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Previous: DONALDSON LUFKIN & JENRETTE INC /NY/, DEF 14A, 2000-03-24 |
Next: DOW CHEMICAL CO /DE/, S-8, 2000-03-24 |
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to __________
Commission file number 1-6862
Donaldson, Lufkin & Jenrette, Inc.
(Exact name of Registrant as specified in its charter)
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Delaware |
13-1898818 |
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277 Park Avenue, New York, New York |
10172 |
Registrant's telephone number, including area code: (212) 892-3000
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class |
Name of Each Exchange on Which Registered |
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DLJ Common Stock, par value $0.10 per share |
New York Stock Exchange |
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DLJdirect Common Stock, par value $0.10 per share |
New York Stock Exchange |
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Series A Fixed/Adjustable Rate Cumulative |
New York Stock Exchange |
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Series B Fixed/Adjustable Rate Cumulative |
New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period than the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K |X|.
As of March 3, 2000, the latest practicable date, there were 127,255,530 shares of DLJ Common Stock, $0.10 par value, outstanding and 18,400,000 shares of DLJdirect Common Stock, $0.10 par value, outstanding.
At March 3, 2000, the aggregate market value of the voting stock of DLJ Common Stock and DLJdirect Common Stock held by non-affiliates of the registrant was approximately $1.7 billion and $226.1 million, respectively. For purposes of this information, the outstanding shares of Common Stock owned by directors and executive officers of the registrant were deemed to be shares of Common Stock held by affiliates.
DOCUMENTS INCORPORATED BY REFERENCE:
The information required to be furnished pursuant to Part III of this Form 10-K is set forth in, and incorporated by reference from, the registrant's definitive proxy statement for the annual meeting of stockholders to be held May 9, 2000, which definitive proxy statement (the "Proxy Statement") will be filed by the registrant with the Securities and Exchange Commission not later than 120 days after the year ended December 31, 1999.
Part I
ITEM 1.
Business
Donaldson, Lufkin & Jenrette, Inc. (the "Company") is a leading integrated investment and merchant bank serving institutional, corporate, governmental and individual clients both domestically and internationally. The Company is a holding company that conducts its business through various subsidiaries including its principal domestic broker-dealer subsidiary, Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC"), and its principal international broker-dealer subsidiary, DLJ International ("DLJI"). The business of the Company includes:
Founded in 1959, the Company initially focused on providing in-depth investment research to institutional investors. In 1970, the Company became the first member firm of the New York Stock Exchange ("NYSE") to be owned publicly. Fifteen years later, the Company was purchased by The Equitable Life Assurance Society of the United States ("Equitable Life"). Prior to the Company's initial public offering in October 1995, the Company was an independently operated indirect wholly owned subsidiary of AXA Financial Inc. ("AXA Financial"), formerly The Equitable Companies Incorporated. At December 31, 1999, AXA Financial owned 70.3% of DLJ's issued and outstanding common stock. AXA Financial is a diversified financial services organization and one of the world's largest investment management organizations. AXA S.A., a French holding company for an international group of insurance and related financial services companies, is AXA Financial's largest stockholder, beneficially owning, at December 31, 1999, approximately 60.0% of AXA Financial's outstanding common stock.
On May 28, 1999 ("the closing date"), the Company issued in an initial public offering 18.4 million shares of DLJdirect Common Stock. DLJdirect Common Stock is what is sometimes referred to as "tracking stock." Tracking stock is a type of common stock that is intended to reflect or "track" the performance of a particular business. In this case, DLJdirect Common Stock ("Tracking Stock") tracks the performance of the Company's existing online discount brokerage and related investment services business for periods subsequent to the closing date. As a result of the offering, the Company 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, the Company had a 100% interest in the earnings of DLJdirect. DLJdirect includes DLJdirect, Inc., a registered broker-dealer.
The Tracking Stock is intended to reflect the performance of DLJdirect. Holders of Tracking Stock are common stockholders of the Company. For this reason, holders of Tracking Stock are subject to all of the risks associated with an investment in the Company and all of its businesses, assets and liabilities. The shares of Tracking Stock have no voting rights except in certain limited circumstances. The Company does not expect to pay any dividends on Tracking Stock in the foreseeable future.
The Company 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, the Company has the right, at any time, to exchange stock of a subsidiary of the Company for Tracking Stock if all of the assets and liabilities of DLJdirect are transferred to the subsidiary. Upon liquidation of the Company, holders of DLJ Common Stock and Tracking Stock will be entitled to receive the net assets of the Company, if any, remaining for distribution to stockholders after payment or provision for all liabilities of the Company and payment of the liquidation preference payable to any holders of preferred stock. Amounts due upon liquidation in respect of shares of DLJ Common Stock and shares of Tracking Stock will be distributed pro rata in accordance with the average market value of DLJ Common Stock and the average market value of Tracking Stock over a 20-trading-day period prior to the liquidation.
Operating Segments
Prior to 1999, the Company operated and managed its business in three principal operating groups: the Banking Group, the Capital Markets Group and the Financial Services Group.
Effective January 1, 1999, the Company changed its organizational structure and began to operate and manage its business through four principal operating groups:
In 1999, the Company also continued to make strides toward establishing a strong international presence. The Company opened investment banking offices in Frankfurt and Taipei, and an equity sales office was established in Singapore. The Merchant Banking Group expanded its international efforts, with investments in the United Kingdom, Italy, France, Argentina and Brazil. At December 31, 1999 and 1998, total net revenues related to the Company's foreign operations were approximately $782.2 million and $389.7 million, respectively. At December 31, 1999 and 1998, total foreign assets were approximately $20.0 billion and $10.9 billion, respectively.
Banking Group
The Company's Banking Group is a major participant in the raising of capital and the providing of financial advice to companies throughout the United States and continues to strengthen its presence in Europe, Asia and Latin America. Through Investment Banking, the Company manages and underwrites public offerings of debt and equity securities, arranges private placements, originates both investment and non-investment-grade debt, underwrites and syndicates senior bank debt and provides advisory and other services in connection with mergers, acquisitions, restructurings and other financial transactions. The Company's Merchant Banking Group pursues direct investments in a variety of areas through a number of investment vehicles funded with capital provided primarily by institutional investors, the Company and its employees. The Sprout Group is Wall Street's oldest venture capital organization.
Equities Group
The Equities Group provides domestic and foreign institutional clients with global research, trading and sales services in U.S. listed and over-the-counter equities, and foreign equities trading in the United States, Europe and Asia. A joint venture has also been established in Johannesburg, South Africa. The Company's Equity Derivatives division provides a broad range of equity and index option products. In addition, Autranet, Inc. ("Autranet") is one of the oldest distributors of research and investment material.
Fixed Income Group
The Fixed Income Group provides institutional clients with research, trading and sales services for a broad range of fixed-income products, and distributes fixed-income securities in connection with offerings underwritten by the Company. The group is focused on two major objectives. The first is enhancing its core businesses, which are high-yield bonds, senior bank debt, U.S. government and investment-grade corporate bonds and real estate finance. The second objective is the development of new products and services that will meet specific client needs. The Fixed Income Group's research professionals include credit analysis teams knowledgeable in high-yield corporate, investment-grade corporate and mortgage-backed securities as well as quantitative and economic research.
Financial Services Group
The Financial Services Group provides a broad array of services to individual investors and the financial intermediaries that represent them. Pershing is a leading provider of correspondent brokerage services, clearing transactions for financial institutions that collectively maintain over 3.2 million active customer accounts. Through its Asset Management Group, the Company provides cash management, investment advisory and trust services primarily to high-net-worth individuals and families. The Company's Investment Services Group provides access to the Company's equity and fixed-income research, trading services and underwriting to a broad mix of private clients. DLJdirect is a leading provider of online discount brokerage and related investment services, offering customers automated securities order placement through the Internet and online service providers. DLJdirect's broad range of investment services is targeted at self-directed, sophisticated online investors.
Net Revenues by Operating Group
The following table illustrates the Company's revenue breakdown by its principal operating groups, net of all interest. Net revenues, however, are not necessarily indicative of the profitability of each group. Certain reclassifications of prior year amounts have been made to conform to the 1999 presentation.
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Years ended December 31,
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1995
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1996
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1997
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1998
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1999
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(in millions)
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| Banking Group |
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$ 671.2
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$ 853.4
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$1,220.2
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$1,486.9
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$1,960.2
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| Fixed Income Group |
328.9
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504.6
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663.7
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617.1
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912.3
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| Equities Group |
481.7
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563.8
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598.4
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700.9
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1,029.1
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| Financial Services Group |
619.4
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827.6
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1,008.9
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1,265.1
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1,793.5
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| Offsets and eliminations |
(51.2
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18.4
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(3.9
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(118.8
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(139.1
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| Net revenues |
$2,050.0
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$2,797.8
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$3,487.3
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$3,951.2
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$5,556.0
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The Company currently conducts its operations in 18 cities in the United States. The Company also has international offices located in 18 cities.
Banking Group
Mergers and Acquisitions
The Company's global merger and acquisition ("M&A") practice is the fastest-growing segment of the Banking Group, participating in a broad range of domestic and international assignments. The M&A professionals use an industry-intensive approach and work closely with the Company's industry specialty groups in a broad range of sectors. The M&A specialists operate from the firm's offices in the United States, Europe, Asia and Latin America. As a result of the firm's focus on international expansion, one-third of the M&A assignments in 1999 involved a party outside the United States.
Capital Raising
Equity and Equity-Linked Offerings. The Equity Capital Markets Group focuses on providing financing for issuers of equity and equity-linked securities in the public markets. The group assists in the origination, and is responsible for the structuring and execution of transactions for a broad range of clients.
High-Yield Debt Underwriting. The High-Yield Securities Group focuses on providing financing in the public and private capital markets. The group is responsible for originating, structuring and executing high-yield transactions across a wide range of companies and industries, as well as managing client relationships with both high-yield corporate issuers and financial sponsors of leveraged transactions.
Investment-Grade Corporate Bonds. The investment-grade debt origination business provides strategic advice and execution services to clients. In 1999, the group lead-managed investment-grade debt offerings totaling approximately $15 billion.
Senior Bank Debt and Bridge Financing. The Senior Bank Debt Group underwrites and syndicates senior bank debt, offering clients the convenience of "one-stop shopping." During 1999, the group arranged and syndicated $53.8 billion of senior bank debt. The Company also offers bridge financing to cover gaps that may occur in the timing and financing of transactions.
Structured Products. The Structured Products Group offers clients financing alternatives to traditional capital markets instruments. The products are customized to meet each client's strategic objectives.
Private Fund Group. The Company's Private Fund Group raises private capital, primarily from institutional investors, for direct investment by venture capital, management buyout and other investment firms, and for certain of the Company's merchant banking activities. The group raised over $14 billion in private capital in 1999.
Other Advisory Services. The Company also offers clients a variety of other advisory services. The Private Capital Placements Group raises capital within the private debt and equity markets. Additionally, the Company's Restructuring Group advises both corporations and creditors in the complex process of corporate restructuring. The Company also participates in the structured finance industry through its Asset-Backed Transactions Group, and specializes in securitizing cash-flow-generating assets through public or private offerings of debt or pass-through certificates.
Merchant Banking
The Company entered the merchant banking investment business in 1985. Through the Merchant Banking Group, the Company makes investments across the entire capital structure, from venture capital equity to investments in the largest leveraged buyouts. The group invests in companies and real estate in the United States, Europe, Asia, Latin America, Australia and Canada, through a variety of investment vehicles. At December 31, 1999, the group had managed funds with committed capital of $10 billion. These funds include DLJ Merchant Banking Partners I and II, L.P. which focus primarily on equity investments in leveraged transactions; the DLJ Bridge Fund, a leader in domestic bridge financing; DLJ Investment Partners I and II, which focus on opportunities in lower risk mezzanine securities; DLJ Real Estate Capital Partners I and II, which make investments in a broad range of real estate-related assets in the United States and abroad; Global Retail Partners, which pursues investment opportunities in the retail and electronic commerce industries, and Phoenix Equity Partners II, which provides private equity capital to established European businesses with leading market shares.
Leveraged Equity Investing. The Company's flagship fund, DLJ Merchant Banking Partners II, L.P. has committed capital of $3 billion, with 25% of the capital committed by DLJ and its employees. The fund makes investments in equity and mezzanine securities arising from leveraged acquisitions and recapitalizations, restructurings of over-leveraged companies and other similar types of transactions, which generally involve significant financial leverage. Since its inception in 1996, the fund has invested approximately $2.4 billion in companies with an aggregate transaction value of more than $27 billion.
DLJ Investment Partners. In late 1999, the Company raised DLJ Investment Partners II, L.P., as a successor to its $500 million DLJ Investment Partners L.P., which commenced operation in 1995. The new fund has committed capital of $1.6 billion, including $300 million from the Company and its employees.
DLJ Real Estate Capital Partners. The initial closing of DLJ Real Estate Capital Partners II, L.P. ("RECP II") was held in late 1999. RECP II is the successor to DLJ Real Estate Capital Partners, L.P., a $680 million fund raised in 1996. DLJ Real Estate Capital Partners, L.P., focuses on investments in a broad range of real estate and real estate-related assets in the United States and abroad. At its first closing, the new fund has committed capital of approximately $900 million from its general and limited partners, including $125 million from the Company and its employees.
Global Retail Partners. Global Retail Partners, L.P., ("GRP") commenced operation in 1996 and focuses on growth retailing and electronic commerce opportunities. In 1999, the Company raised an $87.5 million interim fund to continue GRP's investment activities until the closing of Global Retail Partners II, L.P. GRP and the interim fund have committed capital of approximately $239 million.
Phoenix Equity Partners. Phoenix Equity Partners III ("PEP III") is a £350 million fund, raised at the end of 1999, dedicated to investing in mid-market companies in Europe. The fund focuses primarily on U.K. companies, invests in management buyouts and buy-ins and provides development or expansion capital for mid-market private companies. PEP III is the successor to the £133 million Phoenix Equity Partners II.
Sprout. Founded in 1969, Sprout is one of the oldest and largest groups in the private equity investment and venture capital industry. Since the capitalization of Sprout's first fund at $11.5 million, nine major investment partnerships have been formed primarily for large institutional investors. Sprout has approximately $2.0 billion of committed capital and invests in early-stage, high-growth companies; management buyouts; and mezzanine financing of companies that are not yet ready to access the public capital markets. Its most recent fund, Sprout Capital VIII and related funding is $860 million. Sprout Capital VIII invests in growth companies at all stages of development. Sprout's investors are major public and corporate pension funds, endowments, insurance companies and wealthy individuals.
Equities Group
Research. The Company's institutional equities research department consists of approximately 255 research analysts and associates, based in New York City, London and Hong Kong, who are engaged in the analysis of economic trends and a broad range of industries and companies. The department produces publications, studies and forecasts on economic conditions, financial markets, portfolio strategy, quantitative analysis, industry developments and individual companies. Consistent with the Company's expansion in international markets, global research efforts were expanded to cover the following sectors: Financials, Defense & Aerospace, Pharmaceuticals, Motors, Energy & Utilities, Engineering, Technology, Drinks, Telecoms, Transport and Media. Worldwide coverage now includes more than 1,600 companies.
Sales and Trading. The Company's equity sales and trading operation covers nearly 2,300 of the world's largest institutional investors, in 50 countries around the world. Outside of the United States, there are sales offices in London, Frankfurt, Geneva, Lugano, Tokyo, Hong Kong and Singapore. The Company's trading strategy is client-driven. The Company does not accumulate large positions for its own account, but provides clients with liquidity by taking a position as a principal to facilitate their transactions. In U.S. equities trading, the Company's traders actively trade 1,850 listed stocks and the over-the-counter ("OTC") desk makes markets in approximately 420 stocks. The Company also trades approximately 1,200 securities of companies in the developed and emerging markets of Europe, Asia and Latin America. Internationally, the Company executes and commits capital on all major exchanges. The convertible securities business has also expanded to cover both U.S. and international issuers.
Autranet. Autranet Inc., a registered broker-dealer and member firm of the NYSE, is active in the distribution of investment research products purchased from "independent originators." Independent originators are research specialists not linked to a broker-dealer organization and ranging in size and scope from large economic consulting firms to individual freelance analysts.
Equity Derivatives. The Equity Derivatives division, located in New York and London, provides institutional clients with research, trading and sales services in a broad range of products. The Company's activities in equity derivative products have focused primarily on product innovations in the design and origination of custom-tailored OTC options to meet the specific needs of customers rather than on hedging the firm's own position. The Company offers derivatives based on all traded products including equities, commodities, debt instruments, currencies and indices.
Fixed Income Group
High-Yield Bonds. The High Yield department is ranked number one in the origination of high-yield bonds in the United States and Western Europe. The department provides institutional clients with research, trading and sales services and distributes non-investment-grade securities in connection with offerings underwritten by the Company. During 1999, the Company had domestic underwritings of high-yield securities of over $16 billion.
Senior Bank Debt Group. The Senior Bank Debt Group syndicates leveraged loans and enters into commitments to extend credit primarily to non-investment-grade borrowers. This group provides the Company's clients with the convenience of a single financing source. The group's base of institutional investors has expanded to include pension funds, mutual funds and insurance companies. In 1999, the group acted as lead agent on loans aggregating approximately $53.8 billion.
Investment-Grade Corporate Bonds. The Company is a major participant in the secondary trading and distribution of investment-grade corporate debt instruments and has consistently ranked as one of the top providers of credit research on those securities.
Government Bonds. The Company is a primary dealer in the U.S. Treasury market. The Government Bond department acts as underwriter and market maker in U.S. Treasury bills, notes, bonds, and securities of Federal agencies. The Company also engages in the "stripping" of government and government-guaranteed bonds to create zero-coupon securities. It also trades treasury futures and options and develops hedging programs for its clients. Institutional clients include insurance companies, money managers, commercial banks, hedge funds and pension funds. The Government Bond department also maintains a money desk that provides financing for its daily trading inventory positions, and to a lesser extent, for other fixed-income departments through the use of repurchase agreements. In addition, it acts as an intermediary between borrowers and lenders of short-term funds utilizing repurchase and reverse repurchase agreements.
Real Estate Finance Group. The group provides capital and financial advisory services for major participants in the commercial and residential real estate markets, originating loans secured by residential, multi-family and commercial properties and, acting as agent, places mortgage-backed debt for clients. In 1999, the total underwritings for the group exceeded $26 billion. The Company's commercial mortgage lending subsidiary, Column Financial, originates, acquires and enhances mortgage loans for securitization and sale to investors in the form of Collateralized Mortgage Obligations ("CMOs"). In 1999, Column Financial originated over $2.3 billion in loans.
Foreign Exchange. The Company's Foreign Exchange Group serves a broad range of clients worldwide, including multinational corporations, money managers, hedge funds, banks and high-net-worth individuals. The group is based in New York and London.
Derivatives. The Company's Derivatives Group is a full-service unit that provides hedging alternatives linked to high-yield and investment-grade securities, to institutional investors and corporate issuers. The group offers interest rate derivatives, emerging markets derivatives and credit-structured products. This unit has offices in New York, London, Hong Kong and Tokyo.
Research. The Fixed Income Research Group provides investment analysis and recommendations on more than 500 issuers. In addition, the group provides proprietary research on a variety of structured products and global economic analyses.
Financial Services Group
Pershing Division. Pershing is a leading provider of correspondent brokerage services to many of the world's financial institutions, and through its Global Investment Manager Services Group, a provider of prime brokerage services. Founded in 1939 and acquired by the Company in 1977, Pershing now operates out of 12 offices, with headquarters in Jersey City, New Jersey and regional client coverage from our Charlotte, Chicago, Los Angeles, San Francisco, London, Hong Kong, and Melbourne locations. Pershing provides execution, settlement and clearance on a multi-currency basis in 40 international markets. Pershing's broad range of services, including custody, cash management, product development, information management, portfolio evaluation, financing, research, securities lending, and related services are used by more than 600 customers, which collectively maintain over 3.2 million active client accounts holding nearly $400 billion of assets. As a wholesaler of these services, Pershing operates on a fee-for-service basis.
Pershing maintains a significant presence on the major U.S. securities exchanges and provides agency execution for institutional block and retail orders. Pershing also supplies broad coverage of fixed-income securities and money market funds, and offers access to over 10,000 mutual funds. Through Pershing Trading Company, Pershing is also a market maker on regional exchanges and in the OTC markets. Pershing's London subsidiary, Pershing Securities Limited ("PSL"), is a correspondent clearing firm and provider of private label discount brokerage service in the United Kingdom. Pershing provides Internet-based solutions to approximately 12,000 investment professionals. Pershing technology also allows over 100 broker-dealers to serve nearly 400,000 clients online. Pershing utilizes a combination of in-house products and content partnerships with other e-commerce firms to deliver a wide range of high quality content to investment professionals and clients. In addition, Pershing's Investment Research department offers retail oriented investment analyses and recommendations through traditional and on-line channels.
DLJ Global IMS ("IMS"), formerly London Global Securities, with operations in London and Australia, specializes in international securities financing. IMS uses securities lending, repurchase and reverse repurchase agreements and swap transactions to provide financing and securities lending services to the Company's businesses, customers, and market counterparties. IMS operates as a principal in all major equity and fixed income markets. IMS's operations are conducted within the Global Investment Manager Services Group of Pershing.
Investment Services Group. The Investment Services Group offers a full range of investment and portfolio services to high-net-worth individual investors and medium to smaller size financial institutions and corporations. At the end of 1999, the group had 12 offices in the United States and one in London. The London office has global trading capabilities in a broad range of equity, fixed income and derivative products and also offers a Swiss banking facility.
Asset Management Group. Prior to 1999, the Company's asset management business consisted of two components, Wood, Struthers & Winthrop, which invested on behalf of high-net-worth individuals and families, and DLJ Investment Management Corp., an institutional money manager. At the end of 1999, all of the Company's varied money management services were placed in DLJ Asset Management Group.
The Asset Management Group currently manages $27.5 billion of which approximately $16 billion is managed for institutional clients and approximately $12 billion is managed for individual clients. Assets under management include three open-end mutual fund families — the DLJ Winthrop Focus Funds, the DLJ Winthrop Opportunity Funds and the DLJdirect Funds as well as one closed-end fund, the DLJ High Yield Bond Fund. Investment activities are focused on large and small cap domestic equity management, international and emerging markets equity management, sector fund equity management, high-grade fixed income management, and high-yield fixed income management.
The Asset Management Group also specializes in investment management, tax, trust and estate planning for high-net-worth individuals and families and provides personalized services for its clients through its Wood, Struthers & Winthrop division. The Asset Management Group also manages approximately $6 billion in a portfolio of private placements which it originated. These include private equity funds and exchange funds. The Asset Management Group also provides tax, estate, and financial planning, along with custody and personal fiduciary services through a wholly owned limited purpose trust company subsidiary, Winthrop Trust Company. The Asset Management Group also manages equity portfolios of various types and both dollar and non-dollar fixed income portfolios ranging from short duration and high credit quality to long duration and non-investment grade credit quality through its Institutional Services Division.
DLJdirect. DLJdirect is a leading provider of online discount brokerage and related investment services, offering customers automated securities order placement and information and research capabilities through the Internet and online service providers. DLJdirect's broad range of investment services is targeted at self-directed, sophisticated online investors, who on average have higher account balances than other online investors. DLJdirect was one of the pioneers of online investing. DLJdirect started in the online brokerage business in September 1988. In its 11-year history, DLJdirect has frequently been recognized as a high-quality provider of online brokerage services.
DLJdirect's investment services and products include:
iNautix Technologies, DLJdirect's technology group, develops, designs, and supports Internet-based products and services for DLJdirect, its affiliates, and third parties.
In March 1999, DLJdirect entered into a 10-year joint venture agreement with Sumitomo Bank, the second largest bank in Japan. Pursuant to the agreement, a Japanese corporation, DLJdirect SFG Securities Inc. ("DLJdirect Japan") was formed. Operations commenced as of April 1, 1999, and the corporation's Internet site was launched on June 11, 1999. DLJdirect has a 50% interest in the joint venture. DLJdirect Japan provides Japanese investors with online discount brokerage and the ability to invest in Japanese and U.S. equities.
DLJdirect's online United Kingdom discount brokerage service, DLJdirect Ltd. ("DLJdirect U.K."), commenced operations in the third quarter of 1999. Through its Internet site launched September 1, 1999, DLJdirect U.K. provides investors with the ability to invest in United Kingdom and United States equities.
DLJdirect formed a strategic alliance with Scudder Investments, Inc., Scudder Kemper Investments' direct mutual fund business, to provide broker-dealer services to Scudder's customers. DLJdirect will assume responsibility for Scudder Investments' current brokerage clients, which includes accounts with approximately $1.5 billion in assets. Effective February 5, 2000, Scudder's customers will be converted and serviced by DLJdirect under the co-branded name "DLJdirect for Scudder Investments."
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. DLJdirect-eUnion intends to expand its coverage to include other international and regional markets in the future.
In addition, DLJdirect recently announced 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.
Competition
The Company encounters significant competition in all aspects of the securities business and competes directly worldwide with other domestic and foreign securities firms, a number of which have greater capital, financial and other resources than the Company. In addition to competition from firms currently in the securities business, there has been increasing competition from other sources, such as commercial banks and investment boutiques. As a result of legislative and regulatory initiatives in the United States removing certain restrictions on commercial banks, it is anticipated that competition in some markets currently dominated by investment banks may increase in the future. Such competition could also affect the Company's ability to attract and retain highly skilled individuals to conduct its various businesses. The principal competitive factors influencing the Company's business are its professional staff, the firm's reputation in the marketplace, its existing client relationships, the ability to commit capital to client transactions and its mix of market capabilities. The Company's ability to compete effectively in securities brokerage and investment banking activities will also be influenced by the adequacy of its capital levels.
DLJdirect is part of the online discount brokerage industry, a new, rapidly evolving and intensely competitive market, which 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. DLJdirect expects competition to continue and intensify in the future. DLJdirect faces direct competition from discount brokerage firms providing either touch-tone telephone or online investing services, or both. DLJdirect also encounters competition from the broker-dealer affiliates of established full commission brokerage firms. In addition, it competes with financial institutions, mutual fund sponsors and other organizations, some of which provide electronic brokerage services. DLJdirect's future success depends in part on its ability to develop and enhance its services and products.
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. Additionally, DLJdirect expects to spend significant amounts in the future in order to expand its international presence.
Employees
At December 31, 1999, the Company had approximately 8,500 domestic employees and 1,700 international employees. Professional personnel receive salary as well as incentive compensation in the form of bonus and, in certain instances, through long-term incentive and/or other compensation plans. Most of the Company's securities sales force personnel receive a percentage of their gross revenues or a percentage of a specified revenue pool as compensation. Other employees receive a salary and, in certain cases, overtime compensation and compensation in the form of profit sharing. None of the Company's employees are represented by a labor union.
