EXHIBIT 99
DONALDSON, LUFKIN & JENRETTE, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
1
Independent Auditors' Report
The Board of Directors and Stockholders
Donaldson, Lufkin & Jenrette, Inc.
We have audited the accompanying consolidated statements of financial condition
of Donaldson, Lufkin & Jenrette, Inc. and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Donaldson, Lufkin &
Jenrette, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
New York, New York
February 2, 1998
2
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Consolidated Statements of Financial Condition
(in thousands, except share and per share data)
December 31,
1997 1996
---- ----
ASSETS
Cash and cash equivalents .............................................. $ 273,164 $ 158,831
Cash and securities segregated for regulatory purposes or
deposited with clearing organizations ............................... 832,093 836,406
Securities purchased under agreements to resell ........................ 22,628,782 20,598,738
Securities borrowed .................................................... 20,598,639 9,355,484
Receivables:
Customers ........................................................... 4,397,668 3,169,293
Brokers, dealers and other .......................................... 3,162,970 4,333,983
Securities owned, at value:
U.S. government and agency .......................................... 6,834,996 6,882,604
Corporate debt ...................................................... 5,577,023 4,424,649
Foreign sovereign debt .............................................. 1,624,235 3,116,201
Mortgage whole loans ................................................ 1,555,685 275,510
Equity and other .................................................... 943,782 1,029,094
Long-term corporate development investments ......................... 315,774 204,403
Property, equipment and leasehold improvements, at cost, (net of
accumulated depreciation and amortization of $216,230 and
$163,004 respectively) .............................................. 388,677 282,513
Other assets and deferred amounts ...................................... 1,372,357 835,963
----------- -----------
Total Assets ........................................................... $70,505,845 $55,503,672
=========== ===========
See accompanying notes to consolidated financial statements.
3
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Consolidated Statements of Financial Condition
(in thousands, except share and per share data)
December 31,
1997 1996
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings ................................................ $ 1,418,757 $ 1,162,896
Securities sold under agreements to repurchase ....................... 36,006,656 29,378,291
Securities loaned .................................................... 7,687,416 2,724,773
Payables:
Customers ........................................................ 5,071,653 3,897,817
Brokers, dealers and other ....................................... 2,491,115 3,345,424
Securities sold not yet purchased, at value:
U.S. government and agency ....................................... 7,671,498 6,864,643
Corporate debt ................................................... 854,155 646,421
Foreign sovereign debt ........................................... 553,852 1,265,553
Equity and other ................................................. 1,376,395 665,053
Accounts payable and accrued expenses ................................ 2,119,131 1,721,255
Other liabilities .................................................... 741,870 442,667
----------- -----------
65,992,498 52,114,793
----------- -----------
Long-term borrowings ................................................. 2,251,857 1,541,640
----------- -----------
Total liabilities ........................................... 68,244,355 53,656,433
----------- -----------
Company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely debentures
of the Company ................................................... 200,000 200,000
----------- -----------
Stockholders' Equity:
Series A Preferred Stock, at liquidation preference .............. 200,000 200,000
Common stock ($0.10 par value; 150,000,000 shares authorized;
55,926,381 and 53,300,000 shares issued and outstanding
in 1997 and 1996, respectively) ............................... 5,593 5,330
Restricted stock units (5,179,147 units authorized;
3,281,207 and 5,081,793 units issued and outstanding
in 1997 and 1996, respectively) ............................... 67,255 104,167
Paid-in capital .................................................. 446,518 365,989
Retained earnings ................................................ 1,338,220 969,856
Cumulative translation adjustment ................................ 3,904 1,897
----------- -----------
Total stockholders' equity .................................. 2,061,490 1,647,239
----------- -----------
Total Liabilities and Stockholders' Equity ........................... $70,505,845 $55,503,672
=========== ===========
See accompanying notes to consolidated financial statements.
4
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Consolidated Statements of Income
(in thousands, except per share data)
Years Ended December 31,
1997 1996 1995
---- ---- ----
Revenues:
Commissions .......................................... $ 690,156 $ 573,335 $ 460,196
Underwritings ........................................ 831,714 714,183 441,547
Fees ................................................. 767,259 469,986 369,094
Interest, net of interest to finance U.S. government,
agency and mortgage-backed securities of $2,859,042,
$2,132,593, and $2,019,153, respectively ........... 1,652,135 1,074,223 904,078
Principal transactions-net:
Trading ............................................ 437,083 435,382 364,886
Investment ......................................... 194,527 162,975 163,695
Other ................................................ 67,595 60,672 55,133
---------- ---------- ----------
Total revenues .................................... 4,640,469 3,490,756 2,758,629
---------- ---------- ----------
Costs and Expenses:
Compensation and benefits ............................ 1,908,201 1,538,754 1,261,437
Compensation expense-restricted stock units .......... -- -- 6,163
Interest ............................................. 1,153,167 733,207 680,616
Brokerage, clearing,
exchange fees and other ............................ 231,402 201,292 168,116
Occupancy and equipment .............................. 189,915 159,330 127,094
Communications ....................................... 63,965 53,657 42,807
Other operating expenses ............................. 432,719 330,716 173,896
---------- ---------- ----------
Total costs and expenses .......................... 3,979,369 3,016,956 2,460,129
---------- ---------- ----------
Income before provision for income taxes ................. 661,100 473,800 298,500
---------- ---------- ----------
Provision for income taxes ............................... 252,850 182,500 119,400
---------- ---------- ----------
Net income ............................................... $ 408,250 $ 291,300 $ 179,100
========== ========== ==========
Dividends on preferred stock ............................. $ 12,144 $ 18,653 $ 19,868
========== ========== ==========
Earnings applicable to common shares ..................... $ 396,106 $ 272,647 $ 159,232
========== ========== ==========
Earnings per common share:
Basic ............................................... $ 7.18 $ 5.12 $ 3.15
========== ========== ==========
Diluted ............................................. $ 6.32 $ 4.59 $ 3.09
========== ========== ==========
Weighted average common shares outstanding:
Basic ............................................... 55,159 53,300 50,570
========== ========== ==========
Diluted ............................................. 62,749 59,356 51,580
========== ========== ==========
See accompanying notes to consolidated financial statements.
