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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, 1998
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
- ----- OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 1-6862
Donaldson, Lufkin & Jenrette, Inc.
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 13-1898818
- --------------------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
277 Park Avenue, New York, New York 10172
VAddress 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 18, 1999, the latest practicable date, there were 124,425,447 shares
of Common Stock, $0.10 par value, outstanding.
At March 18, 1999, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $2,175.4 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 21,
1999, which definitive proxy statement (the "Proxy Statement") was filed by the
registrant with the Securities and Exchange Commission on March 18, 1999 not
later than 120 days after the year ended December 31, 1998.
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 Venture capital
o Correspondent brokerage services
o Securities lending
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, 1998 the Equitable owned 72.2% 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, 1998, approximately 59.7% of
Equitable's outstanding common stock.
In 1998 and prior years, the Company operated in three principal
segments in the financial service industry:
o Banking Group
o Capital Markets Group
o Financial Services Group
In 1998, the Company continued to make strides toward achieving the goal of
establishing a strong international presence. The Company launched an
international equities business headquartered in London and opened investment
banking offices in Buenos Aires, Hong Kong, Moscow, Paris and Seoul. The
Merchant Banking Group has expanded its international efforts, with investments
in the UK, Italy, France, Argentina and Brazil. At December 31, 1998 and 1997,
total net revenues related to the Company's foreign operations were
approximately $327.3 million and $371.1 million, respectively. At December 31,
1998 and 1997, total foreign assets were approximately $10.9 billion and $8.6
billion, respectively.
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 in Europe, Asia and Latin America. Through Investment Banking, the Company
manages and underwrites public offerings of securities, arranges private
placements, originates investment-grade debt, underwrites and syndicates senior
bank debt and provides advisory and other services in connection with mergers,
acquisitions, restructurings and other financial transactions. The Company's
Merchant Banking/Principal Investing 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 Sprout Group is Wall Street's oldest venture capital organization. In 1998,
the Banking Group expanded its capabilities in the technology,
telecommunications and financial services industries. In addition, significant
progress was made in establishing a strong presence in Europe, Asia and Latin
America. New offices were opened in Paris, Moscow, Buenos Aires and Seoul, and
the London office added 80 employees.
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CAPITAL MARKETS GROUP
---------------------
EQUITIES DIVISION. The Equities Division provides domestic and
international institutional clients with global research, trading and sales
services in U.S. listed and over-the-counter equities, and foreign equities
trading. In 1998, the division initiated an aggressive worldwide expansion plan,
successfully launching the International Equities Group, a research, sales and
trading operation dedicated to non-U.S. securities. The group is headquartered
in London, with additional locations in Hong Kong and New York City. A joint
venture has also been established in Johannesburg. The group began officially
trading European, Asian and emerging markets equities in January 1999. In
addition, the Company's Equity Derivatives Division provides a broad range of
equity and index option products. Autranet is one of the oldest distributors of
research and investment material.
FIXED INCOME DIVISION. 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. The Division is focused
on two major objectives. The first is enhancing its core businesses, which are
high-yield bonds and senior bank debt, U.S. government and investment-grade
corporate bonds and real estate finance. The second objective is the
development of new products and services that will meet specific client needs.
In 1998, the Company took two such initiatives, forming a global foreign
exchange sales and trading unit and a fixed-income derivatives business. 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.
FINANCIAL SERVICES GROUP.
- ------------------------
The Financial Services Group provides a broad array of services to
individual investors and the financial intermediaries that represent them.
Pershing is a leading provider of correspondent brokerage services, clearing
transactions for financial institutions which collectively maintain over 2.5
million active customer accounts. Through its Asset Management Group, the
Company provides cash management, investment advisory and trust services
primarily to high-net-worth individuals and families. 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.
DLJdirect is a leading provider of online discount brokerage and related
investment services, offering customers automated securities order placement
through the Internet and online service providers. DLJdirect's broad range of
investment services is targeted at self-directed, sophisticated online
investors.
NET REVENUES BY OPERATING GROUP
- -------------------------------
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 1998
presentation.
Years ended December 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(in millions)
Banking Group.......................... $ 405.2 $ 667.6 $ 853.4 $ 1,220.2 $ 1,486.8
Capital Markets Group.................. 641.2 814.7 1,068.4 1,262.2 1,273.3
Financial Services Group............... 458.0 619.4 827.6 1,008.9 1,248.4
Offsets and eliminations............... 0.5 (23.7) 8.1 (4.0) (57.3)
------------ ------------ ------------- ------------ ------------
Net revenues........................... $ 1,504.9 $ 2,078.0 $ 2,757.5 $ 3,487.3 $ 3,951.2
========= ========= ========= ========= =========
The Company currently conducts its operations in 17 cities in the
U.S., including Atlanta, Austin, Boston, Charlotte, Chicago, Dallas, Deerfield,
Houston, Jersey City, Los Angeles, Menlo Park, Miami, New York, Oak Brook,
Parsippany, Philadelphia and San Francisco. The Company also has international
offices located in 12 cities, including Bangalore, Buenos Aires, Geneva, Hong
Kong, London, Lugano, Mexico City, Moscow, Paris, Sao Paulo, Seoul and Tokyo.
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BANKING GROUP
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MERGERS AND ACQUISITIONS
- ------------------------
The Company's global merger and acquisition ("M&A") practice is the
fastest-growing segment of the Banking Group, participating in a broad range of
domestic and international assignments. The M&A professionals use an
industry-intensive approach and work closely with the Company's industry
specialty groups in a broad range of sectors. The M&A specialists operate from
the firm's offices in the U.S., Europe, Asia and Latin America. As a result of
the firm's focus on international expansion, almost one-third of the M&A
assignments in 1998 involved a party outside the U.S.
CAPITAL RAISING
- ---------------
EQUITY AND EQUITY-LINKED OFFERINGS. The equity capital markets group
focuses on providing financing for issuers of equity and equity-linked
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 clients.
HIGH-YIELD DEBT UNDERWRITING. 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.
INVESTMENT-GRADE CORPORATE BONDS. The investment-grade debt
origination business provides strategic advice and execution services to
clients. In 1998, the group lead-managed 69 investment grade debt offerings,
totaling approximately $15 billion.
SENIOR BANK DEBT AND BRIDGE FINANCING. The Senior Bank Debt Group
underwrites and syndicates senior bank debt, offering clients the convenience
of "one-stop shopping". During 1998, the group arranged and syndicated $23
billion of senior bank debt. The Company also offers bridge financing to cover
gaps that may occur in the timing and financing of transactions.
STRUCTURED PRODUCTS. The Structured Products Group was launched in
1998. Structured products offer clients financing alternatives to traditional
capital markets instruments. The products are customized to meet each client's
strategic objectives.
PRIVATE FUND GROUP. 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 group raised over $15 billion
in private capital in 1998.
OTHER ADVISORY SERVICES. The Company also offers clients a variety of
other advisory services. The private capital placements group raises capital
within the private debt and equity markets. Additionally, the Company's
restructuring group advises both corporations and creditors in the complex
process of corporate restructuring. 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.
MERCHANT BANKING/PRINCIPAL INVESTING
- ------------------------------------
The Company entered the merchant banking investment business in 1985.
Through the Merchant Banking Group, the Company makes investments across the
entire capital structure, from venture capital equity to investments in the
largest leveraged buyouts. The funds invest in companies and real estate in the
U.S., Europe, Asia, Latin America, Australia and Canada. At December 31, 1998,
the Group had managed funds with committed capital of approximately $8 billion.
These funds include DLJ Merchant Banking Partners I and II, L.P. which focus
primarily on equity investments in leveraged transactions; the DLJ Bridge Fund,
a leader in domestic bridge financing; DLJ Investment Partners, L.P., which
focuses on opportunities in lower risk mezzanine securities;
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DLJ Real Estate Capital Partners, L.P., which makes investments in a broad range
of real estate-related assets in the U.S. and abroad; Global Retail Partners,
L.P., which pursues investment opportunities in the retail and electronic
commerce industries, and Phoenix Equity Partners II, which provides private
equity capital to established European businesses with leading market shares.
LEVERAGED EQUITY INVESTING. The Company's flagship fund, DLJ Merchant
Banking Partners II, L.P. has committed capital of $3 billion, with 25% of the
capital committed by DLJ and its employees. The fund makes 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.
Since its inception in 1996, the fund has invested approximately $1.5 billion
in 26 companies with an aggregate transaction value of more than $12 billion.
DLJ INVESTMENT PARTNERS. DLJ Investment Partners, L.P. commenced
operation in 1995 to pursue investments primarily in lower-risk mezzanine
securities. The fund has committed capital of $500 million, including $100
million from the Company and its employees.
DLJ REAL ESTATE CAPITAL PARTNERS. DLJ Real Estate Capital Partners,
L.P., focuses on investments in a broad range of real estate and real
estate-related assets in the U.S. and abroad. The fund has committed capital of
approximately $680 million from its general and limited partners, including
$100 million from the Company and its employees.
GLOBAL RETAIL PARTNERS. Global Retail Partners, L.P., commenced
operation in 1996 and focuses on growth retailing and electronic commerce
opportunities. The fund has committed capital of approximately $150 million.
PHOENIX EQUITY PARTNERS II. Phoenix Equity Partners II is a $220 million
fund dedicated to investing in mid-market companies in Europe. The Fund focuses
primarily on U.K. companies, invests in management buyouts and buy-ins and
provides development or expansion capital for midmarket private companies.
During 1998, the fund made four investments and is now two-thirds invested.
DLJ BRIDGE FUND. The Company is the sponsor of the $750 million DLJ
Bridge Fund ("the Bridge Fund") which is funded by a commitment from Equitable.
The Bridge Fund provides short-term loans in connection with DLJ's merchant
banking and financial advisory businesses. The Bridge Fund has a commitment of
subordinated debt from Equitable for the total amount of the loans. Any loans
made by the DLJ Bridge Fund are expected to be refinanced, and the outstanding
amounts repaid, within a short-term period. The Company has also agreed to pay
Equitable the amount, if any, by which any principal loss on an individual loan
exceeds $150 million. At December 31, 1998, the Bridge Fund does not have any
individual bridge loan outstanding in excess of $150 million. At December 31,
1998, the DLJ Bridge Fund had extended $295 million of short-term bridge loans,
which are expected to be refinanced in the first quarter of 1999.
SPROUT. Founded in 1969, Sprout is one of the oldest and largest
groups in the private equity investment and venture capital industry. Since the
capitalization of Sprout's first fund at $11.5 million, ten major investment
partnerships have been formed primarily for large institutional investors.
Sprout has approximately $2 billion of committed capital and invests in
early-stage, high-growth companies; management buyouts; and mezzanine financing
of companies that are not yet ready to access the public capital markets.
During 1998, Sprout raised $860 million to launch a new fund, Sprout Capital
VIII that invests in growth companies at all stages of development. Sprout's
investors are major public and corporate pension funds, endowments, insurance
companies and wealthy individuals.
CAPITAL MARKETS GROUP
- ---------------------
EQUITIES DIVISION
- -----------------
RESEARCH. The Company's institutional equities research department
consists of approximately 90 research analysts and associates, based in New
York City, London and Hong Kong, 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, global
research efforts were expanded in 1998. Coverage of the following industries
was established: global oil and gas, airlines, airports, beverages, Latin
American banks, Asian technology and global media and communications. Coverage
of additional industries is planned for the first half of 1999.
4
SALES AND TRADING. The Company's equity sales and trading operation
covers nearly 2,000 of the world's largest institutional investors, in 50
countries around the world. The Company's trading strategy is client-driven.
The Company does not accumulate large positions for its own account, but
provides clients with liquidity by taking a position as a principal to
facilitate their transactions. In U.S. equities trading, the Company's traders
actively trade 95 percent of the S&P 500 companies. The over-the-counter desk
makes markets in approximately 400 stocks. The Company has also expanded its
convertible securities business, particularly in new issues.
AUTRANET. Autranet Inc., a registered broker-dealer and member firm of
the NYSE is active in the distribution of investment research products
purchased from "independent originators." Independent originators are research
specialists, not linked to a broker-dealer organization and range in size and
scope from large economic consulting firms to individual freelance analysts.
EQUITY DERIVATIVES. The Equity Derivatives Division, located in New
York and London, provides institutional clients with research, trading and
sales services in a broad range of products. 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 the firm's own position. The Company offers
derivatives based on all traded products including equities, commodities, debt
instruments, currencies and indices.
FIXED INCOME DIVISION
- ---------------------
HIGH-YIELD BONDS. The High-Yield department is the number one ranked
firm in the origination of high-yield bonds in the U.S. and Western Europe. The
department provides institutional clients with research, trading and sales
services and distributes non-investment-grade securities in connection with
offerings underwritten by the Company.
SENIOR BANK DEBT GROUP. The Senior Bank Debt Group syndicates
leveraged loans and enters into commitments to extend credit primarily to
non-investment grade borrowers. This group provides the Company's clients with
the convenience of a single financing source. The group's base of institutional
investors has expanded to include pension funds, mutual funds and insurance
companies. In 1998, the Group acted as lead agent on 55 loans aggregating
approximately $23 billion.
INVESTMENT-GRADE CORPORATE BONDS. The Company is 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. In 1998, the Group introduced the Financial
Engineering Desktop ("FED") to its clients. FED is a proprietary technology
which provides live market data, state-of-the art analytics and historical
information on investment-grade corporate debt.
GOVERNMENT BONDS. The Company is a primary dealer in the $3 trillion
market for U.S. Treasuries The Government Bond department acts as underwriter
and market maker in U.S. Treasury bills, notes, bonds, and securities of
Federal agencies. 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.
Institutional clients include insurance companies, money managers, commercial
banks, hedge funds and pension funds. 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. In addition it acts as an intermediary
between borrowers and lenders of short-term funds utilizing repurchase and
reverse repurchase agreements.
REAL ESTATE FINANCE GROUP. The group provides capital and financial
advisory services for major participants in the commercial and residential real
estate markets. In 1998, approximately $6 billion was raised for clients. The
Real Estate Finance Group also originates loans secured by multifamily and
commercial properties and, acting as agent, places mortgage-backed debt for
clients. The Company's commercial mortgage lending subsidiary, Column
Financial, originates, acquires and enhances mortgage loans for securitization
and sale to investors in the form of CMOs. During 1998, Column Financial
originated over $2.5 billion in loans.
FOREIGN EXCHANGE. The Company's Foreign Exchange Group began 24 hour
trading in 1998. The Group serves broad ranges of clients worldwide, including
multinational corporations, money managers, hedge funds, banks and
high-net-worth individuals. The group is based in New York and London, and an
operation in Asia is planned for 1999.
5
DERIVATIVES. In 1998, a full-service unit was formed to provide
hedging alternatives, linked to high-yield and investment-grade securities, to
institutional investors and corporate issuers. Three types of derivative
products are offered: interest rate derivatives, emerging markets derivatives
and credit-structured products. This unit has offices in New York, London, Hong
Kong and Tokyo.
RESEARCH. The Fixed Income Research Group provides investment analysis
and recommendations on more than 500 issuers. In addition, the Group provides
proprietary research on a variety of structured products and global economic
analyses.
FINANCIAL SERVICES GROUP
- ------------------------
PERSHING DIVISION. Pershing is one of the leading providers of
correspondent brokerage services to the world's financial institutions. Founded
in 1939 and acquired by the Company in 1977, Pershing operates out of seven of
the Company's domestic offices and London. Pershing provides execution and
clearance services to over 600 correspondents, which collectively maintain over
2.5 million active customer accounts holding more than $279 billion of assets
at December 31, 1998. 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 services on a fee-for-service 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 information and recommendations provided through its
own research analysts' action-oriented opinions and advice available to its
correspondents.
Sophisticated communications and information management is 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.
LONDON GLOBAL SECURITIES. London Global Securities, with operations in
London and Australia, provides securities lending and financing services to
institutional investors in 25 countries.
DLJDIRECT. DLJdirect is a leading provider of online discount
brokerage and related investment services, offering customers automated
securities order placement and information and research capabilities through
the Internet and online service providers. DLJdirect's broad range of
investment services is targeted at self-directed, sophisticated online
investors, who on average have higher account balances than other online
investors. DLJdirect was one of the pioneers of online investing. DLJdirect
started in the online brokerage business in September 1988 under the name PC
Financial Network. In September 1997, PC Financial Network changed its name to
DLJdirect and relaunched its Internet site as DLJdirect (www.dljdirect.com). In
its ten year history, DLJdirect has been recognized as a high-quality provider
of online brokerage services.
DLJdirect's investment services and products include:
o online order entry for stocks, options mutual funds and U.S. Treasury
securities
o access to selected DLJ-managed initial public offerings and other
equity offerings
o company and industry research from DLJ
o DLJdirect's MarketSpeed(TM), its proprietary software with enhanced
graphics and greater ease of use permitting DLJdirect's customers to
access DLJdirect's online services an average of five times faster
than other major Internet brokers
o stock and mutual fund evaluation tools, including its proprietary
StockScan(TM) for screening over 9,500 public companies and its
proprietary FundScan(TM) for analyzing over 7,000 mutual funds
o research and analysis from independent research organizations,
including Standard & Poor's, Zacks Investment Research Incorporated
and Thomson Investors Network
o daily market commentary from TheStreet.com and Briefing.com
DLJdirect's in-house technology group develops Internet-based products
for DLJ businesses as well as independent clients.
On March 17, 1999 the Company filed a Registration Statement with the
Securities and Exchange Commission relating to a proposed initial public
offering of a new class of common stock that will track the performance of
DLLJdirect, its on line brokerage business.
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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 and corporations.
At the end of 1998, the Group had ten offices in the U.S. and one in London.
The London office has global trading capabilities in a broad range of equity,
fixed income and derivative products and also offers a Swiss banking facility.
In 1998, the Group introduced DLJ Preferred Advisors, which enables clients to
choose from ten professionally managed portfolios in five equity investment
classes. In 1999, clients qualifying for DLJ Private Client Service will be
able to trade online, in addition to reviewing account balances, accessing DLJ
research and obtaining information on DLJ lead-managed securities offerings.
ASSET MANAGEMENT GROUP. The Asset Management Group consists of two
divisions: Wood, Struthers & Winthrop and DLJ Investment Management
Corporation. The group specializes in individual and institutional investment
management and has a total of $17.6 billion of assets under management.
Wood, Struthers & Winthrop Management Corp., founded in 1871, is a
registered investment advisor, managing over $9 billion in assets at December
31, 1998. Wood, Struthers & Winthrop specializes in investment management, tax,
trust and estate planning and has a client base of high-net-worth individuals
and families. 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 $5.7 billion portfolio of
private placements which it originated.
Wood, Struthers & Winthrop is the investment advisor to a domestic
family of five diversified open-end mutual funds. These funds consist of three
U.S. equity funds and two fixed-income funds which aggregate approximately $709
million. In addition, Wood, Struthers & Winthrop and DLJ Investment Management
Corp., are the advisors to the DLJ Winthrop Opportunity Funds, a family of
diversified open-end mutual funds. These funds aggregate $178.6 million at
December 31, 1998.
