<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
---- OF THE SECURITIES EXCHANGE ACT OF
1934 For the quarterly period ended
September 30, 2000
or
---- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---- Commission file number 1-6862
CREDIT SUISSE FIRST BOSTON (USA), INC.
--------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-1898818
------------------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Eleven Madison Avenue, New York, New York 10010
------------------------------------------- --------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (212) 325-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( ).
As of November 8, 2000 the latest practicable date, there were 1,000 shares of
Credit Suisse First Boston (USA), Inc. Common Stock, $0.10 par value, and
18,400,000 shares of DLJdirect Common Stock, $0.10 par value, outstanding.
1
<PAGE>
CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES
(Formerly Donaldson, Lufkin & Jenrette, Inc. and Subsidiaries)
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
Part I FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
Item 1. Financial Statements
Credit Suisse First Boston (USA), Inc. Consolidated Financial Statements
Condensed Consolidated Statements of Financial Condition
at September 30, 2000 and December 31, 1999 (Unaudited)..................... 4
Condensed Consolidated Statements of Income for the three and nine
months ended September 30, 2000 and 1999 (Unaudited) ....................... 6
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the nine months ended September 30, 2000 (Unaudited)............. 7
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2000 and 1999 (Unaudited).................. 8
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................................. 10
DLJdirect Combined Financial Statements
Condensed Combined Statements of Financial Condition at September 30, 2000
and December 31, 1999 (Unaudited)........................................... 29
Condensed Combined Statements of Operations for the three and nine months
ended September 30, 2000 and 1999 (Unaudited) .............................. 30
Condensed Combined Statements of Changes in Allocated Equity for the nine
months ended September 30, 2000 (Unaudited)................................. 31
Condensed Combined Statements of Cash Flows for the nine months ended
September 30, 2000 and 1999 (Unaudited)..................................... 32
Notes to Condensed Combined Financial Statements (Unaudited)................ 33
</TABLE>
2
<PAGE>
CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES
(Formerly Donaldson, Lufkin & Jenrette, Inc. and Subsidiaries)
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS-CONTINUED
<TABLE>
<CAPTION>
Page
NUMBER
------
<S> <C> <C>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Credit Suisse First Boston (USA), Inc. Management's Discussion
and Analysis of Financial Condition and Results of Operations.............. 19
DLJdirect Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 36
Item 3. Quantitative and Qualitative Disclosures about Market Risk................... 26
Part II OTHER INFORMATION
Item 1. Legal Proceedings
Credit Suisse First Boston (USA), Inc........................................ 27
DLJdirect.................................................................... 41
Item 6. Exhibits and Reports on Form 8-K................................................ 42
Signature ................................................................................ 43
</TABLE>
3
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - CREDIT SUISSE FIRST BOSTON (USA), INC.
CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES
(Formerly Donaldson, Lufkin & Jenrette, Inc. and Subsidiaries)
Condensed Consolidated Statements of Financial Condition (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
ASSETS
<S> <C> <C>
Cash and cash equivalents.................................................... $ 4,297,100 $ 2,020,543
Cash and securities segregated for regulatory purposes or
deposited with clearing organizations..................................... 81,189 196,249
Collateralized short-term agreements:
Securities purchased under agreements to resell........................... 23,989,989 29,538,141
Securities borrowed....................................................... 24,416,328 30,348,609
Receivables:
Customers................................................................. 11,037,603 8,671,447
Brokers, dealers and other................................................ 8,490,250 5,978,065
Financial instruments owned, at value:
U.S. government and agencies.............................................. 13,364,685 14,543,947
Corporate debt............................................................ 5,432,977 5,379,440
Foreign sovereign debt.................................................... 1,091,387 3,018,175
Mortgage whole loans...................................................... 4,599,929 1,848,391
Equity and other.......................................................... 2,289,763 3,192,467
Long-term corporate development investments............................... 1,302,974 1,432,669
Office facilities, at cost (net of accumulated depreciation and amortization of
$457,932 and $364,006, respectively)...................................... 721,800 573,878
Other assets and deferred amounts............................................ 2,634,766 2,270,061
------------- -------------
Total Assets................................................................. $ 103,750,740 $ 109,012,082
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES
(Formerly Donaldson, Lufkin & Jenrette, Inc. and Subsidiaries)
Condensed Consolidated Statements of Financial Condition (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Commercial paper and short-term borrowings...................................... $ 855,854 $ 1,358,188
Collateralized short-term financings:
Securities sold under agreements to repurchase.............................. 47,735,546 56,474,394
Securities loaned........................................................... 11,746,859 11,541,759
Payables:
Customers................................................................... 7,423,253 7,792,857
Brokers, dealers and other.................................................. 7,907,391 4,780,631
Financial instruments sold not yet purchased, at value:
U.S. government and agencies................................................ 5,084,892 7,530,070
Corporate debt.............................................................. 739,076 624,639
Equities and other.......................................................... 5,133,032 4,788,819
Accounts payable and accrued expenses........................................... 3,128,730 3,295,448
Other liabilities............................................................... 1,129,431 1,408,945
Long-term borrowings............................................................ 7,748,227 5,309,090
Company-obligated mandatorily redeemable trust securities
of subsidiary trust holding solely debentures of the Company................ 200,000 200,000
Stockholders' Equity:
Preferred stock, 50,000,000 shares authorized:
Series A Preferred Stock, at $50.00 per share liquidation
preference (4,000,000 shares issued and outstanding)................... 200,000 200,000
Series B Preferred Stock, at $50.00 per share liquidation
preference (3,500,000 shares issued and outstanding).................. 175,000 175,000
Common stock, 1,500,000,000 shares authorized:
CSFB (USA) Common Stock ($0.10 par value; 500,000,000 shares authorized;
140,552,714 and 126,014,091 shares issued
and outstanding, respectively)......................................... 14,055 12,601
DLJdirect Common Stock ($0.10 par value; 500,000,000 shares authorized;
18,400,000 shares issued and outstanding; 84,250,000 notional shares in
respect of CSFB (USA)'s retained
interest).............................................................. 1,840 1,840
Restricted stock units (10,358,294 units authorized; 51,430
and 1,099,955 units issued and outstanding, respectively)................ 517 11,265
Paid-in capital............................................................. 1,897,622 1,298,674
Retained earnings........................................................... 2,631,187 2,205,818
Accumulated other comprehensive income...................................... (1,772) 2,044
Employee deferred compensation stock trust.................................. 13,591 13,591
Common stock issued to employee deferred compensation trust................. (13,591) (13,591)
----------------- ---------------
Total stockholders' equity............................................. 4,918,449 3,907,242
---------------- ---------------
Total Liabilities and Stockholders' Equity...................................... $ 103,750,740 $ 109,012,082
================ ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES
(Formerly Donaldson, Lufkin & Jenrette, Inc. and Subsidiaries)
Condensed Consolidated Statements of Income (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Commissions ......................................... $ 306,438 $ 269,174 $ 1,147,940 $ 841,278
Underwritings ....................................... 143,345 245,395 585,241 911,763
Fees ................................................ 454,414 448,691 1,391,212 1,068,439
Interest, net of interest to finance U.S. government,
agency and mortgage-backed securities of
$1,254,983, $790,133, $3,307,126, and
$2,284,995, respectively .......................... 914,552 537,460 2,755,398 1,514,023
Principal transactions-net:
Trading ........................................... 177,763 127,771 776,771 520,234
Investment ........................................ 47,863 57,558 197,222 85,737
Other ............................................... 20,742 18,323 79,677 66,864
----------- ----------- ----------- -----------
Total revenues ................................... 2,065,117 1,704,372 6,933,461 5,008,338
----------- ----------- ----------- -----------
Costs and Expenses:
Compensation and benefits ........................... 814,759 761,553 2,729,082 2,197,276
Interest ............................................ 717,749 375,697 2,144,566 1,112,301
Brokerage, clearing, exchange fees and other ........ 95,971 66,194 288,664 213,741
Occupancy and related costs ......................... 57,966 47,034 159,856 131,154
Communications and technology ....................... 142,171 120,470 392,459 313,507
Other operating expenses ............................ 157,501 139,424 493,134 390,359
----------- ----------- ----------- -----------
Total costs and expenses ......................... 1,986,117 1,510,372 6,207,761 4,358,338
----------- ----------- ----------- -----------
Income before provision for income taxes ................ 79,000 194,000 725,700 650,000
----------- ----------- ----------- -----------
Provision for income taxes .............................. 29,200 71,800 268,500 240,500
----------- ----------- ----------- -----------
Net income .............................................. 49,800 122,200 457,200 409,500
Dividends on preferred stock ............................ 5,289 5,289 15,867 15,867
----------- ----------- ----------- -----------
Earnings applicable to common shares .................... $ 44,511 $ 116,911 $ 441,333 $ 393,633
=========== =========== =========== ===========
Earnings (loss) applicable to common shares:
CSFB (USA) .......................................... $ 45,256 $ 117,507 $ 440,826 $ 394,180
DLJdirect ........................................... $ (745) $ (596) $ 507 $ (547)
=========== =========== =========== ===========
Earnings (loss) per common share:
CSFB (USA)
Basic ............................................ $ 0.35 $ 0.93 $ 3.43 $ 3.15
Diluted .......................................... $ 0.32 $ 0.85 $ 3.15 $ 2.84
=========== =========== =========== ===========
DLJdirect
Basic ............................................ $ (0.04) $ (0.03) $ 0.03 $ (0.03)
Diluted .......................................... $ (0.04) $ (0.03) $ 0.03 $ (0.03)
=========== =========== =========== ===========
Weighted average common shares:
CSFB (USA)
Basic ............................................ 129,862 125,993 128,387 125,211
Diluted .......................................... 143,068 138,185 140,022 139,012
=========== =========== =========== ===========
DLJdirect
Basic ............................................ 18,400 18,400 18,400 18,400
Diluted .......................................... 18,400 18,400 18,420 18,400
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES
(Formerly Donaldson, Lufkin & Jenrette, Inc. and Subsidiaries)
Condensed Consolidated Statements of Changes in Stockholders' Equity (UNAUDITED)
For the Year Ended December 31, 1999 and the
Nine Months Ended September 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Accumulated
CSFB (USA) DLJdirect Restricted Other
Preferred Common Common Stock Paid-in Retained Comprehensive
Stock Stock Stock Units Capital Earnings Income Total
------- -------- -------- ---------- ------- -------- --------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1998 ...... $ 375,000 $ 12,281 $ -- $ 21,333 $ 858,066 $ 1,657,710 $ 3,309 $ 2,927,699
Net income ............... -- -- -- -- -- 600,700 -- 600,700
Translation adjustment ... -- -- -- -- -- -- (1,265) (1,265)
Total comprehensive
income ................ 599,435
Net proceeds from
issuance of DLJdirect
Common Stock .......... -- -- 1,840 -- 344,751 -- -- 346,591
Dividends:
CSFB (USA) common
stock ($0.25 per share) -- -- -- -- -- (31,412) -- (31,412)
Preferred stock
($2.82 per share) ..... -- -- -- -- -- (21,180) -- (21,180)
Exercise of stock
options ............... -- 222 -- -- 72,873 -- -- 73,095
Conversion of restricted
stock units ........... -- 98 -- (10,068) 22,984 -- -- 13,014
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances at
December 31, 1999 .... 375,000 12,601 1,840 11,265 1,298,674 2,205,818 2,044 3,907,242
Net income ............... -- -- -- -- -- 457,200 -- 457,200
Translation adjustment ... -- -- -- -- -- -- (3,816) (3,816)
Total comprehensive
income ............... 453,384
Dividends:
CSFB (USA) common stock
($0.125 per share).... -- -- -- -- -- (15,964) -- (15,964)
Preferred stock
($2.1156 per share) ... -- -- -- -- -- (15,867) -- (15,867)
Exercise of stock
options ............... -- 1,349 -- -- 576,753 -- -- 578,102
Conversion of restricted
stock units .......... -- 105 -- (10,748) 22,195 -- -- 11,552
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances at
September 30, 2000 .... $ 375,000 $ 14,055 $ 1,840 $ 517 $ 1,897,622 $ 2,631,187 $ (1,772) $ 4,918,449
=========== =========== =========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES
(Formerly Donaldson, Lufkin & Jenrette, Inc. and Subsidiaries)
Condensed Consolidated Statements of Cash Flows (UNAUDITED)
(IN THOUSANDS)
For the Nine Months Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income .................................................................... $ 457,200 $ 409,500
------------ ------------
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization ............................................... 78,978 69,972
Deferred taxes .............................................................. 141,849 (29,991)
Increase in unrealized appreciation of long-term corporate development
investments .............................................................. (51,773) (78,892)
Foreign currency translation adjustment ..................................... (3,816) (962)
------------ ------------
622,438 369,627
(Increase) decrease in operating assets:
Cash and securities segregated for regulatory
purposes or deposited with clearing organizations ........................ 115,060 308,253
Securities purchased under agreements to resell ............................ 4,750,177 (11,586,307)
Securities borrowed ........................................................ 5,932,281 (6,855,018)
Receivables from customers ................................................. (2,366,156) (1,581,517)
Receivables from brokers, dealers and other ................................ (2,512,185) (4,677,392)
Financial instruments owned, at value ...................................... 1,203,679 (6,828,038)
Other assets and deferred amounts .......................................... (51,249) (100,736)
Increase (decrease) in operating liabilities:
Securities sold under agreements to repurchase ............................. (4,750,177) 11,586,307
Securities loaned .......................................................... 205,100 1,825,152
Payables to customers ...................................................... (369,604) 605,694
Payables to brokers, dealers and other ..................................... 3,126,760 4,076,347
Financial instruments sold not yet purchased, at value ..................... (1,986,528) 984,977
Accounts payable and accrued expenses ...................................... (166,718) 345,618
Other liabilities .......................................................... (279,512) 288,763
------------ ------------
Net cash provided by (used in) operating activities ............................. $ 3,413,366 $(11,238,270)
------------ ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
8
<PAGE>
CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES
(Formerly Donaldson, Lufkin & Jenrette, Inc. and Subsidiaries)
Condensed Consolidated Statements of Cash Flows (UNAUDITED)
(IN THOUSANDS)
For the Nine Months Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from investing activities:
Net (payments for) proceeds from:
Purchases of long-term corporate development investments .......... $ (584,650) $ (369,153)
Sales of long-term corporate development investments .............. 766,118 65,735
Office facilities ................................................. (243,644) (160,224)
Other assets ...................................................... (96,239) (191,511)
------------ ------------
Net cash used in investing activities ................................. (158,415) (655,153)
------------ ------------
Cash flows from financing activities:
Net proceeds from (payments for):
Short-term financings ............................................. (3,693,030) 10,968,814
Issuance of:
DLJdirect stock ................................................. -- 346,591
Senior notes .................................................... 503,399 649,188
Senior secured floating rate notes .............................. (9,578) (154,308)
Medium-term notes ............................................... 1,777,812 684,158
Structured borrowings ........................................... 166,925 139,727
Other long-term debt ............................................ 579 (210)
Dividends ......................................................... (31,831) (39,395)
Exercise of stock options ......................................... 247,330 31,919
------------ ------------
Net cash provided by (used in) financing activities ................... (1,038,394) 12,626,484
------------ ------------
Increase in cash and cash equivalents ................................. 2,276,557 733,061
Cash and cash equivalents at beginning of period ...................... 2,020,543 1,049,253
------------ ------------
Cash and cash equivalents at end of period ............................ $ 4,297,100 $ 1,782,314
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
9
<PAGE>
CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES
(Formerly Donaldson, Lufkin & Jenrette, Inc. and Subsidiaries)
Notes to Condensed Consolidated Financial Statements (UNAUDITED)
September 30, 2000
1. MERGER AND SUBSEQUENT EVENTS
On August 30, 2000, Credit Suisse Group, a corporation organized under the
laws of Switzerland ("CSG"), agreed to acquire Donaldson, Lufkin & Jenrette,
Inc. and Subsidiaries, ("DLJ, Inc." or the "Company") for total consideration
of approximately $12.7 billion. Pursuant to a tender offer, a CSG subsidiary
offered to purchase all the outstanding shares of the Company's common stock
of the series designated Donaldson, Lufkin & Jenrette, Inc. - DLJ Common
Stock for a purchase price of $90 per share. After the shares were tendered,
the shares held by AXA, S.A., the Company's ultimate parent at the time, and
certain affiliates of AXA, were purchased by the CSG subsidiary. On November
3, 2000, the closing date, DLJ, Inc. became an indirect wholly owned
subsidiary of CSG. Any unexercised or unvested stock options of the Company
as of the closing date were converted into CSG stock options. These
transactions (the "Transaction") will not have an effect on the outstanding
shares of DLJdirect tracking stock, the series designated Donaldson, Lufkin &
Jenrette - DLJdirect Common Stock. After the Transaction, DLJ, Inc. changed
its name to Credit Suisse First Boston (USA), Inc. (the "Company").