5
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1995, 1996 and 1997
(In thousands, except per share data)
Series A Restricted Cumulative
Preferred Common Stock Paid-in Retained Translation
Stock Stock Units Capital Earnings Adjustment Total
---------- ------- ----------- ------- -------- ----------- -----
Balances at December 31, 1994 $ 0 $ 1,000 $ 0 $ 232,080 $ 587,555 $ (344) $ 820,291
Net income .................. -- -- -- -- 179,100 -- 179,100
Dividends:
Common stock
($0.45 per share) ........ -- -- -- -- (22,928) -- (22,928)
Preferred stock
($8.83 per share) ........ -- -- -- -- (19,868) -- (19,868)
Stock split ................. -- 4,000 -- (4,000) -- -- --
Additional capital
contribution
from Equitable ........... -- -- -- 55,000 -- -- 55,000
Net proceeds from issuance
of common stock in
Initial Public Offering .. -- 330 -- 80,913 -- -- 81,243
Issuance of restricted
stock units .............. -- -- 106,163 -- -- -- 106,163
Translation adjustment ...... -- -- -- -- -- (281) (281)
----------- ----------- ----------- ----------- ----------- ------------ -----------
Balances at December 31, 1995 0 5,330 106,163 363,993 723,859 (625) 1,198,720
Net income .................. -- -- -- -- 291,300 -- 291,300
Dividends:
Common stock
($0.50 per share) ........ -- -- -- -- (26,650) -- (26,650)
Preferred stock
($8.29 per share) ........ -- -- -- -- (18,653) -- (18,653)
Forfeiture of restricted
stock units .............. -- -- (1,996) 1,996 -- -- --
Issuance of Series A
preferred stock ........... 200,000 -- -- -- -- -- 200,000
Translation adjustment ...... -- -- -- -- -- 2,522 2,522
----------- ----------- ----------- ----------- ----------- ------------ -----------
Balances at December 31, 1996 $ 200,000 $ 5,330 $ 104,167 $ 365,989 $ 969,856 $ 1,897 $ 1,647,239
Net income .................. -- -- -- -- 408,250 -- 408,250
Dividends:
Common stock
($0.50 per share) ........ -- -- -- -- (27,742) -- (27,742)
Preferred stock
($3.036 per share) ....... -- -- -- -- (12,144) -- (12,144)
Forfeiture of restricted
stock units .............. -- -- (156) 156 -- -- --
Conversion of restricted
stock units to common stock,
including related tax
benefits ................. -- 179 (36,756) 45,220 -- -- 8,643
Conversion of debentures .... -- 69 -- 28,710 -- -- 28,779
Exercise of stock options,
including related tax
benefits................. -- 15 -- 6,443 -- -- 6,458
Translation adjustment ...... -- -- -- -- -- 2,007 2,007
----------- ----------- ----------- ----------- ----------- ------------ -----------
Balances at December 31, 1997 $ 200,000 $ 5,593 $ 67,255 $ 446,518 $ 1,338,220 $ 3,904 $ 2,061,490
=========== =========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
6
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Years Ended December 31,
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income ....................................................... $ 408,250 $ 291,300 $ 179,100
------------ ------------ ------------
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization ................................. 60,828 53,485 38,082
Deferred taxes ................................................ (134,233) (120,022) (119,657)
Decrease in net unrealized (depreciation) appreciation of
long-term corporate development investments ................. (34,524) 50,283 97,792
Compensation expense-restricted stock units ................... -- -- 6,163
Other-net ..................................................... 600 346 1,062
------------ ------------ ------------
300,921 275,392 202,542
Decrease (increase) in operating assets:
Cash and securities segregated for regulatory
purposes or deposited with clearing organizations ........... 4,313 (381,936) 278,540
Securities purchased under agreements to resell ............... (4,622,196) 9,191 (5,462,395)
Securities borrowed ........................................... (11,243,155) (310,574) (354,478)
Receivables from customers .................................... (1,228,375) (813,320) (707,330)
Receivables from brokers, dealers and other ................... 921,011 (2,342,428) (294,652)
Securities owned, at value .................................... (807,663) (4,906,785) (1,796,269)
Other assets and deferred amounts ............................. (179,958) (147,335) 2,805
Increase (decrease) in operating liabilities:
Securities sold under agreements to repurchase ................ 4,622,196 (9,191) 5,462,395
Securities loaned ............................................. 4,962,643 100,560 595,548
Payables to customers ......................................... 1,173,836 1,336,559 604,648
Payables to brokers, dealers and other ........................ (854,309) 2,319,850 (75,226)
Securities sold not yet purchased, at value ................... 1,014,230 2,737,243 1,172,509
Accounts payable and accrued expenses ......................... 397,876 323,790 450,166
Other liabilities ............................................. 310,230 89,551 15,293
Translation adjustment .......................................... 2,007 2,522 (281)
------------ ------------ ------------
Net cash (used in) provided by operating activities ............... $ (5,226,393) $ (1,716,911) $ 93,815
------------ ------------ ------------
See accompanying notes to consolidated financial statements.
7
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Years Ended December 31,
1997 1996 1995
---- ---- ----
Cash flows from investing activities:
Net (payments for) proceeds from:
Purchases of long-term corporate development investments .......... $ (194,777) $ (87,600) $ (98,396)
Sales of long-term corporate development investments .............. 117,930 117,412 78,078
Purchases of property, equipment and leasehold improvements ....... (162,568) (142,597) (141,935)
Other assets ...................................................... 23,375 5,818 42,272
----------- ----------- -----------
Net cash used in investing activities ............................... (216,040) (106,967) (119,981)
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from (payments for):
Short-term financings ............................................. 4,854,182 1,187,338 (541,832)
Subordinated revolving credit agreement ........................... 118,500 (43,500) --
Medium-Term notes ................................................. 359,646 249,515 --
Global floating rate notes ........................................ 347,760 -- --
Structured notes .................................................. (92,536) 191,764 24,470
Convertible debentures ............................................ 18,779 43,500 --
Other long-term debt .............................................. (13,753) (2,858) (78,762)
Swiss Franc Bonds ................................................. -- (105,513) --
Issuance of Company obligated mandatorily redeemable
preferred securities ........................................... -- 200,000 --
Issuance of Series A Preferred Stock .............................. -- 200,000 --
Issuance of common stock in Initial Public Offering ............... -- -- 81,243
Issuance of restricted stock units ................................ -- -- 100,000
Senior Notes ...................................................... -- -- 496,755
Secured term loan agreement ....................................... -- -- 250,000
Secured term loan agreement ....................................... -- -- (250,000)
Dividends ......................................................... (39,886) (45,303) (42,796)
Exercise of stock options ......................................... 4,074 -- --
----------- ----------- -----------
Net cash provided by financing activities ............................. 5,556,766 1,874,943 39,078
----------- ----------- -----------
Increase in cash and cash equivalents ................................. 114,333 51,065 12,912
Cash and cash equivalents at beginning of year ........................ 158,831 107,766 94,854
----------- ----------- -----------
Cash and cash equivalents at end of year .............................. $ 273,164 $ 158,831 $ 107,766
=========== =========== ===========
See accompanying notes to consolidated financial statements.
8
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997
1. Summary of Significant Accounting Policies
The consolidated financial statements include Donaldson, Lufkin & Jenrette,
Inc. and its subsidiaries ("DLJ" or the "Company"). All significant
intercompany balances and transactions have been eliminated. The Company is a
majority owned subsidiary of the Equitable Companies Incorporated and its
subsidiaries (together, "Equitable"). The Company's separate financial
statements reflect Equitable's cost basis established at the time of
Equitable's acquisition of the Company in 1985.
DLJ is a leading integrated investment and merchant bank that serves
institutional, corporate, governmental and individual clients. DLJ's businesses
include securities underwriting; sales and trading; investment and merchant
banking; correspondent brokerage services; online investment services and asset
management.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Substantially all of the Company's financial assets and liabilities, as well as
financial instruments with off-balance sheet risk, are carried at market or
fair values or are carried at amounts which approximate fair value because of
their short-term nature. Estimates of fair value are made at a specific point
in time, based on relevant market information and information about the
financial instrument, specifically, the value of the underlying financial
instrument. These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire holdings of a
particular financial instrument.
For purposes of the consolidated financial statements, the Company considers
all demand deposits held in banks, and certain highly liquid investments with
maturities of 90 days or less other than those held for sale in the ordinary
course of business to be cash equivalents.
Securities sold under agreements to repurchase (repurchase agreements) and
securities purchased under agreements to resell (resale agreements) are treated
as financing arrangements and are carried at contract amounts reflective of the
amounts at which the securities will be subsequently reacquired or resold as
specified in the respective agreements. Interest is accrued on such contract
amounts and is included in receivables from and payables to brokers, dealers
and other in the accompanying consolidated statements of financial condition.
The Company takes possession of the underlying assets purchased under
agreements to resell and obtains additional collateral when the market value
falls below the contract value. Repurchase and resale agreements with the same
counterparty, same maturity date, which settle through the Federal Reserve
system and which are subject to master netting agreements are presented net in
the consolidated financial statements.
Securities borrowed and securities loaned are financing arrangements which are
recorded at the amount of cash collateral advanced or received. Securities
borrowed transactions require the Company to deposit cash, letters of credit or
other collateral with the lender. With respect to securities loaned, the
Company receives collateral in the form of cash or other collateral in an
amount generally in excess of the market value of securities loaned. The
Company monitors the market value of securities borrowed and loaned on a daily
basis with additional collateral obtained or refunded as necessary.
Receivables from and payables to customers include amounts due on cash and
margin transactions. Securities owned by customers are held as collateral for
these receivables. Such collateral is not reflected in the consolidated
financial statements.
9
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
U.S. government and agency securities, mortgage-backed securities, options,
futures and forward transactions and certain other debt obligations are
recorded in the consolidated financial statements on a trade date basis. All
other securities are recorded on a settlement date basis and adjustments are
made to a trade date basis, if significant.
Securities owned (other than long-term corporate development investments) are
carried at market value. Changes in unrealized appreciation (depreciation)
arising from fluctuations in market value or upon realization of security
positions are reflected in revenues, principal transactions-net, trading.
Transfers of financial assets are accounted for as sales to the extent that the
Company has surrendered control over such assets.
