SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-6862
DONALDSON, LUFKIN & JENRETTE, INC.
(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
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (212) 892-3000
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 ( ).
As of May 14, 1996, the latest practicable date, there were 53,300,000 shares
of Common Stock, $0.10 par value, outstanding.
1
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DONALDSON, LUFKIN & JENRETTE, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1996
TABLE OF CONTENTS
Part I FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page Number
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Statements of Financial Condition at
March 31, 1996 and December 31, 1995 (Unaudited).......................... 3
Condensed Consolidated Statements of Income for the three
months ended March 31, 1996 and 1995 (Unaudited) ......................... 5
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the year ended December 31, 1995 and the three
months ended March 31, 1996 (Unaudited)................................... 6
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1996 and 1995 (Unaudited) ......................... 7
Notes to Condensed Consolidated Financial Statements (Unaudited).......... 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................ 13
Part II OTHER INFORMATION
Item 1. Legal Proceedings............................................................. 19
Item 6. Exhibits and Reports on Form 8-K.............................................. 20
Signature..................................................................... 21
</TABLE>
2
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Financial
Condition (Unaudited)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
ASSETS ----------- -----------
<S> <C> <C>
Cash and cash equivalents ..................................................................... $ 169,325 $ 107,766
Cash and securities segregated for regulatory purposes or deposited with clearing organizations 718,696 454,470
Securities purchased under agreements to resell ............................................... 19,298,622 18,748,224
Securities borrowed ........................................................................... 8,379,389 9,044,909
Receivables:
Customers ................................................................................... 2,868,227 2,355,973
Brokers, dealers and other .................................................................. 2,608,849 1,622,858
Securities owned, at value:
U.S. government and agencies ................................................................ 5,154,370 5,601,090
Corporate debt .............................................................................. 3,786,941 3,469,899
Foreign sovereign debt ...................................................................... 842,199 734,238
Mortgage whole loans ........................................................................ 443,883 449,881
Equities and other .......................................................................... 831,276 656,290
Long-term corporate development investments ................................................. 309,388 284,498
Mortgages, other receivables collateralized by
real estate assets and real estate owned ........................................................ 461,043 375,941
Property, equipment and leasehold improvements, at cost, (net of
accumulated depreciation and amortization of $145,209 and $137,640,
respectively) ................................................................................ 232,601 192,446
Other assets and deferred amounts ............................................................... 513,811 478,011
----------- -----------
Total Assets .................................................................................... $46,618,620 $44,576,494
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Financial
Condition (Unaudited)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
-------- --------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings ............................................. $ 1,727,730 $ 752,442
Securities sold under agreements to repurchase .................... 25,789,396 26,744,797
Securities loaned ................................................. 2,607,276 2,624,213
Payables:
Customers ........................................................ 2,898,331 2,561,258
Brokers, dealers and other ....................................... 2,597,149 1,025,574
Securities sold not yet purchased, at value:
U.S. government and agencies ..................................... 5,527,263 5,407,572
Corporate debt ................................................... 503,238 529,273
Foreign sovereign debt ........................................... 311,309 186,861
Equities and other ............................................... 584,739 580,721
Accounts payable and accrued expenses ............................. 1,105,475 1,421,935
Other liabilities and deferred amounts ............................ 387,932 359,212
---------- ------------
44,039,838 42,193,858
---------- ------------
Long-term borrowings .............................................. 1,101,695 958,916
---------- ------------
Total liabilities .............................................. 45,141,533 43,152,774
---------- ------------
Cumulative Exchangeable $8.83 Preferred Stock, at redemption value 225,000 225,000
---------- ------------
Stockholders' Equity:
Common stock ($0.10 par value; 150,000,000 shares authorized;
53,300,000 shares issued and outstanding in 1996 and 1995) .... 5,330 5,330
Restricted stock units (5,179,147 units authorized,
issued and outstanding in 1996 and 1995) ....................... 106,163 106,163
Paid-in capital ................................................... 363,993 363,993
Retained earnings ................................................. 777,330 723,859
Cumulative translation adjustment ................................. (729) (625)
---------- ------------
Total stockholders' equity ....................................... 1,252,087 1,198,720
--------- ------------
Total Liabilities and Stockholders' Equity ........................ $ 46,618,620 $ 44,576,494
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
-------- -------
<S> <C> <C>
Revenues:
Commissions ......................................... $146,534 $107,202
Underwritings ....................................... 135,431 52,413
Fees ................................................ 83,233 87,824
Interest, net of interest to finance U.S. government,
agency and mortgage-backed securities of $487,374,
and $454,186, respectively ........................ 230,799 195,269
Principal transactions-net:
Trading ............................................ 143,461 67,617
Investment ........................................ 25,631 59,636
Other ............................................... 10,821 12,479
------- --------
Total revenues ................................... 775,910 582,440
------- --------
Costs and Expenses:
Compensation and benefits ........................... 344,269 266,705
Interest ............................................ 175,012 139,005
