulnerability to
general economic conditions.
The Company accounts for its high-yield inventory positions on a
market basis with unrealized gains and losses being recognized currently in
earnings. At December 31, 1996 and 1995 the Company had long inventory of
$502.6 million and $500.7 million, respectively, and short inventory of $378.5
million and $219.6 million, respectively, of high-yield securities which
accounted for less than 3.5% of the Company's overall inventory positions.
RISK MANAGEMENT
Exposure to risk and the ways in which the Company manages the various
types of risks on a day-to-day basis is critical to its survival and financial
success. The Company monitors its market and counterparty risk on a daily basis
through a number of control procedures designed to identify and evaluate the
various risks to which the Company is exposed.
The Company often acts as principal in customer-related transactions
in financial instruments which expose the Company to market risks. The Company
also engages in proprietary trading and arbitrage activities and makes dealer
markets in equity securities, investment-grade corporate debt, high-yield
securities, U.S. government and agency securities, mortgages and
mortgage-backed securities. In addition, the Company's Emerging Markets Group
trades a variety of securities, including Brady Bonds, local fixed-income
securities and options, and issues structured notes. As such, the Company may
be required to maintain certain amounts of inventories in order to facilitate
customer order flow. The Company covers its exposure to market risk by limiting
its net long or short position by selling or buying similar instruments and by
utilizing various derivative financial instruments such as futures, forward and
option contracts.
The Company manages risk exposure utilizing mechanisms involving
various levels of management. Position limits in trading and inventory accounts
are established and monitored on an ongoing basis. Current and proposed
underwriting, corporate development, merchant banking and other commitments are
subject to due diligence reviews by senior management as well as professionals
in the appropriate business and support units involved.
Trading activities generally result in the creation of inventory
positions. Position and exposure reports are prepared daily by operations staff
in each of the business groups engaged in trading activities for traders,
trading managers, department managers, divisional management and group
management personnel. Such reports are reviewed independently on a daily basis
by the Company's corporate accounting group. In addition, the corporate
accounting group prepares a consolidated summarized position report indicating
both long and short exposure, along with approved limits, which is distributed
to various levels of management throughout the Company, including the Chief
Executive Officer, and which enables senior management to control inventory
levels and monitor results of the trading groups. The Company also reviews and
monitors, at various levels of management, inventory aging, pricing,
concentration and securities ratings.
In addition to position and exposure reports, the Company produces a
daily revenue report which summarizes the trading, interest, commissions, fees,
underwriting and other revenue items for each of the business groups. Daily
revenue is reviewed for various risk factors and is independently verified by
the corporate accounting group. The daily revenue report is distributed to
various levels of management throughout the Company, including the Chief
Executive Officer, and together with the position and exposure report enables
senior management to monitor and control overall activity of the trading
groups.
27
Credit risk related to various financing activities is reduced by the
industry practice of obtaining and maintaining collateral. The Company monitors
its exposure to counterparty risk on a daily basis through the use of credit
exposure information and the monitoring of collateral values. The Company has
several credit departments which are responsible for reviewing counterparties
to establish appropriate exposure limits for a variety of transactions. In
addition, the Company actively manages the credit exposure relating to its
trading activities by entering into master agreements which permit netting when
feasible, monitoring the creditworthiness of counterparties and their related
trading limits on an ongoing basis, requesting additional collateral when
deemed necessary and limiting the amount and duration of exposure to individual
counterparties.
All counterparties are reviewed on a regular basis to establish
appropriate exposure limits for a variety of transactions. In certain cases,
specific transactions are analyzed to determine the amount of potential
exposure that could arise, and the counterparty's credit is reviewed to
determine whether it supports such exposure. In addition to the counterparty's
credit status, the Company analyzes market movements that could affect exposure
levels. The Company considers four main factors that may affect trades in
determining trading limits: the settlement method; the time it will take for a
trade to settle (i.e., the maturity of the trade); the volatility that could
affect the value of the securities involved in the trade; and the size of the
trade. In addition to determining trading limits, the Company actively manages
the credit exposure relating to its trading activities by entering into master
netting agreements when feasible; monitoring the creditworthiness of
counterparties and the related trading limits on an ongoing basis and
requesting additional collateral when deemed necessary; diversifying and
limiting exposure to individual counterparties and geographic locations; and
limiting the duration of exposure. In certain cases, the Company may also close
out transactions or assign them to other counterparties when deemed necessary
or appropriate to mitigate credit risks.
The Company has established various committees to assist senior
management in managing risk associated with investment banking and merchant
banking transactions. The objectives of the committees are to review potential
clients and engagements, utilize experience with similar clients and
situations, perform credit analyses for certain commitments and to analyze the
Company's potential role as a principal investor. The Company seeks to control
the risks associated with its banking activities by a thorough review by
various committees of the details of all transactions prior to accepting an
engagement. Some of the committees which have been formed are the Fairness and
Valuation Opinion Committee, the Private Placement Committee, the Restructuring
Coordinating Committee, the Equity Commitment Committee, the High-Yield
Underwriting Committee, the Bridge Commitment Committee and the Banking Review
Committee.
From time to time, the Company makes investments in certain merchant
banking transactions or other long-term corporate development investments.
DLJ's merchant banking group has established several investment entities, each
of which has formed their own investment committee. These committees make all
investment and disposition decisions with respect to potential and existing
portfolio companies. In addition, senior officers of the Company meet on a
quarterly basis to review merchant banking and corporate development
investments. After a discussion of the financial and operational aspects of the
companies involved, recommendations regarding carrying values are made for each
investment to the Finance Committee. The Finance Committee then makes a
determination of fair value following a review of such recommendations.
28
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Stockholders
Donaldson, Lufkin & Jenrette, Inc.
We have audited the accompanying consolidated statements of financial condition
of Donaldson, Lufkin & Jenrette, Inc. and subsidiaries as of December 31, 1996
and 1995, the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996, and the related financial statement schedule.
These consolidated financial statements and related financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Donaldson, Lufkin & Jenrette, Inc. and subsidiaries as of December 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1996, in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, 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.
/s/ KPMG Peat Marwick LLP
- ----------------------------
KPMG Peat Marwick LLP
February 3, 1997
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Consolidated Statements of Financial Condition
(in thousands, except share and per share data)
December 31,
1996 1995
----------- -----------
ASSETS
Cash and cash equivalents.................................. $ 158,831 $ 107,766
Cash and securities segregated for regulatory purposes or
deposited with clearing organizations ................... 836,406 454,470
Securities purchased under agreements to resell............ 20,598,738 18,748,224
Securities borrowed........................................ 9,355,483 9,044,909
Receivables:
Customers................................................ 3,169,293 2,355,973
Brokers, dealers and other............................... 4,001,131 1,622,858
Securities owned, at value:
U.S. government and agencies............................. 6,882,604 5,601,090
Corporate debt........................................... 4,424,649 3,469,899
Foreign sovereign debt................................... 3,116,201 734,238
Mortgage whole loans..................................... 275,510 359,756
Equities and other....................................... 1,029,094 656,290
Long-term corporate development investments.............. 204,403 284,498
Mortgages, other receivables collateralized by
real estate assets and real estate owned................. 405,221 466,066
Property, equipment and leasehold improvements, at cost,
(net of accumulated depreciation and amortization of
$163,004 and $137,640 respectively)...................... 282,513 192,446
Other assets and deferred amounts.......................... 763,595 478,011
----------- -----------
Total Assets............................................... $55,503,672 $44,576,494
=========== ===========
See accompanying notes to consolidated financial statements.
30
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Consolidated Statements of Financial Condition
(in thousands, except share and per share data)
December 31,
1996 1995
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings.......................................... $ 1,162,896 $ 758,538
Securities sold under agreements to repurchase................. 29,378,291 26,744,797
Securities loaned.............................................. 2,724,773 2,624,213
Payables:
Customers................................................... 3,897,817 2,561,258
Brokers, dealers and other.................................. 3,345,424 1,025,574
Securities sold not yet purchased, at value:
U.S. government and agencies................................ 6,864,643 5,407,572
Corporate debt.............................................. 646,421 529,273
Foreign sovereign debt...................................... 1,265,553 186,861
Equities & other............................................ 665,053 580,721
Accounts payable and accrued expenses.......................... 1,721,255 1,397,465
Other liabilities.............................................. 442,667 353,116
------------ ------------
52,114,793 42,169,388
------------ ------------
Long-term borrowings........................................... 1,541,640 983,386
------------ ------------
Total liabilities........................................ 53,656,433 43,152,774
------------ ------------
Cumulative Exchangeable $8.83 Preferred Stock, at
redemption value............................................ - 225,000
------------ ------------
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely debentures
of the Company.............................................. 200,000 -
------------ ------------
Stockholders' Equity:
Series A Preferred Stock, at liquidation preference......... 200,000 -
Common stock ($0.10 par value; 150,000,000 shares
authorized; 53,300,000 shares issued and outstanding)..... 5,330 5,330
Restricted stock units (5,179,147 units authorized;
5,081,793 and 5,179,147 units issued and
outstanding in 1996 and 1995, respectively)............... 104,167 106,163
Paid-in capital............................................. 365,989 363,993
Retained earnings........................................... 969,856 723,859
Cumulative translation adjustment........................... 1,897 (625)
------------ ------------
Total stockholders' equity............................... 1,647,239 1,198,720
------------ ------------
Total Liabilities and Stockholders' Equity..................... $ 55,503,672 $ 44,576,494
============ ============
See accompanying notes to consolidated financial statements.
31
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Consolidated Statements of Income
(in thousands, except per share data)
Years Ended December 31,
1996 1995 1994
----------- ----------- -----------
Revenues:
Commissions................................................. $ 573,335 $ 460,196 $ 376,072
Underwritings............................................... 714,183 441,547 261,094
Fees........................................................ 469,986 369,094 281,293
Interest, net of interest to finance U.S. government,
agency and mortgage-backed securities of $2,132,593,
$2,019,153, and $1,612,823, respectively................... 1,074,223 904,078 791,888
Principal transactions-net:
Trading.................................................... 435,382 364,886 165,727
Investment................................................. 162,975 163,695 97,588
Other....................................................... 60,672 55,133 35,021
----------- ----------- -----------
Total revenues............................................ 3,490,756 2,758,629 2,008,683
----------- ----------- -----------
Costs and Expenses:
Compensation and benefits................................... 1,538,754 1,261,437 897,828
Compensation expense-restricted stock units................. - 6,163 -
Interest.................................................... 733,207 680,616 503,832
Brokerage, clearing,
exchange fees and other.................................... 201,292 168,116 135,623
Occupancy and equipment..................................... 159,330 127,094 90,059
Communications.............................................. 53,657 42,807 36,585
Other operating expenses.................................... 330,716 173,896 139,756
----------- ----------- -----------
Total costs and expenses.................................. 3,016,956 2,460,129 1,803,683
----------- ----------- -----------
Income before provision for income taxes....................... 473,800 298,500 205,000
----------- ----------- -----------
Provision for income taxes..................................... 182,500 119,400 82,000
----------- ----------- -----------
Net income..................................................... $ 291,300 $ 179,100 $ 123,000
=========== =========== ===========
Dividends on preferred stock................................... $ 18,653 $ 19,868 $ 20,970
=========== =========== ===========
Earnings applicable to common shares........................... $ 272,647 $ 159,232 $ 102,030
=========== =========== ===========
Weighted average common shares outstanding..................... 59,918 51,657
=========== ===========
Earnings per common share...................................... $ 4.55 $ 3.08
=========== ===========
Pro forma weighted average common shares outstanding........... 51,475
===========
Pro forma earnings per common share............................ $ 1.98
===========
See accompanying notes to consolidated financial statements.
32
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1994, 1995 and 1996
(In thousands, except per share data)
Series A Restricted Cumulative
Preferred Common Stock Paid-in Retained Translation
Stock Stock Units Capital Earnings Adjustment Total
--------- -------- ---------- --------- ---------- ----------- -----------
Balances at December 31,
1993......................... $ 0 $ 1,000 $ 0 $ 232,080 $ 518,049 $ (835) $ 750,294
Net income..................... - - - - 123,000 - 123,000
Dividends:
Common stock
($0.65 per share)........... - - - - (32,524) - (32,524)
Preferred stock
($9.32 per share)........... - - - - (20,970) - (20,970)
Translation adjustment......... - - - - - 491 491
--------- -------- ---------- --------- ---------- ----------- -----------
Balances at December 31,
1994......................... 0 1,000 0 232,080 587,555 (344) 820,291
Net income..................... - - - - 179,100 - 179,100
Dividends:
Common stock
($0.45 per share)........... - - - - (22,928) - (22,928)
Preferred stock
($8.83 per share)........... - - - - (19,868) - (19,868)
Stock split.................... - 4,000 - (4,000) - - -
Additional capital contri-
bution from Equitable....... - - - 55,000 - - 55,000
Net proceeds from issu-
ance of common stock
in Initial Public Offering.. - 330 - 80,913 - - 81,243
Issuance of restricted
stock units................. - - 106,163 - - - 106,163
Translation adjustment......... - - - - - (281) (281)
--------- -------- ---------- --------- ---------- ----------- -----------
Balances at December 31,
1995......................... 0 5,330 106,163 363,993 723,859 (625) 1,198,720
Net income..................... - - - - 291,300 - 291,300
Dividends:
Common stock
($0.50 per share)........... - - - - (26,650) - (26,650)
Preferred stock
($8.29 per share)........... - - - - (18,653) - (18,653)
Forfeiture of restricted
stock units................. - - (1,996) 1,996 - - -
Issuance of Series A
preferred stock.............. 200,000 - - - - - 200,000
Translation adjustment......... - - - - - 2,522 2,522
--------- -------- ---------- --------- ---------- ----------- -----------
Balances at December 31,
1996......................... $ 200,000 $ 5,330 $ 104,167 $ 365,989 $ 969,856 $ 1,897 $ 1,647,239
========= ======== ========== ========= ========== =========== ===========
See accompanying notes to consolidated financial statements.