Long-term corporate development investments represent the Company's involvement
in private debt and equity investments which generally have no readily
available market or may otherwise be restricted as to resale under the
Securities Act of 1933. Accordingly, these investments are carried at estimated
fair value as determined by the Finance Committee of the Board of Directors.
The cost of these investments was $323.2 million and $246.4 million at December
31, 1997 and 1996, respectively. The decrease in net unrealized depreciation of
long-term corporate development investments amounted to $34.5 million for the
year ended December 31, 1997, and the decrease in net unrealized appreciation
amounted to $50.3 million and $97.8 million for the years ended December 31,
1996 and 1995, respectively. Changes in net unrealized appreciation
(depreciation) arising from changes in fair value or upon realization are
reflected in revenues, principal transactions-net, investment.
Property and equipment are carried at cost and are depreciated on a
straight-line basis over the estimated useful life of the related assets
ranging from three to eight years. Leasehold improvements are amortized over
the lesser of the useful life of the improvement or term of the lease. Exchange
memberships owned by the Company are included in other assets and are carried
at cost.
Assets and liabilities of foreign subsidiaries denominated in non-U.S. dollar
currencies are translated at exchange rates prevailing at the date of the
consolidated statements of financial condition. Revenues and expenses are
translated at average exchange rates during the period. The gains or losses
resulting from translating foreign currency financial statements into U.S.
dollars are included as a separate component of stockholders' equity. Gains or
losses resulting from foreign currency transactions are included in the
consolidated statements of income.
Prior to January 1, 1997, the Company was included in the consolidated Federal
income tax returns filed by Equitable. DLJ provided taxes as if the Company
filed a separate tax return. Related current and deferred tax receivables or
liabilities with Equitable are included in other assets or liabilities in the
consolidated statements of financial condition. Deferred tax expenses and
benefits are recognized in the consolidated financial statements for the
changes in deferred tax liabilities and assets. Under a tax sharing agreement
with Equitable, all Federal taxes payable by the Company were payable to
Equitable for periods while the Company was at least 80% owned by Equitable.
Effective January 1, 1997, Equitable's ownership for tax purposes declined to
under 80% and therefore, the Company will file its own U.S. consolidated
Federal income tax return separate and apart from Equitable.
All liabilities related to postretirement and postemployment benefits have been
provided for and the related costs are not significant.
The Company accounts for stock-based compensation in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation." Pursuant to SFAS No. 123, the
Company continues to apply the provisions of APB Opinion No. 25 and provides
pro forma net income and pro forma earnings per share disclosures for employee
stock option grants as if the fair-value-based method defined in SFAS No. 123
had been applied.
10
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
The Company calculates earnings per common share in accordance with SFAS No.
128, "Earnings per Share," which was issued in February 1997. This statement
replaces the presentation of primary and fully diluted earnings per share with
a presentation of basic and diluted earnings per share. Basic earnings per
share excludes the dilutive effects of stock options, non-vested restricted
stock units and convertible debt. Diluted earnings per share reflect all
potential dilutive securities. All earnings per common share amounts reflect
the adoption of this statement.
In December 1996, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125," which delays until January 1, 1998 the effective date for
certain provisions, including repurchase agreements, securities lending
transactions and similar transactions. The deferred provisions of this
statement are not expected to have a material effect on the consolidated
financial statements.
Certain reclassifications have been made to prior year consolidated financial
statements to conform to the 1997 presentation.
2. Equity Distribution
On October 30, 1995, the Company completed an initial public offering ("IPO").
Of the 10.6 million shares of common stock sold in the IPO, 7.3 million shares
were sold by Equitable and 3.3 million shares were sold by the Company, at
$27.00 per share. Proceeds to the Company from the IPO amounted to
approximately $81.2 million, net of related expenses.
3. Related Party Transactions
In the normal course of business, the Company provides brokerage services
including clearance, investment banking and related activities for Equitable
and certain of its affiliates. The amounts related to such activities are not
significant.
The Company is the sponsor of the $1.25 billion DLJ Bridge Fund which provides
short-term loans in connection with DLJ's merchant banking and financial
advisory businesses. The Bridge Fund has a $750 million commitment of
subordinated debt from Equitable and a $500 million commitment of senior
revolving debt by a commercial bank syndicate. Any loans made by the DLJ Bridge
Fund would be expected to be refinanced, and the outstanding amounts repaid,
within a short-term period. The Company has agreed to pay Equitable the first
$25 million of aggregate principal losses incurred by Equitable with respect to
all bridge loans. To the extent such payments by the Company do not fully cover
any such losses incurred by Equitable, Equitable is entitled to receive all
other distributions otherwise payable to the Company with respect to DLJ Bridge
Fund activities until such losses have been recovered. The Company has also
agreed to pay Equitable the amount, if any, by which any principal loss on an
individual loan exceeds $150 million. The DLJ Bridge Fund currently has one
individual bridge loan outstanding in excess of $150 million. Pursuant to
arrangements between the Company and the commercial bank syndicate, the Company
is at risk for a significant portion of any loans funded by such banks.
However, substantially all of the bridge loans have been made without using the
bank commitment. At December 31, 1997, the DLJ Bridge Fund had extended $565.1
million of short-term bridge loans which are expected to be refinanced in the
first quarter of 1998.
Dividends on common stock of $21.3 million, $21.4 million and $21.6 million
were paid or accrued to Equitable for the years ended December 31, 1997, 1996
and 1995, respectively.
4. Cash and Securities Segregated Under Federal and Other Regulations
Cash of $13.7 million and $13.2 million and securities with a market value of
$711.0 million and $770.0 million as of December 31, 1997 and 1996,
respectively, have been segregated in special reserve bank accounts for the
benefit of customers in accordance with regulations of the Securities and
Exchange Commission and the Commodities Futures Trading Commission.
11
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
5. Borrowings
Short-term borrowings are generally demand obligations, at interest rates
approximating Federal fund rates from banks and other financial institutions.
Such borrowings are generally used to finance securities inventories, to
facilitate the securities settlement process and to finance securities
purchased by customers on margin. At December 31, 1997 and 1996, securities
owned by the Company, aggregating $190.5 million and $363.6 million,
respectively, were pledged to secure certain of these borrowings.
Short-term borrowings and repurchase agreements and the weighted average
interest rates related to these borrowings at December 31, 1997 and 1996 are as
follows:
Weighted Average
Amounts Interest Rates
December 31, December 31,
1997 1996 1997 1996
--------- --------- -------- ------
(In millions)
Securities sold under agreements to repurchase............. $ 36,007 $ 29,378 6.04% 6.08%
Bank loans................................................. 988 669 6.57 6.89
Borrowings from other financial institutions............... 133 197 6.21 6.95
Included in short-term borrowings at December 31, 1997 and 1996 are $297.4
million and $297.0 million, respectively of structured notes with maturities of
less than one year.
In January 1998, the Company commenced a $1.0 billion commercial paper program.
Obligations issued thereunder (the "Notes") are exempt from registration under
the Securities Act of 1933, as amended.
The Company also finances its activities through long-term borrowing
arrangements. Long-term borrowings, including current maturities of $32.8
million and $112.0 million at December 31, 1997 and 1996, respectively, consist
of the following:
December 31,
1997 1996
------ ------
(In thousands)
Senior notes, 6 7/8% due in 2005.............................................. $ 497,484 $ 497,160
Senior subordinated revolving credit agreement due in 2000.................... 325,000 206,500
Subordinated exchange notes, 9 5/8% due in 2003............................... 225,000 225,000
Medium-term notes, 5 5/8% due in 2016......................................... 249,561 249,537
Medium-term notes, 6.01% - 6.85% due various dates through 2002............... 199,844 -
Medium-term notes, 6.90% due in 2007.......................................... 148,572 -
Medium-term notes, 6.28% due in 2007.......................................... 99,333 -
Global floating rate notes, due in 2002....................................... 347,909 -
Medium-term notes, 7.88% due in 1997.......................................... - 88,000
Structured notes.............................................................. 123,698 216,234
Other......................................................................... 35,456 59,209
-------------- -------------
Total long-term borrowings............................................... $ 2,251,857 $ 1,541,640
=========== ===========
Structured notes are customized financing instruments in which the amount of
interest or principal paid on the debt obligation is linked to the return on
specific cash instruments. The notes, most of which carry a zero coupon, mature
at various dates, in excess of one year, through 2012.
