<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, 1999
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 that 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 3, 1999, the latest practicable date, there were 125,919,004
shares of DLJ Common Stock, $0.10 par value, and 18,400,000 shares of DLJdirect
Common Stock, $0.10 par value, outstanding.
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I FINANCIAL INFORMATION
Page
Number
------
<S> <C>
Item 1. Financial Statements
Donaldson, Lufkin & Jenrette Inc. Consolidated Financial Statements
Condensed Consolidated Statements of Financial Condition
at September 30, 1999 and December 31, 1998 (Unaudited)..................... 4
Condensed Consolidated Statements of Income for the three
and nine months ended September 30, 1999 and 1998 (Unaudited) .............. 6
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the year ended December 31, 1998 and the nine
months ended September 30, 1999 (Unaudited)................................. 7
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 1998 (Unaudited)................... 8
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................................. 10
DLJdirect Combined Financial Statements
Condensed Combined Statements of Financial Condition at September 30, 1999
and December 31, 1998 (Unaudited)........................................... 26
Condensed Combined Statements of Operations for the three and nine months
ended September 30, 1999 and 1998 (Unaudited) .............................. 27
Condensed Combined Statements of Changes in Allocated Equity for the year
ended December 31, 1998 and the nine months ended
September 30, 1999 (Unaudited).............................................. 28
Condensed Combined Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998 (Unaudited)..................................... 29
Notes to Condensed Combined Financial Statements (Unaudited)................ 30
</TABLE>
2
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS-CONTINUED
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Donaldson, Lufkin & Jenrette Inc. Management's Discussion
and Analysis of Financial Condition and Results of Operations.............. 17
DLJdirect Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................... 33
Part II OTHER INFORMATION
Item 1. Legal Proceedings
Donaldson, Lufkin & Jenrette, Inc............................................ 25
DLJdirect ................................................................... 39
Item 6. Exhibits and Reports on Form 8-K............................................. 40
Signature.................................................................... 46
</TABLE>
3
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - DONALDSON, LUFKIN & JENRETTE, INC.
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,
1999 1998
------------ ------------
ASSETS
<S> <C> <C>
Cash and cash equivalents.................................................... $ 1,782,314 $ 1,049,253
Cash and securities segregated for regulatory purposes or
deposited with clearing organizations..................................... 734,972 1,043,225
Collateralized short-term agreements:
Securities purchased under agreements to resell........................... 24,734,981 20,063,348
Securities borrowed....................................................... 30,822,657 23,967,639
Receivables:
Customers................................................................. 8,309,733 6,523,568
Brokers, dealers and other................................................ 8,245,995 3,773,251
Financial instruments owned, at value:
U.S. government and agencies.............................................. 8,930,156 5,973,394
Corporate debt............................................................ 5,121,364 4,441,492
Foreign sovereign debt.................................................... 2,400,355 423,736
Mortgage whole loans...................................................... 1,367,042 722,284
Equity and other.......................................................... 2,204,228 1,634,201
Long-term corporate development investments............................... 856,066 473,756
Office facilities, at cost, (net of accumulated depreciation and
amortization of $332,677 and $297,959, respectively)...................... 539,957 450,706
Other assets and deferred amounts............................................ 2,065,622 1,742,383
------------ ------------
Total Assets................................................................. $ 98,115,442 $ 72,282,236
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<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,
1999 1998
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Commercial paper and short-term borrowings...................................... $ 541,621 $ 515,646
Collateralized short-term financings:
Securities sold under agreements to repurchase.............................. 51,390,052 35,775,580
Securities loaned........................................................... 9,147,338 7,322,186
Payables:
Customers................................................................... 7,681,434 6,847,046
Brokers, dealers and other.................................................. 7,040,717 3,053,337
Financial instruments sold not yet purchased, at value:
U.S. government and agencies................................................ 6,324,674 5,935,629
Corporate debt.............................................................. 538,508 523,909
Equities and other.......................................................... 3,060,744 2,479,411
Accounts payable and accrued expenses........................................... 2,627,305 2,282,413
Other liabilities............................................................... 1,174,786 937,377
-------------- --------------
89,527,179 65,672,534
-------------- --------------
Long-term borrowings............................................................ 4,660,831 3,482,003
-------------- --------------
Total liabilities...................................................... 94,188,010 69,154,537
-------------- --------------
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).................. 175,000 175,000
Common Stock, 1,500,000,000 shares authorized:
DLJ Common Stock ($0.10 par value; 500,000,000 shares authorized;
125,870,960 and 122,812,558 shares issued
and outstanding, respectively)........................................... 12,587 12,281
DLJdirect Common Stock ($0.10 par value; 500,000,000 shares authorized;
18,400,000 shares issued and outstanding;
84,250,000 notional shares in respect of DLJ's retained interest)........ 1,840 -
Restricted stock units (10,358,294 units authorized; 1,100,598
and 2,082,236 units issued and outstanding, respectively)................ 11,271 21,333
Paid-in capital............................................................. 1,296,572 858,066
Retained earnings........................................................... 2,027,815 1,657,710
Accumulated other comprehensive income...................................... 2,347 3,309
Employee deferred compensation stock trust.................................. 13,591 12,329
Common stock issued to employee deferred compensation trust................. (13,591) (12,329)
-------------- --------------
Total stockholders' equity............................................. 3,727,432 2,927,699
-------------- --------------
Total Liabilities and Stockholders' Equity...................................... $ 98,115,442 $ 72,282,236
============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<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,
---------------------------- -----------------------------
1999 1998 1999 1998
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Commissions............................................... $ 269,174 $ 225,345 $ 841,278 $ 625,811
Underwritings............................................. 245,395 115,536 911,763 764,840
Fees...................................................... 448,691 317,297 1,068,439 891,104
Interest, net of interest to finance U.S. government,
agency and mortgage-backed securities of
$790,133, $794,211, $2,284,995, and
$2,343,029, respectively................................ 537,460 577,515 1,514,023 1,732,568
Principal transactions-net:
Trading................................................. 127,771 (228,232) 520,234 (69,339)
Investment.............................................. 57,558 44,724 85,737 133,217
Other..................................................... 18,323 17,642 66,864 41,792
----------- ---------- ----------- ----------
Total revenues......................................... 1,704,372 1,069,827 5,008,338 4,119,993
----------- ---------- ----------- ----------
Costs and Expenses:
Compensation and benefits................................. 761,553 387,168 2,197,276 1,704,218
Interest.................................................. 375,697 374,686 1,112,301 1,126,793
Brokerage, clearing, exchange fees and other.............. 66,194 61,356 213,741 190,593
Occupancy and related costs............................... 47,029 35,206 131,143 100,919
Communications and technology............................. 120,313 77,155 313,314 226,324
Other operating expenses.................................. 139,586 92,656 390,563 281,796
----------- ---------- ----------- ----------
Total costs and expenses............................... 1,510,372 1,028,227 4,358,338 3,630,643
----------- ---------- ----------- ----------
Income before provision for income taxes...................... 194,000 41,600 650,000 489,350
----------- ---------- ----------- ----------
Provision for income taxes.................................... 71,800 15,900 240,500 187,200
----------- ---------- ----------- ----------
Net income.................................................... $ 122,200 $ 25,700 $ 409,500 $ 302,150
=========== ========== =========== ==========
Dividends on preferred stock.................................. $ 5,289 $ 5,289 $ 15,867 $ 16,021
=========== ========== =========== ==========
Earnings applicable to common shares.......................... $ 116,911 $ 20,411 $ 393,633 $ 286,129
=========== ========== =========== ==========
Earnings (loss) applicable to common shares:
DLJ....................................................... $ 117,507 $ 20,411 $ 394,180 $ 286,129
=========== ========== =========== ==========
DLJdirect................................................. $ (596) $ (547)
=========== ===========
Earnings (loss) per common share:
DLJ
Basic.................................................. $ 0.93 $ 0.17 $ 3.15 $ 2.42
Diluted................................................ $ 0.85 $ 0.15 $ 2.84 $ 2.18
=========== ========== =========== ==========
DLJdirect
Basic.................................................. $ (0.03) $ (0.03)
Diluted................................................ $ (0.03) $ (0.03)
=========== ===========
Weighted average common shares:
DLJ
Basic.................................................. 125,993 121,569 125,211 118,025
Diluted................................................ 138,185 134,478 139,012 131,386
=========== ========== =========== ==========
DLJdirect
Basic.................................................. 18,400 18,400
Diluted................................................ 18,400 18,400
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
For the Year Ended December 31, 1998 and the
Nine Months Ended September 30, 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
Accumulated
DLJ DLJdirect Restricted Other
Preferred Common Common Stock Paid-in Retained Comprehensive
Stock Stock Stock Units Capital Earnings Income Total
------- -------- -------- ----------- ------- -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1997........ $ 200,000 $ 11,185 $ -- $ 67,255 $ 440,926 $ 1,338,220 $ 3,904 $ 2,061,490
Net income.................. -- -- -- -- -- 370,800 -- 370,800
Translation adjustment...... -- -- -- -- -- -- (595) (595)
Total comprehensive
income................... -- 370,205
Dividends:
Common stock
($0.25 per share)....... -- -- -- -- -- (30,000) -- (30,000)
Preferred stock .......... -- -- -- -- -- (21,310) -- (21,310)
Issuance of Series B
Preferred Stock............ 175,000 -- -- -- -- -- -- 175,000
Sale of common stock
to AXA Financial, Inc./AXA. -- 500 -- -- 299,500 -- -- 300,000
Exercise of stock
options, including
related tax benefits.... -- 148 -- -- 37,840 -- -- 37,988
Conversion of
restricted stock
units to common
stock, including
related tax benefits.... -- 448 -- (45,890) 70,870 -- -- 25,428
Forfeiture of restricted
stock units............... -- -- -- (32) 32 -- -- --
Tax benefit on distri-
bution of employee
stock trust............. -- -- -- -- 8,898 -- -- 8,898
--------- -------- ------- --------- --------- ----------- ------- -----------
Balances at
December 31, 1998........ 375,000 12,281 -- 21,333 858,066 1,657,710 3,309 2,927,699
Net income.................. -- -- -- -- -- 409,500 -- 409,500
Translation adjustment...... -- -- -- -- -- -- (962) (962)
Total comprehensive
income................... 408,538
Net proceeds from issuance
of DLJdirect Common Stock -- -- 1,840 -- 344,751 -- -- 346,591
Dividends:
DLJ Common Stock
($0.1875 per share)...... -- -- -- -- -- (23,528) -- (23,528)
Preferred stock.......... -- -- -- -- -- (15,867) -- (15,867)
Exercise of stock
options, including
related tax benefits.... -- 205 -- -- 68,477 -- -- 68,682
Conversion of restricted
stock units to
common stock,
including related
tax benefits............ -- 101 -- (10,056) 25,272 -- -- 15,317
Forfeiture of restricted
stock units............. -- -- -- (6) 6 -- -- --
--------- -------- ------- --------- --------- ----------- ------- -----------
Balances at
September 30, 1999...... $ 375,000 $ 12,587 $ 1,840 $ 11,271 $ 1,296,572 $ 2,027,815 $ 2,347 $ 3,727,432
========= ======== ======= ========== ============ =========== ======== ===========
</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, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income....................................................................... $ 409,500 $ 302,150
------------- ------------
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization.................................................. 69,972 56,662
Deferred taxes................................................................. (29,991) 57,641
Increase in unrealized appreciation of long-term corporate development
investments................................................................. (78,892) (20,138)
------------- ------------
370,589 396,315
(Increase) decrease in operating assets:
Cash and securities segregated for regulatory
purposes or deposited with clearing organizations........................... 308,253 41,923
Securities purchased under agreements to resell............................... (11,586,307) (2,317,839)
Securities borrowed........................................................... (6,855,018) (1,623,141)
Receivables from customers.................................................... (1,786,165) (1,682,490)
Receivables from brokers, dealers and other................................... (4,472,744) (1,926,090)
Financial instruments owned, at value......................................... (6,828,038) (220,329)
Other assets and deferred amounts............................................. (100,736) (171,554)
Increase (decrease) in operating liabilities:
Securities sold under agreements to repurchase................................ 11,586,307 2,317,839
Securities loaned............................................................. 1,825,152 (46,109)
Payables to customers......................................................... 834,388 594,631
Payables to brokers, dealers and other........................................ 3,987,380 1,679,726
Financial instruments sold not yet purchased, at value........................ 984,977 887,960
Accounts payable and accrued expenses......................................... 345,618 86,015
Other liabilities............................................................. 288,763 149,980
Translation adjustment.................................................... (962) 246
------------- ------------
Net cash used in operating activities.............................................. $ (11,098,543) $ (1,832,917)
------------- ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
8
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
For the Nine Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from investing activities:
Net (payments for) proceeds from:
Purchases of long-term corporate development investments.................... $ (369,153) $ (304,660)
Sales of long-term corporate development investments........................ 65,735 185,717
Office facilities........................................................... (160,224) (111,628)
Other assets................................................................ (191,511) (296,037)
----------- -----------
Net cash used in investing activities........................................... (655,153) (526,608)
----------- -----------
Cash flows from financing activities: Net proceeds from (payments for):
Short-term financings....................................................... 10,968,814 1,449,237
Issuance of DLJdirect stock................................................. 346,591 -
Senior notes................................................................ 649,188 643,076
Senior subordinated floating rate notes..................................... - 250,000
Senior secured floating rate notes.......................................... (154,308) 200,000
Subordinated revolving credit agreement..................................... - (325,000)
Medium-term notes........................................................... 684,158 249,001
Other long-term debt........................................................ (210) (9,291)
Dividends................................................................... (39,395) (38,345)
Sale of common stock to AXA Financial, Inc.................................. - 300,000
Issuance of Series B preferred stock........................................ - 175,000
Exercise of stock options................................................... 31,919 20,185
----------- -----------
Net cash provided by financing activities....................................... 12,486,757 2,913,863
----------- -----------
Increase in cash and cash equivalents........................................... 733,061 554,338
Cash and cash equivalents at beginning of period................................ 1,049,253 273,164
----------- -----------
Cash and cash equivalents at end of period...................................... $ 1,782,314 $ 827,502
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
9
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 1999
1. Basis of Presentation
The condensed consolidated financial statements include Donaldson, Lufkin &
Jenrette, Inc. and its subsidiaries ("DLJ Inc." or the "Company"). All
significant intercompany balances and transactions have been eliminated. The
Company is a majority-owned subsidiary of AXA Financial Inc. ("AXA Financial")
and its subsidiaries (formerly the Equitable Companies Incorporated). The
Company's separate financial statements reflect AXA Financial's cost basis,
established in 1985 when they acquired the Company.