33
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Years Ended December 31,
1996 1995 1994
------------ ------------ ------------
Cash flows from operating activities:
Net income......................................................... $ 291,300 $ 179,100 $ 123,000
------------ ------------ ------------
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization................................... 53,485 38,082 24,382
Deferred taxes.................................................. (120,022) (119,657) (55,805)
(Increase) decrease in unrealized appreciation of long-
term corporate development investments........................ 50,283 97,792 (17,481)
Compensation expense-restricted stock units..................... - 6,163 -
Other-net....................................................... 346 1,062 982
------------ ------------ ------------
275,392 202,542 75,078
(Increase) decrease in operating assets:
Cash and securities segregated for regulatory
purposes or deposited with clearing organizations............. (381,936) 278,540 197,772
Securities purchased under agreements to resell................. 9,191 (5,462,395) 620,133
Securities borrowed............................................. (310,574) (354,478) 1,337,057
Receivables from customers...................................... (813,320) (707,330) (384,805)
Receivables from brokers, dealers and other..................... (2,378,273) (177,131) 1,008,110
Securities owned, at value...................................... (4,906,785) (1,796,269) 2,619,844
Other assets and deferred amounts............................... (143,500) (14,156) (75,884)
(Decrease) increase in operating liabilities:
Securities sold under agreements to repurchase.................. (9,191) 5,462,395 (620,133)
Securities loaned............................................... 100,560 595,548 (1,164,538)
Payables to customers........................................... 1,336,559 604,648 (332,807)
Payables to brokers, dealers and other.......................... 2,319,850 (75,226) (864,852)
Securities sold not yet purchased, at value..................... 2,737,243 1,172,509 (470,056)
Accounts payable and accrued expenses........................... 323,790 450,166 35,911
Other liabilities............................................... 89,551 15,293 153,177
Translation adjustment.......................................... 2,522 (281) 491
------------ ------------ ------------
Net cash (used in) provided by operating activities.................. $ (1,748,921) $ 194,375 $ 2,134,498
------------ ------------ ------------
See accompanying notes to consolidated financial statements.
34
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Years Ended December 31,
1996 1995 1994
----------- ----------- -----------
Cash flows from investing activities:
Net (payments for) proceeds from:
Purchases of long-term corporate development
investments...................................................... $ (87,600) $ (98,396) $ (77,450)
Sales of long-term corporate development investments............... 117,412 78,078 58,650
Purchases of property, equipment and leasehold improvements........ (142,597) (141,935) (48,630)
Purchases of mortgages, other receivables collateralized by real
estate assets and real estate owned.............................. (1,950) (117,518) (290,404)
Sales of mortgages, other receivables collateralized by real
estate assets and real estate owned.............................. 34,274 16,958 127,887
Other assets....................................................... 5,504 42,272 (37,500)
----------- ----------- -----------
Net cash used in investing activities.................................. (74,957) (220,541) (267,447)
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from (payments for):
Short-term financings.............................................. 1,187,338 (541,832) (1,851,473)
Structured notes................................................... 191,764 24,470 -
Issuance of common stock in Initial Public Offering................ - 81,243 -
Issuance of restricted stock units................................. - 100,000 -
Senior Debt Offering............................................... - 496,755 -
Convertible debentures............................................. 43,500 - -
Medium-Term notes.................................................. 249,515 - -
Swiss Franc Bonds.................................................. (105,513) - -
Subordinated debt financings....................................... (43,171) 175 49,586
Other long-term debt............................................... (3,187) (69,937) (41,714)
Senior notes payable............................................... - (9,000) (18,000)
Company obligated mandatorily redeemable preferred securities...... 200,000 - -
Issuance of Series A Preferred Stock............................... 200,000 - -
Dividends.......................................................... (45,303) (42,796) (53,494)
Secured term loan agreement........................................ - 250,000 -
Secured term loan agreement........................................ - (250,000) -
----------- ----------- -----------
Net cash provided by (used in) financing activities.................... 1,874,943 39,078 (1,915,095)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents....................... 51,065 12,912 (48,044)
Cash and cash equivalents at beginning of year........................ 107,766 94,854 142,898
----------- ----------- -----------
Cash and cash equivalents at end of year.............................. $ 158,831 $ 107,766 $ 94,854
=========== =========== ===========
See accompanying notes to consolidated financial statements.
35
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
1. Summary of Significant Accounting Policies
The consolidated financial statements include Donaldson, Lufkin & Jenrette,
Inc. and its subsidiaries ("DLJ" or the "Company"). All significant
intercompany balances and transactions have been eliminated. The Company is a
majority owned subsidiary of the Equitable Companies Incorporated and its
subsidiaries (together, "Equitable"). The Company's separate financial
statements reflect Equitable's cost basis established at the time of
Equitable's acquisition of the Company in 1985.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Substantially all of the Company's financial assets and liabilities, as well as
financial instruments with off-balance sheet risk, are carried at market or
fair values or are carried at amounts which approximate fair value because of
their short-term nature. Estimates of fair value are made at a specific point
in time, based on relevant market information and information about the
financial instrument, specifically, the value of the underlying financial
instrument. These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire holdings of a
particular financial instrument.
For purposes of the consolidated financial statements, the Company considers
all demand deposits held in banks, and certain highly liquid investments with
maturities of 90 days or less other than those held for sale in the ordinary
course of business to be cash equivalents.
Receivables from and payables to customers include amounts due on cash and
margin transactions. Securities owned by customers are held as collateral for
these receivables. Such collateral is not reflected in the consolidated
financial statements.
Securities borrowed and securities loaned are financing arrangements which are
recorded at the amount of cash collateral advanced or received. Securities
borrowed transactions require the Company to deposit cash, letters of credit or
other collateral with the lender. With respect to securities loaned, the
Company receives collateral in the form of cash or other collateral in an
amount generally in excess of the market value of securities loaned. The
Company monitors the market value of securities borrowed and loaned on a daily
basis with additional collateral obtained or refunded as necessary.
Securities sold under agreements to repurchase (repurchase agreements) and
securities purchased under agreements to resell (resale agreements) are treated
as financing arrangements and are carried at contract amounts reflective of the
amounts at which the securities will be subsequently reacquired or resold as
specified in the respective agreements. Interest is accrued on such contract
amounts and is included in receivables from and payables to brokers, dealers
and other in the accompanying consolidated statements of financial condition.
The Company takes possession of the underlying assets purchased under
agreements to resell and obtains additional collateral when the market value
falls below the contract value. Repurchase and resale agreements with the same
counterparty, same maturity date, which settle through the Federal Reserve
system and which are subject to master netting agreements are presented net in
the consolidated financial statements.
36
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
U.S. government and agency securities, mortgage-backed securities, options,
futures and forward transactions and certain other debt obligations are
recorded in the consolidated financial statements on a trade date basis. All
other securities are recorded on a settlement date basis and adjustments are
made to a trade date basis, if significant.
Securities owned (other than long-term corporate development investments) are
carried at market value. Changes in unrealized appreciation (depreciation)
arising from fluctuations in market value or upon realization of security
positions are reflected in revenues, principal transactions-net, trading.
Long-term corporate development investments represent the Company's involvement
in private debt and equity investments which generally have no readily
available market or may otherwise be restricted as to resale under the
Securities Act of 1933. Accordingly, these investments are carried at estimated
fair value as determined by the Finance Committee of the Board of Directors.
The cost of these investments was $246.4 million and $276.2 million at December
31, 1996 and 1995, respectively. The (decrease) increase in net unrealized
appreciation of long-term corporate development investments amounted to $(50.3)
million, $(97.8) million and $17.5 million for the years ended December 31,
1996, 1995 and 1994, respectively. Changes in net unrealized appreciation
arising from changes in fair value or upon realization are reflected in
revenues, principal transactions-net, investment.
Mortgages, other receivables collateralized by real estate assets and real
estate owned generally represent the Company's interest in mortgages receivable
and are carried at amounts approximating fair value, determined by reference to
the cash flows and/or estimated sales prices of the underlying properties.
Property and equipment are carried at cost and are depreciated on a
straight-line basis over the estimated useful life of the related assets
ranging from three to eight years. Leasehold improvements are amortized over
the lesser of the useful life of the improvement or term of the lease. Exchange
memberships owned by the Company are included in other assets and are carried
at cost.
Assets and liabilities of foreign subsidiaries denominated in non-U.S. dollar
currencies are translated at exchange rates prevailing at the date of the
consolidated statements of financial condition. 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 are included as a separate component of stockholders' equity. Gains or
losses resulting from foreign currency transactions are included in the
consolidated statements of income.
The Company is included in the consolidated Federal income tax returns filed by
Equitable. DLJ provides taxes as if the Company files a separate tax return.
Related current and deferred tax receivables or liabilities with Equitable are
included in other assets or liabilities in the consolidated statements of
financial condition. Deferred tax expenses and benefits are recognized in the
consolidated financial statements for the changes in deferred tax liabilities
and assets. Under a tax sharing agreement with Equitable, all Federal taxes
payable by the Company are payable to Equitable for periods while the Company
is at least 80% owned by Equitable. Effective January 1, 1997, Equitable's
ownership for tax purposes declined to under 80% and therefore, the Company
will begin to file its own U.S. consolidated Federal income tax return separate
and apart from Equitable.
All liabilities related to postretirement and postemployment benefits have been
provided for and the related costs are not significant.
37
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if
the current market price of the underlying stock exceeded the exercise price.
On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation", which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25 and provide pro forma net income and pro
forma earnings per share disclosures for employee stock option grants made in
1995 and future years as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the provisions
of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS
No. 123.
In June 1996, the Financial Accounting Standards Board (FASB) issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". SFAS No. 125 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring
after December 31, 1996 and is to be applied prospectively. This Statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial-components approach that focuses on control. It
distinguishes transfers of financial assets that are sales from transfers that
are secured borrowings. In December 1996, the FASB issued SFAS No. 127
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125" which delays until January 1, 1998 the effective date for certain
provisions. The Company is currently evaluating the impact of this standard on
its consolidated financial statements.
Certain reclassifications have been made to prior year consolidated financial
statements to conform to the 1996 presentation.
2. Equity Distribution and Senior Debt Offering
On October 30, 1995, the Company completed an initial public offering (the
"Initial Public Offering" or "IPO"). Of the 10.6 million shares of Common Stock
sold in the IPO, 7.3 million shares were sold by Equitable and 3.3 million
shares were sold by the Company, at $27.00 per share. This transaction had the
effect of reducing Equitable's ownership in the Company from 100 percent to
80.2 percent. Equitable's ownership will be further reduced upon the vesting of
forfeitable restricted stock units ("RSUs") acquired by, and/or the exercise of
certain options granted to, certain of the Company's employees in connection
with the IPO. (See Note 13-Employee Benefit Plans for a discussion of RSUs and
options issued in connection with the IPO.) Proceeds to the Company from the
IPO amounted to approximately $81.2 million, net of related expenses.
Concurrent with the IPO, the Company completed the public offering of $500
million aggregate principal of 6 7/8% Senior Notes due November 1, 2005 ("the
Senior Debt Offering"). (See Note 5) Proceeds from the Senior Debt Offering
amounted to approximately $493.5 million (net of underwriting discounts and
commissions) and, along with the proceeds from the IPO, were primarily used to
repay certain outstanding indebtedness.
38
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
3. Related Party Transactions
In the normal course of business, the Company provides brokerage services
including clearance, investment banking and related activities for Equitable
and certain of its affiliates. The amounts related to such activities are not
significant. The Company also manages a bridge facility that provides
short-term loans in connection with merchant banking transactions. The facility
includes a $500 million commitment of senior revolving debt from a commercial
bank syndicate and a $750 million commitment of subordinated debt from
Equitable. The Company has agreed to pay Equitable the first $25 million of
aggregate principal losses incurred by Equitable with respect to all bridge
loans outstanding on September 30, 1995 and the first $25 million of aggregate
principal losses incurred by Equitable with respect to bridge loans made after
September 30, 1995, plus the amount, if any, by which any individual loss
exceeds $150 million. Additionally, Equitable has committed $250 million to a
facility formed for the purpose of making senior credit facilities available to
corporate borrowers.
Amounts payable to Equitable and its affiliates consist primarily of federal
income taxes pursuant to a federal income tax sharing agreement between the
Company and Equitable amounting to $24.4 million and $71.6 million at December
31, 1996 and 1995, respectively, and are included in other liabilities in the
accompanying consolidated statements of financial condition. The Company does
not pay or receive interest on the outstanding balances with Equitable. The
average balances outstanding amounted to $74.9 million and $107.8 million at
December 31, 1996 and 1995, respectively. Dividends on common stock of $21.4
million, $21.6 million and $32.5 million were paid or accrued to Equitable for
the years ended December 31, 1996, 1995 and 1994, respectively.
4. Cash and Securities Segregated Under Federal and Other Regulations
Cash of $13.2 million and $9.9 million and securities with a market value of
$770.0 million and $409.7 million as of December 31, 1996 and 1995,
respectively, have been segregated in special reserve bank accounts for the
benefit of customers in accordance with regulations of the Securities and
Exchange Commission and the Commodities Futures Trading Commission.
5. Borrowings
Short-term borrowings are from banks and other financial institutions and are
generally demand obligations, at interest rates approximating Federal fund
rates. Such borrowings are generally used to finance securities inventories, to
facilitate the securities settlement process and to finance securities
purchased by customers on margin. At December 31, 1996 and 1995, securities
owned by the Company, aggregating $363.6 million and $178.1 million,
respectively, were pledged to secure certain of these borrowings.
39
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
Short-term borrowings and repurchase agreements and the weighted average
interest rates related to these borrowings at December 31, 1996 and 1995 are as
follows:
Weighted Average
Amounts Interest Rates
December 31, December 31,
1996 1995 1996 1995
-------- -------- -------- --------
(In millions)
Securities sold under agreements to repurchase.... $ 29,378 $ 26,745 6.08% 5.69%
Bank loans........................................ 669 400 6.89 6.21
Borrowings from other financial institutions...... 197 358 6.95 6.28
Additionally, included in short-term borrowings at December 31, 1996 are $297.0
million of structured notes with maturities of less than one year. The weighted
average interest rate of such notes issued with a stated coupon was 5.40%.
