<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 25, 1999
REGISTRATION NO. 333-74549
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 5
TO
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 & FLOM LLP
450 LEXINGTON AVENUE 919 THIRD AVENUE
NEW YORK, NEW YORK 10017 NEW YORK, NY 10022-3897
(212) 450-4000 (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. [ ]
--------------
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.
================================================================================
<PAGE>
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 -- MAY 25, 1999
================================================================================
- --------------------------------------------------------------------------------
PROSPECTUS
, 1999
[GRAPHIC OMITTED]
DLJDIRECT COMMON STOCK
DONALDSON, LUFKIN & JENRETTE, INC.
16,000,000 SHARES
- --------------------------------------------------------------------------------
DONALDSON, LUFKIN & JENRETTE, INC.:
- - We are an integrated investment and merchant bank.
- - Donaldson, Lufkin & Jenrette, Inc.
277 Park Avenue
New York, New York 10172
(212) 892-3000
SYMBOL & MARKET:
- - DIR/NYSE
THE OFFERING:
- - Donaldson, Lufkin & Jenrette, Inc. is offering 16,000,000 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.
- - The underwriters have an option to purchase an additional 2,400,000 shares
from Donaldson, Lufkin & Jenrette, Inc.
- - 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 $18.00 and $20.00 per share.
- - Up to 1,400,000 of the shares are being reserved for sale to current
employees at the public offering price less the underwriting fees, or $ per
share.
- - Shares of DLJdirect common stock will have no voting rights, except in
certain limited circumstances.
- - 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 SEC NOR ANY STATE SECURITIES COMMISSION HAS DETERMINED WHETHER THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. NOR HAVE THEY MADE, NOR WILL THEY MAKE, ANY
DETERMINATION AS TO WHETHER ANYONE SHOULD BUY THESE SECURITIES. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
DONALDSON, LUFKIN & JENRETTE DLJDIRECT INC.
BT ALEX- BROWN
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
SALOMON SMITH BARNEY
<PAGE>
ACCESS
DLJdirect [GRAPHIC PICTURES]
THROUGH
MULTIPLE
PLATFORMS
<PAGE>
5X FASTER THAN OTHER MAJOR INTERNET BROKERS*
[GRAPHIC PICTURE]
FEATURES INCLUDE
FASTER ACCESS TO TRADING, PORTFOLIOS,
AND ALL INVESTMENT SERVICES
STREAMING REAL-TIME QUOTES
CUSTOMIZABLE TOOLBAR FOR FASTER ACCESS TO
FREQUENTLY USED FEATURES
S&P DATA AND CHARTS DISPLAYED WITH
PERSONAL HOLDINGS AND PORTFOLIOS
ENHANCED USER-FRIENDLY TICKER WITH
IMPROVED NEWS FEATURES
CUSTOMIZABLE PRICE AND NEWS ALERTS! SM
* Based on a study conducted from November 17, 1998 through December 4, 1998
by Corporate Insight, Inc., an independent market research firm.
** Certain restrictions apply.
<PAGE>
EASY ORDER ENTRY FORM
[GRAPHIC PICTURE]
STOCKSCAN(TM) AND FUNDSCAN(TM)
[GRAPHIC PICTURE]
DLJ RESEARCH*
[GRAPHIC PICTURE]
STANDARD & POOR'S AND ZACKS REPORTS
[GRAPHIC PICTURE]
* Available only to accounts with a balance of $100,000 or more.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page
<S> <C> <S> <C>
Prospectus Summary ..................... 4 Management of DLJdirect ................ 55
Risk Factors ........................... 11 Certain Relationships .................. 65
Special Note Regarding Description of Capital Stock ........... 68
Forward-Looking Statements .......... 21 Certain Cash Management and
Where You Can Find More Allocation Policies ................. 87
Information ......................... 22 Material U.S. Federal Tax
Use of Proceeds ........................ 23 Considerations ...................... 90
Dividend Policy ........................ 23 Underwriting ........................... 93
Capitalization ......................... 24 Legal Matters .......................... 96
Selected Combined Financial Experts ................................ 96
Information of DLJdirect ............ 26 Illustration of Certain Terms .......... I-1
Management's Discussion and Analysis Index to Combined Financial
of Financial Condition and Results of Statements .......................... F-1
Operations of DLJdirect ............. 28
Business of DLJdirect .................. 38
</TABLE>
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". You should be aware that information contained in DLJdirect's
Web site is not deemed to be part of this prospectus.
3
<PAGE>
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.
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. We have
historically operated in three principal segments in the financial services
industry: the Banking Group, the Capital Markets Group and the Financial
Services Group. The Banking Group is a major participant in the raising of
capital and the providing of financial advice to companies throughout the U.S.
and Europe, Asia and Latin America. The Capital Markets Group consists of the
Equities Division, which provides domestic and foreign institutional clients
with global research, trading and sales services in U.S. listed and
over-the-counter equities, and foreign equities trading, and the Fixed Income
Division, which provides institutional clients with research trading and sales
services for a broad range of fixed-income products, and distributes
fixed-income securities in connection with underwritten offerings. The Financial
Services Group provides a broad array of services to individual investors and
the financial intermediaries that represent them.
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
4
<PAGE>
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 (Trade Mark) , 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 (Trade Mark) for screening over 9,500 public companies and its
proprietary FundScan (Trade Mark) 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 $47.2 million during the first quarter of 1999
o the average number of trades executed each day increased 86.9% from
6,100 in 1997 to 11,400 in 1998 and was 20,200 during the first quarter
of 1999
o customer assets increased 93.5% from $4.6 billion at December 31, 1997
to $8.9 billion at December 31, 1998 and were $11.2 billion at March 31,
1999
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.
5
<PAGE>
DLJDIRECT COMMON STOCK
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.
Your rights if we sell 80% or more of We must choose one of the following
the assets of DLJdirect: 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 (or, if we
create additional series of common
stock in the future designed to track
any of our other businesses, shares of
any such series) in exchange for
outstanding DLJdirect common stock at
a 10% premium to the value of the
DLJdirect common stock being
exchanged.
We will not be required to do any of the
above, if:
o the sale is in connection with the
liquidation of Donaldson, Lufkin &
Jenrette, Inc.
o the sale is to an affiliate
o the sale is in exchange for equity
securities of an entity primarily
engaged in a similar or complementary
business
o DLJdirect common stock is the only
outstanding series of common stock at
the time of the sale or
o no shares of DLJdirect common stock
are outstanding at the time of the
sale.
6
<PAGE>
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.
Under existing federal law, any such
exchange would not be a taxable event
for holders of DLJdirect common stock.
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.
Your premium if we exchange shares of We will have the right to issue DLJ
DLJdirect common stock for shares of common stock in exchange for outstanding
DLJ common stock: 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% if as a result of the enactment
of legislative changes or administrative
proposals or changes, we or our
stockholders will, based on the legal
opinion of our tax counsel, more likely
than not be subject to tax upon issuance
of the DLJdirect common stock or DLJ
common stock or such stock will not be
treated as stock of Donaldson, Lufkin &
Jenrette, Inc.
Our right to exchange shares of We will have the right, at any time, to
DLJdirect common stock for shares of exchange stock of a subsidiary of
common stock of a subsidiary: Donaldson, Lufkin & Jenrette, Inc. for
DLJdirect common stock if all of the
assets and liabilities of DLJdirect are
transferred to that subsidiary.
Your share upon a liquidation of Upon liquidation of Donaldson, Lufkin &
Donaldson, Lufkin & Jenrette, Inc.: 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.
7
<PAGE>
THE OFFERING
DLJdirect common stock
offered..................... 16,000,000 shares
Shares of DLJdirect common
stock effectively owned by DLJ
through its retained interest
after this offering........ 85,000,000 shares
Use of proceeds............. The net proceeds from this offering are
estimated to be approximately $281.1 million. We
will allocate to DLJdirect the net proceeds from
11,000,000 of the shares offered hereby which are
equal to approximately $193.3 million and to DLJ
the net proceeds from 5,000,000 of the shares
offered hereby which are equal to approximately
$87.9 million. DLJdirect will use its portion of
the net proceeds (1) to support its advertising
budget of approximately $65 million for 1999, (2)
to repay a note issued to an affiliate prior to
the offering and (3) to repay outstanding
indebtedness under a revolving credit facility
with an affiliate. DLJdirect has not allocated
the balance of the proceeds which is equal to
approximately $83.6 million, or approximately
$112.8 million if the underwriters exercise their
over-allotment option to purchase additional
shares of DLJdirect common stock in full, for any
specific purpose. Such funds may be used to
support DLJdirect's domestic and international
expansion, to permit additional advertising in
future periods and for other general corporate
purposes.
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 $19.00 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. The net proceeds from any exercise of
the underwriters' option will be allocated to DLJdirect and DLJ in the same
proportions as the initial issuance of shares in the offering.
The shares of DLJdirect common stock outstanding exclude 10,000,000 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".
8
<PAGE>
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 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 three months ended March 31, 1998 and 1999
and the combined statements of financial condition data as of March 31, 1999 are
derived from DLJdirect's unaudited combined financial statements which are also
included elsewhere in this prospectus. The unaudited summary combined financial
information reflects all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the results of the interim periods. The operating results for
the three months ended March 31, 1998 and 1999 are not necessarily indicative of
the results to be expected for any other interim period or any other future
fiscal year. 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>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------- -------------------------
1994 1995 1996 1997 1998 1998 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Commissions ......................... $ 28,491 $ 40,358 $ 54,166 $ 50,948 $ 78,717 $ 16,130 $ 32,054
Fees ................................ 3,797 5,067 6,426 12,109 25,484 5,140 9,596
Interest ............................ 1,858 1,846 2,569 4,160 13,723 2,787 5,552
-------- -------- -------- -------- --------- -------- ---------
Total revenues .................... 34,146 47,271 63,161 67,217 117,924 24,057 47,202
-------- -------- -------- -------- --------- -------- ---------
Costs and expenses:
Compensation and benefits ........... 5,422 7,362 11,202 17,174 28,260 5,759 10,683
Brokerage, clearing, exchange
and other fees .................... 9,567 11,709 15,422 20,909 28,423 6,071 8,854
Advertising ......................... 1,971 4,183 9,093 13,137 25,146 9,010 6,101
Occupancy and equipment ............. 1,175 1,437 1,923 3,352 5,045 1,081 1,503
Communications ...................... 791 1,025 1,468 2,844 5,564 1,189 2,705
Technology costs .................... 4,400 5,431 5,205 5,082 4,084 1,103 1,280
Other operating expenses ............ 3,164 4,507 5,567 10,844 18,934 3,660 4,815
-------- -------- -------- -------- --------- -------- ---------
Total costs and expenses .......... 26,490 35,654 49,880 73,342 115,456 27,873 35,941
-------- -------- -------- -------- --------- -------- ---------
Income (loss) before income tax
provision (benefit) ................. 7,656 11,617 13,281 (6,125) 2,468 (3,816) 11,261
Income tax provision (benefit) ....... 3,128 4,746 5,425 (2,502) 1,008 (1,559) 4,088
-------- -------- -------- -------- --------- -------- ---------
Net income (loss) .................... $ 4,528 $ 6,871 $ 7,856 $ (3,623) $ 1,460 $ (2,257) $ 7,173
======== ======== ======== ======== ========= ======== =========
Pro forma earnings per share of
DLJdirect common stock (1):
Basic and diluted ................... $ 0.01 $ 0.07
========= =========
Pro forma weighted average
shares of DLJdirect common
stock outstanding (1):
Basic and diluted ................... 101,000 101,000
========= =========
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
---------------------------
ACTUAL AS ADJUSTED (2)
(IN THOUSANDS)
<S> <C> <C>
STATEMENTS OF FINANCIAL CONDITION DATA:
Cash and cash equivalents ............. $47,825 $207,966
Total assets .......................... 52,429 212,570
Long-term liabilities ................. -- --
Total equity .......................... 30,097 193,280
</TABLE>
<TABLE>
<CAPTION>
AS OF OR FOR THE
THREE MONTHS ENDED
AS OF OR FOR THE YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998 1998 1999
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Total trades ....................... 475,000 660,000 929,000 1,535,000 2,875,000 580,000 1,230,000
Average trades per day ............. 1,900 2,600 3,700 6,100 11,400 9,500 20,200
Total customer assets .............. $1,300,000 $1,900,000 $2,500,000 $4,600,000 $8,900,000 $5,900,000 $11,200,000
Total accounts ..................... 153,000 207,000 280,000 390,000 529,000 428,000 590,000
Total active accounts (3) .......... N/A N/A 113,000 144,000 210,000 161,000 243,000
Total employees .................... 95 139 174 283 374 287 466
Total technology employees ......... 12 14 34 82 119 86 128
</TABLE>
- ----------
(1) Share amounts include shares effectively owned by DLJ through its retained
interest in DLJdirect. 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 allocated net proceeds of
11,000,000 shares of DLJdirect common stock at an assumed initial public
offering price of $19.00 per share, the midpoint of the range set forth
on the cover page of this prospectus, and the use of the net proceeds
from the offering (after deducting estimated underwriting discounts and
commissions and offering expenses payable by us) and (b) the repayment 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 is equal to approximately $33.1 million which
represents the total equity of DLJdirect Holdings Inc. at March 31, 1999
plus the accumulated retained earnings of DLJdirect Holdings Inc. for the
month ended April 30, 1999.
(3) Active accounts consist of those accounts at the end of the related period
with at least one trade in the last twelve months or with a balance at
period end.
10
<PAGE>
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.
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.
HOLDERS OF DLJDIRECT COMMON STOCK WILL NOT HAVE ANY CLAIMS ON THE ASSETS OF
DLJDIRECT
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, in any liquidation, holders of DLJdirect common stock
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
Holders of DLJdirect common stock will have no voting rights, unless a
separate class vote is required by the Delaware general corporation law.
THE BOARD OF DIRECTORS MAY MAKE DECISIONS THAT FAVOR DLJ AT THE EXPENSE OF
DLJDIRECT
Due to the extensive relationships between DLJ and DLJdirect, there will be
inherent conflicts of interest. The board of directors of Donaldson, Lufkin &
Jenrette, Inc., in its sole discretion, will make operational and financial
decisions and implement policies that may affect the businesses of DLJ and
DLJdirect differently, potentially favoring one business at the expense of the
other. 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 from a merger
involving Donaldson, Lufkin & Jenrette, Inc. between holders of DLJ
common stock and DLJdirect common stock,
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o decisions as to whether and when to exchange one series of common stock
for the other series of common stock,
o decisions regarding the sale of assets of either DLJ or DLJdirect, and
o other transactions between DLJ and DLJdirect.
The discretion of the board of directors of Donaldson, Lufkin & Jenrette,
Inc. 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 OF
DONALDSON, LUFKIN & JENRETTE, INC. THAT FAVOR HOLDERS OF DLJ COMMON STOCK AT
THE EXPENSE OF HOLDERS OF DLJDIRECT COMMON STOCK
You may not be able to challenge decisions that have an adverse effect upon
holders of DLJdirect common stock if the board of directors of Donaldson, Lufkin
& Jenrette, Inc. is disinterested and informed with respect to these decisions
and acts in good faith, and in the belief that it is acting in the best
interests of Donaldson, Lufkin & Jenrette, Inc.'s stockholders. 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.
