================================================================================
As filed with the Securities and Exchange Commission on March 17, 1999
Registration No. 333-____
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
Donaldson, Lufkin & Jenrette, Inc.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 13-1898818
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
---------------
277 Park Avenue
New York, New York 10172
(212) 892-3000
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
---------------
Michael A. Boyd
Senior Vice President and General
Counsel
Donaldson, Lufkin & Jenrette, Inc.
277 Park Avenue
New York, New York 10172
(212) 892-3000
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
---------------
Copies to:
Jeffrey Small Matthew J. Mallow
Richard D. Truesdell, Jr. Alan G. Straus
Davis Polk & Wardwell Skadden, Arps, Slate, Meagher &
450 Lexington Avenue Flom LLP
New York, New York 10017 919 Third Avenue
(212) 450-4000 New York, NY 10022-3897
(212) 735-3000
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------
CALCULATION OF REGISTRATION FEE
================================================================================
Proposed Maximum
Title of Each Class Aggregate Amount of
of Securities to be Registered Offering Price (1) Registration Fee
- --------------------------------------------------------------------------------
DLJdirect Common Stock,
par value $0.10 per share........... $138,000,000 $38,364
================================================================================
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
The Registrant amends this Registration Statement on the date or dates
necessary to delay its effective date until the Registrant files a further
amendment which specifically states that this Registration Statement will
become effective in accordance with Section 8(a) of the Securities Act of
1933 or until the Registration Statement becomes effective on such date as
the Commission, acting under Section 8(a), may determine.
================================================================================
We will amend and complete the information in this prospectus. Although we
are permitted by US federal securities laws to offer these securities using
this prospectus, we may not sell them or accept your offer to buy them
until the documentation filed with the SEC relating to these securities has
been declared effective by the SEC. This prospectus is not an offer to
sell these securities or our solicitation of your offer to buy these
securities in any jurisdiction where that would not be permitted or legal.
SUBJECT TO COMPLETION -- March 17, 1999
================================================================================
Prospectus
, 1999
[LOGO]
DLJdirect Common Stock
Donaldson, Lufkin & Jenrette, Inc.
________ Shares
- --------------------------------------------------------------------------------
Donaldson, Lufkin & Jenrette, Inc.:
o We are an integrated investment and merchant bank.
o Donaldson, Lufkin & Jenrette, Inc.
277 Park Avenue
New York, New York 10172
(212) 892-3000
Proposed Symbol/Market:
o DIR/NYSE
The Offering:
o Donaldson, Lufkin & Jenrette, Inc. is offering shares of its DLJdirect
Common Stock. We intend these shares to reflect the performance of
DLJdirect, our online discount brokerage and related investment services
business. DLJdirect Common Stock will have no voting rights.
o The underwriters have an option to purchase an additional shares from
Donaldson, Lufkin & Jenrette, Inc.
o This is our initial public offering of DLJdirect Common Stock, and no
public market currently exists for these shares. We anticipate that the
initial public offering price will be between $ and $ per share.
o We will allocate the proceeds from this offering to DLJdirect, which plans
to use the proceeds to fund increases in marketing expenditures, for
international expansion, to repay a note to an affiliate and for other
general corporate purposes.
o Closing: , 1999.
- --------------------------------------------------------------------------------
Per Share Total
- --------------------------------------------------------------------------------
Public offering price: $ $
Underwriting fees: $ $
Proceeds to Donaldson, Lufkin & Jenrette, Inc.: $ $
- --------------------------------------------------------------------------------
This investment involves risk. See "Risk Factors" beginning on page 11.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
- --------------------------------------------------------------------------------
Donaldson, Lufkin & Jenrette
The undersigned is facilitating Internet distribution.
DLJdirect Inc.
[insert graphics and CD]
TABLE OF CONTENTS
Page
----
Prospectus Summary ..................... 4
Risk Factors ........................... 11
Where You Can Find More Information .... 22
Use of Proceeds ........................ 23
Dividend Policy ........................ 23
Capitalization ......................... 24
Selected Combined Financial Information
of DLJdirect ......................... 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations of DLJdirect ................ 28
Business of DLJdirect .................. 36
Management of DLJdirect ................ 52
Certain Relationships .................. 59
Description of Capital Stock ........... 62
Certain Cash Management and Allocation
Policies ............................. 81
Certain U.S. Federal Tax Considerations 84
Underwriters ........................... 87
Legal Matters .......................... 90
Experts ................................ 90
Illustration of Certain Terms .......... I-1
Index to Combined Financial Statements . F-1
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we
filed with the Securities and Exchange Commission. You should read this
prospectus together with the additional information described under the
heading "Where You Can Find More Information".
PROSPECTUS SUMMARY
This summary highlights key aspects of the offering of
DLJdirect Common Stock. This summary is not a substitute for the more
detailed information contained in the rest of this prospectus. For a more
comprehensive description of the offering of DLJdirect Common Stock, you
should read the entire prospectus. In this prospectus, "we," "us" and "our"
refer to Donaldson, Lufkin & Jenrette, Inc. and "board of directors" refers
to the board of directors of Donaldson, Lufkin & Jenrette, Inc.
Donaldson, Lufkin & Jenrette, Inc. and DLJdirect
Donaldson, Lufkin & Jenrette, Inc.
We are a leading integrated investment and merchant bank that
serves institutional, corporate, governmental and individual clients both
domestically and internationally. Our business includes securities
underwriting, sales and trading, merchant banking, financial advisory
services, investment research, traditional and online brokerage services and
asset management. From a financial reporting standpoint, we have separated
our online discount brokerage and related investment services business - which
we call DLJdirect - from the rest of our businesses - which we call DLJ.
We intend our DLJdirect Common Stock to track the performance
of DLJdirect, and we intend our DLJ Common Stock to track the performance of
DLJ. We are offering you shares of DLJdirect Common Stock, but we are not
offering you any shares of DLJ Common Stock.
DLJ includes:
o All Donaldson, Lufkin & Jenrette, Inc. businesses other than
those businesses that are included in DLJdirect.
o A retained interest in DLJdirect which is currently 100%. This
retained interest will decline to reflect the initial issuance
of DLJdirect Common Stock as well as any future issuances.
Our principal executive offices are located at 277 Park Avenue,
New York, NY 10172. Our telephone number is (212) 892-3000.
DLJdirect - www.DLJdirect.com
DLJdirect is a leading provider of online discount brokerage
and related investment services, offering customers automated securities order
placement and information and research capabilities through the Internet and
online service providers. DLJdirect's broad range of investment services is
targeted at self-directed, sophisticated online investors, who on average have
higher account balances than other online investors.
DLJdirect was one of the pioneers of online investing. In its
10-year history, DLJdirect has frequently been recognized as a high-quality
provider of online brokerage services. Recent industry awards include the
following:
o Barron's 1999 Annual Survey of Online Brokers -- DLJdirect was
rated the number one online broker, based on criteria including
trade execution, reliability and range of services
o Gomez Advisors, Inc. -- DLJdirect was rated the number one
overall Internet broker for five of the last seven quarters,
including the most recent quarter
o TheStreet.com -- DLJdirect was selected the number one online
broker for reliability and ease of use in TheStreet.com's
November 1998 reader survey
DLJdirect's investment services and products include:
o online order entry for stocks, options, mutual funds and U.S.
Treasury securities
o access to selected DLJ-managed initial public offerings and
other equity offerings
o company and industry research from DLJ and independent research
organizations
o DLJdirect MarketSpeed[Trademark], its proprietary software with
enhanced graphics and greater ease of use permitting
DLJdirect's customers to access DLJdirect's online services an
average of five times faster than other major Internet brokers
o stock and mutual fund evaluation tools, including its
proprietary StockScan[Trademark] for screening over 9,500
public companies and its proprietary FundScan[Trademark] for
analyzing over 7,000 mutual funds
DLJdirect has experienced rapid growth in recent years:
o revenues increased 75.4% from $67.2 million in 1997 to $117.9
million in 1998 and were $35.4 million during the fourth
quarter of 1998
o the average number of trades executed each day increased 86.9%
from 6,100 in 1997 to 11,400 in 1998 and was 14,200 during the
fourth quarter of 1998
o customer assets increased 93.5% from $4.6 billion at December
31, 1997 to $8.9 billion at December 31, 1998
The key elements of DLJdirect's strategy are as follows:
o increase penetration of DLJdirect's targeted customer base
o build and enhance the DLJdirect brand
o maintain leading technology
o continue to broaden product offerings
o expand role as an Internet-based distributor of underwritten
securities
o expand globally
As used in this prospectus, the term "DLJdirect" does not
represent a separately incorporated entity but rather means those businesses,
assets and liabilities intended to represent Donaldson, Lufkin & Jenrette,
Inc.'s online discount brokerage and related investment services business.
DLJdirect COMMON STOCK
<TABLE>
<S> <C>
Basic Investment Characteristics: DLJdirect Common Stock is what is sometimes referred to
as "tracking stock". Tracking stock is a type of common
stock that is intended to reflect or "track" the performance
of a particular business. In this case, DLJdirect Common
Stock is intended to track the performance of DLJdirect.
From a financial reporting standpoint, we have separated
our online discount brokerage and related services business,
DLJdirect, from Donaldson, Lufkin & Jenrette, Inc., which
includes the rest of our businesses, and we have allocated
all of our consolidated assets, liabilities, revenue, expenses
and cash flow between DLJdirect and DLJ.
Although we intend DLJdirect Common Stock to reflect the
performance of DLJdirect, holders of DLJdirect Common
Stock will be common stockholders of Donaldson, Lufkin &
Jenrette, Inc. For this reason, holders of DLJdirect
Common Stock will be subject to all of the risks associated
with an investment in Donaldson, Lufkin & Jenrette, Inc.
and all of its businesses, assets and liabilities.
Voting Rights: Shares of DLJdirect Common Stock will have no voting
rights except in certain limited circumstances.
Dividends: We do not expect to pay any dividends on DLJdirect
Common Stock for the foreseeable future.
Mandatory Dividend, Redemption or If we dispose of all or substantially all of the assets of
Exchange on Disposition of Assets: DLJdirect and the disposition is not an exempt disposition
under the terms of our charter, we would be required to
choose one of the following three alternatives:
o pay a dividend to holders of DLJdirect Common Stock in an
amount equal to a proportionate interest in the net
proceeds of the disposition,
o redeem from holders of DLJdirect Common Stock, for an
amount equal to a proportionate interest in the net
proceeds of the disposition, outstanding shares of
DLJdirect Common Stock or
o issue DLJ Common Stock in exchange for outstanding
DLJdirect Common Stock at a 10% premium to the value of
the DLJdirect Common Stock being exchanged.
At any time within one year after completing a special
dividend or partial redemption referred to above, we will
have the right to issue DLJ Common Stock in exchange for
the remaining outstanding DLJdirect Common Stock at a
10% premium to the value of the DLJdirect Common Stock
being exchanged.
To determine the exchange rate that will result in an
exchange at a 10% premium to the value of the DLJdirect
Common Stock being exchanged, we will value DLJ
Common Stock and DLJdirect Common Stock based on
their average market values over a specified 20-trading-day
period before the exchange.
Exchange for DLJ Common Stock at We will have the right to issue DLJ Common Stock in
Donaldson, Lufkin & Jenrette, Inc.'s Option: exchange for outstanding DLJdirect Common Stock at a
premium at any time. The premium will be 25% for
exchanges occurring in the 90 days after issuance and will
decline ratably each quarter thereafter over a period of 3
years to 15%. However, the premium will be 10% in the
event of certain adverse tax law changes after the
consummation of the offering, regardless of when such
changes occur.
Exchange for Stock of a Subsidiary at We will have the right, at any time, to exchange stock of a
Donaldson, Lufkin & Jenrette, Inc.'s Option: subsidiary of Donaldson, Lufkin & Jenrette, Inc. for
DLJdirect Common Stock if all of the assets and liabilities
of DLJdirect are transferred to that subsidiary.
Liquidation: Upon liquidation of Donaldson, Lufkin & Jenrette, Inc.,
holders of DLJ Common Stock and DLJdirect Common
Stock will be entitled to receive the net assets of
Donaldson, Lufkin & Jenrette, Inc., if any, remaining for
distribution to stockholders after payment or provision for
all liabilities of Donaldson, Lufkin & Jenrette, Inc. and
payment of the liquidation preference payable to any
holders of preferred stock. Amounts due upon liquidation
in respect of shares of DLJ Common Stock and shares of
DLJdirect Common Stock will be distributed pro rata in
accordance with the average market value of DLJ Common
Stock and the average market value of DLJdirect Common
Stock over a 20-trading-day period prior to the liquidation.
</TABLE>
THE OFFERING
DLJdirect Common Stock offered...... shares
Notional number of shares attributable
to DLJ in respect of its retained
interest......................... shares
Use of proceeds..................... We will allocate to DLJdirect net
proceeds from the offering of
approximately $ million.
These net proceeds will be used to fund
increases in marketing expenditures,
for international expansion, to repay a
note issued to an affiliate prior to
the consummation of the offering and
for other general corporate purposes.
Proposed New York Stock Exchange
Symbol........................... DIR
Except as otherwise indicated, the information in this prospectus
assumes that the DLJdirect Common Stock being offered will be sold at $ per
share, which is the mid-point of the range set forth on the cover page of the
prospectus, and that the underwriters' option to purchase additional shares of
DLJdirect Common Stock is not exercised. It is intended that the net proceeds
from the issuance of shares of DLJdirect Common Stock in connection with any
exercise of the underwriters' option would be allocated to DLJdirect.
The shares of DLJdirect Common Stock outstanding exclude
shares of DLJdirect Common Stock that have been reserved for
issuance under DLJdirect's stock option plan. See "Management of DLJdirect -
DLJdirect 1999 Incentive Compensation Plan".
SUMMARY COMBINED FINANCIAL INFORMATION OF DLJdirect
The following summary combined financial information should be
read in conjunction with DLJdirect's combined financial statements and the
notes thereto, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations of DLJdirect" contained elsewhere in this
prospectus. The summary combined statements of operations data for the years
ended December 31, 1996, 1997 and 1998 and the combined statements of
financial condition data as of December 31, 1998 are derived from DLJdirect's
audited combined financial statements which are included elsewhere in this
prospectus. The summary combined statements of operations data for the years
ended December 31, 1994 and 1995 are derived from the unaudited combined
financial statements of DLJdirect which are not included in this prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenues:
Commissions.......................................... $28,491 $40,358 $54,166 $50,948 $78,717
Fees................................................. 3,797 5,067 6,426 12,109 25,484
Interest............................................. 1,858 1,846 2,569 4,160 13,723
------ ------ ------ ------ -------
Total revenues..................................... 34,146 47,271 63,161 67,217 117,924
------ ------ ------ ------ -------
Costs and Expenses:
Compensation and benefits............................ 5,422 7,362 11,202 17,174 28,260
Brokerage, clearing, exchange and other fees......... 9,567 11,709 15,422 20,909 28,423
Advertising.......................................... 1,971 4,183 9,093 13,137 25,146
Occupancy and equipment.............................. 1,175 1,437 1,923 3,352 5,045
Communications....................................... 791 1,025 1,468 2,844 5,564
Technology costs..................................... 4,400 5,431 5,205 5,082 4,084
Other operating expenses............................. 3,164 4,507 5,567 10,844 18,934
------ ------ ------ ------ -------
Total costs and expenses........................... 26,490 35,654 49,880 73,342 115,456
------ ------ ------ ------ -------
Income (loss) before income tax provision (benefit)... 7,656 11,617 13,281 (6,125) 2,468
Income tax provision (benefit)........................ 3,128 4,746 5,425 (2,502) 1,008
------ ------ ------ ------ -------
Net income (loss)..................................... $4,528 $6,871 $7,856 $(3,623) $1,460
====== ====== ====== ======= ======
Pro forma weighted average shares of DLJdirect
Common Stock outstanding (1):
Basic and diluted.................................... ======
Pro forma earnings per share of DLJdirect Common
Stock (1):
$
Basic and diluted.................................... ======
</TABLE>
As of December 31, 1998
-----------------------------
Actual As Adjusted (2)
------ ---------------
(in thousands)
Statements of Financial Condition Data:
Cash and cash equivalents............... $26,654
Total assets............................ $29,751
Long-term liabilities................... --
Total equity............................ $21,924
<TABLE>
<CAPTION>
As of or for the Year Ended December 31,
--------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Other Data:
Total trades.................... 475,000 660,000 929,000 1,535,000 2,875,000
Average trades per day.......... 1,900 2,600 3,700 6,100 11,400
Total customer assets........... $1,300,000 $1,900,000 $2,500,000 $4,600,000 $8,900,000
Total accounts.................. 153,000 207,000 280,000 390,000 529,000
Total employees................. 95 139 174 283 374
Total technology employees...... 12 14 34 82 119
</TABLE>
(1) Pro forma basic and diluted earnings per common share amounts have been
calculated by dividing net income applicable to common shares by the pro
forma weighted average common shares outstanding.
(2) As adjusted amounts give effect to (a) the issuance and sale of
shares of DLJdirect Common Stock at an assumed initial public offering
price of $ per share, the midpoint of the range set forth on the cover
page of this prospectus, and the application of the net proceeds therefrom
(after deducting estimated underwriting discounts and commissions and
offering expenses payable by us) and (b) the issuance of a note to an
affiliate prior to the completion of the offering which will be repaid with
a portion of the proceeds from the offering. The note issued to an
affiliate will be in an amount equal to the total equity of DLJdirect
Holdings Inc. at December 31, 1998, which was $21.9 million, plus the
accumulated retained earnings of DLJdirect Holdings Inc. from January 1,
1999 until the end of the month preceding the offering.
RISK FACTORS
You should carefully consider the risks described below before
making an investment decision. The risks described below are not the only
ones facing DLJdirect. Additional risks not presently known to DLJdirect or
that it currently deems immaterial may also impair its business operations.
DLJdirect's business, financial condition or results of operations could be
materially adversely affected by any of these risks. The trading price of
DLJdirect Common Stock could decline due to any of these risks, and you may
lose all or part of your investment.
Risks Relating to Ownership of DLJdirect Common Stock
Holders of DLJdirect Common Stock Will Be Common Stockholders
of Donaldson, Lufkin & Jenrette, Inc. and Will Be Subject to Risks Associated
with an Investment in Donaldson, Lufkin & Jenrette, Inc. as a Whole.
We cannot assure you that the market value of DLJdirect Common
Stock will reflect the performance of DLJdirect as we intend. Holders of
DLJdirect Common Stock will continue to be common stockholders of Donaldson,
Lufkin & Jenrette, Inc. and, as such, will be subject to all risks of an
investment in Donaldson, Lufkin & Jenrette, Inc. and all of our businesses,
assets and liabilities.
Even though from a financial reporting standpoint we have
allocated our consolidated assets, liabilities, revenue, expenses and cash
flow between DLJdirect and DLJ, that allocation will not change the legal
title to any assets or responsibility for any liabilities and will not affect
the rights of any of our creditors. Further, holders of DLJdirect Common
Stock will not have any legal rights related to specific assets of DLJdirect
and, in any liquidation, will receive a share of the net assets of Donaldson,
Lufkin & Jenrette, Inc. based on the relative trading prices of DLJdirect
Common Stock and DLJ Common Stock rather than on any assessment of the actual
value of DLJdirect or DLJ.
Holders of DLJdirect Common Stock Will Have No Voting Rights;
We Are Subject to Takeover Constraints Due to Control by Equitable
Holders of DLJdirect Common Stock will have no voting rights,
unless a separate class vote is required by the Delaware general corporation
law. The holders of DLJ Common Stock are entitled to one vote per share with
respect to all matters generally submitted to our shareholders for approval.
At March 1, 1999, The Equitable Companies Incorporated owned approximately
71.3% of the outstanding shares of DLJ Common Stock. Consequently, Equitable
will be in a position to elect all of our directors and, in general, to
determine the outcome of all matters submitted to a vote of our shareholders.
As long as Equitable continues to own a majority of the voting power of our
common stock, no person interested in acquiring control of Donaldson, Lufkin &
Jenrette, Inc. or DLJdirect will be able to do so without obtaining the
consent of Equitable.
The Board of Directors May Make Operational and Financial
Decisions Affecting DLJ and DLJdirect Differently
The board of directors, in its sole discretion, will make
operational and financial decisions and implement policies that may affect the
businesses of DLJ and DLJdirect differently. Examples include:
o future allocations of assets, liabilities, revenues, expenses,
cash flow and the tax consequences of operations,
o the allocation of business opportunities, resources and
personnel,
o the manner of accounting for a transfer of funds between DLJ
and DLJdirect as either a revolving credit advance, a long-term
loan or a return of capital,
o the allocation of funds for capital expenditures,
o the allocation of proceeds from the issuance of DLJdirect
Common Stock and the costs of repurchases of DLJdirect Common
Stock either to DLJ in respect of its retained interest in
DLJdirect or to the equity of DLJdirect,
o the allocation of issuances of debt or preferred stock of
Donaldson, Lufkin & Jenrette, Inc. between DLJ and DLJdirect,
o decisions as to how to allocate consideration received in
connection with a merger involving Donaldson, Lufkin &
Jenrette, Inc. between holders of DLJ Common Stock and
DLJdirect Common Stock,
o decisions as to whether and when to exchange one series of
common stock for the other series of common stock,
o decisions as to whether and when to approve dispositions of
assets of either DLJ or DLJdirect, and
o other transactions between DLJ and DLJdirect.
Decisions of the board of directors may favor either DLJ or
DLJdirect at the expense of the other. The discretion of the board of
directors in these areas makes an investment in DLJdirect Common Stock riskier
than an investment in ordinary common stock. All of the directors own
disproportionate interests, in both percentage and value terms, of DLJ Common
Stock as compared to DLJdirect Common Stock. This disparity in ownership
interests may create or appear to create potential conflicts of interest when
these directors are faced with decisions that could have different
implications for the different series. See "Certain Cash Management and
Allocation Policies".
Principles of Delaware Law May Protect Decisions of the Board
of Directors That Have a Disparate Impact upon Holders of DLJ Common Stock and
DLJdirect Common Stock
Delaware law provides that a board of directors owes an equal
duty to all stockholders regardless of class or series and does not have
separate or additional duties to either group of stockholders, subject to
applicable provisions set forth in a company's charter. We are not aware of
any legislative or judicial precedent involving the fiduciary duties of
directors of a Delaware corporation with two classes of common stock with
separate rights related to specified operations of the corporation. However,
under the principles of Delaware law referred to above and the related
principle known as the "business judgment rule", you may not be able to
challenge decisions that have an adverse effect upon holders of DLJdirect
Common Stock if the board of directors is disinterested, informed with respect
to these decisions, acts in good faith, and in the belief that it is acting in
the best interests of Donaldson, Lufkin & Jenrette, Inc.'s stockholders.
We May Dispose of Assets of Either DLJdirect or DLJ Without
Your Approval and You May Receive Less Value for Your Shares than the
Market Value of Your Shares
Delaware law requires stockholder approval only for a sale,
lease or exchange of "all or substantially all" of the assets of Donaldson,
Lufkin & Jenrette, Inc. Holders of shares of DLJdirect Common Stock are not
entitled to vote on matters generally submitted to stockholders. Accordingly,
we can sell or otherwise dispose of any amount of assets of DLJdirect without
stockholder approval. In addition, as long as the assets attributed to DLJ
represent less than substantially all of Donaldson, Lufkin & Jenrette, Inc.'s
assets, we may also approve sales and other dispositions of any amount of the
assets of DLJ without any stockholder approval.
Holders of common stock relating to a particular group may
receive less value for their shares than the value that a third-party buyer
might pay for all or substantially all of the assets of such group. In
addition, if we elect to complete an exchange in connection with the
disposition, we could do so as one of the three alternatives required in
connection with the disposition and any exchange could be completed at a time
when DLJdirect Common Stock or DLJ Common Stock may be considered to be
overvalued or undervalued.
The board of directors will decide, in its sole discretion, how
to proceed and is not required to select the option that would result in the
highest value to holders of DLJdirect Common Stock.
We Cannot Assure You That a Market Will Develop for DLJdirect
Common Stock or What Its Market Price Will Be
There is currently no public trading market for DLJdirect
Common Stock, and we cannot assure you that one will develop or be sustained
after the offering. We cannot predict the prices at which DLJdirect Common
Stock will trade after the offering. The initial public offering price for
DLJdirect Common Stock will be determined through our negotiations with the
underwriters and may not bear any relationship to the market price at which
DLJdirect Common Stock will trade after the offering or to any other
established criteria for value.
The Market Price of DLJdirect Common Stock Will Fluctuate and
Could Fluctuate Significantly
The stock market has experienced extreme price and volume
fluctuations. The market prices of securities of Internet-related companies,
in particular, have been especially volatile. In the past, companies that have
experienced volatility have sometimes been the object of securities class
action litigation. Securities class action litigation may result in
substantial costs and a diversion of management's attention and resources.
Recent Clinton Administration Tax Proposal Could Result in the
Exchange of DLJdirect Common Stock for DLJ Common Stock at a Reduced Premium
A recent proposal by the Clinton Administration would impose a
corporate level tax on the issuance of stock similar to the DLJdirect Common
Stock. As proposed by the Clinton Administration, this provision would be
effective upon the date of its enactment by Congress. If this proposal is
enacted, therefore, we could be subject to tax on an issuance of DLJdirect
Common Stock after the date of enactment. We cannot predict whether the
proposal will be enacted by Congress and, if enacted, whether it will be in
the form proposed by the Clinton Administration. We expect the offering to be
consummated prior to the effective date of the proposed legislation. It is
possible, however, that further issuances of the DLJdirect Common Stock would
be affected by the enactment of these proposals. We may issue DLJ Common
Stock in exchange for DLJdirect Common Stock at a premium of 10% if, as a
result of the enactment of legislative changes or administrative proposals or
changes, we or our stockholders will, more likely than not, be subject to tax
upon issuance of the DLJ Common Stock or DLJdirect Common Stock or such stock
will not be treated as stock of Donaldson, Lufkin & Jenrette, Inc. See
"Description of Capital Stock--Optional Exchange of One Series of Common Stock
for the Other Series".
The Value of DLJdirect Common Stock May Decline Due to Future
Issuances of DLJdirect Common Stock
Our certificate of incorporation allows the board of directors,
in its sole discretion, to issue authorized but unissued shares of DLJdirect
Common Stock. This could dilute the value of shares of DLJdirect Common Stock.
Risks Relating to the Business of DLJdirect
Capacity Constraints and System Failures Could Harm
DLJdirect's Business
If DLJdirect's systems cannot be expanded to cope with
increased demand or fail to perform, it could experience:
o unanticipated disruptions in service;
o slower response times;
o decreased customer service and customer satisfaction;
o delays in the introduction of new products and services;
o financial losses;
o litigation or other customer claims; and
o regulatory sanctions.
DLJdirect uses internally developed systems to operate its
business, including transaction processing systems that were designed to be
scalable. However, if DLJdirect's customer base increases substantially,
DLJdirect will need to expand significantly and upgrade its technology,
transaction processing systems and network infrastructure. DLJdirect does not
know whether it will be able to project accurately the rate or timing or cost
of any increases, or expand and upgrade its systems and infrastructure to
accommodate any increases in a timely manner.
DLJdirect's ability to facilitate transactions successfully and
provide high-quality customer service also depends on the efficient and
uninterrupted operation of its computer and communications hardware systems.
DLJdirect's system has experienced periodic interruptions, which it believes
will continue to occur from time to time. DLJdirect's systems and operations
also are vulnerable to damage or interruption from human error, natural
disasters, power loss, sabotage, computer viruses, intentional acts of
vandalism and similar events. While DLJdirect currently maintains redundant
servers to provide limited service during system disruptions, it does not have
fully redundant systems. Any system failure that causes an interruption in
service or decreases the responsiveness of DLJdirect's service could impair
its reputation, damage its brand name and materially adversely affect its
revenues. DLJdirect also relies on a number of third parties for systems
support. Any interruption in these third-party services or a deterioration in
the performance of these services could also be disruptive to its business.
DLJdirect May Be Unable To Manage Its Rapid Growth Effectively
DLJdirect has rapidly and significantly expanded its operations
and anticipates that further similar expansion will be required to realize its
growth strategy. Its rapid growth has placed significant demands on its
management and other resources and is likely to continue. To manage its
future growth, DLJdirect will need to attract, hire and retain highly skilled
and motivated officers and employees and improve existing systems and/or
implement new systems for: (1) transaction processing; (2) operational and
financial management; and (3) training, integrating and managing its growing
employee base. There can be no assurance that DLJdirect will be able to
achieve the rate of growth that it has experienced in the past.
Agreements Between DLJdirect and DLJ Are Not the Result of
Third-Party Negotiations
DLJdirect has entered into a number of important intercompany
arrangements with DLJ entities. None of these arrangements were the result of
third-party negotiations. No assurances can be given therefore that DLJdirect
could not enter into similar arrangements with a third-party on more favorable
terms.
DLJdirect Faces Potential Conflicts of Interest with DLJ
As a result of DLJdirect's extensive business relationships
with DLJ, conflicts of interest may develop between DLJdirect and DLJ or its
affiliates. The board of directors, in its sole discretion, will make
operational and financial decisions and implement policies that affect the
businesses of both DLJ and DLJdirect. In some cases, these decisions may
favor DLJ to the detriment of DLJdirect. The board of directors is primarily
composed of directors and/or executive officers of DLJ and its affiliates and
does not include any members of the management of DLJdirect.
Competition
DLJ and DLJdirect are both engaged in brokerage and related
investment service businesses. DLJ is not restricted from competing with
DLJdirect and there can be no assurance that DLJ will not expand its operations
to compete with DLJdirect. If the markets for their services continue to
converge, opportunities for direct competition between DLJ and DLJdirect will
increase and may include the following:
o DLJ offering online trading to its existing brokerage customers
or launching its own group dedicated to online brokerage;
o DLJdirect competing with DLJ for underwriting business; and
o DLJdirect offering private placements or investment advice to
its customers in competition with financial products and
services offered by DLJ.
Business Opportunities and Strategic Issues
Donaldson, Lufkin & Jenrette, Inc. currently intends to pursue
its online brokerage business through DLJdirect. However, the board of
directors, in its sole discretion, may in the future decide to pursue business
opportunities or operational strategies, even in the online brokerage area,
through DLJ instead of DLJdirect. As DLJdirect expands internationally,
conflicts may arise in selecting new target international markets and in
selecting joint venture partners, if any.
In addition to conflicts posed by international expansion,
DLJdirect may desire to pursue other strategic initiatives that present
conflicts between DLJ and DLJdirect. These initiatives could include:
o alliances by DLJdirect with competitors of DLJ to participate
as an Internet-based distributor or an underwriter in non-DLJ
managed offerings;
o DLJ selling its research products to competitors of DLJdirect;
and
o DLJ including other Internet-based distributors in its
offerings.
In addition to research products and access to DLJ-managed offerings,
DLJdirect intends to expand the range of DLJ products and services available
to its clients as part of its ongoing business strategy. As competition in the
financial services industry increases and DLJdirect's business continues to
grow, issues relating to the pricing and the level of availability for such
products and services may result in conflicts of interest.
Financial Considerations
The consolidated financial results of Donaldson, Lufkin &
Jenrette, Inc. will reflect DLJdirect's financial results. Accordingly,
strategic decisions by DLJdirect that adversely affect DLJdirect's near-term
reported results will also adversely affect DLJ's near-term reported results.
As a result, DLJ may restrict DLJdirect's ability to pursue initiatives that
may adversely affect the near-term reported results of DLJ. Such initiatives
may include:
o significant increases in marketing expenditures or
technological investments;
o changes to DLJdirect's pricing structure; and
o significant international expansion.
Clearing and Execution Services.
Pursuant to an agreement between DLJ and DLJdirect, all
domestic securities transactions of DLJdirect are cleared on a fully disclosed
basis through Pershing. Brokerage, clearing and exchange fees paid to Pershing
represented approximately 24.1% of DLJdirect's total revenues in 1998. In
addition, DLJdirect receives payments from Pershing for order flow and for
interest earned on account balances. Under a recent amendment to the
agreement, the amounts to be paid by DLJdirect to Pershing will include the
license fee for the use of the trademarks that are licensed to DLJdirect in
the United States and certain other jurisdictions. The agreement which
governs these fees and payments provides for good faith renegotiation of
pricing terms in the event of changes in market conditions. As DLJdirect's
business evolves, conflicts may arise regarding decisions for appropriate
levels of future fees and payments.
DLJdirect Depends on Others for Transaction Clearance and
Execution
DLJdirect is dependent upon DLJ's Pershing Division's
transaction clearance and execution capabilities and systems. DLJdirect has
entered into a 10-year agreement with DLJ pursuant to which Pershing acts as
DLJdirect's exclusive clearing broker in the United States. DLJdirect's
communications and information systems are coordinated with the clearing
information systems of Pershing. Additionally, Pershing furnishes DLJdirect
with information necessary to run DLJdirect's business, including transaction
summaries, data feeds for compliance and risk management, execution reports,
and trade confirmations. Accordingly, an interruption or the cessation of
service by Pershing as a result of systems failures or capacity constraints
could have a material adverse effect on DLJdirect's business, financial
condition and operating results.
DLJdirect's Business Could Be Harmed by Market Fluctuations and
Other Securities Industry Risks
DLJdirect's revenues in recent years have been principally from
its electronic brokerage services. Like other brokerage services, DLJdirect
is directly affected by economic and political conditions, broad trends in
business and finance and changes in volume and price levels of securities and
futures transactions. It is also particularly affected by volatility in
technology and Internet-related stocks because a significant portion of its
customers invest in these types of stocks. In recent months, the U.S.
securities markets have fluctuated considerably and a downturn in these
markets could adversely affect DLJdirect's operating results. Reduced trading
volume and prices have historically resulted in reduced transaction revenues.
When trading volume is low, DLJdirect's profitability may be adversely
affected because its overhead remains relatively fixed. Severe market
fluctuations in the future could have a material adverse effect on its
business, financial condition and operating results.
DLJdirect's brokerage business, by its nature, is subject to
various other risks, including customer default and employee misconduct and
errors. DLJdirect allows customers who are credit-approved to place trades
valued at up to $15,000 without first depositing any money into their
accounts. These customers with existing balances are also allowed to purchase
securities for up to five times the value of equity in their accounts. In all
instances, however, customers are required to pay for purchases or post margin
as required by Regulation T and the rules of the NASD and the NYSE. In
addition, in permitting customers to purchase securities in either cash or
margin accounts, DLJdirect takes the risk of a market decline that could
reduce the value of the collateral to below the customers' indebtedness before
the collateral can be sold. Although DLJdirect has thus far experienced only
modest losses and believes that it has established adequate credit assessment
procedures, it could lose sizable sums in the event of customer defaults.
DLJdirect May Not Succeed in Executing Its International
Strategy
To date, DLJdirect has no experience in providing brokerage
services internationally. There can be no assurance that DLJdirect will be
able to succeed in marketing its branded services and products in international
markets. In addition, there are risks inherent in doing business in
international markets, particularly in the heavily regulated brokerage
industry, such as:
o lack of receptivity to and comfort with the concept of online
trading,
o unexpected changes in regulatory requirements, tariffs and
other trade barriers, and
o difficulties in staffing, including reliance on newly hired
local experts, and managing foreign operations.
DLJdirect intends to enter several key international markets
during the next few years. As a result of the factors listed above, it
expects to lose money in its international operations for several years. If
there are unfavorable economic conditions in the international markets in
which DLJdirect does business, the losses could be greater and last longer.
Regulatory and Legal Uncertainties Could Harm DLJdirect's
Business
The securities industry in the United States is subject to
extensive regulation under both federal and state laws. Broker-dealers are
subject to regulations covering all aspects of the securities business.
DLJdirect's mode of operation and profitability may be directly affected by:
o additional legislation,
o changes in rules promulgated by the SEC, the NASD, the Board of
Governors of the Federal Reserve System, the various stock
exchanges and other self-regulatory organizations, or
o changes in the interpretation or enforcement of existing laws
and rules.
The SEC, the NASD or other self-regulatory organizations and
state securities commissions can censure, fine, issue cease-and-desist orders,
suspend or expel a broker-dealer or any of its officers or employees.
DLJdirect's ability to comply with all applicable laws and rules is largely
dependent on its internal system to ensure compliance, as well as its ability
to attract and retain qualified compliance personnel. DLJdirect could be
subject to disciplinary or other actions in the future due to claimed
noncompliance, which could have a material adverse effect on its business,
financial condition and operating results.
DLJdirect intends to expand its business in U.S. securities to
other countries. DLJdirect will need to comply with the regulatory controls
of each specific country in which it conducts business. Its international
expansion may be limited by the compliance requirements of other national
regulatory jurisdictions.
In addition, due to the increasing popularity of the Internet,
laws and regulations may be passed dealing with issues such as user privacy
and the pricing, content and quality of products and services. Increased
attention to these issues could adversely affect the growth of the Internet,
which could in turn decrease the demand for DLJdirect's services or could
otherwise have a material adverse effect on its business, financial condition
and operating results.
