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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, 1997
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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
Series B 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 19, 1998, the latest practicable date, there were 58,458,178
shares of Common Stock, $0.10 par value, outstanding.
At March 19, 1998 the aggregate market value of the voting stock held by non-
affiliates of the registrant was approximately $1,241.1 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 22, 1998, which definitive proxy statement (the "Proxy Statement") was
filed by the registrant with the Securities and Exchange Commission on March
12, 1998 not later than 120 days after the year ended December 31, 1997.
Cover Page 2 of 2
PART I
ITEM 1. BUSINESS
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Donaldson, Lufkin & Jenrette, Inc. (the "Company") is a leading
integrated investment and merchant bank serving 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:
o Securities underwriting, sales and trading
o Merchant banking
o Financial advisory services
o Investment research
o Venture capital
o Correspondent brokerage services
o Online interactive brokerage services
o Asset management and other advisory services
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 the Company's initial
public offering in October 1995, the Company was an independently operated
indirect wholly owned subsidiary of The Equitable Companies Incorporated
("Equitable"). At December 31, 1997 the Equitable owned 76.2% 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, 1997, approximately 58.7% of
Equitable's outstanding common stock.
The Company conducts its business through three principal operating
groups:
o Banking Group
o Investment Banking
o Merchant Banking
o Emerging Markets
o Capital Markets Group
o Fixed Income
o Institutional Equities
o Equity Derivatives
o Sprout
o Financial Services Group
o Pershing
o Investment Services
o Asset Management
In 1997, the Company took steps toward achieving the goal of
establishing a strong international presence. The acquisition of the Phoenix
Securities Group, a London-based investment bank provided the opportunity to
enhance the Company's international merger and acquisition and leveraged
financing capabilities. In 1997, the Company also acquired London Global
Securities, a leading international securities financing intermediary. In
addition to these acquisitions, a new high-yield group was established in
London.
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All business groups have planned expansion of their international activities.
An investment banking group is in the process of being established in Paris,
joining the Company's institutional equity sales operation, as well as planned
investment banking and foreign equity trading operations in Russia and Germany.
The Company continued to target selected areas in the emerging markets of
Eastern Europe, Latin America and Asia. The Merchant Banking Group has expanded
its international efforts, with significant investments in the U.K., Italy,
France, Argentina and Brazil. By year-end, the Company's London operation
employed more than 800 individuals. Total assets and total revenues related to
the Company's foreign operations approximated $8.6 billion and $535.2 million,
respectively, at December 31, 1997. The Company's foreign operations were not
significant in 1996.
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 the 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. The Company's 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.
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 600 financial
institutions which collectively maintain over 1.75 million client accounts. The
Company's Investment Services Group provides access to the Company's equity and
fixed-income research, trading services and underwriting to a broad mix of
private clients. 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. Certain
reclassifications of prior year amounts have been made to conform to the 1997
presentation.
NET REVENUES BY OPERATING GROUP:
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YEARS ENDED DECEMBER 31,
1993 1994 1995 1996 1997
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(in millions)
Banking Group.......................... $ 491.8 $ 390.0 $ 689.2 $ 935.8 $ 1,311.8
Capital Markets Group.................. 1,058.2 702.3 851.9 1,086.4 1,292.5
Financial Services Group............... 455.3 458.2 619.5 827.6 1,008.9
Offsets and eliminations (101.7) (45.6) (82.6) (92.3) (125.9)
--------- --------- --------- --------- ----------
Net revenues........................... $ 1,903.6 $ 1,504.9 $ 2,078.0 $ 2,757.5 $ 3,487.3
========= ========= ========= ========= ==========
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The Company currently conducts its operations in 14 cities 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 international offices located in 10 cities,
including Bangalore, Buenos Aires, Geneva, Hong Kong, London, Lugano, Mexico
City, Paris, Sao Paulo and Tokyo.
BANKING GROUP
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The Company's Banking Group is a major participant in the raising and
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.
INVESTMENT BANKING
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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. 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 1997, for the fifth 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 capital, primarily from institutional
investors, for direct investment by venture capital, management buyout and
other investment firms, and for certain of the Company's merchant banking
activities. The private fund group raised over $11.0 billion in private capital
in 1997. 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
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to financially distressed companies. 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 1997, the Company continued to expand its international investment
banking presence, acquiring a London based investment bank, 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 private securities. It also makes
investments as principal.
MERCHANT BANKING
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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 12 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.
The Merchant Banking Group manages eight distinct capital funds with
total committed capital of approximately $8.0 billion. These funds include DLJ
Merchant Banking Partners, L.P. and DLJ Merchant Banking Partners II, L.P.
which focus 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, DLJ Global
Retail Partners, L.P., which pursues investment opportunities in early stage
retailers and Phoenix Equity Partners II, which focuses on international
opportunities. Through the Senior Debt Fund, the Company arranges and
syndicates financing primarily to non-investment grade borrowers. The Company
is also considering expanding its fund management in the future to include
additional areas of investment.
LEVERAGED EQUITY INVESTING. In 1992, the Company established DLJ
Merchant Banking Partners, L.P., 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. In 1996, the Company closed
the $3 billion DLJ Merchant Banking Partners II, L.P. fund. Over 25% of the
capital was committed by DLJ and its employees. The funds make investments in
equity and mezzanine securities arising from leveraged acquisitions and
recapitalizations, restructurings of over-leveraged companies and other similar
types of transactions, which generally involve significant financial leverage.
In keeping with the firm's international focus, the DLJ Merchant Banking
Partners II, L.P. fund invested approximately $100 million in companies in
Europe, South America and India.
DLJ BRIDGE FUND. The Company is the sponsor of the $1.25 billion DLJ
Bridge Fund which provides short-term loans in connection with DLJ's merchant
banking and financial advisory businesses. The Bridge Fund has a $750 million
commitment of subordinated debt from Equitable and $500 million of senior
revolving credit by a commercial bank syndicate, certain terms of which are
being renegotiated. Any loans made by the DLJ Bridge Fund would be expected to
be refinanced, and the outstanding amounts repaid, within a short-term period.
The Company has agreed to pay Equitable the first $25 million of aggregate
principal losses incurred by Equitable with respect to all bridge loans. 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. The DLJ Bridge Fund currently has one
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individual bridge loan outstanding in excess of $150 million. Pursuant to
arrangements between the Company and the commercial bank syndicate, the Company
is at risk for a significant portion of any loans funded by such banks.
However, substantially all of the bridge loans have been made without using the
bank commitment. At December 31, 1997, the DLJ Bridge Fund had extended $565.1
million of short-term bridge loans which are expected to be refinanced in the
first quarter of 1998.
DLJ INVESTMENT PARTNERS. DLJ Investment Partners, L.P. commenced
operation in 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 the Company and its employees will provide $50 million.
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, L.P., which commenced
operation in 1996, focuses on growth retailing and electronic commerce
opportunities. The fund has committed capital of approximately $150 million.
SENIOR DEBT GROUP. In late 1996, the Company established the Senior
Debt Group, which syndicates leveraged loans and uses the Company's funds
to provide financing to investment banking clients. This group provides the
Company's corporate clients with the convenience of a single financing source.
In 1997, the group acted as lead arranger of loans aggregating approximately
$10 billion.
PHOENIX EQUITY PARTNERS II. Phoenix Equity Partners II is a $220
million fund dedicated to investing in mid-market companies in Europe. During
1997, the fund made investments totaling $63 million.
EMERGING MARKETS
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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 is 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 Turkey and
Russia In addition, they are involved with the structuring, placement and
trading of products based on Russian loans.
The group is also active in the Asia-Pacific region, focusing
exclusively on the sale of Latin American and Emerging European products. In
addition, investment banking services are offered 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.
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, 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 1,600 employees.
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FIXED INCOME
- ------------
The Fixed Income Division 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 core businesses are in high-yield bonds and
bank debt, U.S. government and investment-grade corporate bonds and real estate
finance. 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. In 1997, the high-yield franchise expanded into the international
markets, creating a London-based unit. Further expansion will also include Hong
Kong.
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 new issue underwriting and
origination and new issue structuring.
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-AND ASSET-BACKED 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.
REAL ESTATE FINANCE GROUP. The group provides capital and financial
advisory services for major participants in the commercial real estate market.
In 1997, more than $8 billion was raised for clients. The Real Estate Finance
department also originates loans secured by multifamily and commercial
properties and, acting as agent, places mortgage-backed debt for clients.
Column Financial originates, acquires and enhances mortgage loans for
securitization and sale to investors in the form of Collateralized Mortgage
Obligations. Previously, Column Financial was jointly owned by the Company and
Equitable. During 1997, DLJ increased its ownership in Column Financial from 50
percent to 100 percent by purchasing Equitable's 50 percent interest in Column.
SENIOR DEBT GROUP. In 1997, the Company established the Senior
Debt Group, which syndicates leveraged loans and enters into commitments to
extend credit primarily to non-investment grade borrowers. This Group provides
the Company's corporate clients with the convenience of a single financing
source. In 1997, this Group arranged loans aggregating approximately
$10 billion.
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INSTITUTIONAL EQUITIES
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The Institutional Equities Division provides domestic and
international institutional clients with research, trading and sales services
in U.S. listed and OTC equities, and foreign equities trading and distributes
equity securities in connection with offerings underwritten by the Banking
Group.
DOMESTIC INSTITUTIONAL SALES AND LISTED EQUITY TRADING. The Company's
equity trading operations and sales coverage of major U.S. institutions are
conducted by 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 AND TRADING. The Company's international equity
sales organization operates from five of the Company's international offices
and one domestic office. Consistent with the Company's focus on international
expansion, start-up operations are planned for Western Europe, Russia and the
Far East. These will include integrated research, distribution and trading
capabilities based in Hong Kong and London. International equities expansion
plans include the trading of non-dollar based securities. The division is
scheduled to have a sales and trading operation in Moscow by the end of 1998.
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
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. Consistent with DLJ's expansion in
international markets, the firm now has coverage in four global sectors: power,
energy, communications and transportation. Substantial growth of global
coverage is planned for 1998, with a particular focus in Latin America, Europe
and the Far East.
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 450 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.
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.
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EQUITY DERIVATIVES
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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 hedging against the firm's own positions. The Company offers options based
on U.S. equities and equity indices; foreign currencies; equities from European
and Asian countries; commodities and precious metals; and 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.
SPROUT
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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, ten major investment
partnerships have been formed primarily for large institutional investors.
Present funds under management have original capital of approximately $1.6
billion, and include, among others, Sprout VII, a multi-stage venture fund,
Sprout Growth II, a late-stage equity fund and Sprout VIII, which had an
initial closing of $612 million in 1998 and will have a final closing in the
near future.
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.
PERSHING DIVISION
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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
approximately 600 correspondents, ranging from small investment boutiques to
large financial institutions, which collectively maintain over 1.75 million
client accounts holding more than $175 billion of assets at December 31, 1997.
During 1997, 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 online
order entry and reporting. Pershing also maintains extensive operational and
informational systems for its correspondents.
8
LONDON GLOBAL SECURITIES
- ------------------------
In 1997, the Company acquired London Global Securities, a leading
international securities financing intermediary, with operations in London and
Australia. London Global offers institutional investors financing services for
a full range of securities through a variety of transaction structures.
DLJDIRECT
- ---------
DLJdirect, established in 1988 as PC Financial Network, provides
securities transaction services to the subscribers of major online services,
including America Online, Prodigy, CompuServe and the Internet
(www.DLJdirect.com). DLJdirect offers trading, real-time quotes, news, and for
qualified investors an opportunity to invest in Company lead-managed, initial
public offerings, as well as limited access to the Company's equity research.
DLJdirect has opened more than 400,000 online accounts and conducted more than
$30 billion in transactions.
iNautix Technologies, a subsidiary of DLJdirect, develops financial
transaction solutions and Internet Web-sites for DLJdirect, Pershing
correspondents and other Company affiliates.
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. In 1997,
the group expanded overseas and opened its first offshore office in London, as
part of the Company's principal 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 $1 billion in assets under management at
December 31, 1997.
ASSET MANAGEMENT GROUP
- ----------------------
The Asset Management Group consists of DLJ Investment Management
Corporation and Wood, Struthers & Winthrop. The group specializes in individual
and institutional investment management and has a total of $12 billion of
assets under management.
DLJ Investment Management Corp. was established in 1996 to manage
funds for institutional clients. In its first full year of operation, the
company increased assets under management from $1 billion to $5 billion.
Wood, Struthers & Winthrop Management Corp., founded in 1871 and
acquired by the Company in 1977, is a money management firm, managing over $7
billion in assets at December 31, 1997. 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 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 WSW Capital Inc. subsidiary, the firm manages a $2.9
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 five diversified open-end mutual
funds. The Focus Funds consist of three U.S. equity funds and two fixed-income
funds which aggregate approximately $680 million. In addition, Wood, Struthers
& Winthrop and DLJ Investment Management Corp., are the advisors to the
Winthrop Opportunity Funds, a family of diversified open-end mutual funds.