CSG will account for the Transaction using the purchase method of accounting.
However, since the Company has significant preferred stock and public debt
outstanding, no adjustments of the historical carrying values of the
Company's assets and liabilities to reflect the Transaction will be recorded
in the Company's historical financial statements. Similarly, although the
Transaction will give rise to significant goodwill, none of this goodwill
will be "pushed down" to the Company, and thus goodwill associated with the
Transaction will not affect the Company's results of operations.
In connection with the Transaction, a retention plan has been put in place
for certain of the Company's employees. The retention plan provides for
grants of CSG shares for future services above current compensation levels.
The CSG shares granted for future services vest over a three-year period, and
the total expense associated with these grants is expected to be
approximately $1.2 billion, which will be expensed over the vesting period
beginning as of the closing date.
The Company currently anticipates that it will record restructuring charges
in connection with the Transaction of between $900 million and $1.2 billion
on a pre-tax basis. This is a preliminary estimate, and it is possible that
the final restructuring charge may be outside the range. The expected
restructuring charges are primarily associated with severance payments to
employees, elimination of redundant office facilities and write-off of
related assets.
With a view to integrating the businesses of the Company and CSG, and in
anticipation of the completion of the Transaction, beginning on October 6,
2000, the Company and Credit Suisse First Boston, Inc., a wholly owned
subsidiary of CSG ("CSFBI"), initiated a series of transfers relating to
certain proprietary fixed income and equity portfolios maintained by the
Company and certain of its subsidiaries, on the one hand, and Credit Suisse
First Boston Corporation, a U.S. registered broker dealer that is a direct
wholly owned subsidiary of CSFBI ("CSFB Corp."), and certain of its
affiliates on the other. In connection with these transfers, CSFB Corp. and
certain of its affiliates made an aggregate cash payment of approximately
$4.5 billion to the Company and its subsidiaries. On November 3, 2000, in
conjunction with the closing of the Transaction, the final step in this
series of transfers (collectively, the "Transfer") was completed as CSFBI
transferred all of the outstanding shares of CSFB Corp. to the Company in
exchange for newly issued Shares of the Company. As a result of the Transfer,
CSFB Corp. became a direct wholly owned subsidiary of the Company. Since the
Transfer is a transfer of assets and liabilities between entities under
common control, it will be accounted for at historical cost in a manner
similar to a pooling of interests.
In connection with the Transfer, the Company retired $225.0 million of 9 5/8%
Senior Subordinated Notes for a total consideration of $245.4 million, which
includes accrued interest and a premium.
In addition, to facilitate the integration of the asset management businesses
of the Company and CSG, DLJ Asset Management Group, Inc. ("DLJAM"),
previously an indirect wholly owned subsidiary of the Company, became an
indirect wholly owned subsidiary of CSFBI through a series of share
dividends. The business of DLJAM has been combined with the business of
Credit Suisse Asset Management LLC.
In conjunction with the Transaction, CSG and its subsidiaries obtained a $3.1
billion loan from the Company that matures on November 1, 2001 and bears
interest at a spread above six-month LIBOR.
The financial statements do not reflect the financial position or results of
operations of CSFB Corp. or other parts of the Credit Suisse First Boston
business unit for any period.
10
<PAGE>
CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES
(Formerly Donaldson, Lufkin & Jenrette, Inc. and Subsidiaries)
Notes to Condensed Consolidated Financial Statements (UNAUDITED)
September 30, 2000
2. BASIS OF PRESENTATION
The condensed consolidated financial statements include Credit Suisse First
Boston (USA), Inc. and its subsidiaries. All significant intercompany balances
and transactions have been eliminated. Prior to the Transaction, the Company
was a majority-owned subsidiary of AXA Financial Inc. ("AXA Financial") and
its subsidiaries. The Company's separate financial statements presented
herein reflect AXA Financial's cost basis, established in 1985 when they
acquired the Company.
Certain financial information that is normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
but is not required for interim reporting purposes has been condensed or
omitted. These condensed consolidated financial statements reflect, in the
opinion of management, all adjustments (consisting of normal, recurring
accruals) necessary for a fair presentation of the condensed consolidated
financial position and results of operations for the interim periods presented.
The results of operations for interim periods are not necessarily indicative of
results for the entire year. These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto as of
and for the year ended December 31, 1999 included on Form 10-K filed by the
Company under the Securities Exchange Act of 1934.
To prepare condensed consolidated financial statements in conformity with
generally accepted accounting principles ("GAAP") management must estimate
certain amounts that affect the reported assets and liabilities, disclosure of
contingent assets and liabilities, and reported revenues and expenses. Actual
results could differ from those estimates.
Certain reclassifications have been made to prior period financial statements to
conform to the 2000 presentation. All references to DLJ, Inc. have been
changed to CSFB (USA), Inc.
3. ISSUANCE OF DLJdirect COMMON STOCK
DLJdirect represents a combination of the assets and liabilities of the
Company's online discount brokerage and related investment services business,
rather than a separately incorporated entity. DLJdirect Common Stock tracks
the separate performance of these businesses for periods subsequent to the
date of the offering ("Tracking Stock"). On May 28, 1999 ("the closing
date"), the Company issued in an initial public offering 18.4 million shares
of DLJdirect Common Stock. Prior to issuing the Tracking Stock, the Company's
existing common stock was designated as CSFB (USA) Common Stock (formerly
DLJ, Inc. 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 CSFB (USA). 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 CSFB (USA) includes a 100% retained
interest in DLJdirect for periods prior to the closing date and 82.1% for
subsequent periods.
4. INCOME TAXES
Income taxes for interim period condensed consolidated financial statements have
been accrued using the Company's estimated effective tax rate. Federal income
taxes paid for the nine months ended September 30, 2000 and 1999 were $221.3
million and $179.6 million, respectively.
5. 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 September 30,
2000 and December 31, 1999 there were no borrowings secured by Company-owned
securities.
11
<PAGE>
CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES
(Formerly Donaldson, Lufkin & Jenrette, Inc. and Subsidiaries)
Notes to Condensed Consolidated Financial Statements (UNAUDITED)
The Company has a $2.0 billion commercial paper program. Obligations issued
under this program are exempt from registration under the Securities Act
of 1933, as amended under Section 3(a)(3) (the "Securities Act"). At
September 30, 2000, $0.7 billion was outstanding under this program.
<TABLE>
<CAPTION>
Long-term borrowings: September 30, December 31,
2000 1999
------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Senior notes, 5.875%-8.00% due various dates through 2008............................. $ 2,544,072 $ 2,040,673
Medium-term notes, 0.62% - 7.60% due various dates through 2016...................... 4,007,671 2,229,859
Senior secured floating rate notes due 2005........................................... 286,114 295,692
Global floating rate notes, due 2002.................................................. 349,484 348,805
Subordinated exchange notes, 9.58% due 2003.......................................... 225,000 225,000
Structured borrowings, 6.628% - 7.46% due various dates through 2007................. 315,569 148,644
Other borrowings...................................................................... 20,317 20,417
------------- --------------
Total long-term borrowings....................................................... $ 7,748,227 $ 5,309,090
=========== ===========
Current maturities.................................................................... $ 1,260,352 $ 460,569
=========== ============
</TABLE>
In February 2000, the Company filed a shelf registration with the Securities
and Exchange Commission which enables the Company to issue $3.1 billion of
senior debt, subordinated debt securities, preferred stock and warrants. In
the third quarter of 2000, the Company issued $385.0 million medium-term
notes with various maturity dates through 2003 under its shelf registration
statement.
In April 2000, the Company established a Euro Medium-Term Note program which
enables it to issue up to $1.0 billion of notes. In the second quarter of
2000, the Company issued $890.5 million medium-term notes with various
maturity dates through 2005 from this program. There were no issuances under
this program in the third quarter.
In October 2000, in conjunction with the Transaction, the Company redeemed
the 9.58% Subordinated Exchange Notes due October 15, 2003 for $245.4
million, which includes accrued interest and a premium.
For the nine months ended September 30, 2000 and 1999, interest paid on all
borrowings and financing arrangements amounted to $5.3 billion and $3.3
billion, respectively.
6. LONG-TERM CORPORATE DEVELOPMENT INVESTMENTS
Long-term corporate development investments represent the Company's involvement
in private debt and equity investments. These investments generally have no
readily available market or may otherwise be restricted as to resale under the
Securities Act of 1933; therefore, these investments are carried at estimated
fair value as determined by the Finance Committee of the Board of Directors. The
cost of these investments was $1.2 billion at September 30, 2000 and $1.4
billion at December 31, 1999. For the nine months ended September 30, 2000 and
1999, the increase in net unrealized appreciation amounted to $51.8 million and
$78.9 million, respectively. Changes in unrealized appreciation arising from
changes in fair value or upon realization are reflected in revenues, principal
transactions-net, investment revenues in the condensed consolidated statements
of income.
7. NET CAPITAL
The Company's principal wholly owned subsidiary, Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJSC"), is a registered broker-dealer, a registered
futures commission merchant and member firm of The New York Stock Exchange,
Inc. (the "NYSE"). Accordingly, DLJSC is subject to the minimum net capital
requirements of the Securities and Exchange Commission, NYSE and the
Commodities Futures Trading Commission. As such, it is subject to NYSE's net
capital rule, which conforms to the Uniform Net Capital Rule pursuant to rule
15c3-1 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Under the alternative method permitted by this rule, the required net
capital may not be less than two percent of aggregate debit balances arising
from customer transactions or four percent of segregated funds whichever is
greater. If a member firm's capital is less than four
12
<PAGE>
CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES
(Formerly Donaldson, Lufkin & Jenrette, Inc. and Subsidiaries)
Notes to Condensed Consolidated Financial Statements (UNAUDITED)
percent of aggregate debit balances, the NYSE may require the firm to reduce
its business. If a member firm's net capital is less than five percent of
aggregate debit balances, the NYSE may prevent the firm from expanding its
business and declaring cash dividends. At September 30, 2000, DLJSC's net
capital of approximately $1.7 billion was 15 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
September 30, 2000, the Company and its broker-dealer subsidiaries complied with
all applicable regulatory capital adequacy requirements.
8. EARNINGS PER SHARE
Earnings per common share for periods subsequent to the issuance of the Tracking
Stock have been calculated using the two-class method. The two-class method is
an earnings allocation formula that determines the earnings per share for each
class of common stock according to participation rights in undistributed
earnings.
For the Company, 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. The Company's retained interest excludes the
effect of the 10 million shares of common stock that have been reserved for
issuance under the DLJdirect Incentive Compensation Plan. Diluted earnings per
common share include the dilutive effects of the Restricted Stock Unit Plan and
the dilutive effect of options calculated under the treasury stock method.
During the first quarter of 2000, 1.0 million RSUs vested and were converted
into the Company's common stock. This amount is included in the calculation of
diluted earnings per common share.
For DLJdirect, basic earnings per share is calculated by dividing earnings
applicable to common shares for the period the Tracking Stock was outstanding by
the weighted average actual common shares outstanding. Diluted earnings per
common share include the dilutive effect of options calculated under the
treasury stock method. Earnings per share for DLJdirect for periods prior to the
closing date are not presented as such amounts are not meaningful.
The numerators and denominators of the basic and diluted earnings per common
share computations include the following items:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
CSFB (USA) COMMON STOCK 2000 1999 2000 1999
----------------------- ----- ----- ----- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Earnings applicable to common shares-basic and diluted ...... $ 45,526 $ 117,507 $ 440,826 $ 394,180
========= ========= ========= =========
Weighted average common shares-basic ........................ 129,862 125,993 128,387 125,211
Effect of dilutive securities:
Restricted stock units .................................... -- 944 122 1,061
Stock options ............................................. 13,206 11,248 11,513 12,740
--------- --------- --------- ---------
Weighted average common shares-diluted ....................... 143,068 138,185 140,022 139,012
========= ========= ========= =========
DLJdirect COMMON STOCK
Earnings (loss) applicable to common shares-basic and diluted $ (745) $ (596) $ 507 $ (547)
========= ========= ========= =========
Weighted average common shares-basic ........................ 18,400 18,400 18,400 18,400
Effect of diluted stock options ............................. -- -- 20 --
--------- --------- --------- ---------
Weighted average common shares - diluted .................... 18,400 18,400 18,420 18,400
========= ========= ========= =========
</TABLE>
13
<PAGE>
CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES
(Formerly Donaldson, Lufkin & Jenrette, Inc. and Subsidiaries)
Notes to Condensed Consolidated Financial Statements (UNAUDITED)
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 meet clients' needs. These transactions involve
options, forwards, futures and swaps. The Company also enters into interest rate
and cross currency swaps to modify the characteristics of periodic interest
payments associated with some of its long-term debt obligations.