A Change in Order Flow Rebates Could Adversely Affect DLJdirect
DLJdirect has arrangements with Pershing to receive cash
payments in exchange for routing trade orders to Pershing for execution. This
practice of receiving payments for order flow is an accepted securities
industry practice. Under applicable SEC regulations, DLJdirect has to disclose
the receipt of these payments to its customers. Payments for order flow were
$5.5 million and $8.9 million in 1997 and 1998, respectively, and $1.7 million
and $2.1 million for the fourth quarter of 1997 and 1998, respectively. While
payments for order flow increased 23.5% from the fourth quarter of 1997 to the
same quarter in 1998, the associated trades increased 81%. As a result of the
implementation by the SEC of order handling rules in January 1997, the bid/ask
spread was reduced, thereby reducing market maker margins and limiting
Pershing's ability to pay for order flow.
There can be no assurance that payments for order flow will
continue to be permitted by the SEC, the NASD or other regulatory agencies,
courts or governmental units or by state securities regulators. Loss of any or
all of these revenues could have a material adverse effect on DLJdirect's
business and operating results. Moreover, there may be circumstances under
which payments may be required to be made by DLJdirect to third parties in
order to have orders executed.
DLJdirect's Business Is in an Early Stage of Market
Development; The Success of DLJdirect's Business Will Depend on Continued
Growth of Internet Commerce
The market for electronic brokerage services, particularly over
the Internet, is at an early stage of development and is rapidly evolving.
Consequently, demand and market acceptance for recently introduced services and
products are subject to a high level of uncertainty. For DLJdirect, this
uncertainty is compounded by the risks that consumers will not adopt online
commerce and that commerce on the Internet will not adequately develop to
permit it to succeed.
The Internet has experienced, and is expected to continue to
experience, significant growth in the number of users and amount of traffic.
DLJdirect's success will depend upon the development and maintenance of the
Internet's infrastructure to cope with this increased traffic. This will
require a reliable network backbone with the necessary speed, data capacity
and security, and the timely development of complementary products, such as
high-speed modems, for providing reliable Internet access and services.
The Internet has experienced a variety of outages and other
delays as a result of damage to portions of its infrastructure and could face
similar outages and delays in the future. Outages and delays are likely to
affect the level of Internet usage and the processing of transactions on
DLJdirect's Web site. In addition, the Internet could lose its viability due
to delays in the development or adoption of new standards to handle increased
levels of activity or due to increased government regulation. The adoption of
new standards or government regulation may require DLJdirect to incur
substantial compliance costs.
Fluctuations in DLJdirect's Quarterly Operating Results May
Impact Its Stock Price
DLJdirect expects to experience large fluctuations in future
quarterly operating results that may be caused by many factors, including the
following:
o timing of major advertising campaigns;
o the timing of introductions of or enhancements to online
investing services and products by DLJdirect or its
competitors;
o changes in trading volume in securities markets;
o changes in pricing policies by DLJdirect or its competitors;
o changes in strategy;
o seasonal trends;
o changes in the level of operating expenses to support projected
growth; and
o general economic conditions.
Due to these factors, quarterly revenues and operating results
are difficult to forecast. DLJdirect believes that period-to-period
comparisons of its operating results will not necessarily be meaningful, and
you should not rely on them as any indication of future performance.
DLJdirect's future quarterly operating results may not consistently meet the
expectations of securities analysts or investors, which in turn may have an
adverse effect on the market price of the DLJdirect Common Stock.
Substantial Competition Could Reduce DLJdirect's Market Share
and Harm Its Financial Performance
The market for electronic brokerage services over the Internet
is new, rapidly evolving and intensely competitive. DLJdirect expects
competition to continue and intensify in the future. DLJdirect faces direct
competition from discount brokerage firms providing either touch-tone
telephone or online investing services, or both.
DLJdirect also encounters competition from the broker-dealer
affiliates of established full commission brokerage firms. In addition, it
competes with financial institutions, mutual fund sponsors and other
organizations, some of which provide electronic brokerage services.
Some of DLJdirect's competitors have longer operating histories
and significantly greater financial, technical, marketing and other resources
than DLJdirect. In addition, some of its competitors offer a wider range of
services and financial products than it does, and therefore may be able to
respond more quickly to new or changing opportunities, technologies and
customer requirements. Some current and potential competitors also have greater
name recognition and larger customer bases that could be cultivated, thereby
gaining market share from DLJdirect. These competitors may conduct more
extensive promotional activities and offer better terms and lower prices to
customers than DLJdirect. Moreover, some competitors have established
cooperative relationships among themselves or with third parties to enhance
their services and products and to lower costs. Accordingly, it is possible
that new competitors or alliances among existing competitors may emerge and
significantly reduce DLJdirect's market share.
DLJdirect believes the general financial success of companies
within the online securities industry over the past several years will
continue to attract new competitors to the industry, such as banks, software
development companies, insurance companies, providers of online financial and
information services and others, as these companies expand their product
lines. The current trend toward consolidation in the commercial banking
industry could further increase competition in all aspects of DLJdirect's
business. To the extent DLJdirect's competitors are able to attract and
retain customers based on the convenience of one-stop shopping, its business
or ability to grow could be adversely affected.
DLJdirect Will Need To Introduce New Services and Products To
Remain Competitive
DLJdirect's future success depends in part on its ability to
develop and enhance its services and products. There are significant technical
risks in the development of new services and products or enhanced versions of
existing services and products. There can be no assurance that DLJdirect will
be successful in either of the following:
o effectively using new technologies; or
o developing, introducing and marketing new services and product
enhancements.
If DLJdirect is unable to develop and introduce enhanced or new
services and products quickly enough to respond to market or customer
requirements, or if DLJdirect's services and products do not achieve market
acceptance, DLJdirect's business, financial condition and operating results
will be materially adversely affected.
DLJdirect's Networks May Be Vulnerable to Security Risks
DLJdirect's networks may be vulnerable to unauthorized access,
computer viruses and other security problems. Persons who circumvent security
measures could misappropriate proprietary information or cause interruptions or
malfunctions in DLJdirect's operations. DLJdirect may be required to expend
significant resources to protect against the threat of security breaches or to
alleviate problems caused by any breaches. Although DLJdirect intends to
continue to implement industry-standard security measures, these measures may
be inadequate.
Year 2000 Risks May Harm DLJdirect's Business
Because many computer systems were not designed to handle dates
beyond the year 1999, computer hardware and software may need to be modified
prior to the Year 2000 in order to remain functional thereafter. This may
affect DLJdirect in numerous ways:
o DLJdirect has assessed the impact of the Year 2000 issue on its
products, services and internal information systems. DLJdirect
does not expect its financial results to be materially affected
by the need to address Year 2000 issues, but if the costs
associated with addressing these issues are greater than
planned, its earnings and results of operations could be
affected. Furthermore, if corrective actions are not completed
before Year 2000 problems occur, demand for DLJdirect's
products and services could drop;
o DLJdirect's method of trading depends heavily on the integrity
of electronic systems outside of its control, like online and
Internet service providers, and third-party software such as
Internet browsers. A failure of any of these systems due to
Year 2000 issues would interfere with the trading process and,
in turn, may have a material adverse effect on DLJdirect's
business, financial condition and operating results.
Contingency plans have been developed in the event that
DLJdirect or its key vendors will not be Year 2000 capable, but
any noncompliance may have a negative effect on DLJdirect's
financial results.
Due to DLJdirect's dependence on computer technology to conduct
its business, the nature and impact of Year 2000 processing failures on its
business, financial condition and operating results could be material.
DLJdirect Depends on Key Personnel
DLJdirect's success has been, and will be, dependent to a large
degree on its ability to retain the services of its existing executive
officers and to attract and retain qualified additional senior and middle
managers and key personnel in the future. It does not have "key person" life
insurance policies on any of its officers or employees. Competition for these
personnel is intense. The loss of the services of any of the key personnel or
the inability to identify, hire, train and retain other highly qualified
technical and managerial personnel, including qualified investor service
representatives, in the future could have a material adverse effect on
DLJdirect's business, financial condition and operating results.
DLJdirect May Not Be Able to Keep Up with Rapid Technological
and Other Changes
The markets in which DLJdirect competes are characterized by
rapidly changing technology, evolving industry standards, frequent new service
and product announcements, introductions and enhancements and changing
consumer demands. DLJdirect may not be able to keep up with these rapid
changes. In addition, these market characteristics are heightened by the
emerging nature of the Internet and the apparent need for companies from many
industries to offer Internet-based products and services. DLJdirect's future
success will depend on its ability to adapt to rapidly changing technologies,
to adapt its services to evolving industry standards and to improve the
performance, features and reliability of its services in response to the
evolving demands of the marketplace. In addition, the widespread adoption of
new Internet, networking or telecommunications technologies or other
technological changes could require DLJdirect to incur substantial
expenditures to modify or adapt its services or infrastructure.
DLJdirect Must Comply with Net Capital Requirements
The SEC, the NASD and various other regulatory agencies have
stringent rules with respect to the maintenance of specific levels of net
capital by securities broker-dealers. Net capital is an SEC-defined measure
of a broker-dealer's readily available liquid assets, reduced by its total
liabilities other than approved subordinated debt. If a firm fails to
maintain the required net capital, it may be subject to suspension or
revocation of registration by the SEC, and suspension or expulsion by the
NASD, which could ultimately lead to the firm's liquidation. If the net
capital rules are changed or expanded, or if there is an unusually large
charge against net capital, operations that require the intensive use of
capital would be limited. A large operating loss or charge against net capital
could adversely affect a firm's ability to expand or even maintain its present
levels of business, which could have a material adverse effect on its
business, financial condition and operating results.
Claims of Infringement Could Harm DLJdirect's Business
DLJdirect may in the future receive notices of claims of
infringement of other parties' proprietary rights. There can be no assurance
that claims for infringement or invalidity, or any indemnification claims
based on these claims, will not be asserted or prosecuted against DLJdirect or
DLJ. Any claims, with or without merit, could be time consuming and costly to
defend or litigate, divert management's attention and resources or require
DLJdirect to enter into additional royalty or licensing agreements. Necessary
licenses may not be available on reasonable terms, if at all, and the
assertion or prosecution of any claims could have a material adverse effect on
DLJdirect's business, financial condition and operating results.
DLJdirect Must Protect Its Intellectual Property Rights
DLJdirect's success and ability to compete are dependent to a
significant degree on its proprietary technology. DLJdirect relies primarily
on copyright and trade secret law to protect its technology and trademark law
to protect its marks. Effective trademark protection may not be available for
its trademarks. DLJdirect does not own but licenses certain material marks
from DLJ Long Term Investment Corporation, an affiliate of Donaldson, Lufkin
& Jenrette, Inc., which has obtained or is seeking to obtain registration
protection for those marks in the United States. In addition, it is in the
process of registering the DLJdirect mark in 35 countries worldwide. The
inability of DLJ Long Term Investment Corporation to protect DLJdirect's name
adequately would have a material adverse effect on DLJdirect's business,
financial condition and operating results. There can be no assurance that the
steps taken will prevent misappropriation of DLJdirect's technology or that
agreements entered into for that purpose will be enforceable. Litigation may
be necessary in the future to:
o enforce DLJdirect's intellectual property rights,
o protect DLJdirect's trade secrets,
o determine the validity and scope of the proprietary rights of
others, or
o defend against claims of infringement or invalidity.
Such litigation, whether successful or unsuccessful, could
result in substantial costs and diversions of resources, either of which could
have a material adverse effect on DLJdirect's business, financial condition and
operating results.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and the information incorporated by reference
includes forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Some of the
forward-looking statements can be identified by the use of forward-looking
words such as "believes," "expects," "may," "will," "should," "seeks,"
"approximately," "intends," "plans," "estimates," or "anticipates" or the
negative of those words or other comparable terminology. Forward-looking
statements involve risks and uncertainties. A number of important factors
could cause actual results to differ materially from those in the
forward-looking statements. These factors include systems failures,
technological changes, volatility of securities markets, government
regulations, and economic conditions and competition in the geographic and the
business areas in which we conduct our operations. For a discussion of
factors that could cause actual results to differ, please see the discussion
under "Risk Factors" contained in this prospectus and in other information
contained in our publicly available SEC filings and press releases.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements, and other information with
the SEC. Such reports, proxy statements, and other information concerning
Donaldson, Lufkin & Jenrette, Inc. can be read and copied at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the SEC at 1-800-SEC-0330 for further information on the Public Reference
Room. The SEC maintains an Internet site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC, including Donaldson, Lufkin &
Jenrette, Inc. The common stock of Donaldson, Lufkin & Jenrette, Inc. is
listed on the New York Stock Exchange. Reports and other information
concerning Donaldson, Lufkin & Jenrette, Inc. can also be inspected at the
office of the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York 10005.
This prospectus is part of a registration statement filed with
the SEC by us. The full registration statement can be obtained from the SEC
as indicated above, or from us.
The SEC allows us to "incorporate by reference" the information
we file with the SEC. This permits us to disclose important information to
you by referring to these filed documents. Any information referred to in this
way is considered part of this prospectus, and any information filed with the
SEC by us after the date of this prospectus will automatically be deemed to
update and supersede this information. We incorporate by reference the
following documents that have been filed with the SEC:
o Annual Report on Form 10-K for the year ended December 31, 1997
and all amendments thereto;
o Quarterly Reports on Form 10-Q for the quarters ended March 31,
1998, June 30, 1998 and September 30, 1998 and all amendments
thereto;
o Reports on Form 8-K filed on April 14, 1998, June 25, 1998,
July 16, 1998, July 17, 1998, September 2, 1998, October 15,
1998, October 16, 1998, November 12, 1998, January 12, 1999,
January 25, 1999 and March 16, 1999.
We also incorporate by reference any future filings made with
the SEC pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
until we file a post-effective amendment which indicates the termination of the
offering of the securities made by this prospectus.
We will provide without charge upon written or oral request, a
copy of any or all of the documents that are incorporated by reference into
this prospectus, other than exhibits which are specifically incorporated by
reference into such documents. Requests should be directed to Donaldson,
Lufkin & Jenrette, Inc., 277 Park Avenue, New York, New York 10172, Attention:
Corporate Secretary (Telephone: (212) 892-3000).
USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of
the DLJdirect Common Stock in this offering, after deducting estimated
expenses of $ and underwriting discounts and commissions, of
approximately $ (approximately $ if the underwriters exercise their
over-allotment option to purchase additional shares of DLJdirect Common Stock
in full), at an assumed initial public offering price of $ per share, the
midpoint of the range set forth on the cover page of this prospectus. We will
allocate the net proceeds from this offering to DLJdirect, in a manner
analogous to a primary offering of common stock. DLJdirect plans to use the
proceeds to fund increases in marketing expenditures, for international
expansion, to repay a note issued to an affiliate prior to the consummation of
the offering and for other general corporate purposes. The note issued to an
affiliate will be in an amount equal to the total equity of DLJdirect Holdings
Inc. at December 31, 1998, which was $21.9 million, plus the accumulated
retained earnings of DLJdirect Holdings Inc. from January 1, 1999 until the
end of the month preceding the offering.
DIVIDEND POLICY
We do not expect to pay any dividends for the foreseeable
future on DLJdirect Common Stock. We will, however, otherwise be permitted to
pay dividends on:
o DLJ Common Stock out of the assets of Donaldson, Lufkin &
Jenrette, Inc. legally available for the payment of dividends
under Delaware law, but the total amounts paid as dividends on
DLJ Common Stock cannot exceed the Available Dividend Amount
for DLJ and
o DLJdirect Common Stock, out of the assets of Donaldson, Lufkin
& Jenrette, Inc. legally available for the payment of dividends
under Delaware law (and transfer corresponding amounts to DLJ
in respect of its retained interest in DLJdirect), but the
total of the amounts paid as dividends on DLJdirect Common
Stock and the corresponding amounts transferred to DLJ in
respect of its retained interest in DLJdirect cannot exceed the
Available Dividend Amount for DLJdirect.
The "Available Dividend Amount" for DLJ and DLJdirect, as the
case may be, is based on the amount that would be legally available for the
payment of dividends under Delaware law if DLJ and DLJdirect were each a
single, separate Delaware corporation. For more information on the "Available
Dividend Amount" for DLJ and DLJdirect, see "Description of Capital
Stock--Dividends". We expect that determinations to pay dividends on
DLJdirect would be based primarily upon the financial condition, results of
operations, capital requirements, any restrictions contained in financing or
other agreements binding upon us and other factors that the board of directors
deems relevant.
CAPITALIZATION
The following table sets forth the short-term debt and total
capitalization of Donaldson, Lufkin & Jenrette, Inc. at December 31, 1998 and
as adjusted to reflect (1) the sale by Donaldson, Lufkin & Jenrette, Inc. of
shares of DLJdirect Common Stock pursuant to this offering, (2) the
re-classification of the existing common stock of Donaldson, Lufkin &
Jenrette, Inc. into DLJ Common Stock and (3) repayment of a note issued to an
affiliate prior to the consummation of this offering. The note issued to an
affiliate will be in an amount equal to the total equity of DLJdirect Holdings
Inc. at December 31, 1998, which was $21.9 million, plus the accumulated
retained earnings of DLJdirect Holdings Inc. from January 1, 1999 until the
end of the month preceding the offering. This table should be read in
conjunction with the combined financial statements and notes thereto appearing
elsewhere in this prospectus.
DONALDSON, LUFKIN & JENRETTE, INC.
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------
Actual As Adjusted
------ -----------
(in thousands, except
per share data)
(unaudited)
<S> <C> <C>
Commercial paper and short-term borrowings(1).................................... $ 515,646 $ 515,646
Long-term borrowings: ========== ==========
Senior notes, 6%-6.875% due various dates through 2008.......................... $1,391,036 $1,391,036
Medium-term notes, 5.402%-6.90% due various dates
through 2016.................................................................. 1,046,647 1,046,647
Senior secured floating rate notes due in 2005.................................. 450,000 450,000
Global floating rate notes due 2002............................................. 348,357 348,357
Subordinated exchange notes, 9.58% due in 2003.................................. 225,000 225,000
Other borrowings................................................................ 20,963 20,963
--------- ---------
Total long-term borrowings.................................................... 3,482,003 3,482,003
--------- ---------
DLJ-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely debentures of DLJ............................... 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
DLJ Common Stock, $0.10 par value per share, 300,000,000 shares
authorized (122,812,558 shares issued and outstanding)........................ 12,281 12,281
DLJdirect Common Stock, $0.10 par value per share (as adjusted
shares issued and outstanding, and notional shares in respect
of DLJ's retained interest)(2)................................................ --
Restricted stock units of DLJ Common Stock, 10,358,294 units authorized
(2,082,236 units issued and outstanding)...................................... 21,333 21,333
Paid-in capital................................................................. 858,066
Retained earnings............................................................... 1,657,710 1,657,710
Accumulated other comprehensive income.......................................... 3,309 3,309
Employee deferred compensation stock trust...................................... 12,329 12,329
Common stock issued to employee deferred compensation trust..................... (12,329) (12,329)
--------- ---------
Total stockholders' equity.................................................... $2,927,699 $
========== ==========
Total capitalization........................................................ $6,609,702 $
========== ==========
</TABLE>
- ----------
(1) Short-term borrowings include current maturities of long-term borrowings.
(2) The number of shares of DLJdirect Common Stock outstanding excludes
shares of DLJdirect Common Stock that have been reserved for
issuance under DLJdirect's stock option plan. See "Management -- DLJdirect
1999 Incentive Compensation Plan".
DLJdirect
The following table sets forth the total capitalization of
DLJdirect at December 31, 1998 and as adjusted to give effect to (1) the
issuance of shares of DLJdirect Common Stock and the use of proceeds
therefrom and (2) repayment of a note issued to an affiliate prior to the
completion of this offering in an amount equal to the total equity of
DLJdirect Holdings Inc. at December 31, 1998, which was $21.9 million, plus
the accumulated retained earnings of DLJdirect Holdings Inc. from January 1,
1999 until the end of the month preceding the offering.
As of December 31, 1998
--------------------------
Actual As Adjusted
------ -----------
(in thousands)
Long-term debt ........ $ -- $ --
Equity:
Capital contributions. 25,002
Accumulated deficit .. (3,078)
------ ------
Total equity ......... 21,924
------ ------
Total capitalization $ 21,924 $
====== ======
SELECTED COMBINED FINANCIAL INFORMATION OF DLJdirect
The following selected combined financial information is
qualified by reference to, and should be read in conjunction with, DLJdirect's
combined financial statements and the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
DLJdirect" contained elsewhere in this prospectus. The selected combined
statements of operations data for the years ended December 31, 1996, 1997 and
1998 and the combined statements of financial condition data as of December
31, 1997 and 1998 are derived from DLJdirect's audited combined financial
statements which are included elsewhere in this prospectus. The selected
combined statements of operations data for the years ended December 31, 1994
and 1995 are derived from the unaudited combined financial statements of
DLJdirect which are not included in this prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenues:
Commissions.......................................... $28,491 $40,358 $54,166 $50,948 $78,717
Fees................................................. 3,797 5,067 6,426 12,109 25,484
Interest............................................. 1,858 1,846 2,569 4,160 13,723
------ ------ ------ ------ -------
Total revenues..................................... 34,146 47,271 63,161 67,217 117,924
------ ------ ------ ------ -------
Costs and Expenses:
Compensation and benefits............................ 5,422 7,362 11,202 17,174 28,260
Brokerage, clearing, exchange and other fees......... 9,567 11,709 15,422 20,909 28,423
Advertising.......................................... 1,971 4,183 9,093 13,137 25,146
Occupancy and equipment.............................. 1,175 1,437 1,923 3,352 5,045
Communications....................................... 791 1,025 1,468 2,844 5,564
Technology costs..................................... 4,400 5,431 5,205 5,082 4,084
Other operating expenses............................. 3,164 4,507 5,567 10,844 18,934
------ ------ ------ ------ -------
Total costs and expenses........................... 26,490 35,654 49,880 73,342 115,456
------ ------ ------ ------ -------
Income (loss) before income tax provision (benefit)... 7,656 11,617 13,281 (6,125) 2,468
Income tax provision (benefit)........................ 3,128 4,746 5,425 (2,502) 1,008
------ ------ ------ ------ -------
Net income (loss)..................................... $4,528 $6,871 $7,856 $(3,623) $1,460
====== ====== ====== ======= ======
Pro forma weighted average shares of DLJdirect
Common Stock outstanding (1):
Basic and diluted....................................
Pro forma earnings per share of DLJdirect Common ======
Stock (1):
Basic and diluted.................................... $
======
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
-------------------
1997 1998
---- ----
(in thousands)
<S> <C> <C>
Statements of Financial Condition Data:
Cash and cash equivalents ............. $ 8,881 $26,654
Total assets .......................... $11,871 $29,751
Long-term liabilities ................. -- --
Total equity .......................... $ 5,964 $21,924
</TABLE>
<TABLE>
<CAPTION>
As of or for the Year Ended December 31,
--------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Other Data:
Total trades.................... 475,000 660,000 929,000 1,535,000 2,875,000
Average trades per day.......... 1,900 2,600 3,700 6,100 11,400
Total customer assets........... $1,300,000 $1,900,000 $2,500,000 $4,600,000 $8,900,000
Total accounts.................. 153,000 207,000 280,000 390,000 529,000
Total employees................. 95 139 174 283 374
Total technology employees...... 12 14 34 82 119
</TABLE>
- ----------
(1) Pro forma basic and diluted earnings per common share amounts have been
calculated by dividing net income applicable to common shares by the pro
forma weighted average common shares outstanding.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF DLJdirect
The following discussion of the financial condition and results
of operations of DLJdirect should be read in conjunction with the combined
financial statements and notes thereto included elsewhere in this prospectus.
This discussion contains forward-looking statements that involve risks and
uncertainties. DLJdirect's actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including, but not limited to, those set forth under "Risk Factors" and
elsewhere in this prospectus.
Overview
The online discount brokerage industry is experiencing
substantial competition from established financial services firms as well as
new entrants who are trying to establish their presence in the market quickly.
As a result of intense competitive pressures, the industry has experienced a
significant increase in brand development costs, a lowering of commission
pricing and an increase in content development costs. DLJdirect expects to
spend significant amounts in the future to develop much greater brand
recognition within its targeted market, to stay competitively priced and to
develop new state-of-the-art products and services. As a result, DLJdirect
believes that its future financial results may be adversely affected. In
particular, DLJdirect expects to increase its level of advertising
significantly. It is expected that advertising costs will increase during
each quarter of 1999, with the largest increases expected to occur in the
second half of the year. While the longer-term goal of advertising will be to
increase brand awareness and revenues, it is likely that advertising costs as
a percentage of revenues will increase throughout 1999.
The largest portion of DLJdirect's revenues consist of
brokerage commissions for acting as agent in securities transactions,
including Nasdaq and exchange-listed equities, options and mutual fund
transactions. In June 1997, in order to increase significantly its customer
base as well as overall account activity, DLJdirect made a strategic decision
to lower its base commission for equity trades from $39.95 to $20.00 per
trade. As a result, commission revenues fell slightly in 1997 compared to
1996, but the average number of trades per day increased 64.9% from 3,700 in
1996 to 6,100 in 1997. In 1998 compared to 1997, commission revenues
increased 54.6% to $78.7 million and the average number of trades per day
increased 86.9% to 11,400. DLJdirect regularly reviews its commission rates
as part of its ongoing strategy to maintain its competitive position.
DLJdirect believes that the recent increase in trading activity is also due to
the extensive growth in Internet commerce, DLJdirect's advertising initiatives
and increased activity in the securities markets.
DLJdirect also earns fee income, which increased from $6.4
million in 1996 to $25.5 million in 1998. Fee income includes technology
fees, order flow fees and money market fund distribution fees, all of which
are earned from affiliates. Although the technology group at DLJdirect
primarily serves the growing needs of DLJdirect's business, DLJdirect also
offers technology products and services to third parties through DLJ as a
means of reducing internal development costs. Revenues from technology
development are derived from sales of Internet-based technology applications
primarily to DLJ. DLJdirect also earns fees for order flow through
arrangements with Pershing to receive cash payments in exchange for routing
all of its orders to Pershing for execution. Order flow payments on a per
trade basis have declined in recent periods due to regulatory changes imposing
new order handling rules and there can be no assurance that order flow
revenues will continue. See "Risk Factors--A Change in Order Flow Rebates
Could Harm DLJdirect's Business".
DLJdirect also earns interest income, which increased from $2.6
million in 1996 to $13.7 million in 1998. Interest income consists of
interest on margin debt, free credit and short sale balances and earnings on
its own cash balances. DLJdirect participates in the interest spread on its
customers' debit and credit balances through its clearing agreement with
Pershing. DLJdirect's interest revenues increased significantly in 1998 due
to significant growth in client assets as well as more favorable interest
sharing arrangements with Pershing.
Prior to 1999, DLJdirect received a nominal fee for the
distribution of IPO products, but it now receives customary selling
concessions. As a result, DLJdirect expects revenues associated with its
distribution activities to increase significantly in 1999.
Brokerage, clearing, exchange and other fees represented 24.1%
of DLJdirect's total revenue in 1998. Clearing costs per trade were reduced
under the terms of an amendment to the clearing agreement between DLJdirect and
DLJ effective January 1, 1999. The amended agreement also provides that such
costs will include an amount that represents payment to DLJ Long Term
Investment Corporation for the use of certain trademarks in the United States
and certain other jurisdictions. As a result of the amendment to the clearing
agreement as well as expected increases in trading activity, DLJdirect expects
that clearing costs will continue to decline as a percentage of revenue in
1999.
Technology costs consist primarily of network access fees paid
to online service providers and fees related to systems maintenance and
support. Although the expenses included under "technology costs" are
decreasing, the technology services originally included in this expense
category are increasingly provided internally rather than by third-party
service providers. Technology costs do not include compensation of employees
related to technology development. The number of technology employees
increased from 34 at December 31, 1996 to 119 at December 31, 1998.
In January 1999, DLJdirect began operations in a 24,000 square
foot investor services facility in Charlotte, North Carolina. DLJdirect also
intends in the second quarter of this year to lease a larger headquarters
facility in Jersey City, New Jersey. As a result, DLJdirect expects to incur
an annual increase in occupancy costs of over $2.0 million, a portion of which
will be realized in 1999. The two moves are designed to accommodate planned
increases in business activity. In addition, DLJdirect is currently
implementing fully redundant technology centers in order to increase both
system reliability and capacity. The centers are expected to be operational
in the third quarter of 1999. As a result, DLJdirect expects to incur an
additional annual increase in equipment costs of over $3.0 million, a portion
of which also will be realized in 1999.
Results of Operations
The following table sets forth the percentage of total revenues represented by
certain items on DLJdirect's combined statement of operations for the periods
indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenues:
Commissions ....................................... 85.7% 75.8% 66.8%
Fees .............................................. 10.2 18.0 21.6
Interest .......................................... 4.1 6.2 11.6
----- ----- -----
Total revenues .................................. 100.0 100.0 100.0
----- ----- -----
Costs and Expenses:
Compensation and benefits ......................... 17.8% 25.6% 24.0%
Brokerage, clearing, exchange and other fees ...... 24.5 31.1 24.1
Advertising ....................................... 14.4 19.5 21.3
Occupancy and equipment ........................... 3.0 5.0 4.3
Communications .................................... 2.3 4.2 4.7
Technology costs .................................. 8.2 7.6 3.4
Other operating expenses .......................... 8.8 16.1 16.1
----- ----- -----
Total costs and expenses ........................ 79.0 109.1 97.9
----- ----- -----
Income (loss) before income tax provision (benefit) 21.0 (9.1) 2.1
Income tax provision (benefit) ..................... 8.6 (3.7) 0.9
----- ----- -----
Net income (loss) .................................. 12.4% (5.4)% 1.2%
===== ===== =====
</TABLE>
Year Ended December 31, 1998 Compared to Year Ended December
31, 1997
DLJdirect experienced strong operating results in 1998 compared
to 1997, reflecting primarily an increase in total accounts of 35.6%. For
1998, total revenues of $117.9 increased $50.7 million or 75.4%. Net income
of $1.5 million increased $5.1 million from a net loss of $3.6 million,
primarily resulting from strong revenue growth.
Commissions increased $27.8 million or 54.6% to $78.7 million.
Commissions represented 66.8% of total revenues in 1998 and 75.8% of total
revenues in 1997. The increase in commissions was due primarily to
significant increases in customer trading volume attributable in part to a
full year of activity at the reduced $20 commission rate. Average trades per
day increased 86.9% from 6,100 in 1997 to 11,400 in 1998.
Fees increased $13.4 million or 110.7% to $25.5 million. Fees
represented 21.6% of total revenues in 1998 and 18.0% of total revenues in
1997. Payments for order flow increased $3.4 million or 61.8% to $8.9
million. The increase in payments for order flow was due primarily to
significant increases in customer trading volume. Increases in payments for
order flow were offset in part by a decline in the amount of revenue per trade
that DLJdirect receives for order flow. Fees for technology development
increased $8.6 million or 179.2% to $13.4 million. The increase in fees for
technology development reflects 1998 being the first full year that such fees
were collected. Revenue from money market fund distribution fees increased
$1.6 million or 100.0% to $3.2 million. This growth was due to an increase in
customer money market fund balances of $345.8 million or 84.7% to $754.3
million.
Interest increased $9.6 million or 234.1% to $13.7 million.
Interest represented 11.6% of total revenues in 1998 and 6.2% of total
revenues in 1997. The increase was due primarily to more favorable interest
sharing arrangements with Pershing and to increases in margin debits, free
credits and short sale balances. Margin debits increased $143.1 million or
43.8% to $469.8 million. Free credits increased $201.5 million or 103.2% to
$396.8 million and short sale balances increased $19.4 million or 107.2% to
$37.5 million.
Compensation and benefits increased $11.1 million or 64.5% to
$28.3 million. The increase in compensation and benefits was due primarily to
growth in the number of employees from 283 to 374. These additional employees
were added in DLJdirect's investor services area to accommodate increased
customer activity, as well as in DLJdirect's technology group to develop new
products such as MarketSpeed[Trademark].
Brokerage, clearing, exchange and other fees increased $7.5
million or 35.9% to $28.4 million. The increase in brokerage, clearing,
exchange and other fees was primarily due to significant increases in customer
trading volume, offset in part by lower clearing fees per trade resulting from
reduced clearing rates.
Advertising increased $12.0 million or 91.6% to $25.1 million.
The increase in advertising was due to increased expenditures on advertising
placement and creative development. DLJdirect increased its advertising
expenditures to continue developing the DLJdirect brand name, which was
launched in September 1997, and to continue acquiring new accounts.
Advertising expenditures were targeted at investors through a broad range of
media including television, radio, and print as well as significant online
service providers and popular Web sites such as America Online, the Microsoft
Network and Yahoo!.
Occupancy and equipment costs increased $1.7 million or 51.5%
to $5.0 million. Occupancy and equipment expense includes rent and operating
expenses for facilities, expenditures for repairs and maintenance, and the
expense for furniture, fixtures, leasehold improvements as well as business
and computer equipment. The increase in equipment costs was due primarily to
additional investment in technology systems infrastructure and equipment
expenditures for the increased staff.
Communications costs increased $2.7 million or 93.1% to $5.6
million. Communications expense includes quotation expenses, expenses related
to customer toll-free phone calls and Internet connections. Quotation expenses
and expenses related to customer toll-free phone calls both increased due to
the volume of transactions.
Technology costs decreased $1.0 million or 19.6% to $4.1
million. Technology costs are comprised primarily of network access fees paid
to online service providers and fees related to systems infrastructure.
Network access fees paid to online service providers were reduced by $2.2
million or 59.5% to $1.5 million in 1998 due to renegotiated rates and due to
their partial reclassification to advertising expenses resulting from the
modified structure of an agreement. Fees related to systems maintenance and
support grew $1.3 million or 100.0% to $2.6 million in 1998 due to increased
system capacity.
Other operating expenses increased $8.1 million or 75.0% to
$18.9 million and are comprised primarily of a license fee, professional fees,
printing and stationery, economic and investment research, allocated corporate
overhead, and miscellaneous expenses. The license fee expense increased $4.0
million or 333.3% to $5.2 million. The license fee is paid to DLJ Long Term
Investment Corporation for licensing trademarks and similar intellectual
property. License fee payments were initiated in September 1997. In the
future, amounts paid by DLJdirect to Pershing will include the license fee for
the use of certain of DLJ Long Term Investment Corporation's trademarks that
are licensed to DLJdirect in the United States and in certain other
jurisdictions.
Professional fees primarily include payments made to technology
and marketing consultants, and employee recruiting expenses. Professional
fees increased $883,000 or 25.8% to $4.3 million due to increased advertising
and headcount. Printing and stationery decreased $158,000 or 7.7% to $1.9
million. In 1997 printing and stationery expenses were increased in
conjunction with the renaming of the service from PC Financial Network to
DLJdirect, which necessitated the redesign and reprinting of all marketing
materials and customer correspondence stock. Economic and investment research
increased $1.0 million or 333.3% to $1.3 million reflecting the fact that
DLJdirect first began paying for this research in the fourth quarter of 1997.
Allocated corporate overhead increased $841,000 or 45.2% to $2.7 million due
primarily to expenses related to the increased headcount. Miscellaneous
expenses increased $1.4 million or 70.0% to $3.4 million. Miscellaneous
expenses consisted primarily of accruals for bad debt expense, employee
registration fees and expenses for new account credit checks.
Income before income tax provision increased $8.6 million from
a loss of $6.1 million in 1997 to income of $2.5 million in 1998. The
provision (benefit) for income taxes for 1997 and 1998 was $(2.5) million and
$1.0 million, respectively, which represented a 40.9% effective tax rate for
each period.
As a result of the foregoing factors, net income increased to
$1.5 million in 1998 from a net loss of $3.6 million in 1997.
Year Ended December 31, 1997 Compared to Year Ended December
31, 1996
Total revenues increased $4.1 million or 6.5% to $67.2 million,
reflecting primarily an increase in total accounts of 39.3%. Total revenues
increased primarily as a result of fees and net interest income, partially
offset by decreases in commissions due to a change in DLJdirect's base
commission rate.
Commissions decreased $3.3 million or 6.1% to $50.9 million.
In June 1997, DLJdirect lowered its base commission for equity trades from
$39.95 to $20.00. Although this significantly lowered the average commission
charged to customers, the increased new account generation and increased
trading volume brought commission revenues back to 1996 levels by fourth
quarter 1997.
Fees increased $5.7 million or 89.1% to $12.1 million.
Payments for order flow increased $124,000 or 2.3% to $5.5 million. Although
trading volume increased significantly during 1997 from 929,000 trades in 1996
to 1,535,000 in 1997, the order flow payment on a per trade basis decreased
due to regulatory changes imposing new order handling rules. Revenue from
money market fund distribution fees increased $609,000 or 61.5% to $1.6
million. This increase was due to an increase in customer money market fund
balances from $115.5 million or 39.4% to $408.5 million. Fees for technology
development, collected for the first time in mid-1997, generated $4.8 million
during the year.