These funds consist of an international developing markets fund, an established
markets equity fund, and two money market funds which were launched in 1997.
The Winthrop Opportunity Funds aggregate $170 million at December 31,1997.
9
Wood, Struthers & Winthrop has a limited purpose trust company
subsidiary, Winthrop Trust Company, which provides tax, financial planning,
custody and personal fiduciary services to its high-net-worth individual and
family clients. At December 31, 1997, Winthrop Trust Company had received
fiduciary appointments aggregating in excess of $800 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 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, 1997, the Company had approximately 7,000 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 ("SROs"). 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 certain securities credit transactions. Broker-dealers and
investment advisers are subject to registration and regulation by state
securities regulators in those states in which they conduct business. Industry
SROs, 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. Certain of the Company's
international broker-dealer subsidiaries are subject to the regulatory
requirements of the non-U.S. securities financial regulatory authorities.
10
Each of DLJSC, Pershing Trading Company, L.P. ("Pershing Trading"),
DLJdirect 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 SROs, 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 adviser 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").
Pershing Trading, Autranet and DLJdirect 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 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.
11
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 are subject to regulation by the
SFA, 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 broker-dealer subsidiaries
which are subject to regulation, including capital requirements, imposed by the
SFC 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 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 and/or NASD, each of DLJSC, Pershing Trading, DLJdirect 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. 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 restrict the Company's ability to pay
dividends, pay interest, repay debt, and redeem or purchase shares of its
outstanding capital stock. A change in such rules, or the imposition of new
rules, affecting the scope, coverage, calculation or amount of capital
requirements, or a significant operating loss or any usually large charge
against capital, would adversely affect the ability of the Company to pay
dividends or to expand or even maintain present levels of business. 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, 1997, DLJSC was
required to maintain a minimum "net capital," in accordance with commission and
CFTC rules, of approximately $107.3 million and had total net capital of
approximately $762.2 million (including $482.5 million of subordinated debt
borrowed under various agreements), or approximately $654.9 million in excess
of 2% of aggregate debit items and approximately $507.9 million in excess of 5%
of aggregate debit items.
12
The Company's non-U.S. broker-dealer subsidiaries may be subject to the
net capital requirements imposed by foreign financial regulatory authorities.
At December 31, 1997 and 1996, the Company believes that its foreign
broker-dealer subsidiaries were in compliance with all applicable regulatory
capital adequacy requirements.
ITEM 2. PROPERTIES
----------
The Company's principal executive offices are presently located at 277
Park Avenue, New York, New York and occupy approximately 881,000 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.
The Company's principal London-based broker-dealer subsidiary is
located at 99 Bishopsgate and occupies approximately 76,000 square feet under a
lease expiring in 2008. The Company is in the process of negotiating for an
additional 100,000 square feet in London.
Pershing also leases approximately 460,000 square feet in Jersey City,
New Jersey, under leases which expire at various dates through 2009. The
Company also owns land and a building with approximately 133,000 square feet in
Florham Park, New Jersey.
The Company leases an aggregate of approximately 650,000 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.
The Company believes that its present facilities are adequate for its
current needs.
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 judgment 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 and/or 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 U.S. 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. On October 10, 1997, DLJSC and
13
others were named as defendants in a new adversary proceeding in the Bankruptcy
Court brought by the NGC Settlement Trust, an entity created by the NGC plan of
reorganization to deal with asbestos-related claims. The Trust's allegations
are substantially similar to the claims in the State Court action. On January
21, 1998, the Bankruptcy Court ruled that the State Court plaintiff's claims
were not barred by the NGC plan or reorganization insofar as they alleged
nondisclosure of certain cost reductions announced by NGC in October 1993.
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. 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 agreed to
a settlement of these actions, subject to the District Court's approval, which
was granted on July 31, 1997. The settlement is also subject to the approval by
the U.S. Bankruptcy Court for the Eastern District of Louisiana of proposed
modifications to a confirmed plan of reorganization for Harrah's Jazz Company
and Harrah's Jazz Finance Corp., and the satisfaction or waiver of all
conditions to the effectiveness of the plan, as provided in the plan. There can
be no assurance of the Bankruptcy Court's approval of the modifications to the
plan of reorganization, or that the conditions to the effectiveness of the plan
will be satisfied or waived. In the opinion of management the ultimate
resolution of this matter will not have a material adverse effect on the
Company's results of operations or 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 U.S.
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 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." 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.
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
During the fourth quarter of 1997, no matters were submitted to a vote of
security holders.
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
1997 1st 2nd 3rd 4th
- ---- ---- ---- ---- -----
High................. 47 3/8 64 1/4 71 9/16 87 5/8
Low.................. 36 36 1/2 57 68
Common dividends..... $ 0.125 $ 0.125 $ 0.125 $ 0.125
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
The approximate number of holders of DLJ Common Stock at March 5,
1998, was 7,500.
15
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
1997 1996 1995 1994 1993
---------- ---------- --------- ---------- ----------
(In millions, except share and per share data)
INCOME STATEMENT DATA:
REVENUES
- --------
Commissions................................. $ 690.2 $ 573.3 $ 460.2 $ 376.1 $ 358.8
Underwritings............................... 831.7 714.2 441.5 261.1 574.6
Fees........................................ 767.3 470.0 369.1 281.3 211.3
Interest, net (1)........................... 1,652.1 1,074.2 904.1 791.9 657.3
Principal transactions-net:
Trading..................................... 437.1 435.4 364.9 165.7 381.5
Investment.................................. 194.5 163.0 163.7 97.6 79.9
Other....................................... 67.6 60.7 55.1 35.0 21.9
----------- --------- --------- ---------- ---------
Total revenues............................ 4,640.5 3,490.8 2,758.6 2,008.7 2,285.3
----------- --------- --------- ---------- ---------
COSTS AND EXPENSES
- ------------------
Compensation and benefits.................. 1,908.2 1,538.8 1,261.4 897.8 1,200.4
Compensation expense-
restricted stock units................... - - 6.2 - -
Interest................................... 1,153.2 733.2 680.6 503.8 381.7
Brokerage, clearing, exchange
fees and other........................... 231.4 201.3 168.1 135.6 133.8
Occupancy and equipment.................... 189.9 159.3 127.1 90.1 80.0
Communications............................. 64.0 53.7 42.8 36.6 31.9
Other operating expenses................... 432.7 330.7 173.9 139.8 155.5
----------- --------- --------- ---------- ---------
Total costs and expenses................ 3,979.4 3,017.0 2,460.1 1,803.7 1,983.3
----------- ---------- --------- ----------- ----------
Income before provision for
income taxes.............................. 661.1 473.8 298.5 205.0 302.0
Provision for income taxes................... 252.8 182.5 119.4 82.0 115.9
---------- --------- --------- ---------- ---------
Net income................................... $ 408.3 $ 291.3 $ 179.1 $ 123.0 $ 186.1
========== ========= ========= ========== =========
Dividends on preferred stock................. $ 12.2 $ 18.7 $ 19.9 $ 21.0 $ -
========== ========= ========= ========== =========
Earnings applicable to
common shares............................. $ 396.1 $ 272.6 $ 159.2 $ 102.0 $ 186.1
========== ========= ========= ========== ========
Weighted average common
shares outstanding (2):
Basic................................... 55,159 53,300 50,570
========== ========= ========
Diluted................................. 62,749 59,356 51,580
========== ========= ========
Earnings per common share (2):
Basic................................... $ 7.18 $ 5.12 $ 3.15
========== ========= ===========
Diluted................................. $ 6.32 $ 4.59 $ 3.09
========== ========= ===========
Pro forma weighted average
common shares outstanding (3)..............
Basic................................... 50,000 50,000
========== =========
Diluted................................. 51,475 51,475
========== =========
Pro forma earnings per
common share (3)...........................
Basic................................... $ 2.04 $ 3.72
========== ========
Diluted................................. $ 1.98 $ 3.62
========== ========
16
YEARS ENDED DECEMBER 31,
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------
(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 $ 43,227.4 $ 29,954.2 $ 27,793.1 $ 19,166.9 $ 21,575.2
Total assets................................ 70,505.8 55,503.7 44,576.5 33,261.6 38,766.7
Securities sold under agreements to
repurchase and securities loaned 43,694.1 32,103.1 29,369.0 20,385.4 24,116.7
Long-term borrowings........................ 2,251.9 1,541.6 983.4 539.9 549.0
Redeemable preferred stock 200.0 200.0 225.0 225.0 225.0
Stockholders' equity ....................... 2,061.5 1,647.2 1,198.7 820.3 750.3
OTHER FINANCIAL DATA (AT END OF PERIOD):
Book value per common share
oustanding................................ $ 31.44 $ 24.79 $ 20.50 $ 16.41 $ 15.01
Ratio of net assets to
stockholders' equity (4)................. 13.2x 15.51x 14.00x 17.18x 22.91x
Ratio of long-term borrowings
to total capitalization (5).............. 0.50 0.44 0.37 0.30 0.34
Return on average equity (6)................ 24.1% 20.6% 17.1% 13.1% 30.5%
Ratio of earnings to fixed charges.......... 1.16x 1.16x 1.11x 1.10x 1.20x
Ratio of earnings to combined fixed
charges and preferred stock
dividends (7)............................. 1.16x 1.16x 1.10x 1.09x -
(1) Interest is net of interest expense to finance U.S. government, agency and
mortgage-backed securities of $ 2.9 billion, $2.1 billion, $2.0 billion,
$1.6 billion and $1.1 billion, respectively.
(2) In December 1997, the Company adopted SFAS No. 128 "Earnings per Share"
which is effective for financial statements issued for periods ending after
December 15, 1997. SFAS No. 128 replaces the primary and fully diluted
earnings per share amounts with a presentation of basic and diluted earnings
per share. All earnings per common share amounts reflect the adoption of
this statement.
Basic earnings per common share amounts have been calculated by dividing
earnings applicable to common shares (net income less preferred dividends)
by the weighted average common shares outstanding i.e. excluding the effect
of potentially dilutive securities. Diluted earnings per common share also
include the dilutive effects of common stock issuable under the Restricted
Stock Unit Plan and the dilutive effect of options and convertible debt
under the treasury stock method and "if-converted" method, respectively.
(3) Pro forma diluted 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 diluted common shares
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) Net assets are total assets excluding securities purchased under agreements
to resell and securities borrowed.
(5) Long-term borrowings and total capitalization (the sum of long-term
borrowings, preferred stock and stockholders' equity) exclude current
maturities (one year or less) of long-term borrowings.
(6) After payment of dividends on the Company's preferred stock.
(7) 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 in
1993.
17
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 throughout 1996 continued
during 1997 resulting in record levels of underwriting and merger and
acquisition activity. Record levels were also 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 March 1997, the Company acquired a London-based investment bank,
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 private
equity fund management business investing in private securities. It also makes
investments as principal.
In April 1997, a bridge loan aggregating $150 million was repaid in
full and the Company realized the $28.8 million previously reserved, plus
interest.
In October 1997, the Company sold for cash approximately $250.0 million
of mortgage loans and related assets secured by 38 multi-family properties.
These assets were obtained through the repurchase in 1994 of certain mortgage
related securities previously underwritten by the Company. The sales price
approximated the Company's carrying value of these assets.
In October 1997, the Company acquired London Global Securities ("LGS"),
a securities financing intermediary located in London. LGS is active in
approximately 25 equity markets and offers institutional investors and
financial institutions financing services for a full range of securities,
including equities, convertible bonds, warrants and emerging markets debt
through a variety of transaction structures such as swaps, repurchase
agreements, buy/sell arrangements and collateral management programs.
In December 1997, the Company's shelf registration statement which
enables the Company to issue, from time to time, up to $300 million of senior
or subordinated debt securities or preferred stock, was declared effective.
In January 1998, the Company issued an initial 3.5 million shares of
Fixed/Adjustable Rate Cumulative Preferred Stock, Series B, with a liquidation
preference of $50 per share ($175.0 million aggregate liquidation value) from
such shelf registration statement.
In February 1998, the Board of Directors declared a two-for-one common
stock split of the Company's common stock. The stock split is subject to
shareholder approval of the increase in the number of authorized common shares
from 150 million to 300 million. The split will be effected in the form of a
stock dividend. The par value of the common stock will remain at $.10 per
share. After the split is implemented, the Company's quarterly dividend rate
will be adjusted proportionately downward. All share and per share amounts will
be restated upon approval of the shareholders.
In March 1998, the Company issued $150 million of 6 1/2% Senior Notes
due 2008.
RESULTS OF OPERATIONS
- ---------------------
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
- ---------------------------------------------------------------------
Total revenues for 1997 were $4.6 billion, an increase of $1,149.7
million or 32.9% over 1996. Revenues increased in all of the Company's major
areas of activity during 1997.