Interest paid on all borrowings and financing arrangements amounted to $3.9
billion, $2.8 billion and $2.7 billion for the years ended December 31, 1997,
1996 and 1995, respectively.
12
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
Scheduled maturities of long-term borrowings are as follows:
December 31,
1997 1996
------ ------
(In thousands)
1997 ............. $ -- $ 112,010
1998 ............. 32,758 230,018
1999 ............. 14,753 42,654
2000 ............. 519,050 70
2001 ............. 51,058 82,062
2002 ............. 357,897 --
2003-2016......... 1,276,341 1,074,826
---------- ----------
$2,251,857 $1,541,640
========== ==========
In connection with its 1997 and 1996 financings, the Company:
1996
Established a shelf registration ("shelf") for the issuance, from time to time,
of up to $500 million of Senior Debt Securities and/or Preferred Stock and in
connection therewith, completed an offering of $250 million aggregate principal
amount of 5 5/8% Medium-Term Notes due February 15, 2016. The notes are
repayable by the Company, in whole or in part, at the option of the holders on
February 15, 2001. The Company also issued $200 million Fixed/Adjustable Rate
Cumulative Preferred Stock, Series A from this shelf.
Exercised its option under the terms of the $8.83 Cumulative Preferred Stock
agreement to exchange all 2.25 million shares outstanding for $225 million in
aggregate principal amount of 9 5/8% Subordinated Exchange Notes due 2003,
which includes $20.0 million due to a subsidiary of Equitable at December 31,
1997.
1997
Borrowed an additional $118.5 million under its senior subordinated revolving
credit agreement and extended the maturity thereon to January 30, 2000.
Interest thereon is 6.6875% and 6.375% at December 31, 1997 and 1996,
respectively and is calculated based on the London Interbank Offered Rate
("LIBOR").
Established a $300 million Medium-Term Notes program, of which $200.0 million
with a weighted average interest rate of 6.48% were outstanding at December 31,
1997. The Company has entered into interest rate swap transactions to convert
$190.0 million of such fixed rate notes into floating rate notes based upon
LIBOR. At December 31, 1997, the weighted average effective interest rates on
these notes was 6.08%.
Established a $1.0 billion senior or subordinated debt securities shelf
registration of which up to $500 million has been designated for the offering
of Medium-Term Notes due nine months or more from the date of issuance. At
December 31, 1997 there were $150 million of notes at a fixed rate of 6.90% and
$100 million of notes at a floating rate of 6.28% based upon LIBOR outstanding
under this offering. The Company has entered into an interest rate swap
transaction to convert such floating rate notes into fixed rate notes at 6.94%.
The Company issued $350 million of Global Floating Rate Notes which bear
interest at a floating rate equal to LIBOR plus 0.25% and mature in 2002 and
which are redeemable by the Company in whole or in part on any interest payment
date on or after September 2000.
13
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
Completed a shelf registration for the offering of up to $300 million of senior
or subordinated debt securities or preferred stock. In January 1998, the
Company issued an initial $175 million Fixed/Adjustable Rate Cumulative
Preferred Stock, Series B, from this shelf registration.
Repaid in full the $88.0 million 7.88% Medium-Term Notes plus accrued interest.
Replaced several individual credit facilities aggregating $1.925 billion with a
$2.0 billion revolving credit facility, of which $1.0 billion may be unsecured.
There were no borrowings outstanding under this agreement at December 31, 1997.
6. Income Taxes
Income taxes included in the consolidated statements of income represent the
following:
Current Deferred Total
--------- ----------- ----------
(In thousands)
Year ended December 31, 1997:
U.S. Federal ................ $ 299,091 $(117,622) $ 181,469
Foreign ..................... 25,131 -- 25,131
State and local ............. 62,861 (16,611) 46,250
--------- --------- ---------
$ 387,083 $(134,233) $ 252,850
========= ========= =========
Year ended December 31, 1996:
U.S. Federal ................ $ 222,225 $ (88,970) $ 133,255
Foreign ..................... 16,045 -- 16,045
State and local ............. 64,252 (31,052) 33,200
--------- --------- ---------
$ 302,522 $(120,022) $ 182,500
========= ========= =========
Year ended December 31, 1995:
U.S. Federal ................ $ 197,200 $(104,700) $ 92,500
Foreign ..................... 760 -- 760
State and local ............. 41,097 (14,957) 26,140
--------- --------- ---------
$ 239,057 $(119,657) $ 119,400
========= ========= =========
The difference between the "expected" Federal tax rate and expense computed by
applying the statutory tax rate to income before provision for income taxes and
the effective tax rate and expense is as follows (dollar amounts in thousands):
1997 1996 1995
------------------------ ----------------------- ------------------------
Percent Percent Percent
of of of
Pre-tax Pre-tax Pre-tax
Amount Income Amount Income Amount Income
-------- ------- -------- -------- -------- --------
Computed "expected"
Tax provision ............. $ 231,385 35.0% $ 165,830 35.0% $ 104,475 35.0%
Non-taxable income
and expense items ......... (8,598) (1.3) (4,910) (1.1) (2,560) (0.9)
State and local taxes,
net of related Federal
income tax benefit ........ 30,063 4.5 21,580 4.6 17,485 5.9
--------- ---- --------- ---- --------- ----
$ 252,850 38.2% $ 182,500 38.5% $ 119,400 40.0%
========= ==== ========= ==== ========= ====
14
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1997
and 1996 are as follows:
1997 1996
---------- -------
(In thousands)
Deferred tax assets:
Inventory ............................ $ 6,657 $ 15,463
Investments .......................... 35,617 56,612
Other liabilities and accrued expenses 517,673 385,040
Fixed assets ......................... 4,552 13,737
Deferred tax liabilities:
Inventory ............................ -- (49,349)
Investments .......................... (31,458) (34,072)
Fixed assets ......................... (12,584) (3,796)
Other ................................ (2,871) (282)
--------- ---------
Net deferred tax asset .................... $ 517,586 $ 383,353
========= =========
There are no valuation allowances recorded against deferred tax assets at
December 31, 1997 and 1996 since management has determined that there is
sufficient taxable income from carryback years and anticipated future reversals
of existing taxable temporary differences to offset the tax benefit of
deductible temporary differences. Although realization is not assured,
management believes it is more likely than not that all of the deferred tax
assets will be realized. The amount of the deferred tax assets considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
An affiliate of Equitable was included in the combined return for certain state
and local tax returns filed by the Company. Effective January 1, 1997,
Equitable's ownership for tax purposes declined to under 80% and therefore such
affiliate is no longer included in the Company's state and local tax returns.
Federal income taxes paid in the year ended December 31, 1997 were $293.8
million, including federal income tax equivalents paid to Equitable of $18.6
million. Net federal income tax equivalents paid to Equitable were $267.5
million and $277.8 million in the years ended December 31, 1996 and 1995,
respectively.
7. Net Capital
The Company's wholly owned principal subsidiary, Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJSC") is a registered broker-dealer, a registered
futures commission merchant and member firm of The New York Stock Exchange,
Inc. (the "NYSE") and, accordingly is subject to the minimum net capital
requirements of the Securities and Exchange Commission, NYSE and the
Commodities Futures Trading Commission. As such, it is subject to NYSE's net
capital rule which conforms to the Uniform Net Capital Rule pursuant to rule
15c3-1 of the Securities Exchange Act of 1934. Under the alternative method
permitted by this rule, the required net capital, as defined, shall not be less
than two percent of aggregate debit balances arising from customer
transactions, as defined, or four percent of segregated funds, as defined,
whichever is greater. The NYSE may also require a member firm to reduce its
business if its net capital is less than four percent of aggregate debit
balances and may prohibit a member firm from expanding its business and
declaring cash dividends if its net capital is less than five percent of
aggregate debit balances. At December 31, 1997, DLJSC's net capital of
approximately $762.2 million was 16% of aggregate debit balances and in excess
of the minimum requirement by approximately $654.9 million.