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, 1998 included on Form 10-K filed by the
Company under the Securities Exchange Act of 1934.
To prepare condensed consolidated financial statements in conformity with
generally accepted accounting principles ("GAAP") management must estimate
certain amounts that affect the reported assets and liabilities, disclosure of
contingent assets and liabilities, and reported revenues and expenses. Actual
results could differ from those estimates.
The Company has invested heavily in technology in order to provide quality
products and services to clients and to expand its business. Historically,
technology expenses were included in several income statement lines. To reflect
the increased importance of technology spending, beginning in the third quarter
of 1999, all non-compensation technology costs will be included in the new line
item, "Communications and Technology." This change affects two other existing
expense lines: Occupancy and Related Costs, formerly Occupancy and Equipment,
and Other Operating Expenses. Communications and Technology will now include
systems consulting fees, previously included in Other Operating Expenses, and
communications equipment, previously included in Occupancy and Equipment. Prior
periods have been restated to show the new classifications. Certain other
reclassifications have been made to prior year financial statements to conform
to the 1999 presentation.
2. Issuance of DLJdirect Tracking Stock
DLJdirect Common Stock tracks the separate performance of the Company's existing
online discount brokerage and related investment services business ("Tracking
Stock"). Prior to issuing DLJdirect Common Stock, the Company's existing Common
Stock was designated as DLJ Common Stock to reflect the performance of the
Company's primary businesses, i.e., Banking, Fixed Income, Equities and
Financial Services, plus a 100% interest in DLJdirect. These operations
together, are referred to as DLJ. On May 28, 1999, ("the closing date"), the
Company issued, in an initial public offering, 18.4 million shares of DLJdirect
Common Stock. Holders of DLJdirect Common Stock have no voting rights, except in
certain limited circumstances.
Although the DLJdirect common stock reflects the performance of DLJdirect,
holders of DLJdirect Common Stock are common stockholders of DLJ Inc. For this
reason, holders of DLJdirect common stock will be subject to all of the risks
associated with an investment in DLJ Inc. and all of its businesses, assets and
liabilities.
The Company has the right to issue DLJ Common Stock in exchange for outstanding
DLJdirect Common Stock at a premium at any time. The premium was 25% for
exchanges occurring in the 90 days after issuance and will decline ratably each
quarter thereafter over a period of three years to 15%. However, the premium
will be 10% if as a result of the enactment of legislative changes or
administrative proposals or changes, the Company or our stockholders will, based
on the legal opinion of our tax counsel, more likely than not be subject to tax
upon issuance of the DLJdirect Common Stock or DLJ Common Stock or such stock
will not be treated as stock of DLJ Inc. Notwithstanding the foregoing, the
Company has the right, at any time, to exchange stock of a subsidiary of DLJ
Inc. for DLJdirect Common Stock if all of the assets and liabilities of
DLJdirect are transferred to the subsidiary.
Earnings applicable to common shares for DLJ includes a 100% retained interest
in DLJdirect for periods prior to the closing date and 82.1% for subsequent
periods. Operating results reported by DLJ Inc. prior to the closing date were
not affected by the issuance of the tracking stock.
10
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
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, 1999 and 1998 were $179.6
million and $98.8 million, respectively.
4. Borrowings
Short-term borrowings are generally demand obligations with interest
approximating Federal fund rates. Such borrowings are generally used to
facilitate the securities settlement process, to finance securities inventories
and to finance securities purchased by customers on margin.
In 1998, the Company introduced a $1.0 billion commercial paper program.
Obligations issued under this program (the "Notes") are exempt from registration
under the Securities Act of 1933, as amended under Section 4(2) (the "Securities
Act"). At September 30, 1999, there were $253.5 million Notes outstanding under
this program.
<TABLE>
<CAPTION>
Long-term borrowings: September 30, December 31,
1999 1998
----------- -----------
(In thousands)
<S> <C> <C>
Senior notes, 5.875%-6.875% due various dates through 2008............. $ 2,040,224 $ 1,391,036
Medium-term notes, 0.62% - 7.42% due various dates through 2016........ 1,730,805 1,046,647
Senior secured floating rate notes due 2005............................ 295,692 450,000
Global floating rate notes, due in 2002................................ 348,693 348,357
Subordinated exchange notes, 9.58% due 2003........................... 225,000 225,000
Other borrowings....................................................... 20,417 20,963
----------- -----------
Total long-term borrowings........................................ $ 4,660,831 $ 3,482,003
=========== ===========
Current maturities..................................................... $ 440,617 $ 100,973
=========== ===========
</TABLE>
During the quarter ended September 30, 1999, the Company issued $280.2 million
of medium-term notes that mature at various dates through 2008.
In the first nine months of 1999, the Company purchased $154.3 million of its
senior secured floating rate notes.
For the nine months ended September 30, 1999 and 1998, interest paid on all
borrowings and financing arrangements amounted to $3.3 billion and $3.5 billion,
respectively.
5. Long-term Corporate Development Investments
Long-term corporate development investments represent the Company's involvement
in private debt and equity investments. These investments generally have no
readily available market or may otherwise be restricted as to resale under the
Securities Act of 1933; therefore, these investments are carried at estimated
fair value as determined by the Finance Committee of the Board of Directors. The
cost of these investments was $775.7 million and $472.2 million at September 30,
1999 and December 31, 1998, respectively. For the nine months ended September
30, 1999 and 1998, the increase in net unrealized appreciation amounted to $78.9
million and $20.1 million, respectively. Changes in unrealized appreciation
(depreciation) arising from changes in fair value or upon realization are
reflected in revenues, principal transactions-net, investment revenues 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"). Accordingly, DLJSC is subject to the minimum net capital
requirements of the Securities and Exchange Commission, NYSE and the Commodities
Futures Trading Commission. As such, it is subject to NYSE's net capital rule,
which conforms to the Uniform Net Capital Rule pursuant to rule 15c3-1 of the
Securities Exchange Act of 1934, as amended ("the Exchange Act"). Under the
alternative method permitted by this
11
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
rule, the required net capital may not be less than two percent of aggregate
debit balances arising from customer transactions or four percent of segregated
funds whichever is greater. If a member firm's capital is less than four percent
of aggregate debit balances, the NYSE may require the firm to reduce its
business. If a member firm's net capital is less than five percent of aggregate
debit balances, the NYSE may prevent the firm from expanding its business and
declaring cash dividends. At September 30, 1999, DLJSC's net capital of
approximately $1.5 billion was 19.14 percent of aggregate debit balances and in
excess of the minimum requirement by approximately $1.3 billion.
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, 1999, the Company and its broker-dealer subsidiaries complied with
all applicable regulatory capital adequacy requirements.
7. Earnings Per Share
Earnings per common share for periods after the closing date have been
calculated using the two-class method. The two-class method is an earnings
allocation formula that determines the earnings per share for each class of
common stock according to participation rights in undistributed earnings.
For DLJ, basic earnings per common share represents earnings applicable to
common shares (including its retained interest in DLJdirect) divided by the
weighted average actual common shares outstanding, i.e., excluding the effect of
potentially dilutive securities. Diluted earnings per common share include the
dilutive effects of the Restricted Stock Unit Plan and the dilutive effect of
options calculated under the treasury stock method.
For DLJdirect, basic earnings per share is calculated by dividing earnings
applicable to common shares for the period the tracking stock was outstanding
(May 28, 1999 to September 30, 1999) by the weighted average actual common
shares outstanding. Diluted earnings per common share include the dilutive
effect of options calculated under the treasury stock method. DLJ's retained
interest excludes the effect of the 10 million shares of common stock that have
been reserved for issuance under the DLJdirect Stock Option Plan. Earnings per
share for DLJdirect for periods prior to the closing date are not presented as
such amounts are not meaningful. For the quarter ended September 30, 1999 and
for the period the Tracking Stock was outstanding, exercisable stock options
were excluded from the computation of diluted earnings per share since the
effect of including them was antidilutive.
The numerators and denominators of the basic and diluted earnings per common
share computations include the following items:
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
September 30, September 30,
DLJ Common Stock 1999 1998 1999 1998
- ---------------- ------ ------ ------ -----
(In thousands)
<S> <C> <C> <C> <C>
Earnings applicable to Common Shares-Basic and Diluted................ $ 117,507 $ 20,411 $ 394,180 $ 286,129
========= ========= ========= =========
Weighted Average Common Shares-Basic.................................. 125,993 121,569 125,211 118,025
Effect of Dilutive Securities:
Restricted stock units.............................................. 944 1,929 1,061 2,489
Stock options....................................................... 11,248 10,980 12,740 10,872
--------- --------- --------- ---------
Weighted Average Common Shares-Diluted................................. 138,185 134,478 139,012 131,386
========= ========= ========= =========
DLJdirect Common Stock
Earnings (loss) applicable to Common Shares-Basic and Diluted......... $ (596) $ (547)
========= =========
Weighted Average Common Shares-Basic and Diluted...................... 18,400 18,400
========= =========
</TABLE>
8. Derivative Financial Instruments
The Company enters into certain contractual agreements referred to as
derivatives or off-balance sheet financial
12
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
instruments primarily to provide products for its clients. Under these
agreements, the Company performs the following activities: writes
over-the-counter ("OTC") options to accommodate customers' needs; trades in
forward contracts in U.S. government and agency issued or guaranteed securities;
trades in futures contracts on equity-based indices, interest rate instruments
and currencies and issues structured products based on emerging market financial
instruments and indices. The Company also enters into swap agreements, primarily
equity, interest rate and foreign currency swaps. The Company is not
significantly involved in commodity derivative instruments.
Options
The Company writes option contracts specifically designed to meet customers'
needs. Since the Company, not its counterparty, is obligated to perform, the
options do not expose the Company to credit risk. At the beginning of the
contract period, the Company receives a cash premium. During the contract
period, the Company bears the risk of unfavorable changes in the value of the
financial instruments underlying the options ("market risk"). To cover this
market risk, the Company purchases or sells cash or derivative financial
instruments on a proprietary basis. Such purchases and sales may include debt
and equity securities, forward and futures contracts and options. The
counterparties to these purchases and sales are reviewed to determine whether
they are creditworthy. Future cash requirements for options written equal the
fair value of the options. Option contracts are typically written for a duration
of less than 13 months and are included in the condensed consolidated statements
of financial condition at fair value.
The notional (contract) value, or the market value for cash instruments, of the
written options was $12.9 billion at September 30, 1999 and $5.1 billion at
December 31, 1998. These options contracts were covered by the following
financial instruments:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------- ---------
(In millions)
<S> <C> <C>
U.S. government, mortgage-backed securities and options thereon.... $ 2,725 $ 3,396
Foreign sovereign debt securities.................................. 200 89
Forward rate contracts............................................. 1,075 38
Futures contracts.................................................. 461 76
Interest rate derivatives.......................................... 5,761 650
Equities and other................................................. 2,727 895
-------- -------
Total................................................... $ 12,949 $ 5,144
======== =======
</TABLE>
The trading revenues from writing options (net of related interest expense) were
approximately $78.8 million and $84.9 million, for the nine months ended
September 30, 1999 and 1998, respectively. The fair value of certain written
options is measured by the unamortized premiums and the intrinsic value
determined from various pricing sources. The average fair value of the options
was approximately $370.7 million at September 30, 1999 and $304.3 million at
December 31, 1998. The fair value of the options was approximately $485.1
million at September 30, 1999 and $397.1 million at year-end 1998.
Forwards and Futures
The Company enters into forward purchases and sales contracts for
mortgage-backed securities and foreign currencies. In addition, the Company
enters into futures contracts on equity-based indices, foreign currencies and
other financial instruments as well as options on futures contracts. Forward and
futures contracts are treated as off-balance sheet items. Market risk is the
price movement on the notional value of the contracts.
For forward contracts, cash is generally not required at inception; cash equal
to the notional value on the contract is required at settlement. For futures
contracts, the original margin is required in cash at inception; cash equal to
the daily change in market value is required at settlement.
Since forward contracts are subject to the financial reliability of the
counterparty, the Company is exposed to credit risk. To monitor this credit
risk, the Company limits transactions with specific counterparties, reviews
credit limits and adheres to internally established credit extension policies.
For futures contracts and options on futures contracts, the change in the market
value is settled with the exchanges in cash each day. As a result, the credit
risk with the futures exchange is limited to the net positive change in the
market value for a single day.
13
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company generally enters into forward and futures transactions for periods
of 90 days or less. The remaining maturities for all forwards and futures are
less than 13 months.