Regulation
The Company's business, and the securities industry in general, is subject to extensive regulation in the United States at both the Federal and state level, as well as by industry Self Regulatory Organizations ("SRO"). A number of Federal regulatory agencies are charged with safeguarding the integrity of the securities and other financial markets and with protecting the interests of customers participating in those markets. The Securities and Exchange Commission (the "Commission") is the Federal agency that is primarily responsible for the regulation of broker-dealers and investment advisors doing business in the United States, and the Commodity Futures Trading Commission ("CFTC") is primarily responsible for the regulation of futures commission merchants. In addition, the Department of the Treasury and the Municipal Securities Rulemaking Board have the authority to promulgate regulations relating to U.S. government and agency securities and to municipal securities, respectively. The Board of Governors of the Federal Reserve System promulgates regulations applicable to certain securities credit transactions. Broker-dealers and investment advisers are subject to registration and regulation by state securities regulators in those states in which they conduct business. Industry SROs, each of which has authority over the firms that are its members, include the National Association of Securities Dealers ("NASD"), the New York Stock Exchange ("NYSE"), and other securities exchanges, the National Futures Association ("NFA") and the commodity exchanges. Certain of the Company's international broker-dealer subsidiaries are subject to the regulatory requirements of non-U.S. securities financial regulatory authorities.
Each of DLJSC, Pershing Trading Company, L.P. ("Pershing Trading"), DLJdirect, Inc. and Autranet (collectively, the "U.S. Broker-Dealers") is registered as a broker-dealer with the Commission and is a member of, and subject to regulation by, a number of securities industry SROs, including the NYSE and/or the NASD. Both DLJSC and Pershing Trading are, in addition to being NYSE members, members of most other major U.S. securities exchanges. DLJSC is also registered as a broker-dealer in all 50 states and the District of Columbia, as a futures commission merchant with the CFTC, as an investment adviser with the Commission and in certain states, is also designated a primary dealer in U.S. government securities by the Federal Reserve Bank of New York. In connection with their business as futures commission merchants, DLJSC is a member of, and subject to regulation by, the Chicago Board of Trade ("CBOT") and Autranet is a member of, and subject to regulation by, the NFA. Pershing Trading, Autranet and DLJdirect, Inc. are registered as broker-dealers in a number of states. DLJ Asset Management Group, Inc. and DLJ Investment Partners, Inc. are registered with the Commission and, in certain states as an investment adviser. The Company also has certain other direct and indirect subsidiaries that are registered with the Commission and certain states or with other regulatory authorities as broker-dealers or investment advisers. The New York State Banking Department regulates Winthrop Trust Company.
As a result of registration and SRO memberships, the U.S. Broker-Dealers are subject to overlapping schemes of regulations, which cover all aspects of their securities business. Such regulations cover matters including capital requirements, the use and safekeeping of customers' funds and securities, recordkeeping and reporting requirements, supervisory and organizational procedures intended to assure compliance with securities laws and rules of the SROs and to prevent the improper trading on "material nonpublic" information, employee-related matters, limitations on extensions of credit in securities transactions, required procedures for trading on securities exchanges and in the over-the-counter market, and procedures for the clearance and settlement of trades. A particular focus of the applicable regulations concerns the relationship between broker-dealers and their customers. As a result, the U.S. Broker-Dealers in some instances may be required to make "suitability" determinations as to certain customer transactions, are limited in the amounts that they may charge customers, cannot trade ahead of their customers and must make certain required disclosures to their customers.
As investment advisers registered with the Commission, DLJ Asset Management Group, Inc. and DLJSC are subject to the requirements of the Investment Advisers Act of 1940 and the Commission's regulations thereunder. Such requirements relate to, among other things, limitations on the ability of investment advisers to charge performance-based or non-refundable fees to clients, recordkeeping and reporting requirements, disclosure requirements, and limitations on principal transactions between an adviser or its affiliates and advisory clients, as well as general anti-fraud prohibitions. The state securities law requirements applicable to registered investment advisers are in certain cases more comprehensive than those imposed under the Federal securities laws.
DLJSC, as a registered futures commission merchant, is subject to the capital and other requirements of the CFTC under the Commodity Exchange Act. These requirements include the provision of certain disclosure documents, prohibitions against trading ahead of customers and other fraudulent trading practices, provisions as to the handling of customer funds and reporting and recordkeeping requirements.
In addition to being regulated in the United States, the Company's business is subject to regulation by various foreign governments and regulatory bodies. The Company does business in the international equity and fixed income markets and undertakes investment banking activities through several of its international subsidiaries. The Company's London broker-dealer subsidiaries are subject to regulation by the Securities and Futures Authority ("SFA"), which governs all aspects of a United Kingdom investment business, including regulatory capital, sales and trading practices, use and safekeeping of customer funds and securities, recordkeeping, margin practices and procedures, registration standards for individuals, and periodic reporting and settlement procedures. In addition, the Company has broker-dealer subsidiaries that are subject to regulation, including capital requirements, imposed by the Securities and Futures Commission ("SFC") of Hong Kong, the Monetary Authority of Singapore and the Ontario Securities Commission. Certain other international activities of the Company are subject to regulation by various other agencies.
Additional legislation and regulations, including those relating to the activities of affiliates of broker-dealers, changes in rules promulgated by the Commission, the CFTC or other U.S. or foreign governmental regulatory authorities and SROs or changes in the interpretation or enforcement of existing laws and rules may adversely affect the manner of operation and profitability of the Company.
The Company's businesses may be materially affected not only by regulations applicable to them as a financial market intermediary, but also by regulations of general application. For example, the volume of the Company's underwriting, merger and acquisition and merchant banking businesses in any year could be affected by, among other things, existing and proposed tax legislation, antitrust policy and other governmental regulations and policies (including the interest rate policies of the Federal Reserve Board) and changes in interpretation or enforcement of existing laws and rules that affect the business and financial communities. From time to time, various forms of anti-takeover legislation and legislation that could affect the benefits associated with financing leveraged transactions with high-yield securities have been proposed that, if enacted, could adversely affect the volume of merger and acquisition and merchant banking business, which in turn could adversely affect the Company's underwriting, advisory and trading revenues related thereto.
The Company believes that it has been in compliance in all material respects with the regulations described herein.
In addition, several states, including New York, which is Equitable Life's state of domicile, regulate transactions between an insurer and its affiliates under insurance holding company acts. Under such laws, and an undertaking submitted by Equitable Life to the New York State Insurance Department, certain transactions between the Company, on the one hand, and Equitable Life and its subsidiaries on the other, may be subject to prior notice or approval of the New York State Insurance Department depending on the size of such transactions.
Capital Requirements
DLJSC, Pershing Trading, DLJdirect, Inc. and Autranet are broker-dealers registered with the Commission and subject to the capital requirements of the Commission. In addition, as member firms of the NYSE and/or NASD, they are subject to the capital requirements of their respective SRO. These capital requirements specify minimum levels of capital, computed in accordance with regulatory requirements ("net capital"), that the U.S. Broker-Dealers are required to maintain and also limit the amount of leverage that the U.S. Broker-Dealers are able to obtain in their businesses. As a futures commission merchant, DLJSC is also subject to the capital requirements of the CFTC and the CBOT. Compliance with regulatory capital requirements could limit those operations of the U.S. Broker-Dealers that require the intensive use of capital, such as DLJSC's underwriting and trading activities, and the financing of customer account balances, and also restrict the Company's ability to pay dividends, pay interest, repay debt, and redeem or purchase shares of its outstanding capital stock. A change in such rules, or the imposition of new rules, affecting the scope, coverage, calculation or amount of capital requirements, or a significant operating loss or any unusually large charge against capital, would adversely affect the ability of the Company to pay dividends or to expand or even maintain present levels of business. The Company believes that at all times the U.S. Broker-Dealers have been in compliance in all material respects with the applicable minimum capital rules of the Commission, the NYSE, the CFTC and the CBOT.
The Company's non-U.S. broker-dealer subsidiaries may be subject to the net capital requirements imposed by foreign financial regulatory authorities. At December 31, 1999, the Company's foreign broker-dealer subsidiaries were in compliance with all applicable regulatory capital adequacy requirements.
ITEM 2.
Properties
The Company's principal executive offices are presently located at 277 Park Avenue, New York, New York and occupy approximately 1.2 million square feet under a lease expiring in 2021. The Company has leased space at 280 Park Avenue, New York, New York, aggregating approximately 192,000 square feet under leases expiring at various dates through 2014. The Company also leases space at 120 Broadway, New York, New York, aggregating approximately 94,000 square feet. This lease expires in 2006.
The Company's principal London-based broker-dealer subsidiary is located at 99 Bishopsgate and 111 Old Broad Street, and occupies approximately 225,000 square feet under leases expiring at various dates through 2018.
Pershing also leases approximately 471,000 square feet in Jersey City, New Jersey, under leases that expire at various dates through 2009. In 1999, the Company's online brokerage subsidiary entered into a lease at Harborside Financial Center in Jersey City, New Jersey aggregating approximately 160,000 square feet. This lease expires in 2010. The Company also owns land and a building with approximately 142,000 square feet in Florham Park, New Jersey.
In addition, the Company leases an aggregate of approximately 1.0 million square feet for its domestic and international regional offices, the leases for which expire at various dates through 2014. Other domestic offices are located in Atlanta, Austin, Boston, Charlotte, Chicago, Dallas, Deerfield, Denver, Houston, Jersey City, Los Angeles, Menlo Park, Miami, Oak Brook, Parsippany, Philadelphia and San Francisco. Its foreign office locations are Bangalore, Buenos Aires, Frankfurt, Geneva, Hong Kong, Johannesburg, London, Lugano, Melbourne, Mexico City, Monterrey, Moscow, Paris, Sao Paulo, Seoul, Singapore, Taipei and Tokyo.
The Company believes that its present facilities are adequate for its current needs.
ITEM 3.
Legal Proceedings
In October 1995, DLJSC was named as a defendant in a purported class action filed in a Texas State Court on behalf of the holders of $550.0 million principal amount of subordinated redeemable discount debentures of National Gypsum Corporation ("NGC") canceled in connection with a Chapter 11 plan of reorganization for NGC consummated in July 1993. The State Court named plaintiff also filed an adversary proceeding in the U.S. Bankruptcy Court for the Northern District of Texas seeking a declaratory judgment that the confirmed NGC plan of reorganization does not bar the class action claims. Subsequent to the consummation of NGC's plan of reorganization, NGC's shares traded for values substantially in excess of, and in 1995 NGC was acquired for a value substantially in excess of, the values upon which NGC's plan of reorganization was based. The two actions arise out of DLJSC's activities as financial advisor to NGC in the course of NGC's Chapter 11 reorganization proceedings. The class action complaint alleges that the plan of reorganization submitted by NGC was based upon projections by NGC and DLJSC which intentionally understated forecasts, and provided misleading and incorrect information to hide NGC's true value and that defendants breached their fiduciary duties by, among other things, providing false, misleading or incomplete information to deliberately understate the value of NGC. The class action complaint seeks compensatory and punitive damages purportedly sustained by the class. On October 10, 1997, DLJSC and others were named as defendants in a new adversary proceeding in the Bankruptcy Court brought by the NGC Settlement Trust, an entity created by the NGC plan of reorganization to deal with asbestos-related claims. The Trust's allegations are substantially similar to the claims in the State Court action. On January 21, 1998, the Bankruptcy Court ruled that the State Court plaintiff's claims were not barred by the NGC plan of reorganization insofar as they alleged nondisclosure of certain cost reductions announced by NGC in October 1993. DLJSC has appealed the Bankruptcy Court's ruling. On May 7, 1998, DLJSC and others were named as defendants in a second action in a Texas State Court brought by the NGC Settlement Trust. The allegations of this second Texas State Court action are substantially similar to those of the earlier class action pending in State Court. In an amended order dated January 5, 1999, the State Court granted the class action plaintiff's motion for class certification. In an order dated March 1, 1999, the State Court granted motions for summary judgment filed by DLJSC and the other defendants in both State Court actions. The plaintiffs have appealed. DLJSC intends to defend itself vigorously against all of the allegations contained in the complaints.
On January 26, 1996, a purported purchaser of certain notes and warrants to purchase shares of common stock of Rickel Home Centers, Inc. ("Rickel") filed a class action complaint against DLJSC and certain other defendants for unspecified compensatory and punitive damages in the U. S. District Court for the Southern District of New York. The suit was brought on behalf of the purchasers of 126,457 units consisting of $126,457,000 aggregate principal amount of 13 1/2% senior notes due 2001 and 126,457 warrants to purchase shares of common stock of Rickel (the "Units") issued by Rickel in October 1994. The complaint alleges violations of federal securities laws and common law fraud against DLJSC, as the underwriter of the Units and as an owner of 7.3% of the common stock of Rickel, Eos Partners, L.P. and General Electric Capital Corporation, each as owners of 44.2% of the common stock of Rickel, and members of the board of directors of Rickel, including a DLJSC managing director. The complaint seeks to hold DLJSC liable for alleged misstatements and omissions contained in the prospectus and registration statement filed in connection with the offering of the Units, alleging that the defendants knew of financial losses and a decline in value of Rickel in the months prior to the offering and did not disclose such information. The complaint also alleges that Rickel failed to pay its semi-annual interest payment due on the Units on December 15, 1995 and that Rickel filed a voluntary petition for reorganization pursuant to Chapter 11 of the Bankruptcy Code on January 10, 1996. On April 22, 1999, the complaint against DLJSC and the other defendants was dismissed. The plaintiffs have appealed. DLJSC intends to defend itself vigorously against all of the allegations contained in the complaint.
In November 1998, three purported class actions (Gillet v. Goldman, Sachs & Co. et al., Prager v. Goldman, Sachs & Co. et al., and Holzman v. Goldman, Sachs & Co. et al) were filed in the U.S. District Court for the Southern District of New York against more than 25 underwriters of initial public offering securities, including DLJSC. The complaints allege that defendants conspired to fix the "fee" paid for underwriting initial public offering securities by setting the underwriters' discount or "spread" at 7%, in violation of the federal antitrust laws. The complaints seek treble damages in an unspecified amount and injunctive relief as well as attorney's fees and costs. On March 15, 1999, the plaintiffs filed a Consolidated Amended Complaint captioned In re Public Offering Fee Antitrust Litigation. A motion by all defendants to dismiss the complaints on several grounds is pending. Separately, the U.S. Department of Justice has issued a Civil Investigative Demand to several investment banking firms, including DLJSC, seeking documents and information relating to "alleged" price fixing with respect to underwriting spreads in initial public offerings. The government has not made any charges against DLJSC or the other investment banking firms. DLJSC is cooperating with the Justice Department in providing the requested information and believes that no violation of law by DLJSC has occurred.
In addition to the matters described above, the Company has been named as a defendant in 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. The Company is also involved, from time to time, in proceedings with, and investigations by, governmental agencies and SROs. See "Regulation." The Company does not believe that any such matters, claims or investigations will have a material adverse effect on its results of operations or its consolidated financial condition.
ITEM 4.
Submission of Matters to a Vote of Security Holders
During the fourth quarter of 1999, no matters were submitted to a vote of security holders.
Part II
ITEM 5.
Market for Registrant's Common Equity
and Related Stockholder Matters
Market and Dividend Information
The principal market for trading DLJ Common Stock (stock symbol
"DLJ") and
DLJdirect Common Stock (stock symbol "DIR") is the New York Stock Exchange.
|
|
|||||||||
|
Quarters
|
|||||||||
| 1999 |
1st
|
2nd
|
3rd
|
4th
|
|||||
|
|
|||||||||
| DLJ* |
|
|
|
|
|||||
| High |
70 7/16
|
100 3/4
|
61 7/8
|
57 3/8
|
|||||
| Low |
40 1/8
|
47 9/16
|
38 1/4
|
36 1/2
|
|||||
| Common dividends |
$ .0625
|
$ .0625
|
$ .0625
|
$ .0625
|
|||||
|
|
|||||||||
| DLJdirect | |||||||||
| High |
N/A
|
45 5/8
|
29 5/8
|
19 15/16
|
|||||
| Low |
N/A
|
23 1/16
|
14 5/8
|
12 9/16
|
|||||
|
|
|||||||||
|
Quarters
|
|||||||||
|
1998
|
1st
|
2nd
|
3rd
|
4th
|
|||||
|
|
|||||||||
| DLJ* | |||||||||
| High |
44 3/4
|
52
|
63 3/4
|
44 1/16
|
|||||
| Low |
31 3/8
|
42 5/16
|
24 1/8
|
20 3/8
|
|||||
| Common dividends |
$ .0625
|
$ .0625
|
$ .0625
|
$ .0625
|
|||||
|
|
|||||||||
The DLJdirect Common Stock was issued on May 28, 1999. No dividends were paid on DLJdirect Common Stock in 1999. The approximate number of holders of DLJ Common Stock and DLJdirect Common Stock was 25,000 and 40,000, respectively, at March 5, 2000.
* All figures are adjusted for the two-for-one split of DLJ Common Stock that occurred on May 12, 1998.
ITEM 6. For information required by Item 6, refer to Selected Consolidated
Financial Data for Donaldson, Lufkin & Jenrette, Inc. on page 20 and Selected
Combined Financial Information for DLJdirect on page 64. ITEM 7. For information required by Item 7, refer to Management's Discussion
and Analysis of Financial Condition and Results of Operations for Donaldson,
Lufkin & Jenrette, Inc. on page 22 and Management's Discussion and Analysis
of Financial Condition and Results of Operations for DLJdirect on page
66. ITEM 7A. For information required by Item 7A, refer to Quantitative and
Qualitative Disclosures About Market Risk for Donaldson, Lufkin & Jenrette,
Inc. on page 29 and Quantitative and Qualitative Disclosures about Market Risk
for DLJdirect on page 70. ITEM 8. For information required by Item 8, refer to the Consolidated
Financial Statements and Financial Statement Schedule for Donaldson, Lufkin
& Jenrette, Inc. on page 33 and Combined Financial Statements for DLJdirect
on page 71. ITEM 9. None. (1)
DLJdirect Common Stock tracks the separate performance
of the Company's existing online discount brokerage and related investment
services business ("Tracking Stock"). Prior to issuing DLJdirect Common
Stock, the Company's existing common stock was designated as DLJ Common
Stock and reflects the performance of the Company's primary businesses,
i.e., Banking, Equities, Fixed Income 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. On May 28, 1999 ("the closing date"), the Company
issued in an initial public offering, 18.4 million shares of DLJdirect
Common Stock. The shares of DLJdirect Common Stock have no voting rights,
except in certain limited circumstances. Earnings applicable to common
shares for DLJ include a 100% interest in DLJdirect for periods prior
to the closing date and 82.1% for subsequent periods. Quarterly results
reported by DLJ prior to the closing date were not affected by the issuance
of the Tracking Stock.
(2)
Earnings per share amounts for periods after the closing
date have been calculated using the two-class method. The two-class method
is an earnings allocation formula that determines the earnings per share
for each class of common stock according to participation rights in undistributed
earnings.
For DLJ, basic earnings per common share represents earnings
applicable to common shares (including its retained interest in DLJdirect)
divided by the weighted average actual common shares outstanding, excluding
the effect of potentially dilutive securities. Diluted earnings per common
share include the dilutive effects of the Restricted Stock Unit Plan and
the dilutive effect of options calculated under the treasury stock method.
For DLJdirect, basic earnings per share is calculated
by dividing earnings applicable to common shares for the period the Tracking
Stock was outstanding (May 28, 1999 to December 31, 1999) by the weighted
average actual common shares outstanding. Diluted earnings per common
share include the dilutive effect of options calculated under the treasury
stock method. DLJ's retained interest excludes the effect of the 10 million
shares of common stock that have been reserved for issuance under the
DLJdirect Stock Option Plan. Earnings per share for DLJdirect for periods
prior to the closing date are not presented, as such amounts are not meaningful.
(3)
Interest is net of interest expense to finance U.S. government,
agency and mortgage-backed securities of $3.3 billion, $3.0 billion, $2.9
billion, $2.1 billion and $2.0 billion, respectively.
(4)
Net assets are total assets excluding securities purchased
under agreements to resell and securities borrowed.
(5)
Long-term borrowings and total capitalization (the sum
of long-term borrowings, redeemable trust securities and stockholders'
equity) exclude current maturities (one year or less) of long-term borrowings.
(6)
After payment of dividends on the Company's preferred
stock.
(7)
For the purpose of calculating the ratio of earnings
to combined fixed charges and the ratio of earnings to combined fixed
charges and preferred stock dividends (i) earnings consist of income before
the provision for income taxes and fixed charges and (ii) fixed charges
consist of interest expense and one-third of rental expense which is deemed
representative of an interest factor.
Management's Discussion and Analysis of 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. In 1999, global markets continued to rebound as evidenced by the
Asian recovery from the financial crisis of 1998, while Europe experienced a
doubling of merger volume and a strong demand for its securities. A recovery
in the emerging markets also contributed to favorable market conditions. The domestic investment climate was strong with all major market
indices closing the year at record highs. Total capital raised through IPOs
set a record, nearly doubling the 1998 total. However, rising interest rates,
the fear of inflation and Y2K issues caused bond prices to slide to their lowest
level since 1994. In addition, the issuance of new securities in the high-yield
bond market has not recovered from the level that existed prior to the Russian
debt crisis of 1998. The continued strong growth of the economy gave rise to
fears of inflation. In order to slow the pace of economic growth and ease inflation
worries, the Federal Reserve raised the Federal Funds rate three times in 1999,
and most recently, in February 2000 to 5.75%. Recent Developments 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 securities, subordinated debt securities, preferred stock
and warrants. Results of Operations — DLJ Inc. Year Ended December 31, 1999 Compared to Year Ended December
31, 1998 For 1999, total revenues increased $1.7 billion, or 31.5% to $7.1
billion. During 1999, revenues increased primarily as a result of increases
in commissions, underwritings, fees and trading, offset by decreases in interest
income and investment gains. Changes in net revenues from external sources for
each of the Company's industry segments were: Banking Group revenues increased
$472.7 million primarily as a result of increased underwriting revenues and
fee income related to merger and acquisition activity; Equities Group revenues
increased $336.9 million primarily as a result of increased commissions, underwriting
and trading revenues, both domestically and internationally; Fixed Income Group
revenues increased $254.9 million, principally as a result of positive trading
gains in the high-yield and mortgage-backed securities areas, offset by reduced
underwriting revenues in these areas; Financial Services Group revenues increased
$391.6 million primarily as a result of increased brokerage and correspondent
clearance commission revenues and fee income in the Company's correspondent
and online brokerage businesses. Commission revenues increased $346.0 million or 40.5% to $1.2
billion due to increased business in virtually all areas. Share volumes on the
NYSE and NASDAQ exchanges averaged a combined record 1.8 billion shares per
day for 1999 compared to approximately 1.4 billion shares per day for 1998.
Commissions generated internationally, primarily in London and Hong Kong equities,
increased 410.0% over 1998. The Company's correspondent and online brokerage
businesses added over 1.0 million client accounts in 1999, and related customer
assets increased by approximately $140.8 billion. Underwriting revenues increased $202.9 million or 20.3% to $1.2
billion, primarily as a result of increases in underwriting of domestic equities,
offset by the decline in new issuances of high-yield and mortgage-backed securities. Fee revenues increased $420.2 million or 35.6% to $1.6 billion.
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 from
$17.6 billion to approximately $28.0 billion. Interest, net of interest expense to finance U.S. government,
agency and mortgage-backed securities, decreased $13.8 million or 0.6% to $2.2
billion. The decrease resulted from the elimination of interest related to emerging
markets proprietary trading. (The Company ceased proprietary trading in emerging
markets in the third quarter of 1998). If the impact of the firm's proprietary
trading activities in emerging markets during 1998 were excluded, net interest
income would have increased 22.8%. In most other areas there were increases
in balances of lending activity, which were offset by slight reductions in interest
rates charged. Principal transactions-net, trading revenues increased $777.2
million to $718.6 million primarily as a result of gains in fixed-income and
equities trading, and the elimination in 1999 of trading losses in the emerging
markets, high-yield and mortgage-backed areas. Principal transactions-net, investment revenues decreased $18.7
million or 14.8% to $107.3 million primarily as a result of decreased realized
gains on merchant banking investments sold, offset by increased gains of $68.8
million in the Company's venture capital area. Total costs and expenses for 1999 increased $1.4 billion or 29.2%
to $6.2 billion primarily due to growth in the correspondent and online discount
securities businesses as well as the Company's international expansion in Europe
and Hong Kong. Compensation and benefits increased $873.7 million or 39.2% to
$3.1 billion. Incentive and production-related compensation increased by 45.6%
in 1999. Base compensation, including benefits and payroll taxes, increased
by 24.5% primarily due to the Company's significant international expansion.
Full-time worldwide personnel increased 1,741 or 20.6% to 10,206 at year-end
1999. International headcount increased 30.8% to 1,700 at year-end 1999. Interest expense increased $134.3 million or 9.2% to $1.6 billion
due to increased inventory positions in 1999, offset in part by reduced proprietary
trading in emerging markets securities. All other expenses increased $378.1 million or 33.7% to $1.5 billion,
as noted below. Communications and technology increased by $130.6 million due
to expansion of the Company's international operations, implementation and development
of new systems, consulting fees related to the Year 2000 Project and overhaul
of the online customer trading and information system for the Company's correspondent
brokerage network. Brokerage, clearing, exchange fees and other expenses increased
$55.2 million due to increased trading volume and transaction fee payments.
Occupancy and related costs increased $35.1 million primarily as a result of
the Company's domestic growth and international expansion. All other operating
expenses increased $157.2 million. Included therein are professional fees, travel
and entertainment, advertising, and printing and stationery which increased
$112.9 million due to an overall increase in the level of business activity,
and advertising expense of approximately $38 million by DLJdirect for
the development and implementation of a new advertising campaign. The changes in income before income taxes for each industry segment
were: Banking Group pre-tax income increased $111.1 million as a result of increased
underwritings, and fees related to merger and acquisition activity; Equities
Group pre-tax income increased $46.1 million due to increases in commissions,
underwritings, fees and trading gains; Fixed Income Group pre-tax income increased
$134.1 million as a result of increased trading gains offset by decreased underwriting
revenues in the high-yield and real estate finance areas; Financial Services
Group pre-tax income increased $109.6 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 1999 and 1998 was $352.8
million and $229.7 million, a 37.0% and 38.3% effective tax rate, respectively. Net income for 1999 increased $229.9 million, or 62.0% to $600.7
million. Diluted earnings per common share were $4.18 for 1999 and $2.65 for
1998. Year Ended December 31, 1998 Compared to Year Ended December
31, 1997 For 1998, total revenues of $5.4 billion increased $766.6 million,
or 16.5%. During 1998, revenues increased primarily as a result of increases
in commissions, fees, underwriting revenues and net interest income offset in
part by decreases in trading and investment gains. Changes in net revenues from
external sources for each of the Company's industry segments were: Banking Group
revenues increased $271.4 million primarily as a result of increased underwriting
and fees; Equities Group revenues increased $80.8 million principally as a result
of increases in commissions and underwriting revenues in institutional equities;
Fixed Income Group revenues decreased $52.6 million primarily as a result of
trading losses in high-yield and mortgage-backed securities; Financial Services
Group revenues increased $202.2 million primarily as a result of increased brokerage
and correspondent clearance commissions and fees from asset management activities.
Net revenues in 1998 include $5.0 million related to the Emerging Markets Group.
This represents a decrease of $112.8 million from net revenues in 1997 as a
result of losses incurred primarily from the collapse of the Russian economy.
The Company ceased its proprietary trading in emerging markets in September
1998 and eliminated the bulk of its trading positions during the fourth quarter
of 1998. Commission revenues increased $164.5 million or 23.8% to $854.7
million due to increased levels of activity in virtually all business groups.
This increase is consistent with the increased volume on major exchanges during
the year. Underwriting revenues increased $132.2 million or 15.2% to $1.0
billion. During 1998, the Company experienced market share increases in equity,
convertibles and high yield underwriting. Fee revenues increased $424.4 million or 54.7% to $1.2 billion.