Brokerage, clearing, exchange fees and other ........ 44,729 34,188
Occupancy and equipment ............................. 30,612 28,503
Communications ...................................... 10,703 9,997
Other operating expenses ............................ 62,085 41,542
------- --------
Total costs and expenses ......................... 667,410 519,940
------- --------
Income before provision for income taxes ................ 108,500 62,500
------- --------
Provision for income taxes .............................. 43,400 25,000
------- --------
Net income .............................................. $ 65,100 $ 37,500
-------- --------
Dividends on preferred stock ............................ $ 4,967 $ 4,967
-------- --------
Earnings applicable to common shares .................... $ 60,133 $ 32,533
-------- --------
Weighted average common shares outstanding .............. 59,576
--------
Earnings per common share ............................... $ 1.01
--------
Pro forma weighted average common shares outstanding .... 51,475
--------
Pro forma earnings per common share ..................... $ 0.63
--------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
For the Year Ended December 31, 1995 and the Three Months
Ended March 31, 1996 (In thousands, except per share data)
<TABLE>
<CAPTION>
Restricted Cumulative
Common Stock Paid-in Retained Translation
Stock Units Capital Earnings Adjustment Total
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 ........... $ 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 ........... 5,330 106,163 363,993 723,859 (625) 1,198,720
Net income .............................. -- -- -- 65,100 -- 65,100
Dividends:
Common stock ($0.125 per share) ....... -- -- -- (6,662) -- (6,662)
Preferred stock ($2.21 per share) ..... -- -- -- (4,967) -- (4,967)
Translation adjustment .................. -- -- -- -- (104) (104)
------- -------- -------- -------- -------- ----------
Balances at March 31, 1996 .............. $ 5,330 $ 106,163 $ 363,993 $ 777,330 $ (729) $ 1,252,087
------- -------- -------- -------- -------- ----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
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DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
For the Three Months Ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income ....................................................... $ 65,100 $ 37,500
----------- -----------
Adjustments to reconcile net income to net cash provided by (used
in)operating activities:
Depreciation and amortization ............................... 7,929 6,959
Deferred taxes .............................................. 6,526 (24,437)
(Increase) decrease in unrealized appreciation of long-term
corporate development investments (10,460) 23,424
Other-net .................................................... 85 245
--------- -----------
69,180 43,691
(Increase) decrease in operating assets:
Cash and securities segregated for regulatory
purposes or deposited with clearing organizations ........... (264,226) (82,960)
Securities purchased under agreements to resell ............. (2,251,515) (4,968,141)
Securities borrowed ......................................... 665,520 (630,218)
Receivables from customers .................................. (512,254) 302,701
Receivables from brokers, dealers and other ................. (985,991) 95,844
Securities owned, at value .................................. (147,271) 514,681
Other assets ................................................ (39,824) 148,006
Increase (decrease) in operating liabilities:
Securities sold under agreements to repurchase .............. 2,251,515 4,968,141
Securities loaned ........................................... (16,937) 855,947
Payables to customers ....................................... 337,073 (119,829)
Payables to brokers, dealers and other ...................... 1,571,575 (113,001)
Securities sold not yet purchased, at market value .......... 222,122 725,528
Accounts payable and accrued expenses ....................... (316,460) (206,174)
Other liabilities and deferred amounts ...................... 22,194 (76,442)
Translation adjustment ...................................... (104) 39
----------- -----------
Net cash provided by operating activities ....................... $ 604,597 $ 1,457,813
------------ -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
For the Three Months Ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Cash flows from investing activities:
Net proceeds from (payments for):
Purchases of long-term corporate development investments .......... $ (25,796) $ (11,241)
Sales of long-term corporate development investments .............. 11,366 13,864
Purchases of property, equipment and leasehold improvements ....... (47,851) (8,876)
Purchases of mortgages, other receivables collateralized by real
estate assets and real estate owned .............................. (85,102) (1,415)
Sales of mortgages, other receivables collateralized by real estate
assets and real estate owned ..................................... -- 16,723
Other assets ...................................................... 3,791 16,618
----------- -----------
Net cash (used in) provided by investing activities ................. (143,592) 25,673
----------- -----------
Cash flows from financing activities:
Net proceeds from (payments for):
Short-term financings ............................................. (530,511) (1,600,645)
Medium-Term Notes ................................................. 249,515 --
Swiss Franc Bonds ................................................. (105,513) --
Subordinated debt financings ...................................... (1,308) 175
Other long-term debt .............................................. -- (1,070)
Secured notes payable ............................................. -- (51,367)
Dividends ......................................................... (11,629) (13,100)
Proceeds from secured term loan agreement ......................... -- 250,000
---------- -----------
Net cash used in financing activities ............................... (399,446) (1,416,007)
---------- -----------
Increase in cash and cash equivalents ............................... 61,559 67,479
Cash and cash equivalents at beginning of period .................... 107,766 94,854
--------- -----------
Cash and cash equivalents at end of period .......................... $ 169,325 $ 162,333
========= ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
8
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DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 1996
1. Basis of Presentation
The condensed consolidated financial statements include Donaldson, Lufkin &
Jenrette, Inc. and its subsidiaries ("DLJ" or the "Company"). Prior to October
30, 1995, the Company was wholly owned by The Equitable Companies Incorporated
and its subsidiaries (together, "Equitable"). After the completion of an
initial public offering in October 1995, Equitable's ownership in the Company
was reduced from 100 percent to 80.2 percent. The Company's separate financial
statements reflect Equitable's cost basis established at the time of
Equitable's acquisition of the Company in 1985.