<TABLE>
<CAPTION>
September 30, December 31,
Off-balance sheet values: 1999 1998
---- ----
(In millions)
<S> <C> <C>
Forward Contracts:
Purchased at notional (contract) value................................... $ 48,869 $ 41,254
Sold at notional (contract) value........................................ $ 53,028 $ 39,767
Futures Contracts and Options on Futures Contracts:
Purchased at market value................................................ $ 2,837 $ 1,184
Sold at market value..................................................... $ 4,022 $ 1,607
September 30, December 31,
Values included in the condensed consolidated financial statements: 1999 1998
---- ----
(In millions)
Forward Contracts:
Average fair values included in liabilities during the period................ $ 2 $ 2
Unrealized gains included in total assets at end of period................... $ 206 $ 263
Unrealized losses included in total liabilities at end of period............. $ 217 $ 269
Futures Contracts:
Average fair values included in assets (liabilities) during the period....... $ 10 $ (23)
Unrealized gains included in total assets at end of period................... $ 25 $ 4
Unrealized losses included in total liabilities at end of period............. $ 4 $ 1
</TABLE>
Average fair values were computed using month-end averages. For forward
contracts, the fair values are estimated based on dealer quotes, pricing models
or quoted prices for financial instruments with similar characteristics. For
futures contracts, the fair values are measured by reference to quoted market
prices.
Net trading losses on forward contracts were $126.5 million and $21.9 million
and net trading gains (losses) on futures contracts were $106.6 million and
$(64.7) million for the nine months ended September 30, 1999 and 1998,
respectively.
Swaps
The notional (contract) value of swap agreements, consisting primarily of
interest rate and equity swaps, was approximately $22.4 billion and $8.0 billion
at September 30, 1999 and December 31, 1998, respectively. The notional or
contract amounts indicate the extent of the Company's involvement in the
derivative instruments noted above. They do not measure the Company's exposure
to market or credit risk and do not represent the future cash requirements of
such contracts.
9. Commitments and Contingencies
The Company issues letters of credit for which it is contingently liable for
$349.5 million at September 30, 1999.
The Company has outstanding commitments, expiring on March 16, 2000, to finance
$150.0 million to third parties to be secured by mortgage loans on real estate
properties. At September 30, 1999, unfunded commitments outstanding under this
facility amounted to $47.5 million. In addition, the Company enters into
commitments to extend credit to non-investment grade borrowers in connection
with the origination and syndication of senior bank debt. At September 30, 1999,
unfunded senior bank loan commitments outstanding amounted to $409.8 million.
At September 30, 1999, the Company has commitments of $566.9 million to invest
on a side by side basis with merchant banking partnerships.
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, 1998.
14
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
10. Industry Segment and Geographic Data
In 1998 and prior years the Company operated and managed its businesses and
presented segment information through three principal operating segments:
Banking, Capital Markets and Financial Services. Effective January 1, 1999 the
Company changed its structure to operate and manage its businesses through four
operating segments: Banking, Equities, Fixed Income and Financial Services. The
following is a summary of the Company's segment data:
<TABLE>
<CAPTION>
Fixed Financial
Banking Income Equities Services Elimination
For the Quarters Ended: Group Group Group Group & Other Total
- ----------------------- ----- ----- ----- ----- ------- -----
(in millions)
<S> <C> <C> <C> <C> <C> <C>
September 30, 1999
Net revenues from external sources....... $ 534.4 $ 131.1 $ 219.6 $ 316.5 $ (34.7) $ 1,166.9
Net intersegment revenues................ 0.0 0.0 (1.7) 28.0 (26.3) 0.0
Net interest revenue .................... 2.2 54.7 (3.2) 70.2 37.9 161.8
-------- --------- -------- --------- -------- ---------
Total net revenues ................... $ 536.6 $ 185.8 $ 214.7 $ 414.7 $ (23.1) $ 1,328.7
======== ========= ======== ========= ======== =========
Income before income taxes............... $ 156.1 $ 49.0 $ 2.0 $ 55.7 $ (68.8) $ 194.0
======== ========= ======== ========= ======== =========
September 30, 1998
Net revenues from external sources....... $ 296.7 $ 20.2 $ 138.3 $ 255.6 $ (218.5) $ 492.3
Net intersegment revenues................ - 0.5 (2.0) 14.1 (12.6) 0.0
Net interest revenue..................... 1.1 23.5 8.3 55.2 114.7 202.8
-------- --------- -------- --------- -------- ---------
Total net revenues.................... $ 297.8 $ 44.2 $ 144.6 $ 324.9 $ (116.4) $ 695.1
======== ========= ======== ========= ======== =========
Income before income taxes............... $ 76.1 $ (8.1) $ 2.0 $ 58.8 $ (87.2) $ 41.6
======== ========= ======== ========= ======== =========
For the Nine Months Ended:
September 30, 1999
Net revenues from external sources....... $1,335.2 $ 602.2 $ 675.7 $ 994.3 $ (113.1) $ 3,494.3
Net intersegment revenues................ 0.0 0.2 (3.9) 68.8 (65.1) 0.0
Net interest revenue.. (1.6) 110.3 8.2 194.9 89.9 401.7
-------- --------- -------- --------- -------- ---------
Total net revenues. $1,333.6 $ 712.7 $ 680.0 $ 1,258.0 $ (88.3) $ 3,896.0
======== ========= ======== ========= ======== =========
Income before income taxes............... $ 360.4 $ 222.6 $ 51.5 $ 230.1 $ (214.6) $ 650.0
======== ========= ======== ========= ======== =========
September 30, 1998
Net revenues from external sources....... $1,112.5 $ 451.4 $ 520.4 $ 743.0 $ (439.9) $ 2,387.4
Net intersegment revenues................ 0.0 1.5 (3.4) 38.8 (36.9) 0.0
Net interest revenue..................... (3.5) 87.0 9.5 160.1 352.7 605.8
-------- --------- -------- --------- -------- ---------
Total net revenues.................... $1,109.0 $ 539.9 $ 526.5 $ 941.9 $ (124.1) $ 2,993.2
======== ========= ======== ========= ======== =========
Income before income taxes............... $ 333.1 $ 164.6 $ 56.5 $ 156.6 $ (221.4) $ 489.4
======== ========= ======== ========= ======== =========
Balance sheet data:
September 30, 1999
Segment assets.......................... $1,741.7 $66,820.3 $5,349.3 $21,108.8 $3,095.3 $98,115.4
======== ========= ======== ========= ======== =========
December 31, 1998
Segment assets.......................... $1,132.0 $45,683.7 $2,694.9 $19,925.0 $2,846.6 $72,282.2
======== ========= ======== ========= ======== =========
</TABLE>
15
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following is a reconciliation of the Company's reported income before
provision for income taxes to the Company's consolidated totals:
<TABLE>
<CAPTION>
Quarters Ended Nine months Ended
September 30, September 30,
1999 1998 1999 1998
--------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C>
Income before provision for income taxes:
Total income for reported segments............. $ 262.8 $ 128.8 $ 864.6 $ 710.8
All other income (losses)...................... (12.9) (3.1) (39.9) 30.9
Consolidation/elimination (1).................. (55.9) (84.1) (174.7) (252.3)
------- ------- ------- -------
Total income before provision
for income taxes........................... $ 194.0 $ 41.6 $ 650.0 $ 489.4
======= ======= ======= =======
</TABLE>
(1) Consolidation/elimination represents intercompany accounts/intersegment
revenue-sharing arrangements that are eliminated in consolidation.
The Company's principal operations are located in the United States. The Company
maintains offices in Europe, Latin America and Asia, with the majority of
foreign business done through the London offices. The following are net revenues
by geographic region:
Nine Months Ended
September 30,
1999 1998
--------------------------------------
(in millions)
United States.................. $ 3,367.0 $ 2,713.8
Other foreign.................. 529.0 279.4
---------- ---------
Total.................... $ 3,896.0 $ 2,993.2
========== =========
11. 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, 1998
and the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31
and June 30, 1999. There were no new developments in these proceedings in the
quarter ended September 30, 1999.
In addition to the significant proceedings and matters previously disclosed, 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.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - DONALDSON, LUFKIN & JENRETTE, INC.
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 1998
Annual Report on Form 10-K.
BUSINESS ENVIRONMENT
The Company's principal business activities, investment and merchant
banking, securities sales and trading and correspondent brokerage services are,
by their nature, highly competitive and subject to general market conditions,
volatile trading markets and fluctuations in the volume of market activity.
Consequently, the Company's net income and revenues have been and are likely to
continue to be, subject to wide fluctuations reflecting the impact of many
factors beyond the Company's control including securities market conditions, the
level and volatility of interest rates, competitive conditions and the size and
timing of transactions.
The U.S. economy continued to grow at a steady pace during the third
quarter of 1999. The continuing trend in the rate of growth increased concern
about inflationary pressures, which led to a quarter point increase in the Fed
funds rate on August 24, 1999. Major market indices declined during the quarter
due to fears of interest rate hikes, a weak dollar and recovering overseas
economies. Underwriting of stock and bond issues declined markedly in the third
quarter compared to the first half of 1999, despite strong corporate earnings
growth, reflecting concerns about rising interest rates. High-yield bond
issuance was at its lowest since July 1995. Merger & acquisition activity rose
43% in the third quarter of 1999, primarily in the pan-European markets. This
increase is driven by several factors including increased global competition,
consolidation of industries, relatively low interest rates worldwide and cross
border combinations resulting from the European Monetary Union.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1998
Total revenues for the quarters ended September 30, 1999 and 1998 were
$1.7 billion and $1.1 billion. Increases in commissions, underwritings, fees and
trading were offset by decreases in interest. Changes in net revenues from
external sources for each of the Company's industry segments were: Banking Group
revenues increased by $237.7 million primarily as a result of increased
underwriting revenues and fee income related to merger and acquisition activity,
offset by reduced merchant banking gains; Equities Group revenues increased by
$81.3 million primarily as a result of increased underwriting and trading
revenues in the domestic equities area, and commissions in the international
equities area; Fixed Income Group revenues increased by $110.9 million,
principally as a result of positive trading gains in the high yield and
mortgage-backed securities areas, offset by reduced underwriting revenues in
these areas; Financial Services Group revenues increased by $60.9 million
primarily as a result of increased brokerage and correspondent clearance
commission revenues and fee income in the Company's correspondent and online
brokerage businesses.
Commission revenues increased by $43.9 million or 19.5% to $269.2
million due to increased business in virtually all areas. Share volumes on the
NYSE and NASDAQ exchanges averaged a combined 1.7 million shares per day in the
third quarter of 1999, compared to approximately 1.5 million shares per day for
the comparable period of 1998. The Company also benefited from the start-up of
its London-based equities business.
Underwriting revenues increased by $129.9 million or 112.5% to $245.4
million, primarily as a result of increases in domestic equities, offset by the
decline in new issuances of high yield and mortgage-backed securities.
Fee revenues increased by $131.4 million or 41.4% to $448.7 million.
These results reflect primarily the Company's continuing market share growth in
global merger and acquisitions advisory transactions. In addition, fee income in
the Company's correspondent and online brokerage, and high-net-worth businesses
increased due to customer demand for a variety of portfolio advisory and
technology services.
Interest, net of interest expense to finance U.S. government, agency
and mortgage-backed securities, decreased by $40.0 million or 6.9% to $537.5
million. The decrease resulted from the decrease in emerging markets proprietary
trading. (The Company ceased proprietary trading in emerging markets in the
third quarter of 1998). If the impact of the firm's proprietary trading
activities in emerging markets during the third quarter of 1998 were
17
<PAGE>
excluded, net interest income would have increased 17.6%. In most other areas
there were increases in balances of lending activity, which were offset in part
by reductions in interest rates charged.
Principal transactions-net, trading revenues increased by $356.0
million or 156.0% to $127.8 million primarily from gains in fixed income and
equity trading and the elimination in 1999 of trading losses in the emerging
markets and high yield areas.
Principal transactions-net, investment revenues increased by $12.9
million or 28.9% to $57.6 million. The reduction in realized gains on sales of
investments was $18.3 million. Net unrealized carrying values increased by $31.1
million, which includes the increase of net unrealized depreciation of $1.4
million on investments sold and an increase in net unrealized appreciation of
$32.6 million on retained investments.
Total costs and expenses for the third quarter of 1999 were $1.5
billion, an increase of $482.2 million or 47.4% over the third quarter of 1998,
primarily due to growth at Pershing as well as the Company's international
expansion in Europe.
Compensation and benefits increased $374.4 million or 96.7% to $761.6
million. Incentive and production-related compensation increased by 162.9% in
1999 and base compensation, including benefits and all payroll taxes, increased
by 21.5% primarily due to the Company's significant expansion in Europe. At
September 30, 1999, full-time personnel totaled 9,716 compared to 8,157 at
September 30, 1998, an increase of 1,559 or 19.1%.
Interest expense increased $1.0 million or 0.3% to $375.7 million due
to increased inventory positions in the third quarter of 1999 offset in part by
reduced interest rates and reduced proprietary trading in emerging markets.
All other expenses, as noted below, increased by $106.6 million or
40.0% to $373.1 million from the second quarter of 1998.
Brokerage, clearing, exchange fees and other expenses increased by $4.8
million due to increased trading volume and transaction fee payments. Occupancy
and related costs increased by $11.8 million primarily as a result of the
Company's domestic and international expansion. Communications and technology
increased by $43.1 million due to expansion of the Company's international
operations, implementation and development of new systems, consulting fees
related to the Year 2000 project and overhaul of the online customer trading and
information system for the Company's correspondent brokerage network. All other
operating expenses increased by $46.9 million. Included therein are professional
fees, travel and entertainment, and printing and stationery which increased due
to an overall increase in the level of business activity.
The changes in income before income taxes for each industry segment
were: Banking Group pre-tax income increased by $80.0 million as a result of
increased underwritings, and fees related to merger and acquisition activity;
Equities Group pre-tax income was unchanged; Fixed Income Group pre-tax income
increased by $57.1 million as a result of increased trading gains offset by
decreased underwriting revenues in the high yield and real estate finance areas;
Financial Services Group pre-tax income decreased $3.1 million as a result of
increased advertising and technology spending.
