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, 2000
or
----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to ______to______
Commission file number 1-6862
DONALDSON, LUFKIN & JENRETTE, INC.
--------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-1898818
--------------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
277 Park Avenue, New York, New York 10172
--------------------------------------- -----------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (212) 892-3000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ( X ) No ( ).
As of August 3, 2000, the latest practicable date, there were 127,849,217 shares
of DLJ Common Stock, $0.10 par value, and 18,400,000 shares of DLJdirect Common
Stock, $0.10 par value, outstanding.
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
TABLE OF CONTENTS
Part I FINANCIAL INFORMATION
Page
Number
------
Item 1. Financial Statements
Donaldson, Lufkin & Jenrette Inc. Consolidated Financial
Statements
Condensed Consolidated Statements of Financial Condition
at June 30, 2000 and December 31, 1999 (Unaudited)......... 4
Condensed Consolidated Statements of Income for the three
and six months ended June 30, 2000 and 1999 (Unaudited).... 6
Condensed Consolidated Statements of Changes in
Stockholders' Equity for the six months ended
June 30, 2000 (Unaudited).................................. 7
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2000 and 1999 (Unaudited)........ 8
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................ 10
DLJdirect Combined Financial Statements
Condensed Combined Statements of Financial Condition at
June 30, 2000 and December 31, 1999 (Unaudited)............ 26
Condensed Combined Statements of Operations for the three
and six months ended June 30, 2000 and 1999 (Unaudited) ... 27
Condensed Combined Statements of Changes in Allocated
Equity for the six months ended June 30, 2000 (Unaudited).. 28
Condensed Combined Statements of Cash Flows for the six
months ended June 30, 2000 and 1999 (Unaudited)............ 29
Notes to Condensed Combined Financial Statements
(Unaudited)................................................ 30
2
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
TABLE OF CONTENTS-CONTINUED
Page
Number
------
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
Item 3. Quantitative and Qualitative
Disclosures About Market Risk............................. 23
Part II OTHER INFORMATION
Item 1. Legal Proceedings
Donaldson, Lufkin & Jenrette, Inc............................ 24
DLJdirect.................................................... 38
Item 4. Submission of Matters to a Vote
of Security Holders ....................................... 25
Item 6. Exhibits and Reports on Form 8-K............................. 39
Signature................................................................. 40
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,
2000 1999
------------- ------------
ASSETS
<S> <C> <C>
Cash and cash equivalents.................................................... $ 1,794,238 $ 2,020,543
Cash and securities segregated for regulatory purposes or
deposited with clearing organizations..................................... 154,301 196,249
Collateralized short-term agreements:
Securities purchased under agreements to resell........................... 28,281,810 29,538,141
Securities borrowed....................................................... 34,891,468 30,348,609
Receivables:
Customers................................................................. 10,742,937 8,671,447
Brokers, dealers and other................................................ 10,227,567 5,978,065
Financial instruments owned, at value:
U.S. government and agencies.............................................. 13,920,225 14,543,947
Corporate debt............................................................ 5,863,149 5,379,440
Foreign sovereign debt.................................................... 2,141,134 3,018,175
Mortgage whole loans...................................................... 3,072,388 1,848,391
Equity and other.......................................................... 2,401,481 3,192,467
Long-term corporate development investments............................... 1,493,081 1,432,669
Office facilities, at cost, (net of accumulated depreciation and
amortization of $421,933 and $364,006, respectively)...................... 662,897 573,878
Other assets and deferred amounts............................................ 2,365,895 2,270,061
--------------- --------------
Total Assets................................................................. $ 118,012,571 $109,012,082
=============== ==============
</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,
2000 1999
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Commercial paper and short-term borrowings...................................... $ 1,048,229 $ 1,358,188
Collateralized short-term financings:
Securities sold under agreements to repurchase.............................. 52,086,225 56,474,394
Securities loaned........................................................... 14,151,409 11,541,759
Payables:
Customers................................................................... 7,479,549 7,792,857
Brokers, dealers and other.................................................. 9,614,555 4,780,631
Financial instruments sold not yet purchased, at value:
U.S. government and agencies................................................ 11,038,503 7,530,070
Corporate debt.............................................................. 835,351 624,639
Equities and other.......................................................... 6,060,989 4,788,819
Accounts payable and accrued expenses........................................... 2,615,640 3,295,448
Other liabilities............................................................... 1,206,421 1,408,945
Long-term borrowings............................................................ 7,358,535 5,309,090
Company-obligated mandatorily redeemable trust 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;
127,805,766 and 126,014,091 shares issued
and outstanding, respectively)......................................... 12,781 12,601
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 1,840
Restricted stock units (10,358,294 units authorized; 51,430
and 1,099,955 units issued and outstanding, respectively)................ 517 11,265
Paid-in capital............................................................. 1,339,744 1,298,674
Retained earnings........................................................... 2,586,678 2,205,818
Accumulated other comprehensive income...................................... 605 2,044
Employee deferred compensation stock trust.................................. 13,591 13,591
Common stock issued to employee deferred compensation trust................. (13,591) (13,591)
---------------- --------------
Total stockholders' equity............................................. 4,317,165 3,907,242
--------------- --------------
Total Liabilities and Stockholders' Equity...................................... $ 118,012,571 $ 109,012,082
=============== ==============
</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 Six Months Ended
June 30, June 30,
2000 1999 2000 1999
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Revenues:
Commissions............................................... $ 369,483 $ 291,112 $ 841,502 $ 572,104
Underwritings............................................. 191,271 409,454 441,896 666,368
Fees...................................................... 514,811 332,673 936,798 619,748
Interest, net of interest to finance U.S. government,
agency and mortgage-backed securities of
$1,081,852, and $789,611, $2,052,143,
$1,494,862, respectively................................ 1,027,184 499,902 1,840,846 976,563
Principal transactions-net:
Trading................................................. 214,252 218,418 599,008 392,463
Investment.............................................. 19,470 25,155 149,359 28,179
Other..................................................... 38,881 33,802 58,935 48,541
----------- ------------ ----------- ----------
Total revenues......................................... 2,375,352 1,810,516 4,868,344 3,303,966
----------- ------------ ----------- ----------
Costs and Expenses:
Compensation and benefits................................. 848,261 800,009 1,914,323 1,435,723
Interest.................................................. 822,727 380,651 1,426,817 736,604
Brokerage, clearing, exchange fees and other.............. 88,896 76,326 192,693 147,547
Occupancy and related costs............................... 52,996 43,032 101,890 84,120
Communications and technology............................. 126,802 102,054 250,288 193,037
Other operating expenses.................................. 178,170 149,444 335,633 250,935
----------- ------------ ----------- ----------
Total costs and expenses............................... 2,117,852 1,551,516 4,221,644 2,847,966
----------- ------------ ----------- ----------
Income before provision for income taxes...................... 257,500 259,000 646,700 456,000
----------- ------------ ----------- -----------
Provision for income taxes.................................... 95,300 93,350 239,300 168,700
----------- ------------ ----------- -----------
Net income.................................................... $ 162,200 $ 165,650 $ 407,400 $ 287,300
=========== ============ =========== ==========
Dividends on preferred stock.................................. $ 5,289 $ 5,289 $ 10,578 $ 10,578
=========== ============ =========== ==========
Earnings applicable to common shares.......................... $ 156,911 $ 160,361 $ 396,822 $ 276,722
=========== ============ =========== ==========
Earnings (loss) applicable to common shares:
DLJ ...................................................... $ 158,096 $ 160,312 $ 395,570 $ 276,673
=========== ============ =========== ==========
DLJdirect................................................. $ (1,185) $ 49 $ 1,252 $ 49
=========== ============ =========== ==========
Earnings (loss) per common share:
DLJ
Basic.................................................. $ 1.24 $ 1.28 $ 3.10 $ 2.22
Diluted................................................ $ 1.15 $ 1.14 $ 2.87 $ 1.99
=========== ============ =========== ==========
DLJdirect
Basic.................................................. $ (0.06) $ 0.00 $ 0.07 $ 0.00
Diluted................................................ $ (0.06) $ 0.00 $ 0.07 $ 0.00
=========== ============ =========== ==========
Weighted average common shares:
DLJ
Basic.................................................. 127,826 125,567 127,418 124,783
Diluted................................................ 137,267 140,400 137,836 139,313
=========== ============ =========== ==========
DLJdirect
Basic.................................................. 18,400 18,400 18,400 18,400
Diluted................................................ 18,400 20,423 18,401 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, 1999 and the Six Months Ended June 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Accumulated
DLJ DLJdirect Restricted Other
Preferred Common Common Stock Paid-in Retained Comprehensive
Stock Stock Stock Units Capital Earnings Income Total
------- -------- -------- ----------- ------- -------- -------------- -------
Balances at
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1998....... $ 375,000 $ 12,281 $ - $ 21,333 $ 858,066 $ 1,657,710 $ 3,309 $ 2,927,699
Net income................ - - - - - 600,700 - 600,700
Translation adjustment.... - - - - - - (1,265) (1,265)
Total comprehensive
income................. 599,435
Net proceeds from
issuance of DLJdirect
Common Stock........... - - 1,840 - 344,751 - - 346,591
Dividends:
DLJ Common Stock
($0.25 per share)...... - - - - - (31,412) - (31,412)
Preferred stock
($2.82 per share)...... - - - - - (21,180) - (21,180)
Exercise of stock
options................ - 222 - - 72,873 - - 73,095
Conversion of restricted
stock units............ - 98 (10,068) 22,984 - 13,014
--------- -------- -------- --------- ---------- ---------- ------- -----------
Balances at
December 31, 1999.... 375,000 12,601 1,840 11,265 1,298,674 2,205,818 2,044 3,907,242
Net income............... - - - - - 407,400 - 407,400
Translation adjustment... - - - - - - (1,439) (1,439)
Total comprehensive
income............... 405,961
Dividends:
DLJ Common Stock
($0.125 per share).... - - - - - (15,962) (15,962)
Preferred stock
($1.4104 per share)... - - - - - (10,578) - (10,578)
Exercise of stock
options............... - 75 - - 18,875 - - 18,950
Conversion of restricted
stock units ......... - 105 - (10,748) 22,195 - 11,552
--------- -------- -------- --------- ---------- ---------- ------- ----------
Balances at
June 30, 2000......... $ 375,000 $ 12,781 $ 1,840 $ 517 $ 1,339,744 $ 2,586,678 $ 605 $ 4,317,165
========= ======== ======= ========= =========== =========== ========== ===========
</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, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
------------- -------------
Cash flows from operating activities:
<S> <C> <C>
Net income....................................................................... $ 407,400 $ 287,300
------------- -------------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization.................................................. 65,807 41,099
Deferred taxes................................................................. 52,255 (43,453)
Increase in unrealized appreciation of long-term corporate development
investments................................................................. (49,095) (29,649)
Foreign currency translation adjustment................................... (1,439) (3,266)
(Increase) decrease in operating assets:
Cash and securities segregated for regulatory
purposes or deposited with clearing organizations........................... 41,948 817,827
Securities purchased under agreements to resell............................... (3,907,257) (2,818,870)
Securities borrowed........................................................... (4,542,859) (6,325,074)
Receivables from customers.................................................... (2,071,490) (1,220,822)
Receivables from brokers, dealers and other................................... (4,249,502) (897,671)
Financial instruments owned, at value......................................... 584,043 (4,847,167)
Other assets and deferred amounts............................................. (81,933) (70,524)
Increase (decrease) in operating liabilities:
Securities sold under agreements to repurchase................................ 3,907,257 2,818,870
Securities loaned............................................................. 2,609,650 3,366,476
Payables to customers......................................................... (313,308) 210,589
Payables to brokers, dealers and other........................................ 4,833,924 3,699,283
Financial instruments sold not yet purchased, at value........................ 4,991,315 2,929,073
Accounts payable and accrued expenses......................................... (679,808) (149,353)
Other liabilities............................................................. (184,140) 239,783
------------ -------------
Net cash provided by (used in) operating activities................................ $ 1,412,768 $ (1,995,549)
----------- ------------
</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, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
--------------- ------------
<S> <C> <C>
Cash flows from investing activities:
Net (payments for) proceeds from:
Purchases of long-term corporate development investments.................. $ (552,431) $ (107,764)
Sales of long-term corporate development investments...................... 541,114 43,954
Office facilities......................................................... (150,956) (87,056)
Other assets.............................................................. (70,026) (112,580)
--------------- -----------
Net cash used in investing activities........................................... (232,299) (263,446)
-------------- ------------
Cash flows from financing activities: Net proceeds from (payments for):
Short-term financings....................................................... (3,441,797) 1,230,713
Issuance of:
DLJdirect stock........................................................... - 346,612
Senior notes.............................................................. 503,021 648,738
Senior secured floating rate notes........................................ (5,065) (111,179)
Medium-term notes......................................................... 1,441,914 404,508
Structured borrowings..................................................... 109,064 -
Other long-term debt...................................................... 511 (321)
Dividends................................................................... (26,540) (26,173)
Exercise of stock options................................................... 12,118 29,644
------------- -------------
Net cash provided by (used in) financing activities............................. (1,406,774) 2,522,542
------------ -----------
(Decrease) increase in cash and cash equivalents................................ (226,305) 263,547
Cash and cash equivalents at beginning of period................................ 2,020,543 1,049,253
----------- ------------
Cash and cash equivalents at end of period...................................... $ 1,794,238 $ 1,312,800
=========== ============
</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, 2000
1. Basis of Presentation
---------------------
The condensed consolidated financial statements include Donaldson, Lufkin &
Jenrette, Inc. and its subsidiaries ("DLJ Inc." or the "Company"). All
significant intercompany balances and transactions have been eliminated. The
Company is a majority-owned subsidiary of AXA Financial Inc. ("AXA Financial")
and its subsidiaries. The Company's separate financial statements reflect AXA
Financial's cost basis, established in 1985 when they acquired the Company.