Interest increased $1.6 million or 61.5% to $4.2 million. The
increase was due primarily to more favorable interest sharing arrangements
with Pershing and to increases in margin debits, free credits and short sale
balances. Margin debits increased $187.0 million or 133.9% to $326.7 million,
free credits increased $64.8 million or 49.7% to $195.3 million and short sale
balances increased $2.2 million or 13.8% to $18.1 million.
Compensation and benefits increased $6.0 million or 53.6% to
$17.2 million. The increase in compensation and benefits was due primarily to
growth in the number of employees from 174 to 283, a 62.6% increase.
Brokerage, clearing, exchange and other fees increased $5.5
million or 35.7% to $20.9 million. The increase in brokerage, clearing,
exchange and other fees was primarily due to significant increases in customer
trading volume. On a per trade basis, however, brokerage, clearing, exchange
and other fees decreased due to a reduction in the fee for clearing trades.
Advertising increased $4.0 million or 44.0% to $13.1 million.
The increase in advertising was due to increased expenditures on advertising
placement and creative development. DLJdirect spent $6.8 million in the
fourth quarter of 1997 to launch the new brand name, "DLJdirect," and new
products and services including its redesigned Web site and access to DLJ
Research and DLJ-managed IPOs.
Occupancy and equipment increased $1.4 million or 70.0% to $3.4
million. The increase in occupancy and equipment was due primarily to
additional equipment expenditures for increased staff from 174 to 283, a 62.6%
increase.
Communications increased $1.3 million or 86.7% to $2.8 million.
Quotation expenses and expenses related to customer toll-free phone calls both
increased due to the growth of the business.
Technology costs decreased $123,000 or 2.5% to $5.1 million.
Network access fees paid to online service providers were $3.7 million in 1997
compared to $4.4 million in 1996. Fees related to systems maintenance and
support grew to $1.4 million in 1997 from $800,000 in 1996 due to increased
system capacity.
Other operating expenses increased $5.2 million or 92.9% to
$10.8 million and represented 16.1% of total revenues in 1997 and 8.8% of
total revenues in 1996. The license fee expense, first paid in September 1997,
was $1.2 million.
Professional fees increased $1.8 million or 112.5% to $3.4
million due to increased expenditures for outside consultants and marketing
services. Printing and stationery increased $1.5 million or 250.0% to $2.1
million. In 1997 printing and stationery expenses were increased in
conjunction with the renaming of the service from PC Financial Network to
DLJdirect which necessitated the redesign and reprinting of all marketing
materials and customer correspondence stock. Economic and investment research
expenses, first incurred in the fourth quarter of 1997, were $307,000.
Allocated corporate overhead increased $730,000 or 62.4% to $1.9 million due
primarily to expenses related to the increased headcount. Miscellaneous
expenses decreased $254,000 or 11.3% to $2.0 million.
Income before income tax provision decreased $19.4 million from
$13.3 million in 1996 to a loss of $6.1 million in 1997. The (benefit)
provision for income taxes for 1996 and 1997 was $5.4 and $(2.5) million,
respectively. This represented a 40.9% effective tax rate for each period.
As a result of the foregoing factors, net income decreased to a
net loss of $3.6 million in 1997 from income of $7.9 million in 1996.
Liquidity and Capital Resources
The principal sources of liquidity for DLJdirect's operations
have been paid-in capital, leases of fixed assets through an affiliate and
revenues from operations. Capital contributions amounted to $10.5 million in
1997 and $14.5 million in 1998. The value of equipment acquired through
leases of fixed assets through an affiliate totaled $5.3 million in 1997 and
$5.0 million in 1998. These fixed assets were comprised primarily of
computers and related systems, furniture and leasehold improvements.
DLJdirect generally leases its fixed assets and therefore does not incur
significant capital expenditures.
Although DLJdirect maintains substantial money market accounts
and bank accounts consistent with regulatory requirements, DLJdirect continues
to be substantially dependent on DLJ for almost all of its daily financial,
administrative and operational services and related support functions
including cash management, the receipt of payments from third parties and the
distribution of payments to third parties. In this connection, inter-company
receivables/payables are settled periodically through cash transfers to and
from DLJdirect's accounts. However, after the issuance of the DLJdirect
Common Stock, cash transfers from DLJ to DLJdirect will be revolving credit
advances unless the board of directors decides, in its sole discretion, to
account for such transfers as long-term loans or capital contributions.
Donaldson, Lufkin & Jenrette, Inc. is not obligated to advance any amounts to
DLJdirect. See "Certain Cash Management and Allocation Policies".
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 $(0.6)
million and $2.0 million in 1997 and 1998, respectively. The increase from
1997 to 1998 was primarily due to an increase in transaction volume related to
growth in the discount brokerage operations. In 1997, receivables from
brokers, dealers and others increased $1.9 million. This increase in assets
was offset by increases in operating liabilities including payables to
parent/affiliates, net of $2.0 million and accounts payable and accrued
expenses of $2.6 million. In 1998, there were increased assets including
receivables from brokers, dealers and others of $1.2 million. These increases
were offset by an increase in payables to parent/affiliates, net of $2.2
million.
In 1997 and 1998, net cash provided by financing activities
totaled $9.6 million and $14.5 million, respectively. In 1997 and 1998,
respectively, $10.5 million and $14.5 million was provided by capital
contributions from DLJ. In 1997, DLJdirect paid $0.9 million to DLJ for the
return of equity.
DLJdirect believes that the net proceeds from this offering,
together with its current cash, cash equivalents and cash generated from
operations will be sufficient to meet its anticipated cash needs for working
capital and capital expenditures through at least the end of 2000.
Year 2000
DLJdirect has been actively engaged in addressing Year 2000
issues. Such issues relate to potential problems resulting from non-Year 2000
compliant systems processing transactions using two-digit date fields rather
than four digit date fields for the year of a transaction. If these systems
are not identified and reconfigured, Year 2000 transactions would be processed
as year "00," which could lead to processing inaccuracies and potential
inoperability and could have a material adverse effect on DLJdirect's business.
DLJdirect has undertaken a Year 2000 Project to identify and
modify or replace any non-Year 2000-compliant systems. The Year 2000 Project
is focused on both information technology and non-information technology
systems. A written Year 2000 Plan has been developed and DLJdirect believes
it is taking all steps necessary to achieve Year 2000 compliance. DLJdirect
has also retained the services of consulting firms having considerable
expertise in advising corporations on and remediating Year 2000 issues.
DLJdirect inventoried all systems for which loss of function
would result in an immediate stoppage or significant impairment to core
business areas and determined which of these systems were not Year 2000
compliant. DLJdirect has remediated, tested and returned all of its formerly
non-Year 2000 compliant applications to operation.
DLJdirect has identified all significant third parties, such as
vendors, online partners and facility operators, and has contacted them
regarding their Year 2000 readiness. The Pershing Division of DLJ,
DLJdirect's clearing agent, has assured DLJdirect that it is taking the
necessary steps to prepare for the Year 2000.
DLJdirect has initiated and is actively involved in various
types of testing including the Securities Industry Association's industry-wide
beta testing and vendor-supplied business applications and equipment testing.
For each of the tests in which it has participated, DLJdirect has achieved
successful results. Throughout 1999, internal and external systems will
continue to be tested to ensure that all remediated systems remain compliant.
Cost
The total cost to ensure that DLJdirect's systems are Year 2000
compliant is not expected to be material to DLJdirect's financial position
because DLJdirect outsources its clearing and trade execution services and
most of DLJdirect systems have been developed in the last two years. Based
upon current information, the total cost of the Year 2000 project is currently
estimated to be less than $0.5 million. Based on progress to date, the current
funding level has been found to be adequate. The budget includes Year 2000
compliance testing, full system testing, peer-to-peer testing with industry
agencies, and third party vendors and other industry-wide testing. The budget
also includes developing a contingency plan. Costs related to the Year 2000
project are expensed as incurred. The cost of the Year 2000 project is being
funded by operations.
Risks
The Year 2000 issue includes many risks including the
possibility that DLJdirect's computer and non-information technology systems
will fail. DLJdirect cannot ensure that the schedule for compliance outlined
above will be met or that the systems of other companies on which DLJdirect
depends will be converted in a timely manner. Due to this uncertainty,
DLJdirect is unable to determine whether the Year 2000 will have a material
impact on DLJdirect's business, results of operations or financial condition.
If the Year 2000 risks are not remedied, DLJdirect may experience business
interruption or shutdown, financial loss, regulatory actions and legal
liability. However, the Year 2000 Project is expected to reduce significantly
DLJdirect's level of uncertainty regarding the Year 2000 readiness of internal
and third-party systems. DLJdirect believes that with the completion of the
Year 2000 project as scheduled, the possibility of significant interruptions
of normal operations as a result of the Year 2000 issue, should be reduced.
Contingencies
DLJdirect's contingency plan is designed to safeguard the
interests of DLJdirect and its customers. The plan addresses internal and
external mission critical failure points and is intended to address failures
in facilities, telecommunications, client connections, and major
infrastructure components. DLJdirect intends to have its contingency plan
fully operational in the summer of 1999, and to update the plan as needed on a
continuing basis.
In the event that DLJdirect's internally developed systems
fail, DLJdirect will undertake to correct these systems on an emergency basis.
To ensure that adequate staff will be available on-site to handle an emergency
at the time of such failure, DLJdirect has notified all employees that they
must be available for on-site assistance for the last two weeks of December
1999 and the first two weeks of January 2000.
Recent Accounting Developments
In June 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which requires all derivatives to be recognized in the statement
of financial condition at fair value. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999 and should be applied prospectively. The
adoption of the statement is not expected to have a material adverse effect
on DLJdirect's combined financial statements.
BUSINESS OF DLJdirect
Overview
DLJdirect is a leading provider of online discount brokerage
and related investment services, offering customers automated securities order
placement and information and research capabilities through the Internet and
online service providers. DLJdirect's broad range of investment services is
targeted at self-directed, sophisticated online investors, who on average have
higher account balances than other online investors.
DLJdirect was one of the pioneers of online investing.
DLJdirect started in the online brokerage business in September 1988 under the
name PC Financial Network. In September 1997, PC Financial Network changed its
name to DLJdirect and relaunched its Internet site as DLJdirect
(www.DLJdirect.com). In its 10-year history, DLJdirect has frequently been
recognized as a high-quality provider of online brokerage services. Recent
industry awards include the following:
o Barron's 1999 Annual Survey of Online Brokers -- DLJdirect is
rated the number one online broker, based on criteria including
trade execution, reliability and range of services
o Gomez Advisors, Inc. -- DLJdirect was rated the number one
overall Internet broker for five of the last seven quarters,
including the most recent quarter
o TheStreet.com -- DLJdirect was selected the number one online
broker for reliability and ease of use in TheStreet.com's
November 1998 reader survey
DLJdirect's investment services and products include:
o online order entry for stocks, options, mutual funds and U.S.
Treasury securities
o access to selected DLJ-managed initial public offerings and
other equity offerings
o company and industry research from DLJ
o DLJdirect MarketSpeed[Trademark], its proprietary software with
enhanced graphics and greater ease of use permitting
DLJdirect's customers to access DLJdirect's online services an
average of five times faster than other major Internet brokers
o stock and mutual fund evaluation tools, including its
proprietary StockScan[Trademark] for screening over 9,500
public companies and its proprietary FundScan[Trademark] for
analyzing over 7,000 mutual funds
o research and analysis from independent research organizations,
including Standard & Poor's, Zacks Investment Research
Incorporated and Thomson Investors Network
o daily market commentary from TheStreet.com and Briefing.com
DLJdirect has experienced rapid growth in recent years:
o revenues increased 75.4% from $67.2 million in 1997 to $117.9
million in 1998 and were $35.4 million during the fourth
quarter of 1998
o the average number of trades executed each day increased 86.9%
from 6,100 in 1997 to 11,400 in 1998 and was 14,200 during the
fourth quarter of 1998
o customer assets increased 93.5% from $4.6 billion in 1997 to
$8.9 billion in 1998
The key elements of DLJdirect's strategy are as follows:
Increase Penetration of DLJdirect's Targeted Customer Base -- DLJdirect
focuses on self-directed, sophisticated online investors, who on average
maintain higher account balances than other online investors. DLJdirect
believes it can continue to attract targeted customers by:
o building on the reputation of DLJ as a leading Wall Street
firm,
o providing a wider range of DLJ financial products and services
and
o maintaining high-quality investor service.
Build and Enhance DLJdirect Brand -- DLJdirect intends to increase the
awareness of the DLJdirect brand. As part of this strategy, DLJdirect
plans to increase significantly the amount it spends on marketing, from $25
million in 1998 to $65 million in 1999.
Maintain Leading Technology -- DLJdirect intends to upgrade its technology
continually to increase capacity, provide greater functionality and ease of
use and offer additional services.
Continue To Broaden Product Offerings -- While DLJdirect's primary products
and services will continue to be equity securities and mutual funds,
DLJdirect intends to broaden its offerings continually with additional
products and services offered by DLJ and its affiliated companies,
including AXA S.A., The Equitable Companies Incorporated, Alliance Capital
Management, L.P., DLJ Asset Management Group and The Sprout Group, as well
as unaffiliated financial services providers. DLJdirect also intends to
expand its relationships with online service and content providers to offer
additional products, including insurance, credit and mortgage products.
Expand Role as an Internet-Based Distributor of Underwritten Securities --
DLJdirect intends to increase its access to public offerings and use its
distribution capability by becoming an underwriter and manager of
securities offerings, including offerings that may not include DLJ.
Expand Globally -- DLJdirect intends to enter international markets
selectively, either directly or through alliances or joint ventures with
local partners. DLJdirect recently announced a joint venture in Japan with
Sumitomo Bank and expects to commence operations in the UK during the
second quarter of 1999. DLJdirect's focus will be on large developed
markets that permit it to continue to capitalize on its relationship with
DLJ, AXA and Equitable.
As used in this prospectus, the term "DLJdirect" does not
represent a separately incorporated entity but rather means those businesses,
assets and liabilities intended to represent Donaldson, Lufkin & Jenrette,
Inc.'s online discount brokerage and related investment services businesses.
Industry Overview
According to International Data Corporation ("I.D.C."), the
total number of online brokerage accounts has grown from a small number at the
end of 1994 to 1.6 million at the end of 1996 and 3.7 million at the end of
1997. I.D.C. estimates that there were more than 6.4 million online accounts
at the end of 1998, representing $324.0 billion in assets and over 300,000
trades per day.
DLJdirect believes that the online brokerage industry is
experiencing rapid growth largely as a result of:
o the growing consumer acceptance of the Internet as a
convenient, secure and reliable method of conducting retail
financial transactions;
o an increasing desire on the part of investors to take greater
personal control of their financial future;
o the lowering of commission prices for online brokerage
transactions;
o an increasing amount of high-quality investment research and
information available on the Internet to assist investors in
making their trading decisions;
o the extensive media attention focused on the online brokerage
industry;
o increasing interest by retail investors in purchasing
individual stocks; and
o a favorable investing environment.
Services and Products
DLJdirect's existing services and product offerings are
described below:
Stock, Options, Mutual Fund and Fixed Income Trading
Customers can directly place orders to buy and sell Nasdaq and
exchange-listed securities, as well as equity and index options, mutual funds
and fixed income securities, through DLJdirect's automated order processing
system. System intelligence automatically checks the parameters of an order,
together with the customer's available cash balance and positions held, prior
to executing an order. All transaction and portfolio records are updated to
reflect trading activity. Buy and sell orders placed when the markets are
closed are automatically submitted prior to the next day's market opening.
To date, DLJdirect has the only online account application
submission and approval process in the industry. After an online credit
check, credit-approved customers may buy securities of up to $15,000 in value
without first depositing any money into their accounts. In all instances,
however, customers are required to pay for purchases or post margin as
required by Regulation T and the rules of the NASD.
Orders to trade Nasdaq and exchange-listed securities
constituted 89.1% of DLJdirect's total customer orders in 1998. DLJdirect
supports a range of order types, including market orders, limit orders
(good-till-canceled or day), stop orders and short sales. Customers placing
orders can use DLJdirect's equity research tool, StockScan[Trademark], to
search, screen and profile over 9,500 stocks from approximately 100 different
industries online. Customers can customize screening criteria and identify
investment opportunities. DLJdirect also offers an investment tool which
suggests an asset allocation between different types of equity and fixed
income investments based on the customer's investment objectives, risk
tolerance, investment time-frame, and income requirements.
Customer orders to buy and sell options constituted 9.5% of
DLJdirect's total customer orders in 1998. DLJdirect typically does not offer
option trading involving the writing of uncovered puts or calls or the
establishment of option spreads or straddles to the majority of its customer
base. DLJdirect does maintain a few accounts that have been approved for this
type of trading due to exceptional equity levels within the account as well as
the customers' trading experience and investment objectives.
Customer orders to buy and sell mutual funds comprised 1.3% of
DLJdirect's total customer orders in 1998. Customers can use DLJdirect's
mutual fund research tool, FundScan[Trademark], to search, screen and profile
over 7,000 mutual funds, over 850 of which are available without transaction
fees. As with StockScan[Trademark], customers can customize screening
criteria and identify investment opportunities.
DLJdirect offers its customers the opportunity to buy and sell
fixed income investment products including government, municipal and corporate
bonds, commercial paper, unit investment trusts, certificates of deposit and
collateralized mortgage obligations. Some bond trades may be placed directly
via computer, but other fixed income transactions may only be effected by
speaking with an investor service representative. Fixed income transactions
currently comprise less than 1% of all of DLJdirect's trade executions.
Market Data and Financial Information
During trading hours, DLJdirect continuously receives a direct
feed of detailed quote data, market information and news. Customers can
create personalized lists of stocks, options and mutual funds for quick access
to current pricing information. DLJdirect provides its customers free
real-time quotes, including stocks, options, major market indices, most active
issues, and largest gainers and losers for the major exchanges. DLJdirect
also offers customers subscription access to real-time streaming quotes which
allow them to monitor stock prices as they fluctuate -- without having to
reenter a stock symbol or refresh the screen. Customers can also stay
informed at a glance using their own personal scrolling stock ticker. In
addition, customers can monitor stocks they own and stocks in their model
portfolios as well as display news headlines from a variety of sources.
Customers are alerted when there is current news on an identified stock or
when a stock has reached a pre-selected price threshold. Through its
alliances, DLJdirect also provides immediate access to breaking news, charts,
market commentary and analysis and company financial information. DLJdirect's
Web site provides links to other business and financial Web sites, including
access to SEC filings of public companies.
DLJ provides DLJdirect with a select portion of DLJ's research
products for distribution to all accounts for a 60-day trial period and
thereafter to customers who qualify by maintaining at least $100,000 in
aggregate assets in their DLJdirect accounts. DLJ provides company and
industry reports, economic, global and market-related research as well as
DLJ's select list of recommended securities. DLJdirect has entered into an
agreement with DLJ for continued access to its research products. See
"Certain Transactions".
Portfolio Tracking and Records Management
Customers have online access to a listing of all their
portfolio assets held in their DLJdirect accounts. Customers using
MarketSpeed[Trademark] may receive a real-time listing of all their portfolio
assets, including current price and current market value. Detailed account
balance and transaction information includes cash and money fund balances,
buying power, net market value, dividends received, interest earned, deposits
and withdrawals. Customers can also create "model" portfolios to include most
financial instruments a customer is interested in tracking. These model
portfolios can include stocks, options, and most mutual funds. Customers also
receive quarterly account and annual tax statements and active customers
receive monthly account statements summarizing account activity, including
asset valuation, transaction history, interest income and distribution
summary. DLJdirect's "Select Client Group" customers (customers who meet
minimum balance criteria) receive enhanced statements including realized and
unrealized gains on their investments. DLJdirect's systems support the Open
Financial Exchange (OFX) standard so that customers may download their online
account information into personal financial software programs such as Intuit's
Quicken 98 and 99, Microsoft's MSN MoneyCentral Investor Portfolio, and
Microsoft's Money 99.
Participation in Public Offerings
Customers maintaining accounts with aggregate assets of at
least $100,000 have been eligible to gain access to IPOs managed by Donaldson,
Lufkin & Jenrette Securities Corporation since June 1997. Through February
1999, DLJdirect has participated in 34 DLJ-managed IPOs. Prior to 1999,
DLJdirect received a nominal fee for distribution of IPO products but is now
compensated as a regular member of the selling group. DLJdirect intends to
increase its staff and enhance its capabilities in this area in response to
increasing demand from retail customers and from companies seeking electronic
distribution of shares in their own initial public offering.
DLJdirect is also looking to participate in selling groups or
offerings that may not be managed by DLJ, and is exploring the possibility of
acting in an underwriting capacity. DLJdirect may also consider in the future
acting as an underwriter for a broader array of securities offerings,
including secondary equity offerings, preferred stock offerings, and
investment grade and high yield bond offerings. DLJdirect intends to rely in
large part upon DLJ investment banking professionals in developing its
underwriting capacity. DLJdirect believes that relying upon DLJ as opposed to
hiring and developing a complete investment banking group internally will
minimize costs, unless and until underwriting volumes justify development of
complete internal capacity. See "Certain Transactions".
Cash Management Services
DLJdirect offers several cash management options. Customers
may participate in an asset management account, AssetMaster[SM], combining
their brokerage account with free check writing and access to a Gold
MasterCard debit card. DLJdirect also provides free check writing drawn
against money market funds, cash or margin balances. Funds in the
AssetMaster[SM] and brokerage checking accounts can be invested in one of 11
money market funds managed by Alliance Capital Management, L.P. Customers may
also earn interest on uninvested funds by investing in a money market fund or
participating in a credit interest program.
Mortgage Center
DLJdirect provides access to mortgage services for its
customers through an agreement with E-LOAN, Inc., an online mortgage broker.
Users can take advantage of efficient, easy-to-use tools to search for
mortgage loan rates, obtain customized quotes, compare loans and apply for a
mortgage online. The service operates through hyperlinks to the E-LOAN Web
site.
Access and Delivery of Services
DLJdirect's services are widely accessible through multiple
channels.
[Insert graphic]
Personal Computer. Customers using personal computers can
access DLJdirect services and products through the Internet, online service
providers, such as America Online and Prodigy, or DLJdirect's proprietary
Windows-based investing software, DLJdirect MarketSpeed[Trademark]. The
DLJdirect Web site combines easy-to-use graphics with the trading
capabilities, investing tools and resources that sophisticated investors
demand.
DLJdirect created its proprietary Windows-based investing
software, DLJdirect MarketSpeed[Trademark], in order to enhance its customers'
experience with its Internet-based service. The software caches formatted
data, thus eliminating the need for constant Web page reloads, making
DLJdirect MarketSpeed[Trademark] an average of five times faster than other
major Web brokerage sites, according to Corporate Insight, Inc., an
independent online market research firm. Designed to be user-friendly, the
software may be used with real-time streaming quotes and market data by
customers who qualify for them by filling out an online application and
agreeing to pay the exchange fees for these quotes. The product enables
DLJdirect's customers to use a variety of customizable features and tools with
better graphics and greater ease of use.
Touch-tone Telephone. TradeTalk[SM], DLJdirect's touch-tone
trading service, provides customers with a convenient way to access quotes,
place orders and access portfolio information over toll-free lines from any
touch-tone telephone, 24 hours a day, 7 days a week.
Investor Services Telephone. DLJdirect's trading and investor
service centers may also be accessed 24 hours a day, 7 days a week, via a
toll-free telephone line staffed by licensed investor services representatives
who will take orders for securities transactions, and provide securities
quotes, account and portfolio information, customer service and technical
support.
All orders placed via computer or interactive voice response
are automatically passed through system intelligence. This intelligence
screens the parameters of the order to ensure that DLJdirect can accept the
order and route it to the appropriate exchange or third party market maker.
Technology
DLJdirect maintains proprietary technology that automates
traditionally labor-intensive transactions. Because it was custom-tailored
for electronic marketplace use, the DLJdirect system provides customers with
efficient service and has the added advantage of being scalable and adaptable
as usage increases and service offerings are expanded.
DLJdirect also designs systems and software on a fee basis for
DLJ and its affiliates and, through them, for their customers. In addition,
DLJdirect has designed and developed Web sites for a number of leading
financial institutions. The technology group had 119 associates at December
31, 1998 who are experienced in building easy-to-use, high performance,
scalable systems and have skills in a number of systems and programming
technologies, including IBM mainframe, Unix, Oracle, NT, C++, Java, and HTML.
DLJdirect believes that there is significant potential to exploit the
technology developed by this group commercially both through product sales and
advisory services.
DLJdirect has built proprietary financial services engines that
can interface with many technologies within a variety of delivery platforms
such as AOL, Prodigy, PDAs (personal digital assistants, or palm top devices),
screen phones, and touch-tone telephones. DLJdirect has also used these
engines to provide services and build products for DLJ, AXA and Equitable and
other financial institutions such as registered investment advisors and
full-service brokers. The infrastructure and the software components to
support DLJdirect have been applied in other contexts to minimize the
technological costs to DLJdirect.
The DLJdirect System
The primary components of DLJdirect include presentation
layers, middleware, application servers, system monitors, a compliance rules
engine and a customer server workstation.
Presentation Layer. The presentation layer provides DLJdirect
with the ability to offer its services on many platforms without the need to
modify the rest of its applications for each platform. Products using the
presentation layer include its Web site, DLJdirect MarketSpeed[Trademark],
FundScan[Trademark], StockScan[Trademark] and TradeTalk[SM].
Middleware. DLJdirect's middleware connects all of the
different components of the environment and establishes language among the
different components. DLJdirect's proprietary technology allows these
components to function in different languages, hardware platforms and
protocols. By load balancing among different instances of the same component
providing a specific service, DLJdirect's middleware allows more reliability
and makes the systems environment more scalable. This technology also makes
it easier for DLJdirect to add capacity and maintain servers.
Application Servers. These servers provide DLJdirect's various
services and are optimized for each specific service. They can be configured
in the same machine, across multiple machines, or machines in multiple
locations.
System Monitor. The system monitor is an expert system that
monitors all the different components every few minutes to make sure all are
working correctly. If it finds a problem, it can alert the appropriate
DLJdirect personnel and can, if possible, take actions to rectify the problem
automatically.
Compliance Rules Engine. The rules engine makes it possible to
route orders to the exchanges and market makers, and to approve accounts
online automatically without manual intervention.
Investor Service Workstation. The investor service workstation
platform provides the ability to process exceptions and answer e-mail
effectively and provides integrated access to information about customers and
market data.
DLJdirect is making significant investments in systems
technology and has established technology centers in Jersey City, New Jersey,
and, through its relationship with an affiliate, in Florham Park, New Jersey.
DLJdirect also maintains three investor service centers in Jersey City and
Parsippany, New Jersey, and Charlotte, North Carolina. These facilities
support systems, network services, trading, investor services and backup
capabilities between the multiple locations. DLJdirect is currently
implementing fully redundant technology centers which are expected to be
operational in the third quarter of 1999. To provide for system continuity
during potential outages, DLJdirect also has equipped its computer facilities
with uninterruptible power supply units, as well as back-up generators.
A significant risk to online commerce and communication is the
insecure transmission of confidential information over public networks.
DLJdirect relies on encryption and authentication technology, including public
key cryptography technology licensed from RSA and Netscape, to provide the
security and authentication necessary to effect secure transmission of
confidential information. Features ranging from firewalls to routers and
servers are used in many layers to prevent unauthorized access. See "Risk
Factors--DLJdirect's Networks May Be Vulnerable to Security Risks".
Marketing
DLJdirect's marketing strategy is based on an integrated
marketing model which employs a mix of communications media. The goals of
DLJdirect's marketing programs are to increase its brand name recognition,
attract new customers, increase the retention and value of existing customers,
and activate currently inactive accounts. In particular, its brand strategy
strives to communicate a consistent message to consumers through multiple
marketing venues. DLJdirect pursues its marketing goals through advertising,
marketing on its own and other Web sites, direct one-on-one marketing, public
relations, and co-marketing programs.
DLJdirect targets its services at the self-directed,
sophisticated investor who currently has an account with a full-service
broker. The DLJdirect target investor generally has online access either at
home or at the workplace and tends to track portfolio performances online.
DLJdirect believes that its targeted investors value the types of services and
benefits that DLJdirect has to offer, such as access to DLJ research reports
and DLJ-managed public offerings.
Advertising
DLJdirect's advertising focuses on building awareness of the
DLJdirect brand, products and services and positions DLJdirect as a better way
of executing securities transactions, accessing financial and market data, and
managing portfolios for the individual investor. Print advertisements are
placed in a broad range of business, technology and financial publications,
including Barron's, Forbes, Forbes ASAP, Investor's Business Daily, Money,
Smart Money, The Wall Street Journal and Fortune. DLJdirect also advertises
regularly on national cable and television networks such as CNBC, CNN Headline
News, CNNfn and on national radio networks including National Public Radio.
DLJdirect also advertises online on the America Online service and on sites
such as MSN.com, CBS.MarketWatch.com and TheStreet.com. Through the DLJdirect
Web site, prospective customers can get detailed information on DLJdirect's
services, use an interactive demonstration system, request additional
information and complete an account application online.
Strategic Relationships
DLJdirect pursues strategic relationships to increase its
access to online consumers, build brand name recognition and expand the
products and services DLJdirect can provide to its online investors.
Core Business Expansion
DLJdirect has secured or is actively pursuing alliances with
(1) Internet access and service providers, (2) Internet content providers, (3)
providers of online banking services, and (4) electronic commerce companies.
These alliances are intended to increase DLJdirect's core customer base,
transaction volume and operational efficiency and to enhance further its brand
name recognition. While a majority of DLJdirect's customers access its
services directly through the Internet, direct modem access or touch-tone
telephone, many use online service providers, such as America Online and
Prodigy. Strategic relationships with service providers allow DLJdirect to
access a greater number of potential customers and allow the online service
providers to offer their subscribers a broader range of service options.
DLJdirect's partnerships with leading content providers fulfill customers'
information needs and help drive transaction volume.
New Account Development and Distribution
DLJdirect has developed alliances with key online services and
popular Web sites to increase account development and expand distribution.
These include proprietary online services, Internet service providers, search
engines and financial content providers. They attract significant numbers of
users, and DLJdirect's relationships provide access to expanded market
opportunities. Set forth below are descriptions of several of DLJdirect's key
alliances:
America Online. In 1995, DLJdirect entered into a business
relationship with America Online ("AOL"), a provider of Internet access and
content that allows access to DLJdirect's Web site from the AOL Personal
Finance channel. DLJdirect is one of four exclusive brokerage sponsors of
that channel and the only online brokerage firm to build a customized platform
within AOL's proprietary Remote Managed Gateway technology. The agreement
with AOL provides for extensive marketing and promotional programs across AOL
properties.
Prodigy. DLJdirect has had a business relationship with
Prodigy Communications, Inc., a provider of Internet access and content, since
1988. Currently, DLJdirect maintains a presence on the Prodigy Classic
service, acting as an information and transaction provider. DLJdirect
advertises on Prodigy Internet, including a position on its home page, to
market its financial services to Prodigy's approximately 500,000 users.
DLJdirect's Prodigy Classic service will terminate in the third quarter of
1999 and DLJdirect intends to encourage customers to adopt other means of
access.
MSN.com. DLJdirect has developed a number of key relationships
with Microsoft Corporation that are designed to promote DLJdirect's online
investing services on the Microsoft Network. In January 1999, DLJdirect
entered into a one-year advertising agreement, pursuant to which MSN.com
provides for advertising of DLJdirect's brokerage services on the MSN Web site
and for a direct link to DLJdirect's Web site. DLJdirect is one of three
exclusive broker participants in the "MSN Broker Package."
TheStreet.com. In 1997, DLJdirect entered into an agreement
with TheStreet.com, an Internet site which provides financial news and
commentary. Pursuant to the agreement, DLJdirect displays TheStreet.com's
market report titles on its Internet sites, AOL site, and
MarketSpeed[Trademark] software, through which DLJdirect users can link
directly to the TheStreet.com's Web site containing the full text of market
reports. In return, TheStreet.com offers DLJdirect's account holders
discounted subscriptions for its Internet services.
CBSMarketWatch. DLJdirect has entered into an agreement with
CBSMarketWatch, a leading Web-based provider of real-time business news,
financial programming and financial analysis tools. The agreement provides
for a direct link to DLJdirect's Web site from CBSMarketWatch and advertising
on both CBSMarketWatch and the CBS television network.
Content
Content such as news, quotes, charts and fundamental data helps
provide investors with the information necessary to make investment decisions.
DLJdirect believes that these information services fulfill customers'
information needs, facilitate new ideas and increase transaction volume.
Bridge Information Systems America. Bridge Information Systems
America, Inc. (formerly Telesphere Corporation) provides DLJdirect with
delayed and real-time quotes on U.S. securities.
Business Wire. Business Wire provides DLJdirect with company
press releases for use on its Web site.
Charter Media/Briefing.Com. Charter Media/Briefing.Com
provides DLJdirect with daily financial data, reports, and services which
support its online market commentary and stock analysis areas.
ILX Systems. Through one of its affiliates, DLJdirect has a
relationship with ILX Systems, Inc. to provide real-time quotes on U.S.
securities.
Iverson Financial Systems. Iverson Financial Systems Inc.
provides DLJdirect with securities data that support its online historical
indices and historical charts areas.
Lipper. Lipper Inc. provides DLJdirect with quarterly and
monthly mutual fund data.
PR Newswire. PR Newswire Association, Inc. provides DLJdirect
with company press releases for use on its Web site.
Reuters NewMedia. DLJdirect has an agreement with Reuters
NewMedia, Inc. to provide Reuters news on DLJdirect's Web site.
Standard & Poor's. Standard & Poor's provides DLJdirect with
securities data and reports.
Thomson Investors Network. Thomson Investors Network provides
DLJdirect with securities data regarding insider/institutional holdings and
insider trading along with financial commentary and analysis.
Zacks Investment Research. Zacks Investment Research
Incorporated provides DLJdirect with securities research data.
International
DLJdirect intends to enter international markets selectively,
either directly or through alliances or joint ventures with local partners.
DLJdirect's focus will be on large developed markets that permit it to
capitalize on its relationship with DLJ and AXA.
DLJdirect Japan. In November 1998, DLJdirect announced an
agreement to form a 10-year joint venture ("DLJdirect Japan") with Sumitomo
Bank, the second largest bank in Japan. The joint venture is expected to begin
operations in the second quarter of 1999. DLJdirect will have a 50% interest
in the joint venture.
Through DLJdirect Japan, DLJdirect intends to offer online
discount brokerage, including securities trading, investment trusts and money
market funds to Japanese investors. DLJdirect Japan is initially expected to
provide investors with the ability to invest in Japanese securities. However,
over the longer term DLJdirect expects to offer Japanese investors access to
U.S. securities, including investment products offered by DLJ and its
affiliates. DLJdirect Japan initially will be capitalized with an aggregate
of approximately Yen3 billion (estimated to be $25 million at March 12, 1999)
from the member companies.
DLJdirect UK. DLJdirect expects that its online UK discount
brokerage service ("DLJdirect UK") will begin operations in the second quarter
of 1999. DLJdirect UK has contracted with an affiliate, Pershing Securities
Limited, for execution and clearing services. DLJdirect UK intends initially
to provide investors with the ability to invest in UK equities. Additional UK
financial products are expected to be added later. Over the longer term,
DLJdirect UK intends to offer UK investors access to U.S. and continental
European securities as well, including investment products offered by DLJ and
its affiliates.
Other. Outside of the UK and Japan, DLJdirect is exploring
alliance and joint venture opportunities in a number of key international
markets, including Australia, Belgium, Canada, France, Germany, Hong Kong,
Israel, Italy, Korea, South Africa and Taiwan.
Customer Service
DLJdirect believes that providing excellent service to its
customers is crucial to its success. DLJdirect believes that it has achieved
an excellent record of effective investor service. DLJdirect's investor
service team helps investors access its service online, handles product and
service inquiries, and deals with all brokerage and technical questions.
Investor service representatives assist investors in placing trades both
online and by telephone. At any time of the day or night, investors may
access their accounts and make investment decisions even when they are away
from their PCs.
DLJdirect is highly dependent on Internet-based technologies
and services, and DLJdirect has from time to time experienced significant
interruptions in these technologies and services which have adversely affected
overall investor service. The extremely high trading volumes of 1998 and to
date in 1999 continue to challenge DLJdirect's investor service capacity.
DLJdirect has on occasion fallen short of its target response time for investor
service calls and e-mails, especially during peak trading hours. See "Risk
Factors--Capacity Constraints and Systems Failures Could Harm DLJdirect's
Business".
Telephone and E-mail Support and Technology
Telephone support is available 24 hours a day, 7 days a week,
and currently there are no additional fees charged to investors for this
service. DLJdirect maintains toll-free 800 numbers, and callers may request
to speak with investor service representatives on either a trading team or an
investor service team, or choose to use DLJdirect's proprietary interactive
voice response system, TradeTalk[SM]. DLJdirect's trained investor service
representatives are based in three state-of-the art investor service centers
in Jersey City and Parsippany, New Jersey, and Charlotte, North Carolina. The
geographic distribution of the investor service centers helps to minimize the
risk that telecommunications or other technology failures, or weather-related
or other natural or man-made disasters will interfere with the investor's
rapid access to an investor service representative. At December 31, 1998, 194
representatives made up DLJdirect's investor service team, and DLJdirect plans
to expand this number to 400 by the end of 1999.