For further discussion of these matters, refer to Note 9 of the Consolidated
Financial Statements in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
QUANTITATIVE DISCLOSURES FOR ALL TRADING DERIVATIVES
The notional or contract amounts indicate the extent of the Company's
involvement in the derivative instruments noted above. They do not measure the
Company's exposure to market or credit risk and do not represent the future cash
requirements of such contracts. The notional (contract) amounts for derivatives
outstanding at September 30, 2000 and December 31, 1999 are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
(IN BILLIONS)
-------------
<S> <C> <C>
Options written............................................... $ 17.6 $ 15.1
Options purchased............................................. $ 20.8 $ 7.4
Forward contracts purchased................................... $ 31.4 $ 35.6
Forward contracts sold........................................ $ 46.3 $ 41.1
Futures contracts purchased................................... $ 2.2 $ 2.9
Futures contracts sold........................................ $ 3.1 $ 4.3
Swaps......................................................... $ 42.2 $ 24.5
</TABLE>
The fair values of derivatives outstanding at September 30, 2000 and December
31, 1999 are as follows:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------------- ------------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
(IN MILLIONS)
-------------
<S> <C> <C> <C> <C>
Options........................................... $ 582.2 $ 1,247.5 $ 519.9 $ 1,002.6
Forward contracts................................. $ 1,029.7 $ 1,463.3 $ 327.1 $ 247.3
Futures contracts................................. $ 4.9 $ 1.1 $ 3.5 $ 9.8
Swaps............................................. $ 387.8 $ 369.1 $ 256.9 $ 240.2
</TABLE>
The average fair values of derivatives for the nine months ended September 30,
2000 and the year ended December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 2000 December 31, 1999
-------------------------- ------------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Options........................................... $ 451.3 $ 1,009.2 $169.5 $ 444.8
Forward contracts................................. $ 1,086.0 $ 1,488.1 $329.0 $ 312.6
Futures contracts................................. $ 23.9 $ 8.9 $ 10.3 $ 7.4
Swaps............................................. $ 377.3 $ 329.9 $253.3 $ 94.3
</TABLE>
The majority of the Company's derivatives are short-term in duration.
14
<PAGE>
CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES
(Formerly Donaldson, Lufkin & Jenrette, Inc. and Subsidiaries)
Notes to Condensed Consolidated Financial Statements (UNAUDITED)
DISCLOSURES FOR ALL NON-TRADING DERIVATIVES
The Company also enters into interest rate and cross currency swaps to modify
the characteristics of periodic interest payments associated with some of its
long-term debt obligations. At September 30, 2000 and December 31, 1999, the
notional amount of these swaps was $4.5 billion and $3.3 billion, respectively.
10. COMMITMENTS AND CONTINGENCIES
The Company issues letters of credit for which it is contingently liable for
$351.8 million at September 30, 2000.
The Company enters into commitments to extend credit to non-investment grade
borrowers in connection with the origination and syndication of senior bank
debt. At September 30, 2000, unfunded senior bank loan commitments outstanding
amounted to $890.5 million.
At September 30, 2000, the Company has commitments of $1.7 billion to invest on
a side-by-side basis with merchant banking partnerships.
As a securities broker and dealer, risk is an inherent part of the Company's
business activities. The principal types of risks involved in the Company's
activities are market risk, credit or counterparty risk and transaction risk.
The Company has developed an infrastructure designed to control, monitor and
manage each type of risk. For a further discussion of these matters, refer to
Notes 10 and 11 of the Consolidated Financial Statements in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
11. INDUSTRY SEGMENT AND GEOGRAPHIC DATA
The Company operates and manages its businesses through four operating segments:
Banking, Equities, Fixed Income and Financial Services. The following is a
summary of the Company's segment data:
<TABLE>
<CAPTION>
Fixed Financial
Banking Income Equities Services Elimination
For the Quarters Ended: Group Group Group Group & Other Total
----------------------- ----- ----- ----- ----- ------- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
SEPTEMBER 30, 2000
Net revenues from external sources $ 413.5 $ 157.0 $ 262.2 $ 358.3 $ (40.4) $ 1,150.6
Net intersegment revenues ........ 0.0 (0.1) (1.0) 40.6 (39.5) 0.0
Net interest revenue ............. (6.6) 42.2 18.2 103.8 39.2 196.8
---------- -------- ---------- ---------- -------- ----------
Total net revenues ............ $ 406.9 $ 199.1 $ 279.4 $ 502.7 $ (40.7) $ 1,347.4
========== ======== ========== ========== ======== ==========
Income before income taxes ....... $ 52.1 $ 44.0 $ (34.6) $ 70.8 $ (53.3) $ 79.0
========== ======== ========== ========== ======== ==========
SEPTEMBER 30, 1999
Net revenues from external sources $ 534.3 $ 131.1 $ 219.6 $ 316.4 $ (34.5) $ 1,166.9
Net intersegment revenues ........ 0.0 0.0 (1.7) 28.0 (26.3) 0.0
Net interest revenue ............. 2.2 54.7 (3.2) 70.2 37.9 161.8
---------- -------- ---------- ---------- -------- ----------
Total net revenues ............ $ 536.5 $ 185.8 $ 214.7 $ 414.6 $ (22.9) $ 1,328.7
========== ======== ========== ========== ======== ==========
Income before income taxes ....... $ 156.1 $ 48.9 $ 2.0 $ 55.7 $ (68.7) $ 194.0
========== ======== ========== ========== ======== ==========
For the Nine Months Ended:
SEPTEMBER 30, 2000
Net revenues from external sources $ 1,441.3 $ 475.4 $ 1,054.2 $ 1,303.3 $ (96.2) $ 4,178.1
Net intersegment revenues ........ 0.0 (0.1) (4.1) 128.1 (123.8) 0.0
Net interest revenue ............. (24.7) 132.8 38.5 314.0 150.2 610.8
---------- -------- ---------- ---------- -------- ----------
Total net revenues ............ $ 1,416.6 $ 608.1 $ 1,088.6 $ 1,745.4 $ (69.8) $ 4,788.9
========== ======== ========== ========== ======== ==========
Income before income taxes ....... $ 302.9 $ 155.0 $ 108.6 $ 349.8 $ (190.6) $ 725.7
========== ======== ========== ========== ======== ==========
</TABLE>
15
<PAGE>
CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES
(Formerly Donaldson, Lufkin & Jenrette, Inc. and Subsidiaries)
Notes to Condensed Consolidated Financial Statements (UNAUDITED)
<TABLE>
<CAPTION>
Fixed Financial
Banking Income Equities Services Elimination
For the Nine Months Ended: Group Group Group Group & Other Total
-------------------------- ----- ----- ----- ----- ------- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
SEPTEMBER 30, 1999
Net revenues from external sources $ 1,335.2 $ 602.5 $ 676.9 $ 980.0 $ (100.3) $ 3,494.3
Net intersegment revenues ........ 0.0 (0.1) (5.1) 83.1 (77.9) 0.0
Net interest revenue ............. (1.6) 110.3 8.2 194.9 89.9 401.7
---------- ----------- ---------- ----------- ---------- ------------
Total net revenues ........... $ 1,333.6 $ 712.7 $ 680.0 $ 1,258.0 $ (88.3) $ 3,896.0
========== =========== ========== =========== ========== ============
Income before income taxes ....... $ 360.4 $ 222.6 $ 51.5 $ 230.1 $ (214.6) $ 650.0
========== =========== ========== =========== ========== ============
Balance sheet data:
SEPTEMBER 30, 2000
Segment assets ................... $ 2,220.5 $ 64,842.6 $ 5,019.7 $ 34,367.2 $ (2,699.3) $ 103,750.7
========== =========== ========== =========== ========== ============
DECEMBER 31, 1999
Segment assets ................... $ 2,273.2 $ 74,884.7 $ 5,325.5 $ 30,586.4 $ (4,057.7) $ 109,012.1
========== =========== ========== =========== ========== ============
</TABLE>
The following is a reconciliation of the Company's reported income before
provision for income taxes to the Company's consolidated totals:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
----------------------------------------------------------------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
INCOME BEFORE PROVISION FOR INCOME TAXES:
Total income for reported segments....................... $ 132.3 $ 262.7 $ 916.3 $ 864.6
All other income (losses)................................ 30.9 (12.8) 114.0 (39.9)
Consolidation/elimination (1)............................ (84.2) (55.9) (304.6) (174.7)
------- ------- ------- -------
Total income before provision for income taxes........ $ 79.0 $ 194.0 $ 725.7 $ 650.0
======= ======= ======= =======
</TABLE>
(1) Consolidation/elimination represents intercompany accounts/intersegment
revenue-sharing arrangements that are eliminated in consolidation.
The Company's principal operations are located in the United States. The Company
maintains offices in Europe, Latin America and Asia, with the majority of
foreign business done through the London offices. The following are net revenues
by geographic region:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
--------------------------------
(IN MILLIONS)
<S> <C> <C>
United States...................................................... $ 3,851.5 $ 3,332.3
Other foreign...................................................... 937.4 563.7
----------- -----------
Total........................................................ $ 4,788.9 $ 3,896.0
========= =========
</TABLE>
12. LEGAL PROCEEDINGS
Since Ameriserve Food Distribution, Inc. ("Ameriserve"), its parent company,
Nebco Evans Holding Company, and related corporations, filed Chapter 11
petitions in the U.S. Bankruptcy Court for the District of Delaware on or
about January 31, 2000, Ameriserve has entered into an agreement, subject to
Bankruptcy Court approval, to sell substantially all of its remaining assets,
and has filed a liquidating plan. DLJ Bridge Finance, Inc., a wholly owned
subsidiary of the Company, through a subsidiary, made a $100 million secured
loan to Ameriserve. The loan subsequently was transferred to DLJ Capital
16
<PAGE>
CREDIT SUISSE FIRST BOSTON (USA), INC. AND SUBSIDIARIES
(Formerly Donaldson, Lufkin & Jenrette, Inc. and Subsidiaries)
Notes to Condensed Consolidated Financial Statements (UNAUDITED)
Funding, which has filed a claim with respect to that loan in the Bankruptcy
Court proceeding. Certain parties to the Bankruptcy Court proceeding may seek
subordination of DLJ Capital Funding's claim. In the Bankruptcy Court
proceedings, discovery has been taken from the Company and its affiliates
concerning their relationships with Ameriserve and related companies.
On August 25, 2000, the U.S. Court of Appeals for the Second Circuit ruled on
plaintiffs' appeal from the judgment of the U.S. District Court for the Southern
District of New York dismissing plaintiffs' complaint in the putative class
action brought by a purported class of purchasers of certain notes and warrants
to purchase shares of common stock of Rickel Home Centers, Inc. The Court of
Appeals affirmed the District Court's judgment in part, reversed the judgment in
part, and remanded the case to the District Court for further proceedings on
class certification and other issues. In October 2000, the case was
reassigned from the original judge who presided over the case to another
judge. Plaintiffs moved again for class certification. Defendants have
opposed the motion. The motion is pending.
On September 7, 2000, defendants in IN RE PUBLIC OFFERING FEE ANTITRUST
LITIGATION, which is pending in the U.S. District Court for the Southern
District of New York, filed their memorandum in opposition to plaintiffs' motion
for leave to file a consolidated second amended complaint. On October 2, 2000,
all defendants in CHS ELECTRONICS, INC. V. CREDIT SUISSE FIRST BOSTON
CORPORATION, ET AL., moved to transfer that action from the U.S. District Court
for the Southern District of Florida to the U.S. District Court for the Southern
District of New York.
On October 3, 2000, the U.S. District Court for the Northern District of Texas
partially reversed the ruling issued by the U.S. Bankruptcy Court in the
adversary proceeding brought by the National Gypsum Corporation ("NGC")
Settlement Trust against DLJSC and others. The District Court agreed with the
Bankruptcy Court that the claims of the State Court plaintiff and the NGC
Settlement Trust are not absolutely barred by the NGC plan of reorganization.
However, contrary to the Bankruptcy Court's ruling, the District Court held that
the NGC plan of reorganization requires that plaintiffs (i) pay the attorneys'
fees and costs of defendants in the event that plaintiffs' claims are
unsuccessful, and (ii) provide appropriate proof of plaintiffs' ability to pay
such fees and costs. The State Court plaintiff and the NGC Settlement Trust have
appealed the District Court's judgment to the U.S. Court of Appeals for the
Fifth Circuit.
Beginning in August 2000, the Company, its directors and certain other entities
were named as defendants in four putative class actions filed in the Court of
Chancery, State of Delaware, New Castle County, on behalf of a purported class
of public shareholders of DLJ common stock. Each of the complaints, which are
substantially the same, allege that the transaction (the "CSG Transaction")
announced on August 30, 2000, whereby the Company agreed to be acquired by
Credit Suisse Group ("CSG"), is a breach of the defendants' fiduciary duties;
that the consideration to be received by the public shareholders of the
Company in the transaction is inadequate and unfair; and that the process
whereby the transaction was negotiated and approved was flawed. The
complaints seek, among other relief, damages in an unspecified amount and
rescission of the transaction. Defendants have not been required to file
responsive pleadings in these actions. The Company intends to defend itself
vigorously against all of the allegations contained in the complaints.
Beginning in September 2000, the Company, its directors and certain other
entities were named as defendants in four putative class actions filed in the
Court of Chancery, State of Delaware, New Castle County, on behalf of a
purported class of public shareholders of DLJdirect common stock. Each of the
complaints, which are substantially the same, alleges that the CSG Transaction
is unfair to the holders of DLJdirect common stock in that the value of such
DLJdirect shares is not being maximized in the CSG Transaction. The complaints
further allege that the Company's directors breached their fiduciary duties to
DLJdirect shareholders by approving the CSG Transaction, and that the Company's
directors had personal financial interests that created a conflict of interest
for them because they allegedly own more DLJ common shares in terms of value
than they own DLJdirect shares. The complaints seek, among other relief, damages
in an unspecified amount. On or about October 11, 2000, an amended complaint
was filed in one of these actions which adds allegations that the completion
of the CSG Transaction would adversely affect the DLJdirect shares; that the
holders of DLJdirect shares have a contractual right to a separate vote on
the CSG Transaction as well as a contractual right to have their shares
purchased if the Company shares are being purchased. As additional relief,
the amended complaint seeks, among other things, an order requiring a class
vote on the CSG Transaction. At a conference on October 12, 2000, the Court
denied a motion by plaintiffs to schedule a preliminary injunction hearing on
the allegations of the amended complaint. The time for defendants to answer
or respond to the pleadings in the DLJdirect cases has not yet elapsed. The
Company intends to defend itself vigorously against all of the allegations
contained in the complaints.
17
<PAGE>
CREDIT SUISSE FIRST BOSTON (USA), INC.
(Formerly Donaldson, Lufkin & Jenrette, Inc.)