These results primarily reflect the Company's continuing market share growth
in merger and acquisition advisory services. During 1998, asset management and
other advisory service activities also increased. Interest, net of interest expense to finance U.S. government,
agency and mortgage-backed securities, increased $537.0 million or 32.3% to
$2.2 billion. The bulk of the increase occurred in the stock loan/borrowed business.
In addition, increases in domestic and foreign margin balances and higher levels
of foreign fixed income securities, primarily in the Emerging Markets area prior
to the Company's withdrawal from that activity, resulted in increases in interest
income. Principal transactions-net, trading revenues decreased $416.1
million or 116.1% to $(58.6) million primarily in the Emerging Markets and High
Yield areas. Principal transactions-net, investment revenues decreased $68.5
million or 35.2% to $126.0 million. The decrease is primarily due to a lower
amount of realized gains from securities sold coupled with a reduced increase
in fair value of investments remaining in the portfolio, as a result of volatile
market conditions throughout the year, but in particular during the second half
of the year. In 1998, realized gains on sales of investments were $117.1 million,
net unrealized carrying values increased $8.9 million, including $5.6 million
to eliminate net unrealized depreciation on investments sold, and a $3.3 million
increase in net unrealized appreciation on retained investments. Other revenues decreased $7.0 million or 10.4% to $60.6 million.
Other revenues consist primarily of dividends and miscellaneous transaction
revenues. Total costs and expenses for 1998 increased $827.1 million or
20.8% to $4.8 billion. During 1998, the Company started a non-dollar international
equities group, expanded its Banking Group in the United States and internationally,
established a high-yield business in London and generally increased capacity
in its processing oriented businesses to handle significantly increased levels
of activity. Compensation and benefits increased $323.5 million or 17.2% to
$2.2 billion. Incentive and production-related compensation increased 9.0%.
Base compensation, including benefits and all payroll taxes, increased by 40.0%
due to the hiring of more senior-level executives by various business groups.
Full-time worldwide personnel increased 1,412 or 20.0% to 8,465 at year-end
1998. Interest expense increased $302.7 million or 25.3% to $1.5 billion.
Most of this increase was related to the financing of Pershing's domestic and
foreign stock loan/borrowed business. As noted below, all other expenses increased $201.0 million or
22.4% to $1.1 billion. Brokerage, clearing, exchange fees and other expenses increased
$27.2 million due to increased share volume and transaction fee payments. Occupancy
and related costs increased $35.4 million as a result of the Company's domestic
and international expansion. Communications and technology increased $44.2 million
due to expanded facilities and the overall growth in professional staff. All
other operating expenses increased $94.2 million. These expenses include professional
fees, travel and entertainment, and printing and stationery, which increased
$76.2 million reflecting an overall increase in business activity and including
the costs for the Year 2000 Project. The changes in income before income taxes for each industry segment
were: Banking Group pre-tax income increased by $33.8 million, as a result of
increased profitability in the Company's investment and merchant banking activities;
Equities Group pre-tax income decreased $49.7 million due to the investment
spending related to the development of a non-dollar international equities business;
Fixed Income Group pre-tax income decreased $34.2 million as a result of trading
losses in high-yield and mortgage-backed securities; Financial Services Group
pre-tax income increased $44.7 million as a result of increased commissions
and fees from the Company's correspondent clearing and asset management businesses. The Company's income tax provision for 1998 and 1997 was $229.7
million and $252.9 million, a 38.3% and 38.2% effective tax rate, respectively. Net income for 1998 decreased $37.5 million or 9.2% to $370.8
million. Diluted earnings per common share were $2.65 for 1998 and $3.16 for
1997. 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 December 31, 1999 and 1998, the Company's total assets
were $109.0 billion and $72.2 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 December 31, 1999. Certain of the Company's businesses are capital intensive. In
addition to normal operating requirements, capital is required to cover financing
and regulatory charges on securities inventories, merchant banking investments
and investments in fixed assets. The Company's overall capital needs are continually
reviewed to ensure that its capital base can appropriately support the anticipated
needs of its business units as well as the regulatory capital requirements of
subsidiaries. Based upon these analyses, management believes that the Company's
debt and equity base is adequate for current operating levels. On May 28, 1999, the Company issued in an initial public offering,
18.4 million shares of DLJdirect Common Stock, which tracks the separate
performance of the Company's online discount brokerage business. Net proceeds
from the offering amounted to $346.6 million of which $233.9 million was allocated
to DLJdirect. In 1999, the Company was active in raising additional long-term
financing. In connection therewith, $650.0 million of 5 7/8% Senior Notes
and $1.3 billion of medium term notes with various rates and maturities were
issued in 1999. In addition, during the year ended December 31, 1999, commercial
paper outstanding under the Company's $2.0 billion commercial paper program
increased from $30.9 million to $1.2 billion. The Company's current credit ratings of its long-term debt and
commercial paper are as follows: 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
December 31, 1999, DLJSC had aggregate regulatory "net capital," after adjustments
required by Rule 15c3-1 under the Securities Exchange Act of 1934, of approximately
$1.7 billion, which exceeded minimum net capital requirements by $1.5 billion
and which exceeded the net capital required by DLJSC's most restrictive debt
covenants by $966.3 million. The Company's London-based broker-dealer subsidiaries
are subject to the requirements of the Securities and Futures Authority, a self-regulatory
organization established pursuant to the United Kingdom Financial Services Act
of 1986. Other U.S. and foreign broker-dealer subsidiaries of the Company are
subject to net capital requirements of their respective regulatory agencies.
At December 31,1999, 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. Years Ended December 31, 1999, 1998 and 1997 At December 31, 1999, 1998 and 1997, cash and cash equivalents
totaled $2.0 billion, $1.0 billion and $273.2 million, respectively, an increase
of $1.0 billion, $776.1 million and $114.3 million, respectively. Cash used in operating activities totaled $11.7 billion, $2.4
billion and $5.3 billion in 1999, 1998 and 1997, respectively. In 1999, there
were increases in assets including financial instruments owned of $14.8 billion,
securities borrowed of $6.4 billion and receivables from customers of $2.9 billion.
These increases were partially offset by increases in liabilities including
payables to customers of $1.6 billion, securities loaned of $4.2 billion and
financial instruments sold not yet purchased of $4.0 billion. In 1998, there
were increases in assets including securities borrowed of $3.4 billion, receivables
from customers of $1.7 billion, and a decrease in financial instruments sold
not yet purchased of $1.5 billion. An increase in payables to customers of $1.8
billion and a decrease in financial instruments owned of $3.3 billion offset
these changes. In 1997, securities borrowed increased $11.2 billion and receivables
from customers increased $1.2 billion. These increases in assets were offset
by increases in operating liabilities including securities loaned of $5.0 billion,
payables to customers of $1.0 billion, and financial instruments sold not yet
purchased of $1.0 billion. In 1999 and 1998, net cash used in investing activities of $1.4
billion and $334.0 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 1997, net cash used in investing
activities of $216.0 million consisted primarily of purchases to move the Company's
principal offices. In 1999, 1998 and 1997, net cash provided by financing activities
totaled $14.1 billion, $3.5 billion and $5.6 billion, respectively, of which
$12.1 billion, $1.7 billion and $4.9 billion was provided by short-term financings
(principally repurchase agreements). In the second quarter of 1999, the Company
received net proceeds from the issuance of DLJdirect Common Stock of
$346.6 million. Additionally, in 1999, $649.6 million was provided by issuing
Senior Notes and $1.2 billion was provided by issuing medium-term notes. In
1998, cash of $325.0 million was used to repay the subordinated revolving credit
agreement while $893.6 million was provided by issuing senior notes, $349.3
million was provided by issuing medium-term notes, $450.0 million was provided
by issuing senior secured floating rate notes, $300 million was provided from
the sale of Common Stock to its parent companies, AXA Financial and AXA, S.A.,
and $175.0 million was provided by issuing Series B Preferred Stock. In 1997,
$347.8 million was provided by issuing global floating-rate notes, $359.6 million
was provided by issuing medium-term notes and $118.5 million was provided by
a drawdown of the subordinated revolving credit agreement. 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 swaps to modify the characteristics of periodic interest payments associated
with some of its long-term debt obligations. Options The majority of the Company's options are written options. The
Company writes option contracts specifically designed to meet customers' needs.
Most of the options do not expose the Company to credit risk since the Company,
not its counterparty, is obligated to perform. At the beginning of the contract
period, the Company receives a cash premium. During the contract period, the
Company bears the risk of unfavorable changes in the value of the financial
instruments underlying the options ("market risk"). To cover this market risk,
the Company purchases or sells cash or derivative financial instruments on a
proprietary basis. Such purchases and sales may include debt and equity securities,
forward and futures contracts and options. The counterparties to these purchases
and sales are reviewed to determine whether they are creditworthy. Future cash
requirements for options written equal the fair value of the options. The Company also purchases options for trading purposes. With
purchased options, the Company gets the right, for a fee, to buy or sell the
underlying instrument at a fixed price on or before a specified date. The underlying
instruments for these options include mortgage-backed securities, equities,
interest rate instruments and foreign currencies. All options are reported at
fair value. Forwards and Futures The Company enters into forward purchases and sales contracts
for mortgage-backed securities and foreign currencies. In addition, the Company
enters into futures contracts on equity-based indices, foreign currencies and
other financial instruments as well as options on futures contracts. Forward
and futures contracts are treated as off-balance sheet items. Market risk is
the price movement on the notional value of the contracts. For forward contracts, cash is generally not required at inception;
cash equal to the contract value is required at settlement. For futures contracts,
the original margin is required in cash at inception; cash equal to the change
in market value is required daily. Since forward contracts are subject to the financial reliability
of the counterparty, the Company is exposed to credit risk. To monitor this
credit risk, the Company limits transactions with specific counterparties, reviews
credit limits and adheres to internally established credit extension policies.
For futures contracts and options on futures contracts, the change in the market
value is settled with the exchanges in cash each day. As a result, the credit
risk with futures exchanges is limited to the net positive change in the market
value for a single day. Swaps The Company's swap agreements consist primarily of interest rate
and equity swaps. Equity swaps are contractual agreements to receive the appreciation
or depreciation in value based on a specific strike price on an equity instrument,
in exchange for paying another rate, which is usually based on index or interest
rate movements. Interest rate swaps are contractual agreements to exchange interest
rate payments based on agreed notional amounts and maturity. Swaps are reported
at fair value. 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 December 31, 1999 and 1998 are as follows: The fair values of derivatives outstanding at December 31, 1999
and 1998 are as follows: The average fair values of derivatives for 1999 and 1998 are as
follows: The majority of the Company's derivatives are short-term in duration.
At December 31, 1999, the total notional value of derivatives was $130.9 billion,
of which $103.6 billion expire in less than one year. Disclosures for Non-trading Derivatives The Company also enters into interest rate swaps to modify the
characteristics of periodic interest payments associated with some of its long-term
debt obligations. At December 31, 1999 and 1998, the notional amount of these
interest rate swaps was $3.3 billion and $0.8 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 December 31, 1999, the Company had investments of
$622.2 billion and has commitments to invest up to an additional $699.7 million. AXA Financial has committed, subject to its approval on a transaction-by-transaction
basis, to provide $750.0 million of subordinated debt financing to the DLJ Bridge
Fund. The Bridge Fund provides short-term loans in connection with the Company's
merchant banking and financial advisory businesses. The Company has agreed to
pay AXA Financial the first $25.0 million of aggregate principal losses incurred
by AXA Financial with respect to all bridge loans. To the extent such payments
by the Company do not fully cover any such losses incurred by AXA Financial,
AXA Financial is entitled to receive all other distributions otherwise payable
to the Company with respect to DLJ Bridge Fund activities until such losses
have been recovered. The Company has also agreed to pay AXA Financial the amount,
if any, by which any principal loss on an individual loan exceeds $150.0 million.
At December 31, 1999, the Company had extended $11.4 million as its portion
of short-term financings made with AXA Financial. The Company has made additional bridge loans of $608.3 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 December 31, 1999 and 1998,
the Company had long positions with an aggregate market value of approximately
$5.4 billion and $3.5 billion, respectively, and short positions with an aggregate
market value of approximately $0.5 billion and $0.4 billion, respectively. Risk Management and Value at Risk Exposure to risk and the ways in which the Company manages the
various types of risks on a day-to-day basis is critical to its survival and
financial success. The Company believes that reporting and management of risk
is the responsibility of all its employees, particularly those of the business
groups in which the risks originate. The business groups have policies and procedures
governing their risk-taking activities and independent operations and financial
control staff to monitor and control the risks. In addition, the Company has established several departments at
the corporate level to monitor and control risk: Independent Risk Oversight,
Credit Risk Management, Compliance, Treasury, and Corporate Accounting. The Risk Oversight Department is responsible for ensuring that
there are adequate risk monitoring and management capabilities throughout the
firm and coordinating the risk management practices of the various business
groups. This department reviews and approves trading limits and exceptions to
limits, new products, and major underwriting commitments. All trading desks
provide detailed daily position reports to Risk Oversight, which prepares reports
describing exposures to major market indices, concentration reports, stress
scenarios, and Value-at-Risk. To ensure that risks are properly communicated,
this department maintains personnel in trading areas who are in constant contact
with the risk takers. The Credit Risk Management Department is charged with the responsibility
of analyzing the credit worthiness of the Company's credit counterparties and
granting credit limits to these counterparties. This department ensures that
credit exposure is properly identified, calculated and monitored. In conjunction
with the Legal Department, Credit sets standards for credit-related legal agreements
with credit counterparties. The Compliance program is designed to establish firm policies
and procedures for compliance with the applicable securities laws, rules and
regulations to which the Company is subject, educate employees with regard to
such policies and procedures, monitor compliance through surveillance, and enforce
compliance if necessary. The Company seeks not only to comply with applicable
laws and rules governing its business but also to avoid even the appearance
of impropriety. The Company has committed significant resources to monitoring
compliance by its employees with its policies and procedures. Primary responsibility
for ensuring compliance with the Company's policies and procedures rests with
the immediate supervisor of each employee. However, the Compliance Department
maintains an aggressive daily surveillance program that is supplemented by periodic
surveillance conducted by the Internal Audit Department. Treasury is responsible for ensuring that the Company maintains
adequate capital and liquidity to finance its activities and to support the
estimated risks of its businesses, thereby enabling it to operate under all
market conditions. Treasury continuously reviews overall capital, liquidity
and funding needs by employing various analytical tools and models. Treasury
maintains access to funding through short and long-term public and private markets,
including commercial banks. As part of its contingency planning efforts, Treasury
maintains and manages relationships with its commercial banks, a number of which
participate in the Company's committed revolving credit facility. Treasury is
also responsible for establishing policies and procedures controlling the movement
of cash, both within and outside the Company. Corporate accounting reviews position and exposure reports prepared
by operations staff in each of the business groups engaged in trading activities
for traders, trading managers, department managers, division management and
group management. The corporate accounting group prepares a consolidated summarized
position report listing long and short exposure, and approved limits. The position
report is distributed to various levels of management throughout the Company,
including the Chief Executive Officer, and it enables senior management to control
inventory levels and monitor results of the trading groups. The Company also
reviews and monitors inventory aging, pricing, concentration and securities
ratings. In addition to position and exposure reports, the Company produces
a daily revenue report that summarizes the trading, interest, commissions, fees,
underwriting and other revenue items for each of the business groups. Daily
revenue is reviewed for various risk factors and is independently verified by
the corporate accounting group. The daily revenue report is distributed to various
levels of management throughout the Company, including the Chief Executive Officer,
and together with the position and exposure report, enables senior management
to monitor and control overall activity of the trading groups. To help senior management manage risk associated with investment
banking and merchant banking transactions, the Company has established various
committees. These committees review potential clients and engagements, use experience
with similar clients and situations, analyze credit for certain commitments
and analyze the Company's potential role as a principal investor. To control
the risks associated with its banking activities, various committees review
the details of all transactions before accepting an engagement. The Company
has formed the following committees: the Fairness and Valuation Opinion Committee,
the Private Placement Committee, the Restructuring Coordinating Committee, the
Equity Commitment Committee, the High-Yield Underwriting Committee, the Bridge
Commitment Committee, the Banking Review Committee, the Finance Committee and
the Executive Committee. From time to time, the Company invests in certain merchant banking
transactions or other long-term corporate development investments. The Company's
Merchant Banking Group has established several investment entities, each of
which has formed its own investment committee. These committees decide on all
investments and dispositions with respect to potential and existing portfolio
companies. In addition, each quarter, senior officers of the Company meet to
review merchant banking and long-term corporate development investments. After
discussing the financial and operational aspects of the companies involved,
the senior officers recommend carrying values for each investment to the Finance
Committee. The Finance Committee then reviews such recommendations and determines
fair value. Market risk Market risk represents the potential loss as a result of absolute
and relative price movements in financial instruments due to changes in interest
rates, foreign exchange rates, equity prices, market conditions, and other factors.
The Company's exposure to market risk is directly related to its role as financial
intermediary in customer-related transactions and to its proprietary trading
activities. As of December 31, 1999, the Company's primary market risk exposures
include interest rate risk, credit spread risk and equity price risk. Interest
rate risk results from maintaining inventory positions and trading in interest
rate sensitive financial instruments and arises from various sources including
changes in the absolute and relative level of interest rates, interest rate
volatility, mortgage prepayment rates and the shape of the yield curves in various
markets. To cover its exposure to interest rate risk, the Company enters into
transactions in U.S. government securities, options, swaps, and futures and
forward contracts designed to reduce the Company's risk profile. The Company's
investment grade and high-yield corporate bonds, mortgages, equities, derivatives
and convertible debt activities, also expose it to the risk of loss related
to changes in credit spreads. Credit spread risk arises from the potential changes
in an issuer's credit rating that affect the value of financial instruments.
Equity price risk results from maintaining inventory positions and making markets
in equity securities and arises from changes in the level or volatility of equity
prices, equity index exposure and equity index spreads, which affect the value
of equity securities. To cover its exposure to equity price risk, the Company
enters into transactions in options and futures designed to reduce the Company's
risk profile. Value at risk The Company has developed a Company-wide Value-at-Risk (VAR) model
which uses an historical simulation model based on two years of weekly historical
data, a 95% confidence interval, and a one-day holding period. The VAR number
is the statistically expected maximum loss on the fair value of the Company's
market sensitive instruments for 19 of 20 trading days. In other words, on one
of 20 trading days, the loss is expected to be statistically greater than the
VAR number. However, the model does not indicate how much greater. VAR models
are designed to assist in risk management and to provide senior management with
one probabilistic indicator of risk at the firm level. VAR numbers should not
be interpreted as a predictor of actual results. The VAR model has been specifically
tailored for the Company's risk management needs and risk profile. The VAR model includes the following limitations: (1) a daily
VAR does not capture the risk inherent in trading positions that cannot be liquidated
or hedged in one day, (2) VAR is based on historical market data and assumes
that past trading patterns will predict the future, (3) all inherent market
risks cannot be perfectly modeled, and (4) correlations between market movements
can vary, particularly in times of market stress. Because a VAR model alone
is not a sufficient tool to measure and monitor market risk, the Company will
continue to use other risk management measures, such as stress testing, independent
review of position and trading limits and daily revenue reports. At December 31, 1999 and 1998, the Company-wide VAR for trading
was approximately $17.0 million and $22.0 million, 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. At December
31, 1999 and 1998, the three main components of market risk, expressed in terms
of theoretical fair values, had the following VAR: The histogram below shows daily trading revenue for fiscal 1999
for substantially all of the Company's institutional trading activities: [BAR GRAPH OMITTED] [The following table was depicted as a bar graph
in the printed material.]
Credit risk Credit risk is the potential for loss resulting from the default
by a counterparty of its obligations. Exposure to credit risk is generated by
securities and currency settlements, contracting derivative and forward transactions
with customers and dealers, and the holding in inventory of bonds and/or loans. The Company uses various means to manage its credit risk. The
credit-worthiness of all counterparties is analyzed at the outset of a credit
relationship with the Company. These counterparties are subsequently reviewed
on a periodic basis. The Company sets a maximum exposure limit for each counterparty,
as well as for groups or classes of counterparties. Furthermore, the Company
enters into master netting agreements when feasible and demands collateral from
certain counterparties or for certain types of credit transactions. Year 2000 Following the implementation of the Company's Year 2000 Project
initiatives, no significant Year 2000 problems were encountered that could have
a material adverse effect on the business financial condition or results of
operations of the Company. The total cost of the Year 2000 Project was approximately
$90 million, which was funded by operations, and was not material to the Company's
financial position. 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. [LETTERHEAD OF KPMG] Independent Auditors' Report The Board of Directors and Stockholders We have audited the accompanying consolidated statements of financial
condition of Donaldson, Lufkin & Jenrette, Inc. and subsidiaries as of December
31, 1999 and 1998, and the related consolidated statements of income, changes
in stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1999, and the related financial statement schedule.
These consolidated financial statements and related financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and related financial
statement schedule based on our audits. We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Donaldson, Lufkin & Jenrette, Inc. and subsidiaries as of December 31, 1999
and 1998, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1999, in conformity
with generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the consolidated
financial statements taken as a whole, presents fairly, in all material respects,
the information set forth therein. /s/ KPMG LLP January 31, 2000 Donaldson, Lufkin & Jenrette, Inc. and Subsidiaries December 31, 1999 1998 (In thousands, except share Cash and cash equivalents 2,020,543 1,049,253 Cash and securities segregated for regulatory purposes
or 196,249 1,043,225 Collateralized short-term agreements: Securities purchased under agreements
to resell 29,538,141 20,063,348 Securities borrowed 30,348,609 23,967,639 Receivables: Customers 8,671,447 5,818,005 Brokers, dealers and other 5,978,065 4,478,814 Financial instruments owned, at value: U.S. government and agencies 14,543,947 5,973,394 Corporate debt 5,379,440 4,413,492 Foreign sovereign debt 3,018,175 423,736 Mortgage whole loans 1,848,391 722,284 Equities and other 3,192,467 1,634,201 Long-term corporate development
investments 1,432,669 473,756 Office facilities, at cost, (net of accumulated depreciation
and 573,878 450,706 Other assets and deferred amounts 2,270,061 1,713,883 Total Assets 109,012,082 72,225,736 See accompanying notes to consolidated financial statements. Donaldson, Lufkin & Jenrette, Inc. and Subsidiaries December 31, 1999 1998 (In thousands, except share Liabilities and Stockholders' Equity Commercial paper and short-term borrowings 1,358,188 515,646 Collateralized short-term financings: Securities sold under agreements
to repurchase 56,474,394 35,775,580 Securities loaned 11,541,759 7,322,186 Payables: Customers 7,792,857 6,221,709 Brokers, dealers and other 4,929,275 3,678,674 Financial instruments sold not yet purchased, at value: U.S. government and agencies 7,530,070 5,935,629 Corporate debt 624,639 523,909 Equities and other 4,788,819 2,479,411 Accounts payable and accrued expenses 3,295,448 2,225,913 Other liabilities 1,408,945 937,377 Long-term borrowings 5,160,446 3,482,003 Company-obligated mandatorily redeemable trust 200,000 200,000 Stockholders' Equity: Preferred stock, 50,000,000 shares
authorized: Series A Preferred Stock, at $50.00 per share liquidation
200,000 200,000 Series B Preferred Stock, at $50.00 per share liquidation
175,000 175,000 Common Stock, 1,500,000,000 shares authorized: DLJ Common Stock ($0.10 par value; 500,000,000 12,601 12,281 DLJdirect Common Stock ($0.10 par value; 500,000,000
1,840 — Restricted stock units (10,358,294 units authorized; 1,099,955
11,265 21,333 Paid-in capital 1,298,674 858,066 Retained earnings 2,205,818 1,657,710 Accumulated other comprehensive income 2,044 3,309 Employee deferred compensation stock trust 13,591 12,329 Common stock issued to employee deferred compensation
trust (13,591 (12,329 Total
stockholders' equity 3,907,242 2,927,699 Total Liabilities and Stockholders' Equity 109,012,082 72,225,736 See accompanying notes to consolidated financial statements. Donaldson, Lufkin & Jenrette, Inc. and Subsidiaries 1999 1998 1997 Revenues: Commissions 1,200,695 854,679 690,156 Underwritings 1,246,442 1,043,526 911,270 Fees 1,611,935 1,191,655 767,259 Interest, net of interest to finance
U.S. government, 2,175,308 2,189,108 1,652,135 Principal transactions-net: Trading 718,589 (58,596 357,527 Investment 107,321 126,031 194,527 Other 85,979 60,639 67,595 Total revenues 7,146,269 5,407,042 4,640,469 Costs and Expenses: Compensation and benefits 3,105,389 2,231,655 1,908,201 Interest 1,590,245 1,455,851 1,153,167 Communications and technology 445,218 314,624 270,451 Brokerage, clearing, exchange
fees and other 313,785 258,625 231,402 Occupancy and related costs 178,933 143,832 108,396 Other operating expenses 559,199 401,955 307,752 Total costs and expenses 6,192,769 4,806,542 3,979,369 Income before provision for income taxes 953,500 600,500 661,100 Provision for income taxes 352,800 229,700 252,850 Net income 600,700 370,800 408,250 Dividends on preferred stock 21,180 21,310 12,144 Earnings applicable to common shares 579,520 349,490 396,106 Earnings (loss) applicable to common shares: DLJ 580,423 349,490 396,106 DLJdirect (903 Earnings (loss) per common share: DLJ Basic 4.63 2.93 3.59 Diluted 4.18 2.65 3.16 DLJdirect Basic (0.05 Diluted (0.05 Weighted average common shares: DLJ Basic 125,433 119,260 110,318 Diluted 138,868 131,980 125,498 DLJdirect Basic 18,400 Diluted 18,400 See accompanying notes to consolidated financial statements. Donaldson, Lufkin & Jenrette, Inc. and Subsidiaries For the Years Ended December 31, 1999, 1998 and 1997 Preferred DLJ DLJdirect Restricted Paid-in Retained Accumulated Total Balances at December 31, 1996 200,000 10,659 — 104,167 360,660 969,856 1,897 1,647,239 Net income — — — — — 408,250 — 408,250 Translation adjustment — — — — — — 2,007 2,007 Total comprehensive income Dividends: DLJ Common stock ($0.25 per share) — — — — — (27,742 — (27,742 Preferred stock ($3.036 per share) — — — — — (12,144 — (12,144 Conversion of restricted stock units to common stock — 358 — (36,912 45,197 — — 8,643 Conversion of debentures — 138 — — 28,641 — — 28,779 Exercise of stock options — 30 — — 6,428 — — 6,458 Balances at December 31, 1997 200,000 11,185 — 67,255 440,926 1,338,220 3,904 2,061,490 Net income — — — — — 370,800 — 370,800 Translation adjustment — — — — — — (595 (595 Total comprehensive income Dividends: DLJ Common stock ($0.25 per share) — — — — — (30,000 — (30,000 Preferred stock ($2.84 per share) — — — — (21,310 — (21,310 Issuance of Series B Preferred Stock 175,000 — — — — — — 175,000 Sale of common stock to — 500 — — 299,500 — — 300,000 Exercise of stock options — 148 — — 37,840 — — 37,988 Conversion of restricted stock units — 448 — (45,922 70,902 — — 25,428 Tax benefit on distribution stock trust — — — — 8,898 — — 8,898 Balances at December 31, 1998 375,000 12,281 — 21,333 858,066 1,657,710 3,309 2,927,699 Net income — — — — — 600,700 — 600,700 Translation adjustment — — — — — — (1,265 (1,265 Total comprehensive income 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 See accompanying notes to consolidated financial statements. Donaldson, Lufkin & Jenrette, Inc. and Subsidiaries 1999 1998 1997 Cash flows from operating activities: Net income 600,700 370,800 408,250 Adjustments to reconcile net income to net cash used in
Depreciation and amortization 105,897 84,802 61,428 Deferred taxes (131,746 27,943 (134,233 Increase in unrealized appreciation
of long-term (71,464 (8,939 (34,524 Foreign currency translation adjustment (1,265 (595 2,007 (Increase) decrease in operating assets: Cash and securities segregated
for regulatory 846,976 (211,132 4,313 Securities purchased under agreements
to resell (17,947,110 5,463,657 (4,622,196 Securities borrowed (6,380,970 (3,369,000 (11,243,155 Receivables from customers (2,853,442 (1,689,266 (1,226,993 Receivables from brokers, dealers
and other (1,499,251 (1,046,915 919,629 Financial instruments owned, at
value (14,815,313 3,340,614 (807,663 Other assets and deferred amounts (154,136 (359,115 (179,958 Increase (decrease) in operating liabilities: Securities sold under agreements
to repurchase 17,947,110 (5,463,657 4,622,196 Securities loaned 4,219,573 (365,230 4,962,643 Payables to customers 1,571,148 1,806,838 1,044,223 Payables to brokers, dealers and
other 1,250,601 109,674 (817,232 Financial instruments sold not
yet purchased, at value 4,004,579 (1,516,951 1,014,230 Accounts payable and accrued expenses 1,070,261 163,282 397,876 Other liabilities 522,233 245,320 310,230 Net cash used in operating activities (11,715,619 (2,417,870 (5,318,929 See accompanying notes to consolidated financial statements. Donaldson, Lufkin & Jenrette, Inc. and Subsidiaries 1999 1998 1997 Cash flows from investing activities: Net (payments for) proceeds from: Purchases of long-term corporate development investments (987,993 (347,033 (194,777 Sales of long-term corporate development investments 100,544 197,990 117,930 Office facilities (226,817 (145,742 (162,568 Other assets (272,547 (39,217 23,375 Net cash used in investing activities (1,386,813 (334,002 (216,040 Cash flows from financing activities: Net proceeds from (payments for): Short-term
financings 12,066,563 1,728,652 4,854,182 Issuance of: DLJdirect
Common Stock 346,591 — — Senior
notes 649,637 893,552 — Senior
secured floating rate notes (154,308 450,000 — Subordinated
revolving credit agreement — (325,000 118,500 Global
floating rate notes — 448 347,760 Convertible
debentures — — 18,779 Medium-term
notes 1,183,212 349,337 359,646 Other
long-term debt (98 (14,493 (13,753 Dividends (52,592 (51,310 (39,886 Sale of common stock to AXA Financial
— 300,000 — Issuance of Series B preferred
stock — 175,000 — Exercise of stock options 34,717 21,775 4,074 Net cash provided by financing activities 14,073,722 3,527,961 5,649,302 Increase in cash and cash equivalents 971,290 776,089 114,333 Cash and cash equivalents at beginning of period 1,049,253 273,164 158,831 Cash and cash equivalents at end of period 2,020,543 1,049,253 273,164 See accompanying notes to consolidated financial statements. Donaldson, Lufkin & Jenrette, Inc. and Subsidiaries December 31, 1999 1. Summary of Significant Accounting Policies The consolidated financial statements include Donaldson, Lufkin
& Jenrette, Inc. and its subsidiaries (the "Company"). All significant intercompany
balances and transactions have been eliminated. The Company is a majority-owned
subsidiary of AXA Financial, Inc. ("AXA Financial") and its subsidiaries (formerly
the Equitable Companies Incorporated). The Company's separate financial statements
reflect AXA Financial's cost basis, established in 1985 when it acquired the
Company. The Company is a leading, integrated investment and merchant bank
serving institutional, corporate, government and individual clients. The Company's
businesses include securities underwriting; sales and trading; investment and
merchant banking; financial advisory services; investment research; venture
capital; correspondent brokerage services; online, interactive brokerage services;
and asset management. To prepare 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. Substantially all of the Company's financial assets and liabilities,
as well as financial instruments with off-balance sheet risk, are carried at
market or fair values or are carried at amounts that approximate fair value
because of their short-term nature. Fair value is estimated at a specific point
in time, based on relevant market information or the value of the underlying
financial instrument. These estimates do not generally reflect any premium or
discount that could result from offering for sale at one time the Company's
entire holdings of a particular financial instrument. Cash equivalents include all demand deposits held in banks and
certain highly liquid investments with maturities of 90 days or less, other
than those held for sale in the ordinary course of business. Securities sold under agreements to repurchase ("repurchase agreements")
and securities purchased under agreements to resell ("resale agreements") are
treated as financing arrangements and are carried at contract amounts that reflect
the amounts at which the securities will be subsequently repurchased or resold.