The telephone systems in all three investor service centers are
state-of-the-art and designed along "open architecture" lines that permit
continual upgrades of both hardware and software with a minimum of disruption
and expense. New releases of both programs and equipment are integrated into
the investor service line only after adequate testing and training to insure
continuity of operations. DLJdirect's TradeTalk[SM] currently handles
approximately 50% of incoming calls and thus greatly reduces the volume of
calls which must be handled by representatives. This in turn reduces wait
times during high volume trading hours and helps to reduce overall investor
service costs. Investors can get their account balances, check on order
status, get delayed securities quotes, and place trades through this automated
system.
Among the advanced features of DLJdirect's Automated Call
Distribution ("ACD") system is skill-based routing, which allows investors to
follow telephone prompts which then route their calls to the investor service
team which specializes in the appropriate area. The quality of service is
thus improved, as the investor is more likely to receive help from a
representative who has the particular expertise required to handle each
individual call. The ACD system also automatically produces routing and
management reports that aid supervisors in optimizing the efficiency of their
manpower allocations.
Electronic mail is the other principal method of providing
investor support. All investor service representatives are trained to respond
to investor requests using both pre-composed and original e-mails. Further,
DLJdirect is installing an enhanced state-of-the-art automated e-mail response
system, to be fully operational by May 1999, which will save on personnel
costs and improve response times. The enhanced system will respond to many
types of customer investor e-mails with a high degree of accuracy and
appropriateness. As an important safeguard, all e-mail responses, whether
generated by the automated system or an investor service representative, will
be reviewed by an investor service manager, as is done under DLJdirect's
current, non-automated e-mail protocols. By the end of 1999, DLJdirect
expects that the enhanced automated system will respond to all e-mails routed
through it promptly but in any event within 12 hours, and that a significant
percentage of all customer e-mails will be handled entirely by the automated
system.
Personnel and Training
DLJdirect believes that a key component of an efficient and
motivated investor service team is its training. It is committed to providing
the best available training to its investor service representatives in an
ongoing program that focuses on career development and therefore aids in the
retention of skilled and motivated personnel.
New investor service employees take a 3-month initial course
that trains them in DLJdirect's products, services, and policies. All
investor service representatives have the Series 7 securities broker license
or are required to enter DLJdirect-sponsored training to receive that license.
Each team of approximately eight representatives is supervised by a Series 24
licensed professional, and both the team members and their supervisors receive
continuing training to enable them to become qualified in specialized areas,
such as Select Client Services, Customer Retention and IRA accounts. In 1998,
DLJdirect implemented a mandatory training program for all investor service
representatives, under which DLJdirect staff must attend a minimum of 20 hours
of DLJdirect-sponsored training programs per year in customer service,
securities, and technology subjects.
Investor service managers silently monitor investor service
calls and remotely monitor investor service e-mails as a means of improving
training and customer satisfaction. All investor service representatives
undergo both monthly and annual performance reviews which gauge their
knowledge of DLJdirect's products and services, their level of teamwork, their
work ethic and personal objectives, and above all their ability to deliver
customer satisfaction. DLJdirect pays performance-based bonuses that reflect
training evaluations and performance reviews.
DLJdirect has experienced periods of staffing shortages in
various areas within its investor service team, along with substandard
performance on the part of individual investor service representatives. Given
the current extremely high levels of competition to hire competent personnel
within the U.S. brokerage, online, and financial services industry sectors,
absent a strong and sustained effort on DLJdirect's part to identify, hire,
train, and retain the best available people for its investor service
operations, there exists substantial risk to DLJdirect's ability to maintain
and increase its overall business. See "Risk Factors--DLJdirect Depends on
Key Personnel".
Operations
Clearing
DLJdirect is an introducing broker-dealer, clearing through the
Pershing Division of DLJ on a fully disclosed basis. Pershing and its
affiliates provide execution and clearance services for equities, options,
corporate bonds, municipal bonds, treasury bonds, government agency bonds,
precious metals, mortgage backed bonds, mutual funds and unit investment
trusts. In addition, Pershing provides certain record keeping and operational
services, including custody of securities and cash balances settlement of
securities transactions and custody of securities and cash balances. Pershing
receives and delivers cash and securities for accounts and records such
receipts and deliveries according to information provided by DLJdirect.
Pershing holds in custody securities and cash received for accounts, collects
and disburses dividends and interest, and processes reorganization and voting
instructions with respect to securities held in custody. Pershing is
responsible for the custody of the funds and securities only after Pershing
obtains physical possession or control thereof. Pershing also prepares and
transmits to customers confirmations of trades and periodic account statements
summarizing transactions processed for accounts.
The services provided by Pershing are governed by a clearing
agreement dated as of September 24, 1997, as amended. DLJdirect has general
responsibility for servicing and supervising securities accounts through its
own personnel in accordance with its own policies and applicable laws and
regulations. DLJdirect is also responsible for approving the opening of
customer accounts and obtaining necessary account documentation. DLJdirect is
in general responsible for the ongoing relationship that it has with
customers. The clearing agreement also provides for the payment of a license
fee. The trademark license fee included in the clearing fee does not include
the use of certain trademarks in certain foreign jurisdictions, the use of
which will be negotiated on a case by case basis. See "--Related
Transactions--Other Transactions with DLJ".
Margin Lending
At the request of DLJdirect, Pershing makes loans to customers
collateralized by customer securities. Pershing extends credit for the margin
accounts of DLJdirect, and notifies DLJdirect of initial and maintenance
margin calls. If DLJdirect opens a margin account for a customer, Pershing
will loan money for the purpose of purchasing or holding securities subject to
the terms of Pershing's Margin Agreement and Pershing's margin policies and
applicable margin regulations. DLJdirect is responsible for obtaining the
initial margin as required by Regulation T. Thereafter, Pershing will
calculate the amount of maintenance margin required. Pershing advises the
customer of those requirements, usually through DLJdirect, and calculates the
interest charged on the debit balance, if any. Pershing charges customer
accounts the margin interest and repays DLJdirect a portion of the interest
collected. DLJdirect receives from Pershing a portion of the financial
benefits arising from free credit balances in customer accounts.
In permitting customers to purchase securities on margin,
DLJdirect takes the risk of a market decline that could reduce the value of
the collateral held to below the customers' indebtedness before the collateral
can be sold, which could result in losses to DLJdirect. In the event of a
decline in the market value of the securities in a margin account, the
customer is required to deposit additional securities or cash in the account
so that at all times the customer's equity in the account is at least 25% of
the value of the securities in the account. DLJdirect may impose initial and
maintenance margin requirements for specific securities.
Securities Lending and Borrowing
In connection with the margin and short account activities of
customers of DLJdirect, Pershing borrows securities both to cover short sales
and to complete customer transactions in the event a customer fails to deliver
securities by the required settlement date. Pershing collateralizes these
borrowings by depositing cash or securities with the lender and receives a
rebate calculated to yield a negotiated rate of return. When lending
securities, Pershing receives cash or securities and generally pays a rebate
to the other party in the transaction at a rate calculated to yield a
negotiated return. Securities lending and borrowing transactions are executed
pursuant to written agreements with counterparties that require that the
securities borrowed be "marked-to-market" on a daily basis and that excess
collateral be refunded or that additional collateral be furnished in the event
of changes in the market value of the securities. The securities usually are
"marked-to-market" on a daily basis through the facilities of the various
national clearing organizations. Pershing pays DLJdirect a portion of the
rebate interest or fees earned in these activities relating to customers of
DLJdirect.
Competition
The market for online investing services, particularly over the
Internet, is new, rapidly evolving and intensely competitive, and DLJdirect
expects competition to continue to intensify in the future. DLJdirect
encounters direct competition from discount brokerage firms providing either
touch-tone telephone or online investing services, or both. These competitors
include Ameritrade, Inc.; Charles Schwab & Co., Inc.; Datek Online; Discover
Brokerage Direct, Inc.; E*TRADE Securities, Inc.; Fidelity Brokerage Services,
Inc.; Quick & Reilly, Inc.; and Waterhouse Securities, Inc. It also encounters
competition from the broker-dealer affiliates of established full-commission
brokerage firms, such as Merrill Lynch, Pierce, Fenner & Smith Incorporated
and PaineWebber Incorporated, among others. In addition, DLJdirect competes
with financial institutions, mutual fund sponsors and other organizations,
some of which provide online investing services.
DLJdirect believes that the principal competitive factors
affecting the market for its transaction-enabling services are service,
quality, cost, execution, delivery platform capabilities, ease of use,
graphical user interface look and feel, depth and breadth of services and
content, financial strength and innovation. Based on research conducted with
both customer and non-customer focus groups and the level of activity
DLJdirect continues to experience, DLJdirect believes that it presently
competes favorably with respect to each of these factors.
Some of DLJdirect's competitors have significantly greater
financial, technical, marketing and other resources than DLJdirect thereby
gaining market share to DLJdirect's detriment. Some current and potential
competitors also have greater name recognition and more extensive customer
bases. Additionally, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share.
The general financial success of companies within the online
securities industry over the past several years has strengthened existing
competitors. Management believes that this success will continue to attract
new competitors to the online securities industry such as banks, software
development companies, insurance companies, providers of online financial and
information services and others, as such companies expand their product lines.
The current trend toward consolidation in the commercial banking industry
could further increase competition in all aspects of DLJdirect's business.
While it is not possible to predict the type and extent of competitive services
that commercial banks and other financial institutions ultimately may offer or
whether administrative or legislative barriers will be repealed or modified,
firms such as DLJdirect may be adversely affected by competition or
legislation. In addition, competition among financial services firms exists
for experienced technical and other personnel.
There can be no assurance that DLJdirect will be able to
compete effectively with current or future competitors or that the competitive
pressures faced by it will not have a material adverse effect on its business,
financial condition and operating results. See "Risk Factors--DLJdirect Faces
Significant Competition".
Intellectual Property and Other Proprietary Rights
DLJdirect holds significant value in its proprietary products
and services and its right to use certain marks. DLJdirect's proprietary
products and services and the marks it has contracted to use include:
DLJdirect[Trademark], FundCenter[Registered], FundScan[Trademark],
MarketSpeed[Trademark], StockScan[Trademark], TradeTalk[SM], Trade Up[SM], and
www.DLJdirect.com[Trademark].
DLJdirect's success and ability to compete are dependent to a
significant degree on its proprietary technology. DLJdirect relies primarily
on copyright, trade secret and trademark law to protect its technology.
Effective trademark protection may not be available for its trademarks.
DLJdirect does not own but licenses certain material marks from DLJ Long Term
Investment Corporation which has obtained, or is seeking to obtain,
registration protection for those marks in the United States. In addition,
DLJ Long Term Investment Corporation is in the process of registering the
DLJdirect mark in 35 countries worldwide. Its inability to protect
DLJdirect's name adequately would have a material adverse effect on
DLJdirect's business, financial condition and operating results. See "Risk
Factors--Claims of Infringement Could Harm DLJdirect's Business" and "Risk
Factors--DLJdirect Must Protect Its Intellectual Property Rights".
DLJdirect's proprietary software is protected both as a trade
secret and as a copyrighted work. DLJdirect's policy is to enter into
confidentiality and assignment agreements with its associates, consultants and
vendors and generally to control access to, and distribution of, its software,
documentation and other proprietary information. Notwithstanding the
precautions taken by DLJdirect it may be possible for a third party to copy or
otherwise obtain and use its software or other proprietary information without
authorization or to develop similar software independently. The laws of other
countries may afford DLJdirect little or no effective protection of its
intellectual property. The inability of DLJdirect to protect its intellectual
property rights could have a material adverse effect on its business,
financial condition and operating results.
DLJdirect may in the future receive notices of claims of
infringement of other parties' proprietary rights. Any claims, with or
without merit, could be time-consuming to defend, result in costly litigation,
divert management's attention and resources or require DLJdirect to enter into
additional royalty or licensing agreements. There can be no assurance that
other licenses would be available on reasonable terms, if at all, and the
assertion or prosecution of any claims could have a material adverse effect on
DLJdirect's business, financial condition and operating results.
Government Regulation; Net Capital Requirements
Securities Industry
The securities industry in the United States is subject to
extensive regulation under both federal and state laws. The SEC is the
federal agency responsible for the administration of the federal securities
laws. DLJdirect Inc. is registered as a broker-dealer with the SEC. Much of
the regulation of broker-dealers has been delegated to self-regulatory
organizations ("SROs"), principally the NASD, which has been designated by the
SEC as DLJdirect Inc.'s primary SRO. These self-regulatory organizations
adopt rules, subject to approval by the SEC, that govern the industry and
conduct periodic examinations of DLJdirect's operations. Securities firms are
also subject to regulation by state securities administrators in those states
in which they conduct business. DLJdirect Inc. is registered as a
broker-dealer in all 50 states, and the District of Columbia.
Broker-dealers are subject to regulations covering all aspects
of the securities business, including sales methods, trade practices among
broker-dealers, use and safekeeping of customers' funds and securities, capital
structure, record keeping and the conduct of directors, officers and
employees. DLJdirect is required, directly or indirectly, to comply with many
complex laws and rules, including rules relating to possession and control of
customer funds and securities, margin lending and execution and settlement of
transactions. Additional legislation, changes in rules promulgated by the
SEC, the NASD, the Board of Governors of the Federal Reserve System, the
various stock exchanges, and other self-regulatory organizations, or change in
the interpretation or enforcement of existing laws and rules, may directly
affect the mode of operation and profitability of broker-dealers. The SEC,
the NASD or other self-regulatory organizations and state securities
commissions may conduct administrative proceedings, which can result in
censure, fine, the issuance of cease-and-desist orders or the suspension or
expulsion of a broker-dealer or any of its officers or employees. DLJdirect's
ability to comply with all applicable laws and rules is dependent in large
part upon the maintenance of a compliance system reasonably designed to ensure
compliance. The principal purpose of regulation and discipline of
broker-dealers is the protection of customers and the securities markets,
rather than protection of creditors and shareholders of broker-dealers. In
addition, because the use of the Internet to provide online investing services
is relatively new, regulatory standards are evolving. As a result, DLJdirect
may, in the future, become subject to additional regulation in the United
States and in international jurisdictions.
DLJdirect and DLJ are members of Securities Investor Protection
Corporation ("SIPC"), which provides, in the event of the liquidation of a
member, protection for customers' assets held by the member of up to $500,000
for each customer account, subject to a limitation of $100,000 for claims for
cash balances. In addition, Pershing has purchased and provides to customers
of DLJdirect unlimited excess SIPC coverage for securities only so that the
entire value of securities in each customer account is protected. This excess
SIPC insurance is provided by Asset Guaranty Insurance Company of New York,
New York.
DLJdirect has initiated an aggressive marketing campaign
designed to bring brand name recognition to DLJdirect. Its marketing
activities are principally subject to regulation by the NASD. DLJdirect does
not currently solicit orders from its customers or make investment
recommendations, although it does make available DLJ and other third-party
research and information services. However, if it were to engage in these
activities, it would become subject to additional rules and regulations
governing, among other things, the suitability of recommendations to customers
and sales practices. Further, the NASD or state securities authorities may
seek to expand the situations in which suitability requirements are applicable
to electronic brokers, even in the absence of any recommendations.
It is DLJdirect's intent to expand its business in United
States securities to other countries through the Internet and other gateways.
In order to expand its services globally, it must comply with the regulatory
controls of each specific country in which it conducts business. The varying
compliance requirements of other national regulatory jurisdictions may impose
a limit to its rate of international expansion.
Net Capital Requirements
As a registered broker-dealer and member of the NASD, DLJdirect
Inc. is subject to the SEC's Net Capital Rule. The Net Capital Rule, which
specifies minimum net capital requirements for registered broker-dealers, is
designed to measure the general financial integrity and liquidity of a
broker-dealer and requires that at least a minimum part of its assets be kept
in relatively liquid form.
DLJdirect has elected to compute net capital under the
alternative method of calculation permitted by the Net Capital Rule. Under
the alternative method, DLJdirect is required to maintain minimum net capital,
as defined in the Net Capital Rule, equal to the greater of $250,000 or 2% of
the amount of its "aggregate debit items" computed in accordance with the
Formula for Determination of Reserve Requirements for Brokers and Dealers.
Failure to maintain the required net capital may subject a firm to suspension
or revocation of registration by the SEC and suspension or expulsion by the
NASD and other regulatory bodies and ultimately could require a firm's
liquidation. The Net Capital Rule prohibits payments of dividends, redemption
of stock, the prepayment of subordinated indebtedness, and the making of any
unsecured advance or loan to a shareholder, employee of affiliate, if
aggregate debit items rise beyond 5% of net capital. The Net Capital Rule
also provides that the SEC may restrict, for up to 20 business days, any
withdrawal of equity capital, or unsecured loans or advances to shareholders,
employees or affiliates ("capital withdrawal") if such capital withdrawal,
together with all other net capital withdrawals during a 30-day period,
exceeds 30% of excess net capital and the SEC concludes that the capital
withdrawal may be detrimental to the financial integrity of the broker-dealer.
Net capital is essentially defined as net worth (assets minus
liabilities), plus qualifying subordinated borrowings and certain
discretionary liabilities, less certain mandatory deductions that result from
excluding assets that are not readily convertible into cash and from valuing
conservatively certain other assets. Among these deductions are adjustments
(called "haircuts") which reflect the possibility of a decline in the market
value of an asset prior to its disposition.
A change in the Net Capital Rule, the imposition of new rules
or any unusually large charge against net capital could limit those operations
of DLJdirect that require the intensive use of capital, and could restrict its
ability to withdraw capital from its brokerage subsidiaries, which could limit
its ability to pay dividends, repay debt and redeem or purchase shares of its
outstanding stock.
As of December 31, 1998, DLJdirect was required to maintain
minimum net capital of $250,000 and had total net capital of approximately
$16.6 million.
Electronic Commerce
DLJdirect anticipates that it may be subject to additional
record keeping, data processing and other regulatory requirements as a result
of proposed federal legislation or otherwise, and it may be subject to
additional regulation as the market for online commerce evolves. Because of
the growth in the electronic commerce market, Congress has held hearings on
whether to regulate providers of services and transactions in the electronic
commerce market, and federal or state authorities could enact laws, rules or
regulations affecting DLJdirect's business or operations. DLJdirect also may
be subject to federal, state and foreign money transmitter laws and state,
local and foreign income, sales or other taxes. If enacted or deemed
applicable to DLJdirect, such laws, rules or regulations could be imposed on
its activities or its business.
Due to the increasing popularity of the Internet, it is
possible that laws and regulations may be enacted with respect to the
Internet, covering issues such as user privacy and the pricing, content and
quality of products and services. The Telecommunications Act of 1996, which
was enacted in January 1996, prohibits the transmission over the Internet of
certain types of information and content. Although several of these
prohibitions have been held unconstitutional, the increased attention focused
upon these liability issues as a result of the Telecommunications Act could
adversely affect the growth of Internet and private network use.
Employees
At December 31, 1998, DLJdirect had 374 employees. DLJdirect's
success has been, and will continue to be, dependent to a large degree on its
ability to retain the services of its existing executive officers and to
attract and retain qualified additional senior and middle managers and key
personnel in the future. There can be no assurance that DLJdirect will be
able to attract, assimilate or retain qualified technical and managerial
personnel in the future, and the failure of it to do so would have a material
adverse effect on its business, financial condition and operating results.
None of its employees is subject to collective bargaining agreements or is
represented by a union. DLJdirect considers its relations with its employees
to be good.
Properties
DLJdirect currently occupies space in three sites: corporate
offices and an investor service call center in Jersey City, New Jersey and
investor service call centers in Parsippany, New Jersey and in Charlotte, North
Carolina. The sites comprise approximately 75,000 square feet, in the
aggregate. Each site is leased by an affiliate and provided to DLJdirect
pursuant to an intercompany agreement. The underlying leases expire beginning
in 2002. DLJdirect is in the process of leasing additional space to increase
its overall capacity by more than 85% in order to accommodate its growth
plans. No assurance can be given that such a lease will be completed.
Legal and Administrative Proceedings
DLJdirect is not currently a party to any litigation that it
believes could have a material adverse effect on its business, financial
condition or operating results. However, from time to time DLJdirect has been
threatened with, or named as a defendant in, lawsuits. Compliance and trading
problems that are reported to the NASD or the SEC by dissatisfied customers
are investigated by the NASD or the SEC, and, if pursued, may rise to the
level of disciplinary action. One or more lawsuits, claims or disciplinary
actions decided adversely to DLJdirect could have a material adverse effect on
its business, financial condition and results of operations. DLJdirect is
also subject to periodic regulatory audits and inspections.
Along with several other online brokers, DLJdirect has received
a letter from the State of New York Office of the Attorney General dated
February 2, 1999, requesting that DLJdirect provide certain documents and make
DLJdirect employees available to discuss complaints regarding online brokerage
services. No complaint specific to DLJdirect has been identified. DLJdirect
is collecting and reviewing documents to respond to the request.
The SEC's Office of Compliance Investigations and Examinations
(OCIE) conducts routine investigations of registered broker-dealers.
DLJdirect has received correspondence from OCIE requesting that DLJdirect make
available certain documents and materials relating to the business of
DLJdirect, including DLJdirect's execution policies and practices regarding
the handling of customer orders. DLJdirect is assembling the requested
documents and will produce them in the normal course of business. DLJdirect
believes that this informational request is being conducted on an
industry-wide basis.
MANAGEMENT OF DLJdirect
The following table sets forth information regarding the senior officers of
DLJdirect.
Name Age Position
- ---- --- --------
K. Blake Darcy 42 Chief Executive Officer
Suresh Kumar 40 Chief Information Officer
Craig S. Sim 56 Director of Investment Banking
Rosemary T. McFadden 50 Director of International Business Development
Denise Benou Stires 36 Director of Marketing
Nicholas J. Tortorella 47 Director of Human Resources and Administration
Anthony P. Festa 50 Director of Compliance and Operations
Timothy J. Foley 28 Director of Product Development
Barry B. Mione 34 Director of Investor Services
Kenneth J. Olshansky 57 Director of Finance and Strategic Projects
K. Blake Darcy. K. Blake Darcy has been the Chief Executive
Officer of DLJdirect since its founding in 1988. In 1997, under Mr. Darcy's
direction, DLJdirect created a separate technology group at DLJdirect that
develops online solutions for financial organizations. Mr. Darcy was with DLJ
from 1984 to 1988, where he formed a new business unit at DLJ's Pershing
Division designed to provide turn-key discount brokerage services to banks and
insurance companies and served as Vice President, Marketing Manager of Direct
Brokerage Services. Mr. Darcy began his career in the financial services
industry as a retail broker with Lehman Brothers in 1982. Mr. Darcy graduated
with honors from Hamilton College, where he earned a B.A. in Government.
Suresh Kumar. Suresh Kumar has served as Chief Information
Officer of DLJdirect since 1989. He is responsible for product development,
program management, quality assurance, production support and infrastructure.
From 1986 to 1988, he worked as a programmer in DLJ's Pershing Division.
Prior to joining DLJ, Mr. Kumar was a consultant with Bakst International and
Cap Gemini America. Mr. Kumar earned a B.S. in Technology from the Indian
Institute of Technology at Madras, an M.B.A. from the Indian Institute of
Management at Ahmedabad and a Masters in Computer Science from the New York
Institute of Technology. Mr. Kumar is a member of the Securities Industry
Association.
Craig S. Sim. Craig S. Sim has served as Director of
Investment Banking since February 1999. He has served as a Managing Director
for Investment Banking at Donaldson Lufkin & Jenrette Securities Corporation
since 1986. From 1994 to 1998, Mr. Sim served as Chairman of the
International Banking Group of DLJ, which supervises and coordinates
investment banking in emerging markets of South America, Asia, and Eastern
Europe. From 1986 to 1994 Mr. Sim was head of the Capital Markets Services
Group. Mr. Sim joined DLJ in 1975 as Senior Vice President and syndicate
manager. Since then, Mr. Sim has served as a member of the Operating
Committee of the Banking Group and the DLJ Strategic Committee. He has served
on the New York District Executive Board, the Government Relations Committee
of the Securities Industry Association (SIA) and the SIA NAFTA committee. He
received a B.A. from Gettysburg College, Gettysburg, PA.
Rosemary T. McFadden. Rosemary T. McFadden has served as
Director of International Business Development for DLJdirect since joining
DLJdirect in January 1999. From 1997 to 1999, Ms. McFadden was Senior Vice
President and Associate General Counsel of the Pershing Division of DLJ, where
she was responsible for overseeing the organization and structure of several
international initiatives, as well as co-directing Pershing's strategic
planning committee for conversion of the Euro. From 1993 to 1997, Ms.
McFadden served as a Senior Manager in the International Practice Group at
Price Waterhouse, L.L.P., where she worked on a range of projects related to
the development of capital markets in Russia, the Ukraine, the Republic of
Moldova and Asia. From 1989 to 1993, Ms. McFadden acted in an of counsel
capacity to the firm Schuman, Hanlon & Doherty, specializing in international
corporate law. From 1984 to 1989, Ms. McFadden served as President and Chief
Operating Officer of the New York Mercantile Exchange. Ms. McFadden was
awarded an honorary Ph.D. from St. Elizabeth College. She holds a B.A. and
M.B.A. degree from Rutgers University and a J.D. degree from Seton Hall
University Law School.
Denise Benou Stires. Denise Benou Stires has served as
Director of Marketing for DLJdirect since joining it in September 1997.
During her tenure as Director of Marketing, DLJdirect's marketing campaign was
awarded the "1997 Best Multimedia Campaign" by the Financial Communications
Society. Prior to joining DLJdirect, Ms. Stires was Vice President of
Marketing at Swatch USA from 1995 to 1996. Ms. Stires held management and
supervisory positions at Mars, Incorporated from 1988 to 1995, including
Marketing Director of Pet Care, Effem Foods, Canada and Worldwide Sponsorship
Manager, Mars, Incorporated. She serves on the Board of Trustees of the Kent
Place School in Summit, New Jersey. Ms. Stires holds an M.B.A. from the Yale
School of Management and a B.A. in Political Science and International
Relations from Wellesley College, where she received departmental honors and
was a Wellesley Scholar.
Nicholas J. Tortorella. Nicholas J. Tortorella has served as
Director of Human Resources and Administration for DLJdirect since joining
DLJdirect in April 1995. Mr. Tortorella served as Director of Staffing and
Compensation for the Pershing division of Donaldson, Lufkin and Jenrette from
1989 to April 1995. From 1985 to 1989, he served in various human resources
management positions at Merrill Lynch. From 1977 to 1984, he served as a
Roman Catholic priest for the Roman Catholic Diocese of Rockville Centre. He
has served on the Boards of Trustees of Christ Hospital in Jersey City, New
Jersey, Saint Anthony High School in Jersey City, New Jersey, Goodwill
Industries of Hudson County and United Way of Hudson County. Mr. Tortorella
received a B.A. from St. John's University, New York and an M.Div. from
Immaculate Conception Seminary in New York.
Anthony P. Festa. Anthony P. Festa has been Director of
Compliance and Operations for DLJdirect since November 1993. From 1978 to
1993, Mr. Festa held various management positions at Shearson Lehman Brothers
and its predecessors, including Vice President, Compliance. Prior to that,
Mr. Festa was Senior Examiner in the New York office of the Chicago Board
Options Exchange. Mr. Festa began his securities industry career at E.F.
Hutton in 1970. Mr. Festa is a graduate of Central Connecticut State
University with a degree in History and currently serves as an adjunct
professor at the New York Institute of Finance.
Timothy J. Foley. Timothy J. Foley has served as Director of
Product Development for DLJdirect since September 1998. From June 1997 to
August 1998, he served as Manager of Finance. In the summer of 1995, Mr.
Foley interned for DLJ in the Investment Banking Group before entering the
Sloan School of Management at Massachusetts Institute of Technology, from
which he received his M.B.A degree. Mr. Foley worked at DLJdirect prior to
his DLJ internship in 1995 as an Assistant Vice President and from 1992 to
1994 as an Associate in Product Development. Mr. Foley earned his B.S.E.
degree in Mechanical and Aerospace Engineering from Princeton University.
Barry B. Mione. Barry B. Mione has been Director of Investor
Services since August 1997. Since December 1989, Mr. Mione has held numerous
management positions at DLJdirect and the Pershing Division of DLJ, including
Investor Services Manager of Pershing's Direct Brokerage Services, and Branch
Manager of DLJdirect's Parsippany office. Mr. Mione currently oversees the
Investor Services Representatives in DLJdirect's three investor service
centers. In January 1998, Mr. Mione was responsible for launching DLJdirect's
Select Client Services. He serves on the Chicago Board of Options Exchange
Discount Advisory Committee and Pershing's Best Execution Steering Committee.
He received a B.A. from the State University of New York at Stony Brook in
1986.
Kenneth J. Olshansky. Kenneth J. Olshansky joined DLJdirect as
Director of Finance and Strategic Projects in September 1998. From 1991 to
1997, Mr. Olshansky worked for The Commonwealth of Massachusetts, serving as
Deputy Treasurer of Debt Management from 1993 to 1997. From 1980 to 1991, Mr.
Olshansky was Executive Vice President and General Counsel of CFC Associates,
Inc., a municipal leasing and finance company, and from 1968 to 1980, he was
associated with the Boston, Massachusetts law firm of Csaplar & Bok, where he
was a Partner. He holds a B.S. and an M.S. in Electrical Engineering and
Science from Massachusetts Institute of Technology, where he received a Sloan
Fellowship and was elected to the Tau Beta Pi, Eta Kappa Nu, and Sigma Xi
Academic Honorary Societies. Mr. Olshansky also received a LL.B., cum laude
from Harvard Law School.
Board of Directors of DLJdirect
DLJdirect Holdings Inc. is the corporate entity that owns,
directly or indirectly, a substantial majority of the businesses, assets and
liabilities of DLJdirect. Prior to the consummation of this offering, DLJ
intends to reconstitute the board of directors of DLJdirect Holdings Inc. to
include representatives of both DLJ and DLJdirect. DLJ's current intent is to
submit all significant transactions, including significant "intercompany"
transactions between DLJ and DLJdirect, for approval by the board of directors
of DLJdirect Holdings Inc.
DLJdirect 1999 Incentive Compensation Plan
The board of directors has adopted the DLJdirect 1999 Incentive
Compensation Plan subject to shareholder approval. The board of directors
believes that attracting and retaining key employees is essential to
DLJdirect's continued growth and success. In addition, the board of directors
believes that the long term success of DLJdirect is enhanced by a competitive
and comprehensive compensation program, which may include tailored types of
incentives designed to motivate and reward such persons for outstanding
service, including awards that link compensation to applicable measures of
DLJdirect's performance and the creation of shareholder value. Such awards
will enable DLJdirect to attract and retain key employees and enable such
persons to acquire and/or increase their proprietary interest in DLJdirect and
thereby align their interests with the interests of DLJdirect's shareholders.
In addition, the board of directors has concluded that its Compensation
Committee should be given as much flexibility as possible to provide for
annual and long term incentive awards contingent on performance.
The following is a brief description of the material features
of the Compensation Plan. Such description is qualified in its entirety by
reference to the full text of the Compensation Plan, which has been filed as
an exhibit to the registration statement of which this prospectus is a part.
Types of Awards. The terms of the Compensation Plan provide
for grants of stock options, stock appreciation rights, restricted stock,
restricted stock units, other stock-related awards, and annual incentive or
performance awards that may be settled in cash, stock, or other property
(collectively referred to as "Awards").
Shares Subject to the Compensation Plan; Annual Per-Person
Limitations. Under the Compensation Plan, the total number of shares of
DLJdirect Common Stock reserved and available for delivery to participants in
connection with Awards is (i) million, plus (ii) % of the number of
shares of DLJdirect Common Stock issued or delivered by DLJdirect during the
term of the Compensation Plan (excluding any issuance or delivery in
connection with Awards, or any other compensation or benefit plan of
DLJdirect, or in connection with this offering); provided, however, that the
total number of shares of DLJdirect Common Stock with respect to which
incentive stock options may be granted shall not exceed million.
Shares of DLJdirect Common Stock subject to an Award that is canceled,
expired, forfeited, settled in cash, or otherwise terminated without a
delivery of shares to the participant, including DLJdirect Common Stock
withheld or surrendered in payment of any exercise or purchase price of an
Award or taxes relating to an Award, will again be available for Awards
under the Compensation Plan. Any shares of DLJdirect Common Stock
delivered under the Compensation Plan may consist of authorized and
unissued shares or treasury shares.
In addition, the Compensation Plan imposes individual
limitations on the amount of certain Awards. Under these limitations, during
any fiscal year the number of options, stock appreciation rights, shares of
restricted stock, restricted stock units, shares of DLJdirect Common Stock
issued as a bonus or in lieu of other obligations, and other stock-based
Awards granted to any one participant shall not exceed million
shares for each type of such Award, subject to adjustment in certain
circumstances. The maximum cash amount that may be earned as a final annual
incentive award or other annual cash Award in respect of any fiscal year by
any one participant is $ million, and the maximum cash amount that may be
earned as a final performance award or other cash Award in respect of a
performance period other than an annual period by any one participant on an
annualized basis is $ million.
The Compensation Committee is authorized to adjust the number
and kind of shares subject to the aggregate share limitations and annual
limitations under the Compensation Plan and subject to outstanding Awards
(including adjustments to exercise prices and number of shares of options and
other affected terms of Awards) in the event that a dividend or other
distribution (whether in cash, shares, or other property), recapitalization,
forward or reverse split, reorganization, merger, consolidation, spin-off,
combination, repurchase, or share exchange, or other similar corporate
transaction or event affects the DLJdirect Common Stock so that an adjustment
is appropriate. The Compensation Committee is also authorized to adjust
performance conditions and other terms of Awards in response to these kinds of
events or in response to changes in applicable laws, regulations, or
accounting principles.
Eligibility. Executive officers, directors, and other officers
and employees of Donaldson, Lufkin & Jenrette, Inc. or DLJdirect, as well as
other persons who provide services to Donaldson, Lufkin & Jenrette, Inc. or
DLJdirect, shall be eligible to be granted Awards under the Compensation Plan.
It is anticipated that most, if not all, employees of DLJdirect will be
granted Awards under the Compensation Plan.
Administration. The Compensation Plan will be administered by
the Compensation Committee except to the extent the board of directors elects
to administer the Compensation Plan. Subject to the terms and conditions of
the Compensation Plan, the board of directors or the Compensation Committee is
authorized to interpret the Compensation Plan, construe terms, adopt rules and
regulations, prescribe forms, make all determinations under the Compensation
Plan and, subject to such terms and conditions as they may establish, delegate
authority to officers and managers of DLJ. The Compensation Plan provides
that Compensation Committee members are not personally liable, and are fully
indemnified for all actions taken or made in good faith under the Compensation
Plan.
Stock Options and Stock Appreciation Rights. The Compensation
Committee is authorized to grant stock options, including both incentive stock
options that can result in potentially favorable tax treatment to the
participant and non-qualified stock options (i.e, options not qualifying as
incentive stock options) and stock appreciation rights entitling the
participant to receive the excess of the fair market value of a share of
DLJdirect Common Stock on the date of exercise over the grant price of the
stock appreciation right. The exercise price per share subject to an option
and the grant price of a stock appreciation right is determined by the
Compensation Committee, but must not be less than the fair market value of a
share of DLJdirect Common Stock on the date of grant (except to the extent of
in-the-money awards or cash obligations surrendered by the participant at the
time of grant). All other terms regarding each option or stock appreciation
right are fixed by the Compensation Committee, except that no option or stock
appreciation right may have a term exceeding ten years. Options may be
exercised by payment of the exercise price in cash, DLJdirect Common Stock,
outstanding Awards, or other property as determined by the Compensation
Committee.
Restricted Stock and Restricted Stock Units. The Compensation
Committee is authorized to grant restricted stock and restricted stock units.
Restricted stock is a grant of DLJdirect Common Stock which may not be sold
or disposed of, and which may be forfeited in the event of certain
terminations of employment and/or failure to satisfy stated performance
requirements. A participant granted restricted stock generally has all of the
rights of a shareholder of DLJdirect, including voting and dividend rights.
An Award of restricted stock units confers upon a participant the right to
receive shares at the end of a specified deferral period, subject to possible
forfeiture of the Award in the event of certain terminations of employment
and/or failure to satisfy stated performance requirements. Prior to
settlement, an Award of restricted stock units carries no dividend or other
ownership rights, except for dividend equivalents, if granted.
Dividend Equivalents. The Compensation Committee is authorized
to grant dividend equivalents conferring on participants the right to receive
cash, shares, other Awards, or other property equal in value to dividends paid
on a specific number of shares or other periodic payments. Dividend
equivalents may be granted on a free-standing basis or in connection with
another Award.
Bonus Stock and Awards in Lieu of Cash Obligations. The
Compensation Committee is authorized to grant shares as a bonus free of
restrictions, or to grant shares or other Awards in lieu of obligations to pay
cash under other plans or compensatory arrangements.