Certain financial information that is normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
but is not required for interim reporting purposes has been condensed or
omitted. These condensed consolidated financial statements reflect, in the
opinion of management, all adjustments (consisting of normal, recurring
accruals) necessary for a fair presentation of the condensed consolidated
financial position and results of operations for the interim periods presented.
The results of operations for interim periods are not necessarily indicative of
results for the entire year. These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto as of
and for the year ended December 31, 1999 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 period financial statements to
conform to the 2000 presentation.
2. Issuance of DLJdirect Common Stock
----------------------------------
DLJdirect represents a combination of the assets and liabilities of the
Company's online discount brokerage and related investment services business,
rather than a separately incorporated entity. DLJdirect Common Stock tracks the
separate performance of these businesses for periods subsequent to the date of
the offering ("Tracking Stock"). On May 28, 1999 ("the closing date"), the
Company issued in an initial public offering 18.4 million shares of DLJdirect
Common Stock. Prior to issuing the Tracking Stock, the Company's existing common
stock was designated as DLJ Common Stock to reflect the performance of the
Company's primary businesses, i.e., Banking, Fixed Income, Equities and
Financial Services, plus a retained interest in DLJdirect. All of the Company's
businesses other than those included in DLJdirect, plus the Company's retained
interest in DLJdirect are referred to as DLJ. Holders of the Tracking Stock are
common stockholders of the Company but have no voting rights, except in certain
limited circumstances, and will be subject to all of the risks associated with
an investment in the Company and all of its businesses, assets and liabilities.
Earnings applicable to common shares for DLJ includes a 100% retained interest
in DLJdirect for periods prior to the closing date and 82.1% for subsequent
periods. Operating results reported by DLJ Inc. prior to the closing date were
not affected by the issuance of the Tracking Stock.
3. Income Taxes
------------
Income taxes for interim period condensed consolidated financial statements have
been accrued using the Company's estimated effective tax rate. Federal income
taxes paid for the six months ended June 30, 2000 and 1999 were $ 244.2 million
and $106.5 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. At June 30, 2000 and
December 31, 1999 there were no borrowings secured by Company-owned securities.
The Company has a $2.0 billion commercial paper program. Obligations issued
under this program are exempt from registration under the Securities Act of
1933, as amended under Section 4(2) (the "Securities Act"). At June 30, 2000,
$1.0 billion was outstanding under this program.
10
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (UNAUDITED)
<TABLE>
<CAPTION>
Long-term borrowings: June 30, December 31,
2000 1999
---------- ----------
(IN THOUSANDS)
--------------
<S> <C> <C>
Senior notes, 5.875%-8.00% due various dates through 2008............................. $ 2,543,694 $ 2,040,673
Medium-term notes, 4.995% - 7.42% due various dates through 2016...................... 3,671,773 2,229,859
Senior secured floating rate notes due 2005........................................... 290,627 295,692
Global floating rate notes, due 2002.................................................. 349,416 348,805
Subordinated exchange notes, 9.58% due 2003.......................................... 225,000 225,000
Structured borrowings, 5.00% - 8.6517% due various dates through 2006................. 257,708 148,644
Other borrowings...................................................................... 20,317 20,417
----------- -----------
Total long-term borrowings....................................................... $ 7,358,535 $ 5,309,090
=========== ===========
Current maturities.................................................................... $ 814,966 $ 460,569
============ ===========
</TABLE>
In February 2000, the Company, filed a shelf registration with the Securities
and Exchange Commission which enables the Company to issue $3.1 billion of
senior debt, subordinated debt securities, preferred stock and warrants.
In April 2000, the Company established a Euro Medium-Term Note program which
enables it to issue up to $1.0 billion of notes. During the quarter ended June
30, 2000, the Company issued $890.4 million medium-term notes with various
maturity dates through 2005 from this program. In addition, the Company issued
$354.0 million medium-term notes with various maturity dates through 2002, under
its shelf registration statement.
For the six months ended June 30, 2000 and 1999, interest paid on all borrowings
and financing arrangements amounted to $3.4 billion and $2.2 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 $1.4 billion at June 30, 2000 and December 31,
1999. For the six months ended June 30, 2000 and 1999, the increase in net
unrealized appreciation amounted to $49.1 million and $29.6 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 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, 2000,
DLJSC's net capital of approximately $1.6 billion was 14.7 percent of aggregate
debit balances and in excess of the minimum requirement by approximately $1.4
billion.
11
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (UNAUDITED)
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, 2000, the Company and its broker-dealer subsidiaries complied with all
applicable regulatory capital adequacy requirements.
7. Earnings Per Share
------------------
Earnings per common share for periods subsequent to the issuance of the Tracking
Stock 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, excluding the effect of
potentially dilutive securities. DLJ's retained interest excludes the effect of
the 10 million shares of common stock that have been reserved for issuance under
the DLJdirect Incentive Compensation Plan. 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. During the first
quarter of 2000, 1.0 million RSUs vested and were converted into the Company's
common stock. This amount is included in the calculation of diluted earnings per
common share.
For DLJdirect, basic earnings per share is calculated by dividing earnings
applicable to common shares for the period the Tracking Stock was outstanding 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. 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 2000 1999 2000 1999
---------------- ----- ----- ----- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Earnings applicable to common shares-basic and diluted... $ 158,096 $ 160,312 $395,570 $ 276,673
========= =========== ======== =========
Weighted average common shares-basic............................ 127,826 125,567 127,418 124,783
Effect of dilutive securities:
Restricted stock units........................................ (106) 946 79 1,114
Stock options................................................. 9,547 13,887 10,339 13,416
---------- ----------- -------- --------
Weighted average common shares-diluted........................... 137,267 140,400 137,836 139,313
========== =========== ======== =========
DLJdirect Common Stock
----------------------
Earnings (loss) applicable to common shares-basic and diluted... $ (1,185) $ 49 $ 1,252 $ 49
========== =========== ========= =========
Weighted average common shares-basic............................ 18,400 18,400 18,400 18,400
Effect of diluted stock options................................. 0 2,023 1 2,023
---------- ------------ -------- ---------
Weighted average common shares - diluted........................ 18,400 20,423 18,401 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 various transactions involving derivatives. In general,
derivatives are contractual agreements that derive their values from the
performance of underlying assets, interest or currency exchange rates, or a
variety of indices. The Company enters into derivative transactions primarily
for trading purposes, or to meet clients' needs. These transactions involve
options, forwards, futures and swaps. The Company also enters into interest rate
and cross currency swaps to modify the characteristics of periodic interest
payments associated with some of its long-term debt obligations.
For further discussion of these matters, refer to Note 9 of the Consolidated
Financial Statements in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
QUANTITATIVE DISCLOSURES FOR ALL TRADING DERIVATIVES
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. The notional (contract) amounts for derivatives
outstanding at June 30, 2000 and December 31, 1999 are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
(IN BILLIONS)
-------------
<S> <C> <C>
Options written............................................... $ 16.2 $ 15.1
Options purchased............................................. $ 15.7 $ 7.4
Forward contracts purchased................................... $ 49.5 $ 35.6
Forward contracts sold........................................ $ 55.3 $ 41.1
Futures contracts purchased................................... $ 5.2 $ 2.9
Futures contracts sold........................................ $ 2.4 $ 4.3
Swaps......................................................... $ 37.6 $ 24.5
The fair values of derivatives outstanding at June 30, 2000 and December 31,
1999 are as follows:
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
(IN MILLIONS)
-------------
<S> <C> <C> <C> <C>
Options........................................... $ 378.7 $ 869.7 $ 519.9 $ 1,002.6
Forward contracts................................. $ 230.8 $ 165.1 $ 327.1 $ 247.3
Futures contracts................................. $ 36.1 $ 13.6 $ 3.5 $ 9.8
Swaps............................................. $ 409.2 $ 377.8 $ 256.9 $ 240.2
The average fair values of derivatives for the six months ended June 30, 2000
and the year ended December 31, 1999 are as follows:
<CAPTION>
Six Months Ended Year Ended
June 30, 2000 December 31, 1999
------------- -----------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
(IN MILLIONS)
-------------
<S> <C> <C> <C> <C>
Options........................................... $ 405.6 $ 964.1 $169.5 $ 444.8
Forward contracts................................. $ 326.4 $ 263.1 $329.0 $ 312.6
Futures contracts................................. $ 25.3 $ 24.1 $ 10.3 $ 7.4
Swaps............................................. $ 401.0 $ 360.6 $253.3 $ 94.3
</TABLE>
The majority of the Company's derivatives are short-term in duration.
13
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (UNAUDITED)
DISCLOSURES FOR ALL NON-TRADING DERIVATIVES
The Company also enters into interest rate and cross currency swaps to modify
the characteristics of periodic interest payments associated with some of its
long-term debt obligations. At June 30, 2000 and December 31, 1999, the notional
amount of these swaps was $4.4 billion and $3.3 billion, respectively.
9. Commitments and Contingencies
-----------------------------
The Company issues letters of credit for which it is contingently liable for
$363.3 million at June 30, 2000.
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, 2000, unfunded senior bank loan commitments outstanding
amounted to $925.1 million.
