<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 June 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 than the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ( X ) No ( ).
As of August 4, 1999, the latest practicable date, there were 125,749,657 shares
of DLJ Common Stock, $0.10 par value, and 18,400,000 shares of DLJdirect Common
Stock, $0.10 par value, outstanding.
1
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
TABLE OF CONTENTS
Part I FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
Number
------
Item 1. Financial Statements
<S> <C>
Donaldson, Lufkin & Jenrette Inc. Consolidated Financial Statements
Condensed Consolidated Statements of Financial Condition
at June 30, 1999 and December 31, 1998 (Unaudited).......................... 4
Condensed Consolidated Statements of Income for the three
and six months ended June 30, 1999 and 1998 (Unaudited) .................... 6
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the year ended December 31, 1998 and the six
months ended June 30, 1999 (Unaudited)...................................... 7
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 and 1998 (Unaudited)......................... 8
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................................. 10
DLJdirect Combined Financial Statements
Combined Statements of Financial Condition at June 30, 1999
and December 31, 1998 (Unaudited)........................................... 26
Combined Statements of Operations for the three and six months
ended June 30, 1999 and 1998 (Unaudited) ................................... 27
Combined Statements of Changes in Allocated Equity for the
year ended December 31, 1998 and the six months ended June
30, 1999 (Unaudited)........................................................ 28
Combined Statements of Cash Flows for the six months ended
June 30, 1999 and 1998 (Unaudited).......................................... 29
Notes to Combined Financial Statements (Unaudited).......................... 30
</TABLE>
2
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 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
Item 6. Exhibits and Reports on Form 8-K........................................... 39
Signature.................................................................. 40
</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>
June 30, December 31,
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents.................................................... $ 1,312,800 $ 1,049,253
Cash and securities segregated for regulatory purposes or
deposited with clearing organizations..................................... 225,398 1,043,225
Collateralized short-term agreements:
Securities purchased under agreements to resell........................... 21,604,691 20,063,348
Securities borrowed....................................................... 30,292,713 23,967,639
Receivables:
Customers................................................................. 7,987,359 6,523,568
Brokers, dealers and other................................................ 4,427,953 3,773,251
Financial instruments owned, at value:
U.S. government and agency................................................ 7,687,620 5,973,394
Corporate debt............................................................ 6,395,844 4,441,492
Foreign sovereign debt.................................................... 584,804 423,736
Mortgage whole loans...................................................... 1,222,995 722,284
Equity and other.......................................................... 2,151,011 1,634,201
Long-term corporate development investments............................... 567,215 473,756
Office facilities, at cost, (net of accumulated depreciation and
amortization of $305,386 and $297,959, respectively)...................... 493,490 450,706
Other assets and deferred amounts............................................ 1,972,113 1,742,383
-------------- --------------
Total Assets................................................................. $ 86,926,006 $ 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>
June 30, December 31,
1999 1998
-------- --------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper and short-term borrowings...................................... $ 1,135,500 $ 515,646
Collateralized short-term financings:
Securities sold under agreements to repurchase.............................. 37,927,782 35,775,580
Securities loaned........................................................... 10,688,662 7,322,186
Payables:
Customers................................................................... 7,217,634 6,847,046
Brokers, dealers and other.................................................. 6,592,621 3,053,337
Financial instruments sold not yet purchased, at value:
U.S. government and agencies................................................ 7,762,507 5,935,629
Corporate debt.............................................................. 630,638 523,909
Equities and other.......................................................... 3,474,877 2,479,411
Accounts payable and accrued expenses........................................... 2,132,331 2,282,413
Other liabilities............................................................... 1,128,400 937,377
-------------- --------------
78,690,952 65,672,534
------------- ------------
Long-term borrowings............................................................ 4,423,749 3,482,003
-------------- ------------
Total liabilities...................................................... 83,114,701 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;
125,719,457 and 122,812,558 shares issued
and outstanding, respectively)........................................... 12,572 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; 1,100,596
and 2,082,236 units issued and outstanding, respectively)................ 11,271 21,333
Paid-in capital............................................................. 1,291,742 858,066
Retained earnings........................................................... 1,918,837 1,657,710
Accumulated other comprehensive income...................................... 43 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............................................. 3,611,305 2,927,699
-------------- -------------
Total Liabilities and Stockholders' Equity...................................... $ 86,926,006 $ 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 June 30, Six Months Ended June 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Commissions............................................... $ 291,112 $ 201,942 $ 572,104 $ 400,466
Underwritings............................................. 409,454 343,146 666,368 649,304
Fees...................................................... 332,673 318,436 619,748 573,807
Interest, net of interest to finance U.S. government,
agency and mortgage-backed securities of
$789,611, $782,747, $1,494,862, and
$1,548,818, respectively................................ 499,902 590,264 976,563 1,155,053
Principal transactions-net:
Trading................................................. 218,418 39,949 392,463 158,893
Investment.............................................. 25,155 47,195 28,179 88,493
Other..................................................... 33,802 15,813 48,541 24,150
----------- ---------- ----------- ----------
Total revenues......................................... 1,810,516 1,556,745 3,303,966 3,050,166
----------- ---------- ----------- ----------
Costs and Expenses:
Compensation and benefits................................. 800,009 672,966 1,435,723 1,317,050
Interest.................................................. 380,651 378,241 736,604 752,107
Brokerage, clearing, exchange fees and other.............. 76,326 72,916 147,547 129,237
Occupancy and equipment................................... 77,343 64,614 150,666 124,048
Communications............................................ 27,216 21,658 53,656 41,159
Other operating expenses.................................. 189,971 115,850 323,770 238,815
----------- ---------- ----------- ----------
Total costs and expenses............................... 1,551,516 1,326,245 2,847,966 2,602,416
----------- ---------- ----------- ----------
Income before provision for income taxes...................... 259,000 230,500 456,000 447,750
----------- ---------- ----------- ----------
Provision for income taxes.................................... 93,350 88,200 168,700 171,300
----------- ---------- ----------- ----------
Net income.................................................... $ 165,650 $ 142,300 $ 287,300 $ 276,450
=========== ========== =========== ==========
Dividends on preferred stock.................................. $ 5,289 $ 5,289 $ 10,578 $ 10,732
=========== ========== =========== ==========
Earnings applicable to common shares.......................... $ 160,361 $ 137,011 $ 276,722 $ 265,718
=========== ========== =========== ==========
Earnings applicable to common shares:
DLJ....................................................... $ 160,312 $ 137,011 $ 276,673 $ 265,718
=========== ========== =========== ==========
DLJdirect................................................. $ 49 $ 49
=========== ===========
Earnings per share:
DLJ
Basic.................................................. $ 1.28 $ 1.17 $ 2.22 $ 2.29
Diluted................................................ $ 1.14 $ 1.05 $ 1.99 $ 2.05
=========== ========== =========== ==========
DLJdirect
Basic.................................................. $ 0.00 $ 0.00
Diluted................................................ $ 0.00 $ 0.00
=========== ==========
Weighted average common shares:
DLJ
Basic.................................................. 125,567 117,394 124,783 116,244
Diluted................................................ 140,400 130,661 139,313 129,795
=========== ========== =========== ==========
DLJdirect
Basic.................................................. 18,400 18,400
Diluted................................................ 20,423 20,423
=========== ===========
</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 Six Months Ended June 30, 1999
(In thousands, except per share data)
<TABLE>
<CAPTION>
DLJ DLJdirect Restricted
Preferred Common Common Stock Paid-in
Stock Stock Stock Units Capital
------- -------- -------- ----------- -------
<S> <C> <C> <C> <C> <C>
Balances at
December 31, 1997 ........ $ 200,000 $ 11,185 $ -- $ 67,255 $ 440,926
Net income ................. -- -- -- -- --
Translation adjustment ..... -- -- -- --
Total comprehensive
income .................. --
Dividends:
Common stock
($0.25 per share) ...... -- -- -- -- --
Preferred stock .......... -- -- -- -- --
Issuance of Series B
Preferred Stock ......... 175,000 -- -- -- --
Sale of common stock
to Equitable/AXA ........ -- 500 -- -- 299,500
Exercise of stock
options, including
related tax benefits .... -- 148 -- -- 37,840
Conversion of
restricted stock
units to common
stock, including
related tax benefits .... -- 448 -- (45,890) 70,870
Forfeiture of restricted
stock units ............ -- -- -- (32) 32
Tax benefit on distri-
bution of employee
stock trust ............. -- -- -- -- 8,898
--------- -------- -------- -------- ---------
Balances at
December 31, 1998 ........ 375,000 12,281 -- 21,333 858,066
Net income ................. -- -- -- -- --
Translation adjustment ..... -- -- -- -- --
Total comprehensive
income ..................