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
We can sell any amount of assets of DLJdirect without stockholder approval,
because Delaware law requires stockholder approval only for a sale, lease or
exchange of "all or substantially all" of the assets of the entire company.
There is no clear meaning of "all or substantially all" under Delaware law.
Although we are required to:
o pay a dividend on DLJdirect common stock,
o redeem shares of DLJdirect common stock or
o exchange all outstanding shares of DLJdirect common stock for DLJ common
stock
in connection with certain sales of DLJdirect's assets, the value received by a
holder of DLJdirect common stock may be less than the market value of such
shares prior to the asset sale. In addition, the board of directors of
Donaldson, Lufkin & Jenrette, Inc. 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.
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.
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WE MAY ISSUE DLJ COMMON STOCK IN EXCHANGE FOR DLJDIRECT COMMON STOCK WHEN
DLJDIRECT COMMON STOCK IS UNDERVALUED OR DLJ COMMON STOCK IS OVERVALUED
We will have the right to exchange your shares of DLJdirect common stock
for shares of DLJ common stock at a premium at any time. Because certain
exchanges would be at a premium, and since we could determine to effect an
exchange at a time when either or both of DLJ common stock and DLJdirect common
stock may be considered to be overvalued or undervalued, any such exchange may
be disadvantageous to holders of DLJdirect common stock. In addition, any such
exchange would preclude holders of DLJdirect common stock from retaining their
investment in a security that is intended to reflect separately the performance
of DLJdirect.
A RECENT CLINTON ADMINISTRATION TAX PROPOSAL COULD RESULT IN THE EXCHANGE OF
DLJDIRECT COMMON STOCK FOR DLJ COMMON STOCK AT A REDUCED PREMIUM
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. 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. See "Description of Capital Stock --
Optional Exchange of DLJ Common Stock for DLJdirect Common Stock".
THE VALUE OF DLJDIRECT COMMON STOCK MAY DECLINE IF MORE DLJDIRECT COMMON STOCK
IS ISSUED
Our certificate of incorporation allows the board of directors of
Donaldson, Lufkin & Jenrette, Inc., 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.
THE MANAGEMENT OF DLJDIRECT HAS BROAD DISCRETION IN ALLOCATING THE USE OF
PROCEEDS FROM THIS OFFERING
DLJdirect intends to use its portion of the net proceeds from the offering,
which is equal to approximately $193.3 million, or approximately $222.5 million
if the underwriters exercise their over-allotment option to purchase additional
shares of DLJdirect common stock in full, (1) to support its advertising budget
of approximately $65 million for 1999, (2) to repay a note issued to an
affiliate prior to the offering and (3) to repay outstanding indebtedness under
a revolving credit facility with an affiliate. DLJdirect, however, has not
allocated all of its proceeds for specific purposes and the management of
DLJdirect will have significant flexibility in applying the balance of its share
of the net proceeds, which is equal to approximately $83.6 million, or
approximately $112.8 million if the underwriters exercise their over-allotment
option to purchase additional shares of DLJdirect common stock in full. The
balance of DLJdirect's share of the net proceeds may be used for general
corporate purposes, including to support DLJdirect's domestic and international
expansion and to permit additional advertising in future periods. The failure of
the management of DLJdirect to apply these funds effectively could have a
material adverse effect on the DLJdirect's business, results of operations and
financial condition. See "Use of Proceeds".
RISKS RELATING TO THE BUSINESS OF DLJDIRECT
SYSTEM LIMITATIONS AND 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;
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o slower response times;
o decreased customer service and customer satisfaction; and
o delays in the introduction of new products and services;
which could result in
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, which can accomodate increased
capacity. 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. We have
experienced systems failures in the past and we could experience future systems
failures. Examples of significant systems failures include:
o On April 21, 1998, a high volume of customer activity overloaded
DLJdirect's computer. As a result, customers logging into their accounts
between 9:30 a.m. and 10:00 a.m. were unable to access the system or
experienced significant lag times in doing so. This increased the number
of customers who tried to place orders by telephone, causing such
customers to experience significant wait times or failures to connect.
The problem was resolved by 10:30 a.m. The problem occurred again but to
a lesser extent on April 22, 23, and 27, 1998. Additional computer
resources have been applied to solve the capacity problem.
o On February 1, 1999, a systems update caused the misconfiguration of a
security firewall, making DLJdirect's system inaccessible for customers
attempting to access DLJdirect's service using DLJdirect's Internet site
and Windows-based software from 7:30 a.m. to 11:00 a.m. DLJdirect
customers using AOL, Prodigy, and DLJdirect's telephone system were not
affected by this system failure. However, customers placing orders using
telephone lines experienced significant waiting times during the period
of system failure. The cause of this problem was addressed and has not
subsequently recurred.
o The output from an affiliate's computer system upon which DLJdirect
relies was not available at the usual time on the morning of April 13,
1999. This systems failure affected approximately 35% of customer orders
entered during the period after the close of business on April 12, 1999
until the following morning. Certain orders were trapped in a queue and
could not be released for execution until after 10:00 a.m. In addition,
customers could not place trades through DLJdirect's PC system until
10:00 a.m., which led to long waiting periods for telephone service.
DLJdirect believes the circumstances which caused this situation have
been appropriately remedied.
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 multiple computer facilities to provide limited service
during system disruptions, it does not have facilities in place which will fully
maintain service during a system disruption. 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 harm 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.
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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
Due to the extensive relationships between DLJ and DLJdirect, there will be
inherent conflicts of interest. The board of directors of Donaldson, Lufkin &
Jenrette, Inc., 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 of Donaldson, Lufkin & Jenrette, Inc. 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.
Direct competition between DLJ and DLJdirect may increase
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.
Strategic decisions may benefit DLJ at the expense of DLJdirect
Donaldson, Lufkin & Jenrette, Inc. currently intends to pursue its online
brokerage business through DLJdirect. However, the board of directors of
Donaldson, Lufkin & Jenrette, Inc., 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
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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.
DLJ may restrict DLJdirect's pursuit of initiatives that may adversely affect
the reported results of DLJ in the near future
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 financial results in the near future
will also adversely affect DLJ's financial results in the near future. As a
result, DLJ may restrict DLJdirect's ability to pursue initiatives that may
adversely affect the financial results of DLJ in the near future. 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.
Determing the appropriate fees for trade clearing and execution services
provided by DLJ creates potential conflicts
Pursuant to an agreement between DLJ and DLJdirect, DLJ's Pershing Division
acts as clearing agent for DLJdirect. A clearing agent ordinarily provides
facilities for the execution of customer orders, the settlement of customer
trades and other operational functions incidental to providing custody for
customers' securities and cash balances. Brokerage, clearing and exchange fees
paid to Pershing represented approximately 24.1% of DLJdirect's total revenues
in 1998 and 18.8% of DLJdirect's total revenues in the first quarter of 1999. 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 as a result of
changes in market conditions. Conflicts may arise regarding decisions for
appropriate levels of future fees and payments.
DLJDIRECT DEPENDS ON PERSHING FOR TRADE CLEARANCE AND TRADE EXECUTION
DLJdirect is dependent upon Pershing for trade clearance and trade
execution. DLJdirect has entered into a 10-year agreement with DLJ pursuant to
which Pershing acts as DLJdirect's exclusive clearing agent 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 for compliance and risk management, trade execution
reports, and trade confirmations. Accordingly, an interruption or the cessation
of service by Pershing as a result of systems limitations or failures 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
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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 is substantially 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 or collateral into their accounts. These
customers with existing balances are also allowed to place orders to purchase or
sell 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 provide
cash or acceptable securities as collateral for margin transactions. 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 if customers default on their
obligations.
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 experience with online trading,
o unexpected changes in regulatory requirements, tariffs and other trade
barriers, and
o difficulties in staffing, including reliance on newly hired local
personnel, 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.
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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. For instance, a bill
entitled the "Online Investor Protection Act" has recently been introduced in
the U.S. Senate. This bill is designed to protect investors who use Internet
brokerages to trade securities by enabling the SEC to monitor online brokers,
strengthen penalties for online fraud and give investors access to information
on a broker's speed of execution before they sign up. 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 PAYMENTS FOR ROUTING ITS CUSTOMERS' ORDERS COULD ADVERSELY AFFECT
DLJDIRECT
DLJdirect has arrangements with Pershing to receive cash payments in
exchange for routing trade orders to Pershing for execution. There can be no
assurance that payments for routing customers' orders will continue to be
permitted by the SEC, the NASD or other regulatory agencies, courts or
governmental units or by state securities regulators. Payments made to DLJdirect
by Pershing for routing trade orders were $5.5 million and $8.9 million in 1997
and 1998, respectively, and $2.0 million and $3.2 million for the first quarter
of 1998 and 1999, respectively. While payments for routing these orders
increased 60.0% from the first quarter of 1998 to the same quarter in 1999, the
associated trades increased 118.3%. As a result of the implementation by the SEC
of order handling rules in January 1997, buyers and sellers are able to express
their desire to purchase or sell shares in smaller dollar increments. This
change reduced the opportunity to profit for firms which deal in securities and
has had the effect of reducing the amount Pershing is able to pay DLJdirect for
routing these orders. Loss of these revenues could have a material adverse
effect on DLJdirect's business and operating results. Moreover, DLJdirect may be
required to make payments 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 has historically experienced significant variation in its
quarterly and annual results of operations and expects that future results of
operations will also vary significantly. These fluctuations may result from:
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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 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. 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.
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DLJDIRECT'S NETWORKS MAY BE VULNERABLE TO SECURITY RISKS
DLJdirect has not in the past experienced network security problems.
However, DLJdirect's networks may be vulnerable to unauthorized access, computer
viruses and other security problems. Persons who circumvent security measures
could wrongfully use information of DLJdirect 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 If the costs associated with addressing Year 2000 issues are greater
than planned, DLJdirect's earnings and results of operations could be
affected.
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.
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. 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, the SEC could suspend or revoke its registration, or
the NASD could expel it from membership, 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
20
<PAGE>
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.
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.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and the information incorporated by reference includes
forward-looking statements. 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.
21
<PAGE>
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, 1998 and all
amendments thereto;
o Reports on Form 8-K filed on April 22 and April 23, 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).
We intend to provide you with annual reports containing financial
statements relating to DLJdirect audited by our independent public accountants
and quarterly reports relating to DLJdirect for the first three fiscal quarters
of each fiscal year containing unaudited interim financial information, in each
case, accompanied by a discussion of such financial information and, in the case
of the annual report, including a summary of DLJdirect's business.
22
<PAGE>
USE OF PROCEEDS
We estimate that, after deducting estimated expenses and underwriting
discounts and commissions, we will receive net proceeds from the sale of the
DLJdirect common stock in this offering of approximately $281.1 million
(approximately $323.7 million 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 $19.00 per share, the midpoint of the
range set forth on the cover page of this prospectus. We will allocate the net
proceeds from 11,000,000 of the shares to DLJdirect, as if this were a primary
offering of common stock, and we will allocate the net proceeds from 5,000,000
of the shares to DLJ, as if this were a secondary offering of common stock of a
subsidiary owned by a parent. The net proceeds from any exercise of the
underwriters' over-allotment option will be allocated to DLJdirect and DLJ in
the same proportions as the initial issuance of shares in the offering.
Accordingly, approximately $193.3 million of the net proceeds will be allocated
to DLJdirect (approximately $222.5 if the underwriters exercise their
over-allotment option to purchase additional shares of DLJdirect common stock in
full) and approximately $87.9 million of the net proceeds will be allocated to
DLJ (approximately $101.1 million if the underwriters exercise their
over-allotment option to purchase additional shares of DLJdirect common stock in
full).
DLJdirect plans to use a portion of the net proceeds (1) to support its
advertising budget of approximately $65 million for 1999, (2) to repay a note
issued to an affiliate on May 20, 1999 and (3) to repay outstanding indebtedness
under a revolving credit facility with an affiliate.
The note issued to an affiliate is equal to approximately $33.1 million
which represents the total equity of DLJdirect Holdings Inc. at March 31, 1999
plus the accumulated retained earnings of DLJdirect Holdings Inc. for the month
ended April 30, 1999. The note bears interest at a rate of 5.50% per annum and
is payable on demand but, in any event, no later than June 30, 1999.
The outstanding indebtedness under a revolving credit facility with an
affiliate is equal to approximately $11.6 million and bears interest at the
Federal funds rate plus 30 basis points adjusted daily. This indebtedness was
incurred in May 1999 and is payable on demand. DLJdirect has used these funds in
connection with the initial capitalization of a joint-venture in Japan.
DLJdirect has not allocated the balance of the proceeds, which is equal to
approximately $83.6 million (or approximately $112.8 million if the underwriters
exercise their over-allotment option to purchase additional shares of DLJdirect
common stock in full), for any specific purpose. Such funds may be used to
support DLJdirect's domestic and international expansion, to permit additional
advertising in future periods and for other general corporate purposes. Pending
specific application of the balance of the proceeds, DLJdirect intends to invest
such proceeds in short-term marketable securities.
DLJ plans to use its portion of the net proceeds for general corporate
purposes.
We have decided to undertake this offering of DLJdirect common stock at
this time to raise additional capital for the on-going growth of DLJdirect and
to realize some of the current value of DLJdirect.
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 in
general exceed the amount that would be legally available for the
payment of dividends under Delaware law if DLJ was a single, separate
Delaware corporation -- what we call 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 in general exceed the amount that would be legally available for
the payment of dividends under Delaware law if DLJdirect was a single,
separate Delaware corporation -- what we call the "available dividend
amount" for DLJdirect.
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
23
<PAGE>
DLJdirect would be based primarily upon the financial condition, results of
operations, regulatory and business 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 March 31, 1999 and as adjusted to
reflect (1) the sale by Donaldson, Lufkin & Jenrette, Inc. of 16,000,000 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 is equal to
approximately $33.1 million which represents the total equity of DLJdirect
Holdings Inc. at March 31, 1999 plus the accumulated retained earnings of
DLJdirect Holdings Inc. for the month ended April 30, 1999. 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>
MARCH 31, 1999
------------------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Commercial paper and short-term borrowings ......................... $ 349,844 $ 349,844
========== ==========
Long-term borrowings:
Senior notes, 5.875%-6.875% due various dates through 2008 ........ $2,039,324 $2,039,324
Medium-term notes, 5.402%-6.90% due various dates through 2016..... 1,161,403 1,161,403
Senior secured floating rate notes due 2005 ....................... 450,000 450,000
Global floating rate notes due 2002 ............................... 348,469 348,469
Subordinated exchange notes, 9.58% due 2003 ....................... 225,000 225,000
Other borrowings .................................................. 20,469 20,469
---------- ----------
Total long-term borrowings (1) .................................... 4,244,665 4,244,665
---------- ----------
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 (124,510,367 shares issued and outstanding) .......... 12,451 12,451
DLJdirect common stock, $0.10 par value per share (as adjusted
16,000,000 shares issued and outstanding, and 85,000,000 notional
shares in respect of DLJ's retained interest)(2) ................ -- 1,600
Restricted stock units of DLJ common stock, 10,358,294 units
authorized (1,101,166 units issued and outstanding) ............. 11,277 11,277
Paid-in capital ................................................... 902,238 1,181,773
Retained earnings ................................................. 1,766,287 1,766,287
Accumulated other comprehensive income ............................ 1,871 1,871
Employee deferred compensation stock trust ........................ 13,591 13,591
Common stock issued to employee deferred compensation trust ....... (13,591) (13,591)
---------- ----------
Total stockholders' equity ...................................... $3,069,124 $3,350,259
========== ==========
Total capitalization ........................................... $7,513,789 $7,794,924
========== ==========
</TABLE>
- ----------
(1) Long-term borrowings include current maturities of long-term borrowings.