Notes to Condensed Consolidated Financial Statements (UNAUDITED)
In September 2000, the Company, its directors and CSG, along with certain other
entities, were named as defendants in a putative class action commenced in the
U.S. District Court for the Southern District of New York brought on behalf of a
purported class of public shareholders of DLJdirect. The complaint alleges,
among other things, that certain statements in the 1999 prospectus issued in
connection with the initial public offering of DLJdirect shares were allegedly
false and misleading in their description of the rights attributable to the
DLJdirect shares; that the tender offer materials disseminated in connection
with the CSG Transaction are false and misleading in allegedly failing to
describe certain rights to the DLJdirect shares in connection with the CSG
Transaction, among other things; and that these alleged misstatements constitute
violations of the federal securities laws. The complaint further alleges that
defendants violated their fiduciary duties under state law by failing to provide
for the purchase of DLJdirect shares as part of the CSG Transaction. The
complaint seeks, among other things, an award of rescission or damages in an
unspecified amount, a declaration that defendants have violated the federal
securities laws and their state law fiduciary duties, and unspecified
corrective disclosures. On October 2, 2000, plaintiff moved for an order
setting a date for a preliminary injunction hearing and for expedited
discovery, which the Court has not granted. The Company intends to defend
itself vigorously against all of the allegations contained in the complaint.
On September 6, 2000, DLJSC, Donaldson, Lufkin & Jenrette International ("DLJI")
and certain other individuals and entities were named as defendants in a
putative class action filed in the U.S. District Court for the Southern District
of New York on behalf of a purported class of persons who purchased or acquired
American Depository Shares ("ADS") of Independent Energy Holdings PLC
("Independent Energy") in Independent Energy's secondary offering of $200
million of ADS in March 2000. In early September 2000, shortly before this
action was filed, receivers were appointed for Independent Energy in the United
Kingdom. The complaint alleges violations of the federal securities laws against
DLJSC, as one of the underwriters of the ADS, and DLJI, as a financial advisor
to Independent Energy that sold shares in connection with the secondary
offering, arising out of alleged misrepresentations and omissions contained in
the registration statement and prospectus for the secondary offering of ADS. The
complaint seeks, among other things, compensatory damages, and rescissory,
equitable and/or injunctive relief. The time for DLJSC and DLJI to respond to
the complaint has not yet elapsed. DLJSC and DLJI intend to defend themselves
vigorously against all the allegations contained in the complaint.
Beginning in October 2000, other alleged purchasers of Independent Energy ADS
filed five additional putative class action complaints in the U.S. District
Court for the Southern District of New York naming DLJSC, among others, as a
defendant. The complaints were filed on behalf of purported classes of
persons who purchased or acquired Independent Energy ADS in the secondary
offering of ADS and thereafter. The Company is named as a defendant in one of
the four complaints. The claims asserted in these complaints are
substantially similar to those asserted in the complaint filed on September
6, 2000, described above. The DLJ entities named in these actions, which have
been served in only one of the actions, have not been required to respond to
date in any of these actions. They intend to defend themselves vigorously
against all the allegations contained in these additional complaints.
Although there can be no assurance, the Company's management does not believe
that the ultimate outcome of the matters described above will have a material
adverse effect on the Company's consolidated financial condition. Based upon the
information currently available to it, the Company's management cannot predict
whether or not these matters will have a material adverse effect on the
Company's results of operations in any particular period.
In addition to the significant proceedings and matters previously disclosed, the
Company has been named as a defendant in a number of actions relating to its
various businesses including various civil actions and arbitrations arising out
of its activities as a broker-dealer in securities, as an underwriter and as an
employer, and arising out of alleged employee misconduct. Some of the actions
have been brought on behalf of various classes of claimants and seek damages of
material or indeterminate amounts. The Company is also involved, from time to
time, in proceedings with, and investigations by, governmental agencies and
self-regulatory organizations.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CREDIT SUISSE FIRST BOSTON (USA), INC.
(FORMERLY DONALDSON, LUFKIN & JENRETTE, INC.)
BUSINESS ENVIRONMENT
The Company's principal business activities, investment and merchant
banking, securities sales and trading and correspondent and online discount
brokerage services are, by their nature, highly competitive and subject to
general market conditions, volatile trading markets and fluctuations in the
volume of market activity. Consequently, the Company's net income and revenues
have been and are likely to continue to be, subject to wide fluctuations
reflecting the impact of many factors beyond the Company's control, including
securities market conditions, the level and volatility of interest rates,
competitive conditions and the size and timing of transactions.
Global growth remained relatively healthy in the third quarter of
2000, however concerns about rising oil prices dampened optimism that the
Federal Reserve Board has finished raising interest rates for the year. With
the exception of emerging market bonds, international stock and bond markets
were weak, reflecting a sharp decline in the euro. During the third quarter
IPO issuance rose 24% from the same period last year. U.S stock issues were
greater than the third quarter of 1999, but below the total of both previous
quarters in 2000. A major contributor to the decline in IPO issuance has been
the technology sector, as new issue volume fell 41% from the second quarter
and 66% from the first quarter. More than one quarter of new issuances of
stocks and bonds were done for companies outside the United States,
reflecting a trend toward the globalization of the U.S. market. Mergers and
acquisitions continued at a steady pace with volume and number of deals down
slightly from the third quarter of 1999. Mergers and acquisitions activity
occurred in many different sectors of the economy, as opposed to earlier in
the year when it was focused almost exclusively in the telecommunications,
media and technology sectors. The demand for global financial advisory
services continued to be strong, reflecting the trends of consolidation and
globalization across industry sectors and borders. Stable inflation and signs
of a slowing economy indicate that the Federal Reserve Board's past interest
rate increases have been effective, easing concerns about future increases.
RECENT DEVELOPMENTS
On August 30, 2000, Credit Suisse Group, a corporation organized
under the laws of Switzerland ("CSG"), agreed to acquire Donaldson, Lufkin &
Jenrette, Inc. and Subsidiaries, ("DLJ, Inc." or the "Company") for total
consideration of approximately $12.7 billion. Pursuant to a tender offer, a
CSG subsidiary offered to purchase all the outstanding shares of the
Company's common stock of the series designated Donaldson, Lufkin & Jenrette,
Inc. - DLJ Common Stock for a purchase price of $90 per share. After the
shares were tendered, the shares held by AXA, S.A., the Company's ultimate
parent at the time, and certain affiliates of AXA, were purchased by the CSG
subsidiary. On November 3, 2000, the closing date, DLJ, Inc. became an
indirect wholly owned subsidiary of CSG. Any unexercised or unvested stock
options of the Company as of the closing date were converted into CSG stock
options. These transactions (the "Transaction") will not have an effect on
the outstanding shares of DLJdirect tracking stock, the series designated
Donaldson, Lufkin & Jenrette - DLJdirect Common Stock. After the Transaction,
DLJ, Inc. changed its name to Credit Suisse First Boston (USA), Inc. (the
"Company").
CSG will account for the Transaction using the purchase method of
accounting. However, since the Company has significant preferred stock and
public debt outstanding, no adjustments of the historical carrying values of
the Company's assets and liabilities to reflect the Transaction will be
recorded in the Company's historical financial statements. Similarly,
although the Transaction will give rise to significant goodwill, none of this
goodwill will be "pushed down" to the Company, and thus goodwill associated
with the Transaction will not affect the Company's results of operations.
In connection with the Transaction, a retention plan has been put
in place for certain of the Company's employees. The retention plan provides
for grants of CSG shares for future services above current compensation
levels. The CSG shares granted for future services vest over a three-year
period, and the total expense associated with these grants is expected to be
approximately $1.2 billion, which will be expensed over the vesting period
beginning as of the closing date.
The Company currently anticipates that it will record restructuring
charges in connection with the Transaction of between $900 million and $1.2
billion on a pre-tax basis. This is a preliminary estimate, and it is
possible that the final restructuring charge may be outside the range. The
expected restructuring charges are primarily associated with severance
payments to employees, elimination of redundant office facilities and
write-off of related assets.
With a view to integrating the businesses of the Company and CSG,
and in anticipation of the completion of the Trnasaction, beginning on
October 6, 2000, the Company and Credit Suisse First Boston, Inc., a wholly
owned subsidiary of CSG ("CSFBI"), initiated a series of transfers relating
to certain proprietary fixed income and equity portfolios maintained by the
Company and certain of its subsidiaries, on the one hand, and Credit Suisse
First Boston Corporation, a U.S. registered broker dealer that is a direct
wholly owned subsidiary of CSFBI ("CSFB Corp."), and certain of its
affiliates on the other. In connection with these transfers, CSFB Corp. and
certain of its affiliates made an aggregate cash payment of approximately
$4.5 billion to the Company and its subsidiaries. On November 3, 2000, in
conjunction with the closing of the Transaction, the final step in this
series of transfers (collectively, the "Transfer") was completed as CSFBI
transferred all of the outstanding shares of CSFB Corp. to the Company in
exchange for newly issued Shares of the Company. As a result of the Transfer,
CSFB Corp. became a direct wholly owned subsidiary of the Company. Since the
Transfer is a transfer of assets and liabilities between entities under
common control it will be accounted for at historical cost in a manner
similar to a pooling of interests.
In connection with the Transfer, the Company retired $225.0 million
of 9 5/8% Senior Subordinated Notes for a total consideration of $245.4
million, which includes accrued interest and a premium.
In addition, to facilitate the integration of the asset management
businesses of the Company and CSG, DLJ Asset Management Group, Inc.
("DLJAM"), previously an indirect wholly owned subsidiary of the Company,
became an indirect wholly owned subsidiary of CSFBI through a series of share
dividends. The business of DLJAM has been combined with the business of
Credit Suisse Asset Management LLC.
In conjunction with the Transaction, CSG and its subsidiaries
obtained a $3.1 billion loan from the Company that matures on November 1,
2001 and bears interest at a spread above six-month LIBOR.
The financial statements do not reflect the financial position or
results of operations of CSFB Corp. or other parts of the Credit Suisse First
Boston business unit for any period.
19
<PAGE>
RESULTS OF OPERATIONS - CREDIT SUISSE FIRST BOSTON (USA), INC.
(FORMERLY DONALDSON, LUFKIN & JENRETTE, INC.)
QUARTER ENDED SEPTEMBER 30, 2000 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1999
Due to the uncertainty caused by the merger announcement described
above in "Recent Developments", there was a substantial decline in the Company's
business activity in the month of September. Revenues, which averaged $800.3
million for the first eight months of the year, aggregated $531.0 million for
the month of September 2000. As a result, the comparison of the Company's
results of operations for the quarter ended September 30, 2000 may not be
indicative of results had the merger not occurred.
Total revenues increased $360.7 million, or 20.7% to $2.1 billion.
Revenues increased primarily as a result of increases in commissions, interest
and trading gains, offset by substantial decreases in underwritings. Changes in
net revenues from external sources for each of the Company's industry segments
were: Banking Group revenues decreased $120.8 million primarily due to decreased
fees and underwriting revenues; Equities Group revenues increased $42.6 million
primarily as a result of increased commissions and trading gains both
domestically and internationally; Fixed Income Group revenues increased $25.9
million, principally as a result of an increase in the trading activity in the
fixed income derivatives business; Financial Services Group revenues increased
$41.9 million primarily as a result of increased fees and trading gains in the
Company's correspondent and online brokerage businesses.
Commission revenues increased $37.2 million or 13.8% to $306.4
million due to increased business in virtually all areas. Quarterly combined
share volumes on the NYSE and NASDAQ exchanges averaged approximately 150
billion shares for the third quarter of 2000 compared to approximately 110
billion shares for the comparable period a year ago.
Underwriting revenues decreased $102.1 million or 41.6% to $143.3
million as a result of a decline in domestic new issuances of stocks and bonds,
particularly in the technology, media and telecommunications sectors.
Fee revenues increased $5.7 million or 1.3% to $454.4 million. These
results reflect primarily the Company's continuing market share growth in global
merger and acquisitions advisory transactions and fees related to private fund
and private placement activities. Fee income in the Company's retail,
correspondent and online brokerage businesses increased due to customer demand
for a variety of portfolio advisory and technology services.
Interest, net of interest expense to finance U.S. government, agency
and mortgage-backed securities, increased $377.1 million or 70.2% to $914.6
million. The increase was across all areas of the firm but primarily in
customer-driven activities such as securities lending/borrowing and margin
lending. Margin debit balances increased approximately 37% and most short-term
rates were more than 100 basis points higher than the previous year.
Principal transactions-net, trading revenues increased $50.0 million to
$177.8 million primarily as a result of increased trading volumes in the fixed
income and equity markets.
Principal transactions-net, investment revenues decreased $9.7 million
to $47.9 million primarily as a result of decreased realized and unrealized
gains on the Company's merchant banking and venture capital investments.
Total costs and expenses increased $475.7 million or 31.5% to $2.0
billion primarily due to growth in the correspondent and online discount
securities businesses as well as the Company's international expansion in Europe
and Asia.
Compensation and benefits increased $53.2 million or 7.0% to $814.8
million. Incentive and production-related compensation decreased 3.6%. Base
compensation, including benefits and payroll taxes, increased by 33.2%
primarily due to the Company's significant international expansion. Full-time
worldwide personnel increased by approximately 2,200 or 23% to 12,000 at
September 30, 2000 as compared to September 30, 1999.
Interest expense increased $342.0 million or 91.0% to $717.7 million
due primarily to increased borrowing to finance customer activity as well as
the significant increases in interest rates noted above.
20
<PAGE>
All other expenses increased $80.6 million or 21.6% to $453.6 million,
as noted below.
Communications and technology increased $21.7 million due to
expansion of the Company's international operations, implementation and
development of new systems, and overhaul of the online customer trading and
information systems for the Company's correspondent brokerage network.
Brokerage, clearing, exchange fees and other expenses increased $29.8 million
due to increased trading volume and transaction fee payments. Occupancy and
related costs increased $11.0 million primarily as a result of the Company's
domestic growth and international expansion. All other operating expenses
increased $18.1 million. Included therein are professional fees, travel and
entertainment, and printing and stationery which increased $19.7 million due
to an overall increase in the level of business activity, despite the
September decline, offset by an $8.8 million decrease in advertising.
The changes in income before income taxes for each industry segment
were: Banking Group pretax income decreased $104.0 million as a result of
decreased underwritings, and fees related to merger and acquisition activity;
Equities Group pretax income decreased $36.6 million due to increases in
compensation-related expenses, offset in part by increases in commissions,
net interest income and trading gains; Fixed Income Group pretax income
decreased $4.9 million as a result of decreased underwriting revenues in all
areas, offset in part by trading gains in fixed income derivatives; Financial
Services Group pretax income increased $15.1 million as a result of increased
fees, net interest income, and trading gains related to its correspondent and
online brokerage businesses, offset by increased technology spending.