The Company's income tax provision for the third quarter of 1999 and
1998 was $71.8 million and $15.9 million, respectively, which represented a
37.01% and 38.22% effective tax rate, respectively.
Net income for the quarter ended September 30, 1999 was $122.2 million,
an increase of $96.5 million or 375.5% from the comparable 1998 period. Basic
and diluted earnings per common share, using the treasury stock method were
$0.93 and $0.85 and $0.17 and $0.15 for the third quarter of 1999 and 1998,
respectively.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Total revenues for the nine months ended September 30, 1999 and 1998
were $5.0 billion and $4.1 billion, respectively. Increases in commissions,
underwriting, fees and trading were offset by decreases in interest. Changes in
net revenues from external sources for each of the Company's industry segments
were: Banking Group revenues increased by $222.7 million primarily as a result
of increased merger & acquisition fees; Equities Group revenues increased $155.3
million primarily as a result of increased commission revenues in its non-dollar
equities trading in London and Hong Kong and trading gains in the domestic
equities group; Fixed Income Group revenues increased by $150.8 million
principally as a result of increases in trading gains offset by decreased
underwriting revenues in the high yield and real estate finance areas; Financial
Services Group revenues increased by $251.3 million primarily as a result of
increased brokerage and correspondent clearance commission revenues and fee
income in the Company's correspondent and online brokerage businesses.
18
<PAGE>
Commission revenues increased by $215.5 million or 34.4% to $841.3
million due to increased business in virtually all areas and are consistent with
the overall growth in listed share volume on major equity exchanges. The primary
areas of growth were in the Company's international equities group and
correspondent and online brokerage businesses.
Underwriting revenues increased by $147.0 million or 19.2% to $911.8
million, primarily as a result of increases in domestic and international equity
underwriting, offset by decreases in underwriting of high yield and
mortgage-backed securities.
Fee revenues increased by $177.3 million or 19.9% to $1,068.4 million.
These results reflect primarily the Company's continuing market share growth in
global merger and acquisitions advisory transactions. Fees related to increased
customer demand for a variety of portfolio advisory and technology services at
the Company's correspondent brokerage and online brokerage business also
increased from the prior year.
Interest, net of interest expense to finance U.S. government, agency
and mortgage-backed securities, decreased by $218.6 million or 12.6% to $1,514.0
million, primarily from the decrease in emerging markets proprietary trading.
(The Company ceased proprietary trading in emerging markets in the third quarter
of 1998). If the impact of the firm's proprietary trading activities in emerging
markets during the first nine months of 1998 were excluded, net interest income
would have increased 13.3%. In most other areas there were increases in balances
of lending activity, which were offset in part by reductions in interest rates
charged.
Principal transactions-net, trading revenues increased by $589.5
million or 850.6% to $520.2 million primarily from increases in equity and fixed
income trading gains, as well as the elimination in 1999 of trading losses in
the emerging markets and high yield areas.
Principal transactions-net, investment revenues decreased by $47.5
million or 35.7% to $85.7 million. The reduction in realized gains on sales of
investments was $106.2 million. Net unrealized carrying values increased by
$58.8 million, which includes the increase of net unrealized appreciation of
$8.3 million on investments sold and an increase in net unrealized appreciation
of $50.4 million on retained investments.
Total costs and expenses for the nine months ended September 30, 1999
were $4.4 billion, an increase of $727.7 million or 19.8% over the nine months
ended September 30, 1998, primarily due to growth at Pershing and DLJdirect, as
well as the Company's international expansion in Europe.
Compensation and benefits increased $493.1 million or 28.9% to $2,197.3
million. Incentive and production-related compensation increased by 30.5% in
1999 primarily because the nine months of 1998 included a $29 million provision
for costs associated primarily with the Company's plans for significant
expansion in Europe. Base compensation, including benefits and all payroll
taxes, increased by 25.1% due to expansion in various business groups. At
September 30, 1999, full-time personnel totaled 9,716 compared to 8,157 at
September 30, 1998, an increase of 1,559 or 19.1%.
Interest expense decreased $14.5 million or 1.3% to $1,112.3 million
due to the reduction of proprietary trading in emerging markets offset by
overall increased borrowings.
All other expenses, as noted below, increased by $249.1 million or
31.1% to $1,048.8 million over the nine months of 1998.
Brokerage, clearing, exchange fees and other expenses increased by
$23.1 million due to increased trading volume and transaction fee payments.
Occupancy and related costs increased by $30.2 million as a result of the
Company's domestic and international expansion. Communications and technology
increased by $87.0 million due to expansion of the Company's international
operations, implementation and development of new systems, consulting fees
related to the Year 2000 project and overhaul of the online customer trading and
information system for the Company's correspondent brokerage network. All other
operating expenses increased by $108.8 million. Included therein are
professional fees, travel and entertainment, and printing and stationery which
increased due to an overall increase in the level of business activity.
The changes in income before income taxes for each industry segment
were: Banking Group pre-tax income increased by $27.3 million, primarily as a
result of increased underwriting revenues and fees related to merger and
acquisition activity offset by reduced merchant banking gains; Equities Group
pre-tax income decreased by $5.0 million as continued investment spending
related to international expansion more than offset the related increase in
revenues; Fixed Income Group pre-tax income increased by $58.0 million as
decreased underwriting revenues in the high yield and real estate finance areas
were more than offset by strong trading gains; Financial Services Group pre-tax
income increased $73.5 million as a result of increased brokerage and
correspondent clearance commissions and fee income.
19
<PAGE>
The Company's income tax provision for the nine months of 1999 and 1998
was $240.5 million and $187.2 million, respectively, which represented a 37.0%
and 38.25% effective tax rate, respectively.
Net income for the nine months ended September 30, 1999 was $409.5
million, an increase of $107.3 million or 35.5% from the comparable 1998 period.
Basic and diluted earnings per common share, using the treasury stock method
were $3.15 and $2.84 and $2.42 and $2.18 for the nine months ended September 30,
1999 and 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets are highly liquid with the majority consisting of
securities inventories and collateralized receivables, both of which fluctuate
depending on the levels of proprietary trading and customer business. Such
collateralized receivables consist primarily of resale agreements and securities
borrowed, both of which are secured by U.S. government and agency securities,
and marketable corporate debt and equity securities. In addition, the Company
has significant receivables that turn over frequently from customers, brokers
and dealers. To meet client needs, as a securities dealer, the Company may carry
significant levels of trading inventories. As such, because of changes relating
to customer needs, economic and market conditions and proprietary trading
strategies, the Company's total assets or the individual components of total
assets vary significantly from period to period. A relatively small percentage
of total assets is fixed or held for a period of longer than one year. At
September 30, 1999 and December 31, 1998, the Company's total assets were $98.1
billion and $72.3 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. Depending upon prevailing market
conditions, other borrowing costs are negotiated. The Company monitors overall
liquidity by tracking the extent to which unencumbered marketable assets exceed
short-term unsecured borrowings.
The Company maintains a $2.5 billion revolving credit facility with
various banks, of which $1.9 billion may be unsecured. There were no borrowings
outstanding under this agreement at September 30, 1999.
Certain of the Company's businesses are capital intensive. In addition
to normal operating requirements, capital is required to cover financing and
regulatory charges on securities inventories, merchant banking investments and
investments in fixed assets. The Company's overall capital needs are continually
reviewed to ensure that its capital base can appropriately support the
anticipated needs of its business units as well as the regulatory capital
requirements of subsidiaries. Based upon these analyses, management believes
that the Company's debt and equity base is adequate for current operating
levels.
On May 28, 1999, the Company issued in an initial public offering,
18.4 million shares of DLJdirect Common Stock. The shares of DLJdirect Common
Stock have no voting rights, except in certain limited circumstances. Net
proceeds from the offering amounted to $343.2 million of which $235.9 million
was allocated to DLJdirect .
During the nine months ended September 30, 1999, the Company was active
in raising additional long-term financing. As of September 30, 1999, $650.0
million of 5 7/8% Senior Notes and an aggregate of $685.2 million medium term
notes with various rates and maturities have been issued.
In addition, during the nine months ended September 30, 1999,
commercial paper outstanding under the Company's $1.0 billion commercial paper
program increased from $30.9 million to $253.5 million.
The Company's current credit ratings of its long-term debt and commercial paper
are as follows:
Long-Term Debt Commercial Paper
Duff & Phelps A D-1
Fitch IBCA A F-1
Moody's A3 P-2
Standard & Poors A- A-2
Thomson BankWatch A+ TBW-1
20
<PAGE>
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, 1999, DLJSC had aggregate regulatory "net capital," after
adjustments required by Rule 15c3-1 under the Securities Exchange Act of 1934,
of approximately $1.5 billion, which exceeded minimum net capital requirements
by $1.3 billion and which exceeded the net capital required by DLJSC's most
restrictive debt covenants by $909.3 million. 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, 1999, the
Company and its broker-dealer subsidiaries were in compliance with all
applicable regulatory capital adequacy requirements.
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, 1999 and 1998
At September 30, 1999 and 1998, cash and cash equivalents totaled $1.8
billion and $827.5 million, an increase of $733.1 million and $554.3 million,
respectively.
Cash used in operating activities totaled $11.1 billion and $1.8
billion for the nine months ended September 30, 1999 and 1998, respectively, and
reflects primarily an increase in operating assets. In the first nine months of
1999, there were increases in assets including financial instruments owned of
$6.8 billion, securities borrowed of $6.9 billion and receivables from brokers,
dealers and other of $4.5 billion. These increases were partially offset by
increases in liabilities including payables to brokers, dealers and other of
$4.0 billion, securities loaned of $1.8 billion and financial instruments sold
not yet purchased of $1.0 billion.
For the nine months ended September 30, 1999 and 1998, cash of $655.1
million and $526.6 million, respectively, was used in investing activities.
These generally consist of purchases of long-term corporate development
investments and office facilities.
For the first nine months of 1999 and 1998, net cash provided by
financing activities totaled $12.5 billion and $2.9 billion, respectively, of
which, $11.0 billion and $1.4 billion was provided by short-term financings
(principally repurchase agreements). In the second quarter of 1999, the Company
received proceeds from the issuance of DLJdirect Common Stock of $346.6 million.
Additionally, in 1999, $649.2 million was provided by issuing Senior Notes and
$684.2 million was provided by issuing medium-term notes.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are financial instruments, the payments on which are linked
to the prices, or relationships between prices, of securities or commodities,
interest rates, currency exchange rates or other financial measures
(collectively, "cash market instruments"). Derivatives enable the Company and
its clients to manage their exposure to interest rates and currency exchange
rates, and security and other price risks. Derivatives may include options,
forward and futures contracts and swaps. Certain types of derivatives, including
forwards and certain options, are traded in the over-the-counter ("OTC")
markets. Other types of derivatives, including futures contracts and listed
options, are traded on regulated exchanges. The Company uses derivatives
primarily to provide products to its clients, rather than to cover its own
positions.
The Company has focused its derivative activities on writing OTC
options contracts to accommodate its customers' needs, trading in forward
contracts in U.S. government and agency issued or guaranteed securities, trading
in futures contracts on equity-based indices, interest rate instruments, and
foreign currencies, and issuing structured products based on emerging market
financial instruments and indices. The Company also enters into swap agreements,
primarily equity, interest rate and foreign currency swaps.
21
<PAGE>
Options Contracts:
Options contracts are typically written for a duration of less than 13
months and are included in the consolidated statements of financial condition at
fair value. Revenues from these activities (net of related interest expenses)
were approximately $78.8 million and $84.9 million for the nine months ended
September 30, 1999 and 1998, respectively. Option writing revenues are primarily
from the amortization of option premiums.
The notional (contract) value, or the market value for cash
instruments, of the written options contracts was approximately $12.9 billion
and $9.0 billion at September 30, 1999 and 1998, respectively. These options
contracts were covered by various financial instruments that the Company has
purchased or sold as principal.
Forward and Futures Contracts:
The Company enters into forward purchases and sales contracts for
mortgage-backed securities and foreign currencies. In addition, the Company
enters into futures contracts on equity-based indices, foreign currencies and
other financial instruments. Forward and futures contracts are treated as
off-balance sheet items. Market risk is the price movement on the notional value
of the contracts.
For the nine months ended September 30, 1999 and 1998, net trading
losses on forward contracts were $126.5 million and $21.9 million and net
trading gains (losses) on futures contracts were $106.6 million and $(64.7)
million, respectively.
Off-balance sheet values:
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
------------------ ------------------
Purchases Sales Purchases Sales
--------- ----- --------- -----
(In millions)
<S> <C> <C> <C> <C>
Forward Contracts
(Notional Contract Value)................ $48,869 $53,028 $39,954 $42,528
======= ======= ======= =======
Futures Contracts and Options on
Futures Contracts (Market Value)......... $ 2,837 $ 4,022 $ 1,393 $ 2,588
======= ======= ======= =======
</TABLE>
Swap Agreements:
The notional (contract) value of swap agreements consisting primarily
of interest rate and equity swaps, was approximately $22.4 billion and $8.0
billion at September 30, 1999 and December 31, 1998, respectively. The notional
or contract amounts indicate the extent of the Company's involvement in the
derivative instruments noted above. They do not measure the Company's exposure
to market or credit risk and do not represent the future cash requirements of
such contracts.
MERCHANT BANKING AND BRIDGE LENDING ACTIVITIES
The Company's merchant banking activities include investments in
various partnerships, for which subsidiaries of the Company act as general
partner, as well as direct investments in connection with its merchant banking
activities. At September 30, 1999 the Company had investments of $687.2 million
and has commitments to invest up to an additional $566.9 million.