(2) The number of shares of DLJdirect common stock outstanding excludes
10,000,000 shares of
24
<PAGE>
DLJdirect common stock that have been reserved for issuance under DLJdirect's
stock option plan. At or prior to the offering, it is anticipated that DLJ
will grant options to purchase approximately 6,500,000 to 7,000,000 shares of
DLJdirect common stock. See "Management -- DLJdirect 1999 Incentive
Compensation Plan".
DLJDIRECT
The following table sets forth the total capitalization of DLJdirect at
March 31, 1999 and as adjusted to give effect to (1) the allocated net proceeds
of 11,000,000 shares of DLJdirect common stock and the use of proceeds therefrom
and (2) repayment of a note issued to an affiliate on May 20, 1999 in an amount
equal to approximately $33.1 million which represents the total equity of
DLJdirect Holdings Inc. at March 31, 1999 plus the accumulated retained earnings
of DLJdirect Holdings Inc. for the month ended April 30, 1999.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
-------------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
Long-term debt .................. $ -- $ --
Equity:
Capital contributions ......... 26,002 193,280
Retained earnings ............. 4,095 --
------- --------
Total equity .................. 30,097 193,280
------- --------
Total capitalization ......... $30,097 $193,280
======= ========
</TABLE>
25
<PAGE>
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 three months ended March 31, 1998 and 1999 and the
combined statements of financial condition data as of March 31, 1999 are derived
from DLJdirect's unaudited combined financial statements which are also included
elsewhere in this prospectus. The unaudited three-month selected combined
financial information reflects all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the results of the interim periods. The operating results
for the three months ended March 31, 1998 and 1999 are not necessarily
indicative of the results to be expected for any other interim period or any
other future fiscal year. 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>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------- -------------------------
1994 1995 1996 1997 1998 1998 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Commissions ......................... $ 28,491 $ 40,358 $ 54,166 $ 50,948 $ 78,717 $ 16,130 $ 32,054
Fees ................................ 3,797 5,067 6,426 12,109 25,484 5,140 9,596
Interest ............................ 1,858 1,846 2,569 4,160 13,723 2,787 5,552
-------- -------- -------- -------- --------- -------- ---------
Total revenues .................... 34,146 47,271 63,161 67,217 117,924 24,057 47,202
-------- -------- -------- -------- --------- -------- ---------
Costs and expenses:
Compensation and benefits ........... 5,422 7,362 11,202 17,174 28,260 5,759 10,683
Brokerage, clearing, exchange
and other fees .................... 9,567 11,709 15,422 20,909 28,423 6,071 8,854
Advertising ......................... 1,971 4,183 9,093 13,137 25,146 9,010 6,101
Occupancy and equipment ............. 1,175 1,437 1,923 3,352 5,045 1,081 1,503
Communications ...................... 791 1,025 1,468 2,844 5,564 1,189 2,705
Technology costs .................... 4,400 5,431 5,205 5,082 4,084 1,103 1,280
Other operating expenses ............ 3,164 4,507 5,567 10,844 18,934 3,660 4,815
-------- -------- -------- -------- --------- -------- ---------
Total costs and expenses .......... 26,490 35,654 49,880 73,342 115,456 27,873 35,941
-------- -------- -------- -------- --------- -------- ---------
Income (loss) before income tax
provision (benefit) ................. 7,656 11,617 13,281 (6,125) 2,468 (3,816) 11,261
Income tax provision (benefit) ....... 3,128 4,746 5,425 (2,502) 1,008 (1,559) 4,088
-------- -------- -------- -------- --------- -------- ---------
Net income (loss) .................... $ 4,528 $ 6,871 $ 7,856 $ (3,623) $ 1,460 $ (2,257) $ 7,173
======== ======== ======== ======== ========= ======== =========
Pro forma earnings per share of
DLJdirect common stock (1):
Basic and diluted ................... $ 0.01 $ 0.07
========= =========
Pro forma weighted average
shares of DLJdirect common
stock outstanding (1):
Basic and diluted ................... 101,000 101,000
========= =========
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
---------------------- MARCH 31,
1997 1998 1999
(IN THOUSANDS)
<S> <C> <C> <C>
STATEMENTS OF FINANCIAL CONDITION DATA:
Cash and cash equivalents ............. $ 8,881 $26,654 $47,825
Total assets .......................... 11,871 29,751 52,429
Long-term liabilities ................. -- -- --
Total equity .......................... 5,964 21,924 30,097
</TABLE>
<TABLE>
<CAPTION>
AS OF OR FOR
THE THREE
MONTHS ENDED
AS OF OR FOR THE YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998 1998 1999
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Total trades ....................... 475,000 660,000 929,000 1,535,000 2,875,000 580,000 1,230,000
Average trades per day ............. 1,900 2,600 3,700 6,100 11,400 9,500 20,200
Total customer assets .............. $1,300,000 $1,900,000 $2,500,000 $4,600,000 $8,900,000 $5,900,000 $11,200,000
Total accounts ..................... 153,000 207,000 280,000 390,000 529,000 428,000 590,000
Total active accounts (2) .......... N/A N/A 113,000 144,000 210,000 161,000 243,000
Total employees .................... 95 139 174 283 374 287 466
Total technology employees ......... 12 14 34 82 119 86 128
</TABLE>
- ----------
(1) Share amounts include shares effectively owned by DLJ through its retained
interest in DLJdirect. 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) Active accounts consist of those accounts at the end of the related period
with at least one trade in the last twelve months or with a balance at
period end.
27
<PAGE>
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. In particular, DLJdirect expects to
spend approximately $65 million on advertising in 1999. As a result, DLJdirect
believes that its advertising fees as a percentage of revenues will increase
significantly in 1999, and accordingly, that its financial results in the near
future will be adversely affected. It is expected that advertising costs will
increase during each remaining 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 payments for
routing its customers' orders could adversely affect DLJdirect".
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.
28
<PAGE>
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 the remainder of 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 provides for volume discounts
and sliding scale payments taking into account the size of DLJdirect's business
and the level of services provided by Pershing. In particular, the per trade
clearing fee declines by 5.0% for clearing volumes in excess of 4,000,000 trades
per year and by an additional 5.0% for clearing volumes in excess of 6,000,000
trades per year. 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. Brokerage, clearing, exchange and other fees as a
percentage of revenues declined significantly for the three months ended March
31, 1999, principally as a result of the amendment to the clearing agreement. As
a result of the revised 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.
Other operating expenses include amounts allocated to DLJdirect by DLJ for
public relations, telecommunications, tax, internal audit, insurance, employee
benefits, human resources, legal, compliance, credit, general administrative,
accounting, treasury, library and record management, facilities, security and
custodial services. DLJ allocates these expenses using a proportional cost
methodology based on the relative number of employees and square foot usage of
DLJdirect or on actual costs incurred. Management believes that the amounts
allocated to DLJdirect are reasonable.
In January 1999, DLJdirect began operations in a 24,000 square foot
investor services facility in Charlotte, North Carolina. In April 1999,
DLJdirect entered into a lease for approximately 100,000 square feet in Jersey
City, New Jersey. DLJdirect intends to move its current Jersey City, New Jersey
headquarters to that space in the beginning of the third quarter of 1999 upon
the scheduled completion of renovation. As a result, DLJdirect expects to incur
an annual increase in occupancy costs of over $3.0 million, a portion of which
will be realized in 1999. The two moves are designed to accommodate a portion of
planned increases in business activity. In this connection, DLJdirect is in the
process of developing plans to acquire additional space to increase its call
center capacity significantly by the end of 1999. 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 approximately $8.0 million, a
portion of which also will be realized in 1999.
29
<PAGE>
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>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------------- -------------------------
1996 1997 1998 1998 1999
<S> <C> <C> <C> <C> <C>
Revenues:
Commissions ........................... 85.7% 75.8% 66.8% 67.0% 67.9%
Fees .................................. 10.2 18.0 21.6 21.4 20.3
Interest .............................. 4.1 6.2 11.6 11.6 11.8
----- ----- ----- ----- -----
Total revenues ....................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Costs and expenses:
Compensation and benefits ............. 17.8 25.6 24.0 23.9 22.6
Brokerage, clearing, exchange and
other fees ........................... 24.5 31.1 24.1 25.2 18.8
Advertising ........................... 14.4 19.5 21.3 37.5 12.9
Occupancy and equipment ............... 3.0 5.0 4.3 4.5 3.2
Communications ........................ 2.3 4.2 4.7 4.9 5.7
Technology costs ...................... 8.2 7.6 3.4 4.6 2.7
Other operating expenses .............. 8.8 16.1 16.1 15.3 10.2
----- ----- ----- ----- -----
Total costs and expenses ............. 79.0 109.1 97.9 115.9 76.1
----- ----- ----- ----- -----
Income (loss) before income tax
provision (benefit) ................... 21.0 ( 9.1) 2.1 (15.9) 23.9
Income tax provision (benefit) ......... 8.6 ( 3.7) 0.9 ( 6.5) 8.7
----- ----- ----- ----- -----
Net income (loss) ...................... 12.4% ( 5.4)% 1.2% ( 9.4)% 15.2%
===== ===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31,
1998
DLJdirect experienced strong operating results for the three months ended
March 31, 1999 compared to the three months ended March 31, 1998, reflecting
primarily an increase in active accounts of 50.9% and customer trading volume of
112.6%. Total revenues increased $23.1 million or 95.9% to $47.2 million for the
three months ended March 31, 1999 from $24.1 million for the three months ended
March 31, 1998. Net income increased $9.5 million to $7.2 million from a net
loss of $2.3 million, primarily resulting from strong revenue growth and modest
expense growth.
Commissions increased $16.0 million or 99.4% to $32.1 million. Commissions
represented 67.9% of total revenues for the three months ended March 31, 1999
and 67.0% of total revenues for the three months ended March 31, 1998. The
increase in commissions was due primarily to significant increases in customer
trading volume. Average trades per day increased 112.6% from 9,500 for the three
months ended March 31, 1998 to 20,200 for the three months ended March 31, 1999.
Fees increased $4.5 million or 88.2% to $9.6 million. Fees represented
20.3% of total revenues for the three months ended March 31, 1999 and 21.4% of
total revenues for the three months ended March 31, 1998. Payments for routing
orders increased $1.2 million or 60.0% to $3.2 million. The increase in payments
for routing orders was due primarily to significant increases in customer
trading volume, offset in part by a decline in the amount of revenue per trade
that DLJdirect receives for routing orders. Fees for technology development
increased $1.7 million or 68.0% to $4.2 million primarily due to increased
demand for Internet-based technology applications. Revenue from money market
fund distribution fees increased $511,000 or 86.8% to $1.1 million. This growth
was due to an increase in customer money market fund balances of $395.0 million
or 83.8% to $866.2 million. The remaining fees for the three months ended March
31, 1999 include payments in connection with public offerings, subscription fees
and account-related fees.
Interest increased $2.8 million or 100.0% to $5.6 million. Interest
represented 11.8% of total revenues for the three months ended March 31, 1999
and 11.6% of total revenues for the three months
30
<PAGE>
ended March 31, 1998. 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 $306.3 million or 85.0%
to $666.8 million. Free credits increased $226.0 million or 91.5% to $473.1
million and short sale balances increased $11.4 million or 39.3% to $40.4
million.
Compensation and benefits increased $4.9 million or 84.5% to $10.7 million.
The increase in compensation and benefits was due primarily to growth in the
number of employees from 287 to 466. 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 including
MarketSpeed (Trade Mark) .
Brokerage, clearing, exchange and other fees increased $2.8 million or
45.9% to $8.9 million. The increase in brokerage, clearing, exchange and other
fees was primarily due to significant increases in customer trading volume,
offset in part by lower clearing fees per trade resulting from reduced clearing
rates.
Advertising decreased $2.9 million or 32.2% to $6.1 million. The decrease
in advertising was due primarily to unusually large advertising expenditures for
the three months ended March 31, 1998. However, DLJdirect expects advertising to
increase sinificantly in the latter half of 1999. See "--Overview".
Occupancy and equipment costs increased $422,000 or 39.1% to $1.5 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 occupancy cost was due to the opening of the
Charlotte, North Carolina investor services facility. 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 $1.5 million or 125.0% to $2.7 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 increased
volume of transactions.
Technology costs increased $177,000 or 15.8% to $1.3 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 $529,000 or 90.6% to $55,000 during
the three months ended March 31, 1999 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
$681,000 or 131.2% to $1.2 million during the three months ended March 31, 1999
due to increased business activity and initial support in the United Kingdom.
Other operating expenses increased $1.1 million or 29.7% to $4.8 million.
Operating expenses are comprised of professional fees, printing and stationery,
economic and investment research, allocated corporate overhead and miscellaneous
expenses. For the three months ended March 31, 1998, other operating expenses
also included license fees of $927,000 paid to DLJ Long Term Investment
Corporation for licensing trademarks and similar intellectual property.
Commencing January 1, 1999, the license fees are included in brokerage,
clearing, exchange and other fees because such license fees are included in
amounts paid by DLJdirect to Pershing under its clearing agreement. Professional
fees primarily include payments made to technology and marketing consultants,
and for legal services. Professional fees increased $1.2 million or 171.4% to
$1.9 million primarily due to the development of advertising strategies and the
start-up operations in the UK and Japan. Miscellaneous expenses increased
$795,000 or 131.4% to $1.4 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 $15.1 million from a loss of
$3.8 million for the three months ended March 31, 1998 to income of $11.3
million for the three months ended March 31,
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<PAGE>
1999. The provision (benefit) for income taxes for the three months ended March
31, 1998 and for the three months ended March 31, 1999 was $(1.6) million,
representing a 40.9% effective tax rate, and $4.1 million, representing a 36.3%
effective tax rate, respectively.
As a result of the foregoing factors, net income increased to $7.2 million
for the three months ended March 31, 1999 from a net loss of $2.3 million for
the three months ended March 31, 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
DLJdirect experienced strong operating results in 1998 compared to 1997,
reflecting primarily an increase in active accounts of 45.8%. For 1998, total
revenues of $117.9 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 $9.5 million or 226.2% to $13.7 million. Interest
represented 11.6% of total revenues in 1998 and 6.2% of total revenues in 1997.
The increase was due primarily to 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 (Trade Mark) .
Brokerage, clearing, exchange and other fees increased $7.5 million or
35.9% to $28.4 million. The increase in brokerage, clearing, exchange and other
fees was primarily due to significant increases in customer trading volume,
offset in part by lower clearing fees per trade resulting from reduced clearing
rates.
Advertising increased $12.0 million or 91.6% to $25.1 million. The increase
in advertising was due to increased expenditures on advertising placement and
creative development. DLJdirect increased its advertising expenditures to
continue developing the DLJdirect brand name, which was launched in September
1997, and to continue acquiring new accounts. Advertising expenditures were
targeted at investors through a broad range of media including television,
radio, and print as well as significant online service providers and popular Web
sites such as America Online, the Microsoft Network and Yahoo!.