Certain financial information that is normally included in annual financial
statements prepared in accordance with generally accepted accounting
principles but is not required for interim reporting purposes has been
condensed or omitted. These condensed consolidated financial statements
reflect, in the opinion of management, all adjustments (consisting of normal,
recurring accruals) necessary for a fair presentation of the consolidated
financial position and results of operations for the interim periods
presented. The results of operations for interim periods are not necessarily
indicative of results for the entire year. These financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto as of and for the year ended December 31, 1995 included on Form 10-K
filed by the Company under the Securities Act of 1934.
The preparation of 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 financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. Income Taxes
Income taxes for interim period condensed consolidated financial statements
have been accrued using the Company's estimated effective tax rate. Net
Federal income tax equivalents paid to Equitable were $35.0 million for the
three months ended March 31, 1996. There were no Federal income tax
equivalents paid to Equitable for the three months ended March 31, 1995.
3. Borrowings
Long-term borrowings, including current maturities of $7.0 million and $110.3
million at March 31, 1996 and December 31, 1995, respectively, consist of the
following:
March 31, December 31,
1996 1995
---- ----
(In thousands)
Senior notes, 6 7/8% due in 2005 ............. $ 496,917 $ 496,836
Senior subordinated revolving credit agreement
due in 1998 ............................... 250,000 250,000
Medium-term notes, 5 5/8% due in 2016 ........ 249,519 --
Medium-term notes, 7.88% due in 1997 ......... 88,000 88,000
Swiss Franc bonds, 10.55% due in 1996 ........ -- 105,513
Other ........................................ 17,259 18,567
---------- ----------
Total long-term borrowings .............. $1,101,695 $ 958,916
========== ==========
9
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DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
In January 1996, the Swiss franc bonds of $105.5 million plus accrued interest
were repaid in full.
On February 12, 1996, a shelf registration statement, which enables the
Company to issue from time to time up to $500 million in aggregate public
offering price of Senior Debt Securities and/or Preferred Stock, was declared
effective by the Securities and Exchange Commission. On February 15, 1996, the
Company completed an offering off of such shelf registration statement of $250
million aggregate principal amount of its 5 5/8% Medium-Term Notes due
February 15, 2016. The notes are repayable by the Company, in whole or in
part, at the option of the holders on February 15, 2001.
Interest paid on all borrowings and financing arrangements amounted to $664.3
million and $595.5 million for the three months ended March 31, 1996 and 1995,
respectively.
At March 31, 1996, the Company has committed credit facilities which enables
it to borrow up to $1.28 billion on a secured basis and $340 million on an
unsecured basis. Interest rates to be charged are based upon Federal funds,
Eurodollar or negotiated rates, as applicable. There were no borrowings
outstanding at March 31, 1996 and December 31, 1995 under these agreements.
4. Long-term Corporate Development Investments
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 $290.6 million and $276.2 million
at March 31, 1996 and December 31, 1995, respectively. The increase (decrease)
in net unrealized appreciation of long-term corporate development investments
amounted to $10.5 million and $(23.4) million for the three months ended March
31, 1996 and 1995, respectively. Changes in unrealized appreciation arising
from changes in fair value or upon realization are reflected in revenues,
principal transactions-net, investment in the condensed consolidated
statements of income.
5. 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, the NYSE and the
Commodities Futures Trading Commission. As such, it is subject to the 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 March 31, 1996, DLJSC's net capital of
approximately $644.8 million was 22 percent of aggregate debit balances and in
excess of the minimum requirement by approximately $577.4 million.
Certain U.S. and foreign subsidiaries of the Company are subject to net
capital requirements of their respective regulatory agencies. At March 31,
1996, the Company and its subsidiaries were in compliance with all applicable
regulatory capital adequacy requirements.
10
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DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
6. Earnings Per Share
Earnings per common share and pro forma earnings per share are computed by
dividing net income applicable to common shares by the weighted average or the
pro forma number of shares of common stock and common stock equivalents
outstanding during each period presented and after deducting the dividends on
preferred stock requirements. Weighted average common shares outstanding are
the same for both primary and fully diluted earnings per common share. The
Restricted Stock Units issued in October 1995 are considered common stock
equivalents upon issuance and also have a dilutive effect on the Company's
historical earnings per share amounts. Weighted average common shares
outstanding have been adjusted for the dilutive effect of the units on the
Company's historical pro forma earnings per share using the treasury stock
method.
7. Commitments and Contingencies
At March 31, 1996, the Company was contingently liable for unsecured letters
of credit of approximately $151.2 million.