Interest on such contract amounts is accrued and is included in the accompanying
consolidated statements of financial condition in receivables from and payables
to brokers, dealers and other. Certain repurchase and resale agreements are
considered operating activities for the purposes of the consolidated statements
of cash flows. The Company takes possession of the assets purchased under resale
agreements and obtains additional collateral when the market value falls below
the contract value. Repurchase and resale agreements are presented net in the
consolidated statements of financial condition, if they are with the same counterparty,
have the same maturity date, settle through the Federal Reserve System, and
are subject to master netting agreements. Securities borrowed and securities loaned are financing arrangements
that are recorded at the amount of cash collateral advanced or received. For
securities borrowed, the Company deposits cash, letters of credit or other collateral
with the lender. For securities loaned, the Company receives collateral in cash
or other collateral that exceeds the market value of securities loaned. The
Company monitors the market value of securities borrowed and loaned daily and
obtains or refunds additional collateral, as necessary. Receivables from and payables to customers include amounts due
on cash and margin transactions. For receivables, securities owned by customers
are held as collateral. Such collateral is not reflected in the consolidated
financial statements. U.S. government and agency securities, mortgage-backed securities,
options, forward and futures transactions and certain other debt and equity
securities are recorded in the consolidated financial statements on a trade
date basis. All other securities are recorded on a settlement date basis and,
if significant, adjustments are made to a trade date basis. Other than long-term corporate development investments and certain
non-investment grade holdings, which are recorded at estimated fair value, financial
instruments owned are carried at market value. Changes in unrealized appreciation
(depreciation) arising from fluctuations in market or fair value or upon realization
of security positions are reflected in principal transactions-net, trading revenues,
in the consolidated statements of income. To the extent that the Company has surrendered control, transfers
of financial assets are accounted for as sales. 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 be otherwise restricted as to resale
under the Securities Act of 1933; therefore, these investments are carried at
estimated fair value as determined by the Finance Committee of the Board of
Directors. The cost of these investments was $1.4 billion at year-end 1999 and
$472.3 million at year-end 1998. In 1999, net unrealized appreciation of long-term
corporate development investments increased $71.5 million. In 1998 and 1997,
the increase in net unrealized appreciation amounted to $8.9 million and $34.5
million, respectively. Changes in net unrealized appreciation arising from changes
in fair value or upon realization are reflected in principal transactions-net,
investment revenues in the consolidated statements of income. Office facilities are carried at cost and are depreciated on a
straight-line basis over the estimated useful life of the related assets, ranging
from three to eight years. Leasehold improvements are amortized over the lesser
of the useful life of the improvement or term of the lease. Exchange memberships
owned by the Company are included in other assets and are carried at cost. Changes in unrealized gains and losses, as well as realized gains
and losses on all derivative instruments (options, forward and futures contracts
and swaps), are included in principal transactions-net, trading revenues, in
the consolidated statements of income. Related offsetting amounts are included
in receivables from or payables to brokers, dealers and other in the consolidated
statements of financial condition. Fair value of certain written options includes
any deferred unamortized premiums. Such premiums are recognized over the life
of the option contracts on a straight-line basis or are recognized through the
change in the fair value of the option in principal transactions-net, trading
revenues in the consolidated statements of income. Swap transactions entered
into for non-trading purposes to modify the interest rate exposure associated
with certain long-term debt issued by the Company are accounted for on an accrual
basis. Under the accrual basis, the net amount to be received or paid is accrued
as part of interest expense in the consolidated statements of income. Cash flows
from derivative instruments are included as operating activities in the consolidated
statements of cash flows. Assets and liabilities of foreign subsidiaries denominated in
foreign currencies are translated at exchange rates prevailing at the date of
the consolidated statements of financial condition. Revenues and expenses are
translated at average exchange rates during the period. Gains and losses from
translating foreign currency financial statements into U.S. dollars are included
as a separate component of stockholders' equity. Gains and losses from foreign
currency transactions are included in the consolidated statements of income. Effective January 1, 1997, AXA Financial's ownership for tax purposes
declined to less than 80%; therefore, the Company files its own U.S. consolidated
Federal income tax return. Liabilities related to postretirement and postemployment benefits
have been provided for and the related costs are not significant. The Company accounts for stock-based compensation related to stock
options in accordance with APB Opinion No. 25, "Accounting for Stock Issued
to Employees," and accordingly, does not recognize any compensation cost associated
with such plans in the consolidated financial statements. In accordance with
SFAS No. 123, "Accounting for Stock-Based Compensation," the Company provides
pro forma net income and pro forma earnings per share disclosures for employee
stock option grants as if the fair-value-based method had been applied. Basic and diluted earnings per common share amounts for both classes
of the Company's stock are calculated by dividing earnings applicable to common
shares (net income less preferred dividends) by the weighted average common
shares outstanding. Basic earnings per share excludes the dilutive effects of
stock options, non-vested restricted stock units and convertible debt. Diluted
earnings per share reflects all potentially dilutive securities. SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," requires all derivatives to be recognized in the consolidated statements
of financial condition at fair value. SFAS No. 133 as amended, is effective
for fiscal years beginning after June 15, 2000, and should be applied prospectively.
Since most of the Company's derivatives are currently carried at fair value,
the adoption of this statement is not expected to have a material effect on
the Company's consolidated financial statements. The Company has invested heavily in technology in order to provide
quality products and services to clients and to expand its business. Historically,
technology expenses were included in several income statement lines. To reflect
the increased importance of technology spending, all non-compensation technology
costs are included in the new line item, Communications and Technology. This
change affects two other existing expense lines: Occupancy and Related Costs,
formerly Occupancy and Equipment, and Other Operating Expenses. Communications
and Technology will now include systems consulting fees, previously included
in Other Operating Expenses, and communications equipment, previously included
in Occupancy and Equipment. Prior periods have been restated to show the new
classifications. Certain other reclassifications have been made to prior year
consolidated financial statements to conform to the 1999 presentation. 2. Issuance of DLJdirect Common Stock DLJdirect Common Stock tracks the separate performance
of the Company's existing 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 include a 100% interest
in DLJdirect for periods prior to the closing date and 82.1% for subsequent
periods. Operating results reported by the Company prior to the closing date
were not affected by the issuance of the Tracking Stock. 3. Common Stock Split In February 1998, the Board of Directors declared a two-for-one
stock split (the "stock split") of the Company's common stock, subject to stockholder
approval to increase the number of authorized common shares. In April 1998,
stockholders approved an amendment to the Company's Certificate of Incorporation,
which increased the number of total authorized shares of common stock to 300
million and the number of total authorized shares of preferred stock to 50 million.
The stock split was effected in the form of a 100% stock dividend to stockholders
of record on April 27, 1998, and was paid on May 11, 1998. The par value of
the common stock remained at $0.10 per share. To preserve the value of the post-split
shares, an adjustment was made from paid-in capital to common stock. In the
accompanying consolidated financial statements all common share, per common
share, restricted stock unit and option data have been restated for the effect
of the stock split. 4. Related Party Transactions In the normal course of business, the Company provides brokerage
services including clearance, investment banking and related activities for
AXA Financial and certain of its affiliates. The amounts related to such activities
are not significant. In connection with the Company's merchant banking and financial
advisory businesses, the Company had extended $11.4 million as its portion of
short-term financings made with AXA Financial. Such amounts are included in
long-term corporate development investments in the consolidated statement of
financial condition. For the years ended December 31, 1999, 1998 and 1997, dividends
on common stock paid or accrued to AXA Financial were $22.2 million, $21.7 million
and $21.3 million, respectively. 5. Cash and Securities Segregated Under Federal and Other Regulations Securities with a market value of $122.0 million and $883.0 million
at December 31, 1999 and 1998, respectively, were segregated in special reserve
bank accounts to benefit customers in accordance with regulations of the Securities
and Exchange Commission and the Commodities Futures Trading Commission. 6. 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 December 31, 1999 and
1998, there were no borrowings secured by Company-owned securities. Short-term borrowings and repurchase agreements: The Company has established a $2.0 billion commercial paper program.
Obligations issued under this program (the "Notes") are exempt from registration
under the Securities Act of 1933, as amended under Section 4(2) (the "Securities
Act"). At December 31, 1999, $1.2 billion of notes were outstanding under this
program. Long-term borrowings: For the years ended December 31, 1999, 1998 and 1997, interest
paid on all borrowings and financing arrangements was $4.6 billion, $4.6 billion
and $3.9 billion, respectively. Interest paid on repurchase agreements was $3.1
billion, $3.0 billion and $2.5 billion, for the years ended December 31, 1999,
1998 and 1997, respectively. At December 31, 1999, the Company had entered into interest rate
swaps on $3.3 billion of its senior and medium-term notes. Scheduled maturities of long-term borrowings are as follows: In connection with its 1999 and 1998 financings, the Company: 1999 Established a $2.0 billion shelf of debt securities or preferred
stock in March. Issued $650.0 million 5.875% Senior Notes due 2002 and $970.2
million of Medium-Term Notes with interest rates ranging from 4.995% to 7.42%
that mature at various dates through 2008 from this $2.0 billion shelf. Issued $315.0 million of Medium-Term Notes with interest rates
ranging from 5.0% to 7.07% that mature at various dates through 2004 from the
$1.0 billion shelf established in 1997. Purchased $159.0 million of its Senior Secured Floating Rate Notes. During 1999, the Company amended its $2.8 billion revolving credit
facility to reduce the aggregate commitment of banks thereunder to $2.5 billion,
of which $1.9 billion may be unsecured. At December 31, 1999, no borrowings
were outstanding under this facility. 1998 Issued an initial $175.0 million Fixed/Adjustable Rate Cumulative
Preferred Stock, Series B, from the $300.0 million shelf established in 1997. Issued $650.0 million of 6.5% Senior Notes that mature in 2008
and $350.0 million Medium-Term Notes with interest ranging from 5.402% to 6.28%
that mature at various dates through 2003. Issued $250.0 million of 6% Senior Notes that mature in 2001 from
the $1.0 billion shelf established in 1997. Issued Senior Secured and Senior Subordinated Secured Floating
Rate Notes for $200.0 million and $250.0 million, due March 15, 2005 and September
15, 2005, respectively. These notes are collateralized by a portfolio of investments,
primarily senior bank debt valued at $441.0 million. Senior bank debt consists
of interests in senior corporate debt, including term loans, revolving loans
and other corporate debt. Amended the $2.0 billion revolving credit facility to increase
the aggregate commitment of banks thereunder to $2.8 billion, of which $1.7
billion may be unsecured. At year-end 1998, no borrowings were outstanding under
this agreement. Repaid the $325.0 million senior subordinated revolving credit
agreement and terminated the related credit facility. 7. Income Taxes Income taxes included in the consolidated statements of income
include the following: Current:
The following summarizes the difference between the "expected"
tax provision, which is computed by applying the statutory tax rate to income
before provision for income taxes, and the effective provision for income taxes,
which is computed by using the effective tax rate: Non-taxable income and expense items
(19,633
(2.1
(3,875
(0.6
(8,598
(1.3
State and local taxes, net of related 38,708
4.1
23,400
3.9
30,063
4.5
Provision for income taxes
352,800
37.0
229,700
38.3
252,850
38.2
Deferred tax assets and deferred tax liabilities are generated
by the following temporary differences:
2,429
1,633
26,740
45,690
662,638
523,476
6,384
8,892
(50,478
(45,858
(26,313
(42,243
(11
(1,947
Net deferred tax asset
621,389
489,643
Management has determined that taxable income from carryback years
and anticipated future reversals of existing taxable temporary differences are
sufficient to offset the tax benefit of deductible temporary differences. As
a result, at year-end 1999 and 1998, valuation allowances have not been recorded
against deferred tax assets. Although realization is not assured, management
believes it is more likely than not that all of the deferred tax assets will
be realized. However, if estimates of future taxable income during the carryforward
period are reduced, the amount of the deferred tax assets considered realizable
could also be reduced. In 1999, 1998 and 1997, respectively, the Company paid
$273.8 million, $101.3 million and $293.8 million in Federal income taxes including
$4.1 million in 1998 and $18.6 million in 1997 of Federal income tax equivalents
paid to AXA Financial. 8. Net Capital The Company's principal wholly owned subsidiary, 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,
the NYSE and the Commodities Futures Trading Commission. As such, it is subject
to the NYSE's net capital rule, which conforms to the Uniform Net Capital Rule
under 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 December 31, 1999, DLJSC's net capital of approximately $1.7 billion was
17.6 percent of aggregate debit balances and in excess of the minimum requirement
by approximately $1.5 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 December 31, 1999 and 1998, the Company and its broker-dealer subsidiaries
complied with all applicable regulatory capital adequacy requirements. 9. 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 swaps to modify the characteristics of periodic interest payments associated
with some of its long-term debt obligations. Options The majority of the Company's options are written options. The
Company writes option contracts specifically designed to meet customers' needs.
Most of the options do not expose the Company to credit risk since the Company,
not its counterparty, is obligated to perform. At the beginning of the contract
period, the Company receives a cash premium. During the contract period, the
Company bears the risk of unfavorable changes in the value of the financial
instruments underlying the options ("market risk"). To cover this market risk,
the Company purchases or sells cash or derivative financial instruments on a
proprietary basis. Such purchases and sales may include debt and equity securities,
forward and futures contracts and options. The counterparties to these purchases
and sales are reviewed to determine whether they are creditworthy. Future cash
requirements for options written equal the fair value of the options. The Company also purchases options for trading purposes. With
purchased options, the Company gets the right, for a fee, to buy or sell the
underlying instrument at a fixed price on or before a specified date. The underlying
instruments for these options include mortgage-backed securities, equities,
interest rates and foreign currencies. All options are reported at fair value. Forwards and Futures The Company enters into forward purchases and sales contracts
for mortgage-backed securities and foreign currencies. In addition, the Company
enters into futures contracts on equity-based indices, foreign currencies and
other financial instruments as well as options on futures contracts. Forward
and futures contracts are treated as off-balance sheet items. Market risk is
the price movement on the notional value of the contracts. For forward contracts, cash is generally not required at inception;
cash equal to the contract value is required at settlement. For futures contracts,
the original margin is required in cash at inception; cash equal to the change
in market value is required daily. Since forward contracts are subject to the financial reliability
of the counterparty, the Company is exposed to credit risk. To monitor this
credit risk, the Company limits transactions with specific counterparties, reviews
credit limits and adheres to internally established credit extension policies.
For futures contracts and options on futures contracts, the change in the market
value is settled with a clearing broker in cash each day. As a result, the credit
risk with the clearing broker is limited to the net positive change in the market
value for a single day. Swaps The Company's swap agreements consist primarily of interest rate
and equity swaps. Equity swaps are contractual agreements to receive the appreciation
or depreciation in value based on a specific strike price on an equity instrument
in exchange for paying another rate, which is usually based on index or interest
rate movements. Interest rate swaps are contractual agreements to exchange interest
rate payments based on agreed notional amounts and maturity. Swaps are reported
at fair value. 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 December 31, 1999 and 1998 are as follows: Options written
15.1
5.8
Options purchased
7.4
3.1
Forward contracts purchased
35.6
41.3
Forward contracts sold
41.1
39.8
Futures contracts purchased
2.9
1.2
Futures contracts sold
4.3
1.6
Swaps
24.5
8.4
The fair values of derivatives outstanding at December 31, 1999
and 1998 are as follows: Options
519.9
1,002.6
114.5
397.1
Forward contracts
327.1
247.3
262.9
269.3
Futures contracts
3.5
9.8
4.0
1.0
Swaps
256.9
240.2
62.1
84.7
The average fair values of derivatives for 1999 and 1998 are as
follows: The majority of the Company's derivatives are short-term in duration.
At December 31, 1999, the notional or contract amounts of derivatives expiring
in future years based on contractual expiration are as follows: Options written
8.7
4.8
0.5
1.1
15.1
Options purchased
3.4
2.8
0.3
0.9
7.4
Forward contracts purchased
35.6
—
—
—
35.6
Forward contracts sold
40.9
—
0.2
—
41.1
Futures contracts purchased
2.2
0.7
—
—
2.9
Futures contracts sold
3.8
0.5
—
—
4.3
Swaps
9.0
4.5
3.5
7.5
24.5
Total
103.6
13.3
4.5
9.5
130.9
Percent of total
79.1
10.2
3.4
7.3
100.0
Disclosures for All Non-trading Derivatives The Company also enters into interest rate swaps to modify the
characteristics of periodic interest payments associated with some of its long-term
debt obligations. At December 31, 1999 and 1998, the notional amount of these
interest rate swaps was $3.3 billion and $0.8 billion, respectively. 10. Financial Instruments With Off-Balance Sheet Risk In the normal course of business, the Company's customer, trading
and correspondent clearance activities include executing, settling and financing
various securities and financial instrument transactions. To execute these transactions,
the Company purchases and sells (including "short sales") securities, writes
options, and purchases and sells forward contracts for mortgage-backed securities
and foreign currencies and financial futures contracts. If the customer or counterparty
to the transaction is unable to fulfill its contractual obligations, and margin
requirements are not sufficient to cover losses, the Company may be exposed
to off-balance sheet risk. In these situations, the Company may be required
to purchase or sell financial instruments at prevailing market prices, which
may not fully cover the obligations of its customers or counterparties. This
risk is limited by requiring customers and counterparties to maintain margin
collateral that complies with regulatory and internal guidelines. Additionally,
with respect to the Company's correspondent clearance activities, introducing
correspondent brokers are required to guarantee the performance of their customers
to meet contractual obligations. As part of the Company's financing and securities settlement activities,
the Company uses securities as collateral to support various secured financing
sources. If the counterparty does not meet its contracted obligation to return
securities used as collateral, the Company may be exposed to the risk of reacquiring
the securities at prevailing market prices to satisfy its obligations. The Company
controls this risk by monitoring the market value of securities pledged each
day and by requiring collateral levels to be adjusted in the event of excess
market exposure. As of December 31, 1999, cash of $4.6 billion and pledged securities
with a market value of approximately $2.3 billion are used as collateral for
securities borrowed with a market value of approximately $6.6 billion. In accordance
with industry practice, these securities borrowed and pledged are not reflected
in the consolidated statements of financial condition. The Company enters into forward contracts under which securities
are delivered or received in the future at a specified price or yield. If counterparties
are unable to perform under the terms of the contracts or if the value of securities
and interest rates changes, the Company is exposed to risk. Such risk is controlled
by monitoring the market value of the securities contracted for each day and
by reviewing the creditworthiness of the counterparties. The settlement of these
transactions is not expected to have a material adverse effect on the Company's
consolidated financial statements. Risks associated with letters of credit, guarantees and underwriting
commitments are not significant. 11. Concentrations of Credit Risk As a securities broker and dealer, the Company is engaged in various
securities trading and brokerage activities servicing a diverse group of domestic
and foreign corporations, governments, and institutional and individual investors.
A substantial portion of the Company's transactions is executed with and on
behalf of institutional investors including other brokers and dealers, mortgage
brokers, commercial banks, U.S. government agencies, mutual funds and other
financial institutions. These transactions are generally collateralized. Credit risk is the potential for loss resulting from the default
by a counterparty of its obligations. Exposure to credit risk is generated by
securities and currency settlements, contracting derivative and forward transactions
with customers and dealers, and the holding in inventory of bonds and/or loans.
The Company uses various means to manage its credit risk. The credit-worthiness
of all counterparties is analyzed at the outset of a credit relationship with
the Company. These counterparties are subsequently reviewed on a periodic basis.
The Company sets a maximum exposure limit for each counterparty, as well as
for groups or classes of counterparties. Furthermore, the Company enters into
master netting agreements when feasible and demands collateral from certain
counterparties or for certain types of credit transactions. The Company's customer securities activities are transacted either
in cash or on a margin basis, in which the Company extends credit to the customer.
The Company seeks to control the risks associated with its customer activities
by requiring customers to maintain margin collateral to comply with various
regulatory and internal guidelines. Each day, the Company monitors required
margin levels and requires customers to deposit additional collateral, or reduce
positions, when necessary. 12. Trust Securities In 1996, the Company and its wholly owned trust, DLJ Capital Trust
I (the "Trust"), completed an offering of $200.0 million of the Trust's 8.42%
mandatorily redeemable trust securities. The Trust exists for the sole purpose
of issuing trust securities and common securities and investing the proceeds
in an equivalent amount of Junior Subordinated Debentures of the Company. At
December 31, 1999 and 1998, the only assets of the Trust were $200.0 million
of 8.42% Junior Subordinated Debentures of the Company due 2046. The Junior
Subordinated Debentures are redeemable by the Company, in whole or in part,
on or after August 31, 2001. The Trust must also redeem its trust securities
having an aggregate liquidation amount equal to the aggregate principal amount
of Junior Subordinated Debentures being redeemed. To the extent the Company has made principal and interest payments
on the Junior Subordinated Debentures, the Company guarantees payment to the
holders of the trust securities issued by the Trust. The Company has issued
a full and unconditional guarantee of the Trust's obligations under the trust
securities of the Trust. 13. Stockholders' Equity On May 28, 1999, the Company issued, in an initial public offering,
18.4 million shares of Tracking Stock. The shares of Tracking Stock have no
voting rights, except in certain limited circumstances. Net proceeds from the
offering amounted to $346.6 million. On May 20, 1999 the Company amended its certificate of incorporation
to authorize the issuance of $1.5 billion shares of common stock in multiple
series. In July 1998, the Emerging Issues Task Force ("EITF") reached
a consensus on EITF Issue 97-14, "Accounting for Deferred Compensation Arrangements
Where Amounts Earned are Held in a Rabbi Trust and Invested" ("EITF 97-14").
Under EITF 97-14, assets of the trust should be consolidated with those of the
employer and the value of the employer's stock held in the rabbi trust should
be classified in stockholders' equity in a manner similar to Treasury Stock.