Occupancy and equipment costs increased $1.6 million or 47.1% to $5.0
million. Occupancy and equipment expense includes rent and operating expenses
for facilities, expenditures for repairs and
32
<PAGE>
maintenance, and the expense for furniture, fixtures, leasehold improvements as
well as business and computer equipment. The increase in equipment costs was due
primarily to additional investment in technology systems infrastructure and
equipment expenditures for the increased staff.
Communications costs increased $2.8 million or 100.0% to $5.6 million.
Communications expense includes quotation expenses, expenses related to customer
toll-free phone calls and 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. Commencing January 1, 1999, amounts paid by
DLJdirect to Pershing include the license fee for the use of certain of DLJ Long
Term Investment Corporation's trademarks that are licensed to DLJdirect in the
United States and in certain other jurisdictions.
Professional fees primarily include payments made to technology and
marketing consultants, and employee recruiting expenses. Professional fees
increased $883,000 or 25.8% to $4.3 million due to increased advertising and
headcount. Printing and stationery decreased $158,000 or 7.7% to $1.9 million.
In 1997 printing and stationery expenses were increased in conjunction with the
renaming of the service from PC Financial Network to DLJdirect, which
necessitated the redesign and reprinting of all marketing materials and customer
correspondence stock. Economic and investment research increased $1.0 million or
333.3% to $1.3 million reflecting the fact that DLJdirect first began paying for
this research in the fourth quarter of 1997. Allocated corporate overhead
increased $841,000 or 45.2% to $2.7 million due primarily to expenses related to
the increased headcount. Miscellaneous expenses increased $1.4 million or 70.0%
to $3.4 million. Miscellaneous expenses consisted primarily of accruals for bad
debt expense, employee registration fees and expenses for new account credit
checks.
Income before income tax provision 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 active accounts of 27.4%. 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
33
<PAGE>
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 of $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 2.4% 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.
34
<PAGE>
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, $14.5
million in 1998 and $1.0 million for the three months ended March 31, 1999. The
value of equipment acquired through leases of fixed assets through an affiliate
totaled $5.3 million in 1997, $5.0 million in 1998 and $1.6 million for the
three months ended March 31, 1999. These fixed assets were comprised primarily
of computers and related systems, furniture and leasehold improvements.
DLJdirect generally leases its fixed assets and therefore does not incur
significant capital expenditures.
Although DLJdirect maintains substantial money market accounts 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 $(600,000) 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. Cash provided by operating activities
totaled $20.2 million for the three months ended March 31, 1999.
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 $900,000 to DLJ for the return of equity. For the three
months ended March 31, 1999 net cash provided by financing activities totaled
$1.0 million.
DLJdirect believes that the net proceeds from this offering (after paying
the note to an affiliate), 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.
35
<PAGE>
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 retained the services of three independent consulting firms
having considerable expertise in advising corporations on and remediating Year
2000 issues. The consultants were hired to address issues involving both
information and non-information technology systems.
The current state of DLJdirect's Year 2000 Project is as follows:
In the case of information technology, DLJdirect's internal computer codes
have been identified, assessed and remediated. The converted codes have been
running successfully in the current systems environment. The codes are further
tested monthly to insure continuing Year 2000 compliance; this testing will be
maintained until a date after December 31, 1999. An independent consultant, PKS
Systems Integration LLC, was contracted by DLJ's Pershing Division to perform
further application code assessment and code conversion. PKS reviewed all code
and produced analysis reports for DLJdirect to review. DLJdirect then approved
the code for conversion, and DLJdirect and PKS converted the code which is being
used in production as described above.
DLJdirect defines "significant third parties" as those parties that, if
lost or degraded by Year 2000-related failure, would cause an immediate stoppage
or significant impairment to business areas of DLJdirect. DLJdirect has
identified all significant third parties, such as vendors, online partners and
facility operators, and has formally communicated with significant third parties
asking them to report their state of readiness for Year 2000 use. All
significant third parties have responded, and approximately 56% of the
significant third parties claim their products and/or services are currently
Year 2000 compliant. DLJdirect believes that the remaining 44% of significant
third parties will be Year 2000 compliant by August 31, 1999. DLJdirect intends
to have in place a Year 2000 compliant back-up provider for products or services
it deems still in question. All significant third parties have provided
assurances that they are taking necessary steps to be Year 2000 compliant.
Pershing has informed DLJdirect that it is taking steps to be Year 2000
compliant by August 31, 1999.
DLJdirect reviews all significant third party responses and technical data
about their Year 2000 efforts published on their Web sites to determine its
comfort with such parties progress in addressing their Year 2000 issues.
DLJdirect also participates whenever possible in point-to-point tests (i.e.
tests in which data is sent from DLJdirect to the third party and/or is sent
from the third party to DLJdirect) to ensure the compatibility of significant
third party systems with those of DLJdirect. DLJdirect is evaluating the
possibility of obtaining alternate vendors for back-up service in cases where
point-to-point testing is unavailable or produces unacceptable results.
DLJdirect has in general not sought representations or warranties from
third parties about their products or services' abilities to handle the Year
2000 issue without error. It has sought direct statements about a product's or
service's readiness and has accepted in-progress status reports. Some third
parties have stated, with conditions, that their services and/or products are
Year 2000 compliant. DLJdirect believes that these statements are likely to be
actionable if a failure of the product or service occurs within the limits of
the conditions stated. However, DLJdirect's main focus has been on participating
in testing programs, including testing with significant third parties, as a
means to addressing Year 2000 issues. DLJdirect's conclusion, based upon its
review of significant third party response to date, is that DLJdirect must
continue to test significant third-party products and services up to and beyond
December 31, 1999 and alternate services and products available, if necessary.
In the case of non-information technology systems, analysis and testing by
Carlson Design/Construct Corp. has started but has not yet been completed; the
tests will be followed by the remediation, replacement, or back-up of all
non-information technology systems in order to render DLJdirect's
non-information technology systems Year 2000 compliant. Electronic Data Services
was hired to perform non-compute assessment, inventory, and certification of
DLJdirect's non-information technology systems.
36
<PAGE>
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. To date,
DLJdirect has spent less than $1 million on the Year 2000-related remediation of
its sytems.
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.
DLJdirect's reasonable worst case Year 2000 scenario would involve the loss
of most of DLJdirect's significant critical functions, their back-ups and
alternate service and product choices coupled with loss of access to most
physical locations. This scenario would include, but not be limited to,
substantial loss of utilities in all three of DLJdirect's physical facilities,
its clearing services, the exchanges and Depository Trust Company, and the
failure of most of DLJdirect's telephone, data, and Internet connections.
DLJdirect, however, continues to regard this scenario as being highly unlikely.
DLJdirect is requiring key employees to be on site before, during and after
December 31, 1999. DLJdirect has a written contingency plan that addresses a
significant portion of the above referenced scenario.
PricewaterhouseCoopers was retained as an independent consultant to update
DLJdirect's Year 2000 Contingency plan. DLJdirect is taking steps to implement
PricewaterhouseCoopers' recommendations by December 31, 1999.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DLJdirect's primary financial instruments are cash and cash equivalents.
This includes cash in banks and highly rated, liquid money market investments.
DLJdirect believes that such instruments are not subject to material potential
near-term losses in future earnings from reasonably possible near-term changes
in market rates or prices.
RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board 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.
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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 public
equity offerings
o company and industry research from DLJ
o DLJdirect MarketSpeed (Trade Mark) , 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 (Trade Mark) for screening over 9,500 public companies and its
proprietary FundScan (Trade Mark) 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 $47.2 million during the first quarter of 1999
o the average number of trades executed each day increased 86.9% from
6,100 in 1997 to 11,400 in 1998 and was 20,200 during the first quarter
of 1999
o customer assets increased 93.5% from $4.6 billion in 1997 to $8.9
billion in 1998 and were $11.2 billion at March 31, 1999
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:
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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 entered into a 10-year joint venture agreement with
Sumitomo Bank, the second largest bank in Japan, 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, 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. International
Data Corporation 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.
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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 NYSE.
Orders to trade Nasdaq and exchange-listed securities constituted 89.1% of
DLJdirect's total customer orders in 1998 and 91.5% of DLJdirect's total
customer orders in the first quarter of 1999. 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 (Trade Mark) , 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 and 7.3% of DLJdirect's total customer orders in
the first quarter of 1999. 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 after
taking into consideration the high equity level within the accounts 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 and 1.2% of DLJdirect's total customer orders in
the first quarter of 1999. Customers can use DLJdirect's mutual fund research
tool, FundScan (Trade Mark) , to search, screen and profile over 7,000 mutual
funds, over 850 of which are available without transaction fees. As with
StockScan (Trade Mark) , 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
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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 online access to select DLJ equities 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. Under the terms of its agreement
with DLJdirect, DLJ has agreed not to provide its research directly to any other
online discount brokerage firm for a period of three years which is
automatically renewable for consecutive one year terms unless either party
chooses not to renew the agreement. DLJ provides company and industry reports,
economic, global and market-related research as well as DLJ's select list of
recommended securities. See "Certain Relationships".
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 (Trade Mark) 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 May 14, 1999, DLJdirect
has participated in 41 DLJ-managed IPOs and five DLJ-managed additional equity
offerings. 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 for offerings
that may not be managed by DLJ. In addition, in April 1999, DLJdirect obtained
the necessary regulatory approvals to act as an underwriter of securities
offerings. 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 part upon DLJ investment banking
professionals to perform services in connection with DLJdirect acting as a lead
manager in offerings. 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 Relationships".
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Cash Management Services
DLJdirect offers several cash management options. Customers may participate
in an asset management account, AssetMasterSM, 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 AssetMasterSM 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.
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 (Trade Mark) . 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 (Trade Mark) , 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 (Trade Mark) 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. TradeTalkSM, 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
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of leading financial institutions. The technology group had 128 associates at
March 31, 1999 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 (Trade Mark) , FundScan (Trade
Mark) , StockScan (Trade Mark) 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 Data Security and Netscape Communications
Corporation, to provide the security and authentication necessary to effect
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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
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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 (Trade Mark) software,
through which DLJdirect users can link directly to The Street.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.
MarketWatch.com. DLJdirect has entered into an agreement with
MarketWatch.com, Inc., 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 MarketWatch.com, Inc. and advertising
on both MarketWatch.com, Inc. 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.
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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 March 1999, DLJdirect entered into a 10-year joint
venture agreement with Sumitomo Bank, the second largest bank in Japan. Pursuant
to the agreement, a Japanese corporation ("DLJdirect SFG Securities Inc.") was
formed, and it commenced operations as of April 1, 1999. DLJdirect has a 50%
interest in the joint venture and in DLJdirect Japan.
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
- -3 billion (estimated to be $25 million at May 14, 1999) from the member
companies. DLJdirect Holdings Inc. has established a $20 million revolving line
of credit with DLJ in connection with the initial capitalization of DLJdirect
Japan, among other things.
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.
SERVICES TO INVESTMENT ADVISORS
DLJdirect believes that a market for its services exists among registered
investment advisors who seek online access to the securities markets in order to
execute transactions for client accounts. DLJdirect intends to explore this
business opportunity in the future by either
o building the capacity itself;
o purchasing it from an affiliate of DLJ; or
o purchasing it from a third party.
The registered investment advisor services business is extremely competitive and
there can be no assurance that entry by DLJdirect, if undertaken at all, will be
successful.
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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 -- System limitations
and 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,
TradeTalkSM. 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 April 1, 1999, 288 representatives made up DLJdirect's
investor service team, and DLJdirect plans to expand this number to 800 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 TradeTalkSM 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
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 has
installed 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
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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 are required to be appropriately licensed or to enter
DLJdirect-sponsored training to receive that license. 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
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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
"-- Certain Relationships -- 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.
RELATIONSHIP WITH DLJ
DLJdirect will be operated as a separate company from DLJ. However, as a
result of DLJdirect's extensive business relationships with DLJ, conflicts of
interest are likely to develop between DLJdirect and DLJ or its affiliates.
Although DLJdirect has its own management team, the senior officers of DLJdirect
ultimately report to the management of DLJ. In addition, the board of directors
of Donaldson, Lufkin & Jenrette, Inc. will in general make operational and
financial decisions and implement policies that affect the business of both DLJ
and DLJdirect. In some cases these decisions may favor DLJ to the detriment of
DLJdirect. The board of directors of Donaldson, Lufkin & Jenrette, Inc. 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.
The board of directors of DLJ has adopted certain cash management and
allocations policies with respect to intercompany transfers and other
allocations between DLJ and DLJdirect. DLJdirect will in general remit its cash
receipts to DLJ, and DLJ will in general fund DLJdirect's cash disbursements on
a daily basis. See "Certain Cash Management and Allocation Policies".
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Prior to the consummation of this offering, DLJ intends to reconstitute the
board of directors of DLJdirect Holdings Inc. ("Holdings"), the corporate entity
that currently owns a substantial majority of the assets of DLJdirect. Shortly
after the consummation of the offering, DLJ intends to add two outside directors
to the board of directors of DLJdirect Holdings Inc. 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 Holdings. The decisions of the board of both DLJ and Holdings would be
subject to the board of directors general fiduciary duty. However, there can be
no assurance that transactions between DLJdirect and DLJ could not be effected
on more favorable terms with unaffiliated, third parties.
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
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 -- Substantial competition
could reduce DLJdirect's market share and harm its financial performance".
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 (Trade Mark),
FundCenter (Registered Trademark) , FundScan (Trade Mark) , MarketSpeed (Trade
Mark) , StockScan (Trade Mark) , TradeTalkSM, TradeUp(SM), and www.DLJdirect.com
(Trade Mark) .
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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 -- 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
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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.
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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 March 31, 1999, DLJdirect was required to maintain minimum net
capital of $250,000 and had total net capital of approximately $26.6 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 March 31, 1999, DLJdirect had 466 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 82,000 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 entered
into a lease in April 1999 for approximately 100,000 square feet in Jersey City,
New Jersey. DLJdirect intends to move its current Jersey City, New Jersey
operations to that space in the beginning of the third quarter of 1999 upon its
scheduled completion. This will increase overall capacity by more than 70%.
DLJdirect is also in the process of developing plans to acquire additional space
to increase its call center capacity significantly by the end of 1999.
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
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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 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 was identified. DLJdirect responded to this
request in February 1999. On March 29, 1999, a further request for information
was received by each of the online brokers, including DLJdirect. Subsequently, a
meeting was held with representatives from the Office of the Attorney General at
which time it was agreed that each online broker would identify and produce the
requested documents that were readily available. DLJdirect expects to respond to
the modified request in the normal course of business.
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 produced the requested documents in the normal course of
business. DLJdirect believes that this informational request was conducted on an
industry-wide basis.
On May 6, 1999, a purported DLJdirect account holder filed a class action
complaint for unspecified damages against DLJdirect Inc. The complaint alleges
unfair business practices in violation of California's Business and Professions
Code and violations of California's Consumers' Legal Remedies Act. The
allegations involve the plaintiff's purported inability to obtain access to
initial public offerings in meaningful amounts. The complaint seeks equitable
relief in the form of restitution and disgorgement of all earnings, profits,
compensation and benefits obtained by DLJdirect as a result of such unfair
business practices. DLJdirect intends to defend itself vigorously against all of
the allegations contained in the complaint.