Certain of the Company's London-based broker-dealer subsidiaries are subject to
the requirements of the Securities and Futures Authority, a self-regulatory
organization established pursuant to the United Kingdom Financial Services Act
of 1986. Other U.S. and foreign broker-dealer subsidiaries of the
15
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
Company are subject to net capital requirements of their respective regulatory
agencies. At December 31, 1997 and 1996, the Company and its broker-dealer
subsidiaries were in compliance with all applicable regulatory capital adequacy
requirements.
8. Derivative Financial Instruments
Substantially all of the Company's activities related to derivatives are, by
their nature, trading activities which are primarily for the purpose of
customer accommodations. The Company enters into certain contractual agreements
referred to as derivatives or off-balance sheet financial instruments involving
futures, forwards and options. The Company's derivative activities consist of
writing over-the-counter ("OTC") options to accommodate its customers needs,
trading in forward contracts in U.S. government and agency issued or guaranteed
securities and in futures contracts on equity-based indices, interest rate
instruments and currencies and issuing structured products based on emerging
market financial instruments and indices. The Company's involvement in swap
contracts and commodity derivative instruments is not significant. Although the
Company may enter into certain derivative instruments to provide an economic
hedge against certain risks, all realized and unrealized gains and losses on
these instruments are recorded currently in the consolidated statements of
income.
Accounting Policies for Derivatives
Changes in unrealized gains or losses as well as realized gains and losses at
settlement on all derivative instruments (options, forward and futures
contracts) are included in the consolidated statements of income in principal
transactions-net, trading. Related offsetting amounts are presented as
receivables or payables from brokers, dealers and other in the consolidated
statements of financial condition. Fair value of the options includes the
unamortized premiums which are deferred and are included in payables to
brokers, dealers and other in the consolidated statements of financial
condition. Such premiums are recognized over the life of the option contracts
on a straight-line basis or are recognized through the change in the fair value
of the option in principal transactions-net, trading revenue in the
consolidated statements of income. Cash flows from derivative instruments are
presented as operating activities in the consolidated statements of cash flows.
Options
As part of customer accommodations the Company writes option contracts
specifically designed to meet customers' needs. As a writer of OTC option
contracts, the Company receives a cash premium at the beginning of the contract
period and bears the risk of unfavorable changes in the value of the financial
instruments underlying the options. Options written do not expose the Company
to credit risk since they obligate the Company (not its counterparty) to
perform. With respect to the financial instruments underlying these options,
the Company makes a determination that credit exposures are appropriate for the
particular counterparty with whom business is conducted. The Company generally
covers its market risk associated with the options business by purchasing or
selling cash or other derivative financial instruments on a proprietary basis.
Such purchases and sales may include debt and equity securities, futures and
forward contracts and options. The Company reviews the creditworthiness of the
counterparties of such covering transactions. Future cash requirements for
options written are equal to the fair value of the options. Option contracts
are typically written for a duration of less than 13 months and are included in
the consolidated statements of financial condition at fair value.
16
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
The notional (contract) values of the written options were $5.4 billion and
$8.6 billion at December 31, 1997 and 1996, respectively. Such options
contracts are covered by the following financial instruments which the Company
has purchased or sold on a proprietary basis and are reflected in the table
below at either the underlying contract (notional) amounts for derivative
instruments or at market value for cash instruments:
December 31,
1997 1996
---- ----
(In millions)
U.S. government, mortgage-backed
securities and options thereon.... $3,773 $4,679
Foreign sovereign debt securities . 73 2,460
Futures contracts ................. 219 306
Equities and other ................ 1,340 1,167
------ ------
Total .................. $5,405 $8,612
====== ======
The trading revenues from option writing activity (net of related interest
expense) were approximately $84.9 million, $71.2 million and $96.0 million for
the years ended December 31, 1997, 1996 and 1995, respectively. The fair value
of options is measured by the unamortized premiums and the intrinsic value
determined from various pricing sources. The average fair value of the options
was approximately $223.3 million and $172.7 million for the years ended
December 31, 1997 and 1996, respectively. The fair values of options were
approximately $196.4 million and $241.9 million at December 31, 1997 and 1996,
respectively, and were included as liabilities in the accompanying consolidated
statements of financial condition.
Forwards and Futures
As part of its trading activities, the Company enters into forward purchases
and sales contracts for mortgage-backed securities and foreign currencies. The
Company also enters into futures contracts on equity-based indices, foreign
currencies and other financial instruments as well as options on futures
contracts. Forward and futures contracts are treated as off-balance sheet
items. Market risk for a forward and future is the movement of price on the
notional value of the contracts. Cash requirements at inception equal the
original margin on futures contracts. Generally, no cash is required at
inception for forward contracts. The cash requirement at settlement is equal to
the notional value on the contract for a forward contract and the daily changes
in market value for a futures contract. The performance of forward contracts is
dependent on the financial reliability of the counterparty and exposes the
Company to credit risk. The Company monitors credit exposure of forward
contracts by limiting transactions with specific counterparties, reviewing
credit limits and adhering to internally established credit extension policies.
Futures contracts and options on futures contracts are exchange-traded
financial instruments that generally do not represent exposure to credit risk
due to daily cash settlements of the change in market value with the exchanges.
The credit risk with the futures exchange is limited to the net positive change
in the market value for a single day.
17
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
The following is a summary of the values of these contracts at December 31,
1997 and 1996:
December 31,
1997 1996
---- ----
(In millions)
Forward Contracts:
Purchased at notional (contract) value....................... $ 18,366 $ 14,070
Sold at notional (contract) value............................ 27,028 17,917
Futures Contracts and Options on Futures Contracts:
Purchased at market value.................................... $ 988 $ 1,420
Sold at market value......................................... 2,767 2,774
The following is a summary of the values of these contracts included in the
consolidated financial statements at December 31, 1997 and 1996:
December 31,
1997 1996
---- ----
(In millions)
Forward Contracts:
Average fair values included in liabilities during the period........ $ 2 $ 10
Unrealized gains included in total assets at end of period........... 56 44
Unrealized losses included in total liabilities at end of period..... 50 46
Futures Contracts:
Average fair values included in assets during the period............. $ 1 $ 2
Unrealized gains included in total assets at end of period........... - 6
Unrealized losses included in total liabilities at end of period..... 2 -
Net trading gains (losses) on forward contracts were $(5.1) million, $39.0
million and $149.0 million and net trading gains (losses) on futures contracts
were $(24.0) million, $8.0 million and $(58.0) million for the years ended
December 31, 1997, 1996 and 1995, respectively.
Average fair values during the period were computed using month-end averages.
The fair values of futures contracts are measured by reference to quoted market
prices. Fair values of forward contracts are estimated on the basis of dealer
quotes, pricing models or quoted prices for financial instruments with similar
characteristics. The Company generally enters into futures and forward
transactions for periods of 90 days or less. The remaining maturities for all
options, forwards and futures are less than 13 months.
9. Financial Instruments With Off-Balance Sheet Risk
In the normal course of business, the Company's customer, trading and
correspondent clearance activities involve the execution, settlement and
financing of various securities and financial instrument transactions. The
execution of these transactions includes the purchase and sale (including
"short sales") of securities, the writing of options, and the purchase and sale
of financial futures contracts and forward purchase and sales contracts for
mortgage-backed securities and foreign currencies. These activities may expose
the Company to off-balance sheet risk in the event the customer or counterparty
to the transaction is unable to fulfill its contractual obligations and margin
requirements are not sufficient to fully cover losses. In these situations, the
Company may be required to purchase or sell financial instruments at prevailing
market prices which may not fully cover the obligations of its customers or
counterparties. The Company limits this risk by requiring customers and
counterparties to maintain margin collateral that is in compliance with
regulatory and internal guidelines. Additionally, with respect to the Company's
correspondent clearance activities, introducing correspondent brokers are
required to guarantee the performance of their customers in meeting contractual
obligations.
18
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
The Company's financing and securities settlement activities involve the
Company using securities as collateral in support of various secured financing
sources. In the event the counterparty does not meet its contracted obligation
to return securities used as collateral, the Company may be exposed to the risk
of reacquiring the securities at prevailing market prices in order to satisfy
its obligations. The Company controls this risk by monitoring the market value
of securities pledged on a daily basis and by requiring adjustments of
collateral levels in the event of excess market exposure. As of December 31,
1997, the Company has pledged securities with a market value of approximately
$2.2 billion as collateral for securities borrowed with a market value of
approximately $2.0 billion. In accordance with industry practice, the amounts
of these securities borrowed and pledged are not reflected in the consolidated
statements of financial condition.