Other Stock-Based Awards. The Compensation Plan authorizes the
Compensation Committee, subject to limitations under applicable law, to grant
Awards that are denominated or payable in shares. The Compensation Committee
determines the terms and conditions of such Awards, including consideration to
be paid to exercise Awards in the nature of purchase rights, the period during
which Awards will be outstanding, and forfeiture conditions and restrictions
on Awards.
Performance and Annual Incentive Awards. A participant's right
to exercise or receive a grant or settlement of an Award may be subject to
performance conditions as specified by the Compensation Committee. In
addition, the Compensation Plan authorizes specific annual incentive awards,
which represent a conditional right to receive cash, shares or other Awards
upon achievement of preestablished performance goals during a specified
one-year period.
The performance goals to be achieved as a condition of payment
or settlement of a performance award or annual incentive award will consist of
(a) one or more business criteria and (b) a targeted level or levels of
performance with respect to each such business criteria. In the case of
performance awards or annual incentive awards intended to meet the
requirements of Internal Revenue Code Section 162(m), if applicable, the
business criteria used must be one of those specified in the Compensation
Plan, although for other participants the Compensation Committee may specify
any other criteria. The business criteria specified in the Compensation Plan
are: (1) earnings per share; (2) revenues; increase in revenues; the excess of
all or a portion of revenues over operating expenses (excluding expenses
determined by the Compensation Committee at the time performance goals are
established); (3) cash flow; (4) cash flow return on investment; (5) return on
net assets, return on assets, return on investment, return on capital, return
on equity; (6) economic value added; (7) operating margin; (8) net income;
pretax earnings; pretax earnings before interest, depreciation, amortization
and/or incentive compensation; pretax operating earnings; operating earnings
(with or without investment gains or losses); (9) total shareholder return;
(10) reduction in costs; (11) increase in the fair market value of the
DLJdirect Common Stock; and (12) any of the above goals as compared to the
performance of a published or special index deemed applicable by the
Compensation Committee including, but not limited to, the Standard & Poor's
500 Stock Index or a group of comparable companies.
Subject to the requirements of the Compensation Plan, the
Compensation Committee will determine other performance award and annual
incentive award terms, including the required levels of performance with
respect to the business criteria, the corresponding amounts payable upon
achievement of such levels of performance, termination and forfeiture
provisions, and the form of settlement.
Other Terms of Awards. Awards may be settled in the form of
cash, DLJdirect Common Stock, other Awards, or other property, in the
discretion of the Compensation Committee. The Compensation Committee may
require or permit participants to defer the settlement of all or part of an
Award. The Compensation Committee is authorized to place cash, shares, or
other property in trusts or make other arrangements to provide for payment of
obligations under the Compensation Plan. The Compensation Committee may
condition any payment relating to an Award on the withholding of taxes.
Awards granted under the Compensation Plan generally may not be pledged or
otherwise encumbered and are not transferable except by will or by the laws of
descent and distribution.
Awards under the Compensation Plan are generally granted
without a requirement that the participant pay consideration in the form of
cash or property for the grant (as distinguished from the exercise), except to
the extent required by law. The Compensation Committee may, however, grant
Awards in exchange for other Awards under the Compensation Plan or other
awards granted by Donaldson, Lufkin & Jenrette, Inc., and may grant Awards in
addition to and in tandem with such other Awards, awards, or rights as well.
Loan Provisions. With the Compensation Committee's consent,
and subject to applicable law, Donaldson, Lufkin & Jenrette, Inc. may make,
guarantee or arrange for a loan to a participant with respect to the exercise
of any option, purchase of shares or other payment in connection with any
Award, including the payment by a participant of any or all federal, state or
local income or other taxes due in connection with any Award.
Amendment and Termination of the Compensation Plan. The board
of directors may amend or discontinue the Compensation Plan or the
Compensation Committee's authority to grant Awards without further shareholder
approval, except for amendments required by applicable law or any stock
exchange or automated quotation system on which the shares are then listed or
quoted. Shareholder approval will not be deemed to be required under laws
or regulations, such as those relating to incentive stock options, that
condition favorable treatment of participants on such approval, although the
board of directors may, in its discretion, seek shareholder approval in any
circumstance in which it deems such approval advisable. Thus, shareholder
approval will not necessarily be required for amendments that might increase
the cost of the Compensation Plan or broaden eligibility. Unless earlier
terminated by the board of directors, the Compensation Plan will terminate at
such time as no shares remain available for issuance under the Compensation
Plan and Donaldson, Lufkin & Jenrette, Inc. or DLJdirect has no further rights
or obligations with respect to outstanding Awards under the Compensation Plan.
Initial Awards. At or prior to the offering, it is anticipated
that the Compensation Committee will make the following grants of
non-qualified stock options to each of the following executive officers under
the Compensation Plan: . It is expected that such
options will have an exercise price equal to the initial public offering price
of the DLJdirect Common Stock. It is also expected that these options will
generally become exercisable in four equal installments based on continued
service with Donaldson, Lufkin & Jenrette, Inc. or DLJdirect during the
four-year period following the grant date.
Federal Income Tax Implications of the Compensation Plan. The
following is a brief description of the federal income tax consequences
generally arising with respect to Awards under the Compensation Plan.
The grant of an option or stock appreciation right will create
no tax consequences for the participant or Donaldson, Lufkin & Jenrette, Inc.
or DLJdirect. A participant will not recognize taxable income upon exercising
an incentive stock option (except that the alternative minimum tax may apply).
Upon exercising an option other than an incentive stock option, the
participant must generally recognize ordinary income equal to the difference
between the exercise price and fair market value of the freely transferable
and nonforfeitable shares acquired on the date of exercise. Upon exercising a
stock appreciation right, the participant must generally recognize ordinary
income equal to the cash or the fair market value of the freely transferable
and nonforfeitable shares received.
Upon a disposition of shares acquired upon exercise of an
incentive stock option before the end of the applicable incentive stock
options holding periods, the participant must generally recognize ordinary
income equal to the lesser of (i) the fair market value of the shares at the
date of exercise of the incentive stock options minus the exercise price, or
(ii) the amount realized upon the disposition of the incentive stock options
shares minus the exercise price. Otherwise, a participant's disposition of
shares acquired upon the exercise of an option (including an incentive stock
option for which the incentive stock options holding periods are met) or stock
appreciation right generally will result in short-term or long-term capital
gain or loss measured by the difference between the sale price and the
participant's tax basis in such shares (the tax basis generally being the
exercise price plus any amount previously recognized as ordinary income in
connection with the exercise of the option or stock appreciation right).
DLJdirect generally will be entitled to a tax deduction equal
to the amount recognized as ordinary income by the participant in connection
with an option or stock appreciation right. Pursuant to the Tax Sharing
Agreement, the tax benefit may be paid to DLJ if the stock associated with
such deduction is attributed to DLJ. DLJ may also, pursuant to the Tax
Sharing Agreement, be required to pay DLJdirect for tax benefits arising out
of the issuance of DLJdirect Common Stock to a DLJ employee in connection with
an option or stock appreciation right. DLJdirect generally is not entitled to
a tax deduction relating to amounts that represent a capital gain to a
participant. Accordingly, if the participant holds the shares of an incentive
stock option grant for the required holding period, DLJdirect will not receive
any tax deduction for that grant.
With respect to Awards granted under the Compensation Plan that
result in the payment or issuance of cash or shares or other property that is
either not restricted as to transferability or not subject to a substantial
risk of forfeiture, the participant must generally recognize ordinary income
equal to the cash or the fair market value of shares or other property
received. Thus, deferral of the time of payment or issuance will generally
result in the deferral of the time the participant will be liable for income
taxes with respect to such payment or issuance. DLJdirect generally will be
entitled to a deduction in an amount equal to the ordinary income recognized
by the participant. Pursuant to the Tax Sharing Agreement, the tax benefit
may be paid to DLJ if the stock associated with such deduction is attributed
to DLJ. DLJ may also, pursuant to the Tax Sharing Agreement, be required to
pay DLJdirect for tax benefits arising out of the issuance of DLJdirect Common
Stock to a DLJ employee in connection with an option or stock appreciation
right.
With respect to Awards involving the issuance of shares or
other property that is restricted as to transferability and subject to a
substantial risk of forfeiture, the participant must generally recognize
ordinary income equal to the fair market value of the shares or other property
received at the first time the shares or other property becomes transferable
or is not subject to a substantial risk of forfeiture, whichever occurs
earlier. A participant may elect to be taxed at the time of receipt of shares
or other property rather than upon lapse of restrictions on transferability
or substantial risk of forfeiture, but if the participant subsequently
forfeits such shares or property, the participant would not be entitled to any
tax deduction, including as a capital loss, for the value of the shares or
property on which he previously paid tax. The participant must file such
election with the Internal Revenue Service within 30 days of the receipt of
the shares or other property. DLJdirect generally will be entitled to a
deduction in an amount equal to the ordinary income recognized by the
participant. Pursuant to the Tax Sharing Agreement, the tax benefit may be
paid to DLJ if the stock associated with such deduction is attributed to DLJ.
DLJ may also, pursuant to the Tax Sharing Agreement, be required to pay
DLJdirect for tax benefits arising out of the issuance of DLJdirect Common
Stock to a DLJ employee in connection with an option or stock appreciation
right.
Awards that are granted, accelerated or enhanced upon the
occurrence of a change in control may give rise, in whole or in part, to
"excess parachute payments" within the meaning of Internal Revenue Code
Section 280G and, to such extent, will be non-deductible by DLJdirect and
subject to a 20% excise tax by the participant.
Director Stock Option Plan
The board of directors intends to adopt a stock option plan for
directors, subject to stockholder approval, that would provide for grants of
stock options and other awards based on shares of DLJdirect Common Stock.
CERTAIN RELATIONSHIPS
DLJdirect, DLJ and their respective affiliates engage in a
variety of transactions in the ordinary course of their respective businesses.
As a general rule, DLJdirect has not retained an independent third party to
evaluate transactions with DLJ and there has been no independent committee of
the board of directors to evaluate these transactions. Notwithstanding this
fact, DLJdirect believes that the terms and conditions of these transactions,
including the fees or other amounts paid by DLJdirect in connection with these
transactions, were established through negotiations which adequately took into
account (1) the terms and conditions of transactions of the same or a similar
nature entered into by DLJdirect with unaffiliated third parties, (2) the
terms and conditions of transactions of the same or a similar nature entered
into by DLJ with unaffiliated third parties, and/or (3) the terms and
conditions of market transactions of the same or a similar nature entered into
by unaffiliated third parties. Notwithstanding the foregoing, there can be no
assurance that DLJdirect could not have obtained more favorable terms from an
unaffiliated third party. See "Risk Factors--DLJdirect Faces Potential
Conflicts of Interest".
Clearing and License Arrangements
Pursuant to an agreement dated September 24, 1997, as amended
on March 11, 1999, between the Pershing Division of DLJ and DLJdirect,
Pershing acts as the clearing agent for DLJdirect and in such capacity performs
traditional operational functions, including execution and clearance of trades
and holding customer funds and securities. Pershing carries the cash and
margin accounts of DLJdirect customers and clears transactions on a fully
disclosed basis for such accounts. Without the prior written approval of
Pershing, DLJdirect may not enter into similar services contracts with any
other clearing agencies. Pershing deducts the fees for its clearing services
from the commissions, mark-ups and other charges DLJdirect establishes for
each transaction. The clearance fees, order flow payments, interest sharing
and charges for other services provided for in the agreement were negotiated
between DLJdirect and Pershing with reference to those for comparable
arrangements available in the securities industry generally. These fees
include volume discounts and sliding scale payments taking into account the
size of DLJdirect's business and the levels of services provided by Pershing.
The agreement also provides for good faith renegotiation of any provision upon
the request of either party. If the parties are unable to agree upon
negotiation, the parties will be subject to the final decision of the
operating committee of the board of directors. The amounts paid to DLJ by
DLJdirect pursuant to this agreement were $15.4 million, $20.9 million, and
$28.4 million in 1996, 1997 and 1998, respectively. The agreement expires on
March 10, 2009. Under the agreement, as amended, the amounts to be paid by
DLJdirect to Pershing will include the license fee for the use of certain
trademarks that are licensed to DLJdirect in the United States and certain
other jurisdictions. The clearing agreement may be terminated by either party
upon a default of the other party or the disability of either party.
In March 1999, DLJdirect entered into an exclusive license
agreement with DLJ Long Term Investment Corporation. Under this agreement,
DLJ Long Term Investment Corporation has licensed certain trademarks, services
marks, trade names and other proprietary rights to various words, slogans,
symbols and logos to DLJdirect for use in its provision of financial services
and sale or other distribution of related financial goods. The nature and
quality of all financial goods and services offered by DLJdirect under the
licensed marks are subject to the control of DLJ Long Term Investment
Corporation, and the use of the marks must be consistent with specific
guidelines. Fees payable under the current license agreement for the use of
the marks in the United States and certain other jurisdictions are to be paid
in accordance with the terms of the clearing agreement with DLJ. The license
fee included in the clearing fee does not include the use of the marks in
certain other foreign jurisdictions, the use of which will be negotiated on a
case by case basis. The agreement expires on March 10, 2009. The agreement
is terminable by DLJ Long Term Investment Corporation for certain events,
including, among other things, a default by DLJdirect, the bankruptcy of
DLJdirect or the sale or dissolution of DLJdirect.
Tax Sharing Agreements
DLJdirect is, and after the offerings will continue to be,
included in the same consolidated tax group as DLJ for Federal income tax
purposes until such time as it ceases to be eligible for inclusion in this
consolidated tax group. In connection with the offering, DLJ and DLJdirect
intend to enter into a tax sharing agreement, effective as of January 1, 1999
and applicable to any Federal, foreign, state, local and other taxes.
Pursuant to the provisions of such agreement, DLJdirect and DLJ will generally
make payments between them such that, with respect to any period in which
DLJdirect is a member of the same consolidated tax group as DLJ for Federal
income tax purposes, the amount of Federal income taxes to be paid by
DLJdirect will be determined, with certain exceptions, as though DLJdirect
were to file for such period and all prior periods separate Federal income tax
returns (generally including any amounts determined to be due as a result of a
redetermination of the Federal income tax liability of the DLJ consolidated
group arising from an audit or otherwise) as the common parent of an
affiliated group of corporations filing a consolidated return rather than a
consolidated subsidiary of DLJ. DLJ and DLJdirect have each agreed to remit
interest to the other on any payments that are not timely made. DLJdirect is
also entitled to receive payments from DLJ in respect of utilization of its
tax assets, if any. The amount of any such payment will generally be
determined by the actual tax benefit received by the DLJ consolidated group.
Conversely, if inclusion of DLJdirect in the consolidated group should
increase the tax of other members, DLJdirect will reimburse DLJ for such cost.
Any tax benefit related to (1) the exercise of options in DLJ Common Stock, or
DLJdirect Common Stock that is attributed to DLJ pursuant to the board of
directors' cash management policy, (2) the vesting of restricted DLJ Common
Stock, or restricted DLJdirect Common Stock that is attributed to DLJ pursuant
to the board of directors' cash management policy, (3) satisfaction of stock
appreciation rights that result in a charge to DLJ's earnings, or (4) other
compensation funded by DLJ will be allocated to DLJ. If DLJdirect Common
Stock vests in or, pursuant to the exercise of an option, is issued to an
employee of DLJ, its subsidiaries or affiliates exclusive of DLJdirect, and is
attributed to DLJdirect pursuant to the board of directors' cash management
policy, or if a compensation deduction results from any other DLJdirect
stock-based compensation plan that is related to an employee of DLJ, its
subsidiaries or affiliates exclusive of DLJdirect, and is attributed to
DLJdirect pursuant to the cash management policy, the resulting tax benefit
will be allocated to DLJdirect.
While DLJdirect remains part of the same consolidated group as
DLJ, Donaldson, Lufkin & Jenrette, Inc. will continue to have all the rights
of a common parent of a consolidated group, will be the sole and exclusive
agent for DLJdirect in any and all matters related to the Federal income tax
liability of DLJdirect, and will be responsible for the preparation and filing
of consolidated Federal income tax returns. In addition, each member of a
consolidated group for Federal income tax purposes is jointly and severally
liable for the Federal income tax liability of each other member of its
consolidated group. Accordingly, under the tax sharing agreement, DLJ has
agreed to indemnify DLJdirect against such liabilities to the extent that they
relate to the Federal income tax liability of the DLJ consolidated group for
periods that DLJdirect is included in the same consolidated group as DLJ,
except to the extent attributable to DLJdirect.
Other Transactions with DLJ
DLJ provides services to DLJdirect pursuant to an Intercompany
Services Agreement dated February 23, 1999. The agreement covers public
relations, telecommunications, tax, internal audit, insurance, employee
benefits, human resources, legal, compliance, credit, general administrative,
accounting, treasury, library and record management services, facilities,
security and custodial services. These services may be provided by an
employee of DLJ or any of its affiliates or by any third party chosen at the
sole discretion of DLJ and the costs of these services and space are allocated
to DLJdirect. The agreement may be terminated upon a change in control or
upon 90-day notice by either party. Amounts paid by DLJdirect under this
agreement were $1.2 million, $1.9 million, and $2.7 million, in 1996, 1997 and
1998, respectively.
DLJdirect provides technology services to DLJ in exchange for
fee payments. Fees related to these services were $4.8 million and $12.8
million in 1997 and 1998, respectively. Pursuant to a Services Agreement dated
August 1, 1997 between a subsidiary of DLJdirect Holdings Inc. and an
affiliate of Equitable, the subsidiary provides services to Equitable in
return for monthly fees. These services include development services such as
technological solutions to enhance account security, maintenance services
(including hotline support, scheduled maintenance and informal training) and
hosting services such as the interconnection, monitoring and provision of
servers to support Equitable's Internet applications. Fees paid by Equitable
amounted to $600,000 in 1998.
DLJ provides DLJdirect with access to select DLJ research
products pursuant to an agreement dated September 11, 1997. The research
includes, among other things, product marketing notes, DLJ buylines, various
"facts and focus" segments, weekly reports by portfolio managers and
company/industry reports. Under the terms of the agreement, DLJdirect can
provide those customers having more than $100,000 in total assets in DLJdirect
accounts and authorized non-trial customers with access to this research. DLJ
agrees not to make this research or similar research available to DLJdirect's
competitors at more favorable rates than those charged to DLJdirect. DLJdirect
agrees to pay DLJ fees, which are based on the number of qualified customers.
Amounts paid under this agreement were $307,000 in 1997 and $1.4 million in
1998. The agreement is for a period of one year and is automatically renewed
for successive one year terms unless either party provides 90-day prior notice
of termination.
DLJdirect distributes certain Alliance Capital Management, L.P.
sponsored funds and cash management products and receives marketing and
distribution fees. Amounts paid by Alliance to DLJdirect in connection with
these distribution services during 1996, 1997 and 1998 totaled $1.0 million,
$1.6 million and $3.0 million, respectively.
DLJdirect currently occupies office facilities owned by a joint
venture in which Equitable participates. Amounts paid under this agreement in
1997 and 1998 were $239,000 and $410,000, respectively. Donaldson Leasing
Corp. provides off balance sheet financing for a substantial portion of fixed
assets used by DLJdirect pursuant to a five-year Master Lease Agreement dated
September 3, 1996. Amounts paid under this agreement were $632,000, $1.1
million, and $2.5 million, in 1996, 1997, and 1998, respectively. A small
percentage of the equipment used by DLJdirect is leased by an affiliate from a
third-party leasing company and provided to DLJdirect under an intercompany
services agreement. DLJdirect leases 100% of its fixed assets located in North
Carolina pursuant to a lease with a third-party leasing company guaranteed by
Donaldson, Lufkin & Jenrette, Inc.
Certain directors, officers and employees of DLJdirect, DLJ,
Equitable, AXA and their subsidiaries maintain margin accounts with DLJdirect
Inc. Margin account transactions for such directors, officers and employees
are conducted by DLJdirect Inc. in the ordinary course of business and are
substantially on the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with unaffiliated
persons and do not involve more than the normal risk of collectibility or
present other unfavorable features.
DESCRIPTION OF CAPITAL STOCK
The following description is not complete and should be read
with the amended and restated certificate of incorporation, which we have
filed as an exhibit to the registration statement of which this prospectus is
a part.
This description refers in many places to "DLJ's Retained
Interest in DLJdirect." This represents the ownership of DLJ in that portion
of DLJdirect that is not represented by DLJdirect Common Stock. The size of
this retained interest relative to the interest represented by DLJdirect
Common Stock may change in the future if actions are taken, such as issuances
of additional shares of DLJdirect Common Stock, repurchases of DLJdirect
Common Stock, or transfers of cash or other property between DLJ and
DLJdirect, that change either the total amount of the assets of DLJdirect or
the number of shares of DLJdirect Common Stock that is outstanding. These
actions, and the effect that they would have on holders of DLJdirect Common
Stock are described further in this section. See Annex 1 for further
discussion of certain terms defined in this section.
General
Our current certificate of incorporation authorizes us to issue
300,000,000 shares of common stock, par value $0.10 per share, and 50,000,000
shares of preferred stock, par value $0.01 per share. Only the preferred
stock is currently issuable in series by the board of directors. As of March
1, 1999, we had 124,320,184 shares of common stock and 7,500,000 shares of
preferred stock issued and outstanding.
Before the offering, we will file an amended and restated
certificate of incorporation which will further amend and restate our current
certificate of incorporation. This amended and restated certificate of
incorporation (the "restated charter") will
o authorize the board of directors to issue common stock in two
series -- Donaldson, Lufkin & Jenrette, Inc.--DLJ Common Stock
("DLJ Common Stock") and Donaldson, Lufkin, Jenrette,
Inc.--DLJdirect Common Stock ("DLJdirect Common Stock"). The
board of directors will be authorized to issue 150,000,000
shares of DLJdirect Common Stock;
o we intend DLJdirect Common Stock to reflect the
performance of the online discount brokerage and related
services business of DLJdirect, including certain
activities currently conducted by DLJdirect Holdings Inc.
and one or more affiliates of Donaldson, Lufkin &
Jenrette, Inc. (the "DLJdirect Group" or "DLJdirect");
o we intend DLJ Common Stock to reflect the performance of
the rest of the businesses conducted by DLJ and its
affiliates (the "DLJ Group" or "DLJ"), including DLJ's
Retained Interest (as defined below) in DLJdirect;
o we have allocated all of Donaldson, Lufkin & Jenrette,
Inc.'s consolidated assets, liabilities, revenue,
expenses and cash flow between the DLJ Group and
DLJdirect Group;
o re-classify each outstanding share of common stock into a share
of DLJ Common Stock.
The full definitions of the terms "DLJ" and "DLJdirect" are set
forth under "--Mandatory Dividend, Redemption or Exchange on Disposition of
All or Substantially All of the Assets of a Group" below.
Before the time of the offering, the board of directors will
designate the initial Number of Shares Issuable with Respect to DLJ's Retained
Interest in DLJdirect. See "--DLJ's Retained Interest in DLJdirect" and
"--Number of Shares Issuable with Respect to DLJ's Retained Interest in
DLJdirect" and our restated charter for additional information about DLJ's
Retained Interest in DLJdirect and the Number of Shares Issuable with Respect
to DLJ's Retained Interest in DLJdirect.
The board of directors will have the authority in its sole
discretion to issue authorized but unissued shares of common stock from time
to time for any proper corporate purpose. The board of directors will have
the authority to do so without stockholders approval, except as may be
provided by Delaware law or the rules and regulations of any securities
exchange on which any series of outstanding common stock may then be listed.
Dividends
The board of directors will retain the discretion whether or
not to pay dividends on either DLJ Common Stock or DLJdirect Common Stock. We
do not expect to pay dividends on DLJdirect Common Stock in the future;
however,
o we will otherwise be permitted to pay dividends on DLJ Common
Stock out of assets of Donaldson, Lufkin & Jenrette, Inc.
legally available for the payment of dividends under Delaware
law, but the total amounts paid as dividends on DLJ Common
Stock cannot exceed the Available Dividend Amount for DLJ and
o we will otherwise be permitted to pay dividends on DLJdirect
Common Stock out of the assets of Donaldson, Lufkin & Jenrette,
Inc. legally available for the payment of dividends under
Delaware law, and transfer corresponding amounts to DLJ in
respect of its Retained Interest in DLJdirect. However, the
total amounts paid as dividends on DLJdirect Common Stock and
the corresponding amounts transferred to DLJ in respect of its
Retained Interest in DLJdirect cannot exceed the Available
Dividend Amount for DLJdirect.
The "Available Dividend Amount" for DLJ at any time is the
amount that would then be legally available for the payment of dividends on
DLJ's common stock under Delaware law if
o DLJ and DLJdirect were each a single, separate Delaware
corporation,
o DLJ had outstanding (a) a number of shares of common stock, par
value $0.10 per share, equal to the number of shares of DLJ
Common Stock that are then outstanding and (b) a number of
shares of preferred stock, par value $0.01 per share, equal to
the number of shares of preferred stock of Donaldson, Lufkin &
Jenrette, Inc. that have been attributed to DLJ that are then
outstanding,
o the assumptions about DLJdirect set forth in the next sentence
were true, and
o DLJ owned a number of shares of DLJdirect Common Stock equal to
the Number of Shares Issuable with Respect to DLJ's Retained
Interest in DLJdirect.
Similarly, the "Available Dividend Amount" for DLJdirect at any time is the
amount that would then be legally available for the payment of dividends on
DLJdirect's Common Stock under Delaware law if DLJdirect were a single,
separate Delaware corporation having outstanding:
o a number of shares of common stock, par value $0.10 per share,
equal to the number of shares of DLJdirect Common Stock that
are then outstanding plus the Number of Shares Issuable with
Respect to DLJ's Retained Interest in DLJdirect and
o a number of shares of preferred stock, par value $0.01 per
share, equal to the number of shares of preferred stock of
Donaldson, Lufkin & Jenrette, Inc. that have been attributed to
DLJdirect, if any, that are then outstanding.
The amount legally available for the payment of dividends on
common stock of a corporation under Delaware law is generally limited to:
o the total assets of the corporation less its total liabilities
less
o the aggregate par value of the issued shares of its common and
preferred stock, plus any amounts which the board of directors
has designated as capital in respect of such shares.
However, if that amount is not greater than zero, the
corporation may also pay dividends out of the net profits for the corporation
for the fiscal year in which the dividend is declared and/or the preceding
fiscal year. As mentioned above, these restrictions will form the basis for
calculating the Available Dividend Amounts for DLJ and DLJdirect. Thus, net
losses of either Group, and any dividends and distributions on, or repurchases
of, either series of common stock, may reduce the assets legally available for
dividends on both series of common stock. These restrictions will also form
the basis for calculating the aggregate amount of dividends that Donaldson,
Lufkin & Jenrette, Inc. as a whole can pay on its common stock, regardless of
series. Thus, for example, net losses of the DLJ Group, and any dividends and
distributions on, or repurchases of, DLJ Common Stock, will reduce the assets
legally available for dividends on the DLJdirect Common Stock.
Subject to the foregoing limitations, applicable regulatory
requirements and to any other limitations set forth in any future series of
preferred stock or in any agreements binding on Donaldson, Lufkin & Jenrette,
Inc. from time to time, we have the right to pay dividends on both, one or
neither series of common stock in equal or unequal amounts, notwithstanding
the performance of either Group, the amount of assets available for dividends
on either series, the amount of prior dividends paid on either series, the
respective voting rights of each series or any other factor.
At the time of any dividend on the outstanding shares of
DLJdirect Common Stock, including any dividend required as a result of a
disposition of All or Substantially All of the Assets (as defined herein) of
DLJdirect but excluding any dividend payable in shares of DLJdirect Common
Stock, we will credit to DLJ, and charge against DLJdirect, a corresponding
amount in respect of DLJ's Retained Interest in DLJdirect. Specifically, the
corresponding amount will equal (1) the aggregate amount of such dividend
times (2) a fraction, the numerator of which is the Number of Shares Issuable
with Respect to DLJ's Retained Interest in DLJdirect and the denominator of
which is the number of shares of DLJdirect Common Stock then outstanding.
This amount can also be expressed as follows:
(Aggregate Amount of Dividend) X (Number of Shares Issuable with
Respect to DLJ's Retained Interest)
-------------------------------------------------------------------------
(Number of Shares of DLJdirect Common Stock Outstanding)
Mandatory Dividend, Redemption or Exchange on Disposition of All or
Substantially All of the Assets of a Group.
If we dispose of All or Substantially All of the Assets of a
Group to one or more persons or entities, in one transaction or a series of
related transactions (collectively, a "Disposition"), and the Disposition is
not an Exempt Disposition as defined below, we would be required, by the 85th
Trading Day after the consummation of such Disposition, to either:
o declare and pay a dividend to holders of the series of common
stock that relates to that Group in cash, securities (other
than common stock of Donaldson, Lufkin & Jenrette, Inc.) or
other property, or a combination thereof, in an amount having a
Fair Value equal to their Proportionate Interest in the Net
Proceeds of such Disposition,
o redeem from holders of the series of common stock that relates
to that Group, for cash, securities (other than common stock of
Donaldson, Lufkin & Jenrette, Inc.) or other property, or a
combination thereof, in an amount having a Fair Value equal to
their Proportionate Interest in the Net Proceeds of such
Disposition, all of the outstanding shares of the relevant
series of common stock (or, if such Group continues after such
Disposition to own any material assets other than the proceeds
of such Disposition, a number of shares of such series of
common stock having an aggregate average Market Value, during
the 20 consecutive Trading Day period beginning on the 16th
Trading Day immediately following the date on which the
Disposition is consummated, equal to such Fair Value) or
o issue shares of the series of common stock that does not relate
to that Group in exchange for all of the outstanding shares of
the series of common stock that relates to that Group at a 10%
premium, based on the average Market Value of the relevant
series of common stock as compared to the average Market Value
of the other series of common stock during the 20 consecutive
Trading Day period beginning on the 16th Trading Day
immediately following the date on which the Disposition is
consummated.
In connection with any special dividend on, or redemption of,
DLJdirect Common Stock as described above, we will credit to DLJ, and charge
against DLJdirect, a corresponding amount in respect of DLJ's Retained Interest
in DLJdirect. Specifically, the corresponding amount will equal
o the aggregate Fair Value of such dividend or redemption times
o a fraction, the numerator of which is the Number of Shares
Issuable with respect to DLJ's Retained Interest in DLJdirect
and the denominator of which is the number of shares of
DLJdirect Common Stock then outstanding.
This amount can also be represented by the following:
(Aggregate Fair Value) X (Number of Shares Issuable with
Respect to DLJ's Retained Interest)
-------------------------------------------------------------------------
(Number of Shares of DLJdirect Common Stock Outstanding)
In addition, in connection with any redemption of DLJdirect
Common Stock as described above, we will decrease the Number of Shares
Issuable with Respect to DLJ's Retained Interest in DLJdirect by the same
proportion as the proportionate decrease in outstanding shares of DLJdirect
caused by such redemption.
At any time within one year after completing any dividend or
partial redemption of the sort referred to above, we will have the right to
issue shares of the series of common stock that does not relate to the Group
in question in exchange for outstanding shares of the series of common stock
that relates to that Group at a 10% premium. The exchange ratio that will
result in a 10% premium will be calculated based on the average Market Value
of the relevant series of common stock as compared to the average Market Value
of the other series of common stock during the 20 consecutive Trading Day
period ending on the 5th Trading Day immediately preceding the date on which
Donaldson, Lufkin & Jenrette, Inc. mails the notice of exchange to holders of
the relevant series. In determining whether to effect any such exchange
following such a dividend or partial redemption, we would, in addition to
other matters, consider:
o whether the remaining assets of such Group continue to
constitute a viable business,
o the number of shares of such common stock remaining issued and
outstanding,
o the per share market price of such common stock and
o the ongoing cost of continuing to have a separate series of
such common stock outstanding.
The following terms used in this prospectus have the meanings
specified in our amended and restated charter and are set forth below:
"All or Substantially All of the Assets" of either Group means
a portion of such assets that represents at least 80% of the then-current Fair
Value of the assets of such Group.
"DLJ" means:
o all of the businesses, assets and liabilities of Donaldson,
Lufkin & Jenrette, Inc. and its subsidiaries other than the
businesses, assets and liabilities that are part of DLJdirect,
o the rights and obligations of DLJ under any inter-Group debt
deemed to be owed to or by DLJ, as such rights and obligations
are defined in accordance with policies established from time
to time by the board of directors, and
o a proportionate interest in DLJdirect, after giving effect to
any options, preferred stock, other securities or debt issued
or incurred by Donaldson, Lufkin & Jenrette, Inc. and
attributed to DLJdirect, equal to the Retained Interest
Percentage; provided that:
o Donaldson, Lufkin & Jenrette, Inc. may re-allocate assets
from one Group to the other Group in return for other
assets or services rendered by that other Group in the
ordinary course of business or in accordance with
policies established by the board of directors from time
to time and
o if Donaldson, Lufkin & Jenrette, Inc. transfers cash,
other assets or securities to holders of shares of
DLJdirect Common Stock as a dividend or other
distribution on shares of DLJdirect Common Stock, other
than a dividend or distribution payable in shares of
DLJdirect Common Stock, or as payment in a redemption of
shares of DLJdirect Common Stock effected as a result of
a DLJdirect Disposition, then the board of directors
shall re-allocate from DLJdirect to DLJ cash or other
assets having a Fair Value equal to the aggregate Fair
Value of the cash, other assets or securities so
transferred times a fraction, the numerator of which
shall equal the Number of Shares Issuable with Respect to
DLJ's Retained Interest in DLJdirect on the record date
for such dividend or distribution, or on the date of such
redemption, and the denominator of which shall equal the
number of shares of DLJdirect Common Stock outstanding on
such date.
This last amount can also be expressed as follows:
(Fair Value of Cash, Assets or X (Number of Shares Issuable with
Securities Transferred) Respect to DLJ's Retained Interest in
DLJdirect)
- -----------------------------------------------------------------------------
(Number of Shares of DLJdirect Common Outstanding)
"DLJdirect" means:
o all of the businesses, assets and liabilities of DLJdirect
Holdings Inc. and its subsidiaries,
o the business, assets and liabilities of DLJdirect U.K.
o any assets or liabilities acquired or incurred by DLJdirect
Holdings Inc. or any of its subsidiaries after the filing of
our amended and restated certificate of incorporation (the
"Effective Date"), in the ordinary course of business,
o any businesses, assets or liabilities acquired or incurred by
Donaldson, Lufkin & Jenrette, Inc. or any of its subsidiaries
after the Effective Date that the board of directors has
specifically allocated to DLJdirect or that Donaldson, Lufkin &
Jenrette, Inc. otherwise allocates to DLJdirect in accordance
with policies established from time to time by the board of
directors, and
o the rights and obligations of DLJdirect under any inter-Group
debt deemed to be owed to or by DLJdirect, as such rights and
obligations are defined in accordance with policies established
from time to time by the board of directors; provided that:
o Donaldson, Lufkin & Jenrette, Inc. may re-allocate assets
from one Group to the other Group in return for other
assets or services rendered by that other Group in the
ordinary course of business or in accordance with
policies established by the board of directors from time
to time and
o if Donaldson, Lufkin & Jenrette, Inc. transfers cash,
other assets or securities to holders of shares of
DLJdirect Common Stock as a dividend or other
distribution on shares of DLJdirect Common Stock, other
than a dividend or distribution payable in shares of
DLJdirect Common Stock, or as payment in a redemption of
shares of DLJdirect Common Stock effected as a result of
a DLJdirect Disposition, then the board of directors
shall re-allocate from DLJdirect to DLJ cash or other
assets having a Fair Value equal to the aggregate Fair
Value of the cash, other assets or securities so
transferred times a fraction, the numerator of which
shall equal the Number of Shares Issuable with Respect to
DLJ's Retained Interest in DLJdirect on the record date
for such dividend or distribution, or on the date of such
redemption, and the denominator of which shall equal the
number of shares of DLJdirect Common Stock outstanding on
such date.
This last amount can also be expressed as follows:
(Fair Value of Cash, Assets or X (Number of Shares Issuable with Respect
Securities Transferred) to DLJ's Retained Interest in DLJdirect)
------------------------------------------------------------------------------
(Number of Shares of DLJdirect Common Stock Outstanding)
"Exempt Disposition" means any of the following:
o a Disposition in connection with the liquidation, dissolution
or winding-up of Donaldson, Lufkin & Jenrette, Inc. and the
distribution of assets to stockholders,
o a Disposition to any person or entity controlled by Donaldson,
Lufkin & Jenrette, Inc., as determined by the board of
directors in its sole discretion,
o a Disposition by either Group for which Donaldson, Lufkin &
Jenrette, Inc. receives consideration primarily consisting of
equity securities, including, without limitation:
o capital stock of any kind,
o interests in a general or limited partnership,
o interests in a limited liability company or
o debt securities convertible into or exchangeable for any
of the above, or options or warrants to acquire any of
the above,
in each case without regard to the voting power or other management
governance rights associated therewith, of an entity which is primarily
engaged or proposes to engage primarily in one or more businesses similar or
complementary to businesses conducted by such Group prior to the
Disposition, as determined by the board of directors in its sole discretion,
o a dividend out of DLJdirect's assets that is paid to holders of
DLJdirect Common Stock, and a transfer of a corresponding
amount to DLJ in respect of its Retained Interest in DLJdirect,
o a dividend out of DLJ's assets to holders of DLJ Common Stock
and
o any other Disposition, if
o at the time of the Disposition there are no shares of DLJ
Common Stock outstanding,
o at the time of the Disposition there are no shares of
DLJdirect Common Stock outstanding or
o before the 30th Trading Day following the Disposition we
have mailed a notice stating that we are exercising our
right to exchange all of the outstanding shares of DLJ
Common Stock or DLJdirect Common Stock for newly issued
shares of the other series of common stock as
contemplated under "--Optional Exchange of One Series of
Common Stock for the Other Series" below.