As a securities broker and dealer, risk is an inherent part of the Company's
business activities. The principal types of risks involved in the Company's
activities are market risk, credit or counterparty risk and transaction risk.
The Company has developed an infrastructure to control, monitor and manage
each type of risk. For a further discussion of these matters, refer to Notes 9
and 10 of the Consolidated Financial Statements in the Company's Annual Report
on the Form 10-K for the year ended December 31, 1995.
8. Derivative Financial Instruments
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 options to accommodate its customers needs, primarily 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 notes. The Company's
involvement in swap contracts is not significant. 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.
Options contracts are typically written for a duration of less than thirteen
months. The notional value of written options contracts outstanding was
approximately $4.9 billion at March 31, 1996. These written option contracts
are substantially covered by various financial instruments that the Company
has purchased or sold as principal.
The notional contract and market values of the forward and futures contracts
at March 31, 1996 and December 31, 1995 were as follows:
March 31, 1996 December 31, 1995
-------------- -----------------
Purchases Sales Purchases Sales
--------- ----- --------- -----
(In millions) (In millions)
Forward Contracts
(Notional Contract Value) $17,945 $17,297 $18,186 $17,066
======= ======= ======= =======
Futures Contracts
(Market Value) .......... $ 1,673 $ 1,002 $ 1,129 $ 1,932
======= ======= ======= =======
11
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DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
9. Legal Proceedings
Certain significant legal proceedings and matters have been previously
disclosed in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 and there have been no material developments in such
proceedings and matters.
In addition to the significant proceedings and matters referred to above, 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. Some of the
actions have been brought on behalf of various classes of claimants and seek
damages of material or indeterminate amounts. The Company is also involved,
from time to time, in proceedings with, and investigations by, governmental
agencies and self-regulatory organizations. Although there can be no assurance
that such other 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 the ultimate resolution of any such other
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.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following analysis of the consolidated results of operations and financial
condition of Donaldson, Lufkin & Jenrette, Inc. and Subsidiaries should be
read in conjunction with the Condensed Consolidated Financial Statements and
the related Notes to Condensed Consolidated Financial Statements included
elsewhere herein, and with the Management's Discussion and Analysis section
included in the Company's 1995 Annual Report on Form 10-K.
BUSINESS ENVIRONMENT
The Company's principal business activities, investment and merchant
banking, securities sales and trading and correspondent brokerage services
are, by their nature, highly competitive and subject to general market
conditions, volatile trading markets and fluctuations in the volume of market
activity. Consequently, the Company's net income and revenues have been and
are likely to continue to be, subject to wide fluctuations, reflecting the
impact of many factors beyond the Company's control, including securities
market conditions, the level and volatility of interest rates, competitive
conditions and the size and timing of transactions.
The strong conditions that existed in the second half of 1995
continued to improve in the first quarter of 1996. Rising stock prices and
record levels of underwriting improved operating results throughout the
securities industry.
RECENT DEVELOPMENTS
In March 1996, the Company moved its principal offices from 140
Broadway to 277 Park Avenue in New York City.
On February 12, 1996, a shelf registration statement, which enables
the Company to issue up to $500 million in aggregate public offering price of
Senior Debt Securities and/or Preferred Stock, was declared effective by the
Securities and Exchange Commission. On February 15, 1996, the Company
completed an offering off of such shelf registration statement of $250 million
aggregate principal amount of its 5 5/8% Medium-Term Notes due 2016. The notes
are repayable by the Company, in whole or in part, at the option of the
holders on February 15, 2001.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1996 COMPARED TO QUARTER ENDED MARCH 31, 1995
Total revenues for the quarter ended March 31, 1996 were $775.9
million, an increase of $193.5 million or 33.2% over the quarter ended March
31, 1995. Revenues increased in most of the Company's major areas of activity
during the first quarter of 1996.
Commission revenues increased by $39.3 million or 36.7% to $146.5
million due to increased business in all areas and is generally consistent
with the overall growth in listed share volume on major equity exchanges.
Underwriting revenues increased by $83.0 million or 158.4% to $135.4
million. The Company experienced increases in all areas of underwriting during
the first quarter of 1996.
Fee revenues decreased by $4.6 million or 5.2% to $83.2 million.
Overall, merger and acquisition ("M&A") and other advisory services activities
have increased during the first quarter of 1996, however the average fee
earned per transaction was lower in the quarter ended March 31, 1996 as
compared to the quarter ended March 31, 1995.
Interest, net of interest expense to finance U.S. government, agency
and mortgage-backed securities, increased by $35.5 million or 18.2% to $230.8
million. Higher levels of customer margin balances and securities
loaned/borrowed activity at Pershing accounted for approximately one half of
the increase. The remaining increase was due to higher levels of inventory in
the Fixed Income Division and the full quarter impact of the Latin America
business which commenced operations in March of 1995.
13
<PAGE>
Principal transactions-net, trading revenues increased by $75.8
million or 112.2% to $143.5 million. All of the Company's major trading areas
experienced improved results over the quarter ended March 31, 1995.