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MANAGEMENT OF DLJDIRECT
The following table sets forth information regarding the senior officers of
DLJdirect.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
K. Blake Darcy .................. 42 Chief Executive Officer
Glenn H. Tongue ................. 40 President
Suresh Kumar .................... 41 Chief Information Officer
Craig S. Sim .................... 56 Director of Investment Banking
Rosemary T. McFadden ............ 50 Director of Global Business Development
Denise Benou Stires ............. 36 Director of Marketing
Ramaswamy Nagappan .............. 37 Director of Application Development
Nicholas J. Tortorella .......... 47 Director of Human Resources and Administration
Michael J. Hogan ................ 48 General Counsel
Anthony P. Festa ................ 50 Director of Compliance and Operations
Timothy J. Foley ................ 29 Director of Product Development
Barry B. Mione .................. 34 Director of Investor Services
Kenneth J. Olshansky ............ 57 Director of Finance and Strategic Projects
Robert D. Flowers. Jr. .......... 54 Director of Select Client Relations
Linda Finnerty .................. 52 Director of Public Relations
</TABLE>
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.
Glenn H. Tongue. Glenn H. Tongue has served as President of DLJdirect
since April 1999. Prior to this appointment, he was a Managing Director in the
Investment Banking Group at DLJ where he has worked since 1989. At DLJ, his
duties included oversight of the investment banking activities on behalf of
DLJdirect. Mr. Tongue holds a B.S.E. in Electrical Engineering and Computer
Science from Princeton University as well as an M.B.A. from The Wharton School.
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 a Director of Investment Banking
since February 1999. He has served as a Managing Director in the Investment
Banking Group at DLJ 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.
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Rosemary T. McFadden. Rosemary T. McFadden has served as Director of Global
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.
Ramaswamy Nagappan. Ramaswamy Nagappan has been with DLJdirect since March
1997 as Director of Application Development, and he is responsible for managing
application development efforts. From 1988 to 1997, Mr. Nagappan worked at DLJ
as a programmer in the Pershing Division. Prior to joining DLJ, Mr. Nagappan was
a consultant with Pershing, Guardian Life Insurance, Bakst International, and
Data Software Research Corp. During his career at Pershing and DLJdirect, Mr.
Nagappan has developed and implemented mainframe, UNIX, and Windows systems for
a wide range of brokerage applications. Mr. Nagappan earned his Bachelor of
Engineering Degree in Electronics and Communication from Anna University, Madras
(India) in 1983. In 1984, he also received a Diploma in Business and Computer
Management from Indian Institute of Computer Management. Mr. Nagappan has served
as a member of the FIX protocol committee and the Cincinnati Stock Exchange's
technical committee. He is a member of the Institute of Electrical and
Electronics Engineers.
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 DLJ 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.
Michael J. Hogan. Michael J. Hogan has served as General Counsel of
DLJdirect since April 1999. He is responsible for oversight of DLJdirect's
legal department. From 1970 to 1999, he worked at Lehman Brothers Inc., most
recently as Senior Deputy General Counsel and Managing Director when he managed
the firm's legal, compliance and internal audit services on a global basis.
From 1977 to 1981, he served as Counsel and Director of Compliance at the
Coffee, Sugar and Cocoa Exchange in New York. Mr. Hogan holds Bar Admissions in
New York, Georgia, Missouri and the District of Columbia. Mr. Hogan received
his J.D. from Emory University Law School and his B.A. from Washington
University, St. Louis, Missouri.
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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.
Robert D. Flowers, Jr. Robert D. Flowers, Jr. has served as Director of
Select Client Relations of DLJdirect since April 1999. He is responsible for
overseeing DLJdirect's Select Client Group, serving customers who maintain
account balances of $1,000,000 and higher. From August 1994 to July 1997, Mr.
Flowers was at Bank of America where he served as President and Chief Executive
Officer of BA Investment Services, Inc. and as Director of the Retail
Investment Products Division. He was a senior officer in the retail brokerage
unit of Bank One from 1992 to 1994 and First Union from 1984 to 1992. Mr.
Flowers holds a B.A. from Walsh University and is a member of the Securities
Industry Association. He is based in the DLJdirect Charlotte office.
Linda Finnerty. Linda Finnerty has served as Director of Public Relations
of DLJdirect since April 1999. She is responsible for directing DLJdirect's
press releases. From 1998 to 1999, she served as Vice President and Director of
Corporate Communications at Delaware Investments, based in Philadelphia, where
she oversaw all internal and external communications. From 1989 to 1997, she
worked at Alliance Capital, most recently as Vice President and Director of
Corporate Communications. Ms. Finnerty holds a B.S. from Fordham University and
a graduate diploma in communications from Hofstra University. She is a member of
the Public Relations Society of New York, National Investor Relations Institute
and the Financial Communications Society.
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
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offering, DLJ intends to reconstitute the board of directors of DLJdirect
Holdings Inc. to include representatives of both DLJ and DLJdirect. Shortly
after the consummation of the offering, DLJ plans to add two independent
directors to the board of directors of DLJdirect Holdings Inc. 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. The following table sets forth the
proposed board members of DLJdirect Holdings Inc. upon the consummation of the
offering:
NAME AGE POSITION
Richard S. Pechter ............ 54 Chairman of the Board
K. Blake Darcy ................ 42 Director
Glenn H. Tongue ............... 40 Director
Suresh Kumar .................. 41 Director
Gates H. Hawn ................. 50 Director
Richard F. Brueckner .......... 49 Director
Richard S. Pechter. Richard S. Pechter has served as Chairman of the board
of directors of DLJdirect since April 1999. Mr. Pechter has served as a director
of DLJ since 1979, as Managing Director of Donaldson, Lufkin & Jenrette
Securities Corporation since 1981 and as Chairman of DLJ's Financial Services
Group since 1987. From 1979 to 1984, Mr. Pechter served as Chief Executive
Officer of Pershing, and from 1975 to 1979 he served as Executive Vice President
and Chief Administrative Officer of DLJ. He served as Chief Financial Officer of
DLJ from 1973 to 1975 and as Vice President and Treasurer of DLJ from 1971 to
1973, after joining DLJ in 1969 as a research analyst. Mr. Pechter has served as
President of the Investment Association of New York, as a director of the
National Securities Clearing Corporation, the Depository Trust Company and
Interstate/Johnson Lane, as Vice Chairman of the Securities Industry
Association, and as a Trustee of the Securities Industry Association's
Securities Industry Institute. He is the Tony Award-winning producer of the
Broadway musical "Titanic". Mr. Pechter graduated from Yale University and holds
an M.B.A. from the Harvard Business School, where he was a Baker Scholar.
Gates H. Hawn. Gates H. Hawn has been a director of DLJdirect since April
1999. He has been Chief Operating Officer and a Managing Director of Pershing
since 1983. He joined DLJ in 1981 as a Senior Vice President. From 1970 to 1981,
Mr. Hawn was with the Bankers Trust Company. Mr. Hawn currently serves as a
director of the Farmers Museum, the Clark Foundation and the Philharmonic
Orchestra of New Jersey and as Hudson County Chairman of New Jersey Blood
Services. He has served as an Exchange Official of the American Stock Exchange,
Chairman of the New York District of the Securities Industry Association,
President of the Investment Association of New York, President of the Bond Club
of New York and Chairman of the National Securities Clearing Corporation. He has
also served as a director of the Chicago Stock Exchange, the NASDAQ Stock
Market, the Glimmerglass Opera and Deerfield Academy. Mr. Hawn is a graduate of
Williams College.
Richard F. Brueckner. Richard F. Brueckner has served as a director of
DLJdirect since its inception. He has served as a Managing Director of DLJ's
Financial Services Group and Pershing since 1984. He previously served as
Treasurer of DLJ from 1979 to 1981, Chief Financial Officer of Pershing from
1980 to 1981 and has held a variety of senior management positions in
operations and marketing at Pershing. He serves as a Trustee of Frontier Trust
Company in Fargo, North Dakota and is Chairman and CEO of the Securities
Industry Foundation for Economic Education. Mr. Brueckner has served as a
director of the National Association of Securities Dealers, Inc. and its
regulatory subsidiary and was Chairman of the National Adjudicatory Council and
the Technology Advisory Committee. Mr. Brueckner has also served as Chairman of
the Securities Industry Association's Clearing Firms Committee, the Membership
Committee and the New York District for the Securities Industry Association and
as Chairman of the NASD's New York District Committee. Mr. Brueckner received
his B.A. from Muhlenberg College.
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DLJDIRECT 1999 INCENTIVE COMPENSATION PLAN
The board of directors of Donaldson, Lufkin & Jenrette, Inc. has adopted
the DLJdirect 1999 Incentive Compensation Plan on March 16, 1999 and the plan
will be voted on by stockholders on May 25, 1999. The board of directors of
Donaldson, Lufkin & Jenrette, Inc. believes that attracting and retaining key
employees and service providers is essential to DLJdirect's continued growth and
success. In addition, the board of directors of Donaldson, Lufkin & Jenrette,
Inc. 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 service providers 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 of Donaldson, Lufkin &
Jenrette, Inc. has concluded that its Compensation and Management 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) 10,000,000, plus (ii) 7.5% of the number of shares of DLJdirect
common stock issued or delivered 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
10,000,000. 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 2,000,000 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 $5 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.
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Eligibility. Executive officers 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, including
directors of Donaldson, Lufkin & Jenrette, Inc. and DLJdirect Holdings Inc.
shall be eligible to be granted Awards under the Compensation Plan. It is
estimated that approximately 900 persons are eligible to receive Awards and 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 of Donaldson,
Lufkin & Jenrette, Inc. elects to administer the Compensation Plan. Subject to
the terms and conditions of the Compensation Plan, the board of directors of
Donaldson, Lufkin & Jenrette, Inc. 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.
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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) management 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
although the Compensation Committee has authority to permit Awards to be
transferred in limited circumstances.
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
of Donaldson, Lufkin & Jenrette, Inc. may amend or discontinue the Compensation
Plan or the Compensation
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Committee's authority to grant Awards without further shareholder approval,
except for amendments required to be approved by stockholders 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 of Donaldson, Lufkin & Jenrette, Inc. 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 of Donaldson,
Lufkin & Jenrette, Inc., 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 grants of options to purchase approximately
6,500,000 to 7,000,000 shares of DLJdirect common stock to the executive
officers, certain directors and other eligible persons 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.
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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.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to DLJdirect's Chief
Executive Officer and each of DLJdirect's four other most highly compensated
officers based on 1998 salary and annual bonuses (collectively, the "Named
Officers") who were serving as officers at the end of the fiscal year ended
December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------- ----------------------------------------
RESTRICTED LTIP ALL OTHER
SALARY BONUS STOCK AWARDS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($)(1) (#)(2) ($)(3) (4)
<S> <C> <C> <C> <C> <C> <C>
K. Blake Darcy .......................... 1998 $150,000 $1,350,000 -- $130,341 $5,910
Chief Executive Officer
Suresh Kumar ............................ 1998 125,000 750,000 -- -- --
Chief Information Officer
Ramaswamy Nagappan ...................... 1998 125,000 300,000 -- -- --
Director of Applications Development
Denise Benou Stires ..................... 1998 125,000 250,000 -- -- --
Director of Marketing
Nicholas J. Tortorella .................. 1998 110,000 160,000 -- -- --
Director of Human Resources
and Administration
</TABLE>
- ----------
(1) Includes amounts contributed by each of the Named Officers under various
deferred compensation plans maintained by Donaldson, Lufkin & Jenrette,
Inc.
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(2) In exchange for surrendering amounts accrued under certain multi-year
compensation arrangements maintained by Donaldson, Lufkin & Jenrette,
Inc, Mr. Darcy received restricted stock units under Donaldson, Lufkin &
Jenrette, Inc.'s 1995 Restricted Stock Unit Plan at the time of
Donaldson, Lufkin & Jenrette, Inc.'s initial public offering in October
1995. Each restricted stock unit represents the right to receive a share
of common stock, subject to certain conditions described below. Units
awarded under the 1995 Restricted Stock Unit Plan fall into two
categories. "Base Units" and "Premium Units." Base Units vested 50% in
February 1997 and February 1998. Premium Units vest in three equal
installments in each of February 1998, February 1999 and February 2000.
No dividends or dividend equivalents are paid on the restricted stock
units. As of December 31, 1998, the last day of trading during the fiscal
year ended December 31, 1998, the aggregate value of the unvested
restricted stock units, based on the average of the high and low prices
of Common Stock as reported on the New York Stock Exchange on such date
of $41.3125 was $58,829, for Mr. Darcy (based on 1,424 RSUs). None of the
other officers is a holder of RSUs.
(3) The amount shown reflects amounts earned under Donaldson, Lufkin &
Jenrette, Inc.'s 1994-1996 Long Term Incentive Plan.
(4) The amount shown reflects distributions in 1998 in respect of units
awarded in prior years under a plan which allocated to the participants a
portion of the profits realized by Donaldson, Lufkin & Jenrette, Inc on
certain investments.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR (1998) AND FYE OPTION/SAR
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
SHARES UNDERLYING UNEXERCISED MONEY OPTIONS AT FYE
ACQUIRED ON VALUE REALIZED OPTIONS AT FYE (#) ($)(1)
NAME EXERCISE (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
<S> <C> <C> <C> <C>
K. Blake Darcy ................. -- -- 38,258/35,000 $891,186/604,687
Suresh Kumar ................... -- -- 1,250/3,750 $ 9,141/27,422
Ramaswamy Nagappan ............. -- -- -- --
Denise Benou Stires ............ -- -- -- --
Nicholas J. Tortorella ......... -- -- -- --
</TABLE>
- ----------
(1) All of the options shown above are options on DLJ common stock. No
options on DLJdirect common stock were granted during 1998. DLJ expects
to grant options to purchase approximately 6,500,000 to 7,000,000 shares
of DLJdirect common stock at or prior to the offering. An "in-the-money
option" is an option for which the market price of the underlying common
stock at year-end 1998 exceeds the exercise price of the option. The
value of unexercised, in-the-money options shown above is based upon the
difference between the exercise price of all options and $41.3125, the
average of the high and low prices of the DLJ common stock as reported on
the New York Stock Exchange on December 31, 1998, the last day of trading
during the fiscal year ended December 31, 1998. The actual amount, if
any, realized upon exercise of stock options will depend upon the market
price of DLJ common stock relative to the exercise price per share of the
stock option at the time the stock option is exercised. There is no
assurance that the values of unexercised in-the-money stock options
reflected in this table will be realized.
COMPENSATION AND MANAGEMENT COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Donaldson, Lufkin & Jenrette, Inc. Compensation and
Management Committee during the fiscal year ended December 31, 1998 was an
officer or employee of DLJ or DLJdirect.
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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 with DLJ".
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 agency. 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. In particular, the per trade clearing fee
declines by 5.0% for clearing volumes in excess of 4,000,000 trades per year and
by an additional 5.0% for clearing volumes in excess of 6,000,000 trades per
year. 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, and $8.9 million in the first quarter of
1999. 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.