"Fair Value" means:
o in the case of cash, the amount thereof,
o in the case of capital stock that has been Publicly Traded for
a period of at least 15 months, the Market Value thereof and
o in the case of other assets or securities, the fair market
value thereof as the board of directors shall determine in good
faith.
(Any good faith board of directors' determination of Fair Value shall be
conclusive and binding on all stockholders.)
"Market Capitalization" of either series of common stock on any
date means the Market Value of a share of such series on such date times the
number of shares of such series outstanding on such date. Shares issuable with
respect to DLJ's Retained Interest in DLJdirect are not considered to be
outstanding unless and until they are in fact issued to third parties.
"Market Value" of a share of any class or series of capital
stock on any Trading Day generally means the average of the high and low
reported sale prices of a share of such class or series on such Trading Day,
subject to certain exceptions described in our restated charter.
The "Net Proceeds" of a Disposition of any assets of a Group
means the positive amount, if any, remaining from the gross proceeds of such
Disposition after any payment of, or reasonable provision for:
o any taxes payable by Donaldson, Lufkin & Jenrette, Inc. or any
subsidiary or affiliate thereof in respect of such Disposition,
or which would have been payable but for the utilization of tax
benefits attributable to the Group not the subject of the
Disposition,
o any taxes payable by Donaldson, Lufkin & Jenrette, Inc. or any
subsidiary or affiliate thereof in respect of any resulting
dividend or redemption,
o any transaction costs, including, without limitation, any
legal, investment banking and accounting fees and expenses and
o any liabilities, contingent or otherwise, of, attributed to or
related to, such Group, including, without limitation, any
liabilities for deferred taxes, any indemnity or guarantee
obligations which are outstanding or incurred in connection
with the Disposition or otherwise, any liabilities for future
purchase price adjustments and any obligations with respect to
outstanding securities, other than common stock, attributed to
such Group, as determined in good faith by the board of
directors.
"Proportionate Interest" of holders of DLJdirect Common Stock
in the Net Proceeds of a DLJdirect Disposition, or in the outstanding shares
of common stock of any subsidiaries holding DLJdirect's assets and
liabilities, means
o the amount of such Net Proceeds, or the number of such shares,
times
o the number of shares of DLJdirect Common Stock outstanding
divided by
o the Total Number of Notional DLJdirect Common Shares Deemed
Outstanding.
This amount can also be expressed as follows:
(Total Number of DLJdirect
(Net Proceeds or Number of Shares) X Common Shares Deemed Outstanding)
------------------------------------------
(Total Number of Notional DLJdirect Common
Shares Outstanding)
"Proportionate Interest" of holders of DLJ Common Stock in the
Net Proceeds of a DLJ Disposition (or in the outstanding shares of common
stock of any subsidiaries holding DLJ's assets and liabilities) means the
amount of such Net Proceeds (or the number of such shares).
"Publicly Traded" with respect to any security means:
o registered under Section 12 of the Securities Exchange Act of
1934, as amended, (the "Exchange Act") or any successor
provision of law, and
o listed for trading on the NYSE, or any other national
securities exchange registered under Section 7 of the Exchange
Act, or any successor provision of law, or
o listed on the Nasdaq National Market, or any successor market
system.
"Total Number of Notional DLJdirect Common Shares Deemed
Outstanding" means the number of shares of DLJdirect Common Stock outstanding
plus the Number of Shares Issuable with Respect to DLJ's Retained Interest in
DLJdirect.
"Trading Day" means each weekday on which the relevant security
or, if there are two relevant securities, each relevant security, is traded on
the principal national securities exchange on which it is listed or admitted to
trading or on the Nasdaq National Market or, if such security is not listed or
admitted to trading on a national securities exchange or quoted on the Nasdaq
National Market, traded in the principal over-the-counter market in which it
trades.
Optional Exchange of One Series of Common Stock for the Other Series
We will have the right at any time to issue shares of DLJ
Common Stock in exchange for outstanding shares of DLJdirect Common Stock at a
premium. The premium will initially be 25%, for exchanges occurring in the
first 90 days after issuance, and will decline thereafter over a period of 3
years to 15%.
Notwithstanding the preceding paragraph, upon the occurrence of
a Tax Event (as defined below), we will have the right to issue shares of DLJ
Common Stock in exchange for outstanding shares of DLJdirect Common Stock at a
premium of 10%. "Tax Event" means the receipt by Donaldson, Lufkin &
Jenrette, Inc. of an opinion of tax counsel experienced in such matters, who
shall not be an officer or employee of Donaldson, Lufkin & Jenrette, Inc. or
any of its affiliates, to the effect that, as a result of any amendment to, or
change in, the laws (or any regulations thereunder) of the United States or
any political subdivision or taxing authority thereof or therein (including
any proposed change in such regulations announced by an administrative
agency), or as a result of any official or administrative pronouncement or
action or judicial decision interpreting or applying such laws or regulations,
it is more likely than not that for United States federal income tax purposes
(1) Donaldson, Lufkin & Jenrette, Inc., its subsidiaries or affiliates, or any
of its successors or its stockholders is or, at any time in the future, will
be subject to tax upon the issuance of shares of either DLJ Common Stock or
DLJdirect Common Stock or (2) either DLJ Common Stock or DLJdirect Common
Stock is not or, at any time in the future, will not be treated solely as
stock of Donaldson, Lufkin & Jenrette, Inc. For purposes of rendering such
opinion, tax counsel shall assume that any administrative proposals will be
adopted as proposed. However, in the event a change in law is proposed, tax
counsel shall render an opinion only in the event of enactment.
The exchange ratio that will result in the specified premium
will be calculated based on the average Market Value of DLJ Common Stock as
compared to the average Market Value of DLJdirect Common Stock during the 20
consecutive Trading Day period ending on, and including, the 5th Trading Day
immediately preceding the date on which we mail the notice of exchange to
holders of the outstanding shares being exchanged.
Optional Exchange for Stock of a Subsidiary
At any time at which all of the assets and liabilities of a
Group, and no other assets or liabilities of Donaldson, Lufkin & Jenrette,
Inc. or any subsidiary thereof, are held directly or indirectly by one or more
wholly owned subsidiaries of Donaldson, Lufkin & Jenrette, Inc. (the "Group
Subsidiaries"), we will have the right to deliver to holders of the relevant
series of common stock their Proportionate Interest in all of the outstanding
shares of the common stock of the Group Subsidiaries in exchange for all of
the outstanding shares of such series of common stock.
o If the series of common stock being exchanged is DLJ Common
Stock and the Number of Shares Issuable with Respect to DLJ's
Retained Interest in DLJdirect is greater than zero, we will
also issue a number of shares of DLJdirect Common Stock equal
to the then current Number of Shares Issuable with Respect to
DLJ's Retained Interest in DLJdirect and deliver those shares
to the holders of DLJ Common Stock or to one of the DLJ Group
Subsidiaries, at our option.
o If the series of common stock being exchanged is DLJdirect
Common Stock and the Number of Shares Issuable with Respect to
DLJ's Retained Interest in DLJdirect is greater than zero (so
that less than all of the shares of common stock of the Group
Subsidiaries are being delivered to the holders of DLJdirect
Common Stock), we may retain the remaining shares of common
stock of the Group Subsidiaries or distribute those shares as a
dividend on DLJ Common Stock.
General Dividend, Exchange and Redemption Provisions
If we complete a Disposition of All or Substantially All of the
Assets of a Group, other than an Exempt Disposition, we would be required, not
more than 10 Trading Days after the consummation of such Disposition, to issue
a press release specifying:
o the Net Proceeds of such Disposition,
o the number of shares of the series of common stock related to
such Group then outstanding,
o the number of shares of such series of common stock issuable
upon conversion, exchange or exercise of any convertible or
exchangeable securities, options or warrants and the
conversion, exchange or exercise prices thereof, and
o if the Group is DLJdirect, the Number of Shares Issuable with
Respect to DLJ's Retained Interest in DLJdirect.
Not more than 30 Trading Days after such consummation, we would be required to
announce by press release which of the actions specified in the first
paragraph under "--Mandatory Dividend, Redemption or Exchange" we have
determined to take, and upon making that announcement, that determination
would become irrevocable. In addition, we would be required, not more than 30
Trading Days after such consummation and not less than 10 Trading Days before
the applicable payment date, redemption date or exchange date, to send a
notice by first-class mail, postage prepaid, to holders of the relevant series
of common stock at their addresses as they appear on our transfer books.
o If we determine to pay a special dividend, we would be required
to specify in the notice (1) the record date for such dividend,
(2) the payment date of such dividend (which cannot be more
than 85 Trading Days after such consummation) and (3) the
aggregate amount and type of property to be paid in such
dividend (and the approximate per share amount thereof).
o If we determine to undertake a redemption, we would be required
to specify in the notice (1) the date of redemption (which
cannot be more than 85 Trading Days after such consummation),
(2) the aggregate amount and type of property to be paid as a
redemption price (and the approximate per share amount
thereof), (3) if less than all shares of the relevant series of
common stock are to be redeemed, the number of shares to be
redeemed and (4) the place or places where certificates for
shares of such series of common stock, properly endorsed or
assigned for transfer (unless we waive such requirement),
should be surrendered in return for delivery of the cash,
securities or other property to be paid by Donaldson, Lufkin &
Jenrette, Inc. in such redemption.
o If we determine to undertake an exchange, we would be required
to specify in the notice (1) the date of exchange (which cannot
be more than 85 Trading Days after such consummation), (2) the
number of shares of the other series of common stock to be
issued in exchange for each outstanding share of such series of
common stock and (3) the place or places where certificates for
shares of such series of common stock, properly endorsed or
assigned for transfer, unless we waive such requirement, should
be surrendered in return for delivery of the other series of
common stock to be issued by Donaldson, Lufkin & Jenrette, Inc.
in such exchange.
If we determine to complete any exchange described under
"--Optional Exchange of One Series of Common Stock for the Other Series" or
"Optional Exchange for Stock of a Subsidiary", we would be required, between 10
and 30 Trading Days before the exchange date, to send a notice by first-class
mail, postage prepaid, to holders of the relevant series of common stock at
their addresses as they appear on our transfer books, specifying (1) the
exchange date and the other terms of the exchange and (2) the place or places
where certificates for shares of such series of common stock, properly
endorsed or assigned for transfer, unless we waive such requirement, should be
surrendered for delivery of the stock to be issued or delivered by Donaldson,
Lufkin & Jenrette, Inc. in such exchange.
Neither the failure to mail any required notice to any
particular holder nor any defect therein would affect the sufficiency thereof
with respect to any other holder or the validity of any dividend, redemption
or exchange.
If we are redeeming less than all of the outstanding shares of
a series of common stock as described above, we would redeem such shares pro
rata or by lot or by such other method as the board of directors determines to
be equitable.
No holder of shares of a series of common stock being exchanged
or redeemed will be entitled to receive any cash, securities or other property
to be distributed in such exchange or redemption until such holder surrenders
certificates for such shares, properly endorsed or assigned for transfer, at
such place as we specify, unless we waive such requirement. As soon as
practicable after our receipt of certificates for such shares, we would
deliver to the person for whose account such shares were so surrendered, or to
the nominee or nominees of such person, the cash, securities or other property
to which such person is entitled, together with any fractional payment
referred to below, in each case without interest. If less than all of the
shares of common stock represented by any one certificate were to be exchanged
or redeemed, we would also issue and deliver a new certificate for the shares
of such common stock not exchanged or redeemed.
We would not be required to issue or deliver fractional shares
of any capital stock or any other fractional securities to any holder of
common stock upon any exchange, redemption, dividend or other distribution
described above. If more than one share of common stock were held at the same
time by the same holder, we may aggregate the number of shares of any capital
stock that would be issuable or any other securities that would be
distributable to such holder upon any such exchange, redemption, dividend or
other distribution. If there are fractional shares of any capital stock or
any other fractional securities remaining to be issued or distributed to any
holder, we would, if such fractional shares or securities were not issued or
distributed to such holder, pay cash in respect of such fractional shares or
securities in an amount equal to the Fair Value thereof, without interest.
From and after the date set for any exchange or redemption, all
rights of a holder of shares of common stock that were exchanged or redeemed
would cease except for the right, upon surrender of the certificates
representing such shares, to receive the cash, securities or other property
for which such shares were exchanged or redeemed, together with any fractional
payment as provided above, in each case without interest and, if such holder
was a holder of record as of the close of business on the record date for a
dividend not yet paid, the right to receive such dividend. A holder of shares
of common stock being exchanged would not be entitled to receive any dividend
or other distribution with respect to shares of the other series of common
stock until after the shares being exchanged are surrendered as contemplated
above. Upon such surrender, we would pay to the holder the amount of any
dividends or other distributions, without interest, which theretofore became
payable with respect to a record date occurring after the exchange, but which
were not paid by reason of the foregoing, with respect to the number of whole
shares of the other series of common stock represented by the certificate or
certificates issued upon such surrender. From and after the date set for any
exchange, we would, however, be entitled to treat the certificates for shares
of common stock being exchanged that were not yet surrendered for exchange as
evidencing the ownership of the number of whole shares of the other series of
common stock for which the shares of such common stock should have been
exchanged, notwithstanding the failure to surrender such certificates.
We would pay any and all documentary, stamp or similar issue or
transfer taxes that might be payable in respect of the issue or delivery of
any shares of capital stock and/or other securities on any exchange or
redemption described herein. We would not, however, be required to pay any
tax that might be payable in respect of any transfer involved in the issue or
delivery of any shares of capital stock and/or other securities in a name
other than that in which the shares so exchanged or redeemed were registered,
and no such issue or delivery will be made unless and until the person
requesting such issue pays to Donaldson, Lufkin & Jenrette, Inc. the amount of
any such tax or establishes to our satisfaction that such tax has been paid.
We may, subject to applicable law, establish such other rules,
requirements and procedures to facilitate any dividend, redemption or exchange
contemplated as described above as the board of directors may determine to be
appropriate under the circumstances.
Voting Rights
Holders of DLJdirect Common Stock will not be entitled to vote,
unless a separate class vote is required by applicable law. Holders of DLJ
Common Stock will vote on all matters as to which common stockholders
generally are entitled to vote. On all such matters for which no separate
vote is required, each outstanding share of DLJ Common Stock entitles the
holder to one vote.
The Delaware general corporation law requires a separate vote
of holders of shares of common stock of any series on any amendment to the
certificate of incorporation if the amendment would alter or change the powers,
preferences or special rights of the shares of such series so as to affect
them adversely but would not so affect the entire class.
Liquidation
The holders of DLJ Common Stock and DLJdirect Common Stock will
be entitled, upon voluntary or involuntary liquidation, dissolution or
winding-up of Donaldson, Lufkin & Jenrette, Inc., to receive in respect of
shares of DLJ Common Stock and shares of DLJdirect Common Stock their
proportionate interest in the net assets of Donaldson, Lufkin & Jenrette,
Inc., if any, remaining for distribution to stockholders after payment of or
provision for all liabilities, including contingent liabilities, of Donaldson,
Lufkin & Jenrette, Inc. and payment of the liquidation preference payable to
any holders of our preferred stock, if any such stock is outstanding. Each
share of DLJ Common Stock and DLJdirect Common Stock, respectively, will be
entitled to a share of net liquidation proceeds based on the ratio of the
average Market Value of such share of stock to the average aggregate Market
Value of both series of the Donaldson, Lufkin & Jenrette, Inc. common stock
during the 20 consecutive Trading Day period ending on, and including, the 5th
Trading Day before the date of the first public announcement of (1) a
voluntary liquidation, dissolution or winding-up by Donaldson, Lufkin &
Jenrette, Inc. or (2) the institution of any proceeding for the involuntary
liquidation, dissolution or winding-up of Donaldson, Lufkin & Jenrette, Inc.
The liquidation formula is intended to provide liquidation
rights for each series of common stock proportionate to the respective Market
Values at the time of any liquidation.
Neither the merger nor consolidation of Donaldson, Lufkin &
Jenrette, Inc. with any other entity, nor a sale, transfer or lease of all or
any part of the assets of Donaldson, Lufkin & Jenrette, Inc., would alone be
deemed a liquidation, dissolution or winding-up for these purposes.
DLJ's Retained Interest in DLJdirect
In this document, we call the percentage interest in DLJdirect
intended to be represented at any time by the outstanding shares of DLJdirect
Common Stock the "Outstanding Interest Percentage", and we call the remaining
percentage interest in DLJdirect intended to be represented at any time by
DLJ's Retained Interest in DLJdirect the "Retained Interest Percentage". At
any time, the Outstanding Interest Percentage equals the number of shares of
DLJdirect Common Stock Outstanding divided by the Total Number of Notional
DLJdirect Common Shares Deemed Outstanding, expressed as a percentage. The
Outstanding Interest Percentage can also be expressed as follows:
Number of Shares of DLJdirect Common Stock Outstanding
------------------------------------------------------
Total Number of Notional DLJdirect Common Shares
Deemed Outstanding
The Retained Interest Percentage equals the Number of Shares
Issuable with Respect to DLJ's Retained Interest in DLJdirect divided by the
Total Number of Notional DLJdirect Common Shares Deemed Outstanding, expressed
as a percentage. The Retained Interest Percentage can also be expressed as
follows:
Number of Shares Issuable with Respect to DLJ's Retained Interest In DLJdirect
- ------------------------------------------------------------------------------
Total Number of Notional DLJdirect Common Shares Deemed Outstanding
The sum of the Outstanding Interest Percentage and the Retained
Interest Percentage always equals 100%. Thus:
Outstanding Interest Percentage + Retained Interest Percentage = 100%
Before any shares of DLJdirect Common Stock are issued, the
Retained Interest Percentage will be 100% and the Outstanding Interest
Percentage will be 0%.
Number of Shares Issuable with Respect to DLJ's Retained Interest in DLJdirect.
The board of directors has determined that the initial Number
of Shares Issuable with Respect to DLJ's Retained Interest in DLJdirect will
be . In the offering, we will attribute the entire net proceeds of
such shares to the equity of DLJdirect. Thus, after giving effect to the
offering
o there will be shares of DLJdirect Common Stock
outstanding, or shares if the underwriters fully exercise
their option to purchase additional shares,
o the Number of Shares Issuable with Respect to DLJ's Retained
Interest in DLJdirect will decline to ,
o the Total Number of Notional DLJdirect Common Shares Deemed
Outstanding will be ,
o the Outstanding Interest Percentage will be approximately %,
or approximately % if the underwriters fully exercise
their option to purchase additional shares and
o the Retained Interest Percentage will be approximately %, or
approximately if the underwriters fully exercise their
option to purchase additional shares.
Attribution of Issuances of DLJdirect Common Stock
After the offering, whenever we decide to issue shares of
DLJdirect Common Stock, we would determine, in our sole discretion, whether to
attribute that issuance, and the proceeds thereof:
o to DLJ in respect of its Retained Interest in DLJdirect, in a
manner analogous to a secondary offering of common stock of a
subsidiary owned by a corporate parent, or
o to DLJdirect, in a manner analogous to a primary offering of
common stock.
If we issue any shares of DLJdirect Common Stock and attribute that issuance,
and the proceeds thereof, to DLJ in respect of its Retained Interest in
DLJdirect, the Number of Shares Issuable with Respect to DLJ's Retained
Interest in DLJdirect would be reduced by the number of shares so issued, the
number of outstanding shares of DLJdirect Common Stock would be increased by
the same amount, the Total Number of Notional DLJdirect Common Shares Deemed
Outstanding would remain unchanged, the Retained Interest Percentage would be
reduced and the Outstanding Interest Percentage would be correspondingly
increased. If we instead attribute that issuance (and the proceeds thereof)
to DLJdirect, the Number of Shares Issuable with Respect to DLJ's Retained
Interest in DLJdirect would remain unchanged, the number of outstanding shares
of DLJdirect Common Stock and the Total Number of Notional DLJdirect Common
Shares Deemed Outstanding would be increased by the number of shares so
issued, the Retained Interest Percentage would be reduced and the Outstanding
Interest Percentage would be correspondingly increased.
Issuances of DLJdirect Common Stock as Distributions on DLJ Common Stock
We reserve the right to issue shares of DLJdirect Common Stock
as a distribution on DLJ Common Stock, although we do not currently intend to
do so. If we did so, we would attribute that distribution to DLJ in respect
of its Retained Interest in DLJdirect. As a result, the Number of Shares
Issuable with Respect to DLJ's Retained Interest in DLJdirect would be reduced
by the number of shares so distributed, the number of outstanding shares of
DLJdirect Common Stock would be increased by the same amount, the Total Number
of Notional DLJdirect Common Shares Deemed Outstanding would remain unchanged,
the Retained Interest Percentage would be reduced and the Outstanding Interest
Percentage would be correspondingly increased. If instead we issued shares of
DLJdirect Common Stock as a distribution on DLJdirect Common Stock, we would
attribute that distribution to DLJdirect, in which case we would
proportionately increase the Number of Shares Issuable with Respect to DLJ's
Retained Interest in DLJdirect. As a result, the Number of Shares Issuable
with Respect to DLJ's Retained Interest in DLJdirect and the Total Number of
Notional DLJdirect Common Shares Deemed Outstanding would each be increased by
the same percentage as the number of outstanding shares of DLJdirect Common
Stock is increased and the Retained Interest Percentage and Outstanding
Interest Percentage would remain unchanged.
Dividends on DLJdirect Common Stock
At the time of any dividend on the outstanding shares of
DLJdirect Common Stock, including any dividend required as a result of a
Disposition of All or Substantially All of the Assets of DLJdirect, but
excluding any dividend payable in DLJdirect Common Stock, we will credit to
DLJ, and charge against DLJdirect, a corresponding amount in respect of DLJ's
Retained Interest in DLJdirect. Specifically, the corresponding amount will
equal the aggregate amount of such dividend times a fraction, the numerator of
which is the Number of Shares Issuable with Respect to DLJ's Retained Interest
in DLJdirect and the denominator of which is the number of shares of DLJdirect
Common Stock then outstanding.
This amount can also be expressed as follows:
<TABLE>
<S> <C>
(Aggregate Amount of Dividend on DLJdirect X (Number of Shares Issuable with Respect
Common Stock) to DLJ's Retained Interest in DLJdirect)
----------------------------------------
(Number of Shares of DLJdirect Common
Stock Outstanding)
</TABLE>
Repurchases of DLJdirect Common Stock
If we decide to repurchase shares of DLJdirect Common Stock, we
would determine, in our sole discretion, whether to attribute that repurchase
and the cost thereof to DLJ, in a manner analogous to a purchase of common
stock of a subsidiary by a corporate parent, or to DLJdirect, in a manner
analogous to an issuer repurchase. If we repurchase shares of DLJdirect
Common Stock and attribute that repurchase and the cost thereof to DLJ, the
Number of Shares Issuable with Respect to DLJ's Retained Interest in DLJdirect
would be increased by the number of shares so purchased, the number of
outstanding shares of DLJdirect Stock would be decreased by the same amount,
the Total Number of Notional DLJdirect Common Shares Deemed Outstanding would
remain unchanged, the Retained Interest Percentage would be increased and the
Outstanding Interest Percentage would be correspondingly decreased. If we
instead attribute that repurchase and the cost thereof to DLJdirect, the Number
of Shares Issuable with Respect to DLJ's Retained Interest in DLJdirect would
remain unchanged, the number of outstanding shares of DLJdirect Common Stock
and the Total Number of Notional DLJdirect Common Shares Deemed Outstanding
would be decreased by the number of shares so repurchased, the Retained
Interest Percentage would be increased and the Outstanding Interest Percentage
would be correspondingly reduced.
Transfers of Cash or Other Property between DLJ and DLJdirect
We may, in our sole discretion, determine to transfer cash or
other property of DLJdirect to DLJ in return for a decrease in DLJ's Retained
Interest in DLJdirect, in a manner analogous to a return of capital, or to
transfer cash or other property of DLJ to DLJdirect in return for an increase
in DLJ's Retained Interest in DLJdirect, in a manner analogous to a capital
contribution. If we determine to transfer cash or other property of DLJdirect
to DLJ in return for a decrease in DLJ's Retained Interest in DLJdirect, the
Number of Shares Issuable with Respect to DLJ's Retained Interest in DLJdirect
and the Total Number of Notional DLJdirect Common Shares Deemed Outstanding
would each be decreased by an amount equal to the Fair Value of such cash or
other property divided by the Market Value of a share of DLJdirect Common
Stock on the day of transfer, the number of outstanding shares of DLJdirect
Common Stock would remain unchanged, the Retained Interest Percentage would be
decreased and the Outstanding Interest Percentage would be correspondingly
increased.
If we instead determine to transfer cash or other property of
DLJ to DLJdirect in return for an increase in DLJ's Retained Interest in
DLJdirect, the Number of Shares Issuable with Respect to DLJ's Retained
Interest in DLJdirect and the Total Number of Notional DLJdirect Common Shares
Deemed Outstanding would each be increased by an amount equal to the Fair
Value of such cash or other property divided by the Market Value of a share of
DLJdirect Common Stock on the day of transfer, the number of outstanding
shares of DLJdirect Common Stock would remain unchanged, the Retained Interest
Percentage would be increased and the Outstanding Interest Percentage would be
correspondingly decreased.
We may not attribute issuances of DLJdirect Common Stock to
DLJ, transfer cash or other property of DLJdirect to DLJ in return for a
decrease in its Retained Interest in DLJdirect or take any other action to the
extent that doing so would cause the Number of Shares Issuable with Respect to
DLJ's Retained Interest in DLJdirect to decrease below zero.
For illustrations showing how to calculate the Retained
Interest Percentage, the Outstanding Interest Percentage, the Number of Shares
Issuable with Respect to DLJ's Retained Interest in DLJdirect and the Total
Number of Notional DLJdirect Common Shares Deemed Outstanding after giving
effect to certain hypothetical dividends, issuances, repurchases and
transfers, see "Illustration of Certain Terms".
Effectiveness of Certain Terms
The terms described under "--Dividends", "--Mandatory Dividend,
Redemption or Exchange on Disposition of All or Substantially All of the
Assets of a Group", "--Optional Exchange of One Series of Common Stock for the
Other Series", "--Optional Exchange for Stock of a Subsidiary" and
"--Liquidation" above apply only when there are shares of both series of
common stock outstanding.
Determinations by the Board
The restated charter will provide that, subject to applicable
law, any determinations made by the board of directors in good faith under the
charter or in any certificate of designation filed pursuant thereto would be
final and binding on all stockholders of Donaldson, Lufkin & Jenrette, Inc.
Preemptive Rights
Holders of DLJ Common Stock and DLJdirect Common Stock will not
have any preemptive rights to subscribe for any additional shares of capital
stock or securities that we may issue in the future.
Certain Other Provisions of the Amended and Restated Certificate of
Incorporation and By-laws
Preferred Stock
The restated charter, like our current charter, provides that
the board of directors may issue shares of preferred stock in one or more
series from time to time. The board of directors has the authority to fix by
resolution or resolutions the designations and the powers, preferences and
rights, and the qualifications, limitations and restrictions thereof, of the
shares of each series of preferred stock, including without limitation, the
following:
o the distinctive serial designation of such series which shall
distinguish it from other series,
o the number of shares included in such series,
o the dividend rate, or method of determining such rate, payable
to holders of the shares of such series,
o any condition upon which such dividends shall be paid and the
date or dates upon which such dividends shall be payable,
o whether dividends on the shares of such series shall be
cumulative and, in the case of shares of any series having
cumulative dividend rights, the date or dates or method of
determining the date or dates from which dividends on the
shares of such series shall be cumulative,
o the amount or amounts which shall be payable out of the assets
of Donaldson, Lufkin & Jenrette, Inc. to holders of the shares
of such series upon voluntary or involuntary liquidation,
dissolution or winding-up Donaldson, Lufkin & Jenrette, Inc.
and the relative rights of priority, if any, of payment of the
shares of such series,
o the price or prices at which, the period or periods within
which and the terms and conditions upon which the shares of
such series may be redeemed, in whole or in part, at the option
of Donaldson, Lufkin & Jenrette, Inc. or at the option of the
holder or holders thereof or upon the happening of a specified
event or events,
o the obligation, if any, of Donaldson, Lufkin & Jenrette, Inc.
to purchase or redeem shares of such series pursuant to a
sinking fund or otherwise and the price or prices at which, the
period or periods within which and the terms and conditions
upon which the shares of such series shall be redeemed or
purchased, in whole or in part, pursuant to such obligation,
o whether or not the shares of such series shall be convertible
or exchangeable, at any time or times at the option of the
holder or holders thereof or at the option of Donaldson, Lufkin
& Jenrette, Inc. or upon the happening of a specified event or
events, into shares of any other class or classes or any other
series of the same or any other class or classes of stock of
Donaldson, Lufkin & Jenrette, Inc. and the price or prices or
rate or rates of exchange or conversion and any adjustments
applicable thereto and
o whether or not holders of the shares of such series shall have
voting rights, in addition to the voting rights provided by
law, and if so the terms of such voting rights.
Series A and Series B Fixed Adjustable Rate Preferred Stock
General. The Series A Preferred Stock is a single series
consisting of 4,000,000 shares with a liquidation preference of $50 per share.
The Series B Preferred Stock is a single series consisting of 3,500,000 shares
with a liquidation preference of $50 per share. The holders of the Preferred
Stock have no preemptive rights. The Preferred Stock is not convertible into
shares of either series of common stock of Donaldson, Lufkin & Jenrette, Inc.
and is fully paid and nonassessable.
The Series A Preferred Stock ranks on a parity with the Series
B Preferred Stock and prior to both series of the common stock of Donaldson,
Lufkin & Jenrette, Inc. as to the payment of dividends and distribution of
assets upon dissolution, liquidation or winding up of Donaldson, Lufkin &
Jenrette, Inc.
Dividends. Dividends on the Series A Preferred Stock are
payable quarterly at the annual rate of 5.94% or $2.97 per share through
November 30, 2001. After November 30, 2001, dividends on the Series A
Preferred Stock are payable at the Applicable Rate from time to time in
effect. The Applicable Rate per annum for each dividend period beginning
November 30, 2001 will generally be equal to 0.50% plus the highest of the
Treasury Bill Rate, the Ten Year Constant Maturity Rate and the Thirty Year
Constant Maturity Rate (each as defined by the terms of the Series A Preferred
Stock). The Applicable Rate per annum for each dividend period beginning
November 30, 2001, will not be less than 6.44% nor greater than 12.44%
(without taking into account any adjustments as described below under "Changes
in the Dividends Received Percentage").
Dividends on the Series B Preferred Stock are payable quarterly
at the annual rate of 5.30% of $2.65 per share through January 15, 2003.
After January 15, 2003, dividends on the Series B Preferred Stock are payable
at the Applicable Rate from time to time in effect. The Applicable Rate per
annum for each dividend period beginning January 15, 2003 will generally be
equal to 0.40% plus the highest of the Treasury Bill Rate, the Ten Year
Constant Maturity Rate and the Thirty Year Constant Maturity Rate (each as
defined by the terms of the Series B Preferred Stock). The Applicable Rate
per annum for each dividend period beginning January 15, 2003, will not be
less than 5.70% nor greater than 11.30% (without taking into account any
adjustments as described below under "Changes in the Dividends Received
Percentage").
Dividends on the Preferred Stock are cumulative and rights
accrue to the holders of the Preferred Stock if Donaldson, Lufkin & Jenrette,
Inc. fails to declare one or more dividends on such series of Preferred Stock
in any amount, whether or not the earnings or financial condition of
Donaldson, Lufkin & Jenrette, Inc. are sufficient to pay such dividends in
whole or in part.
Changes in the Dividend Received Percentage. If one or more
amendments to the Internal Revenue Code of 1986, as amended (the "Code"), are
enacted which reduce the percentage of the dividends received deduction
(currently 70%) as specified in Section 243(a)(1) of the Code or any successor
provision (the "Dividends Received Percentage"), the amount of each dividend
on each share of the Series A Preferred Stock for dividend payments made on or
after the date of enactment of such change will generally be adjusted upward
pursuant to a specified formula set forth in the terms of the Series A
Preferred Stock.
In addition, if the Dividends Received Percentage is reduced to
50% or less, Donaldson, Lufkin & Jenrette, Inc. may at its option, redeem the
Series A Preferred Stock as a whole but not in part as described below. See
"--Redemption".
If, prior to July 9, 1999, one or more amendments to the Code
are enacted which reduce the Dividends Received Percentage, the amount of each
dividend on each share of the Series B Preferred Stock for dividend payments
made on or after the date of enactment of such change will generally be
adjusted upward pursuant to a specified formula set forth in the terms of the
Series B Preferred Stock, provided, however, that if the Dividends Received
Percentage shall be less than 50%, then the Dividend Received Percentage shall
be deemed to equal 50%.
Voting Rights. The holders of the Preferred Stock are not
entitled to vote, except as set forth below or as expressly required by
applicable law.
If the equivalent of six quarterly dividends payable on the
Preferred Stock or any other class or series of preferred stock are in
default, the number of directors of Donaldson, Lufkin & Jenrette, Inc. will be
increased by two, and the holders of the Preferred Stock, voting as a single
class with the holders of shares of any other class of Donaldson, Lufkin &
Jenrette, Inc.'s preferred stock ranking on a parity with the Preferred Stock
upon which like voting rights have been conferred and are exercisable, will be
entitled to elect such two directors to fill such newly-created directorships.
In addition, the affirmative vote or consent of the holders of
at least 66 2/3% of the outstanding shares of the applicable series of
Preferred Stock will be required for any amendment of the certificate of
incorporation of Donaldson, Lufkin & Jenrette, Inc. which will adversely
affect the powers, preferences, privileges or rights of such series of
Preferred Stock. The affirmative vote or consent of the holders of at least
66 2/3% of the outstanding shares of the Preferred Stock and any other series
of Donaldson, Lufkin & Jenrette, Inc.'s preferred stock ranking on a parity
with the Preferred Stock, voting as a single class without regard to series,
will be required to issue, authorize or increase the authorized amount of, or
issue or authorize any obligation or security convertible into or evidencing
a right to purchase, any additional class or series of stock ranking prior to
the Preferred Stock, or to reclassify any authorized stock of Donaldson,
Lufkin & Jenrette, Inc. into such prior shares, but such vote will not be
required for Donaldson, Lufkin & Jenrette, Inc. to take any such actions with
respect to any stock ranking on a parity with or junior to the Preferred Stock.
Redemption. Prior to November 30, 2001, the Series A Preferred
Stock is not redeemable, except under certain limited circumstances as
described below. On or after such date, each share of Series A Preferred Stock
will be redeemable, in whole or in part, at the option of Donaldson, Lufkin &
Jenrette, Inc., at $50 per share, plus accrued and unpaid dividends. However,
if the Dividends Received Percentage is equal to or less than 50% and, as a
result, the amount of dividends on the Series A Preferred Stock will be or is
adjusted as described above under "Changes in the Dividends Received
Percentage," Donaldson, Lufkin & Jenrette, Inc., at its option, may redeem
all, but not less than all, of the outstanding shares of the Series A
Preferred Stock at a redemption price specified by the terms of the Series A
Preferred Stock.
Prior to January 15, 2003, the Series B Preferred Stock is not
redeemable. On or after such date, each share of Series B Preferred Stock
will be redeemable, in whole or in part, at the option of Donaldson, Lufkin &
Jenrette, Inc., at $50 per share, plus accrued and unpaid dividends.
In addition, if the holders of the shares of Preferred Stock
are entitled to vote upon or consent to a merger or consolidation of
Donaldson, Lufkin & Jenrette, Inc., and if Donaldson, Lufkin & Jenrette, Inc.
offers to purchase all of the outstanding shares of a series of Preferred
Stock (the "Offer"), then each holder of such series of Preferred Stock who
does not sell their shares of Preferred Stock pursuant to the Offer shall be
deemed irrevocably to have voted or consented all shares of Preferred Stock
owned by such holder in favor of the merger or consolidation of Donaldson,
Lufkin & Jenrette, Inc. without any further action by the holder. The Offer
shall be at a price of $50 per share, together with accrued and unpaid
dividends, if any, to the date fixed for redemption.
Certain Provisions of Delaware Law
Donaldson, Lufkin & Jenrette, Inc. is subject to the business
combination provisions of Section 203 of the Delaware general corporation law.