The Company also finances its activities through long-term borrowing
arrangements. Long-term borrowings, including current maturities of $112.0
million and $110.3 million at December 31, 1996 and 1995, respectively, consist
of the following:
December 31,
1996 1995
------ ------
(In thousands)
Senior notes, 6 7/8% due in 2005..................................... $ 497,160 $ 496,836
Senior subordinated revolving credit agreement
due in 1998........................................................ 206,500 250,000
Subordinated exchange notes, 9 5/8% due in 2003...................... 225,000 -
Structured notes..................................................... 216,234 24,470
Medium-term notes, 5 5/8% due in 2016................................ 249,537 -
Medium-term notes, 7.88% due in 1997................................. 88,000 88,000
Swiss Franc bonds, 10.55% due in 1996................................ - 105,513
Junior subordinated convertible debentures, 6.1875%
due in 2001......................................................... 43,500 -
Other................................................................ 15,709 18,567
----------- ---------
Total long-term borrowings...................................... $ 1,541,640 $ 983,386
=========== =========
Scheduled maturities of long-term borrowings are as follows:
December 31,
1996 1995
------ ------
(In thousands)
1996........................... $ - $ 110,333
1997........................... 112,010 105,923
1998........................... 230,018 250,126
1999........................... 42,654 814
2000........................... 70 19,354
2001-2016...................... 1,156,888 496,836
----------- ---------
$ 1,541,640 $ 983,386
=========== =========
40
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
The commitment under the senior subordinated revolving credit agreement was
increased to $325 million in January 1995. Interest on the senior subordinated
revolving credit agreement is 6.375% and 6.75% at December 31, 1996 and 1995,
respectively and is calculated based on the London Interbank Offered Rate
("LIBOR").
In March 1995, the Company entered into a secured term loan agreement for
$250.0 million which was collateralized by bonds secured by real estate assets
and originally due in 1999. In October 1995, this agreement was repaid in full
with the proceeds of the IPO and the Senior Debt Offering.
In October 1995, the Company issued at a discount $500 million aggregate
principal amount of 6 7/8% Senior Notes due November 1, 2005 (the "Senior
Notes") in the Senior Debt Offering. Interest is payable semi-annually in
arrears on May 1 and November 1 commencing on May 1, 1996. The Senior Notes are
not redeemable by the Company prior to maturity and are not entitled to any
sinking fund.
In January 1996, the Swiss Franc bonds of $105.5 million plus accrued interest
were repaid in full.
In February 1996, a shelf registration statement, which enables the Company to
issue from time to time up to $500 million in aggregate public offering price
of Senior Debt Securities and/or Preferred Stock, was declared effective by the
Securities and Exchange Commission. On February 15, 1996, the Company completed
an offering under such shelf registration statement of $250 million aggregate
principal amount of its 5 5/8% Medium-Term Notes due February 15, 2016. The
notes are repayable by the Company, in whole or in part, at the option of the
holders on February 15, 2001.
Structured notes are customized financing instruments in which the amount of
interest or principal paid on the debt obligation is linked to the return on
specific cash market financial instruments. At December 31, 1996 the weighted
average interest rate of structured notes issued with a stated coupon was
11.12%. The notes mature at various dates through 2007.
In July 1996, $43.5 million junior subordinated convertible debentures were
issued by a subsidiary of the Company. The debentures are convertible, in whole
or in part, at the option of an affiliate, into adjustable rate cumulative
redeemable preferred stock of the subsidiary on or after July 31, 1997.
In October 1996, the Company exercised its option under the terms of the $8.83
Cumulative Preferred Stock agreement to exchange all 2.25 million shares
outstanding for $225 million in aggregate principal amount of 9.58%
Subordinated Exchange Notes due 2003. The notes are redeemable, in whole or in
part, at the option of the Company at any time (See Note 11-Preferred
Securities).
Interest paid on all borrowings and financing arrangements amounted to $2.8
billion, $2.7 billion and $2.1 billion for the years ended December 31, 1996,
1995 and 1994, respectively.
The Company has committed credit facilities which enables it to borrow up to
$1.28 billion on a secured basis and $650 million on an unsecured basis.
Interest rates to be charged are based upon Federal funds, Eurodollar or
negotiated rates, as applicable. There were no borrowings outstanding at
December 31, 1996 and 1995 under these agreements.
41
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
6. Income Taxes
Income taxes included in the consolidated statements of income represent the
following:
Current Deferred Total
--------- ---------- ---------
(In thousands)
Year ended December 31, 1996:
U.S. Federal............................... $ 222,225 $ (88,970) $ 133,255
Foreign.................................... 16,045 - 16,045
State and local............................ 64,252 (31,052) 33,200
--------- ---------- ---------
$ 302,522 $ (120,022) $ 182,500
========= ========== =========
Year ended December 31, 1995:
U.S. Federal............................... $ 197,200 $ (104,700) $ 92,500
Foreign.................................... 760 - 760
State and local............................ 41,097 (14,957) 26,140
--------- ---------- ---------
$ 239,057 $ (119,657) $ 119,400
========= ========== =========
Year ended December 31, 1994:
U.S. Federal............................... $ 115,067 $ (45,417) $ 69,650
Foreign.................................... 1,305 - 1,305
State and local............................ 21,433 (10,388) 11,045
--------- ---------- ---------
$ 137,805 $ (55,805) $ 82,000
========= ========== =========
The difference between the "expected" Federal tax rate and expense computed by
applying the statutory tax rate to income before provision for income taxes and
the effective tax rate and expense is as follows (dollar amounts in thousands):
1996 1995 1994
-------------------- -------------------- --------------------
Percent Percent Percent
of of of
Pre-tax Pre-tax Pre-tax
Amount Income Amount Income Amount Income
---------- ------- ---------- ------- ---------- -------
Computed "expected"
tax provision............ $ 165,830 35.0% $ 104,475 35.0% $ 71,750 35.0%
Non-taxable income
and expense items........ (4,910) (1.1) (2,560) (0.9) 2,223 1.1
State and local taxes,
net of related Federal
income tax benefit....... 21,580 4.6 17,485 5.9 8,027 3.9
---------- ------- ---------- ------- ---------- -------
$ 182,500 38.5% $ 119,400 40.0% $ 82,000 40.0%
========== ======= ========== ======= ========== =======
42
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1996
and 1995 are as follows:
1996 1995
--------- ---------
(In thousands)
Deferred tax assets:
Inventory..................................... $ 15,463 $ 7,705
Investments................................... 56,612 59,116
Other liabilities and accrued expenses........ 385,040 305,197
Fixed assets.................................. 13,737 5,418
Other......................................... - 3,700
Deferred tax liabilities:
Inventory..................................... (49,349) (52,334)
Investments................................... (34,072) (64,026)
Fixed assets.................................. (3,796) (1,139)
Other......................................... (282) (306)
--------- ---------
Net deferred tax asset............................. $ 383,353 $ 263,331
========= =========
There are no valuation allowances recorded against deferred tax assets at
December 31, 1996 and 1995 since management has determined that there is
sufficient taxable income from carryback years and anticipated future reversals
of existing taxable temporary differences to offset the tax benefit of
deductible temporary differences.
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax assets will be realized. The amount of the
deferred tax assets considered realizable, however, could be reduced in the
near term if estimates of future taxable income during the carryforward period
are reduced.
An affiliate of Equitable is included in the combined return for certain state
and local tax returns filed by the Company. Effective January 1, 1997,
Equitable's ownership for tax purposes declined to under 80% and therefore such
affiliate will no longer be included in the Company's state and local tax
returns.
Net Federal income tax equivalents paid to Equitable were $267.5 million,
$277.8 million and $87.0 million in the years ended December 31, 1996, 1995 and
1994, respectively.
7. Net Capital
The Company's wholly owned principal subsidiary, Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJSC") is a registered broker-dealer, a registered
futures commission merchant and member firm of The New York Stock Exchange,
Inc. (the "NYSE") and, accordingly is subject to the minimum net capital
requirements of the Securities and Exchange Commission, NYSE and the
Commodities Futures Trading Commission. As such, it is subject to NYSE's net
capital rule which conforms to the Uniform Net Capital Rule pursuant to rule
15c3-1 of the Securities Exchange Act of 1934. Under the alternative method
permitted by this rule, the required net capital, as defined, shall not be less
than two percent of aggregate debit balances arising from customer
transactions, as defined, or four percent of segregated funds, as defined,
whichever is greater. The NYSE may also require a member firm to reduce its
business if its net capital is less than four percent of aggregate debit
balances and may prohibit a member firm from expanding its business and
declaring cash dividends if its net capital is less than five percent of
aggregate debit balances. At December 31, 1996, DLJSC's net capital of
approximately $654.1 million was 21% of aggregate debit balances and in excess
of the minimum requirement by approximately $584.0 million.
43
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
Certain other U.S. and foreign subsidiaries of the Company are subject to net
capital requirements of their respective regulatory agencies. At December 31,
1996 and 1995 the Company and its subsidiaries were in compliance with all
applicable regulatory capital adequacy requirements.
8. Derivative Financial Instruments
Substantially all of the Company's business related to derivatives is by its
nature trading activities which are primarily for the purpose of customer
accommodations. The Company's derivative activities consist primarily of option
writing and trading in forward and futures contracts. Derivative financial
instruments have both on-and off-balance sheet implications depending on the
nature of the contracts. The Company's involvement in swap contracts is not
significant.
Accounting Policies
Changes in unrealized gains or losses on all derivative instruments are
included in the consolidated statements of income in principal
transactions-net, trading. Changes in the value of options contracts are
included in the consolidated statements of income. Fair value of the options
includes the premiums which are deferred and are recognized as revenue over the
life of the option contracts on a straight-line basis or are recognized as
revenue through the change in the fair value of the option. The notional
amounts of forward and futures contracts are treated as off-balance sheet
items. Changes in unrealized gains and losses on forward and futures contracts
are included in the consolidated statements of income with corresponding
offsetting amounts reflected as assets or liabilities.
Options
As part of customer accommodations the Company writes option contracts
specifically designed to meet customers' needs. As a writer of over the counter
("OTC") option contracts, the Company receives a cash premium at the beginning
of the contract period and bears the risk of unfavorable changes in the value
of the financial instruments underlying the options. Options written do not
expose the Company to credit risk since they obligate the Company (not its
counterparty) to perform. With respect to the financial instruments underlying
these options, the Company makes a determination that credit exposures are
appropriate for the particular counterparty with whom business is conducted.
The Company generally covers its market risk associated with the options
business by purchasing or selling cash or other derivative financial
instruments on a proprietary basis to cover the options written. Such purchases
and sales may include debt and equity securities, futures and forward contracts
and options. The Company reviews the creditworthiness of the counterparties of
such covering transactions. Future cash requirements for options written are
equal to the fair value of the options. Option contracts are typically written
for a duration of less than 13 months and are included in the balance sheet at
fair value. Option premiums are recognized as revenue over the life of the
option contracts on a straight-line basis or are recognized as revenue through
the change in the fair value of the option.
The notional (contract) value of the written options was $8.6 billion and $3.7
billion at December 31, 1996 and 1995, respectively. Such options contracts are
covered by the following financial
44
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
instruments which the Company has purchased or sold on a proprietary basis and
are reflected in the table below at either the underlying contract (notional)
amounts for derivative instruments or at market value for cash instruments:
December 31,
1996 1995
------- -------
(In millions)
U.S. government, mortgage-backed
securities and options thereon................. $ 4,679 $ 1,569
Foreign sovereign debt securities................... 2,460 666
Equity swap contracts............................... 70 408
Currency forward contracts.......................... 18 -
Futures contracts................................... 306 183
Equities and other.................................. 1,079 911
------- -------
Total.................................... $ 8,612 $ 3,737
======= =======
The trading revenues from option writing activity (net of related interest
expense) were approximately $71.2 million, $96.0 million and $100.3 million for
the years ended December 31, 1996, 1995 and 1994, respectively. The fair value
of options is measured by the unamortized premiums and the intrinsic value
determined from various pricing sources. The average fair value of the options
was approximately $172.7 million and $128.7 million for the years ended
December 31, 1996 and 1995, respectively. The fair value of options was
approximately $241.9 million and $154.4 million at December 31, 1996 and 1995,
respectively, and were included as liabilities in the accompanying consolidated
statements of financial condition.
Forwards and Futures
As part of its trading activities, the Company enters into forward purchases
and sales contracts for mortgage-backed securities and foreign currencies. The
Company also enters into futures contracts on equity-based indices, foreign
currencies and other financial instruments as well as options on futures
contracts. Forward and futures contracts are treated as off-balance sheet
items. Changes in unrealized gains and losses on forward and futures contracts
are included in the consolidated statements of income with corresponding
offsetting amounts reflected as assets or liabilities. Market risk for a
forward and future is the movement of price on the notional value of the
contracts. Cash requirements at inception equal the original margin on futures
contracts. Generally, no cash is required at inception for forward contracts.
The cash requirement at settlement is equal to the notional value on the
contract for a forward contract and the daily changes in market value for a
futures contract. The performance of forward contracts is dependent on the
financial reliability of the counterparty and exposes the Company to credit
risk. The Company monitors credit exposure of forward contracts by limiting
transactions with specific counterparties, reviewing credit limits and adhering
to internally established credit extension policies. Futures contracts and
options on futures contracts are exchange-traded financial instruments that
generally do not represent exposure to credit risk due to daily cash
settlements of the change in market value with the exchanges. The credit risk
with the futures exchange is limited to the net positive change in the market
value for a single day. The following is a summary of the values of these
contracts at December 31, 1996 and 1995:
December 31,
1996 1995
-------- --------
(In millions)
Forward Contracts:
Purchased at notional (contract) value................ $ 14,070 $ 18,186
Sold at notional (contract) value..................... 17,917 17,066
Futures Contracts and Options on Futures Contracts:
Purchased at market value............................. $ 1,420 $ 1,129
Sold at market value.................................. 2,774 1,932
45
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
The following is a summary of the values of these contracts included in the
consolidated financial statements at December 31, 1996 and 1995:
December 31,
1996 1995
------ ------
(In millions)
Forward Contracts:
Average fair values included in liabilities during
the period............................................. $ (10) $ (4)
Unrealized gains included in total assets
at end of period....................................... 44 48
Unrealized losses included in total liabilities at
end of period......................................... 46 51
Futures Contracts:
Average fair values included in assets during
the period............................................. $ 2 $ -
Average fair values included in liabilities during
the period............................................. - (6)
Unrealized gains included in total assets
at end of period....................................... 6 -
Net trading gains (losses) on forward contracts were $39.0 million, $149.0
million and $(157.0) million and net trading gains (losses) on futures
contracts were $8.0 million, $(58.0) million and $59.0 million for the years
ended December 31, 1996, 1995 and 1994, respectively.
Average fair values during the period were computed using month-end averages.
The fair values of futures contracts are measured by reference to quoted market
prices. Fair values of forward contracts are estimated on the basis of dealer
quotes, pricing models or quoted prices for financial instruments with similar
characteristics. The Company generally enters into futures and forward
transactions for periods of 90 days or less. The remaining maturities for all
options, forwards and futures are less than 13 months.