The Company's income tax provision for the quarters ended September
30, 2000 and 1999 was $29.2 million and $71.8 million, respectively, a 37.0%
effective tax rate for both periods.
Net income for the quarter ended September 30, 2000 decreased $72.4
million, or 59.2% to $49.8 million. Diluted earnings per common share were
$0.32 for 2000 and $0.85 for 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Due to the uncertainty caused by the merger announcement described
above in "Recent Developments", there was a substantial decline in the Company's
business activity in the month of September. Revenues, which averaged $800.3
million for the first eight months of the year, aggregated $531.0 million for
the month of September 2000. As a result, the comparison of the Company's
results of operations for the nine months ended September 30, 2000 may not be
indicative of results had the merger not occurred.
Total revenues for the nine months increased $1.9 billion, or 38.0%
to $6.9 billion. During 2000, revenues increased primarily as a result of
increases in commissions, fees, interest, trading and investment gains,
offset in part by decreases in underwritings. Changes in net revenues from
external sources for each of the Company's industry segments were: Banking
Group revenues increased $106.1 million primarily as a result of increased
advisory fees and investment gains, which offset the effects of decreased
underwriting revenues. The Company's growing market share in global
transactions was reflected in the 47% increase in revenues from international
banking; Equities Group revenues increased $377.3 million primarily as a
result of increased commissions and trading revenues, both domestically and
internationally; Fixed Income Group revenues decreased $127.1 million,
principally as a result of reduced underwriting revenues in the high-yield
market, offset in part by increased trading activity in the asset backed
area; Financial Services Group revenues increased $323.3 million primarily as
a result of increased commissions, fees and trading gains in the Company's
correspondent and online brokerage businesses.
Commission revenues increased $306.6 million or 36.4% to $1.1
billion due to increased business in virtually all areas. Commissions
generated internationally, primarily in London and Hong Kong equities more
than doubled over the comparable period of 1999.
Underwriting revenues decreased $326.6 million or 35.8% to $585.2
million, primarily as a result of the overall decline in domestic new issuances
of stocks and bonds, particularly in the high-yield market.
Fee revenues increased $322.8 million or 30.0% to $1.4 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.
Interest, net of interest expense to finance U.S. government, agency
and mortgage-backed securities, increased $1.2 billion or 82.0% to $2.8 billion.
The increase was primarily in customer-driven activities such as securities
lending/borrowing and margin lending. Margin debit balances increased
approximately 56% and most short-term rates were more than 100 basis points
higher than the previous year.
Principal transactions-net, trading revenues increased $256.6 million
to $776.8 million primarily as a result of increases in customer order flow and
trading volumes in the fixed income and equity markets.
21
<PAGE>
Principal transactions-net, investment revenues increased $111.5
million to $197.2 million primarily as a result of increased realized and
unrealized gains on the Company's merchant banking and venture capital
investments.
Total costs and expenses for 2000 increased $1.8 billion or 42.4% 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 $531.8 million or 24.2% to $2.7
billion. Incentive and production-related compensation increased by 21.0% in
2000. Base compensation, including benefits and payroll taxes, increased by
32.5% primarily due to the Company's significant international expansion.
Full-time worldwide personnel increased approximately 2,200 or 23% to 12,000 at
September 30, 2000 as compared to September 30, 1999.
Interest expense increased $1.0 billion or 92.8% to $2.1 billion due
primarily to increased borrowing to finance customer activity as well as the
significant increases in interest rates noted above.
All other expenses increased $285.4 million or 27.2% to $1.3 billion,
as noted below.
Communications and technology increased by $79.0 million due to
expansion of the Company's international operations, implementation and
development of new systems, and overhaul of the online customer trading and
information systems for the Company's correspondent brokerage network.
Brokerage, clearing, exchange fees and other expenses increased $75.0 million
due to increased trading volume and transaction fee payments. Occupancy and
related costs increased $28.7 million primarily as a result of the Company's
domestic growth and international expansion. All other operating expenses
increased $102.7 million. Included therein are professional fees, travel and
entertainment, and printing and stationery which increased $61.5 million due to
an overall increase in the level of business activity, and advertising which
increased $10.4 million, due to the development and implementation of a new
advertising campaign by DLJdirect.
The changes in income before income taxes for each industry segment
were: Banking Group pre-tax income decreased $57.5 million as a result of
decreased underwritings and increased technology spending, which offset an
increase in advisory fees and investment gains; Equities Group pretax income
increased $57.1 million due to increases in commissions and trading gains; Fixed
Income Group pretax income decreased $67.6 million as a result of decreased
underwriting revenues in the high-yield and real estate finance areas, offset in
part by increased trading gains in the asset-backed area; Financial Services
Group pretax income increased $119.7 million principally as a result of
increased commissions, fees and net interest income in its correspondent and
online brokerage businesses.
The Company's income tax provision for the nine months ended September
30, 2000 and 1999 was $268.5 million and $240.5 million, a 37.0% effective tax
rate for both periods.
Net income for the nine months ended September 30, 2000 increased
$47.7 million, or 11.6% to $457.2 million. Diluted earnings per common share
were $3.15 for 2000 and $2.84 for 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets are highly liquid with the majority consisting of
securities inventories and collateralized receivables, each of which fluctuate
depending on the levels of proprietary trading and customer business. These
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 September 30, 2000 and
December 31, 1999, the Company's total assets were $103.8 billion and $109.0
billion, respectively.
The majority of the Company's assets are financed through daily
operations by repurchase agreements, financial instruments sold not yet
purchased, securities loaned, bank loans, commercial paper and through payables
to brokers and dealers. Short-term funding is generally obtained at rates
related to federal funds, LIBOR and money market rates. Depending upon
prevailing market conditions, other borrowing costs are negotiated. The Company
monitors overall liquidity by tracking the extent to which unencumbered
marketable assets exceed short-term unsecured borrowings. Additionally in 1999,
the Company received net proceeds from the issuance of DLJdirect Common Stock of
$346.6 million.
22
<PAGE>
In July 2000, the Company amended its $2.5 billion revolving credit
facility with various banks, increasing the aggregate commitment to $2.8
billion, of which $2.38 billion may be unsecured. There were no borrowings
outstanding under this agreement at September 30, 2000.
Certain of the Company's businesses are capital intensive. In addition
to normal operating requirements, capital is required to cover financing and
regulatory charges on securities inventories, merchant banking investments and
investments in fixed assets. The Company's overall capital needs are continually
reviewed to ensure that its capital base can appropriately support the
anticipated needs of its business units as well as the regulatory capital
requirements of subsidiaries. Based upon these analyses, management believes
that the Company's debt and equity base is adequate for current operating
levels.
In February 2000, the Company filed a shelf registration with the
Securities and Exchange Commission, which enables the Company to issue up to
$3.1 billion of senior debt, subordinated debt, preferred stock and warrants.
In the third quarter, the Company issued $385.0 million medium-term notes
with various maturity dates through 2003 under its shelf registration
statement.
During the first quarter of 2000, the Company issued $500 million of 8%
senior notes maturing on March 1, 2005 and $485.0 million of medium-term notes
with various maturity dates through 2007.
In April 2000, the Company established a Euro Medium-Term Note program,
which enables it to issue up to $1.0 billion of notes. In the second quarter
of 2000, the Company issued $890.5 million medium-term notes with various
maturity dates through 2005 from this program. There were no issuances under
this program in the third quarter.
In October 2000, in conjunction with the Transaction, the Company
redeemed the 9.58% Subordinated Exchange Notes due October 15, 2003 for
$245.4 million, which includes accrued interest and a premium.
In addition, during the quarter ended September 30, 2000, commercial
paper outstanding under the Company's $2.0 billion commercial paper program
decreased from $1.0 billion to $0.7 billion.
From time to time, the Company has explored potential acquisition
opportunities as a means of expanding its business. Such opportunities may
involve acquisitions which are material in size and may require the raising of
additional capital.
The Company's credit ratings of its long-term debt and commercial
paper following the Transaction are as follows:
<TABLE>
<CAPTION>
LONG-TERM DEBT COMMERCIAL PAPER
<S> <C> <C>
Fitch A+ F-1
Moody's A1 P-1
Standard & Poors AA- A-1+
Thomson BankWatch AA- TBW-1
</TABLE>
The Company's principal wholly owned subsidiaries, Donaldson, Lufkin
& Jenrette Securities Corporation ("DLJSC") and CSFB Corp. are 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. At
September 30, 2000, CSFB Corp. was not a wholly owned subsidiary of the
Company, so no specific information relating to the capital requirements of
CSFB Corp. are included in this quarterly report. DLJSC has consistently
maintained capital substantially in excess of the minimum requirements of
such capital rules. At September 30, 2000, DLJSC had aggregate regulatory
"net capital," after adjustments required by Rule 15c3-1 under the Securities
Exchange Act of 1934, of approximately $1.7 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 $0.8 billion. The
Company's London-based broker-dealer subsidiaries are subject to the
requirements of the Securities and Futures Authority, a self-regulatory
organization established pursuant to the United Kingdom Financial Services
Act of 1986. Other U.S. and foreign broker-dealer subsidiaries of the Company
are subject to net capital requirements of their respective regulatory
agencies. At September 30, 2000, the Company and its broker-dealer
subsidiaries were in compliance with all applicable regulatory capital
adequacy requirements.
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.
23
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
At September 30, 2000 and 1999, cash and cash equivalents totaled $4.3
billion and $1.8 billion, respectively, an increase of $2.3 billion and $0.7
billion, respectively.
Cash provided by (used in) operating activities totaled $3.5 billion
and $(11.2) billion in 2000 and 1999, respectively. In 2000, there were
decreases in assets including securities borrowed of $5.9 billion and
financial instruments owned of $1.2 billion and increases in liabilities
including payables to customers, brokers, dealers and other of $2.8 billion.
Increases in receivables from customers, brokers, dealers and other of $4.9
billion and a decrease in financial instruments sold not yet purchased, of
$2.0 billion, offset these changes. In 1999, there were increases in assets
including receivables from customers, brokers, dealers and other of $6.3
billion, financial instruments owned of $6.8 billion, and securities borrowed
of $6.9 billion. An increase in liabilities, including payables to customers,
brokers, dealers and other of $4.7 billion, securities loaned of $1.8 billion
and financial instruments sold, not yet purchased of $0.1 billion offset
these changes.
In 2000 and 1999, net cash used in investing activities of $158.4
million and $655.2 million, respectively, consisted primarily of purchases
related to the Company's domestic and international offices and net purchases
of long-term corporate development investments.
In 2000 and 1999, net cash (used in) provided by financing activities
totaled $(1.0) billion and $12.6 billion, respectively. In 2000, $3.7 billion
was used to pay down short-term financings (principally repurchase
agreements) and $2.4 billion was provided by the issuance of senior notes,
medium-term notes and structured borrowings. In 1999, $11.0 billion was
provided by short-term financings (principally repurchase agreements) and
$1.5 billion was provided by the issuance of senior notes, medium-term notes
and structured borrowings. Additionally in 1999, the Company received net
proceeds from the issuance of DLJdirect Common Stock of $346.6 million.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into various transactions involving derivatives. In general,
derivatives are contractual agreements that derive their values from the
performance of underlying assets, interest or currency exchange rates, or a
variety of indices. The Company enters into derivative transactions primarily
for trading purposes, or to provide products for its clients. These transactions
involve options, forwards, futures and swaps. The Company also enters into
interest rate and cross currency swaps to modify the characteristics of periodic
interest payments associated with some of its long-term debt obligations.
For further discussion of these matters, refer to Note 9 to the consolidated
financial statements and Management's Discussion and Analysis of Financial
Condition included in the Company's Form 10-K for the fiscal year ended December
31, 1999.
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 September 30, 2000 and December 31, 1999, are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
(IN BILLIONS)
-------------
<S> <C> <C>
Options written............................................... $ 17.6 $ 15.1
Options purchased........................................ $ 20.8 $ 7.4
Forward contracts purchased................................... $ 31.4 $ 35.6
Forward contracts sold........................................ $ 46.3 $ 41.1
Futures contracts purchased................................... $ 2.2 $ 2.9
Futures contracts sold........................................ $ 3.1 $ 4.3
Swaps......................................................... $ 42.2 $ 24.5
</TABLE>
The majority of the Company's derivatives are short-term in duration.
DISCLOSURES FOR NON-TRADING DERIVATIVES
The Company also enters into interest rate and cross currency swaps to modify
the characteristics of periodic interest payments associated with some of its
long-term debt obligations. At September 30, 2000 and December 31, 1999, the
notional amount of these swaps was $4.5 billion and $3.3 billion, respectively.
24
<PAGE>
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 September 30, 2000, the Company had investments of
$818.7 million and has commitments to invest up to an additional $1.7 billion.
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 DLJ 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 September 30, 2000, the Company had extended $10.4 million as its
portion of short-term financings made with AXA Financial.
In connection with the Transaction, on or prior to November 15,
2000, Credit Suisse First Boston or one of its affiliates will acquire all of
AXA Financial's loans under the DLJ Bridge Fund and will assume all of AXA
Financial's obligations under the DLJ Bridge Fund.
The Company has made additional bridge loans of $147.7 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 September 30, 2000 and December
31, 1999, the Company had long positions with an aggregate market value of
approximately $7.9 billion and $5.4 billion, respectively, and short positions
with an aggregate market value of approximately $0.6 billion and $0.5 billion,
respectively.
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, and (xii) the effect of any future acquisitions.
25
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - DLJ, INC.
RISK MANAGEMENT AND VALUE AT RISK
For a description of the Company's risk management policies and procedures and
value-at-risk ("VAR") model, including such model's assumptions and limitations,
refer to the Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the Company's 1999 Annual Report on Form 10-K.
The Company-wide VAR was approximately $16.0 million and $17.0 million at
September 30, 2000 and December 31, 1999, respectively.
The Company-wide VAR for non-trading market risk sensitive instruments is not
separately disclosed because the amount is not significant. Due to the benefit
of diversification the Company-wide VAR is less than the sum of the individual
components. The three main components of market risk, expressed in terms of
theoretical fair values, had the following VAR:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------- --------
(IN MILLIONS)
<S> <C> <C>
Trading:
Interest rate risk....................... $ 8 $ 10
Equity risk.............................. $ 12 $ 14
Foreign currency exchange risk........... $ - $ -
</TABLE>
26
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS- CREDIT SUISSE FIRST BOSTON (USA), INC.
(FORMERLY DONALDSON, LUFKIN & JENRETTE, INC.)