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.
DLJ Investment Management Corp. provides cash management services to
institutional clients. During 1998, assets under management increased from $5
billion to $8 billion, a gain of 60 percent. In 1998, DLJ Investment Management
Corp. launched the DLJ High-Yield Bond Fund, a $500 million closed-end
investment company.
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 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, 1998, the Company had approximately 8,500 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.
7
REGULATION
- ----------
The Company's business, and the securities industry in general is
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 non-U.S. securities financial regulatory authorities.
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/or
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, required procedures for trading on securities exchanges
and in the over-the-counter market, and procedures for the clearance and
settlement of trades. 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.
8
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
Securities and Futures Authority ("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 Securities and Futures Commission ("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 them 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
- --------------------
DLJSC, Pershing Trading, DLJdirect and Autranet are broker-dealers
registered with the Commission and subject to the capital requirements of the
Commission. In addition, as member firms of the NYSE and/or NASD, they are
subject to the capital requirements of their respective SRO. 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 unusually 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.
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, 1998 and 1997, the Company's foreign broker-dealer
subsidiaries were in compliance with all applicable regulatory capital adequacy
requirements.
9
ITEM 2. PROPERTIES
----------
The Company's principal executive offices are presently located at 277
Park Avenue, New York, New York and occupy approximately 1.2 million square
feet under a lease expiring in 2021. The Company has leased space at 280 Park
Avenue, New York, New York, aggregating approximately 190,000 square feet under
a lease expiring at various dates through 2014. 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 98,000 square feet under a
lease expiring in 2011. In 1998, the Company entered into a lease at 111 Old
Broad Street aggregating approximately 130,000 square feet. This lease expires
in 2018.
Pershing also leases approximately 460,000 square feet in Jersey City,
New Jersey, under leases that expire at various dates through 2009. The Company
also owns land and a building with approximately 142,000 square feet in Florham
Park, New Jersey.
The Company leases an aggregate of approximately 730,000 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, Moscow, Paris, Sao Paulo, Seoul 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. DLJSC's motions for summary judgments were denied in April 1998.
Trial has been scheduled for May 17, 1999. DLJSC believes that it has
meritorious defenses to the complaints and is contesting the suits vigorously.
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 $550.0 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 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. 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 has appealed the Bankruptcy
Court's ruling. On May 7, 1998, DLJSC and others were named as defendants in a
second action in a Texas State Court brought by the NGC Settlement Trust. The
allegations of this second Texas State Court
10
action are substantially similar to those of the earlier class action pending
in State Court. In an amended order dated January 5, 1999, the State Court
granted the class action plaintiff's motion for class certification. In an
order dated March 1, 1999, the State Court granted motions for summary judgment
filed by DLJSC and the other defendants. The plaintiffs have indicated that
they intend to appeal. DLJSC intends to defend itself vigorously against all of
the allegations contained in the complaints.
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. In April
1998, DLJSC's motion to dismiss the complaint against it was denied, and
plaintiff's motion for class certification was denied. In December 1998, the
motion of two other potential class representatives to intervene in the action
was denied. DLJSC intends to defend itself vigorously against all of the
allegations contained in the complaint.
On January 24, 1997, various money management firms and others who
allegedly purchased and/or beneficially owned $116 million aggregate principal
amount of Senior Subordinated Notes (the "Notes") issued in May 1994 by
Mid-American Waste Systems, Inc. ("Mid-American") filed a complaint against
DLJSC and a number of other financial institutions and several former officers
and directors of Mid-American in the Court of Common Pleas, Franklin County,
Ohio. The action seeks rescission, compensatory and punitive damages. The suit
alleges violations of federal securities laws and the Ohio Securities Act, and
common law fraud, aiding and abetting common law fraud, negligent
misrepresentation, breach of contract, breach of fiduciary duty/acting in
concert and negligence. DLJSC was an underwriter for the initial offering of
the Notes. The Notes went into default in February 1996 and Mid-American filed
a voluntary petition for reorganization pursuant to Chapter 11 of the United
States Bankruptcy Code in January 1997. The complaint seeks to hold DLJSC
liable for various alleged misrepresentations and omissions contained in the
prospectus for the Notes and other filings and for various oral representations
concerning the Notes, which plaintiffs claim were false and misleading. Fact
discovery is complete and expert discovery is ongoing. Both DLJSC and
plaintiffs filed motions for summary judgment, all of which are pending. Trial
is currently scheduled to commence on May 4, 1999. Other alleged purchasers
and/or beneficial owners of an additional $15 million aggregate principal
amount of the Notes issued by Mid-American described above filed two additional
lawsuits against DLJSC both in the U.S. District Court for the Southern
District of Ohio, on April 14, 1997 and December 30, 1997. The allegations are
substantially similar to those described above. Discovery in these actions,
consolidated with fact discovery in the Ohio state court action described
above, is still ongoing. No trial date has been set in either case. On July 31,
1998, DLJSC filed a motion to dismiss the later filed action for lack of timely
service of valid process, which is pending. DLJSC believes that it has
meritorious defenses to all of the allegations contained in all of the
complaints described above and is contesting the suits vigorously.
On January 20, 1999, the Plan Administrator for the bankruptcy estate
of Mid-American, represented by counsel for plaintiffs in the Ohio state court
action against DLJSC described above, filed another action against DLJSC and
other financial institutions, several individuals and two law firms in the
Supreme Court of the State of New York based on factual allegations similar to
those made in the Ohio state court action. The actions seeks compensatory and
punitive damages. The plaintiff alleges claims against DLJSC for breach of
fiduciary duty, aiding and abetting breach of fiduciary duty, professional
malpractice, common law fraud, constructive fraud, aiding and abetting common
law fraud, negligence, negligent misrepresentation and breach of contract. The
complaint alleges that, as an underwriter, DLJSC is liable for alleged
misrepresentations and omissions in the prospectus for the Mid-American Senior
Subordinated
11
Notes, and that, as Mid-American's financial advisor after the initial
offering, DLJSC allegedly knew or should have known about and should have
disclosed to Mid-American that Mid-American's financial condition was
precarious and that publicly disclosed documents were false and misleading
regarding Mid-American's finances and operations. There has been no discovery
or other proceedings in this action. DLJSC believes that it has meritorious
defenses to all of the allegations contained in the complaint and will contest
the suit vigorously.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
During the fourth quarter of 1998, 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
1998 1st 2nd 3rd 4th
---- --- --- --- ---
High.................... 44 3/4 52 63 3/4 44 1/16
Low..................... 31 3/8 42 5/16 24 1/8 20 3/8
Common dividends........ $ .0625 $ .0625 $ .0625 $ .0625
Quarters
1997 1st 2nd 3rd 4th
---- --- --- --- ---
High.................... 23 11/16 32 1/8 35 25/32 43 13/16
Low..................... 18 18 1/4 28 1/2 34
Common dividends........ $ .0625 $ .0625 $ .0625 $ .0625
The approximate number of holders of DLJ Common Stock at March 5, 1999,
was 15,000.
* All figures are adjusted for the two-for-one split of DLJ Common Stock
that occurred on May 12, 1998.
12
SELECTED CONSOLIDATED FINANCIAL DATA
Years Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In millions, except share and per share data)
Income Statement Data:
Revenues
- --------
Commissions....................... $ 854.7 $ 690.2 $ 573.3 $ 460.2 $ 376.1
Underwritings..................... 1,077.7 905.6 755.6 473.3 290.7
Fees.............................. 1,191.7 767.3 470.0 369.1 281.3
Interest, net (1)................. 2,189.1 1,652.1 1,074.2 904.1 791.9
Principal transactions-net:
Trading......................... (92.8) 363.2 394.0 333.1 136.1
Investment...................... 126.0 194.5 163.0 163.7 97.6
Other............................. 60.6 67.6 60.7 55.1 35.0
---------- ---------- ---------- ---------- ----------
Total revenues................ 5,407.0 4,640.5 3,490.8 2,758.6 2,008.7
---------- ---------- ---------- ---------- ----------
Costs and Expenses
Compensation and benefits........ 2,231.7 1,908.2 1,538.8 1,261.4 897.8
Compensation expense-
Restricted stock units......... - - - 6.2 -
Interest......................... 1,455.9 1,153.2 733.2 680.6 503.8
Brokerage, clearing, exchange
fees and other................. 258.6 231.4 201.3 168.1 135.6
Occupancy and equipment........... 269.9 189.9 159.3 127.1 90.1
Communications.................... 89.8 64.0 53.7 42.8 36.6
Other operating expenses.......... 500.6 432.7 330.7 173.9 139.8
---------- ---------- ---------- ---------- ----------
Total costs and expenses...... 4,806.5 3,979.4 3,017.0 2,460.1 1,803.7
---------- ---------- ---------- ---------- ----------
Income before provision for
Income taxes..................... 600.5 661.1 473.8 298.5 205.0
Provision for income taxes.......... 229.7 252.8 182.5 119.4 82.0
---------- ---------- ---------- ---------- ----------
Net income.......................... $ 370.8 $ 408.3 $ 291.3 $ 179.1 $ 123.0
============ =========== ========== ========== =========
Dividends on preferred stock........ $ 21.3 $ 12.2 $ 18.7 $ 19.9 $ 21.0
============ =========== ========== ========== =========
Earnings applicable to
Common shares..................... $ 349.5 $ 396.1 $ 272.6 $ 159.2 $ 102.0
============ =========== ========== ========== =========
Weighted average common
Shares outstanding (2):
Basic.......................... 119,260 110,318 106,600 101,140 100,000
============ =========== ========== ========== ==========
Diluted........................ 131,980 125,498 118,712 103,160 102,950
============ =========== ========== ========== ==========
Earnings per common share (2):
Basic.......................... $ 2.93 $ 3.59 $ 2.56 $ 1.58 $ 1.02
============ =========== ========== ========== ===========
Diluted........................ $ 2.65 $ 3.16 $ 2.30 $ 1.55 $ .99
============ =========== ========== ========== ===========
13
Years Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(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.............. $ 44,031.0 $ 43,227.4 $ 29,954.2 $ 27,793.1 $ 19,166.9
Total assets....................... 72,282.2 70,505.8 55,503.7 44,576.5 33,261.6
Securities sold under agreements
to repurchase and securities 43,097.8 43,694.1 32,103.1 29,369.0 20,385.4
loaned..........................
Long-term borrowings............... 3,482.0 2,128.2 1,325.4 958.9 539.9
Redeemable preferred stock ........ 200.0 200.0 200.0 225.0 225.0
Stockholders' equity .............. 2,927.7 2,061.5 1,647.2 1,198.7 820.3
Other Financial Data (at end of period):
Book value per common share
outstanding...................... $ 20.44 $ 15.72 $ 12.40 $ 10.25 $ 8.21
Ratio of net assets to
stockholders' equity (3)........ 9.6x 13.2x 15.51x 14.00x 17.18x
Ratio of long-term borrowings
to total capitalization (4)...... 0.52 0.48 0.40 0.37 0.30
Return on average equity (5)....... 16.5% 24.1% 20.6% 17.1% 13.1%
Ratio of earnings to fixed charges. 1.13x 1.16x 1.16x 1.11x 1.10x
Ratio of earnings to combined
fixed charges and preferred
stock 1.13x 1.16x 1.16x 1.10x 1.09x
dividends (6)...................
(1) Interest is net of interest expense to finance U.S. government, agency and
mortgage-backed securities of $3.0 billion, $2.9 billion, $2.1 billion,
$2.0 billion and $1.6 billion, respectively.
(2) 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.
The weighted average common shares outstanding and earnings per common
share amounts are pro forma for the year ended December 31, 1994. 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.
(3) Net assets are total assets excluding securities purchased under agreements
to resell and securities borrowed.
(4) 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.
(5) After payment of dividends on the Company's preferred stock.
(6) For the purpose of calculating the ratio of earnings to combined fixed
charges and 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.
14
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 the state of the global economy,
securities market conditions, the level and volatility of interest rates,
competitive conditions and the size and timing of transactions.
The unprecedented volatility in the global capital markets in 1998 had
a significant negative impact on revenue and net earnings in the financial
services industry. The collapse of the Russian economy in mid-year and the
economic conditions in Japan, Asia and in worldwide emerging markets led to the
widespread sell-off of fixed income and equity securities throughout the world.
After the Russian crisis, there was a flight to quality resulting in increased
purchases of U.S. government securities and larger spreads between these and
almost all other fixed income securities. In the U.S. these conditions
diminished liquidity and greatly reduced fixed income and equity underwriting.
The effect was particularly damaging in the high yield sector and emerging
markets. These same conditions negatively impacted fixed income and equity
markets worldwide which resulted in efforts by the Federal Reserve Bank to
restore liquidity to the capital markets by cutting interest rates three times
in the latter stages of 1998. The investment climate improved so that most
market indices rebounded into positive returns.
Although the merger market was also impacted by the global market
turmoil in the third quarter, worldwide merger and acquisition activity
increased 54% over 1997. Equity and high yield underwriting declined
significantly during the third and fourth quarters due to extreme market
volatility and illiquidity. Initial public offering ("IPO") activity declined
for the second consecutive year.
RESULTS OF OPERATIONS
- ---------------------
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
- ---------------------------------------------------------------------
For 1998, total revenues of $5.4 billion increased $766.6 million or
16.5%. During 1998, revenues increased primarily as a result of increases in
commissions, fees, underwriting revenues and net interest income offset in part
by decreases in trading and investment gains. Changes in net revenues from
external sources for each of the Company's industry segments were: Banking
Group revenues increased by $271.3 million primarily as a result of increased
underwriting and fees; Capital Markets Group revenues decreased by $17.6
million principally as a result of decreased trading revenues in fixed income
offsetting increases in commissions and underwriting revenues in institutional
equities and fixed income; Financial Services Group revenues increased $185.4
million primarily as a result of increased brokerage and correspondent
clearance commissions and fees from asset management activities. Net revenues
in 1998 include $5.0 million related to the Emerging Markets Group. This
represents a decrease of $112.8 million from net revenues in 1997 as a result
of losses incurred primarily from the collapse of the Russian economy. The
Company ceased its proprietary trading in emerging markets in September 1998
and eliminated the bulk of its trading positions during the fourth quarter of
1998.
Commission revenues increased $164.5 million or 23.8% to $854.7
million due to increased levels of activity in virtually all business groups.
This increase is consistent with the increased volume on major exchanges during
the year.
Underwriting revenues increased $172.1 million or 19.0% to $1,077.7
million. During 1998, the Company experienced market share increases in equity,
convertibles and high yield underwriting.
Fee revenues increased $424.4 million or 55.3% to $1,191.7 million.
These results primarily reflect the Company's continuing market share growth in
merger and acquisition advisory services. During 1998, asset management and
other advisory service activities also increased.
15
Interest, net of interest expense to finance U.S. government, agency
and mortgage-backed securities, increased $537.0 million or 32.5% to $2,189.1
million. The bulk of the increase occurred in the stock loan/borrowed business.
In addition, increases in domestic and foreign margin balances and higher
levels of foreign fixed income securities, primarily in the Emerging Markets
area prior to the Company's withdrawal from that activity, resulted in
increases in interest income.
Principal transactions-net, trading revenues decreased by $456.0
million or 125.5% to $(92.8) million primarily in the Emerging Markets and High
Yield areas.
Principal transactions-net, investment revenues decreased $68.5
million or 35.2% to $126.0 million. The decrease is primarily due to a lower
amount of realized gains from securities sold coupled with a reduced increase
in fair value of investments remaining in the portfolio, as a result of
volatile market conditions throughout the year, but in particular during the
second half of the year. In 1998, realized gains on sales of investments were
$117.1 million, net unrealized carrying values increased $8.9 million,
including $5.6 million to eliminate net unrealized depreciation on investments
sold, and a $3.3 million increase in net unrealized appreciation on retained
investments.
Other revenues decreased $7.0 million or 10.3% to $60.6 million. Other
revenues consist primarily of dividends and miscellaneous transaction revenues.
Total costs and expenses for 1998 increased $827.2 million or 20.8% to
$4,806.5 million. During 1998, the Company started a non-dollar international
equities group, expanded its Banking Group in the U.S. and internationally,
established a high-yield business in London and generally increased capacity in
its processing oriented businesses to handle significantly increased levels of
activity.
Compensation and benefits increased $323.5 million or 17.0% to
$2,231.7 million. Incentive and production-related compensation increased 9.0%.
Base compensation, including benefits and all payroll taxes, increased by 40.0%
due to the hiring of more senior level executives by various business groups.
Full-time personnel increased 1,412 or 20.0% to 8,465 at year-end 1998.
Interest expense increased $302.7 million or 26.2% to $1,455.9
million. Most of this increase was related to the financing of Pershing's
domestic and foreign stock loan/borrowed business.
As noted below, all other expenses increased $201.0 million or 21.9%
to $1,119.0 million.
Brokerage, clearing, exchange fees and other expenses increased $27.2
million due to increased share volume and transaction fee payments. Occupancy
and equipment costs increased $80.1 million as a result of the Company's
domestic and international expansion. Communications costs increased $25.8
million due to expanded facilities and the overall growth in professional
staff. All other operating expenses increased $67.9 million. These expenses
include professional fees, travel and entertainment, and printing and
stationery, which increased $61.7 million reflecting an overall increase in
business activity and including the costs for the Year 2000 project (see "Year
2000").
The changes in income before income taxes for each industry segment
were: Banking Group pre-tax income increased by $33.9 million, as a result of
increased profitability in the Company's investment and merchant banking
activities; Capital Markets Group pre-tax income decreased by $128.6 million
due to decreased trading revenues in the fixed income area and the investment
spending related to the development of a non-dollar international equities
business; Financial Services Group pre-tax income increased by $28.0 million as
a result of increased commissions and fees from the Company's correspondent
clearing and asset management businesses.
The Company's income tax provision for 1998 and 1997 was $229.7
million and $252.8 million, respectively, which represented a 38.3% and 38.2%
effective tax rate for each period.
Net income for 1998 decreased $37.5 million or 9.2% to $370.8 million.
Using the treasury stock method diluted earnings per common share were $2.65
for 1998 and $3.16 for 1997.
16
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
- ---------------------------------------------------------------------
For 1997, total revenues of $4,640.5 million increased $1,149.7
million or 32.9%. During 1997, revenues increased in all of the Company's major
areas of activity. Changes in net revenues from external sources for each of
the Company's industry segments were: Banking Group revenues increased by
$375.3 million primarily as a result of increased underwriting activity and
fees; Capital Markets Group revenues increased by $192.3 million principally as
a result of increased commission revenues in domestic equities and increased
fixed income underwriting revenues particularly in the high yield group;
Financial Service Group revenues increased $113.2 million primarily as a result
of an increase in commissions and fees from asset management activities.