18
Commission revenues increased by $116.8 million or 20.4% to $690.2
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 $117.5 million or 16.5% to $831.7
million. The Company experienced increases in all areas of underwriting during
1997.
Fee revenues increased by $297.3 million or 63.3% to $767.3 million.
Overall, merger and acquisition ("M&A"), private placements and other advisory
services activities increased during 1997. Private equity capital raised for
other investment organizations increased in 1997. In addition, fees from the
Company's asset management group increased due to an increase in assets under
management from $5.6 billion at the beginning of 1997 to $12.0 billion at the
end of the year.
Interest, net of interest expense to finance U.S. government, agency
and mortgage-backed securities, increased by $577.9 million or 53.8% to $1.7
billion. Higher levels of foreign fixed-income financing instruments in the
Company's newly acquired London Global Securities division and higher interest
rates earned in the Emerging Markets business accounted for most of the
increase. The remaining increase was due to higher levels of inventory in the
Fixed Income Division and increased customer margin balances at Pershing.
Principal transactions-net, trading revenues increased by $1.7 million
or 0.4% to $437.1 million.
Principal transactions-net, investment revenues increased by $31.6
million or 19.4% to $194.5 million. Realized gains on investments were $160.0
million. Net unrealized carrying values increased by $34.5 million, which
includes the elimination of net unrealized depreciation of $45.6 million on
investments sold and an increase in net unrealized depreciation of $11.1
million on retained investments.
Other revenues, consisting primarily of dividends and miscellaneous
transaction revenues, increased by $6.9 million or 11.4% to $67.6 million due
to increased revenue sharing arrangements at Pershing.
Total costs and expenses for 1997 were $4.0 billion, an increase of
$962.4 million or 31.9% over 1996.
Compensation and benefits increased $369.4 million or 24.0% to $1.9
billion. 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
22.6% in 1997, while base compensation, including benefits and payroll taxes,
increased by 28.2% due to expansion in various business groups, consistent with
the growth of the Company's international businesses. At December 31, 1997,
full-time personnel totaled 7,053 compared to 5,885 at December 31, 1996, an
increase of 1,168 or 19.8%.
Interest expense increased $420.0 million or 57.3% to $1,153.2 million.
Most of this increase was related to expanded levels of inventory of
fixed-income related products in the Real Estate Finance department and as a
result of the London Global acquisition.
All other expenses, as noted below, increased by $173.0 million or
23.2% to $918.0 million in 1997.
Brokerage, clearing, exchange fees and other expenses increased by
$30.1 million due to increased share volume, underwriting related expenses and
transaction fee payments. Occupancy and equipment costs increased by $30.6
million as a result of the full year impact of the firm's relocation and
expansion of the Company's principal office in the U.S. as well as expansion of
the Company's other domestic and international offices. During the fourth
quarter of 1997, the Company moved its principal London operations to a new and
expanded location. Communications costs increased by $10.3 million due to
expanded facilities and growth in professional staff. All other operating
expenses increased by $102.0 million. Included therein are data processing,
professional fees, travel and entertainment, and printing and stationery which
increased by $110.5 million reflecting an overall increase in the level of
business activity and costs for Year 2000 project (See "Year 2000"). Increased
advertising expenses relate primarily to a major national print, television and
online advertising campaign on behalf of DLJdirect, the Company's online
investing broker. These increases were offset by a reduction of expenses
incurred on previously underwritten mortgage-related securities, the assets of
which were sold in the fourth quarter of 1997.
19
The Company's income tax provision for 1997 and 1996 was $252.8
million and $182.5 million, respectively, which represented a 38.2% and 38.5%
effective tax rate for each period.
Net income for 1997 was $408.3 million, up $117.0 million or 40.1% as
compared to 1996. Diluted earnings per common share using the treasury stock
method were $6.32 and $4.59 for 1997 and 1996, respectively.
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
had approximately $8.0 billion of committed capital related to its merchant
banking activities.
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-net, 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-net, 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.
20
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 40.0%
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. Diluted earnings per common share using the
treasury stock method were $4.59 and $3.09 for 1996 and 1995, 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, 1997 and 1996
were $70.5 billion and $55.5 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 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.
In March 1996, the Company moved its principal offices from 140
Broadway to 277 Park Avenue in New York City. In 1997, the Company moved its
principal London operations to a new and expanded location. The Company
financed expenditures related to the moves with available operating capital.
During the second quarter of 1997, the Company replaced several
individual credit facilities aggregating $1.925 billion with a $2.0 billion
revolving credit facility, of which $1.0 billion may be unsecured. There were
no borrowings outstanding under this agreement at December 31, 1997.
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 $325.0 million.
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 instruments. At December
31, 1997 and 1996, the Company had issued long-term structured notes with
principal amounts of $123.7 million and $216.2 million outstanding,
respectively. The Company covers its obligations on structured notes primarily
by purchasing and selling the financial instruments to which the value of its
structured notes are linked.
21
In April 1997, the Company commenced a program for the offering of up
to $300 million Medium-Term Notes due nine months or more from the date of
issuance. The Medium-Term Note program was established under a shelf
registration statement previously filed by the Company. The notes may bear
interest at fixed or floating rates and may be issued as indexed notes, dual
currency notes, renewable notes, amortizing notes or original issue discount
notes. At December 31, 1997, the Company had $200.0 million of notes
outstanding under this program with a weighted average interest rate of 6.48%.
The Company has entered into interest rate swap transactions to convert $190.0
million of such fixed rate notes into floating rate notes based upon LIBOR. At
December 31, 1997, the weighted average effective interest rates on these notes
was 6.08%.
In September 1997, the Company filed a shelf registration statement
which enables the Company to issue from time to time up to $1.0 billion in
aggregate principal amount of senior or subordinated debt securities. In
addition, the Company commenced a program under such shelf registration for the
offering of up to $500 million Medium-Term Notes due nine months or more from
the date of issuance. The notes may bear interest at fixed or floating rates
and may be issued as indexed notes, dual currency notes, renewable notes,
amortizing notes or original issue discount notes. At December 31, 1997, there
were $150 million notes outstanding under this program with a fixed rate of
6.90%. In October 1997, the Company issued an additional $100 million
Medium-Term Notes from this same shelf registration statement. These notes
mature on October 29, 2007 and bear interest at a floating rate of 6.28% at
December 31, 1997 based upon LIBOR. The Company has entered into an interest
rate swap transaction to convert such notes to fixed rate notes at 6.94%. In
addition, in September 1997, the Company issued $350 million Global Floating
Rate Notes from the $1.0 billion shelf registration statement. Such notes bear
interest at a floating rate equal to LIBOR plus 0.25% and mature on September
18, 2002. The notes are redeemable by the Company in whole or in part on any
interest payment date on or after September 2000.
In December 1997, the Company's shelf registration statement which
enables the Company to issue, from time to time, up to $300 million of senior
or subordinated debt securities or preferred stock, was declared effective. In
January 1998, the Company issued an initial 3.5 million shares of
Fixed/Adjustable Rate Cumulative Preferred Stock, Series B, with a liquidation
preference of $50 per share ($175.0 million aggregate liquidation value) from
such shelf registration statement.
In January 1998, the Company commenced a $1.0 billion commercial paper
program. Obligations issued thereunder (the "Notes") are exempt from
registration under the Securities Act of 1933, as amended. The Notes rank pari
passu with the Company's other unsecured and unsubordinated indebtedness.
The Company's current credit ratings of its long-term debt and commercial paper
are as follows:
Long-Term Debt Commercial Paper
----------------- --------------------------
Duff & Phelps A -
Fitch IBCA A F-1
Moody's A3 P-2
Standard & Poors A- A-2
Thomson BankWatch A+ TBW-1
On December 19, 1997, Moody's Investors Service upgraded the ratings of the
Company's senior debt to A3 from Baal and assigned a P-2 rating to the
Company's commercial paper.
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 should 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, 1997, DLJSC had
aggregate regulatory "net capital," after adjustments required by Rule 15c3-1
under the Exchange Act of 1934, of approximately $762.2 million, which exceeded
minimum net capital requirements by $654.9 million and which exceeded the net
capital required by DLJSC's most restrictive debt covenants by $394.7 million.
22
Certain of the Company's London-based broker-dealer subsidiaries are
subject to the requirements of the Securities and Futures Authority, a
self-regulatory organization established pursuant to the United Kingdom
Financial Services Act of 1986. Other U.S. and foreign broker-dealer
subsidiaries of the Company are subject to net capital requirements of their
respective regulatory agencies. At December 31, 1997 and 1996, the Company and
its broker-dealer subsidiaries were in compliance with all applicable
regulatory capital adequacy requirements.
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, 1997, 1996 and 1995
- --------------------------------------------
Cash and cash equivalents at December 31, 1997, 1996 and 1995 totaled
$273.2 million, $158.8 million and $107.8 million, respectively, an increase of
$114.3 million, $51.1 million and $12.9 million, respectively.
Cash (used in) provided by operating activities totaled $(5.2)
billion, $(1.7) billion and $93.8 million in 1997, 1996 and 1995, respectively.
In 1997, there were increases in securities borrowed of $11.2 billion and
receivables from customers of $1.2 billion. These increases were offset by
increases in operating liabilities including securities loaned of $5.0 billion,
payables to customers of $1.2 billion, securities sold not yet purchased of
$1.0 billion and accounts payable and accrued expenses of $397.9 million. 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 $2.3 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 1997, net cash used in investing activities of $216.0 million
consisted primarily of fixed asset purchases related to the expansion of the
Company's domestic and international offices and net purchases of long-term
corporate development investments. Such purchases were partially offset by
proceeds received from the sale of mortgage loans and related assets secured by
38 multi-family properties totaling $250.0 million. In 1996 and 1995, net cash
used in investing activities of $107.0 million and $120.0 million,
respectively, consisted primarily of fixed asset purchases related to the
Company's move of its principal offices. Additionally, in 1996, cash was
provided from the sales of long-term corporate development investments.
In 1997 and 1996, net cash provided by financing activities totaled
$5.6 billion and $1.9 billion, respectively, of which, $4.9 billion and $1.2
billion was provided by short-term financings. In 1997, cash of $88.0 million
was used to repay medium-term notes due in 1997, $347.8 million was provided by
the issuance of global floating rate notes, $447.6 million was provided by the
issuance of medium-term notes and $118.5 million was provided by the issuance
of an addition to the subordinated revolving credit agreement. In 1996, cash of
$105.5 million was used to repay Swiss Franc Bonds. $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
Fixed/Adjustable Rate Cumulative Preferred Stock of the Company. In 1995, cash
of $541.8 million was used to repay short-term funding (principally repurchase
agreements). Additionally, $496.8 million was provided from the issuance of
Senior Notes, $100.0 million from the issuance of restricted stock units, $81.2
million from the issuance of common stock in the IPO and $250.0 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.
23
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 may include
swaps, futures or forward 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, trading in futures contracts on equity-based indices, interest rate
instruments, and foreign currencies, and issuing structured products based on
emerging market financial instruments and indices. The Company's involvement in
swap contracts which may 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) values of the written options were $5.4
billion and $8.6 billion at December 31, 1997 and 1996, respectively. The
overall decrease in the notional value of all options was due primarily to
decreases in customer activity related to foreign sovereign debt securities
resulting from competitive pressures and overall market conditions. 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,
1997 1996
-------- --------
(In millions)
U.S. government, mortgage-backed
securities and options thereon.............. $ 3,773 $ 4,679
Foreign sovereign debt securities............... 73 2,460
Futures contracts............................... 219 306
Equities and other.............................. 1,340 1,167
-------- -------
Total.................................... $ 5,405 $ 8,612
======== =======
24
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.
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 assets sold 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
$(2.0) million and $(10.0) million for forward contracts and $1.0 million and
$2.0 million for futures contracts for the years ended December 31, 1997 and
1996, respectively. Net unrealized gains (losses) of approximately $(6.0)
million and $(3.0) million related to forward contracts and approximately
$(2.0) million and $6.0 million related to futures contracts at December 31,
1997 and 1996, 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 $(5.1) million, $39.0 million and $149.0 million and net trading
gains (losses) on futures contracts were $(24.0) million, $8.0 million and
$(58.0) million for the years ended December 31, 1997, 1996 and 1995,
respectively.
The notional contract and market values of the forward and futures
contracts at December 31, 1997 and 1996 were as follows:
December 31,
1997 1996
---- ----
(In millions)
Forward Contracts:
Purchased at notional (contract) value $ 18,366 $ 14,070
Sold at notional (contract) value 27,028 17,917
Futures Contracts and Options on Future Contracts:
Purchased at market value....................................... $ 988 $ 1,420
Sold at market value............................................ 2,767 2,774
MERCHANT BANKING AND BRIDGE LENDING ACTIVITIES
- ----------------------------------------------
The Company's merchant banking activities include investments in
various partnerships, for which subsidiaries of the Company act as general
partner, as well as direct investments in connection with its merchant banking
activities. As of December 31, 1997 the Company has investments of $245.8
million and has potential commitments to invest up to an additional $885.6
million in connection with these merchant banking activities.