Net proceeds from issuance
of DLJdirect Common Stock
-- -- 1,840 -- 344,772
Dividends:
DLJ Common Stock
($0.125 per share) ...... -- -- -- -- --
Preferred stock .......... -- -- -- -- --
Exercise of stock
options, including
related tax benefits .... -- 190 -- -- 63,626
Conversion of restricted
stock units to
common stock,
including related
tax benefits ............ -- 101 -- (10,056) 25,272
Forfeiture of
restricted stock units ..... -- -- -- (6) 6
--------- -------- -------- -------- ---------
Balances at
June 30, 1999 ........... $ 375,000 $ 12,572 $ 1,840 $ 11,271 $ 1,291,742
=========== =========== =========== =========== ===========
<CAPTION>
Accumulated
Other
Retained Comprehensive
Earnings Income Total
-------- ------ -------
<S> <C> <C> <C>
Balances at
December 31, 1997 ........ $ 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
Sale of common stock
to Equitable/AXA ........ -- -- 300,000
Exercise of stock
options, including
related tax benefits .... -- -- 37,988
Conversion of
restricted stock
units to common
stock, including
related tax benefits .... -- -- 25,428
Forfeiture of restricted
stock units ............ -- -- --
Tax benefit on distri-
bution of employee
stock trust ............. -- -- 8,898
---------- -------- ----------
Balances at
December 31, 1998 ........ 1,657,710 3,309 2,927,699
Net income ................. 287,300 -- 287,300
Translation adjustment ..... -- (3,266) (3,266)
Total comprehensive
income .................. 284,034
Net proceeds from issuance
of DLJdirect Common Stock
-- -- 346,612
Dividends:
DLJ Common Stock
($0.125 per share) ...... (15,595) -- (15,595)
Preferred stock .......... (10,578) -- (10,578)
Exercise of stock
options, including
related tax benefits .... -- -- 63,816
Conversion of restricted
stock units to
common stock,
including related
tax benefits ............
-- -- 15,317
Forfeiture of
restricted stock units ..... -- -- --
----------- --------- -----------
Balances at
June 30, 1999 ........... $ 1,918,837 $ 43 $ 3,611,305
=========== ========= ===========
</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 Six Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income....................................................................... $ 287,300 $ 276,450
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization.................................................. 41,099 42,478
Deferred taxes................................................................. (43,453) (7,003)
Increase in unrealized appreciation of long-term corporate
development investments...................................................... (29,649) (2,042)
------------- ------------
255,297 309,883
(Increase) decrease in operating assets:
Cash and securities segregated for regulatory
purposes or deposited with clearing organizations........................... 817,827 483,309
Securities purchased under agreements to resell............................... (2,818,870) (4,135,727)
Securities borrowed........................................................... (6,325,074) (3,621,559)
Receivables from customers.................................................... (1,463,791) (2,343,150)
Receivables from brokers, dealers and other................................... (654,702) (1,408,691)
Financial instruments owned, at value......................................... (4,847,167) (2,277,625)
Other assets.................................................................. (70,524) (221,259)
Increase (decrease) in operating liabilities:
Securities sold under agreements to repurchase................................ 2,818,870 4,135,727
Securities loaned............................................................. 3,366,476 843,377
Payables to customers......................................................... 370,588 723,818
Payables to brokers, dealers and other........................................ 3,539,284 1,685,062
Financial instruments sold not yet purchased, at value........................ 2,929,073 2,472,750
Accounts payable and accrued expenses......................................... (149,353) 99,177
Other liabilities and deferred amounts ....................................... 239,783 450,818
Translation adjustment.................................................... (3,266) (412)
------------- ------------
Net cash used in operating activities.............................................. $ (1,995,549) $ (2,804,502)
------------ ------------
</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 Six Months Ended June 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.................... $ (107,764) $ (308,286)
Sales of long-term corporate development investments........................ 43,954 171,837
Office facilities........................................................... (87,056) (76,522)
Other assets................................................................ (112,580) (262,901)
--------------- -------------
Net cash used in investing activities........................................... (263,446) (475,872)
--------------- -------------
Cash flows from financing activities:
Net proceeds from (payments for):
Short-term financings....................................................... 1,230,713 2,867,491
Issuance of DLJdirect stock................................................. 346,612 -
Senior notes................................................................ 648,738 643,076
Senior secured floating rate notes.......................................... (111,179) -
Subordinated revolving credit agreement..................................... - (325,000)
Medium-term notes........................................................... 404,508 124,562
Other long-term debt........................................................ (321) (8,248)
Dividends................................................................... (26,173) (25,375)
Issuance of Series B preferred stock........................................ - 175,000
Exercise of stock options................................................... 29,644 15,057
--------------- -------------
Net cash provided by financing activities....................................... 2,522,542 3,466,563
--------------- -------------
Increase in cash and cash equivalents........................................... 263,547 186,189
Cash and cash equivalents at beginning of period................................ 1,049,253 273,164
--------------- -------------
Cash and cash equivalents at end of period...................................... $ 1,312,800 $ 459,353
=============== =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
9
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 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 the Equitable Companies Incorporated
and its subsidiaries (together, "Equitable"). The Company's separate financial
statements reflect Equitable's cost basis, established in 1985 when Equitable
acquired the Company.
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. Certain reclassifications have been
made to prior year financial statements to conform to the 1999 presentation.
2. Issuance of DLJdirect Tracking Stock
In March 1999, the Company and the majority shareholder of the Company approved
the authorization of the issuance by DLJ Inc. of a new series of common stock,
DLJdirect Common Stock. The DLJdirect Common Stock is intended to track 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 and reflects 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 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. 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.
Although the Company intends DLJdirect common stock to reflect the performance
of DLJdirect, holders of DLJdirect Common Stock will be common stockholders of
Donaldson, Lufkin & Jenrette, Inc. For this reason, holders of DLJdirect common
stock will be subject to all of the risks associated with an investment in
Donaldson, Lufkin & Jenrette, 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 will be 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 Donaldson, Lufkin & Jenrette, Inc. The Company
has the right, at any time, to exchange stock of a subsidiary of Donaldson,
Lufkin & Jenrette, 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. Quarterly results reported by DLJ prior to the closing date were not
affected by the issuance of the tracking stock. DLJ's retained interest in the
earnings of DLJdirect for the quarter equals 100% for the period April-May 27,
1999 and 82.1% thereafter through June 30, 1999.
3. Income Taxes
Income taxes for interim period condensed consolidated financial statements have
been accrued using the
10
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
Company's estimated effective tax rate. Federal income taxes paid for the six
months ended June 30, 1999 and 1998 were $106.5 million and $14.7 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 June 30, 1999, there were $194.0 million Notes outstanding under this
program.
<TABLE>
<CAPTION>
Long-term borrowings: June 30, December 31,
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Senior notes, 5.875%-6.875% due various dates through 2008............................ $ 2,039,774 $ 1,391,036
Medium-term notes, 5.10% - 6.90% due various dates through 2016....................... 1,451,155 1,046,647
Senior secured floating rate notes due 2005........................................... 338,821 450,000
Global floating rate notes, due in 2002............................................... 348,581 348,357
Subordinated exchange notes 9.58% due 2003........................................... 225,000 225,000
Other borrowings...................................................................... 20,418 20,963
------------- -----------
Total long-term borrowings....................................................... $ 4,423,749 $ 3,482,003
=========== ===========
Current maturities.................................................................... $ 390,584 $ 100,973
============ ============
</TABLE>
In March 1999, the Company established a $2.0 billion shelf of debt securities
or preferred stock. During the quarter ended March 31, 1999, the Company issued
$650.0 million 5 7/8% senior notes due 2002 from this shelf. During the quarter
ended June 30, 1999, the Company issued $290.0 million of medium-term notes that
mature at various dates through 2004 from this $2.0 billion shelf.
In the second quarter of 1999, the Company purchased $111.2 million of its
Senior secured floating rate notes.
For the six months ended June 30, 1999 and 1998, interest paid on all borrowings
and financing arrangements amounted to $2.2 billion and $2.3 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 $536.1 million and $472.3 million at June 30, 1999
and December 31, 1998, respectively. For the six months ended June 30, 1999 and
1998, the increase in net unrealized appreciation amounted to $29.6 million and
$2.0 million, respectively. Changes in unrealized appreciation (depreciation)
arising from changes in fair value or upon realization are reflected in
revenues, principal transactions-net, investment 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 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
11
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 June 30, 1999, DLJSC's net capital of approximately
$1.3 billion was 16.41 percent of aggregate debit balances and in excess of the
minimum requirement by approximately $1.1 billion.
Certain of the Company's London-based broker-dealer subsidiaries are subject to
the requirements of the Securities and Futures Authority, a self-regulatory
organization established 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
June 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 amounts 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 June 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. Net income for DLJdirect for
such period was $271 thousand of which 82.1% or $222 thousand is applicable to
the retained interest of DLJ and 17.9% or $49 thousand is applicable to common
shareholders of DLJdirect. 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. For the quarter and six months ended June 30, 1999,
earnings per share for DLJdirect rounds to less than $0.01. Earnings per share
for DLJdirect for periods prior to the closing date are not presented as such
amounts are not meaningful.
The numerators and denominators of the basic and diluted earnings per common
share computations include the following items:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
DLJ Common Stock 1999 1998 1999 1998
- ---------------- ------ ------ ------ -----
(In thousands)
<S> <C> <C> <C> <C>
Earnings applicable to Common Shares-Basic and Diluted........... $ 160,312 $ 137,011 $ 276,673 $ 265,718
========= ========= ========= =========
Weighted Average Common Shares-Basic............................. 125,567 117,394 124,783 116,244
Effect of Dilutive Securities:
Restricted stock units......................................... 946 1,929 1,114 2,746
Stock options.................................................. 13,887 11,338 13,416 10,805
--------- ---------- ---------- ---------
Weighted Average Common Shares-Diluted............................ 140,400 130,661 139,313 129,795
========= ========= ========= =========
DLJdirect Common Stock
- ----------------------
Earnings applicable to Common Shares-Basic and Diluted........... $ 49 $ 49
========= =========
Weighted Average Common Shares-Basic............................. 18,400 18,400
Effect of Dilutive Securities:
Stock options.................................................. 2,023 2,023
--------- ----------
Weighted Average Common Shares-Diluted............................ 20,423 20,423
========= =========
</TABLE>
12
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
8. Derivative Financial Instruments
The Company enters into certain contractual agreements referred to as
derivatives or off-balance sheet financial instruments primarily to provide
products for its clients. Under these agreements, the Company performs the
following activities: writes over-the-counter ("OTC") options to accommodate
customers' needs; trades in forward contracts in U.S. government and agency
issued or guaranteed securities; trades in futures contracts on equity-based
indices, interest rate instruments and currencies; enters into swap transactions
to manage foreign currency, interest rate and equity risks; and issues
structured products based on emerging market financial instruments and indices.