Commission revenues increased $116.8 million or 20.4% to $690.2
million due to increased business in all areas. This increase is generally
consistent with the overall growth in listed share volume on major equity
exchanges.
Underwriting revenues increased $150.0 million or 19.8% to $905.6
million. During 1997, the Company experienced increases in all areas of
underwriting.
Fee revenues increased $297.3 million or 63.3% to $767.3 million.
Overall, revenue from merger and acquisition, private placements and other
advisory services activities increased during 1997. In 1997, private equity
capital raised for other investment organizations increased. In addition, fees
from the Company's asset management group increased due to an increase in
assets under management from $5.6 billion at year-end 1996 to $12.0 billion at
year-end 1997.
Interest, net of interest expense to finance U.S. government, agency
and mortgage-backed securities, increased $577.9 million or 53.8% to $1,652.1
million. This increase was driven by 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. 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 decreased $30.8 million
or 7.8% to $363.2 million.
Principal transactions-net, investment revenues increased $31.6
million or 19.4% to $194.5 million. During 1997, realized gains on sales of
investments were $160.0 million. Net unrealized carrying values increased $34.5
million, including $45.6 million to eliminate net unrealized depreciation on
investments sold and a $11.1 million increase in net unrealized depreciation on
retained investments.
Other revenues increased $6.9 million or 11.4% to $67.6 million due to
increased revenue sharing arrangements at Pershing. Other revenues consist
primarily of dividends and miscellaneous transaction revenues.
Total costs and expenses for 1997 increased $962.4 million or 31.9% to
$3,979.4 million.
Compensation and benefits increased $369.4 million or 24.0% to
$1,908.2 million. Most of the increase was due to increased variable incentive
and production-related compensation, which resulted from higher revenues and
operating results. 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. Incentive and
production-related compensation increased 22.6%. Full-time personnel increased
1,168 or 19.8% to 7,053 at year-end 1997.
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 Securities acquisition.
As noted below, all other expenses increased $173.0 million or 23.2%
to $918.0 million.
17
Brokerage, clearing, exchange fees and other expenses increased $30.1
million due to increased share volume, underwriting expenses and transaction
fee payments. Occupancy and equipment costs increased $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. and 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 $10.3
million due to expanded facilities and growth in professional staff. All other
operating expenses increased $102.0 million. These expenses include data
processing, professional fees, travel and entertainment, and printing and
stationery, which increased $110.5 million reflecting an overall increase in
business activity and costs for the 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. This increase was offset by lower expenses
on previously underwritten mortgage-related securities, the assets of which
were sold in the fourth quarter of 1997.
The changes in income before income taxes for each industry segment
were: the Banking Group pre-tax income increased $116.0 million primarily as a
result of increased profits in the investment banking area; Capital Markets
Group pre-tax income increased $48.4 million as a result of increased
underwritings in the high yield area offset by losses in institutional
equities; and Financial Services Group pre-tax income increased $15.4 million
due to increased commissions and fees from the Company's asset management
activities.
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 rose $117.0 million or 40.1% to $408.3 million.
Using the treasury stock method diluted earnings per common share were $3.16
for 1997 and $2.30 for 1996.
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. The
collateralized receivables consist primarily of resale agreements and
securities borrowed, both of which are secured by U.S. government and agency
securities, marketable corporate debt and equity securities. In addition, the
Company has significant receivables that turn over frequently from customers,
brokers and dealers. To meet client needs, as a securities dealer, the Company
may carry significant levels of trading inventories. As such, because of
changes in customer needs, economic and market conditions and proprietary
trading strategies, the Company's total assets or the components of total
assets vary significantly from period to period. A relatively small percentage
of total assets is fixed or held for a period of longer than one year. At
December 31, 1998 and 1997, the Company's total assets were $72.3 billion and
$70.5 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 payables to brokers and dealers. Short-term
funding is generally obtained at rates related to Federal funds, LIBOR and
money market rates. Depending upon prevailing market conditions, other
borrowing costs are negotiated. The Company monitors overall liquidity by
tracking the extent to which unencumbered marketable assets exceed short-term
unsecured borrowings.
During 1998, the Company amended its $2.0 billion revolving credit
facility to increase the aggregate commitment of banks thereunder to $2.8
billion, of which $1.7 billion may be unsecured. There were no borrowings
outstanding under this agreement at December 31, 1998.
Certain of the Company's businesses are capital intensive. In addition
to normal operating requirements, capital is required to cover financing and
regulatory requirements 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.
18
During 1998, the Company has been active in raising additional long-term
financing, including the issuance of $650.0 million 6 1/2% Senior Notes, $250.0
million 6% Senior Notes and $350.0 million medium-term notes. In the third
quarter of 1998, a subsidiary of the Company issued non-recourse Senior Secured
and Senior Subordinated Secured Floating Rate Notes in the principal amounts of
$200.0 million and $250.0 million due March 15, 2005 and September 15, 2005,
respectively. At December 31, 1998, a portfolio of investments, primarily
senior bank debt valued at $441.0 million, collateralizes the non-recourse
notes. In addition, in May 1998, the Company repaid its $325.0 million senior
subordinated revolving credit agreement and terminated the related credit
facility.
In January 1998, the Company issued 3.5 million shares of
Fixed/Adjustable Rate Cumulative Preferred Stock, Series B, with a liquidation
preference of $50.00 per share ($175.0 million aggregate liquidation value).
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 under Section 4(2)
("the Securities Act."). The Notes rank pari passu with the Company's other
unsecured and unsubordinated indebtedness. At December 31, 1998, $30.9 million
of Notes were outstanding under this program.
In July 1998, the Company sold an aggregate of five million shares of
newly issued common stock to its parent companies, Equitable and AXA for $300.0
million in a transaction exempt from the registration requirements of the
Securities Act.
On March 17, 1999 the Company filed a Registration Statement with the
Securities and Exchange Commission relating to a proposed initial public
offering of a new class of common stock that will track the performance of
DLJdirect, its online brokerage business.
In March 1999, the Company filed a shelf registration statement,
which enables it to issue, from time to time, up to $2 billion of senior or
subordinated debt securities or preferred stock. In March 1999, the Company
issued $650 million of 5 7/8% Senior Notes due 2002 pursuant to such
registration statement.
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 D-1
Fitch IBCA A F-1
Moody's A3 P-2
Standard & Poors A- A-2
Thomson Bank Watch A+ TBW-1
The Company's principal wholly owned subsidiary, 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 regulate 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, 1998, DLJSC had aggregate
regulatory "net capital," after adjustments required by Rule 15c3-1 under the
Exchange Act, of approximately $1.2 billion, which exceeded minimum net capital
requirements by approximately $1.1 billion and which exceeded the net capital
required by DLJSC's most restrictive debt covenants by $777.0 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 Company are
subject to net capital requirements of their respective regulatory agencies. At
December 31, 1998, 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.
The Company continues to explore potential acquisition opportunities
as a means of expanding its business. Such opportunities may involve
acquisitions which are material in size and may require the raising of
additional capital.
19
CASH FLOWS
- ----------
Years Ended December 31, 1998, 1997 and 1996
- --------------------------------------------
At December 31, 1998, 1997 and 1996 cash and cash equivalents totaled
$1,049.3 million, $273.2 million and $158.8 million, respectively, an increase
of $776.1 million, $114.3 million and $51.1 million, respectively.
Cash used in operating activities totaled $2.4 billion, $5.3 billion
and $1.5 billion in 1998, 1997 and 1996, respectively. In 1998, there were
increases in assets including securities borrowed of $3.4 billion, receivables
from customers of $2.1 billion, and a decrease in financial instruments sold
not yet purchased of $1.5 billion. These changes were offset by an increase in
payables to customers of $1.8 billion and a decrease in financial instruments
owned of $3.3 billion. In 1997, securities borrowed increased $11.2 billion and
receivables from customers increased $1.2 billion. These increases in assets
were offset by increases in operating liabilities including securities loaned
of $5.0 billion, payables to customers of $1.2 billion and financial
instruments sold not yet purchased of $1.0 billion. In 1996, financial
instruments owned increased by $4.9 billion, receivables from brokers, dealers
and other increased by $2.3 billion, and receivables from customers increased
by $0.8 billion. These changes were offset by increases in financial
instruments sold not yet purchased of $2.7 billion, increases in payables to
brokers, dealers and other of $2.5 billion and payables to customers of $1.3
billion.
In 1998, net cash used in investing activities of $334.0 million
consisted primarily of purchases to expand the Company's domestic and
international offices and net purchases of long-term corporate development
investments. In 1997 and 1996, net cash used in investing activities of $216.0
million and $107.0 million, respectively, consisted primarily of purchases to
move the Company's principal offices. Additionally, in 1997, cash was used for
the purchases of long-term corporate development investments. While in 1996
cash was provided from the sales of long-term corporate development
investments.
In 1998, 1997 and 1996, net cash provided by financing activities
totaled $3.5 billion, $5.6 billion, and $1.7 billion, respectively, of which
$1.7 billion, $4.9 billion and $1.2 billion, respectively, was provided by
short-term financings. In 1998, cash of $325.0 million was used to repay the
subordinated revolving credit agreement, while $893.6 million was provided by
issuing senior notes, $349.3 million was provided by issuing medium-term notes,
$450.0 million was provided by issuing senior secured floating rate notes,
$300.0 million was provided from the sale of Common Stock to Equitable/AXA, and
$175.0 million was provided by issuing Series B Preferred Stock. In 1997,
$347.8 million was provided by issuing global floating-rate notes, $359.6
million was provided by issuing medium-term notes and $118.5 million was
provided by a drawdown of 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 issuing medium-term notes, $200.0 million was provided by issuing
mandatorily redeemable preferred securities by the Company's wholly owned
Trust, and $200.0 million was provided by issuing Series A Fixed/Adjustable
Rate Cumulative Preferred Stock.
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, "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
options, forward and futures contracts and swaps. 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 uses derivatives
primarily to provide products to its clients, rather than to cover its own
positions.
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.
20
Options:
--------
The Company writes option contracts specifically designed to meet
customers' needs. Since the Company, not its counterparty, is obligated to
perform, the options do not expose the Company to credit risk. At the beginning
of the contract period, the Company receives a cash premium. During the
contract period, the Company bears the risk of unfavorable changes in the value
of the financial instruments underlying the options ("market risk"). To cover
this market risk, the Company purchases or sells cash or derivative financial
instruments on a proprietary basis. Such purchases and sales may include debt
and equity securities, forward and futures contracts and options. The
counterparties to these purchases and sales are reviewed to determine whether
they are creditworthy. Future cash requirements for options written equal 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.
The notional (contract) value, or the market value for cash
instruments, of the written options was $5.1 billion at year-end 1998 and $5.4
billion at year-end 1997. These options contracts were covered by the following
financial instruments:
December 31,
1998 1997
---- ----
(In millions)
U.S. government, mortgage-backed
securities and options thereon............................... $ 3,396 $ 3,773
Foreign sovereign debt securities................................. 89 73
Forward rate agreements........................................... 38 -
Futures contracts................................................. 76 219
Equities and other................................................ 1,545 1,340
-------- --------
Total.................................................. $ 5,144 $ 5,405
======= =======
Forwards and Futures Trading:
-----------------------------
The Company enters into forward purchases and sales contracts for
mortgage-backed securities and foreign currencies. In addition, the Company
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 is
the price movement on the notional value of the contracts.
For forward contracts, cash is generally not required at inception;
cash equal to the notional value on the contract is required at settlement. For
futures contracts, the original margin is required in cash at inception; cash
equal to the change in market value is required at settlement. Futures contracts
are settled daily.
For the years ended December 31, 1998 and 1997, respectively the
average monthly fair values were approximately $(2.0) million and $(2.0)
million for forward contracts and $(23.0) million and $1.0 million for futures
contracts. At December 31, 1998 and 1997, respectively the receivables from or
payables to brokers, dealers and other captions in the Company's consolidated
statements of financial condition included net unrealized gains (losses) of
approximately $(6.0) million and $6.0 million related to forward contracts and
approximately $3.0 million and $(2.0) million related to futures contracts. For
the years ended December 31, 1998, 1997 and 1996 unrealized gains and losses on
forward and futures contracts are recorded in earnings. Net trading gains
(losses) on forward contracts were $7.0 million, $(5.1) million and $39.0
million and net trading gains (losses) on futures contracts were $(86.0)
million, $(24.0) million and $8.0 million, for the years ended
December 31, 1998, 1997, and 1996 respectively.
21
Off balance sheet values:
December 31,
1998 1997
---- ----
(in millions)
Forward Contracts:
Purchased at notional (contract) value....................... $ 41,254 $ 18,366
Sold at notional (contract) value............................ $ 39,767 $ 27,028
Futures Contracts and Options on Future Contracts:
Purchased at market value.................................... $ 1,184 $ 988
Sold at market value......................................... $ 1,607 $ 2,767
Swaps
-----
The notional (contract) value of swap agreements, consisting primarily
of interest rate and equity swaps, was approximately $8.0 billion and $686.9
million at December 31, 1998 and December 31, 1997, respectively. The notional
or contract amounts indicate the extent of the Company's involvement in the
derivative instruments noted above. They do not measure the Company's exposure
to market or credit risk and do not represent the future cash requirements of
such contracts.
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. At December 31, 1998, in connection with these merchant banking
activities, the Company had investments of $380.7 million and had potential
commitments to invest up to an additional $718.0 million.
Equitable has committed, subject to approval by Equitable on a
transaction-by-transaction basis, to provide $750.0 million of subordinated
debt financing to the DLJ Bridge Fund. The Company has agreed to pay Equitable
the first $25.0 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 $150.0 million. At December 31,
1998, the DLJ Bridge Fund does not have any individual bridge loan outstanding
in excess of $150.0 million. At December 31, 1998, the DLJ Bridge Fund had
extended $295.0 million of short-term bridge loans, which are expected to be
refinanced in the first quarter of 1999.
HIGH-YIELD AND NON-INVESTMENT GRADE SECURITIES
- ----------------------------------------------
The Company underwrites, trades, sells and holds high-yield and
non-investment-grade securities. Non-investment-grade securities are securities
or loans to companies rated BB+ or lower as well as non-rated securities or
loans. Due to credit considerations, liquidity of secondary trading markets and
vulnerability to general economic conditions, these securities generally
involve greater risk than investment-grade holdings. During the third quarter,
the Company's high-yield and non-investment grade holdings were reduced in
response to the volatile market conditions. The Company ceased trading in its
emerging markets proprietary debt trading group in September 1998 and has made
other adjustments to lower its risk profile.
22
The Company records high-yield securities at market value and records
non-investment grade holdings at market or fair value. Unrealized gains and
losses are recognized currently in earnings. Long and short holdings (excluding
derivatives and structured notes) are as follows:
1998 1997
------------------ ------------
Long Short Long Short
---- ----- ---- -----
(in millions)
High-Yield................................. $ 429.3 $ 345.3 $ 645.6 $ 389.6
Senior Bank Debt........................... 1,261.6 - 864.1 -
Foreign Sovereign Debt..................... 423.6 13.8 1,615.4 543.3
Mortgage Whole Loans ...................... 722.3 - 1,555.7 -
Convertible Securities..................... 460.6 8.0 534.8 3.1
Other Non-Investment Grade................. 243.2 21.5 44.4 4.9
---------- --------- ----------- ----------
Totals............................. $ 3,540.6 $ 388.6 $ 5,260.0 $ 940.9
========= ======= ========= =======
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. Each day, the Company monitors its market and counterparty risk
through a number of control procedures designed to identify and evaluate the
various risks to which the Company is exposed. The Company has established an
Independent Risk Oversight function to oversee risk policies and risk
monitoring and management capabilities throughout the firm and coordinate the
risk management practices of the various business groups. This department is
assisted by a Risk Committee comprised of senior professionals from each of the
operating and key administrative groups.
To help senior management manage risk associated with investment
banking and merchant banking transactions the Company has established various
committees. These committees review potential clients and engagements, use
experience with similar clients and situations, analyze credit for certain
commitments and analyze the Company's potential role as a principal investor.
To control the risks associated with its banking activities, various committees
review the details of all transactions before accepting an engagement.
The Company has formed the following committees: 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.
From time to time, the Company invests 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 its own investment committee. These committees decide on all
investments and dispositions with respect to potential and existing portfolio
companies. In addition, each quarter, senior officers of the Company meet to
review merchant banking and corporate development investments. After discussing
the financial and operational aspects of the companies involved, the senior
officers recommend carrying values for each investment to the Finance
Committee. The Finance Committee then reviews such recommendations and
determines fair value.
The Company often acts as principal in customer-related transactions
in financial instruments that 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. As such, to facilitate
customer order flow the Company may be required to maintain certain amounts of
inventories. The Company covers its exposure to market risk by limiting its net
long or short position by selling or buying similar instruments and by using
various derivative financial instruments in the exchange-traded and OTC
markets.
23
Position limits in trading and inventory accounts are established and
monitored continuously. Current and proposed underwriting, corporate
development, merchant banking and other commitments are subject to due diligence
reviews by senior management and by professionals in the appropriate business
and support units involved.
Trading activities generally result in inventory positions. Each day,
position and exposure reports are prepared by operations staff in each of the
business groups engaged in trading activities for traders, trading managers,
department managers, division management and group management. These reports
are independently reviewed by the Company's corporate accounting group. The
corporate accounting group prepares a consolidated summarized position report
listing long and short exposure, and approved limits. The position report is
distributed to various levels of management throughout the Company, including
the Chief Executive Officer, and it enables senior management to control
inventory levels and monitor results of the trading groups. The Company also
reviews and monitors inventory aging, pricing, concentration and securities
ratings.
In addition to position and exposure reports the Company produces a
daily revenue report that 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 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
activities. As of December 31, 1998, the Company's primary market risk
exposures include interest rate risk, credit spread risk and equity price risk.
Interest rate risk results from maintaining inventory positions and trading in
interest rate sensititive financial instruments and arises from various sources
including changes in the absolute and relative level of interest rates,
interest rate volatility, mortgage prepayment rates and the shape of the yield
curves in various markets. To cover its exposure to interest rate risk, the
Company enters into transactions in U.S. government securities, options and
futures and forward contracts designed to reduce the Company's risk profile.
The Company's investment grade and high-yield 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 changes in an issuer's credit rating that affect the value
of financial instruments. Equity price risk results from maintaining inventory
positions and making markets in equity securities and 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. To cover its
exposure to equity price risk, the Company enters into transactions in options
and futures designed to reduce the Company's risk profile.
Value at risk
- -------------
In 1997 the Company developed a Company-wide Value-at-Risk (VAR)
model. This model used a variance-covariance approach with a confidence
interval of 95% and a one-day holding period, based on historical data for one
year. The Company has made changes to the model in the course of 1998. In
response to the volatile and illiquid markets of the third quarter of 1998,
which departed markedly from the normal statistical distributions that underlie
the variance-covariance approach, the Company has estimated VAR by using an
historical simulation model based on two years of weekly historical data, a 95%
confidence interval, and a one-day holding period. The effect of this change in
approach was not material.
