<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _______
Commission file number 1-6862 / /
DONALDSON, LUFKIN & JENRETTE, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-1898818
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
277 Park Avenue, New York, New York 10172
- --------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (212) 892-3000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /.
As of May 8, 2000, the latest practicable date, there were 127,714,862 shares of
DLJ Common Stock, $0.10 par value, and 18,400,000 shares of DLJdirect Common
Stock, $0.10 par value, outstanding.
1
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENTS
Part I FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
NUMBER
------
Item 1. Financial Statements
<S> <C>
Donaldson, Lufkin & Jenrette Inc. Consolidated Financial Statements
Condensed Consolidated Statements of Financial Condition
at March 31, 2000 and December 31, 1999 (Unaudited)............ 4
Condensed Consolidated Statements of Income for the three
months ended March 31, 2000 and 1999 (Unaudited) .............. 6
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the three months ended March 31, 2000 (Unaudited)... 7
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2000 and 1999 (Unaudited)......... 8
Notes to Condensed Consolidated Financial Statements
(Unaudited).................................................... 10
DLJdirect Combined Financial Statements
Condensed Combined Statements of Financial Condition at March
31, 2000 and December 31, 1999 (Unaudited)..................... 22
Condensed Combined Statements of Operations for the three
months ended March 31, 2000 and 1999 (Unaudited) .............. 23
Condensed Combined Statements of Changes in Allocated Equity
for the three months ended March 31, 2000 (Unaudited).......... 24
Condensed Combined Statements of Cash Flows for the three
months ended March 31, 2000 and 1999 (Unaudited)............... 25
Notes to Condensed Combined Financial Statements (Unaudited)... 26
</TABLE>
2
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENTS-CONTINUED
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C> <C>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Donaldson, Lufkin & Jenrette Inc. Management's Discussion
and Analysis of Financial Condition and Results of Operations... 16
DLJdirect Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 28
Part II OTHER INFORMATION
Item 1. Legal Proceedings
Donaldson, Lufkin & Jenrette, Inc................................... 21
DLJdirect........................................................... 31
Item 6. Exhibits and Reports on Form 8-K.................................... 32
Signature........................................................... 38
</TABLE>
3
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - DONALDSON, LUFKIN & JENRETTE, INC.
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
March 31 December 31,
2000 1999
-------- ------------
ASSETS
<S> <C> <C>
Cash and cash equivalents ...................................... $ 1,353,992 $ 2,020,543
Cash and securities segregated for regulatory purposes or
deposited with clearing organizations ........................ 150,248 196,249
Collateralized short-term agreements:
Securities purchased under agreements to resell .............. 22,409,925 29,538,141
Securities borrowed .......................................... 37,316,830 30,348,609
Receivables:
Customers .................................................... 11,817,482 8,671,447
Brokers, dealers and other ................................... 12,306,576 5,978,065
Financial instruments owned, at value:
U.S. government and agencies ................................. 15,889,838 14,543,947
Corporate debt ............................................... 6,000,189 5,379,440
Foreign sovereign debt ....................................... 3,397,318 3,018,175
Mortgage whole loans ......................................... 2,571,987 1,848,391
Equity and other ............................................. 4,498,236 3,192,467
Long-term corporate development investments .................. 1,580,462 1,432,669
Office facilities, at cost, (net of accumulated depreciation and
amortization of $392,821 and $364,006, respectively) ......... 604,298 573,878
Other assets and deferred amounts .............................. 2,377,436 2,270,061
------------ ------------
Total Assets ................................................... $122,274,817 $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>
March 31, December 31,
2000 1999
--------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Commercial paper and short-term borrowings .................................... $ 2,184,841 $ 1,358,188
Collateralized short-term financings:
Securities sold under agreements to repurchase ............................. 51,128,825 56,474,394
Securities loaned .......................................................... 17,345,976 11,541,759
Payables:
Customers .................................................................. 8,912,748 7,792,857
Brokers, dealers and other ................................................. 11,294,210 4,780,631
Financial instruments sold not yet purchased, at value:
U.S. government and agencies ............................................... 8,574,605 7,530,070
Corporate debt ............................................................. 727,566 624,639
Equities and other ......................................................... 7,393,506 4,788,819
Accounts payable and accrued expenses ......................................... 2,716,473 3,295,448
Other liabilities ............................................................. 1,277,742 1,408,945
Long-term borrowings .......................................................... 6,357,320 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;
127,444,097 and 126,014,091 shares issued
and outstanding, respectively) ........................................ 12,744 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 ............................................................ 1,331,068 1,298,674
Retained earnings .......................................................... 2,437,758 2,205,818
Accumulated other comprehensive income ..................................... 2,078 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 ............................................ 4,161,005 3,907,242
------------- -------------
Total Liabilities and Stockholders' Equity .................................... $ 122,274,817 $ 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
March 31,
2000 1999
------------ --------
<S> <C> <C>
Revenues:
Commissions ........................................................ $ 472,019 $ 280,992
Underwritings ...................................................... 250,625 256,914
Fees ............................................................... 421,987 287,075
Interest, net of interest to finance U.S. government, agency and
mortgage-backed securities of $970,291, and $705,251, respectively 813,662 476,661
Principal transactions-net:
Trading .......................................................... 384,756 174,045
Investment ....................................................... 129,889 3,024
Other .............................................................. 20,054 14,739
---------- ----------
Total revenues .................................................. 2,492,992 1,493,450
---------- ----------
Costs and Expenses:
Compensation and benefits .......................................... 1,066,062 635,714
Interest ........................................................... 604,090 355,953
Brokerage, clearing, exchange fees and other ....................... 103,797 71,221
Occupancy and related costs ........................................ 48,894 41,088
Communications and technology ...................................... 123,486 90,983
Other operating expenses ........................................... 157,463 101,491
---------- ----------
Total costs and expenses ........................................ 2,103,792 1,296,450
---------- ----------
Income before provision for income taxes .............................. 389,200 197,000
---------- ----------
Provision for income taxes ............................................ 144,000 75,350
---------- ----------
Net income ............................................................ $ 245,200 $ 121,650
