<PAGE>
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
September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
[ ] Commission file number 1-6862
DONALDSON, LUFKIN & JENRETTE, INC.
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-1898818
--------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
277 Park Avenue, New York, New York 10172
--------------------------------------- -------------------
(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 November 6, 1998, the latest practicable date, there were 122,753,132
shares of Common Stock, $0.10 par value, outstanding.
1
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
Part I FINANCIAL INFORMATION
Page
Number
Item 1. Financial Statements
Condensed Consolidated Statements of Financial Condition
at September 30, 1998 and December 31, 1997 (Unaudited)..... 3
Condensed Consolidated Statements of Income for the three
and nine months ended September 30, 1998 and 1997
(Unaudited)................................................. 5
Condensed Consolidated Statements of Changes in
Stockholders' Equity for the year ended December 31, 1997
and the nine months ended September 30, 1998 (Unaudited) ... 6
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998 and 1997 (Unaudited)... 7
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................. 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................. 22
Part II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 25
Item 2. Changes in Securities and Use of Proceeds................... 25
Item 6. Exhibits and Reports on Form 8-K............................ 26
Signature................................................... 27
2
<PAGE>
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>
September 30, December 31,
1998 1997
------------ ------------
ASSETS
<S> <C> <C>
Cash and cash equivalents.................................................... $ 827,502 $ 273,164
Cash and securities segregated for regulatory purposes or deposited with
clearing organizations.................................................... 790,170 832,093
Collateralized short-term agreements:
Securities purchased under agreements to resell........................... 20,845,439 22,628,782
Securities borrowed....................................................... 22,221,780 20,598,639
Receivables:
Customers................................................................. 6,080,158 4,397,668
Brokers, dealers and other................................................ 5,089,060 3,162,970
Financial instruments owned, at value:
U.S. government and agency................................................ 8,719,525 6,834,996
Corporate debt............................................................ 4,479,569 5,577,023
Foreign sovereign debt.................................................... 680,348 1,624,235
Mortgage whole loans...................................................... 1,454,627 1,555,685
Equities and other........................................................ 1,421,981 943,782
Long-term corporate development investments............................... 454,855 315,774
Office facilities, at cost, (net of accumulated depreciation and
amortization of $273,688 and $216,230, respectively)...................... 440,835 388,677
Other assets ................................................................ 1,787,000 1,372,357
------------ ------------
Total Assets................................................................. $ 75,292,849 $ 70,505,845
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition (Unaudited)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Commercial paper and short-term borrowings...................................... $ 1,100,360 $ 1,121,352
Collateralized short-term financings:
Securities sold under agreements to repurchase.............................. 35,693,542 36,006,656
Securities loaned........................................................... 7,641,307 7,687,416
Payables:
Customers................................................................... 5,666,284 5,071,653
Brokers, dealers and other.................................................. 4,591,944 2,912,218
Financial instruments sold not yet purchased, at value:
U.S. government and agencies................................................ 8,541,285 7,671,498
Corporate debt.............................................................. 842,313 854,155
Foreign sovereign debt...................................................... 82,604 553,852
Equities and other.......................................................... 1,877,658 1,376,395
Accounts payable and accrued expenses........................................... 2,205,146 2,119,131
Other liabilities............................................................... 851,242 741,870
----------- -----------
69,093,685 66,116,196
----------- -----------
Long-term borrowings............................................................ 3,137,104 2,128,159
----------- -----------
Total liabilities...................................................... 72,230,789 68,244,355
----------- -----------
Company-obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely debentures of the Company................ 200,000 200,000
----------- -----------
Stockholders' Equity:
Preferred stock, 50,000,000 shares authorized:
Series A Preferred Stock, at $50.00 per share liquidation
preference (4,000,000 shares issued and outstanding)................... 200,000 200,000
Series B Preferred Stock, at $50.00 per share liquidation
preference (3,500,000 shares issued and outstanding).................. 175,000 -
Common stock ($0.10 par value; 300,000,000 shares
authorized; 122,719,330 and 111,852,762 shares issued
and outstanding, respectively)........................................... 12,272 11,185
Restricted stock units (10,358,294 units authorized; 2,082,876
and 6,562,414 units issued and outstanding, respectively)................ 21,340 67,255
Paid-in capital............................................................. 847,273 440,926
Retained earnings........................................................... 1,602,025 1,338,220
Accumulated other comprehensive income...................................... 4,150 3,904
Employee deferred compensation stock trust.................................. 31,216 12,061
Common stock issued to employee deferred compensation trust................. (31,216) (12,061)
----------- -----------
Total stockholders' equity............................................. 2,862,060 2,061,490
----------- -----------
Total Liabilities and Stockholders' Equity...................................... $75,292,849 $70,505,845
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Commissions......................................... $ 225,345 $ 178,301 $ 625,811 $ 504,997
Underwritings....................................... 121,727 294,452 795,201 651,812
Fees................................................ 317,297 209,703 891,104 532,530
Interest, net of interest to finance U.S.
government, agency and mortgage-backed
securities of $794,211, $731,785,
$2,343,029 and $2,097,579, respectively........... 577,515 400,413 1,732,568 1,090,133
Principal transactions-net:
Trading........................................... (234,423) 84,908 (99,700) 332,216
Investment........................................ 44,724 85,587 133,217 149,967
Other............................................... 17,642 15,132 41,792 49,424
---------- ---------- ---------- ----------
Total revenues................................... 1,069,827 1,268,496 4,119,993 3,311,079
---------- ---------- ---------- ----------
Costs and Expenses:
Compensation and benefits........................... 387,168 545,493 1,704,218 1,411,272
Interest............................................ 374,686 279,287 1,126,793 744,464
Brokerage, clearing, exchange fees and other........ 61,356 56,409 190,593 166,194
Occupancy and equipment............................. 65,849 47,452 189,897 132,757
Communications...................................... 23,479 16,141 64,638 45,912
Other operating expenses............................ 115,689 135,614 354,504 311,380
---------- ---------- ---------- ----------
Total costs and expenses......................... 1,028,227 1,080,396 3,630,643 2,811,979
---------- ---------- ---------- ----------
Income before provision for income taxes................ 41,600 188,100 489,350 499,100
---------- ---------- ---------- ----------
Provision for income taxes.............................. 15,900 67,800 187,200 192,200
---------- ---------- ---------- ----------
Net income.............................................. $ 25,700 $ 120,300 $ 302,150 $ 306,900
========== ========== ========== ==========
Dividends on preferred stock............................ $ 5,289 $ 2,970 $ 16,021 $ 9,174
========== ========== ========== ==========
Earnings applicable to common shares.................... $ 20,411 $ 117,330 $ 286,129 $ 297,726
========== ========== ========== ==========
Earnings per share:
Basic............................................... $ 0.17 $ 1.06 $ 2.42 $ 2.71
Diluted............................................. $ 0.15 $ 0.93 $ 2.18 $ 2.40
========== ========== ========== ==========
Weighted average common shares:
Basic............................................... 121,569 111,116 118,025 109,826
Diluted............................................. 134,478 126,786 131,386 124,278
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
For the Year Ended December 31, 1997 and the Nine Months
Ended September 30, 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
Accumulated
Restricted Other
Preferred Common Stock Paid-in Retained Comprehensive
Stock Stock Units Capital Earnings Income Total
--------- -------- --------- ---------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996....... $ 200,000 $ 10,659 $ 104,167 $ 360,660 $ 969,856 $ 1,897 $1,647,239
Net income........................... - - - - 408,250 - 408,250
Dividends:
Common stock ($0.25 per share).... - - - - (27,742) - (27,742)
Preferred stock................... - - - - (12,144) - (12,144)
Common stock issued upon the
exercise of stock options,
including related tax benefits.... - 30 - 6,428 - - 6,458
Conversion of restricted stock
units to common stock,
including related tax benefits.... - 358 (36,756) 45,041 - - 8,643
Forfeiture of restricted stock units. - - (156) 156 - - -
Conversion of debentures............. - 138 - 28,641 - - 28,779
Translation adjustment............... - - - - - 2,007 2,007
--------- -------- --------- ---------- ---------- ------- ----------
Balances at December 31, 1997....... 200,000 11,185 67,255 440,926 1,338,220 3,904 2,061,490
Net income........................... - - - - 302,150 - 302,150
Dividends:
Common stock ($0.125 per
share)......................... - - - - (22,324) - (22,324)
Preferred stock .................. - - - - (16,021) - (16,021)
Issuance of Series B Preferred
Stock............................. 175,000 - - - - - 175,000
Sale of common stock to
Equitable/AXA..................... - 500 - 299,500 - - 300,000
Common stock issued upon the
exercise of stock options,
including related tax benefits.... - 139 - 35,952 - - 36,091
Conversion of restricted stock
units to common stock,
including related tax benefits.... - 448 (45,890) 70,870 - - 25,428
Forfeiture of restricted stock units. - - (25) 25 - - -
Translation adjustment............... - - - - - 246 246
--------- -------- --------- ---------- ---------- ------- ----------
Balances at September 30, 1998...... $ 375,000 $ 12,272 $ 21,340 $ 847,273 $1,602,025 $ 4,150 $2,862,060
========= ======== ========== ========== ========== ======= ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