24
The VAR number is the statistically expected maximum loss on the fair
value of the Company's market sensitive instruments for 19 of 20 trading days.
In other words, on one of 20 trading days, the loss is expected to be
statistically greater than the VAR number. However, the model does not indicate
how much greater.
VAR models are 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 VAR
model has been specifically tailored for the Company's risk management needs
and risk profile.
The VAR model includes the following limitations: (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) all inherent market risks
cannot be perfectly modeled, and (4) correlations between market movements can
vary, particularly in times of market stress.
The Company believes that a Company-wide VAR analysis is an important
advance in risk management, but it is aware of the limitations inherent in any
statistical analysis. Because a VAR model alone is not a sufficient tool to
measure and monitor market risk, 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.
At December 31, 1998 and December 31, 1997 the Company-wide VAR for
trading was approximately $22.0 million and $11.0 million, respectively. The
Company-wide VAR for non-trading market risk sensitive instruments is not
separately disclosed because the amount is not significant. Due to the benefit
of diversification the Company-wide VAR is less than the sum of the individual
components. At December 31, 1998 and December 31, 1997 the three main
components of market risk, expressed in terms of theoretical fair values, had
the following VAR:
December 31,
1998 1997
------------- ---------
(In millions)
Trading:
Interest rate risk...................... $ 16 $ 8
Equity risk............................. $ 11 $ 8
Foreign currency exchange risk.......... $ - $ 1
..................
The increase in value at risk in 1998 over 1997 is due largely to the
dramatic increase in volatility across a broad range of financial instruments.
Credit risk
- -----------
Credit risk related to various financing activities is reduced by the
industry practice of obtaining and maintaining collateral. Each day the Company
monitors its exposure to counterparty risk through the use of credit exposure
information and monitoring collateral values.
To establish appropriate exposure limits for a variety of
transactions, all counterparties are reviewed on a periodic basis. Specific
transactions are analyzed to assess the potential exposure and the
counterparty's credit is reviewed to determine whether it supports such
exposure. The Company also analyzes market movements that could affect exposure
levels. To determine trading limits the Company considers four main factors:
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 its credit exposure by
performing the following activities: enters into master netting agreements when
feasible; monitors the creditworthiness of counterparties and the related
trading limits on an ongoing basis and requests additional collateral when
deemed necessary; diversifies and limits exposure to individual counterparties
and geographic locations; and limits the duration of exposure. To mitigate
credit risks, in certain cases, the Company may also close out transactions or
assign them to other counterparties when deemed necessary or appropriate.
25
YEAR 2000
- ---------
The Company has been actively engaged in addressing Year 2000 issues.
Such issues relate to potential problems resulting from non-Year 2000 compliant
systems processing transactions using two-digit date fields rather than four
digit date fields for the year of a transaction. 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 effect on the Company's business.
As a result of the Company's recent expansion, entry into new product
markets and move to its new corporate headquarters, many of the Company's
communications and data processing systems are Year 2000 compliant. However,
the Company, has undertaken a Year 2000 Project to identify and modify any
non-Year 2000 compliant systems. The Year 2000 Project is the Company's highest
priority. The Year 2000 Project is decentralized by functional area and is
focused on both information technology and non-information technology systems.
A written Year 2000 Plan has been developed for each unit (Business Units and
Administrative Units) and the units are responsible for all steps necessary to
ensure that their respective assets and systems are Year 2000 compliant. The
Year 2000 Project is overseen by two Project Management Offices: one for the
Company's correspondent clearance business and the other responsible for the
Company's remaining functional units. The Project Managers report to a Steering
Committee, comprised of Senior Business Managers, which in turn reports to the
Company's Chief Financial Officer and Chief Executive Officer. The Company has
also retained the services of several consulting firms having considerable
expertise in advising corporations on Year 2000 issues.
As of December 31, 1998, the Company has inventoried all systems,
identified mission critical systems (those systems where loss of their function
would result in an immediate stoppage or significant impairment to core
business areas) and determined which of these systems are not Year 2000
compliant. By the end of the first quarter of 1999 the Company's correspondent
clearance business expects to renovate, test and return all of its non-Year
2000 compliant applications to production after remediation has been completed.
With respect to the rest of the Company's systems, by the first quarter of
1999, all mission critical systems are expected to be renovated, implemented
and tested. The same process will be performed for non-critical systems and is
expected to be completed by the second quarter of 1999. None of the Company's
other major information technology projects have been affected significantly
due to the implementation of the Year 2000 Project.
The Company has identified all significant third parties, such as
fiduciary agents, vendors, custodial banks, correspondents and facility
operators, and has contacted them regarding their Year 2000 readiness. All such
parties have assured the Company that they are taking the necessary steps to
prepare for the Year 2000.
The Company has initiated and is actively involved in various types of
testing including the Securities Industry Association's industry-wide beta
testing, electronic file testing with correspondents and vendor-supplied
business applications testing. For each of the tests in which it has
participated, the Company has achieved successful results. Throughout 1999,
internal and external systems will continue to be tested to ensure that all
remediated systems remain compliant.
Costs
- -----
The total cost to ensure that the Company's systems are Year 2000
compliant is not expected to be material to the Company's financial position.
Based upon current information, the total cost of the Year 2000 project is
currently estimated to be between $85 and $90 million, which has been approved
by the Board of Directors of the Company. Based on progress to date, the
current funding level has been found to be adequate. More than half of the Year
2000 budget is allocated to renovate and test applications. The budget includes
Year 2000 compliance testing, full system testing, peer to peer testing with
industry agencies, correspondents and third party vendors and other
industry-wide testing. The budget also includes developing a contingency plan.
Costs related to the Year 2000 project are expensed as incurred. At December
31, 1998, costs since inception totaled $77.0 million. The cost of the project
is being funded by operations.
26
Risks
- -----
The Year 2000 issue includes many risks including the possibility that
the Company's computer and non-information technology systems will fail. The
Company cannot ensure that the schedule for compliance outlined above will be
met or that the systems of other companies on which the Company depends will be
timely converted. Due to this uncertainty, the Company is unable to determine
whether the Year 2000 will have a material impact on the Company's business,
results of operations or financial condition. If the Year 2000 risks are not
remedied, the Company may experience business interruption or shutdown,
financial loss, regulatory actions, damage to the Company's global franchise
and legal liability. However, the Year 2000 Project is expected to reduce
significantly the Company's level of uncertainty regarding the Year 2000
readiness of internal and third-party systems. The Company believes that with
the completion of the Project as scheduled, the possibility of significant
interruptions of normal operations as a result of the Year 2000, should be
reduced.
Contingencies
- -------------
The Company's action plan is designed to safeguard the interests of
the Company and its customers; however, except as discussed below, a formal
contingency plan does not exist. The Company is assessing contingency
requirements and by the end of the second quarter of 1999 will develop a
contingency plan. DLJ' s correspondent clearance business has a written general
contingency plan, which covers a variety of independent events that may require
recovery/contingency plans, including Year 2000 system failures. To enhance
this plan, Year 2000-specific scenarios are being developed.
To the fullest extent permitted by law, the foregoing discussion is a
"Year 2000 Readiness Disclosure" within the meaning of the Year 2000
Information and Readiness Disclosure Act 105 P.L. 271.
Forward looking statements contained under "YEAR 2000" above should be
read in conjunction with the Company's disclosure under the heading "FORWARD
LOOKING STATEMENTS" below.
RECENT ACCOUNTING DEVELOPMENTS
- ------------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which requires all derivatives to be recognized in the statement of financial
condition at fair value. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999 and should be applied prospectively. Earlier application is
permitted. Since most of the Company's derivatives are carried at fair value,
the adoption of this statement is not expected to have a material impact on the
Company's results of operations or its consolidated statement of financial
condition.
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, as well as its
strategic objectives, including, without limitation, global expansion. Such
forward looking statements are subject to various risks and uncertainties and
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, which is affected by, among other things, the availability
of capital, the level and volatility of interest rates and the uncertainties of
the global and U.S. economies, (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
27
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, (x) the
effect of any future acquisitions, (xi) the risks associated with Year 2000
issues, including failure to meet the schedule for Year 2000 compliance, the
uncertainty surrounding Year 2000 readiness of third parties, and increased
costs associated with the implementation of the Year 2000 project and (xii)
factors that may affect the timeliness of Year 2000 compliance include the
ability to locate, correct and successfully test all relevant computer code
according to schedule, the continued availability of certain resources
including personnel, timely responses and corrections by third-parties and
suppliers and the compatibility of new systems with those systems not being
replaced.
28
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 23-28 of this
document.
29
[KPMG LOGO]
345 Park Avenue
New York, NY 10154
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, 1998
and 1997, 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, 1998, 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, 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 LLP
February 2, 1999
except as to footnote 19, which is as of March 17, 1999
30
[LOGO]
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(In thousands, except share and per share data)
December 31, December 31,
1998 1997
---- ----
ASSETS
Cash and cash equivalents.................................................... $ 1,049,253 $ 273,164
Cash and securities segregated for regulatory purposes or deposited with
clearing organizations.................................................... 1,043,225 832,093
Collateralized short-term agreements:
Securities purchased under agreements to resell........................... 20,063,348 22,628,782
Securities borrowed....................................................... 23,967,639 20,598,639
Receivables:
Customers................................................................. 6,523,568 4,397,668
Brokers, dealers and other................................................ 3,773,251 3,162,970
Financial instruments owned, at value:
U.S. government and agency................................................ 5,973,394 6,834,996
Corporate debt............................................................ 4,441,492 5,577,023
Foreign sovereign debt.................................................... 423,736 1,624,235
Mortgage whole loans...................................................... 722,284 1,555,685
Equities and other........................................................ 1,634,201 943,782
Long-term corporate development investments............................... 473,756 315,774
Office facilities, at cost, (net of accumulated depreciation and amortization
of $297,959 and $216,230, respectively)................................... 450,706 388,677
Other assets and deferred amounts ........................................... 1,742,383 1,372,357
-------------- --------------
Total Assets................................................................. $ 72,282,236 $ 70,505,845
============ ============
See accompanying notes to consolidated financial statements.
31
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(In thousands, except share and per share data)
December 31, December 31,
1998 1997
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper and short-term borrowings...................................... $ 515,646 $ 1,121,352
Collateralized short-term financings:
Securities sold under agreements to repurchase.............................. 35,775,580 36,006,656
Securities loaned........................................................... 7,322,186 7,687,416
Payables:
Customers................................................................... 6,847,046 5,071,653
Brokers, dealers and other.................................................. 3,053,337 2,912,218
Financial instruments sold not yet purchased, at value:
U.S. government and agencies................................................ 5,935,629 7,671,498
Corporate debt.............................................................. 523,909 854,155
Foreign sovereign debt...................................................... 40,744 553,852
Equities and other.......................................................... 2,438,667 1,376,395
Accounts payable and accrued expenses........................................... 2,282,413 2,119,131
Other liabilities............................................................... 937,377 741,870
--------------- ---------------
65,672,534 66,116,196
Long-term borrowings............................................................ 3,482,003 2,128,159
-------------- --------------
Total liabilities...................................................... 69,154,537 68,244,355
------------- -------------
Company-obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely debentures of the Company................ 200,000 200,000
--------------- ---------------
Stockholders' Equity:
Preferred stock, 50,000,000 shares authorized:
Series A Preferred Stock, at $50.00 per share liquidation
preference (4,000,000 shares issued and outstanding)................... 200,000 200,000
Series B Preferred Stock, at $50.00 per share liquidation
preference (3,500,000 shares issued and outstanding).................. 175,000 -
Common stock ($0.10 par value; 300,000,000 shares
authorized; 122,812,558 and 111,852,762 shares issued
and outstanding, respectively)........................................... 12,281 11,185
Restricted stock units (10,358,294 units authorized; 2,082,236
and 6,562,414 units issued and outstanding, respectively)................ 21,333 67,255
Paid-in capital............................................................. 858,066 440,926
Retained earnings........................................................... 1,657,710 1,338,220
Accumulated other comprehensive income...................................... 3,309 3,904
Employee deferred compensation stock trust.................................. 12,329 12,061
Common stock issued to employee deferred compensation trust................. (12,329) (12,061)
--------------- ---------------
Total stockholders' equity............................................. 2,927,699 2,061,490
-------------- --------------
Total Liabilities and Stockholders' Equity...................................... $ 72,282,236 $ 70,505,845
============ ============
See accompanying notes to consolidated financial statements.
32
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands, except per share data)
Years Ended December 31,
1998 1997 1996
---- ---- ----
Revenues:
Commissions........................................................ $ 854,679 $ 690,156 $ 573,335
Underwritings...................................................... 1,077,712 905,607 755,627
Fees............................................................... 1,191,655 767,259 469,986
Interest, net of interest to finance U.S. government,
agency and mortgage-backed securities of $3,045,391,
$2,859,042 and $2,132,593, respectively.......................... 2,189,108 1,652,135 1,074,223
Principal transactions-net:
Trading.......................................................... (92,782) 363,190 393,938
Investment....................................................... 126,031 194,527 162,975
Other.............................................................. 60,639 67,595 60,672
------------ ------------- ------------
Total revenues.................................................. 5,407,042 4,640,469 3,490,756
---------- ----------- ----------
Costs and Expenses:
Compensation and benefits.......................................... 2,231,655 1,908,201 1,538,754
Interest........................................................... 1,455,851 1,153,167 733,207
Brokerage, clearing,
exchange fees and other.......................................... 258,625 231,402 201,292
Occupancy and equipment............................................ 269,975 189,915 159,330
Communications..................................................... 89,793 63,965 53,657
Other operating expenses........................................... 500,643 432,719 330,716
----------- ------------ -----------
Total costs and expenses........................................ 4,806,542 3,979,369 3,016,956
---------- ---------- ----------
Income before provision for income taxes............................... 600,500 661,100 473,800
----------- ------------ -----------
Provision for income taxes............................................. 229,700 252,850 182,500
----------- ------------ -----------
Net income............................................................. $ 370,800 $ 408,250 $ 291,300
========== =========== ==========
Dividends on preferred stock........................................... $ 21,310 $ 12,144 $ 18,653
=========== ============ ===========
Earnings applicable to common shares................................... $ 349,490 $ 396,106 $ 272,647
========== =========== ==========
Earnings per common share:
Basic............................................................. $ 2.93 $ 3.59 $ 2.56
============ ============= ============
Diluted........................................................... $ 2.65 $ 3.16 $ 2.30
============ ============= ============
Weighted average common shares outstanding:
Basic............................................................. 119,260 110,318 106,600
=========== ============ ===========
Diluted........................................................... 131,980 125,498 118,712
=========== ============ ===========
See accompanying notes to consolidated financial statements.
33
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1996, 1997n and 1998
(In thousands, except per share data)
Restricted
Preferred Common Stock Paid-in Retained
Stock Stock Units Capital Earnings
------- -------- ----------- ------- ----------
Balances at December 31, 1995.......... $ 0 $ 10,659 $ 106,163 $ 358,664 $ 723,859
Net income............................. - - - - 291,300
Translation adjustment................. - - - - -
Total comprehensive income.......... - - - - -
Dividends:
Common stock ($0.25 per share)....... - - - - (26,650)
Preferred stock ($8.29 per share).... - - - - (18,653)
Forfeiture of restricted stock units... - - (1,996) 1,996 -
Issuance of Series A Preferred stock... 200,000 - - - -
--------- ------------ -------------- -------------- --------------
Balances at December 31, 1996.......... 200,000 10,659 104,167 360,660 969,856
Net income............................. - - - - 408,250
Translation adjustment................. - - - - -
-
Total comprehensive income..........
Dividends:
Common stock ($0.25 per share)....... - - - - (27,742)
Preferred stock ($3.036 per share)... - - - - (12,144)
Forfeiture of restricted stock units... - - (156) 156 -
Conversion of restricted stock
units to common stock............... - 358 (36,756) 45,041 -
Conversion of debentures............... - 138 - 28,641 -
Exercise of stock options.............. - 30 - 6,428 -
--------- ------------ -------------- -------------- --------------
Balances at December 31, 1997.......... 200,000 11,185 67,255 440,926 1,338,220
Net income............................. - - - - 370,800
Translation adjustment................. - - - - -
Total comprehensive income..........
Dividends:
Common stock ($0.25 per share)....... - - - - (30,000)
Preferred stock ($2.84 per share).... - - - - (21,310)
Issuance of Series B Preferred Stock... 175,000 - - - -
Sale of common stock to Equitable/AXA..
- 500 - 299,500 -
Exercise of stock options.............. - 148 - 37,840 -
Conversion of restricted stock
units to common stock............... - 448 (45,890) 70,870 -
Forfeiture of restricted stock units... - - (32) 32 -
Tax benefit on distribution of
employee stock trust................ - - - 8,898 -
--------- ------------ -------------- -------------- --------------
Balances at December 31, 1998..........$ 375,000 $ 12,281 $ 21,333 $ 858,066 $ 1,657,710
========= ======== ======== ========= ===========
Accumulated
Other
Comprehensive
Income Total
------ -------
Balances at December 31, 1995.......... $ (625) $ 1,198,720
Net income............................. - 291,300
Translation adjustment................. 2,522 2,522
Total comprehensive income.......... - 293,822
Dividends:
Common stock ($0.25 per share)....... - (26,650)
Preferred stock ($8.29 per share).... - (18,653)
Forfeiture of restricted stock units... - -
Issuance of Series A Preferred stock... - 200,000
--------- ------------
Balances at December 31, 1996.......... 1,897 1,647,239
Net income............................. - 408,250
Translation adjustment................. 2,007 2,007
Total comprehensive income.......... 410,257
Dividends:
Common stock ($0.25 per share)....... - (27,742)
Preferred stock ($3.036 per share)... - (12,144)
Forfeiture of restricted stock units... - -
Conversion of restricted stock
units to common stock............... - 8,643
Conversion of debentures............... - 28,779
Exercise of stock options.............. - 6,458
--------- ------------
Balances at December 31, 1997.......... 3,904 2,061,490
Net income............................. - 370,800
Translation adjustment................. (595) (595)
Total comprehensive income.......... 370,205
Dividends:
Common stock ($0.25 per share)....... - (30,000)
Preferred stock ($2.84 per share).... - (21,310)
Issuance of Series B Preferred Stock... - 175,000
Sale of common stock to Equitable/AXA..