Since Ameriserve Food Distribution, Inc. ("Ameriserve"), its parent company,
Nebco Evans Holding Company, and related corporations, filed Chapter 11
petitions in the U.S. Bankruptcy Court for the District of Delaware on or about
January 31, 2000, Ameriserve has entered into an agreement, subject to
Bankruptcy Court approval, to sell substantially all of its remaining assets,
and has filed a liquidating plan. DLJ Bridge Finance Inc., through a subsidiary,
made a $100 million secured loan to Ameriserve. The loan subsequently was
transferred to DLJ Capital Funding, which has filed a claim with respect to that
loan in the Bankruptcy Court proceeding. Certain parties to the Bankruptcy Court
proceeding may seek subordination of DLJ Capital Funding's claim. In the
Bankruptcy Court proceedings discovery has been taken from The Company and its
affiliates concerning their relationships with Ameriserve and related companies.
On August 25, 2000, the U.S. Court of Appeals for the Second Circuit ruled on
plaintiffs' appeal from the judgment of the U.S. District Court for the Southern
District of New York dismissing plaintiffs' complaint in the putative class
action brought by a purported class of purchasers of certain notes and warrants
to purchase shares of common stock of Rickel Home Centers, Inc. The Court of
Appeals affirmed the District Court's judgment in part, reversed the judgment in
part, and remanded the case to the District Court for further proceedings on
class certification and other issues. In October 2000, the case was
reassigned from the original judge who presided over the case to another
judge. Plaintiffs moved again for class certification. Defendants have opposed
the motion. The motion is pending.
On September 7, 2000, defendants in IN RE PUBLIC OFFERING FEE ANTITRUST
LITIGATION, which is pending in the U.S. District Court for the Southern
District of New York, filed their memorandum in opposition to plaintiffs' motion
for leave to file a consolidated second amended complaint. On October 2, 2000,
all defendants in CHS ELECTRONICS, INC. V. CREDIT SUISSE FIRST BOSTON
CORPORATION, ET AL., moved to transfer that action from the U.S. District Court
for the Southern District of Florida to the U.S. District Court for the Southern
District of New York.
On October 3, 2000, the U.S. District Court for the Northern District of Texas
partially reversed the ruling issued by the U.S. Bankruptcy Court in the
adversary proceeding brought by the National Gypsum Corporation ("NGC")
Settlement Trust against DLJSC and others. The District Court agreed with the
Bankruptcy Court that the claims of the State Court plaintiff and the NGC
Settlement Trust are not absolutely barred by the NGC plan of reorganization.
However, contrary to the Bankruptcy Court's ruling, the District Court held that
the NGC plan of reorganization requires that plaintiffs (i) pay the attorneys'
fees and costs of defendants in the event that plaintiffs' claims are
unsuccessful, and (ii) provide appropriate proof of plaintiffs' ability to pay
such fees and costs. The State Court plaintiff and the NGC Settlement Trust have
appealed the District Court's judgment to the U.S. Court of Appeals for the
Fifth Circuit.
Beginning in August 2000, the Company, its directors and certain other
entities were named as defendants in four putative class actions filed in the
Court of Chancery, State of Delaware, New Castle County, on behalf of a
purported class of public shareholders of DLJ common stock. Each of the
complaints, which are substantially the same, allege that the transaction
(the "CSG Transaction") announced on August 30, 2000, whereby the Company
agreed to be acquired by Credit Suisse Group ("CSG"), is a breach of the
defendants' fiduciary duties; that the consideration to be received by the
public shareholders of the Company in the transaction is inadequate and
unfair; and that the process whereby the transaction was negotiated and
approved was flawed. The complaints seek damages, among other relief, in an
unspecified amount and rescission of the transaction. Defendants have not
been required to file responsive pleadings in these actions. The Company
intends to defend itself vigorously against all of the allegations contained
in the complaints.
Beginning in September 2000, the Company, its directors and certain other
entities were named as defendants in four putative class actions filed in the
Court of Chancery, State of Delaware, New Castle County, on behalf of a
purported class of public shareholders of DLJdirect common stock. Each of the
complaints, which are substantially the same, alleges that the CSG
Transaction is unfair to the holders of DLJdirect common stock in that the
value of such DLJdirect shares is not being maximized in the CSG Transaction.
The complaints further allege that the Company's directors breached their
fiduciary duties to DLJdirect shareholders by approving the CSG Transaction,
and that the Company's directors had personal financial interests that
created a conflict of interest for them because they allegedly own more DLJ
common shares in terms of value than they own DLJdirect shares. The
complaints seek, among other relief, damages in an unspecified amount. On or
about October 11, 2000, an amended complaint was filed in one of these
actions which adds allegations that the completion of the CSG Transaction
would adversely affect the DLJdirect shares; that the holders of DLJdirect
shares have a contractual right to a separate vote on the CSG Transaction as
well as a contractual right to have their shares purchased if the Company
shares are being purchased. As additional relief, the amended complaint
seeks, among other things, an order requiring a class vote on the CSG
Transaction. At a
27
<PAGE>
CREDIT SUISSE FIRST BOSTON (USA), INC.
(Formerly Donaldson, Lufkin & Jenrette, Inc.)
Notes to Condensed Consolidated Financial Statements (UNAUDITED)
conference on October 12, 2000, the Court denied a motion by plaintiffs to
schedule a preliminary injunction hearing on the allegations of the amended
complaint. The time for defendants to answer or respond to the pleadings in the
DLJdirect cases has not yet elapsed. The Company intends to defend itself
vigorously against all of the allegations contained in the complaints.
In September 2000, the Company, its directors and CSG, along with
certain other entities, were named as defendants in a putative class action
commenced in the U.S. District Court for the Southern District of New York
brought on behalf of a purported class of public shareholders of DLJdirect. The
complaint alleges, among other things, that certain statements in the 1999
prospectus issued in connection with the initial public offering of DLJdirect
shares were allegedly false and misleading in their description of the rights
attributable to the DLJdirect shares; that the tender offer materials
disseminated in connection with the CSG Transaction are false and misleading in
allegedly failing to describe certain rights to the DLJdirect shares in
connection with the CSG Transaction, among other things; and that these alleged
misstatements constitute violations of the federal securities laws. The
complaint further alleges that defendants violated their fiduciary duties under
state law by failing to provide for the purchase of DLJdirect shares as part of
the CSG Transaction. The complaint seeks, among other things, an award of
rescission or damages in an unspecified amount, a declaration that defendants
have violated the federal securities laws and their state law fiduciary
duties, and unspecified corrective disclosures. On October 2, 2000, plaintiff
moved for an order setting a date for a preliminary injunction hearing and
for expedited discovery, which the Court has not granted. The Company intends
to defend itself vigorously against all of the allegations contained in the
complaint.
On September 6, 2000, DLJSC, Donaldson, Lufkin & Jenrette International ("DLJI")
and certain other individuals and entities were named as defendants in a
putative class action filed in the U.S. District Court for the Southern District
of New York on behalf of a purported class of persons who purchased or acquired
American Depository Shares ("ADS") of Independent Energy Holdings PLC
("Independent Energy") in Independent Energy's secondary offering of $200
million of ADS in March 2000. In early September 2000, shortly before this
action was filed, receivers were appointed for Independent Energy in the United
Kingdom. The complaint alleges violations of the federal securities laws against
DLJSC, as one of the underwriters of the ADS, and DLJI, as a financial advisor
to Independent Energy that sold shares in connection with the secondary
offering, arising out of alleged misrepresentations and omissions contained in
the registration statement and prospectus for the secondary offering of ADS. The
complaint seeks, among other things, compensatory damages, and rescissory,
equitable and/or injunctive relief. The time for DLJSC and DLJI to respond to
the complaint has not yet elapsed. DLJSC and DLJI intend to defend themselves
vigorously against all the allegations contained in the complaint.
Beginning in October 2000, other alleged purchasers of Independent Energy ADS
filed five additional putative class action complaints in the U.S. District
Court for the Southern District of New York naming DLJSC, among others, as a
defendant. The complaints were filed on behalf of purported classes of
persons who purchased or acquired Independent Energy ADS in the secondary
offering of ADS and thereafter. The Company is named as a defendant in one of
the four complaints. The claims asserted in these complaints are
substantially similar to those asserted in the complaint filed on September
6, 2000, described above. The DLJ entities named in these actions, which have
been served in only one of the actions, have not been required to respond to
date in any of these actions. They intend to defend themselves vigorously
against all the allegations contained in these additional complaints.
Although there can be no assurance, the Company's management does not believe
that the ultimate outcome of the matters described above will have a material
adverse effect on the Company's consolidated financial condition. Based upon the
information currently available to it, the Company's management cannot predict
whether or not these matters will have a material adverse effect on the
Company's results of operations in any particular period.
In addition to the significant proceedings and matters previously disclosed, the
Company has been named as a defendant in a number of actions relating to its
various businesses including various civil actions and arbitrations arising out
of its activities as a broker-dealer in securities, as an underwriter and as an
employer, and arising out of alleged employee misconduct. Some of the actions
have been brought on behalf of various classes of claimants and seek damages of
material or indeterminate amounts. The Company is also involved, from time to
time, in proceedings with, and investigations by, governmental agencies and
self-regulatory organizations.
28
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - DLJdirect
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Condensed Combined Statements of Financial Condition (Unaudited)
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
<S> <C> <C>
ASSETS
Cash and cash equivalents......................................................... $ 155,867 $ 237,020
Short-term investments............................................................ 38,226 7,848
Deposit with affiliated clearing broker........................................... 447 329
Receivables from brokers, dealers and others, net................................. 29,461 19,015
Financial instruments owned, at market value...................................... 61 1,010
Office facilities, at cost (net of accumulated depreciation
and amortization of $660 and $470, respectively)............................... 413 92
Investment in and advances to joint ventures...................................... 50,689 11,009
Long-term corporate development investments....................................... 5,522 730
Other assets...................................................................... 2,346 1,389
------------ ------------
Total assets...................................................................... $ 283,032 $ 278,442
========= =========
LIABILITIES AND ALLOCATED EQUITY
Liabilities:
Payables to parent and affiliates, net.......................................... $ 15,530 $ 12,550
Financial instruments sold not yet purchased, at market value................... 29 26
Accounts payable and accrued expenses........................................... 32,669 34,074
---------- ----------
Total liabilities................................................................. 48,228 46,650
---------- ----------
Commitments and contingencies..................................................... - -
Allocated equity.................................................................. 233,493 230,662
Accumulated other comprehensive income............................................ 1,311 1,130
----------- -----------
Total allocated equity............................................................ 234,804 231,792
--------- ----------
Total liabilities and allocated equity............................................ $ 283,032 $ 278,442
========= =========
</TABLE>
See accompanying notes to condensed combined financial statements.
29
<PAGE>
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Condensed Combined Statements of Operations (Unaudited)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Commissions ............................................... $ 37,212 $ 30,660 $ 157,293 $ 98,425
Underwritings ............................................. 1,567 1,787 6,249 5,468
Fees ...................................................... 21,774 11,385 58,192 32,854
Interest .................................................. 18,697 11,276 56,233 25,712
--------- --------- --------- ---------
Total revenues .......................................... 79,250 55,108 277,967 162,459
--------- --------- --------- ---------
Costs and expenses:
Compensation and benefits ................................. 34,107 17,136 88,324 41,351
Interest .................................................. 272 227 1,162 702
Brokerage, clearing, exchange fees, and other ............. 11,063 8,865 42,518 26,939
Advertising ............................................... 9,125 18,128 47,185 37,461
Occupancy and related costs ............................... 4,026 1,084 9,560 2,494
Communications and technology ............................. 12,383 5,973 33,927 16,757
Other operating expenses .................................. 11,378 7,423 40,843 17,982
--------- --------- --------- ---------
Total costs and expenses ................................ 82,354 58,836 263,519 143,686
--------- --------- --------- ---------
Income (loss) before income tax provision (benefit) and
equity in net loss of joint ventures ...................... (3,104) (3,728) 14,448 18,773
--------- --------- --------- ---------
Income tax provision (benefit) ............................... (1,272) (1,490) 6,025 7,807
Equity in net loss of joint ventures ......................... (2,330) (1,092) (5,592) (2,048)
--------- --------- --------- ---------
Net income (loss) ....................................... $ (4,162) $ (3,330) $ 2,831 $ 8,918
========= ========= ========= =========
Earnings (loss) per share:
Basic ................................................. $ (0.04) $ (0.03) $ 0.03 $ 0.09
Diluted ............................................... $ (0.04) $ (0.03) $ 0.03 $ 0.09
========= ========= ========= =========
Weighted average notional and outstanding shares:
Basic ................................................. 102,650 102,650 102,650 102,650
Diluted ............................................... 102,650 102,650 102,670 103,269
========= ========= ========= =========
Earnings (loss) applicable to:
CSFB (USA) Retained Interest .......................... $ (3,417) $ (2,734) $ 2,324 $ 9,465
DLJdirect Tracking Stock .............................. (745) (596) 507 (547)
========= ========= ========= =========
Tracking Stock earnings (loss) per share:
Basic ................................................. $ (0.04) $ (0.03) $ 0.03 $ (0.03)
Diluted ............................................... $ (0.04) $ (0.03) $ 0.03 $ (0.03)
========= ========= ========= =========
Tracking Stock weighted average common shares:
Basic ................................................. 18,400 18,400 18,400 18,400
Diluted ............................................... 18,400 18,400 18,420 18,400
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed combined financial statements.
30
<PAGE>
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Condensed Combined Statements of Changes In Allocated Equity (Unaudited)
(IN THOUSANDS)
For the Year Ended December 31, 1999 and the
Nine Months Ended September 30, 2000
<TABLE>
<CAPTION>
Accumulated Other Total
Allocated Equity Comprehensive Income Allocated Equity
---------------- -------------------- ----------------
<S> <C> <C> <C>
Balances at December 31, 1998............... $ 21,924 $ - $ 21,924
Net income.................................. 6,932 - 6,932
Translation adjustment-net of taxes......... - 1,130 1,130
Total comprehensive income............... - - 8,062
Capital contribution from CSFB (USA), Inc. . 1,000 - 1,000
Allocated equity from issuance of
Tracking Stock........................... 233,945 - 233,945
Dividend paid to CSFB (USA), Inc. .......... (33,139) - (33,139)
----------- ----------- -----------
Balances at December 31, 1999............... 230,662 1,130 231,792
Net income.................................. 2,831 - 2,831
Translation adjustment-net of taxes......... - 181 181
Total comprehensive income............... - - 3,012
----------- ----------- -----------
Balances at September 30, 2000.............. $ 233,493 $ 1,311 $ 234,804
========== =========== ==========
</TABLE>
See accompanying notes to condensed combined financial statements.