At June 30, 2000, the Company has commitments of $689.2 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 10 and 11 of the Consolidated Financial Statements in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
10. Industry Segment and Geographic Data
------------------------------------
The Company operated and managed its businesses through four operating segments:
Banking, Equities, Fixed Income and Financial Services. The following is a
summary of the Company's segment data:
<TABLE>
<CAPTION>
Fixed Financial
Banking Income Equities Services Elimination
For the Quarters Ended: Group Group Group Group & Other Total
----------------------- -------- ------ -------- --------- ------------ -----
(IN MILLIONS)
June 30, 2000
-------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues from external sources....... $ 472.5 $ 121.2 $ 345.8 $ 428.0 $ (19.4) $ 1,348.1
Net intersegment revenues................ - - (1.3) 42.2 (40.9) 0.0
Net interest revenue..................... (10.9) 42.6 14.6 97.0 61.2 204.5
------- ------- ------- ------- -------- ---------
Total net revenues. $ 461.6 $ 163.8 $ 359.1 $ 567.2 $ 0.9 $ 1,552.6
======= ======= ======= ======= ======== =========
Income before income taxes............... $ 96.4 $ 30.0 $ 49.1 $ 108.6 $ (26.6) $ 257.5
======== ======= ======= ======= ======= =========
June 30, 1999
-------------
Net revenues from external sources....... $ 476.9 $ 290.2 $ 248.1 $ 333.4 $ (37.9) $ 1,310.6
Net intersegment revenues................ - (0.2) (2.2) 40.8 (38.4) 0.0
Net interest revenue..................... (2.3) 27.5 6.0 63.0 25.1 119.3
------- ------- ------- ------- ------- ---------
Total net revenues.................... $ 474.6 $ 317.5 $ 251.9 $ 437.1 $ (51.2) $ 1,429.9
======= ======= ======= ======= ======= ==========
Income before income taxes............... $ 126.0 $ 110.8 $ 24.8 $ 83.8 $ (86.4) $ 259.0
======= ======= ======= ======= ======= =========
For the Six Months Ended:
------------------------
June 30, 2000
-------------
Net revenues from external sources....... $1,027.8 $ 318.3 $ 791.9 $ 945.1 $ (55.6) $ 3,027.5
Net intersegment revenues................ - 0.0 (3.1) 87.4 (84.3) 0.0
Net interest revenue..................... (18.1) 90.7 20.3 210.2 110.9 414.0
-------- ------- ------- ------- --------- -----------
Total net revenues. $ 1,009.7 $ 409.0 $ 809.1 $ 1,242.7 $ (29.0) $ 3,441.5
========= ======= ======= ========= ======= =========
Income before income taxes............... $ 250.8 $ 111.0 $ 143.2 $ 279.1 $ (137.4) $ 646.7
========== ======= ======= ========== ======== ==========
</TABLE>
14
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (UNAUDITED)
<TABLE>
<CAPTION>
Fixed Financial
Banking Income Equities Services Elimination
For the Six Months Ended (Cont'd): Group Group Group Group & Other Total
---------------------------------- ----- ----- ----- ----- ------- -----
(IN MILLIONS)
June 30, 1999
-------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues from external sources....... $ 800.8 $ 471.4 $ 457.2 $ 663.6 $ (65.6) $ 2,327.4
Net intersegment revenues................ - (0.1) (3.3) 55.1 (51.7) 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 $ 843.4 $ (65.2) $ 2,567.4
========= ======= ========= ========= ========== =============
Income before income taxes............... $ 204.3 $ 173.6 $ 49.5 $ 174.4 $ (145.8) $ 456.0
========= ======= ========= ========= ========== =============
Balance sheet data:
June 30, 2000
-------------
Segment assets.......................... $ 2,395.4 $ 72,581.7 $ 7,428.2 $ 43,430.2 $(7,822.9) $ 118,012.6
========== ========== ========== ========== ========== =============
December 31, 1999
-----------------
Segment assets.......................... $ 2,273.2 $ 74,884.7 $ 5,325.5 $ 30,586.4 $(4,057.7) $ 109,012.1
========== ========== ========= ========== ========= =============
The following is a reconciliation of the Company's reported income before
provision for income taxes to the Company's consolidated totals:
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
----------------------------------------------------------------------
(IN MILLIONS)
Income before provision for income taxes:
----------------------------------------
<S> <C> <C> <C> <C>
Total income for reported segments......................... $ 284.1 $ 345.3 $ 784.1 $ 601.8
All other income (losses).................................. 61.7 (5.8) 83.0 (27.0)
Consolidation/elimination (1).............................. (88.3) (80.5) (220.4) (118.8)
-------- ------- ------- --------
Total income before provision for income taxes......... $ 257.5 $ 259.0 $ 646.7 $ 456.0
======== ======= ======= ========
(1) Consolidation/elimination represents intercompany accounts/intersegment
revenue-sharing arrangements that are eliminated in consolidation.
The Company's principal operations are located in the United States. The Company
maintains offices in Europe, Latin America and Asia, with the majority of
foreign business done through the London offices. The following are net revenues
by geographic region:
<CAPTION>
Six Months Ended
June 30,
2000 1999
--------------------------------------
(IN MILLIONS)
<S> <C> <C>
United States...................................................... $ 2,744.2 $ 2,201.4
Other foreign...................................................... 697.3 366.0
---------- ---------
Total........................................................ $ 3,441.5 $ 2,567.4
========== =========
</TABLE>
15
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (UNAUDITED)
11. Legal Proceedings.
-----------------
On July 21, 2000, in the consolidated action captioned IN RE PUBLIC OFFERING FEE
ANTITRUST LITIGATION pending in the U.S. District Court for the Southern
District of New York, plaintiffs filed a motion for leave to file a second
amended complaint. The principal proposed amendment to the previously filed
Consolidated Amended Complaint is the addition of an issuer company as a
plaintiff. On August 3, 2000, another purported class action, captioned CHS
ELECTRONICS, INC. V. CREDIT SUISSE FIRST BOSTON CORPORATION, ET AL., Case No.
00-2822, was filed in the U.S. District court for the Southern District of
Florida against 18 securities firms, including Donaldson, Lufkin & Jenrette,
Inc. ("DLJ"). The complaint makes allegations substantially similar to those
advanced in IN RE PUBLIC OFFERING FEE ANTITRUST LITIGATION, asserting that
defendants conspired to fix the "fee" paid for underwriting initial public
offering securities by setting the underwriters' discount or "spread" at 7% in
violation of the federal antitrust laws. The complaint seeks treble damages in
an unspecified amount and injunctive relief as well as attorney's fees and
costs. To date, DLJ has not been served in the action filed in Florida. DLJ and
DLJSC intend to defend themselves vigorously against all the allegations
contained in the complaints.
On or about January 31, 2000, Ameriserve Food Distribution, Inc. ("Ameriserve"),
its parent company, Nebco Evans Holding Company ("NEHC"), and related
corporations, filed Chapter 11 petitions in the U. S. Bankruptcy Court for the
District of Delaware. Over a period of several years DLJSC provided investment
banking services to Ameriserve and NEHC. A DLJ merchant banking affiliate was
for a time an investor in Ameriserve, and an employee of DLJSC and an employee
of a DLJ merchant banking affiliate were members of the board of directors of
Ameriserve. In the Bankruptcy Court proceedings discovery has been sought from
DLJ and its affiliates in connection with their relationships with these
companies. In addition, the staff of the Securities and Exchange Commission has
issued an informal request for information, and the U. S. Attorney's Office for
the Eastern District of New York has issued a grand jury subpoena requesting
information. DLJ and its affiliates are cooperating with these discovery
requests. No claim has been brought against DLJ or its affiliates to date.
Between September 1995 and October 1998, DLJSC was named as a defendant in six
separate actions filed by institutional investors who invested and lost
approximately $300 million in three hedge funds (the "Funds") managed by David
Askin ("Askin"). The Funds filed for bankruptcy in April 1994. All six
complaints have been consolidated for discovery purposes and are currently
pending in the U. S. District Court for the Southern District of New York. The
defendants are Askin, Askin Capital Management ("ACM", Askin's management
company), and two securities dealers (including DLJSC) that sold collateralized
mortgage obligations to the Funds. The only claim against DLJSC that has
survived a motion to dismiss is aiding and abetting common law fraud. The
complaints allege that DLJSC aided and abetted an alleged fraud of the investors
by Askin and ACM by selling securities that were inconsistent with the Funds'
investment objectives and by providing inaccurate monthly mark-to-market prices
for securities purchased by the Funds. The actions seek joint and several
recovery of rescissionary, compensatory, and punitive damages. DLJSC's motion
for summary judgment on the plaintiffs' claims is currently pending. DLJSC
intends to defend itself vigorously against all of the allegations contained in
the complaints.
In August 1997, DLJSC was named as a defendant in another action arising out of
the bankruptcy of the Funds. This action was brought by the "Litigation Advisory
Board," an entity created by the Funds' plan of liquidation to pursue all
unresolved claims held by the Funds. The action is currently pending in the U.
S. District Court for the Southern District of New York. The only claims against
DLJSC that have survived a motion to dismiss are for breach of contract.
Generally, the lawsuit alleges that the Funds were damaged when DLJSC issued
allegedly improper margin calls and liquidated the Funds' reverse repurchase
positions at less than fair market value. The complaint alleges that the Funds'
investors lost over $400 million in equity, but does not specify the amount of
damages that the Funds themselves claim to have suffered as a result of the
allegations made in this complaint. DLJSC intends to defend itself vigorously
against all of the allegations contained in the complaint.
Although there can be no assurance, DLJ's management does not believe that the
ultimate outcome of the matters described above will have a material adverse
effect on DLJ's consolidated financial condition. Based upon the information
currently available to it, DLJ's management cannot predict whether or not these
matters will have a material adverse effect on DLJ's results of operations in
any particular period.
In addition to the significant proceedings and matters previously disclosed, the
Company has been named as a defendant in a number of actions relating to its
various businesses including various civil actions and arbitrations arising out
of its activities as a broker-dealer in securities, as an underwriter and as an
employer, and arising out of alleged employee misconduct. Some of the actions
have been brought on behalf of various classes of claimants and seek damages of
material or indeterminate amounts. The Company is also involved, from time to
time, in proceedings with, and investigations by, governmental agencies and self
regulatory organizations. Although there can be no assurance that such other
actions, proceedings, investigations and litigation will not have a material
adverse effect on the results of operations of the Company in any future period,
depending in part on the results for such period, in the opinion of management
of the Company the ultimate resolution of any such other actions, proceedings,
investigations and litigation against the Company will not have a material
adverse effect on the consolidated financial condition and/or results of
operations of the Company.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - DONALDSON, LUFKIN & JENRETTE, INC.
BUSINESS ENVIRONMENT
--------------------
The Company's principal business activities, investment and merchant
banking, securities sales and trading and correspondent and online discount
brokerage services are, by their nature, highly competitive and subject to
general market conditions, volatile trading markets and fluctuations in the
volume of market activity. Consequently, the Company's net income and revenues
have been and are likely to continue to be, subject to wide fluctuations
reflecting the impact of many factors beyond the Company's control, including
securities market conditions, the level and volatility of interest rates,
competitive conditions and the size and timing of transactions.
The business environment in the second quarter of 2000 was
characterized by continued strong economic growth and rising interest rates,
resulting in volatile market conditions. Most major market indices fell during
the second quarter, particularly the technology-heavy NASDAQ. Higher interest
rates had a negative impact on new issuances of stocks and bonds. Domestic stock
and bond issuances decreased 24% from the second quarter of 1999. High-yield
bond issuances were particularly affected by the rising rates and the decline in
the technology sector. The demand for global financial advisory services
continued to be strong, reflecting the trends of consolidation and globalization
across industry sectors and borders. In an effort to slow the U.S. economy and
relieve inflationary pressures, the Federal Reserve Board raised the federal
funds rate 50 basis points to 6.5% on May 16, 2000, the sixth increase since
June of 1999. There are indications that this strategy has been successful, as
the economy has shown signs of slowing, while inflation has remained moderate.