- 300,000
Exercise of stock options.............. - 37,988
Conversion of restricted stock
units to common stock............... - 25,428
Forfeiture of restricted stock units... - -
Tax benefit on distribution of
employee stock trust................ - 8,898
-------- ------------
Balances at December 31, 1998.......... $ 3,309 $ 2,927,699
======= ===========
34
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Years Ended December 31,
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net income......................................................... $ 370,800 $ 408,250 $ 291,300
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization................................... 84,802 61,428 53,831
Deferred taxes.................................................. 27,943 (134,233) (120,022)
Decrease in net unrealized (depreciation) appreciation of
long-term corporate development investments................... (8,939) (34,524) 50,283
------------- ------------- ------------
474,606 300,921 275,392
(Increase) decrease in operating assets:
Cash and securities segregated for regulatory
purposes or deposited with clearing organizations............. (211,132) 4,313 (381,936)
Securities purchased under agreements to resell.. 5,463,657 (4,622,196) 9,191
Securities borrowed............................................. (3,369,000) (11,243,155) (310,574)
Receivables from customers...................................... (2,125,900) (1,228,375) (813,320)
Receivables from brokers, dealers and other..................... (610,281) 921,011 (2,342,428)
Financial instruments owned, at value........................... 3,340,614 (807,663) (4,906,785)
Other assets and deferred amounts............................... (359,115) (179,958) (147,335)
Increase (decrease) in operating liabilities:
Securities sold under agreements to repurchase... (5,463,657) 4,622,196 (9,191)
Securities loaned............................................... (365,230) 4,962,643 100,560
Payables to customers........................................... 1,775,393 1,173,836 1,336,559
Payables to brokers, dealers and other............................ 141,119 (946,845) 2,511,614
Financial instruments sold not yet purchased, at value.......... (1,516,951) 1,014,230 2,737,243
Accounts payable and accrued expenses........................... 163,282 397,876 323,790
Other liabilities............................................... 245,320 310,230 89,551
Translation adjustment............................................ (595) 2,007 2,522
---------------- -------------- ----------------
Net cash used in operating activities................................ $(2,417,870) $ (5,318,929) $ (1,525,147)
----------- ------------ ------------
See accompanying notes to consolidated financial statements.
35
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Years Ended December 31,
1998 1997 1996
---- ---- ----
Cash flows from investing activities: Net (payments for) proceeds from:
Purchases of long-term corporate development investments........... $ (347,033) $ (194,777) $ (87,600)
Sales of long-term corporate development investments............... 197,990 117,930 117,412
Office facilities.................................................. (145,742) (162,568) (142,597)
Other assets....................................................... (39,217) 23,375 5,818
-------------- ----------- --------------
Net cash used in investing activities.................................. (334,002) (216,040) (106,967)
------------- ---------- ------------
Cash flows from financing activities: Net proceeds from (payments for):
Short-term financings.............................................. 1,728,652 4,854,182 1,187,338
Senior notes....................................................... 893,552 - -
Medium-term notes.................................................. 349,337 359,646 249,515
Subordinated revolving credit agreement............................ (325,000) 118,500 (43,500)
Senior secured floating rate notes................................. 450,000 - -
Global floating rate notes......................................... 448 347,760 -
Other long-term debt............................................... (14,493) (13,753) (2,858)
Convertible debentures............................................. - 18,779 43,500
Swiss Franc Bonds.................................................. - - (105,513)
Dividends.......................................................... (51,310) (39,886) (45,303)
Issuance of Company obligated mandatorily redeemable preferred
securities...................................................... - - 200,000
Sale of common stock to Equitable/AXA.............................. 300,000 - -
Issuance of Series A Preferred Stock............................... - - 200,000
Issuance of Series B Preferred Stock............................... 175,000 - -
Exercise of stock options.......................................... 21,775 4,074 -
--------------- -------------- -----------------
Net cash provided by financing activities.............................. 3,527,961 5,649,302 1,683,179
------------ ----------- ---- -----------
Increase in cash and cash equivalents.................................. 776,089 114,333 51,065
Cash and cash equivalents at beginning of year........................ 273,164 158,831 107,766
------------- ----------- ------------
Cash and cash equivalents at end of year.............................. $ 1,049,253 $ 273,164 $ 158,831
=========== ========== ===========
See accompanying notes to consolidated financial statements.
36
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
1. Summary of Significant Accounting Policies
------------------------------------------
The consolidated financial statements include Donaldson, Lufkin & Jenrette,
Inc. and its subsidiaries (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 in 1985 when Equitable acquired the
Company.
The Company is a leading, integrated investment and merchant bank serving
institutional, corporate, government and individual clients. The Company's
businesses include securities underwriting; sales and trading; investment and
merchant banking; financial advisory services; investment research; venture
capital; correspondent brokerage services; online, interactive brokerage
services; and asset management.
To prepare consolidated financial statements in conformity with generally
accepted accounting principles ("GAAP"), management must estimate certain
amounts that affect the reported assets and liabilities, disclosure of
contingent assets and liabilities, and reported revenues and expenses. 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 that approximate fair value because of
their short-term nature. Fair value is estimated at a specific point in time,
based on relevant market information or the value of the underlying financial
instrument. These estimates do not generally 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.
Cash equivalents include 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.
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 that reflect the
amounts at which the securities will be subsequently repurchased or resold.
Interest on such contract amounts is accrued and is included in the
accompanying consolidated statements of financial condition in receivables from
and payables to brokers, dealers and other. The Company takes possession of the
assets purchased under agreements to resell and obtains additional collateral
when the market value falls below the contract value. In the consolidated
financial statements, repurchase and resale agreements are presented net if
they are with the same counterparty, have the same maturity date, settle
through the Federal Reserve system, and are subject to master netting
agreements.
Securities borrowed and securities loaned are financing arrangements that are
recorded at the amount of cash collateral advanced or received. For securities
borrowed, the Company deposits cash, letters of credit or other collateral with
the lender. For securities loaned, the Company receives collateral in cash or
other collateral that exceeds the market value of securities loaned. Each day,
the Company monitors the market value of securities borrowed and loaned and
obtains or refunds additional collateral, as necessary.
Receivables from and payables to customers include amounts due on cash and
margin transactions. For receivables, securities owned by customers are held as
collateral. Such collateral is not reflected in the consolidated financial
statements.
U.S. government and agency securities, mortgage-backed securities, options,
forward and futures 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, if significant,
adjustments are made to a trade date basis.
37
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
Other than long-term corporate development investments and senior bank debt,
financial instruments owned 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 principal transactions-net,
trading revenues, in the consolidated statements of income.
To the extent that the Company has surrendered control, transfers of financial
assets are accounted for as sales.
Long-term corporate development investments represent the Company's involvement
in private debt and equity investments. These investments generally have no
readily available market or may be otherwise restricted as to resale under the
Securities Act of 1933; therefore, 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 $472.3 million at year-end 1998 and $323.2
million at year-end 1997. In 1998 net unrealized appreciation of long-term
corporate development investments increased $8.9 million. In 1997 and 1996, the
decrease in net unrealized appreciation (depreciation) amounted to $(34.5)
million and $50.3 million, respectively. Changes in net unrealized appreciation
(depreciation) arising from changes in fair value or upon realization are
reflected in principal transactions-net, investment revenues in the
consolidated statements of income.
Office facilities 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.
Changes in unrealized gains and losses, as well as realized gains and losses at
settlement on all derivative instruments (options, forward and futures
contracts and swaps), are included in principal transactions-net, trading
revenues, in the consolidated statements of income. Related offsetting amounts
are included in receivables from or payables to brokers, dealers and other in
the consolidated statements of financial condition. Fair value of options
includes any deferred unamortized premiums. 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.
Swap transactions entered into for non-trading purposes to modify the interest
rate and foreign currency exposure associated with certain assets and
liabilities are accounted for on an accrual basis. Under the accrual basis, the
net amount to be received or paid is accrued as part of interest expense in the
consolidated statements of income. Cash flows from derivative instruments are
included as operating activities in the consolidated statements of cash flows.
Assets and liabilities of foreign subsidiaries denominated in foreign
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. Gains and losses from
translating foreign currency financial statements into U.S. dollars are
included as a separate component of stockholders' equity. Gains and losses from
foreign currency transactions are included in the consolidated statements of
income.
Effective January 1, 1997, Equitable's ownership for tax purposes declined to
less than 80%; therefore, the Company files its own U.S. consolidated Federal
income tax return.
All liabilities related to postretirement and postemployment benefits have been
provided for and the related costs are not significant.
38
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
The Company accounts for stock-based compensation related to stock options in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees",
and accordingly, does not recognize any compensation cost associated with such
plans in the consolidated financial statements. In accordance with SFAS No.
123, "Accounting for Stock-Based Compensation", the Company provides pro forma
net income and pro forma earnings per share disclosures for employee stock
option grants as if the fair-value-based method had been applied.
Basic and diluted earnings per common share amounts are calculated by dividing
earnings applicable to common shares (net income less preferred dividends) by
the weighted average common shares outstanding. Basic earnings per share
excludes the dilutive effects of stock options, non-vested restricted stock
units and convertible debt. Diluted earnings per share reflects all potentially
dilutive securities.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
requires all derivatives to be recognized in the consolidated statements of
financial condition at fair value. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999 and should be applied prospectively. Since most
of the Company's derivatives are currently carried at fair value, the adoption
of this statement is not expected to have a material effect on the Company's
results of operations or its consolidated statements of financial condition.
To conform to the 1998 presentation, certain reclassifications have been made
to prior year consolidated financial statements.
2. Common Stock Split
------------------
In February 1998, the Board of Directors declared a two-for-one stock split
(the "stock split") of the Company's common stock, subject to stockholder
approval to increase the number of authorized common shares. In April 1998,
stockholders approved an amendment to the Company's Certificate of
Incorporation, which increased the number of total authorized shares of common
stock to 300 million and the number of total authorized shares of preferred
stock to 50 million. The stock split was effected in the form of a 100% stock
dividend to stockholders of record on April 27, 1998, and was paid on May 11,
1998. The par value of the common stock remained at $0.10 per share. To
preserve the value of the post-split shares, an adjustment was made from
paid-in capital to common stock. In the accompanying consolidated financial
statements all common share, per common share, restricted stock unit and option
data have been restated for the effect of the stock split.
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 $750.0 million DLJ Bridge Fund ("the Bridge
Fund"), which is funded by a commitment from Equitable. The Bridge Fund
provides short-term loans in connection with the Company's merchant banking and
financial advisory businesses. The Bridge Fund has a commitment of subordinated
debt from Equitable for the total amount of the loans. Any loans made by the
Bridge Fund would be expected to be refinanced, and the outstanding amounts
repaid, within a short-term period. At December 31, 1998, the Bridge Fund had
extended $295.0 million of short-term bridge loans.
For the years ended December 31, 1998, 1997 and 1996, dividends on common stock
paid or accrued to Equitable were $21.7 million, $21.3 million and $21.4
million, respectively.
39
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
4. Cash and Securities Segregated Under Federal and Other Regulations
------------------------------------------------------------------
Cash of $13.7 million at December 31, 1997 and securities with a market value
of $883.0 million and $711.0 million at December 31, 1998 and 1997,
respectively were segregated in special reserve bank accounts to benefit
customers in accordance with regulations of the Securities and Exchange
Commission and the Commodities Futures Trading Commission.
5. Borrowings
----------
Short-term borrowings are generally demand obligations with interest
approximating Federal fund rates. Such borrowings are generally used to
facilitate the securities settlement process, to finance securities
inventories, and to finance securities purchased by customers on margin. At
December 31, 1998 there were no borrowings secured by Company-owned securities.
At December 31, 1997, certain of these borrowings were secured by Company-owned
securities aggregating $190.5 million.
Short-term borrowings and repurchase agreements:
Weighted Average
Interest Rates
December 31, December 31,
1998 1997 1998 1997
---- ---- ---- ----
(In millions)
Securities sold under repurchase agreements................ $ 35,776 $ 36,007 4.89% 6.04%
Bank loans................................................. $ 391 $ 988 5.79% 6.57%
Borrowings from other financial institutions............... $ 125 $ 133 5.72% 6.21%
In January 1998, the Company introduced a $1.0 billion commercial paper
program. Obligations issued under this program (the "Notes") are exempt from
registration under the Securities Act of 1933, as amended under Section 4(2)
(the "Securities Act"). At December 31, 1998, $30.9 million of notes were
outstanding under this program.
Long-term borrowings:
December 31,
1998 1997
---------- -------
(In thousands)
Senior notes 6%-6.875%, due various dates through 2008........................ $ 1,391,036 $ 497,484
Medium-term notes 5.402% - 6.90%, due various dates through 2016.............. 1,046,647 697,310
Senior subordinated revolving credit agreement, due 2000...................... - 325,000
Senior secured floating rate notes, due 2005.................................. 450,000 -
Global floating rate notes, due 2002.......................................... 348,357 347,909
Subordinated exchange notes 9.58%, due 2003................................... 225,000 225,000
Other......................................................................... 20,963 35,456
-------------- --------------
Total long-term borrowings............................................... $ 3,482,003 $ 2,128,159
=========== ===========
Current maturities............................................................ $ 100,973 $ 1,623
============ ==============
For the years ended December 31, 1998, 1997 and 1996, interest paid on all
borrowings and financing arrangements was $4.6 billion, $3.9 billion and $2.8
billion, respectively.
40
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
Scheduled maturities of long-term borrowings are as follows:
December 31,
1998 1997
---------- -------
(In thousands)
1998................................ $ - $ 1,623
1999................................ 100,973 153
2000................................ 189,987 514,926
2001................................ 369,265 33,610
2002................................ 358,348 357,897
2003................................ 374,397 225,000
2004-2016........................... 2,089,033 994,950
----------- -------------
$ 3,482,003 $ 2,128,159
=========== ===========
In connection with its 1998 and 1997 financings, the Company:
1998
- ----
Issued an initial $175.0 million Fixed/Adjustable Rate Cumulative Preferred
Stock, Series B, from the $300.0 million shelf established in 1997.
Issued $650.0 million of 6.5% Senior Notes that mature in 2008 and $350.0
million Medium-Term Notes with interest ranging from 5.402% - 6.28% that mature
at various dates through 2003.
Issued $250.0 million of 6% Senior Notes that mature in 2001 from the $1.0
billion shelf established in 1997. To convert these fixed rate notes into
floating rate notes based upon the London Interbank Offered Rate ("LIBOR"), the
Company entered into interest rate swap transactions.
Issued Senior Secured and Senior Subordinated Secured Floating Rate Notes for
$200.0 million and $250.0 million, due March 15, 2005 and September 15, 2005,
respectively. These notes are collateralized by a portfolio of investments,
primarily senior bank debt valued at $441.0 million. Senior bank debt consists
of interests in senior corporate debt, including term loans, revolving loans
and other corporate debt.
Amended the $2.0 billion revolving credit facility to increase the aggregate
commitment of banks thereunder to $2.8 billion, of which $1.7 billion may be
unsecured. At year-end 1998, no borrowings were outstanding under this
agreement.
Repaid the $325.0 million senior subordinated revolving credit agreement and
terminated the related credit facility.
1997
- ----
Borrowed an additional $118.5 million under its senior subordinated revolving
credit agreement and extended the maturity date to January 30, 2000. Interest
is based on LIBOR and was 6.69% at year-end 1997 and 6.38% at year-end 1996.
Established a $300.0 million Medium-Term Note program. At year-end 1997, $200.0
million was outstanding with a weighted average interest rate of 6.48%. To
convert $190.0 million of such fixed rate notes into floating rate notes based
upon LIBOR, the Company entered into interest rate swap transactions. At
year-end 1997, the weighted average effective interest rate on these notes was
6.08 %.
41
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
Established a $1.0 billion senior or subordinated debt securities shelf
registration, under which up to $500.0 million can be offered as Medium-Term
Notes due nine months or more from the date of issuance. At year-end 1997,
notes outstanding under this registration included $150.0 million at a fixed
rate of 6.90% and $100.0 million at a floating rate of 6.28% based upon LIBOR.
Using interest rate swaps, these floating rate notes were converted into fixed
rate notes at 6.94%.
Issued $350.0 million of Global Floating Rate Notes with interest at a floating
rate equal to LIBOR plus 0.25%. These notes mature in 2002 and can be redeemed
by the Company in whole or in part on any interest payment date on or after
September 2000.
Completed a shelf registration to offer up to $300.0 million of senior or
subordinated debt securities or preferred stock.
Repaid in full $88.0 million 7.88% Medium-Term Notes plus accrued interest.
Replaced several individual credit facilities aggregating $1.9 billion with a
$2.0 billion revolving credit facility, of which $1.0 billion may be unsecured.
At year-end 1997, no borrowings were outstanding under this agreement.
6. Income Taxes
------------
Income taxes included in the consolidated statements of income include the
following:
December 31, December 31, December 31,
1998 1997 1996
---------------------------------------------------
(In thousands)
Current:
U.S. Federal.................................... $ 128,980 $ 299,091 $ 222,225
Foreign......................................... 45,701 25,131 16,045
State and local................................. 27,076 62,861 64,252
----------- ----------- -----------
Total current...................................... 201,757 387,083 302,522
---------- ---------- ----------
Deferred:
U.S. Federal.................................... 19,019 (117,622) (88,970)
State and local................................. 8,924 (16,611) (31,052)
----------- ------------ -----------
Total deferred..................................... 27,943 (134,233) (120,022)
---------- ----------- ----------
Total provision for income taxes................... $ 229,700 $ 252,850 $ 182,500
========= ========== =========
42
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
The following summarizes the difference between the "expected" tax provision,
which is computed by applying the statutory tax rate to income before provision
for income taxes, and the effective provision for income taxes, which is
computed by using the effective tax rate:
1998 1997 1996
------------------ ------------------- ------------------
Percent Percent Percent
of of of
Pre-tax Pre-tax Pre-tax
Amount Income Amount Income Amount Income
------ ------ ------ ------ ------ ------
(In thousands) (In thousands) (In thousands)
Computed "expected"
tax provision........... $ 210,175 35.0% $ 231,385 35.0% $ 165,830 35.0%
Non-taxable income
and expense items....... (3,875) (0.6) (8,598) (1.3) (4,910) (1.1)
State and local taxes,
net of related Federal
income tax benefit...... 23,400 3.9 30,063 4.5 21,580 4.6
----------- -------- ----------- -------- ----------- -----
Provision for income taxes.. $ 229,700 38.3% $ 252,850 38.2% $ 182,500 38.5%
========= ====== ========= ====== ========= =====
Deferred tax assets and deferred tax liabilities are generated by the following
temporary differences:
1998 1997
---------- ----------
(In thousands)
Deferred tax assets:
Inventory................................ $ 1,633 $ 6,657
Investments.............................. 45,690 35,617
Other liabilities and accrued expenses... 523,476 517,673
Office facilities........................ 8,892 4,552
Deferred tax liabilities:
Investments.............................. (45,858) (31,458)
Office facilities........................ (42,243) (12,584)
Other.................................... (1,947) (2,871)
---------- -----------
Net deferred tax asset........................ $ 489,643 $ 517,586
========= =========
Management has determined that taxable income from carryback years and
anticipated future reversals of existing taxable temporary differences are
sufficient to offset the tax benefit of deductible temporary differences. As a
result, at year-end 1998 and 1997, valuation allowances have not been recorded
against deferred tax assets. Although realization is not assured, management
believes it is more likely than not that all of the deferred tax assets will be
realized. However, if estimates of future taxable income during the
carryforward period are reduced, the amount of the deferred tax assets
considered realizable could also be reduced.