9. Financial Instruments With Off-Balance Sheet Risk
In the normal course of business, the Company's customer, trading and
correspondent clearance activities involve the execution, settlement and
financing of various securities and financial instrument transactions. The
execution of these transactions includes the purchase and sale (including
"short sales") of securities, the writing of options, and the purchase and sale
of financial futures contracts and forward purchase and sales contracts for
mortgage-backed securities and foreign currencies. These activities may expose
the Company to off-balance sheet risk in the event the customer or counterparty
to the transaction is unable to fulfill its contractual obligations and margin
requirements are not sufficient to fully cover losses. In these situations, the
Company may be required to purchase or sell financial instruments at prevailing
market prices which may not fully cover the obligations of its customers or
counterparties. The Company limits this risk by requiring customers and
counterparties to maintain margin collateral that is in compliance with
regulatory and internal guidelines. Additionally, with respect to the Company's
correspondent clearance activities, introducing correspondent brokers are
required to guarantee the performance of their customers in meeting contractual
obligations.
The Company's financing and securities settlement activities involve the
Company using securities as collateral in support of various secured financing
sources. In the event the counterparty does not meet its contracted obligation
to return securities used as collateral, the Company may be exposed to the risk
of reacquiring the securities at prevailing market prices in order to satisfy
its obligations. The Company controls this risk by monitoring the market value
of securities pledged on a daily basis and by requiring adjustments of
collateral levels in the event of excess market exposure.
46
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
The Company's activities include entering into forward contracts which provide
for the future delivery or receipt of securities at a specified price or yield.
Risk arises from the potential inability of counterparties to perform under the
terms of the contracts and from changes in securities value and interest rates.
The Company controls the risk by monitoring the market value of the securities
contracted for on a daily basis and reviewing the creditworthiness of the
counterparties. The Company reflects the changes in the market value of these
instruments in the consolidated statements of income. The settlement of these
transactions is not expected to have a material adverse effect on the Company's
consolidated financial statements.
Risks associated with letters of credit, guarantees or underwriting commitments
are not significant.
10. Concentrations of Credit Risk
As a securities broker and dealer, the Company is engaged in various securities
trading and brokerage activities servicing a diverse group of domestic and
foreign corporations, governments, institutional and individual investors. A
substantial portion of the Company's transactions are executed with and on
behalf of institutional investors including other brokers and dealers, mortgage
brokers, commercial banks, U.S. governmental agencies, mutual funds and other
financial institutions and are generally collateralized. The Company's exposure
to credit risk associated with the nonperformance of these counterparties in
fulfilling their contractual obligations pursuant to securities transactions,
can be directly impacted by volatile securities markets, credit markets and
regulatory changes. Credit risk is the amount of accounting loss the Company
would incur if a counterparty failed to perform its obligations under
contractual terms and the collateral held, if any, was deemed insufficient. All
counterparties are reviewed on a regular basis to establish appropriate
exposure limits for a variety of transactions. In certain cases, specific
transactions are analyzed to determine the amount of potential exposure that
could arise, and the counterparty's credit is reviewed to determine whether it
supports such exposure. In addition to the counterparty's credit status, the
Company analyzes market movements that could affect exposure levels. The
Company considers four main factors that may affect trades in determining
trading limits: the settlement method; the time it will take for a trade to
settle (i.e., the maturity of the trade); the volatility that could affect the
value of the securities involved in the trade; and the size of the trade. In
addition to determining trading limits, the Company actively manages the credit
exposure relating to its trading activities by entering into master netting
agreements when feasible; monitoring the creditworthiness of counterparties and
the related trading limits on an ongoing basis and requesting additional
collateral when deemed necessary; diversifying and limiting exposure to
individual counterparties and geographic locations; and limiting the duration
of exposure. In certain cases, the Company may also close out transactions or
assign them to other counterparties when deemed necessary or appropriate to
mitigate credit risks.
The Company's customer securities activities are transacted on either a cash or
margin basis. In margin transactions, the Company extends credit to the
customer, subject to various regulatory and internal margin requirements,
collateralized by cash and securities in the customer's account. The Company
seeks to control the risks associated with its customer activities by requiring
customers to maintain margin collateral in compliance with various regulatory
and internal guidelines. The Company monitors required margin levels daily and,
pursuant to such guidelines, requires the customers to deposit additional
collateral, or reduce positions, when necessary.
11. Preferred Securities
During the third quarter of 1996, the Company and its wholly owned trust, DLJ
Capital Trust I (the "Trust") completed an offering from a shelf registration
of $200 million of the Trust's 8.42% mandatorily redeemable preferred
securities. The Trust exists for the sole purpose of issuing preferred
securities and common securities and investing the proceeds in an equivalent
amount of junior subordinated debentures of the Company. The only assets of its
Trust at December 31, 1996 were $200 million of 8.42% Junior Subordinated
Debentures of the Company due 2046. The Junior Subordinated Debentures are
redeemable by the Company, in whole or in part, on or after August 31, 2001.
The Trust must redeem its preferred securities having an aggregate liquidation
amount equal to the aggregate principal amount of junior subordinated
debentures redeemed.
47
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
The Company guarantees payment to the holders of the preferred securities
issued by the Trust, to the extent the Company has made principal and interest
payments on the Junior Subordinated Debentures. The Company has issued a full
and unconditional guarantee of the Trust's obligations under the preferred
securities of the Trust.
In addition, in October 1996, the Company exercised its option under the terms
of the $8.83 Cumulative Preferred Stock agreement to exchange all 2.25 million
shares outstanding for $225 million in aggregate principal amount of 9.58%
Subordinated Exchange Notes due October 15, 2003. The notes are redeemable, in
whole or in part, at the option of the Company, at any time.
12. Stockholders' Equity
In August 1995, the Company amended its Certificate of Incorporation whereby
the amount of total authorized shares of Common Stock was increased to 150.0
million shares and the Company declared a 5-to-1 stock split ("the 1995 Stock
Split"). All share, per share and dividend per share amounts have been
retroactively restated to reflect this split.
In October 1995, Equitable made a capital contribution to the Company of a
portion of its investment in a New York Stock Exchange listed company valued at
$55.0 million at the time of the contribution. Such shares were recorded at
Equitable's carrying value immediately prior to the contribution, marked to
market as appropriate, and sold in 1996 at a nominal profit.
In October 1995, the Company completed the Initial Public Offering resulting in
the sale of 3.3 million shares of Common Stock at $27.00 per share. Proceeds to
the Company amounted to approximately $81.2 million, net of related expenses.
In connection with the Initial Public Offering, the Company adopted the 1995
Restricted Stock Unit Plan and granted approximately 5.2 million units under
this plan.
On November 19, 1996, the Company issued 4.0 million shares of Fixed/Adjustable
Rate Cumulative Preferred Stock, Series A, with a liquidation preference of $50
per share. Dividends on the preferred stock are cumulative and payable
quarterly at a rate of 5.94% per annum through November 30, 2001. Thereafter,
the dividend rate will be adjusted based on various indices, not to be less
than 6.44% nor higher than 12.44%. The preferred stock is redeemable, in whole
or in part, at the option of the Company, on or after November 30, 2001. At
December 31, 1996, 4.0 million shares of such preferred stock were authorized,
issued and outstanding.
13. Employee Benefit Plans
Long-Term Incentive Plan
The Company has two long-term incentive compensation plans ("1991 LTI Plan" and
"1994 LTI Plan"). Certain members of management agreed with the Company in 1993
not to participate in the 1994 LTI Plan but instead to extend the performance
period under which units in the 1991 LTI Plan are valued from three to six
years. Units in the plans are awarded to participants at the discretion of
senior management. Participants generally vest in their unit awards at the rate
of 33% per annum, with 100% vesting at the end of each three-year period. These
LTI Plans ended December 31, 1996. The value of the participants' units is
based upon the Company's cumulative average performance, as defined, over the
relevant three or six-year performance period. Such value shall be paid 50%
within 120 days of the later of the final vesting date or the end of the
performance period with the remaining 50% payable within one year thereafter.
(See "1995 Restricted Stock Unit Plan"). Amounts charged to expense for the
1991 LTI Plan and 1994 LTI Plan were $190.5 million, $132.8 million and $92.6
million for the years ended December 31, 1996, 1995 and 1994, respectively.
1996 Incentive Compensation Plan
In the second quarter of 1996, the stockholders approved the 1996 Incentive
Compensation Plan (the "Incentive Plan") which is effective January 1, 1996.
Awards under the Incentive Plan are determined by the Compensation and
Management Committee of the Board of Directors. The
48
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
Incentive Plan provides for the creation of short-term and long-term award
pools to be awarded to key employees of the Company. Short-term award pools are
for a performance period up to two years and are based on 10% of pre-tax
earnings, as defined. Long-term award pools are for performance periods of
three to 10 years and are based on a percentage of pre-tax earnings and vary
with the Company's average return on common equity during the performance
period. Participants may receive awards in the form of cash, options, shares or
restricted stock units, however, stock-based payments are limited to a total of
8.8 million shares. Under certain circumstances, participants may defer the
receipt of part or all of any award.
1995 Restricted Stock Unit Plan
In October 1995, the Company adopted the 1995 Restricted Stock Unit Plan (the
"Plan"). Each RSU granted under the Plan represents the right under certain
circumstances to receive a share of Common Stock. Certain of the Company's
employees received RSUs in exchange for a reduction in their interests in
certain cash compensation arrangements maintained by the Company aggregating
$100.0 million. These units are subject to forfeiture in certain circumstances
and will vest annually in specified proportions from February 1997 through
February 2000. Units that are forfeited under the Plan will become eligible for
subsequent grants. The number of units granted under the Plan was 5,179,147
units. Compensation expense for such awards, determined based on the difference
between the fair value of the RSUs and the amount of cash compensation
exchanged therefor, amounted to approximately $6.2 million and was recorded in
the fourth quarter of 1995. As of December 31, 1996, 97,354 restricted stock
units were forfeited.
Stock Option Plans
In October 1995, the Company adopted the 1995 and 1996 Stock Option Plans.
Under the Company's 1995 Stock Option Plan, options to purchase an aggregate of
9,168,678 shares of Common Stock (the maximum allowable under the 1995 Stock
Option Plan) with an exercise price of $27.00 were granted to certain
employees. Such options were granted to employees in exchange for their
foregoing future interests under certain cash compensation arrangements
aggregating $55.7 million. The options are subject to forfeiture in certain
circumstances and will vest in two equal installments in February 1997 and
February 1998 and are exercisable for a period of up to 10 years from the date
of the grant. Options that are forfeited under the 1995 Stock Option Plan will
become eligible for subsequent grant under the 1996 Stock Option Plan.
The 1996 Stock Option Plan (the "1996 Plan") provides for the granting of
options to key employees, consultants or other service providers to the Company
after the Initial Public Offering. Options to purchase a maximum of 8,789,851
shares of Common Stock, exclusive of forfeitures from the 1995 Stock Option
Plan, are available under the 1996 Plan. The options are exercisable for up to
10 years from the date of grant, are subject to forfeiture in certain
circumstances and will vest in four equal installments commencing one year
after the date of grant. No options will become exercisable prior to February
1997. Options that are forfeited under the 1996 Plan become eligible for
subsequent grant under that plan.
In 1996, the Company adopted the Non-Employee Directors Stock Plan (the "Plan")
to provide compensation to the Company's non-employee directors in the form of
equity. Each non-employee director was granted stock options to purchase 4,000
shares of the Company's common stock on the date the Plan was adopted and will
be granted an additional 4,000 stock options on the date of their annual
re-election to the Board of Directors. Such stock options are granted at a
price equal to the fair value of the stock at the date of grant. The options
are exercisable for up to 10 years from the date of grant and vest in four
equal annual installments commencing one year from the date of grant. In
addition, non-employee directors may be granted other equity-based awards on a
discretionary basis. The total number of shares issuable under the Plan is
200,000. Any shares issued under the Plan will reduce the number of shares
issuable under the Company's 1996 Stock Option Plan. At December 31, 1996,
stock options to purchase 24,000 shares of the Company's common stock were
issued and outstanding.
49
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
A summary of the Company's stock option activity follows:
Weighted Average
Shares Exercise Price
------ --------------
Outstanding at January 1, 1995 - $ -
Granted.................................. 9,168,678 27.00
---------- -------
Outstanding at December 31, 1995 9,168,678 27.00
Granted.................................. 2,134,000 32.54
Forfeited................................ (172,346) 27.00
---------- -------
Outstanding at December 31, 1996 11,130,332 $ 28.06
========== =======
Exercise prices for options outstanding at December 31, 1996 ranged from $27.00
to $33.50. The weighted average fair value of options granted during 1996 was
$9.35 per share. The average remaining contractual life of options outstanding
at December 31, 1996 was nine years.
The Company applies APB Opinion 25 in accounting for its stock option plans
and, accordingly, does not recognize any compensation cost associated with such
plans in the consolidated financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its options
under SFAS No. 123, the Company's net income and earnings per common share
would have been reduced to the pro forma amounts indicated below:
1996 1995
---- ----
Net income (in thousands) As reported $ 291,300 $ 179,100
Pro forma $ 273,800 $ 176,200
Earnings per common share As reported $ 4.55 $ 3.08
Pro forma $ 4.33 $ 3.04
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for options granted during 1996 and 1995, respectively:
dividend yield of 1.54% and 1.85%; expected volatility of 25% for both years,
risk-free interest rates of 6.07% and 5.86%; and an expected life of five years
for all grants.
Other Plans
The Company has a defined contribution employee benefit plan covering
substantially all of the Company's full-time and certain qualified part-time
employees. Company contributions to this plan are determined by the Board of
Directors of the Company annually and were $7.4 million, $6.1 million and $4.9
million for 1996, 1995 and 1994, respectively.
Certain key employees of the Company participate in various other deferred
compensation arrangements which include equity investments in selected merchant
banking activities of the Company paid for by such employees and other
non-qualified plans which are funded by insurance contracts.
14. Leases, Commitments and Contingent Liabilities
The Company leases office space and equipment under cancelable and
non-cancelable lease agreements which expire on various dates through the year
2016. Rent expense for the years ended December 31, 1996, 1995 and 1994
aggregated $76.6 million, $66.2 million and $55.7 million, respectively.
Sublease revenue aggregated $1.0 million for each of the years ended December
31, 1996, 1995 and 1994.