The Company's activities include entering into forward contracts which provide
for the future delivery or receipt of securities at a specified price or yield.
Risks arise from the potential inability of counterparties to perform under the
terms of the contracts and from changes in the value of securities and interest
rates. The Company controls such risks by monitoring the market value of the
securities contracted for on a daily basis and reviewing the creditworthiness
of the counterparties. The settlement of these transactions is not expected to
have a material adverse effect on the Company's consolidated financial
statements.
Risks associated with letters of credit, guarantees or underwriting commitments
are not significant.
10. Concentrations of Credit Risk
As a securities broker and dealer, the Company is engaged in various securities
trading and brokerage activities servicing a diverse group of domestic and
foreign corporations, governments, institutional and individual investors. A
substantial portion of the Company's transactions are executed with and on
behalf of institutional investors including other brokers and dealers, mortgage
brokers, commercial banks, U.S. governmental agencies, mutual funds and other
financial institutions and are generally collateralized. The Company's exposure
to credit risk associated with the nonperformance of these counterparties in
fulfilling their contractual obligations pursuant to securities transactions,
can be directly impacted by volatile securities markets, credit markets and
regulatory changes. Credit risk is the amount of accounting loss the Company
would incur if a counterparty failed to perform its obligations under
contractual terms and the collateral held, if any, was deemed insufficient. All
counterparties are reviewed on a regular basis to establish appropriate
exposure limits for a variety of transactions. In certain cases, specific
transactions are analyzed to determine the amount of potential exposure that
could arise, and the counterparty's credit is reviewed to determine whether it
supports such exposure. In addition to the counterparty's credit status, the
Company analyzes market movements that could affect exposure levels. The
Company considers four main factors that may affect trades in determining
trading limits: the settlement method; the time it will take for a trade to
settle (i.e., the maturity of the trade); the volatility that could affect the
value of the securities involved in the trade; and the size of the trade. In
addition to determining trading limits, the Company actively manages the credit
exposure relating to its trading activities by entering into master netting
agreements when feasible; monitoring the creditworthiness of counterparties and
the related trading limits on an ongoing basis, requesting additional
collateral when deemed necessary; diversifying and limiting exposure to
individual counterparties and geographic locations; and limiting the duration
of exposure. In certain cases, the Company may also close out transactions or
assign them to other counterparties when deemed necessary or appropriate to
mitigate credit risks.
The Company's customer securities activities are transacted on either a cash or
margin basis. In margin transactions, the Company extends credit to the
customer, subject to various regulatory and internal margin requirements,
collateralized by cash and securities in the customer's account. The Company
seeks to control the risks associated with its customer activities by requiring
customers to maintain margin collateral in compliance with various regulatory
and internal guidelines. The Company monitors required margin levels daily and,
pursuant to such guidelines, requires the customers to deposit additional
collateral, or reduce positions, when necessary.
19
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
11. Preferred Securities
In 1996, the Company and its wholly owned trust, DLJ Capital Trust I (the
"Trust") completed an offering of $200 million of the Trust's 8.42% mandatorily
redeemable preferred securities. The Trust exists for the sole purpose of
issuing preferred securities and common securities and investing the proceeds
in an equivalent amount of junior subordinated debentures of the Company. The
only assets of its Trust at December 31, 1997 and 1996 were $200 million of
8.42% Junior Subordinated Debentures of the Company due 2046. The Junior
Subordinated Debentures are redeemable by the Company, in whole or in part, on
or after August 31, 2001. The Trust must redeem its preferred securities having
an aggregate liquidation amount equal to the aggregate principal amount of
junior subordinated debentures redeemed.
The Company guarantees payment to the holders of the preferred securities
issued by the Trust, to the extent the Company has made principal and interest
payments on the Junior Subordinated Debentures. The Company has issued a full
and unconditional guarantee of the Trust's obligations under the preferred
securities of the Trust.
12. Stockholders' Equity
In 1995, the Company amended its Certificate of Incorporation whereby the
amount of total authorized shares of Common Stock was increased to 150.0
million shares and the Company declared a 5-for-1 stock split.
In 1995, the Company completed an initial public offering resulting in the sale
of 3.3 million shares of Common Stock at $27.00 per share. Proceeds to the
Company amounted to approximately $81.2 million, net of related expenses. In
connection with the Initial Public Offering, the Company adopted the 1995
Restricted Stock Unit Plan and granted approximately 5.2 million units under
this plan.
In 1996, the Company issued 4.0 million shares of Fixed/Adjustable Rate
Cumulative Preferred Stock, Series A, with a liquidation preference of $50 per
share. Dividends on the preferred stock are cumulative and payable quarterly at
a rate of 5.94% per annum through November 30, 2001. Thereafter, the dividend
rate will be adjusted based on various indices, not to be less than 6.44% nor
higher than 12.44%. The preferred stock is redeemable, in whole or in part, at
the option of the Company, on or after November 30, 2001. At December 31, 1997
and 1996, 4.0 million shares of such preferred stock were authorized, issued
and outstanding.
During 1997, 1.8 million restricted stock units vested and were converted into
common stock from the Company's authorized and unissued shares. Approximately
600,000 of such shares were deposited in a grantor trust pursuant to the
Executive Deferred Compensation Plan which was effective January 1, 1997.
During 1997, the Company exercised its option to redeem all of the outstanding
convertible debentures issued in connection with the acquisition of a London
based financial advisory firm. As a result, the holders of such debentures
elected to convert such debentures into an aggregate of 685,204 shares of
common stock of the Company.
In January 1998, the Company issued 3.5 million shares of Fixed/Adjustable Rate
Cumulative Preferred Stock, Series B, with a liquidation preference of $50 per
share ($175.0 million aggregate liquidation value) from a shelf registration
statement previously filed by the Company. Dividends on the preferred stock are
cumulative and payable quarterly at the rate of 5.30% per annum through January
2003, subject to adjustment in later years. The preferred stock is redeemable,
in whole or in part, at the option of the Company, on or after January 15,
2003.
20
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
13. Earnings Per Share
Basic and diluted earnings per common share amounts have been calculated by
dividing earnings applicable to common shares (net income less preferred
dividends) by the weighted average common shares outstanding. Diluted earnings
per common share also include the dilutive effects of shares of common stock
issuable under the Restricted Stock Unit Plan, and options and convertible debt
under the treasury stock method and "if-converted" method, respectively. In
February 1998, approximately 2.2 million restricted stock units vested and will
be converted into the Company's common stock and included in the calculation of
basic earnings per common share.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per common share computations at December 31 (in
thousands):
1997 1996 1995
------------------- ------------------- -------------------
Income Shares Income Shares Income Shares
------ ------ ------ ------ ------ ------
Basic EPS
Earnings applicable to common
shares .................... $396,106 55,159 $272,647 53,300 $159,232 50,570
Effect of Dilutive Securities
Restricted stock units .... -- 3,523 -- 5,152 -- 894
Stock Options ............. -- 3,830 -- 904 -- 116
Convertible Debt........... 308 237 -- -- -- --
-------- -------- -------- -------- -------- --------
Diluted EPS .................. $396,414 62,749 $272,647 59,356 $159,232 51,580
======== ======== ======== ======== ======== ========
14. Employee Compensation and Benefit Plans
1996 Incentive Compensation Plan
Awards under the 1996 Incentive Compensation Plan (the "Incentive Plan") are
determined by the Compensation and Management Committee of the Board of
Directors. The Incentive Plan provides for the creation of short-term and
long-term award pools to be awarded to key employees of the Company. Short-term
award pools are for a performance period up to two years and are based on 10%
of pre-tax earnings, as defined. Long-term award pools are for performance
periods of three to 10 years and are based on a percentage of pre-tax earnings
and vary with the Company's average return on common equity during the
performance period. Participants may receive awards in the form of cash,
options, shares or restricted stock units; however, stock-based payments are
limited to a total of 8.8 million shares. Under certain circumstances
participants may defer the receipt of part or all of any award. During 1997,
the Management and Compensation Committee of the Board of Directors authorized
the creation of a long-term award pool for the performance period from January
1, 1997 to December 31, 1999. Each unit granted under the Plan is equal to a
percentage interest in the long-term award pool. The units vest at the rate of
33 1/3% per year during the performance period. The amount charged to expense
for the Plan was $185.5 million for the year ended December 31, 1997. Amounts
charged to expense for the years ended December 31, 1996 and 1995 were $190.5
million and $132.8 million, respectively, relating to a predecessor long-term
incentive compensation plan that expired on December 31, 1996.