For the Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income....................................................................... $ 302,150 $ 306,900
------------ ------------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization................................................. 56,662 43,570
Deferred taxes................................................................ 57,641 (20,872)
Decrease in unrealized depreciation of long-term corporate development
investments ................................................................ (20,138) (27,012)
------------ ------------
396,315 302,586
(Increase) decrease in operating assets:
Cash and securities segregated for regulatory
purposes or deposited with clearing organizations........................... 41,923 116,882
Securities purchased under agreements to resell............................... (2,317,839) (4,522,527)
Securities borrowed........................................................... (1,623,141) (6,431,666)
Receivables from customers.................................................... (1,682,490) (852,668)
Receivables from brokers, dealers and other................................... (1,926,090) (1,388,913)
Financial instruments owned, at value......................................... (220,329) (2,254,526)
Other assets.................................................................. (171,554) (140,595)
Increase (decrease) in operating liabilities:
Securities sold under agreements to repurchase................................ 2,317,839 4,522,527
Securities loaned............................................................. (46,109) 2,477,335
Payables to customers......................................................... 594,631 951,726
Payables to brokers, dealers and other........................................ 1,679,726 912,821
Financial instruments sold not yet purchased, at value........................ 887,960 2,651,099
Accounts payable and accrued expenses......................................... 86,015 260,959
Other liabilities and deferred amounts ....................................... 149,980 143,294
Translation adjustment........................................................ 246 1,053
------------ ------------
Net cash used in operating activities.............................................. $ (1,832,917) $ (3,250,613)
------------ ------------
</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 Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from investing activities:
Net (payments for) proceeds from:
Purchases of long-term corporate development investments.................... $ (304,660) $ (158,372)
Sales of long-term corporate development investments........................ 185,717 72,942
Office facilities........................................................... (111,628) (113,428)
Other assets................................................................ (296,037) (208,008)
---------- ----------
Net cash used in investing activities........................................... (526,608) (406,866)
---------- ----------
Cash flows from financing activities:
Net proceeds from (payments for):
Short-term financings....................................................... 1,449,237 3,067,548
Senior subordinated floating rate notes..................................... 250,000
Senior secured floating rate notes.......................................... 200,000
Global Floating Rate Notes.................................................. - 347,760
Senior notes................................................................ 643,076 -
Subordinated revolving credit agreement..................................... (325,000) 118,500
Medium-term notes........................................................... 249,001 260,327
Other long-term debt........................................................ (9,291) 6,026
Dividends................................................................... (38,345) (29,924)
Sale of common stock to Equitable/AXA....................................... 300,000 -
Issuance of Series B preferred stock........................................ 175,000 -
Exercise of stock options................................................... 20,185 836
---------- ----------
Net cash provided by financing activities....................................... 2,913,863 3,771,073
---------- ----------
Increase in cash and cash equivalents........................................... 554,338 113,594
Cash and cash equivalents at beginning of period................................ 273,164 158,831
---------- ----------
Cash and cash equivalents at end of period...................................... $ 827,502 $ 272,425
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
8
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 1998
1. Basis of Presentation
The condensed 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.
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 condensed 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, 1997 included on Form 10-K filed by the
Company under the Securities Exchange Act of 1934.
The preparation of condensed 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 condensed consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Certain reclassifications have been made to prior year
financial statements to conform to the 1998 presentation.
2. Common Stock Split
In February 1998, the Board of Directors declared a two-for-one stock split
(the "stock split") of the Company's common stock, subject to stockholder
approval to increase the number of authorized common shares. In April 1998,
stockholders approved an amendment to the Company's Certificate of
Incorporation whereby the amount of total authorized shares of common stock was
increased to 300 million shares and the amount of total authorized shares of
preferred stock was increased to 50 million shares. The stock split was
effected in the form of a 100% stock dividend to stockholders of record on
April 27, 1998, and was paid on May 11, 1998. The par value of the common stock
remained at $.10 per share. Accordingly, an adjustment from paid-in capital to
common stock was made to preserve the value of the post-split shares. All
common share, per common share, restricted stock unit and option data have been
restated for the effect of the stock split in the accompanying condensed
consolidated financial statements.
3. Income Taxes
Income taxes for interim period condensed consolidated financial statements
have been accrued using the Company's estimated effective tax rate. Federal
income taxes paid for the nine months ended September 30, 1998 and 1997 were
$98.8 million and $145.3 million including net Federal income tax equivalents
paid to Equitable of $1.7 million and $7.1 million, respectively for each
period.
4. 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 financial instruments settlement process and to finance
financial instruments purchased by customers on margin. In January 1998, the
Company commenced a $1.0 billion commercial paper program. Obligations issued
thereunder (the "Notes") are exempt from registration under the Securities Act
of 1933, as amended. The Notes rank pari passu with the Company's other
unsecured and unsubordinated indebtedness. At September 30, 1998, $259.5
million of Notes were outstanding under this program.
9
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
Long-term borrowings, including current maturities of $1.1 million and $1.6
million at September 30, 1998 and December 31, 1997, respectively, consist of
the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- -----------
(In thousands)
<S> <C> <C>
Medium-term notes, 5.625%-6.90% due various dates through 2016...... $ 946,622 $ 697,310
Senior subordinated revolving credit agreement due in 2000........... - 325,000
Global floating rate notes, due in 2002.............................. 348,245 347,909
Subordinated exchange notes, 9.58% due in 2003...................... 225,000 225,000
Senior notes, 6 7/8% due in 2005..................................... 497,727 497,484
Senior secured floating rate notes due in 2005....................... 450,000 -
Senior notes, 6 1/2% due in 2008..................................... 643,347 -
Other................................................................ 26,163 35,456
----------- -----------
Total long-term borrowings...................................... $ 3,137,104 $ 2,128,159
=========== ===========
</TABLE>
During the nine months ended September 30, 1998, the Company issued $650.0
million of 6 1/2% Senior Notes which mature in 2008 and $250.0 million
medium-term notes that bear interest at rates ranging from 5.82% - 6.28% and
mature at various dates through 2003.
In the third quarter of 1998, a subsidiary of the Company issued Senior Secured
and Senior Subordinated Secured Floating Rate Notes in the principal amounts of
$200 million and $250 million due March 15, 2005 and September 15, 2005,
respectively. At September 30, 1998, a portfolio of investments, primarily
senior bank debt valued at $520.8 million, collateralizes the non-recourse
notes. Senior bank debt consist of interests in senior corporate debt,
including term loans, revolving loans and other corporate debt.
During the second quarter of 1998, the Company amended its $2.0 billion
revolving credit facility to increase the aggregate commitment of banks
thereunder to $2.75 billion, of which $1.65 billion may be unsecured. There
were no borrowings outstanding under this agreement at September 30, 1998.
In May 1998, the Company repaid its $325 million senior subordinated revolving
credit agreement and terminated the related credit facility.
Subordinated exchange notes due in 2003 include $20.0 million due to a
subsidiary of Equitable at September 30, 1998.
Interest paid on all borrowings and financing arrangements amounted to $3.5
billion and $2.8 billion for the nine months ended September 30, 1998 and 1997,
respectively.
5. 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, as amended. 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 $442.2 million and $323.2 million
at September 30, 1998 and December 31, 1997, respectively. The increase
(decrease) in net unrealized appreciation (depreciation) for the nine months
ended September 30, 1998 and 1997 amounted to $20.1 million and $(27.0)
million, respectively. Changes in unrealized appreciation (depreciation)
arising from changes in fair value or upon realization are reflected in
revenues, principal transactions-net, investment in the condensed consolidated
statements of income.
6. Net Capital
The Company's principal wholly-owned 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 the NYSE's
net capital rule which conforms to the Uniform Net Capital Rule pursuant to
rule 15c3-1 of the Securities
10
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
Exchange Act of 1934, as amended ("the Exchange Act"). 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 September 30, 1998, DLJSC's net capital of
approximately $1.0 billion was 18 percent of aggregate debit balances and in
excess of the minimum requirement by approximately $884.8 million. Certain of
the Company's London-based broker-dealer subsidiaries are subject to the
requirements of the Securities and Futures Authority, a self-regulatory
organization established pursuant to the United Kingdom Financial Services Act
of 1986. Other U.S. and foreign broker-dealer subsidiaries of the Company are
subject to net capital requirements of their respective regulatory agencies. At
September 30, 1998, the Company and its broker-dealer subsidiaries were in
compliance with all applicable regulatory capital adequacy requirements.