50
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
At December 31, 1996 minimum rental commitments, exclusive of sublease revenue,
escalation and renewal options, on all non-cancelable leases in excess of one
year, are as follows:
Total Lease
Period Commitments
------ -----------
(In thousands)
1997..................................... $ 58,495
1998..................................... 58,020
1999..................................... 59,148
2000..................................... 54,746
2001..................................... 54,028
2002-2016................................ 642,415
---------
Total............................. $ 926,852
=========
In the normal course of business, the Company issues letters of credit for
which it is contingently liable for $163.0 million and $142.0 million at
December 31, 1996 and 1995, respectively.
Subsidiaries of the Company have outstanding commitments to provide financings
to third parties in the total amount of $784.0 million, of which $734.0 million
was unfunded at December 31, 1996.
15. Legal Proceedings
The Company has been named as a defendant in a number of actions relating to
its various businesses including various civil actions and arbitrations arising
out of its activities as a broker-dealer in securities, as an underwriter and
as an employer and arising out of alleged employee misconduct. The Company is
also involved, from time to time, in proceedings with, and investigations by,
governmental agencies and self regulatory organizations. Some of the actions
have been brought on behalf of various classes of claimants and seek damages of
material or indeterminate amounts. While the ultimate outcome of litigation
involving the Company cannot be predicted with certainty, management, having
reviewed these actions with its counsel, believes it has meritorious defenses
to all such actions and intends to defend each of these vigorously.
Although there can be no assurance that such actions, proceedings,
investigations and litigation will not have a material adverse effect on the
results of operations of the Company in any future period, depending in part on
the results for such period, in the opinion of management of the Company, based
upon advice of counsel, the ultimate resolution of such actions, proceedings,
investigations and litigation against the Company will not have a material
adverse effect on the consolidated financial condition and/or results of
operations of the Company; except, due to the early stage of the three actions
described below, based upon information currently available to it, management
cannot make an estimate of loss, if any, or predict whether or not such
litigation will have a material adverse effect on the Company's results of
operations in any particular period.
In October 1995, DLJSC was named as a defendant in a purported class action
filed in a Texas State Court on behalf of the holders of $550 million principal
amount of subordinated redeemable discount debentures of National Gypsum
Corporation ("NGC") canceled in connection with a Chapter 11 plan of
reorganization for NGC consummated in July 1993. The State Court named
plaintiff also filed an adversary proceeding in the Bankruptcy Court for the
Northern District of Texas seeking a declaratory judgment that the confirmed
NGC plan of reorganization does not bar the class action claims. Subsequent to
the consummation of NGC's plan of reorganization, NGC's shares traded for
values substantially in excess of, and in 1995 NGC was acquired for a value
substantially in excess of, the values upon which NGC's plan of reorganization
was based. The two actions arise out of DLJSC's activities as financial advisor
to NGC in the course of NGC's Chapter 11 reorganization proceedings. The class
action complaint alleges that the plan of reorganization submitted by NGC was
based upon projections by NGC and DLJSC which intentionally understated
forecasts, and provided misleading and incorrect information in order to hide
NGC's true value and that defendants breached their fiduciary duties by, among
other things, providing false, misleading or incomplete information to
deliberately understate the value of NGC. The class action complaint seeks
compensatory and punitive damages purportedly sustained by the class.
51
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
The Texas State Court action which was removed to the Bankruptcy Court, has
been remanded back to the state court, which remand is being opposed by DLJSC.
DLJSC intends to defend itself vigorously against all of the allegations
contained in the complaint. Although there can be no assurance, the Company
does not believe that the ultimate outcome of this litigation will have a
material adverse effect on its consolidated financial condition.
In November and December 1995, DLJSC, along with various other parties, was
named as a defendant in a number of purported class actions filed in the U.S.
District Court for the Eastern District of Louisiana. The complaints allege
violations of the Federal securities laws arising out of a public offering in
1994 of $435 million of first mortgage notes of Harrah's Jazz Company and
Harrah's Jazz Finance Corp. The complaints seek to hold DLJSC liable for
various alleged misstatements and omissions contained in the prospectus dated
November 9, 1994. DLJSC intends to defend itself vigorously against all of the
allegations contained in the complaints. Although there can be no assurance,
the Company does not believe that the ultimate outcome of this litigation will
have a material adverse effect on its consolidated financial condition.
On January 26, 1996, a purported purchaser of certain notes and warrants to
purchase shares of common stock of Rickel Home Centers, Inc. ("Rickel") filed a
class action complaint against DLJSC and certain other defendants for
unspecified compensatory and punitive damages in the United States District
Court for the Southern District of New York. The suit was brought on behalf of
the purchasers of 126,457 units consisting of $126,457,000 aggregate principal
amount of 13 1/2% senior notes due 2001 and 126,457 warrants to purchase shares
of common stock of Rickel (the "Units") issued by Rickel in October 1994. The
complaint alleges violations of Federal securities laws and common law fraud
against DLJSC, as the underwriter of the Units and as an owner of 7.3% of the
common stock of Rickel, Eos Partners, L.P. and General Electric Capital
Corporation, each as owners of 44.2% of the common stock of Rickel, and members
of the Board of Directors of Rickel, including a DLJSC Managing Director. The
complaint seeks to hold DLJSC liable for alleged misstatements and omissions
contained in the prospectus and registration statement filed in connection with
the offering of the Units, alleging that the defendants knew of financial
losses and a decline in value of Rickel in the months prior to the offering and
did not disclose such information. The complaint also alleges that Rickel
failed to pay its semi-annual interest payment due on the Units on December 15,
1995 and that Rickel filed a voluntary petition for reorganization pursuant to
Chapter 11 of the United States Bankruptcy Code on January 10, 1996. DLJSC
intends to defend itself vigorously against all of the allegations contained in
the complaint. Although there can be no assurance, the Company does not believe
that the ultimate outcome of this litigation will have a material adverse
effect on its consolidated financial condition.
16. Earnings Per Share
Earnings per common share and pro forma earnings per common share are computed
by dividing net income applicable to common shares after deducting the
dividends on preferred stock requirements by the weighted average or the pro
forma number of shares of common stock and common stock equivalents outstanding
during each period presented (adjusted for the 1995 Stock Split, See Note 12).
Weighted average common shares and common share equivalents outstanding are
substantially the same for both primary and fully diluted earnings per common
share. The Restricted Stock Units issued in October 1995 are considered common
stock equivalents upon issuance and also have a dilutive effect on the
Company's historical earnings per share amounts. Weighted average common shares
and common share equivalents outstanding have been adjusted for the dilutive
effect of the units on the Company's historical pro forma earnings per share
using the treasury stock method.
52
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
17. Industry Segment and Geographic Area Data
The Company is primarily engaged in a single line of business as a securities
broker-dealer, which comprises several types of services, such as principal and
agency transactions, underwriting and investment banking and correspondent
clearing. These activities constitute a single business segment.
The assets and revenues related to the Company's foreign operations are not
significant, however the Company has begun expanding its activities abroad.
18. Quarterly Data (Unaudited)
The following table sets forth selected highlights for each of the fiscal
quarters during the years ended December 31, 1996 and 1995 (dollars in
thousands, except per share data):
Income
Before Earnings
Provision Per
Total For Income Net Common
Revenues Taxes Income Share *
----------- ---------- --------- ------
1996:
First quarter......................... $ 775,910 $ 108,500 $ 65,100 $ 1.01
Second quarter........................ 991,209 157,300 97,000 1.53
Third quarter......................... 771,007 92,000 56,100 0.86
Fourth quarter........................ 952,630 116,000 73,100 1.15
----------- --------- --------- ------
Total year.............. $ 3,490,756 $ 473,800 $ 291,300 $ 4.55
=========== ========= ========= ======
1995:
First quarter......................... $ 582,440 $ 62,500 $ 37,500 $ 0.63
Second quarter........................ 691,298 70,000 42,000 0.72
Third quarter......................... 687,522 70,000 42,000 0.72
Fourth quarter........................ 797,369 96,000 57,600 0.93
----------- --------- --------- ------
Total year.............. $ 2,758,629 $ 298,500 $ 179,100 $ 3.08
=========== ========= ========= ======
* The sum of the quarters' earnings per common share may not equal the total
year amounts due to the effect of averaging the number of shares of common
stock and common stock equivalents throughout the year.
53
SCHEDULE I
DONALDSON, LUFKIN & JENRETTE, INC.
(Parent Company Only)
Condensed Statements of Financial Condition
(in thousands, except share and per share data)
December 31,
1996 1995
----------- -----------
ASSETS
Cash and cash equivalents..................................... $ 7,747 $ 4,843
Receivables from brokers, dealers and other .................. 1,292 976
Securities owned, at value.................................... 40,102 67,499
Receivables from subsidiaries................................. 2,232,198 2,284,187
Investment in subsidiaries, at equity......................... 1,905,023 1,093,905
Other assets and deferred amounts............................. 526,369 415,868
----------- -----------
Total Assets.................................................. $ 4,712,731 $ 3,867,278
=========== ===========
See accompanying notes to condensed financial statements.
54
DONALDSON, LUFKIN & JENRETTE, INC.
(Parent Company Only)
Condensed Statements of Financial Condition
(In thousands, except share and per share data)
December 31,
1996 1995
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings....................................................... $ 335,912 $ 580,469
Accounts payable and accrued expenses....................................... 999,713 793,295
Due to Equitable............................................................ 24,417 71,609
Other liabilities........................................................... 437,096 304,716
----------- -----------
1,797,138 1,750,089
8.42% Junior subordinated debentures, held by a
subsidiary trust ....................................................... 206,224 -
----------- -----------
Other long-term borrowings................................................. 1,062,130 693,469
----------- -----------
Total liabilities................................................... 3,065,492 2,443,558
----------- -----------
Cumulative Exchangeable $8.83 Preferred Stock,
at redemption value..................................................... - 225,000
----------- -----------
Stockholders' Equity:
Series A Preferred Stock, at liquidation preference..................... 200,000 -
Common stock ($0.10 par value; 150,000,000 shares
authorized; 53,300,000 and 50,000,000 shares issued and
outstanding).......................................................... 5,330 5,330
Restricted stock units (5,179,147 authorized; 5,081,793 and
5,179,147 units issued and outstanding in 1996 and 1995,
respectively) ........................................................ 104,167 106,163
Paid-in capital......................................................... 365,989 363,993
Retained earnings....................................................... 969,856 723,859
Cumulative translation adjustment....................................... 1,897 (625)
----------- -----------
Total stockholders' equity........................................... 1,647,239 1,198,720
----------- -----------
Total Liabilities and Stockholders' Equity.................................. $ 4,712,731 $ 3,867,278
=========== ===========
See accompanying notes to condensed financial statements.
55
DONALDSON, LUFKIN & JENRETTE, INC.
(Parent Company Only)
Condensed Statements of Income
(In thousands, except per share data)
Years Ended December 31,
1996 1995 1994
---------- --------- ---------
Revenues:
Dividends from affiliates................................ $ 57,094 $ 107,371 $ 25,000
Interest from affiliates................................. 151,774 138,710 111,483
Allocations to affiliates................................ 16,805 14,709 14,097
Other.................................................... 23,508 11,995 37,344
---------- --------- ---------
Total revenues...................................... 249,181 272,785 187,924
---------- --------- ---------
Costs and Expenses:
Compensation and benefits................................ 144,574 129,049 75,017
Interest and operating expenses.......................... 110,447 82,421 69,409
---------- --------- ---------
Total costs and expenses............................ 255,021 211,470 144,426
---------- --------- ---------
Income (loss) before income tax benefit and equity
in undistributed net income of subsidiaries.............. (5,840) 61,315 43,498
---------- --------- ---------
Income tax benefit........................................... 51,766 25,865 2,170
---------- --------- ---------
Income before equity in undistributed
net income of subsidiaries............................... 45,926 87,180 45,668
---------- --------- ---------
Equity in undistributed net income of subsidiaries........... 245,374 91,920 77,332
---------- --------- ---------
Net income................................................... $ 291,300 $ 179,100 $ 123,000
========== ========= =========
Dividends on preferred stock................................. $ 18,653 $ 19,868 $ 20,970
========== ========= =========
Earnings applicable to common shares......................... $ 272,647 $ 159,232 $ 102,030
========== ========= =========
Weighted average common shares outstanding................... 59,918 51,657
========== =========
Earnings per common share.................................... $ 4.55 $ 3.08
========== =========
Pro forma weighted average common shares
outstanding ............................................. 51,475
=========
Pro forma earnings per common share.......................... $ 1.98
=========
See accompanying notes to condensed financial statements.
56
DONALDSON, LUFKIN & JENRETTE, INC.
(Parent Company Only)
Condensed Statements of Cash Flows
(In thousands)
Years Ended December 31,
1996 1995 1994
---------- --------- -----------
Net cash provided by operating activities..................... $ 194,255 $ 168,857 $ 822,766
---------- --------- -----------
Cash flows from investing activities:
Net (payments for) proceeds from:
Dividends from affiliates................................ 57,094 107,371 25,000
Investment in subsidiaries............................... (563,222) (74,314) (78,678)
Other assets............................................. 3,111 (9,061) (16,353)
---------- --------- -----------
Net cash (used in) provided by investing activities.......... (503,017) 23,996 (70,031)
---------- --------- -----------
Cash flows from financing activities:
Net (payments for) proceeds from:
Short-term borrowings..................................... (244,557) (212,209) (1,181,943)
Issuance of common stock in Initial
Public Offering......................................... - 81,243 -
Issuance of restricted stock units........................ - 100,000 -
Senior Debt Offering...................................... - 496,755 -
Medium-Term Notes......................................... 249,515 - -
Swiss Franc Bonds......................................... (105,513) - -
Other long-term debt...................................... (687) (16,070) -
Senior notes payable...................................... - (9,000) (18,000)
Junior subordinated debentures............................ 206,224 - -
Issuance of Series A Preferred Stock...................... 200,000 - -
Dividends................................................. (45,303) (42,796) (53,494)
Receivables from subsidiaries............................. 51,989 (609,467) 440,781
---------- --------- -----------
Net cash provided by (used in) financing activities........... 311,668 (211,544) (812,656)
---------- --------- -----------
Increase (decrease) in cash and cash equivalents.............. 2,904 (18,691) (59,921)
---------- --------- -----------
Cash and cash equivalents at beginning of year............... 4,843 23,534 83,455
---------- --------- -----------
Cash and cash equivalents at end of year...................... $ 7,747 $ 4,843 $ 23,534
========== ========= ===========
See accompanying notes to condensed financial statements.