The Company is not significantly involved in commodity derivative instruments.
Options
The Company writes option contracts specifically designed to meet customers'
needs. Since the Company, not its counterparty, is obligated to perform, the
options do not expose the Company to credit risk. At the beginning of the
contract period, the Company receives a cash premium. During the contract
period, the Company bears the risk of unfavorable changes in the value of the
financial instruments underlying the options ("market risk"). To cover this
market risk, the Company purchases or sells cash or derivative financial
instruments on a proprietary basis. Such purchases and sales may include debt
and equity securities, forward and futures contracts and options. The
counterparties to these purchases and sales are reviewed to determine whether
they are creditworthy. Future cash requirements for options written equal the
fair value of the options. Option contracts are typically written for a duration
of less than 13 months and are included in the consolidated statements of
financial condition at fair value.
The notional (contract) value, or the market value for cash instruments, of the
written options was $12.1 billion at June 30, 1999 and $5.1 billion at December
31, 1998. These options contracts were covered by the following financial
instruments:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ---------
(In millions)
<S> <C> <C>
U.S. government, mortgage-backed securities and options thereon........... $ 4,286 $ 3,396
Foreign sovereign debt securities......................................... 35 89
Forward rate agreements................................................... - 38
Futures contracts......................................................... 293 76
Interest rate swaps....................................................... 4,462 650
Equities and other........................................................ 3,066 895
-------- -------
Total.......................................................... $ 12,142 $ 5,144
======== =======
</TABLE>
The trading revenues from writing options (net of related interest expense) were
approximately $38.4 million and $40.8 million, for the six months ended June 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
$324.1 million at June 30, 1999 and $304.3 million at December 31, 1998. The
fair value of the options was approximately $369.1 million at June 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>
June 30, December 31,
Off-balance sheet values: 1999 1998
---- ----
(In millions)
<S> <C> <C>
Forward Contracts:
Purchased at notional (contract) value................................... $ 41,596 $ 41,254
Sold at notional (contract) value........................................ $ 44,353 $ 39,767
Futures Contracts and Options on Futures Contracts:
Purchased at market value................................................ $ 1,573 $ 1,184
Sold at market value..................................................... $ 2,286 $ 1,607
June 30, December 31,
Values included in the consolidated financial statements: 1999 1998
---- ----
(In millions)
Forward Contracts:
Average fair values included in liabilities during the period................ $ 19 $ 2
Unrealized gains included in total assets at end of period................... $ 230 $ 263
Unrealized losses included in total liabilities at end of period............. $ 235 $ 269
Futures Contracts:
Average fair values included in assets (liabilities) during the period....... $ 9 $ (23)
Unrealized gains included in total assets at end of period................... $ 7 $ 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 gains (losses) on forward contracts were $(101.6) million and $45.5
million and net trading gains (losses) on futures contracts were $39.4 million
and $(26.2) million for the six months ended June 30, 1999 and 1998,
respectively.
Swaps
The notional (contract) value of swap agreements, consisting primarily of
interest rate and equity swaps, was approximately $15.5 billion and $8.0 billion
at June 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
$576.2 million at June 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 June 30, 1999, unfunded commitments outstanding under this
facility amounted to $30.0 million. In addition, the Company enters into
commitments to extend credit to non-investment grade borrowers in connection
with the origination and syndication of senior bank debt. At June 30, 1999,
unfunded senior bank loan commitments outstanding amounted to $228.7 million.
At June 30, 1999, the Company has commitments of $621.9 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
Group Group Group Group & Other Total
----- ----- ----- ----- ------- -----
(in millions)
<S> <C> <C> <C> <C> <C> <C>
For the Quarters Ended:
- -----------------------
June 30, 1999
Net revenues from external sources....... $ 476.8 $ 289.8 $ 247.0 $ 358.8 $ (61.8) $ 1,310.6
Net intersegment revenues................ 0.0 0.2 (1.1) 26.5 (25.6) 0.0
Net interest revenue..................... (2.3) 27.5 6.0 63.0 25.1 119.3
------- ------- ------- ------- --------- ---------
Total net revenues.................... $ 474.5 $ 317.5 $ 251.9 $ 448.3 $ (62.3) $ 1,429.9
======= ======= ======= ======= ========== =========
Income before income taxes............... $ 126.0 $ 110.8 $ 24.8 $ 83.7 $ (86.3) $ 259.0
======= ======= ======= ======= ========== =========
June 30, 1998
Net revenues from external sources....... $ 466.2 $ 193.5 $ 172.3 $ 243.2 $ (109.2) $ 966.0
Net intersegment revenues................ -- 0.5 (0.9) 11.6 (11.2) 0.0
Net interest revenue..................... (3.9) 30.9 0.5 56.3 128.6 212.4
------- ------- ------- ------- --------- ---------
Total net revenues.................... $ 462.3 $ 224.9 $ 171.9 $ 311.1 $ 8.2 $ 1,178.4
======= ======= ======= ======= ========== =========
Income before income taxes............... $ 146.1 $ 78.0 $ 8.1 $ 47.4 $ (49.1) $ 230.5
======= ======= ======= ======= ========== =========
For the Six Months Ended:
- -------------------------
June 30, 1999
Net revenues from external sources....... $ 800.8 $ 471.1 $ 456.1 $ 677.8 $ (78.4) $ 2,327.4
Net intersegment revenues................ 0.0 0.2 (2.2) 40.8 (38.8) 0.0
Net interest revenue.. (3.8) 55.6 11.4 124.7 52.1 240.0
------- ------- ------- ------- --------- ---------
Total net revenues.................... $ 797.0 $ 526.9 $ 465.3 $ 843.3 $ (65.1) $ 2,567.4
======= ======= ======= ======= ========== =========
Income before income taxes............... $ 204.3 $ 173.6 $ 49.5 $ 174.4 $ (145.8) $ 456.0
======= ======= ======= ======= ========== =========
June 30, 1998
Net revenues from external sources....... $ 815.8 $ 431.2 $ 366.1 $ 481.6 $ (200.0) $ 1,894.7
Net intersegment revenues................ 0.0 1.0 (1.4) 24.7 (24.3) 0.0
Net interest revenue..................... (4.6) 63.5 1.6 104.9 238.0 403.4
------- ------- ------- ------- --------- ---------
Total net revenues.................... $ 811.2 $ 495.7 $ 366.3 $ 611.2 $ 13.7 $ 2,298.1
======= ======= ======= ======= ========== =========
Income before income taxes............... $ 257.0 $ 172.7 $ 38.9 $ 92.0 $ (112.8) $ 447.8
======= ======= ======= ======= ========== =========
<CAPTION>
Fixed Financial
Banking Income Equities Services Elimination
Group Group Group Group & Other Total
----- ----- ----- ----- ------- -----
Balance sheet data: (in millions)
<S> <C> <C> <C> <C> <C> <C>
June 30, 1999
Segment assets.......................... $ 1,306.1 $ 55,938.7 $ 3,718.2 $ 24,353.9 $ 1,609.1 $ 86,926.0
========= ========== ========= ========== ========= ==========
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>
June 30,
1999 1998
--------------------------------------
(in millions)
Income before provision for income taxes:
- -----------------------------------------
<S> <C> <C>
Total income for reported segments................................. $ 601.8 $ 582.0
All other income (losses).......................................... (27.0) 34.0
Consolidation/elimination (1)...................................... (118.8) (168.2)
----------- -----------
Total income before provision for income taxes.................. $ 456.0 $ 447.8
========== ==========
</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
business done through the London offices. The following are net revenues by
geographic region:
June 30,
1999 1998
--------------------------------------
(in millions)
United States..................... $ 2,201.0 $ 2,032.0
Other foreign..................... 366.4 266.1
---------- ---------
Total....................... $ 2,567.4 $ 2,298.1
========== =========
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 Form 10-Q for the quarter ended March 31, 1999. These matters have been
updated as follows:
In the Rickel Home Center and National Gypsum cases, the plaintiffs have filed
appeals.
In the Dayton Monetary Associates, Davison, and Mid-American Waste Systems
actions, the settlements have been completed without a material adverse effect
on DLJ's consolidated financial condition or results of operations.
In addition to the significant proceedings and matters referred to above, the
Company has been named as a defendant in a number of actions relating to its
various businesses including various civil actions and arbitrations arising out
of its activities as a broker-dealer in securities, as an underwriter and as an
employer and arising out of alleged employee misconduct. Some of the actions
have been brought on behalf of various classes of claimants and seek damages of
material or indeterminate amounts. The Company is also involved, from time to
time, in proceedings with, and investigations by, governmental agencies and self
regulatory organizations. Although there can be no assurance that such other
actions, proceedings, investigations and litigation will not have a material
adverse effect on the results of operations of the Company in any future period,
depending in part on the results for such period, in the opinion of management
of the Company the ultimate resolution of any such other actions, proceedings,
investigations and litigation against the Company will not have a material
adverse effect on the consolidated financial condition and/or results of
operations of the Company.
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.
Economic growth in the U.S. was robust during the second quarter of
1999. Continued growth in equity trading activity resulted in all major market
indices achieving record highs. Average daily volume on the major exchanges
increased 19% from a year ago. The equity markets in Asia continue to recover
based on restructuring and better fundamental economics. Europe, however, is
experiencing weak economic growth. On June 30, the Federal Reserve increased
interest rates by 25 basis points. In addition, merger and acquisition activity
continued at a near record pace in the second quarter of 1999, primarily in the
pan-European markets. Acquisitions of non-U.S. firms were $631 billion in the
six months of 1999 versus $454 billion for the same period a year ago. Merger
and acquisition activity crossed industry sectors and borders, and reflects the
trends of consolidation and deregulation.