The Company is the sponsor of the $1.25 billion DLJ Bridge Fund which
provides short-term loans in connection with DLJ's merchant banking and
financial advisory businesses. The Bridge Fund has a $750 million commitment of
subordinated debt from Equitable and $500 million of senior revolving credit
by a commercial bank syndicate, certain terms of which are being renegotiated.
Any loans made by the DLJ Bridge Fund would be expected to be refinanced, and
the outstanding amounts repaid, within a short-term period. The Company has
agreed to pay Equitable the first $25 million of aggregate principal losses
incurred by Equitable with respect to all bridge loans. 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
25
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. The DLJ Bridge Fund currently has one individual bridge
loan outstanding in excess of $150 million. Pursuant to arrangements between
the Company and the commercial bank syndicate, the Company is at risk for a
significant portion of any loans funded by such banks. However, substantially
all of the bridge loans have been made without using the bank commitment. At
December 31, 1997, the DLJ Bridge Fund had extended $565.1 million of
short-term bridge loans which are expected to be refinanced in the first
quarter of 1998.
HIGH-YIELD AND NON-INVESTMENT GRADE DEBT SECURITIES
- ---------------------------------------------------
The Company participates in the underwriting, trading, sales and
holding of high-yield and non-investment-grade securities. Non-investment-grade
securities are defined as securities or loans to companies rated BB+ or lower
as well as non-rated securities or loans. These securities generally involve
greater risk than investment-grade debt holdings due to credit considerations,
liquidity of secondary trading markets and vulnerability to general economic
conditions. During the past year, the Company's high-yield and non-investment
grade holdings increased due to the demand for higher-yielding instruments,
expansion of the Company's senior bank debt activities, and the acquisition of
the remaining interest in an affiliate dealing in whole loans.
The Company accounts for its high-yield securities at market value and
non-investment grade holdings generally at market or fair value, with
unrealized gains and losses recognized currently in earnings. At December 31,
1997 and 1996 the Company had long and short holdings (excluding derivatives
and structured notes) as follows:
1997 1996
---------------------- ----------------------
(in millions)
Holdings Long Short Long Short
-------- ---- ----- ---- -----
High-Yield.................................... $ 645.6 $ 389.6 $ 509.9 $ 381.4
Senior Bank Debt.............................. 864.1 - 305.6 -
Foreign Sovereign Debt..................... 1,615.4 543.3 3,092.4 346.0
Mortgage Whole Loans ......................... 1,555.7 - 275.5 -
Convertible Debt........................... 320.3 3.1 122.8 2.8
Other Non-Investment Grade................. 44.4 4.9 64.2 1.8
----------- ------- --------- -------
Totals $ 5,045.5 $ 940.9 $ 4,370.4 $ 732.0
========= ======= ========= =======
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 established a Risk
Committee comprised of senior professionals from each of the three operating
and key administrative groups. The Risk Committee's objective is to update risk
policies as appropriate and improve monitoring capabilities throughout the
Company. An independent risk officer function is designed to oversee this
process as well as to monitor adherence by the various business groups to the
Company's risk policy statements issued by the Risk Committee.
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, the Banking Review
Committee, the Finance Committee, and the Executive Committee.
26
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.
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 and selected derivatives. In addition, the Company's
Emerging Markets Group trades a variety of securities, including Brady Bonds,
foreign 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
in the exchange-traded and OTC Markets.
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.
MARKET RISK
- -----------
Market risk represents the potential loss the Company may incur as a
result of absolute and relative price movements in financial instruments due to
changes in interest rates, foreign exchange rates, equity prices, and other
factors. The Company's exposure to market risk is directly related to its role
as financial intermediary in customer-related transactions and to its
proprietary trading and arbitrage activities. The Company's primary market risk
exposures as of December 31, 1997 include interest rate risk, foreign currency
exchange rate risk and equity price risk. Interest rate risk results from
maintaining inventory positions and trading in interest rate sensititive
financial instruments. The Company is exposed to interest rate risk which
arises from various sources including changes in the absolute and relative
level of interest rates, interest rate volatilty, mortgage prepayment rates and
the shape of the yield curves in various markets. The Company's investment
grade and high-yiel corporate bonds, mortgages, equities, derivatives and
convertible debt activities, also expose it to the risk of loss related to
changes in credit spreads. Credit spread risk arises from the potential that
changes in an issuer's credit rating affect the value of financial instruments.
The Company attempts to cover its
27
exposure to interest rate risk by entering into transactions in U.S. government
securities, options and futures and forward contracts designed to reduce the
Company's risk profile. Foreign currency exchange rate risk arises from the
possibility that changes in foreign currency exchange rates or their
volatilities will impact the value of financial instruments. The principal
currencies creating foreign currency exchange risk for the Company at December
31, 1997 were the British Sterling, Turkish Lira and German Deutsche Mark. The
Company attempts to cover the risk arising from its foreign exchange activities
primarily through the use of options, futures and forward transactions and
currency swaps. Equity price risk results from maintaining inventory positions
and making markets in equity securities. Equity price risk arises from changes
in the level or volatility of equity prices, equity index exposure and equity
index spreads which affect the value of equity securities. The Company attempts
to cover its exposure to equity price risk by entering into transactions in
options and futures designed to reduce the Company's risk profile.
VALUE AT RISK
- -------------
As a result of the Securities and Exchange Commission's new market risk
disclosure rules, the Company developed a Company-wide Value-at-Risk ("VAR")
model late in 1997. This Company-wide VAR model was not actively used for risk
management in 1997, but some form of VAR is expected to be used in the future.
The Company's VAR model includes virtually all of the Company's trading
market risk sensitive instruments and its non-trading market risk sensitive
instruments. Non-trading market risk sensitive instruments are not material and
consequently are not reported separately. The Company has estimated its VAR
using a variance-covariance model with a confidence interval of 95% and a one
day holding period, based on historical data for one year.
The VAR number is the statistically expected maximum loss on the fair
value of the Company's market sensitive instruments for 19 out of every 20
trading days. In other words, on 1 out of every 20 trading days, the loss is
statistically expected to be greater than the VAR number. The model, however,
does not state how much greater.
VAR models are statistical analyses designed to assist in risk
management and to provide senior management with one probabilistic indicator of
risk at the firm level. VAR numbers should not be interpreted as a predictor of
actual results. The Company's VAR model has been specifically tailored for its
risk management needs and to its risk profile. The variance-covariance method
assigns all market instruments to their applicable risk categories such as
interest rate exposure, foreign currency exposure, equity exposure, industry
type, credit rating, volatility exposure and country exposure. Correlations and
volatilities are calculated from historical data series for each risk category
and used in the variance-covariance matrix to calculate VAR. The Company's
variance-covariance model gives equal weight to earlier and later historical
data and assumes that market rate movements over one day are adequately
represented by the use of a normal distribution and therefore does not include
certain other non-normal distributions. Moreover, non-linear market movements
are not included.
The Company's VAR model, in common with all other VAR models, is
limited by its assumptions and qualifications. These limitations include the
following: (1) a daily VAR does not capture the risk inherent in trading
positions that cannot be liquidated or hedged in one day, (2) VAR is based on
historical market data and assumes that past trading patterns will predict the
future, (3) it is not possible to perfectly model all inherent market risks,
(4) correlations between market movements can vary, particularly in times of
market stress and (5) the model's assumption of a normal distribution may not
reflect actual market movements.
The Company believes that the use of a Company-wide VAR analysis is an
important advance in its risk management but is aware of the limitations
inherent in any statistical analysis. A VAR model alone is not a sufficient
tool to measure and monitor market risk and, as it has traditionally done, the
Company will continue to use other risk management measures, such as stress
testing, independent review of position and trading limits and daily revenue
reports.
28
Total Company-wide VAR was approximately $10.9 million at December 31,
1997. The Company-wide VAR is less than the sum of the individual components
below due to the benefit of diversification among the risks presented below.
The VAR for the three main components of market risk, expressed in terms of
theoretical fair values at December 31, 1997 is as follows:
(in millions)
-------------
Interest Rate risk $ 7.6
Equity risk $ 7.9
Foreign Currency Exchange Rate risk $ 1.2
CREDIT RISK
- -----------
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.
All counterparties are reviewed on a periodic basis to establish
appropriate exposure limits for a variety of transactions. As appropriate,
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 instruments 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.
YEAR 2000
- ---------
As a result of the Company's recent expansion, entry into new product
markets and its move to new corporate headquarters, many of the Company's newer
communications and data processing systems are Year 2000 compliant. The
Company, however, has undertaken a project to identify and modify non-Year 2000
compliant communications and data processing systems in anticipation of the
Year 2000. Many of the non-Year 2000 compliant systems process transactions
using two-digit date fields for the year of a transaction, rather than the full
four digits. If these systems are not identified and reconfigured, Year 2000
transactions would be processed as year "00," which could lead to processing
inaccuracies and potential inoperability and could have a material adverse
affect on the Company's business. At the present time, the Company expects that
most of its significant Year 2000 corrections should be tested and in
production by the end of 1998. However, there can be no assurance that such
schedule will be met or the systems of other companies on which the Company's
business is dependent also will be timely converted or that any such failure to
convert by another company would not have an adverse effect on the Company's
business. The total cost of the project through the end of 1998 is currently
estimated to be between $80 and $90 million. Costs related to this project are
expensed and the Company has incurred approximately $40 million of such costs
at December 31, 1997.
RECENT ACCOUNTING DEVELOPMENTS
- ------------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" which is effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for the
reporting and display of comprehensive income and its components. In addition,
in June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" which is
effective for financial statements for periods beginning after December 15,
1997. This statement requires a company to report financial and descriptive
information about its reportable operating segments. The Company is currently
evaluating the impact of these standards on its financial statement
presentation and disclosures.
29
FORWARD-LOOKING STATEMENTS
- --------------------------
The Company has made in this report, and from time to time, may otherwise make
in its public filings, press releases and discussions with Company management,
forward-looking statements concerning the Company's operations, economic
performance and financial condition. Forward-looking statements include, among
other things, information concerning the Year 2000 and the Company's potential
exposures to various types of market risks as well as statements preceded by,
followed by, or that otherwise include the words "believes," "expects,"
"anticipates," "intends," "estimates," "projects," "probability," "should,"
"risk," "VAR," "target," "goal," "objective," or similar expressions or
variations on such expressions. Forward-looking statements are subject to
certain risks and uncertainties. For example, certain of the market risk
disclosures are dependent on choices of key model characteristics and
assumptions and are subject to various limitations. The Company claims the
protection afforded by the safe harbor for forward-looking statements contained
in the Private Securities Litigation Reform Act of 1995. Actual results could
differ materially from those currently anticipated due to a number of factors
in addition to those discussed elsewhere herein and in the Company's other
public filings, press releases and discussions with Company management,
including (i) the volatile nature of the securities business, (ii) the
competitive nature of the securities business, (iii) the effect of extensive
federal, state and foreign regulation on the Company's business, (iv) market,
credit and liquidity risks associated with the Company's underwriting,
securities trading, market-making and arbitrage activities, (v) potential
losses that could result from the Company's merchant banking activities as a
result of its capital intensive nature, (vi) risks associated with the
Company's use of derivative financial instruments, (vii) the availability of
adequate financing to support the Company's business, (viii) potential
restrictions on the business of, and withdrawal of capital from, certain
subsidiaries of the Company due to net capital requirements (ix) potential
liability under federal and state securities and other laws and (x) the effect
of any future acquisitions.
30
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - "Risk Management," on pages 26-32 of
this document.
31
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, 1997
and 1996, and 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, 1997, 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 financial position of Donaldson, Lufkin &
Jenrette, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, 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
New York, New York
February 2, 1998
32
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,
1997 1996
------------ --------
ASSETS
Cash and cash equivalents.................................................. $ 273,164 $ 158,831
Cash and securities segregated for regulatory purposes or
deposited with clearing organizations.................................... 832,093 836,406
Securities purchased under agreements to resell............................ 22,628,782 20,598,738
Securities borrowed........................................................ 20,598,639 9,355,484
Receivables:
Customers............................................................... 4,397,668 3,169,293
Brokers, dealers and other.............................................. 3,162,970 4,333,983
Securities owned, at value:
U.S. government and agency.............................................. 6,834,996 6,882,604
Corporate debt.......................................................... 5,577,023 4,424,649
Foreign sovereign debt.................................................. 1,624,235 3,116,201
Mortgage whole loans.................................................... 1,555,685 275,510
Equity and other........................................................ 943,782 1,029,094
Long-term corporate development investments............................. 315,774 204,403
Property, equipment and leasehold improvements, at cost, (net of
accumulated depreciation and amortization of $216,230 and
$163,004 respectively)................................................... 388,677 282,513
Other assets and deferred amounts.......................................... 1,372,357 835,963
------------ ------------
Total Assets............................................................... $ 70,505,845 $ 55,503,672
============ ============
See accompanying notes to consolidated financial statements.