31
<PAGE>
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Condensed Combined Statements of Cash Flows (Unaudited)
(IN THOUSANDS)
For the Nine Months Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................................. $ 2,831 $ 8,918
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Equity in net loss of joint ventures ....................................... 5,592 2,048
Depreciation and amortization .............................................. (197) 113
Deferred taxes ............................................................. 371 (1,233)
(Increase) decrease in operating assets:
Deposit with affiliated clearing broker .................................... (118) (79)
Receivables from brokers, dealers and other, net ........................... (10,446) (1,509)
Financial instruments owned, at market value ............................... 949 13
Other assets ............................................................... (990) 347
Increase (decrease) in operating liabilities:
Payables to parent and affiliates, net ..................................... 2,483 3,075
Financial instruments sold, not yet purchased, at market value ............. 3 (2)
Accounts payable and accrued expenses ...................................... (1,405) 19,978
--------- ---------
Net cash (used in) provided by operating activities ........................ (927) 31,669
--------- ---------
Cash flows from investing activities:
Investment in and advances to joint ventures .............................. (44,932) (12,431)
Short-term investments .................................................... (30,378) (64,342)
Purchase of office facilities ............................................. (124) --
Purchase of long-term corporate development investments ................... (4,792) --
--------- ---------
Net cash used in investing activities ......................................... (80,226) (76,773)
--------- ---------
Cash flows from financing activities:
Net proceeds from capital contributions from CSFB (USA), Inc. .............. -- 1,000
Net proceeds from issuance of Tracking Stock ............................... -- 233,945
Dividend paid to CSFB (USA), Inc. .......................................... -- (33,139)
--------- ---------
Net cash provided by financing activities ..................................... -- 201,806
--------- ---------
Increase (decrease) in cash and cash equivalents .............................. (81,153) 156,702
Cash and cash equivalents at beginning of period .............................. 237,020 26,654
--------- ---------
Cash and cash equivalents at end of period .................................... $ 155,867 $ 183,356
========= =========
</TABLE>
See accompanying notes to condensed combined financial statements
32
<PAGE>
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Notes to Condensed Combined Financial Statements (Unaudited)
September 30, 2000
1. BASIS OF PRESENTATION
DLJdirect represents a combination of the assets and liabilities of the online
discount brokerage and related investment services business of Credit Suisse
First Boston (USA), Inc. (formerly Donaldson, Lufkin & Jenrette, Inc. and
Subsidiaries) ("CSFB (USA), Inc."), rather than a separately incorporated
entity. All prior references to Donaldson, Lufkin & Jenrette, Inc. have been
changed to CSFB (USA), Inc. DLJdirect Common Stock tracks the separate
performance of these businesses for periods subsequent to the date of the
offering ("Tracking Stock"). On May 28, 1999 CSFB (USA), Inc. issued in an
initial public offering 18.4 million shares of DLJdirect Common Stock. The
shares of Tracking Stock have no voting rights, except in certain limited
circumstances, and holders of the Tracking Stock do not have any claims to
the net assets of DLJdirect. Prior to the offering, CSFB (USA), Inc.
designated its existing common stock as CSFB (USA) Common Stock, which
represents the performance of CSFB (USA), Inc.'s primary businesses plus a
retained interest in DLJdirect. All of CSFB (USA), Inc.'s businesses other
than those included in DLJdirect, plus its retained interest in DLJdirect,
are referred to as CSFB (USA). As a result of the offering, CSFB (USA) 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, CSFB (USA) had a 100% interest in the
earnings of DLJdirect.
The Tracking Stock initially consisted principally of the assets, liabilities,
revenues and expenses of CSFB (USA), Inc.'s ultimate 100% equity interest in
DLJdirect Holdings Inc. (subsequent to June 1, 1997) and CSFB (USA), Inc.'s
online discount brokerage division (prior to June 2, 1997). DLJdirect may also
include such other related assets and liabilities of CSFB (USA), Inc. as the
Board of Directors of CSFB (USA), Inc. may deem appropriate in the future.
Even though CSFB (USA), 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 CSFB (USA), Inc. and are subject to all the risks
associated with an investment in CSFB (USA), Inc. and all of its businesses,
assets and liabilities. Material financial events, which may occur at CSFB
(USA), 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 CSFB (USA), Inc. included herein.
CSFB (USA), Inc. has the right to issue CSFB (USA) 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, CSFB
(USA), Inc. has the right, at any time, to exchange stock of a subsidiary of
CSFB (USA), Inc. for Tracking Stock if all of the assets and liabilities of
DLJdirect are transferred to the subsidiary.
Certain financial information that is normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
but is not required for interim reporting purposes has been condensed or
omitted. These condensed combined financial statements reflect, in the opinion
of management, all adjustments (consisting of normal, recurring accruals)
necessary for a fair presentation of the condensed combined financial position
and results of operations for the interim periods presented. The results of
operations for interim periods are not necessarily indicative of results for the
entire year. These financial statements should be read in conjunction with the
combined financial statements and notes thereto as of and for the year ended
December 31, 1999 included on Form 10-K filed by CSFB (USA), Inc. under the
Securities Exchange Act of 1934.
To prepare condensed combined financial statements in conformity with generally
accepted accounting principles ("GAAP"), management must estimate certain
amounts that affect the reported assets and liabilities, disclosure of
contingent assets and liabilities, and reported revenues and expenses. Actual
results could differ from those estimates. Certain other reclassifications have
been made to prior year combined financial statements to conform to the 2000
presentation.
33
<PAGE>
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Notes to Condensed Combined Financial Statements (Unaudited)
2. CREDIT SUISSE FIRST BOSTON MERGER
On August 30, 2000, Credit Suisse Group, a corporation organized under the
laws of Switzerland, ("CSG") agreed to acquire Donaldson, Lufkin & Jenrette,
Inc. and Subsidiaries for total consideration of approximately $12.7 billion
(the "Merger"). On November 3, 2000, the closing date of the Merger, CSFB
(USA), Inc. became an indirect wholly owned subsidiary of CSG. Under the terms
of the agreement, a subsidiary of CSG purchased all the outstanding shares of
the series designated Donaldson, Lufkin & Jenrette, Inc. - DLJ Common Stock
for a purchase price of $90 per share. The Merger will not have an effect on
the outstanding shares of DLJdirect tracking stock, the series designated
Donaldson, Lufkin & Jenrette, Inc. - DLJdirect Common Stock. As a result of
the Merger, Donaldson, Lufkin & Jenrette, Inc. has changed its name to Credit
Suisse First Boston (USA), Inc.
3. RELATED PARTY TRANSACTIONS
DLJdirect transacts business with a group of companies affiliated through common
majority ownership with CSFB (USA), Inc., and has various transactions and
relationships with members of the group. Due to these relationships, it is
possible that the terms of these transactions are not the same as those that
would result from transactions among unrelated parties.
On September 27, 2000, DLJdirect issued a $20.0 million note receivable to
DLJdirect SFG Securities Inc., a 50% owned joint venture in Japan. The note
bears interest at 1.14% and matures on December 29, 2000.
4. NET CAPITAL
DLJdirect Holdings Inc.'s principal subsidiary, DLJdirect Inc., is a registered
broker-dealer and a member of the National Association of Securities Dealers
Inc. ("NASD") and, accordingly is subject to the minimum net capital
requirements of the Securities and Exchange Commission and the NASD. As such, it
is subject to the NASD's net capital rule, which conforms to the Uniform Net
Capital Rule pursuant to rule 15c3-1 of the Securities Exchange Act of 1934.
Under the alternative method permitted by this rule, the required net capital,
as defined, shall not be less than two percent of aggregate debit balances, as
defined, or $250,000, whichever is greater. At September 30, 2000, DLJdirect
Inc.'s net capital of $32.6 million was in excess of the minimum requirement by
$32.3 million.
DLJdirect's London-based broker-dealer affiliate, DLJdirect Ltd., is subject to
the requirements of the Securities and Futures Authority, a self-regulatory
organization established pursuant to the United Kingdom Financial Services Act
of 1986. At September 30, 2000, DLJdirect complied with all applicable
regulatory capital adequacy requirements.
5. INCOME TAXES
DLJdirect is part of a group that files consolidated Federal income tax returns.
DLJdirect settles all taxes, current and deferred, with CSFB (USA), Inc. under a
tax sharing arrangement. Taxes are provided as if DLJdirect filed a separate
return.
6. EARNINGS PER SHARE
Earnings per share amounts have been calculated by dividing net income by the
weighted average notional and outstanding tracking shares. The notional shares
represent CSFB (USA)'s 82.1% retained interest in DLJdirect. Prior to the
offering, CSFB (USA) had a 100% interest in the earnings of DLJdirect.
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.
34
<PAGE>
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Notes to Condensed Combined Financial Statements (Unaudited)
The numerators and denominators of the basic and diluted earnings per common
share computations include the following items:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------ ------ ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Earnings (loss) applicable to Common Shares-Basic and Diluted ................. $ (4,162) $ (3,330) $ 2,831 $ 8,918
========= ========= ========= =========
Weighted Average Common Shares-Basic .......................................... 102,650 102,650 102,650 102,650
Effect of Dilutive Securities:
Stock options ............................................................... --* -- 20 619
--------- --------- --------- ---------
Weighted Average Common Shares-Diluted ......................................... 102,650 102,650 102,670 103,269
========= ========= ========= =========
TRACKING STOCK
Earnings (loss) applicable to Common Shares-Basic and Diluted ................. $ (745) $ (596) $ 507 $ (547)
========= ========= ========= =========
Weighted Average Common Shares-Basic .......................................... 18,400 18,400 18,400 18,400
Effect of Dilutive Securities:
Stock options ............................................................... --* -- 20 --
--------- --------- --------- ---------
Weighted Average Common Shares-Diluted ......................................... 18,400 18,400 18,420 18,400
========= ========= ========= =========
</TABLE>
* Exercisable stock options are excluded from the computation of diluted
earnings per share since the effect of including them was antidilutive.
6. LEGAL PROCEEDINGS
DLJdirect has been named a defendant in actions relating to its businesses.
While the ultimate outcome of litigation involving DLJdirect cannot be predicted
with certainty, management, having reviewed these actions with its counsel,
believes it has meritorious defenses to all such actions and intends to defend
each of these vigorously. In the opinion of management of DLJdirect, the
ultimate resolution of all litigation, regulatory and investigative matters
affecting DLJdirect will not have a material adverse effect on the financial
condition or results of operations of DLJdirect.
35
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - DLJdirect
The following analysis of the results of operations and financial condition of
DLJdirect should be read in conjunction with the Condensed Combined Financial
Statements and the related Notes thereto, and with the Condensed Consolidated
Financial Statements and related Notes of CSFB (USA), 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 step up its rebranding efforts within its
targeted market, to stay competitively priced and to develop new
state-of-the-art products and services. In particular, DLJdirect expects to
spend significant amounts for advertising and promotions. Moreover, DLJdirect
expects to continue to spend significant amounts to increase its customer
service and technology staffs. Additionally, DLJdirect expects to spend
substantial amounts in the future in order to expand its international presence,
where competition is intense as well.
RECENT DEVELOPMENTS - DLJdirect
On August 30, 2000, Credit Suisse Group, a corporation organized
under the laws of Switzerland, ("CSG") agreed to acquire Donaldson, Lufkin &
Jenrette, Inc. (the "Merger"). On November 3, 2000, the closing date of the
Merger, CSFB (USA), Inc. became an indirect wholly owned subsidiary of CSG.
Under the terms of the agreement, a subsidiary of CSG purchased all the
outstanding shares of the series designated Donaldson, Lufkin & Jenrette,
Inc. - DLJ Common Stock. The Merger will not have an effect on the
outstanding shares of DLJdirect tracking stock, the series designated
Donaldson, Lufkin & Jenrette, Inc. - DLJdirect Common Stock. As a result of
the Merger, Donaldson, Lufkin & Jenrette, Inc. has changed its name to Credit
Suisse First Boston (USA), Inc.
RESULTS OF OPERATIONS - DLJdirect
QUARTER ENDED SEPTEMBER 30, 2000 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1999
DLJdirect experienced strong revenue growth for the quarter ended
September 30, 2000 compared to the quarter ended September 30, 1999, reflecting
primarily an increase in active accounts of 48.3% and customer trading volume of
21.9%. Active accounts consist of those accounts at the end of the related
period with at least one trade in the last twelve months or with a balance at
period end. Total revenues increased $24.2 million or 43.9% to $79.3 million for
the quarter ended September 30, 2000 from $55.1 million for the quarter ended
September 30, 1999. Net income decreased $0.9 million to a net loss of $(4.2)
million for the quarter ended September 30, 2000 from a net loss of $(3.3)
million for the quarter ended September 30, 1999.
Commissions increased $6.5 million or 21.2% to $37.2 million.
Commissions represented 46.9% of total revenues for the quarter ended September
30, 2000 and 55.7% of total revenues for the quarter ended September 30, 1999.
The increase in commissions was due primarily to increases in customer trading
volume. Average trades per day increased 23.4% to 23,700 for the quarter ended
September 30, 2000 from 19,200 for the quarter ended September 30, 1999.
Underwriting revenues earned in connection with public offerings for
the quarter ended September 30, 2000 were $1.6 million compared to $1.8 million
for the quarter ended September 30, 1999. Underwritings represented 2.0% of
total revenues for the quarter ended September 30, 2000 and 3.3% of total
revenues for the quarter ended September 30, 1999.
Fees increased $10.4 million or 91.2% to $21.8 million. Fees
represented 27.5% of total revenues for the quarter ended September 30, 2000 and
20.7% of total revenues for the quarter ended September 30, 1999. Payments for
routing orders increased $0.3 million or 10.3% to $3.2 million. The increase in
payments for routing orders was due primarily to 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,
earned by iNautix Technologies, Inc., DLJdirect's technology group, increased
$8.3 million or 136.1% to $14.4 million primarily due to increased demand from
related entities for Internet-based technology applications. Revenue from money
market fund distribution fees increased $1.4 million or 93.3% to $2.9 million.
This growth was due to an increase in customer money market fund balances of
$775.0 million or 63.3% to $2.0 billion. The remaining fees for the quarters
ended September 30, 2000 and 1999 include subscription and account related fees.
36
<PAGE>
Interest revenues increased $7.4 million or 65.5% to $18.7 million.
Interest represented 23.6% of total revenues for the quarter ended September 30,
2000 and 20.5% of total revenues for the quarter ended September 30, 1999. The
increase was due primarily to interest earned on the net proceeds allocated to
DLJdirect from the issuance of Tracking Stock and to increases in margin debits,
free credits and short sale balances. Margin debits increased $822.0 million or
84.0% to $1.8 billion. Free credits increased $121.1 million or 19.4% to $744.9
million and short sale balances increased $23.6 million or 39.9% to $82.8
million.
Compensation and benefits increased $17.0 million or 99.4% to $34.1
million. The increase in compensation and benefits was due primarily to growth
in the number of employees from 820 to 1,712. These additional employees were
added primarily in DLJdirect's investor services, operations, and compliance
areas to accommodate increased customer activity, in DLJdirect's technology
group, including in India, to develop new products and systems and maintain
systems infrastructure, in the UK operations, as well as in executive
management.