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 Pershing. 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.
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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 have entered 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 amended as of 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, and $588,000 in the first quarter of 1999.
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, and $4.2 million in
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the first quarter of 1999. DLJdirect and DLJ intend to memorialize this
arrangement in an agreement effective May 3, 1999. 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 and $92,000 in the first quarter of 1999.
DLJ provides DLJdirect with online access to select DLJ equities research
products pursuant to a three-year agreement effective as of April 28, 1999.
After three years, the agreement will automatically renew for consecutive one
year terms unless either party provides 90-day advanced written notice of its
intention not to renew the agreement. 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 has agreed for a period of three
years not to make its research directly available to any other online discount
brokerage firm. DLJdirect agrees to pay DLJ fees, which decrease incrementally
based on the number of qualified customers. Amounts paid under a similar prior
agreement were $307,000 in 1997, $1.3 million in 1998, and $434,000 in the first
quarter of 1999.
DLJdirect has agreed to compensate DLJ for providing to DLJdirect
allocations in offerings in which DLJ serves as lead manager or co-manager and
in which DLJdirect participates as an underwriter or a member of a selling
group. The amount of such compensation is equal to 10% of the selling
concessions received by DLJdirect. In addition, DLJ has agreed that, upon
request, it will assist DLJdirect in performing due diligence and provide
DLJdirect with other investment banking services in offerings in which DLJdirect
is a lead manager or co-manager and in which DLJ does not otherwise participate
in exchange for compensation equal to 10% of the selling concession received by
DLJdirect in such offerings.
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 $3.2
million, respectively, and $1.1 million in the first quarter of 1999.
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, and $102,000 in the first quarter of
1999. 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, and $703,000 in the first quarter of 1999. 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.
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DESCRIPTION OF CAPITAL STOCK
The following description is not complete and should be read with our
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
o issuances of additional shares of DLJdirect common stock,
o repurchases of DLJdirect common stock, or
o 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, "Illustration of Certain Terms", for
further discussion of certain terms defined in this section.
PROPOSED AMENDMENT TO OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
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 amendment to our amended and restated
certificate of incorporation which will
o authorize the board of directors of Donaldson, Lufkin & Jenrette, Inc.
to issue a total of 1.5 billion shares of common stock in multiple
series, including DLJ common stock and DLJdirect common stock. The board
of directors of Donaldson, Lufkin & Jenrette, Inc. will be authorized to
issue 500,000,000 shares of DLJ common stock and 500,000,000 shares of
DLJdirect common stock and
o re-classify each outstanding share of common stock into a share of DLJ
common stock.
We intend DLJdirect common stock to reflect the performance of the online
discount brokerage and related investment services businesses of DLJdirect,
including certain activities currently conducted by DLJdirect Holdings Inc. and
one or more affiliates of Donaldson, Lufkin & Jenrette, Inc.
We intend DLJ common stock to reflect the performance of the rest of the
businesses conducted by DLJ and its affiliates, including DLJ's retained
interest in DLJdirect.
We will allocate all of Donaldson, Lufkin & Jenrette, Inc.'s consolidated
assets, liabilities, revenue, expenses and cash flow between DLJ and DLJdirect.
We may decide to authorize the issuance of shares of additional series of
common stock other than DLJ common stock or DLJdirect common stock in which case
we shall designate the assets and liabilities of DLJ to which such series of
common stock relates and such assets and liabilities shall be an additional
"Group" for the purposes of our restated charter.
Before the offering, the board of directors of Donaldson, Lufkin &
Jenrette, Inc. will designate the initial number of shares of DLJdirect common
stock that may be issued for the account of DLJ in respect of its retained
interest in DLJdirect. See "-- DLJ's Retained Interest in DLJdirect or Any
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Group" and our restated charter for additional information about DLJ's retained
interest in DLJdirect (or in any other Group) and the initial number of shares
of DLJdirect common stock that may be issued for the account of DLJ in respect
of its retained interest in DLJdirect (or in any other Group).
The board of directors of Donaldson, Lufkin & Jenrette, Inc. 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 of Donaldson, Lufkin & Jenrette, Inc. 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 of Donaldson, Lufkin & Jenrette, Inc. will retain
the discretion whether or not to pay dividends on DLJdirect common stock or any
series of common stock. We do not expect to change our current dividend policy
for our outstanding common stock (which will become DLJ common stock). We do not
expect to pay dividends on DLJdirect common stock in the future; however,
o we will be permitted to pay dividends on any series of common stock out
of the lesser of the assets of Donaldson, Lufkin & Jenrette, Inc.
legally available for the payment of dividends under Delaware law and
the Available Dividend Amount (as defined herein) for the Group to which
such series of common stock relates.
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 of Donaldson,
Lufkin & Jenrette, Inc. 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 all, any or no series of common
stock in equal or unequal amounts, regardless of the relative amounts of the
Available Dividend Amounts, the amount of dividends previously declared on
either series, the respective voting or liquidation rights of each series or any
other factor.
At the time of any dividend on the outstanding shares of DLJdirect common
stock or any other series of common stock, including any dividend resulting from
a disposition of All or Substantially All of the Assets (as defined herein) of
the Group to which such series of common stock relates but excluding any
dividend payable in shares of such series of common stock, we will credit to
DLJ, and charge against such Group, a corresponding amount in respect of DLJ's
retained interest in such Group. Specifically, the corresponding amount will
equal (1) the aggregate amount of such dividend times (2) the Retained Interest
Amount (as defined herein) in respect of such Group.
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The board of directors of Donaldson, Lufkin & Jenrette, Inc. may declare
and pay dividends or distributions of shares of common stock (or securities
convertible into or exchangeable or exercisable for shares of common stock) if
such dividends or distributions of shares
o of any series of common stock (or securities convertible into or
exchangeable or exercisable for shares of common stock) are on shares of
the same series of common stock, or
o are of a series of common stock other than DLJ common stock (or
securities convertible into or exchangeable or exercisable for shares of
a series of common stock other than DLJ common stock) on shares of DLJ
common stock and the sum of the shares of the series of common stock to
be issued and the shares of the series of common stock issuable upon
conversion, exchange or exercise of any outstanding convertible
securities attributable to the DLJ Group is less than or equal to the
Number of Shares Issuable with Respect to DLJ's Retained Interest in
such Group.
MANDATORY DIVIDEND, REDEMPTION OR EXCHANGE ON DISPOSITION OF ALL OR
SUBSTANTIALLY ALL OF THE ASSETS OF A GROUP
In general, if we sell 80% or more of the assets of DLJdirect, we must
either:
o pay a dividend to holders of DLJdirect common stock equal to a
proportionate interest in the net proceeds of the sale,
o redeem outstanding shares of DLJdirect common stock in an amount equal
to a proportionate interest in the net proceeds of the sale, or
o issue DLJ common stock in exchange for outstanding DLJdirect common
stock at a 10% premium to the DLJdirect common stock.
This provision is described in greater detail below.
If we dispose of All or Substantially All of the Assets of a Group
(including the DLJdirect Group) to one or more persons or entities, in one
transaction or a series of related transactions, 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 the Group that consummated such Disposition in cash,
securities (other than common stock of Donaldson, Lufkin & Jenrette,
Inc.) or other property, or a combination thereof, in an aggregate
amount having a Fair Value (determined as of the Disposition Date) equal
to the product of the Outstanding Interest Fraction in such Group
(determined as of the record date for such dividend) and the Fair Value
(determined as of the Disposition Date) of the Net Proceeds of such
Disposition,
o redeem from holders of the series of common stock that relates to the
Group that consummated such Disposition, in exchange for cash,
securities (other than common stock of Donaldson, Lufkin & Jenrette,
Inc.) or other property, or a combination thereof, in an amount equal to
the product of the Outstanding Interest Fraction with respect to such
Group (determined as of the redemption date) and the Fair Value
(determined as of the Disposition Date) of the Net Proceeds of such
Disposition, all of the outstanding shares of such series of common
stock (unless such Disposition involves substantially all (but not all)
of the assets attributed to such Group, in which case, 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 Disposition Date, equal to
such amount) or
o issue shares of a series of common stock that does not relate to the
Group that consummated such Disposition in exchange for each outstanding
share of the series of common stock that relates to the Group that
consummated such Disposition at a 10% premium, based on the
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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 Disposition Date.
In connection with any special dividend on, or redemption of, common stock
as described above, we will credit to DLJ, and charge against the applicable
Group, a corresponding amount in respect of DLJ's retained interest in such
Group. Specifically, the corresponding amount will equal
o the aggregate Fair Value of such dividend or redemption times
o the Retained Interest Amount in respect of such Group.
In addition, in connection with any redemption of common stock as described
above, we will decrease the Number of Shares Issuable with Respect to DLJ's
Retained Interest in such Group by the same proportion as the proportionate
decrease in outstanding shares of such Group 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 a series of common stock that does not relate to the Group in question in
exchange for each remaining outstanding share of the series of common stock that
relates to that Group at a 10% premium. The exchange ratio 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.
OPTIONAL EXCHANGE OF DLJ COMMON STOCK FOR DLJDIRECT COMMON STOCK
We will have the right at any time to declare that each outstanding share
of DLJdirect common stock shall be exchanged, as of the applicable exchange
date, for a number of fully paid and nonassessable shares of DLJ 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%, as determined by the applicable exchange date.
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%.
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
In general, we can exchange stock of one of our subsidiaries for DLJdirect
common stock if all the assets and liabilities of DLJdirect are transferred to
that subsidiary. This provision is described in greater detail below.
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
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or more wholly owned subsidiaries of Donaldson, Lufkin & Jenrette, Inc., we may,
provided that there are funds of Donaldson, Lufkin & Jenrette, Inc. legally
available, declare that all of the outstanding shares of the common stock
relating to such Group shall be exchanged, as of the applicable exchange date,
for the number of fully paid and nonassessable shares of common stock of such
Group Subsidiaries equal to the product of the Outstanding Interest Fraction
with respect to such Group (determined as of the applicable exchange date) and
the number of shares of common stock of each such Group Subsidiary as will be
outstanding immediately following such exchange. Such shares of common stock of
such Group Subsidiaries may be delivered by the delivery of shares of one or
more of such Group Subsidiaries that own directly or indirectly all of the other
shares that are deliverable as described in the preceding sentence.
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 any Group
other than DLJ on the exchange date is greater than zero, we will also issue a
number of shares of the series of common stock that relates to such Group on the
exchange date equal to the then current Number of Shares Issuable with Respect
to DLJ's Retained Interest in such Group and deliver those shares to the holders
of DLJ common stock or to one of the DLJ Group Subsidiaries, at our option.
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 later than
the 10th Trading Day after the applicable Disposition Date, 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 not DLJ, the Number of Shares Issuable with Respect to
DLJ's Retained Interest in such Group.
Not more than 40 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. After making that announcement, the determination would become
irrevocable. In addition, we would be required, not more than 40 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 Disposition Date),
(3) the Net Proceeds of such Disposition, and
(4) 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 Disposition Date),
(2) the Net Proceeds of such Disposition,
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(3) the type of property to be paid as a redemption price and the
approximate per share amount thereof,
(4) if less than all shares of the relevant series of common stock are
to be redeemed, the number of shares to be redeemed, and
(5) 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 Disposition Date),
(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 DLJ Common Stock for DLJdirect Common Stock" or "Optional Exchange
for Stock of a Subsidiary", we must, between 10 and 30 Trading Days before the
exchange date, 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
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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
In general, upon a liquidation of our company, holders of DLJ common stock
and DLJdirect common stock will receive any net assets remaining after the
payment of our liabilities and of the liquidation preference on any preferred
stock, on a pro rata basis 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. This provision is described in
greater detail below.
The holders of each series of common stock, including DLJdirect common
stock, will be entitled, upon voluntary or involuntary liquidation, dissolution
or winding-up of Donaldson, Lufkin & Jenrette,
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Inc., to receive 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 each series of common stock will be
entitled to a share of net liquidation proceeds in proportion to the respective
liquidation units per share of such class. Each share of DLJ common stock shall
have one liquidation unit and each share of each other series of common stock
shall have a number of liquidation units (including a fraction of one
liquidation unit) equal to the quotient of the average Market Value of one share
of such series of 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. divided by the average Market Value of one share of DLJ common
stock during such 20 Trading Day period.
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 OR ANY GROUP
In this document, the proportional interest in DLJdirect or any other Group
(other than DLJ) intended to be represented at any time by the outstanding
shares of the series of common stock that relates to such Group, is represented
by the "Outstanding Interest Fraction" and the remaining proportional interest
in such Group intended to be represented at any time by DLJ's retained interest
in such Group, is represented by the "Retained Interest Fraction".
At any time, the Outstanding Interest Fraction equals the number of shares
of the series of common stock that relates to such Group outstanding divided by
the sum of number of shares of such series of common stock outstanding and the
Number of Shares Issuable with Respect to DLJ's Retained Interest in such Group.
The Outstanding Interest Fraction in any Group can also be expressed as follows:
Number of Shares of such Series of common stock
Outstanding
------------------------------------------
Number of Shares of such Series of common stock Outstanding +
Number of Shares Issuable with Respect to
DLJ's Retained Interest in such Group
The Retained Interest Fraction in respect of any Group equals the Number of
Shares Issuable with Respect to DLJ's Retained Interest in such Group divided by
the sum of the Number of Shares Issuable with Respect to DLJ's Retained Interest
in such Group and the number of shares of such series of common stock
outstanding. The Retained Interest Fraction in respect of any Group can also be
expressed as follows:
Number of Shares Issuable with Respect to DLJ's Retained
Interest in such Group
------------------------------------------
Number of Shares Issuable with Respect to DLJ's Retained Interest in
such Group + Number of Shares of
such Series of common stock Outstanding
ATTRIBUTION OF ISSUANCES OF COMMON STOCK
Whenever we decide to issue shares of any series of common stock other than
DLJ common stock, we would determine, in our sole discretion, whether to
attribute that issuance, and the proceeds thereof:
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o to DLJ in respect of its retained interest in the Group to which such
series of common stock relates, in a manner analogous to a secondary
offering of common stock of a subsidiary owned by a corporate parent, or
o to such Group, in a manner analogous to a primary offering of common
stock.
If we issue any shares of any series of common stock other than DLJ common stock
and attribute that issuance, and the proceeds thereof, to DLJ in respect of its
retained interest in the Group to which such series of common stock relates,
o the Number of Shares Issuable with Respect to DLJ's Retained Interest in
respect of such Group would be reduced by the number of shares so
issued,
o the number of outstanding shares of such series of common stock would be
increased by the same amount,
o the Retained Interest Fraction in respect of such Group would be
reduced, and
o the Outstanding Interest Fraction in respect of such Group would be
correspondingly increased.
If we instead attribute that issuance (and the proceeds thereof) to such Group,
the Number of Shares Issuable with Respect to DLJ's Retained Interest in such
Group would remain unchanged, the number of outstanding shares of such series of
common stock would be increased by the number of shares so issued, the Retained
Interest Fraction in respect of such Group would be reduced and the Outstanding
Interest Fraction in respect of such Group would be correspondingly increased.