AXA Financial has committed, subject to its approval on a
transaction-by-transaction basis, to provide $750.0 million of subordinated debt
financing to the DLJ Bridge Fund. The Bridge Fund provides short-term loans in
connection with DLJ's merchant banking and financial advisory businesses. The
Company has agreed to pay AXA Financial the first $25.0 million of aggregate
principal losses incurred by AXA Financial with respect to all bridge loans. To
the extent such payments by the Company do not fully cover any such losses
incurred by AXA Financial, AXA Financial is entitled to receive all other
distributions otherwise payable to the Company with respect to DLJ Bridge Fund
activities until such losses have been recovered. The Company has also agreed to
pay AXA Financial the amount, if any, by which any principal loss on an
individual loan exceeds $150.0 million. At September 30, 1999, the DLJ Bridge
Fund had no individual bridge loans outstanding in excess of $150.0 million. At
September 30, 1999, the DLJ Bridge Fund had extended $257.3 million of
short-term bridge loans.
HIGH-YIELD AND OTHER NON-INVESTMENT GRADE DEBT
The Company underwrites, trades, sells and holds high-yield and
non-investment-grade securities. Non-investment-grade securities are securities
or loans to companies rated BB+ or lower as well as non-rated securities or
loans. Due to credit considerations, liquidity of secondary trading markets and
vulnerability to general economic conditions, these securities generally involve
greater risk than investment-grade holdings.
22
<PAGE>
The Company records high-yield securities at market value and records
non-investment grade holdings at market or fair value, except for senior bank
debt which is carried at lower of cost or market. Unrealized gains and losses
are recognized currently in earnings. Long and short financial holdings
(excluding derivatives and structured notes) are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------ ------------------------
(In millions)
Long Short Long Short
---- ----- ---- -----
<S> <C> <C> <C> <C>
High-Yield.................................. $ 627.8 $ 371.5 $ 429.3 $ 345.3
Senior Bank Debt............................ 1,417.7 50.4 1,261.6 -
Foreign Sovereign Debt...................... 517.3 11.6 423.6 13.8
Mortgage Whole Loans ....................... 1,253.8 - 722.3 -
Convertible Securities...................... 194.4 15.3 460.6 8.0
Other Non-Investment Grade.................. 177.5 - 243.2 21.5
--------- ------- --------- -------
Totals...................................... $ 4,188.5 $ 448.8 $ 3,540.6 $ 388.6
========= ======= ========= =======
</TABLE>
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 1998 Annual Report
on Form 10-K.
The Company-wide VAR was approximately $18.0 million and $22.0 million
at September 30, 1999 and December 31, 1998, respectively. The Company-wide VAR
is less than the sum of the individual components below due to the benefit of
diversification among the risks presented below. The VAR for the two main
components of market risk, expressed in terms of theoretical fair values at
September 30, 1999 and December 31, 1998 is as follows:
September 30, December 31,
1999 1998
------------- -------------
(In millions)
Interest rate risk............... $ 9 $ 16
Equity risk...................... $ 13 $ 11
YEAR 2000
The Company has been actively engaged in addressing Year 2000 issues.
Such issues relate to potential problems resulting from non-Year 2000 compliant
systems processing transactions using two-digit date fields rather than four
digit date fields for the year of a transaction. If these systems are not
identified and reconfigured, Year 2000 transactions would be processed as year
"00," which could lead to inaccurate processing and could have a material
adverse effect on the Company's business.
The Company's plans for preparing for Year 2000 are in writing and
address all mission critical computer systems globally. Such systems have been
remedied, tested and implemented. The Company has also renovated, tested and
implemented all non-critical systems. The Company has a reasonable basis to
believe that all applications, both mainframe and non-mainframe are Year 2000
compliant. The post implementation process will ensure continued compliance of
the applications. This process includes redundant vendor testing, correspondent
testing, extended point-to-point testing, and integrated systems testing through
year-end. Throughout the Year 2000 process, none of the Company's major
technology projects has been significantly impacted.
Costs
The total cost to ensure that the Company's systems are Year 2000
compliant is not expected to be material to the Company's financial position.
Based upon current information, the total cost of the Year 2000 project is
estimated to be approximately $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 was
allocated to renovate and test applications. The budget included Year 2000
compliance testing, full system testing, point to point testing with industry
agencies, correspondents and third party vendors and other industry-wide
testing. The budget also included developing a contingency plan. Costs related
to the Year 2000 project are expensed as incurred. At September 30, 1999, costs
since inception totaled $89 million. The cost of the project is being funded by
operations.
23
<PAGE>
Risks
The Year 2000 issue includes many risks including the possibility that
the Company's computer and non-information technology systems will fail. The
Company cannot be certain that the systems of other companies on which the
Company depends will be converted in a timely fashion. Due to this uncertainty,
the Company is unable to determine whether the Year 2000 will have a material
impact on the Company's business, results of operations or financial condition.
If the changes which the Company has implemented to address the Year 2000 issues
do not work as planned, the Company may experience business interruption or
shutdown, financial loss, regulatory actions, damage to the Company's global
franchise and legal liability. However, the Year 2000 Project is expected to
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 Project substantially completed, as of September 30, 1999, the possibility
of significant interruptions of normal operations as a result of the Year 2000
should be reduced.
Contingencies
The Company has assessed Year 2000 contingency requirements and has
developed a formal contingency plan. The contingency plan addresses procedures
to be implemented in the event of problems concerning the following:
o Mission-critical systems
o Electronic interfaces; and
o Third parties.
This plan includes written Year 2000-specific contingency plans that will
address corporate-wide shared services (i.e., communications systems and
physical facilities), as well as their mission critical business units. Year
2000 command centers are being established and will be staffed with incident
management teams that will coordinate communications world-wide at year-end. In
addition, year-end cross-over weekend plans are being implemented.
To the fullest extent permitted by law, the foregoing discussion is a
"Year 2000 Readiness Disclosure" within the meaning of the Year 2000 Information
and Readiness Disclosure Act 105 P.L. 271.
Forward looking statements contained under "YEAR 2000" above should be
read in conjunction with the Company's disclosure under the heading "FORWARD
LOOKING STATEMENTS" below.
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 affecting the timeliness of Year 2000 compliance including 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- DONALDSON, LUFKIN & JENRETTE, INC.
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, 1998
and the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31
and June 30, 1999. There were no new developments in these proceedings in the
quarter ended September 30, 1999.
In addition to the significant proceedings and matters previously disclosed, 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.
25
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - DLJDIRECT
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Condensed Combined Statements of Financial Condition (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
ASSETS
<S> <C> <C>
Cash and cash equivalents..................................................... $ 183,356 $ 26,654
Short-term investments........................................................ 64,342 -
Deposit with affiliated clearing broker....................................... 329 250
Receivables from brokers, dealers and others, net............................. 3,396 1,887
Financial instruments owned, at market value.................................. 29 42
Office facilities, at cost (net of accumulated depreciation
and amortization of $397 and $284, respectively)........................... 165 278
Investment in joint venture................................................... 11,765 -
Other assets.................................................................. 293 640
--------- --------
Total assets.................................................................. $ 263,675 $ 29,751
========= ========
LIABILITIES AND ALLOCATED EQUITY
Liabilities:
Payables to parent and affiliates, net...................................... $ 7,564 $ 5,211
Financial instruments sold not yet purchased, at market value............... 22 24
Accounts payable and accrued expenses....................................... 22,570 2,592
--------- --------
Total liabilities............................................................. 30,156 7,827
--------- --------
Commitments and contingencies................................................. - -
Allocated equity.............................................................. 232,648 21,924
Accumulated other comprehensive income........................................ 871 -
--------- --------
Total allocated equity........................................................ 233,519 21,924
--------- --------
Total liabilities and allocated equity........................................ $ 263,675 $ 29,751
========= ========
</TABLE>
See accompanying notes to condensed combined financial statements.
26
<PAGE>
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Condensed Combined Statements of Operations (Unaudited)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Commissions....................................................... $ 30,660 $ 19,443 $ 98,425 $ 54,314
Fees.............................................................. 13,172 7,070 38,322 18,365
Interest.......................................................... 11,049 3,669 25,010 9,838
--------- -------- --------- ---------
Total revenues.................................................. 54,881 30,182 161,757 82,517
--------- -------- --------- ---------
Costs and expenses:
Compensation and benefits......................................... 17,136 7,552 41,351 20,231
Brokerage, clearing, exchange and other fees...................... 8,865 6,984 26,939 19,724
Advertising....................................................... 18,128 6,585 37,461 19,918
Occupancy and equipment........................................... 2,545 1,347 6,017 3,659
Communications.................................................... 2,641 1,196 8,065 3,931
Technology costs.................................................. 813 782 2,624 3,089
Other operating expenses.......................................... 8,481 4,422 20,527 12,513
--------- -------- --------- ---------
Total costs and expenses........................................ 58,609 28,868 142,984 83,065
--------- -------- --------- ---------
Income (loss) before income tax provision (benefit) and equity
in net loss of joint venture.................................... (3,728) 1,314 18,773 (548)
--------- -------- --------- ---------
Income tax provision (benefit)....................................... (1,490) 538 7,807 (223)
Equity in net loss of joint venture.................................. (1,092) - (2,048) -
--------- -------- --------- ---------
Net income (loss)............................................... $ (3,330) $ 776 $ 8,918 $ (325)
========= ======== ========= =========
Earnings (loss) per share:
Basic......................................................... $ (0.03) $ 0.01 $ 0.09 $ (0.00)
Diluted....................................................... $ (0.03) $ 0.01 $ 0.09 $ (0.00)
========= ======== ========= =========
Weighted average notional and outstanding shares:
Basic......................................................... 102,650 102,650 102,650 102,650
Diluted....................................................... 102,650 104,673 103,269 102,650
========= ======== ========= =========
Earnings (loss) attributable to:
DLJ Retained Interest......................................... $ (2,734) $ 776 $ 9,465 $ (325)
DLJdirect Tracking Stock...................................... (596) - (547) -
========= ======== ========= =========
Tracking Stock earnings (loss) per share:
Basic......................................................... $ (0.03) $ (0.03)
Diluted....................................................... $ (0.03) $ (0.03)
========= =========
Tracking Stock weighted average common shares:
Basic......................................................... 18,400 18,400
Diluted....................................................... 18,400 18,400
========= =========
</TABLE>
See accompanying notes to condensed combined financial statements.
27
<PAGE>
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Condensed Combined Statements of Changes In Allocated Equity (Unaudited)
(In thousands)
For the Year Ended December 31, 1998 and the
Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
Accumulated Other Total
Allocated Equity Comprehensive Income Allocated Equity
---------------- -------------------- ----------------
<S> <C> <C> <C>
Balances at December 31, 1997............ $ 5,964 $ - $ 5,964
Net income............................... 1,460 - 1,460
Capital contributions from DLJ........... 14,500 - 14,500
--------- -------- ---------
Balances at December 31, 1998............ 21,924 - 21,924
Net income............................... 8,918 - 8,918
Translation adjustment................... - 871 871
Total comprehensive income............ - - 31,713
Capital contribution from DLJ............ 1,000 - 1,000
Allocated equity from issuance of
Tracking Stock........................ 233,945 - 233,945
Dividend paid to DLJ..................... (33,139) - (33,139)
--------- -------- ---------
Balances at September 30, 1999........... $ 232,648 $ 871 $ 233,519
========= ======== =========
</TABLE>
See accompanying notes to condensed combined financial statements.
28
<PAGE>
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Condensed Combined Statements of Cash Flows (Unaudited)
(In thousands)
For the Nine Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................................... $ 8,918 $ (325)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization............................................... 113 228
Deferred taxes.............................................................. (1,233) (204)
Equity in net loss of joint venture......................................... 2,048 -
(Increase) decrease in operating assets:
Deposit with affiliated clearing broker..................................... (79) -
Receivables from brokers, dealers and other, net............................ (1,509) (443)
Financial instruments owned, at market value................................ 13 11
Other assets................................................................ 347 (87)
Increase (decrease) in operating liabilities:
Payables to parent and affiliates, net...................................... 3,075 (1,616)
Financial instruments sold, not yet purchased, at market value.............. (2) 6
Accounts payable and accrued expenses....................................... 19,978 2,087
--------- --------
Net cash provided by (used in) operating activities......................... 31,669 (343)
--------- --------
Cash flows from investing activities:
Net proceeds from sale of office facilities................................. - 1,231
Investment in joint venture................................................. (12,431) -
Short-term investments...................................................... (64,342) -
--------- --------
Net cash provided by (used in) investing activities............................ (76,773) 1,231
--------- --------
Cash flows from financing activities:
Net proceeds from capital contributions from DLJ............................ 1,000 11,500
Allocated equity from issuance of Tracking Stock............................ 233,945 -
Dividend paid to DLJ........................................................ (33,139) -
--------- --------
Net cash provided by financing activities...................................... 201,806 11,500
--------- --------
Increase in cash and cash equivalents.......................................... 156,702 12,388
Cash and cash equivalents at beginning of period............................... 26,654 8,881
--------- --------
Cash and cash equivalents at end of period..................................... $ 183,356 $ 21,269
========= ========
</TABLE>
See accompanying notes to condensed combined financial statements
29
<PAGE>
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Notes to Condensed Combined Financial Statements (Unaudited)
1. Basis of Presentation
DLJdirect Common Stock tracks the separate performance of DLJ Inc.'s existing
online discount brokerage and related investment services business for periods
subsequent to the date of the offering ("Tracking Stock"). On May 28, 1999 ("the
closing date"), DLJ Inc. issued in an initial public offering 18.4 million
shares of DLJdirect Common Stock. The shares of DLJdirect Common Stock have no
voting rights, except in certain limited circumstances.