33
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Consolidated Statements of Financial Condition
(in thousands, except share and per share data)
December 31,
1997 1996
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings..................................................... $ 1,418,757 $ 1,162,896
Securities sold under agreements to repurchase............................ 36,006,656 29,378,291
Securities loaned......................................................... 7,687,416 2,724,773
Payables:
Customers............................................................. 5,071,653 3,897,817
Brokers, dealers and other............................................ 2,491,115 3,345,424
Securities sold not yet purchased, at value:
U.S. government and agency............................................ 7,671,498 6,864,643
Corporate debt........................................................ 854,155 646,421
Foreign sovereign debt ................................................ 553,852 1,265,553
Equity and other...................................................... 1,376,395 665,053
Accounts payable and accrued expenses..................................... 2,119,131 1,721,255
Other liabilities......................................................... 741,870 442,667
------------ -------------
65,992,498 52,114,793
------------ -------------
Long-term borrowings...................................................... 2,251,857 1,541,640
------------ -------------
Total liabilities ............................................... 68,244,355 53,656,433
------------ -------------
Company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely debentures
of the Company........................................................ 200,000 200,000
------------ -------------
Stockholders' Equity:
Series A Preferred Stock, at liquidation preference................... 200,000 200,000
Common stock ($0.10 par value; 150,000,000 shares
authorized; 55,926,381 and 53,300,000 shares issued and
outstanding in 1997 and 1996, respectively)........................ 5,593 5,330
Restricted stock units (5,179,147 units authorized;
3,281,207 and 5,081,793 units issued and outstanding
in 1997 and 1996, respectively).................................... 67,255 104,167
Paid-in capital....................................................... 446,518 365,989
Retained earnings..................................................... 1,338,220 969,856
Cumulative translation adjustment..................................... 3,904 1,897
------------ -------------
Total stockholders' equity....................................... 2,061,490 1,647,239
------------ ------------
Total Liabilities and Stockholders' Equity................................ $ 70,505,845 $ 55,503,672
============ =============
See accompanying notes to consolidated financialstatements.
34
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Consolidated Statements of Income
(in thousands, except per share data)
Years Ended December 31,
1997 1996 1995
-------- --------- ---------
Revenues:
Commissions........................................................ $ 690,156 $ 573,335 $ 460,196
Underwritings...................................................... 831,714 714,183 441,547
Fees............................................................... 767,259 469,986 369,094
Interest, net of interest to finance U.S. government,
agency and mortgage-backed securities of $2,859,042,
$2,132,593, and $2,019,153, respectively......................... 1,652,135 1,074,223 904,078
Principal transactions-net:
Trading.......................................................... 437,083 435,382 364,886
Investment....................................................... 194,527 162,975 163,695
Other.............................................................. 67,595 60,672 55,133
----------- ------------ -----------
Total revenues.................................................. 4,640,469 3,490,756 2,758,629
----------- ------------ -----------
Costs and Expenses:
Compensation and benefits.......................................... 1,908,201 1,538,754 1,261,437
Compensation expense-restricted stock units........................ - - 6,163
Interest........................................................... 1,153,167 733,207 680,616
Brokerage, clearing,
exchange fees and other.......................................... 231,402 201,292 168,116
Occupancy and equipment............................................ 189,915 159,330 127,094
Communications..................................................... 63,965 53,657 42,807
Other operating expenses........................................... 432,719 330,716 173,896
----------- ------------ -----------
Total costs and expenses........................................ 3,979,369 3,016,956 2,460,129
----------- ------------ -----------
Income before provision for income taxes 661,100 473,800 298,500
----------- ------------ -----------
Provision for income taxes............................................. 252,850 182,500 119,400
----------- ------------ -----------
Net income............................................................. $ 408,250 $ 291,300 $ 179,100
=========== ============ ===========
Dividends on preferred stock........................................... $ 12,144 $ 18,653 $ 19,868
=========== =========== ===========
Earnings applicable to common shares................................... $ 396,106 $ 272,647 $ 159,232
=========== =========== ===========
Earnings per common share:
Basic............................................................. $ 7.18 $ 5.12 $ 3.15
=========== ============ ==========
Diluted........................................................... $ 6.32 $ 4.59 $ 3.09
=========== ============ ==========
Weighted average common shares outstanding:
Basic............................................................. 55,159 53,300 50,570
=========== ============ ==========
Diluted........................................................... 62,749 59,356 51,580
=========== =========== ==========
See accompanying notes to consolidated financial statements.
35
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1995, 1996
and 1997 (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, 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 contribution
from Equitable .................. - - - 55,000 - - 55,000
Net proceeds from issuance
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
Net income.......................... - - - - 408,250 - 408,250
Dividends:
Common stock
($0.50 per share) ............... - - - - (27,742) - (27,742)
Preferred stock
($3.036 per share) .............. - - - - (12,144) - (12,144)
Forfeiture of restricted
stock units ..................... - - (156) 156 - - -
Conversion of restricted stock
units to common stock,
including related tax benefits .. - 179 (36,756) 45,220 - - 8,643
Conversion of debentures............ - 69 - 28,710 - - 28,779
Exercise of stock options,
including related tax benefits .. - 15 - 6,443 - - 6,458
Translation adjustment.............. - - - - - 2,007 2,007
---------- --------- ---------- --------- --------- --------- ---------
Balances at December 31, 1997 $ 200,000 $ 5,593 $ 67,255 $ 446,518 $1,338,220 $ 3,904 $ 2,061,490
========= ========= ========== ========= ========== ========= ============
See accompanying notes to consolidated financial statements.
36
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Years Ended December 31,
1997 1996 1995
----------- ------------ ------------
Cash flows from operating activities:
Net income................................................. $ 408,250 $ 291,300 $ 179,100
----------- ------------ ------------
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization........................... 60,828 53,485 38,082
Deferre taxes........................................... (134,233) (120,022) (119,657)
Decrease in net unrealized (depreciation) appreciation of
long-term corporate development investments............ (34,524) 50,283 97,792
Compensation expense-restricted stock units............... - - 6,163
Other-net................................................. 600 346 1,062
-------------- ------------ ------------
300,921 275,392 202,542
Decrease (increase) in operating assets:
Cash and securities segregated for regulatory
purposes or deposited with clearing organizations..... 4,313 (381,936) 278,540
Securities purchased under agreements to resell......... (4,622,196) 9,191 (5,462,395)
Securities borrowed..................................... (11,243,155) (310,574) (354,478)
Receivables from customers.............................. (1,228,375) (813,320) (707,330)
Receivables from brokers, dealers and other............. 921,01 (2,342,428) (294,652)
Securities owned, at value.............................. (807,663) (4,906,785) (1,796,269)
Other assets and deferred amounts....................... (179,958) (147,335) 2,805
Increase (decrease) in operating liabilities:
Securities sold under agreements to repurchase.......... 4,622,196 (9,191) 5,462,395
Securities loaned....................................... 4,962,643 100,560 595,548
Payables to customers................................... 1,173,836 1,336,559 604,648
Payables to brokers, dealers and other.................. (854,309) 2,319,850 (75,226)
Securities sold not yet purchased, at value............. 1,014,230 2,737,243 1,172,509
Accounts payable and accrued expenses................... 397,876 323,790 450,166
Other liabilities....................................... 310,230 89,551 15,293
Translation adjustment.................................... 2,007 2,522 (281)
------------ ------------ -------------
Net cash (used in) provided by operating activities......... $ (5,226,393) $ (1,716,911) $ 93,815
------------ ------------ ------------
See accompanying notes to consolidated financial statements.
37
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Years Ended December 31,
1997 1996 1995
------------ ----------- ----------
Cash flows from investing activities:
Net (payments for) proceeds from:
Purchases of long-term corporate development investments.... $ (194,777) $ (87,600) $ (98,396)
Sales of long-term corporate development investments........ 117,930 117,412 78,078
Purchases of property, equipment and leasehold
improvements............................................. (162,568) (142,597) (141,935)
Other assets................................................ 23,375 5,818 42,272
------------ ----------- -----------
Net cash used in investing activities........................... (216,040) (106,967) (119,981)
------------ ----------- -----------
Cash flows from financing activities:
Net proceeds from (payments for):
Short-term financings....................................... 4,854,182 1,187,338 (541,832)
Subordinated revolving credit agreement..................... 118,500 (43,500) -
Medium-Term notes........................................... 359,646 249,515 -
Global floating rate notes.................................. 347,760 - -
Structured notes............................................ (92,536) 191,764 24,470
Convertible debentures...................................... 18,779 43,500 -
Other long-term debt........................................ (13,753) (2,858) (78,762)
Swiss Franc Bonds........................................... - (105,513) -
Issuance of Company obligated mandatorily redeemable
preferred securities...................................... - 200,000 -
Issuance of Series A Preferred Stock........................ - 200,000 -
Issuance of common stock in Initial Public Offering......... - - 81,243
Issuance of restricted stock units.......................... - - 100,000
Senior Notes................................................ - - 496,755
Secured term loan agreement................................. - - 250,000
Secured term loan agreement................................. - - (250,000)
Dividends................................................... (39,886) (45,303) (42,796)
Exercise of stock options................................... 4,074 - -
-------------- ----------- -----------
Net cash provided by financing activities....................... 5,556,766 1,874,943 39,078
------------ ----------- -----------
Increase in cash and cash equivalents........................... 114,333 51,065 12,912
Cash and cash equivalents at beginning of year.................. 158,831 107,766 94,854
------------ ----------- -----------
Cash and cash equivalents at end of year........................ $ 273,164 $ 158,831 $ 107,766
============ =========== ===========
See accompanying notes to consolidated financial statements.
38
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997
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.
DLJ is a leading integrated investment and merchant bank that serves
institutional, corporate, governmental and individual clients. DLJ's businesses
include securities underwriting; sales and trading; investment and merchant
banking; correspondent brokerage services; online investment services and asset
management.
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.
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.
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.
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.
39
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.
Transfers of financial assets are accounted for as sales to the extent that the
Company has surrendered control over such assets.
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 $323.2 million and $246.4 million at December
31, 1997 and 1996, respectively. The decrease in net unrealized depreciation of
long-term corporate development investments amounted to $34.5 million for the
year ended December 31, 1997, and the decrease in net unrealized appreciation
amounted to $50.3 million and $97.8 million for the years ended December 31,
1996 and 1995, respectively. Changes in net unrealized appreciation
(depreciation) arising from changes in fair value or upon realization are
reflected in revenues, principal transactions-net, investment.
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.
Prior to January 1, 1997, the Company was included in the consolidated Federal
income tax returns filed by Equitable. DLJ provided taxes as if the Company
filed 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 were payable to
Equitable for periods while the Company was 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 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.
The Company accounts for stock-based compensation in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation." Pursuant to SFAS No. 123, the
Company continues to apply the provisions of APB Opinion No. 25 and provides
pro forma net income and pro forma earnings per share disclosures for employee
stock option grants as if the fair-value-based method defined in SFAS No. 123
had been applied.
40
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
The Company calculates earnings per common share in accordance with SFAS No.
128, "Earnings per Share," which was issued in February 1997. This statement
replaces the presentation of primary and fully diluted earnings per share with
a presentation of basic and diluted earnings per share. Basic earnings per
share excludes the dilutive effects of stock options, non-vested restricted
stock units and convertible debt. Diluted earnings per share reflect all
potential dilutive securities. All earnings per common share amounts reflect
the adoption of this statement.
In December 1996, the Financial Accounting Standards Board ("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, including repurchase agreements, securities lending
transactions and similar transactions. The deferred provisions of this
statement are not expected to have a material effect on the consolidated
financial statements.
Certain reclassifications have been made to prior year consolidated financial
statements to conform to the 1997 presentation.
2. Equity Distribution
-------------------
On October 30, 1995, the Company completed an initial public offering ("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. Proceeds to the Company from the IPO amounted to
approximately $81.2 million, net of related expenses.
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 is the sponsor of the $1.25 billion DLJ Bridge Fund which provides
short-term loans in connection with DLJ's merchant banking and financial
advisory businesses. The Bridge Fund has a $750 million commitment of
subordinated debt from Equitable and a $500 million commitment of senior
revolving debt by a commercial bank syndicate. Any loans made by the DLJ Bridge
Fund would be expected to be refinanced, and the outstanding amounts repaid,
within a short-term period. The Company has agreed to pay Equitable the first
$25 million of aggregate principal losses incurred by Equitable with respect to
all bridge loans. 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. The DLJ Bridge Fund currently has one
individual bridge loan outstanding in excess of $150 million. Pursuant to
arrangements between the Company and the commercial bank syndicate, the Company
is at risk for a significant portion of any loans funded by such banks.
However, substantially all of the bridge loans have been made without using the
bank commitment. At December 31, 1997, the DLJ Bridge Fund had extended $565.1
million of short-term bridge loans which are expected to be refinanced in the
first quarter of 1998.