ISSUANCES OF COMMON STOCK AS DISTRIBUTIONS ON DLJ COMMON STOCK
We reserve the right to issue shares of any series of common stock other
than DLJ 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 the Group to which such series of
common stock relates. As a result,
o the Number of Shares Issuable with Respect to DLJ's Retained Interest in
such Group would be reduced by the number of shares so distributed,
o the number of outstanding shares of such series of common stock would be
increased by the same amount,
o the Retained Interest Fraction in such Group would be reduced, and
o the Outstanding Interest Fraction in such Group would be correspondingly
increased.
If instead we issued shares of such series of common stock as a distribution on
such series of common stock, we would attribute that distribution to such Group,
in which case we would proportionately increase the Number of Shares Issuable
with Respect to DLJ's Retained Interest in such Group. As a result,
o the Number of Shares Issuable with Respect to DLJ's Retained Interest in
such Group would be increased by the same percentage as the number of
outstanding shares of such series of common stock is increased, and
o the Retained Interest Fraction in respect of such Group and the
Outstanding Interest Fraction in respect of such Group would remain
unchanged.
DIVIDENDS ON COMMON STOCK
At the time of any dividend on the outstanding shares of any series of
common stock other than DLJ common stock, including any dividend required as a
result of a Disposition of All or Substantially All of the Assets of the Group
to which such series of common stock relates, but excluding any dividend payable
in shares of such series of common stock, we will credit to DLJ, and
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charge against such Group, a corresponding amount in respect of DLJ's retained
interest in such Group. Specifically, the corresponding amount will equal the
aggregate amount of such dividend times the Retained Interest Amount in respect
of such Group.
REPURCHASES OF COMMON STOCK
If we decide to repurchase shares of any series of common stock other than
DLJ 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 the
Group to which such series of common stock relates, in a manner analogous to an
issuer repurchase. If we repurchase shares of such series of common stock and
attribute that repurchase and the cost thereof to DLJ,
o the Number of Shares Issuable with Respect to DLJ's Retained Interest in
respect of such Group would be increased by the number of shares so
purchased,
o the number of outstanding shares of such series common stock would be
decreased by the same amount,
o the Retained Interest Fraction in respect of such Group would be
increased, and
o the Outstanding Interest Fraction in respect of such Group would be
correspondingly decreased.
If we instead attribute that repurchase and the cost thereof to the Group to
which such series of common stock relates,
o the Number of Shares Issuable with Respect to DLJ's Retained Interest in
such Group would remain unchanged,
o the number of outstanding shares of such series common stock would be
decreased by the number of shares so repurchased,
o the Retained Interest Fraction in respect of such Group would be
increased, and
o the Outstanding Interest Fraction in respect of such Group would be
correspondingly reduced.
TRANSFERS OF CASH OR OTHER PROPERTY BETWEEN DLJ AND ANY OTHER GROUP
We may, in our sole discretion, determine to transfer cash or other
property of any Group to DLJ in return for a decrease in DLJ's retained interest
in such Group, in a manner analogous to a return of capital, or to transfer cash
or other property of DLJ to such Group in return for an increase in DLJ's
retained interest in such Group, in a manner analogous to a capital
contribution. If we determine to transfer cash or other property of any Group to
DLJ in return for a decrease in DLJ's retained interest in such Group,
o the Number of Shares Issuable with Respect to DLJ's Retained Interest in
such Group would 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
the series of common stock relating to such Group on the day of
transfer,
o the number of outstanding shares of such series common stock would
remain unchanged,
o the Retained Interest Fraction in respect of such Group would be
reduced, and
o the Outstanding Interest Fraction in respect of such Group would be
correspondingly increased.
If we instead determine to transfer cash or other property of DLJ to any other
Group in return for an increase in DLJ's retained interest in such Group,
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o the Number of Shares Issuable with Respect to DLJ's Retained Interest in
such Group would 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
the series of common stock relating to such Group on the day of
transfer,
o the number of outstanding shares of such series of common stock would
remain unchanged,
o the Retained Interest Fraction in respect of such Group would be
increased, and
o the Outstanding Interest Fraction in respect of such Group would be
correspondingly decreased.
We may not attribute issuances of any series of common stock to DLJ,
transfer cash or other property of any Group to DLJ in return for a decrease in
its retained interest in such Group 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 such Group to decrease below zero.
For illustrations showing how to calculate the Retained Interest Fraction,
the Outstanding Interest Fraction and the Number of Shares Issuable with Respect
to DLJ's Retained Interest in DLJdirect after giving effect to certain
hypothetical dividends, issuances, repurchases and transfers, see "Illustration
of Certain Terms".
DEFINITIONS
The following terms used in this prospectus have the meanings specified in
our restated charter and are set forth below:
"All or Substantially All of the Assets" of a Group means, with respect to
any Disposition, a portion of such assets that represents at least 80% of the
Fair Value (determined as of the Disposition Date) of the assets of such Group.
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 each other Group were each a single, separate Delaware
corporation,
o DLJ had outstanding (1) 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 (2) 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 each other Group set forth in the following
definition were true, and
o DLJ owned a number of shares of each series of common stock (other than
DLJ common stock) equal to the Number of Shares Issuable with Respect to
DLJ's Retained Interest in each Group to which each such series of
common stock relates.
The "Available Dividend Amount" for any Group that is not DLJ (including
DLJdirect) at any time is the amount that would then be legally available for
the payment of dividends on the series of common stock relating to such Group
under Delaware law if such other Group 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 the series of common stock relating to such
Group that are then outstanding plus the Number of Shares Issuable with
Respect to DLJ's Retained Interest in such Group 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 such Group, if any, that are
then outstanding.
The "Code" means the Internal Revenue Code of 1986, as amended.
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A "Disposition" means the disposition of All or Substantially All of the
Assets of a Group (including the DLJdirect Group) to one or more persons or
entities, in one transaction or a series of related transactions.
The "Disposition Date" is the date of the consummation of a Disposition.
The "Dividends Received Percentage" refers to the percentage of the
dividends received deduction (currently 70%) as specified in Section 243(a)(1)
of the Code or any successor provision.
"DLJ" or "DLJ Group" 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 any Group other than DLJ,
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 of Donaldson, Lufkin & Jenrette, Inc., and
o a proportionate interest in any Group other than DLJ, after giving
effect to any options, preferred stock, other securities or debt issued
or incurred by Donaldson, Lufkin & Jenrette, Inc. and attributed to any
Group other than DLJ, equal to the Retained Interest Fraction in respect
of such Group; provided that:
o Donaldson, Lufkin & Jenrette, Inc. may re-allocate assets from one
Group to another 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 of
Donaldson, Lufkin & Jenrette, Inc. from time to time and
o if Donaldson, Lufkin & Jenrette, Inc. transfers cash, other assets
or securities to holders of shares of a series of common stock other
than DLJ common stock as a dividend or other distribution on shares
of such series of common stock, other than a dividend or
distribution payable in shares of such series of common stock, or as
payment in a redemption of shares of such series of common stock
effected as a result of a Disposition relating to the Group to which
such series of common stock relates, then the board of directors of
Donaldson, Lufkin & Jenrette, Inc. shall re-allocate from such Group
to DLJ cash or other assets having a Fair Value equal to the
aggregate Fair Value (in each case, determined as of the record date
for such dividend or distribution or as of the date of such
redemption) of the cash, other assets or securities so transferred
times the Retained Interest Amount in respect of such Group
(determined as of the record date for such dividend or distribution,
or as of the date of such redemption).
"DLJdirect" or "DLJdirect Group" means:
o all of the businesses, assets and liabilities of DLJdirect Holdings Inc.
and its subsidiaries,
o the business, assets and liabilities of DLJdirect's online United
Kingdom discount brokerage service,
o any assets or liabilities acquired or incurred by DLJdirect Holdings
Inc. or any of its subsidiaries after the filing of our restated
charter, 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 filing of
our restated charter that the board of directors of Donaldson, Lufkin &
Jenrette, Inc. 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 of Donaldson, Lufkin & Jenrette, Inc., 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 of Donaldson, Lufkin & Jenrette, Inc.; provided that:
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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 of
Donaldson, Lufkin & Jenrette, Inc. 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 of Donaldson, Lufkin & Jenrette, Inc. shall
re-allocate from DLJdirect to DLJ cash or other assets having a Fair
Value equal to the aggregate Fair Value (in each case, determined as
of the record date for such dividend or distribution or as of the
date of such redemption) of the cash, other assets or securities so
transferred times the Retained Interest Amount in respect of
DLJdirect (determined as of the record date for such dividend or
distribution, or as of the date of such redemption).
"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 of Donaldson,
Lufkin & Jenrette, Inc. in its sole discretion,
o a Disposition by any 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 of Donaldson, Lufkin & Jenrette, Inc.
in its sole discretion,
o a dividend out of any Group's assets that is paid to holders of shares
of the series of common stock relating to such Group, and a transfer of
a corresponding amount to DLJ in respect of its retained interest in
such Group,
o a dividend out of DLJ's assets to holders of DLJ common stock and
o a Disposition by any Group other than DLJ or DLJdirect that is
designated to be an "Exempt Disposition" by the board of directors of
Donaldson, Lufkin & Jenrette, Inc. in the resolution or resolutions
authorizing the issuance of the shares of the series of common stock
that relates to such Group,
o any other Disposition, if
o at the time of the Disposition there are no shares of any series of
common stock outstanding other than the series of common stock
relating to the Group that consummated such Disposition,
o at the time of the Disposition there are no shares of the series of
common stock relating to the Group that consummated such Disposition
outstanding or
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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 DLJdirect common stock for newly issued
shares of DLJ common stock as contemplated under "-- Optional
Exchange of DLJ Common Stock for DLJdirect Common Stock" 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 of Donaldson, Lufkin & Jenrette, Inc. shall
determine in good faith.
(Any good faith determination by the board of directors of Donaldson, Lufkin &
Jenrette, Inc. of Fair Value shall be conclusive and binding on all
stockholders.)
"Group Subsidiaries" means one or more wholly owned subsidiaries of
Donaldson, Lufkin & Jenrette, Inc.
"Market Capitalization" of a 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 a Group other than DLJ 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 of Donaldson, Lufkin & Jenrette, Inc.
"Number of Shares Issuable with Respect to DLJ's Retained Interest in
DLJdirect" refers to the initial number of shares of DLJdirect common stock that
may be issued for the account of DLJ in respect of its retained interest in
DLJdirect.
An "Offer" occurs when 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 when Donaldson, Lufkin & Jenrette, Inc. offers to
purchase all of the outstanding shares of a series of Preferred Stock.
"Outstanding Interest Fraction" means (i) with respect to DLJ, at any time
of determination, 1 and (ii) with respect to any other Group, at any time of
determination, a fraction the numerator of which shall be the number of shares
of the series of common stock applicable to such Group
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outstanding on such date and the denominator of which shall be the sum of the
number of shares of the series of common stock applicable to such Group
outstanding on such date and the Number of Shares Issuable with Respect to DLJ's
Retained Interest in such Group.
"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.
The "restated charter" refers to our amended and restated certificate of
incorporation together with the proposed amendment.
"Retained Interest Amount" means (i) with respect to DLJ, at any time of
determination, 1 and (ii) with respect to any other Group, at any time of
determination, a fraction the numerator of which shall be the Number of Shares
Issuable with Respect to DLJ's Retained Interest in such Group and the
denominator of which shall be the number of shares of the series of common stock
relating to such Group outstanding on such date.
"Retained Interest Fraction" means (i) with respect to DLJ, at any time of
determination, 1 and (ii) with respect to any other Group, at any time of
determination, a fraction the numerator of which shall be the Number of Shares
Issuable with Respect to DLJ's Retained Interest in such Group and the
denominator of which shall be the sum of the number of shares of the series of
common stock relating to such Group outstanding on such date and the Number of
Shares Issuable with Respect to DLJ's Retained Interest in such Group.
"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.
"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.
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 DLJ Common Stock for DLJdirect Common
Stock", "-- Optional Exchange for Stock of a Subsidiary" and "-- Liquidation"
above apply only when there are shares of multiple series of common stock
outstanding.
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DETERMINATIONS BY THE BOARD
The restated charter will provide that, subject to applicable law, any
determinations made by the board of directors of Donaldson, Lufkin & Jenrette,
Inc. 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 of Donaldson, Lufkin & Jenrette, Inc. may issue shares of preferred
stock in one or more series from time to time. The board of directors of
Donaldson, Lufkin & Jenrette, Inc. 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.
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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 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.
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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
662/3% 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 662/3% 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 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
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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 662/3% 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.
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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. 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. In this
description, each of DLJ and DLJdirect is sometimes called a "Group". If we
decide to authorize the issuance of shares of additional series of common stock
other than DLJ common stock or DLJdirect common stock, we will designate the
assets and liabilities of DLJ to which such series of common stock relates and
such assets and liabilities will be an additional "group" for the purpose of the
policies summarized below.
The board of directors of Donaldson, Lufkin & Jenrette, Inc. 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 of
Donaldson, Lufkin & Jenrette, Inc. to modify, rescind or add to any of these
policies would, however, be subject to the general fiduciary duties of the board
of directors of Donaldson, Lufkin & Jenrette, Inc. The board of directors of
Donaldson, Lufkin & Jenrette, Inc. 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 -- Risks
relating to ownership of DLJdirect common stock -- Holders of DLJdirect common
stock will be common stockholders of Donaldson, Lufkin & Jenrette, Inc.".
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
Donaldson, Lufkin & Jenrette, Inc. funds cash disbursements for Donaldson,
Lufkin & Jenrette, Inc. 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
Donaldson, Lufkin & Jenrette, Inc. 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:
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(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 of Donaldson, Lufkin & Jenrette, Inc. determines
otherwise. The board of directors of Donaldson, Lufkin & Jenrette, Inc. 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 or Any Group".
(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 of Donaldson, Lufkin & Jenrette, Inc. The board of
directors of Donaldson, Lufkin & Jenrette, Inc. 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 of Donaldson, Lufkin & Jenrette, Inc. determines
that a given transfer or type of transfer should be accounted for as a
long-term loan,
o the board of directors of Donaldson, Lufkin & Jenrette, Inc. 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 of Donaldson, Lufkin & Jenrette, Inc. 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 of Donaldson, Lufkin & Jenrette, Inc. 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 of Donaldson, Lufkin & Jenrette,
Inc. 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
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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 of Donaldson,
Lufkin & Jenrette, Inc., 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 of Donaldson, Lufkin &
Jenrette, Inc., 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 one share of DLJdirect
common stock 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 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 one share of DLJdirect
common stock 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".
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MATERIAL U.S. FEDERAL TAX CONSIDERATIONS
The following discussion is a summary of the material 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"), all 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
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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.
MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES TO NON-U.S. INVESTORS
The following is a summary of material 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
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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, 2000, 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.
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UNDERWRITING
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, DLJdirect Inc., BT Alex. Brown
Incorporated, Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Morgan Stanley & Co. Incorporated and Salomon Smith Barney Inc.
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
UNDERWRITERS: SHARES
Donaldson, Lufkin & Jenrette Securities Corporation .........
DLJdirect Inc. ..............................................
BT Alex. Brown Incorporated .................................
Goldman, Sachs & Co. ........................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated ..................................
Morgan Stanley & Co. Incorporated ...........................
Salomon Smith Barney Inc. ...................................
Total ...................................................... 16,000,000
==========
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
2,400,000 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.