As a result of the offering DLJ Inc. has a retained interest of 82.1% in
DLJdirect represented by 84.3 million notional shares. The 18.4 million shares
of DLJdirect Tracking Stock reflect the 17.9% owned by the public. Prior to the
offering, DLJ Inc. had a 100% interest in the earnings of DLJdirect.
The DLJdirect Common Stock initially consisted principally of the assets,
liabilities, revenues and expenses of DLJ Inc.'s ultimate 100% equity interest
in DLJdirect Holdings Inc. (subsequent to June 1, 1997) and DLJ Inc.'s online
discount brokerage division (prior to June 2, 1997). DLJdirect may also include
such other related assets and liabilities of DLJ Inc. as the Board of Directors
of DLJ Inc. may deem appropriate in the future. It is currently the intention of
DLJ Inc. that any businesses, assets and liabilities related to its online
discount brokerage and related investment services businesses will be attributed
to DLJdirect. However, the Board of Directors of DLJ Inc., in its sole
discretion, may in the future decide to pursue business opportunities or
operational strategies, even in the online brokerage area, through DLJ Inc.
instead of DLJdirect.
DLJ Inc. has the right to issue DLJ Common Stock in exchange for outstanding
DLJdirect Common Stock at a premium at any time. The premium was 25% for
exchanges occurring in the 90 days after issuance and will decline ratably each
quarter thereafter over a period of three years to 15%. However, the premium
will be 10% in the event that certain legislative or administrative proposals
are enacted. Notwithstanding the foregoing, DLJ Inc. has the right, at any time,
to exchange stock of a subsidiary of DLJ Inc. for DLJdirect Common Stock if all
of the assets and liabilities of DLJdirect are transferred to the subsidiary.
Even though DLJ Inc. has allocated certain assets, liabilities, revenues,
expenses and cash flows to DLJdirect, that allocation will not change the legal
title to any assets or responsibility for any liabilities and will not affect
the rights of creditors. Holders of DLJdirect Common Stock will be common
stockholders of DLJ Inc. and will be subject to all the risks associated with an
investment in DLJ Inc. and all of its businesses, assets and liabilities.
Material financial events, which may occur at DLJ Inc., may affect DLJdirect's
results of operations or financial position. Accordingly, financial information
for DLJdirect should be read in conjunction with financial information of DLJ
Inc.
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 combined financial statements reflect, in the opinion
of management, all adjustments (consisting of normal, recurring accruals)
necessary for a fair presentation of the condensed combined 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
combined financial statements and notes thereto as of and for the year ended
December 31, 1998 included on Form S-3 filed by DLJ Inc. on May 25, 1999.
2. Summary of Significant Accounting Policies
To prepare condensed combined financial statements in conformity with generally
accepted accounting principles ("GAAP"), management must estimate certain
amounts that affect the reported assets and liabilities, disclosure of
contingent assets and liabilities, and reported revenues and expenses. Actual
results could differ from those estimates. Certain reclassifications have been
made to prior year financial statements to conform to the 1999 presentation.
Substantially all of DLJdirect's financial assets and liabilities, including
short-term investments, are carried at market or fair value or are carried at
amounts which approximate fair value because of their short-term nature. Fair
value is estimated at a specific point in time, based on relevant market
information.
Cash equivalents include all demand deposits held in banks and certain highly
liquid investments with maturities of 90 days or less, other than those held for
sale in the ordinary course of business.
Commission revenue and brokerage, clearing, exchange and other fees are reported
on a trade date basis.
30
<PAGE>
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Notes to Condensed Combined Financial Statements (Unaudited)
Office facilities are carried at cost and are depreciated on a straight-line
basis over the estimated useful life of the related assets, ranging from three
to eight years. Leasehold improvements are amortized over the lesser of the
useful life of the improvement or the term of the lease.
Advertising costs are expensed as incurred.
Investment in joint venture is accounted for by the equity method.
DLJ Inc. allocates certain general administrative and facilities expenses to
DLJdirect using a proportional cost methodology based on the relative number of
employees and square foot usage of DLJdirect or on actual costs incurred.
3. Related Party Transactions
DLJdirect transacts business with a group of companies affiliated through common
majority ownership with DLJ Inc., and has various transactions and relationships
with members of the group. Due to these relationships, it is possible that the
terms of these transactions are not the same as those that would result from
transactions among unrelated parties.
4. Net Capital
DLJdirect Holdings Inc.'s principal subsidiary, DLJdirect Inc., is a registered
broker-dealer and a member of the National Association of Securities Dealers
Inc. ("NASD") and, accordingly is subject to the minimum net capital
requirements of the Securities and Exchange Commission and the NASD. As such, it
is subject to the NASD's net capital rule which conforms to the Uniform Net
Capital Rule pursuant to rule 15c3-1 of the Securities Exchange Act of 1934.
Under the alternative method permitted by this rule, the required net capital,
as defined, shall not be less than two percent of aggregate debit balances, as
defined, or $250,000, whichever is greater. At September 30, 1999, DLJdirect
Inc.'s net capital of $25.7 million was in excess of the minimum requirement by
$25.4 million.
5. Income Taxes
DLJdirect is part of a group that files consolidated Federal income tax returns.
DLJdirect settles all taxes, current and deferred, on a current basis with DLJ
Inc. under a tax sharing arrangement. Taxes are provided as if DLJdirect filed a
separate return.
6. Earnings Per Share
Earnings (loss) per share amounts have been calculated by dividing net income
(loss) by the weighted average notional and outstanding tracking shares. For
periods prior to the quarter ended September 30, 1999, these amounts are pro
forma as if the issuance of the DLJdirect Tracking Stock occurred at the
beginning of 1998. Earnings per share amounts for the quarter ended September
30, 1999 are calculated based on actual results. The notional shares represent
DLJ's 82.1% retained interest in DLJdirect. Prior to the offering, DLJ Inc. had
a 100% interest in the earnings of DLJdirect. These pro forma amounts are
presented for comparative purposes only.
Tracking Stock earnings per common share amounts have been calculated by
dividing earnings applicable to common shares by the weighted average actual
common shares outstanding. For the nine months ended September 30, 1999,
earnings per share amounts are calculated for the period the tracking stock was
outstanding, May 28, 1999 to September 30, 1999. Earnings per share for periods
prior to the closing date are not presented as such amounts are not meaningful.
For the quarter ended September 30, 1999 and for the period the Tracking Stock
was outstanding, exercisable stock options were excluded from the computation of
diluted earnings per share since the effect of including them was antidilutive.
31
<PAGE>
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Notes to Condensed Combined Financial Statements (Unaudited)
The numerators and denominators of the basic and diluted earnings per common
share computations include the following items:
<TABLE>
<CAPTION>
Tracking Stock Tracking Stock
Three Months Ended Nine Months Ended Three Months Ended May 28 -
September 30, September 30, September 30, September 30,
1999 1999 1999 1999
-------------------- -------------------- -------------------- ---------------------
(Loss) Shares Income Shares (Loss) Shares (Loss) Shares
------ ------ ------ ------ ------ ------ ------ ------
(In thousands) (In thousands) (In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS:
Earnings (loss) applicable to
common shares ............. $(3,330) 102,650 $8,918 102,650 $ (596) 18,400 $ (547) 18,400
======= ======= ====== ======= ====== ====== ====== ======
Effect of dilutive
securities:
Stock options.............. $ - - $ - 619 $ - - $ - -
------- ------- ------ ------- ------ ------ ------ ------
Diluted EPS.................. $(3,330) 102,650 $8,918 103,269 $ (596) 18,400 $ (547) 18,400
======= ======= ====== ======= ====== ====== ====== ======
</TABLE>
7. Legal Proceedings
DLJdirect has been named a defendant in actions relating to its businesses.
While the ultimate outcome of litigation involving DLJdirect cannot be predicted
with certainty, management, having reviewed these actions with its counsel,
believes it has meritorious defenses to all such actions and intends to defend
each of these vigorously. In the opinion of management of DLJdirect, the
ultimate resolution of all litigation, regulatory and investigative matters
affecting DLJdirect will not have a material adverse effect on the financial
condition or results of operations of DLJdirect.
32
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - DLJDIRECT
DLJdirect Common Stock tracks the separate performance of DLJ Inc.'s existing
online discount brokerage and related investment services business for periods
subsequent to the date of the offering ("Tracking Stock"). On May 28, 1999 ("the
closing date"), DLJ Inc. issued in an initial public offering, 18.4 million
shares of DLJdirect Common Stock. The shares of DLJdirect Common Stock have no
voting rights, except in certain limited circumstances. Net proceeds from the
offering, before certain costs of issuance, amounted to $343.2 million of which
$235.9 million was attributed to DLJdirect as allocated equity.
As a result of the offering, DLJ Inc. has a retained interest of 82.1% in
DLJdirect represented by 84.3 million notional shares. The 18.4 million shares
of DLJdirect Tracking Stock reflects the 17.9% owned by the public. Prior to the
offering DLJ Inc. had a 100% interest in the earnings of DLJdirect.
It is currently the intention of DLJ Inc. that any businesses, assets and
liabilities related to its online discount brokerage and related investment
service businesses will be attributed to DLJdirect. However, the Board of
Directors of DLJ Inc., in its sole discretion, may in the future decide to
pursue business opportunities or operational strategies, even in the online
brokerage area, through other affiliates of DLJ Inc. instead of DLJdirect.
The following analysis of the results of operations and financial condition of
DLJdirect should be read in conjunction with the Condensed Combined Financial
Statements and the related Notes thereto, and with the Condensed Consolidated
Financial Statements and related Notes of DLJ Inc. included elsewhere herein.
This analysis contains forward-looking statements that involve risks and
uncertainties. DLJdirect's actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors.
OVERVIEW
The online discount brokerage industry is experiencing substantial
competition from established financial services firms as well as new entrants
who are trying to establish their presence in the market quickly. As a result of
intense competitive pressures, the industry has experienced a significant
increase in brand development costs, a lowering of commission pricing and an
increase in content development costs. DLJdirect expects to spend significant
amounts in the future to develop much greater brand recognition within its
targeted market, to stay competitively priced and to develop new
state-of-the-art products and services. In particular, DLJdirect expects to
spend a significant amount on advertising. It is expected that advertising costs
will increase during the remaining quarter of 1999. While the longer-term goal
of advertising will be to increase brand awareness and revenues, it is likely
that advertising costs as a percentage of revenues will increase throughout
1999.
RESULTS OF OPERATIONS - DLJDIRECT
QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1998
DLJdirect experienced strong revenue growth for the quarter ended
September 30, 1999 compared to the quarter ended September 30, 1998, reflecting
primarily an increase in active accounts of 53.3% and customer trading volume of
70.6%. Total revenues increased $24.7 million or 81.8% to $54.9 million for the
quarter ended September 30, 1999 from $30.2 million for the quarter ended
September 30, 1998. Net income, however, decreased $4.1 million to a net loss of
$3.3 million for the quarter ended September 30, 1999, as growth in expenses,
particularly advertising and compensation and benefits, outpaced growth in
revenues.
Commissions increased $11.3 million or 58.2% to $30.7 million.
Commissions represented 55.9% of total revenues for the quarter ended September
30, 1999 and 64.2% of total revenues for the quarter ended September 30, 1998.
The increase in commissions was due primarily to increases in customer trading
volume. Average trades per day increased 71.4% from 11,200 for the quarter ended
September 30, 1998 to 19,200 for the quarter ended September 30, 1999.
Fees increased $6.1 million or 85.9% to $13.2 million. Fees represented
24.0% of total revenues for the quarter ended September 30, 1999 and 23.5% of
total revenues for the quarter ended September 30, 1998. Payments for routing
orders increased $600,000 or 26.1% to $2.9 million. The increase in payments for
routing orders was due primarily to significant increases in customer trading
volume, offset in part by a decline in the amount of revenue per trade that
DLJdirect receives for routing orders. Fees for technology development increased
$2.2 million or 56.4% to $6.1 million primarily due to increased demand for
Internet-based technology applications. Revenue from money market fund
distribution fees increased $866,000 or 118.0% to $1.6 million. This growth was
due to an increase in customer money market fund balances of $611.0 million or
98.6% to $1,231.0 million. The remaining fees for the quarter ended September
30, 1999 include payments in connection with public offerings, subscription fees
and account-related fees.
33
<PAGE>
Interest increased $7.3 million or 197.3% to $11.0 million. Interest
represented 20.0% of total revenues for the quarter ended September 30, 1999 and
12.3% of total revenues for the quarter ended September 30, 1998. The increase
was due primarily to more favorable interest sharing arrangements with Pershing
and to increases in margin debits, free credits and short sale balances. Margin
debits increased $496.0 million or 103.8% to $974.0 million. Free credits
increased $323.0 million or 107.3% to $624.0 million and short sale balances
increased $39.0 million or 193.1% to $59.2 million.
Compensation and benefits increased $9.5 million or 125.0% to $17.1
million. The increase in compensation and benefits was due primarily to growth
in the number of employees from 333 to 820. These additional employees were
added in DLJdirect's investor services area to accommodate increased customer
activity, in DLJdirect's technology group to develop new products, as well as in
executive management.
Brokerage, clearing, exchange and other fees increased $1.9 million or
27.1% to $8.9 million. The increase in brokerage, clearing, exchange and other
fees was primarily due to significant increases in customer trading volume,
offset in part by lower clearing fees per trade resulting from reduced clearing
rates.
Advertising increased $11.5 million or 174.2% to $18.1 million. The
increase in advertising was due primarily to the development and rollout of a
new advertising campaign. DLJdirect expects advertising to increase in the
remaining quarter of 1999.