Dividends on common stock of $21.3 million, $21.4 million and $21.6 million
were paid or accrued to Equitable for the years ended December 31, 1997, 1996
and 1995, respectively.
4. Cash and Securities Segregated Under Federal and Other Regulations
------------------------------------------------------------------
Cash of $13.7 million and $13.2 million and securities with a market value of
$711.0 million and $770.0 million as of December 31, 1997 and 1996,
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.
41
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
5. Borrowings
----------
Short-term borrowings are generally demand obligations, at interest rates
approximating Federal fund rates from banks and other financial institutions.
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, 1997 and 1996, securities
owned by the Company, aggregating $190.5 million and $363.6 million,
respectively, were pledged to secure certain of these borrowings.
Short-term borrowings and repurchase agreements and the weighted average
interest rates related to these borrowings at December 31, 1997 and 1996 are as
follows:
Weighted Average
Amounts Interest Rates
December 31, December 31,
1997 1996 1997 1996
--------- -------- --------- ---------
(In millions)
Securities sold under agreements to repurchase.............. $ 36,007 $ 29,378 6.04% 6.08%
Bank loans.................................................. 988 669 6.57 6.89
Borrowings from other financial institutions................ 133 197 6.21 6.95
Included in short-term borrowings at December 31, 1997 and 1996 are $297.4
million and $297.0 million, respectively of structured notes with maturities of
less than one year.
In January 1998, the Company commenced a $1.0 billion commercial paper program.
Obligations issued thereunder (the "Notes") are exempt from registration under
the Securities Act of 1933, as amended.
The Company also finances its activities through long-term borrowing
arrangements. Long-term borrowings, including current maturities of $32.8
million and $112.0 million at December 31, 1997 and 1996, respectively, consist
of the following:
December 31,
1997 1996
---------- ------------
(In thousands)
Senior notes, 6 7/8% due in 2005................................................ $ 497,484 $ 497,160
Senior subordinated revolving credit agreement due in 2000 ..................... 325,000 206,500
Subordinated exchange notes, 9 5/8% due in 2003................................. 225,000 225,000
Medium-term notes, 5 5/8% due in 2016........................................... 249,561 249,537
Medium-term notes, 6.01% - 6.85% due various dates through 2002................. 199,844 -
Medium-term notes, 6.90% due in 2007............................................ 148,572 -
Medium-term notes, 6.28% due in 2007............................................ 99,333 -
Global floating rate notes, due in 2002......................................... 347,909 -
Medium-term notes, 7.88% due in 1997............................................ - 88,000
Structured notes................................................................ 123,698 216,234
Other........................................................................... 35,456 59,209
---------- ------------
Total long-term borrowings................................................. $2,251,857 $ 1,541,640
========== ============
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 instruments. The notes, most of which carry a zero coupon, mature
at various dates, in excess of one year, through 2012.
Interest paid on all borrowings and financing arrangements amounted to $3.9
billion, $2.8 billion and $2.7 billion for the years ended December 31, 1997,
1996 and 1995, respectively.
42
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
Scheduled maturities of long-term borrowings are as follows:
December 31,
1997 1996
---------- ------------
(In thousands)
1997..................................... $ - $ 112,010
1998..................................... 32,758 230,018
1999..................................... 14,753 42,654
2000..................................... 519,050 70
2001..................................... 51,058 82,062
2002..................................... 357,897 -
2003-2016................................ 1,276,341 1,074,826
------------ ------------
$ 2,251,857 $ 1,541,640
============ ============
In connection with its 1997 and 1996 financings, the Company:
1996
- ----
Established a shelf registration ("shelf") for the issuance, from time to time,
of up to $500 million of Senior Debt Securities and/or Preferred Stock and in
connection therewith, completed an offering of $250 million aggregate principal
amount 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. The Company also issued $200 million Fixed/Adjustable Rate
Cumulative Preferred Stock, Series A from this shelf.
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 5/8% Subordinated Exchange Notes due 2003,
which includes $20.0 million due to a subsidiary of Equitable at December 31,
1997.
1997
- ----
Borrowed an additional $118.5 million under its senior subordinated revolving
credit agreement and extended the maturity thereon to January 30, 2000.
Interest thereon is 6.6875% and 6.375% at December 31, 1997 and 1996,
respectively and is calculated based on the London Interbank Offered Rate
("LIBOR").
Established a $300 million Medium-Term Notes program, of which $200.0 million
with a weighted average interest rate of 6.48% were outstanding at December 31,
1997. The Company has entered into interest rate swap transactions to convert
$190.0 million of such fixed rate notes into floating rate notes based upon
LIBOR. At December 31, 1997, the weighted average effective interest rates on
these notes was 6.08 %.
Established a $1.0 billion senior or subordinated debt securities shelf
registration of which up to $500 million has been designated for the offering
of Medium-Term Notes due nine months or more from the date of issuance. At
December 31, 1997 there were $150 million of notes at a fixed rate of 6.90% and
$100 million of notes at a floating rate of 6.28% based upon LIBOR outstanding
under this offering. The Company has entered into an interest rate swap
transaction to convert such floating rate notes into fixed rate notes at 6.94%.
The Company issued $350 million of Global Floating Rate Notes which bear
interest at a floating rate equal to LIBOR plus 0.25% and mature in 2002 and
which are redeemable by the Company in whole or in part on any interest payment
date on or after September 2000.
43
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
Completed a shelf registration for the offering of up to $300 million of senior
or subordinated debt securities or preferred stock. In January 1998, the
Company issued an initial $175 million Fixed/Adjustable Rate Cumulative
Preferred Stock, Series B, from this shelf registration.
Repaid in full the $88.0 million 7.88% Medium-Term Notes plus accrued interest.
Replaced several individual credit facilities aggregating $1.925 billion with a
$2.0 billion revolving credit facility, of which $1.0 billion may be unsecured.
There were no borrowings outstanding under this agreement at December 31, 1997.
6. Income Taxes
------------
Income taxes included in the consolidated statements of income represent the
following:
Current Deferred Total
------------- ------------- ------------
(In thousands)
Year ended December 31, 1997:
U.S. Federal............................... $ 299,091 $ (117,622) $ 181,469
Foreign........................................ 25,131 - 25,131
State and local................................ 62,861 (16,611) 46,250
------------- ------------- ------------
$ 387,083 $ (134,233) $ 252,850
============= ============= ============
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
============= ============= ===========
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):
1997 1996 1995
---------------------------- --------------------------- -------------------------
Percent Percent Percent
of Of of
Pre-tax Pre-tax Pre-tax
Amount Income Amount Income Amount Income
---------- ------- --------- ------- --------- --------
Computed "expected"
Tax provision $ 231,385 35.0% $ 165,830 35.0% $ 104,475 35.0%
Non-taxable income
and expense items (8,598) (1.3) (4,910) (1.1) (2,560) (0.9)
State and local taxes, net
of related Federal income
tax benefit 30,063 4.5 21,580 4.6 17,485 5.9
---------- ------ --------- ------- --------- --------
$ 252,850 38.2% $ 182,500 38.5% $ 119,400 40.0%
========== ====== ========= ======= ========= ========
44
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, 1997
and 1996 are as follows:
1997 1996
----------- -----------
(In thousands)
Deferred tax assets:
Inventory..................................... $ 6,657 $ 15,463
Investments................................... 35,617 56,612
Other liabilities and accrued expenses 517,673 385,040
Fixed assets.................................. 4,552 13,737
Deferred tax liabilities:
Inventory..................................... - (49,349)
Investments................................... (31,458) (34,072)
Fixed assets.................................. (12,584) (3,796)
Other......................................... (2,871) (282)
---------- -----------
Net deferred tax asset............................. $ 517,586 $ 383,353
=========
There are no valuation allowances recorded against deferred tax assets at
December 31, 1997 and 1996 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 was 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 is no longer included in the Company's state and local tax returns.
Federal income taxes paid in the year ended December 31, 1997 were $293.8
million, including federal income tax equivalents paid to Equitable of $18.6
million. Net federal income tax equivalents paid to Equitable were $267.5
million and $277.8 million in the years ended December 31, 1996 and 1995,
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, 1997, DLJSC's net capital of
approximately $762.2 million was 16% of aggregate debit balances and in excess
of the minimum requirement by approximately $654.9 million.
Certain of the Company's London-based broker-dealer subsidiaries are subject to
the requirements of the Securities and Futures Authority, a self-regulatory
organization established pursuant to the United Kingdom Financial Services Act
of 1986. Other U.S. and foreign broker-dealer subsidiaries of the
45
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
Company are subject to net capital requirements of their respective regulatory
agencies. At December 31, 1997 and 1996, the Company and its broker-dealer
subsidiaries were in compliance with all applicable regulatory capital adequacy
requirements.
8. Derivative Financial Instruments
--------------------------------
Substantially all of the Company's activities related to derivatives are, by
their nature, trading activities which are primarily for the purpose of
customer accommodations. The Company enters into certain contractual agreements
referred to as derivatives or off-balance sheet financial instruments involving
futures, forwards and options. The Company's derivative activities consist of
writing over-the-counter ("OTC") options to accommodate its customers needs,
trading in forward contracts in U.S. government and agency issued or guaranteed
securities and in futures contracts on equity-based indices, interest rate
instruments and currencies and issuing structured products based on emerging
market financial instruments and indices. The Company's involvement in swap
contracts and commodity derivative instruments is not significant. Although the
Company may enter into certain derivative instruments to provide an economic
hedge against certain risks, all realized and unrealized gains and losses on
these instruments are recorded currently in the consolidated statements of
income.
Accounting Policies for Derivatives
- -----------------------------------
Changes in unrealized gains or losses as well as realized gains and losses at
settlement on all derivative instruments (options, forward and futures
contracts) are included in the consolidated statements of income in principal
transactions-net, trading. Related offsetting amounts are presented as
receivables or payables from brokers, dealers and other in the consolidated
statements of financial condition. Fair value of the options includes the
unamortized premiums which are deferred and are included in payables to
brokers, dealers and other in the consolidated statements of financial
condition. Such premiums are recognized over the life of the option contracts
on a straight-line basis or are recognized through the change in the fair value
of the option in principal transactions-net, trading revenue in the
consolidated statements of income. Cash flows from derivative instruments are
presented as operating activities in the consolidated statements of cash flows.
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.
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.
46
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
The notional (contract) values of the written options were $5.4 billion and
$8.6 billion at December 31, 1997 and 1996, 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,
1997 1996
-------- -------
(In millions)
U.S. government, mortgage-backed
securities and options thereon..... $ 3,773 $ 4,679
Foreign sovereign debt securities...... 73 2,460
Futures contracts...................... 219 306
Equities and other..................... 1,340 1,167
------- -------
Total............................ $ 5,405 $ 8,612
======= =======
The trading revenues from option writing activity (net of related interest
expense) were approximately $84.9 million, $71.2 million and $96.0 million for
the years ended December 31, 1997, 1996 and 1995, 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 $223.3 million and $172.7 million for the years ended
December 31, 1997 and 1996, respectively. The fair values of options were
approximately $196.4 million and $241.9 million at December 31, 1997 and 1996,
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. 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.
47
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
The following is a summary of the values of these contracts at December 31,
1997 and 1996:
December 31,
1997 1996
------- -------
(In millions)
Forward Contracts:
Purchased at notional (contract) value......... $ 18,366 $ 14,070
Sold at notional (contract) value.............. 27,028 17,917
Futures Contracts and Options on Futures Contracts:
Purchased at market value...................... $ 988 $ 1,420
Sold at market value........................... 2,767 2,774
The following is a summary of the values of these contracts included in the
consolidated financial statements at December 31, 1997 and 1996:
December 31,
1997 1996
------- -------
(In millions)
Forward Contracts:
Average fair values included in liabilities during the period.......... $ 2 $ 10
Unrealized gains included in total assets at end of period............. 56 44
Unrealized losses included in total liabilities at end of period....... 50 46
Futures Contracts:
Average fair values included in assets during the period............... $ 1 $ 2
Unrealized gains included in total assets at end of period............. - 6
Unrealized losses included in total liabilities at end of period....... 2 -
Net trading gains (losses) on forward contracts were $(5.1) million, $39.0
million and $149.0 million and net trading gains (losses) on futures contracts
were $(24.0) million, $8.0 million and $(58.0) million for the years ended
December 31, 1997, 1996 and 1995, 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.
48
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
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. As of December 31,
1997, the Company has pledged securities with a market value of approximately
$2.2 billion as collateral for securities borrowed with a market value of
approximately $2.0 billion. In accordance with industry practice, the amounts
of these securities borrowed and pledged are not reflected in the consolidated
statements of financial condition.
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.
Risks arise from the potential inability of counterparties to perform under the
terms of the contracts and from changes in the value of securities and interest
rates. The Company controls such risks by monitoring the market value of the
securities contracted for on a daily basis and reviewing the creditworthiness
of the counterparties. 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, 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.