Principal transactions-net, investment revenues decreased by $34.0
million or 57.0% to $25.6 million. Realized gains on investments were $15.2
million. Net unrealized carrying values increased by $10.5 million, which
includes the elimination of net unrealized appreciation of $3.9 million on
investments sold and an increase in net unrealized appreciation of $14.4
million on retained investments. During the first quarter of 1995, the Company
recorded a gain of $25.0 million, net on one investment. There were no
comparably sized gains in the first quarter of 1996.
Other revenues, consisting primarily of dividends and miscellaneous
transaction revenues, decreased by $1.7 million or 13.3% to $10.8 million.
Total costs and expenses for the first quarter of 1996 were $667.4
million, an increase of $147.5 million or 28.4% over the first quarter of
1995.
Compensation and benefits increased $77.6 million or 29.1% to $344.3
million. Most of the increase was due to increased variable incentive and
production-related compensation, which resulted from higher revenues and
operating results. Incentive and production-related compensation increased by
39.7% in 1996, while base compensation, including benefits and all payroll
taxes, increased by 5.4% due to expansion in various business groups. At March
31, 1996, full-time personnel totaled 5,041 compared to 4,678 at March 31,
1995, an increase of 363 or 7.8%.
Interest expense increased $36.0 million or 25.9% to $175.0 million.
Most of this increase was related to higher balances in payables to brokers,
dealers and customers in the correspondent clearing business at Pershing and
expanded levels of fixed income related products.
All other expenses, as noted below, increased by $33.9 million or
29.7% to $148.1 million for the first quarter of 1996.
Brokerage, clearing, exchange fees and other expenses increased by
$10.5 million due to increased share volume, underwriting related expenses and
transaction fee payments. Occupancy and equipment costs increased by $2.1
million as a result of the relocation of the Company's principal office in the
U.S. and the expansion of the Company's overseas offices. Communications costs
increased by $0.7 million. All other operating expenses increased by $20.5.
Included therein are data processing, professional fees, travel and
entertainment, and printing and stationery which increased by $14.5 million
reflecting an overall increase in the level of business activity. In addition,
for the quarter ended March 31, 1996, $6.0 million of expenses were incurred
for mortgage-related securities previously underwritten by the Company
which were repurchased in 1994.
The Company's income tax provision for the first quarter of 1996 and
1995 was $43.4 million and $25.0 million, respectively, which represented a
40% effective tax rate for both periods.
Net income for the quarter ended March 31, 1996 was $65.1 million,
up $27.6 million or 73.6% from the comparable 1995 period. Earnings per common
share for the first quarter of 1996 and pro forma earnings per common share
using the treasury stock method were $1.01 and $0.63 for the first quarter of
1996 and 1995, respectively.
14
<PAGE>
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 customer business and proprietary
trading. Such collateralized receivables consist primarily of resale
agreements and securities borrowed, both of which are secured by U.S.
government and agency securities and highly marketable corporate debt and
equity securities. In addition, the Company has significant receivables from
customers, brokers and dealers which turn over frequently. As a securities
dealer, the Company may carry significant levels of trading inventories to
meet client needs. As such, the Company's total assets or the individual
components of total assets vary significantly from period to period because of
changes relating to customer needs, economic and market conditions and
proprietary trading strategies. A relatively small percentage of total assets
is fixed or held for a period of longer than one year. The Company's total
assets at March 31, 1996 and December 31, 1995 were $46.6 billion and $44.6
billion, respectively.
The majority of the Company's assets are financed through daily
operations by repurchase agreements, securities sold not yet purchased,
securities loaned, bank loans, and through payables to customers and brokers
and dealers. Short-term funding is generally obtained at rates related to
Federal funds, LIBOR and money market rates. Other borrowing costs are
negotiated depending upon prevailing market conditions. The Company monitors
overall liquidity by tracking the extent to which unencumbered marketable
assets exceed short-term unsecured borrowings.
The Company maintains borrowing relationships with a broad range of
banks, financial institutions, counterparties and others including $6.1
billion, at March 31, 1996, in uncommitted and committed bank credit lines
with 50 domestic and international banks. These include $4.5 billion of
uncommitted bank credit lines, $1.3 billion of secured committed bank lines
and $340.0 million of unsecured committed bank lines.
Certain of the Company's businesses are capital intensive. In
addition to normal operating requirements, capital is required to cover
financing and regulatory charges on securities inventories, merchant banking
investments and investments in fixed assets. The Company's overall capital
needs are continually reviewed to ensure that its capital base can
appropriately support the anticipated needs of its business units as well as
the regulatory capital requirements of subsidiaries. Based upon these
analyses, management believes that the Company's debt and equity base is
adequate for current operating levels. The Company has been active in raising
additional long-term financing, including extending the maturity of its $250.0
million senior subordinated revolving credit agreement and increasing the
amount of the credit available thereunder to $325.0 million in 1995. As of
March 31, 1996, $250.0 million was outstanding under this facility.