7. 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 under the treasury
stock method. All earnings per share amounts have been restated for the effect
of the stock split.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per common share computations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
1998 1997 1998 1997
-------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Earnings applicable to Common Shares- Basic $ 20,411 $ 117,330 $ 286,129 $ 297,726
Effect of Dilutive Securities:
Convertible Debt - 354 - 310
-------- --------- --------- ---------
Earnings applicable to Common Shares- Diluted $ 20,411 $ 117,684 $ 286,129 $ 298,036
======== ========= ========= =========
Weighted Average Common Shares- Basic 121,569 111,116 118,025 109,826
Effect of Dilutive Securities:
Restricted Stock Units 1,929 6,524 2,489 7,226
Stock Options 10,980 8,620 10,872 6,592
Convertible Debt - 526 - 634
-------- --------- --------- ---------
Weighted Average Common Shares- Diluted 134,478 126,786 131,386 124,278
======== ========= ========= =========
</TABLE>
8. Stockholders' Equity
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). Dividends are payable
quarterly at a rate of 5.30% per annum, subject to adjustment after January
2003.
In February 1998, approximately 4.4 million restricted stock units (after
giving effect to the stock split) vested and were converted into the Company's
common stock from authorized and unissued shares.
In July 1998, the Emerging Issues Task Force ("EITF") reached a consensus on
EITF Issue 97-14, "Accounting for Deferred Compensation Arrangements Where
Amounts Earned are Held in a Rabbi Trust and Invested" ("EITF 97-14"). Under
EITF 97-14, assets of the trust are to be consolidated with those of the
employer and the value of the employer's stock held in the rabbi trust should
be classified in stockholders' equity in a manner similar to Treasury Stock.
The Company has adopted EITF 97-14 as of September 30, 1998. At September 30,
1998, approximately
11
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
3.0 million shares of the Company's stock are included in the rabbi trust. The
shares and the corresponding liability to employees are shown as components of
stockholders' equity in the Company's financial statements. In October 1998,
approximately 1.8 million of such shares were distributed to employees by the
trust.
In July 1998, the Company sold an aggregate of five million shares of newly
issued common stock to its parent companies, Equitable and AXA for $300.0
million in a transaction exempt from the registration requirements of the
Securities Act of 1933, as amended, under Section 4(2) ("the Securities Act").
As a result, Equitable and its affiliates' beneficial ownership of the Company
increased to approximately 73 percent on an undiluted basis.
9. Comprehensive Income
The components of comprehensive income for the three and nine months ended
September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
1998 1997 1998 1997
-------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Net income...................................... $ 25,700 $ 120,300 $ 302,150 $ 306,900
Other comprehensive income:
Foreign currency translation adjustments...... 658 (618) 246 1,053
-------- --------- --------- ---------
Total comprehensive income...................... $ 26,358 $ 119,682 $ 302,396 $ 307,953
======== ========= ========= =========
</TABLE>
10. Derivative Financial Instruments
The Company enters into certain contractual agreements referred to as
derivatives or off-balance sheet financial instruments involving options,
forwards and futures and swap agreements. 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's
option activities consist primarily of writing over-the-counter ("OTC") options
to accommodate its customers' needs. Forward and futures contracts primarily
represent commitments to purchase or sell U.S. government and agency issued or
guaranteed securities, money market instruments and foreign currency. The
Company enters into swap transactions to manage foreign currency, interest rate
and equity risks. The Company's involvement in 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 condensed 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 and swaps) are included in the condensed 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
condensed consolidated statements of financial condition. Fair value of certain
options includes the unamortized premiums which are deferred and are included
in payables to brokers, dealers and other in the condensed consolidated
statements of financial condition. Such premiums are recognized over the life
of the option contracts on a straight-line basis. Cash flows from derivative
instruments are presented as operating activities in the condensed consolidated
statements of cash flows.
The Company also enters into swap transactions as an end-user for non-trading
purposes to modify the interest rate and foreign currency exposure associated
with certain liabilities and assets. Such transactions are accounted for on an
accrual basis. Under the accrual basis, the net amount to be received or paid
under the swap agreement is accrued as part of interest expense in the
condensed consolidated statements of income.
Option contracts are typically written for a duration of less than 13 months.
The notional (contract) values of the written options were $9.0 billion and
$5.4 billion at September 30, 1998 and December 31, 1997, 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
12
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
for derivative instruments or at market value for cash instruments:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
(In millions)
<S> <C> <C>
U.S. government, mortgage-backed
securities and options thereon.......... $ 6,679 $ 3,773
Foreign sovereign debt securities............ 96 73
Futures contracts............................ 229 219
Equities and other........................... 2,043 1,340
------- -------
Total............................. $ 9,047 $ 5,405
======= =======
</TABLE>
The trading revenues from option writing activity (net of related interest
expense) were approximately $84.9 million and $51.5 million for the nine months
ended September 30, 1998 and 1997, 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 $277.4 million and $223.3 million for the nine months ended
September 30, 1998 and the year ended December 31, 1997, respectively. The fair
values of options were approximately $340.7 million and $196.4 million at
September 30, 1998 and December 31, 1997, respectively, and were included as
liabilities in the accompanying condensed consolidated statements of financial
condition.
The notional amounts of forward and futures contracts are treated as
off-balance sheet items. The notional contract and market values of such
contracts at September 30, 1998 and December 31, 1997, were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
(In millions)
<S> <C> <C>
Forward Contracts:
Purchased at notional (contract) value.......... $ 39,954 $ 19,721
Sold at notional (contract) value............... 42,528 28,339
Futures Contracts and Options on Futures Contracts:
Purchased at market value....................... $ 1,393 $ 988
Sold at market value............................ 2,588 2,767
</TABLE>
The following is a summary of the values of these contracts included in the
condensed consolidated financial statements at September 30, 1998 and December
31, 1997:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
(In millions)
<S> <C> <C>
Forward Contracts:
Average fair values included in assets (liabilities) during the period.... $ 20 $ (2)
Unrealized gains included in total assets at end of period................ 171 56
Unrealized losses included in total liabilities at end of period.......... 194 50
Futures Contracts:
Average fair values included in assets (liabilities) during the period.... $ (17) $ 1
Unrealized gains included in total assets at end of period................ 1 -
Unrealized losses included in total liabilities at end of period.......... 45 2
</TABLE>
Net trading losses on forward contracts were $21.9 million and $38.2 million
and net trading losses on futures contracts were $64.7 million and $33.3
million for the nine months ended September 30, 1998 and 1997, respectively.
13
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 notional (contract) value of swap agreements was approximately $6.0 billion
and $686.9 million at September 30, 1998 and December 31, 1997, respectively.
The notional or contract amounts indicate the extent of the Company's
involvement in the derivative instruments noted above. They do not measure the
Company's exposure to market or credit risk and do not represent the future
cash requirements of such contracts.
11. Commitments and Contingencies
At September 30, 1998, the Company was contingently liable for unsecured
letters of credit of approximately $559.3 million.
The Company has outstanding commitments, expiring on March 16, 2000, to provide
financings to third parties in the total amount of $150.0 million which would
be secured by mortgage loans on real estate properties. At September 30, 1998,
unfunded commitments outstanding under this facility amounted to $52.8 million.
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 September 30, 1998, unfunded senior bank loan commitments
outstanding amounted to $328.8 million.
The Company has commitments to invest on a side by side basis with merchant
banking partnerships in the amount of $785.4 million at September 30, 1998.
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 designed to control, monitor and
manage each type of risk. For a further discussion of these matters, refer to
Notes 8, 9 and 10 of the Consolidated Financial Statements in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
12. 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, 1997. With respect to the litigation in the National Gypsum case,
DLJSC has appealed the Bankruptcy Court's ruling in January 1998 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. On May 7,
1998, DLJSC and others were named as defendants in a second action filed in a
Texas State Court brought by the NGC Settlement Trust. The allegations of this
second Texas State Court action are substantially similar to those of the
earlier class action pending in State Court.
In the matter of Harrah's Jazz, the proponents of the plan of reorganization
filed a notice in the U.S. Bankruptcy Court for the Eastern District of
Louisiana on October 30, 1998 indicating that the conditions to the plan of
reorganization have been satisfied and that the plan of reorganization became
effective as of October 30, 1998. Accordingly, the settlement of the litigation
against DLJSC has become final and did not have a material effect on the
Company's results of operations or financial condition.