========== ==========
Dividends on preferred stock .......................................... $ 5,289 $ 5,289
========== ==========
Earnings applicable to common shares .................................. $ 239,911 $ 116,361
========== ==========
Earnings applicable to common shares:
DLJ ................................................................ $ 237,474 $ 116,361
========== ==========
DLJdirect .......................................................... $ 2,437
==========
Earnings per common share:
DLJ
Basic ........................................................... $ 1.87 $ 0.94
Diluted ......................................................... $ 1.72 $ 0.84
========== ==========
DLJdirect
Basic ........................................................... $ 0.13
Diluted ......................................................... $ 0.13
==========
Weighted average common shares:
DLJ
Basic ........................................................... 127,008 123,995
Diluted ......................................................... 138,466 137,850
========== ==========
DLJdirect
Basic ........................................................... 18,400
Diluted ......................................................... 18,482
==========
</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 Three Months Ended March 31, 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
------- -------- -------- ----------- ------- -------- -------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
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 ................. -- -- -- -- -- 245,200 -- 245,200
Translation adjustment ..... -- -- -- -- -- -- 34 34
Total comprehensive
income ................. -- -- -- -- -- -- -- 245,234
Dividends:
DLJ Common Stock
($0.0625 per share) ..... -- -- -- -- -- (7,971) -- (7,971)
Preferred stock
($0.7052 per share) ..... -- -- -- -- -- (5,289) -- (5,289)
Exercise of stock
options ................. -- 38 -- -- 10,199 -- -- 10,237
Conversion of restricted
stock units ............ -- 105 -- (10,748) 22,195 -- -- 11,552
----------- ----------- -------- ----------- ----------- ----------- ----------- ----------
Balances at
March 31, 2000 .......... $ 375,000 $ 12,744 $ 1,840 $ 517 $ 1,331,068 $ 2,437,758 $ 2,078 $4,161,005
=========== =========== ======== =========== =========== =========== =========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (UNAUDITED)
(IN THOUSANDS)
For the Three Months Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income ...................................................... $ 245,200 $ 121,650
----------- -----------
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization ................................. 31,125 21,795
Deferred taxes ................................................ 3,165 (20,538)
Increase in unrealized appreciation of long-term corporate
development investments .................................... (51,192) (16,337)
Foreign currency translation adjustment ...................... 34 (1,438)
(Increase) decrease in operating assets:
Cash and securities segregated for regulatory
purposes or deposited with clearing organizations .......... 46,001 31,103
Securities purchased under agreements to resell .............. 1,403,381 (9,417,458)
Securities borrowed .......................................... (6,968,221) (5,393,292)
Receivables from customers ................................... (3,146,035) (297,964)
Receivables from brokers, dealers and other .................. (6,328,511) (820,385)
Financial instruments owned, at value ........................ (4,375,148) (2,375,100)
Other assets and deferred amounts ............................ (156,377) (4,959)
Increase (decrease) in operating liabilities:
Securities sold under agreements to repurchase ............... (1,403,381) 9,417,458
Securities loaned ............................................ 5,804,217 3,457,603
Payables to customers ........................................ 1,119,891 92,972
Payables to brokers, dealers and other ....................... 6,513,579 2,224,745
Financial instruments sold not yet purchased, at value ....... 3,752,149 1,418,613
Accounts payable and accrued expenses ........................ (578,975) (687,149)
Other liabilities ............................................ (115,984) 152,385
----------- -----------
Net cash used in operating activities ............................ $(4,205,082) $(2,096,296)
----------- -----------
</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 Three Months Ended March 31, 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 ........... $ (382,951) $ (69,725)
Sales of long-term corporate development investments ............... 286,350 26,869
Office facilities .................................................. (59,893) (34,232)
Other assets ....................................................... 44,185 (15,057)
----------- -----------
Net cash used in investing activities ................................. (112,309) (92,145)
----------- -----------
Cash flows from financing activities:
Net proceeds from (payments for):
Short-term financings .............................................. 2,609,300 2,430,046
Issuance of:
Senior notes ..................................................... 499,784 648,288
Senior secured floating rate notes ............................... (5,065) --
Medium-term notes ................................................ 475,499 114,756
Structured borrowings ............................................ 78,000 46,939
Other long-term debt ............................................. 12 (382)
Dividends .......................................................... (13,260) (13,073)
Exercise of stock options .......................................... 6,570 10,443
----------- -----------
Net cash provided by financing activities ............................. 3,650,840 3,237,017
----------- -----------
(Decrease) increase in cash and cash equivalents ...................... (666,551) 1,048,576
Cash and cash equivalents at beginning of period ...................... 2,020,543 1,049,253
----------- -----------
Cash and cash equivalents at end of period ............................ $ 1,353,992 $ 2,097,829
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
9
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (UNAUDITED)
March 31, 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 Common Stock tracks the separate performance of the Company's online
discount brokerage and related investment services business. On May 28, 1999,
(the "closing date"), the Company issued, in an initial public offering, 18.4
million shares of DLJdirect Common Stock (the "Tracking 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 three months ended March 31, 2000 and 1999 were $97.7 million
and $4.7 million, respectively.
4. BORROWINGS
Short-term borrowings are generally demand obligations with interest
approximating Federal fund rates. Such borrowings are generally used to
facilitate the securities settlement process, to finance securities inventories
and to finance securities purchased by customers on margin. At March 31, 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 March 31, 2000,
$1.7 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: March 31 December 31,
2000 1999
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Senior notes, 5.875%-8.00% due various dates through 2008 ............. $2,540,457 $2,040,673
Medium-term notes, 4.995% - 7.42% due various dates through 2016 ...... 2,705,358 2,229,859
Senior secured floating rate notes due 2005 ........................... 290,627 295,692
Global floating rate notes, due 2002 .................................. 348,917 348,805
Subordinated exchange notes, 9.58% due 2003 .......................... 225,000 225,000
Structured borrowings, 5.00% - 8.6517% due various dates through 2006 . 226,644 148,644
Other borrowings ...................................................... 20,317 20,417
---------- ----------
Total long-term borrowings ........................................ $6,357,320 $5,309,090
========== ==========
Current maturities .................................................... $ 919,443 $ 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.
During the quarter ended March 31, 2000, the Company issued an aggregate of
$485.0 million medium-term notes with various maturity dates through 2007 and
also issued $500.0 million 8% senior notes that mature in 2005.