RECENT DEVELOPMENTS
In March 1999, the Board of Directors of Donaldson, Lufkin & Jenrette
("DLJ Inc. or the Company") and the majority shareholder of the Company approved
the authorization of the issuance by DLJ Inc. of a new series of common stock,
DLJdirect Common Stock. The DLJdirect Common Stock is intended to track 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 and reflects 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 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. 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 Common Stock.
RESULTS OF OPERATIONS
Quarter Ended June 30, 1999 Compared to Quarter Ended June 30, 1998
Total revenues for the quarters ended June 30, 1999 and 1998 were $1.8
billion and $1.6 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 $10.6 million primarily as a result of record underwriting
revenues offset by reduced merchant banking gains; Equities Group revenues
increased by $74.7 million primarily as a result of increased commissions in the
international equities area, Fixed Income Group revenues increased by $96.3
million, principally as a result of increased trading gains in the high yield
and mortgage-backed securities areas. Financial Services Group revenues
increased by $115.6 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 $89.2 million or 44.2% to $291.1
million due to increased business in virtually all areas and is consistent with
the overall growth in listed share volume on major equity exchanges.
Underwriting revenues increased by $66.4 million or 19.4% to $409.5
million, primarily as a result of increases in high yield and high grade
corporate underwritings, as well as international transactions.
Fee revenues increased by $14.3 million or 4.5% to $332.7 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 corespondent and online brokerage businesses increased due to
customer demand for a variety of portfolio advisory and technology services.
17
<PAGE>
Interest, net of interest expense to finance U.S. government, agency
and mortgage-backed securities, decreased by $90.4 million or 15.3% to $499.9
million. All of 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 second quarter of 1998 were excluded,
net interest income would have increased 14.3%. 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 $178.5
million to $218.4 million primarily from international trading gains and the
elimination in 1999 of trading losses in the Emerging Markets group. If the
impact of the firm's proprietary trading activities in emerging markets during
the second quarter of 1998 were excluded, net trading revenues would have
increased 109.5%
Principal transactions-net, investment revenues decreased by $22.0
million or 46.6% to $25.2 million. The reduction in realized gains on sales of
investments was $39.1 million. Net unrealized carrying values increased by $17.0
million, which includes the elimination of net unrealized appreciation of $2.4
million on investments sold and an increase in net unrealized appreciation of
$19.4 million on retained investments.
Total costs and expenses for the second quarter of 1999 were $1.6
billion, an increase of $225.3 million or 16.4% over the second quarter of 1998,
primarily due to growth at Pershing as well as the Company's international
expansion in Europe.
Compensation and benefits increased $127.0 million or 18.9% to $800.0
million. Incentive and production-related compensation increased by 15.8% in
1999 and base compensation, including benefits and all payroll taxes, increased
by 28.7% primarily due to the Company's significant expansion in Europe. At June
30, 1999, full-time personnel totaled 9,048 compared to 7,710 at June 30, 1998,
an increase of 1,338 or 17.4%.
Interest expense increased $2.5 million or 0.7% to $380.7 million due
to increased inventory positions in the second 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 $95.7 million or 34.7%
to $370.8 million from the second quarter of 1998.
Brokerage, clearing, exchange fees and other expenses increased by $3.4
million due to increased share volume and transaction fee payments. Occupancy
and equipment costs increased by $12.7 million primarily as a result of the
Company's domestic and international expansion. Communications costs increased
by $5.5 million due to expanded facilities and overall growth in professional
staff and transaction volume. All other operating expenses increased by $74.1
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. Data processing costs increased due to expansion of the
Company's international operations and the implementation and development of new
systems. In addition, these costs increased due to the overhaul of the on-line
customer trading and information system for the Company's correspondent
brokerage network as well as costs relating to the Year 2000 project.
The changes in income before income taxes for each industry segment
were: Banking Group pre-tax income decreased by $20.1 million, primarily as a
result of decreased underwriting revenues and a reduction in merchant banking
gains; Equities Group pre-tax income increased by $1.1 million as continued
investment spending related to international expansion was more than offset by
the related increases in commission and underwriting revenues; Fixed Income
Group pre-tax income increased by $32.8 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 increased $30.5
million as a result of increased brokerage and correspondent clearance
commissions and fees earned by the Company's asset management, and correspondent
and online brokerage businesses.
The Company's income tax provision for the second quarter of 1999 and
1998 was $93.4 million and $88.2 million, respectively, which represented a 36%
and 38.25% effective tax rate, respectively.
Net income for the quarter ended June 30, 1999 was $165.7 million, an
increase of $23.4 million or 16.4% from the comparable 1998 period. Basic and
diluted earnings per common share, using the treasury stock method were $1.28
and $1.17 and $1.14 and $1.05 for the second quarter of 1999 and 1998,
respectively.
Six Months Ended June 30, 1999 Compared to Six Ended June 30, 1998
Total revenues for the six months ended June 30, 1999 and 1998 were
$3.3 billion and $3.1 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 decreased by $15.0 million primarily as a result of
decreased underwriting revenues from the 1998 record levels and reduced merchant
banking gains; Equities Group revenues increased $90.0 million primarily as a
result of increased commission revenues in its non-dollar equities trading in
London and Hong Kong; Fixed Income Group revenues
18
<PAGE>
increased by $39.9 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 $196.2 million
primarily as a result of increased brokerage and correspondent clearance
commission revenues and fee income in the Company's asset management, and
correspondent and online brokerage businesses.
Commission revenues increased by $171.6 million or 42.8% to $572.1
million due to increased business in all areas and is generally consistent with
the overall growth in listed share volume on major equity exchanges.
Underwriting revenues increased by $17.1 million or 2.6% to $666.4
million, primarily as a result of increases on fixed income underwritings as
well as international transactions.
Fee revenues increased by $45.9 million or 8.0% to $619.7 million.
These results reflect primarily the Company's continuing market share growth in
both 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 $178.5 million or 15.5% to $976.6
million. All of 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 first six months of 1998 were
excluded, net interest income would have increased 10.9%. In most other areas
there were increases in balances of lending activity, which were offset in part
by reductions in interest rates charged. Increases in balances of lending
activity were more than offset by reductions in interest rates charged.
Principal transactions-net, trading revenues increased by $233.6
million or 147% to $392.5 million primarily from improvements in most areas and
the elimination in 1999 of trading losses in the Emerging Markets group. If the
impact of the firm's proprietary trading activities in emerging markets during
the first quarter of 1998 were excluded, net trading revenues would have
increased 46.0%.
Principal transactions-net, investment revenues decreased by $60.3
million or 68.1% to $28.2 million. The reduction in realized gains on sales of
investments was $ 87.9 million. Net unrealized carrying values increased by
$27.6 million, which includes the elimination of net unrealized depreciation of
$9.9 million on investments sold and an increase in net unrealized appreciation
of $17.7 million on retained investments.
Total costs and expenses for the second quarter of 1999 were $2.8
billion, an increase of $245.6 million or 9.6% over the second quarter of 1998,
primarily due to growth at Pershing as well as the Company's international
expansion in Europe.
Compensation and benefits increased $118.6 million or 9.0% to $1,435.7
million. Incentive and production-related compensation increased by 3.3% in 1999
primarily because the six 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 27.1% due to expansion in various business groups. At June 30, 1999,
full-time personnel totaled 9,048 compared to 7,710 at June 30, 1998, an
increase of 1,338 or 17.4%.
Interest expense decreased $15.5 million or 2.1% to $736.6 million due
to the reduction of proprietary trading in emerging markets offset by increased
borrowings at lower interest rates.
All other expenses, as noted below, increased by $142.5 million or
26.7% to $675.7 million over the six months of 1998.
Brokerage, clearing, exchange fees and other expenses increased by
$18.3 million due to increased share volume and transaction fee payments.
Occupancy and equipment costs increased by $26.7 million as a result of the
Company's domestic and international expansion. Communications costs increased
by $12.5 million due to expanded facilities and overall growth in professional
staff and transaction volume. All other operating expenses increased by $85.0
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. Data processing costs increased due to expansion of the
Company's international operations and the implementation and development of new
systems. In addition, these costs increased due to the overhaul of the on-line
customer trading and information system for the Company's correspondent
brokerage network as well as costs relating to the Year 2000 project.
The changes in income before income taxes for each industry segment
were: Banking Group pre-tax income decreased by $52.7 million, primarily as a
result of decreased underwriting revenues and 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
19
<PAGE>
increased by $0.9 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 $76.6 million as a result of
increased brokerage and correspondent clearance commissions and fee income.
The Company's income tax provision for the six months of 1999 and 1998
was $168.7 million and $171.3 million, respectively, which represented a 37% and
38.25% effective tax rate, respectively.
Net income for the six months ended June 30, 1999 was $287.3 million,
an increase of $10.8 million or 3.9% from the comparable 1998 period. Basic and
diluted earnings per common share, using the treasury stock method were $2.22
and $2.29 and $1.99 and $2.05 for the six months ended June 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 June
30, 1999 and December 31, 1998, the Company's total assets were $86.9 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 June 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.