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.
14
<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 (the
"Company") 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 of Financial Condition and Results of Operations included in the
Company's 1997 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 the state of the global economy,
securities market conditions, the level and volatility of interest rates,
competitive conditions and the size and timing of transactions.
The unprecedented volatility in global capital markets during the third quarter
of 1998 had a significant negative impact on the financial services industry.
Global economic problems, particularly the collapse of the Russian economy and
the economic conditions in Japan and Asia led to the widespread sell-off of
fixed income and equity securities throughout the world. After the Russian
crisis in mid-August, there was a flight to quality resulting in increased
purchases of U.S. government securities and larger spreads between these and
almost all other fixed income securities ranging from high grade to high yield
instruments. These conditions diminished liquidity and greatly reduced U.S.
bond and equity underwriting. The effect was particularly damaging in the high
yield sector and emerging markets. These same conditions negatively impacted
fixed income and equity markets worldwide.
Mergers and acquisitions also slowed from the second quarter, although
year-over-year growth in worldwide mergers remains at 54 percent. Equity and
high yield underwriting has declined significantly during the third quarter due
to the extreme market volatility. IPO activity declined 66 percent compared to
the comparable quarter of 1997 due to these unfavorable market conditions.
RECENT DEVELOPMENTS
In July 1998, the Company sold an aggregate of five million shares of newly
issued common stock to its parent companies, Equitable and AXA, for $300.0
million in a transaction exempt from the registration requirement of the
Securities Act. As a result, Equitable and its affiliates' beneficial ownership
of the Company increased to approximately 73 percent on an undiluted basis.
In August 1998, a subsidiary of the Company issued non-recourse Senior Secured
and Senior Subordinated Secured Floating Rate Notes in the principal amounts of
$200 million and $250 million due March 15, 2005 and September 15, 2005,
respectively.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1998 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1997
Total revenues for the quarter ended September 30, 1998 were $1.1 billion, a
decrease of $198.7 million or 15.7% from the quarter ended September 30, 1997.
Revenues decreased in the third quarter of 1998 due primarily to a decrease in
underwriting and principal transactions, trading.
Commission revenues increased by $47.0 million or 26.4% to $225.3 million
during the quarter. Volume on virtually every exchange reached record levels
due to extreme volatility experienced in the equity markets.
Underwriting revenues decreased by $172.7 million or 58.7% to $121.7 million.
The Company and the industry experienced significant decreases as underwriting
activity slowed sharply reflecting the poor market conditions in the equity,
fixed-income and high-yield markets.
Fee revenues increased by $107.6 million or 51.3% to $317.3 million primarily
as a result of increased fees in the asset management area, including the
Private Fund Group. Other advisory service activities, including mergers &
acquisitions, also increased during the third quarter of 1998.
Interest, net of interest expense to finance U.S. government, agency and
mortgage-backed securities, increased by $177.1 million or 44.2% to $577.5
million. The largest increases took place in the stock loan/borrowed business.
In addition, there were increases in domestic and foreign margin balances and
higher levels of fixed-income securities.
15
<PAGE>
Principal transactions-net, trading revenues decreased by $319.3 million to
$(234.4) million, reflecting losses or reduced revenues in most trading areas.
The most significant losses occurred in high-yield bond trading and emerging
markets areas. The trading losses in emerging markets related primarily to the
collapse in Russian securities and its effect on emerging markets throughout
the world. Such decreases were offset in part by the increases in net interest
revenues from the Company's emerging markets business. At September 30, 1998,
the Company's exposure to emerging markets securities, the aggregate of its net
position for each country, was less than $100 million.
Principal transactions-net, investment revenues decreased by $40.9 million or
47.7% to $44.7 million. The decrease is primarily due to lower profits on
investments sold. Realized gains on investments were $26.6 million. Net
unrealized carrying values increased by $18.1 million, which includes the
elimination of net unrealized appreciation of $0.2 million on investments sold
and an increase in net unrealized appreciation of $18.3 million on retained
investments.
Other revenues, consisting primarily of dividends and miscellaneous transaction
revenues, increased by $2.5 million or 16.6% to $17.6 million.
Total costs and expenses for the third quarter of 1998 were $1.0 billion, a
decrease of $52.2 million or 4.8% from the third quarter of 1997.
Compensation and benefits decreased by $158.3 million or 29.0% to $387.2
million. Incentive and production-related compensation decreased by 51.0% in
1998 due to lower revenues, and a decrease in operating results. Base
compensation, including benefits and all payroll taxes, increased by 45.0% due
to continued hiring of senior level executives in various business groups. At
September 30, 1998, full-time personnel totaled 8,157 compared to 6,815 at
September 30, 1997, an increase of 1,342 or 19.7 %.
Interest expense increased $95.4 million or 34.2% to $374.7 million. Most of
this increase was related to the financing of domestic and foreign stock
loan/borrowed business.
All other expenses, as noted below, increased by $10.8 million or 4.2% to
$266.4 million for the third quarter of 1998.
Brokerage, clearing, exchange fees and other expenses increased by $4.9 million
due to increased commission and volume related expenses. Occupancy and
equipment costs increased by $18.4 million as a result of the expansion of the
Company's principal office in the U.S. and the expansion of the Company's other
domestic and overseas offices. Communications costs increased by $7.3 million
due to expanded facilities and the overall growth in professional staff. All
other operating expenses decreased by $20.0 million. Included therein are
professional fees, travel and entertainment, and printing and stationery. All
of these costs increased due to an overall increase in the level of business
activity as well as costs relating to the Year 2000 project.
The Company's income tax provision for the third quarter of 1998 and 1997 was
$15.9 million and $67.8 million, respectively, which represented a 38.2% and
36% effective tax rate, respectively.
Net income for the quarter ended September 30, 1998 was $25.7 million, down
$94.6 million or 78.6% from the comparable 1997 period. Basic and diluted
earnings per common share using the treasury stock method were $0.17 and $0.15
and $1.06 and $0.93 for the third quarter of 1998 and 1997, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Total revenues for the nine months ended September 30, 1998 were $4.1 billion,
an increase of $0.8 billion or 24.4% over the nine months ended September 30,
1997. Revenues increased primarily due to increases in fees and net interest
income during 1998.
Commission revenues increased by $120.8 million or 23.9% to $625.8 million.
Volume on virtually every exchange reached record levels due to the extreme
volatility experienced in the equity markets during the third quarter of 1998.
Underwriting revenues increased by $143.4 million or 22.0% to $795.2 million.
The Company and the industry experienced increases in equity, fixed income and
high yield underwriting during the first seven months of the year.
16
<PAGE>
Fee revenues increased by $358.6 million or 67.3% to $891.1 million. The
results reflect DLJ's continuing market share growth in mergers and
acquisitions. Asset management and other advisory service activities also
increased during the first nine months of 1998.
Interest, net of interest expense to finance U.S. government, agency and
mortgage-backed securities, increased by $642.4 million or 58.9% to $1.7
billion. The largest increases took place in the stock loan/borrowed business.
In addition, there were increases in domestic and foreign margin balances and
higher levels of foreign fixed-income securities.
Principal transactions-net, trading revenues decreased by $431.9 million to
$(99.7) million primarily in the emerging markets and high-yield areas. The
Emerging Markets losses are due to the collapse of the Russian securities
markets and its effect on emerging markets throughout the world. The difficult
global fixed income markets resulted in widening credit spreads in high-yield
and mortgage securities. Such decreases are offset in part by the increases in
net interest revenues from the Company's Emerging Markets business.
Principal transactions-net, investment revenues decreased by $16.8 million or
11.2% to $133.2 million. The decrease is primarily due to lower profits on
investments sold. Realized gains on investments were $113.1 million. Net
unrealized carrying values increased by $20.1 million, which includes the
elimination of net unrealized depreciation of $5.8 million on investments sold
and an increase in net unrealized appreciation of $14.3 million on retained
investments.
Other revenues, consisting primarily of dividends and miscellaneous transaction
revenues, decreased by $7.6 million or 15.4% to $41.8 million.
Total costs and expenses for the nine months ended September 30, 1998 were $3.6
billion, an increase of $818.7 million or 29.1% over the nine months ended
1997. During 1998, the Company launched an international equities group, opened
an office in Moscow and established a high-yield business in London. In
addition, the Investment Banking Group expanded coverage in the financial
services, technology and telecommunications industries.
Compensation and benefits increased $292.9 million or 20.8% to $1.7 billion.