For the three months ended March 31, 2000 and 1999, interest paid on all
borrowings and financing arrangements amounted to $1.5 billion and $1.0
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 $1.5 billion and $1.4 billion at March 31, 2000
and December 31, 1999, respectively. For the three months ended March 31, 2000
and 1999, the increase in net unrealized appreciation amounted to $51.2 million
and $16.3 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 March 31,
2000, DLJSC's net capital of approximately $1.4 billion was 11.3 percent of
aggregate debit balances and in excess of the minimum requirement by
approximately $1.2 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
March 31, 2000, the Company and its broker-dealer subsidiaries complied with all
applicable regulatory capital adequacy requirements.
11
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (UNAUDITED)
7. EARNINGS PER SHARE
Earnings per common share for periods after the closing date have been
calculated using the two-class method. The two-class method is an earnings
allocation formula that determines the earnings per share for each class of
common stock according to participation rights in undistributed earnings.
For DLJ, basic earnings per common share represents earnings applicable to
common shares (including its retained interest in DLJdirect) divided by the
weighted average actual common shares outstanding, 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
March 31,
DLJ COMMON STOCK 2000 1999
- ---------------- ----- ----
(IN THOUSANDS)
<S> <C> <C>
Earnings applicable to common shares-basic and diluted $237,474 $116,361
======== ========
Weighted average common shares-basic ................. 127,008 123,995
Effect of dilutive securities:
Restricted stock units .............................. 263 1,285
Stock options ....................................... 11,195 12,570
-------- --------
Weighted average common shares-diluted ................ 138,466 137,850
======== ========
DLJdirect COMMON STOCK
- ----------------------
Earnings applicable to common shares-basic and diluted $ 2,437
========
Weighted average common shares-basic ................. 18,400
Effect of diluted stock options ...................... 82
--------
Weighted average common shares - diluted ............. 18,482
========
</TABLE>
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.
12
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (UNAUDITED)
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 March 31, 2000 and December 31, 1999 are as follows:
March 31, December 31,
2000 1999
---- ----
(IN BILLIONS)
Options written .............................. $ 17.2 $ 15.1
Options purchased ............................ $ 11.4 $ 7.4
Forward contracts purchased .................. $ 42.2 $ 35.6
Forward contracts sold ....................... $ 50.3 $ 41.1
Futures contracts purchased .................. $ 2.3 $ 2.9
Futures contracts sold ....................... $ 3.4 $ 4.3
Swaps ........................................ $ 31.8 $ 24.5
The fair values of derivatives outstanding at March 31, 2000 and December 31,
1999 are as follows:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Options .................. $ 757.2 $ 997.4 $ 519.9 $ 1,002.6
Forward contracts ........ $ 125.8 $ 95.3 $ 327.1 $ 247.3
Futures contracts ........ $ 17.6 $ 11.2 $ 3.5 $ 9.8
Swaps .................... $ 303.2 $ 440.5 $ 256.9 $ 240.2
</TABLE>
The average fair values of derivatives for the three months ended March 31, 2000
and the year ended December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, 2000 December 31, 1999
-------------- -----------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Options .................. $ 462.4 $ 1,044.0 $ 169.5 $ 444.8
Forward contracts ........ $ 255.8 $ 182.2 $ 329.0 $ 312.6
Futures contracts ........ $ 22.6 $ 28.7 $ 10.3 $ 7.4
Swaps .................... $ 412.9 $ 334.9 $ 253.3 $ 94.3
</TABLE>
The majority of the Company's derivatives are short-term in duration.
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 March 31, 2000 and December 31, 1999, the
notional amount of these swaps was $4.1 billion and $3.3 billion,
respectively.
13
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements- (Continued)
9. COMMITMENTS AND CONTINGENCIES
The Company issues letters of credit for which it is contingently liable for
$327.9 million at March 31, 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 March 31, 2000, unfunded senior bank loan commitments outstanding
amounted to $712.4 million.
At March 31, 2000, the Company has commitments of $640.8 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)
<S> <C> <C> <C> <C> <C> <C>
MARCH 31, 2000
Net revenues from external sources $ 555.2 $ 197.0 $ 446.2 $ 517.2 $ (36.3) $ 1,679.3
Net intersegment revenues ........ -- 0.1 (1.9) 45.2 (43.4) --
Net interest revenue ............. (7.2) 48.1 5.7 113.1 49.9 209.6
---------- --------- -------- --------- --------- ----------
Total net revenues ............ $ 548.0 $ 245.2 $ 450.0 $ 675.5 $ (29.8) $ 1,888.9
========== ========= ======== ========= ========= ==========
Income before income taxes ....... $ 154.4 $ 81.0 $ 94.1 $ 170.5 $ (110.8) $ 389.2
========== ========= ======== ========= ========= ==========
MARCH 31, 1999
Net revenues from external sources $ 324.0 $ 181.3 $ 209.1 $ 330.2 $ (27.8) $ 1,016.8
Net intersegment revenues ........ -- -- (1.1) 14.3 (13.2) 0.0
Net interest revenue ............. (1.5) 28.1 5.4 61.7 27.0 120.7
---------- --------- -------- --------- --------- ----------
Total net revenues ............ $ 322.5 $ 209.4 $ 213.4 $ 406.2 $ (14.0) $ 1,137.5
========== ========= ======== ========= ========= ==========
Income before income taxes ....... $ 78.3 $ 62.8 $ 24.7 $ 90.7 $ (59.5) $ 197.0
========== ========= ======== ========= ========= ==========
Balance sheet data:
MARCH 31, 2000
Segment assets ................... $ 2,379.9 $ 67,672.3 $ 9,556.0 $ 54,286.6 $ (11,620.0) $ 122,274.8
========== ========= ======== ========= ========= ==========
DECEMBER 31, 1999
Segment assets ................... $ 2,273.2 $ 74,884.7 $ 5,325.5 $ 30,586.4 $ (4,057.7) $ 109,012.1
========== ========= ======== ========= ========= ==========
</TABLE>
14
<PAGE>
DONALDSON, LUFKIN & JENRETTE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (UNAUDITED)
The following is a reconciliation of the Company's reported income before
provision for income taxes to the Company's consolidated totals:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
----------------------------------
(IN MILLIONS)
INCOME BEFORE PROVISION FOR INCOME TAXES:
<S> <C> <C>
Total income for reported segments................................. $ 500.0 $ 256.5
All other income (losses).......................................... 21.4 (21.2)
Consolidation/elimination (1)...................................... (132.2) (38.3)
-------- ---------
Total income before provision for income taxes.................. $ 389.2 $ 197.0
======= ========
</TABLE>
(1) Consolidation/elimination represents intercompany accounts/intersegment
revenue-sharing arrangements that are eliminated in consolidation.