There is still some uncertainty, however, which clouds the outlook for interest
rates.
RESULTS OF OPERATIONS - DLJ INC.
---------------------------------
QUARTER ENDED JUNE 30, 2000 COMPARED TO QUARTER ENDED JUNE 30, 1999
-------------------------------------------------------------------
Total revenues increased $564.9 million, or 31.2% to $2.4 billion.
Revenues increased primarily as a result of increases in commissions, fees and
interest, offset by substantial decreases in underwritings. Changes in net
revenues from external sources for each of the Company's industry segments were:
Banking Group revenues decreased $4.4 million due to increased merger and
acquisition and other advisory fees, offset by the effects of decreased
underwriting revenues; Equities Group revenues increased $97.7 million primarily
as a result of increased commissions, net interest income and strong trading
revenues, both domestically and internationally; Fixed Income Group revenues
decreased $169.0 million, principally as a result of a dramatic decline in
underwriting revenues, particularly in the high-yield markets; Financial
Services Group revenues increased $94.7 million primarily as a result of
increased commission revenues, net interest income and fee income in the
Company's correspondent and online brokerage businesses.
Commission revenues increased $78.4 million or 26.9% to $369.5 million
due to increased business in virtually all areas. Share volumes on the NYSE and
NASDAQ exchanges averaged a combined 2.5 billion shares per day for the second
quarter of 2000 compared to approximately 1.8 billion shares per day for the
comparable period a year ago. Commissions generated internationally, primarily
in London and Hong Kong equities, more than doubled over 1999.
Underwriting revenues decreased $218.2 million or 53.3% to
$191.3million, as rising interest rates led to the decline in new issuances of
stocks and bonds, particularly in the high-yield markets.
Fee revenues increased $182.1 million or 54.7% to $514.8 million. These
results reflect primarily the Company's continuing market share growth in global
merger and acquisitions advisory transactions and fees related to private fund
and private placement activities. Fee income in the Company's retail,
correspondent and online brokerage businesses increased due to customer demand
for a variety of portfolio advisory and technology services.
Interest, net of interest expense to finance U.S. government, agency
and mortgage-backed securities, increased $527.3 million or 105.5% to $1.0
billion. The increase was across all areas of the firm but primarily in
customer-driven activities such as securities lending/borrowing and margin
lending. Margin debit balances increased approximately 60% and short-term rates
were more than 100 basis points higher than the previous year.
Principal transactions-net, trading revenues decreased $4.1 million to
$214.3 million primarily as a result of reduced trading volumes in the fixed
income markets.
17
<PAGE>
Principal transactions-net, investment revenues decreased $5.7 million
to $19.5 million primarily as a result of decreased realized and unrealized
gains on the Company's merchant banking and venture capital investments.
Total costs and expenses increased $566.4 million or 36.5% to $2.1
billion primarily due to growth in the correspondent and online discount
securities businesses as well as the Company's international expansion in Europe
and Hong Kong.
Compensation and benefits increased $48.3 million or 6.0% to $848.3
million. Incentive and production-related compensation remained relatively
unchanged in 2000. Base compensation, including benefits and payroll taxes,
increased by 25.5% primarily due to the Company's significant international
expansion. Full-time worldwide personnel increased 2,200 or 24% to 11,300 at
quarter-end 2000 as compared to second quarter 1999.
Interest expense increased $442.0 million or 116.1% to $822.7 million
due primarily to increased borrowing to finance customer activity as well as the
significant increases in interest rates noted above.
All other expenses increased $76.1 million or 20.5% to $446.9 million,
as noted below.
Communications and technology increased by $24.7 million due to
expansion of the Company's international operations, implementation and
development of new systems, and overhaul of the online customer trading and
information systems for the Company's correspondent brokerage network.
Brokerage, clearing, exchange fees and other expenses increased $12.6 million
due to increased trading volume and transaction fee payments. Occupancy and
related costs increased $10.0 million primarily as a result of the Company's
domestic growth and international expansion. All other operating expenses
increased $28.8 million. Included therein are professional fees, travel and
entertainment, and printing and stationery which increased $17.1 million due to
an overall increase in the level of business activity, and advertising which
increased $7.5 million, due to the development and implementation of a new
advertising campaign by DLJdirect.
The changes in income before income taxes for each industry segment
were: Banking Group pretax income decreased $29.6 million as a result of
decreased underwritings, offset in part by increased fees related to merger and
acquisition activity; Equities Group pretax income increased $24.3 million due
to increases in commissions, net interest income and trading gains; Fixed Income
Group pretax income decreased $80.8 million as a result of decreased
underwriting revenues in all areas; Financial Services Group pretax income
increased $24.8 million as a result of increased commissions, net interest
income, and fees related to its correspondent and online brokerage businesses,
offset by increased advertising and technology spending.
The Company's income tax provision for the quarters ended June 30, 2000
and 1999 was $95.3 million and $93.4 million, a 37.0% and 36.0% effective tax
rate, respectively.
Net income for the quarter ended June 30, 2000 decreased $3.5 million,
or 2.1% to $162.2 million. Diluted earnings per common share were $1.15 for 2000
and $1.14 for 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
-------------------------------------------------------------------------
Total revenues for the six months increased $1.6 billion, or 47.3% to
$4.9 billion. During 2000, revenues increased primarily as a result of increases
in commissions, fees, interest, trading and investment gains, offset by
decreases in underwritings. Changes in net revenues from external sources for
each of the Company's industry segments were: Banking Group revenues increased
$227.0 million primarily as a result of increased merger and acquisition and
other advisory fees, which offset the effects of decreased underwriting
revenues. The Company's growing market share in global transactions was
reflected in the 78% increase in revenues from international banking; Equities
Group revenues increased $334.7 million primarily as a result of increased
commissions, net interest income and trading revenues, both domestically and
internationally; Fixed Income Group revenues decreased $153.1 million,
principally as a result of reduced underwriting revenues in the high-yield
market, offset in part by strong secondary trading activity in this area;
Financial Services Group revenues increased $281.5 million primarily as a
result of increased commission revenues, net interest income and trading gains
in the Company's correspondent and online brokerage businesses.
Commission revenues increased $269.4 million or 47.1% to $841.5 billion
due to increased business in virtually all areas. Commissions generated
internationally, primarily in London and Hong Kong equities increased threefold
over the comparable period of 1999.
Underwriting revenues decreased $224.5 million or 33.7% to $441.9
million, primarily as a result of the overall decline in domestic new issuances
of stocks and bonds, particularly in the high-yield market.
18
<PAGE>
Fee revenues increased $317.1 million or 51.2% to $936.8 million. These
results reflect primarily the Company's continuing market share growth in global
merger and acquisitions advisory transactions. Fee income in the Company's
correspondent and online brokerage businesses increased due to customer demand
for a variety of portfolio advisory and technology services.
Interest, net of interest expense to finance U.S. government, agency
and mortgage-backed securities, increased $864.2 million or 88.5% to $1.8
billion. The increase was primarily in customer-driven activities such as
securities lending/borrowing and margin lending. Margin debit balances
increased approximately 67% and most short-term rates were more than 100 basis
points higher than the previous year.
Principal transactions-net, trading revenues increased $206.5 million
to $599.0 million primarily as a result of increases in customer order flow and
trading volumes in both the equity and fixed income markets.
Principal transactions-net, investment revenues increased $121.2
million to $149.4 million primarily as a result of increased realized and
unrealized gains on the Company's merchant banking and venture capital
investments.
Total costs and expenses for 2000 increased $1.4 billion or 48.2% to
$4.2 billion primarily due to growth in the correspondent and online discount
securities businesses as well as the Company's international expansion in Europe
and Hong Kong.
Compensation and benefits increased $478.6 million or 33.3% to $1.9
billion. Incentive and production-related compensation increased by 33.8% in
2000. Base compensation, including benefits and payroll taxes, increased by
32.1% primarily due to the Company's significant international expansion.
Full-time worldwide personnel increased 2,200 or 24 % to 11,300 at June 30, 2000
as compared to June 30, 1999.
Interest expense increased $690.2 or 93.7% to $1.4 billion due
primarily to increased borrowing to finance customer activity as well as the
significant increases in interest rates noted above.
All other expenses increased $205.0 million or 30.3% to $880.5 million,
as noted below.
Communications and technology increased by $57.3 million due to
expansion of the Company's international operations, implementation and
development of new systems, and overhaul of the online customer trading and
information systems for the Company's correspondent brokerage network.
Brokerage, clearing, exchange fees and other expenses increased $45.2 million
due to increased trading volume and transaction fee payments. Occupancy and
related costs increased $17.8 million primarily as a result of the Company's
domestic growth and international expansion. All other operating expenses
increased $84.7 million. Included therein are professional fees, travel and
entertainment, and printing and stationery which increased $41.7 million due to
an overall increase in the level of business activity, and advertising which
increased $19.2 million, due to the development and implementation of a new
advertising campaign by DLJdirect.
The changes in income before income taxes for each industry segment
were: Banking Group pre-tax income increased $46.5 million as a result of
increased fees related to merger and acquisition activity which more than offset
decreased underwritings; Equities Group pretax income increased $93.7 million
due to increases in commissions, fees and trading gains; Fixed Income Group
pretax income decreased $62.6 million as a result of decreased underwriting
revenues in the high-yield and real estate finance areas, offset in part by
increased trading gains; Financial Services Group pretax income increased $104.7
million as a result of increased commissions, net interest income and trading
gains in its correspondent and online brokerage businesses, offset by increased
advertising and technology spending.
The Company's income tax provision for the six months ended June 30,
2000 and 1999 was $239.3 million and $168.7 million, a 37.0% effective tax rate
for both periods.
Net income for the six months ended June 30, 2000 increased $120.1
million, or 41.8% to $407.4 million. Diluted earnings per common share were
$2.87 for 2000 and $1.99 for 1999.
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's assets are highly liquid with the majority consisting of
securities inventories and collateralized receivables, each 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. At June 30, 2000 and December
31, 1999, the Company's total assets were $118.0 billion and $109.0 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, commercial paper 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. Additionally in 1999,
the Company received net proceeds from the issuance of DLJdirect Common Stock of
$346.6 million
In July 2000, the Company amended its $2.5 billion revolving credit
facility with various banks, increasing the aggregate commitment to $2.8
billion, of which $2.38 billion may be unsecured. There were no borrowings
outstanding under this agreement at June 30, 2000.
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 February 2000, the Company filed a shelf registration with the
Securities and Exchange Commission, which enables the Company to issue $3.1
billion of senior debt, subordinated debt, preferred stock and warrants.
During the first quarter of 2000, the Company issued $500 million of 8%
senior notes maturing on March 1, 2005 and $485.0 million of medium-term notes
with various maturity dates through 2007.
In April 2000, the Company established a Euro Medium-Term Note program,
which enables it to issue up to $1.0 billion of notes. During the quarter ended
June 30, 2000, the Company issued $890.4 million medium-term notes with various
maturity dates through 2005 from this program. In addition, the Company issued
$354.0 million medium-term notes with various maturity dates through 2002, under
its shelf registration statement.
In addition, during the quarter ended June 30, 2000, commercial paper
outstanding under the Company's $2.0 billion commercial paper program decreased
from $1.2 billion to $1.0 billion.