Incentive and production-related compensation increased by 13.4% in 1998 due to
higher revenues and operating results. Base compensation, including benefits
and all payroll taxes, increased by 43.7% due to the hiring of more senior
level executives in various business groups. In addition, the first quarter of
1998 includes a $29 million one-time provision for costs associated primarily
with the Company's plans for significant expansion in Europe. At September 30,
1998, full-time personnel totaled 8,157 compared to 6,815 at September 30,
1997, an increase of 1,342 or 19.7%.
Interest expense increased $382.3 million or 51.4% to $1.1 billion. Most of
this increase was related to the financing of Pershing's domestic and foreign
stock loan/borrowed business.
All other expenses, as noted below, increased by $143.4 million or 21.8% to
$799.6 million for the first nine months of 1998.
Brokerage, clearing, exchange fees and other expenses increased by $24.4
million due to increased share volume and transaction fee payments. Occupancy
and equipment costs increased by $57.1 million as a result of the expansion of
the Company's principal office in the U.S. and the expansion of the Company's
other domestic and overseas offices. Communications costs increased by $18.7
million due to expanded facilities and the overall growth in professional
staff. All other operating expenses increased by $43.1 million. Included
therein are professional fees, travel and entertainment, and printing and
stationery. All of these costs increased due to an overall increase in the
level of business activity. Data processing costs increased due to expansion of
the Company's international operations and the implementation and development
of new systems. In addition, these costs increased due to the costs relating to
the Year 2000 project.
The Company's income tax provision for the nine months ended September 30, 1998
and 1997 was $187.2 million and $192.2 million, respectively, which represented
a 38.3% and 38.5% effective tax rate, respectively.
Net income for the nine months ended September 30, 1998 was $302.2 million,
down $4.8 million or 1.5% from the comparable 1997 period. Basic and diluted
earnings per common share using the treasury stock method were $2.42 and $2.18
and $2.71 and $2.40 for the nine months ended September 30, 1998 and 1997,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The third quarter of 1998 was adversely affected by the difficult market
conditions. Decreased liquidity resulted as a flight to quality and increased
risk aversion in the fixed income markets pushed credit spreads to extremely
high levels. In addition, trading desks have become more cautious and selective
in their trading activities and inventory positions.
17
<PAGE>
The Company's assets are highly liquid with the majority consisting of
securities inventories and collateralized receivables, both of which fluctuate
depending on the levels of proprietary trading and customer business. Such
collateralized receivables consist primarily of resale agreements and
securities borrowed, both of which are secured by U.S. government and agency
securities, and marketable corporate debt and equity securities. In addition,
the Company has significant receivables from customers, brokers and dealers
which turn over frequently. As a securities dealer, the Company may carry
significant levels of trading inventories to meet client needs. As such, the
Company's total assets or the individual components of total assets vary
significantly from period to period because of changes relating to customer
needs, economic and market conditions and proprietary trading strategies. A
relatively small percentage of total assets is fixed or held for a period of
longer than one year. The Company's total assets at September 30, 1998 and
December 31, 1997 were $75.3 billion and $70.5 billion, respectively.
The majority of the Company's assets are financed through daily operations by
repurchase agreements, financial instruments sold not yet purchased, securities
loaned, bank loans, and through payables to brokers and dealers. Short-term
funding is generally obtained at rates related to Federal funds, LIBOR and
money market rates. Other borrowing costs are negotiated depending upon
prevailing market conditions. The Company monitors overall liquidity by
tracking the extent to which unencumbered marketable assets exceed short-term
unsecured borrowings.
During the second quarter of 1998, the Company amended its $2.0 billion
revolving credit facility to increase the aggregate commitment of banks
thereunder to $2.75 billion, of which $1.65 billion may be unsecured. There
were no borrowings outstanding under this agreement at September 30, 1998.
Certain of the Company's businesses are capital intensive. In addition to
normal operating requirements, capital is required to cover financing and
regulatory requirements on securities inventories, merchant banking investments
and investments in fixed assets. The Company's overall capital needs are
continually reviewed to ensure that its capital base can appropriately support
the anticipated needs of its business units as well as the regulatory capital
requirements of subsidiaries. Based upon these analyses, management believes
that the Company's debt and equity base is adequate for current operating
levels. The Company has been active in raising additional long-term financing,
including the issuance of $650.0 million of 6 1/2% Senior Notes and $250.0
million medium-term notes during the nine months ended September 30, 1998. In
the third quarter of 1998, a subsidiary of the Company issued Senior Secured
and Senior Subordinated Secured Floating Rate Notes in the principal amounts of
$200 million and $250 million due March 15, 2005 and September 15, 2005,
respectively. At September 30, 1998, a portfolio of investments, primarily
senior bank debt valued at $520.8 million, collateralizes the non-recourse
notes. In addition, in May 1998, the Company repaid its $325 million senior
subordinated revolving credit agreement and terminated the related credit
facility.
In January 1998, the Company issued 3.5 million shares of Fixed/Adjustable Rate
Cumulative Preferred Stock, Series B, with a liquidation preference of $50 per
share ($175.0 million aggregate liquidation value).
In January 1998, the Company commenced a $1.0 billion commercial paper program.
Obligations issued thereunder (the "Notes") are exempt from registration under
the Securities Act of 1933, as amended. The Notes rank pari passu with the
Company's other unsecured and unsubordinated indebtedness. At September 30,
1998, $259.5 million of Notes were outstanding under this program.
In July 1998, the Company sold an aggregate of five million shares of newly
issued common stock to its parent companies, Equitable and AXA for $300.0
million in a transaction exempt from the registration requirement of the
Securities Act.
The Company's current credit ratings of its long-term debt and commercial paper
are as follows:
<TABLE>
<CAPTION>
Long-Term Debt Commercial Paper
-------------- ----------------
<S> <C> <C>
Duff & Phelps A D-1
Fitch IBCA A F-1
Moody's A3 P-2
Standard & Poors A- A-2
Thomson Bank Watch A+ TBW-1
</TABLE>
The Company's principal wholly-owned subsidiary, Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJSC") is subject to the capital requirements of the
Securities and Exchange Commission, the New York Stock Exchange, Inc., the
Commodities Futures Trading Commission and the Chicago Board of Trade, all of
which regulate the general capital adequacy and liquidity of broker-dealers
and/or futures commission merchants. DLJSC has consistently maintained capital
substantially in excess of the minimum requirements of such capital rules. At
September 30, 1998, DLJSC had aggregate regulatory "net capital," after
adjustments required by Rule 15c3-1 under the Exchange Act, of approximately
$1.0 billion, which exceeded minimum net capital requirements
18
<PAGE>
by approximately $884.8 million and which exceeded the net capital required by
DLJSC's most restrictive debt covenants by $648.2 million. Certain of the
Company's London-based broker-dealer subsidiaries are subject to the
requirements of the Securities and Futures Authority, a self-regulatory
organization established pursuant to the United Kingdom Financial Services Act
of 1986. Other U.S. and foreign broker-dealer subsidiaries of the Company are
subject to net capital requirements of their respective regulatory agencies. At
September 30, 1998, the Company and its broker-dealer subsidiaries were in
compliance with all applicable regulatory capital adequacy requirements.
The Company's overall capital and funding needs are continually reviewed to
ensure that its capital base can support the estimated needs of its business
units.
The Company continues to explore potential acquisition opportunities as a means
of expanding its business. Such opportunities may involve acquisitions which
are material in size and may require the raising of additional capital.
CASH FLOWS
The Company's condensed consolidated statements of 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.
Nine Months Ended September 30, 1998 and 1997
Cash and cash equivalents at September 30, 1998 and 1997, totaled $827.5
million and $272.4 million, respectively, an increase of $554.3 million and
$113.6 million, respectively for the comparable periods.
Cash used in operating activities totaled $1.8 billion and $3.3 billion for the
nine months ended September 30, 1998 and 1997, respectively, and reflects
primarily an increase in operating assets. In the first nine months of 1998,
there were increases in assets including securities borrowed of $1.6 billion,
receivables from customers of $1.7 billion and receivables from brokers,
dealers and other of $1.9 billion. These increases were partially offset by
increases in liabilities including financial instruments sold not yet purchased
of $0.9 billion, payables to customers of $ 0.6 billion and payables to
brokers, dealers and other of $1.7 billion. In the first nine months of 1997,
there were increases in assets including securities borrowed of $6.4 billion,
financial instruments owned of $2.2 billion and receivables from brokers,
dealers and other of $1.4 billion. These increases were partially offset by
increases in securities loaned of $2.5 billion, financial instruments sold not
yet purchased of $2.7 billion and payables to customers of $1.0 billion.
For the nine months ended September 30, 1998 and 1997, cash of $526.6 million
and $406.9 million, respectively, was used in investing activities. These
generally consist of purchases of long-term corporate development investments
and office facilities. Additionally, in 1997, cash was used for the purchase of
net assets related to the acquisition of a London-based investment bank,
Phoenix Group Limited.