The Company's principal operations are located in the United States. The Company
maintains offices in Europe, Latin America and Asia, with the majority of
foreign business done through the London offices. The following are net revenues
by geographic region:
Three Months Ended
March 31,
2000 1999
-----------------------------
(IN MILLIONS)
United States........................ $ 1,503.6 $ 996.5
Other foreign........................ 385.3 141.0
---------- ---------
Total........................... $ 1,888.9 $ 1,137.5
========== =========
11. LEGAL PROCEEDINGS
Certain significant legal proceedings and matters have been previously disclosed
in the Company's Annual Report on Form 10-K for the year ended December 31,
1999. There were no new developments in these proceedings in the quarter ended
March 31, 2000.
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.
15
<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.
Continued strong U.S. economic growth and low inflation,
resulting in robust equity markets characterized the domestic investment
climate in the first quarter of 2000. Investor demand for technology issues
was very strong, as the technology-heavy NASDAQ reached the 5000 mark in
early March. The latter half of the month was extremely volatile as
technology stocks and the NASDAQ composite experienced dramatic drops. Equity
new issuances were at higher levels compared to the same period last year,
however they were more than offset by reduced fixed income offerings due to
rising interest rates and widening corporate and agency spreads. Merger and
acquisition activity continued to reflect 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 twice during the quarter. The most recent rate
hike, to 6.00%, in March was the fifth since June of 1999. The economy
continues to be strong, however, prompting anticipation of additional
increases in interest rates.
RESULTS OF OPERATIONS - DLJ INC.
QUARTER ENDED MARCH 31, 2000 COMPARED TO QUARTER ENDED MARCH 31, 1999
For 2000, total revenues increased $999.5 million, or 66.9% to $2.5
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 $231.2
million primarily as a result of increased underwriting revenues and fee income
related to merger and acquisition activity; Equities Group revenues increased
$237.1 million primarily as a result of increased commissions, underwriting and
trading revenues, both domestically and internationally; Fixed Income Group
revenues increased $15.7 million, principally as a result of positive trading
gains in the high-yield and mortgage-backed securities areas, offset by reduced
underwriting revenues in these areas; Financial Services Group revenues
increased $187.0 million primarily as a result of increased brokerage and
correspondent clearance commission revenues and fee income in the Company's
correspondent and online brokerage businesses.
Commission revenues increased $191.0 million or 68.0% to $472.0 million
due to increased business in virtually all areas. Share volumes on the NYSE and
NASDAQ exchanges averaged a combined record 2.8 billion shares per day for the
first quarter of 2000 compared to approximately 1.7 billion shares per day
for the first quarter of 1999. Commissions generated internationally,
primarily in London and Hong Kong equities increased almost threefold over
1999. The Company's correspondent and online brokerage businesses added over
236 thousand active client accounts in the first quarter of 2000, and related
customer assets increased by approximately $59 billion.
Underwriting revenues decreased $6.3 million or 2.5% to $250.6 million,
primarily as a result of the overall decline in domestic new issuances of stocks
and bonds.
Fee revenues increased $134.9 million or 47.0% to $422.0 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.
In addition, fees related to asset management increased as funds under
management increased to approximately $29 billion.
Interest, net of interest expense to finance U.S. government, agency and
mortgage-backed securities, increased $337.0 million or 70.7% to $813.7
billion. The increase resulted primarily from increased customer activity and
to a lesser extent, increased rates of interest. Margin debit balances
increased over 80% and all other lending activity was up significantly. There
was only a slight increase in interest on trading activity.
Principal transactions-net, trading revenues increased $210.8 million to
$384.8 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 $126.9 million
to $129.9 million primarily as a result of increased realized and unrealized
gains on the Company's merchant banking and venture capital investments.
16
<PAGE>
Total costs and expenses for 2000 increased $807.3 million or 62.3% 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 $430.4 million or 67.7% to $1.1
billion. Incentive and production-related compensation increased by 80.1% in
2000. Base compensation, including benefits and payroll taxes, increased by
39.2% primarily due to the Company's significant international expansion.
Full-time worldwide personnel increased 1,888 or 21.8% to 10,560 at quarter-end
2000 compared to first quarter 1999.
Interest expense increased $248.1 million or 69.7% to $604.1 million
due primarily to increased borrowing to finance customer activity as well as to
slight increases in interest rates.
All other expenses increased $128.9 million or 42.3% to $433.7 million,
as noted below.
Communications and technology increased by $32.5 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 system for the Company's correspondent brokerage network. Brokerage,
clearing, exchange fees and other expenses increased $32.6 million due to
increased trading volume and transaction fee payments. Occupancy and related
costs increased $7.8 million primarily as a result of the Company's domestic
growth and international expansion. All other operating expenses increased $56.0
million. Included therein are professional fees, travel and entertainment, and
printing and stationery which increased $24.7 million due to an overall increase
in the level of business activity, and advertising which increased $11.0
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 $76.1 million as a result of
increased underwritings, and fees related to merger and acquisition activity;
Equities Group pre-tax income increased $69.4 million due to increases in
commissions, fees and trading gains; Fixed Income Group pre-tax income increased
$18.2 million as a result of increased trading gains offset by decreased
underwriting revenues in the high-yield and real estate finance areas; Financial
Services Group pre-tax income increased $79.8 million as a result of increased
commissions 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 March 31, 2000
and 1999 was $144.0 million and $75.4 million, a 37.0% and 38.3% effective tax
rate, respectively.
Net income for 2000 increased $123.5 million, or 101.5% to $245.2
million. Diluted earnings per common share were $1.72 for 2000 and $0.84 for
1999.
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 March 31, 2000 and December
31, 1999, the Company's total assets were $122.3 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.
The Company maintains a $2.5 billion revolving credit facility with
various banks, of which $1.9 billion may be unsecured. There were no borrowings
outstanding under this agreement at March 31, 2000.
17
<PAGE>
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 securities, 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 addition, during the quarter ended March 31, 2000, commercial paper
outstanding under the Company's $2.0 billion commercial paper program increased
from $1.2 billion to $1.7 billion.