In general, such provisions prohibit a publicly-held Delaware corporation from
engaging in various business combination transactions with any interested
stockholder for a period of three years after the date of the transaction in
which the person became an interested stockholder unless:
o the business combination transaction, or the transaction in
which the interested stockholder became an interested
stockholder, is approved by the board of directors prior to the
time the interested stockholder obtained such status,
o upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares
outstanding those shares owned by
o persons who are directors and also officers and
o employee stock plans in which employee participants do
not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a
tender or exchange offer or
o on or subsequent to such date the business combination is
approved by the board of directors and authorized at an annual
or special meeting of stockholders by the affirmative vote of
at least 66 2/3% of the outstanding voting stock which is not
owned by the interested stockholder.
A "business combination" is defined to include mergers, asset sales and other
transactions resulting in financial benefit to a stockholder. In general, an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or, within three years, did own) 15% or more of a
corporation's voting stock. The statute could prohibit or delay mergers or
other takeover or change in control attempts with respect to Donaldson, Lufkin
& Jenrette, Inc. and, accordingly, may discourage attempts to acquire
Donaldson, Lufkin & Jenrette, Inc.
Stock Transfer Agent and Registrar
First Chicago Trust Company of New York is the registrar and
transfer agent for DLJ Common Stock and DLJdirect Common Stock.
CERTAIN CASH MANAGEMENT AND ALLOCATION POLICIES
From a financial reporting standpoint, Donaldson, Lufkin &
Jenrette, Inc. has allocated all of its consolidated assets, liabilities,
revenue, expenses and cash flow between DLJ and DLJdirect. In this
prospectus, each of DLJ and DLJdirect is sometimes called a "Group". The
financial statements of DLJdirect reflect the application of certain cash
management and allocation policies adopted by the board of directors. These
policies are summarized below.
The board of directors may, in its sole discretion, modify,
rescind or add to any of these policies, although it has no present intention
to do so. The decision of the board of directors to modify, rescind or add to
any of these policies would, however, be subject to the board of directors'
general fiduciary duties. The board of directors intends to delegate its
authority with regard to these policies to its operating committee, all of
whom are senior officers of DLJ.
Even though Donaldson, Lufkin & Jenrette, Inc. has allocated
all of its consolidated assets, liabilities, revenue, expenses and cash flow
between DLJ and DLJdirect, holders of DLJdirect Common Stock will continue to
be common stockholders of Donaldson, Lufkin & Jenrette, Inc. and, as such,
will be subject to all risks associated with an investment in Donaldson,
Lufkin & Jenrette, Inc. and all of its businesses, assets and liabilities.
See "Risk Factors--Risk Factors Relating to DLJdirect Common Stock--Holders of
DLJdirect Common Stock Will Be Common Stockholders of Donaldson, Lufkin &
Jenrette, Inc. and Will Be Subject to Risks Associated with an Investment in
Donaldson, Lufkin & Jenrette, Inc. as a Whole".
Treasury Activities
Donaldson, Lufkin & Jenrette, Inc. manages most treasury
activities on a centralized, consolidated basis. These activities include the
investment of surplus cash, the issuance, repayment and repurchase of
short-term and long-term debt, and the issuance and repurchase of common stock
and preferred stock. Each Group generally remits its cash receipts, other
than receipts of foreign operations or operations that are not wholly-owned, to
Donaldson, Lufkin & Jenrette, Inc., and Donaldson, Lufkin & Jenrette, Inc.
generally funds each Group's cash disbursements, other than disbursements of
foreign operations or operations that are not wholly-owned, on a daily basis.
In certain instances DLJ funds cash disbursements for DLJ entities including
DLJdirect.
In the combined financial statements of DLJdirect included in
this prospectus:
o all external debt and equity transactions, and the proceeds
thereof, were attributed to DLJ,
o whenever DLJdirect held cash, substantially all of that cash
was invested in money market funds managed by an affiliate,
o whenever DLJdirect had a cash need, that cash need was funded
by DLJ and accounted for as a capital contribution, i.e., as an
increase of DLJdirect's division equity and DLJ's Retained
Interest in DLJdirect and
o all expenses of DLJdirect were paid by DLJ and reimbursed by
DLJdirect.
No interest expense has been reflected in the combined financial statements of
DLJdirect for cash transfers from Donaldson, Lufkin & Jenrette, Inc. or any of
its affiliates and no interest income from DLJdirect has been reflected in the
financial statements of Donaldson, Lufkin & Jenrette, Inc. for any period
prior to the date on which DLJdirect Common Stock is issued. Interest income
earned on DLJdirect's money market funds is included in DLJdirect's financial
statements.
After the date on which DLJdirect Common Stock is first issued:
(1) Donaldson, Lufkin & Jenrette, Inc. will attribute each
future incurrence or issuance of external debt or preferred stock and
the proceeds thereof to DLJ, unless the board of directors determines
otherwise. The board of directors may, but is not required to,
attribute an incurrence or issuance of debt or preferred stock, and
the proceeds thereof, to DLJdirect to the extent that Donaldson,
Lufkin & Jenrette, Inc. incurs or issues the debt or preferred stock
for the benefit of DLJdirect.
(2) Donaldson, Lufkin & Jenrette, Inc. will attribute each
future issuance of DLJ Common Stock, and the proceeds thereof, to DLJ.
Donaldson, Lufkin & Jenrette, Inc. may attribute any future issuance
of DLJdirect Common Stock and the proceeds thereof
o to DLJ in respect of its Retained Interest in DLJdirect, in a
manner analogous to a secondary offering of common stock of a
subsidiary owned by a corporate parent or
o to DLJdirect, in a manner analogous to a primary offering of
common stock.
Dividends on and repurchases of DLJ Common Stock will be charged against DLJ,
and dividends on and repurchases of DLJdirect Common Stock will be charged
against DLJdirect. In addition, at the time of any dividend on DLJdirect
Common Stock, Donaldson, Lufkin & Jenrette, Inc. will credit to DLJ, and
charge against DLJdirect, a corresponding amount in respect of DLJ's Retained
Interest in DLJdirect. See "--Description of Capital Stock--DLJ's Retained
Interest in DLJdirect".
(3) DLJdirect will continue to invest its excess cash. DLJ
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. The board of
directors will determine, in its sole discretion, whether to provide
any particular funds to either DLJ or DLJdirect and will not be
obligated to do so.
(4) Donaldson, Lufkin & Jenrette, Inc. will account for all cash
transfers from one Group to or for the account of the other Group,
other than transfers in return for assets or services rendered or
transfers in respect of DLJ's Retained Interest that correspond to
dividends paid on DLJdirect Common Stock, as inter-Group revolving
credit advances unless:
o the board of directors determines that a given transfer or type of
transfer should be accounted for as a long-term loan,
o the board of directors determines that a given transfer or type of
transfer should be accounted for as a capital contribution increasing
DLJ's Retained Interest in DLJdirect or
o the board of directors determines that a given transfer or type of
transfer should be accounted for as a return of capital reducing
DLJ's Retained Interest in DLJdirect.
There are no specific criteria to determine when Donaldson, Lufkin & Jenrette,
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 would 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. Factors the
board of directors would consider include:
o the current and projected capital structure of each Group,
o the relative levels of internally generated funds of each
Group,
o the financing needs and objectives of the recipient Group,
o the investment objectives of the transferring Group,
o the availability, cost and time associated with alternative
financing sources and
o prevailing interest rates and general economic conditions.
(5) Any cash transfer accounted for as an inter-Group revolving
credit advance will bear interest at the rate at which the board of
directors, in its sole discretion, determines Donaldson, Lufkin &
Jenrette, Inc. could borrow such funds on a revolving credit basis.
Any cash transfer accounted for as a long-term loan will have interest
rate, amortization, maturity, redemption and other terms that
generally reflect the then prevailing terms on which the board of
directors, in its sole discretion, determines Donaldson, Lufkin &
Jenrette, Inc. could borrow such funds.
(6) Any cash transfer from DLJ to DLJdirect or for DLJdirect's
account accounted for as a capital contribution will correspondingly
increase DLJdirect's shareholders' equity and DLJ's Retained Interest
in DLJdirect. As a result, the number of shares of DLJdirect Common
Stock that Donaldson, Lufkin & Jenrette, Inc. may issue for the
account of DLJ in respect of its Retained Interest (which we call the
"Number of Shares Issuable with Respect to DLJ's Retained Interest in
DLJdirect") will increase by the amount of such capital contribution
divided by the Market Value of DLJdirect Common Stock on the date of
transfer.
This increase in the Number of Shares Issuable with Respect to
DLJ's Retained Interest in DLJdirect may also be expressed as follows:
Amount of Capital Contribution to DLJdirect
-------------------------------------------------
Market Value of DLJdirect on the Date of Transfer
(7) Any cash transfer from DLJdirect to DLJ, or DLJ's account,
accounted for as a return of capital will correspondingly reduce
DLJdirect's division equity and DLJ's Retained Interest in DLJdirect.
As a result, the Number of Shares Issuable with Respect to DLJ's
Retained Interest in DLJdirect will decrease by the amount of such
return of capital divided by the Market Value of DLJdirect Common
Stock on the date of transfer.
This percentage decrease in the Number of Shares Issuable with
Respect to DLJ's Retained Interest in DLJdirect may also be expressed as
follows:
Amount of Return of Capital to DLJdirect
-------------------------------------------------
Market Value of DLJdirect on the Date of Transfer
Clearing and Licensing Fees
Pursuant to an agreement dated September 24, 1997, as amended
on March 11, 1999, between the Pershing Division of DLJ and DLJdirect,
Pershing acts as the clearing agent for DLJdirect. For a description of the
transaction execution and clearance arrangements, see "Certain Relationships".
Taxes
DLJdirect is, and after the offerings will continue to be,
included in the same consolidated tax group as DLJ for Federal income tax
purposes until such time as it ceases to be eligible for inclusion in the same
consolidated tax group as DLJ. For a description of the tax sharing
arrangements between DLJ and DLJdirect, see "Certain Relationships".
Corporate General and Administrative Expenses
DLJ provides services to DLJdirect pursuant to an Intercompany
Services Agreement dated February 23, 1999. For a description of the
Intercompany Services Agreement, see "Certain Relationships".
CERTAIN U.S. FEDERAL TAX CONSIDERATIONS
The following discussion is a summary of the principal United
States federal income tax consequences of the ownership of DLJdirect Common
Stock. The discussion is based on the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury regulations and published positions of the
Internal Revenue Service (the "IRS"), both of which are subject to change. In
particular Congress could enact legislation affecting the treatment of stock
with characteristics similar to the DLJdirect Common Stock, or the Treasury
Department could issue regulations that change current law. Any future
legislation or regulations could apply retroactively to the offering of
DLJdirect Common Stock.
This discussion addresses only those of you who will hold your
DLJdirect Common Stock as a capital asset. This discussion does not discuss
all aspects of United States federal income taxation that may be relevant to
you in light of your particular circumstances. This discussion does not apply
to you if you are a tax-exempt organization, S corporation or other
pass-through entity, mutual fund, small business investment company, regulated
investment company, insurance company or other financial institution,
broker-dealer or are otherwise subject to special treatment under the federal
income tax laws. You should consult your tax advisors with regard to the
application of the federal income tax laws, as well as to the applicability
and effect of any state, local, or foreign tax laws to which you may be
subject.
In the opinion of Davis Polk & Wardwell, our counsel, for
federal income tax purposes, DLJdirect Common Stock will be considered our
common stock. Accordingly, for federal income tax purposes, we believe that
neither you nor we will recognize any income, gain or loss as a result of the
issuance of DLJdirect Common Stock.
No ruling has been sought from the Internal Revenue Service.
The Internal Revenue Service has announced that it will not issue advance
rulings on the classification of an instrument whose dividend rights are
determined by reference to the earnings of a segregated portion of the issuing
corporation's assets, including assets held by a subsidiary. Davis Polk &
Wardwell's opinion is not binding on the Internal Revenue Service. In
addition, there are no court decisions or other authorities bearing directly
on the classification of instruments with characteristics similar to those of
DLJdirect Common Stock. It is possible, therefore, that the Internal Revenue
Service could assert that the issuance of the DLJdirect Common Stock could
result in taxation to us. Davis Polk & Wardwell, however, is of the opinion
that the Internal Revenue Service would not prevail in such an assertion.
A recent proposal by the Clinton Administration would impose a
corporate level tax on the issuance of stock similar to the DLJdirect Common
Stock. As proposed by the Clinton Administration, this provision would be
effective upon the date of its enactment by Congress. We expect the offering
to be consummated prior to the effective date of the proposed legislation, so
that the issuance of DLJdirect Common stock in the offering would not be
subject to the proposal. If this proposal is enacted, however, it is possible
that we could be subject to tax on an issuance of DLJdirect Common Stock after
the date of enactment. We cannot predict whether the proposal will be enacted
by Congress and, if enacted, whether it will be in the form proposed by the
Clinton Administration. We may issue DLJ Common Stock in exchange for
DLJdirect Common Stock at a premium of 10% if, based on the legal opinion of
our tax counsel, it is more likely than not as a result of the enactment of
legislative changes or administrative proposals or changes that we or our
stockholders will be subject to tax upon issuance of the DLJ Common Stock, or
DLJdirect Common Stock or such stock will not be treated as stock of
Donaldson, Lufkin & Jenrette, Inc. Such an exchange should qualify as a
tax-free recapitalization such that no gain or loss is required to be
recognized by us or by holders of the stock to be exchanged.
Backup Withholding. Certain non-corporate holders of DLJdirect
Common Stock could be subject to backup withholding at a rate of 31% on the
payment of dividends on or proceeds from the sale of such stock. Backup
withholding will apply only if the stockholder (1) fails to furnish its
taxpayer identification number ("TIN"), which, for an individual would be his
or her social security number, (2) furnishes an incorrect TIN, (3) is notified
by the IRS that it has failed to properly report payments of interest or
dividends or (4) under certain circumstances, fails to certify under penalties
of perjury that it has furnished a correct TIN and has not been notified by
the IRS that it is subject to backup withholding for failure to report
payments of interest or dividends. Stockholders should consult their tax
advisors regarding their qualification for exemption from backup
withholding and the procedures for obtaining such an exemption if
applicable. The amount of any backup withholding from a payment to a
holder of DLJdirect Common Stock will be allowed as a credit against such
stockholder's federal income tax liability and may entitle such holder to a
refund, provided that the required information is furnished to the IRS.
Certain United States Federal Tax Consequences to Non-U.S. Investors
The following is a summary of certain United States federal tax
consequences to non-U.S. investors of owning DLJdirect Common Stock. In this
summary, "non-U.S. investor" means a person or entity other than (1) a citizen
or resident of the United States; (2) a corporation, partnership or other
entity created or organized in or under the laws of the United States or any
state; (3) an estate, the income of which is subject to United States federal
income taxation regardless of its source; or (4) a trust, the administration
of which is subject to the primary supervision of a United States court and
the control of all of the substantial decisions of which is within the
authority of one or more United States persons.
This summary does not address all of the federal tax
considerations that may be relevant to a non-U.S. investor in light of its
particular circumstances or to non-U.S. investors that may be subject to
special treatment under federal tax laws. Also, this summary does not discuss
any aspects of state, local or foreign taxation. This summary is based on
current provisions of the Internal Revenue Code, Treasury regulations,
judicial opinions, published positions of the IRS and other applicable
authorities. These authorities are all subject to change, possibly with
retroactive effect. Each prospective non-U.S. investor should consult its
tax advisor with respect to the tax consequences of investing in the DLJdirect
stock.
Dividends. Dividends paid to a non-U.S. investor generally
will be subject to withholding of federal income tax at a 30% rate or such
lower rate as may be specified by an applicable income tax treaty. However,
if the dividend is effectively connected with the conduct of a trade or
business of the non-U.S. investor within the United States, the dividend will
instead be taxed at ordinary federal income tax rates on a net income basis.
Further, if the non-U.S. investor is a corporation, this effectively connected
dividend income may also be subject to an additional branch profits tax.
Sale or Other Disposition of DLJdirect Common Stock. A
non-U.S. investor generally will not be subject to federal income tax on any
gain recognized on the sale or other disposition of DLJdirect Common Stock,
except in the following circumstances: (1) the gain will be subject to federal
income tax if it is effectively connected with a trade or business of the
non-U.S. investor within the United States; (2) the gain will be subject to
federal income tax if the non-U.S. investor is an individual who holds the
DLJdirect Common Stock as a capital asset, is present in the United States for
183 or more days in the taxable year of the sale or other disposition, and
either the individual has a "tax home" in the United States for federal income
tax purposes or the gain is attributable to an office or other fixed place of
business maintained by the individual in the United States; (3) the gain may be
subject to federal income tax pursuant to federal income tax laws applicable
to certain expatriates; or (4) the gain may be subject to federal income tax
if Donaldson, Lufkin & Jenrette, Inc. is or has been during certain periods
a "United States real property holding corporation." Donaldson, Lufkin &
Jenrette, Inc. believes that it will not constitute a United States real
property holding corporation immediately after the offering and does not
expect to become a United States real property holding corporation; however,
no assurance can be given in this regard.
Backup Withholding and Information Reporting
Dividends. United States backup withholding tax generally will
not apply to dividends paid to a non-U.S. investor at an address outside the
United States. Donaldson, Lufkin & Jenrette, Inc. must report annually to the
IRS and to each non-U.S. investor the amount of dividends paid to such
investor and the amount, if any, of tax withheld with respect to such
dividends. This information may also be made available to the tax authorities
in the non-U.S. investor's country of residence.
Sale Through a U.S. Office of a Broker. Upon the sale or other
disposition of DLJdirect Common Stock by a non-U.S. investor to or through a
United States office of a broker, the broker must backup withhold at a rate of
31% and report the sale to the IRS, unless the investor certifies its foreign
status under penalties of perjury or otherwise establishes an exemption from
backup withholding.
Sale Through a Foreign Office of a Broker. Upon the sale or
other disposition of DLJdirect Common Stock by a non-U.S. investor to or
through a foreign office of a United States broker or a foreign broker with
certain types of relationships with the United States, the broker is not
required to backup withhold. However, the broker must report the sale or
other disposition to the IRS unless the broker has documentary evidence in its
files that the seller is a non-U.S. investor and certain other conditions are
met, or the holder otherwise establishes an exemption.
Backup withholding is not an additional tax. Amounts withheld
under the backup withholding rules are generally allowable as a refund or
credit against the non-U.S. investor's federal income tax liability, if any,
provided that the required information is furnished to the IRS in a timely
manner.
Final United States Treasury regulations, effective for
payments made after December 31, 1999, may affect the procedures to be
followed by a non-U.S. investor in establishing such investor's foreign status
for purposes of the withholding, backup withholding and information reporting
rules described in the preceding paragraphs. Prospective non-U.S. investors
should consult their tax advisors concerning such regulations.
Federal Estate Taxes. DLJdirect Common Stock owned or treated
as owned by an individual who is not a citizen or a "resident," which is
specially defined for federal estate tax purposes, of the United States at the
time of death, will be included in such individual's gross estate for federal
estate tax purposes, unless an applicable estate tax treaty provides otherwise.
UNDERWRITERS
Subject to the terms and conditions contained in an
underwriting agreement, dated , 1999, the underwriters named
below, who are represented by Donaldson, Lufkin & Jenrette Securities
Corporation and , have severally agreed to purchase from
Donaldson, Lufkin & Jenrette, Inc. the respective number of shares of
DLJdirect Common Stock set forth opposite their names below.
Number of
shares
---------
Underwriters
- ------------
Donaldson, Lufkin & Jenrette Securities Corporation........
DLJdirect Inc..............................................
---------
Total.....................................................
=========
The underwriting agreement provides that the obligations of the
several underwriters to purchase and accept delivery of the shares of DLJdirect
Common Stock offered in this prospectus are subject to approval by their counsel
of certain legal matters and to certain other conditions. The underwriters are
obligated to purchase and accept delivery of all the shares of DLJdirect Common
Stock offered in this prospectus (other than those shares covered by the
over-allotment option described below) if any are purchased.
The underwriters initially propose to offer the shares of
DLJdirect Common Stock in part directly to the public at the initial public
offering price set forth on the cover page of this prospectus and in part to
certain dealers, including the underwriters, at that price less a concession
not in excess of $ per share. The underwriters may allow, and the
dealers may re-allow, to certain other dealers a concession not in excess of $
per share. After the initial offering of the DLJdirect Common Stock,
the public offering price and other selling terms may be changed by the
representatives of the underwriters at any time without notice. The
underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
Donaldson, Lufkin & Jenrette, Inc. has granted to the
underwriters an option, exercisable within 30 days after the date of this
prospectus, to purchase, from time to time, in whole or in part, up to an
aggregate of additional shares of DLJdirect Common Stock at the
initial public offering price less underwriting discounts and commissions.
The underwriters may exercise this option solely to cover over-allotments, if
any, made in connection with the offering. To the extent that the
underwriters exercise this option, each underwriter will become obligated,
subject to certain conditions, to purchase its pro rata portion of the
additional shares based on the underwriter's percentage underwriting
commitment as indicated in the preceding table.
Donaldson, Lufkin & Jenrette, Inc. has agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the underwriters may be
required to make.
Each of Donaldson, Lufkin & Jenrette, Inc., its executive
officers, directors, stockholders and option holders have agreed, subject to
certain exceptions, not to:
o offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise
transfer or dispose of, directly or indirectly, any shares of
DLJdirect Common Stock or any securities convertible into or
exercisable or exchangeable for DLJdirect Common Stock or
o enter into any swap or other arrangement that transfers all or
a portion of the economic consequences associated with the
ownership of any DLJdirect Common Stock for a period of days
after the date of this prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation
and . However, Donaldson, Lufkin & Jenrette, Inc. may:
o grant stock options or stock awards under Donaldson,
Lufkin & Jenrette, Inc.'s existing benefit or
compensation plans, including the DLJdirect 1999
Incentive Compensation Plan,
o issue shares of DLJdirect Common Stock upon the exercise
of options, warrants or rights or the conversion of
currently outstanding securities, and
o issue, offer and sell shares of DLJdirect Common Stock or
securities convertible, exercisable or exchangeable in
transactions not involving a public offering, as long as
each recipient of the securities agrees in writing to be
bound by the restrictions in this paragraph.
In addition, during this period, Donaldson, Lufkin & Jenrette,
Inc. has also agreed not to file any registration statement with respect to,
and each of its executive officers, directors and certain stockholders of
Donaldson, Lufkin & Jenrette, Inc. has agreed not to make any demand for, or
exercise any right with respect to, the registration of any shares of
DLJdirect Common Stock or any securities convertible into or exercisable or
exchangeable for DLJdirect Common Stock without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation.
Prior to the offering, there has been no established trading
market for DLJdirect Common Stock. The initial public offering price of the
shares of DLJdirect Common Stock offered in this prospectus has been
determined by negotiation among Donaldson, Lufkin & Jenrette, Inc. and the
representatives of the underwriters. The factors considered in determining
the initial public offering price included the history of and the prospects
for the industry in which DLJdirect competes, the past and present operations
of DLJdirect, the historical results of operations of DLJdirect, the prospects
for future earnings of DLJdirect, the recent market prices of securities of
generally comparable companies and the general condition of the securities
markets at the time of the offering.
Application will be made to list the DLJdirect Common Stock on
the NYSE under the symbol "DIR", subject to official notice of issuance.
In order to meet the requirements for listing the DLJdirect Common Stock on
the NYSE, the Underwriters have undertaken to sell lots of 100 or more shares
to a minimum of 2,000 beneficial owners.
Other than in the United States, no action has been taken by
Donaldson, Lufkin & Jenrette, Inc. or the underwriters that would permit a
public offering of the shares of DLJdirect Common Stock offered in this
prospectus in any jurisdiction where action for that purpose is required. The
shares of DLJdirect Common Stock offered in this prospectus may not be offered
or sold, directly or indirectly, nor may this prospectus or any other offering
material or advertisements in connection with the offer and sale of any shares
of DLJdirect Common Stock be distributed or published in any jurisdiction,
except under circumstances that will result in compliance with the applicable
rules and regulations of the jurisdiction. Persons with this prospectus
should inform themselves about and observe any restrictions relating to the
offering and the distribution of this prospectus. This prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any shares of
DLJdirect Common Stock offered in this prospectus in any jurisdiction in which
an offer or a solicitation of this kind is unlawful.
In connection with the offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
DLJdirect Common Stock. Specifically, the underwriters may overallot, which
would involve syndicate sales in excess of the offering size, creating a
syndicate short position. The underwriters may bid for and stabilize the
price of the DLJdirect Common Stock. In addition, the underwriting syndicate
may reclaim selling concessions from syndicate members and selected dealers if
they repurchase previously distributed DLJdirect Common Stock in syndicate
covering transactions, in stabilizing transactions or otherwise. These
activities may stabilize or maintain the market price of the DLJdirect Common
Stock above independent market levels. The underwriters are not required to
engage in these activities, and may end any of these activities at any time.
The underwriters have reserved for sale approximately
shares of DLJdirect Common Stock for directors and current and former
employees of DLJ and DLJdirect and directors and employees of Equitable who
have an interest in purchasing shares of DLJdirect Common Stock in the
offering. The underwriters have advised DLJ, DLJdirect and Equitable that the
price per share for the shares will be the initial public offering price less
underwriting discounts and commissions, or $ per share. The number of
shares available for sale to the general public in the offering will be
reduced to the extent persons purchase reserved shares. Any reserved shares
not purchased will be offered by the underwriters and former employees of DLJ
and DLJdirect and directors and employees of Equitable who purchase any of the
shares offered in the offering will be prohibited from selling, pledging,
assigning, hypothecating or transferring their shares for a period of five
months following the effective date of the offering.
Donaldson, Lufkin & Jenrette Securities Corporation is an
affiliate of Donaldson, Lufkin & Jenrette, Inc. Donaldson, Lufkin & Jenrette
Securities Corporation has committed to purchase from Donaldson, Lufkin &
Jenrette, Inc. % of the shares of DLJdirect Common Stock being
underwritten by the underwriters in the offering on the same basis as the
other underwriters. Although the amount of proceeds derived from the offering
by Donaldson, Lufkin & Jenrette, Inc. will not be affected by Donaldson,
Lufkin & Jenrette Securities Corporation's participation as an underwriter, to
the extent that part or all of the shares of DLJdirect Common Stock
underwritten by Donaldson, Lufkin & Jenrette Securities Corporation are not
resold, Donaldson, Lufkin & Jenrette, Inc.'s consolidated equity will be
reduced. Until resold, any unsold shares will be eliminated in consolidation
as if they were not outstanding for purposes of any future computations of
earnings per common share and book value per common share. Donaldson, Lufkin
& Jenrette Securities Corporation intends to resell any shares which it is
unable to resell in the offering at prevailing market prices.
The offering is being conducted in accordance with Rule 2720 of
the Conduct of Rules of the NASD, which provides that, among other things,
when an NASD member participates in the underwriting of its parent's equity
securities, the initial public offering price can be no higher than that
recommended by a "qualified independent underwriter" meeting certain
standards. In accordance with this requirement, has
served in this role and has recommended a price in compliance with the
requirements of Rule 2720. In connection with the offering,
in its role as qualified independent underwriter has performed due
diligence investigations and reviewed and participated in the preparation of
this prospectus and the registration statement of which this prospectus forms
a part. In addition, the underwriters may not confirm sales to any
discretionary account without the prior specific written approval of the
customer.
NYSE Rule 312(g) prohibits a member corporation, after the
distribution of securities of its parent to the public, from effecting any
transaction, except on an unsolicited basis, for the account of any customer
in, or making any recommendation with respect to the purchase or sale of, any
of these securities. Thus, following the offering, DLJdirect Inc. and
Donaldson, Lufkin & Jenrette, Inc.'s other subsidiaries will not be permitted
to make a market in or to make recommendations regarding the purchase or sale
of the DLJdirect Common Stock.
The current by-laws of the NASD prohibit employees of DLJdirect
Inc. and Donaldson, Lufkin & Jenrette, Inc., their spouses and, under certain
circumstances, other members of their immediate families who purchase any of
the shares in the offering from selling, pledging, assigning, hypothecating or
transferring their shares for a period of five months following the effective
date of the offering.
LEGAL MATTERS
The validity of the issuance of the shares of DLJdirect Common
Stock offered hereby will be passed upon for Donaldson, Lufkin & Jenrette,
Inc. by Davis Polk & Wardwell, New York, New York. Certain legal matters
relating to the shares of DLJdirect Common Stock offered hereby will be passed
upon for the underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New
York, New York.
EXPERTS
We incorporate by reference into this prospectus and our
registration statement our consolidated financial statements of Donaldson,
Lufkin & Jenrette, Inc. as of December 31, 1998 and 1997 and for each of the
years in the three-year period ended December 31, 1998, and we include in this
prospectus and our registration statement the combined financial statements of
DLJdirect as of December 31, 1997 and 1998 and for each of the years in the
three-year period ended December 31, 1998. We have relied on the reports of
KPMG LLP, independent certified public accountants, incorporated by reference
and included in this prospectus and our registration statement, and upon their
authority as experts in accounting and auditing.
ILLUSTRATION OF CERTAIN TERMS
The following illustrations show how to calculate the Retained
Interest Percentage, the Outstanding Interest Percentage, the Number of Shares
Issuable with Respect to DLJ's Retained Interest in DLJdirect and the Total
Number of Notional DLJdirect Common Shares Deemed Outstanding after giving
effect to certain hypothetical dividends, issuances, repurchases and
transfers, in each case based on the assumptions set forth herein. In these
illustrations, the Number of Shares Issuable with Respect to DLJ's Retained
Interest in DLJdirect is initially assumed to be 100. Unless otherwise
specified, each illustration below should be read independently as if none of
the other transactions referred to below had occurred. Actual calculations
may be slightly different due to rounding.
"Total Number of Notional DLJdirect Common Shares Deemed
Outstanding" means the number of shares of DLJdirect Common Stock outstanding
plus the Number of Shares Issuable with Respect to DLJ's Retained Interest in
DLJdirect.
At any given time, the percentage interest in DLJdirect
intended to be represented by the outstanding shares of DLJdirect Common Stock
(i.e., the Outstanding Interest Percentage) is equal to:
Outstanding Shares of DLJdirect Common Stock
-----------------------------------------------------------
Total Number of Notional DLJdirect Common Shares Deemed Outstanding
and the remaining percentage interest in DLJdirect intended to be represented
by DLJ's Retained Interest in DLJdirect (i.e., the Retained Interest
Percentage) is equal to:
Number of Shares Issuable with Respect to DLJ's Retained
Interest in DLJdirect
-----------------------------------------------------------
Total Number of Notional DLJdirect Common Shares Deemed Outstanding
The sum of the Outstanding Interest Percentage and the Retained
Interest Percentage would always equal 100%. In our example, before the first
issuance the Number of Shares Issuable with Respect to DLJ's Retained Interest
in DLJdirect and the Total Number of Notional DLJdirect Common Shares Deemed
Outstanding are each equal to 100, the Retained Interest Percentage is 100%
and the Outstanding Interest Percentage is 0%.
The Offering
The following illustration reflects an assumed issuance by
Donaldson, Lufkin & Jenrette, Inc. of 15 shares of DLJdirect Common Stock in
the offering.
Offering for Account of DLJdirect
Assume the issuance is attributed to DLJdirect as an increase
in its equity, with the net proceeds credited solely to DLJdirect.
Shares previously issued and outstanding..................... 0
Newly issued shares for account of DLJdirect................. 15
--
Total issued and outstanding after the offering........... 15
==
o The Number of Shares Issuable with Respect to DLJ's Retained Interest in
DLJdirect (100) would remain unchanged.
o As a result, the issued and outstanding shares (15) would represent an
Outstanding Interest Percentage of approximately 13%, calculated as
follows:
15
--------
15 + 100
The Retained Interest Percentage would accordingly be about 87%.
o In this case, in the event of any dividend or other distribution paid
on the outstanding shares of DLJdirect Common Stock (other than a
dividend or other distribution payable in shares of DLJdirect Common
Stock), DLJ would be credited, and DLJdirect would be charged, with
an amount equal to 667% (representing the ratio of the Number of
Shares Issuable with Respect to DLJ's Retained Interest in DLJdirect
(100) to the total number of shares of DLJdirect Common Stock issued
and outstanding following the offering (15)) of the aggregate amount
of such dividend or distribution.
Additional Offerings of DLJdirect Stock
The following illustrations reflect an assumed issuance of
an additional 15 shares of DLJdirect Common Stock after the assumed initial
issuance of 15 shares attributed to DLJdirect as an increase in its equity.
Additional Offering for Account of DLJ
Assume the issuance is attributed to DLJ in respect of its
Retained Interest, with the net proceeds credited solely to DLJ.
Shares previously issued and outstanding........................ 15
Newly issued shares for account of DLJ.......................... 15
--
Total issued and outstanding after additional offering....... 30
==
o The Number of Shares Issuable with Respect to DLJ's Retained Interest
in DLJdirect would decrease by the number of shares of DLJdirect
Common Stock issued for the account of DLJ.
Number of Shares Issuable with Respect to DLJ's Retained Interest
in DLJdirect prior to the additional offering................ 100
Newly issued shares for account of DLJ.......................... 15
--
Number of Shares Issuable with Respect to DLJ's Retained Interest
in DLJdirect after the additional offering................... 85
==
o As a result, the total issued and outstanding shares (30) would in the
aggregate represent an Outstanding Interest Percentage of approximately
26%, calculated as follows:
30
-------
30 + 85
The Retained Interest Percentage would accordingly be reduced to
approximately 74%.
o In this case, in the event of any dividend or other distribution paid on
DLJdirect Common Stock (other than a dividend or other distribution
payable in shares of DLJdirect Common Stock), DLJ would be credited, and
DLJdirect would be charged, with an amount equal to 283% (representing
the ratio of the Number of Shares Issuable with Respect to DLJ's
Retained Interest in DLJdirect (85) to the total number of shares of
DLJdirect Common Stock issued and outstanding following the additional
offering (30)) of the aggregate amount of such dividend or distribution.
Additional Offering for Account of DLJdirect
Assume the issuance is attributed to DLJdirect as an increase
in its equity, with the net proceeds credited solely to DLJdirect.
Shares previously issued and outstanding.......................... 15
Newly issued shares for account of DLJdirect...................... 15
--
Total issued and outstanding after the additional offering..... 30
==
o The Number of Shares Issuable with Respect to DLJ's Retained Interest
in DLJdirect (100) would remain unchanged.
o As a result, the total issued and outstanding shares (30) would in the
aggregate represent an Outstanding Interest Percentage of approximately
23%, calculated as follows:
30
--------
30 + 100
The Retained Interest Percentage would accordingly be reduced to
approximately 77%.
o In this case, in the event of any dividend or other distribution paid on
DLJdirect Common Stock (other than a dividend or the distribution
payable in shares of DLJdirect Common Stock), DLJ would be credited,
and DLJdirect would be charged, with an amount equal to approximately
333% (representing the ratio of the Number of Shares Issuable with
Respect to DLJ's Retained Interest in DLJdirect (100) to the total
number of shares of DLJdirect Common Stock issued and outstanding
following the additional offering (30)) of the aggregate amount of
such dividend or distribution.
Offerings of Convertible Securities
If Donaldson, Lufkin & Jenrette, Inc. was to issue any
securities convertible into or exercisable for shares of DLJdirect Common
Stock, the Outstanding Interest Percentage and the Retained Interest
Percentage would be unchanged at the time of such issuance. If any shares
of DLJdirect Common Stock were issued upon conversion or exercise of such
securities, however, then the Outstanding Interest Percentage and the
Retained Interest Percentage would be affected as shown above under
"Additional Offering for Account of DLJ", if such securities were
attributed to DLJ, or under "Additional Offering for Account of DLJdirect",
if such securities were attributed to DLJdirect.
Repurchases of DLJdirect Stock
The following illustrations reflect an assumed repurchase by
Donaldson, Lufkin & Jenrette, Inc. of 5 shares of DLJdirect Common Stock
after the assumed initial issuance of 15 shares of DLJdirect Common Stock
attributed to DLJdirect as an increase in its equity.
Repurchase for the Account of DLJ
Assume the repurchase is attributed to DLJ as an increase in
its Retained Interest in DLJdirect, with the cost charged solely against DLJ.
Shares previously issued and outstanding.................... 15
Shares repurchased for account of DLJ....................... 5
--
Total issued and outstanding after repurchase............ 10
==
o The Number of Shares Issuable with Respect to DLJ's Retained Interest
in DLJdirect would be increased by the number of any shares of
DLJdirect Common Stock repurchased for the account of DLJ.
Number of Shares Issuable with Respect to DLJ's Retained
Interest in DLJdirect prior to repurchase................ 100
Number of shares repurchased for the account of DLJ......... 5
---
Number of Shares Issuable with Respect to DLJ's Retained
Interest in DLJdirect after repurchase................. 105
===
o As a result, the total issued and outstanding shares (10) would in the
aggregate represent an Outstanding Interest Percentage of approximately
9%, calculated as follows:
10
--------
10 + 105
The Retained Interest Percentage would accordingly be increased to
approximately 91%.