57
DONALDSON, LUFKIN & JENRETTE, INC.
(Parent Company Only)
Notes to Condensed Financial Statements
1. Basis of Presentation
The condensed financial statements of Donaldson, Lufkin & Jenrette, Inc.
("Parent Company Only") should be read in conjunction with the
consolidated financial statements of Donaldson, Lufkin & Jenrette, Inc.
and subsidiaries ("DLJ" or the "Company") and the notes thereto.
Investments in subsidiaries are accounted for under the equity method.
Certain reclassifications have been made to prior year condensed
financial statements to conform to the 1996 presentation.
2. Related Party Transactions
Receivables from subsidiaries include $1,303.8 million and $874.0
million loaned under master note agreements at December 31, 1996 and
1995, respectively. Substantially all receivables from subsidiaries
provide for interest based on Federal funds rates.
The amount of cash dividends paid to the Company by consolidated
subsidiaries of the Company amounted to $57.1 million, $107.4 million
and $25.0 million for the years ended December 31, 1996, 1995, and 1994,
respectively. There are no restrictions on the payment of dividends,
except for those stipulated in certain debt agreements and in the
Uniform Net Capital Rules applicable to brokers and dealers and futures
commission merchants, which provide for certain minimum amounts of
capital to be maintained to satisfy regulatory requirements in the
Company's principal broker-dealer subsidiary, Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJSC") and under certain
circumstances limits the amount of excess capital that can be withdrawn.
The regulatory requirements, including the Uniform Net Capital rules,
are designed to measure the general financial integrity and liquidity of
registered broker-dealers and futures commission merchants and provide
minimum acceptable net capital levels to satisfy commitments to
customers. Unless an adequate level of capital is maintained, regulated
broker-dealer subsidiaries would be prohibited from paying dividends to
the Company.
3. Long-term Borrowings
Long-term borrowings from banks of $1,062.1 million and $693.5 million
include current maturities of $90.4 million and $105.5 million at
December 31, 1996 and 1995, respectively. The following table sets
forth the maturity of long-term borrowings at December 31, 1996 and
1995:
December 31,
1996 1995
----------- ---------
(In thousands)
1996 .................... $ - $ 105,513
1997...................... 91,120
90,433
1998...................... - -
1999...................... -
-
2000...................... - -
2001-2005................. 971,697 496,836
----------- ---------
$ 1,062,130 $ 693,469
=========== =========
58
DONALDSON, LUFKIN & JENRETTE, INC.
(Parent Company Only)
Notes to Condensed Financial Statements
During the third quarter of 1996, the Parent Company and its wholly
owned trust, DLJ Capital Trust I (the "Trust") completed an offering
from a shelf registration of $200 million of the Trust's 8.42%
mandatorily redeemable preferred securities. The Trust exists for the
sole purpose of issuing preferred securities and common securities and
investing the proceeds in an equivalent amount of junior subordinated
debentures of the Parent Company. The only assets of its Trust at
December 31, 1996 were $200 million of 8.42% Junior Subordinated
Debentures of the Parent Company due 2046. The Junior Subordinated
Debentures are redeemable by the Parent Company, in whole or in part, on
or after August 31, 2001. The Trust must redeem its preferred securities
having an aggregate liquidation amount equal to the aggregate principal
amount of junior subordinated debentures redeemed.
The Parent Company guarantees payment to the holders of the preferred
securities issued by the Trust, to the extent the Parent Company has
made principal and interest payments on the Junior Subordinated
Debentures. The Parent Company has issued a full and unconditional
guarantee of the Trust's obligations under the preferred securities of
the Trust.
The Parent Company maintains a committed credit facility which enables
it to borrow up to $650 million on an unsecured basis. Such facility was
increased in 1996 from $340 million in 1995. There were no borrowings
outstanding at December 31, 1996 and 1995 under this agreement.
4. Contingent Liabilities
From time to time the Parent Company issues guarantees of the
obligations of certain subsidiaries. The amounts of such items in the
aggregate are not considered excessive in relation to the normal
operating levels of the Company and management does not anticipate, as
of December 31, 1996, losses as a result of these transactions.
59
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
60
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required to be furnished pursuant to this item is
incorporated herein by reference from the Registrant's Proxy Statement under
the caption "Election of Directors" which appears on pages 3-6 for the
following directors:
John Chalsty Jerry M. de St. Paer
Joe L. Roby Denis Duverne
Carl B. Menges Louis Harris
Anthony F. Daddino Henri G. Hottinguer
Hamilton E. James W. Edwin Jarmain
Richard S. Pechter Francis Jungers
Theodore P. Shen Joseph J. Melone
Claude Bebear W.J. Sanders III
Henri de Castries John C. West
The information required to be furnished pursuant to this item with regards to
executive officers of the Registrant that has not been included in the
Registrant's Proxy Statement is as follows:
Michael M. Bendik was appointed Senior Vice President and Chief Accounting
Officer in 1983. Mr. Bendik joined the Company as an accounting supervisor in
1974 and since then has held various executive positions at the Company until
his appointment as Senior Vice President and Chief Accounting Officer.
Michael A. Boyd was appointed Senior Vice President and General Counsel in
1975. Mr. Boyd joined the Company in 1971 as an Associate General Counsel of
the Company and General Counsel of its then subsidiary Alliance Capital
Management Corporation.
Gerald B. Rigg was appointed Senior Vice President and Director of Human
Resources in 1986. Mr. Rigg joined the Company in 1971 as a salesman in the
Company's Institutional Equities Division. Since then Mr. Rigg has held various
executive positions at the Company until his election as Senior Vice President
and Director of Human Resources.
ITEM 11. EXECUTIVE COMPENSATION
The information required to be furnished pursuant to this item is set
forth under the caption "Executive Compensation" of the Proxy Statement, and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required to be furnished pursuant to this item is set
forth under the captions "Voting Securities" and "Security Ownership
Management" of the Proxy Statement, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required to be furnished pursuant to this item is set
forth under the caption "Certain Relationships and Related Party Transactions"
of the Proxy Statement, and is incorporated herein by reference.
61
DONALDSON, LUFKIN & JENRETTE, INC.
FORM 10-K
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
FOR THE YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
Part IV EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page Number
Item 14 (a) (1) Financial Statements -----------
Independent Auditors' Report....................................................... 29
Consolidated Statements of Financial Condition at December 31, 1996 and 1995....... 30
Consolidated Statements of Income for the years ended December 31, 1996, 1995 and
1994............................................................................... 32
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994................................................... 33
Consolidated Statements of Cash Flows for years ended December 31, 1996, 1995 and
1994............................................................................... 34
Notes to Consolidated Financial Statements......................................... 36
Item 14 (a) (2) Financial Statement Schedule
Schedule I Condensed Financial Information of Registrant.......................... 54
Item 14 (a) (3) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Restated Certificate of Incorporation of Registrant
3.2 By-laws of the Registrant
4.1 Registration Rights and Indemnification Agreement
4.2 Specimen Stock Certificate of the Registrant
4.7 Certificate of Designation of the Registrant's
Fixed/Adjustable Rate Cumulative Preferred Stock, Series A
10.1 Donaldson, Lufkin & Jenrette, Inc. 1991-1993 Long-term
Incentive Plan
10.2 Amendment No. 1 to the Donaldson, Lufkin & Jenrette, Inc.
1991-1993 Long-term Incentive Plan
62
Item 14 (a) (3) Exhibits (Continued)
EXHIBIT NO. DESCRIPTION
----------- -----------
10.3 Amendment No. 2 to the Donaldson, Lufkin & Jenrette, Inc.
1991-1993 Long-term Incentive Plan
10.4 Donaldson, Lufkin & Jenrette, Inc. 1994-1996 Long-term
Incentive Plan
10.5 Amendment No. 1 to the Donaldson, Lufkin & Jenrette, Inc.
1994-1996 Long-term Incentive Plan
10.6 Donaldson, Lufkin & Jenrette, Inc. 1995 Restricted Stock
Unit Plan
10.7 Donaldson, Lufkin & Jenrette, Inc. 1995 Stock Option Plan
10.8 Donaldson, Lufkin & Jenrette, Inc. 1996 Stock Option Plan
10.9 Deferred Compensation Agreement, dated December 30, 1983,
between Michael M. Bendik and the Registrant
10.10 Deferred Compensation Agreement, dated December 30, 1983,
between Michael A. Boyd and the Registrant
10.11 Deferred Compensation Agreement, dated December 30, 1983,
between John S. Chalsty and the Registrant
10.12 Deferred Compensation Agreement, dated December 30, 1983,
between Anthony F. Daddino and the Registrant
10.13 Deferred Compensation Agreement, dated December 30, 1983,
between Richard H. Jenrette and the Registrant
10.14 Deferred Compensation Agreement, dated December 30, 1983,
between Carl B. Menges and the Registrant
10.15 Deferred Compensation Agreement, dated December 30, 1983,
between Richard S. Pechter and the Registrant
10.16 Deferred Compensation Agreement, dated December 30, 1983,
between Gerald B. Rigg and the Registrant
10.17 Deferred Compensation Agreement, dated December 30, 1983,
between Joe L. Roby and the Registrant
10.18 Deferred Compensation Agreement, dated December 30, 1983,
between Theodore P. Shen and the Registrant
10.19 Letter agreement between the Registrant and ACMC, Inc.,
dated as of August 25, 1995, regarding certain state and
local tax sharing arrangements
10.20 Insurance Agreement, dated August 27, 1992, by and between
the Registrant and Thomas E. Siegler, as Trustee and Owner
of the 1992 Chalsty Insurance Trust, dated August 25, 1995
10.21 Amendment, dated August 28, 1992, to the Insurance
Agreement, dated August 27, 1992, by and between the
Registrant and Michael Cappiccille, as Trustee and Owner
10.22 Federal tax sharing agreement
63
Item 14 (a) (3) Exhibits (Continued)
EXHIBIT NO. DESCRIPTION
----------- -----------
10.23 Agreement of lease between 99 Bishopsgate Limited,
Landlord, and DLJ International Limited, Tenant and the
Registrant, Tenant's Guarantor, 99 Bishopsgate London, EC2,
dated as of October 24, 1996.
10.30 Agreement of Lease between Stanley Stahl D/B/A Stahl Park
Avenue Co., Landlord, and the Registrant, Tenant, 277 Park
Avenue, New York, New York, dated as of October 26, 1994
10.31 First Amendment of Lease by and between Stanley Stahl D/B/A
Stahl Park Avenue Co. and the Registrant, dated as of March
30, 1995
10.32 Amended and Restated Equitable Credit Agreement, dated
March 1, 1994, among the Registrant, The Equitable Life
Assurance Society of the United States, Equitable Variable
Life Insurance Company, DLJ Bridge Finance, Inc., DLJ
Capital Corporation and DLJ Investment Inc.
10.33 Preferred Stock purchase agreement between the Registrant
and The Equitable Life Assurance Society of the United
States
10.34 Master Repurchase Agreement between Column Financial, Inc.
and DLJ Mortgage Capital, Inc. dated as of November 1, 1993
10.35 Mortgage Loan Purchase Agreement between Column Financial,
Inc. and DLJ Mortgage Acceptance Corp. dated as of December
1, 1994
10.36 First Amendment to the Amended and Restated Equitable
Credit Agreement dated March 1, 1994, among the Registrant,
The Equitable Life Assurance Society of the United States,
Equitable Variable Life Insurance Company, DLJ Bridge
Finance, Inc., DLJ Capital Corporation and DLJ Investment
Inc.