20
<PAGE>
From time to time, the Company has explored 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.
The Company's current credit ratings of its long-term debt and
commercial paper are as follows:
Long-Term Debt Commercial Paper
-------------- ----------------
Fitch 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, 2000, DLJSC had aggregate regulatory "net capital," after adjustments
required by Rule 15c3-1 under the Securities Exchange Act of 1934, of
approximately $1.6 billion, which exceeded minimum net capital requirements by
$1.4 billion and which exceeded the net capital required by DLJSC's most
restrictive debt covenants by $0.8 billion. The Company's London-based
broker-dealer subsidiaries are subject to the requirements of the Securities and
Futures Authority, a self-regulatory organization established pursuant to the
United Kingdom Financial Services Act of 1986. Other U.S. and foreign
broker-dealer subsidiaries of the Company are subject to net capital
requirements of their respective regulatory agencies. At June 30, 2000, the
Company and its broker-dealer subsidiaries were in compliance with all
applicable regulatory capital adequacy requirements.
21
<PAGE>
CASH FLOWS
----------
The Company's 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, 2000 AND 1999
---------------------------------------
At June 30, 2000 and 1999, cash and cash equivalents totaled $1.8
billion and $1.3 billion, respectively, a decrease of $0.2 billion and an
increase of $0.3 billion, respectively.
Cash provided by (used in) operating activities totaled $1.4 billion
and $(2.0) billion in 2000 and 1999, respectively. In 2000, there were increases
in assets including securities borrowed of $4.5 billion and receivables from
customers, brokers, dealers and other of $6.3 billion. These increases were more
than offset by increases in liabilities including payables to brokers, dealers
and other of $4.8 billion, securities loaned of $2.6 billion and financial
instruments sold not yet purchased of $5.0 billion. In 1999, there were
increases in assets including receivables from customers, brokers, dealers and
other of $2.1 billion, financial instruments owned of $4.8 billion, and
securities borrowed of $6.3 billion. An increase in liabilities, including
payables to brokers, dealers and other of $3.7 billion, securities loaned of
$3.4 billion and financial instruments sold, not yet purchased of $2.9 billion
offset these changes.
In 2000 and 1999, net cash used in investing activities of $232.3
million and $263.4 million, respectively, consisted primarily of purchases
related to the Company's domestic and international offices and net purchases of
long-term corporate development investments.
In 2000 and 1999, net cash (used in) provided by financing activities
totaled $(1.4) billion and $2.5 billion, respectively. In 2000, $3.4 billion was
used to pay down short-term financings (principally repurchase agreements) and
$2.0 billion was provided by the issuance of senior notes, medium-term notes and
structured borrowings. In 1999, $1.2 billion was provided by short-term
financings (principally repurchase agreements) and $942.1 billion was provided
by the issuance of senior notes, medium-term notes and structured borrowings.
Additionally in 1999, the Company received net proceeds from the issuance of
DLJdirect Common Stock of $346.6 million.
DERIVATIVE FINANCIAL INSTRUMENTS
--------------------------------
The Company enters into various transactions involving derivatives. In general,
derivatives are contractual agreements that derive their values from the
performance of underlying assets, interest or currency exchange rates, or a
variety of indices. The Company enters into derivative transactions primarily
for trading purposes, or to provide products for its clients. These transactions
involve options, forwards, futures and swaps. The Company also enters into
interest rate and cross currency swaps to modify the characteristics of periodic
interest payments associated with some of its long-term debt obligations.
For further discussion of these matters, refer to Note 9 to the consolidated
financial statements and Management's Discussion and Analysis of Financial
Condition included in the Company's Form 10-K for the fiscal year ended December
31, 1999.
22
<PAGE>
QUANTITATIVE DISCLOSURES FOR TRADING DERIVATIVES
------------------------------------------------
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. The notional (contract) amounts for derivatives
outstanding at June 30, 2000 and December 31, 1999, are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------- ------------
(IN BILLIONS)
-------------
<S> <C> <C>
Options written............................. $ 16.2 $ 15.1
Options purchased........................... $ 15.7 $ 7.4
Forward contracts purchased................. $ 49.5 $ 35.6
Forward contracts sold...................... $ 55.3 $ 41.1
Futures contracts purchased................. $ 5.2 $ 2.9
Futures contracts sold...................... $ 2.4 $ 4.3
Swaps....................................... $ 37.6 $ 24.5
</TABLE>
The majority of the Company's derivatives are short-term in duration.
DISCLOSURES FOR NON-TRADING DERIVATIVES
---------------------------------------
The Company also enters into interest rate and cross currency swaps to modify
the characteristics of periodic interest payments associated with some of its
long-term debt obligations. At June 30, 2000 and December 31, 1999, the notional
amount of these swaps was $4.4 billion and $3.3 billion, respectively.
MERCHANT BANKING AND BRIDGE LENDING ACTIVITIES
----------------------------------------------
The Company's merchant banking activities include direct investments
and investments in various partnerships, for which subsidiaries of the Company
act as general partner. At June 30, 2000, the Company had investments of $717.6
million and has commitments to invest up to an additional $689.2 million.
AXA Financial has committed, subject to its approval on a
transaction-by-transaction basis, to provide $750.0 million of subordinated debt
financing to the DLJ Bridge Fund. The Bridge Fund provides short-term loans in
connection with the Company's merchant banking and financial advisory
businesses. The Company has agreed to pay AXA Financial the first $25.0 million
of aggregate principal losses incurred by AXA Financial with respect to all
bridge loans. To the extent such payments by the Company do not fully cover any
such losses incurred by AXA Financial, AXA Financial is entitled to receive all
other distributions otherwise payable to the Company with respect to DLJ Bridge
Fund activities until such losses have been recovered. The Company has also
agreed to pay AXA Financial the amount, if any, by which any principal loss on
an individual loan exceeds $150.0 million.
At June 30, 2000, the Company had extended $10.3 million as its portion
of short-term financings made with AXA Financial.
The Company has made additional bridge loans of $518.4 million in
connection with its merchant banking and financial advisory businesses.
HIGH-YIELD AND OTHER NON-INVESTMENT-GRADE DEBT
----------------------------------------------
The Company underwrites, trades, sells and holds high-yield and
non-investment-grade securities. Non-investment-grade securities are securities
or loans to companies rated BB+ or lower, as well as non-rated securities or
loans. Due to credit considerations, liquidity of secondary trading markets and
vulnerability to general economic conditions, these securities generally involve
greater risk than investment-grade holdings.
The Company records high-yield securities at market value and records
non-investment-grade holdings at market or fair value. Unrealized gains and
losses are recognized currently in earnings. At June 30, 2000 and December 31,
1999, the Company had long positions with an aggregate market value of
approximately $6.6 billion and $3.5 billion, respectively, and short positions
with an aggregate market value of approximately $0.5 billion and $0.5 billion,
respectively.
23
<PAGE>
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, online and
traditional brokerage 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) risks associated with potential systems limitations
or systems failures in the business of DLJdirect, (x) risks associated with the
international expansion of the Company's businesses, especially with respect to
DLJdirect, (xi) potential liability under federal and state securities and other
laws, (xii) the effect of any future acquisitions.
ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK - DLJ, INC.
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 1999 Annual Report on Form 10-K.
The Company-wide VAR was approximately $21.0 million and $17.0 million at June
30, 2000 and December 31, 1999, respectively.
The Company-wide VAR for non-trading market risk sensitive instruments is not
separately disclosed because the amount is not significant. Due to the benefit
of diversification the Company-wide VAR is less than the sum of the individual
components. The three main components of market risk, expressed in terms of
theoretical fair values, had the following VAR:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- -------------
(IN MILLIONS)
-------------
<S> <C> <C>
Trading:
Interest rate risk....................... $ 10 $ 10
Equity risk.............................. $ 15 $ 14
Foreign currency exchange risk........... $ 1 $ -
</TABLE>
24
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS- DONALDSON, LUFKIN & JENRETTE, INC.
On July 21, 2000, in the consolidated action captioned IN RE PUBLIC OFFERING
FEE ANTITRUST LITIGATION pending in the U.S. District Court for the Southern
District of New York, plaintiffs filed a motion for leave to file a second
amended complaint. The principal proposed amendment to the previously filed
Consolidated Amended Complaint is the addition of an issuer company as a
plaintiff. On August 3, 2000, another purported class action, captioned CHS
ELECTRONICS, INC. V. CREDIT SUISSE FIRST BOSTON CORPORATION, ET AL., Case No.
00-2822, was filed in the U.S. District court for the Southern District of
Florida against 18 securities firms, including Donaldson, Lufkin & Jenrette,
Inc. ("DLJ"). The complaint makes allegations substantially similar to those
advanced in IN RE PUBLIC OFFERING FEE ANTITRUST LITIGATION, asserting that
defendants conspired to fix the "fee" paid for underwriting initial public
offering securities by setting the underwriters' discount or "spread" at 7% in
violation of the federal antitrust laws. The complaint seeks treble damages in
an unspecified amount and injunctive relief as well as attorney's fees and
costs. To date, DLJ has not been served in the action filed in Florida. DLJ and
DLJSC intend to defend themselves vigorously against all the allegations
contained in the complaints.
On or about January 31, 2000, Ameriserve Food Distribution, Inc. ("Ameriserve"),
its parent company, Nebco Evans Holding Company ("NEHC"), and related
corporations, filed Chapter 11 petitions in the U. S. Bankruptcy Court for the
District of Delaware. Over a period of several years DLJSC provided investment
banking services to Ameriserve and NEHC. A DLJ merchant banking affiliate was
for a time an investor in Ameriserve, and an employee of DLJSC and an employee
of a DLJ merchant banking affiliate were members of the board of directors of
Ameriserve. In the Bankruptcy Court proceedings discovery has been sought from
DLJ and its affiliates in connection with their relationships with these
companies. In addition, the staff of the Securities and Exchange Commission has
issued an informal request for information, and the U. S. Attorney's Office for
the Eastern District of New York has issued a grand jury subpoena requesting
information. DLJ and its affiliates are cooperating with these discovery
requests. No claim has been brought against DLJ or its affiliates to date.
Between September 1995 and October 1998, DLJSC was named as a defendant in six
separate actions filed by institutional investors who invested and lost
approximately $300 million in three hedge funds (the "Funds") managed by David
Askin ("Askin"). The Funds filed for bankruptcy in April 1994. All six
complaints have been consolidated for discovery purposes and are currently
pending in the U. S. District Court for the Southern District of New York. The
defendants are Askin, Askin Capital Management ("ACM", Askin's management
company), and two securities dealers (including DLJSC) that sold collateralized
mortgage obligations to the Funds. The only claim against DLJSC that has
survived a motion to dismiss is aiding and abetting common law fraud. The
complaints allege that DLJSC aided and abetted an alleged fraud of the investors
by Askin and ACM by selling securities that were inconsistent with the Funds'
investment objectives and by providing inaccurate monthly mark-to-market prices
for securities purchased by the Funds. The actions seek joint and several
recovery of rescissionary, compensatory, and punitive damages. DLJSC's motion
for summary judgment on the plaintiffs' claims is currently pending. DLJSC
intends to defend itself vigorously against all of the allegations contained in
the complaints.
In August 1997, DLJSC was named as a defendant in another action arising out of
the bankruptcy of the Funds. This action was brought by the "Litigation Advisory
Board," an entity created by the Funds' plan of liquidation to pursue all
unresolved claims held by the Funds. The action is currently pending in the U.