The Company adopted EITF 97-14 as of September 30, 1998. In 1999 and 1998, respectively,
approximately 1.0 million and 4.4 million restricted stock units ("RSU") vested
and were converted into common stock from the Company's authorized and unissued
shares. Approximately 2.1 million of these shares were deposited in the rabbi
trust pursuant to the Executive Deferred Compensation Plan, which was effective
January 1, 1997. In October 1998, approximately 1.8 million of such shares were
distributed by the rabbi trust to employees. At December 31, 1999, approximately
1.3 million shares of the Company's stock are included in the rabbi trust. The
shares and the corresponding liability to employees are shown as components
of stockholders' equity in the Company's consolidated statements of financial
condition. In July 1998, the Company sold an aggregate of five million shares
of newly issued common stock to its parent companies, AXA Financial and AXA
S.A., for $300.0 million in a transaction exempt from the registration requirements
of the Securities Act. In 1997, the Company exercised its option to redeem all of the
outstanding convertible debentures issued in connection with the acquisition
of a London-based financial advisory firm. As a result, the holders of such
debentures elected to convert such debentures into an aggregate of 1,370,408
shares of common stock of the Company. The Company has issued 4.0 million shares of Fixed/Adjustable
Rate Cumulative Preferred Stock, Series A, with a liquidation preference of
$50.00 per share ($200.0 million aggregate liquidation value). Dividends on
the preferred stock are cumulative and payable quarterly at 5.94% per annum
through November 30, 2001. Thereafter, the dividend rate will be adjusted, based
on various indices, to be at least 6.44% but less than 12.44%. The preferred
stock is redeemable, in whole or in part, at the option of the Company, on or
after November 30, 2001. At December 31, 1999 and 1998, 4.0 million shares of
such preferred stock were authorized, issued and outstanding. The Company has also issued 3.5 million shares of Fixed/Adjustable
Rate Cumulative Preferred Stock, Series B, with a liquidation preference of
$50.00 per share ($175.0 million aggregate liquidation value). Dividends on
the preferred stock are cumulative and payable quarterly at 5.30% per annum
through January 2003, subject to adjustment in later years. The preferred stock
is redeemable, in whole or in part, at the option of the Company, on or after
January 15, 2003. 14. 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. Diluted earnings per common share include
the dilutive effects of the Restricted Stock Unit Plan and the dilutive effect
of options and convertible debt calculated under the treasury stock and "if-converted"
method, respectively. In 1999, approximately 1.0 million RSUs vested and were
converted into the Company's common stock. This amount is included in the calculation
of earnings per common share. All earnings per share have been restated for
the stock split. For DLJdirect, basic earnings per share is calculated by
dividing earnings applicable to common shares for the period the Tracking Stock
was outstanding (May 28, 1999 to December 31, 1999) by the weighted average
actual common shares outstanding. Diluted earnings per common share include
the dilutive effect of options calculated under the treasury stock method. DLJ's
retained interest excludes the effect of the 10 million shares of common stock
that have been reserved for issuance under the DLJdirect Incentive Compensation
Plan. Earnings per share for DLJdirect for periods prior to the closing
date are not presented as such amounts are not meaningful. For the period the
Tracking Stock was outstanding, exercisable stock options were excluded from
the computation of diluted earnings per share since the effect of including
them was antidilutive. The numerators and denominators of the basic and diluted earnings
per common share computations include the following items: Basic Earnings applicable to
Common Shares
580,423
125,433
349,490
119,260
396,106
110,318
Effect of Dilutive Securities:
Restricted stock units
—
1,029
—
2,348
—
7,046
Stock options
—
12,406
—
10,372
—
7,660
Convertible debt
—
—
—
—
308
474
Diluted Earnings applicable to
Common Shares
580,423
138,868
349,490
131,980
396,414
125,498
DLJdirect Common Stock
Earnings (loss) applicable
Basic and Diluted
(903
18,400
15. Employee Compensation and Benefit Plans 1996 Incentive Compensation Plan Awards under the 1996 Incentive Compensation Plan (the "Incentive
Plan") are determined by the Compensation and Management Committee of the Board
of Directors (the "Compensation Committee"). The Incentive Plan creates short-term
and long-term award pools for key employees of the Company. Short-term award
pools are for a performance period up to two years and are based on 10% of pre-tax
earnings, as defined. Long-term award pools are for a performance period of
three to ten years and are based on a percentage of pre-tax earnings that varies
with the Company's average return on common equity during the performance period.
Participants may receive awards in cash, options, shares or RSUs; however, stock-based
payments are limited to a total of 17.6 million shares. Under certain circumstances,
participants may defer the receipt of part or all of any award. Each unit granted
under the Plan is equal to a percentage interest in the long-term award pool.
The units vest at the rate of 33 1/3% per year during the performance period.
During 1997, the Compensation Committee authorized a long-term award pool for
the performance period from January 1, 1997 to December 31, 1999. For the years
ended December 31, 1999, 1998 and 1997, the amount charged to expense was $266.4
million, $165.5 million and $185.5 million, respectively. 1995 Restricted Stock Unit Plan In 1995, the Company adopted the 1995 Restricted Stock Unit Plan
(the "Plan"). Each RSU granted under the Plan represents the right to receive
a share of common stock under certain circumstances. These RSUs may be forfeited
in certain circumstances and vest annually in specified proportions from February
1997 through February 2000. RSUs that are forfeited will become available for
subsequent grants. Under the Plan, 10,358,294 units were granted. As of December
31, 1999, 214,165 RSUs were forfeited and 9,044,174 RSUs vested and were converted
to common stock from the Company's authorized and unissued shares. Stock Option Plans In 1995, the Company adopted the 1995 and 1996 Stock Option Plans.
Under the 1995 Stock Option Plan, options were granted to certain employees
to purchase an aggregate of 18,337,356 shares of common stock (the maximum allowable
under the 1995 Stock Option Plan) with an exercise price of $13.50. The options
may be forfeited in certain circumstances, vested in equal installments in February
1997 and February 1998, and are exercisable for up to ten years from the date
of the grant. Options that are forfeited under the 1995 Stock Option Plan will
become available for subsequent grant under the 1996 Stock Option Plan. Under the 1996 Stock Option Plan (the "1996 Plan") options are
available to purchase a maximum of 17,579,702 shares of common stock, exclusive
of forfeitures from the 1995 Stock Option Plan. The options are exercisable
for up to ten years from the date of grant, may be forfeited in certain circumstances,
and vest in four equal annual installments starting one year after the date
of grant. Options that are forfeited under the 1996 Plan become available for
subsequent grant under that plan. In 1996, the Company adopted the Non-Employee Directors Stock
Plan (the "Stock Plan") to provide equity compensation to the Company's non-employee
directors. Under the Stock Plan, stock options are granted at a price equal
to the fair value of the stock at the date of grant. The options are exercisable
for up to 10 years from the date of grant and vest in four equal annual installments
starting one year from the date of grant. Under the Stock Plan, 200,000 shares
are issuable. Any shares issued under the Stock Plan will reduce the number
of shares issuable under the 1996 Plan. In May 1999, with the issuance of the Tracking Stock, the Company
adopted the 1999 DLJdirect Incentive Compensation Plan (the "DLJdirect
Incentive Plan"). Awards under the DLJdirect Incentive Plan are determined
by the Compensation Committee. Under this plan, stock options on DLJdirect
stock are granted at a price equal to the fair value of the stock at the date
of grant. The options are exercisable for up to 10 years from the date of grant
and vest in four equal annual installments starting one year from the date of
grant. Under the DLJdirect Incentive Plan, 10,000,000 shares are issuable. The following summarizes the stock option activity for all plans: DLJ Common Stock:
Outstanding at December 31, 1996
22,260,664
$14.03
Granted
6,431,668
$30.54
Forfeited
(133,866
$16.01
Exercised
(296,370
$13.76
Outstanding at December 31, 1997
28,262,096
$17.78
Granted
1,508,489
$38.59
Forfeited
(60,000
$17.31
Exercised
(1,458,366
$14.91
Outstanding at December 31, 1998
28,252,219
$19.04
Granted
4,788,175
$45.23
Forfeited
(78,500
$34.61
Exercised
(2,196,153
$15.85
Outstanding at December 31, 1999
30,765,741
$23.30
DLJdirect Common Stock:
Outstanding at December 31, 1998
—
$ —
Granted
6,300,050
$19.76
Forfeited
(67,000
$20.00
Exercised
—
—
Outstanding at December 31, 1999
6,233,050
$19.76
The following summarizes information related to stock options
outstanding at December 31, 1999: DLJ:
$13.50 - 25.99
20,238,481
$14.61
8.4
$26.00 - 38.99
4,920,746
33.99
7.8
$39.00 - 52.99
4,806,714
43.28
9.0
$53.00 - 76.88
799,800
57.09
9.7
Total
30,765,741
$23.30
8.4
At December 31, 1999, 20,568,365 options on DLJ Common Stock were
exercisable at prices ranging from $13.50 to $52.99. The weighted average exercise
price of such options was $16.62. At December 31, 1998, there were 21,378,671
options on DLJ Common Stock exercisable at exercise prices ranging from $13.50
to $38.00. The weighted average exercise price of these options was $15.05. DLJdirect:
$13.56 - 14.13
256,250
$14.10
9.8
$14.14 - 20.00
5,976,800
20.00
9.4
Total
6,233,050
$19.76
9.4
At December 31, 1999, no options on DLJdirect Common Stock
were exercisable. The Company accounts for its stock option plans in accordance
with APB Opinion No. 25 and, accordingly, does not recognize any compensation
cost associated with such plans in the consolidated financial statements. If
the Company had calculated compensation cost under SFAS No. 123 (based on the
fair value of options at the grant date), the Company would have reported the
following net earnings applicable to common shares and earnings per common share: Net earnings applicable to common shares
As reported
580,423
349,490
396,106
(903
Pro forma
546,083
328,390
375,856
(6,345
Basic earnings per common share
As reported
4.63
2.93
3.59
(0.05
Pro forma
4.35
2.75
3.41
(0.34
Diluted earnings per common share
As reported
4.18
2.65
3.16
(0.05
Pro forma
3.93
2.49
3.00
(0.34
For the purpose of computing the pro forma amounts indicated above,
the fair value of each option on the date of grant is estimated using the Black-Scholes
option-pricing model. The weighted average assumptions used in the model are
as follows: Expected dividend yield
0.56
0.69
0.86
0.0
Expected stock volatility
36
40
33
45
Risk-free interest rates
5.06
5.53
5.96
5.69
Expected life (in years)
5
5
5
5
Fair value per share of options
17.19
16.27
10.81
9.30
Other Plans The Company has a defined contribution employee benefit plan covering
the Company's domestic full-time and part-time employees. Company contributions
to this plan are determined by the Board of Directors of the Company annually
and were $10.4 million, $9.6 million and $9.6 million for 1999, 1998 and 1997,
respectively. Certain key employees of the Company also participate in the following
deferred compensation arrangements: equity investments in selected merchant
banking activities of the Company funded by deferred compensation and leverage
provided by the Company; non-qualified deferred compensation plans that include
managed investments; and other non-qualified plans that are funded by the Company
with insurance contracts. The plans' investments, including the leverage factor,
and the amounts accrued by the Company under the plans are both included in
the consolidated statements of financial condition. These compensation-related
assets amounted to $937.0 million and $703.6 million, respectively, at December
31, 1999 and 1998. Related liabilities for deferred compensation amounted to
$492.2 million and $434.1 million, respectively, at December 31, 1999 and 1998. 16. Leases, Commitments and Contingent Liabilities The Company leases office space and equipment under cancelable
and non-cancelable lease agreements that expire on various dates through 2021.
Rent expense for office space and equipment, with lease terms in excess of one
year was $157.7 million, $115.6 million and $89.9 million, for the years ended
December 31, 1999, 1998 and 1997, respectively. Sublease revenue was $0.1 million
for each of the years ended December 31, 1999, 1998 and 1997, respectively. At December 31, 1999, non-cancelable leases in excess of one year,
excluding sublease revenue, escalation and renewal options had the following
minimum lease commitments: Period
(In thousands)
2000
$ 133,662
2001
133,778
2002
127,832
2003
117,193
2004
113,773
2005 - 2021
1,508,547
Total
$2,134,785
In the normal course of business, the Company enters into underwriting
commitments. Management of the Company believes that transactions relating to
such underwriting commitments that were open at December 31, 1999, will have
no material effect on the consolidated financial statements. The Company has
issued letters of credit for which it is contingently liable for $367.5 million
and $657.5 million at December 31, 1999 and 1998, respectively. The Company has outstanding commitments, expiring on March 16,
2000, to finance $150.0 million to third parties to be secured by mortgage loans
on real estate properties. At December 31, 1999, unfunded commitments outstanding
under this facility amounted to $62.5 million. In addition, the Company enters
into commitments to extend credit to non-investment grade borrowers in connection
with the origination and syndication of senior bank debt. At December 31, 1999,
unfunded senior bank loan commitments outstanding were $475.3 million. At December 31, 1999, the Company has commitments of $699.7 million
to invest on a side-by-side basis with merchant banking partnerships. 17. Industry Segment and Geographic Data In 1998 and prior years the Company operated and managed its businesses
and presented segment information through three principal operating segments:
Banking, Capital Markets and Financial Services. Effective January 1, 1999,
the Company changed its structure to operate and manage its businesses through
four operating segments: Banking, Equities, Fixed Income and Financial Services. Such segments are managed separately based on types of products
and services offered and their related client bases. The Company evaluates the
performance of its segments based primarily on income before income taxes. For internal management reporting, the Company may allocate certain
revenues to its operating segments in excess of the amount realized on the related
transactions. Such excess amounts are eliminated in consolidation. The Company
also allocates to segments a pro rata share of amounts for leased facilities,
equipment and certain general overhead expenses based upon specified amounts,
usage criteria or agreed rates, and allocates interest expense based upon capital
utilization at rates that approximate market. All other accounting policies
of the segments are the same as those described in the summary of significant
accounting policies. The following is a summary of the Company's segment data: December 31, 1999:
Net revenues from 1,960.8
750.6
1,025.0
1,387.3
(152.7
4,971.0
Net intersegment 0.0
0.0
(8.8
121.9
(113.1
0.0
Depreciation and 18.5
15.2
16.7
42.6
15.1
108.1
Net interest revenue
(0.6
161.7
12.9
284.3
126.7
585.0
Income before 526.8
300.1
115.6
311.9
(300.9
953.5
Segment assets
2,273.2
74,884.7
5,325.5
30,586.4
(4,057.7
109,012.1
Expenditures for 23.8
15.6
39.8
113.5
59.0
251.7
December 31, 1998:
Net revenues from 1,488.1
495.7
688.1
995.7
(449.6
3,218.0
Net intersegment 0.0
0.9
(4.8
54.2
(50.3
0.0
Depreciation and 16.3
15.2
12.1
31.8
12.7
88.1
Net interest revenue
(1.2
120.5
17.6
215.2
381.1
733.2
Income before 415.7
166.0
69.5
202.3
(253.0
600.5
Segment assets
1,132.0
45,683.7
2,694.9
19,925.0
2,790.1
72,225.7
Expenditures for 36.4
8.0
18.9
77.3
13.2
153.8
December 31, 1997:
Net revenues from 1,216.7
548.3
607.3
793.5
(177.5
2,988.3
Net intersegment 1.3
3.4
(2.7
46.1
(48.1
0.0
Depreciation and 11.5
12.2
8.9
16.6
10.9
60.1
Net interest revenue
2.2
112.0
(6.2
169.3
221.7
499.0
Income before 381.9
200.2
119.2
157.6
(197.8
661.1
Segment assets
753.2
49,459.9
1,993.7
18,124.3
118.2
70,449.3
Expenditures for 66.6
24.6
19.4
83.1
30.3
224.0
The following is a reconciliation of the Company's reported segment
revenues, income before provision for income taxes and segment assets to the
Company's consolidated totals: Revenues:
Total net revenues for reported segments
5,695.1
4,070.0
3,491.3
All other revenues
19.9
105.3
153.7
Consolidation/elimination(1)
(159.0
(224.1
(157.7
Total consolidated net revenues
5,556.0
3,951.2
3,487.3
Income before provision for income taxes:
Total income for reported segments
1,254.4
853.5
859.0
All other income (losses)
(25.4
0.5
(24.6
Consolidation/elimination(1)
(275.5
(253.5
(173.3
Total income before provision
953.5
600.5
661.1
Segment assets:
Total assets for reported segments
113,069.8
69,435.6
70,331.1
All other assets
3.6
1,264.9
3,015.1
Consolidation/elimination (1)
(4,061.3
1,525.2
(2,896.9
Total segment assets
109,012.1
72,225.7
70,449.3
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: United States
4,773.8
3,561.5
3,151.3
Foreign
782.2
389.7
336.0
Total
5,556.0
3,951.2
3,487.3
The following are long-lived assets by geographic region: United States
463.7
384.7
356.3
Foreign
170.3
128.0
98.9
Total
634.0
512.7
455.2
18. Legal Proceedings 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. From time
to time, the Company is also involved in proceedings with, and investigations
by, government agencies and self-regulatory organizations. Some of the actions
have been brought on behalf of various classes of claimants and seek damages
of material or indeterminate amounts. Although the ultimate outcome of litigation
involving the Company cannot be predicted with certainty, after reviewing these
actions with its counsel, management believes it has meritorious defenses to
all such actions and intends to defend each of these vigorously. Although there can be no assurance that such 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,
based upon advice of counsel, the ultimate resolution of such 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; except that, for the matters described below, based upon information
currently available to it, management cannot predict whether or not such litigation
will have a material adverse effect on the Company's results of operations in
any particular period. In October 1995, DLJSC was named as a defendant in a purported
class action filed in a Texas State Court on behalf of the holders of $550.0
million principal amount of subordinated redeemable discount debentures of National
Gypsum Corporation ("NGC") canceled in connection with a Chapter 11 plan of
reorganization for NGC consummated in July 1993. The State Court named plaintiff
also filed an adversary proceeding in the U.S. Bankruptcy Court for the Northern
District of Texas seeking a declaratory judgment that the confirmed NGC plan
of reorganization does not bar the class action claims. Subsequent to the consummation
of NGC's plan of reorganization, NGC's shares traded for values substantially
in excess of, and in 1995 NGC was acquired for a value substantially in excess
of, the values upon which NGC's plan of reorganization was based. The two actions
arise out of DLJSC's activities as financial advisor to NGC in the course of
NGC's Chapter 11 reorganization proceedings. The class action complaint alleges
that the plan of reorganization submitted by NGC was based upon projections
by NGC and DLJSC which intentionally understated forecasts, and provided misleading
and incorrect information to hide NGC's true value and that defendants breached
their fiduciary duties by, among other things, providing false, misleading or
incomplete information to deliberately understate the value of NGC. The class
action complaint seeks compensatory and punitive damages purportedly sustained
by the class. On October 10, 1997, DLJSC and others were named as defendants
in a new adversary proceeding in the Bankruptcy Court brought by the NGC Settlement
Trust, an entity created by the NGC plan of reorganization to deal with asbestos-related
claims. The Trust's allegations are substantially similar to the claims in the
State Court action. On January 21, 1998, the Bankruptcy Court ruled that the
State Court plaintiff's claims were not barred by the NGC plan of reorganization
insofar as they alleged nondisclosure of certain cost reductions announced by
NGC in October 1993. DLJSC has appealed the Bankruptcy Court's ruling. On May
7, 1998, DLJSC and others were named as defendants in a second action in a Texas
State Court brought by the NGC Settlement Trust. The allegations of this second
Texas State Court action are substantially similar to those of the earlier class
action pending in State Court. In an amended order dated January 5, 1999, the
State Court granted the class action plaintiff's motion for class certification.
In an order dated March 1, 1999, the State Court granted motions for summary
judgment filed by DLJSC and the other defendants in both State Court actions.
The plaintiffs have appealed. DLJSC intends to defend itself vigorously against
all of the allegations contained in the complaints. On January 26, 1996, a purported purchaser of certain notes and
warrants to purchase shares of common stock of Rickel Home Centers, Inc. ("Rickel")
filed a class action complaint against DLJSC and certain other defendants for
unspecified compensatory and punitive damages in the U. S. District Court for
the Southern District of New York. The suit was brought on behalf of the purchasers
of 126,457 units consisting of $126,457,000 aggregate principal amount of 13
1/2% senior notes due 2001 and 126,457 warrants to purchase shares of common
stock of Rickel (the "Units") issued by Rickel in October 1994. The complaint
alleges violations of federal securities laws and common law fraud against DLJSC,
as the underwriter of the Units and as an owner of 7.3% of the common stock
of Rickel, Eos Partners, L.P. and General Electric Capital Corporation, each
as owners of 44.2% of the common stock of Rickel, and members of the board of
directors of Rickel, including a DLJSC managing director. The complaint seeks
to hold DLJSC liable for alleged misstatements and omissions contained in the
prospectus and registration statement filed in connection with the offering
of the Units, alleging that the defendants knew of financial losses and a decline
in value of Rickel in the months prior to the offering and did not disclose
such information. The complaint also alleges that Rickel failed to pay its semi-annual
interest payment due on the Units on December 15, 1995 and that Rickel filed
a voluntary petition for reorganization pursuant to Chapter 11 of the Bankruptcy
Code on January 10, 1996. On April 22, 1999, the complaint against DLJSC and
the other defendants was dismissed. The plaintiffs have appealed. DLJSC intends
to defend itself vigorously against all of the allegations contained in the
complaint. In November 1998, three purported class actions (Gillet v. Goldman,
Sachs & Co. et al., Prager v. Goldman, Sachs & Co. et al., and Holzman v. Goldman,
Sachs & Co. et al.) were filed in the U.S. District Court for the Southern District
of New York against more than 25 underwriters of initial public offering securities,
including DLJSC. The complaints allege that defendants conspired to fix the
"fee" paid for underwriting initial public offering securities by setting the
underwriters' discount or "spread" at 7%, in violation of the federal antitrust
laws. The complaints seek treble damages in an unspecified amount and injunctive
relief as well as attorney's fees and costs. On March 15, 1999, the plaintiffs
filed a Consolidated Amended Complaint captioned In re Public Offering Fee Antitrust
Litigation. A motion by all defendants to dismiss the complaints on several
grounds is pending. Separately, the U.S. Department of Justice has issued a
Civil Investigative Demand to several investment banking firms, including DLJSC,
seeking documents and information relating to "alleged" price fixing with respect
to underwriting spreads in initial public offerings. The government has not
made any charges against DLJSC or the other investment banking firms. DLJSC
is cooperating with the Justice Department in providing the requested information
and believes that no violation of law by DLJSC has occurred. 19. Quarterly Data (Unaudited) 1999:
First quarter
1,493,450
197,000
121,650
0.94
0.84
0.07
0.07
Second quarter
1,810,516
259,000
165,650
1.28
1.14
0.05
0.05
Third quarter
1,704,372
194,000
122,200
0.93
0.85
(0.03
(0.03
Fourth quarter
2,137,931
303,500
191,200
1.48
1.35
(0.02
(0.02
Total year
7,146,269
953,500
600,700
4.63
4.18
0.07
0.07
1998:
First quarter
1,493,421
217,250
134,150
1.12
1.00
(0.02
(0.02
Second quarter
1,556,745
230,500
142,300
1.17
1.05
0.01
0.01
Third quarter
1,069,827
41,600
25,700
0.17
0.15
0.01
0.01
Fourth quarter
1,287,049
111,150
68,650
0.52
0.47
0.02
0.02
Total year
5,407,042
600,500
370,800
2.93
2.65
0.01
0.01
*
Due to the effect of averaging the number of shares of
common stock and common stock equivalents throughout the year, the sum
of the quarters' earnings per common share may not equal the total year
amounts.
**
For the periods prior to the quarter ended September
30, 1999, earnings per share amounts are pro forma as if the issuance
of DLJdirect Tracking Stock occurred at the beginning of 1998.
SCHEDULE I See accompanying notes to condensed financial statements. Donaldson, Lufkin & Jenrette, Inc. (Parent
Company) See accompanying notes to condensed financial statements. Donaldson, Lufkin & Jenrette, Inc. (Parent Company) Net cash provided by operating activities
784,864
544,785
153,693
Cash flows from investing activities:
Net proceeds from (payments for):
Dividends from affiliates
205,090
136,000
Investment in subsidiaries
(892,012
(472,996
(222,083
Allocated equity to DLJdirect
(233,945
Other assets
(15,250
(51,474
(1,873
Net cash used in investing activities
(1,141,207
(319,380
(87,956
Cash flows from financing activities:
Net proceeds from (payments for):
Short-term financings
1,096,764
(432,914
331,845
Issuance of:
DLJdirect Common Stock
346,591
Senior notes
649,637
893,552
Medium-term notes
1,183,212
349,337
359,646
Global floating rate notes
448
347,760
Other long-term debt
26,345
Series B preferred stock
175,000
Subordinated loan from subsidiaries
47,950
(623,176
(149,274
Dividends paid
(52,592
(51,310
(39,886
Sale of common stock to AXA Financial and AXA, S.A.