49
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
11. Preferred Securities
--------------------
In 1996, the Company and its wholly owned trust, DLJ Capital Trust I (the
"Trust") completed an offering 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, 1997 and 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.
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.
12. Stockholders' Equity
--------------------
In 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-for-1 stock split.
In 1995, the Company completed an 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.
In 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, 1997
and 1996, 4.0 million shares of such preferred stock were authorized, issued
and outstanding.
During 1997, 1.8 million restricted stock units vested and were converted into
common stock from the Company's authorized and unissued shares. Approximately
600,000 of such shares were deposited in a grantor trust pursuant to the
Executive Deferred Compensation Plan which was effective January 1, 1997.
During 1997, the Company exercised its option to redeem all of the outstanding
convertible debentures issued in connection with the acquisition of a London
based financial advisory firm. As a result, the holders of such debentures
elected to convert such debentures into an aggregate of 685,204 shares of
common stock of the Company.
In January 1998, the Company issued 3.5 million shares of Fixed/Adjustable Rate
Cumulative Preferred Stock, Series B, with a liquidation preference of $50 per
share ($175.0 million aggregate liquidation value) from a shelf registration
statement previously filed by the Company. Dividends on the preferred stock are
cumulative and payable quarterly at the rate of 5.30% per annum through January
2003, subject to adjustment in later years. The preferred stock is redeemable,
in whole or in part, at the option of the Company, on or after January 15,
2003.
50
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
13. Earnings Per Share
------------------
Basic and diluted earnings per common share amounts have been calculated by
dividing earnings applicable to common shares (net income less preferred
dividends) by the weighted average common shares outstanding. Diluted earnings
per common share also include the dilutive effects of shares of common stock
issuable under the Restricted Stock Unit Plan, and options and convertible debt
under the treasury stock method and "if-converted" method, respectively. In
February 1998, approximately 2.2 million restricted stock units vested and will
be converted into the Company's common stock and included in the calculation of
basic earnings per common share.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per common share computations at December 31 (in
thousands):
1997 1996 1995
--------------------------- ------------------------- ------------------------
Income Shares Income Shares Income Shares
---------- --------- -------- -------- --------- -------
Basic EPS
Earnings applicable to
common shares................ $ 396,106 55,159 $ 272,647 53,300 $ 159,232 50,570
Effect of Dilutive Securities
Restricted stock units....... - 3,523 - 5,152 - 894
Stock Options................ - 3,830 - 904 - 116
Convertible Debt............. 308 237 - - - -
---------- --------- --------- -------- --------- --------
Diluted EPS..................... $ 396,414 62,749 $ 272,647 59,356 $ 159,232 51,580
========== ========= ========= ======== ========= ========
14. Employee Compensation and Benefit Plans
---------------------------------------
1996 Incentive Compensation Plan
- --------------------------------
Awards under the 1996 Incentive Compensation Plan (the "Incentive Plan") are
determined by the Compensation and Management Committee of the Board of
Directors. The 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. During 1997,
the Management and Compensation Committee of the Board of Directors authorized
the creation of a long-term award pool for the performance period from January
1, 1997 to December 31, 1999. Each unit granted under the Plan is equal to a
percentage interest in the long-term award pool. The units vest at the rate of
33 1/3% per year during the performance period. The amount charged to expense
for the Plan was $185.5 million for the year ended December 31, 1997. Amounts
charged to expense for the years ended December 31, 1996 and 1995 were $190.5
million and $132.8 million, respectively, relating to a predecessor long-term
incentive compensation plan that expired on December 31, 1996.
1995 Restricted Stock Unit Plan
- -------------------------------
In 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. These units are subject to
forfeiture in certain circumstances and 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. As of December 31, 1997, 104,948 restricted
stock units were forfeited and 1,792,992 million restricted stock units vested
and were converted to common stock from the Company's authorized and unissued
shares.
51
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
Stock Option Plans
- ------------------
In 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. The options
are subject to forfeiture in certain circumstances and 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.
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 Stock
Option Plan (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
vest in four equal installments commencing one year after the date of grant.
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. 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. 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.
A summary of the Company's stock option activity for all plans is as 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
---------- ----------------
Granted.................................. 3,215,834 61.07
Forfeited................................ (66,933) 32.03
Exercised................................ (148,185) 27.51
---------- ----------------
Outstanding at December 31, 1997 14,131,048 $ 35.56
========== ================
The table below summarizes information related to options outstanding at
December 31, 1997:
Weighted Average Weighted Average
Exercise Prices Number Outstanding Exercise Price Remaining Life (Year)
--------------- ------------------ ---------------- ----------------------
$27.00-$35.99 10,915,214 $ 28.05 8.0
$36.00-$50.99 777,334 40.04 9.3
$51.00-$76.00 2,438,500 67.77 9.8
------------------ ---------------- ----------------------
Total 14,131,048 $ 35.56 8.4
================== ================ ======================
52
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
At December 31, 1997, there were 4,942,691 options exercisable at exercise
prices ranging from $27.00-$35.99. The weighted average exercise price of such
options totaled $27.58. At December 31, 1996 and 1995, no options were
exercisable.
The Company applies APB Opinion No. 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 the pro forma amounts indicated below:
1997 1996 1995
---- ---- ----
Net income (in thousands) As reported $ 408,250 $ 291,300 $ 179,100
Pro forma $ 388,000 $ 273,700 $ 176,200
Basic earnings per common share As reported $ 7.18 $ 5.12 $ 3.15
Pro forma $ 6.81 $ 4.79 $ 3.09
Diluted earnings per common share As reported $ 6.32 $ 4.59 $ 3.09
Pro forma $ 6.01 $ 4.36 $ 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 1997, 1996 and 1995, respectively:
dividend yield of 0.86%, 1.54% and 1.85%; expected volatility of 33%, 25% and
25%, risk-free interest rates of 5.96%, 6.07% and 5.86%; and an expected life
of five years for all grants. The weighted average fair value of options
granted during 1997, 1996 and 1995 were $22.45, $9.35, and $7.36, respectively
per share.
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 $9.6 million, $7.4 million and $6.1
million for 1997, 1996 and 1995, 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 funded by deferred compensation of such
employees, certain non-funded, non-qualified deferred compensation plans which
include managed investments, and other non-qualified plans which are funded by
the Company with insurance contracts.
15. 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, 1997, 1996 and 1995
aggregated $89.9 million, $76.6 million and $66.2 million, respectively.
Sublease revenue aggregated $0.1 million for the year ended December 31, 1997
and $1.0 million for each of the years ended December 31, 1996 and 1995.
53
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
At December 31, 1997, 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)
1998 ................................................. $ 72,847
1999 ................................................. 74,712
2000 ................................................. 67,401
2001 ................................................. 65,378
2002 ................................................. 70,372
2003-2016 ............................................ 627,827
-----------
Total........................................ $ 978,537
===========
In the normal course of business, the Company enters into underwriting
commitments. Transactions relating to such underwriting commitments that were
open at December 31, 1997, and were subsequently settled, had no material
effect on the consolidated financial statements. The Company also issues
letters of credit for which it is contingently liable for $244.0 million and
$163.0 million at December 31, 1997 and 1996, respectively.
The Company has outstanding commitments, expiring on December 31, 1998, to
provide financings to third parties in the total amount of $200.0 million which
would be secured by mortgage loans on real estate properties. At December 31,
1997, there were no amounts borrowed under this facility. In addition, the
Company enters into commitments to extend credit in connection with the
origination and syndication of senior bank debt of non-investment grade
borrowers. At December 31, 1997, unfunded senior bank loan commitments
outstanding amounted to $539.9 million.
The Company has commitments to invest on a side by side basis with merchant
banking partnerships in the amount of $885.6 million at December 31, 1997.
16. 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.
54
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
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 U.S. 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. On October 10, 1997, DLJSC and others were named as defendants in
a new adversary proceeding in the Bankruptcy Court brought by the NGC
Settlement Trust, an entity created by the NGC plan of reorganization to deal
with asbestos-related claims. The Trust's allegations are substantially similar
to the claims in the State Court action. In court papers dated October 16,
1997, the State Court plaintiff indicated that he would intervene in the
Trust's adversary proceeding. On January 21, 1998, the Bankruptcy Court ruled
that the State Court plaintiff's claims were not barred by the NGC plan of
reorganization insofar as they alleged nondisclosure of certain cost reductions
announced by NGC in October 1993. 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.
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 agreed to a settlement of
these actions, subject to the District Court's approval, which was granted on
July 31, 1997. The settlement is also subject to the approval by the U.S.
Bankruptcy Court for the Eastern District of Louisiana of proposed
modifications to a confirmed plan of reorganization for Harrah's Jazz Company
and Harrah's Jazz Finance Corp., and the satisfaction or waiver of all
conditions to the effectiveness of the plan, as provided in the plan. There can
be no assurance of the Bankruptcy Court's approval of the modifications to the
plan of reorganization, or that the conditions to the effectiveness of the plan
will be satisfied or waived. In the opinion of management the ultimate
resolution of this matter will not have a material adverse effect on the
Company's results of operations or 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 U. S. District Court for
the Southern District of New York. The suit was brought on behalf of the
purchasers of 126,457 units consisting of
55
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
$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 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.
17. Industry Segment and Geographic Area Data
-----------------------------------------
The Company currently follows the provisions of SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise" in disclosing its business
segments. Pursuant to that statement, 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. Total assets and total revenues related to the
Company's foreign operations approximated $8.6 billion and $534.2 million,
respectively at December 31, 1997. Total assets and revenues related to such
operations at December 31, 1996 were not significant.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which is effective for financial statements
for periods beginning after December 15, 1997. This statement requires a
company to report financial and descriptive information about its reportable
operating segments. The Company is evaluating the manner in which it will
disclose its segment data and intends to present the disclosures required under
this statement. Currently, the Company views its business from the perspective
of three principal operating groups: the Banking Group, the Capital Markets
Group and the Financial Services Group. In determining which segments of
business the Company operates in for purposes of the disclosures required by
this statement, the Company may redesignate certain portions of the business
within the three principal groups or identify additional segments.
56
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
18. Quarterly Data (Unaudited)
-------------------------
The following table sets forth selected highlights for each of the fiscal
quarters during the years ended December 31, 1997 and 1996 (dollars in
thousands, except per share data):
Income Basic Diluted
Before Earnings Earnings
Provision Per Per
Total For Income Net Common Common
Revenues Taxes Income Share * Share *
--------- ---------- --------- ---------- ----------
1997:
First quarter.................. $ 981,403 $ 144,000 $ 86,400 $ 1.53 $ 1.37
Second quarter................. 1,061,180 167,000 100,200 1.76 1.57
Third quarter.................. 1,268,496 188,100 120,300 2.11 1.85
Fourth quarter................. 1,329,390 162,000 101,350 1.76 1.53
--------- ------------ ----------- --------- ---------
Total year....... $ 4,640,469 $ 661,100 $ 408,250 $ 7.18 $ 6.32
========= =========== =========== ========= =========
1996:
First quarter................. $ 775,910 $ 108,500 $ 65,100 $ 1.13 $ 1.02
Second quarter................ 991,209 157,300 97,000 1.73 1.55
Third quarter................. 771,007 92,000 56,100 0.96 0.86
Fourth quarter................ 952,630 116,000 73,100 1.30 1.16
------------ ----------- ---------- ---------- --------
Total year...... $ 3,490,756 $ 473,800 $ 291,300 $ 5.12 $ 4.59
=========== =========== ========== ========== ========
* 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.
57
SCHEDULE I
DONALDSON, LUFKIN & JENRETTE, INC.
(Parent Company Only)
Condensed Statements of Financial Condition
(in thousands, except share and per share data)
December 31,
1997 1996
---------- -------
ASSETS
Cash and cash equivalents....................................................... $ 8 $ 7,747
Receivables from brokers, dealers and other .................................... 6,879 1,292
Long-term corporate development investments..................................... 47,896 40,102
Receivables from subsidiaries................................................... 3,335,459 2,232,198
Investment in subsidiaries, at equity........................................... 2,332,338 1,905,023
Other assets and deferred amounts............................................... 845,997 526,369
------------ -----------
Total Assets.................................................................... $ 6,568,577 $ 4,712,731
============ ===========
See accompanying notes to condensed financial statements.
58
DONALDSON, LUFKIN & JENRETTE, INC.