The Company's current credit ratings of its long-term debt and commercial paper
are as follows:
LONG-TERM DEBT COMMERCIAL PAPER
Duff & Phelps A D-1
Fitch IB4CA 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
March 31, 2000, DLJSC had aggregate regulatory "net capital," after adjustments
required by Rule 15c3-1 under the Securities Exchange Act of 1934, of
approximately $1.4 billion, which exceeded minimum net capital requirements by
$1.2 billion and which exceeded the net capital required by DLJSC's most
restrictive debt covenants by $475.6 million. The Company's London-based
broker-dealer subsidiaries are subject to the requirements of the Securities and
Futures Authority, a self-regulatory organization established pursuant to the
United Kingdom Financial Services Act of 1986. Other U.S. and foreign
broker-dealer subsidiaries of the Company are subject to net capital
requirements of their respective regulatory agencies. At March 31, 2000, the
Company and its broker-dealer subsidiaries were in compliance with all
applicable regulatory capital adequacy requirements.
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.
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.
QUARTERS ENDED MARCH 31, 2000 AND 1999
At March 31, 2000 and 1999, cash and cash equivalents totaled $1.4
billion and $2.1 billion, respectively, a decrease of $0.6 billion and an
increase of $1.0 billion, respectively.
Cash used in operating activities totaled $4.2 billion and $2.1
billion in 2000 and 1999, respectively. In 2000, there were increases in
assets including financial instruments owned of $4.4 billion, securities
borrowed of $7.0 billion and receivables from customers, brokers, dealers and
other of $9.5 billion. These increases were partially offset by increases in
liabilities including payables to customers, brokers, dealers and other of
$7.6 billion, securities loaned of $5.8 billion and financial instruments
sold not yet purchased of $3.8 billion. In 1999, there were increases in
assets including financial instruments owned of $2.4 billion, and securities
borrowed of $5.4 billion. An increase in liabilities, including payables to
customers, brokers, dealers and other of $2.3 billion, securities loaned of
$3.5 billion and a decrease in financial instruments sold, not yet purchased
of $1.4 billion offset these changes.
18
<PAGE>
In 2000 and 1999, net cash used in investing activities of $112.3
million and $92.1 million, respectively, consisted primarily of purchases to
expand the Company's domestic and international offices and net purchases of
long-term corporate development investments.
In 2000 and 1999, net cash provided by financing activities totaled
$3.7 billion and $3.2 billion, respectively. In 2000, $2.6 billion was
provided by short-term financings (principally repurchase agreements) and
$1.0 billion was provided by the issuance of senior notes, medium-term notes
and structured borrowings. In 1999, $2.4 billion was provided by short-term
financings (principally repurchase agreements) and $0.8 billion was provided
by the issuance of senior notes, medium-term notes and structured borrowings.
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.
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 March 31, 2000 and December 31, 1999 are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
(IN BILLIONS)
<S> <C> <C>
Options written .............................. $ 17.2 $ 15.1
Options purchased ............................ $ 11.4 $ 7.4
Forward contracts purchased .................. $ 42.2 $ 35.6
Forward contracts sold ....................... $ 50.3 $ 41.1
Futures contracts purchased .................. $ 2.3 $ 2.9
Futures contracts sold ....................... $ 3.4 $ 4.3
Swaps ........................................ $ 31.8 $ 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 March 31, 2000 and December 31, 1999, the
notional amount of these swaps was $4.1 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 March 31, 2000, the Company had investments of $738.5
million and has commitments to invest up to an additional $640.8 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
19
<PAGE>
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 March 31, 2000, the Company had extended $13.8 million as its
portion of short-term financings made with AXA Financial.
The Company has made additional bridge loans of $598.3 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 March 31, 2000 and December 31,
1999, the Company had long positions with an aggregate market value of
approximately $6.4 billion and $5.4 billion, respectively, and short positions
with an aggregate market value of approximately $0.4 billion and $0.5 billion,
respectively.
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 $20.0 million and $17.0 million at March
31, 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:
March 31, December 31,
2000 1999
-------- ------------
(IN MILLIONS)
Trading:
Interest rate risk................ $ 10 $10
Equity risk....................... $ 15 $14
Foreign currency exchange risk.... $ - $ -
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.
20
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS- DONALDSON, LUFKIN & JENRETTE, INC.
Certain significant legal proceedings and matters have been previously disclosed
in the Company's Annual Report on Form 10-K for the year ended December 31,
1999. There were no new developments in these proceedings in the quarter ended
March 31, 2000.
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.
21
<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>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents ..................................... $217,693 $237,020
Short-term investments ........................................ 18,926 7,848
Deposit with affiliated clearing broker ....................... 430 329
Receivables from brokers, dealers and others, net ............. 27,271 19,015
Financial instruments owned, at market value .................. 1,175 1,010
Office facilities, at cost (net of accumulated depreciation
and amortization of $493 and $470, respectively) ............ 69 92
Investment in joint venture ................................... 23,405 11,009
Long-term corporate development investments ................... 5,480 730
Other assets .................................................. 2,721 1,389
-------- --------
Total assets .................................................. $297,170 $278,442
======== ========
LIABILITIES AND ALLOCATED EQUITY
Liabilities:
Payables to parent and affiliates, net ...................... $ 19,431 $ 12,550
Financial instruments sold not yet purchased, at market value 44 26
Accounts payable and accrued expenses ....................... 32,325 34,074
-------- --------
Total liabilities ............................................. 51,800 46,650
-------- --------
Commitments and contingencies ................................. -- --
Allocated equity .............................................. 244,276 230,662
Accumulated other comprehensive income ........................ 1,094 1,130
-------- --------
Total allocated equity ........................................ 245,370 231,792
-------- --------
Total liabilities and allocated equity ........................ $297,170 $278,442
======== ========
</TABLE>
See accompanying notes to condensed combined financial statements.