In 1998, 1997 and 1996, respectively, the Company paid $101.3 million, $293.8
million and $267.5 million in federal income taxes including $4.1 million,
$18.6 million and $267.5 million of federal income tax equivalents paid to
Equitable.
43
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
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"). Accordingly, DLJSC is subject to the minimum net capital
requirements of the Securities and Exchange Commission, the NYSE and the
Commodities Futures Trading Commission. As such, it is also subject to the
NYSE's net capital rule, which conforms to the Uniform Net Capital Rule under
rule 15c3-1 of the Securities Exchange Act of 1934. Under the alternative
method permitted by this rule, the required net capital may not be less than
two percent of aggregate debit balances arising from customer transactions or
four percent of segregated funds, whichever is greater. If a member firm's
capital is less than four percent of aggregate debit balances, the NYSE may
require the firm to reduce its business. If a member firm's net capital is less
than five percent of aggregate debit balances, the NYSE may prevent the firm
from expanding its business and declaring cash dividends. At December 31, 1998,
DLJSC's net capital of approximately $1.2 billion was 20 percent of aggregate
debit balances and exceeded the minimum requirement by approximately $1.1
billion.
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 under 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, 1998 and 1997, the Company and its broker-dealer subsidiaries
complied with all applicable regulatory capital adequacy requirements.
8. Derivative Financial Instruments
--------------------------------
The Company enters into certain contractual agreements referred to as
derivatives or off-balance sheet financial instruments primarily to provide
products for its clients. Under these agreements, the Company performs the
following activities: writes over-the-counter ("OTC") options to accommodate
customers' needs; trades in forward contracts in U.S. government and agency
issued or guaranteed securities; trades in futures contracts on equity-based
indices, interest rate instruments and currencies; enters into swap
transactions to manage foreign currency, interest rate and equity risks; and
issues structured products based on emerging market financial instruments and
indices. The Company is not significantly involved in commodity derivative
instruments.
Options
- -------
The Company writes option contracts specifically designed to meet customers'
needs. Since the Company, not its counterparty, is obligated to perform, the
options do not expose the Company to credit risk. At the beginning of the
contract period, the Company receives a cash premium. During the contract
period, the Company bears the risk of unfavorable changes in the value of the
financial instruments underlying the options ("market risk"). To cover this
market risk, the Company purchases or sells cash or derivative financial
instruments on a proprietary basis. Such purchases and sales may include debt
and equity securities, forward and futures contracts and options. The
counterparties to these purchases and sales are reviewed to determine whether
they are creditworthy. Future cash requirements for options written equal 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.
44
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
The notional (contract) value, or the market value for cash instruments, of the
written options was $5.1 billion at year-end 1998 and $5.4 billion at year-end
1997. These options contracts were covered by the following financial
instruments:
December 31,
1998 1997
---- ----
(In millions)
U.S. government, mortgage-backed
Securities and options thereon...... $ 3,396 $ 3,773
Foreign sovereign debt securities........ 89 73
Forward rate agreements.................. 38 -
Futures contracts........................ 76 219
Equities and other....................... 1,545 1,340
-------- --------
Total......................... $ 5,144 $ 5,405
======= =======
The trading revenues from writing options (net of related interest expense)
were approximately $79.2 million, $84.9 million and $71.2 million for the years
ended December 31, 1998, 1997 and 1996, respectively. The fair value of certain
written 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 $304.3 million for 1998 and $223.3 million for 1997. The fair
value of the options was approximately $397.1 million at year-end 1998 and
$196.4 million at year-end 1997.
Forwards and Futures
- --------------------
The Company enters into forward purchases and sales contracts for
mortgage-backed securities and foreign currencies. In addition, the Company
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 is
the price movement on the notional value of the contracts.
For forward contracts, cash is generally not required at inception; cash equal
to the notional value on the contract is required at settlement. For futures
contracts, the original margin is required in cash at inception; cash equal to
the daily change in market value is required at settlement.
Since forward contracts are subject to the financial reliability of the
counterparty, the Company is exposed to credit risk. To monitor this credit
risk, the Company limits transactions with specific counterparties, reviews
credit limits and adheres to internally established credit extension policies.
For futures contracts and options on futures contracts, the change in the
market value is settled with the exchanges in cash each day. As a result, the
credit risk with the futures exchange is limited to the net positive change in
the market value for a single day.
The Company generally enters into forward and futures transactions for periods
of 90 days or less. The remaining maturities for all forwards and futures are
less than 13 months.
45
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
December 31,
Off-balance sheet values: 1998 1997
---- ----
(In millions)
Forward Contracts:
Purchased at notional (contract) value.......................... $ 41,254 $ 18,366
Sold at notional (contract) value............................... $ 39,767 $ 27,028
Futures Contracts and Options on Futures Contracts:
Purchased at market value....................................... $ 1,184 $ 988
Sold at market value............................................ $ 1,607 $ 2,767
December 31,
Values included in the consolidated financial statements: 1998 1997
---- ----
(In millions)
Forward Contracts:
Average fair values included in liabilities during the year........... $ 2 $ 2
Unrealized gains included in total assets at year-end................. $ 263 $ 56
Unrealized losses included in total liabilities at year-end........... $ 269 $ 50
Futures Contracts:
Average fair values included in (liabilities) assets during the year.. $ (23) $ 1
Unrealized gains included in total assets at year-end................. $ 4 $ -
Unrealized losses included in total liabilities at year-end........... $ 1 $ 2
Average fair values were computed using month-end averages. For forward
contracts, the fair values are estimated based on dealer quotes, pricing models
or quoted prices for financial instruments with similar characteristics. For
futures contracts, the fair values are measured by reference to quoted market
prices.
Net trading gains (losses) on forward contracts were $7.0 million, $(5.1)
million and $39.0 million and net trading gains (losses) on futures contracts
were $(86.0) million, $(24.0) million and $8.0 million for the years ended
December 31, 1998, 1997 and 1996, respectively.
Swaps
- -----
The notional (contract) value of swap agreements, consisting primarily of
interest rate and equity swaps, was approximately $8.0 billion and $686.9
million at December 31, 1998 and December 31, 1997, respectively. The notional
or contract amounts indicate the extent of the Company's involvement in the
derivative instruments noted above. They do not measure the Company's exposure
to market or credit risk and do not represent the future cash requirements of
such contracts.
9. Financial Instruments With Off-Balance Sheet Risk
-------------------------------------------------
In the normal course of business, the Company's customer, trading and
correspondent clearance activities include executing, settling and financing
various securities and financial instrument transactions. To execute these
transactions, the Company purchases and sells (including "short sales")
securities, writes options, and purchases and sells forward contracts for
mortgage-backed securities and foreign currencies and financial futures
contracts. If the customer or counterparty to the transaction is unable to
fulfill its contractual obligations, and margin requirements are not sufficient
to cover losses, the Company may be exposed to off-balance sheet risk. 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. This risk is limited by
requiring customers and counterparties to maintain margin collateral that
complies 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 to meet
contractual obligations.
46
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
As part of the Company's financing and securities settlement activities, the
Company uses securities as collateral to support various secured financing
sources. If 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 to satisfy its
obligations. The Company controls this risk by monitoring the market value of
securities pledged each day and by requiring collateral levels to be adjusted
in the event of excess market exposure. As of December 31, 1998, pledged
securities with a market value of approximately $2.1 billion are used as
collateral for securities borrowed with a market value of approximately $2.1
billion. In accordance with industry practice, these securities borrowed and
pledged are not reflected in the consolidated statements of financial
condition.
The Company enters into forward contracts under which securities are delivered
or received in the future at a specified price or yield. If counterparties are
unable to perform under the terms of the contracts or if the value of
securities and interest rates changes, the Company is exposed to risk. Such
risk is controlled by monitoring the market value of the securities contracted
for each day and by 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 and 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, and institutional and individual investors.
A substantial portion of the Company's transactions is executed with and on
behalf of institutional investors including other brokers and dealers, mortgage
brokers, commercial banks, U.S. government agencies, mutual funds and other
financial institutions. These transactions are generally collateralized. 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. This credit risk can be directly
affected by volatile securities markets, credit markets and regulatory changes.
To establish exposure limits for a variety of transactions, all counterparties
are reviewed regularly. 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. The Company also analyzes market movements that could affect exposure
levels. To set trading limits, the Company considers the following four
factors: 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. 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.
The Company's customer securities activities are transacted either in cash or
on a margin basis, in which the Company extends credit to the customer. The
Company seeks to control the risks associated with its customer activities by
requiring customers to maintain margin collateral to comply with various
regulatory and internal guidelines. Each day, the Company monitors required
margin levels and requires customers to deposit additional collateral, or
reduce positions, when necessary.
11. Preferred Securities
--------------------
In 1996, the Company and its wholly owned trust, DLJ Capital Trust I (the
"Trust"), completed an offering of $200.0 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. At December 31, 1998 and 1997,
47
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
the only assets of the Trust were $200.0 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.
To the extent the Company has made principal and interest payments on the
Junior Subordinated Debentures, the Company guarantees payment to the holders
of the preferred securities issued by the Trust. 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 January 1998, under a shelf registration statement filed previously, the
Company issued 3.5 million shares of Fixed/Adjustable Rate Cumulative Preferred
Stock, Series B, with a liquidation preference of $50.00 per share ($175.0
million aggregate liquidation value). Dividends on the preferred stock are
cumulative and payable quarterly at 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.
In 1998 and 1997, respectively, approximately 4.4 million and 1.8 million
restricted stock units ("RSU's") vested and were converted into common stock
from the Company's authorized and unissued shares. Approximately 3.0 million of
these shares were deposited in a grantor trust pursuant to the Executive
Deferred Compensation Plan, which was effective January 1, 1997. In October
1998, approximately 1.8 million of such shares were distributed by the trust to
employees.
In July 1998, the Emerging Issues Task Force ("EITF") reached a consensus on
EITF Issue 97-14, "Accounting for Deferred Compensation Arrangements Where
Amounts Earned are Held in a Rabbi Trust and Invested" ("EITF 97-14"). Under
EITF 97-14, assets of the trust should be consolidated with those of the
employer and the value of the employer's stock held in the rabbi trust should
be classified in stockholders' equity in a manner similar to Treasury Stock.
The Company adopted EITF 97-14 as of September 30, 1998. At December 31, 1998,
approximately 1.2 million shares of the Company's stock are included in the
rabbi trust. The shares and the corresponding liability to employees are shown
as components of stockholders' equity in the Company's consolidated statements
of financial condition.
In July 1998, the Company sold an aggregate of five million shares of newly
issued common stock to its parent companies, Equitable and AXA for $300.0
million in a transaction exempt from the registration requirements of the
Securities Act. As a result, Equitable and its affiliates' beneficial ownership
of the Company increased to approximately 73 percent on an undiluted basis.
In 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 1,370,408 shares of
common stock of the Company.
In 1996, the Company issued 4.0 million shares of Fixed/Adjustable Rate
Cumulative Preferred Stock, Series A, with a liquidation preference of $50.00
per share. Dividends on the preferred stock are cumulative and payable
quarterly at 5.94% per annum through November 30, 2001. Thereafter, the
dividend rate will be adjusted, based on various indices, to be at least 6.44%
but less 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,
1998 and 1997, 4.0 million shares of such preferred stock were authorized,
issued and outstanding.
48
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
13. Earnings per Share
------------------
Basic and diluted earnings per common share amounts are 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 4.4 million RSU's vested and were converted into the
Company's common stock; this transaction is included in the calculation of
earnings per common share. All earnings per share amounts have been restated
for the effect of the stock split.
The numerators and denominators of the basic and diluted earnings per common
share computations include the following reconciling items:
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ ------------
Income Shares Income Shares Income Shares
------ ------ ------ ------ ------ ------
(in thousands)
Basic EPS
Earnings applicable to common
shares...................... $ 349,490 119,260 $ 396,106 110,318 $ 272,647 106,600
Effect of Dilutive Securities
Restricted stock units...... - 2,348 - 7,046 - 10,304
Stock options............... - 10,372 - 7,660 - 1,808
Convertible debt............ 308 474 - -
------------- ------------- -------------- ----------- --------------------------
Diluted EPS..................... $ 349,490 131,980 $ 396,414 125,498 $ 272,647 118,712
========= ======== ========== ========= ========= ========
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 "Compensation Committee"). The Incentive Plan creates short-term
and long-term award pools for 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 a performance
period of three to ten years and are based on a percentage of pre-tax earnings
that varies with the Company's average return on common equity during the
performance period. Participants may receive awards in cash, options, shares or
restricted stock units; however, stock-based payments are limited to a total of
17.6 million shares. Under certain circumstances participants may defer the
receipt of part or all of any award. 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. During 1997, the
Compensation Committee authorized a long-term award pool for the performance
period from January 1, 1997 to December 31, 1999. For the years ended December
31, 1998, 1997 and 1996, the amount charged to expense was $165.5 million,
$185.5 million and $190.5 million, respectively.
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 to receive a share of
common stock under certain circumstances. These RSU's may be forfeited in
certain circumstances and vest annually in specified proportions from February
1997 through February 2000. RSU's that are forfeited will become available for
subsequent grants. Under the Plan, 10,358,294 units were granted. As of
December 31, 1998, 212,954 RSU's were forfeited and 8,063,104 RSU's vested and
were converted to common stock from the Company's authorized and unissued
shares.
49
Stock Option Plans
- ------------------
In 1995, the Company adopted the 1995 and 1996 Stock Option Plans. Under the
1995 Stock Option Plan, options were granted to certain employees to purchase
an aggregate of 18,337,356 shares of Common Stock (the maximum allowable under
the 1995 Stock Option Plan) with an exercise price of $13.50. The options may
be forfeited in certain circumstances, vested in equal installments in February
1997 and February 1998, and are exercisable for up to ten years from the date
of the grant. Options that are forfeited under the 1995 Stock Option Plan will
become available for subsequent grant under the 1996 Stock Option Plan.
Under the 1996 Stock Option Plan (the "1996 Plan") options are available to
purchase a maximum of 17,579,702 shares of Common Stock, exclusive of
forfeitures from the 1995 Stock Option Plan. The options are exercisable for up
to ten years from the date of grant, may be forfeited in certain circumstances,
and vest in four equal annual installments starting one year after the date of
grant. Options that are forfeited under the 1996 Plan become available for
subsequent grant under that plan.
In 1996, the Company adopted the Non-Employee Directors Stock Plan (the "Stock
Plan") to provide equity compensation to the Company's non-employee directors.
Under the Stock Plan, 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
starting one year from the date of grant. Under the Stock Plan, 200,000 shares
are issuable. Any shares issued under the Stock Plan will reduce the number of
shares issuable under the 1996 Plan.
The following summarizes the stock option activity for all plans: Weighted Average
Options Exercise Price
------- --------------
Outstanding at December 31, 1995....................................... 18,337,356 $ 13.50
----------- -------
Granted................................................................ 4,268,000 $ 16.27
Forfeited.............................................................. (344,692) $ 13.50
------------- -------
Outstanding at December 31, 1996....................................... 22,260,664 $ 14.03
----------- -------
Granted................................................................ 6,431,668 $ 30.54
Forfeited.............................................................. (133,866) $ 16.01
Exercised.............................................................. (296,370) $ 13.76
------------ -------
Outstanding at December 31, 1997....................................... 28,262,096 $ 17.78
----------- -------
Granted................................................................ 1,508,489 $ 38.59
Forfeited.............................................................. (60,000) $ 17.31
Exercised.............................................................. (1,458,366) $ 14.91
------------ -------
Outstanding at December 31, 1998....................................... 28,252,219 $ 19.04
=========== =======
The following summarizes information related to stock options outstanding at
December 31, 1998:
Weighted Average Weighted Average
Exercise Prices Number Outstanding Exercise Price Remaining Life (Years)
--------------- ------------------ -------------- ----------------------
$13.50-25.99 22,268,858 $ 14.59 7.1
$26.00-38.99 5,048,672 $ 33.94 8.8
$39.00-52.875 934,689 $ 44.65 9.4
------------- ------- ---
Total 28,252,219 $ 19.04 7.5
========== ======= ===
50
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
At December 31, 1998, 21,378,671 options were exercisable at prices ranging
from $13.50 to $38.00. The weighted average exercise price of such options was
$15.05. At December 31, 1997, there were 9,885,382 options exercisable at
exercise prices ranging from $13.50 to $17.99. The weighted average exercise
price of these options was $13.79. At December 31, 1996, no options were
exercisable.
The Company accounts for its stock option plans in accordance with APB Opinion
No. 25 and, accordingly, does not recognize any compensation cost associated
with such plans in the consolidated financial statements. If the Company had
calculated compensation cost under SFAS No. 123 (based on the fair value at the
grant date), the Company would have reported the following net income and
earnings per common share:
1998 1997 1996
---- ---- ----
Net income (in thousands) As reported $ 370,800 $ 408,250 $ 291,300
Pro forma $ 349,700 $ 388,000 $ 273,700
Basic earnings per common share As reported $ 2.93 $ 3.59 $ 2.56
Pro forma $ 2.75 $ 3.41 $ 2.40
Diluted earnings per common share As reported $ 2.65 $ 3.16 $ 2.30
Pro forma $ 2.49 $ 3.00 $ 2.18
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model. For options granted during 1998, 1997 and
1996, respectively, the Company used the following weighted average
assumptions: dividend yield of 0.69%, 0.86% and 1.54%; expected volatility of
40%, 33% and 25%; risk-free interest rates of 5.53%, 5.96% and 6.07%; and an
expected life of five years for all grants. The weighted average fair value per
share of options granted during 1998, 1997 and 1996 was $16.27, $10.81, and
$4.03, respectively.
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, $9.6 million and $7.4
million for 1998, 1997 and 1996, respectively.
Certain key employees of the Company also participate in the following deferred
compensation arrangements: equity investments in selected merchant banking
activities of the Company funded by deferred compensation; certain non-funded,
non-qualified deferred compensation plans that include managed investments; and
other non-qualified plans that 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 that expire on various dates through 2021. Rent
expense for the years ended December 31, 1998, 1997 and 1996 was $115.6
million, $89.9 million and $76.6 million, respectively. Sublease revenue was
$0.1 million for each of the years ended December 31, 1998 and 1997 and $1.0
million for the year ended December 31, 1996.
51
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
At December 31, 1998, non-cancelable leases in excess of one year, excluding
sublease revenue, escalation and renewal options had the following minimum
lease commitments:
Period
------ (In thousands)
1999............................ $ 116,947
2000............................ 109,589
2001............................ 106,680
2002............................ 107,463
2003............................ 104,923
2004-2021....................... 1,573,867
------------
Total.................... $ 2,119,469
===========
In the normal course of business, the Company enters into underwriting
commitments. Transactions relating to such underwriting commitments that were
open at December 31, 1998, 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 $657.5 million and
$244.0 million at December 31, 1998 and 1997, respectively.