1995 Restricted Stock Unit Plan
In 1995, the Company adopted the 1995 Restricted Stock Unit Plan (the "Plan").
Each RSU granted under the Plan represents the right under certain
circumstances to receive a share of Common Stock. These units are subject to
forfeiture in certain circumstances and vest annually in specified proportions
from February 1997 through February 2000. Units that are forfeited under the
Plan will become eligible for subsequent grants. The number of units granted
under the Plan was 5,179,147 units. As of December 31, 1997, 104,948 restricted
stock units were forfeited and 1,792,992 million restricted stock units vested
and were converted to common stock from the Company's authorized and unissued
shares.
21
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
Stock Option Plans
In 1995, the Company adopted the 1995 and 1996 Stock Option Plans. Under the
Company's 1995 Stock Option Plan, options to purchase an aggregate of 9,168,678
shares of Common Stock (the maximum allowable under the 1995 Stock Option Plan)
with an exercise price of $27.00 were granted to certain employees. The options
are subject to forfeiture in certain circumstances and vest in two equal
installments in February 1997 and February 1998, and are exercisable for a
period of up to 10 years from the date of the grant. Options that are forfeited
under the 1995 Stock Option Plan will become eligible for subsequent grant
under the 1996 Stock Option Plan.
Options to purchase a maximum of 8,789,851 shares of Common Stock, exclusive of
forfeitures from the 1995 Stock Option Plan, are available under the 1996 Stock
Option Plan (the "1996 Plan"). The options are exercisable for up to 10 years
from the date of grant, are subject to forfeiture in certain circumstances and
vest in four equal installments commencing one year after the date of grant.
Options that are forfeited under the 1996 Plan become eligible for subsequent
grant under that plan.
In 1996, the Company adopted the Non-Employee Directors Stock Plan (the "Plan")
to provide compensation to the Company's non-employee directors in the form of
equity. Such stock options are granted at a price equal to the fair value of
the stock at the date of grant. The options are exercisable for up to 10 years
from the date of grant and vest in four equal annual installments commencing
one year from the date of grant. The total number of shares issuable under the
Plan is 200,000. Any shares issued under the Plan will reduce the number of
shares issuable under the Company's 1996 Stock Option Plan.
A summary of the Company's stock option activity for all plans is as follows:
Weighted Average
Shares Exercise Price
------ ----------------
Outstanding at January 1, 1995 . -- $ --
Granted ........................ 9,168,678 27.00
----------- ---------
Outstanding at December 31, 1995 9,168,678 27.00
----------- ---------
Granted ........................ 2,134,000 32.54
Forfeited ...................... (172,346) 27.00
----------- ---------
Outstanding at December 31, 1996 11,130,332 28.06
----------- ---------
Granted ........................ 3,215,834 61.07
Forfeited ...................... (66,933) 32.03
Exercised ...................... (148,185) 27.51
----------- ---------
Outstanding at December 31, 1997 14,131,048 $ 35.56
=========== =========
The table below summarizes information related to options outstanding at
December 31, 1997:
Weighted Average Weighted Average
Exercise Prices Number Outstanding Exercise Price Remaining Life (Years)
--------------- ------------------ ---------------- ----------------------
$27.00-$35.99 10,915,214 $ 28.05 8.0
$36.00-$50.99 777,334 40.04 9.3
$51.00-$76.00 2,438,500 67.77 9.8
--------- ----- ---
Total 14,131,048 $ 35.56 8.4
========== ======= ===
22
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
At December 31, 1997, there were 4,942,691 options exercisable at exercise
prices ranging from $27.00-$35.99. The weighted average exercise price of such
options totaled $27.58. At December 31, 1996 and 1995, no options were
exercisable.
The Company applies APB Opinion No. 25 in accounting for its stock option plans
and, accordingly, does not recognize any compensation cost associated with such
plans in the consolidated financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its options
under SFAS No. 123, the Company's net income and earnings per common share
would have been the pro forma amounts indicated below:
1997 1996 1995
---- ---- ----
Net income (in thousands) As reported $ 408,250 $ 291,300 $ 179,100
Pro forma $ 388,000 $ 273,700 $ 176,200
Basic earnings per common share As reported $ 7.18 $ 5.12 $ 3.15
Pro forma $ 6.81 $ 4.79 $ 3.09
Diluted earnings per common share As reported $ 6.32 $ 4.59 $ 3.09
Pro forma $ 6.01 $ 4.36 $ 3.04
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for options granted during 1997, 1996 and 1995, respectively:
dividend yield of 0.86%, 1.54% and 1.85%; expected volatility of 33%, 25% and
25%, risk-free interest rates of 5.96%, 6.07% and 5.86%; and an expected life
of five years for all grants. The weighted average fair value of options
granted during 1997, 1996 and 1995 were $22.45, $9.35, and $7.36, respectively
per share.
Other Plans
The Company has a defined contribution employee benefit plan covering
substantially all of the Company's full-time and certain qualified part-time
employees. Company contributions to this plan are determined by the Board of
Directors of the Company annually and were $9.6 million, $7.4 million and $6.1
million for 1997, 1996 and 1995, respectively.
Certain key employees of the Company participate in various other deferred
compensation arrangements which include equity investments in selected merchant
banking activities of the Company funded by deferred compensation of such
employees, certain non-funded, non-qualified deferred compensation plans which
include managed investments, and other non-qualified plans which are funded by
the Company with insurance contracts.
15. Leases, Commitments and Contingent Liabilities
The Company leases office space and equipment under cancelable and
non-cancelable lease agreements which expire on various dates through the year
2016. Rent expense for the years ended December 31, 1997, 1996 and 1995
aggregated $89.9 million, $76.6 million and $66.2 million, respectively.
Sublease revenue aggregated $0.1 million for the year ended December 31, 1997
and $1.0 million for each of the years ended December 31, 1996 and 1995.
23
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
At December 31, 1997, minimum rental commitments, exclusive of sublease
revenue, escalation and renewal options, on all non-cancelable leases in excess
of one year, are as follows:
Total Lease
Period Commitments
------ -----------
(In thousands)
1998............................................. $ 72,847
1999............................................. 74,712
2000............................................. 67,401
2001............................................. 65,378
2002............................................. 70,372
2003-2016........................................ 627,827
---------
Total..................................... $ 978,537
=========
In the normal course of business, the Company enters into underwriting
commitments. Transactions relating to such underwriting commitments that were
open at December 31, 1997, and were subsequently settled, had no material
effect on the consolidated financial statements. The Company also issues
letters of credit for which it is contingently liable for $244.0 million and
$163.0 million at December 31, 1997 and 1996, respectively.
The Company has outstanding commitments, expiring on December 31, 1998, to
provide financings to third parties in the total amount of $200.0 million which
would be secured by mortgage loans on real estate properties. At December 31,
1997, there were no amounts borrowed under this facility. In addition, the
Company enters into commitments to extend credit in connection with the
origination and syndication of senior bank debt of non-investment grade
borrowers. At December 31, 1997, unfunded senior bank loan commitments
outstanding amounted to $539.9 million.
The Company has commitments to invest on a side by side basis with merchant
banking partnerships in the amount of $885.6 million at December 31, 1997.
16. Legal Proceedings
The Company has been named as a defendant in a number of actions relating to
its various businesses including various civil actions and arbitrations arising
out of its activities as a broker-dealer in securities, as an underwriter and
as an employer and arising out of alleged employee misconduct. The Company is
also involved, from time to time, in proceedings with, and investigations by,
governmental agencies and self-regulatory organizations. Some of the actions
have been brought on behalf of various classes of claimants and seek damages of
material or indeterminate amounts. While the ultimate outcome of litigation
involving the Company cannot be predicted with certainty, management, having
reviewed these actions with its counsel, believes it has meritorious defenses
to all such actions and intends to defend each of these vigorously.