In March 1999, the Board of Directors of Donaldson, Lufkin & Jenrette
("DLJ Inc. or the Company") and the majority shareholder of the Company approved
the authorization of the issuance by DLJ Inc. of a new series of common stock,
DLJdirect Common Stock. The DLJdirect Common Stock is intended to track 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 and reflects 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 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. 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 six months ended June 30, 1999, the Company was active in
raising additional long-term financing. In March 1999, the Company established
a $2.0 billion senior or subordinated debt securities or preferred stock shelf
registration. As of June 30, 1999, $650.0 million of 5 7/8% Senior Notes and an
aggregate of $290.0 million medium term notes have been issued under this shelf.
In addition, during the six months ended June 30, 1999, commercial
paper outstanding under the Company's $1.0 billion commercial paper program
increased from $30.9 million to $194.0 million.
20
<PAGE>
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
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
June 30, 1999, DLJSC had aggregate regulatory "net capital," after adjustments
required by Rule 15c3-1 under the Securities Exchange Act of 1934, of
approximately $1.3 billion, which exceeded minimum net capital requirements by
$1.1 billion and which exceeded the net capital required by DLJSC's most
restrictive debt covenants by $683.9 million. Certain of the Company's
London-based broker-dealer subsidiaries are subject to the requirements of the
Securities and Futures Authority, a self-regulatory organization established
pursuant to the United Kingdom Financial Services Act of 1986. Other U.S. and
foreign broker-dealer subsidiaries of the Company are subject to net capital
requirements of their respective regulatory agencies. At June 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.
Six Months Ended June 30, 1999 and 1998
At June 30, 1999 and 1998, cash and cash equivalents totaled $1.3
billion and $459.4 million, an increase of $263.5 million and $186.2 million,
respectively.
Cash used in operating activities totaled $2.0 billion and $2.8 billion
for the six months ended June 30, 1999 and 1998, respectively, and reflects
primarily an increase in operating assets. In the first six months of 1999,
there were increases in assets including financial instruments owned of $4.8
billion, securities borrowed of $6.3 billion and receivables from brokers,
dealers and other of $0.7 billion. These increases were partially offset by
increases in liabilities including payables to brokers, dealers and other of
$3.5 billion, securities loaned of $3.4 billion and financial instruments sold
not yet purchased of $2.9 billion.
For the six months ended June 30, 1999 and 1998, cash of $263.4 million
and $475.9 million, respectively, was used in investing activities. These
generally consist of purchases of long-term corporate development investments
and office facilities.
For the first six months of 1999 and 1998, net cash provided by
financing activities totaled $2.5 billion and $3.5 billion, respectively, of
which, $1.2 billion and $2.9 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, $648.7 million was provided by issuing Senior Notes and
$404.5 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.
21
<PAGE>
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.
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 $38.4 million and $40.8 million for the six months ended June
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 $12.1 billion
and $7.9 billion at June 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 six months ended June 30, 1999 and 1998, net trading gains
(losses) on forward contracts were $(101.6) million and $45.5 million and net
trading gains (losses) on futures contracts were $39.4 million and $(26.2)
million, respectively.
Off-balance sheet values:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
------------- -------------
Purchases Sales Purchases Sales
--------- ----- --------- -----
(In millions)
<S> <C> <C> <C> <C>
Forward Contracts
(Notional Contract Value)................ $ 41,596 $ 44,353 $ 33,814 $ 37,750
======== ======== ======== ========
Futures Contracts and Options on
Futures Contracts (Market Value)......... $ 1,573 $ 2,286 $ 1,560 $ 3,441
======== ======== ======== ========
</TABLE>
Swap Agreements:
The notional (contract) value of swap agreements consisting primarily
of interest rate and equity swaps, was approximately $15.5 billion and $8.0
billion at June 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 June 30, 1999 the Company had investments of $425.9 million and
has commitments to invest up to an additional $621.9 million.
Equitable has committed, subject to approval by Equitable on a
transaction-by-transaction basis, to provide $750.0 million of subordinated debt
financing to the DLJ Bridge Fund. The Bridge Fund provides short-term loans in
connection with DLJ's merchant banking and financial advisory businesses. The
Company has agreed to pay Equitable the first $25.0 million of aggregate
principal losses incurred by Equitable with respect to all bridge loans. To the
extent such payments by the Company do not fully cover any such losses incurred
by Equitable, Equitable is entitled to receive all other distributions otherwise
payable to the Company with respect to DLJ Bridge Fund activities until such
losses have been recovered. The Company has also agreed to pay Equitable the
amount, if any, by which any principal loss on an individual loan exceeds $150.0
million. At June 30, 1999, the DLJ Bridge Fund there were no individual bridge
loans outstanding in excess of $150.0 million. At June 30, 1999, the DLJ Bridge
Fund had extended $146.1 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
<PAGE>
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>
June 30, December 31,
1999 1998
------------------ ---------------------
(In millions)
Long Short Long Short
---- ----- ---- -----
<S> <C> <C> <C> <C>
High-Yield.................................. $ 529.1 $ 309.4 $ 429.3 $ 345.3
Senior Bank Debt............................ 847.5 - 1,261.6 -
Foreign Sovereign Debt...................... 514.4 0.6 423.6 13.8
Mortgage Whole Loans ....................... 1,223.0 37.7 722.3 -
Convertible Securities...................... 260.3 4.2 460.6 8.0
Other Non-Investment Grade.................. 167.7 48.8 243.2 21.5
---------- -------- ----------- --------
Totals...................................... $ 3,542.0 $ 400.7 $ 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 $24.0 million and $22.0 million at June
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 June 30, 1999 and
December 31, 1998 is as follows:
June 30, December 31,
1999 1998
------------- ---------------
(In millions)
Interest rate risk........... $ 15 $ 16
Equity risk.................. $ 11 $ 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. 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 between $85 and $90 million, which has been approved by the
Board of Directors of the Company. Based on progress to date, the current
funding level has been found to be adequate. More than half of the Year 2000
budget is allocated to renovate and test applications. The budget includes Year
2000 compliance testing, full system testing, point to point testing with
industry agencies, correspondents and third party vendors and other
industry-wide testing. The budget also includes developing a contingency plan.
Costs related to the Year 2000 project are expensed as incurred. At June 30,
1999, costs since inception totaled $88 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
reduce significantly the Company's level of uncertainty regarding the Year 2000
readiness of internal and third party systems. The Company believes that with
the Project substantially completed, as of June 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.
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 that may affect the timeliness of Year 2000 compliance include the
ability to locate, correct and successfully test all relevant computer code
according to schedule, the continued availability of certain resources including
personnel, timely responses and corrections by third-parties and suppliers and
the compatibility of new systems with those systems not being replaced.
24
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS- 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 Form 10-Q for the quarter ended March 31, 1999. These matters have been
updated as follows:
In the Rickel Home Center and National Gypsum cases, the plaintiffs have filed
appeals.
In the Dayton Monetary Associates, Davison, and Mid-American Waste Systems
actions, the settlements have been completed without a material adverse effect
on DLJ's consolidated financial condition or results of operations.
In addition to the significant proceedings and matters referred to above, the
Company has been named as a defendant in a number of actions relating to its
various businesses including various civil actions and arbitrations arising out
of its activities as a broker-dealer in securities, as an underwriter and as an
employer and arising out of alleged employee misconduct. Some of the actions
have been brought on behalf of various classes of claimants and seek damages of
material or indeterminate amounts. The Company is also involved, from time to
time, in proceedings with, and investigations by, governmental agencies and self
regulatory organizations. Although there can be no assurance that such other
actions, proceedings, investigations and litigation will not have a material
adverse effect on the results of operations of the Company in any future period,
depending in part on the results for such period, in the opinion of management
of the Company the ultimate resolution of any such other actions, proceedings,
investigations and litigation against the Company will not have a material
adverse effect on the consolidated financial condition and/or results of
operations of the Company.
25
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - DLJdirect
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Combined Statements of Financial Condition (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
ASSETS
<S> <C> <C>
Cash and cash equivalents...................................... $ 240,888 $ 26,654
Deposit with affiliated clearing broker........................ 250 250
Receivables from brokers, dealers and others, net.............. 8,394 1,887
Securities owned, at market value.............................. 55 42
Office facilities, at cost (net of accumulated depreciation
and amortization of $336 and $284, respectively)............ 226 278
Investment in joint venture.................................... 11,463 -
Other assets................................................... 653 640
--------- --------
Total assets................................................... $ 261,929 $ 29,751
========= ========
LIABILITIES AND ALLOCATED EQUITY
Liabilities:
Payables to parent and affiliates, net....................... $ 5,797 $ 5,211
Securities sold not yet purchased, at market value........... 2,496 24
Accounts payable and accrued expenses........................ 17,656 2,592
--------- --------
Total liabilities.............................................. 25,949 7,827
-------- --------
Commitments and contingencies.................................. - -
Allocated equity............................................... 235,992 21,924
Accumulated other comprehensive income......................... (12) -
--------- --------
Total allocated equity......................................... 235,980 21,924
--------- --------
Total liabilities and allocated equity......................... $ 261,929 $ 29,751
========= ========
</TABLE>
See accompanying notes to combined financial statements.