The Company has outstanding commitments, expiring on March 16, 2000, to finance
$150.0 million to third parties to be secured by mortgage loans on real estate
properties. At December 31, 1998, unfunded commitments outstanding under this
facility amounted to $74.0 million. In addition, the Company enters into
commitments to extend credit to non-investment grade borrowers in connection
with the origination and syndication of senior bank debt. At December 31, 1998,
unfunded senior bank loan commitments outstanding were $589.5 million.
At December 31, 1998, the Company has commitments of $718.0 million to invest
on a side-by-side basis with merchant banking partnerships.
16. Industry Segment and Geographic Area Data
-----------------------------------------
In 1998 and prior years, the Company operated in three principal segments in
the financial service industry: Banking Group, Capital Markets Group and
Financial Services Group. Such segments are managed separately based on types
of products and services offered and their related client bases. The Company
evaluates the performance of its segments based primarily on income before
income taxes.
o The Banking Group raises and invests capital and provides financial
advice to companies throughout the U.S. and abroad. Through this group,
the Company manages and underwrites public offerings of securities,
arranges private placements, provides client advisory and other services,
pursues direct investments in a variety of areas and provides venture
capital to institutional investors.
o The Capital Markets Group trades, conducts research on, originates and
distributes equity and fixed-income securities, and places private equity
investments.
o The Financial Services Group provides a broad array of services to
individual and high-net-worth investors and the financial intermediaries
that represent them, including correspondent brokerage services, online
investment services, research and trading services, cash management and
investment advisory services.
52
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
For internal management reporting, the Company allocates certain revenues to
its operating segments in excess of the amount realized on the related
transactions. Such excess amounts are eliminated in consolidation. The Company
also allocates to segments a pro rata share of amounts for leased facilities,
equipment and certain general overhead expenses based upon specified amounts,
usage criteria or agreed rates, and allocates interest expense based upon
capital utilization at rates that approximate market. All other accounting
policies of the segments are the same as those described in the summary of
significant accounting policies.
Capital Financial
Banking Markets Services Elimination
Group Group Group and Other Total
----- ----- ----- --------- -----
(in millions)
December 31, 1998:
- ------------------
Net revenues from external sources $ 1,488.00 $ 1,139.10 $ 979.00 $ (388.20) $ 3,217.90
------------ ------------ ------------ ----------- ------------
Net intersegment revenues ........ - (3.9) 54.2 (50.3) 0.0
------------ ------------ ------------ ----------- ------------
Net interest revenue ............. (1.2) 138.1 215.2 381.2 733.3
------------ ------------ ------------ ----------- ------------
Depreciation and amortization .... 19.2 27.8 31.5 9.6 88.1
------------ ------------ ------------ ----------- ------------
Income before income taxes ....... 415.8 190.8 185.6 (191.7) 600.5
------------ ------------ ------------ ----------- ------------
Segment assets ................... $ 1,132.10 $ 48,378.50 $ 19,925.00 $ 2,846.60 $ 72,282.20
------------ ------------ ------------ ----------- ------------
Expenditures for long-lived assets $ 37.40 $ 26.9 $ 77.3 $ 12.2 $ 153.8
------------ ------------ ------------ ----------- ------------
December 31, 1997:
- ------------------
Net revenues from external sources $ 1,216.70 $ 1,156.70 $ 793.60 $ (178.40) $ 2,988.60
------------ ------------ ------------ ----------- ------------
Net intersegment revenues ........ 1.3 0.7 46.0 (48.0) 0.0
------------ ------------ ------------ ----------- ------------
Net interest revenue ............. 2.2 104.8 169.3 222.4 498.7
------------ ------------ ------------ ----------- ------------
Depreciation and amortization .... 15 21 16.6 7.5 60.1
------------ ------------ ------------ ----------- ------------
Income before income taxes ....... 381.9 319.4 157.6 (197.8) 661.1
------------ ------------ ------------ ----------- ------------
Segment assets ................... $ 709.6 $ 47,950.10 $ 18,124.30 $ 3,721.80 $ 70,505.80
------------ ------------ ------------ ----------- ------------
Expenditures for long-lived assets $ 68.7 $ 44.0 $ 83.1 $ 28.2 $ 224.0
------------ ------------ ------------ ----------- ------------
December 31, 1996:
- ------------------
Net revenues from external sources $ 841.40 $ 964.40 $ 680.40 $ (69.70) $ 2,416.50
------------ ------------ ------------ ----------- ------------
Net intersegment revenues ........ 0.8 (1.1) 32.5 (32.2) 0.0
------------ ------------ ------------ ----------- ------------
Net interest revenue ............. 11.2 105.1 114.7 110 341.0
------------ ------------ ------------ ----------- ------------
Depreciation and amortization .... 8.5 18.3 20.2 5.9 52.9
------------ ------------ ------------ ----------- ------------
Income before income taxes ....... 265.9 271.0 142.2 (205.3) 473.8
------------ ------------ ------------ ----------- ------------
Segment assets ................... $ 416.90 $ 42,104.20 $ 8,903.80 $ 4,078.80 $ 55,503.70
------------ ------------ ------------ ----------- ------------
Expenditures for long-lived assets $ 16.9 $ 21.7 $ 43.4 $ 60.6 $ 142.6
------------ ------------ ------------ ----------- ------------
53
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
The Company ceased its proprietary trading in emerging markets in September
1998 and eliminated the bulk of its trading positions during the fourth quarter
of 1998. As a result of this and a subsequent reorganization, the activities of
the Emerging Markets Group are included in the Elimination and Other column in
the above table. Related net revenues from external sources were $5.0 million,
$117.8 million and $109.9 million and earnings (losses) before income taxes
were $(58.7) million, $32.5 million and $28.1 million for 1998, 1997 and 1996,
respectively. The related assets were $1,124.2 million, $2,680.3 million and
$3,565.8 million at December 31, 1998, 1997 and 1996, respectively.
The following is a reconciliation of the Company's reported segment revenues,
income before provision for income taxes and segment assets to the Company's
consolidated totals:
December 31, December 31, December 31,
1998 1997 1996
----------------------------------------------------------
(in millions)
Revenues:
Total net revenues for reported segments............. $ 4,008.5 $ 3,491.3 $ 2,749.4
All other revenues................................... 148.7 166.2 147.7
Consolidation/elimination (1)........................ (206.0) (170.2) (139.6)
----------- ----------- ------------
Total consolidated net revenues................... $ 3,951.2 $ 3,487.3 $ 2,757.5
========= ========= =========
Income before provision for income taxes:
Total income for reported segments..................... $ 792.2 $ 858.9 $ 679.1
All other income (losses).............................. 46.0 (25.7) (69.6)
Consolidation/elimination (1).......................... (237.7) (172.1) (135.7)
----------- ---------- ----------
Total income before provision for income taxes...... $ 600.5 $ 661.1 $ 473.8
========== ========== ========
Segment assets:
Total assets for reported segments..................... $ 69,435.6 $ 66,784.0 $ 51,424.9
All other assets....................................... 2,717.8 4,026.6 4,151.1
Consolidation/elimination (1).......................... 128.8 (304.8) (72.3)
------------ ------------- --------------
Total segment assets................................ $ 72,282.2 $ 70,505.8 $ 55,503.7
========== ========== ==========
(1) Consolidation/elimination represents intercompany accounts/intersegment
revenue-sharing arrangements that are eliminated in consolidation.
The Company's principal operations are located in the United States. The
Company maintains offices in Europe, Latin America and Asia, with the majority
of business done through the London offices. The following are net revenues by
geographic region:
December 31, December 31, December 31,
1998 1997 1996
----------------------------------------------------------
(in millions)
United States.......................................... $ 3,623.9 $ 3,116.2 $ 2,474.3
Emerging markets....................................... 5.0 117.8 109.9
Other foreign.......................................... 322.3 253.3 173.3
----------- ----------- -----------
Total............................................ $ 3,951.2 $ 3,487.3 $ 2,757.5
========== ========= ==========
54
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
The following are long-lived assets by geographic region:
United States........... $ 384.7 $ 356.3 $ 277.2
Foreign................. 128.0 98.9 14.2
-------- --------- ---------
Total............. $ 512.7 $ 455.2 $ 291.4
======= ======= =======
17. 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. From time to
time, the Company is also involved in proceedings with, and investigations by,
government 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. Although the ultimate outcome of litigation
involving the Company cannot be predicted with certainty, after reviewing these
actions with its counsel, management 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 that, for the four actions described below,
based upon information currently available to it, management cannot predict
whether or not such litigation will have a material adverse effect on the
Company's results of operations in any particular period.
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. DLJSC's motions for
summary judgments were denied in April 1998. Trial has been scheduled for May
17, 1999. DLJSC believes that it has meritorious defenses to the complaints and
is contesting the suits vigorously.
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 $550.0 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 to hide NGC's true value and that defendants breached their
fiduciary duties by, among other things, providing
55
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
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. 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 has appealed the Bankruptcy Court's ruling. On May 7, 1998, DLJSC and
others were named as defendants in a second action in a Texas State Court
brought by the NGC Settlement Trust. The allegations of this second Texas State
Court action are substantially similar to those of the earlier class action
pending in State Court. In an amended order dated January 5, 1999, the State
Court granted the class action plaintiff's motion for class certification.
Discovery is proceeding in both State Court actions. In early February 1999,
DLJSC filed motions for summary judgment which are pending. Trial in the two
State Court actions is expected in May 1999. DLJSC intends to defend itself
vigorously against all of the allegations contained in the complaints.
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. In April 1998, DLJSC's motion to
discuss the complaint against it was denied, and plaintiff's motion for class
certification was denied. In December 1998, the motion of two other potential
class representatives to intervene in the action was denied. DLJSC intends to
defend itself vigorously against all of the allegations contained in the
complaint.
On January 24, 1997, various money management firms and others who allegedly
purchased and/or beneficially owned $116 million aggregate principal amount of
Senior Subordinated Notes (the "Notes") issued in May 1994 by Mid-American
Waste Systems, Inc. ("Mid-American") filed a complaint against DLJSC and a
number of other financial institutions and several former officers and
directors of Mid-American in the Court of Common Pleas, Franklin County, Ohio.
The action seeks rescission, compensatory and punitive damages. The suit
alleges violations of federal securities laws and the Ohio Securities Act, and
common law fraud, aiding and abetting common law fraud, negligent
misrepresentation, breach of contract, breach of fiduciary duty/acting in
concert and negligence. DLJSC was an underwriter for the initial offering of
the Notes. The Notes went into default in February 1996 and Mid-American filed
a voluntary petition for reorganization pursuant to Chapter 11 of the United
States Bankruptcy Code in January 1997. The complaint seeks to hold DLJSC
liable for various alleged misrepresentations and omissions contained in the
prospectus for the Notes and other filings and for various oral representations
concerning the Notes, which plaintiffs claim were false and misleading. Fact
discovery is complete and expert discovery is ongoing. Both DLJSC and
plaintiffs filed motions for summary judgment, all of which are pending. Trial
is currently scheduled to commence on May 4, 1999. Other alleged purchasers
and/or beneficial owners of an additional $15 million aggregate principal
amount of the Notes issued by Mid-American described above filed two additional
lawsuits against DLJSC both in the U.S. District Court for the Southern
District of Ohio, on April 14, 1997 and December 30, 1997. The allegations are
substantially similar to those described above. Discovery in these actions,
56
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
consolidated with fact discovery in the Ohio state court action described
above, is still ongoing. No trial date has been set in either case. On July 31,
1998, DLJSC filed a motion to dismiss the later filed action for lack of timely
service of valid process, which is pending. DLJSC believes that it has
meritorious defenses to all of the allegations contained in all of the
complaints described above and is contesting the suits vigorously.
On January 20, 1999, the Plan Administrator for the bankruptcy estate of
Mid-American, represented by counsel for plaintiffs in the Ohio state court
action against DLJSC described above, filed another action against DLJSC and
other financial institutions, several individuals and two law firms in the
Supreme Court of the State of New York based on factual allegations similar to
those made in the Ohio state court action. The actions seeks compensatory and
punitive damages. The plaintiff alleges claims against DLJSC for breach of
fiduciary duty, aiding and abetting breach of fiduciary duty, professional
malpractice, common law fraud, constructive fraud, aiding and abetting common
law fraud, negligence, negligent misrepresentation and breach of contract. The
complaint alleges that, as an underwriter, DLJSC is liable for alleged
misrepresentations and omissions in the prospectus for the Mid-American Senior
Subordinated Notes, and that, as Mid-American's financial advisor after the
initial offering, DLJSC allegedly knew or should have known about and should
have disclosed to Mid-American that Mid-American's financial condition was
precarious and that publicly disclosed documents were false and misleading
regarding Mid-American's finances and operations. There has been no discovery
or other proceedings in this action. DLJSC believes that it has meritorious
defenses to all of the allegations contained in the complaint and will contest
the suit vigorously.
18. Quarterly Data (Unaudited)
--------------------------
Income Basic Diluted
Before Earnings Earnings
Provision Per Per
Total For Income Net Common Common
Revenues Taxes Income Share * Share *
-------- ----- ------ ------- -------
1998:
First quarter........................$ 1,493,421 $ 217,250 $ 134,150 $ 1.12 $ 1.00
Second quarter........................ 1,556,745 230,500 142,300 1.17 1.05
Third quarter......................... 1,069,827 41,600 25,700 0.17 0.15
Fourth quarter........................ 1,287,049 111,150 68,650 0.52 0.47
---------- ---------- ---------- ------- -------
Total year.............$ 5,407,042 $ 600,500 $ 370,800 $ 2.93 $ 2.65
=========== ========= ========= ====== ======
1997:
First quarter.......................$. 981,403 $ 144,000 $ 86,400 $ 0.77 $ 0.69
Second quarter........................ 1,061,180 167,000 100,200 0.88 0.79
Third quarter......................... 1,268,496 188,100 120,300 1.06 0.93
Fourth quarter........................ 1,329,390 162,000 101,350 0.88 0.77
---------- ------------ ----------- ------- -------
Total year.............$ 4,640,469 $ 661,100 $ 408,250 $ 3.59 $ 3.16
=========== =========== ========== ====== ======
* Due to the effect of averaging the number of shares of common stock and
common stock equivalents throughout the year, the sum of the quarters'
earnings per common share may not equal the total year amounts.
19. Subsequent Event
----------------
On March 17, 1999 the Company filed a registration statement with the Securities
and Exchange Commission relating to a proposed initial public offering of a new
class of common stock that will track the performance of DLJdirect, its online
brokerage business.
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,
1998 1997
---- ----
ASSETS
Cash and cash equivalents.................................................... $ 706,010 $ 8
Receivables from brokers, dealers and other ................................. 9,168 6,879
Long-term corporate development investments.................................. 57,029 47,896
Receivables from subsidiaries................................................ 4,110,750 3,335,459
Investment in subsidiaries, at equity........................................ 2,790,692 2,332,338
Other assets and deferred amounts............................................ 926,139 845,997
------------ ------------
Total Assets................................................................. $ 8,599,789 $ 6,568,577
=========== ===========
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,
1998 1997
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings....................................................... $ 234,843 $ 667,757
Accounts payable and accrued expenses....................................... 1,261,171 1,180,714
Other liabilities........................................................... 958,814 684,688
------------- -------------
2,454,828 2,533,159
8.42% Junior subordinated debentures, held by a subsidiary trust .......... 206,224 206,224
Other long-term borrowings................................................. 3,011,038 1,767,704
------------ ------------
Total liabilities................................................... 5,672,090 4,507,087
------------ ------------
Stockholders' Equity:
Preferred Stock, 50,000,000 shares authorized:
Series A Preferred Stock, at $50.00 per share liquidation preference
(4,000,000 shares issued and outstanding).......................... 200,000 200,000
Series B Preferred Stock, at $50.00 per share liquidation preference
(3,500,000 shares issued and outstanding) ......................... 175,000 -
Common stock ($0.10 par value; 300,000,000 shares authorized; 122,812,558
and 111,852,762 shares issued and outstanding, respectively)..........
12,281 5,593
Restricted stock units (10,358,294 units authorized; 2,082,236 and
6,562,414 units issued and outstanding, respectively) ................ 21,333 67,255
Paid-in capital......................................................... 858,066 446,518
Retained earnings....................................................... 1,657,710 1,338,220
Accumulated other comprehensive income.................................. 3,309 3,904
Employee deferred compensation stock trust.............................. 12,329 12,061
Common stock issued to employee deferred compensation trust............. (12,329) (12,061)
--------------- ---------------
Total stockholders' equity........................................... 2,927,699 2,061,490
------------ ------------
Total Liabilities and Stockholders' Equity.................................. $ 8,599,789 $ 6,568,577
=========== ===========
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,
1998 1997 1996
---- ---- ----
Revenues:
Dividends from affiliates................................. $ 205,090 $ 136,000 $ 57,094
Interest from affiliates.................................. 229,785 129,256 151,774
Allocations to affiliates................................. 19,021 17,809 16,805
Other..................................................... 27,486 19,958 23,508
----------- ----------- -----------
Total revenues....................................... 481,382 303,023 249,181
---------- ---------- ----------
Costs and Expenses:
Compensation and benefits................................. 147,952 155,224 144,574
Interest and operating expenses........................... 87,788 60,141 110,447
------------ ---------- ----------
Total costs and expenses............................. 235,740 215,365 255,021
----------- ---------- ----------
Income (loss) before income tax benefit and equity
in undistributed net income of subsidiaries............... 245,642 87,658 (5,840)
---------- ----------- -----------
Income tax benefit............................................ 139,799 72,870 51,766
---------- ----------- ----------
Income before equity in undistributed
net income of subsidiaries................................ 385,441 160,528 45,926
---------- ----------- ----------
Equity in undistributed net income (loss) of subsidiaries..... (14,641) 247,722 245,374
----------- ---------- -------
Net income.................................................... $ 370,800 $ 408,250 $ 291,300
========= ========= ---------
Dividends on preferred stock................................... $ 21,310 $ 12,144 $ 18,653
========== ========== ==========
Earnings applicable to common shares........................... $ 349,490 $ 396,106 $ 272,647
========= ========= =========
Earnings per common share:
Basic..................................................... $ 2.93 $ 3.59 $ 2.56
=========== =========== ===========
Diluted................................................... $ 2.65 $ 3.16 $ 2.30
=========== =========== ===========
Weighted average common shares outstanding:
Basic..................................................... 119,260 110,318 106,600
========== =========== ==========
Diluted................................................... 131,980 125,498 118,712
========== =========== ==========
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,
1998 1997 1996
---- ---- ----
Net cash provided by operating activities..................... $ 544,785 $ 153,693 $ 194,253
----------- ---------- ----------
Cash flows from investing activities: Net proceeds from (payments for):
Dividends from affiliates................................ 205,090 136,000 57,094
Investment in subsidiaries............................... (472,996) (222,083) (563,222)
Other assets............................................. (51,474) (1,873) 3,111
------------- ------------- -------------
Net cash used in investing activities......................... (319,380) (87,956) (503,017)
----------- ------------ -----------
Cash flows from financing activities: Net proceeds from (payments for):
Short-term borrowings..................................... (432,914) 331,845 (244,557)
Senior Notes.............................................. 893,552 - -
Medium-Term Notes......................................... 349,337 359,646 249,515
Global floating notes..................................... 448 347,760 -
Swiss Franc Bonds......................................... - - (105,513)
Convertible debentures.................................... - 28,779 -
Other long-term debt...................................... - (2,434) (687)
Junior subordinated debentures............................ - - 206,224
Issuance of Series A Preferred Stock...................... - - 200,000
Issuance of Series B Preferred Stock...................... 175,000 - -
Subordinated loan from subsidiaries....................... (623,176) (149,274) -
Dividends................................................. (51,310) (39,886) (45,303)
Sale of common stock to Equitable/AXA..................... 300,000 - -
Exercise of stock options................................. 21,775 4,074 -
Receivables from subsidiaries............................. (152,115) (953,986) 51,989
----------- ----------- -----------
Net cash provided by (used in) financing activities........... 480,597 (73,476) 311,668
---------- ----------- ----------
Increase (decrease) in cash and cash equivalents.............. 706,002 (7,739) 2,904
----------- ------------- -----------
Cash and cash equivalents at beginning of year............... 8 7,747 4,843
--------------- ------------ -----------
Cash and cash equivalents at end of year...................... $ 706,010 $ 8 $ 7,747
========== ============== ==========
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 $781.0 million and $1,923.7
million loaned under master note agreements at December 31, 1998 and
1997, 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 $205.1 million, $136.0 million
and $57.1 million for the years ended December 31, 1998, 1997, and 1996,
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. At December 31, 1998, there were current
maturities of long-term borrowings of $99.9 million. Long-term
borrowings consist of the following:
December 31,
1998 1997
---- ----
(In thousands)
Senior notes, 6% - 6.875% due various dates through 2008.............. $ 1,391,036 $ 497,484
Subordinated exchange notes, 9 5/8% due in 2003....................... 225,000 225,000
Medium-term notes, 5.402% - 6.90% due various dates through 2016....