Repurchase for Account of DLJdirect without Participation by DLJ
Assume the repurchase is attributed to DLJdirect, with the
cost being charged solely against DLJdirect. Further assume that the board
of directors does not determine to transfer assets from DLJdirect to DLJ to
hold constant the Outstanding Interest Percentage and Retained Interest
Percentage.
Shares previously issued and outstanding.................... 15
Shares repurchased for account of DLJdirect................. 5
--
Total issued and outstanding after repurchase............ 10
==
o The Number of Shares Issuable with Respect to DLJ's Retained Interest
in DLJdirect (100) would remain unchanged.
o As a result, the total issued and outstanding shares (10) would in the
aggregate represent an Outstanding Interest Percentage of approximately
9%, calculated as follows:
10
--------
10 + 100
The Retained Interest Percentage would accordingly be increased to
approximately 91%.
Repurchase for Account of DLJdirect with Participation by DLJ
Assume the repurchase is attributed to DLJdirect, with the cost
being charged solely against DLJdirect. Further assume that the repurchase is
made in connection with a tender offer for 5, or 33%, of the then outstanding
shares at a price of $20 per share, and that the board of directors determines
to transfer cash or other assets from DLJdirect to DLJ to hold constant the
Outstanding Interest Percentage and Retained Interest Percentage.
Shares previously issued and outstanding.................... 15
Shares repurchased for account of DLJdirect................. 5
--
Total issued and outstanding after repurchase............ 10
==
o In order to hold constant the Outstanding Interest Percentage and
Retained Interest Percentage, the board of directors determines that
the Market Value of a share of DLJdirect Common Stock in this context
is $20 and transfer from DLJdirect to DLJ an amount of cash or other
assets equal to about 667% (representing the ratio of the Number of
Shares Issuable with Respect to DLJ's Retained Interest in DLJdirect
(100) to the total number of shares of DLJdirect Common Stock issued
and outstanding (15), in each case immediately prior to the
repurchase) of the aggregate amount of the cash paid in the tender
offer to holders of outstanding shares of DLJdirect Common Stock
($100), for a total of $667.
o In that case, the Number of Shares Issuable with Respect to DLJ's
Retained Interest in DLJdirect (100) would be decreased to reflect the
amount of cash so transferred ($667) divided by the Market Value per
share of DLJdirect Common Stock ($20).
Number of Shares Issuable with Respect to DLJ's Retained
Interest in DLJdirect prior to transfer.................. 100
Adjustment in respect of DLJ's Retained Interest to reflect
transfer to DLJ of funds theretofore allocated to
DLJdirect................................................ 33
--
Number of Shares Issuable with Respect to DLJ's Retained
Interest in DLJdirect after transfer................... 67
==
o As a result, the total issued and outstanding shares (10) would in the
aggregate continue to represent an Outstanding Interest Percentage of
13%, calculated as follows:
10
-------
10 + 67
The Retained Interest Percentage would accordingly continue to remain
87%.
o Assuming that the board of directors transferred only half of the $667
amount, or $333.50, from DLJdirect to DLJ, the Number of Shares Issuable
with Respect to DLJ's Retained Interest in DLJdirect (100) would
decrease by the amount of cash so transferred ($333.50) divided by the
Market Value per share of DLJdirect Common Stock ($20).
Number of Shares Issuable with Respect to DLJ's Retained
Interest in DLJdirect prior to transfer.................. 100
Adjustment in respect of DLJ's Retained Interest to reflect
transfer to DLJ of cash theretofore allocated to
DLJdirect................................................ 17
--
Number of Shares Issuable with Respect to DLJ's Retained
Interest in DLJdirect after transfer................... 83
==
o In that case, as a result, the total issued and the outstanding shares
(10) would in the aggregate represent an Outstanding Interest Percentage
of about 11%, calculated as follows:
10
-------
10 + 83
The Retained Interest Percentage would accordingly be increased to
approximately 89%.
DLJdirect Common Stock Dividends
The following illustrations reflect assumed dividends of
DLJdirect Common Stock on outstanding shares of DLJ Common Stock and
outstanding shares of DLJdirect Common Stock, respectively, after the
assumed initial issuance of 15 shares of DLJdirect Common Stock attributed
to DLJdirect as an increase in its equity.
DLJdirect Common Stock Dividend on DLJ Common Stock
Assume 1,000 shares of DLJ Common Stock are outstanding and
Donaldson, Lufkin & Jenrette, Inc. declares a dividend of 1/20 of a share of
DLJdirect Common Stock on each outstanding share of DLJ Common Stock.
Shares previously issued and outstanding................... 15
Newly issued shares for account of DLJ..................... 50
--
Total issued and outstanding after dividend............. 65
==
o Any dividend of shares of DLJdirect Common Stock to the holders of
shares of DLJ Common Stock would be treated as a reduction in the
Number of Shares Issuable with Respect to DLJ's Retained Interest in
DLJdirect.
Number of Shares Issuable with Respect to DLJ's Retained
Interest in DLJdirect prior to dividend................. 100
Number of shares distributed on outstanding shares of DLJ
Common Stock for account of DLJ......................... 50
--
Number of Shares Issuable with Respect to DLJ's Retained
Interest in DLJdirect after dividend.................. 50
==
o As a result, the total issued and outstanding shares (65) would in
the aggregate represent an Outstanding Interest Percentage of 57%,
calculated as follows:
65
-------
65 + 50
The Retained Interest Percentage would accordingly be reduced to 43%.
Note, however, that after the dividend, the holders of DLJ Common
Stock would also hold 50 shares of DLJdirect Common Stock, which
would be intended to represent a 50% interest in the value
attributable to DLJdirect.
DLJdirect Common Stock Dividend on DLJdirect Common Stock
Assume Donaldson, Lufkin & Jenrette, Inc. declares a dividend
of 1/5 of a share of DLJdirect Common Stock on each outstanding share of
DLJdirect Common Stock.
Shares previously issued and outstanding................... 15
Newly issued shares for account of DLJdirect............... 3
--
Total issued and outstanding after dividend............. 18
==
o The Number of Shares Issuable with Respect to DLJ's Retained Interest
in DLJdirect would reflect the stock dividend payable in shares of
DLJdirect Common Stock to holders of shares of DLJdirect Common
Stock. That is, the Number of Shares Issuable with Respect to DLJ's
Retained Interest in DLJdirect would be increased by a number equal
to 667% (representing the ratio of the Number of Shares Issuable with
Respect to DLJ's Retained Interest in DLJdirect (100) to the number
of shares of DLJdirect Common Stock issued and outstanding (15), in
each case immediately prior to such dividend) of the aggregate number
of shares issued in connection with such dividend (3), or 20.
Number of Shares Issuable with Respect to DLJ's Retained
Interest in DLJdirect prior to dividend................. 100
Adjustment in respect of DLJ's Retained Interest to reflect
shares distributed on outstanding shares of DLJdirect
Common Stock............................................ 20
---
Number of Shares Issuable with Respect to DLJ's Retained
Interest in DLJdirect after dividend................. 120
===
o As a result, the total issued and outstanding shares (18) would in the
aggregate represent an Outstanding Interest Percentage of approximately
13%, calculated as follows:
18
--------
18 + 120
The Retained Interest Percentage would accordingly remain 87%.
Capital Transfers of Cash or Other Assets Between DLJ and DLJdirect
Capital Contribution of Cash or Other Assets from DLJ to
DLJdirect
The following illustration reflects the assumed contribution
by DLJ to DLJdirect, after the assumed initial issuance of 15 shares of
DLJdirect Common Stock attributed to DLJdirect as an increase in its
equity, of $40 of assets allocated to DLJ at a time when the Market Value
of the DLJdirect Common Stock is $20 per share.
Shares previously issued and outstanding..................... 15
Newly issued shares.......................................... 0
--
Total issued and outstanding after contribution........... 15
==
o The Number of Shares Issuable with Respect to DLJ's Retained Interest
in DLJdirect would increase to reflect the contribution to DLJdirect
of assets theretofore allocated by DLJ by a number equal to the value
of the assets contributed ($40) divided by the Market Value of
DLJdirect Common Stock at that time ($20), or 2 shares.
Number of Shares Issuable with Respect to DLJ's Retained
Interest in DLJdirect prior to contribution............... 100
Increase to reflect contribution to DLJdirect of assets
allocated to DLJ.......................................... 2
---
Number of Shares Issuable with Respect to DLJ's Retained
Interest in DLJdirect after contribution............... 102
===
o As a result, the total issued and outstanding shares (15) would in the
aggregate represent an Outstanding Interest Percentage of approximately
13%, calculated as follows:
15
--------
15 + 102
The Retained Interest Percentage would accordingly increase to slightly
more than 87%.
Return of Capital Transfer of Cash or Other Assets from
DLJdirect to DLJ
The following illustration reflects the assumed transfer by
DLJdirect to DLJ, after the assumed initial issuance of 15 shares of
DLJdirect Common Stock attributed to DLJdirect as an increase in its equity
of $40, of assets allocated to DLJdirect on a date on which the Market
Value of DLJdirect Common Stock is $20 per share.
Shares previously issued and outstanding..................... 15
Newly issued shares.......................................... 0
--
Total issued and outstanding after contribution........... 15
==
o The Number of Shares Issuable with Respect to DLJ's Retained Interest
in DLJdirect would decrease to reflect the transfer to DLJ of assets
theretofore allocated to DLJdirect by a number equal to the value of
the assets transferred ($40) divided by the Market Value of DLJdirect
Common Stock at that time ($20), or 2 shares.
Number of Shares Issuable with Respect to DLJ's Retained
Interest in DLJdirect prior to contribution................ 100
Decrease to reflect transfer to DLJ of assets allocated to
DLJdirect.................................................. 2
--
Number of Shares Issuable with Respect to DLJ's Retained
Interest in DLJdirect after contribution................ 98
==
o As a result, the total issued and outstanding shares (15) would in the
aggregate represent an Outstanding Interest Percentage of
approximately 13%, calculated as follows:
15
-------
15 + 98
The Retained Interest Percentage would accordingly decrease to slightly
less than 87%.
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
INDEX TO COMBINED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report...............................................F-2
Combined Financial Statements:
Combined Statements of Financial Condition..............................F-3
Combined Statements of Operations.......................................F-4
Combined Statements of Changes in Equity................................F-5
Combined Statements of Cash Flows.......................................F-6
Notes to Combined Financial Statements..................................F-7
Independent Auditors' Report
The Board of Directors and Stockholders
Donaldson, Lufkin & Jenrette, Inc.
We have audited the accompanying combined statements of financial condition of
DLJdirect (a combination of certain assets and liabilities of Donaldson,
Lufkin & Jenrette, Inc., as described in note 1) as of December 31, 1997 and
1998, and the related combined statements of operations, changes in equity,
and cash flows for each of the years in the three-year period ended December
31, 1998. These combined financial statements are the responsibility of
Donaldson, Lufkin & Jenrette, Inc.'s management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes, examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
We have audited the consolidated financial statements of Donaldson, Lufkin &
Jenrette, Inc. and subsidiaries as of December 31, 1997 and 1998, and for each
of the years in the three-year period ended December 31, 1998 and have issued
our report dated February 2, 1999. The combined financial statements of
DLJdirect should be read in conjunction with the consolidated financial
statements of Donaldson, Lufkin & Jenrette, Inc. and subsidiaries.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of DLJdirect as of
December 31, 1997 and 1998, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1998,
in conformity with generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
March 16, 1999
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Combined Statements of Financial Condition
(In thousands)
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1998
ASSETS ------ ------
<S> <C> <C>
Cash and cash equivalents................................................................... $8,881 $26,654
Deposit with affiliated clearing broker..................................................... 250 250
Receivables from brokers, dealers and others, net........................................... 725 1,887
Office facilities, at cost (net of accumulated depreciation and amortization of $260
and $284, respectively).................................................................... 1,808 278
Other assets................................................................................ 207 682
------ ------
Total Assets................................................................................ $11,871 $29,751
====== ======
LIABILITIES AND EQUITY
Liabilities:
Payables to parent/affiliates, net......................................................... $3,266 $5,211
Accounts payable and accrued expenses...................................................... 2,641 2,616
------ ------
Total liabilities........................................................................ 5,907 7,827
Commitments and contingencies............................................................... -- --
Equity:
Capital contributions...................................................................... 10,502 25,002
Accumulated deficit........................................................................ (4,538) (3,078)
------ ------
Total equity............................................................................. 5,964 21,924
------ ------
Total Liabilities and Equity................................................................ $11,871 $29,751
====== ======
See accompanying notes to combined financial statements.
</TABLE>
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Combined Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Revenues:
Commissions.................................................. $ 54,166 $ 50,948 $ 78,717
Fees......................................................... 6,426 12,109 25,484
Interest..................................................... 2,569 4,160 13,723
------ ------ -------
Total revenues............................................. 63,161 67,217 117,924
------ ------ -------
Costs and expenses:
Compensation and benefits.................................... 11,202 17,174 28,260
Brokerage, clearing, exchange and other fees................. 15,422 20,909 28,423
Advertising.................................................. 9,093 13,137 25,146
Occupancy and equipment...................................... 1,923 3,352 5,045
Communications............................................... 1,468 2,844 5,564
Technology costs............................................. 5,205 5,082 4,084
Other operating expenses..................................... 5,567 10,844 18,934
------ ------ -------
Total costs and expenses................................... 49,880 73,342 115,456
------ ------ -------
Income (loss) before income tax provision (benefit)........... 13,281 (6,125) 2,468
Income tax provision (benefit)................................ 5,425 (2,502) 1,008
------ ------ -------
Net income (loss)............................................. $ 7,856 $ (3,623) $ 1,460
====== ====== =======
See accompanying notes to combined financial statements.
</TABLE>
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Combined Statements of Changes in Equity
<TABLE>
<CAPTION>
For the Years Ended December 31, 1996, 1997 and 1998
-------------------------------------------------------------------------
Capital Accumulated
Divisional Equity Contributions Deficit Total Equity
----------------- ------------- ----------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Balances at December 31, 1995............ $ -- $ -- $ -- $ --
Divisional net income.................... 7,856 -- -- 7,856
Return of divisional equity to DLJ....... (7,856) -- -- (7,856)
----- ------ ------ ------
Balances at December 31, 1996............ -- -- -- --
Divisional net income from January 1,
1997 to May 31, 1997.................... 915 -- -- 915
Net (loss) from June 1, 1997 to
December 31, 1997....................... -- -- (4,538) (4,538)
Capital contributions from DLJ........... -- 10,502 -- 10,502
Return of divisional equity to DLJ....... (915) -- -- (915)
----- ------ ------ ------
Balances at December 31, 1997............ -- 10,502 (4,538) 5,964
Net income............................... -- -- 1,460 1,460
Capital contributions from DLJ........... -- 14,500 -- 14,500
----- ------ ------ ------
Balances at December 31, 1998............ $ -- $25,002 $(3,078) $21,924
===== ====== ====== ======
See accompanying notes to combined financial statements.
</TABLE>
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Combined Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................................... $ 7,856 $(3,623) $ 1,460
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization.......................................... 949 652 299
Deferred taxes......................................................... (344) 160 (275)
----- ----- ------
8,461 (2,811) 1,484
(Increase) decrease in operating assets:
Deposit with affiliated clearing broker.............................. -- (250) --
Receivables from brokers, dealers and other, net..................... 283 (1,923) (1,162)
Other assets......................................................... -- (207) (475)
Increase (decrease) in operating liabilities:
Payables to parent/affiliates, net................................... 357 1,951 2,220
Accounts payable and accrued expenses................................ -- 2,641 (25)
----- ----- ------
Net cash provided by (used in) operating activities..................... 9,101 (599) 2,042
----- ----- ------
Cash flows from investing activities:
Purchase of office facilities.......................................... (1,245) (107) --
Net proceeds from sale of office facilities............................ -- -- 1,231
----- ----- ------
Net cash provided by (used in) investing activities..................... (1,245) (107) 1,231
----- ----- ------
Cash flows from financing activities:
Net proceeds from capital contributions from DLJ....................... -- 10,502 14,500
Payments to DLJ........................................................ (7,856) (915) --
----- ----- ------
Net cash provided by (used in) financing activities..................... (7,856) 9,587 14,500
----- ----- ------
Increase in cash and cash equivalents................................... -- 8,881 17,773
Cash and cash equivalents at beginning of year.......................... -- -- 8,881
----- ----- ------
Cash and cash equivalents at end of year................................ $ -- $ 8,881 $26,654
===== ===== ======
See accompanying notes to combined financial statements.
</TABLE>
DLJDIRECT
(a combination of certain assets and liabilities as described in note 1)
Notes to Combined Financial Statements
1. Basis of Presentation
On March 16, 1999, the Board of Directors of Donaldson, Lufkin
& Jenrette, Inc. ("DLJ Inc.") authorized, subject to shareholder approval, the
issuance of a new series of stock, DLJdirect Common Stock.
The DLJdirect Common Stock is intended to reflect the separate
performance of the existing online discount brokerage services of DLJ Inc.
DLJdirect would initially consist principally of the assets, liabilities,
revenues and expenses of DLJ Inc.'s ultimate 100% equity interest in DLJdirect
Holdings Inc. (subsequent to June 1, 1997) and DLJ Inc.'s online discount
brokerage division (prior to June 2, 1997). DLJdirect would also include such
other related assets and liabilities of DLJ Inc. as the Board of Directors of
DLJ Inc. may deem appropriate in the future. It is currently the intention of
DLJ Inc. that any businesses, assets and liabilities related to its online
discount brokerage and related investment service businesses will be
attributed to DLJdirect. However, the Board of Directors of DLJ Inc., in its
sole discretion, may in the future decide to pursue business opportunities or
operational strategies, even in the online brokerage area, through other
affiliates of DLJ Inc. instead of DLJdirect.
Even though DLJ Inc. has allocated certain assets, liabilities,
revenues, expenses and cash flows to DLJdirect, that allocation will not
change the legal title to any assets or responsibility for any liabilities and
will not affect the rights of creditors. Holders of DLJdirect Common Stock
will be common stockholders of DLJ Inc. and will be subject to all the risks
associated with an investment in DLJ Inc. and all of its businesses, assets
and liabilities. Material financial events which may occur at DLJ Inc. may
affect DLJdirect's results of operations or financial position. Accordingly,
financial information for DLJdirect should be read in conjunction with
financial information of DLJ Inc.
2. Summary of Significant Accounting Policies
To prepare financial statements in conformity with generally
accepted accounting principles ("GAAP"), management must estimate certain
amounts that affect the reported assets and liabilities, disclosure of
contingent assets and liabilities, and reported revenues and expenses. Actual
results could differ from those estimates.
Substantially all of DLJdirect's financial assets and
liabilities are carried at market or fair value or are carried at amounts
which approximate fair value because of their short-term nature. Fair value
is estimated at a specific point in time, based on relevant market information.
Cash equivalents include all demand deposits held in banks and
certain highly liquid investments with maturities of 90 days or less, other
than those held for sale in the ordinary course of business.
Commissions revenue and brokerage, clearing, exchange and other
fees are reported on a trade date basis.
Office facilities are carried at cost and are depreciated on a
straight-line basis over the estimated useful life of the related assets,
ranging from three to eight years. Leasehold improvements are amortized over
the lesser of the useful life of the improvement or the term of the lease.
Advertising costs are expensed as incurred.
Effective January 1, 1997, DLJdirect is included in the
consolidated Federal income tax returns of DLJ Inc. In addition, for the
period prior to its incorporation, the division was included in the
consolidated Federal income tax returns of DLJ Inc. Prior to 1997, DLJ Inc.
and its subsidiaries were included in the consolidated Federal income tax
return of The Equitable Companies Incorporated. Related current and deferred
tax assets or liabilities are included in payables to parent/affiliates, net
in the combined statements of financial condition. Deferred tax expenses and
benefits are recognized in the combined statements of operations for the
changes in deferred tax liabilities and assets.
Pursuant to SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", DLJdirect operates in one reportable
segment as a provider of online discount brokerage services. DLJdirect's
involvement in foreign operations is not significant.
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use". SOP 98-1
requires that certain costs related to the development or purchase of
internal-use software be capitalized and amortized over the estimated useful
life of the software. The SOP also requires that costs related to the
preliminary project stage and the post-implementation/operations stage of an
internal-use computer software development project be expensed as incurred.
The adoption of this SOP did not have a material impact on DLJdirect's
combined financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities".
SFAS 133 establishes accounting and reporting standards for derivative
instruments and hedging activities and is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. DLJdirect does not expect the
adoption of SFAS 133 to have a material impact on its combined financial
statements.
3. DLJdirect Common Stock (unaudited)
The majority stockholder of DLJ Inc. has agreed to approve, by
written consent, the authorization of the issuance of a new series of common
stock, to be designated as DLJdirect Common Stock ("DLJdirect Common Stock").
Before the DLJdirect Common Stock is first issued, DLJ Inc.'s existing common
stock will be reclassified as DLJ Common Stock ("DLJ Common Stock"), and that
stock will be intended to reflect the performance of DLJ Inc.'s other
businesses and a "Retained Interest" in DLJdirect. DLJ Inc. currently plans
to offer to the public, for cash, shares of DLJdirect Common Stock intended to
represent a portion of the equity value attributed to DLJdirect.
In connection with the offering of DLJdirect Common Stock,
DLJdirect Holdings Inc. intends to pay as a dividend immediately prior to the
offering a note to Donaldson, Lufkin & Jenrette Securities Corporation in an
aggregate amount equal to the total equity of DLJdirect Holdings Inc. at
December 31, 1998 plus the accumulated retained earnings of DLJdirect Holdings
Inc. from January 1, 1999 until the end of the month preceding the offering.
4. Related Party Transactions
DLJdirect transacts business with a group of companies
affiliated through common majority ownership with DLJ Inc., and has various
transactions and relationships with members of the group. Due to these
relationships, it is possible that the terms of these transactions are not the
same as those that would result from transactions among unrelated parties.
Pursuant to a clearing agreement between DLJdirect and an
affiliate of DLJ Inc. all securities transactions of DLJdirect are cleared on
a fully disclosed basis through an affiliate of DLJ Inc. In connection with
such transactions, DLJdirect had $250,000 on deposit with DLJ Inc. at December
31, 1997 and 1998.
An affiliate of DLJ Inc. also charged DLJdirect $15.4 million,
$20.9 million and $28.4 million for transaction, execution and clearance
services which amount is included in brokerage, clearing, exchange and other
fees in the accompanying combined statements of operations for the years ended
December 31, 1996, 1997 and 1998, respectively. DLJ Inc. pays DLJdirect a
percentage of the interest earned on DLJdirect's customers' balances. For the
years ended December 31, 1996, 1997 and 1998, respectively, DLJdirect received
$2.6 million, $3.8 million and $12.6 million from an affiliate of DLJ Inc.
which is included in interest revenues in the accompanying combined statements
of operations. In addition, for the years ended December 31, 1996, 1997 and
1998, DLJdirect received $5.4 million, $5.5 million and $8.9 million,
respectively, from an affiliate of DLJ Inc. for order flow, which amount is
included in fees in the accompanying combined statements of operations.
DLJdirect received $4.8 million and $13.4 million in fees for technology
development from DLJ Inc. affiliates for the years ending December 31, 1997
and 1998, respectively.
In 1997 DLJdirect entered into a three-year License Agreement
with an affiliate. Under this agreement, the affiliate has licensed certain
trademarks, services marks, trade names and other proprietary rights to
various words, slogans, symbols and logos to DLJdirect for use in its
provision of financial services and sale or other distribution of related
financial goods. For the years ended December 31, 1997 and 1998, other
operating expenses included $1.2 million and $5.2 million, respectively, for
this agreement. Pursuant to a new License Agreement executed in March 1999,
the amounts paid by DLJdirect to the affiliate will include the license fee
for the use of DLJ Inc.'s trademarks that are licensed to DLJdirect for use in
the United States and certain other jurisdictions.
Employees of DLJdirect participate in DLJ Inc.'s defined
contribution employee benefit plans. Certain key employees of DLJdirect
participate in stock options, long-term incentive compensation and restricted
stock unit employee benefit plans and various deferred compensation
arrangements, as well as other non-qualified plans which are funded by
insurance contracts. Expenses associated with these compensation arrangements
are reflected in DLJdirect's combined statements of operations.
DLJ Inc. accounts for stock-based compensation related to stock
options in accordance with APB Opinion No. 25 "Accounting for Stock Issued to
Employees", and accordingly, does not recognize any compensation cost
associated with such plans. The pro forma effect on DLJdirect's combined
statements of operations, as determined in accordance with SFAS No. 123
"Accounting for Stock Based Compensation", is not material.
5. Net Capital
DLJdirect Holdings Inc.'s principal subsidiary, DLJdirect Inc.,
is a registered broker-dealer and a member of the National Association of
Securities Dealers Inc. ("NASD") and, accordingly is subject to the minimum net
capital requirements of the Securities and Exchange Commission and the NASD.
As such, it is subject to the NASD's net capital rule which conforms to the
Uniform Net Capital Rule pursuant to rule 15c3-1 of the Securities Exchange
Act of 1934. Under the alternative method permitted by this rule, the
required net capital, as defined, shall not be less than two percent of
aggregate debit balances, as defined, or $250,000, whichever is greater. At
December 31, 1998, DLJdirect Inc.'s net capital of $16.6 million was in excess
of the minimum requirement by $16.4 million.
6. Income Taxes
DLJdirect settles all taxes, current and deferred, on a current
basis with DLJ Inc. under a tax sharing arrangement. Income tax provision
(benefit) included in the combined statements of operations is as follows:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1996 1997 1998
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Current:
U.S. Federal.................................. $4,497 $(2,088) $1,022
State and local............................... 1,272 (574) 261
----- ----- -----
Total current.................................. 5,769 (2,662) 1,283
----- ----- -----
Deferred:
U.S. Federal.................................. (267) 137 (236)
State and local............................... (77) 23 (39)
----- ----- -----
Total deferred................................. (344) 160 (275)
----- ----- -----
Total income tax provision (benefit)........... $5,425 $(2,502) $1,008
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
1996 1997 1998
----------------------------- ----------------------------- -----------------------------
Percent of Percent of Percent of
Amount Pre-tax Income Amount Pre-tax Income Amount Pre-tax Income
------------- -------------- ------------- -------------- ------------- --------------
(in thousands) (in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" tax provision
(benefit)............................ $4,648 35.0% $(2,144) 35.0% $ 864 35.0%
State and local taxes, net of related
Federal income tax benefit........... 777 5.9 (358) 5.9 144 5.9
----- ---- ----- ---- ----- ----
Income tax provision (benefit)........ $5,425 40.9% $(2,502) 40.9% $1,008 40.9%
===== ==== ===== ==== ===== ====
</TABLE>
Deferred tax assets and deferred tax liabilities are
generated by the following temporary differences settled with DLJ Inc.:
1997 1998
------ ------
(in thousands)
Net deferred tax assets:
Deferred compensation and other......... $ 504 $ 779
====== =====
Management has determined that taxable income carryback
years and anticipated future taxable income are sufficient to offset the
tax benefit of deductible temporary differences. As a result, at year-end
1997 and 1998, valuation allowances have not been recorded against the net
deferred tax assets. Although realization is not assured, management
believes it is more likely than not that all of the net deferred tax assets
will be realized. However, if estimates of future taxable income during
the carryforward period are reduced, the amount of the net deferred tax
assets considered realizable could also be reduced.
7. Lease Commitments
DLJdirect primarily obtains its office space and equipment
under cancelable and non-cancelable operating lease agreements through an
affiliate. Such operating leases expire on various dates through 2009. Rent
expense for the years ended December 31, 1996, 1997 and 1998 amounted to $0.5
million, $1.7 million and $3.0 million, respectively, and is included in
occupancy and equipment in the accompanying combined statements of operations.
At December 31, 1998, non-cancelable operating leases in excess
of one year, excluding escalation and renewal options, had the following
minimum lease commitments:
(in thousands)
1999............................... $ 3,540
2000............................... 3,091
2001............................... 2,778
2002............................... 1,684
2003............................... 574
2004-2009.......................... 290
-------
Total............................. $ 11,957
=======
8. Concentrations of Credit Risk
In the normal course of business, DLJdirect executes securities
transactions on behalf of customers through its affiliated clearing broker.
In connection with these activities, a customer's unsettled trades may expose
DLJdirect to off-balance-sheet credit risk in the event the customer is unable
to fulfill its contractual obligations. DLJdirect seeks to control the risk
associated with its customer activities by making credit inquiries when
establishing customer relationships and by monitoring customer trading
activity.
Credit risk is the amount of accounting loss DLJdirect would
incur if a customer failed to perform its obligations under contractual terms.
Substantially all of the clearing and depository operations for DLJdirect are
performed by its affiliated clearing broker pursuant to a clearance agreement.
The affiliated clearing broker reviews as considered necessary, the
creditworthiness of the customers with which DLJdirect conducts business.
DLJdirect's exposure to credit risk associated with the nonperformance by
customers in fulfilling their contractual obligations pursuant to securities
transactions can be directly affected by volatile securities markets, credit
markets and regulatory changes.
==============================================================================
, 1999
[LOGO]
DLJdirect Common Stock
Donaldson, Lufkin & Jenrette, Inc.
________ Shares
----------
PROSPECTUS
----------
Donaldson, Lufkin & Jenrette
- ------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representation as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where
that would not be permitted or legal. Neither the delivery of this prospectus
nor any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of DLJdirect
have not changed since the date hereof.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Until , 1999 (25 days after the date of this prospectus),
all dealers, whether or not participating in this offering, that effect
transactions in these securities may be required to deliver a prospectus.
This is in addition to the dealer's obligation to deliver a prospectus when
acting as an underwriter in this offering and when selling previously unsold
allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
Amount
To Be Paid
----------
Registration fee.................................. $ 38,364
NASD Filing fee...................................
New York Stock Exchange listing fee...............
Transfer agent's fees.............................
Printing and engraving expenses...................
Legal fees and expenses...........................
Accounting fees and expenses......................
Blue Sky fees and expenses........................
Miscellaneous..................................... -------
Total......................................... $
=======
Each of the amounts set forth above, other than the
Registration fee and the NASD filing fee, is an estimate.
Item 15. Indemnification of Directors and Officers.
Reference is made to Section 102(b)(7) of the Delaware General
Corporation Law (the "DGCL"), which enables a corporation in its original
certificate of incorporation or an amendment thereto to eliminate or limit the
personal liability of a director for violations of the director's fiduciary
duty, except (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
pursuant to Section 174 of the DGCL (providing for liability of directors for
the unlawful payment of dividends or unlawful stock purchases or redemptions)
or (iv) for any transaction from which a director derived an improper personal
benefit.
Section 145 of the DGCL empowers Donaldson, Lufkin &
Jenrette, Inc. to indemnify, subject to the standards set forth therein,
any person in connection with any action, suit or proceeding brought or
threatened by reason of the fact that the person was a director, officer,
employee or agent of such company, or is or was serving as such with
respect to another entity at the request of such company. The DGCL also
provides that Donaldson, Lufkin & Jenrette, Inc. may purchase insurance on
behalf of any such director, officer, employee or agent.
Donaldson, Lufkin & Jenrette, Inc.'s Certificate of
Incorporation provides in effect for the indemnification by Donaldson,
Lufkin & Jenrette, Inc. of each director and officer of Donaldson, Lufkin &
Jenrette, Inc. to the fullest extent permitted by applicable law.
Item 16. Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed as part of this Registration
Statement:
<TABLE>
<S> <C>
1* Form of Underwriting Agreement
3.1* Form of Restated Certificate of Incorporation, to be filed with the Delaware
Secretary of State prior to the completion of this offering
3.2* By-Laws of Registrant (Incorporated by reference to the corresponding exhibit
to the Registrant's Registration Statement on Form S-1, Registration No. 33-96276)
4.1* Form of DLJdirect Common Stock Certificate
5.1* Opinion of Davis Polk & Wardwell
8.1* Tax opinion of Davis Polk & Wardwell (included in Exhibit 5.1)
10.1* DLJdirect 1999 Incentive Compensation Plan
23.1 Consent of KPMG LLP
23.2 Consent of KPMG LLP
23.3* Consent of Davis Polk & Wardwell (included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
- ----------
* To be filed by Amendment.
</TABLE>
Item 17. Undertakings
The undersigned hereby undertakes:
(a) The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act, each filing
of the registrant's annual report pursuant to section 13(a) or section
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrant pursuant to the provisions
referenced in Item 14 of this Registration Statement, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer, or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered
hereunder, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under
the Securities Act of 1933, the information omitted from the
form of prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this Registration Statement as of the
time it was declared effective.
(2) For the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment
that contains a form of prospectus shall be deemed to be a
new Registration Statement relating to the securities
offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering
thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
Donaldson, Lufkin & Jenrette, Inc. certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form S-3 and has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, New York, on
the 17th day of March, 1999.
DONALDSON, LUFKIN & JENRETTE, INC.
By: /s/ Joe L. Roby
--------------------------------------
Joe L. Roby
President and Chief Executive Officer
The registrant and each person whose signature appears below
constitutes and appoints Joe L. Roby, Anthony F. Daddino and Marjorie S.
White, and any agent for service named in this registration statement and
each of them, his, her or its true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him, her or it and
in his, her, or its name, place and stead, in any and all capacities, to
sign and file (i) any and all amendments (including post-effective
amendments) to this registration statement, with all exhibits thereto, and
other documents in connection therewith, and (ii) a registration statement,
and any and all amendments thereto, relating to the offering covered hereby
filed pursuant to Rule 462(b) under the Securities Act of 1933, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite or necessary to be done in and about
the premises, as fully to all intents and purposes as he, she, or it might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the Requirements of the Securities Act of 1933,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Joe L. Roby President, Chief Executive Officer
- ------------------------ and Director March 17, 1999
Joe L. Roby
/s/ John S. Chalsty Chairman of the Board and
- ------------------------ Director March 17, 1999
John S. Chalsty
/s/ Anthony F. Daddino Executive Vice President, Chief
- ------------------------ Financial Officer and Director March 17, 1999
Anthony F. Daddino
/s/ Hamilton E. James
- ------------------------ Managing Director and Director March 17, 1999
Hamilton E. James
/s/ Richard S. Pechter
- ------------------------ Managing Director and Director March 17, 1999
Richard S. Pechter
/s/ Michael M. Bendik Senior Vice President and Chief
- ------------------------ Accounting Officer March 17, 1999
Michael M. Bendik
- ------------------------ Director March 17, 1999
Henri de Castries
/s/ Denis Duverne
- ------------------------ Director March 17, 1999
Denis Duverne
/s/ Louis Harris
- ------------------------ Director March 17, 1999
Louis Harris
- ------------------------ Director March 17, 1999
Michael Hegarty
- ------------------------ Director March 17, 1999
Henri G. Hottinguer
/s/ W. Edwin Jarmain
- ------------------------ Director March 17, 1999
W. Edwin Jarmain
/s/ Francis Jungers
- ------------------------ Director March 17, 1999
Francis Jungers
/s/ Edward D. Miller
- ------------------------ Director March 17, 1999
Edward D. Miller
/s/ W.J. Sanders, III
- ------------------------ Director March 17, 1999
W.J. Sanders, III
- ------------------------ Director March 17, 1999
Stanley B. Tulin
/s/ John C. West
- ------------------------ Director March 17, 1999
John C. West
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description Numbered Page
------- ----------- -------------
<S> <C> <C>
1 Form of Underwriting Agreement
3.1 Form of Restated Certificate of Incorporation, to be filed with the
Delaware Secretary of State prior to the completion of this offering
3.2 By-Laws of Registrant (Incorporated by reference to the corresponding
exhibit to the Registrant's Registration Statement on Form S-1,
Registration No. 33-96276)
4.1 Form of DLJdirect Common Stock Certificate
5.1 Opinion of Davis Polk & Wardwell
8.1 Tax opinion of Davis Polk & Wardwell (included in Exhibit 5.1)
10.1 DLJdirect 1999 Incentive Compensation Plan
23.1 Consent of KPMG LLP
23.2 Consent of KPMG LLP
23.3 Consent of Davis Polk & Wardwell (included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
</TABLE>
EXHIBIT 23.1
Consent of Independent Certified Public Accountants
The Board of Directors and Shareholders
Donaldson, Lufkin & Jenrette, Inc.:
We consent to the use of our reports included herein and to the reference
to our firm under the heading "Experts" in the registration statement.
/s/ KPMG LLP
New York, New York
March 16, 1999
EXHIBIT 23.2
Consent of Independent Certified Public Accountants
The Board of Directors and Shareholders
Donaldson, Lufkin & Jenrette, Inc.:
We consent to incorporation by reference in the registration statement on Form
S-3 dated March 17, 1999 of our report dated February 2, 1999, which is
included in the December 31, 1998 annual report on Form 8-K dated March 16,
1999 of Donaldson, Lufkin & Jenrette, Inc., also incorporated herein by
reference and to the reference to our firm under the heading "Experts" in
the registration statement.
/s/ KPMG LLP
New York, New York
March 16, 1999