Mortgages and other receivables collateralized by real estate assets
and real estate owned amounting to $461.0 million at March 31, 1996 and $375.9
million at December 31, 1995, generally represent the Company's interest in
mortgages receivable including certain mortgage-related securities previously
underwritten by the Company which were primarily repurchased in 1994, and are
carried at amounts approximating fair value, determined by, among other
things, the discounted cash flow and/or estimated sales prices of the
underlying properties.
15
<PAGE>
In March 1996, the Company moved its principal offices from 140
Broadway to 277 Park Avenue in New York City. The Company is presently
financing expenditures related to the move from currently available operating
capital.
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 ensure
the general capital adequacy and liquidity of broker-dealers and futures
commission merchants. DLJSC has consistently maintained capital substantially
in excess of the minimum requirements of such capital rules. At March 31,
1996, DLJSC had aggregate regulatory "net capital," after adjustments required
by Rule 15c3-1 under the Exchange Act of 1934, of approximately $644.8
million, which exceeded minimum net capital requirements by $577.4 million and
which exceeded the net capital required by DLJSC's most restrictive debt
covenants by $426.1 million.
On February 12, 1996, a shelf registration statement, which
enables the Company to issue up to $500 million in aggregate public offering
price of Senior Debt Securities and/or Preferred Stock, was declared effective
by the Securities and Exchange Commission. On February 15, 1996, the Company
completed an offering off of such shelf registration statement of $250 million
aggregate principal amount of its 5 5/8% Medium-Term Notes due 2016. The notes
are repayable by the Company, in whole or in part, at the option of the
holders on February 15, 2001. Net proceeds to the Company from this offering
were $248.3 million (net of underwriting discounts and commissions).
The Company's overall capital and funding needs are continually reviewed to
ensure that its capital base can support the estimated needs of its business
units.
CASH FLOWS
The Company's statements of consolidated cash flows classify cash
flow into three broad categories: cash flows from operating activities,
investing activities and financing activities. The Company's net cash flows
are principally associated with operating and financing activities, which
support the Company's trading, customer and banking activities.
Quarters Ended March 31, 1996 and 1995
Cash and cash equivalents at March 31, 1996 and 1995, totaled $169.3
million and $162.3 million, respectively, an increase of $61.6 million and
$67.5 million, respectively, for the comparable periods.
Cash provided by operating activities totaled $604.6 million and $1.5
billion for the first three months of 1996 and 1995, respectively, and
reflects primarily an increase in operating liabilities for both periods. In
the first three months of 1996, there were increases in payables to customers
of $337.1 million and payables to brokers, dealers and other of $1.6 billion
and a decrease in securities borrowed of $665.5 million. These increases were
partially offset by increases in assets including receivables from customers
of $512.3 million and receivables from brokers, dealers and other of $986.0
million. In the first three months of 1995, there were increases in securities
sold not yet purchased of $725.5 million, securities loaned of $855.9 million
and a decrease in trading inventories of $514.7 million. These increases were
offset by increases in assets including securities borrowed of $630.2 million.
During the first three months of 1996, net cash used in investing
activities of $143.6 million was comprised primarily of fixed asset purchases
in connection with the Company's move of its principal offices and purchases
of mortgages receivables collateralized by real estate assets. During the
first three months of 1995, investing activities of $25.7 million were
comprised primarily of increases in other assets and receivables
collateralized by real estate assets.
For the first three months of 1996 and 1995, cash of $530.5 million
and $1.6 billion, respectively, was used to repay short-term funding
(principally repurchase agreements). Additionally, in the first quarter of
1996, $105.5 million was used to repay Swiss Franc Bonds which matured in
January 1996 and $249.5 million was provided by the issuance of Medium-Term
Notes.
16
<PAGE>
DERIVATIVE FINANCIAL INSTRUMENTS
The Company's derivative activities are not as extensive as many of
its competitors. Instead, the Company has focused its derivative activities on
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 engaging in futures contracts on equity-based
indices, interest rate instruments, and currencies, and issuing structured
notes. The Company's involvement in swap contracts is not significant. As a
result, the Company's involvement in derivative products is related primarily
to revenue generation through the provision of products to its clients as
opposed to hedges against the Company's own positions.
Options Contracts:
Options contracts are typically written for a duration of less than
13 months. Revenues from these activities (net of related interest expenses)
were approximately $8.8 million and $19.1 million for the three months ended
March 31, 1996 and 1995, respectively. Option writing revenues are primarily
from the amortization of option premiums. The decrease in revenues primarily
resulted from lower levels of activity, both in size and number of
transactions, by the Company's institutional customers. These reductions were
caused by a number of factors, including market conditions and competition
from other financial institutions.
The notional value of written options contracts outstanding was
approximately $4.9 billion and $3.9 billion at March 31, 1996 and 1995,
respectively. The overall increase in the notional value of all options is
reflective of the higher levels of interest in these products by the Company's
customers. The decrease in the notional value of other options was due
primarily to decreases in customer activity related to U.S. government
obligations. Such written options contracts are substantially covered by
various financial instruments that the Company has purchased or sold as
principal.