26
<PAGE>
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Combined Statements of Operations (Unaudited)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Commissions....................................................... $ 35,711 $ 18,741 $ 67,765 $ 34,871
Fees.............................................................. 15,554 6,155 25,150 11,295
Interest.......................................................... 8,409 3,382 13,961 6,169
---------- -------- --------- ---------
Total revenues.................................................. 59,674 28,278 106,876 52,335
---------- -------- --------- ---------
Costs and expenses:
Compensation and benefits......................................... 13,532 6,920 24,215 12,679
Brokerage, clearing, exchange and other fees...................... 9,220 6,669 18,074 12,740
Advertising....................................................... 13,232 4,323 19,333 13,333
Occupancy and equipment........................................... 1,968 1,231 3,471 2,312
Communications.................................................... 2,719 1,546 5,424 2,735
Technology costs.................................................. 531 1,204 1,811 2,307
Other operating expenses.......................................... 7,231 4,431 12,046 8,091
---------- -------- --------- ---------
Total costs and expenses........................................ 48,433 26,324 84,374 54,197
---------- -------- --------- ---------
Income (loss) before income tax provision (benefit) and equity
in net loss of joint venture.................................... 11,241 1,954 22,502 (1,862)
---------- -------- --------- ---------
Income tax provision (benefit)....................................... 5,209 798 9,297 (761)
Equity in net loss of joint venture.................................. (956) - (956) -
---------- -------- --------- ---------
Net income (loss)............................................... $ 5,076 $ 1,156 $ 12,249 $ (1,101)
========== ======== ========= =========
Pro forma earnings (loss) per share:
Basic......................................................... $ 0.05 $ 0.01 $ 0.12 $ (0.01)
Diluted....................................................... $ 0.05 $ 0.01 $ 0.12 $ (0.01)
========== ======== ========= =========
Weighted average notional and outstanding shares:
Basic......................................................... 102,650 102,650 102,650 102,650
Diluted....................................................... 104,673 104,673 104,673 104,673
========== ======== ========= =========
Earnings (loss) attributable to:
DLJ Retained Interest (pro forma) ............................ $ 4,167 $ 1,156 $ 10,056 $ (1,101)
DLJdirect Tracking Stock (pro forma) ......................... 909 - 2,193 -
========== ======== ========= =========
Tracking Stock pro forma earnings per share:
Basic......................................................... $ 0.05 $ 0.12
Diluted....................................................... $ 0.04 $ 0.11
========== =========
Earnings for period May 28-June 30, 1999............................. $ 271 $ 271
========== =========
Earnings attributable to:
DLJ Retained Interest......................................... $ 222 $ 222
DLJdirect Tracking Stock...................................... 49 49
========== =========
Tracking Stock earnings share:
Basic......................................................... $ 0.00 $ 0.00
Diluted....................................................... $ 0.00 $ 0.00
========== =========
Tracking Stock weighted average common shares:
Basic......................................................... 18,400 18,400
Diluted....................................................... 20,423 20,423
========== =========
</TABLE>
See accompanying notes to combined financial statements.
27
<PAGE>
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Combined Statements of Changes In Allocated Equity (Unaudited)
(In thousands)
For the Year Ended December 31, 1998 and the Six Months Ended June 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............................... 12,249 - 12,249
Translation adjustment................... - (12) (12)
Total comprehensive income............ - - 12,237
Capital contribution from DLJ............ 1,000 - 1,000
Allocated equity from issuance of
DLJdirect Common Stock................ 233,958 - 233,958
Dividend paid to DLJ..................... (33,139) - (33,139)
--------- --------- ---------
Balances at June 30, 1999................ $ 235,992 $ (12) $ 235,980
========= ========= =========
</TABLE>
See accompanying notes to combined financial statements.
28
<PAGE>
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Combined Statements of Cash Flows (Unaudited)
(In thousands)
For the Six Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................................... $ 12,249 $ (1,101)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization............................................... 52 157
Deferred taxes.............................................................. (184) (140)
Equity in net loss of joint venture......................................... 956 -
(Increase) in operating assets:
Receivables from brokers, dealers and other, net............................ (6,507) (428)
Securities owned, at market value........................................... (13) (11)
Other assets................................................................ (13) (99)
Increase (decrease) in operating liabilities:
Payables to parent and affiliates, net...................................... 770 (248)
Securities sold, not yet purchased.......................................... 2,472 (6)
Accounts payable and accrued expenses....................................... 15,064 2,789
-------- --------
Net cash provided by operating activities................................... 24,846 913
-------- --------
Cash flows from investing activities:
Net proceeds from sale of office facilities................................. - 1,231
Investment in joint venture................................................. (12,431) -
-------- --------
Net cash provided by (used in) investing activities............................ (12,431) 1,231
-------- --------
Cash flows from financing activities:
Net proceeds from capital contributions from DLJ............................ 1,000 5,000
Net proceeds from issuance of Tracking Stock................................ 233,958 -
Dividend paid to DLJ........................................................ (33,139) -
-------- --------
Net cash provided by financing activities...................................... 201,819 5,000
-------- --------
Increase in cash and cash equivalents.......................................... 214,234 7,144
Cash and cash equivalents at beginning of period............................... 26,654 8,881
-------- --------
Cash and cash equivalents at end of period..................................... $240,888 $ 16,025
======== ========
</TABLE>
See accompanying notes to combined financial statements
29
<PAGE>
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Notes to Combined Financial Statements (Unaudited)
1. Basis of Presentation
In March 1999, the Board of Directors of Donaldson, Lufkin & Jenrette Inc. ("DLJ
Inc.") and the majority shareholder of DLJ Inc. approved the authorization of
the issuance by DLJ Inc. of a new series of common stock, DLJdirect Common
Stock. The DLJdirect Common Stock will track 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 attributable to DLJdirect as allocated
equity. Prior to the offering, DLJ Inc. had a 100% interest in the earnings of
DLJdirect. Subsequent to the offering, 17.9% of DLJdirect's earnings are
applicable to the holders of DLJdirect Common Stock while DLJ has a retained
interest of 82.1% in DLJdirect. For the period the Tracking Stock was
outstanding (May 28 to June 30, 1999), earnings applicable to the shareholders
of DLJdirect Common Stock were $49 thousand.
The DLJdirect Common Stock initially consists 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 has the right to issue DLJ Common Stock in exchange for outstanding
DLJdirect Common Stock at a premium at any time. The premium will be 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. DLJ has the right, at any time, to exchange stock of a subsidiary
of Donaldson, Lufkin & Jenrette, Inc. for DLJdirect Common Stock if all of the
assets and liabilities of DLJdirect are transferred to the subsidiary.
Prior to the offering of DLJdirect Common Stock, DLJdirect Holdings Inc. paid
$33.1 million as a dividend, to Donaldson, Lufkin & Jenrette Securities
Corporation. This amount was an aggregate amount equal to the total equity of
DLJdirect Holdings Inc. at December 31, 1998 plus the accumulated retained
earnings of DLJdirect Holdings Inc. from January 1, 1999 until the end of April
30, 1999.
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.
2. Summary of Significant Accounting Policies
To prepare 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 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 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 on 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. Investment in Joint Venture
In March 1999, DLJdirect entered into a 10-year joint venture agreement with
Sumitomo Bank, the second largest bank in Japan. DLJdirect has a 50% interest in
the corporation. Pursuant to the agreement, a Japanese corporation was formed,
and it commenced operations as of April 1, 1999. DLJdirect does not have a
controlling interest in this joint venture and therefore accounts for this
investment on the equity method.
4. 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.
5. 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 June 30, 1999, DLJdirect Inc.'s
net capital of $24.4 million was in excess of the minimum requirement by $24.1
million.
6. 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.
7. Earnings Per Share
Basic earnings per share for DLJdirect is calculated by dividing earnings
applicable to common shares for the period the tracking stock was outstanding
(May 28 to June 30, 1999) by the weighted average actual common shares
outstanding. Earnings per share amounts for such period round to less than
$0.01. Diluted earnings per common share include the dilutive effect of options
calculated under the treasury stock method. Net income for DLJdirect for such
period was $271 thousand of which 17.9% or $49 thousand is applicable to common
shareholders of DLJdirect and 82.1% or $222 thousand is applicable to the
retained interest of DLJ. 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 shared for periods prior to the
closing date are not presented as such amounts are not meaningful.
Pro forma earnings per share amounts have been calculated by dividing net income
(loss) by the weighted average notional and outstanding tracking shares as if
the issuance of the DLJdirect Tracking Stock occurred at the beginning of 1999.
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.
31
<PAGE>
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Notes to Combined Financial Statements (Unaudited)
Tracking Stock pro forma earnings per common share amounts have been calculated
by dividing earnings applicable to common shares by the weighted average actual
common shares outstanding as if the issuance of the DLJdirect Tracking Stock
occurred at the beginning of 1999. These pro forma amounts are presented for
comparative purposes only.
The numerators and denominators of the basic and diluted earnings per common
share computations include the following items:
<TABLE>
<CAPTION>
Tracking Stock
For the Period May 28 Pro Forma Pro Forma
To June 30, June 30, June 30,
1999 1999 1999
------------------ ------------------ ----------------
Income Shares Income Shares Income Shares
------ ------ ------ ------ ------ ------
(In thousands) (In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Earnings applicable to
common shares .............................. $ 49 18,400 $ 5,076 102,650 $ 909 18,400
======== ======== ======== ======== ======== ========
Effect of dilutive securities:
Stock options .............................. $ -- 2,023 $ -- 2,023 $ -- 2,023
-------- -------- -------- -------- -------- --------
Diluted EPS .................................. $ 49 20,423 $ 5,076 104,673 $ 909 20,423
======== ======== ======== ======== ======== ========
</TABLE>
8. Legal Proceedings
DLJdirect has been named a defendant in actions relating to its businesses. Some
of the actions seek damages of material or indeterminate amounts. 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
On March 16, 1999, the Board of Directors of DLJ and majority shareholder of DLJ
approved, by written consent, the authorization of the issuance of a new series
of common stock, to be designated as DLJdirect Common Stock ("DLJdirect Common
Stock"). Before the DLJdirect Common Stock was first issued, DLJ's existing
common stock was reclassified as DLJ Common Stock ("DLJ Common Stock"), and that
stock will be intended to reflect the performance of DLJ's other businesses and
a "Retained Interest" in DLJdirect.