10.37 Agreement of lease between Broadpine Realty Holding
Company, Inc. and the Registrant, Tenant, 120 Broadway, New
York, New York, dated as of November 10, 1995
10.38 Donaldson, Lufkin & Jenrette, Inc. 1996 Incentive
Compensation Plan
10.39 1995 Restricted Stock Unit Plan Agreement (Base), dated
October 24, 1995, between Michael M. Bendik and the
Registrant
10.40 1995 Restricted Stock Unit Plan Agreement (Base), dated
October 24, 1995, between Michael A. Boyd and the
Registrant
10.41 1995 Restricted Stock Unit Plan Agreement (Base), dated
October 24, 1995, between John S. Chalsty and the
Registrant
10.42 1995 Restricted Stock Unit Plan Agreement (Base), dated
October 24, 1995, between Anthony F. Daddino and the
Registrant
10.43 1995 Restricted Stock Unit Plan Agreement (Base), dated
October 24, 1995, between Hamilton E. James and the
Registrant
10.44 1995 Restricted Stock Unit Plan Agreement (Base), dated
October 24, 1995, between Carl B. Menges and the Registrant
64
Item 14 (a) (3) Exhibits (Continued)
EXHIBIT NO. DESCRIPTION
----------- -----------
10.45 1995 Restricted Stock Unit Plan Agreement (Base), dated
October 24, 1995, between Richard S. Pechter and the
Registrant
10.46 1995 Restricted Stock Unit Plan Agreement (Base), dated
October 24, 1995, between Gerald B. Rigg and the Registrant
10.47 1995 Restricted Stock Unit Plan Agreement (Base), dated
October 24, 1995, between Joe L. Roby and the Registrant
10.48 1995 Restricted Stock Unit Plan Agreement (Base), dated
October 24, 1995, between Theodore P. Shen and the
Registrant
10.49 1995 Restricted Stock Unit Plan Agreement (Premium), dated
October 24, 1995, between Michael M. Bendik and the
Registrant
10.50 1995 Restricted Stock Unit Plan Agreement (Premium), dated
October 24, 1995, between Michael A. Boyd and the
Registrant
10.51 1995 Restricted Stock Unit Plan Agreement (Premium), dated
October 24, 1995, between John S. Chalsty and the
Registrant
10.52 1995 Restricted Stock Unit Plan Agreement (Premium), dated
October 24, 1995, between Anthony F. Daddino and the
Registrant
10.53 1995 Restricted Stock Unit Plan Agreement (Premium), dated
October 24, 1995, between Hamilton E. James and the
Registrant
10.54 1995 Restricted Stock Unit Plan Agreement (Premium), dated
October 24, 1995, between Carl B. Menges and the Registrant
10.55 1995 Restricted Stock Unit Plan Agreement (Premium), dated
October 24, 1995, between Richard S. Pechter and the
Registrant
10.56 1995 Restricted Stock Unit Plan Agreement (Premium), dated
October 24, 1995, between Gerald B. Rigg and the Registrant
10.57 1995 Restricted Stock Unit Plan Agreement (Premium), dated
October 24, 1995, between Joe L. Roby and the Registrant
10.58 1995 Restricted Stock Unit Plan Agreement (Premium), dated
October 24, 1995, between Theodore P. Shen and the
Registrant
10.59 1995 Stock Option Plan Agreement, dated October 24, 1995,
between Michael M. Bendik and the Registrant
10.60 1995 Stock Option Plan Agreement, dated October 24, 1995,
between Michael A. Boyd and the Registrant
10.61 1995 Stock Option Plan Agreement, dated October 24, 1995,
between John S. Chalsty and the Registrant
10.62 1995 Stock Option Plan Agreement, dated October 24, 1995,
between Anthony F. Daddino and the Registrant
10.63 1995 Stock Option Plan Agreement, dated October 24, 1995,
between Hamilton E. James and the Registrant
65
Item 14 (a) (3) Exhibits (Continued)
EXHIBIT NO. DESCRIPTION
----------- -----------
10.64 1995 Stock Option Plan Agreement, dated October 24, 1995,
between Carl B. Menges and the Registrant
10.65 1995 Stock Option Plan Agreement, dated October 24, 1995,
between Richard S. Pechter and the Registrant
10.66 1995 Stock Option Plan Agreement, dated October 24, 1995,
between Gerald B. Rigg and the Registrant
10.67 1995 Stock Option Plan Agreement, dated October 24, 1995,
between Joe L. Roby and the Registrant
10.68 1995 Stock Option Plan Agreement, dated October 24, 1995,
between Theodore P. Shen and the Registrant
10.69 Amendment No. 1 to LTI-IV Unit Award Agreement, dated
October 24, 1995, between Michael M. Bendik and the
Registrant
10.70 Amendment No. 2 to LTI-III Unit Award Agreement, dated
October 24, 1995, between Michael A. Boyd and the
Registrant
10.71 Amendment No. 2 to LTI-III Unit Award Agreement, dated
October 24, 1995, between John S. Chalsty and the
Registrant
10.72 Amendment No. 2 to LTI-III Unit Award Agreement, dated
October 24, 1995, between Anthony F. Daddino and the
Registrant
10.73 Amendment No. 1 to LTI-IV Unit Award Agreement, dated
October 24, 1995, between Hamilton E. James and the
Registrant
10.74 Amendment No. 2 to LTI-III Unit Award Agreement, dated
October 24, 1995, between Carl B. Menges and the Registrant
10.75 Amendment No. 2 to LTI-III Unit Award Agreement, dated
October 24, 1995, between Richard S. Pechter and the
Registrant
10.76 Amendment No. 2 to LTI-III Unit Award Agreement, dated
October 24, 1995, between Gerald B. Rigg and the Registrant
10.77 Amendment No. 2 to LTI-III Unit Award Agreement, dated
October 24, 1995, between Joe L. Roby and the Registrant
10.78 Amendment No. 2 to LTI-III Unit Award Agreement, dated
October 24, 1995, between Theodore P. Shen and the
Registrant
10.79 Insurance Agreement dated November 29, 1995, by and between
the Registrant and Kayla L. Pechter and Philip M. Satow, as
Trustees and Owners of the 1995 Pechter Insurance Trust,
dated August 22, 1995
10.80 Insurance Agreement dated October 31, 1995, by and between
the Registrant and Winthrop Trust Company, as Trustee and
Owner of the Anthony F. Daddino Insurance Trust, dated
August 25, 1995
66
Item 14 (a) (3) Exhibits (Continued)
EXHIBIT NO. DESCRIPTION
----------- -----------
10.81 Insurance Agreement dated February 1, 1996 by and between
the Registrant and Jeanette Eliasberg as Trustee and Owner
of the Trust created under Agreement dated December 22,
1993 between Theodore P. Shen, as Grantor and Jeanette
Eliasberg as Trustee.
10.82 Insurance Agreement dated February 1, 1996 by and between
the Registrant and Jeanette Eliasberg as Trustee and Owner
of the Trust created under Agreement dated December 22,
1993 between Theodore P. Shen, as Grantor and Jeanette
Eliasberg as Trustee.
10.83 Insurance Agreement dated February 1, 1996 by and between
the Registrant and Jeanette Eliasberg as Trustee and Owner
of the Trust created under Agreement dated December 22,
1993 between Theodore P. Shen, as Grantor and Jeanette
Eliasberg as Trustee.
10.84 Insurance Agreement dated January 4, 1996 by and between
the Registrant and Dan Curtis Roby as Trustee and Owner of
the Roby 1995 Insurance Trust dated November 27, 1995.
10.85 Second Amendment of Lease by and between Stanley Stahl
D/B/A Stahl Park Avenue Co. and the Registrant, dated
August 24, 1995.
10.86 Third Amendment of Lease by and between Stanley Stahl D/B/A
Stahl Park Avenue Co. and the Registrant, dated October 6,
1995.
10.87 Fourth Amendment of Lease by and between Stanley Stahl
D/B/A Stahl Park Avenue Co. and the Registrant, dated April
29, 1996.
10.88 1996 Non-Employee Directors Stock Plan
10.89 1996 Stock Option Plan Agreement, dated May 16, 1996,
between Joe L. Roby and the Registrant.
10.90 Donaldson, Lufkin & Jenrette, Inc. 1996 Incentive
Compensation Plan.
11.1 Statement re computation of per share earnings
12.1 Computation of ratio of earnings to fixed charges and ratio
of earnings to combined fixed charges and preferred stock
dividends
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
67
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, hereunto duly authorized, on the 27th day of
March 1997.
Donaldson, Lufkin & Jenrette, Inc.
(Registrant)
By: /s/ Joe L. Roby
--------------------------------
Joe L. Roby
President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has to be signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 27th day of March 1997.
NAME TITLE
---- -----
/s/ John S. Chalsty
- ------------------------
John S. Chalsty Chairman of the Board and Chief Executive Officer;
Director
/s/ Joe L. Roby
- ------------------------
Joe L. Roby President and Chief Operating Officer; Director
/s/ Anthony F. Daddino
- ------------------------
Anthony F. Daddino Executive Vice President and Chief Financial
Officer; Director
/s/ Carl B. Menges
- ------------------------
Carl B. Menges Vice Chairman; Director
/s/ Hamilton E. James
- ------------------------
Hamilton E. James Managing Director; Director
/s/ Richard S. Pechter
- ------------------------
Richard S. Pechter Managing Director; Director
/s/ Theodore P. Shen
- ------------------------
Theodore P. Shen Managing Director; Director
/s/ Michael M. Bendik
- ------------------------
Michael M. Bendik Senior Vice President and Chief Accounting Officer
68
NAME TITLE
---- -----
/s/ Michael A. Boyd
- ------------------------
Michael A. Boyd Senior Vice President and General Counsel
/s/ Gerald B. Rigg
- ------------------------
Gerald B. Rigg Senior Vice President and Director of Human Resources
/s/ Claude Bebear
- ------------------------
Claude Bebear Director
/s/ Henri de Castries
- ------------------------
Henri de Castries Director
/s/ Jerry M. de St. Paer
- ------------------------
Jerry M. de St. Paer Director
/s/ Denis Duverne
- ------------------------
Denis Duverne Director
/s/ Louis Harris
- ------------------------
Louis Harris Director
/s/ Henri G. Hottinguer
- ------------------------
Henri G. Hottinguer Director
/s/ W. Edwin Jarmain
- ------------------------
W. Edwin Jarmain Director
/s/ Francis Jungers
- ------------------------
Francis Jungers Director
/s/ Joseph J. Melone
- ------------------------
Joseph J. Melone Director
/s/ W.J. Sanders III
- ------------------------
W.J. Sanders III Director
/s/ John C. West
- ------------------------
John C. West Director
69
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- --------
3.1 Restated Certificate of Incorporation of Registrant
(Incorporated by reference to the corresponding exhibit
to the Registrant's Registration Statement on Form S-1,
Registration No. 33-96276).
3.2 By-laws of the Registrant (Incorporated by reference to
the corresponding exhibit to the Registrant's
Registration Statement on Form S-1, Registration No.
33-96276).
4.1 Registration Rights and Indemnification Agreement
(Incorporated by reference to the corresponding exhibit
to the Registrant's annual report on Form 10-K for the
fiscal year ended December 31, 1995).
4.2 Specimen Stock Certificate of the Registrant
(Incorporated by reference to the corresponding exhibit
to the Registrant's Registration Statement on Form S-1,
Registration No. 33-96276).
4.7 Certificate of Designation of the Registrant's
Fixed/Adjustable Rate Cumulative Preferred Stock,
Series A (Incorporated by reference to Exhibit 4.3 to
the Registrant's Registration Statement on Form S-3,
File No. 33-80771.
10.1 Donaldson, Lufkin & Jenrette, Inc. 1991-1993 Long-term
Incentive Plan (Incorporated by reference to the
corresponding exhibit to the Registrant's Registration
Statement on Form S-1, Registration No. 33-96276).
10.2 Amendment No. 1 to the Donaldson, Lufkin & Jenrette,
Inc. 1991-1993 Long-term Incentive Plan (Incorporated
by reference to the corresponding exhibit to the
Registrant's Registration Statement on Form S-1,
Registration No. 33-96276).
10.3 Amendment No. 2 to the Donaldson, Lufkin & Jenrette,
Inc. 1991-1993 Long-term Incentive Plan (Incorporated
by reference to the corresponding exhibit to the
Registrant's annual report on Form 10-K for the fiscal
year ended December 31, 1995).
10.4 Donaldson, Lufkin & Jenrette, Inc. 1994-1996 Long-term
Incentive Plan (Incorporated by reference to the
corresponding exhibit to the Registrant's Registration
Statement on Form S-1, Registration No. 33-96276).
10.5 Amendment No. 1 to the Donaldson, Lufkin & Jenrette,
Inc. 1994-1996 Long-term Incentive Plan (Incorporated
by reference to the corresponding exhibit to the
Registrant's annual report on Form 10-K for the fiscal
year ended December 31, 1995).
10.6 Donaldson, Lufkin & Jenrette, Inc. 1995 Restricted
Stock Unit Plan (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
10.7 Donaldson, Lufkin & Jenrette, Inc. 1995 Stock Option
Plan (Incorporated by reference to the corresponding
exhibit to the Registrant's annual report on Form 10-K
for the fiscal year ended December 31, 1995).
70
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- --------
10.8 Donaldson, Lufkin & Jenrette, Inc. 1996 Stock Option
Plan (Incorporated by reference to Annex A of the
Registrant's Proxy Statement on Schedule 14Afiled on
March 22, 1996 and furnished to shareholders in
connection with the soliciatation of proxies for the
Registrant's annual meeting of shareholders to be held
on April 30, 1996.
10.9 Deferred Compensation Agreement, dated December 30,
1983, between Michael M. Bendik and the Registrant
(Incorporated by reference to the corresponding exhibit
to the Registrant's Registration Statement on Form S-1,
Registration No. 33-96276).
10.10 Deferred Compensation Agreement, dated December 30,
1983, between Michael A. Boyd and the Registrant
(Incorporated by reference to the corresponding exhibit
to the Registrant's Registration Statement on Form S-1,
Registration No. 33-96276).
10.11 Deferred Compensation Agreement, dated December 30,
1983, between John S. Chalsty and the Registrant
(Incorporated by reference to the corresponding exhibit
to the Registrant's Registration Statement on Form S-1,
Registration No. 33-96276).
10.12 Deferred Compensation Agreement, dated December 30,
1983, between Anthony F. Daddino and the Registrant
(Incorporated by reference to the corresponding exhibit
to the Registrant's Registration Statement on Form S-1,
Registration No. 33-96276).
10.13 Deferred Compensation Agreement, dated December 30,
1983, between Richard H. Jenrette and the Registrant
(Incorporated by reference to the corresponding exhibit
to the Registrant's Registration Statement on Form S-1,
Registration No. 33-96276).
10.14 Deferred Compensation Agreement, dated December 30,
1983, between Carl B. Menges and the Registrant
(Incorporated by reference to the corresponding exhibit
to the Registrant's Registration Statement on Form S-1,
Registration No. 33-96276).
10.15 Deferred Compensation Agreement, dated December 30,
1983, between Richard S. Pechter and the Registrant
(Incorporated by reference to the corresponding exhibit
to the Registrant's Registration Statement on Form S-1,
Registration No. 33-96276).
71
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- --------
10.16 Deferred Compensation Agreement, dated December 30,
1983, between Gerald B. Rigg and the Registrant
(Incorporated by reference to the corresponding exhibit
to the Registrant's Registration Statement on Form S-1,
Registration No. 33-96276).
10.17 Deferred Compensation Agreement, dated December 30,
1983, between Joe L. Roby and the Registrant
(Incorporated by reference to the corresponding exhibit
to the Registrant's Registration Statement on Form S-1,
Registration No. 33-96276).
10.18 Deferred Compensation Agreement, dated December 30,
1983, between Theodore P. Shen and the Registrant
(Incorporated by reference to the corresponding exhibit
to the Registrant's Registration Statement on Form S-1,
Registration No. 33-96276).
10.19 Letter agreement between the Registrant and ACMC, Inc.,
dated as of August 25, 1995, regarding certain state
and local tax sharing arrangements (Incorporated by
reference to the corresponding exhibit to the
Registrant's Registration Statement on Form S-1,
Registration No. 33-96276).
10.20 Insurance Agreement, dated August 27, 1992, by and
between the Registrant and Thomas E. Siegler, as
Trustee and Owner of the 1992 Chalsty Insurance Trust,
dated August 25, 1995 (Incorporated by reference to the
corresponding exhibit to the Registrant's Registration
Statement on Form S-1, Registration No. 33-96276).
10.21 Amendment, dated August 28, 1992, to the Insurance
Agreement, dated August 27, 1992, by and between the
Registrant and Michael Cappiccille, as Trustee and
Owner (Incorporated by reference to the corresponding
exhibit to the Registrant's Registration Statement on
Form S-1, Registration No. 33-96276).
10.22 Federal tax sharing agreement (Incorporated by
reference to the corresponding exhibit to the
Registrant's Registration Statement on Form S-1,
Registration No. 33-96276).