For the first nine months of 1998 and 1997, net cash provided by financing
activities totaled $2.9 billion and $3.8 billion, respectively, of which, $1.4
billion and $3.1 billion was provided by short-term financings (principally
repurchase agreements). Additionally, in 1998, $643.1 million was provided by
the issuance of Senior Notes and $450.0 million was provided from the issuance
of Senior Secured Floating Rate Notes offset by $325.0 million which was used
to repay the Company's senior subordinated revolving credit facility. The
Company also received proceeds of $300.0 million from the sale of common stock
to its parent companies and $175.0 million was provided from the issuance of
Series B preferred stock.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company has focused its derivative activities on writing over-the-counter
("OTC") options contracts to accommodate its customers' needs, trading in
forward contracts in U.S. government and agency issued or guaranteed
securities, foreign currencies, trading in futures contracts on equity-based
indices, interest rate instruments and foreign currencies and entering into
swap transactions. The Company's involvement in commodity derivative
instruments is not significant.
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 $84.9 million and $51.5 million for the nine months ended
September 30, 1998 and 1997, respectively. Option writing revenues are
primarily from the amortization of option premiums.
19
<PAGE>
The notional value of written options contracts outstanding was approximately
$9.0 billion and $5.8 billion at September 30, 1998 and 1997, respectively.
Such written options contracts are substantially covered by various financial
instruments that the Company has purchased or sold as principal. The overall
increase in the notional value of all options was due primarily to increases in
customer activity related to U.S. government and mortgage-backed securities and
currency forward contracts.
Forward and Futures Contracts:
As part of the Company's trading activities, including trading activities in
the related cash instruments, the Company enters into forward and futures
contracts primarily involving securities, foreign currencies, indices and
forward rate agreements, as well as options on futures contracts. Such forward
and futures contracts are entered into as part of the Company's covering
transactions and generally are not used for speculative purposes.
Net trading losses on forward contracts were $21.9 million and $39.7 million
and net trading losses on futures contracts were $64.7 million and $33.3
million for the nine months ended September 30, 1998 and 1997, respectively.
The notional contract and market values of the forward and futures contracts at
September 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
------------------ ------------------
Purchases Sales Purchases Sales
--------- ----- --------- -----
(In millions)
<S> <C> <C> <C> <C>
Forward Contracts
(Notional Contract Value).......... $ 39,954 $ 42,528 $ 19,899 $ 30,769
======== ======== ========= ========
Futures Contracts and Options on
Futures Contracts (Market Value)... $ 1,393 $ 2,588 $ 1,724 $ 2,664
======== ======== ========= ========
</TABLE>
The increase in the notional value of the forward contracts is attributable
primarily to foreign currency contracts entered into by the newly formed
foreign exchange desk in the third quarter of 1998.
Swap Agreements:
The Company enters into swap agreements to manage foreign currency, interest
rate and equity risk. The notional (contract) value of swap agreements was
approximately $6.0 billion at September 30, 1998. The Company's involvement in
swap contracts at September 30, 1997 was not significant. The notional or
contract amounts indicate the extent of the Company's involvement in the
derivative instruments. They do not measure the Company's exposure to market or
credit risk and do not represent the future cash requirements of such
contracts.
MERCHANT BANKING AND BRIDGE LENDING ACTIVITIES
The Company's merchant banking activities include investments in various
partnerships, for which subsidiaries of the Company act as general partner, as
well as direct investments in connection with its merchant banking activities.
As of September 30, 1998 the Company had investments of $793.4 million and has
commitments to invest up to an additional $785.4 million in connection with
these merchant banking activities.
The Company is the sponsor of the $750 million DLJ Bridge Fund which provides
short-term loans in connection with DLJ's merchant banking and financial
advisory businesses. The Bridge Fund has a commitment of subordinated debt from
Equitable for the total amount of the loans. Any loans made by the DLJ Bridge
Fund would be expected to be refinanced, and the outstanding amounts repaid,
within a short-term period. At September 30, 1998, the DLJ Bridge Fund had
extended $525.3 million of short-term bridge loans.
20
<PAGE>
HIGH-YIELD AND OTHER NON-INVESTMENT GRADE DEBT
The Company participates in the underwriting, trading, sales and holding of
high-yield and other non-investment-grade debt. Non-investment-grade debt is
defined as loans to companies rated BB+ or lower as well as non-rated loans.
These instruments generally involve greater risk than investment-grade debt
holdings due to credit considerations, liquidity of secondary trading markets
and vulnerability to general economic conditions. In the third quarter of 1998,
the Company's high-yield and other non-investment grade debt decreased
primarily as a result of the turmoil in the global economy, particularly the
emerging markets.
The Company accounts for its high-yield financial instruments at market value
and other non-investment grade holdings generally at market or fair value, with
unrealized gains and losses recognized currently in earnings. At September 30,
1998 and December 31, 1997, the Company had long and short financial
instruments (excluding derivatives and structured notes) as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(In millions)
Long Short Long Short
---- ----- ---- -----
<S> <C> <C> <C> <C>
High-Yield Debt............................ $ 738.5 $ 323.8 $ 645.6 $ 389.6
Senior Bank Debt........................... 1,245.0 - 864.1 -
Foreign Sovereign Debt..................... 672.0 60.9 1,615.4 543.3
Mortgage Whole Loans ...................... 1,452.6 30.7 1,555.7 -
Convertible Debt........................... 220.7 13.6 320.3 3.1
Other Non-Investment Grade................. 140.4 10.7 44.4 4.9
--------- ------- --------- -------
Totals...................................... $ 4,469.2 $ 439.7 $ 5,045.5 $ 940.9
========= ======= ========= =======
</TABLE>
21
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISK MANAGEMENT AND VALUE AT RISK
For a description of the Company's risk management policies and procedures and
value-at-risk ("VAR") model, including such model's assumptions and
limitations, refer to the Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the Company's 1997 Annual
Report on Form 10-K.
In 1997 the Company developed a Company-wide Value-at-Risk (VAR) model. This
model used a variance-covariance approach with a confidence interval of 95% and
a one-day holding period, based on historical data for one year. The Company
has made changes to the model in the course of 1998. In response to the
volatile and illiquid markets of the third quarter of 1998, which departed
markedly from the normal statistical distributions that underlie the
variance-covariance approach, the Company has estimated VAR by using an
historical simulation model based on two years of weekly historical data, a 95%
confidence interval, and a one-day holding period. The effect of this change in
approach was not material.
The Company-wide VAR for trading was approximately $23 million and $11 million,
at September 30, 1998 and December 31, 1997, respectively. The Company-wide VAR
for non-trading market risk sensitive instruments is not separately disclosed
because the amount is not significant. The Company-wide VAR is less than the
sum of the individual components below due to the benefit of diversification
among the risks presented. The VAR for the three main components of market
risk, expressed in terms of theoretical fair values at September 30, 1998 and
December 31, 1997, is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(In millions)
<S> <C> <C>
Trading:
Interest rate risk...................... $ 15 $ 8
Equity risk............................. $ 10 $ 8
Foreign currency exchange risk.......... $ 1 $ 1
</TABLE>
Value at risk increased at September 30, 1998 because of the dramatic increase
in volatility across a broad range of financial instruments.
VAR models are statistical analyses that should not be interpreted as being
predictive of actual results. A VAR model alone is not a sufficient tool to
measure and monitor market risk, and, as it has traditionally done, the Company
will continue to use other risk management measures, including stress tests,
independent reviews of positions, trading limits and daily revenue reports.
RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
requires all derivatives to be recognized in the statement of financial
condition at fair value. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999 and should be applied prospectively. Earlier application is
permitted. Since most of the Company's derivatives are carried at fair value,
the adoption of this statement is not expected to have a material impact on the
Company's results of operations or its consolidated statement of financial
condition.
In September 1998, the FASB addressed the accounting for expenditures incurred
by the investment advisors of closed-end funds. The FASB concluded that such
costs are to be considered start-up costs in accordance with AICPA Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5").
Accordingly, offering costs incurred by an investment advisor in connection
with the distribution of shares of closed-end funds subsequent to the effective
date of this pronouncement should be expensed as incurred. Costs incurred prior
to the effective date should be reflected as a cumulative effect of a change in
accounting principle, as described in APB Opinion No. 20, "Accounting Changes"
upon adoption of SOP 98-5, which is effective for fiscal years beginning after
December 15, 1998.
EMU
On January 1, 1999, conversion rates of the national currencies of eleven
member countries of the European Union will be fixed with the "euro". This will
ultimately result in the replacement of the currencies of these member
countries with the euro. The Company is currently assessing the impact of the
Euro conversion on the Company and implementing the necessary changes to
mitigate any risks associated with the conversion. Costs associated with the
Euro conversion are not expected to be material. The Company expects to be
prepared for the Euro conversion in the fourth quarter of 1998.