Interest expense increased $45,000 or 19.8% to $272,000. Interest
expense is primarily due to interest paid on intercompany balances.
Brokerage, clearing, exchange and other fees increased $2.2 million or
24.7% to $11.1 million. The increase in brokerage, clearing, exchange and other
fees was primarily due to increases in customer trading volume, offset in part
by lower clearing fees per trade resulting from reduced clearing rates.
Advertising decreased $9.0 million or 49.7% to $9.1 million. The
decrease in advertising was due primarily to the expiration of a major agreement
and the substantial decrease in market activity and account openings.
Occupancy and related costs increased $2.9 million or 263.6% to $4.0
million. Occupancy and related costs includes rent and operating expenses for
facilities, expenditures for repairs and maintenance, and the lease expense for
furniture, fixtures, leasehold improvements as well as business equipment. The
increase in occupancy cost was due primarily to the opening of two investor
services facilities, one in Charlotte, North Carolina and the other in Sandy
City, Utah, new technology centers in East Brunswick, New Jersey, and Chennai,
India, and to the relocation of DLJdirect's headquarters.
Communications and technology costs increased $6.4 million or 106.7% to
$12.4 million. Communications expense includes quotation expenses, expenses
related to customer toll-free phone calls and regular telephone services, and
lease expense for communication systems infrastructure. Technology expense
includes lease expense for technology systems infrastructure and computer
equipment. Increases in both communications and technology costs were due
primarily to improvements in and expansion of technology infrastructure and
increases in facilities and staff.
Other operating expenses increased $4.0 million or 54.1% to $11.4
million. Operating expenses are comprised of professional fees, printing and
stationery, economic and investment research, allocated corporate overhead and
miscellaneous expenses. Professional fees primarily include payments made to
marketing consultants and recruiters, and for legal services. Professional fees
increased $1.8 million or 69.2% to $4.4 million primarily due to continuing
staffing expansion in all areas, and the development of international
operations. Miscellaneous expenses increased $2.7 million or 122.7% to $4.9
million. Miscellaneous expenses consisted primarily of accruals for bad debt
expense, travel and entertainment, information services, customer service
related expenses, employee registration fees and expenses for new account credit
checks.
Income (loss) before income tax provision (benefit) and equity in net
loss of joint ventures increased $0.6 million to a loss of $(3.1) million for
the quarter ended September 30, 2000 from a net loss of $(3.7) million for the
quarter ended September 30, 1999. The provision (benefit) for income taxes for
the quarters ended September 30, 2000 and 1999 was $(1.3) million, representing
a 41.9% effective tax rate, and $(1.5) million, representing a 40.5% effective
tax rate, respectively.
Income before advertising costs, income tax provision and equity in net
loss of joint ventures amounted to $6.0 million and $14.4 million for the
quarters ended September 30, 2000 and 1999, respectively.
DLJdirect has a 50% interest in foreign-based joint ventures in Japan,
Hong Kong and the Middle East. For the quarters ended September 30, 2000 and
1999, DLJdirect's share of the equity in the net loss of these joint ventures
was $(2.3) million and $(1.1) million, respectively.
As a result of the foregoing factors, net income (loss) decreased to
$(4.2) million for the quarter ended September 30, 2000 from $(3.3) million for
the quarter ended September 30, 1999.
37
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
DLJdirect experienced strong results for the nine months ended
September 30, 2000 compared to the nine months ended September 30, 1999,
reflecting primarily an increase in active accounts of 55.8% and customer
trading volume of 61.7%. Active accounts consist of those accounts at the end of
the related period with at least one trade in the last twelve months or with a
balance at period end. Total revenues increased $115.5 million or 71.1% to
$278.0 million for the nine months ended September 30, 2000 from $162.5 million
for the nine months ended September 30, 1999. Net income decreased $6.1 million
to $2.8 million from $8.9 million, primarily resulting from continued
international expansion.
Commissions increased $58.9 million or 59.9% to $157.3 million.
Commissions represented 56.6% of total revenues for the nine months ended
September 30, 2000 and 60.6% of total revenues for the nine months ended
September 30, 1999. The increase in commissions was due primarily to significant
increases in customer trading volume. Average trades per day increased 61.0%
from 20,500 for the nine months ended September 30, 1999 to 33,000 for the nine
months ended September 30, 2000.
Underwriting revenues earned in connection with public offerings for
the nine months ended September were $6.2 million compared to $5.5 million for
the nine months ended September 30, 1999. Underwritings represented 2.2% of
total revenues for the nine months ended September 30, 2000 and 3.4% of total
revenues for the nine months ended September 30, 1999.
Fees increased $25.3 million or 76.9% to $58.2 million. Fees
represented 20.9% of total revenues for the nine months ended September 30, 2000
and 20.2% of total revenues for the nine months ended September 30, 1999.
Payments for routing orders increased $4.4 million or 45.6% to $14.0 million.
The increase in payments for routing orders was due primarily to significant
increases in customer trading volume, offset in part by a decline in the amount
of revenue per trade that DLJdirect receives for routing orders. Fees for
technology development, earned by iNautix Technologies, Inc., DLJdirect's
technology group, increased $15.8 million or 95.8% to $32.3 million
primarily due to increased demand from related entities for Internet-based
technology applications. Revenue from money market fund distribution fees
increased $4.3 million or 113.2% to $8.1 million. This growth was due to an
increase in customer money market fund balances of $775.0 million or 63.3% to
$2.0 billion. The remaining fees for the nine months ended September 30, 2000
includes subscription fees and account-related fees.
Interest revenues increased $30.5 million or 118.7% to $56.2
million. Interest represented 20.2% of total revenues for the nine months
ended September 30, 2000 and 15.8% of total revenues for the nine months
ended September 30, 1999. The increase was due primarily to more favorable
interest sharing arrangements with Pershing, an affiliated clearing broker,
and to increases in margin debits, free credits and short sale balances.
Margin debits increased $822.0 million or 84.0% to $1.8 billion. Free credits
increased $121.1 million or 19.4% to $ 744.9 million and short sale balances
increased $23.6 million or 39.9% to $82.8 million.
Compensation and benefits increased $46.9 million or 113.3% to $88.3
million. The increase in compensation and benefits was due primarily to growth
in the number of employees from 820 to 1,712. These additional employees were
added primarily in DLJdirect's investor services, operations, and compliance
areas to accommodate increased customer activity, in DLJdirect's technology
group, including in India, to develop new products and systems and maintain
systems infrastructure, in the UK operations, as well as in executive
management.
Brokerage, clearing, exchange and other fees increased $15.6 million or
58.0% to $42.5 million. The increase in brokerage, clearing, exchange and other
fees was primarily due to significant increases in customer trading volume,
offset in part by lower clearing fees per trade resulting from reduced clearing
rates.
Advertising increased $9.7 million or 25.9% to $47.2 million. The
increase in advertising was due primarily to the development and implementation
of new branding and advertising campaigns.
Occupancy and related costs increased $7.1 million or 284.0% to $9.6
million. Occupancy and related costs includes rent and operating expenses for
facilities, expenditures for repairs and maintenance, and the lease expense for
furniture, fixtures, leasehold improvements as well as business and computer
equipment. The increase in occupancy cost was due primarily to the opening of
two investor services facilities, one in Charlotte, North Carolina, and the
other in Sandy City, Utah, new technology centers in East Brunswick, New Jersey,
and Chennai, India, and to the relocation of DLJdirect's headquarters.
Communications and technology costs increased $17.1 million or 101.8%
to $33.9 million. Communications expense includes quotation expenses, expenses
related to customer toll-free phone calls and regular telephone services, and
lease expense for communication systems infrastructure. Technology expense
includes lease expense for technology systems infrastructure and computer
equipment. Increases in both communications and technology costs were due
primarily to the increased volume of transactions, improvements in and expansion
of technology infrastructure, and increases in facilities and in staff.
38
<PAGE>
Other operating expenses increased $22.8 million or 126.7% to $40.8
million. Operating expenses are comprised of professional fees, printing and
stationary, economic and investment research, allocated corporate overhead
and miscellaneous expenses. Professional fees primarily include payments made
to technology and marketing consultants and recruiters, and for legal
services. Professional fees increased $8.9 million or 153.4% to $14.7 million
primarily due to the development of advertising and marketing strategies, the
relocation of DLJdirect's headquarters, continuing staffing expansion in all
areas, and the development of international operations. Miscellaneous
expenses increased $10.6 million or 186.0% to $16.3 million. Miscellaneous
expenses consisted primarily of accruals for bad debt expense, postage,
travel and entertainment, information services, customer service related
expense, employee registration fees and expenses for new account credit
checks.
Income before income tax provision and equity in net loss of joint
ventures decreased $4.4 million from income of $18.8 million for the nine months
ended September 30, 1999 to $14.4 million for the nine months ended September
30, 2000. The provision for income taxes for the nine months ended September 30,
2000 and for the nine months ended September 30, 1999 was $6.0 million,
representing a 41.7% effective tax rate, and $7.8 million, representing a 41.5%
effective tax rate, respectively.
DLJdirect has a 50% interest in foreign-based joint ventures in Japan,
Hong Kong, and the Middle East. For the nine months ended September 30, 2000 and
September 30, 1999, DLJdirect'S equity in net loss of joint ventures was $(5.6)
million, and $(2.0) million, respectively.
As a result of the foregoing factors, net income decreased to $6.1
million for the nine months ended September 30, 2000 from $8.9 million for the
nine months ended September 30, 1999. For the period the Tracking Stock was
outstanding (May 28 to September 30, 1999), net income applicable to the
shareholders of DLJdirect Common Stock was $(547,000).
LIQUIDITY AND CAPITAL RESOURCES - DLJdirect
The principal sources of liquidity for DLJdirect's operations are
allocated capital and leases of fixed assets through an affiliate. The value of
equipment acquired through leases of fixed assets through an affiliate totaled
$35.3 million for the nine months ended September 30, 2000 and $15.4 million for
the nine months ended September 30, 1999. These fixed assets were comprised
primarily of computers and related systems, furniture and leasehold
improvements. DLJdirect generally leases its fixed assets and therefore does not
incur significant capital expenditures.
Although DLJdirect maintains substantial money market accounts, bank
accounts and investment accounts consistent with regulatory requirements,
DLJdirect continues to be substantially dependent on CSFB (USA), Inc. for
almost all of its daily financial, administrative and operational services
and related support functions including cash management, the receipt of
payments from third parties and the distribution of payments to third
parties. DLJdirect continues to invest its excess cash. At September 30,
2000, DLJdirect had approximately $194.1 million invested in money market
accounts and short-term investments. CSFB (USA), 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 CSFB (USA), Inc. The board of directors of CSFB
(USA), Inc. will determine, in its sole discretion, whether to provide any
particular funds to either CSFB (USA), 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 CSFB (USA), 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 CSFB (USA), 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 $(1.0) million
and $31.7 million for the nine months ended September 30, 2000, and 1999,
respectively. In the nine months ended September 30, 2000, there were
increased assets including receivables from brokers, dealers and others of
$10.4 million. This increase was offset by an increase in payables to parent
and affiliate, net of $2.5 million and a decrease in accounts payable and
accrued expenses of $1.4 million. In the nine months ended September 30,
1999, receivables from brokers, dealers and others increased $1.5 million.
This increase in assets was offset by increases in operating liabilities
including accounts payable and accrued expenses of $20.0 million and payable
to parent and affiliate, net of $3.1 million.
39
<PAGE>
Cash used in investing activities totaled $80.2 million for the nine
months ended September 30, 2000. For the nine months ended September 30, 2000,
DLJdirect invested $30.4 million in short-term investments, purchased $4.8
million of long-term corporate development investments, and invested $24.9
million in several foreign joint ventures in which it has a 50% interest. For
the nine months ended September 30, 1999, DLJdirect invested $64.3 million in
short-term investments and $12.4 million in a 50% joint venture with a Japanese
bank.
For the nine months ended September 30, 1999 net cash provided by
financing activities totaled $201.8 million which was provided by capital
contributions from CSFB (USA), Inc. The net proceeds, together with its current
cash, cash equivalents and cash generated from operations will be sufficient to
meet its anticipated cash needs for working capital and capital expenditures
through at least the end of 2000.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - DLJdirect
DLJdirect's primary financial instruments are cash and cash
equivalents. This includes cash in banks and highly rated liquid money market
investments. DLJdirect believes that such instruments are not subject to
material potential near-term losses in future earnings from reasonably possible
near-term changes in market rates or prices.
40
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - DLJdirect
DLJdirect has been named a defendant in actions relating to its businesses.
While the ultimate outcome of litigation involving DLJdirect cannot be predicted
with certainty, management, having reviewed these actions with its counsel,
believes it has meritorious defenses to all such actions and intends to defend
each of these vigorously. In the opinion of management of DLJdirect, the
ultimate resolution of all litigation, regulatory and investigative matters
affecting DLJdirect will not have a material adverse effect on the financial
condition or results of operations of DLJdirect.
41
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3.1 Amended and Restated Certificate of Incorporation.
3.2 By-Laws.
11 Statement re: computation of basic earnings per share.
11.1 Statement re: computation of diluted earnings per share.
12 Ratio of earnings to fixed charges
12.1 Ratio of earnings to fixed charge and preferred dividends
15 Independent Accountants' Review Report - Credit Suisse First Boston
(USA), Inc. and Subsidiaries
15.1 Independent Accountants' Review Report - DLJdirect
27 Financial Data Schedule
(b) Reports on Form 8-K
1. Form 8-K dated July 20; Item 5
2. Form 8-K dated July 26; Item 5
3. Form 8-K dated October 26; Item 2
4. Form 8-K dated November 7; Items 1, 2, 5 and 7
42
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CREDIT SUISSE FIRST BOSTON (USA), INC
/S/ ANTHONY F. DADDINO
---------------------------------------------
Anthony F. Daddino
CHIEF FINANCIAL AND ADMINISTRATIVE OFFICER
(ON BEHALF OF THE REGISTRANT AND AS
PRINCIPAL FINANCIAL OFFICER)
November 14, 2000
43
<PAGE>
EXHIBIT INDEX
3.1 Amended and Restated Certificate of Incorporation (Incorporated herein
by reference to Exhibit 3.1 to the Company's Registration Statement on
Form S-3/A File No. 333-74549) filed on May 6, 1999
3.2 By-Laws (Incorporated herein by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-3 File No. 333-53499) filed
on May 22, 1998
11 Statement re : computation of basic earnings per share
11.1 Statement re: computation of diluted earnings per share
12 Ratio of earnings to fixed charges
12.1 Ratio of earnings to fixed charges and preferred dividends
15 Independent Accountants' Review Report - Credit Suisse First Boston
(USA), Inc. and Subsidiaries
15.1 Independent Accountants' Review Report - DLJdirect
27 Financial Data Schedule
44