Occupancy and equipment costs increased $1.2 million or 92.3% to $2.5
million. Occupancy and equipment expense includes rent and operating expenses
for facilities, expenditures for repairs and maintenance, and the operating
lease expense for furniture, fixtures, leasehold improvements as well as
business and computer equipment. The increase in occupancy cost was due to the
opening of the Charlotte, North Carolina investor services facility. The
increase in equipment costs was due primarily to additional investment in
technology systems infrastructure and equipment expenditures for the increased
staff.
Communications costs increased $1.4 million or 116.7% to $2.6 million.
Communications expense includes quotation expenses, expenses related to customer
toll-free phone calls and Internet connections. Quotation expenses and expenses
related to customer toll-free phone calls both increased due to the increased
volume of transactions.
Technology costs increased $31,000 or 4.0% to $813,000. Technology
costs are comprised primarily of network access fees paid to online service
providers and fees related to systems infrastructure. Network access fees paid
to online service providers have been reduced to a non-significant amount due to
renegotiated rates and due to their partial reclassification to advertising
expenses resulting from the modified structure of an agreement. Fees related to
systems infrastructure, for systems maintenance and support, remained
substantially unchanged.
Other operating expenses increased $4.1 million or 93.2% to $8.5
million. Operating expenses are comprised of professional fees, printing and
stationery, economic and investment research, allocated corporate overhead and
miscellaneous expenses. For the quarter ended September 30, 1998, other
operating expenses also included license fees of $1.2 million paid to DLJ Long
Term Investment Corporation for licensing trademarks and similar intellectual
property. Commencing January 1, 1999, the license fees are included in
brokerage, clearing, exchange and other fees because such license fees are
included in amounts paid by DLJdirect to Pershing under its clearing agreement.
Professional fees primarily include payments made to technology and marketing
consultants and recruiters, and for legal services. Professional fees increased
$2.6 million or 260.0% to $3.6 million primarily due to the development of
advertising strategies, increased use of technology consultants, the start-up of
operations in the UK and to the continuing expansion in Charlotte and North
Carolina. Miscellaneous expenses increased $1.4 million or 175.0% to $2.2
million. Miscellaneous expenses consisted primarily of accruals for bad debt
expense, travel and entertainment, information services, customer service
related expense, employee registration fees and expenses for new account credit
checks.
Income before income tax provision (benefit) and equity in net loss of
joint venture decreased $5.0 million from $1.3 million for the quarter ended
September 30, 1998 to a net loss of $3.7 million for the quarter ended September
30, 1999. The provision (benefit) for income taxes for the quarter ended
September 30, 1998 and for the quarter ended September 30, 1999 was $538,000,
representing a 40.9% effective tax rate, and ($1.5) million, representing a
40.5% effective tax rate, respectively.
DLJdirect has a 50% interest in a foreign-based joint venture with a
Japanese bank. For the quarter ended September 30, 1999, DLJdirect's equity in
the net loss of this joint venture was $1.1 million.
As a result of the foregoing factors, net loss for the quarter ended
September 30, 1999 was ($3.3) million, a decrease from net income of $776,000
for the quarter ended September 30, 1998.
34
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
DLJdirect experienced strong operating results for the nine months
ended September 30, 1999 compared to the nine months ended September 30, 1998,
reflecting primarily an increase in active accounts of 53.3% and customer
trading volume of 95.3%. Total revenues increased $79.3 million or 96.1% to
$161.8 million for the nine months ended September 30, 1999 from $82.5 million
for the nine months ended September 30, 1998. Net income increased $9.2 million
to $8.9 million from a net loss of $325,000
Commissions increased $44.1 million or 81.2% to $98.4 million.
Commissions represented 60.8% of total revenues for the nine months ended
September 30, 1999 and 65.8% of total revenues for the nine months ended
September 30, 1998. The increase in commissions was due primarily to significant
increases in customer trading volume. Average trades per day increased 95.2%
from 10,500 for the nine months ended September 30, 1998 to 20,500 for the nine
months ended September 30, 1999.
Fees increased $19.9 million or 108.2% to $38.3 million. Fees
represented 23.7% of total revenues for the nine months ended September 30, 1999
and 22.3% of total revenues for the nine months ended September 30, 1998.
Payments for routing orders increased $2.8 million or 41.2% to $9.6 million. The
increase in payments for routing orders was due primarily to significant
increases in customer trading volume, offset in part by a decline in the amount
of revenue per trade that DLJdirect receives for routing orders. Fees for
technology development increased $7.1 million or 75.5% to $16.5 million
primarily due to increased demand for Internet-based technology applications.
Revenue from money market fund distribution fees increased $2.2 million or
115.8% to $4.1 million. This growth was due to an increase in customer money
market fund balances of $611.0 million or 98.6% to $1,231.0 million.
Interest increased $15.2 million or 155.1% to $25.0 million. Interest
represented 15.5% of total revenues for the nine months ended September 30, 1999
and 11.9% of total revenues for the nine months ended September 30, 1998. The
increase was due primarily to more favorable interest sharing arrangements with
Pershing and to increases in margin debits, free credits and short sale
balances. Margin debits increased $496.0 million or 103.8% to $974.0 million.
Free credits increased $323.0 million or 107.3% to $624.0 million and short sale
balances increased $39.0 million or 193.1% to $59.2 million.
Compensation and benefits increased $21.2 million or 105.0% to $41.4
million. The increase in compensation and benefits was due primarily to growth
in the number of employees from 333 to 820. These additional employees were
added in DLJdirect's investor services area to accommodate increased customer
activity, in DLJdirect's technology group to develop new products including
MarketSpeed (Trademark), as well as in executive management.
Brokerage, clearing, exchange and other fees increased $7.2 million or
36.5% to $26.9 million. The increase in brokerage, clearing, exchange and other
fees was primarily due to significant increases in customer trading volume,
offset in part by lower clearing fees per trade resulting from reduced clearing
rates.
Advertising increased $17.6 million or 88.4% to $37.5 million. The
increase in advertising was due primarily to the development and rollout of a
new advertising campaign. DLJdirect expects advertising to increase in the
remaining quarter of 1999.
Occupancy and equipment costs increased $2.3 million or 62.2% to $6.0
million. Occupancy and equipment expense includes rent and operating expenses
for facilities, expenditures for repairs and maintenance, and the operating
lease expense for furniture, fixtures, leasehold improvements as well as
business and computer equipment. The increase in occupancy cost was due to the
opening of the Charlotte, North Carolina investor services facility as well as
to lease escalation clauses related to other sites. The increase in equipment
costs was due primarily to additional investment in technology systems
infrastructure and equipment expenditures for the increased staff.
Communications costs increased $4.2 million or 107.7% to $8.1 million.
Communications expense includes quotation expenses, expenses related to customer
toll-free phone calls and Internet connections. Quotation expenses and expenses
related to customer toll-free phone calls both increased due to the increased
volume of transactions.
Technology costs decreased $465,000 or 15.2% to $2.6 million.
Technology costs are comprised primarily of network access fees paid to online
service providers and fees related to systems infrastructure. Network access
fees paid to online service providers have been reduced to a non-significant
amount due to renegotiated rates and due to their partial reclassification to
advertising expenses resulting from the modified structure of an agreement.
35
<PAGE>
Other operating expenses increased $8.0 million or 64.0% to $20.5
million. Operating expenses are comprised of professional fees, printing and
stationery, economic and investment research, allocated corporate overhead and
miscellaneous expenses. For the nine months ended September 30, 1998, other
operating expenses also included license fees of $3.3 million paid to DLJ Long
Term Investment Corporation for licensing trademarks and similar intellectual
property. Commencing January 1, 1999, the license fees are included in
brokerage, clearing, exchange and other fees because such license fees are
included in amounts paid by DLJdirect to Pershing under its clearing agreement.
Professional fees primarily include payments made to technology and marketing
consultants and recruiters, and for legal services. Professional fees increased
$5.8 million or 223.1% to $8.4 million primarily due to the development of
advertising strategies, increased use of technology consultants, and the
start-up operations in the UK and Japan and to the expansion in Charlotte, North
Carolina. Miscellaneous expenses increased $3.4 million or 147.8% to $5.7
million. Miscellaneous expenses consisted primarily of accruals for bad debt
expense, travel and entertainment, information services, customer service
related expense, employee registration fees and expenses for new account credit
checks.
Income before income tax provision (benefit) and equity in net loss of
joint venture increased $19.3 million from a net loss of $548,000 for the nine
months ended September 30, 1998 to income of $18.8 million for the nine months
ended September 30, 1999. The provision (benefit) for income taxes for the nine
months ended September 30, 1998 and for the nine months ended September 30, 1999
was $7.8 million, representing a 41.5% effective tax rate, and $(223,000),
representing a 40.7% effective tax rate, respectively.
DLJdirect has a 50% interest in a foreign-based joint venture with a
Japanese bank. For the nine months ended September 30, 1999, DLJdirect's equity
in the net loss of this joint venture was $2.0 million.
As a result of the foregoing factors, net income increased to $8.9
million for the nine months ended September 30, 1999 from a net loss of $325,000
for the nine months ended September 30, 1998. For the period the Tracking Stock
was outstanding (May 28 to September 30, 1999), net loss applicable to the
shareholders of DLJdirect Common Stock was $547,000.
LIQUIDITY AND CAPITAL RESOURCES - DLJDIRECT
The principal sources of liquidity for DLJdirect's operations have been
allocated capital, leases of fixed assets through an affiliate and revenues from
operations. DLJdirect was allocated net proceeds of $233.9 million, before
certain costs of issuance, as a result of the initial public offering by DLJ
Inc. of 18.4 million shares of DLJdirect common stock on May 28, 1999. Capital
contributions amounted to $11.5 million in the nine months ended September 30,
1998 and $1.0 million for the nine months ended September 30, 1999. The value of
equipment acquired through leases of fixed assets through an affiliate totaled
$4.1 million for the nine months ended September 30, 1998 and $15.4 million for
the nine months ended September 30, 1999. These fixed assets were comprised
primarily of computers and related systems, furniture and leasehold
improvements. DLJdirect generally leases its fixed assets and therefore does not
incur significant capital expenditures.
Although DLJdirect maintains substantial money market accounts and bank
accounts consistent with regulatory requirements, DLJdirect continues to be
substantially dependent on DLJ Inc. for almost all of its daily financial,
administrative and operational services and related support functions including
cash management, the receipt of payments from third parties and the distribution
of payments to third parties. DLJdirect continues to invest its excess cash. At
September 30, 1999, DLJdirect had approximately $247.7 million invested in money
market accounts and other short-term investments. DLJ Inc. intends to fund
DLJdirect's liquidity needs in the ordinary course of business. However,
significant expenditures will be funded on a case by case basis as determined by
the board of directors of DLJ Inc. The board of directors of DLJ Inc. will
determine, in its sole discretion, whether to provide any particular funds to
either DLJ Inc. or DLJdirect and will not be obligated to do so. In this
connection, inter-company receivables/payables are settled periodically through
cash transfers to and from DLJdirect's accounts. There are no specific criteria
to determine when DLJ Inc. will account for a cash transfer as a long-term loan,
a capital contribution or a return of capital rather than an inter-group
revolving credit advance. The board of directors of DLJ Inc. will make such a
determination in the exercise of its business judgment at the time of such
transfer, or the first of such type of transfer, based upon all relevant
circumstances.
Applicable law and regulations require minimum levels of capital to be
maintained by DLJdirect Inc., the broker-dealer subsidiary of DLJdirect Holdings
Inc. Consequently, the cash balances of DLJdirect Inc. may not be available as a
source of liquidity to support other aspects of the business of DLJdirect. The
SEC's Net Capital Rules are the primary regulatory restrictions. DLJdirect
continually reviews the capital in its broker-dealer subsidiary to ensure that
it meets these regulatory requirements and can appropriately support the
anticipated capital needs of the business. DLJdirect's right to participate in
the assets of any subsidiary is also subject to prior claims of the subsidiary's
customers and other creditors.
36
<PAGE>
Cash provided by (used in) operating activities totaled $(343,000) and
$31.7 million for the nine months ended September 30, 1998 and 1999,
respectively. The increase from 1998 to 1999 was primarily due to an increase in
transaction volume related to growth in the discount brokerage operations. In
the first nine months of 1998, receivables from brokers, dealers and others
increased $443,000. This increase in assets was offset by increases in operating
liabilities including accounts payable and accrued expenses of $2.1 million. In
the first nine months of 1999, there were increased assets including receivables
from brokers, dealers and others of $1.5 million. These increases were offset by
increases in payable to parent of $3.1 million and accounts payable and accrued
expenses of $20.0 million.
Cash provided by (used in) investing activities totaled $1.2 million
and $(76.8) million for the nine months ended September 30, 1998 and 1999,
respectively. Net proceeds from the sale of office facilities amounted to $1.2
million for the nine months ended September 30, 1998. For the nine months ended
September 30, 1999, DLJdirect invested $64.3 million in short-term investments
and $12.4 million in exchange for a 50% interest in a joint venture with a
Japanese bank.
For the nine months ended September 30, 1998 and 1999, net cash
provided by financing activities totaled $11.5 million and $201.8 million,
respectively. In the first nine months of 1998 and 1999, respectively, $11.5
million and $1.0 million was provided by capital contributions from DLJ Inc.
DLJdirect received net proceeds of $233.9 million from DLJ Inc.'s
issuance of DLJdirect tracking stock. Prior to the offering, DLJdirect paid
$33.1 million as a dividend to an affiliate. The net proceeds, together with its
current cash, cash equivalents and cash generated from operations will be
sufficient to meet its anticipated cash needs for working capital and capital
expenditures through at least the end of 2000.