On May 28, 1999 ("the closing date"), DLJ 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.
The DLJdirect Common Stock is intended to reflect the separate performance of
the existing online discount brokerage services of DLJ. DLJ's retained interest
in DLJdirect is not considered outstanding DLJdirect Common Stock. Therefore,
any net earnings or loss attributable to the retained interest is not included
in DLJdirect's per share calculations.
It is currently the intention of DLJ 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, 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 instead of DLJdirect.
The following analysis of the results of operations and financial condition of
DLJdirect should be read in conjunction with the Combined Financial Statements
and the related Notes thereto, and with the Condensed Consolidated Financial
Statements and related Notes of DLJ 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 approximately $65 million on advertising in 1999. It is expected that
advertising costs will increase during each remaining quarter of 1999, with the
largest increase expected to occur in the fourth quarter. 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, and accordingly, that its financial results in the near future
will be adversely affected.
RESULTS OF OPERATIONS - DLJdirect
Quarter Ended June 30, 1999 Compared to Quarter Ended June 30, 1998
DLJdirect experienced strong operating results for the quarter ended
June 30, 1999 compared to the quarter ended June 30, 1998, reflecting primarily
an increase in active accounts of 55.6% and customer trading volume of 107.4%.
Total revenues increased $31.4 million or 111.0% to $59.7 million for the
quarter ended June 30, 1999 from $28.3 million for the quarter ended June 30,
1998. Net income increased $3.9 million to $5.1 million for the quarter ended
June 30, 1998, primarily resulting from strong revenue growth and more modest
expense growth.
Commissions increased $17.0 million or 90.9% to $35.7 million.
Commissions represented 59.8% of total revenues for the quarter ended June 30,
1999 and 66.3% of total revenues for the quarter ended June 30, 1998. The
increase in commissions was due primarily to significant increases in customer
trading volume. Average trades per day increased 88.8% from 10,700 for the
quarter ended June 30, 1998 to 20,200 for the quarter ended June 30, 1999.
33
<PAGE>
Fees increased $9.4 million or 151.6% to $15.6 million. Fees
represented 26.1% of total revenues for the quarter ended June 30, 1999 and
21.8% of total revenues for the quarter ended June 30, 1998. Payments for
routing orders increased $1.2 million or 50.0% to $3.6 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 $3.2 million or 106.7% to $6.2 million primarily due to
increased demand for Internet-based technology applications. Revenue from money
market fund distribution fees increased $515,000 or 65.6% to $1.3 million. This
growth was due to an increase in customer money market fund balances of $469.1
million or 86.2% to $1,013.5 million. The remaining fees for the quarter ended
June 30, 1999 include payments in connection with public offerings, subscription
fees and account-related fees.
Interest increased $5.0 million or 147.1% to $8.4 million. Interest
represented 14.1% of total revenues for the quarter ended June 30, 1999 and
12.0% of total revenues for the quarter ended June 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 $465.9 million or 101.3% to $925.8 million. Free credits
increased $299.7 million or 111.2% to $569.2 million and short sale balances
increased $7.1 million or 23.4% to $37.5 million.
Compensation and benefits increased $6.6 million or 95.7% to $13.5
million. The increase in compensation and benefits was due primarily to growth
in the number of employees from 320 to 618. 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 $2.5 million or
37.3% to $9.2 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 $8.9 million or 207.0% to $13.2 million. The
increase in advertising was due primarily to the development of a new
advertising campaign. DLJdirect expects advertising to increase significantly
in the latter half of 1999.
Occupancy and equipment costs increased $737,000 or 58.4% to $2.0
million. Occupancy and equipment expense includes rent and operating expenses
for facilities, expenditures for repairs and maintenance, and the 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 $1.2 million or 80.0% to $2.7 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 $673,000 or 55.9% to $531,000. 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 $2.8 million or 63.6% to $7.2
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 June 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 for legal services. Professional fees increased $1.9 million or
211.1% to $2.8 million primarily due to the development of advertising
strategies and the start-up of operations in the UK and Japan and to the
continuing expansion in Charlotte, North Carolina. Miscellaneous expenses
increased $1.2 million or 133.3% to $2.1 million. Miscellaneous expenses
consisted primarily of accruals for bad debt expense, postage, travel and
entertainment, information services, customer service related expense, employee
registration fees and expenses for new account credit checks.
34
<PAGE>
Income before income tax provision (benefit) and equity in net loss of
joint venture increased $9.2 million from $2.0 million for the quarter ended
June 30, 1998 to income of $11.2 million for the quarter ended June 30, 1999.
The provision (benefit) for income taxes for the quarter ended June 30, 1998 and
for the quarter ended June 30, 1999 was $798,000, representing a 40.8% effective
tax rate, and $5.2 million, representing a 46.3% effective tax rate,
respectively. The increase in DLJdirect's effective tax rate for the quarter
ended June 30, 1999 was due to increased activity in multiple state
jurisdictions.
In March 1999, DLJdirect entered into a 10-year joint venture agreement
with Sumitomo Bank, the second largest bank in Japan. Pursuant to the agreement,
a Japanese corporation was formed, and it commenced operations as of April 1,
1999. DLJdirect has a 50% interest in the corporation. For the quarter ended
June 30, 1999, DLJdirect's equity in net loss of joint venture was $956,000.
As a result of the foregoing factors, net income increased to $5.1
million for the quarter ended June 30, 1999 from $1.2 million for the quarter
ended June 30, 1998. For the period the Tracking Stock was outstanding
(May 28 to June 30, 1999), net income applicable to the shareholders of
DLJdirect Common Stock was $49 thousand.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
DLJdirect experienced strong operating results for the six months ended
June 30, 1999 compared to the six months ended June 30, 1998, reflecting
primarily an increase in active accounts of 55.6% and customer trading volume of
109.6%. Total revenues increased $54.6 million or 104.4% to $106.9 million for
the six months ended June 30, 1999 from $52.3 million for the six months ended
June 30, 1998. Net income increased $13.3 million to $12.2 million from a net
loss of $1.1 million, primarily resulting from strong revenue growth and modest
expense growth.
Commissions increased $32.9 million or 94.3% to $67.8 million.
Commissions represented 63.4% of total revenues for the six months ended June
30, 1999 and 66.7% of total revenues for the six months ended June 30, 1998. The
increase in commissions was due primarily to significant increases in customer
trading volume. Average trades per day increased 109.9% from 10,100 for the six
months ended June 30, 1998 to 21,200 for the six months ended June 30, 1999.
Fees increased $13.9 million or 123.0% to $25.2 million. Fees
represented 23.6% of total revenues for the six months ended June 30, 1999 and
21.6% of total revenues for the six months ended June 30, 1998. Payments for
routing orders increased $1.4 million or 31.1% to $5.9 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 $4.9 million or 89.1% to $10.4 million primarily due to
increased demand for Internet-based technology applications. Revenue from money
market fund distribution fees increased $1.4 million or 127.3% to $2.5 million.
This growth was due to an increase in customer money market fund balances of
$469.1 million or 86.2% to $1,013.5 million. The remaining fees for the six
months ended June 30, 1999 include payments in connection with public offerings,
subscription fees and account-related fees.
Interest increased $7.8 million or 125.8% to $14.0 million. Interest
represented 13.1% of total revenues for the six months ended June 30, 1999 and
11.9% of total revenues for the six months ended June 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 $465.9 million or 101.3% to $925.8 million. Free credits
increased $299.7 million or 111.2% to $569.2 million and short sale balances
increased $7.1 million or 23.4% to $37.5 million.
Compensation and benefits increased $11.5 million or 90.6% to $24.2
million. The increase in compensation and benefits was due primarily to growth
in the number of employees from 320 to 618. 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 $5.4 million or
42.5% to $18.1 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 $6.0 million or 45.1% to $19.3 million. The
increase in advertising was due primarily to the development of a new
advertising campaign. DLJdirect expects advertising to increase significantly in
the latter half of 1999.
35
<PAGE>
Occupancy and equipment costs increased $1.2 million or 52.2% to $3.5
million. Occupancy and equipment expense includes rent and operating expenses
for facilities, expenditures for repairs and maintenance, and the 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 $2.7 million or 100.0% to $5.4 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 $496,000 or 21.6% to $1.8 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. Fees
related to systems maintenance and support grew $572,000 or 50.7% to $1.7
million during the six months ended June 30, 1999 due to increased business
activity and initial support in the United Kingdom.
Other operating expenses increased $3.9 million or 48.1% to $12.0
million. Operating expenses are comprised of professional fees, printing and
stationery, economic and investment research, allocated corporate overhead and
miscellaneous expenses. For the six months ended June 30, 1998, other operating
expenses also included license fees of $2.2 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 for legal services. Professional fees increased $2.1 million or
131.3% to $3.7 million primarily due to the development of advertising
strategies and the start-up operations in the UK and Japan and to the continuing
expansion in Charlotte, North Carolina. Miscellaneous expenses increased $2.0 or
133.3% to $3.5 million. Miscellaneous expenses consisted primarily of accruals
for bad debt expense, postage, 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 $24.4 million from a loss of $1.9 million for the six
months ended June 30, 1998 to income of $22.5 million for the six months ended
June 30, 1999. The provision (benefit) for income taxes for the six months ended
June 30, 1998 and for the six months ended June 30, 1999 was $(761,000)
representing a 40.9% effective tax rate, and $9.3 million, representing a 41.3%
effective tax rate, respectively.
In March 1999, DLJdirect entered into a 10-year joint venture agreement
with Sumitomo Bank, the second largest bank in Japan. Pursuant to the agreement,
a Japanese corporation was formed, and it commenced operations as of April 1,
1999. DLJdirect has a 50% interest in the corporation. For the six months ended
June 30, 1999, DLJdirect's equity in net loss of joint venture was $956,000.