10.23 Agreement of lease between 99 Bishopsgate Limited, 82
Landlord, and DLJ International Limited, Tenant and the
Registrant, Tenant's Guarantor, 99 Bishopsgate London,
EC2, dated as of October 24, 1996.
10.30 Agreement of Lease between Stanley Stahl D/B/A Stahl
Park Avenue Co., Landlord, and the Registrant, Tenant,
277 Park Avenue, New York, New York, dated as of
October 26, 1994 (Incorporated by reference to the
corresponding exhibit to the Registrant's Registration
Statement on Form S-1, Registration No. 33-96276).
10.31 First Amendment of Lease by and between Stanley Stahl
D/B/A Stahl Park Avenue Co. and the Registrant, dated
as of March 30, 1995 (Incorporated by reference to the
corresponding exhibit to the Registrant's Registration
Statement on Form S-1, Registration No. 33-96276).
72
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- --------
10.32 Amended and Restated Equitable Credit Agreement, dated
March 1, 1994, among the Registrant, The Equitable Life
Assurance Society of the United States, Equitable
Variable Life Insurance Company, DLJ Bridge Finance,
Inc., DLJ Capital Corporation and DLJ Investment Inc.
(Incorporated by reference to the corresponding exhibit
to the Registrant's Registration Statement on Form S-1,
Registration No. 33-96276).
10.33 Preferred Stock purchase agreement between the
Registrant and The Equitable Life Assurance Society of
the United States (Incorporated by reference to the
corresponding exhibit to the Registrant's Registration
Statement on Form S-1, Registration No. 33-96276).
10.34 Master Repurchase Agreement between Column Financial,
Inc. and DLJ Mortgage Capital, Inc. dated as of
November 1, 1993 (Incorporated by reference to the
corresponding exhibit to the Registrant's Registration
Statement on Form S-1, Registration No. 33-96276).
10.35 Mortgage Loan Purchase Agreement between Column
Financial, Inc. and DLJ Mortgage Acceptance Corp. dated
as of December 1, 1994 (Incorporated by reference to
the corresponding exhibit to the Registrant's
Registration Statement on Form S-1, Registration No.
33-96276).
10.36 First Amendment to the Amended and Restated Equitable
Credit Agreement dated March 1, 1994, among the
Registrant, The Equitable Life Assurance Society of the
United States, Equitable Variable Life Insurance
Company, DLJ Bridge Finance, Inc., DLJ Capital
Corporation and DLJ Investment Inc. (Incorporated by
reference to the corresponding exhibit to the
Registrant's annual report on Form 10-K for the fiscal
year ended December 31, 1995).
10.37 Agreement of lease between Broadpine Realty Holding
Company, Inc. and the Registrant, Tenant, 120 Broadway,
New York, New York, dated as of November 10, 1995
(Incorporated by reference to the corresponding exhibit
to the Registrant's annual report on Form 10-K for the
fiscal year ended December 31, 1995).
10.38 Donaldson, Lufkin & Jenrette, Inc. 1996 Incentive
Compensation Plan (Incorporated by reference to Annex B
of the Registrant's Proxy Statement on Schedule 14A
filed on March 22, 1996 and furnished to shareholders
in connection with the solicitation of proxies for the
Registrant's annual meeting of shareholders to be held
on April 30, 1996.
10.39 1995 Restricted Stock Unit Plan Agreement (Base), dated
October 24, 1995, between Michael M. Bendik and the
Registrant (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
10.40 1995 Restricted Stock Unit Plan Agreement (Base), dated
October 24, 1995, between Michael A. Boyd and the
Registrant (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
10.41 1995 Restricted Stock Unit Plan Agreement (Base), dated
October 24, 1995, between John S. Chalsty and the
Registrant (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
73
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10.42 1995 Restricted Stock Unit Plan Agreement (Base), dated
October 24, 1995, between Anthony F. Daddino and the
Registrant (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
10.43 1995 Restricted Stock Unit Plan Agreement (Base), dated
October 24, 1995, between Hamilton E. James and the
Registrant (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
10.44 1995 Restricted Stock Unit Plan Agreement (Base), dated
October 24, 1995, between Carl B. Menges and the
Registrant (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
10.45 1995 Restricted Stock Unit Plan Agreement (Base), dated
October 24, 1995, between Richard S. Pechter and the
Registrant (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
10.46 1995 Restricted Stock Unit Plan Agreement (Base), dated
October 24, 1995, between Gerald B. Rigg and the
Registrant (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
10.47 1995 Restricted Stock Unit Plan Agreement (Base), dated
October 24, 1995, between Joe L. Roby and the
Registrant (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
10.48 1995 Restricted Stock Unit Plan Agreement (Base), dated
October 24, 1995, between Theodore P. Shen and the
Registrant (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
10.49 1995 Restricted Stock Unit Plan Agreement (Premium),
dated October 24, 1995, between Michael M. Bendik and
the Registrant (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
10.50 1995 Restricted Stock Unit Plan Agreement (Premium),
dated October 24, 1995, between Michael A. Boyd and the
Registrant (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
10.51 1995 Restricted Stock Unit Plan Agreement (Premium),
dated October 24, 1995, between John S. Chalsty and the
Registrant (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
10.52 1995 Restricted Stock Unit Plan Agreement (Premium),
dated October 24, 1995, between Anthony F. Daddino and
the Registrant (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
74
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- ------ ----------- --------
10.53 1995 Restricted Stock Unit Plan Agreement (Premium),
dated October 24, 1995, between Hamilton E. James and
the Registrant (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
10.54 1995 Restricted Stock Unit Plan Agreement (Premium),
dated October 24, 1995, between Carl B. Menges and the
Registrant (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
10.55 1995 Restricted Stock Unit Plan Agreement (Premium),
dated October 24, 1995, between Richard S. Pechter and
the Registrant (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
10.56 1995 Restricted Stock Unit Plan Agreement (Premium),
dated October 24, 1995, between Gerald B. Rigg and the
Registrant (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
10.57 1995 Restricted Stock Unit Plan Agreement (Premium),
dated October 24, 1995, between Joe L. Roby and the
Registrant (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
10.58 1995 Restricted Stock Unit Plan Agreement (Premium),
dated October 24, 1995, between Theodore P. Shen and
the Registrant (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
10.59 1995 Stock Option Plan Agreement, dated October 24,
1995, between Michael M. Bendik and the Registrant
(Incorporated by reference to the corresponding exhibit
to the Registrant's annual report on Form 10-K for the
fiscal year ended December 31, 1995).
10.60 1995 Stock Option Plan Agreement, dated October 24,
1995, between Michael A. Boyd and the Registrant
(Incorporated by reference to the corresponding exhibit
to the Registrant's annual report on Form 10-K for the
fiscal year ended December 31, 1995).
10.61 1995 Stock Option Plan Agreement, dated October 24,
1995, between John S. Chalsty and the Registrant
(Incorporated by reference to the corresponding exhibit
to the Registrant's annual report on Form 10-K for the
fiscal year ended December 31, 1995).
10.62 1995 Stock Option Plan Agreement, dated October 24,
1995, between Anthony F. Daddino and the Registrant
(Incorporated by reference to the corresponding exhibit
to the Registrant's annual report on Form 10-K for the
fiscal year ended December 31, 1995).
10.63 1995 Stock Option Plan Agreement, dated October 24,
1995, between Hamilton E. James and the Registrant
(Incorporated by reference to the corresponding exhibit
to the Registrant's annual report on Form 10-K for the
fiscal year ended December 31, 1995).
75
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EXHIBIT NUMBERED
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- ------ ----------- --------
10.64 1995 Stock Option Plan Agreement, dated October 24,
1995, between Carl B. Menges and the Registrant
(Incorporated by reference to the corresponding exhibit
to the Registrant's annual report on Form 10-K for the
fiscal year ended December 31, 1995).
10.65 1995 Stock Option Plan Agreement, dated October 24,
1995, between Richard S. Pechter and the Registrant
(Incorporated by reference to the corresponding exhibit
to the Registrant's annual report on Form 10-K for the
fiscal year ended December 31, 1995).
10.66 1995 Stock Option Plan Agreement, dated October 24,
1995, between Gerald B. Rigg and the Registrant
(Incorporated by reference to the corresponding exhibit
to the Registrant's annual report on Form 10-K for the
fiscal year ended December 31, 1995).
10.67 1995 Stock Option Plan Agreement, dated October 24,
1995, between Joe L. Roby and the Registrant
(Incorporated by reference to the corresponding exhibit
to the Registrant's annual report on Form 10-K for the
fiscal year ended December 31, 1995).
10.68 1995 Stock Option Plan Agreement, dated October 24,
1995, between Theodore P. Shen and the Registrant
(Incorporated by reference to the corresponding exhibit
to the Registrant's annual report on Form 10-K for the
fiscal year ended December 31, 1995).
10.69 Amendment No. 1 to LTI-IV Unit Award Agreement, dated
October 24, 1995, between Michael M. Bendik and the
Registrant (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
10.70 Amendment No. 2 to LTI-III Unit Award Agreement, dated
October 24, 1995, between Michael A. Boyd and the
Registrant (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
10.71 Amendment No. 2 to LTI-III Unit Award Agreement, dated
October 24, 1995, between John S. Chalsty and the
Registrant (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
10.72 Amendment No. 2 to LTI-III Unit Award Agreement, dated
October 24, 1995, between Anthony F. Daddino and the
Registrant (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
10.73 Amendment No. 1 to LTI-IV Unit Award Agreement, dated
October 24, 1995, between Hamilton E. James and the
Registrant (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
10.74 Amendment No. 2 to LTI-III Unit Award Agreement, dated
October 24, 1995, between Carl B. Menges and the
Registrant (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
76
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- ------ ----------- --------
10.75 Amendment No. 2 to LTI-III Unit Award Agreement, dated
October 24, 1995, between Richard S. Pechter and the
Registrant (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
10.76 Amendment No. 2 to LTI-III Unit Award Agreement, dated
October 24, 1995, between Gerald B. Rigg and the
Registrant (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
10.77 Amendment No. 2 to LTI-III Unit Award Agreement, dated
October 24, 1995, between Joe L. Roby and the
Registrant (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
10.78 Amendment No. 2 to LTI-III Unit Award Agreement, dated
October 24, 1995, between Theodore P. Shen and the
Registrant (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31,
1995).
10.79 Insurance Agreement dated November 29, 1995, by and
between the Registrant and Kayla L. Pechter and Philip
M. Satow, as Trustees and Owners of the 1995 Pechter
Insurance Trust, dated August 22, 1995 (Incorporated by
reference to the corresponding exhibit to the
Registrant's annual report on Form 10-K for the fiscal
year ended December 31, 1995).
10.80 Insurance Agreement dated October 31, 1995, by and
between the Registrant and Winthrop Trust Company, as
Trustee and Owner of the Anthony F. Daddino Insurance
Trust, dated August 25, 1995 (Incorporated by reference
to the corresponding exhibit to the Registrant's annual
report on Form 10-K for the fiscal year ended December
31, 1995).
10.81 Insurance Agreement dated February 1, 1996 by and
between the Registrant and Jeanette Eliasberg as
Trustee and Owner of the Trust created under Agreement
dated December 22, 1993 between Theodore P. Shen, as
Grantor and Jeanette Eliasberg as Trustee.
(Incorporated herein by reference to the corresponding
exhibit to the Registrant's quarterly report on Form
10-Q for the period ended June 30, 1996).
10.82 Insurance Agreement dated February 1, 1996 by and
between the Registrant and Jeanette Eliasberg as
Trustee and Owner of the Trust created under Agreement
dated December 22, 1993 between Theodore P. Shen, as
Grantor and Jeaette Eliasberg as Trustee. (Incorporated
herein by reference to the corresponding exhibit to the
Registrant's quarterly report on Form 10-Q for the
period ended June 30, 1996).
10.83 Insurance Agreement dated February 1, 1996 by and
between the Registrant and Jeanette Eliasberg as
Trustee and Owner of the Trust created under Agreement
dated December 22, 1993 between Theodore P. Shen, as
Grantor and Jeanette Eliasberg as Trustee.
(Incorporated herein by reference to the corresponding
exhibit to the Registrant's quarterly report on Form
10-Q for the period ended June 30, 1996).
77
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10.84 Insurance Agreement dated January 4, 1996 by and
between the Registrant and Dan Curtis Roby as Trustee
and Owner of the Roby 1995 Insurance Trust dated
November 27, 1995. (Incorporated herein by reference to
the corresponding exhibit to the Registrant's quarterly
report on Form 10-Q for the period ended June 30,
1996).
10.85 Second Amendment of Lease by and between Stanley Stahl
D/B/A Stahl Park Avenue Co. and the Registrant, dated
August 24, 1995. (Incorporated herein by reference to
the corresponding exhibit to the Registrant's quarterly
report on Form 10-Q for the period ended June 30,
1996).
10.86 Third Amendment of Lease by and between Stanley Stahl
D/B/A Stahl Park Avenue Co. and the Registrant, dated
October 6, 1995. (Incorporated herein by reference to
the corresponding exhibit to the Registrant's quarterly
report on Form 10-Q for the period ended June 30,
1996).
10.87 Fourth Amendment of Lease by and between Stanley Stahl
D/B/A Stahl Park Avenue Co. and the Registrant, dated
April 29, 1996. (Incorporated herein by reference to
the corresponding exhibit to the Registrant's quarterly
report on Form 10-Q for the period ended June 30,
1996).
10.88 1996 Non-Employee Directors Stock Plan (Incorporated by
reference to Annex A of the Registrant's Proxy
Statement on Schedule 14A filed on March 11, 1997 and
furnished to shareholders in connection with
solicitation of proxies for the Registrant's annual
meeting of shareholders to be held on April 16, 1997.
10.89 1996 Stock Option Plan Agreement, dated May 16, 1996, 593
between Joe L. Roby and the Registrant.
10.90 Donaldson, Lufkin & Jenrette, Inc. 1996 Incentive
Compensation Plan. (Incorporated herein by reference to
Annex B of the Company's Proxy Statement on Schedule 14
A).
11.1 Statement re computation of per share earnings 596
12.1 Computation of ratio of earnings to fixed charges and 597
ratio of earnings to combined fixed charges and preferred
stock dividends
21.1 Subsidiaries of the Registrant (Incorporated by
reference to the corresponding exhibit to the
Registrant's annual report on Form 10-K for the fiscal
year ended December 31, 1995).
23.1 Consent of KPMG Peat Marwick LLP 599
27 Financial Data Schedule 600
78