300,000
Exercise of stock options
34,717
21,775
4,074
Receivables from subsidiaries
(2,708,306
(152,115
(953,986
Net cash provided by (used in) financing activities
597,973
480,597
(73,476
Increase (decrease) in cash and cash equivalents
241,630
706,002
(7,739
Cash and cash equivalents at beginning of year
706,010
8
7,747
Cash and cash equivalents at end of year
947,640
706,010
8
See accompanying notes to condensed financial statements. Donaldson, Lufkin & Jenrette, Inc. (Parent Company) December 31, 1999 1. Basis of Presentation The condensed financial statements of Donaldson, Lufkin & Jenrette, Inc. ("Parent
Company") should be read in conjunction with the consolidated financial statements
of Donaldson, Lufkin & Jenrette, Inc. and subsidiaries (the "Company") and the
notes thereto. Investments in subsidiaries are accounted for under the equity
method. 2. Issuance of DLJdirect Common Stock DLJdirect Common Stock tracks the separate performance of the Company's
existing 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. These operations together 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 include a 100% interest in DLJdirect
for periods prior to the closing date and 82.1% for subsequent periods. Operating
results reported by the Company prior to the closing date were not affected
by the issuance of the tracking stock. 3. Related Party Transactions Receivables from subsidiaries include $774.5 million and $781.0 million loaned
under master note agreements at December 31, 1999 and 1998, respectively. Substantially
all receivables from subsidiaries provide for interest based on Federal funds
rates. There were no cash dividends paid to the Parent Company by its consolidated
subsidiaries in 1999. The amount of cash dividends paid to the Parent Company
by its consolidated subsidiaries amounted to $205.1 million and $136.0 million
for the years ended December 31, 1998 and 1997, respectively. There are no restrictions
on the payment of dividends, except for those stipulated in certain debt agreements
and in those applicable to brokers and dealers which provide for certain minimum
amounts of capital to be maintained to satisfy regulatory requirements in the
Company's domestic and foreign broker-dealer subsidiaries. Under certain circumstances,
the amount of excess capital that can be withdrawn is limited. The regulatory
requirements are designed to measure the general financial integrity and liquidity
of broker-dealers and provide minimum acceptable net capital levels to satisfy
commitments to customers. Unless an adequate level of capital is maintained,
regulated broker-dealer subsidiaries would be prohibited from paying dividends
to the Parent Company. 4. Long-term Borrowings The Parent Company finances certain of its activities through long-term borrowing
arrangements. At December 31, 1999 there were current maturities of long-term
borrowings of $459.8 million. Long-term borrowings consist of the following:
Senior notes, 5.875% - 6.875% due various dates through 2008
2,040,673
1,391,036
Medium-term notes, 4.995% - 7.42% due various dates through 2016
2,229,859
1,046,645
Subordinated exchange notes, 9.58% due 2003
225,000
225,000
Global floating rate notes, due 2002
348,805
348,357
Total long-term borrowings
4,844,337
3,011,038
For a detailed description of the Parent Company's long-term borrowings, see
Note 6 of the Notes to Consolidated Financial Statements of Donaldson, Lufkin
& Jenrette, Inc. and subsidiaries. Scheduled maturities of long-term borrowings are as follows: 1999
99,888
2000
459,763
189,917
2001
1,013,629
349,455
2002
1,216,591
358,348
2003
374,531
374,397
2004
129,589
2005 - 2016
1,650,234
1,639,033
During 1999, the Company reduced its revolving credit facility from $2.8 billion
to $2.5 billion, which allows the Parent Company to borrow up to $1.9 billion
on an unsecured basis, subject to certain limitations. There were no borrowings
outstanding under this agreement at December 31, 1999. 5. Income Taxes Certain of the Parent Company's subsidiaries record income taxes as if each
subsidiary files a separate income tax return. The tax rates used in the computation
for such subsidiaries are generally higher than the Company's overall consolidated
effective tax rate. The income tax benefit recorded by the Parent Company results
from the Company's overall lower consolidated effective tax rate and the ability
of the Parent Company to utilize tax attributes related to its subsidiaries
and affiliates. 6. Contingent Liabilities From time to time the Parent Company issues guarantees of the obligations of
certain subsidiaries. The amounts of such items in the aggregate are not considered
excessive in relation to the normal operating levels of the Company and management
does not anticipate, as of December 31, 1999, losses as a result of these guarantees. 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. Diluted earnings per common share include
the dilutive effects of the Restricted Stock Unit Plan and the dilutive effect
of options and convertible debt calculated under the treasury stock and "if-converted"
method, respectively. In 1999, approximately 1.0 million RSUs vested and were
converted into the Company's common stock. This amount is included in the calculation
of earnings per common share. All earnings per share have been restated for
the stock split. Selected Combined Financial Information Revenues:
Commissions
142,805
78,717
50,948
54,166
40,358
Underwritings
8,987
Fees
47,811
25,484
12,109
6,426
5,067
Interest
38,468
13,723
4,160
2,569
1,846
Total revenues
238,071
117,924
67,217
63,161
47,271
Costs and expenses:
Compensation and benefits
60,991
28,260
17,174
11,202
7,362
39,206
28,423
20,909
15,422
11,709
Advertising
62,913
25,146
13,137
9,093
4,183
Occupancy and equipment
9,768
5,045
3,352
1,923
1,437
Communications
11,896
5,564
2,844
1,468
1,025
Technology costs
3,288
4,084
5,082
5,205
5,431
Other operating expenses
31,969
18,934
10,844
5,567
4,507
Total costs and expenses
220,031
115,456
73,342
49,880
35,654
18,040
2,468
(6,125
13,281
11,617
Income tax provision (benefit)
7,893
1,008
(2,502
5,425
4,746
Equity in net loss of joint venture
(3,215
Net income (loss)
6,932
1,460
(3,623
7,856
6,871
Earnings (loss) per share(2):
Basic
0.07
0.01
(0.04
0.08
0.07
Diluted
0.07
0.01
(0.04
0.08
0.07
Weighted average notional and outstanding shares:
Basic
102,650
102,650
102,650
102,650
102,650
Diluted
102,660
102,650
102,650
102,650
102,650
Earnings (loss) attributable to:
DLJ Retained Interest
7,835
1,460
(3,623
7,856
6,871
DLJdirect Tracking Stock(1)
(903
Tracking Stock earnings (loss) per share(2):
Basic
(0.05
Diluted
(0.05
Tracking Stock weighted average common shares:
Basic
18,400
Diluted
18,400
Statement of Financial Condition Data:
Cash and cash equivalents
237,020
26,654
Total assets
278,442
29,751
Long-term liabilities
Total allocated equity
231,792
21,924
Other Data:
Total trades
5,667,000
2,875,000
1,535,000
929,000
660,000
Average trades per day
22,700
11,400
6,100
3,700
2,600
Total customer assets
20,400,000
8,900,000
4,600,000
2,500,000
1,900,000
Total accounts
766,000
529,000
390,000
280,000
207,000
Total active accounts(3)
333,000
210,000
144,000
113,000
N/A
Total employees
865
374
283
174
139
Total technology employees
215
119
82
34
14
Other Data— Total trades
147,000
Average trades per day(5)
1,100
Total customer assets
1,300,000
Total accounts
29,000
Total active accounts(3)
14,000
Total employees
46
Total technology employees
4
(2) Earnings (loss) per share amounts have been calculated by dividing net
income (loss) by the weighted average notional and outstanding shares of Tracking
Stock. Earnings per share amounts for the years prior to the year ended December
31, 1999 are calculated based on pro forma amounts as if the Tracking Stock
was issued for all periods presented. The notional shares represent DLJ's 82.1%
retained interest in DLJdirect. Prior to the offering, DLJ had a 100%
interest in the earnings of DLJdirect. These pro forma amounts are presented
for comparative purposes only. Tracking Stock earnings per common share amounts have been calculated by
dividing earnings applicable to common shares by the weighted average actual
common shares outstanding for the period the Tracking Stock was outstanding,
May 28, 1999 to December 31, 1999. Tracking Stock earnings per share for periods
prior to the closing date are not presented as such amounts are not meaningful. (3) Active accounts consist of those accounts at the end of the related
period with at least one trade in the last twelve months or with a balance at
period end. (4) Represents 100% of the activities of DLJdirect SFG Securities
Inc., DLJdirect's unconsolidated joint venture in Japan, which began
trading in June 1999. (5) Average trades per day are based upon actual trade days from commencement
of operations. Management's Discussion and Analysis
of DLJdirect Common Stock tracks the separate performance
of DLJ Inc.'s existing online discount brokerage and related investment services
business for periods subsequent to May 28, 1999, 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. Net proceeds from the offering amounted to
$346.6 million of which $233.9 million was attributed to DLJdirect as
allocated equity. 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 DLJ Inc.'s 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 reflects the 17.9%
owned by the public and employees. Prior to the offering, DLJ had a 100% interest
in the earnings of DLJdirect. The following analysis of the results of operations and financial
condition of DLJdirect should be read in conjunction with the Combined
Financial Statements and the related Notes thereto, and with the 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. Additionally, DLJdirect expects to spend significant
amounts in the future in order to expand its international presence.
Recent Developments — DLJdirect DLJdirect formed a strategic alliance with Scudder Investments, Inc.,
Scudder Kemper Investments' direct mutual fund business, to provide broker-dealer
services to Scudder's customers. DLJdirect will assume responsibility
for Scudder Investments' current brokerage clients, which includes accounts
with approximately $1.5 billion in assets. Effective February 5, 2000, Scudder's
customers will be converted and serviced by DLJdirect under the co-branded
name "DLJdirect for Scudder Investments." 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. DLJdirect-eUnion
intends to expand its coverage to include other international and regional markets
in the future.. In addition, DLJdirect recently announced 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.
Results of Operations — DLJdirect Year Ended December 31, 1999 Compared to Year Ended December
31, 1998 DLJdirect experienced strong operating results for the
year ended December 31, 1999 compared to the year ended December 31, 1998, reflecting
primarily an increase in active accounts of 58.6% and customer trading volume
of 97.1%. Total revenues increased $120.2 million or 102.0% to $238.1 million
for the year ended December 31, 1999 from $117.9 million for the year ended
December 31, 1998. Net income increased $5.4 million to $6.9 million for the
year ended December 31, 1999 from $1.5 million for the year ended December 31,
1998. Commissions increased $64.1 million or 81.4% to $142.8 million.
Commissions represented 60.0% of total revenues for the year ended December
31, 1999 and 66.8% of total revenues for the year ended December 31, 1998. The
increase in commissions was due primarily to significant increases in customer
trading volume. Average trades per day increased 99.1% to 22,700 for the year
ended December 31, 1999 from 11,400 for the year ended December 31, 1998. Underwritings revenues earned in connection with public offerings
for the year ended December 31, 1999 were $9.0 million compared with a negligible
amount for the year ended December 31, 1998. Underwritings represented 3.8%
of total revenues for the year ended December 31, 1999. Fees increased $22.3 million or 87.5% to $47.8 million. Fees
represented 20.1% of total revenues for the year ended December 31, 1999 and
21.6% of total revenues for the year ended December 31, 1998. Payments for routing
orders increased $5.3 million or 59.6% to $14.2 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 $10.5 million or 78.4% to $23.9 million primarily due to increased
demand for Internet-based technology applications. Revenue from money market
fund distribution fees increased $2.9 million or 90.6% to $6.1 million. This
growth was due to an increase in customer money market fund balances of $610.3
million or 79.6% to $1.4 billion. The remaining fees for the years ended December
31, 1999 and 1998 include subscription and account related fees. Interest income increased $24.8 million or 181.0% to $38.5 million.
Interest represented 16.2% of total revenues for the year ended December 31,
1999 and 11.6% of total revenues for the year ended December 31, 1998. 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 $790.2 million or 168.2%
to $1.26 billion. Free credits increased $317.3 million or 80.0% to $714.1 million
and short sale balances increased $65.9 million or 175.7% to $103.4 million. Compensation and benefits increased $32.7 million or 115.5%
to $61.0 million. The increase in compensation and benefits was due primarily
to growth in the number of employees from 374 to 865. 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 MarketSpeedTM, in the UK operations, as well
as in executive management. Brokerage, clearing, exchange and other fees increased $10.8
million or 38.0% to $39.2 million. The increase in brokerage, clearing, exchange
and other fees was primarily due to significant increases in customer trading
volume, offset in part by lower clearing fees per trade resulting from reduced
clearing rates. Advertising increased $37.8 million or 150.6% to $62.9 million.
The increase in advertising was due primarily to the development and implementation
of a new branding and advertising campaign. Occupancy and equipment costs increased $4.8 million or 96.0%
to $9.8 million. Occupancy and equipment expense includes rent and operating
expenses for facilities, expenditures for repairs and maintenance, and the operating
lease expense for furniture, fixtures, leasehold improvements as well as business
and computer equipment. The increase in occupancy cost was due to the opening
of the Charlotte, North Carolina investor services facilities and to the relocation
of DLJdirect's headquarters. The increase in equipment costs was due
primarily to additional investment in technology systems infrastructure and
equipment expenditures for the increased staff. Communications costs increased $6.3 million or 112.5% to $11.9
million. Communications expense includes quotation expenses, expenses related
to customer toll-free phone calls and regular telephone services. Quotation
expenses and expenses related to customer toll-free phone calls both increased
due to the increased volume of transactions. Technology costs decreased $800,000 or 19.5% to $3.3 million.
Fees related to systems infrastructure, for systems maintenance and support,
increased moderately. However, overall technology costs decreased due to the
substantial reduction of network access fees paid to online service providers. Other operating expenses increased $13.1 million or 69.3% to
$32.0 million. Operating expenses are comprised of professional fees, printing
and stationery, economic and investment research, allocated corporate overhead
and miscellaneous expenses. For the year ended December 31, 1998, other operating
expenses also included license fees of $5.2 million paid to DLJ Long Term Investment
Corporation for licensing trademarks and similar intellectual property. Commencing
January 1, 1999, the license fees are included in brokerage, clearing, exchange
and other fees because such license fees are included in amounts paid by DLJdirect
to Pershing under its clearing agreement. Professional fees primarily include
payments made to technology and marketing consultants and recruiters, and for
legal services. Professional fees increased $9.3 million or 216.3% to $13.6
million primarily due to the development of advertising strategies, increased
use of technology consultants, the start-up operations in the UK and Japan,
the relocation of the home office, and to the continuing expansion in Charlotte,
North Carolina. Miscellaneous expenses increased $5.3 million or 155.9% to $8.7
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 (benefit) and equity in net
loss of joint venture increased $15.5 million to $18.0 million for the year
ended December 31, 1999 from $2.5 million for the year ended December 31, 1998.
The provision (benefit) for income taxes for the years ended December 31, 1999
and 1998 was $7.9 million, representing a 43.8% effective tax rate, and $1.0
million, representing a 40.9% effective tax rate, respectively. Income before advertising costs, income tax provision (benefit)
and equity in net loss of joint venture amounted to $81.0 million and $27.6
million for the years ended December 31, 1999 and 1998, 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 year ended December 31, 1999, DLJdirect's share of the equity
in the net loss of this joint venture was $3.2 million. As a result of the foregoing factors, net income increased to
$6.9 million for the year ended December 31, 1999 from $1.5 million for the
year ended December 31, 1998. For the period the Tracking Stock was outstanding
(May 28, 1999 to December 31, 1999), net loss applicable to the shareholders
of Tracking Stock was $903,000 or $0.05 per share. Year Ended December 31, 1998 Compared to Year Ended December
31, 1997 DLJdirect experienced strong operating results in 1998
compared to 1997, reflecting primarily an increase in active accounts of 45.8%.
For 1998, total revenues of $117.9 million increased $50.7 million or 75.4%.
Net income of $1.5 million increased $5.1 million from a net loss of $3.6 million,
primarily resulting from strong revenue growth. Commissions increased $27.8 million or 54.6% to $78.7 million.
Commissions represented 66.8% of total revenues in 1998 and 75.8% of total revenues
in 1997. The increase in commissions was due primarily to significant increases
in customer trading volume attributable in part to a full year of activity at
the reduced $20 commission rate. Average trades per day increased 86.9% to 11,400
in 1998 from 6,100 in 1997. Fees increased $13.4 million or 110.7% to $25.5 million. Fees
represented 21.6% of total revenues in 1998 and 18.0% of total revenues in 1997.
Payments for order flow increased $3.4 million or 61.8% to $8.9 million. The
increase in payments for order flow was due primarily to significant increases
in customer trading volume. Increases in payments for order flow were offset
in part by a decline in the amount of revenue per trade that DLJdirect
receives for order flow. Fees for technology development increased $8.6 million
or 179.2% to $13.4 million. The increase in fees for technology development
reflects 1998 being the first full year that such fees were collected. Revenue
from money market fund distribution fees increased $1.6 million or 100.0% to
$3.2 million. This growth was due to an increase in customer money market fund
balances of $345.8 million or 84.7% to $754.3 million. The remaining fees for
the years ended December 31, 1998 and 1997 include subscription and account
related fees. Interest income increased $9.5 million or 226.2% to $13.7 million.
Interest represented 11.6% of total revenues in 1998 and 6.2% of total revenues
in 1997. The increase was due primarily to increases in margin debits, free
credits and short sale balances. Margin debits increased $143.1 million or 43.8%
to $469.8 million. Free credits increased $201.5 million or 103.2% to $396.8
million and short sale balances increased $19.4 million or 107.2% to $37.5 million. Compensation and benefits increased $11.1 million or 64.5% to
$28.3 million. The increase in compensation and benefits was due primarily to
growth in the number of employees from 283 to 374. These additional employees
were added in DLJdirect's investor services area to accommodate increased
customer activity, as well as in DLJdirect's technology group to develop
new products such as MarketSpeedTM. Brokerage, clearing, exchange and other fees increased $7.5
million or 35.9% to $28.4 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 91.6% to $25.1 million.
The increase in advertising was due to increased expenditures on advertising
placement and creative development. DLJdirect increased its advertising
expenditures to continue developing the DLJdirect brand name, which was
launched in September 1997, and to continue acquiring new accounts. Advertising
expenditures were targeted at investors through a broad range of media including
television, radio, and print as well as significant online service providers
and popular Web sites such as America Online, the Microsoft Network and Yahoo! Occupancy and equipment costs increased $1.6 million or 47.1%
to $5.0 million. Occupancy and equipment expense includes rent and operating
expenses for facilities, expenditures for repairs and maintenance, and the expense
for furniture, fixtures, leasehold improvements, as well as business and computer
equipment. The increase in equipment costs was due primarily to additional investment
in technology systems infrastructure and equipment expenditures for the increased
staff. Communications costs increased $2.8 million or 100.0% to $5.6
million. Communications expense includes quotation expenses, expenses related
to customer toll-free phone calls and regular telephone services. Quotation
expenses and expenses related to customer toll-free phone calls both increased
due to the volume of transactions. Technology costs decreased $1.0 million or 19.6% to $4.1 million. Fees related
to systems infrastructure, for systems maintenance and support, increased moderately.
However, overall technology costs decreased due to the substantial reduction
of network access fees paid to online service providers. Other operating expenses increased $8.1 million or 75.0% to
$18.9 million and are comprised primarily of a license fee, professional fees,
printing and stationery, economic and investment research, allocated corporate
overhead, and miscellaneous expenses. The license fee expense increased $4.0
million or 333.3% to $5.2 million. The license fee is paid to DLJ Long Term
Investment Corporation for licensing trademarks and similar intellectual property.
License fee payments were initiated in September 1997. Commencing January 1,
1999, amounts paid by DLJdirect to Pershing include the license fee for
the use of certain of DLJ Long Term Investment Corporation's trademarks that
are licensed to DLJdirect in the United States and in certain other jurisdictions.
Professional fees primarily include payments made to technology and marketing
consultants, and employee recruiting expenses. Professional fees increased $883,000
or 25.8% to $4.3 million due to increased advertising and headcount. Printing
and stationery decreased $158,000 or 7.7% to $1.9 million. In 1997 printing
and stationery expenses were increased in conjunction with the renaming of the
service from PC Financial Network to DLJdirect, which necessitated the
redesign and reprinting of all marketing materials and customer correspondence
stock. Economic and investment research increased $1.0 million or 333.3% to
$1.3 million reflecting the fact that DLJdirect first began paying for
this research in the fourth quarter of 1997. Allocated corporate overhead increased
$841,000 or 45.2% to $2.7 million due primarily to expenses related to the increased
headcount. Miscellaneous expenses increased $1.4 million or 70.0% to $3.4 million.
Miscellaneous expenses consisted primarily of accruals for bad debt expense,
employee registration fees and expenses for new account credit checks. Income before income tax provision (benefit) and equity in net
loss of joint venture increased $8.6 million to income of $2.5 million in 1998
from a loss of $6.1 million in 1997. The provision (benefit) for income taxes
for the years ended December 31, 1998 and 1997 was $1.0 million and $(2.5) million,
respectively, which represented a 40.9% effective tax rate for each period. Income before advertising costs, income tax provision (benefit)
and equity in net loss of joint venture amounted to $27.6 million and $7.0 million
for the years ended December 31, 1998 and 1997, respectively. As a result of the foregoing factors, net income increased to
$1.5 million in 1998 from a net loss of $3.6 million in 1997. 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. DLJdirect
was allocated net proceeds of $233.9 million as a result of the initial public
offering by DLJ Inc. of 18.4 million shares of Tracking Stock. The value of
equipment acquired through leases of fixed assets through an affiliate totaled
$44.2 million for the year ended December 31, 1999 and $5.0 million for the
year ended December 31, 1998. 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 December 31, 1999, DLJdirect
had approximately $244.9 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 (used in) operating activities totaled $28.8
million, $2.0 million and $(599,000) for the years ended December 31, 1999,
1998 and 1997, respectively. The increases were primarily due to increases in
transaction volume related to growth in the online brokerage operations. In
the year ended December 31, 1999, there were increased assets including receivables
from brokers, dealers and others of $17.1 million. These increases were offset
by increases in payables to parent and affiliates, net of $9.4 million and accounts
payable and accrued expenses of $31.5 million. In the year ended December 31,
1998, receivables from brokers, dealers and others increased $1.2 million. This
increase in assets was offset by increases in operating liabilities including
payables to parent and affiliates, net of $2.2 million. In the year ended December
31, 1997, there were increased assets including receivables from brokers, dealers
and others of $1.9 million. These increases were offset by increases of payables
to parent and affiliates, net of $2.0 million and accounts payable and accrued
expenses of $2.6 million. Cash provided by (used in) investing activities totaled $(20.3)
million, $1.2 million and $(107,000) for the years ended December 31, 1999,
1998 and 1997, respectively. For the year ended December 31, 1999, DLJdirect
invested $7.8 million in short-term investments and $12.4 million in exchange
for a 50% interest in a joint venture with a Japanese bank. Net proceeds from
the sale of office facilities amounted to $1.2 million for the year ended December
31, 1998. In 1997, net cash used in investing activities consisted primarily
of purchases of office facilities. For the years ended December 31, 1999, 1998 and 1997, net cash
provided by financing activities totaled $201.8 million, $14.5 million and $9.6
million, respectively. In the years ended December 31, 1999, 1998 and 1997,
respectively, $1.0 million, $14.5 million and $10.5 million was provided by
capital contributions from DLJ Inc. DLJdirect received net proceeds of
$233.9 million from DLJ Inc.'s issuance of Tracking Stock. Prior to the offering,
DLJdirect paid $33.1 million as a dividend to an affiliate. The net proceeds,
together with its current cash, cash equivalents and cash generated from operations
will be sufficient to meet its anticipated cash needs for working capital and
capital expenditures through at least the end of 2000. 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. [LETTERHEAD OF KPMG ] Independent Auditors' Report The Board of Directors and Stockholders We have audited the accompanying combined statements of financial
condition of DLJdirect (a combination of certain assets and liabilities
of Donaldson, Lufkin & Jenrette, Inc., as described in note 1) as of December
31, 1999 and 1998, and the related combined statements of operations, changes
in allocated equity, and cash flows for each of the years in the three-year
period ended December 31, 1999. These combined financial statements are the
responsibility of Donaldson, Lufkin & Jenrette, Inc.'s management. Our responsibility
is to express an opinion on these combined financial statements based on our
audits. We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes, examining, on a test basis,
evidence supporting the amounts and disclosures in the combined financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion. We have audited the consolidated financial statements of Donaldson,
Lufkin & Jenrette, Inc. and subsidiaries as of December 31, 1999 and 1998, and
for each of the years in the three-year period ended December 31, 1999 and have
issued our report dated January 31, 2000. The combined financial statements
of DLJdirect should be read in conjunction with the consolidated financial
statements of Donaldson, Lufkin & Jenrette, Inc. and subsidiaries. In our opinion, the combined financial statements referred to
above present fairly, in all material respects, the financial position of DLJdirect
as of December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1999, in conformity with generally accepted accounting principles. /s/ KPMG LLP January 31, 2000 DLJdirect Assets
Cash and cash equivalents
237,020
26,654
Short-term investments
7,848
—
Deposit with affiliated clearing broker
329
250
Receivables from brokers, dealers and others, net
19,015
1,887
Financial instruments owned, at market value
1,010
42
Office facilities, at cost (net of accumulated depreciation
and amortization of $470 and $284, respectively)
92
278
Investment in joint venture
11,009
—
Prepaid expenses and other assets
2,119
640
Total Assets
278,442
29,751
Liabilities and Allocated Equity
Liabilities:
Payables to parent and affiliates, net
12,550
5,211
Financial instruments sold not yet purchased, at market value
26
24
Accounts payable and accrued expenses
34,074
2,592
Total liabilities
46,650
7,827
Commitments and contingencies
Allocated equity
230,662
21,924
Accumulated other comprehensive income
1,130
—
Total allocated equity
231,792
21,924
Total Liabilities and Allocated Equity
278,442
29,751
See accompanying notes to combined financial statements. DLJdirect Revenues:
Commissions
142,805
78,717
50,948
Underwritings
8,987
—
—
Fees
47,811
25,484
12,109
Interest
38,468
13,723
4,160
Total revenues
238,071
117,924
67,217
Costs and expenses:
Compensation and benefits
60,991
28,260
17,174
Brokerage, clearing, exchange and other fees
39,206
28,423
20,909
Advertising
62,913
25,146
13,137
Occupancy and equipment
9,768
5,045
3,352
Communications
11,896
5,564
2,844
Technology costs
3,288
4,084
5,082
Other operating expenses
31,969
18,934
10,844
Total costs and expenses
220,031
115,456
73,342
18,040
2,468
(6,125
Income tax provision (benefit)
7,893
1,008
(2,502
Equity in net loss of joint venture
(3,215
—
—
Net income (loss)
6,932
1,460
(3,623
Earnings (loss) per share:
Basic
0.07
0.01
(0.04
Diluted
0.07
0.01
(0.04
Weighted average notional and outstanding shares:
Basic
102,650
102,650
102,650
Diluted
102,660
102,650
102,650
Earnings (loss) attributable to:
DLJ Retained Interest
7,835
1,460
(3,623
DLJdirect Tracking Stock
(903
—
—
Tracking Stock earnings (loss) per share:
Basic
(0.05
Diluted
(0.05
Tracking Stock weighted average common shares:
Basic
18,400
Diluted
18,400
See accompanying notes to combined financial statements. DLJdirect Balances at December 31, 1996
—
—
—
—
Divisional net income from
January 1, 1997 to May 31, 1997
915
—
—
915
Net (loss) from June 1, 1997 to
December 31, 1997
—
(4,538
—
(4,538
Capital contributions from DLJ Inc.
—
10,502
—
10,502
Return of divisional equity to DLJ Inc.
(915
—
—
(915
Balances at December 31, 1997
—
5,964
—
5,964
Net income
—
1,460
—
1,460
Capital contributions from DLJ Inc.
—
14,500
—
14,500
Balances at December 31, 1998
—
21,924
—
21,924
Net income
—
6,932
—
6,932
Translation adjustment — net of taxes
—
—
1,130
1,130
Total comprehensive income
—
—
—
8,062
Capital contribution from DLJ Inc.
—
1,000
—
1,000
Allocated equity from issuance of
Tracking Stock
—
233,945
—
233,945
Dividend paid to DLJ Inc.
—
(33,139
—
(33,139
Balances at December 31, 1999
—
230,662
1,130
231,792
See accompanying notes to combined financial statements. DLJdirect Cash flows from operating activities:
Net income (loss)
6,932
1,460
(3,623
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization
186
299
652
Deferred taxes
(2,721
(275
160
Equity in net loss of joint venture
3,215
—
—
(Increase) decrease in operating assets:
Deposit with affiliated clearing broker
(79
—
(250
Receivables from brokers, dealers and other, net
(17,128
(1,162
(1,923
Financial instruments owned, at market value
(968)
—
—
Prepaid expenses and other assets
(1,479
(475
(207
Increase (decrease) in operating liabilities:
Payables to parent and affiliates, net
9,397
2,220
1,951
Financial instruments sold, not yet purchased, at market
value
2
—
—
Accounts payable and accrued expenses
31,482
(25
2,641
Net cash provided by (used in) operating activities
28,839
2,042
(599
Cash flows from investing activities:
Net proceeds from (payments for):
Purchase of office facilities
—
—
(107
Sale of office facilities
—
1,231
—
Investment in joint venture
(12,431
—
—
Short-term investments
(7,848
—
—
Net cash provided by (used in) investing activities
(20,279
1,231
(107
Cash flows from financing activities:
Net proceeds from (payments for):
Capital contributions from DLJ Inc.
1,000
14,500
10,502
Allocated equity from issuance of Tracking Stock
233,945
—
—
Dividend paid to DLJ Inc.
(33,139
—
—
Return of divisional equity to DLJ Inc.
—
—
(915
Net cash provided by financing activities
201,806
14,500
9,587
Increase in cash and cash equivalents
210,366
17,773
8,881
Cash and cash equivalents at beginning of period
26,654
8,881
—
Cash and cash equivalents at end of period
237,020
26,654
8,881
See accompanying notes to combined financial statements. DLJdirect December 31, 1999 1. Basis of Presentation DLJdirect Common Stock tracks the separate performance of Donaldson,
Lufkin & Jenrette, Inc.'s ("DLJ Inc.") existing 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 DLJ Inc.'s 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. 2. Summary of Significant Accounting Policies To prepare combined financial statements in conformity with generally accepted
accounting principles, management must estimate certain amounts that affect
the reported assets and liabilities, disclosure of contingent assets and liabilities,
and reported revenues and expenses. Actual results could differ from those estimates.