22
<PAGE>
YEAR 2000
The Company has been actively engaged in addressing Year 2000 issues. Such
issues relate to potential problems resulting from non-Year 2000 compliant
systems processing transactions using two-digit date fields for the year of a
transaction, rather than full four digits fields. If these systems are not
identified and reconfigured, Year 2000 transactions would be processed as year
"00," which could lead to processing inaccuracies and potential inoperability,
and could have a material adverse effect on the Company's business.
PROJECT
As a result of the Company's recent expansion, entry into new product markets
and move to its new corporate headquarters, many of the Company's
communications and data processing systems are Year 2000 compliant. The
Company, however, has undertaken a Year 2000 Project to identify and modify any
non-Year 2000 compliant systems. The Year 2000 Project is the Company's highest
priority. The Year 2000 Project is decentralized within the functional areas of
the firm and is focused on both information technology and non-information
technology systems. A written Year 2000 Plan has been developed for each unit
(Business Units and Administrative Units) and the respective units are
responsible for all steps necessary to ensure that all assets and systems of
such unit are Year 2000 compliant. Oversight of the Year 2000 Project is
performed by two Project Management Offices, one responsible for the Company's
correspondent clearance business and the other responsible for the remaining
functional units of the Company. The Project Managers report to a Steering
Committee, comprised of Senior Business Managers, which in turn reports to the
Chief Financial Officer and Chief Executive Officer of the Company. The Company
has also retained the services of several major consulting firms who have
considerable expertise in advising corporations on Year 2000 issues and their
potential impact.
As of September 30, 1998, the Company has completed an inventory of all
systems, identified mission critical systems (those systems where loss of their
function would result in an immediate stoppage or significant impairment to
core business areas) and determined which of these is not Year 2000 compliant.
The Company's correspondent clearance business expects to have all of its non
- -Year 2000 compliant applications renovated, tested and returned to production
by the end of 1998. Renovation, implementation and testing of all other mission
critical systems are expected to be completed by the first quarter of 1999. The
same process will be performed for non-critical systems and is expected to be
completed by the second quarter of 1999. None of the Company's other
information technology projects have been delayed due to the implementation of
the Year 2000 Project.
The Company has identified all significant third parties, such as fiduciary
agents, vendors, custodial banks, correspondents and facility operators, and
contacted them regarding their Year 2000 readiness. All such parties have
provided the Company with assurances that they are taking the necessary steps
to prepare for the Year 2000.
The Company has initiated and is actively involved in various types of testing
including the Securities Industry Association's industry-wide beta testing,
electronic file testing with correspondents and vendor-supplied business
applications testing. The Company has achieved successful results in each of
the tests in which it has participated. As described above, all applications
will be tested by the second quarter of 1999. Testing of internal and external
systems will continue throughout 1999 to ensure that all remediated systems
remain compliant.
COSTS
The total cost associated with required modifications to ensure that the
Company's systems are Year 2000 compliant is not expected to be material to the
Company's financial position. Based upon current information, the total cost of
the Year 2000 project is currently estimated to be between $85 and $90 million
which has been approved by the Board of Directors of the Company. Based on
progress to date, the current funding level has been found to be adequate. More
than half of the Year 2000 budget is allocated to renovate and test
applications. The budget also includes Year 2000 compliance testing, full
system testing, peer to peer testing with industry agencies, correspondents and
third party vendors and other industry wide testing. The Company has also
provided for developing a formal contingency plan in the budget. Costs related
to the Year 2000 project are expensed as incurred and since inception totaled
$71 million at September 30, 1998. The cost of the project is being funded by
operations.
RISKS
There are many risks associated with the Year 2000 issue, including the
possibility of a failure of the Company's computer and non-information
technology systems. There can be no assurance that the schedule for compliance
outlined above can be met or that the systems of other companies on which the
Company's business is dependent will be timely converted. Due to this
uncertainty, the Company is unable to determine at this time whether the Year
2000 will have a material impact on the Company's business, results of
operations or financial condition. If the Year 2000 risks are not remedied, the
Company may experience business interruption or shutdown, financial loss,
regulatory actions, damage to the Company's global franchise and legal
liability. The Year 2000 Project, however, is expected to significantly reduce
the Company's level of uncertainty regarding the Year 2000 readiness of
internal and third party systems. The Company believes that, with the
completion of the Project as scheduled the possibility of significant
interruptions of normal operations as a result of the Year 2000, should be
reduced.
23
<PAGE>
CONTINGENCIES
The Company's action plan is designed to safeguard the interests of the Company
and its customers, however, except as discussed below, no formal contingency
plan exists. The Company is currently in the process of assessing contingency
requirements and will develop a contingency plan in the first quarter of 1999.
DLJ' s correspondent clearance business has a written general contingency plan,
which covers a variety of independent events that may require
recovery/contingency plans, including Year 2000 system failures. To enhance
this plan, Year 2000 specific scenarios are being developed.
To the fullest extent permitted by law, the foregoing Year 2000 discussion is
a "Year 2000 Readiness Disclosure" within the meaning of the Year 2000
Information and Readiness Disclosure Act 105 P.L. 271.
Readers are cautioned that forward looking statements contained under "YEAR
2000" above should be read in conjunction with the Company's disclosure under
the heading :"FORWARD LOOKING STATEMENTS" below.
FORWARD-LOOKING STATEMENTS
The Company has made in this report, and from time to time may otherwise make
in its public filings, press releases and discussions with Company management,
forward looking statements concerning the Company's operations, economic
performance and financial condition, as well as its strategic objectives,
including, without limitation, global expansion. Such forward looking
statements are subject to various risks and uncertainties and the Company
claims the protection afforded by the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
Actual results could differ materially from those currently anticipated due to
a number of factors in addition to those discussed elsewhere herein and in the
Company's other public filings, press releases and discussions with Company
management, including (i) the volatile nature of the securities business, which
is affected by, among other things, the availability of capital, the level and
volatility of interest rates and the uncertainties of the global and U.S.
economies, (ii) the competitive nature of the securities business, (iii) the
effect of extensive federal, state and foreign regulation on the Company's
business, (iv) market, credit and liquidity risks associated with the Company's
underwriting, securities trading, market-making and arbitrage activities, (v)
potential losses that could result from the Company's merchant banking
activities as a result of its capital intensive nature, (vi) risks associated
with the Company's use of derivative financial instruments, (vii) the
availability of adequate financing to support the Company's business, (viii)
potential restrictions on the business of, and withdrawal of capital from,
certain subsidiaries of the Company due to net capital requirements, (ix)
potential liability under federal and state securities and other laws, (x) the
effect of any future acquisitions, (xi) the risks associated with Year 2000
issues, including failure to meet the schedule for Year 2000 compliance, the
uncertainty surrounding Year 2000 readiness of third parties, and increased
costs associated with the implementation of the Year 2000 project and (xii)
factors that may affect the timeliness of Year 2000 compliance include the
ability to locate, correct and successfully test all relevant computer code
according to schedule, the continued availability of certain resources
including personnel, timely responses and corrections by third-parties and
suppliers and the compatibility of new systems with those systems not being
replaced.
24
<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, 1997. With respect to the litigation involving Dayton Monetary
Associates and Charles Davison, DLJSC's motions for summary judgments were
denied in April 1998. In the National Gypsum case, DLJSC has appealed the
Bankruptcy Court's ruling in January 1998 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. On May 7, 1998, DLJSC and
others were named as defendants in a second action filed in a Texas State Court
brought by the NGC Settlement Trust. The allegations of this second Texas State
Court action are substantially similar to those of the earlier class action
pending in State Court.
In Harrah's Jazz, the proponents of the plan of reorganization filed a notice
in the U.S. Bankruptcy Court for the Eastern District of Louisiana on October
30, 1998 indicating that the conditions to the plan of reorganization have been
satisfied and that the plan of reorganization became effective as of October
30, 1998. Accordingly, the settlement of the litigation against DLJSC has
become final and did not have a material effect on the Company's results of
operation or financial condition.
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 22, 1998, the Company sold an aggregate of five million shares of newly
issued common stock to its parent companies, Equitable and AXA in a private
placement. Proceeds from the sale were $300 million. The shares are exempt from
registration under Section 4(2) of the Securities Act.
25
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
11 Statement re: computation of basic earnings per share.
11.1 Statement re: computation of diluted earnings per share.
12 Ratio of earnings to fixed charges.
12.1 Ratio of earnings to fixed charges and preferred dividends.
27 Financial Data Schedule
(b) Reports on Form 8-K
26
<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.