Futures and Forward Contracts:
As part of the Company's trading activities, including trading
activities in the related cash market instruments, the Company enters into
forward and futures contracts primarily involving securities, foreign
currencies, indices and forward rate agreements. Such forward and futures
contracts are entered into as part of the Company's covering transactions and
generally are not used for speculative purposes.
Net trading gains (losses) on forward contracts were $(23.9) million
and $43.7 million and net trading gains (losses) on futures contracts were
$8.7 million and $(35.0) million for the three months ended March 31, 1996 and
1995, respectively.
The notional contract and market values of the forward and futures contracts
at March 31, 1996 and 1995 were as follows:
March 31, 1996 March 31, 1995
-------------- --------------
Purchases Sales Purchases Sales
--------- ------ --------- ------
(In millions)
Forward Contracts
(Notional Contract Value) $ 17,945.2 $ 17,297.3 $ 13,323.0 $ 14,762.0
============ =========== =========== =========
Futures Contracts
(Market Value) .......... $ 1,672.6 $ 1,001.7 $ 282.1 $ 1,218.8
============ =========== =========== =========
17
<PAGE>
Structured Notes:
Structured notes are customized derivative instruments in which the
amount of interest or principal paid on a debt obligation is linked to
movements in the value of cash market financial instruments. At March 31, 1996
and 1995, the Company had issued structured notes with principal amounts of
$82.7 million and $65.1 million outstanding, respectively. The Company expects
the volume of this activity to increase in the future. The Company covers its
obligations on structured notes primarily by purchasing and selling the
securities to which the value of its structured notes are linked.
MERCHANT BANKING TRANSACTIONS
The Company's merchant banking investments are carried at estimated fair
value as determined by the Finance Committee of the Board of Directors.
Changes in unrealized appreciation arising from changes in fair value or gains
or losses upon realization are reflected in principal transactions- net,
investments. At March 31, 1996 and December 31, 1995, the Company's share in
its merchant banking investments amounted to $224.5 million and $210.1
million, respectively.
HIGH YIELD TRANSACTIONS
The Company accounts for its high-yield inventory positions on a market
basis with unrealized gains and losses being recognized currently in earnings.
At March 31, 1996 and December 31, 1995, the Company had long inventory of
$604.1 million and $500.7 million, respectively, and short inventory of $225.2
million and $219.6 million, respectively, of high-yield securities, which
accounted for less than 7.5% of the Company's overall inventory positions.
18
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Certain significant legal proceedings and matters have been
previously disclosed in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 and there have been no material developments in such
proceedings and matters.
In addition to the significant proceedings and matters referred to
above, 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. Some of the actions have been brought on behalf of various classes
of claimants and seek damages of material or indeterminate amounts. The
Company is also involved, from time to time, in proceedings with, and
investigations by, governmental agencies and self regulatory organizations.
Although there can be no assurance that such other 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
the ultimate resolution of any such other 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.
ITEM 5. OTHER INFORMATION
The Company's Annual Meeting of Stockholders was held on April 30, 1996.
At the meeting, (i) eighteen persons were elected as directors of the Company,
(ii) the selection of KPMG Peat Marwick LLP to serve as the independent
auditors of the Company for the fiscal year ending December 31, 1996 was
ratified, (iii) the Donaldson, Lufkin & Jenrette, Inc. 1996 Stock Option Plan
was approved, and (iv) the Donaldson, Lufkin & Jenrette, Inc. 1996 Incentive
Compensation Plan was approved.
Election of Directors:
Nominee For Withheld Against Non-Vote
Claude Bebear 50,789,816 12,808
John S. Chalsty 50,790,036 12,588
Anthony F. Daddino 50,790,316 12,308
Henri de Castries 50,790,116 12,508
Jerry de St. Paer 50,754,093 48,531
Kevin C. Dolan 50,789,593 13,031
Louis Harris 50,789,592 13,032
Henri Baron Hottinguer 50,790,116 12,508
Hamilton E. James 50,790,516 12,108
W. Edwin Jarmain 50,790,016 12,608
Francis Jungers 50,790,092 12,532
Joseph J. Melone 50,754,316 48,308
Carl B. Menges 50,790,516 12,108
Richard S. Pechter 50,790,516 12,108
Joe L. Roby 50,790,216 12,408
W.J. Sanders III 50,754,716 47,908
Theodore P. Shen 50,790,516 12,108
John C. West 50,788,892 13,732
Ratification of Auditors . 50,795,458 3,367 3,799
Approval of 1996 Stock
Option Plan 46,922,358 9,034 2,168,602 1,702,630
Approval of 1996 Incentive
Compensation Plan 46,939,665 9,310 2,151,019 1,702,630
19
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3.1 Certificate of Incorporation. (Incorporated herein by
reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1, File No. 33-96276).
3.2 By-Laws. (Incorporated herein by reference to Exhibit 3.2
to the Company's Registration Statement on Form S-1, File
No. 33-96276).
4.1 Form of Senior Debt Securities (Incorporated herein by
reference to exhibit 4.5 of the Company's Form 10-K for the
year ended December 31, 1995, File No. 1-6862).