S. District Court for the Southern District of New York. The only claims against
DLJSC that have survived a motion to dismiss are for breach of contract.
Generally, the lawsuit alleges that the Funds were damaged when DLJSC issued
allegedly improper margin calls and liquidated the Funds' reverse repurchase
positions at less than fair market value. The complaint alleges that the Funds'
investors lost over $400 million in equity, but does not specify the amount of
damages that the Funds themselves claim to have suffered as a result of the
allegations made in this complaint. DLJSC intends to defend itself vigorously
against all of the allegations contained in the complaint.
Although there can be no assurance, DLJ's management does not believe that the
ultimate outcome of the matters described above will have a material adverse
effect on DLJ's consolidated financial condition. Based upon the information
currently available to it, DLJ's management cannot predict whether or not these
matters will have a material adverse effect on DLJ's results of operations in
any particular period.
In addition to the significant proceedings and matters previously disclosed, the
Company has been named as a defendant in a number of actions relating to its
various businesses including various civil actions and arbitrations arising out
of its activities as a broker-dealer in securities, as an underwriter and as an
employer, and arising out of alleged employee misconduct. Some of the actions
have been brought on behalf of various classes of claimants and seek damages of
material or indeterminate amounts. The Company is also involved, from time to
time, in proceedings with, and investigations by, governmental agencies and self
regulatory organizations. Although there can be no assurance that such other
actions, proceedings, investigations and litigation will not have a material
adverse effect on the results of operations of the Company in any future period,
depending in part on the results for such period, in the opinion of management
of the Company the ultimate resolution of any such other actions, proceedings,
investigations and litigation against the Company will not have a material
adverse effect on the consolidated financial condition and/or results of
operations of the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 9, 2000 at the
meeting, (i) eighteen persons were elected as directors of the Company, (ii) the
selection of KPMG LLP to serve as the Company's independent auditors for the
fiscal year ending December 31, 2000 was ratified.
Election of Directors:
<TABLE>
<CAPTION>
NOMINEE FOR WITHHELD AGAINST
------- --- -------- -------
<S> <C> <C> <C>
Joe L. Roby 124,420,496 410,296
John S. Chalsty 124,419,200 411,592
Anthony F. Daddino 124,421,220 409,572
David DeLucia 124,417,873 412,919
Hamilton E. James 124,433,411 397,381
Stuart M. Robbins 124,444,811 385,981
Henri de Castries 124,421,495 409,297
Denis Duverne 124,421,689 409,103
Jane Mack Gould 124,429,451 401,341
Louis Harris 124,569,709 261,083
Michael Hegarty 124,433,838 396,954
Henri G. Hottinguer 124,577,333 253,459
W. Edwin Jarmain 124,578,124 252,668
Francis Jungers 124,567,664 263,128
Edward D. Miller 124,422,073 408,719
W.J. Sanders III 124,434,901 395,891
Stanley B. Tulin 124,423,154 407,638
John C. West 124,566,726 264,066
Ratification of Auditors 124,765,533 36,941 28,318
</TABLE>
25
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - DLJdirect
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Condensed Combined Statements of Financial Condition (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
ASSETS
<S> <C> <C>
Cash and cash equivalents................................................... $ 188,292 $ 237,020
Short-term investments...................................................... 44,177 7,848
Deposit with affiliated clearing broker..................................... 447 329
Receivables from brokers, dealers and others, net........................... 19,821 19,015
Financial instruments owned, at market value................................ 39 1,010
Office facilities, at cost (net of accumulated depreciation
and amortization of $568 and $470, respectively)......................... 355 92
Investment in joint ventures................................................ 22,734 11,009
Long-term corporate development investments................................. 5,483 730
Other assets................................................................ 1,803 1,389
--------- ---------
Total assets................................................................ $ 283,151 $ 278,442
========= =========
LIABILITIES AND ALLOCATED EQUITY
Liabilities:
Payables to parent and affiliates, net.................................... $ 14,260 $ 12,550
Financial instruments sold not yet purchased, at market value............. 28 26
Accounts payable and accrued expenses..................................... 30,028 34,074
-------- ---------
Total liabilities........................................................... 44,316 46,650
-------- ---------
Commitments and contingencies............................................... - -
Allocated equity............................................................ 237,655 230,662
Accumulated other comprehensive income...................................... 1,180 1,130
--------- ---------
Total allocated equity...................................................... 238,835 231,792
--------- ---------
Total liabilities and allocated equity...................................... $ 283,151 $ 278,442
========= =========
</TABLE>
See accompanying notes to condensed combined financial statements.
26
<PAGE>
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Condensed Combined Statements of Operations (Unaudited)
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------ ------ ------------ ----
<S> <C> <C> <C> <C>
Revenues:
Commissions................................................ $ 45,542 $ 35,711 $ 120,081 $ 67,765
Underwritings.............................................. 1,594 3,254 4,682 3,681
Fees....................................................... 17,711 12,300 36,418 21,469
Interest................................................... 19,142 8,731 37,536 14,436
----------- --------- ---------- --------
Total revenues........................................... 83,989 59,996 198,717 107,351
----------- --------- ---------- --------
Costs and expenses:
Compensation and benefits.................................. 27,046 13,532 54,217 24,215
Interest................................................... 375 322 890 475
Brokerage, clearing, exchange fees, and other.............. 12,855 9,220 31,455 18,074
Advertising................................................ 19,990 13,232 38,060 19,333
Occupancy and related costs................................ 3,144 868 5,534 1,410
Communications and technology.............................. 11,443 5,390 21,544 10,784
Other operating expenses................................... 17,053 6,191 29,465 10,558
----------- --------- ---------- --------
Total costs and expenses................................. 91,906 48,755 181,165 84,849
----------- --------- ---------- --------
Income (loss) before income tax provision (benefit) and
equity in net loss of joint ventures.......................... (7,917) 11,241 17,552 22,502
----------- --------- ---------- --------
Income tax provision (benefit)................................ (3,353) 5,209 7,297 9,297
Equity in net loss of joint ventures.......................... (2,057) (956) (3,262) (956)
----------- --------- ---------- --------
Net income (loss)........................................ $ (6,621) $ 5,076 $ 6,993 $ 12,249
=========== ========= ========== =========
Earnings (loss) per share:
Basic.................................................. $ (0.06) $ 0.05 $ 0.07 $ 0.12
Diluted................................................ $ (0.06) $ 0.05 $ 0.07 $ 0.12
=========== ========= ========== =========
Weighted average notional and outstanding shares:
Basic.................................................. 102,650 102,650 102,650 102,650
Diluted................................................ 102,650 104,673 102,651 104,673
=========== ========= ========== =========
Earnings (loss) applicable to:
DLJ Retained Interest.................................. $ (5,436) $ 222 $ 5,741 $ 222
DLJdirect Tracking Stock............................... (1,185) 49 1,252 49
========== ========= ========= =========
Tracking Stock earnings (loss) per share:
Basic.................................................. $ (0.06) $ 0.00 $ 0.07 $ 0.00
Diluted................................................ $ (0.06) $ 0.00 $ 0.07 $ 0.00
=========== ========= ========== =========
Tracking Stock weighted average common shares:
Basic.................................................. 18,400 18,400 18,400 18,400
Diluted................................................ 18,400 20,423 18,401 20,423
=========== ========= ========== =========
</TABLE>
See accompanying notes to condensed combined financial statements.
27
<PAGE>
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Condensed Combined Statements of Changes In Allocated Equity (Unaudited)
(in thousands)
For the Year Ended December 31, 1999 and the Six Months Ended June 30, 2000
<TABLE>
<CAPTION>
Accumulated Other Total
Allocated Equity Comprehensive Income Allocated Equity
---------------- -------------------- ----------------
<S> <C> <C> <C>
Balances at December 31, 1998............ $ 21,924 $ - $ 21,924
Net income............................... 6,932 - 6,932
Translation adjustment-net of taxes...... - 1,130 1,130
Total comprehensive income............ - - 8,062
Capital contribution from DLJ............ 1,000 - 1,000
Allocated equity from issuance of
Tracking Stock........................ 233,945 - 233,945
Dividend paid to DLJ..................... (33,139) - (33,139)
---------- ----------- ----------
Balances at December 31, 1999............ 230,662 1,130 231,792
Net income............................... 6,993 - 6,993
Translation adjustment-net of taxes...... - 50 50
Total comprehensive income............ - - 7,043
---------- ----------- ----------
Balances at June 30, 2000................ $ 237,655 $ 1,180 $ 238,835
========== =========== ==========
</TABLE>
See accompanying notes to condensed combined financial statements.
28
<PAGE>
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Condensed Combined Statements of Cash Flows (Unaudited)
(in thousands)
For the Six Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................................. $ 6,993 $ 12,249
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in net loss of joint ventures........................................ 3,262 956
Depreciation and amortization............................................... (105) 52
Deferred taxes.............................................................. (335) (184)
(Increase) decrease in operating assets:
Deposit with affiliated clearing broker..................................... (118) -
Receivables from brokers, dealers and other, net............................ (806) (6,507)
Financial instruments owned, at market value................................ 971 (13)
Other assets................................................................ (414) (13)
Increase (decrease) in operating liabilities:
Payables to parent and affiliates, net...................................... 2,015 770
Financial instruments sold, not yet purchased, at market value.............. 2 2,472
Accounts payable and accrued expenses....................................... (4,046) 15,064
--------- ---------
Net cash provided by operating activities................................... 7,419 24,846
--------- ---------
Cash flows from investing activities:
Investment in joint ventures................................................ (14,907) (12,431)
Short-term investments...................................................... (36,329) -
Purchase of office facilities............................................... (158) -
Purchase of long-term corporate development investments..................... (4,753) -
--------- ---------
Net cash used in investing activities........................................ (56,147) (12,431)
--------- ---------
Cash flows from financing activities:
Net proceeds from capital contributions from DLJ............................ - 1,000
Net proceeds from issuance of Tracking Stock................................ - 233,958
Dividend paid to DLJ........................................................ - (33,139)
--------- ---------
Net cash provided by financing activities...................................... - 201,819
--------- ---------
Increase (decrease) in cash and cash equivalents............................... (48,728) 214,234
Cash and cash equivalents at beginning of period............................... 237,020 26,654
--------- ---------
Cash and cash equivalents at end of period..................................... $ 188,292 $ 240,888
========= =========
</TABLE>
See accompanying notes to condensed combined financial statements.
29
<PAGE>
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Notes to Condensed Combined Financial Statements (Unaudited)
June 30, 2000
1. Basis of Presentation
---------------------
DLJdirect represents a combination of the assets and liabilities of Donaldson,
Lufkin & Jenrette, Inc.'s ("DLJ Inc.") online discount brokerage and related
investment services business, rather than a separately incorporated entity.
DLJdirect Common Stock tracks the separate performance of these businesses 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 Tracking Stock have no
voting rights, except in certain limited circumstances. Prior to the offering,
DLJ Inc. designated its existing common stock as DLJ Common Stock, which
represents the performance of DLJ Inc.'s primary businesses plus a retained
interest in DLJdirect. All of DLJ Inc.'s businesses other than those included in
DLJdirect, plus its retained interest in DLJdirect, are referred to as DLJ. As a
result of the offering, DLJ has a retained interest of 82.1% in DLJdirect
represented by 84.3 million notional shares. The 18.4 million shares of Tracking
Stock reflect the 17.9% owned by the public. Prior to the offering, DLJ had a
100% interest in the earnings of DLJdirect.