Although there can be no assurance that such actions, proceedings,
investigations and litigation will not have a material adverse effect on the
results of operations of the Company in any future period, depending in part on
the results for such period, in the opinion of management of the Company, based
upon advice of counsel, the ultimate resolution of such actions, proceedings,
investigations and litigation against the Company will not have a material
adverse effect on the consolidated financial condition and/or results of
operations of the Company; except, due to the early stage of the three actions
described below, based upon information currently available to it, management
cannot make an estimate of loss, if any, or predict whether or not such
litigation will have a material adverse effect on the Company's results of
operations in any particular period.
24
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
In October 1995, DLJSC was named as a defendant in a purported class action
filed in a Texas State Court on behalf of the holders of $550 million principal
amount of subordinated redeemable discount debentures of National Gypsum
Corporation ("NGC") canceled in connection with a Chapter 11 plan of
reorganization for NGC consummated in July 1993. The State Court named
plaintiff also filed an adversary proceeding in the U.S. Bankruptcy Court for
the Northern District of Texas seeking a declaratory judgment that the
confirmed NGC plan of reorganization does not bar the class action claims.
Subsequent to the consummation of NGC's plan of reorganization, NGC's shares
traded for values substantially in excess of, and in 1995 NGC was acquired for
a value substantially in excess of, the values upon which NGC's plan of
reorganization was based. The two actions arise out of DLJSC's activities as
financial advisor to NGC in the course of NGC's Chapter 11 reorganization
proceedings. The class action complaint alleges that the plan of reorganization
submitted by NGC was based upon projections by NGC and DLJSC which
intentionally understated forecasts, and provided misleading and incorrect
information in order to hide NGC's true value and that defendants breached
their fiduciary duties by, among other things, providing false, misleading or
incomplete information to deliberately understate the value of NGC. The class
action complaint seeks compensatory and punitive damages purportedly sustained
by the class. On October 10, 1997, DLJSC and others were named as defendants in
a new adversary proceeding in the Bankruptcy Court brought by the NGC
Settlement Trust, an entity created by the NGC plan of reorganization to deal
with asbestos-related claims. The Trust's allegations are substantially similar
to the claims in the State Court action. In court papers dated October 16,
1997, the State Court plaintiff indicated that he would intervene in the
Trust's adversary proceeding. On January 21, 1998, the Bankruptcy Court ruled
that the State Court plaintiff's claims were not barred by the NGC plan of
reorganization insofar as they alleged nondisclosure of certain cost reductions
announced by NGC in October 1993. DLJSC intends to defend itself vigorously
against all of the allegations contained in the complaints. Although there can
be no assurance, the Company does not believe that the ultimate outcome of this
litigation will have a material adverse effect on its consolidated financial
condition.
In November and December 1995, DLJSC, along with various other parties, was
named as a defendant in a number of purported class actions filed in the U.S.
District Court for the Eastern District of Louisiana. The complaints allege
violations of the federal securities laws arising out of a public offering in
1994 of $435 million of first mortgage notes of Harrah's Jazz Company and
Harrah's Jazz Finance Corp. The complaints seek to hold DLJSC liable for
various alleged misstatements and omissions contained in the prospectus dated
November 9, 1994. On February 26, 1997, the parties agreed to a settlement of
these actions, subject to the District Court's approval, which was granted on
July 31, 1997. The settlement is also subject to the approval by the U.S.
Bankruptcy Court for the Eastern District of Louisiana of proposed
modifications to a confirmed plan of reorganization for Harrah's Jazz Company
and Harrah's Jazz Finance Corp., and the satisfaction or waiver of all
conditions to the effectiveness of the plan, as provided in the plan. There can
be no assurance of the Bankruptcy Court's approval of the modifications to the
plan of reorganization, or that the conditions to the effectiveness of the plan
will be satisfied or waived. In the opinion of management the ultimate
resolution of this matter will not have a material adverse effect on the
Company's results of operations or on its consolidated financial condition.
On January 26, 1996, a purported purchaser of certain notes and warrants to
purchase shares of common stock of Rickel Home Centers, Inc. ("Rickel") filed a
class action complaint against DLJSC and certain other defendants for
unspecified compensatory and punitive damages in the U. S. District Court for
the Southern District of New York. The suit was brought on behalf of the
purchasers of 126,457 units consisting of
25
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
$126,457,000 aggregate principal amount of 13 1/2% senior notes due 2001 and
126,457 warrants to purchase shares of common stock of Rickel (the "Units")
issued by Rickel in October 1994. The complaint alleges violations of federal
securities laws and common law fraud against DLJSC, as the underwriter of the
Units and as an owner of 7.3% of the common stock of Rickel, Eos Partners, L.P.
and General Electric Capital Corporation, each as owners of 44.2% of the common
stock of Rickel, and members of the board of directors of Rickel, including a
DLJSC managing director. The complaint seeks to hold DLJSC liable for alleged
misstatements and omissions contained in the prospectus and registration
statement filed in connection with the offering of the Units, alleging that the
defendants knew of financial losses and a decline in value of Rickel in the
months prior to the offering and did not disclose such information. The
complaint also alleges that Rickel failed to pay its semi-annual interest
payment due on the Units on December 15, 1995 and that Rickel filed a voluntary
petition for reorganization pursuant to Chapter 11 of the Bankruptcy Code on
January 10, 1996. DLJSC intends to defend itself vigorously against all of the
allegations contained in the complaint. Although there can be no assurance, the
Company does not believe that the ultimate outcome of this litigation will have
a material adverse effect on its consolidated financial condition.
17. Industry Segment and Geographic Area Data
The Company currently follows the provisions of SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise" in disclosing its business
segments. Pursuant to that statement, the Company is primarily engaged in a
single line of business as a securities broker-dealer, which comprises several
types of services, such as principal and agency transactions, underwriting and
investment banking and correspondent clearing. These activities constitute a
single business segment. Total assets and total revenues related to the
Company's foreign operations approximated $8.6 billion and $534.2 million,
respectively at December 31, 1997. Total assets and revenues related to such
operations at December 31, 1996 were not significant.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which is effective for financial statements
for periods beginning after December 15, 1997. This statement requires a
company to report financial and descriptive information about its reportable
operating segments. The Company is evaluating the manner in which it will
disclose its segment data and intends to present the disclosures required under
this statement. Currently, the Company views its business from the perspective
of three principal operating groups: the Banking Group, the Capital Markets
Group and the Financial Services Group. In determining which segments of
business the Company operates in for purposes of the disclosures required by
this statement, the Company may redesignate certain portions of the business
within the three principal groups or identify additional segments.
26
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements-(Continued)
18. Quarterly Data (Unaudited)
The following table sets forth selected highlights for each of the fiscal
quarters during the years ended December 31, 1997 and 1996 (dollars in
thousands, except per share data):
Income Basic Diluted
Before Earnings Earnings
Provision Per Per
Total For Income Net Common Common
Revenues Taxes Income Share* Share*
-------- ---------- ------ ------- --------
1997:
First quarter......................... $ 981,403 $ 144,000 $ 86,400 $ 1.53 $1.37
Second quarter ....................... 1,061,180 167,000 100,200 1.76 1.57
Third quarter ........................ 1,268,496 188,100 120,300 2.11 1.85
Fourth quarter ....................... 1,329,390 162,000 101,350 1.76 1.53
---------- --------- --------- ------ -----
Total year............. $4,640,469 $ 661,100 $ 408,250 $ 7.18 $6.32
========== ========= ========= ====== =====
1996:
First quarter......................... $ 775,910 $ 108,500 $ 65,100 $ 1.13 $1.02
Second quarter ....................... 991,209 157,300 97,000 1.73 1.55
Third quarter ........................ 771,007 92,000 56,100 0.96 0.86
Fourth quarter ....................... 952,630 116,000 73,100 1.30 1.16
---------- --------- --------- ------ -----
Total year............... $3,490,756 $ 473,800 $ 291,300 $ 5.12 $4.59
========== ========= ========= ====== =====
* The sum of the quarters' earnings per common share may not equal the total
year amounts due to the effect of averaging the number of shares of common
stock and common stock equivalents throughout the year.
27