November 14, 1998 /s/ Anthony F. Daddino
------------------------------
Anthony F. Daddino
Executive Vice President and
Chief Financial Officer
(On behalf of the Registrant and as
Principal Financial Officer)
27
<PAGE>
EXHIBIT INDEX
11 Statement re: computation of basic earnings per share.
11.1 Statement re: computation of diluted earnings per share.
12 Ratio of earnings to fixed charges.
12.1 Ratio of earnings to fixed charges and preferred dividends.
27 Financial Data Schedule
28
<PAGE>
EXHIBIT 11
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Computation of Basic Earnings Per Share
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted Average Common Shares (1):
Average Common Shares Outstanding 121,411 111,072 117,879 109,786
Average Restricted Stock Units Outstanding 158 44 146 40
-------- --------- --------- ---------
Weighted Average Common Shares Outstanding 121,569 111,116 118,025 109,826
======== ========= ========= =========
Earnings:
Net Income $ 25,700 $ 120,300 $ 302,150 $ 306,900
Less: Preferred Stock Dividend Requirement 5,289 2,970 16,021 9,174
-------- --------- --------- ---------
Earnings Applicable to Common Shares $ 20,411 $ 117,330 $ 286,129 $ 297,726
======== ========= ========= =========
Basic Earnings Per Common Share $ 0.17 $ 1.06 $ 2.42 $ 2.71
======== ========= ========= =========
</TABLE>
(1) In February 1998, the Board of Directors declared a two-for-one stock
split (the "stock split") of the Company's common stock, subject to
stockholder approval, to increase the number of authorized common shares.
In April 1998, the stockholders approved an amendment to the Company's
Certificate of Incorporation whereby the amount of total authorized shares
of common stock was increased to 300 million shares and the amount of
total authorized shares of preferred stock was increased to 50 million.
The stock split was effected in the form of a 100% stock dividend to
stockholders of record on April 27, 1998, and was paid on May 11, 1998.
All common share, per common share, restricted stock unit and option data
have been restated for the effect of the stock split.
29
<PAGE>
EXHIBIT 11-1
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Computation of Diluted Earnings Per Share
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted Average Common Shares (1):
Average Common Shares Outstanding 121,411 110,230 117,879 109,502
Average Restricted Stock Units Outstanding 2,087 6,566 2,635 7,266
Average Common Shares Issuable
Under Employee Benefit Plans 10,980 8,620 10,872 6,592
Average Common Shares Issuable
Upon Conversion of Convertible Debt - 1,370 - 918
-------- --------- --------- ---------
Weighted Average Common Shares Outstanding 134,478 126,786 131,386 124,278
======== ========= ========= =========
Earnings:
Net Income $ 25,700 $ 120,300 $ 302,150 $ 306,900
Less: Preferred Stock Dividend Requirement 5,289 2,970 16,021 9,174
-------- --------- --------- ---------
Earnings Applicable to Common Shares $ 20,411 $ 117,330 $ 286,129 $ 297,726
======== ========= ========= =========
Diluted Earnings Per Common Share $ 0.15 $ 0.93 $ 2.18 $ 2.40
======== ========= ========= =========
</TABLE>
(1) In February 1998, the Board of Directors declared a two-for-one stock
split (the "stock split") of the Company's common stock, subject to
stockholder approval, to increase the number of authorized common shares.
In April 1998, the stockholders approved an amendment to the Company's
Certificate of Incorporation whereby the amount of total authorized shares
of common stock was increased to 300 million shares and the amount of
total authorized shares of preferred stock was increased to 50 million.
The stock split was effected in the form of a 100% stock dividend to
stockholders of record on April 27, 1998, and was paid on May 11, 1998.
All common share, per common share, restricted stock unit and option data
have been restated for the effect of the stock split.
30
<PAGE>
EXHIBIT 12
DONALDSON, LUFKIN & JENRETTE, INC.
STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS, EXCEPT FOR RATIO)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------------------------------------------------------------------
1993 1994 1995 1996 1997
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Earnings:
Income before provision for income
taxes $ 302,000 $ 205,000 $ 298,500 $ 473,800 $ 661,100
Add: Fixed Charges
Interest expense (gross) 1,465,303 2,116,655 2,699,769 2,865,800 4,012,209
Interest factor in rents 15,432 18,565 22,064 25,515 29,978
----------- ----------- ----------- ----------- -----------
Total fixed charges 1,480,735 2,135,220 2,721,833 2,891,315 4,042,187
Earnings before fixed charges, and
provision for income taxes $ 1,782,735 $ 2,340,220 $ 3,020,333 $ 3,365,115 $ 4,703,287
=========== =========== =========== =========== ===========
Ratio of earnings to fixed charges 1.20 1.10 1.11 1.16 1.16
=========== =========== =========== =========== ===========
<CAPTION>
FOR THE NINE
MONTHS ENDED
---------------
9/30/98
---------------
<S> <C>
Earnings:
Income before provision for income
taxes $ 489,350
Add: Fixed Charges
Interest expense (gross) 3,469,822
Interest factor in rents 27,409
-----------
Total fixed charges 3,497,231
Earnings before fixed charges, and
provision for income taxes $ 3,986,581
===========
Ratio of earnings to fixed charges 1.14
===========
</TABLE>
<PAGE>
EXHIBIT 12.1
DONALDSON, LUFKIN & JENRETTE, INC.
STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED
DIVIDENDS
(IN THOUSANDS, EXCEPT FOR RATIO)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------------------------------------------------------------------
1993 1994 1995 1996 1997
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Earnings:
Income before provision for income
taxes $ 302,000 $ 205,000 $ 298,500 $ 473,800 $ 661,100
Add: Fixed Charges
Interest (gross) 1,465,303 2,116,655 2,699,769 2,865,800 4,012,209
Interest factor in rents 15,432 18,565 22,064 25,515 29,978
----------- ----------- ----------- ----------- -----------
Total fixed charges 1,480,735 2,135,220 2,721,833 2,891,315 4,042,187
Add: Preferred dividends -- 20,970 19,868 18,653 12,144
Combined fixed charges and
preferred dividends 1,480,735 2,156,190 2,741,701 2,909,968 4,054,331
Earnings before fixed charges
and provision for income taxes $ 1,782,735 $ 2,340,220 $ 3,020,333 $ 3,365,115 $ 4,703,287
=========== =========== =========== =========== ===========
Ratio of earnings to fixed charges
and preferred dividends 1.20 1.09 1.10 1.16 1.16
=========== ============ ============ ============ ===========
<CAPTION>
FOR THE NINE
MONTHS ENDED
---------------
9/30/98
---------------
<S> <C>
Earnings:
Income before provision for income
taxes $ 489,350
Add: Fixed Charges
Interest (gross) 3,469,822
Interest factor in rents 27,409
-----------
Total fixed charges 3,497,231
Add: Preferred dividends 16,021
Combined fixed charges and
preferred dividends 3,513,252
Earnings before fixed charges
and provision for income taxes $ 3,986,581
===========
Ratio of earnings to fixed charges
and preferred dividends 1.13
===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
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>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 827,502
<RECEIVABLES> 11,169,218
<SECURITIES-RESALE> 20,845,439
<SECURITIES-BORROWED> 22,221,780
<INSTRUMENTS-OWNED> 17,210,905
<PP&E> 440,835
<TOTAL-ASSETS> 75,292,849
<SHORT-TERM> 1,100,360
<PAYABLES> 10,258,228
<REPOS-SOLD> 35,693,542
<SECURITIES-LOANED> 7,641,307
<INSTRUMENTS-SOLD> 11,343,860
<LONG-TERM> 3,137,104
200,000
375,000
<COMMON> 12,272
<OTHER-SE> 2,474,788
<TOTAL-LIABILITY-AND-EQUITY> 75,292,849
<TRADING-REVENUE> (99,700)
<INTEREST-DIVIDENDS> 1,754,975
<COMMISSIONS> 624,900
<INVESTMENT-BANKING-REVENUES> 1,096,655
<FEE-REVENUE> 74,949
<INTEREST-EXPENSE> 1,126,793
<COMPENSATION> 1,704,218
<INCOME-PRETAX> 489,350
<INCOME-PRE-EXTRAORDINARY> 489,350
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 302,150
<EPS-PRIMARY> 2.42<F1>
<EPS-DILUTED> 2.18<F1>
<FN>
<F1> Basic and diluted earnings per share amounts have been restated for the
implementation of SFAS No. 128 "Earnings Per Share" and for the effect of
the stock split. The restated basic and diluted earnings per share amounts
at September 30, 1997 totaled $2.71 and $2.40, respectively.
</FN>
</TABLE>