The Tracking Stock initially consisted principally of the assets, liabilities,
revenues and expenses of DLJ Inc.'s ultimate 100% equity interest in DLJdirect
Holdings Inc. (subsequent to June 1, 1997) and DLJ Inc.'s online discount
brokerage division (prior to June 2, 1997). DLJdirect may also include such
other related assets and liabilities of DLJ Inc. as the Board of Directors of
DLJ Inc. may deem appropriate in the future.
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 Tracking Stock are common stockholders of
DLJ Inc. and are 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.
included herein. DLJ Inc. has the right to issue DLJ Common Stock in exchange
for outstanding Tracking Stock at a premium at any time. The premium was 25% for
exchanges occurring in the first 90 days after issuance and will decline ratably
each quarter thereafter over a period of three years to 15%. However, the
premium will be 10% in the event that certain legislative or administrative
proposals are enacted. Notwithstanding the foregoing, DLJ Inc. has the right, at
any time, to exchange stock of a subsidiary of DLJ Inc. for Tracking Stock if
all of the assets and liabilities of DLJdirect are transferred to the
subsidiary.
Certain financial information that is normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
but is not required for interim reporting purposes has been condensed or
omitted. These condensed combined financial statements reflect, in the opinion
of management, all adjustments (consisting of normal, recurring accruals)
necessary for a fair presentation of the condensed combined financial position
and results of operations for the interim periods presented. The results of
operations for interim periods are not necessarily indicative of results for the
entire year. These financial statements should be read in conjunction with the
combined financial statements and notes thereto as of and for the year ended
December 31, 1999 included on Form 10-K filed by DLJ Inc. under the Securities
Exchange Act of 1934.
To prepare condensed combined financial statements in conformity with generally
accepted accounting principles ("GAAP"), management must estimate certain
amounts that affect the reported assets and liabilities, disclosure of
contingent assets and liabilities, and reported revenues and expenses. Actual
results could differ from those estimates. Certain other reclassifications have
been made to prior year combined financial statements to conform to the 2000
presentation.
2. 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.
3. 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
30
<PAGE>
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Notes to Condensed Combined Financial Statements (Unaudited)
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, 2000, DLJdirect Inc.'s
net capital of $36.5 million was in excess of the minimum requirement by $36.3
million.
DLJdirect's London-based broker-dealer affiliate, DLJdirect Ltd., is 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. At June 30, 2000, DLJdirect complied with all applicable regulatory
capital adequacy requirements.
4. Income Taxes
------------
DLJdirect is part of a group that files consolidated Federal income tax returns.
DLJdirect settles all taxes, current and deferred, with DLJ Inc. under a tax
sharing arrangement. Taxes are provided as if DLJdirect filed a separate return.
5. Earnings Per Share
------------------
Earnings per share amounts have been calculated by dividing net income by the
weighted average notional and outstanding tracking shares. Earnings per share
amounts for the quarter and six months ended June 30, 2000 are calculated based
on actual results. The notional shares represent DLJ's 82.1% retained interest
in DLJdirect. Prior to the offering, DLJ Inc. had a 100% interest in the
earnings of DLJdirect. These pro forma amounts are presented for comparative
purposes only. For the quarter and six months ended June 30, 1999, these amounts
are pro forma as if the issuance of the DLJdirect Tracking Stock occurred at the
beginning of 1999.
Tracking Stock earnings per common share amounts have been calculated by
dividing earnings applicable to common shares by the weighted average actual
common shares outstanding.
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,
2000 1999 2000 1999
------ ------ ------ -----
(IN THOUSANDS)
-------------
<S> <C> <C> <C> <C>
Earnings (loss) applicable to Common Shares-Basic and Diluted......... $ (6,621) $ 5,076 $ 6,993 $ 12,249
========== ========= ========= =========
Weighted Average Common Shares-Basic.................................. 102,650 102,650 102,650 102,650
Effect of Dilutive Securities:
Stock options....................................................... -* 2,023 1 2,023
--------- --------- --------- --------
Weighted Average Common Shares-Diluted.............................. 102,650 104,673 102,651 104,673
========= ======== ========= ========
Tracking Stock
--------------
Earnings (loss) applicable to Common Shares-Basic and Diluted....... $ (1,185) $ 49 $ 1,252 $ 49
========= ======== ========== =========
Weighted Average Common Shares-Basic.................................. 18,400 18,400 18,400 18,400
Effect of Dilutive Securities:
Stock options....................................................... -* 2,023 1 2,023
--------- --------- ---------- ---------
Weighted Average Common Shares-Diluted................................. 18,400 20,423 18,401 20,423
========= ========= ========== =========
</TABLE>
* Exercisable stock options are excluded from the computation of diluted
earnings per share since the effect of including them was antidilutive.
31
<PAGE>
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Notes to Condensed Combined Financial Statements (Unaudited)
6. Legal Proceedings
-----------------
DLJdirect has been named a defendant in actions relating to its businesses.
While the ultimate outcome of litigation involving DLJdirect cannot be predicted
with certainty, management, having reviewed these actions with its counsel,
believes it has meritorious defenses to all such actions and intends to defend
each of these vigorously. In the opinion of management of DLJdirect, the
ultimate resolution of all litigation, regulatory and investigative matters
affecting DLJdirect will not have a material adverse effect on the financial
condition or results of operations of DLJdirect.
32
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - DLJdirect
The following analysis of the results of operations and financial condition of
DLJdirect should be read in conjunction with the Condensed Combined Financial
Statements and the related Notes thereto, and with the Condensed Consolidated
Financial Statements and related Notes of DLJ Inc. included elsewhere herein.
OVERVIEW - DLJdirect
-------------------
The online discount brokerage industry is experiencing substantial
competition from established financial services firms as well as new entrants
who are trying to quickly establish their presence in the market. 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 significant amounts for advertising and promotions. Moreover, DLJdirect
expects to continue to spend significant amounts to increase its customer
service and technology staffs. Additionally, DLJdirect expects to spend
substantial amounts in the future in order to expand its international presence,
where competition is intense as well.
RECENT DEVELOPMENTS - DLJdirect
-------------------------------
In February 2000, DLJdirect formed a joint venture to offer online
brokerage services in 14 countries throughout the Middle East and North Africa.
The joint venture, DLJdirect-eUnion, will offer investors in the region online
access to U.S. securities markets.
In April 2000, DLJdirect formed a joint venture with Hutchison Whampoa
Ltd. in Hong Kong. The joint venture will offer online brokerage services in
Hong Kong, mainland China, Thailand, Singapore, Malaysia, the Philippines,
Taiwan and Indonesia as part of DLJdirect's international expansion strategy.
In May 2000, DLJdirect opened its first U.S. retail branch office in
Delray Beach, Florida. The office is staffed with experienced investment
professionals who will be available to demonstrate DLJdirect's financial
products and services, answer technical questions, help investors open accounts,
and conduct other transactions.
In addition, DLJdirect is in the process of opening a new investor
service center in Sandy City, Utah and new technology centers in the United
States and in India.
RESULTS OF OPERATIONS - DLJdirect
---------------------------------
QUARTER ENDED JUNE 30, 2000 COMPARED TO QUARTER ENDED JUNE 30, 1999
-------------------------------------------------------------------
DLJdirect experienced strong operating results for the quarter ended
June 30, 2000 compared to the quarter ended June 30, 1999, reflecting primarily
an increase in active accounts of 69% and customer trading volume of 62%. Active
accounts consist of those accounts at the end of the related period with at
least one trade in the last twelve months or with a balance at period end. Total
revenues increased $24.0 million or 40.0% to $84.0 million for the quarter ended
June 30, 2000 from $60.0 million for the quarter ended June 30, 1999. Net income
decreased $11.7 million to a net loss of $6.6 million for the quarter ended June
30, 2000 from net income of $5.1 million for the quarter ended June 30, 1999.
Commissions increased $9.8 million or 27.5% to $45.5 million.
Commissions represented 54.2% of total revenues for the quarter ended June 30,
2000 and 59.5% of total revenues for the quarter ended June 30, 1999. The
increase in commissions was due primarily to significant increases in customer
trading volume. Average trades per day increased 61.7% to 35,900 for the quarter
ended June 30, 2000 from 22,200 for the quarter ended June 30, 1999.
Underwritings revenues earned in connection with public offerings for
the quarter ended June 30, 2000 were $1.6 million compared to $3.3 million for
the quarter ended June 30, 1999. Underwritings represented 1.9% of total
revenues for the quarter ended June 30, 2000 and 5.5% of total revenues for the
quarter ended June 30, 1999.
Fees increased $5.4 million or 43.9% to $17.7 million. Fees represented
21.1% of total revenues for the quarter ended June 30, 2000 and 20.5% of total
revenues for the quarter ended June 30, 1999. Payments for routing orders
increased $0.4 million or 11.1% to $4.0 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
$3.3 million or 53.2% to $9.5 million primarily due to increased demand from
related entities for Internet-based technology applications. Revenue from money
market fund distribution fees increased $1.6 million or 123.1% to $2.9 million.
This growth was due to an increase in customer money market fund balances of
$862.0 million or 85.1% to $1.9 billion. The remaining fees for the quarters
ended June 30, 2000 and 1999 include subscription and account related fees.
33
<PAGE>
Interest income increased $10.4 million or 119.5% to $19.1 million.
Interest represented 22.7% of total revenues for the quarter ended June 30, 2000
and 14.5% of total revenues for the quarter ended June 30, 1999. The increase
was due primarily to interest earned on the net proceeds allocated to DLJdirect
from the issuance of Tracking Stock and to increases in margin debits, free
credits and short sale balances. Margin debits increased $796.3 million or 86.0
% to $1.7 billion. Free credits increased $166.1 million or 29.2% to $735.3
million and short sale balances increased $40.9 million or 109.1% to $78.4
million.
Compensation and benefits increased $13.5 million or 100.0% to $27.0
million. The increase in compensation and benefits was due primarily to growth
in the number of employees from 638 to 1,453. These additional employees were
added primarily in DLJdirect's investor services, operations, and compliance
areas to accommodate increased customer activity, in DLJdirect's technology
group to develop new products and systems and maintain systems infrastructure,
in the UK operations, as well as in executive management.
Interest expense increased $53,000 or 16.5% to $375,000. Interest
expense is primarily due to interest paid on intercompany balances.
Brokerage, clearing, exchange and other fees increased $3.7 million or
40.2% to $12.9 million. The increase in brokerage, clearing, exchange and other
fees was primarily due to significant increases in customer trading volume,
offset in part by lower clearing fees per trade resulting from reduced clearing
rates.
Advertising increased $6.8 million or 51.5% to $20.0 million. The
increase in advertising was due primarily to the development and implementation
of new branding and advertising campaigns.
Occupancy and related costs increased $2.2 million or 244.4% to $3.1
million. Occupancy and related costs includes rent and operating expenses for
facilities, expenditures for repairs and maintenance, and the lease expense for
furniture, fixtures, leasehold improvements as well as business equipment. The
increase in occupancy cost was due to the opening of two investor services
facilities in Charlotte, North Carolina and to the relocation of DLJdirect's
headquarters.
Communications and technology costs increased $6.0 million or 111.1% to
$11.4 million. Communications expense includes quotation expenses, expenses
related to customer toll-free phone calls and regular telephone services, and
lease expense for communication systems infrastructure. Technology expense
includes lease expense for technology systems infrastructure and computer
equipment. Increases in both communications and technology costs were due
primarily to the increased volume of transactions, improvements in and expansion
of technology infrastructure, and increases in staff.