As a result of the foregoing factors, net income increased to $12.2
million for the six months ended June 30, 1999 from a net loss of $1.1 million
for the six months ended June 30, 1998. For the period the Tracking Stock was
outstanding (May 28 to June 30, 1999), net income applicable to the shareholders
of DLJdirect Common Stock was $49 thousand.
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 $235.9 million, before
certain costs of issuance, as a result of the initial public offering by DLJ of
18.4 million shares of DLJdirect common stock on May 28, 1999. Capital
contributions amounted to $5.0 million in the six months ended June 30, 1998 and
$1.0 million for the six months ended June 30, 1999. The value of equipment
acquired through leases of fixed assets through an affiliate totaled $2.1
million for the six months ended June 30, 1998 and $5.3 million for the six
months ended June 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 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
June 30, 1999, DLJdirect had approximately $241 million invested in money market
accounts and other short-term investments. DLJ intends to fund DLJdirect's
liquidity needs in the ordinary course
36
<PAGE>
of business. However, significant expenditures will be funded on a case by case
basis as determined by the board of directors of DLJ. The board of directors of
DLJ will determine, in its sole discretion, whether to provide any particular
funds to either DLJ 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 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 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.
Cash provided by (used in) operating activities totaled $913,000 and
$24.8 million for the six months ended June 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 six
months of 1998, receivables from brokers, dealers and others increased $428,000.
This increase in assets was offset by increases in operating liabilities
including accounts payable and accrued expenses of $2.8 million. In the first
six months of 1999, there were increased assets including receivables from
brokers, dealers and others of $7.0 million. These increases were offset by
increases in securities sold, not yet purchased of $2.5 million and accounts
payable and accrued expenses of $15.1 million.
Cash provided by (used in) investing activities totaled $1.2 million
for the six months ended June 30, 1998. Net proceeds from the sale of office
facilities amounted to $1.2 million for the six months ended June 30, 1998. In
March 1999, DLJdirect entered into a 10-year joint venture agreement with
Sumitomo Bank to form DLJdirect SFG Securities. For the six months ended June
30, 1999, DLJdirect invested $12.4 million in exchange for a 50% interest in
this joint venture.
For the six months ended June 30, 1998 and 1999, net cash provided by
financing activities totaled $5.0 million and $201.8 million, respectively. In
the first six months of 1998 and 1999, respectively, $5.0 million and $1.0
million was provided by capital contributions from DLJ.
DLJdirect received net proceeds of $234.0 million from the 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'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.
37
<PAGE>
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, and approximately 56% of the
significant third parties claim their products and/or services are currently
Year 2000 compliant. DLJdirect believes that the remaining 44% of significant
third parties will be Year 2000 compliant by August 31, 1999. DLJdirect intends
to have in place a Year 2000 compliant back-up provider for products or services
it deems still in question. All significant third parties have provided
assurances that they are taking necessary steps to be Year 2000 compliant.
Pershing has informed DLJdirect that it is taking steps to be Year 2000
compliant by August 31, 1999.
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 is evaluating the
possibility of obtaining 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.
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>
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 April 22, 1999
2. Form 8-K dated April 23, 1999
3. Form 8-K dated July 23, 1999
39
<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.
August 14, 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)
40
<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
41
<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 Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------------ ----------- ------------ --------
<S> <C> <C> <C> <C>
DLJ Common Stock
Weighted Average Common Shares:
Average Common Shares Outstanding 125,409 117,236 124,625 116,110
Average Restricted Stock Units Outstanding 158 158 158 134
------- ------- ------- -------
Weighted Average Common Shares Outstanding 125,567 117,394 124,783 116,244
======== ======== ======== ========
Earnings:
Net Income $165,650 $142,300 $287,300 $276,450
Less: Preferred Stock Divid 5,289 5,289 10,578 10,732
Earnings Applicable to Common
Shares-DLJdirect
49 -- 49 --
------- -------- -------- --------
Earnings Applicable to Common Shares $160,312 $137,011 $276,673 $265,718
======== ======== ======== ========
Basic Earnings Per Common Share $ 1.28 $ 1.17 $ 2.22 $ 2.29
======== ======== ======== ========
DLJdirect Common Stock
Weighted Average Common Shares:
Average Common Shares Outstanding 18,400 18,400
======== ========
Earnings:
Net Income $ 49 $ 49
-------- --------
Earnings Applicable to Common Shares $ 49 $ 49
======== ========
Basic Earnings Per Common Share $ 0.00 $ 0.00
======== ========
</TABLE>
42
<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 Six Months Ended
June 30, March 31,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
DLJ Common Stock
Weighted Average Common Shares:
Average Common Shares Outstanding 125,409 117,236 124,625 116,110
Average Restricted Stock Units Outstanding 1,104 2,087 1,272 2,880
Average Common Shares Issuable Under
Employee Benefit Plans 13,887 11,338 13,416 10,805
-------- -------- -------- --------
Weighted Average Common Shares Outstanding 140,400 130,661 139,313 129,795
======== ======== ======== ========
Earnings:
Net Income $165,650 $142,300 $287,300 $276,450
Less: Preferred Stock Dividend Requirement 5,289 5,289 10,578 10,732
Earnings Applicable to Common
Shares-DLJdirect 49 -- 49 --
-------- -------- -------- --------
Earnings Applicable to Common Shares $160,312 $137,011 $276,673 $265,718
======== ======== ======== ========
Diluted Earnings Per Common Share $ 1.14 $ 1.05 $ 1.99 $ 2.05
======== ======== ======== ========
DLJdirect Common Stock
Weighted Average Common Shares:
Average Common Shares Outstanding 18,400 18,400
Average Common Shares Issuable Under
Employee Benefit Plans 2,023 2,023
-------- --------
Weighted Average Common Shares Outstanding 20,423 20,423
======== ========
Earnings:
Net Income $ 49 $ 49
-------- --------
Earnings Applicable to Common Shares $ 49 $ 49
======== ========
Diluted Earnings Per Common Share $ 0.00 $ 0.00
======== ========
</TABLE>
43
<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 Six
For the Years Ended Months Ended
-------------------------------------------------------------- ------------
1994 1995 1996 1997 1998 6/99
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Income before provision
for income taxes $ 205,000 $ 298,500 $ 473,800 $ 661,100 $ 600,500 $ 456,000
Add: Fixed Charges
Interest expense (gross) 2,116,655 2,699,769 2,865,800 4,012,209 4,501,242 2,231,466
Interest factor in rents 18,565 22,064 25,515 29,351 38,517 23,688
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges 2,135,220 2,721,833 2,891,315 4,041,560 4,539,759 2,255,154
Earnings before fixed
charges, and provision
for income taxes $2,340,220 $3,020,333 $3,365,115 $4,702,660 $5,140,259 $2,711,154
========== ========== ========== ========== ========== ==========
Ratio of earnings to fixed
charges 1.10 1.11 1.16 1.16 1.13 1.20
========== ========== ========== ========== ========== ==========
</TABLE>
<PAGE>
EXHIBIT 12.1
<TABLE>
DONALDSON, LUFKIN & JENRETTE, INC.
STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
(In thousands, except for ratio)
<CAPTION>
For the Six
For the Years Ended Months Ended
-------------------------------------------------------------- ------------
1994 1995 1996 1997 1998 6/99
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Income before provision
for income taxes $ 205,000 $ 298,500 $ 473,800 $ 661,100 $ 600,500 $ 456,000
Add: Fixed Charges
Interest (gross) 2,116,655 2,699,769 2,865,800 4,012,209 4,501,242 2,231,466
Interest factor in rents 18,565 22,064 25,515 29,351 38,517 23,688
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges 2,135,220 2,721,833 2,891,315 4,041,560 4,539,759 2,255,154
Add: Preferred dividends 20,970 19,868 18,653 12,144 21,310 10,578
Combined fixed charges
and preferred dividends 2,156,190 2,741,701 2,909,968 4,053,704 4,561,069 2,265,732
Earnings before fixed
charges and provision
for income taxes $2,340,220 $3,020,333 $3,365,115 $4,702,660 $5,140,259 $2,711,154
========== ========== ========== ========== ========== ==========
Ratio of earnings to fixed
charges and preferred
dividends 1.09 1.10 1.16 1.16 1.13 1.20
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,538,198
<RECEIVABLES> 12,415,312
<SECURITIES-RESALE> 21,604,691
<SECURITIES-BORROWED> 30,292,713
<INSTRUMENTS-OWNED> 18,609,489
<PP&E> 493,490
<TOTAL-ASSETS> 86,926,006
<SHORT-TERM> 1,135,500
<PAYABLES> 13,810,255
<REPOS-SOLD> 37,927,782
<SECURITIES-LOANED> 10,688,662
<INSTRUMENTS-SOLD> 11,868,022
<LONG-TERM> 4,423,749
200,000
375,000
<COMMON> 12,572
<OTHER-SE> 3,223,733
<TOTAL-LIABILITY-AND-EQUITY> 86,926,006
<TRADING-REVENUE> 392,463
<INTEREST-DIVIDENDS> 270,068
<COMMISSIONS> 570,012
<INVESTMENT-BANKING-REVENUES> 754,517
<FEE-REVENUE> 45,066
<INTEREST-EXPENSE> 736,604
<COMPENSATION> 1,435,723
<INCOME-PRETAX> 456,000
<INCOME-PRE-EXTRAORDINARY> 456,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 287,300
<EPS-BASIC> 2.22
<EPS-DILUTED> 1.99
</TABLE>