Certain reclassifications have been made to prior year financial statements
to conform to the 1999 presentation. Substantially all of DLJdirect's financial assets and liabilities, including
short-term investments, are carried at market or fair value or are carried at
amounts, which approximate fair value because of their short-term nature. Fair
value is estimated at a specific point in time, based on relevant market information. Cash equivalents include all demand deposits held in banks and certain highly
liquid investments with maturities of 90 days or less. Securities transactions are recorded on a settlement date basis and, if significant,
adjustments are made to a trade date basis. Commission revenue and brokerage,
clearing, exchange and other fees are reported on a trade date basis. Office facilities are carried at cost and are depreciated on a straight-line
basis over the estimated useful life of the related assets, ranging from three
to eight years. Leasehold improvements are amortized over the lesser of the
useful life of the improvement or the term of the lease. Advertising costs are expensed as incurred. Investment in joint venture is accounted for by the equity method. Assets and liabilities of foreign joint ventures denominated in foreign currencies
are translated at exchange rates prevailing at the date of the combined statements
of financial condition. Revenues and expenses are translated at average exchange
rates during the period. Gains and losses from translating foreign currency
financial statements into U.S. dollars (net of taxes) are included as a separate
component of allocated equity. DLJ Inc. allocates certain general administrative and facilities expenses to
DLJdirect using a proportional cost methodology based on the relative
number of employees and square foot usage of DLJdirect or on actual costs
incurred. DLJdirect accounts for stock-based compensation related to stock options
in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and accordingly, does not recognize any compensation cost associated with such
plans in the combined financial statements. In accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation," DLJdirect provides pro forma
net income and pro forma earnings per share disclosures for employee stock option
grants as if the fair-value-based method had been applied. Basic and diluted earnings per common share amounts are calculated by dividing
earnings applicable to common shares by the weighted average common shares outstanding.
Basic earnings per share excludes the dilutive effects of stock options. Diluted
earnings per share reflects all potentially dilutive securities. Pursuant to SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," DLJdirect operates in one reportable segment as
a provider of online discount brokerage services. DLJdirect's involvement
in foreign operations is not significant. 3. Investment in Foreign Joint Venture In March 1999, DLJdirect entered into a 10-year joint venture agreement
with Sumitomo Bank in Japan. Pursuant to the agreement, DLJdirect SFG
Securities Inc. was formed. Operations commenced on April 1, 1999 and the corporation's
Internet site was launched on June 11, 1999. DLJdirect accounts for this
investment on the equity method. Summarized financial information for DLJdirect SFG Securities Inc. as
of December 31, 1999 is as follows: Total liabilities
304,064
Loss before income tax benefit
(9,849
Net loss
(6,430
4. Related Party Transactions DLJdirect transacts business with a group of companies affiliated through
common majority ownership with DLJ Inc. ("affiliates"), 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. Pursuant to clearing agreements between DLJdirect and affiliates all
securities transactions of DLJdirect are cleared on a fully disclosed
basis through an affiliate which amounts are included in brokerage, clearing,
exchange and other fees in the accompanying combined statements of operations.
In connection with such transactions, DLJdirect had $329,000 and $250,000
on deposit with DLJ Inc. at December 31, 1999 and 1998, respectively. The following summarizes the income/expense components generated from transactions
with affiliates for the years ended December 31, 1999, 1998 and 1997. Fee Income
38.1
22.3
10.3
Interest Income
30.7
12.6
3.8
Brokerage, clearing, exchange and other fees
39.2
28.4
20.9
For the years ended December 31, 1998 and 1997, other operating expenses included
$5.2 million and $1.2 million, respectively, for a license agreement with an
affiliate. The affiliate has licensed certain trademarks, service marks, trade
names and other proprietary rights to various words, slogans, symbols and logos
to DLJdirect for use in its provision of financial services and sale
or other distribution of related financial goods. In March 1999, DLJdirect
entered into a new license agreement and an amended clearing agreement. The
amounts paid by DLJdirect under the clearing agreement include payments
in respect of the license fee for the use of DLJ Inc.'s trademarks. If such
agreements were entered into in prior years under these conditions, management
believes that there would have been no material effect upon the total costs
and expenses of DLJdirect. Employees of DLJdirect participate in DLJ Inc.'s defined contribution
employee benefit plans. Certain key employees of DLJdirect participate
in stock options, long-term incentive compensation and restricted stock unit
employee benefit plans and various deferred compensation arrangements, as well
as other non-qualified plans which are funded by insurance contracts. Expenses
associated with these compensation arrangements are reflected in DLJdirect's
combined statements of operations. 5. Income Taxes DLJdirect is part of a group that files consolidated Federal income
tax returns. DLJdirect records the settlement of all current and deferred
income taxes in the intercompany account with DLJ Inc. under a tax sharing arrangement.
Taxes are provided as if DLJdirect filed a separate return. Income tax
provision (benefit) included in the combined statements of operations is as
follows: Current:
U.S. Federal
7,083
1,022
(2,088
State and local
2,868
261
(574
Total current
9,951
1,283
(2,662
Deferred:
U.S. Federal
(1,602
(236
137
State and local
(456
(39
23
Total deferred
(2,058
(275
160
Total income tax provision (benefit)
7,893
1,008
(2,502
The following summarizes the difference between the "expected" tax provision,
which is computed by applying the statutory tax rate to income before income
tax provision (benefit), and the effective income tax provision, which is computed
by using the effective tax rate. Computed "expected" tax provision (benefit)
6,314
35.0
864
35.0
(2,144
35.0
State and local taxes, net of related
Federal income tax benefit
1,568
8.7
144
5.9
(358
5.9
Non-taxable expense items
11
0.1
—
—
—
—
Income tax provision (benefit)
7,893
43.8
1,008
40.9
(2,502
40.9
Net deferred tax assets:
Deferred compensation and other
2,837
$779
Management has determined that taxable income from carryback years and anticipated
future taxable income are sufficient to offset the tax benefit of deductible
temporary differences. As a result, at year-end 1999 and 1998, valuation allowances
have not been recorded against the net deferred tax assets. Although realization
is not assured, management believes it is more likely than not that all of the
net deferred tax assets will be realized. However, if estimates of future taxable
income during the carryforward period are reduced, the amount of the net deferred
tax assets considered realizable could also be reduced. 6. Net Capital DLJdirect includes DLJdirect, Inc., a registered broker-dealer
and a member of the National Association of Securities Dealers Inc. ("NASD").
DLJdirect, Inc. 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. As a broker-dealer
who does not carry customer accounts, under the alternative method permitted
by this rule, the required net capital, as defined, shall not be less than $250,000.
At December 31, 1999, DLJdirect, Inc.'s net capital of $24.2 million
was in excess of the minimum requirement by $24.0 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 December 31, 1999, DLJdirect complied with all applicable
regulatory capital adequacy requirements. 7. Concentrations of Credit Risk In the normal course of business, DLJdirect executes securities transactions
on behalf of customers through its affiliated clearing broker. In connection
with these activities, a customer's unsettled trades may expose DLJdirect
to off-balance-sheet credit risk in the event the customer is unable to fulfill
its contractual obligations. DLJdirect seeks to control the risk associated
with its customer activities by making credit inquiries when establishing customer
relationships and by monitoring customer trading activity. Credit risk is the amount of accounting loss DLJdirect would incur if
a customer failed to perform its obligations under contractual terms. Substantially
all of the clearing and depository operations for DLJdirect are performed
by its affiliated clearing broker pursuant to a clearance agreement. The affiliated
clearing broker reviews as considered necessary, the creditworthiness of the
customers with which DLJdirect conducts business. DLJdirect's
exposure to credit risk associated with the nonperformance by customers in fulfilling
their contractual obligations pursuant to securities transactions can be directly
affected by volatile securities markets, credit markets and regulatory changes. 8. Earnings Per Share Earnings (loss) per share amounts have been calculated by dividing net income
(loss) by the weighted average notional and outstanding shares of Tracking Stock.
Earnings per share amounts for the years ended December 31, 1999, 1998, and
1997 are calculated based on pro forma amounts as if the issuance of Tracking
Stock occurred at the beginning of 1997. The notional shares represent DLJ's
82.1% retained interest in DLJdirect. Prior to the offering, DLJ had
a 100% interest in the earnings of DLJdirect. These pro forma amounts
are presented for comparative purposes only. Tracking Stock earnings per common share amounts have been calculated by dividing
earnings applicable to common shares by the weighted average actual common shares
outstanding for the period the Tracking Stock was outstanding, May 28, 1999
to December 31, 1999. Tracking Stock 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: Basic EPS:
Earnings (loss) applicable to common shares
6,932
102,650
(903
18,400
Effect of dilutive securities:
Stock options
—
10
—
— *
Diluted EPS
6,932
102,660
(903
18,400
*Exercisable stock options are excluded from the computation of diluted earnings
per share since the effect of including them was antidilutive. 9. Employee Compensation and Benefit Plans 1999 Incentive Compensation Plan — DLJdirect Common Stock Awards under the 1999 Incentive Compensation Plan (the "Plan") are determined
by the Compensation and Management Committee of the Board of Directors of DLJ
Inc. Under the Plan, stock options on DLJdirect stock are granted at
a price equal to the fair value of the stock at the date of grant. The options
are exercisable for up to 10 years from the date of grant and vest in four equal
annual installments starting one year from the date of grant. Under the Plan,
10,000,000 shares are issuable. The following summarizes the stock option activity: Outstanding at December 31, 1998
—
Granted
6,300,050
19.76
Forfeited
(67,000
20.00
Exercised
Outstanding at December 31, 1999
6,233,050
19.76
The following summarizes information related to stock options outstanding at
December 31, 1999: $13.56 — $14.13
256,250
14.10
9.8
$14.14 — $20.00
5,976,800
20.00
9.4
Total
6,233,050
19.76
9.4
At December 31, 1999, there were no options exercisable. DLJdirect accounts for its stock option plans in accordance with APB
Opinion No. 25 and, accordingly, does not recognize any compensation cost associated
with such plans in the combined financial statements. If DLJdirect had
calculated compensation cost under SFAS No. 123 (based on the fair value of
options at the grant date), DLJdirect would have reported the following
net loss and loss per common share for the period the Tracking Stock was outstanding: Net loss (in thousands)
As reported
(903
Pro forma
(6,345
Basic loss per common share
As reported
(0.05
Pro forma
(0.34
Diluted loss per common share
As reported
(0.05
Pro forma
(0.34
The fair value of each option is estimated on the date of grant using the Black-Scholes
option-pricing model. For options granted during 1999 DLJdirect used
the following weighted average assumptions: expected volatility of 45%, risk-free
interest rates of 5.69% and an expected life of five years for all grants. The
weighted average fair value per share of options granted during 1999 was $9.30. 10. Leases, Commitments DLJdirect primarily obtains its office space and equipment under cancelable
and non-cancelable operating lease agreements through an affiliate. Such operating
leases expire on various dates through 2019. Expenses related to leased premises,
equipment and technology for the years ended December 31, 1999, 1998 and 1997
was $4.9 million, $3.0 million and $1.7 million, respectively. At December 31, 1999, non-cancelable operating leases in excess of one year,
excluding escalation and renewal options, had the following minimum lease commitments:
2000
17,502
2001
19,211
2002
17,504
2003
15,088
2004
13,390
2005-2019
46,890
Total
129,585
11. 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. 12. Quarterly Data (Unaudited) 1999:
First quarter
47,202
11,261
7,173
0.07
0.07
Second quarter
59,674
11,241
5,076
0.05
0.05
Third quarter
54,881
(3,728
(3,330
(0.03
(0.03
Fourth quarter
76,314
(734
(1,987
(0.02
(0.02
Total year
238,071
18,040
6,932
0.07
0.07
1998:
First quarter
24,057
(3,816
(2,257
(0.02
(0.02
Second quarter
28,278
1,954
1,156
0.01
0.01
Third quarter
30,182
1,314
776
0.01
0.01
Fourth quarter
35,407
3,016
1,785
0.02
0.02
Total year
117,924
2,468
1,460
0.01
0.01
For the periods prior to the quarter ended September 30, 1999, earnings per
share amounts are pro forma as if the issuance of DLJdirect Tracking
Stock occurred at the beginning of 1998. * Due to the effect of averaging the number of shares of common stock and common
stock equivalents throughout the year, the sum of the quarters' earnings per
common share may not equal the total year amounts. Part III ITEM 10. The information required to be furnished pursuant to this item is set forth
under the caption "Election of Directors" of the Proxy Statement, and is incorporated
herein by reference. The information required to be furnished pursuant to this item with regard
to executive officers of the Registrant that has not been included in the Registrant's
Proxy Statement is as follows: Michael A. Boyd was appointed Senior Vice President and General Counsel in
1975. Mr. Boyd joined the Company in 1971 as an Associate General Counsel of
the Company and General Counsel of its then subsidiary Alliance Capital Management
Corporation. Edward J. Resch was appointed Chief Accounting Officer in 1999. Mr. Resch joined
the Company in 1995 as Director of Internal Audit. Prior to 1999, Mr. Resch
was Chief Financial Officer of the Company's Capital Markets Group. Gates H. Hawn was appointed Chairman of the Financial Services Group in 1999.
Mr. Hawn joined the Company in 1981 and has been responsible for the Pershing
Division of the Company since 1983. ITEM 11. The information required to be furnished pursuant to this item is set forth
under the caption "Executive Compensation" of the Proxy Statement, and is incorporated
herein by reference. ITEM 12. The information required to be furnished pursuant to this item is set forth
under the captions "Voting Securities" and "Security Ownership Management" of
the Proxy Statement, and is incorporated herein by reference. ITEM 13. The information required to be furnished pursuant to this item is set forth
under the caption "Certain Relationships and Related Party Transactions" of
the Proxy Statement, and is incorporated herein by reference. Signatures Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, hereunto duly authorized, on the 30th day of March
2000. Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has to be signed below by the following persons on behalf of the registrant
and in the capacities indicated on the 30th day of March 2000. /s/ John S. Chalsty Chairman of the Board; Director
/s/ Joe L. Roby President and Chief Executive Officer; Director
/s/ Anthony F. Daddino Executive Vice President and Chief Financial Officer; Director
/s/ Hamilton E. James Managing Director; Director
/s/ David F. DeLucia Managing Director; Director
/s/ Stuart M. Robbins Managing Director; Director
/s/ Gates H. Hawn Chairman, Financial Services Group
/s/ Edward J. Resch Senior Vice President and Chief Accounting Officer
/s/ Michael A. Boyd Senior Vice President and General Counsel
/s/ Henri de Castries
Director
/s/ Denis Duverne Director
/s/ Louis Harris Director
/s/ Henri G. Hottinguer Director
/s/ W. Edwin Jarmain Director
/s/ Francis Jungers Director
/s/ Edward Miller Director
/s/ W. J. Sanders III Director
/s/ Stanley Tulin Director
/s/ John C. West Director
/s/ Michael Hegarty Director
/s/ Jane Mack Gould Director
Donaldson, Lufkin & Jenrette, Inc. Table of Contents Part IV
Exhibits, Financial Statement Schedules and ITEM 14
Financial Statements — DLJ Inc.
(a)(1)
Independent Auditors' Report
Consolidated Statements of Financial Condition at December 31, 1999 and
1998
Consolidated Statements of Income for the years ended December 31, 1999,
1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for years ended December 31, 1999,
1998 and 1997
Notes to Consolidated Financial Statements
Independent Auditors' Report
Combined Statements of Financial Condition at December 31, 1999 and 1998
Combined Statements of Operations for the years ended December 31, 1999,
1998 and 1997
Combined Statements of Changes in Allocated Equity for the years ended
December 31, 1999, 1998 and 1997
Combined Statements of Cash Flows for the years ended December 31, 1999,
1998 and 1997
Notes to Combined Financial Statements
Financial Statement Schedule
(a)(2)
Schedule I Condensed Financial Information of Registrant
ITEM 14
(a)(3)
Exhibits
Exhibit No.
Description
3.1
Restated Certificate of Incorporation of Registrant
3.2
By-laws of the Registrant
4.1
Registration Rights and Indemnification Agreement
4.2
Specimen Stock Certificate of the Registrant
4.8
Certificate of Designation of 3,500,000 shares of Fixed/Adjustable Rate
Cumulative Preferred Stock, Series B
10.6
Donaldson, Lufkin & Jenrette, Inc. 1995 Restricted Stock Unit Plan
10.7
Donaldson, Lufkin & Jenrette, Inc. 1995 Stock Option Plan
10.8
Donaldson, Lufkin & Jenrette, Inc. 1996 Stock Option Plan
10.10
Deferred Compensation Agreement, dated December 30, 1983, between Michael
A. Boyd and the Registrant
10.11
Deferred Compensation Agreement, dated December 30, 1983, between John
S. Chalsty and the Registrant
10.12
Deferred Compensation Agreement, dated December 30, 1983, between Anthony
F. Daddino and the Registrant
10.17
Deferred Compensation Agreement, dated December 30, 1983, between Joe
L. Roby and the Registrant
10.19
Letter agreement between the Registrant and ACMC, Inc., dated as of August
25, 1995, regarding certain state and local tax sharing arrangements
10.20
Insurance Agreement, dated August 27, 1992, by and between the Registrant
and Thomas E. Siegler, as Trustee and Owner of the 1992 Chalsty Insurance
Trust, dated August 25, 1995
10.21
Amendment, dated August 28, 1992, to the Insurance Agreement, dated August
27, 1992, by and between the Registrant and Michael Cappiccille, as Trustee
and Owner
10.22
Federal tax sharing agreement
10.23
Agreement of lease between 99 Bishopsgate Limited, Landlord, and DLJ
International Limited, Tenant and the Registrant, Tenant's Guarantor,
99 Bishopsgate London, EC2, dated as of October 24, 1996.
10.24
Agreement of sublease between SBC Warburg, Inc. and the Registrant's
tenant, 277 Park Avenue, New York, New York, dated June 13, 1997.
10.30
Agreement of Lease between Stanley Stahl D/B/A Stahl Park Avenue Co.,
Landlord, and the Registrant, Tenant, 277 Park Avenue, New York, New York,
dated as of October 26, 1994
10.31
First Amendment of Lease by and between Stanley Stahl D/B/A Stahl Park
Avenue Co. and the Registrant, dated as of March 30, 1995
10.32
Amended and Restated Equitable Credit Agreement, dated March 1, 1994,
among the Registrant, The Equitable Life Assurance Society of the United
States, Equitable Variable Life Insurance Company, DLJ Bridge Finance,
Inc., DLJ Capital Corporation and DLJ Investment Inc.
10.33
Preferred Stock purchase agreement between the Registrant and The Equitable
Life Assurance Society of the United States
10.36
First Amendment to the Amended and Restated Equitable Credit Agreement
dated March 1, 1994, among the Registrant, The Equitable Life Assurance
Society of the United States, Equitable Variable Life Insurance Company,
DLJ Bridge Finance, Inc., DLJ Capital Corporation and DLJ Investment Inc.
10.37
Agreement of lease between Broadpine Realty Holding Company, Inc. and
the Registrant, Tenant, 120 Broadway, New York, New York, dated as of
November 10, 1995
10.38
Donaldson, Lufkin & Jenrette, Inc. 1996 Incentive Compensation Plan
10.80
Insurance Agreement dated October 31, 1995, by and between the Registrant
and Winthrop Trust Company, as Trustee and Owner of the Anthony F. Daddino
Insurance Trust, dated August 25, 1995
10.84
Insurance Agreement dated January 4, 1996 by and between the Registrant
and Dan Curtis Roby as Trustee and Owner of the Roby 1995 Insurance Trust
dated November 27, 1995.
10.85
Second Amendment of Lease by and between Stanley Stahl D/B/A Stahl Park
Avenue Co. and the Registrant, dated August 24, 1995.
10.86
Third Amendment of Lease by and between Stanley Stahl D/B/A Stahl Park
Avenue Co. and the Registrant dated October 6, 1995.
10.87
Fourth Amendment of Lease by and between Stanley Stahl D/B/A Stahl Park
Avenue Co. and the Registrant dated April 29, 1996.
10.88
1996 Non-Employee Directors Stock Plan.
10.91
Purchase and Sale Agreement, dated July 16, 1998 among the Company, AXA
Financial Inc. and AXA Holdings (Belgium).
10.92
First Amended and Restated Credit Agreement, dated May 29, 1998 among
the Company, a syndicate of banks, Chase Securities, Inc. the Chase Manhattan
Bank, the Bank of New York and The First National Bank of Chicago
10.93
Agreement of Lease between USF Nominees Limited, Landlord, DLJ UK Properties
Limited, Tenant, 111 Old Broad Street, London and the Company, Surety,
dated as of June 3, 1998.
10.94
Sublease Agreement between Furman Selz, LLC, Sublandlord and the Company,
Subtenant, 280 Park Avenue, New York, New York, dated as of June 16, 1998.
11.1
Statement re: computation of basic earnings per share.
11.2
Statement re: computation of diluted earnings per share.
12.1
Computation of ratio of earnings to fixed charges and ratio of earnings
to combined fixed charges and preferred stock dividends.
21.1
Subsidiaries of the Registrant
23.1
Consent of KPMG LLP
27
Financial Data Schedule
The Company agrees to furnish copies to the Commission of all instruments
with respect to long-term debt of the Company and its subsidiaries.
ITEM 14
(b)
Reports on Form 8-K
Form 8-K dated January 12, 1999; Items 5 and 7
Exhibit Index Exhibit No.
Description
3.1
Restated Certificate of Incorporation of Registrant (Incorporated by
reference to the corresponding exhibit to the Registrant's Registration
Statement on Form S-1, Registration No. 33-96276).
3.2
By-laws of the Registrant (Incorporated by reference to the corresponding
exhibit to the Registrant's Registration Statement on Form S-1, Registration
No. 33-96276).
4.1
Registration Rights and Indemnification Agreement (Incorporated by reference
to the corresponding exhibit to the Registrant's annual report on Form
10-K for the fiscal year ended December 31, 1995).
4.2
Specimen Stock Certificate of the Registrant (Incorporated by reference
to the corresponding exhibit to the Registrant's Registration Statement
on Form S-1, Registration No. 33-96276).
4.7
Certificate of Designation of the Registrant's Fixed/Adjustable Rate
Cumulative Preferred Stock, Series A (Incorporated by reference to Exhibit
4.3 to the Registrant's Registration Statement on Form S-3, File No. 33-80771.
4.8
Certificate of Designation of 3,500,000 shares of Fixed/Adjustable Rate
Cumulative Preferred Stock, Series B. (Incorporated herein by reference
to Exhibit 99.1 to the Company's Form 8-K, dated January 8, 1998; Item
5).
10.6
Donaldson, Lufkin & Jenrette, Inc. 1995 Restricted Stock Unit Plan
(Incorporated by reference to the corresponding exhibit to the Registrant's
annual report on Form 10-K for the fiscal year ended December 31, 1995).
10.7
Donaldson, Lufkin & Jenrette, Inc. 1995 Stock Option Plan (Incorporated
by reference to the corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31, 1995).
10.8
Donaldson, Lufkin & Jenrette, Inc. 1996 Stock Option Plan (Incorporated
by reference to Annex A of the Registrant's Proxy Statement on Schedule
14Afiled on March 22, 1996 and furnished to shareholders in connection
with the solicitation of proxies for the Registrant's annual meeting of
shareholders to be held on April 30, 1996.
10.10
Deferred Compensation Agreement, dated December 30, 1983, between Michael
A. Boyd and the Registrant (Incorporated by reference to the corresponding
exhibit to the Registrant's Registration Statement on Form S-1, Registration
No. 33-96276).
10.11
Deferred Compensation Agreement, dated December 30, 1983, between John
S. Chalsty and the Registrant (Incorporated by reference to the corresponding
exhibit to the Registrant's Registration Statement on Form S-1, Registration
No. 33-96276).
10.12
Deferred Compensation Agreement, dated December 30, 1983, between Anthony
F. Daddino and the Registrant (Incorporated by reference to the corresponding
exhibit to the Registrant's Registration Statement on Form S-1, Registration
No. 33-96276).
10.17
Deferred Compensation Agreement, dated December 30, 1983, between Joe
L. Roby and the Registrant (Incorporated by reference to the corresponding
exhibit to the Registrant's Registration Statement on Form S-1, Registration
No. 33-96276).
10.19
Letter agreement between the Registrant and ACMC, Inc., dated as of August
25, 1995, regarding certain state and local tax sharing arrangements (Incorporated
by reference to the corresponding exhibit to the Registrant's Registration
Statement on Form S-1, Registration No. 33-96276).
10.20
Insurance Agreement, dated August 27, 1992, by and between the Registrant
and Thomas E. Siegler, as Trustee and Owner of the 1992 Chalsty Insurance
Trust, dated August 25, 1995 (Incorporated by reference to the corresponding
exhibit to the Registrant's Registration Statement on Form S-1, Registration
No. 33-96276).
10.21
Amendment, dated August 28, 1992, to the Insurance Agreement, dated August
27, 1992, by and between the Registrant and Michael Cappiccille, as Trustee
and Owner (Incorporated by reference to the corresponding exhibit to the
Registrant's Registration Statement on Form S-1, Registration No. 33-96276).
10.22
Federal tax sharing agreement (Incorporated by reference to the corresponding
exhibit to the Registrant's Registration Statement on Form S-1, Registration
No. 33-96276).
10.23
Agreement of lease between 99 Bishopsgate Limited, Landlord, and DLJ
International Limited, Tenant and the Registrant, Tenant's Guarantor,
99 Bishopsgate London, EC2, dated as of October 24, 1996. (Incorporated
by reference to the corresponding exhibit to the Registrant's annual report
on Form 10-K for the fiscal year ended December 31, 1996).
10.24
Agreement of sublease between SBC Warburg, Inc. and the Registrant's
tenant, 277 Park Avenue, New York, New York, dated June 13, 1997. (Incorporated
by reference to the corresponding exhibit on Form 10Q for the period ended
June 30, 1997).
10.30
Agreement of Lease between Stanley Stahl D/B/A Stahl Park Avenue Co.,
Landlord, and the Registrant, Tenant, 277 Park Avenue, New York, New York,
dated as of October 26, 1994 (Incorporated by reference to the corresponding
exhibit to the Registrant's Registration Statement on Form S-1, Registration
No. 33-96276).
10.31
First Amendment of Lease by and between Stanley Stahl D/B/A Stahl Park
Avenue Co. and the Registrant, dated as of March 30, 1995 (Incorporated
by reference to the corresponding exhibit to the Registrant's Registration
Statement on Form S-1, Registration No. 33-96276).
10.32
Amended and Restated Equitable Credit Agreement, dated March 1, 1994,
among the Registrant, The Equitable Life Assurance Society of the United
States, Equitable Variable Life Insurance Company, DLJ Bridge Finance,
Inc., DLJ Capital Corporation and DLJ Investment Inc. (Incorporated by
reference to the corresponding exhibit to the Registrant's Registration
Statement on Form S-1, Registration No. 33-96276).
10.33
Preferred Stock purchase agreement between the Registrant and The Equitable
Life Assurance Society of the United States (Incorporated by reference
to the corresponding exhibit to the Registrant's Registration Statement
on Form S-1, Registration No. 33-96276).
10.36
First Amendment to the Amended and Restated Equitable Credit Agreement
dated March 1, 1994, among the Registrant, The Equitable Life Assurance
Society of the United States, Equitable Variable Life Insurance Company,
DLJ Bridge Finance, Inc., DLJ Capital Corporation and DLJ Investment Inc.