YEAR 2000 - DLJdirect
DLJdirect has been actively engaged in addressing Year 2000 issues.
Such issues relate to potential problems resulting from non-Year 2000 compliant
systems processing transactions using two-digit date fields rather than four
digit date fields for the year of a transaction. If these systems are not
identified and reconfigured, Year 2000 transactions would be processed as year
"00," which could lead to processing inaccuracies and potential inoperability
and could have a material adverse effect on DLJdirect's business.
DLJdirect has undertaken a Year 2000 Project to identify and modify or
replace any non-Year 2000-compliant systems. The Year 2000 Project is focused on
both information technology and non-information technology systems. A written
Year 2000 Plan has been developed and DLJdirect believes it is taking all steps
necessary to achieve Year 2000 compliance.
DLJdirect has retained the services of three independent consulting
firms having considerable expertise in advising corporations on and remediating
Year 2000 issues. The consultants were hired to address issues involving both
information and non-information technology systems.
The current state of DLJdirect's Year 2000 Project is as follows:
In the case of information technology, DLJdirect's internal computer
codes have been identified, assessed and remediated. The converted codes have
been running successfully in the current systems environment. The codes are
further tested monthly to insure continuing Year 2000 compliance; this testing
will be maintained until a date after December 31, 1999. An independent
consultant, PKS Systems Integration LLC, was contracted by DLJ Inc.'s Pershing
Division to perform further application code assessment and code conversion. PKS
reviewed all code and produced analysis reports for DLJdirect to review.
DLJdirect then approved the code for conversion, and DLJdirect and PKS converted
the code, which is being used in production as described above.
DLJdirect defines "significant third parties" as those parties that, if
lost or degraded by Year 2000-related failure, would cause an immediate stoppage
or significant impairment to business areas of DLJdirect. DLJdirect has
identified all significant third parties, such as vendors, online partners and
facility operators, and has formally communicated with significant third parties
asking them to report their state of readiness for Year 2000 use. All
significant third parties have responded. As of September 30, 1999,
approximately 93% of the significant third parties have stated their products
and/or services are currently Year 2000 compliant. The remaining 7% are internet
service providers, telephone and electric utilities who state they can not
certify Year 2000 compliance because of their dependency on third party vendors.
They have stated that they have done significant work to assure their systems
are Year 2000 ready but that they could not guarantee that their systems would
be up and running on January 1, 2000. Where available, DLJdirect has in place a
Year 2000 compliant back-up provider for products or services it deems still in
question. Pershing has informed DLJdirect that it is Year 2000 compliant as of
August 31, 1999.
37
<PAGE>
DLJdirect reviews all significant third party responses and technical
data about their Year 2000 efforts published on their Web sites to determine its
comfort with such parties progress in addressing their Year 2000 issues.
DLJdirect also participates whenever possible in point-to-point tests (i.e.,
tests in which data is sent from DLJdirect to the third party and/or is sent
from the third party to DLJdirect) to ensure the compatibility of significant
third party systems with those of DLJdirect. DLJdirect has obtained alternate
vendors for back-up service in cases where point-to-point testing is unavailable
or produces unacceptable results.
DLJdirect has in general not sought representations or warranties from
third parties about their products or services' abilities to handle the Year
2000 issue without error. It has sought direct statements about a product's or
service's readiness and has accepted in-progress status reports. Some third
parties have stated, with conditions, that their services and/or products are
Year 2000 compliant. DLJdirect believes that these statements are likely to be
actionable if a failure of the product or service occurs within the limits of
the conditions stated. However, DLJdirect's main focus has been on participating
in testing programs, including testing with significant third parties, as a
means to addressing Year 2000 issues. DLJdirect's conclusion, based upon its
review of significant third party response to date, is that DLJdirect must
continue to test significant third-party products and services up to and beyond
December 31, 1999 and alternate services and products available, if necessary.
In the case of non-information technology systems, analysis and testing
has started but has not yet been completed; the tests will be followed by the
remediation, replacement, or back-up of all non-information technology systems
in order to render DLJdirect's non-information technology systems Year 2000
compliant. An independent consultant was hired to perform non-compute
assessment, inventory, and certification of DLJdirect's non-information
technology systems.
DLJdirect has initiated and is actively involved in various types of
testing, including the Securities Industry Association's industry-wide beta
testing and vendor-supplied business applications and equipment testing. For
each of the tests in which it has participated, DLJdirect has achieved
successful results. Throughout 1999, internal and external systems will continue
to be tested to ensure that all remediated systems remain compliant. To date,
DLJdirect has spent less than $1 million on the Year 2000-related remediation of
its systems.
The Year 2000 issue includes many risks including the possibility that
DLJdirect's computer and non-information technology systems will fail. DLJdirect
cannot ensure that the schedule for compliance outlined above will be met or
that the systems of other companies on which DLJdirect depends will be converted
in a timely manner. Due to this uncertainty, DLJdirect is unable to determine
whether the Year 2000 will have a material impact on DLJdirect's business,
results of operations or financial condition.
DLJdirect's reasonable worst case Year 2000 scenario would involve the
loss of most of DLJdirect's significant critical functions, their back-ups and
alternate service and product choices coupled with loss of access to most
physical locations. This scenario would include, but not be limited to,
substantial loss of utilities in all three of DLJdirect's physical facilities,
its clearing services, the exchanges and Depository Trust Company, and the
failure of most of DLJdirect's telephone, data, and Internet connections.
DLJdirect, however, continues to regard this scenario as being highly unlikely.
DLJdirect is requiring key employees to be on site before, during and after
December 31, 1999. DLJdirect has a written contingency plan that addresses a
significant portion of the above referenced scenario.
DLJdirect has retained an independent consultant to update DLJdirect's
Year 2000 Contingency plan. DLJdirect is taking steps to implement their
recommendations by December 31, 1999. The contingency plan addresses procedures
to be implemented in the event of problems concerning the following:
o Mission-critical systems
o Electronic interfaces; and
o Third parties
This plan includes written Year 2000-specific contingency plans that
will address corporate-wide shared services (i.e., communications systems and
physical facilities), as well as their mission critical business units. Year
2000 command centers are being established and will be staffed with incident
management teams that will coordinate communications at year-end. In addition,
year-end cross-over weekend plans are being implemented.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - DLJdirect
DLJdirect's primary financial instruments are cash and cash
equivalents. This includes cash in banks and highly rated liquid money market
investments. DLJdirect believes that such instruments are not subject to
material potential near-term losses in future earnings from reasonably possible
near-term changes in market rates or prices.
38
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - DLJdirect
DLJdirect has been named a defendant in actions relating to its businesses.
While the ultimate outcome of litigation involving DLJdirect cannot be predicted
with certainty, management, having reviewed these actions with its counsel,
believes it has meritorious defenses to all such actions and intends to defend
each of these vigorously. In the opinion of management of DLJdirect, the
ultimate resolution of all litigation, regulatory and investigative matters
affecting DLJdirect will not have a material adverse effect on the financial
condition or results of operations of DLJdirect.
39
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3.1 Amended and Restated Certificate of Incorporation.
3.2 By-Laws.
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 charge and preferred dividends
27 Financial Data Schedule
(b) Reports on Form 8-K
1. Form 8-K dated October 14, 1999
40
<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 15, 1999 /s/ Anthony F. Daddino
-----------------------------------------
Anthony F. Daddino
Executive Vice President and Chief
Financial Officer
(On behalf of the Registrant and as
Principal Financial Officer)
41
<PAGE>
EXHIBIT INDEX
3.1 Amended and Restated Certificate of Incorporation (Incorporated herein
by reference to Exhibit 3.1 to the Company's Registration Statement on
Form S-3/A File No. 333-74549) filed on May 6, 1999
3.2 By-Laws (Incorporated herein by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-3 File No. 333-53499) filed
on May 22, 1998
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
42
<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,
1999 1998 1999 1998
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
DLJ Common Stock
Weighted Average Common Shares:
Average Common Shares Outstanding 125,835 121,411 125,053 117,879
Average Restricted Stock Units Outstanding 158 158 158 146
--------- -------- --------- ---------
Weighted Average Common Shares Outstanding 125,993 121,569 125,211 118,025
========= ======== ========= =========
Earnings:
Net Income $ 122,200 $ 25,700 $ 409,500 $ 302,150
Less: Preferred Stock Dividend Requirement 5,289 5,289 15,867 16,021
Earnings Applicable to Common
Shares-DLJdirect (596) - (547) -
--------- -------- --------- ---------
Earnings Applicable to Common Shares $ 117,507 $ 20,411 $ 394,180 $ 286,129
========= ======== ========= =========
Basic Earnings Per Common Share $ 0.93 $ 0.17 $ 3.15 $ 2.42
========= ======== ========= =========
DLJdirect Common Stock
Weighted Average Common Shares:
Average Common Shares Outstanding 18,400 18,400
========= =========
Earnings:
Net Income $ (596) $ (547)
========= =========
Earnings Applicable to Common Shares $ (596) $ (547)
========= =========
Basic Earnings Per Common Share $ (0.03) $ (0.03)
========= =========
</TABLE>
43
<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,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
DLJ Common Stock
Weighted Average Common Shares:
Average Common Shares Outstanding 125,835 121,417 125,053 117,880
Average Restricted Stock Units Outstanding 1,102 2,087 1,220 2,635
Average Common Shares Issuable Under
Employee Benefit Plans 11,248 10,974 12,739 10,871
--------- --------- --------- ---------
Weighted Average Common Shares Outstanding 138,185 134,478 139,012 131,386
========= ========= ========= =========
Earnings:
Net Income $ 122,200 $ 25,700 $ 409,500 $ 302,150
Less: Preferred Stock Dividend Requirement 5,289 5,289 15,867 16,021
Earnings Applicable to Common
Shares-DLJdirect (596) -- (547) --
--------- --------- --------- ---------
Earnings Applicable to Common Shares $ 117,507 $ 20,411 $ 394,180 $ 286,129
========= ========= ========= =========
Diluted Earnings Per Common Share $ 0.85 $ 0.15 $ 2.84 $ 2.18
========= ========= ========= =========
DLJdirect Common Stock
Weighted Average Common Shares:
Average Common Shares Outstanding 18,400 18,400
Average Common Shares Issuable Under
Employee Benefit Plans 0 0
--------- ---------
Weighted Average Common Shares Outstanding 18,400 18,400
========= =========
Earnings:
Net Income $ (596) $ (547)
========= =========
Earnings Applicable to Common Shares $ (596) $ (547)
========= =========
Diluted Earnings Per Common Share $ (0.03) $ (0.03)
========= =========
</TABLE>
44
<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 Nine
For the Years Ended Months Ended
------------------------------------------------------- ---------- ---------------
1994 1995 1996 1997 1998 Sep-99
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Income before provision for
income taxes $ 205,000 $ 298,500 $ 473,800 $ 661,100 $ 600,500 $ 650,000
Add: Fixed Charges
Interest expense (gross) 2,116,655 2,699,769 2,865,800 4,012,209 4,501,242 3,397,296
Interest factor in rents 18,565 22,064 25,515 29,351 38,517 37,383
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges 2,135,220 2,721,833 2,891,315 4,041,560 4,539,759 3,434,679
Earnings before fixed charges,
and provision for income taxes $2,340,220 $3,020,333 $3,365,115 $4,702,660 $5,140,259 $4,084,679
========== ========== ========== ========== ========== ==========
Ratio of earnings to fixed charges 1.10 1.11 1.16 1.16 1.13 1.19
========== ========== ========== ========== ========== ==========
</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 Nine
For the Years Ended Months Ended
1994 1995 1996 1997 1998 9/99
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Income before provision for
income taxes $ 205,000 $ 298,500 $ 473,800 $ 661,100 $ 600,500 $ 650,000
Add: Fixed Charges
Interest(gross) 2,116,655 2,699,769 2,865,800 4,012,209 4,501,242 3,397,296
Interest factor in rents 18,565 22,064 25,515 29,351 38,517 37,383
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges 2,135,220 2,721,833 2,891,315 4,041,560 4,539,759 3,434,679
Add: Preferred dividends 20,970 19,868 18,653 12,144 21,310 15,867
Combined fixed charges and preferred
dividends 2,156,190 2,741,701 2,909,968 4,053,704 4,561,069 3,450,546
Earnings before fixed charges
and provision for income taxes $2,340,220 $3,020,333 $3,365,115 $4,702,660 $5,140,259 $4,084,679
========== ========== ========== ========== ========== ==========
Ratio of earnings to fixed charges
and preferred dividends 1.09 1.10 1.16 1.16 1.13 1.18
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<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.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,517,286
<SECURITIES> 16,555,728
<RECEIVABLES> 24,734,981
<ALLOWANCES> 30,822,657
<INVENTORY> 20,879,211
<CURRENT-ASSETS> 539,957
<PP&E> 98,115,442
<DEPRECIATION> 541,621
<TOTAL-ASSETS> 14,722,151
<CURRENT-LIABILITIES> 51,390,052
<BONDS> 9,147,338
9,923,926
4,660,831
<COMMON> 200,000
<OTHER-SE> 375,000
<TOTAL-LIABILITY-AND-EQUITY> 12,587
<SALES> 3,339,845
<TOTAL-REVENUES> 98,115,442
<CGS> 520,234
<TOTAL-COSTS> 439,901
<OTHER-EXPENSES> 838,610
<LOSS-PROVISION> 1,256,476
<INTEREST-EXPENSE> 72,151
<INCOME-PRETAX> 1,112,301
<INCOME-TAX> 2,197,276
<INCOME-CONTINUING> 650,000
<DISCONTINUED> 650,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 409,500
<EPS-BASIC> 3.15
<EPS-DILUTED> 2.84
</TABLE>