(Parent Company Only)
Condensed Statements of Financial Condition
(In thousands, except share and per share data)
December 31,
1997 1996
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings................................................ $ 667,757 $ 335,912
Accounts payable and accrued expenses................................ 1,180,714 999,713
Due to Equitable..................................................... - 24,417
Other liabilities.................................................... 684,688 437,096
------------- -----------
2,533,159 1,797,138
------------- -----------
8.42% Junior subordinated debentures, held by a subsidiary trust 206,224 206,224
------------- -----------
Other long-term borrowings........................................... 1,767,704 1,062,130
------------- -----------
Total liabilities............................................. 4,507,087 3,065,492
------------- -----------
Stockholders' Equity:
Series A Preferred Stock, at liquidation preference............. 200,000 200,000
Common stock ($0.10 par value; 150,000,000 shares authorized;
55,926,381 and 53,300,000 shares issued and outstanding in
1997 and 1996, respectively).................................. 5,593 5,330
Restricted stock units (5,179,147 authorized; 3,281,207 and
5,081,793 units issued and outstanding in 1997 and 1996,
respectively)................................................. 67,255 104,167
Paid-in capital................................................. 446,518 365,989
Retained earnings............................................... 1,338,220 969,856
Cumulative translation adjustment............................... 3,904 1,897
------------- ----------
Total stockholders' equity............................. 2,061,490 1,647,239
------------- ----------
Total Liabilities and Stockholders' Equity.......................... $ 6,568,577 $4,712,731
============= ==========
See accompanying notes to condensed financial statements.
59
DONALDSON, LUFKIN & JENRETTE, INC.
(Parent Company Only)
Condensed Statements of Income
(In thousands, except per share data)
Years Ended December 31,
1997 1996 1995
---------- ---------- ---------
Revenues:
Dividends from affiliates .................................. $ 136,000 $ 57,094 $ 107,371
Interest from affiliates................................... 129,256 151,774 138,710
Allocations to affiliates.................................. 17,809 16,805 14,709
Other...................................................... 19,958 23,508 11,995
---------- ---------- ---------
Total revenues........................................ 303,023 249,181 272,785
---------- ---------- ---------
Costs and Expenses:
Compensation and benefits.................................. 155,224 144,574 129,049
Interest and operating expenses............................ 60,141 110,447 82,421
---------- --------- ---------
Total costs and expenses .............................. 215,365 255,021 211,470
---------- --------- ---------
Income (loss) before income tax benefit and equity
in undistributed net income of subsidiaries................ 87,658 (5,840) 61,315
---------- --------- -----------
Income tax benefit............................................. 72,870 51,766 25,865
---------- --------- -----------
Income before equity in undistributed
net income of subsidiaries................................. 160,528 45,926 87,180
---------- --------- -----------
Equity in undistributed net income of subsidiaries ............ 247,722 245,374 91,920
--------- --------- ----------
Net income..................................................... $ 408,250 $ 291,300 $ 179,100
========= --------- =========
Dividends on preferred stock................................. $ 12,144 $ 18,653 $ 19,868
========= ========= =========
Earnings applicable to common shares $ 396,106 $ 272,647 $ 159,232
========= ========= =========
Weighted average common shares outstanding:
Basic................................................... 55,159 53,300 50,570
========= ========= =========
Diluted................................................. 62,749 59,356 51,580
========= ========= =========
Earnings per common share:
Basic................................................... $ 7.18 $ 5.12 $ 3.15
========= ========= =========
Diluted................................................. $ 6.32 $ 4.59 $ 3.09
========= ========= =========
See accompanying notes to condensed financial statements.
60
DONALDSON, LUFKIN & JENRETTE, INC.
(Parent Company Only)
Condensed Statements of Cash Flows
(In thousands)
Years Ended December 31,
1997 1996 1995
--------- --------- ---------
Net cash provided by operating activities ................................. $ 153,693 $ 194,253 $ 168,857
--------- --------- ---------
Cash flows from investing activities: Net proceeds from (payments for):
Dividends from affiliates ............................................ 136,000 57,094 107,371
Investment in subsidiaries ........................................... (222,083) (563,222) (74,314)
Other assets ......................................................... (1,873) 3,111 (9,061)
--------- --------- ---------
Net cash (used in) provided by investing activities ...................... (87,956) (503,017) 23,996
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from (payments for):
Short-term borrowings ................................................. 331,845 (244,557) (212,209)
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 ..................................................... 359,646 249,515 --
Global floating notes ................................................. 347,760 -- --
Swiss Franc Bonds ..................................................... -- (105,513) --
Convertible debentures ................................................ 28,779 -- --
Other long-term debt .................................................. (2,434) (687) (16,070)
Senior notes payable .................................................. -- -- (9,000)
Junior subordinated debentures ........................................ -- 206,224 --
Issuance of Series A Preferred Stock .................................. -- 200,000 --
Subordinated loan from subsidiaries ................................... (149,274) -- --
Dividends ............................................................. (39,886) (45,303) (42,796)
Exercise of stock options ............................................. 4,074 -- --
Receivables from subsidiaries ......................................... (953,986) 51,989 (609,467)
--------- --------- ---------
Net cash (used in) provided by financing activities ....................... (73,476) 311,668 (211,544)
--------- --------- ---------
(Decrease) increase in cash and cash equivalents .......................... (7,739) 2,904 (18,691)
--------- --------- ---------
Cash and cash equivalents at beginning of year ............................ 7,747 4,843 23,534
--------- --------- ---------
Cash and cash equivalents at end of year .................................. $ 8 $ 7,747 $ 4,843
========= ========= =========
See accompanying notes to condensed financial statements.
61
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.
2. Related Party Transactions
--------------------------
Receivables from subsidiaries include $1,923.7 million and $1,303.8
million loaned under master note agreements at December 31, 1997 and
1996, 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 $136.0 million, $57.1 million
and $107.4 million for the years ended December 31, 1997, 1996, and
1995, respectively. There are no restrictions on the payment of
dividends, except for those stipulated in certain debt agreements and in
those applicable to brokers and dealers which provide for certain
minimum amounts of capital to be maintained to satisfy regulatory
requirements in the Company's domestic and foreign broker-dealer
subsidiaries. Under certain circumstances, the amount of excess capital
that can be withdrawn is limited. The regulatory requirements are
designed to measure the general financial integrity and liquidity of
broker-dealers 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
--------------------
The Company finances certain of its activities through long-term
borrowing arrangements. Long-term borrowings from banks include
current maturities of $90.4 million at December 31, 1996. At December
31, 1997, there were no current maturities of long-term borrowings.
Long-term borrowings consist of the following:
December 31,
1997 1996
---------- ----------
(In thousands)
Senior notes, 6 7/8% due in 2005 ................. $ 497,484 $ 497,160
Subordinated exchange notes, 9 5/8% due in 2003 .. 225,000 225,000
Medium-term notes, 5 5/8% due in 2016 ............ 249,561 249,537
Medium-term notes, 6.01% - 6.85% due various
dates through 2002 ........................... 199,845 --
Medium-term notes, 6.90% due in 2007 ............. 148,572 --
Medium-term notes, 6.28% due in 2007 ............. 99,333 --
Global floating rate notes, due in 2002 .......... 347,909 --
Medium-term notes, 7.88% due in 1997 ............. -- 88,000
Other ............................................ -- 2,433
---------- ----------
Total long-term borrowings .................. $1,767,704 $1,062,130
========== ==========
For a detailed description of the Parent Company's long-term
borrowings, see Note 5 of the Notes to Consolidated Financial Statements of
Donaldson, Lufkin & Jenrette, Inc. and Subsidiaries.
62
DONALDSON, LUFKIN & JENRETTE, INC.
(Parent Company Only)
Notes to Condensed Financial Statements
Scheduled maturities of long-term borrowings are as follows:
December 31,
1997 1996
-------- ---------
(In thousands)
1998........... $ - $ 90,433
1999........... - -
2000........... 189,856 -
2001........... - -
2002.......... 357,897 -
2003-2016..... 1,219,951 971,697
---------- ----------
$1,767,704 $1,062,130
========== ==========
DLJ entered into a $2 billion revolving credit facility in 1997 which
allows the Parent Company to borrow up to $1 billion on an unsecured
basis, subject to certain limitations. There were no borrowings
outstanding under this agreement at December 31, 1997.
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, 1997, losses as a result of these guarantees.
63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
----------------------------------------------------------------
FINANCIAL DISCLOSURE
----------------------
None
64
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information required to be furnished pursuant to this item is set
forth under the caption "Election of Directors" of the Proxy Statement, and is
incorporated herein by reference.
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.
65
DONALDSON, LUFKIN & JENRETTE, INC.
FORM 10-K
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
FOR THE YEAR ENDED DECEMBER 31, 1997
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............................................................. 32
Consolidated Statements of Financial Condition at December 31, 1997 and
1996..................................................................................... 33
Consolidated Statements of Income for the years ended December 31, 1997,
1996 and 1995........................................................................... 35
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995.................................................. 36
Consolidated Statements of Cash Flows for years ended December 31, 1997,
1996 and 1995........................................................................... 37
Notes to Consolidated Financial Statements.............................................. 39
Item 14 (a) (2) Financial Statement Schedule
Schedule I Condensed Financial Information of Registrant................................ 58
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
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
66
Item 14 (a) (3) Exhibits (Continued)
EXHIBIT NO. DESCRIPTION
---------- -----------
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
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.
67
Item 14 (a) (3) Exhibits (Continued)
EXHIBIT NO. DESCRIPTION
---------- -----------
10.24 Agreement of sublease between SBC Warburg, Inc. and the
Registrant's tenant, 277 Park Avenue, New York, New York,
dated June 13, 1997.
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
10.45 1995 Restricted Stock Unit Plan Agreement (Base), dated
October 24, 1995, between Richard S. Pechter and the
Registrant
68
Item 14 (a) (3) Exhibits (Continued)
EXHIBIT NO. DESCRIPTION
----------- -------------
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
69
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
70
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 basic earnings per share.
11.2 Statement re: computation of diluted earnings per share.
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
The Company agrees to furnish copies to the Commission
of all instruments with respect to long-term debt of the
Company and its subsidaries.
(b) Reports on Form 8-K
1. Form 8-K dated October 13, 1997; Item 5
71
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 1998.
Donaldson, Lufkin & Jenrette, Inc.
(Registrant)
By:
/s/ Joe L. Roby
-------------------------------------
Joe L. Roby
President and Chief Executive 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 1998.
NAME TITLE
------ -------
/s/ John S. Chalsty Chairman of the Board; Director
---------------------------------
John S. Chalsty
/s/ Joe L. Roby President and Chief Executive
----------------------------------- officer; director
Joe L. Roby
/s/ Anthony F. Daddino Executive Vice President and
------------------------------------ Chief Financial Officer;
Anthony F. Daddino Director
/s/ Hamilton E. James
----------------------------------- Managing Director; Director
Hamilton E. James
/s/ Richard S. Pechter
---------------------------------- Managing Director; Director
Richard S. Pechter
/s/ Michael M. Bendik Senior Vice President and
---------------------------------- Chief Accounting Officer
Michael M. Bendik
/s/ Michael A. Boyd Senior Vice President and
----------------------------------- General Counsel
Michael A. Boyd
/s/ Gerald B. Rigg Senior Vice President and
----------------------------------- Director of Human Resources
Gerald B. Rigg
/s/ Henri de Castries Director
-----------------------------------
Henri de Castries
/s/ Denis Duverne Director
-----------------------------------
Denis Duverne
/s/ Louis Harris Director
-----------------------------------
Louis Harris
72
NAME TITLE
----- -----------
/s/ Henri G. Hottinguer Director
-----------------------------------
Henri G. Hottinguer
/s/ W. Edwin Jarmain Director
-----------------------------------
W. Edwin Jarmain
/s/ Francis Jungers Director
-----------------------------------
Francis Jungers
/s/ Edward Miller Director
-----------------------------------
Edward Miller
/s/ W. J. Sanders III Director
-----------------------------------
W.J. Sanders III
/s/ Stanley Tulin Director
------------------------------------
Stanley Tulin
/s/ John C. West Director
-------------------------------------
John C. West
73
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).
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.
74
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
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).
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).
75
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
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, Landlord, and
DLJ International Limited, Tenant and the Registrant, Tenant's
Guarantor, 99 Bishopsgate London, EC2, dated as of October 24,
1996. (Incorporated by reference to the corresponding exhibit to
the Registrant's annual report on Form 10-K for the fiscal year
ended December 31, 1996).
10.24 Agreement of sublease between SBC Warburg, Inc. and the
Registrant's tenant, 277 Park Avenue, New York, New York, dated
June 13, 1997. (Incorporated by reference to the corresponding
exhibit on Form 10Q for the period ended June 30, 1997).
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).
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).
76
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
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).
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).
77
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
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).
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).
78
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
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).
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).
79
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
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).
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).
80
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
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).
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).
81
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
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, 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 basic earnings per share. 85
11.2 Statement re: computation of diluted earnings per share. 86
12.1 Computation of ratio of earnings to fixed charges and ratio of
earnings to combined fixed charges and preferred stock dividends. 87
21.1 Subsidiaries of the Registrant (Incorporated by reference to the
corresponding Exhibit on Form 10Q for the period ended June 30,
1997).
23.1 Consent of KPMG Peat Marwick LLP. 89
27 Financial Data Schedule. 90
82