22
<PAGE>
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Condensed Combined Statements of Income (Unaudited)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---- ----
<S> <C> <C>
Revenues:
Commissions .................................................... $ 74,539 $ 32,054
Underwritings .................................................. 3,088 427
Fees ........................................................... 18,707 9,169
Interest ....................................................... 18,394 5,705
--------- ---------
Total revenues ............................................... 114,728 47,355
--------- ---------
Costs and expenses:
Compensation and benefits ...................................... 27,171 10,683
Interest ....................................................... 515 153
Brokerage, clearing, exchange fees, and other .................. 18,600 8,854
Advertising .................................................... 18,070 6,101
Occupancy and related costs .................................... 2,390 542
Communications and technology .................................. 10,101 5,394
Other operating expenses ....................................... 12,412 4,367
--------- ---------
Total costs and expenses ..................................... 89,259 36,094
--------- ---------
Income before income tax provision and equity in net loss
of joint venture ............................................... 25,469 11,261
--------- ---------
Income tax provision ............................................. 10,650 4,088
Equity in net loss of joint venture .............................. (1,205) --
--------- ---------
Net income ................................................... $ 13,614 $ 7,173
========= =========
Earnings per share:
Basic ...................................................... $ 0.13 $ 0.07
Diluted .................................................... $ 0.13 $ 0.07
========= =========
Weighted average notional and outstanding shares:
Basic ...................................................... 102,650 102,650
Diluted .................................................... 102,732 102,650
========= =========
Earnings attributable to:
DLJ Retained Interest ...................................... $ 11,177 $ 7,173
DLJdirect Tracking Stock ................................... $ 2,437 --
========= =========
Tracking Stock earnings per share:
Basic ...................................................... $ 0.13
Diluted .................................................... $ 0.13
=========
Tracking Stock weighted average common shares:
Basic ...................................................... 18,400
Diluted .................................................... 18,482
=========
</TABLE>
See accompanying notes to condensed combined financial statements.
23
<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 Three Months Ended March 31, 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 ... -- 1,130 1,130
taxes
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 ...................... 13,614 -- 13,614
Translation adjustment-net of ... -- (36) (36)
taxes
Total comprehensive income .... -- -- 13,578
--------- --------- ---------
Balances at March 31, 2000 ...... $ 244,276 $ 1,094 $ 245,370
========= ========= =========
</TABLE>
See accompanying notes to condensed combined financial statements.
24
<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 Three Months Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income ....................................................... $ 13,614 $ 7,173
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in net loss of joint venture .............................. 1,205 --
Depreciation and amortization .................................... 23 (3)
Deferred taxes ................................................... (87) (6)
(Increase) in operating assets:
Deposit with affiliated clearing broker .......................... (101) --
Receivables from brokers, dealers and other, net ................. (8,256) (846)
Financial instruments owned, at market value ..................... (165) --
Other assets ..................................................... (1,332) (658)
Increase (decrease) in operating liabilities:
Payables to parent and affiliates, net ........................... 6,988 12,745
Financial instruments sold, not yet purchased, at market value ... 18 --
Accounts payable and accrued expenses ............................ (1,749) 1,766
--------- ---------
Net cash provided by operating activities ........................ 10,158 20,171
--------- ---------
Cash flows (used in) investing activities:
Investment in joint venture ...................................... (13,657) --
Short-term investments ........................................... (11,078) --
Purchase of long-term corporate development investments .......... (4,750) --
--------- ---------
Net cash used in investing activities ............................... (29,485) --
--------- ---------
Cash flows from financing activities:
Net proceeds from capital contributions from DLJ ................. -- 1,000
--------- ---------
Net cash provided by financing activities ........................... -- 1,000
--------- ---------
Increase (decrease) in cash and cash equivalents .................... (19,327) 21,171
Cash and cash equivalents at beginning of period .................... 237,020 26,654
--------- ---------
Cash and cash equivalents at end of period .......................... $ 217,693 $ 47,825
========= =========
</TABLE>
See accompanying notes to condensed combined financial statements
25
<PAGE>
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Notes to Condensed Combined Financial Statements (Unaudited)
March 31, 2000
1. BASIS OF PRESENTATION
DLJdirect Common Stock tracks the separate performance of Donaldson, Lufkin &
Jenrette, Inc.'s ("DLJ Inc.") online discount brokerage and related investment
services business for periods subsequent to May 28, 1999 ("the closing date"),
whereby DLJ Inc. issued in an initial public offering 18.4 million shares of
DLJdirect Common Stock ("Tracking 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.
26
<PAGE>
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Notes to Condensed Combined Financial Statements (Unaudited)
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
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 March 31, 2000, DLJdirect Inc.'s
net capital of $37.0 million was in excess of the minimum requirement by $36.7
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 March 31, 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, on a current basis 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 ended March 31, 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 ended March 31, 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. Earnings per share 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>
Tracking Stock
Three Months Ended Three Months Ended Three Months Ended
March 31, March 31, March 31,
2000 1999 2000
------------------ ------------------ -------------
INCOME SHARES INCOME SHARES INCOME SHARES
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Earnings applicable to
common shares .............. $ 13,614 102,650 $ 7,173 102,650 $ 2,437 18,400
========= ======== ======== ========== ======== ========
Effect of dilutive securities:
Stock options .............. $ -- 82 $ -- -- $ - 82
--------- -------- -------- ---------- -------- --------
Diluted EPS .................. $ 13,614 102,732 $ 7,173 102,650 $ 2,437 18,482
========= ======== ======== ========== ======== ========
</TABLE>
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.
27
<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. Additionally,
DLJdirect expects to spend significant amounts in the future in order to expand
its international presence.
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 MARCH 31, 2000 COMPARED TO QUARTER ENDED MARCH 31, 1999
DLJdirect experienced strong operating results for the quarter ended
March 31, 2000 compared to the quarter ended March 31, 1999, reflecting
primarily an increase in active accounts of 65.4% and customer trading volume of
133.9%. Total revenues increased $67.3 million or 142.0% to $114.7 million for
the quarter ended March 31, 2000 from $47.4 million for the quarter ended March
31, 1999. Net income increased $6.4 million to $13.6 million for the quarter
ended March 31, 2000 from $7.2 million for the quarter ended March 31, 1999.
Commissions increased $42.4 million or 132.1% to $74.5 million.
Commissions represented 65.0% of total revenues for the quarter ended March 31,
2000 and 67.7% of total revenues for the quarter ended March 31, 1999. The
increase in commissions was due primarily to significant increases in customer
trading volume. Average trades per day increased 125.7% to 45,600 for the
quarter ended March 31, 2000 from 20,200 for the quarter ended March 31, 1999.
Underwritings revenues earned in connection with public offerings for
the quarter ended March 31, 2000 were $3.1 million compared with a negligible
amount for the quarter ended March 31, 1999. Underwritings represented 2.7% of
total revenues for the quarter ended March 31, 2000.