Other operating expenses increased $10.9 million or 175.8% to $17.1
million. Operating expenses are comprised of professional fees, printing and
stationery, economic and investment research, allocated corporate overhead and
miscellaneous expenses. Professional fees primarily include payments made to
marketing consultants and recruiters, and for legal services. Professional fees
increased $4.5 million or 236.8% to $6.4 million primarily due to the
development of advertising and marketing strategies, the relocation of
DLJdirect's headquarters, continuing staffing expansion in all areas, and the
development of international operations. Miscellaneous expenses increased $4.1
million or 195.2% to $6.2 million. Miscellaneous expenses consisted primarily of
accruals for bad debt expense, travel and entertainment, information services,
customer service related expenses, employee registration fees and expenses for
new account credit checks.
Income (loss) before income tax provision (benefit) and equity in net
loss of joint ventures decreased $19.1 million to a loss of $7.9 million for the
quarter ended June 30, 2000 from income of $11.2 million for the quarter ended
June 30, 1999. The provision (benefit) for income taxes for the quarters ended
June 30, 2000 and 1999 was $(3.4) million, representing a 43.0% effective tax
rate, and $5.2 million, representing a 46.4% effective tax rate, respectively.
Income before advertising costs, income tax provision and equity in net
loss of joint ventures amounted to $12.1 million and $24.4 million for the
quarters ended June 30, 2000 and 1999, respectively.
DLJdirect has a 50% interest in foreign-based joint ventures in Japan,
Hong Kong and the Middle East. For the quarters ended June 30, 2000 and 1999,
DLJdirect's share of the equity in the net loss of these joint ventures was
$(2.1) million and $(1.0) million, respectively.
As a result of the foregoing factors, net income (loss) decreased to
$(6.6) million for the quarter ended June 30, 2000 from $5.1 million for the
quarter ended June 30, 1999.
34
<PAGE>
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
-------------------------------------------------------------------------
DLJdirect experienced strong operating results for the six months ended
June 30, 2000 compared to the six months ended June 30, 1999, reflecting
primarily an increase in active accounts of 69% and customer trading volume of
62%. Active accounts consist of those accounts at the end of the related period
with at least one trade in the last twelve months or with a balance at period
end. Total revenues increased $91.3 million or 85.0% to $198.7 million for the
six months ended June 30, 2000 from $107.4 million for the six months ended June
30, 1999. Net income decreased $5.2 million to $7.0 million from $12.2 million,
primarily resulting from continued international expansion.
Commissions increased $52.3 million or 77.1% to $120.1 million.
Commissions represented 60.4% of total revenues for the six months ended June
30, 2000 and 63.1% of total revenues for the six months ended June 30, 1999. The
increase in commissions was due primarily to significant increases in customer
trading volume. Average trades per day increased 61.7% from 22,200 for the six
months ended June 30, 1999 to 35,900 for the six months ended June 30, 2000.
Underwritings revenues earned in connection with public offerings for
the six months ended June 30, 2000 were $4.7 million compared to $3.7 million
for the six months ended June 30, 1999. Underwritings represented 2.4% of total
revenues for the six months ended June 30, 2000 and 3.4% of total revenues for
the six months ended June 30, 1999.
Fees increased $14.9 million or 69.3% to $36.4 million. Fees
represented 18.3% of total revenues for the six months ended June 30, 2000 and
20.0% of total revenues for the six months ended June 30, 1999. Payments for
routing orders increased $4.1 million or 60.3% to $10.9 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 $7.4 million or 70.5% to $17.9 million primarily due to
increased demand from related entities for Internet-based technology
applications. Revenue from money market fund distribution fees increased $2.8
million or 121.7% to $5.1 million. This growth was due to an increase in
customer money market fund balances of $862.0 million or 85.1% to $1.9 billion.
The remaining fees for the six months ended June 30, 2000 includes subscription
fees and account-related fees.
Interest increased $23.1 million or 160.4% to $37.5 million. Interest
represented 18.9% of total revenues for the six months ended June 30, 2000 and
13.4% of total revenues for the six months ended June 30, 1999. 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 $796.3 million or 86.0 % to $1.7 billion. Free credits
increased $166.1 million or 29.2% to $735.3 million and short sale balances
increased $40.9 million or 109.1% to $78.4 million.
Compensation and benefits increased $30.0 million or 124.0% to $54.2
million. The increase in compensation and benefits was due primarily to growth
in the number of employees from 638 to 1,453. These additional employees were
added primarily in DLJdirect's investor services, operations, and compliance
areas to accommodate increased customer activity, in DLJdirect's technology
group to develop new products and systems and maintain systems infrastructure,
in the UK operations, as well as in executive management.
Brokerage, clearing, exchange and other fees increased $13.4 million or
74.0% to $31.5 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 $18.8 million or 97.4% to $38.1 million. The
increase in advertising was due primarily to the development and implementation
of new branding and advertising campaign.
Occupancy and related costs increased $4.1 million or 292.9% to $5.5
million. Occupancy and related costs includes rent and operating expenses for
facilities, expenditures for repairs and maintenance, and the lease expense for
furniture, fixtures, leasehold improvements as well as business and computer
equipment. The increase in occupancy cost was due to the opening of two investor
services facilities in Charlotte, North Carolina and to the relocation of
DLJdirect's headquarters.
Communications and technology costs increased $10.7 million or 99.1% to
$21.5 million. Communications expense includes quotation expenses, expenses
related to customer toll-free phone calls and regular telephone services, and
lease expense for communication systems infrastructure. Technology expense
includes lease expense for technology systems infrastructure and computer
equipment. Increases in both communications and technology costs were due
primarily to the increased volume of transactions, improvements in and expansion
of technology infrastructure, and increases in staff.
Other operating expenses increased $18.9 million or 178.3% to $29.5
million. Operating expenses are comprised of professional fees, printing and
stationery, economic and investment research, allocated corporate overhead and
miscellaneous expenses. Professional fees primarily include payments made to
35
<PAGE>
technology and marketing consultants and recruiters, and for legal services.
Professional fees increased $7.1 million or 221.9% to $10.3 million primarily
due to the development of advertising and marketing strategies, the relocation
of DLJdirect's headquarters, continuing staffing expansion in all areas, and the
development of international operations. Miscellaneous expenses increased $7.9
million or 225.7% to $11.4 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 and equity in net loss of joint
ventures decreased $4.9 million from income of $22.5 million for the six months
ended June 30, 1999 to $17.6 million for the six months ended June 30, 2000. The
provision for income taxes for the six months ended June 30, 2000 and for the
six months ended June 30, 1999 was $7.3 million, representing a 41.5% 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. In addition, DLJdirect entered into joint ventures in Hong Kong and the
Middle East. DLJdirect has a 50% interest in these joint ventures. For the six
months ended June 30, 2000 and June 30, 1999, DLJdirect'S equity in net loss of
joint ventures was $(3.3) million, and $(956,000), respectively.
As a result of the foregoing factors, net income decreased to $7.0
million for the six months ended June 30, 2000 from $12.2 million for the six
months ended June 30, 1999. 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 are
allocated capital and leases of fixed assets through an affiliate. The value of
equipment acquired through leases of fixed assets through an affiliate totaled
$18.0 million for the six months ended June 30, 2000 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, bank
accounts and investment accounts consistent with regulatory requirements,
DLJdirect continues to be substantially dependent on DLJ Inc. for almost all of
its daily financial, administrative and operational services and related support
functions including cash management, the receipt of payments from third parties
and the distribution of payments to third parties. DLJdirect continues to invest
its excess cash. At June 30, 2000, DLJdirect had approximately $232.5 million
invested in money market accounts and short-term investments. DLJ Inc. intends
to fund DLJdirect's liquidity needs in the ordinary course of business. However,
significant expenditures will be funded on a case by case basis as determined by
the board of directors of DLJ Inc. The board of directors of DLJ Inc. will
determine, in its sole discretion, whether to provide any particular funds to
either DLJ Inc. or DLJdirect and will not be obligated to do so. In this
connection, intercompany receivables/payables are settled periodically through
cash transfers to and from DLJdirect's accounts. There are no specific criteria
to determine when DLJ Inc. will account for a cash transfer as a long-term loan,
a capital contribution or a return of capital rather than an inter-group
revolving credit advance. The board of directors of DLJ Inc. will make such a
determination in the exercise of its business judgment at the time of such
transfer, or the first of such type of transfer, based upon all relevant
circumstances.
Applicable law and regulations require minimum levels of capital to be
maintained by DLJdirect, Inc., the broker-dealer subsidiary of DLJdirect
Holdings Inc. Consequently, the cash balances of DLJdirect, Inc. may not be
available as a source of liquidity to support other aspects of the business of
DLJdirect. The SEC's Net Capital Rules are the primary regulatory restrictions.
DLJdirect continually reviews the capital in its broker-dealer subsidiary to
ensure that it meets these regulatory requirements and can appropriately support
the anticipated capital needs of the business. DLJdirect's right to participate
in the assets of any subsidiary is also subject to prior claims of the
subsidiary's customers and other creditors.
Cash provided by operating activities valued $7.4 million and $24.8
million for the six months ended June 30, 2000, and 1999, respectively. In the
six months ended June 30, 2000, there were increased assets including
receivables from brokers, dealers and others of $806,000 and other amounts of
$414,000. This increase was offset by a decrease of financial instruments
owned of $971,000, an increase in payables to parent and affiliate, net of $2.0
million and a decrease in accounts payable and accrued expenses of $4.1 million.
In the six months ended June 30, 1999, receivables from brokers, dealers and
others increased $6.5 million. This increase in assets was offset by increases
in operating liabilities including amounts payable and accrued expenses of $5.1
million and financial instruments sold not yet purchased of $2.5 million.
Cash used in investing activities totaled $56.1 million for the six
months ended June 30, 2000. For the six months ended June 30, 2000, DLJdirect
invested $36.3 million in short-term investments, purchased 4.8 million of
long-term corporate development investments and invested $14.9 million in
several foreign joint ventures in which it has a 50% interest. For the six
months ended June 30, 1999, DLJdirect invested $12.4 million in a 50% joint
venture with a Japanese bank.
For the six months ended June 30, 1999 net cash provided by financing
activities totaled $201.8 million which was provided by capital contributions
from DLJ Inc. The net proceeds, together with its current cash, cash
equivalents and cash generated from operating will be sufficient to meet its
anticipated cash needs for working capital and capital expenditures through at
least the end of 2000.
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.
36
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - DLJdirect
DLJdirect has been named a defendant in actions relating to its businesses.
While the ultimate outcome of litigation involving DLJdirect cannot be predicted
with certainty, management, having reviewed these actions with its counsel,
believes it has meritorious defenses to all such actions and intends to defend
each of these vigorously. In the opinion of management of DLJdirect, the
ultimate resolution of all litigation, regulatory and investigative matters
affecting DLJdirect will not have a material adverse effect on the financial
condition or results of operations of DLJdirect.
37
<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
15 Independent Accountants' Review Report - Donaldson, Lufkin &
Jenrette, Inc.
15.1 Independent Accountants' Review Report - DLJdirect
27 Financial Data Schedule
(b) Reports on Form 8-K
1. Form 8-K dated May 23, 2000; Item 5
2. Form 8-K dated July 20, 2000; Items 5 and 7
3. Form 8-K dated July 26, 2000; Item 5
38
<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, 2000 /s/ Anthony F. Daddino
----------------------------------------------
Anthony F. Daddino
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(ON BEHALF OF THE REGISTRANT AND AS
PRINCIPAL FINANCIAL OFFICER)
39
<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
15 Independent Accountants' Review Report - Donaldson, Lufkin &
Jenrette, Inc.
15.1 Independent Accountants' Review Report - DLJdirect
27 Financial Data Schedule
40