4.2 Specimen 5 5/8% Medium-Term Note due 2016. (Incorporated
herein by reference to Exhibit 4.6 of the Company's Form
10-K for the year ended December 31, 1995, File No. 1-6862).
10.8 Donaldson, Lufkin & Jenrette, Inc. 1996 Stock Option Plan.
(Incorporated herein by reference to Annex A of the Company's
Proxy Statement on Schedule 14 A).
10.9 Donaldson, Lufkin & Jenrette, Inc. 1996 Incentive
Compensation Plan. (Incorporated herein by reference to
Annex B of the Company's Proxy Statement on Schedule 14 A).
11 Statement re: computation of per share earnings.
27 Financial Data Schedule
(b) Reports on Form 8-K.
1. Form 8-K dated February 9, 1996; Items 5 and 7
2. Form 8-K filed on February 12, 1996; Items 5 and
7 and including the Company's consolidated
financial statements for the year ended
December 31, 1995.
20
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DONALDSON, LUFKIN & JENRETTE, INC.
Date: May 14, 1996 /s/ Anthony F. Daddino
------------------------------
Anthony F. Daddino
Executive Vice President and Chief
Financial Officer
(On behalf of the Registrant and as
Principal Financial Officer)
21
<PAGE>
EXHIBIT INDEX
3.1 Certificate of Incorporation. (Incorporated herein by reference to
Exhibit 3.1 to the Company's Registration Statement on Form S-1, File
No. 33-96276).
3.2 By-Laws. (Incorporated herein by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1, File No. 33-96276).
4.1 Form of Senior Debt Securities (Incorporated herein by reference to
exhibit 4.5 of the Company's Form 10-K for the year ended December 31,
1995, File No. 1-6862).
4.2 Specimen 5 5/8% Medium-Term Note due 2016. (Incorporated herein by
reference to Exhibit 4.6 of the Company's Form 10-K for the year ended
December 31, 1995, File No. 1-6862).
10.8 Donaldson, Lufkin & Jenrette, Inc. 1996 Stock Option Plan.
(Incorporated herein by reference to Annex A of the Company's Proxy
Statement on Schedule 14 A).
10.9 Donaldson, Lufkin & Jenrette, Inc. 1996 Incentive Compensation Plan.
(Incorporated herein by reference to Annex B of the Company's Proxy
Statement on Schedule 14 A).
11 Statement re: computation of per share earnings.
27 Financial Data Schedule
22
<PAGE>
EXHIBIT 11
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Computation of Earnings Per Share
(In thousands, except per share amounts)
Three Months Ended
March 31,
1996 1995
----- -----
Weighted Average Common Shares:
Average Common Shares Outstanding ....................... 53,300 50,000
Average Restricted Stock Units Outstanding .............. 5,179
Average Common Shares Issuable Under Employee Benefit
Plans ................................................. 1,097
Proforma average common shares upon issuance of
Restricted Stock Units Under the Treasury
Stock Method ........... -- 1,475
------- -------
Weighted Average Common Shares Outstanding ................. 59,576
======
Proforma Weighted Average Common Shares Outstanding ........ 51,475
=======
Earnings:
Net Income ........................................ $65,100 $37,500
Less: Preferred Stock Dividend Requirement ....... 4,967 4,967
------- -------
Earnings Applicable to Common Shares ....................... $60,133 $32,533
======= =======
Earnings Per Common Share .................................. $ 1.01
=======
Proforma Earnings Per Common Share ....................... $ 0.63
=======
Weighted average common shares outstanding are the same for both primary
and fully diluted earnings per common share.
23
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
EXHIBIT 27
The schedule contains summary financial information extracted from the condensed
consolidated financial statements and is qualified in its entirety by reference
to such financial statements.
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Financial Data Schedule
(In thousands, except per share data)
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> MAR-31-1996
<CASH> $ 888,021
<RECEIVABLES> 5,477,076
<SECURITIES-RESALE> 19,298,622
<SECURITIES-BORROWED> 8,379,389
<INSTRUMENTS-OWNED> 11,368,057
<PP&E> 232,601
<TOTAL-ASSETS> 46,618,620
<SHORT-TERM> 1,727,730
<PAYABLES> 5,495,480
<REPOS-SOLD> 25,789,396
<SECURITIES-LOANED> 2,607,276
<INSTRUMENTS-SOLD> 6,926,549
<LONG-TERM> 1,101,695
225,000
0
<COMMON> 5,330
<OTHER-SE> 1,246,757
<TOTAL-LIABILITY-AND-EQUITY> 46,618,620
<TRADING-REVENUE> 143,461
<INTEREST-DIVIDENDS> 241,620
<COMMISSIONS> 146,534
<INVESTMENT-BANKING-REVENUES> 180,951
<FEE-REVENUE> 8,570
<INTEREST-EXPENSE> 175,012
<COMPENSATION> 344,269
<INCOME-PRETAX> 108,500
<INCOME-PRE-EXTRAORDINARY> 108,500
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 65,100
<EPS-PRIMARY> $1.01
<EPS-DILUTED> $1.01
</TABLE>