(Incorporated by reference to the corresponding exhibit to the Registrant's
annual report on Form 10-K for the fiscal year ended December 31, 1995).
10.37
Agreement of lease between Broadpine Realty Holding Company, Inc. and
the Registrant, Tenant, 120 Broadway, New York, New York, dated as of
November 10, 1995 (Incorporated by reference to the corresponding exhibit
to the Registrant's annual report on Form 10-K for the fiscal year ended
December 31, 1995).
10.38
Donaldson, Lufkin & Jenrette, Inc. 1996 Incentive Compensation Plan
(Incorporated by reference to Annex B of the Registrant's Proxy Statement
on Schedule 14A filed on March 22, 1996 and furnished to shareholders
in connection with the solicitation of proxies for the Registrant's annual
meeting of shareholders to be held on April 30, 1996).
10.80
Insurance Agreement dated October 31, 1995, by and between the Registrant
and Winthrop Trust Company, as Trustee and Owner of the Anthony F. Daddino
Insurance Trust, dated August 25, 1995 (Incorporated by reference to the
corresponding exhibit to the Registrant's annual report on Form 10-K for
the fiscal year ended December 31, 1995).
10.84
Insurance Agreement dated January 4, 1996 by and between the Registrant
and Dan Curtis Roby as Trustee and Owner of the Roby 1995 Insurance Trust
dated November 27, 1995. (Incorporated herein by reference to the corresponding
exhibit to the Registrant's quarterly report on Form 10-Q for the period
ended June 30, 1996).
10.85
Second Amendment of Lease by and between Stanley Stahl D/B/A Stahl Park
Avenue Co. and the Registrant, dated August 24, 1995. (Incorporated herein
by reference to the corresponding exhibit to the Registrant's quarterly
report on Form 10-Q for the period ended June 30, 1996).
10.86
Third Amendment of Lease by and between Stanley Stahl D/B/A Stahl Park
Avenue Co. and the Registrant, dated October 6, 1995. (Incorporated herein
by reference to the corresponding exhibit to the Registrant's quarterly
report on Form 10-Q for the period ended June 30, 1996).
10.87
Fourth Amendment of Lease by and between Stanley Stahl D/B/A Stahl Park
Avenue Co. and the Registrant, dated April 29, 1996. (Incorporated herein
by reference to the corresponding exhibit to the Registrant's quarterly
report on Form 10-Q for the period ended June 30, 1996).
10.88
1996 Non-Employee Directors Stock Plan (Incorporated by reference to
Annex A of the Registrant's Proxy Statement on Schedule 14A filed on March
11, 1997 and furnished to shareholders in connection with solicitation
of proxies for the Registrant's annual meeting of shareholders to be held
on April 16, 1997).
10.91
Purchase and Sale Agreement, dated July 16, 1998 among the Company, The
Equitable Companies Incorporated and AXA Holdings (Belgium). (Incorporated
herein by reference to Exhibit 10.85 of the Registrant's quarterly report
on Form 10-Q for the period ended June 30, 1998).
10.92
First Amended and Restated Credit Agreement, dated May 29, 1998 among
the Company, a syndicate of banks, Chase Securities, Inc. the Chase Manhattan
Bank, the Bank of New York and The First National Bank of Chicago (Incorporated
herein by reference to Exhibit 10.91 of the Registrant's quarterly report
on Form 10-Q for the period ended June 30, 1998).
10.93
Agreement of Lease between USF Nominees Limited, Landlord, DLJ UK Properties
Limited, Tenant, 111 Old Broad Street, London and the Company, Surety,
dated as of June 3, 1998 (Incorporated herein by reference to Exhibit
10.92 of the Registrant's quarterly report on Form 10-Q for the period
ended June 30, 1998).
10.94
Sublease Agreement between Furman Selz, LLC, Sublandlord and the Company,
Subtenant, 280 Park Avenue, New York, New York, dated as of June 16, 1998
(Incorporated herein by reference to Exhibit 10.93 of the Registrant's
quarterly report on Form 10-Q for the period ended June 30, 1998).
11.1
Statement re: computation of basic earnings per share.
11.2
Statement re: computation of diluted earnings per share.
12.1
Computation of ratio of earnings to fixed charges and ratio of earnings
to combined fixed charges and preferred stock dividends.
21.1
Subsidiaries of the Registrant.
23.1
Consent of KPMG LLP.
27
Financial Data Schedule.
Selected Financial Data
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants
and Accounting and Financial Disclosure
Donaldson, Lufkin & Jenrette, Inc.
Years Ended December 31,
1999
1998
1997
1996
1995
(In millions, except share and per
share data)
Income Statement Data:
Revenues
Commissions
$
1,200.7
$
854.7
$
690.2
$
573.3
$
460.2
Underwritings
1,246.4
1,043.5
911.3
766.5
473.4
Fees
1,611.9
1,191.7
767.3
470.0
369.1
Interest, net(3)
2,175.4
2,189.1
1,652.1
1,074.2
904.1
Principal transactions-net:
Trading
718.6
(58.6
)
357.5
393.3
305.0
Investment
107.3
126.0
194.5
163.0
163.7
Other
86.0
60.6
67.6
60.7
55.1
Total revenues
7,146.3
5,407.0
4,640.5
3,501.0
2,730.6
Costs and Expenses
Compensation and benefits
3,105.4
2,231.7
1,908.2
1,549.0
1,190.0
Compensation expense-restricted
stock units
—
—
—
—
6.2
Interest
1,590.2
1,455.9
1,153.2
733.2
680.6
Communications and technology
445.2
314.6
270.5
175.4
126.3
Brokerage, clearing, exchange fees
and other
313.8
258.6
231.4
201.3
168.1
Occupancy and related costs
178.9
143.8
108.4
89.8
73.0
Other operating expenses
559.3
401.9
307.7
278.5
187.9
Total costs and expenses
6,192.8
4,806.5
3,979.4
3,027.2
2,432.1
Income before provision for income taxes
953.5
600.5
661.1
473.8
298.5
Provision for income taxes
352.8
229.7
252.8
182.5
119.4
Net income
$
600.7
$
370.8
$
408.3
$
291.3
$
179.1
Dividends on preferred stock
$
21.2
$
21.3
$
12.2
$
18.7
$
19.9
Earnings applicable to common shares
$
579.5
$
349.5
$
396.1
$
272.6
$
159.2
Earnings (loss) applicable to common shares (1):
DLJ
$
580.4
$
349.5
$
396.1
$
272.6
$
159.2
DLJdirect
$
(0.9
)
Earnings (loss) per common share(2):
DLJ
Basic
$
4.63
$
2.93
$
3.59
$
2.56
$
1.58
Diluted
$
4.18
$
2.65
$
3.16
$
2.30
$
1.55
DLJdirect
Basic
$
(0.05
)
Diluted
$
(0.05
)
Weighted average common shares outstanding
(in thousands) (2):
DLJ
Basic
125,433
119,260
110,318
106,600
101,140
Diluted
138,868
131,980
125,498
118,712
103,160
DLJdirect
Basic
18,400
Diluted
18,400
Years Ended December 31,
1999
1998
1997
1996
1995
(In millions, except share and per
share data
and financial ratios)
Balance Sheet Data (at end of period):
Securities purchased under agreements
to resell and securities borrowed
$
59,886.8
$
44,031.0
$
43,227.4
$
29,954.2
$
27,793.1
Total assets
109,012.1
72,225.7
70,449.3
55,447.2
44,520.0
Securities sold under agreements to
repurchase and securities loaned
68,016.2
43,097.8
43,694.1
32,103.1
29,369.0
Long-term borrowings
5,160.5
3,482.0
2,128.2
1,325.4
958.9
Exchangeable preferred stock
—
—
—
—
225.0
Redeemable trust securities
200.0
200.0
200.0
200.0
—
Stockholders' equity
3,907.2
2,927.7
2,061.5
1,647.2
1,198.7
Other Financial Data (at end of period):
Book value per common
share outstanding
$
27.46
$
20.44
$
15.72
$
12.40
$
10.25
Ratio of net assets to
stockholders' equity(4)
12.6
x
9.6
x
13.2
x
15.5
x
14.0
x
Ratio of long-term borrowings
to total capitalization(5)
0.53
0.52
0.48
0.40
0.37
Return on average equity(6)
19.1
%
16.5
%
24.1
%
20.6
%
17.1
%
Ratio of earnings to fixed charges
1.19
x
1.13
x
1.16
x
1.16
x
1.11
x
Ratio of earnings to combined
fixed charges and preferred
stock dividends(7)
1.19
x
1.13
x
1.16
x
1.16
x
1.10
x
Financial Condition and Results of Operations
Donaldson, Lufkin & Jenrette, Inc.
Long-Term Debt
Commercial Paper
Duff & Phelps
A
D-1
Fitch IBCA
A
F-1
Moody's
A3
P-2
Standard & Poors
A-
A-2
Thomson BankWatch
A+
TBW-1
1999
1998
(In billions)
Options written
$
15.1
$
5.8
Options purchased
$
7.4
$
3.1
Forward contracts purchased
$
35.6
$
41.3
Forward contracts sold
$
41.1
$
39.8
Futures contracts purchased
$
2.9
$
1.2
Futures contracts sold
$
4.3
$
1.6
Swaps
$
24.5
$
8.4
1999
1998
Assets
Liabilities
Assets
Liabilities
(In millions)
Options
$
519.9
$
1,002.6
$
114.5
$
397.1
Forward contracts
$
327.1
$
247.3
$
262.9
$
269.3
Futures contracts
$
3.5
$
9.8
$
4.0
$
1.0
Swaps
$
256.9
$
240.2
$
62.1
$
84.7
1999
1998
Assets
Liabilities
Assets
Liabilities
(In millions)
Options
$
169.5
$
444.8
$
86.6
$
309.9
Forward contracts
$
329.0
$
312.6
$
135.6
$
139.2
Futures contracts
$
10.3
$
7.4
$
3.7
$
19.4
Swaps
$
253.3
$
94.3
$
28.1
$
26.7
December 31,
1999
1998
(In millions)
Trading:
Interest rate risk
$10
$16
Equity risk
$14
$11
Foreign currency exchange risk
$—
$—
1999 DAILY NET TRADING REVENUES —
$ millions
NUMBER OF DAYS
–4
0
–3
2
–2
3
–1
7
–0
12
1
24
2
41
3
50
4
43
5
29
6
19
7
9
8
3
9
1
10+
9
Donaldson, Lufkin & Jenrette, Inc.
Consolidated Statements of Financial Condition
and per share data)
Assets
$
$
deposited with clearing organizations
amortization of $364,006 and $297,959, respectively)
$
$
Consolidated Statements of Financial Condition
and per share data)
$
$
securities of subsidiary trust holding solely
debentures of the Company
preference (4,000,000 shares issued and outstanding)
preference (3,500,000 shares issued and outstanding)
shares authorized; 126,014,091 and 122,812,558
shares issued and outstanding, respectively)
shares authorized; 18,400,000 shares issued and
outstanding; 84,250,000 notional shares in respect
of DLJ's retained interest)
and 2,082,236 units issued and outstanding, respectively)
)
)
$
$
Consolidated Statements of Income
Years Ended December 31,
(In thousands, except per share data)
$
$
$
agency and mortgage-backed
securities of
$3,249,565, $3,045,391
and $2,859,042, respectively
)
$
$
$
$
$
$
$
$
$
$
$
$
$
)
$
$
$
$
$
$
$
)
$
)
Consolidated Statements of Changes in
Stockholders' Equity
Stock
Common
Stock
Common
Stock
Stock
Units
Capital
Earnings
Other
Comprehensive
Income
(In thousands, except per share data)
$
$
$
$
$
$
$
410,257
)
)
)
)
)
)
)
370,205
)
)
)
)
AXA Financial and AXA, S.A.
)
)
)
599,435
)
)
)
)
)
$
$
$
$
$
$
$
$
Consolidated Statements of Cash Flows
For the Years Ended December 31,
(In thousands)
$
$
$
operating activities:
)
)
corporate development
investments
)
)
)
)
)
purposes or deposited
with clearing organizations
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
$
)
$
)
$
)
Consolidated Statements of Cash Flows
For the Years Ended December 31,
(In thousands)
$
)
$
)
$
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
and AXA, S.A.
$
$
$
Notes to Consolidated Financial Statements
December 31,
Weighted Average Interest Rates
December 31,
1999
1998
1999
1998
(In millions)
Securities sold under repurchase agreements
$
56,474
$
35,776
4.38%
4.89%
Bank loans
$
172
$
391
6.44%
5.79%
Borrowings from other financial institutions
$
1,186
$
125
6.21%
5.72%
December 31,
1999
1998
(In thousands)
Senior notes 5.875% - 6.875%, due various dates through
2008
$
2,040,673
$
1,391,036
Medium-term notes 4.995% - 7.42%, due various dates through
2016
2,229,859
1,046,647
Senior secured floating rate notes, due 2005
295,692
450,000
Global floating rate notes, due 2002
348,805
348,357
Subordinated exchange notes 9.58%, due 2003
225,000
225,000
Other
20,417
20,963
Total long-term borrowings
$
5,160,446
$
3,482,003
Current maturities
$
460,569
$
100,973
December 31,
1999
1998
(In thousands)
1999
$
—
$
100,973
2000
460,569
189,987
2001
1,033,239
369,265
2002
1,216,591
358,348
2003
374,531
374,397
2004
129,589
—
2005 - 2016
1,945,927
2,089,033
Total
$
5,160,446
$
3,482,003
December 31,
1999
December 31,
1998
December 31,
1997
(In thousands)
U.S. Federal
$
398,501
$
128,980
$
299,091
Foreign
4,844
45,701
25,131
State and local
81,201
27,076
62,861
Total current
484,546
201,757
387,083
Deferred:
U.S. Federal
(110,095
)
19,019
(117,622
)
State and local
(21,651
)
8,924
(16,611
)
Total deferred
(131,746
)
27,943
(134,233
)
Total provision for income taxes
$
352,800
$
229,700
$
252,850
1999
1998
1997
Amount
(In thousands)
Percent of
Pre-Tax
Income
Amount
(In thousands)
Percent of
Pre-Tax
Income
Amount
(In thousands)
Percent of
Pre-Tax
Income
Computed "expected" tax provision
$
333,725
35.0
%
$
210,175
35.0
%
$
231,385
35.0
%
)
)
)
)
)
)
Federal income tax benefit
$
%
$
%
$
%
1999
1998
(In thousands)
Deferred tax assets:
Inventory
$
$
Investments
Other liabilities
and accrued expenses
Office facilities
Deferred tax liabilities:
Investments
)
)
Office facilities
)
)
Other
)
)
$
$
1999
1998
(In billions)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1999
1998
Assets
Liabilities
Assets
Liabilities
(In millions)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1999
1998
Assets
Liabilities
Assets
Liabilities
(In millions)
Options
$
169.5
$
444.8
$
86.6
$
309.9
Forward contracts
$
329.0
$
312.6
$
135.6
$
139.2
Futures contracts
$
10.3
$
7.4
$
3.7
$
19.4
Swaps
$
253.3
$
94.3
$
28.1
$
26.7
Less Than
One Year
One to Three
Years
Three to Five
Years
Greater Than
Five Years
Total
(In millions)
$
$
$
$
$
$
$
$
$
$
%
%
%
%
%
DLJ Common Stock
December 31, 1999
December 31, 1998
December 31, 1997
Income
Shares
Income
Shares
Income
Shares
(In thousands)
$
$
$
$
$
$
$
$
to Common Shares
$
)
$
Options
Weighted Average
Exercise Price
)
)
)
)
)
)
)
Exercise
Prices
Number
Outstanding
Weighted Average
Exercise Price
Weighted Average
Remaining Life (Years)
Exercise
Prices
Number
Outstanding
Weighted Average
Exercise Price
Weighted Average
Remaining Life (Years)
DLJ
DLJdirect
1999
1998
1997
1999
(In thousands, except per share data)
$
$
$
$
)
$
$
$
$
)
$
$
$
$
)
$
$
$
$
)
$
$
$
$
)
$
$
$
$
)
DLJ
DLJdirect
1999
1998
1997
1999
%
%
%
%
%
%
%
%
%
%
%
%
$
$
$
$
Banking
Group
Fixed Income
Group
Equities
Group
Financial
Services
Group
Elimination
& Other
Total
(In millions)
external sources
$
$
$
$
$
)
$
revenues
)
)
amortization
)
income taxes
$
$
$
$
$
)
$
$
$
$
$
$
)
$
long lived assets
$
$
$
$
$
$
external sources
$
$
$
$
$
)
$
revenues
)
)
amortization
)
income taxes
$
$
$
$
$
)
$
$
$
$
$
$
$
long lived assets
$
$
$
$
$
$
external sources
$
$
$
$
$
)
$
revenues
)
)
amortization
)
income taxes
$
$
$
$
$
)
$
$
$
$
$
$
$
long lived assets
$
$
$
$
$
$
December 31,
1999
1998
1997
(In millions)
$
$
$
)
)
)
$
$
$
$
$
$
)
)
)
)
)
for income taxes
$
$
$
$
$
$
)
)
$
$
$
(1)
Consolidation/elimination represents intercompany accounts/intersegment
revenue-sharing arrangements that are eliminated in consolidation.
December 31,
1999
1998
1997
(In millions)
$
$
$
$
$
$
December 31,
1999
1998
1997
(In millions)
$
$
$
$
$
$
Total Revenues
Income
Before
Provisions
For Income
Taxes
Net
Income
DLJ Common Shares*
Earnings Per Share
DLJdirect Common Shares**
Earnings Per Share
Basic
Diluted
Basic
Diluted
$
$
$
$
$
$
$
)
)
)
)
$
$
$
$
$
$
$
$
$
$
$
$
$
)
$
)
$
$
$
$
$
$
$
Donaldson, Lufkin & Jenrette, Inc. (Parent Company)
Condensed Statements of Financial Condition
December 31,
1999
1998
(In thousands, except share and per share
data)
Assets
Cash and cash equivalents
$ 947,640
$ 706,010
Receivables from brokers, dealers and other
79,142
9,168
Long-term corporate development investments
65,987
57,029
Receivables from subsidiaries
6,771,106
4,110,750
Investment in subsidiaries, at equity
4,501,100
2,790,692
Other assets and deferred amounts
1,184,445
869,640
Total Assets
$13,549,420
$8,543,289
Liabilities and Stockholders' Equity
Short-term borrowings
$ 1,331,607
$ 234,843
Accounts payable and accrued expenses
1,784,064
1,204,671
Other liabilities
1,475,946
958,814
8.42% Junior subordinated debentures, held by a subsidiary
trust
206,224
206,224
Other long-term borrowings
4,844,337
3,011,038
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; 126,014,091
and 122,812,558 shares issued
and outstanding, respectively)
12,601
12,281
DLJdirect Common Stock ($0.10
par value; 500,000,000 shares
authorized; 18,400,000 shares issued
and outstanding;
84,250,000 notional
shares in respect of DLJ's retained interest)
1,840
—
Restricted stock units (10,358,294 units authorized;
1,099,955
and 2,082,236 units issued and
outstanding, respectively)
11,265
21,333
Paid-in capital
1,298,674
858,066
Retained earnings
2,205,818
1,657,710
Accumulated other comprehensive income
2,044
3,309
Employee deferred compensation stock trust
13,591
12,329
Common stock issued to employee deferred compensation
trust
(13,591
)
(12,329
)
Total stockholders' equity
3,907,242
2,927,699
Total Liabilities and Stockholders' Equity
$13,549,420
$8,543,289
Condensed Statements of Income
Years Ended December 31,
1999
1998
1997
(In thousands, except per share data)
Revenues:
Dividends from affiliates
$
—
$
205,090
$
136,000
Interest from affiliates
321,871
229,785
129,256
Allocations from affiliates
19,209
19,021
17,809
Other
66,275
27,486
19,958
Total revenues
407,355
481,382
303,023
Costs and Expenses:
Compensation and benefits
271,592
147,952
155,224
Interest and operating expenses
328,150
87,788
60,141
Total costs and expenses
599,742
235,740
215,365
Income (loss) before income tax benefit and
equity
in undistributed net income of
subsidiaries
(192,387
)
245,642
87,658
Income tax benefit
208,636
139,799
72,870
Income before equity in undistributed
net income of subsidiaries
16,249
385,441
160,528
Equity in undistributed net income (loss) of
subsidiaries
584,451
(14,641
)
247,722
Net income
$
600,700
$
370,800
$
408,250
Dividends on preferred stock
$
21,180
$
21,310
$
12,144
Earnings applicable to common shares
$
579,520
$
349,490
$
396,106
Earnings (loss) applicable to common shares:
DLJ
$
580,423
$
349,490
$
396,106
DLJdirect
$
(903
)
Earnings (loss) per common share:
DLJ
Basic
$
4.63
$
2.93
$
3.59
Diluted
$
4.18
$
2.65
$
3.16
DLJdirect
Basic
$
(0.05
)
Diluted
$
(0.05
)
Weighted average common shares outstanding:
DLJ
Basic
125,433
119,260
110,318
Diluted
138,868
131,980
125,498
DLJdirect
Basic
18,400
Diluted
18,400
Condensed Statements of Cash Flows
Years Ended December 31,
1999
1998
1997
(In thousands)
$
$
$
—
)
)
)
)
—
—
)
)
)
)
)
)
)
—
—
—
—
—
—
—
—
)
)
)
)
)
—
—
)
)
)
)
)
$
$
$
Notes to Condensed Financial Statements
December 31,
1999
1998
(In thousands)
$
$
$
$
December 31,
1999
1998
(In thousands)
$
—
$
—
$
4,844,337
$
3,011,038
DLJdirect
Years Ended December 31,
1999
1998
1997
1996
1995
(In thousands, except per share data)
$
$
$
$
$
—
—
—
—
Brokerage, clearing, exchange and other fees
Income (loss) before income tax
provision (benefit) and equity in
net loss of joint venture
)
)
)
—
—
—
—
$
$
$
)
$
$
$
$
$
)
$
$
$
$
$
)
$
$
$
$
$
)
$
$
$
)
—
—
—
—
$
)
$
)
As of December 31,
1999
1998
(In thousands)
$
$
—
—
As of and for the Years Ended December
31,
1999
1998
1997
1996
1995
(Dollars in thousands)
$
$
$
$
$
Unconsolidated Joint Venture(4):
$
(1) DLJdirect Common Stock tracks the separate performance of DLJ
Inc.'s existing 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 DLJ Inc.'s 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.
Financial Condition and Results of Operations
DLJdirect
Donaldson, Lufkin & Jenrette, Inc.
(a combination of certain assets and liabilities as described
in note 1)
Combined Statements of Financial Condition
December 31,
1999
1998
(In thousands)
$
$
$
$
$
$
$
$
(a combination of certain assets and liabilities as described in
note 1)
Combined Statements of Operations
Years Ended December 31,
1999
1998
1997
(In thousands, except per share data)
$
$
$
Income (loss) before income tax provision (benefit)
and equity in net loss of joint venture
)
)
)
$
$
$
)
$
$
$
)
$
$
$
)
$
$
$
)
$
)
$
)
$
)
(a combination of certain assets and liabilities as described
in note 1)
Combined Statements of Changes In Allocated Equity
For the Years Ended December 31, 1999,
1998 and 1997
Divisional
Equity
Allocated
Equity
Accumulated
Other
Comprehensive
Income
Total
Allocated
Equity
(In thousands)
$
$
$
$
)
)
)
)
)
)
$
$
$
$
(a combination of certain assets
and liabilities as described in note 1)
Combined Statements of Cash Flows
For the Years Ended December 31,
1999
1998
1997
(In thousands)
$
$
$
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
$
$
$
(a combination of certain assets and liabilities as described in
note 1)
Notes to Combined Financial Statements
(In thousands)
Total assets
$
318,874
$
$
)
$
)
December 31,
1999
1998
1997
(In millions)
$
$
$
Fee income includes amounts received from affiliates for order flow and technology
development. Interest income includes amounts received by DLJdirect from
affiliates for interest earned on DLJdirect's customers' balances.
December 31,
1999
1998
1997
(In thousands)
$
$
$
)
)
)
)
)
)
)
)
)
$
$
$
)
1999
1998
1997
Amount
(In thousands)
Percent of
Pre-tax
Income
Amount
(In thousands)
Percent of
Pre-tax
Income
Amount
(In thousands)
Percent of
Pre-tax
Income
$
%
$
%
$
)
%
)
$
%
$
%
$
)
%
Deferred tax assets and deferred tax liabilities are generated by the following
temporary differences:
1999
1998
(In thousands)
$
Year Ended
December 31, 1999
(Pro forma)
Tracking Stock
Period May 28 to
December 31, 1999
Income
Shares
(Loss)
Shares
(In thousands)
(In thousands)
$
$
)
$
$
$
$
)
Options
Weighted
Average
Exercise
Price
$
—
$
)
$
—
—
$
Exercise Prices
Number Outstanding
Weighted Average
Exercise Price
Weighted Average
Remaining Life (Years)
$
$
$
1999
$
)
$
)
$
)
$
)
$
)
$
)
Period
(In thousands)
$
$
Total
Revenues
Income (Loss)
Before Income Tax
Provision
And Equity
In Net Loss Of
Joint Venture
Net Income
(Loss)
Basic
Earnings
(Loss)
Per Common
Share*
Diluted
Earnings
(Loss)
Per Common
Share*
(In thousands)
$
$
$
$
$
)
)
)
)
)
)
)
)
$
$
$
$
$
$
$
)
$
)
$
)
$
)
$
$
$
$
$
Directors and Executive Officers of the Registrant
Executive Compensation
Security Ownership of Certain Beneficial Owners
and Management
Certain Relationships and Related Transactions
Donaldson, Lufkin & Jenrette,
Inc.
(Registrant)
By: /s/ Joe L.
Roby
Joe L. Roby
President and Chief Executive Officer
Name
Title
John S. Chalsty
Joe L. Roby
Anthony F. Daddino
Hamilton E. James
David F. DeLucia
Stuart M. Robbins
Gates H. Hawn
Edward J. Resch
Michael A. Boyd
Henri de Castries
Denis Duverne
Louis Harris
Henri G. Hottinguer
W. Edwin Jarmain
Francis Jungers
Edward Miller
W.J. Sanders III
Stanley Tulin
John C. West
Michael Hegarty
Jane Mack Gould
Form 10-K
Index to Financial Statements and Financial Statement Schedule for the Year
Eended December 31, 1999
Reports on Form 8-K
Financial Statements — DLJdirect
ITEM 14
4.7
Certificate of Designation of the Registrant's
Fixed/Adjustable Rate Cumulative Preferred Stock, Series A
10.95
Second Amended and Restated Credit, dated as
of May 28, 1999 among the Company, a syndicate of banks, Chase Securities,
Inc., the Chase Manhattan Bank, the Bank of New York and the First National
Bank of Chicago.
Form 8-K dated January 25, 1999; Item 5
Form 8-K dated March 16, 1999; Items 5 and 7
Form 8-K dated March 18, 1999; Item 5
Form 8-K dated April 22, 1999; Item 5
Form 8-K dated April 23, 1999; Items 5 and 7
Form 8-K dated July 23, 1999; Item 5
Form 8-K dated October 14, 1999; Item 5
10.95
Second Amended and Restated Credit, dated as
of May 28, 1999 among the Company, a syndicate of banks, Chase Securities,
Inc., the Chase Manhattan Bank, the Bank of New York and the First National
Bank of Chicago.
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