1,046,645 697,310
Global floating rate notes, due in 2002............................... 348,357 347,909
------------- -------------
Total long-term borrowings....................................... $ 3,011,038 $ 1,767,703
=========== ===========
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,
1998 1997
---- ----
(In thousands)
1999 ........... $ 99,888 $ -
2000............. 189,917 189,856
2001............. 349,455 -
2002............. 358,348 357,897
2003............. 374,397 225,000
2004-2016........ _ 1,639,033 994,951
------------ ------------
$ 3,011,038 $ 1,767,704
============ ===========
DLJ entered into a $2.75 billion revolving credit facility in 1998 which
allows the Parent Company to borrow up to $1.65 billion on an unsecured
basis, subject to certain limitations. There were no borrowings
outstanding under this agreement at December 31, 1998.
3. Income Taxes
-------------
Certain of the Company's subsidiaries record income taxes as if each
subsidiary files a separate income tax return. The tax rates used in the
computation for such subsidiaries are generally higher than the
Company's overall consolidated effective tax rate. The income tax
benefit recorded by the Parent Company results from the Company's
overall lower consolidated effective tax rate and the ability of the
Company to utilize tax attributes related to its subsidiaries and
affiliates.
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, 1998, 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
regard 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
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 30th day of
March 1999.
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 30th day of March 1999.
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; Director
Anthony F. Daddino
/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
66
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
/s/ Michael Hegarty Director
- -------------------------------
Michael Hegarty
67
DONALDSON, LUFKIN & JENRETTE, INC.
FORM 10-K
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
FOR THE YEAR ENDED DECEMBER 31, 1998
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.................................................. 30
Consolidated Statements of Financial Condition at December 31, 1998 and 1997..
31
Consolidated Statements of Income for the years ended December 31, 1998, 1997
and 1996...................................................................... 33
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996........................................ 34
Consolidated Statements of Cash Flows for years ended December 31, 1998, 1997
and 1996...................................................................... 35
Notes to Consolidated Financial Statements.................................... 37
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
4.8 Certificate of Designation of 3,500,000 shares of Fixed/Adjustable Rate
Cumulative Preferred Stock, Series B
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
68
Item 14 (a) (3) Exhibits (Continued)
EXHIBIT NO. DESCRIPTION
----------- -----------
10.4 Donaldson, Lufkin & Jenrette, Inc. 1994-1996 Long-term Incentive Plan
10.5 Amendment No. 1 to the Donaldson, Lufkin & Jenrette, Inc. 1994-1996 Long-term
Incentive Plan
10.6 Donaldson, Lufkin & Jenrette, Inc. 1995 Restricted Stock Unit Plan
10.7 Donaldson, Lufkin & Jenrette, Inc. 1995 Stock Option Plan
10.8 Donaldson, Lufkin & Jenrette, Inc. 1996 Stock Option Plan
10.9 Deferred Compensation Agreement, dated December 30, 1983, between Michael M.
Bendik and the Registrant
10.10 Deferred Compensation Agreement, dated December 30, 1983, between Michael A.
Boyd and the Registrant
10.11 Deferred Compensation Agreement, dated December 30, 1983, between John S.
Chalsty and the Registrant
10.12 Deferred Compensation Agreement, dated December 30, 1983, between Anthony F.
Daddino and the Registrant
10.15 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
10.19 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
69
Item 14 (a) (3) Exhibits (Continued)
EXHIBIT NO. DESCRIPTION
----------- -----------
10.23 Agreement of lease between 99 Bishopsgate Limited,
Landlord, and DLJ International Limited, Tenant and the
Registrant, Tenant's Guarantor, 99 Bishopsgate London, EC2,
dated as of October 24, 1996.
10.24 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
10.36 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
70
Item 14 (a) (3) Exhibits (Continued)
EXHIBIT NO. DESCRIPTION
----------- -----------
10.45 1995 Restricted Stock Unit Plan Agreement (Base), dated October 24, 1995,
between Richard S. Pechter and the Registrant
10.46 1995 Restricted Stock Unit Plan Agreement (Base), dated October 24, 1995,
between Gerald B. Rigg and the Registrant
10.47 1995 Restricted Stock Unit Plan Agreement (Base), dated October 24, 1995,
between Joe L. Roby and the Registrant
10.49 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
10.55 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
10.59 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
71
Item 14 (a) (3) Exhibits (Continued)
EXHIBIT NO. DESCRIPTION
----------- -----------
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
10.69 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
10.75 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
10.79 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
72
Item 14 (a) (3) Exhibits (Continued)
EXHIBIT NO. DESCRIPTION
----------- -----------
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.
10.91 Purchase and Sale Agreement, dated July 16, 1998 among the
Company, The Equitable Companies Incorporated and AXA
Holdings (Belgium).
10.92 First Amended and Restated Credit Agreement, dated May 29,
1998 among the Company, a syndicate of banks, Chase
Securities, Inc. the Chase Manhattan Bank, the Bank of New
York and The First National Bank of Chicago
10.93 Agreement of Lease between USF Nominees Limited, Landlord,
DLJ UK Properties Limited, Tenant, 111 Old Broad Street,
London and the Company, Surety, dated as of June 3, 1998.
10.94 Sublease Agreement between Furman Selz, LLC, Sublandlord
and the Company, Subtenant, 280 Park Avenue, New York, New
York, dated as of June 16, 1998.
73
Item 14 (a) (3) Exhibits (Continued)
EXHIBIT NO. DESCRIPTION
----------- -----------
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 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 subsidiaries.
(b) Reports on Form 8-K
1. Form 8-K dated July 16,1998; Item 5
2. Form 8-K dated July 17, 1998; Item 5
3. Form 8-K dated September 2, 1998; Item 5
4. Form 8-K dated October 14, 1998; Item 5
5. Form 8-K dated October 16, 1998; Item 5
74
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.
4.8 Certificate of Designation of 3,500,000 shares of
Fixed/Adjustable Rate Cumulative Preferred Stock, Series B.
(Incorporated herein by reference to Exhibit 99.1 to the
Company's Form 8-K, dated January 8, 1998; Item 5).
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).
75
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------- ----
10.8 Donaldson, Lufkin & Jenrette, Inc. 1996 Stock Option Plan
(Incorporated by reference to Annex A of the Registrant's Proxy
Statement on Schedule 14Afiled on March 22, 1996 and furnished to
shareholders in connection with the soliciatation of proxies for
the Registrant's annual meeting of shareholders to be held on
April 30, 1996.
10.9 Deferred Compensation Agreement, dated December 30, 1983, between
Michael M. Bendik and the Registrant (Incorporated by reference
to the corresponding exhibit to the Registrant's Registration
Statement on Form S-1, Registration No. 33-96276).
10.10 Deferred Compensation Agreement, dated December 30, 1983, between
Michael A. Boyd and the Registrant (Incorporated by reference to
the corresponding exhibit to the Registrant's Registration
Statement on Form S-1, Registration No.
33-96276).
10.11 Deferred Compensation Agreement, dated December 30, 1983, between
John S. Chalsty and the Registrant (Incorporated by reference to
the corresponding exhibit to the Registrant's Registration
Statement on Form S-1, Registration No. 33-96276).
10.12 Deferred Compensation Agreement, dated December 30, 1983, between
Anthony F. Daddino and the Registrant (Incorporated by reference
to the corresponding exhibit to the Registrant's Registration
Statement on Form S-1, Registration No. 33-96276).
10.15 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).
76
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------- ----
10.19 Letter agreement between the Registrant and ACMC, Inc., dated as
of August 25, 1995, regarding certain state and local tax sharing
arrangements (Incorporated by reference to the corresponding
exhibit to the Registrant's Registration Statement on Form S-1,
Registration No. 33-96276).
10.20 Insurance Agreement, dated August 27, 1992, by and between the
Registrant and Thomas E. Siegler, as Trustee and Owner of the
1992 Chalsty Insurance Trust, dated August 25, 1995 (Incorporated
by reference to the corresponding exhibit to the Registrant's
Registration Statement on Form S-1, Registration No.
33-96276).
10.21 Amendment, dated August 28, 1992, to the Insurance Agreement,
dated August 27, 1992, by and between the Registrant and Michael
Cappiccille, as Trustee and Owner (Incorporated by reference to
the corresponding exhibit to the Registrant's Registration
Statement on Form S-1, Registration No. 33-96276).
10.22 Federal tax sharing agreement (Incorporated by reference to the
corresponding exhibit to the Registrant's Registration Statement
on Form S-1, Registration No. 33-96276).
10.23 Agreement of lease between 99 Bishopsgate Limited, 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).
77
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------- ----
10.34 Master Repurchase Agreement between Column Financial, Inc. and DLJ Mortgage
Capital, Inc. dated as of November 1, 1993 (Incorporated by reference to the
corresponding exhibit to the Registrant's Registration Statement on Form S-1,
Registration No. 33-96276).
10.35 Mortgage Loan Purchase Agreement between Column Financial, Inc. and DLJ
Mortgage Acceptance Corp. dated as of December 1, 1994 (Incorporated by
reference to the corresponding exhibit to the Registrant's Registration
Statement on Form S-1, Registration No. 33-96276).
10.36 First Amendment to the Amended and Restated Equitable Credit
Agreement dated March 1, 1994, among the Registrant, The
Equitable Life Assurance Society of the United States, Equitable
Variable Life Insurance Company, DLJ Bridge Finance, Inc., DLJ
Capital Corporation and DLJ Investment Inc. (Incorporated by
reference to the corresponding exhibit to the Registrant's annual
report on Form 10-K for the fiscal year ended December 31, 1995).
10.37 Agreement of lease between Broadpine Realty Holding Company, Inc.
and the Registrant, Tenant, 120 Broadway, New York, New York,
dated as of November 10, 1995 (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report on Form
10-K for the fiscal year ended December 31, 1995).
10.38 Donaldson, Lufkin & Jenrette, Inc. 1996 Incentive Compensation
Plan (Incorporated by reference to Annex B of the Registrant's
Proxy Statement on Schedule 14A filed on March 22, 1996 and
furnished to shareholders in connection with the solicitation of
proxies for the Registrant's annual meeting of shareholders to be
held on April 30, 1996).
10.39 1995 Restricted Stock Unit Plan Agreement (Base), dated October
24, 1995, between Michael M. Bendik and the Registrant
(Incorporated by reference to the corresponding exhibit to the
Registrant's annual report on Form 10-K for the fiscal year ended
December 31, 1995).
10.40 1995 Restricted Stock Unit Plan Agreement (Base), dated October
24, 1995, between Michael A. Boyd and the Registrant
(Incorporated by reference to the corresponding exhibit to the
Registrant's annual report on Form 10-K for the fiscal year ended
December 31, 1995).
10.41 1995 Restricted Stock Unit Plan Agreement (Base), dated October
24, 1995, between John S. Chalsty and the Registrant
(Incorporated by reference to the corresponding exhibit to the
Registrant's annual report on Form 10-K for the fiscal year ended
December 31, 1995).
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).
78
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------- ----
10.45 1995 Restricted Stock Unit Plan Agreement (Base), dated October
24, 1995, between Richard S. Pechter and the Registrant
(Incorporated by reference to the corresponding exhibit to the
Registrant's annual report on Form 10-K for the fiscal year ended
December 31, 1995).
10.46 1995 Restricted Stock Unit Plan Agreement (Base), dated October
24, 1995, between Gerald B. Rigg and the Registrant (Incorporated
by reference to the corresponding exhibit to the Registrant's
annual report on Form 10-K for the fiscal year ended December 31,
1995).
10.47 1995 Restricted Stock Unit Plan Agreement (Base), dated October
24, 1995, between Joe L. Roby and the Registrant (Incorporated by
reference to the corresponding exhibit to the Registrant's annual
report on Form 10-K for the fiscal year ended December 31, 1995).
10.49 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).
79
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------- ----
10.55 1995 Restricted Stock Unit Plan Agreement (Premium), dated
October 24, 1995, between Richard S. Pechter and the Registrant
(Incorporated by reference to the corresponding exhibit to the
Registrant's annual report on Form 10-K for the fiscal year ended
December 31, 1995).
10.56 1995 Restricted Stock Unit Plan Agreement (Premium), dated
October 24, 1995, between Gerald B. Rigg and the Registrant
(Incorporated by reference to the corresponding exhibit to the
Registrant's annual report on Form 10-K for the fiscal year ended
December 31, 1995).
10.57 1995 Restricted Stock Unit Plan Agreement (Premium), dated
October 24, 1995, between Joe L. Roby and the Registrant
(Incorporated by reference to the corresponding exhibit to the
Registrant's annual report on Form 10-K for the fiscal year ended
December 31, 1995).
10.59 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).
80
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------- ----
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).
10.69 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).
10.75 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).
81
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------- ----
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).
10.79 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).
10.84 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).
82
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------- ----
10.86 Third Amendment of Lease by and between Stanley Stahl D/B/A Stahl
Park Avenue Co. and the Registrant, dated October 6, 1995.
(Incorporated herein by reference to the corresponding exhibit to
the Registrant's quarterly report on Form 10-Q for the period
ended June 30, 1996).
10.87 Fourth Amendment of Lease by and between Stanley Stahl D/B/A
Stahl Park Avenue Co. and the Registrant, dated April 29, 1996.
(Incorporated herein by reference to the corresponding exhibit to
the Registrant's quarterly report on Form 10-Q for the period
ended June 30, 1996).
10.88 1996 Non-Employee Directors Stock Plan (Incorporated by reference
to Annex A of the Registrant's Proxy Statement on Schedule 14A
filed on March 11, 1997 and furnished to shareholders in
connection with solicitation of proxies for the Registrant's
annual meeting of shareholders to be held on April 16, 1997).
10.89 1996 Stock Option Plan Agreement, dated May 16, 1996, between Joe
L. Roby and the Registrant. (Incorporated by reference to the
corresponding exhibit on Form 10-K for the fiscal year ended
December 31, 1996).
10.91 Purchase and Sale Agreement, dated July 16, 1998 among the
Company, The Equitable Companies Incorporated and AXA Holdings
(Belgium). (Incorporated herein by reference to Exhibit 10.85 of the Registrant's
quarterly report on Form 10-Q for the period ended June 30, 1998)
10.92 First Amended and Restated Credit Agreement, dated May 29, 1998 among the
Company, a syndicate of banks, Chase Securities, Inc. the Chase Manhattan Bank,
the Bank of New York and The First National Bank of Chicago. (Incorporated herein
by reference to Exhibit 10.91 of the Registrant's quarterly report on Form 10-Q for
the period ended June 30, 1998)
10.93 Agreement of Lease between USF Nominees Limited, Landlord, DLJ UK
Properties Limited, Tenant, 111 Old Broad Street, London and the
Company, Surety, dated as of June 3, 1998. (Incorporated herein by reference to
Exhibit 10.92 of the Registrant's quarterly report on Form 10-Q for the period ended
June 30, 1998)
10.94 Sublease Agreement between Furman Selz, LLC, Sublandlord and the
Company, Subtenant, 280 Park Avenue, New York, New York, dated as
of June 16, 1998. (Incorporated herein by reference to Exhibit 10.93 of the
Registrant's quarterly report on Form 10-Q for the period ended June 30, 1998)
11.1 Statement re: computation of basic earnings per share. 84
11.2 Statement re: computation of diluted earnings per share. 85
12.1 Computation of ratio of earnings to fixed charges and ratio of earnings to
combined fixed charges and preferred stock dividends. 86
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP. 88
27 Financial Data 90
Schedule.
83
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 day of 1999.
Donaldson, Lufkin & Jenrette, Inc.
(Registrant)
By:
______________________________________
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 day of 1999.
Name Title
---- -----
____________________________________ Chairman of the Board; Director
John S. Chalsty
____________________________________ President and Chief Executive
Joe L. Roby Officer; Director
____________________________________ Executive Vice President and Chief
Anthony F. Daddino Financial Officer; Director
____________________________________ Managing Director; Director
Hamilton E. James
____________________________________ Managing Director; Director
Richard S. Pechter
____________________________________ Senior Vice President and
Michael M. Bendik Chief Accounting Officer
84
Name Title
---- -----
____________________________________ Senior Vice President and
Michael A. Boyd General Counsel
____________________________________ Senior Vice President and
Gerald B. Rigg Director of Human Resources
____________________________________ Director
Henri de Castries
____________________________________ Director
Denis Duverne
____________________________________ Director
Louis Harris
____________________________________ Director
Henri G. Hottinguer
____________________________________ Director
W. Edwin Jarmain
____________________________________ Director
Francis Jungers
____________________________________ Director
Edward Miller
____________________________________ Director
W.J. Sanders III
____________________________________ Director
Stanley Tulin
____________________________________ Director
John C. West
____________________________________ Director
Michael Hegarty
85