Fees increased $9.5 million or 103.3% to $18.7 million. Fees represented
16.3% of total revenues for the quarter ended March 31, 2000 and 19.4% of total
revenues for the quarter ended March 31, 1999. Payments for routing orders
increased $3.6 million or 112.5% to $6.8 million. The increase in payments for
routing orders was due primarily to significant increases in customer trading
volume, offset in part by a decline in the amount of revenue per trade that
DLJdirect receives for routing orders. Fees for technology development increased
$4.2 million or 100.0% to $8.4 million primarily due to increased demand for
Internet-based technology applications. Revenue from money market fund
distribution fees increased $1.5 million or 187.5% to $2.3 million. This growth
was due to an increase in customer money market fund balances of $913.8 million
or 103.1% to $1.8 billion. The remaining fees for the quarters ended March 31,
2000 and 1999 include subscription and account related fees.
28
<PAGE>
Interest income increased $12.7 million or 222.8% to $18.4 million.
Interest represented 16.0% of total revenues for the quarter ended March 31,
2000 and 12.0% of total revenues for the quarter ended March 31, 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 $1.3 billion or
185.7% to $2.0 billion. Free credits increased $363.6 million or 76.9% to $836.7
million and short sale balances increased $74.8 million or 185.1% to $115.2
million.
Compensation and benefits increased $16.5 million or 154.2% to $27.2
million. The increase in compensation and benefits was due primarily to growth
in the number of employees from 466 to 1,040. These additional employees were
added primarily in DLJdirect's investor services area to accommodate increased
customer activity, in DLJdirect's technology group to develop new products,
including MarketSpeed(TM), in the UK operations, as well as in executive
management.
Interest expense increased $362,000 or 236.6% to $515,000. Interest
expense is primarily due to interest paid on intercompany balances.
Brokerage, clearing, exchange and other fees increased $9.7 million or
109.0% to $18.6 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 $12.0 million or 196.7% to $18.1 million. The
increase in advertising was due primarily to the development and implementation
of new branding and advertising campaigns.
Occupancy and related costs increased $1.9 million or 380.0% to $2.4
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 $4.7 million or 87.0% to
$10.1 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 $8.0 million or 181.8% to $12.4
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 $2.6 million or 185.7% to $4.0 million primarily due to the
development of advertising strategies, the relocation of DLJdirect's
headquarters, continuing expansion in Charlotte, North Carolina, and the
development of international operations. Miscellaneous expenses increased $3.8
million or 271.4% to $5.2 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 before income tax provision and equity in net loss of joint
venture increased $14.2 million to $25.5 million for the quarter ended March 31,
2000 from $11.3 million for the quarter ended March 31, 1999. The provision for
income taxes for the quarters ended March 31, 2000 and 1999 was $10.7 million,
representing a 42.0% effective tax rate, and $4.1 million, representing a 36.3%
effective tax rate, respectively.
Income before advertising costs, income tax provision and equity in net
loss of joint venture amounted to $43.6 million and $17.4 million for the
quarters ended March 31, 2000 and 1999, respectively.
DLJdirect has a 50% interest in a foreign-based joint venture with a
Japanese bank. This joint venture began trading in June 1999. For the quarter
ended March 31, 2000, DLJdirect's share of the equity in the net loss of this
joint venture was $1.2 million.
As a result of the foregoing factors, net income increased to $13.6
million for the quarter ended March 31, 2000 from $7.2 million for the quarter
ended March 31, 1999.
29
<PAGE>
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
$10.6 million for the three months ended March 31, 2000 and $1.6 million for the
three months ended March 31, 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 March 31, 2000, DLJdirect had approximately $236.6 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 totaled $10.2 million and $20.2
million for the three months ended March 31, 2000, and 1999, respectively. The
increases were primarily due to increases in transaction volume related to
growth in the online brokerage operations. In the three months ended March 31,
2000, there were increased assets including receivables from brokers, dealers
and others of $8.3 million and other assets of $1.3 million. These increases
were offset by increases in payables to parent and affiliates, net of $7.0
million. In the three months ended March 31, 1999, receivables from brokers,
dealers and others increased $846,000. This increase in assets was offset by
increases in operating liabilities including payables to parent and affiliates,
net of $12.7 million.
Cash used in investing activities totaled $29.5 million for the three
months ended March 31, 2000. For the three months ended March 31, 2000,
DLJdirect invested $11.1 million in short-term investments, purchased $4.8
million of long-term corporate development investments and invested an
additional $13.7 million in its 50% interest in a joint venture with a Japanese
bank.
For the three months ended March 31, 1999 net cash provided by financing
activities totaled $1.0 million which was provided by capital contributions from
DLJ Inc. The net proceeds, together with its current cash, cash equivalents and
cash generated from operations will be sufficient to meet its anticipated cash
needs for working capital and capital expenditures through at least the end of
2000.
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.
30
<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.
31
<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 January 21, 2000; Items 5 and 7
2. Form 8-K dated March 16, 2000; Items 5 and 7
3. Form 8-K dated April 20, 2000; Item 5
32
<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.
May 15, 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)
33
<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
34
<PAGE>
EXHIBIT 11
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Computation of Basic Earnings Per Share
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---- ----
<S> <C> <C>
DLJ COMMON STOCK
Weighted Average Common Shares:
Average Common Shares Outstanding .................. 126,850 123,837
Average Restricted Stock Units Outstanding ......... 158 158
-------- --------
Weighted Average Common Shares Outstanding ............ 127,008 123,995
======== ========
Earnings:
Net Income ........................................ $245,200 $121,650
Less: Preferred Stock Dividend Requirement ....... 5,289 5,289
Earnings Applicable to Common Shares-DLJdirect 2,437 --
-------- --------
Earnings Applicable to Common Shares .................. $237,474 $116,361
======== ========
Basic Earnings Per Common Share ....................... $ 1.87 $ 0.94
======== ========
DLJDIRECT COMMON STOCK
Weighted Average Common Shares:
Average Common Shares Outstanding ................. 18,400
========
Earnings Applicable to Common Shares .................. $ 2,437
========
Basic Earnings Per Common Share ....................... $ 0.13
========
</TABLE>
<PAGE>
EXHIBIT 11.1
DONALDSON, LUFKIN & JENRETTE, INC. & SUBSIDIARIES
Computation of Diluted Earnings Per Share
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
------------ --------
DLJ COMMON STOCK
<S> <C> <C>
Weighted Average Common Shares:
Average Common Shares Outstanding .................. 126,850 123,837
Average Restricted Stock Units Outstanding ......... 421 1,443
Average Common Shares Issuable Under
Employee Benefit Plans ........................... 11,195 12,570
-------- --------
Weighted Average Common Shares Outstanding ............ 138,466 137,850
======== ========
Earnings:
Net Income ........................................ $245,200 $121,650
Less: Preferred Stock Dividend Requirement ....... 5,289 5,289
Earnings Applicable to Common Shares-DLJdirect 2,437 --
-------- --------
Earnings Applicable to Common Shares .................. $237,474 $116,361
======== ========
Diluted Earnings Per Common Share ..................... $ 1.72 $ 0.84
======== ========
DLJDIRECT COMMON STOCK
Weighted Average Common Shares:
Average Common Shares Outstanding ................. 18,400
Average Common Shares Issuable Under
Employee Benefit Plans ........................... 82
--------
Weighted Average Common Shares Outstanding ............ 18,482
========
Earnings Applicable to Common Shares .................. $ 2,437
========
Diluted Earnings Per Common Share ..................... $ 0.13
========
</TABLE>
<PAGE>
Exhibit 12
DONALDSON, LUFKIN & JENRETTE, INC.
STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In thousands, except for ratio)
<TABLE>
<CAPTION>
For the Years Ended For the
------------------------------------------------------------------ Quarter Ended
1995 1996 1997 1998 1999 3/00
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Income before provisions for
income taxes $ 298,500 $ 473,800 $ 661,100 $ 600,500 $ 953,500 $ 389,200
Add: Fixed Charges
Interest expense (gross) 2,699,769 2,865,800 4,012,209 4,501,242 4,839,810 1,574,381
Interest factor in rents 22,064 25,515 29,351 38,517 52,563 12,859
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges 2,721,833 2,891,315 4,041,560 4,539,759 4,892,373 1,587,240
Earnings before fixed charges,
and provision for income taxes $3,020,333 $3,365,115 $4,702,660 $5,140,259 $5,845,873 $1,976,440
========== ========== ========== ========== ========== ==========
Ratio of earnings to fixed charges 1.11 1.16 1.16 1.13 1.19 1.25
========== ========== ========== ========== ========== ==========
</TABLE>
<PAGE>
Exhibit 12.1
DONALDSON, LUFKIN & JENRETTE, INC.
STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED DIVIDENDS
(In thousands, except for ratio)
<TABLE>
<CAPTION>
For the Years Ended For the
------------------------------------------------------------------ Quarter Ended
1995 1996 1997 1998 1999 3/00
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Income before provisions for
income taxes $ 298,500 $ 473,800 $ 661,100 $ 600,500 $ 953,500 $ 389,200
Add: Fixed Charges
Interest (gross) 2,699,769 2,865,600 4,012,209 4,501,242 4,839,810 1,574,381
Interest factor in rents 22,064 25,515 29,351 38,517 52,563 12,859
---------- ---------- ---------- ---------- ---------- ----------
Total fixed charges 2,721,833 2,891,315 4,041,560 4,539,759 4,892,373 1,587,240
Add: Preferred dividends 19,868 18,653 12,144 21,310 21,180 5,289
Combined fixed charges and
preferred dividends 2,741,701 2,909,968 4,053,704 4,561,069 4,913,553 1,592,529
Earnings before fixed charges,
and provision for income taxes $3,020,333 $3,365,115 $4,702,660 $5,140,259 $5,845,873 $1,976,440
========== ========== ========== ========== ========== ==========
Ratio of earnings to fixed charges
and preferred dividends 1.10 1.16 1.16 1.13 1.19 1.24
========== ========== ========== ========== ========== ==========
</TABLE>
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors
Donaldson, Lufkin & Jenrette, Inc.
We have reviewed the accompanying condensed consolidated statement of
financial condition of Donaldson, Lufkin & Jenrette, Inc. and subsidiaries as
of March 31, 2000, and the related condensed consolidated statements of
income, changes in stockholders' equity and cash flows for the three-month
period ended March 31, 2000. These condensed consolidated financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with Standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
New York, New York
May 12, 2000
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors
Donaldson, Lufkin & Jenrette, Inc.
We have reviewed the accompanying condensed combined statement of financial
condition of DLJdirect (a combination of certain assets and liabilities as
described in note 1) as of March 31, 2000, and the related condensed combined
statements of income, changes in allocated equity and cash flows for the
three-month period ended March 31, 2000. These condensed combined financial
statements are the responsibility of the Donaldson, Lufkin and Jenrette,
Inc.'s management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of the interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
We have also reviewed the condensed consolidated statement of financial
condition of Donaldson, Lufkin & Jenrette, Inc. and subsidiaries as of March
31, 20000, and the related condensed consolidated statements of income,
changes in stockholders' equity and cash flows for the three-month period
ended March 31, 2000, and have issued our report dated May 12, 2000. The
condensed combined financial statements of DLJdirect should be read in
conjunction with the condensed consolidated financial statements of
Donaldson, Lufkin and Jenrette, Inc. and subsidiaries.
Based on our review, we are not aware of any material modifications that
should be made to the condensed combined financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
New York, New York
May 12, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,504,240
<RECEIVABLES> 24,124,058
<SECURITIES-RESALE> 22,409,925
<SECURITIES-BORROWED> 37,316,830
<INSTRUMENTS-OWNED> 33,938,030
<PP&E> 604,298
<TOTAL-ASSETS> 122,274,817
<SHORT-TERM> 2,184,841
<PAYABLES> 20,206,958
<REPOS-SOLD> 51,128,825
<SECURITIES-LOANED> 17,345,976
<INSTRUMENTS-SOLD> 16,695,677
<LONG-TERM> 6,357,320
200,000
375,000
<COMMON> 12,744
<OTHER-SE> 3,773,261
<TOTAL-LIABILITY-AND-EQUITY> 122,274,817
<TRADING-REVENUE> 384,756
<INTEREST-DIVIDENDS> 223,310
<COMMISSIONS> 471,159
<INVESTMENT-BANKING-REVENUES> 512,901
<FEE-REVENUE> 35,209
<INTEREST-EXPENSE> 604,090
<COMPENSATION> 1,066,062
<INCOME-PRETAX> 389,200
<INCOME-PRE-EXTRAORDINARY> 245,200
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 245,200
<EPS-BASIC> 1.87
<EPS-DILUTED> 1.72
</TABLE>