Donaldson, Lufkin & Jenrette, Inc. has 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
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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 180 days after the date of this
prospectus without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation.
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 into, or exercisable or exchangeable for, DLJdirect common
stock in transactions not involving a public offering, or in connection
with future acquisitions, 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 has been 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
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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 2,500,000 shares of
DLJdirect common stock for directors, current and former employees, and certain
customers of DLJ, including a limited number of shares for certain agents of
Equitable, who have an interest in purchasing shares of DLJdirect common stock
in the offering. The underwriters have advised DLJ that the price per share for
the shares reserved for sale to its current employees will be the initial public
offering price less underwriting discounts and commissions, or $ per share and
the price per share for the shares reserved for sale to its directors, former
employees and certain customers will be the initial public offering price. The
underwriters have advised Equitable that the price per share for shares reserved
for sale to certain agents will be the initial public offering price. 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 certain agents 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 and DLJdirect Inc. are
affiliates of Donaldson, Lufkin & Jenrette, Inc. Donaldson, Lufkin & Jenrette
Securities Corporation and DLJdirect Inc. have 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 and DLJdirect Inc.'s participation as
underwriters, to the extent that part or all of the shares of DLJdirect common
stock underwritten by Donaldson, Lufkin & Jenrette Securities Corporation and
DLJdirect Inc. are not resold, Donaldson, Lufkin & Jenrette, Inc.'s and
DLJdirect's, as applicable, 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 and DLJdirect Inc. intend to resell any shares which they are 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, Goldman, Sachs & Co. has served in this role and has
recommended a price in compliance with the requirements of Rule 2720. In
connection with the offering, Goldman, Sachs & Co. 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.
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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. Skadden, Arps, Slate, Meagher & Flom
LLP, New York, New York will serve as legal counsel for the underwriters.
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.
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ILLUSTRATION OF CERTAIN TERMS
The following illustrations show how to calculate the Retained Interest
Percentage, the Outstanding Interest Percentage and the Number of Shares
Issuable with Respect to DLJ's Retained Interest in DLJdirect 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.
At any given time, the percentage interest in DLJdirect intended to be
represented by the outstanding shares of DLJdirect common stock -- which we call
the Outstanding Interest Percentage -- is represented by the Outstanding
Interest Fraction, calculated as follows:
Outstanding Shares of DLJdirect common stock
------------------------------------------------------
Outstanding Shares of DLJdirect common stock + Number of Shares Issuable
with Respect to DLJ's Retained Interest in DLJdirect
and the remaining percentage interest in DLJdirect intended to be represented by
DLJ's retained interest in DLJdirect -- which we call the Retained Interest
Percentage -- is represented by the Retained Interest Fraction calculated as
follows:
Number of Shares Issuable with Respect to DLJ's Retained
Interest in DLJdirect
------------------------------------------------------
Outstanding Shares of DLJdirect common stock + Number of Shares Issuable
with Respect to DLJ's Retained Interest in DLJdirect
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 is 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.
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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 COMMON 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.
I-2
<PAGE>
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. were to issue any securities
convertible into or exercisable for shares of DLJdirect common stock, the
Outstanding Interest Fraction and the Retained Interest Fraction 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 Fraction and the Retained Interest Fraction 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 COMMON 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.
I-3
<PAGE>
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 Fraction and Retained Interest Fraction.
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 Fraction and Retained Interest Fraction.
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 Fraction and Retained
Interest Fraction, 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.
I-4
<PAGE>
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).
<TABLE>
<S> <C>
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
===
</TABLE>
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).
<TABLE>
<S> <C>
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
===
</TABLE>
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.
<TABLE>
<S> <C>
Shares previously issued and outstanding .............. 15
Newly issued shares for account of DLJ ................ 50
--
Total issued and outstanding after dividend ......... 65
==
</TABLE>
I-5
<PAGE>
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.
<TABLE>
<S> <C>
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
===
</TABLE>
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.
<TABLE>
<S> <C>
Shares previously issued and outstanding .............. 15
Newly issued shares for account of DLJdirect .......... 3
--
Total issued and outstanding after dividend ......... 18
==
</TABLE>
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.
<TABLE>
<S> <C>
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
===
</TABLE>
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%.
I-6
<PAGE>
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.
<TABLE>
<S> <C>
Shares previously issued and outstanding .................. 15
Newly issued shares ....................................... 0
--
Total issued and outstanding after contribution ......... 15
==
</TABLE>
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.
<TABLE>
<S> <C>
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
===
</TABLE>
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.
<TABLE>
<S> <C>
Shares previously issued and outstanding .................. 15
Newly issued shares ....................................... 0
--
Total issued and outstanding after contribution ......... 15
==
</TABLE>
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.
<TABLE>
<S> <C>
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
===
</TABLE>
I-7
<PAGE>
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%.
I-8
<PAGE>
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
F-1
<PAGE>
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, except as to footnote 19 which is as of March
17, 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
except as to footnote 10, which is as of March 17, 1999
F-2
<PAGE>
DLJDIRECT
(A COMBINATION OF CERTAIN ASSETS AND LIABILITIES AS DESCRIBED IN NOTE 1)
COMBINED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------------ MARCH 31,
1997 1998 1999
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents ..................................... $ 8,881 $ 26,654 $47,825
Deposit with affiliated clearing broker ....................... 250 250 250
Receivables from brokers, dealers and others, net ............. 725 1,887 2,733
Office facilities, at cost (net of accumulated depreciation and
amortization of $260, $284 and $281, respectively) ........... 1,808 278 281
Other assets .................................................. 207 682 1,340
-------- -------- -------
Total assets ............................................... $ 11,871 $ 29,751 $52,429
======== ======== =======
LIABILITIES AND EQUITY
Liabilities:
Payables to parent and affiliates, net ....................... $ 3,266 $ 5,211 $17,950
Accounts payable and accrued expenses ........................ 2,641 2,616 4,382
-------- -------- -------
Total liabilities .......................................... 5,907 7,827 22,332
-------- -------- -------
Commitments and contingencies ................................. -- -- --
Equity:
Capital contributions ........................................ 10,502 25,002 26,002
Retained earnings (deficit) .................................. (4,538) (3,078) 4,095
-------- -------- -------
Total equity ............................................... 5,964 21,924 30,097
-------- -------- -------
Total liabilities and equity ............................... $ 11,871 $ 29,751 $52,429
======== ======== =======
</TABLE>
See accompanying notes to combined financial statements.
F-3
<PAGE>
DLJDIRECT
(A COMBINATION OF CERTAIN ASSETS AND LIABILITIES AS DESCRIBED IN NOTE 1)
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Commissions ................................ $ 54,166 $ 50,948 $ 78,717 $ 16,130 $ 32,054
Fees ....................................... 6,426 12,109 25,484 5,140 9,596
Interest ................................... 2,569 4,160 13,723 2,787 5,552
-------- -------- -------- -------- --------
Total revenues ........................... 63,161 67,217 117,924 24,057 47,202
-------- -------- -------- -------- --------
Costs and expenses:
Compensation and benefits .................. 11,202 17,174 28,260 5,759 10,683
Brokerage, clearing, exchange and other fees 15,422 20,909 28,423 6,071 8,854
Advertising ................................ 9,093 13,137 25,146 9,010 6,101
Occupancy and equipment .................... 1,923 3,352 5,045 1,081 1,503
Communications ............................. 1,468 2,844 5,564 1,189 2,705
Technology costs ........................... 5,205 5,082 4,084 1,103 1,280
Other operating expenses ................... 5,567 10,844 18,934 3,660 4,815
-------- -------- -------- -------- --------
Total costs and expenses ................. 49,880 73,342 115,456 27,873 35,941
-------- -------- -------- -------- --------
Income (loss) before income tax provision
(benefit) .................................. 13,281 (6,125) 2,468 (3,816) 11,261
Income tax provision (benefit) .............. 5,425 (2,502) 1,008 (1,559) 4,088
-------- -------- -------- -------- --------
Net income (loss) ........................ $ 7,856 $ (3,623) $ 1,460 $ (2,257) $ 7,173
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-4
<PAGE>
DLJDIRECT
(A COMBINATION OF CERTAIN ASSETS AND LIABILITIES AS DESCRIBED IN NOTE 1)
COMBINED STATEMENTS OF CHANGES IN EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
----------------------------------------------------------------------
CAPITAL RETAINED
DIVISIONAL EQUITY CONTRIBUTIONS EARNINGS (DEFICIT) TOTAL EQUITY
<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
Net income ..................................... -- -- 7,173 7,173
Capital contribution from DLJ .................. -- 1,000 -- 1,000
-------- ------- -------- --------
Balances at March 31, 1999 (unaudited) ......... $ -- $26,002 $ 4,095 $ 30,097
======== ======= ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-5
<PAGE>
DLJDIRECT
(A COMBINATION OF CERTAIN ASSETS AND LIABILITIES AS DESCRIBED IN NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------- ---------------------------
1996 1997 1998 1998 1999
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................... $ 7,856 $ (3,623) $ 1,460 $ (2,257) $7,173
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization ....................... 949 652 299 86 (3)
Deferred taxes ...................................... (344) 160 (275) (170) (6)
(Increase) decrease in operating assets:
Deposit with affiliated clearing broker ........... -- (250) -- -- --
Receivables from brokers, dealers and
other, net ....................................... 283 (1,923) (1,162) (917) (846)
Other assets ...................................... -- (207) (475) (175) (658)
Increase (decrease) in operating liabilities:
Payables to parent and affiliates, net ............ 357 1,951 2,220 6,858 12,745
Accounts payable and accrued expenses ............. -- 2,641 (25) 2,850 1,766
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities .......................................... 9,101 (599) 2,042 6,275 20,171
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchase of office facilities ....................... (1,245) (107) -- -- --
Net proceeds from sale of office facilities ......... -- -- 1,231 1,231 --
-------- -------- -------- -------- --------
Net cash provided by (used in) investing
activities .......................................... (1,245) (107) 1,231 1,231 --
-------- -------- -------- -------- --------
Cash flows from financing activities:
Net proceeds from capital contributions from
DLJ ............................................... -- 10,502 14,500 5,000 1,000
Payments to DLJ ..................................... (7,856) (915) -- -- --
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities .......................................... (7,856) 9,587 14,500 5,000 1,000
-------- -------- -------- -------- --------
Increase in cash and cash equivalents ................ -- 8,881 17,773 12,506 21,171
Cash and cash equivalents at beginning of
period .............................................. -- -- 8,881 8,881 26,654
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period ........... $ -- $ 8,881 $ 26,654 $ 21,387 $47,825
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-6
<PAGE>
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.
DLJ Inc. allocates certain general administrative and facilities expenses
to DLJdirect using a proportional cost methodology based on the relative number
of employees and square foot usage of DLJdirect or on actual costs incurred.
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
F-7
<PAGE>
DLJDIRECT
(A COMBINATION OF CERTAIN ASSETS AND LIABILITIES AS DESCRIBED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
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 and 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.
F-8
<PAGE>
DLJDIRECT
(A COMBINATION OF CERTAIN ASSETS AND LIABILITIES AS DESCRIBED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
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 and an amended clearing agreement
executed in March 1999, the amounts paid by DLJdirect under the clearing
agreement include payments in respect of the license fee for the use of DLJ
Inc.'s trademarks. Such trademarks are licensed to DLJdirect for use in the
United States and certain other jurisdictions under the License Agreement, and
as a result the licensor will receive payment of that fee from the clearing
provider. If such agreements were entered into in prior years under these
conditions, management believes that there would have been no material effect
upon the total costs and expenses of DLJdirect.
Employees of DLJdirect participate in DLJ Inc.'s defined contribution
employee benefit plans. Certain key employees of DLJdirect participate in stock
options, long-term incentive compensation and restricted stock unit employee
benefit plans and various deferred compensation arrangements, as well as other
non-qualified plans which are funded by insurance contracts. Expenses associated
with these compensation arrangements are reflected in DLJdirect's combined
statements of operations.
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 is part of a group that files consolidated Federal income tax
returns. DLJdirect settles all taxes, current and deferred, on a current basis
with DLJ Inc. under a tax sharing arrangement.
F-9
<PAGE>
DLJDIRECT
(A COMBINATION OF CERTAIN ASSETS AND LIABILITIES AS DESCRIBED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
Taxes are provided as if DLJdirect filed a separate return. Income tax provision
(benefit) included in the combined statements of operations is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1996 1997 1998
--------- ------------ ---------
<S> <C> <C> <C>
(IN THOUSANDS)
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>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1996 1997 1998
----------------------------- ----------------------------- ----------------------------
PERCENT OF PERCENT OF PERCENT OF
PRETAX PRETAX PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT 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.:
<TABLE>
<CAPTION>
AS OF DECEMBER
31,
----------------
1997 1998
------ -------
(IN THOUSANDS)
<S> <C> <C>
Net deferred tax assets:
Deferred compensation and other ......... $504 $779
==== ====
</TABLE>
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.
F-10
<PAGE>
DLJDIRECT
(A COMBINATION OF CERTAIN ASSETS AND LIABILITIES AS DESCRIBED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
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:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999 .............. $ 3,540
2000 .............. 3,091
2001 .............. 2,778
2002 .............. 1,684
2003 .............. 574
2004-2009 ......... 290
-------
Total ............ $11,957
=======
</TABLE>
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.
9. SUBSEQUENT EVENTS (UNAUDITED)
In March 1999, DLJdirect entered into a joint venture agreement with a
Japanese bank. DLJdirect has a 50% interest in this joint venture which amount
is included in other assets in the accompanying combined statements of financial
condition.
On April 1, 1999, DLJdirect entered into a 10-year lease agreement with an
annual commitment of approximately $3.0 million.
10. SUBSEQUENT EVENT -- FILING OF REGISTRATION STATEMENT
On March 17, 1999 DLJ Inc. filed a registration statement with the
Securities and Exchange Commission relating to a proposed initial public
offering of a new class of common stock that will track the performance of
DLJdirect, its online brokerage business.
F-11
<PAGE>
[DLJDIRECT LOGO]
5X FASTER THEN OTHER MAJOR INTERNET BROKERS*
Based a study conducted from November 17, 1998 through December 4, 1998 by
Corporate Insight, Inc., an independent online market research firm.
<PAGE>
================================================================================
- --------------------------------------------------------------------------------
, 1999
[GRAPHIC OMITTED]
DLJDIRECT COMMON STOCK
DONALDSON, LUFKIN & JENRETTE, INC.
16,000,000 SHARES
-------------------------
P R O S P E C T U S
-------------------------
DONALDSON, LUFKIN & JENRETTE
DLJDIRECT INC.
BT ALEX. BROWN
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
SALOMON SMITH BARNEY
- --------------------------------------------------------------------------------
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.
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
AMOUNT
TO BE PAID
-------------
Registration fee ............................ $ 78,327
NASD filing fee ............................. 10,000
New York Stock Exchange listing fee ......... 84,300
Transfer agent's fees ....................... 2,500
Printing and engraving expenses ............. 400,000
Legal fees and expenses ..................... 1,000,000
Accounting fees and expenses ................ 800,000
Blue Sky fees and expenses .................. 5,000
Miscellaneous ............................... 4,873
----------
Total ...................................... $2,385,000
==========
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:
1 ** Form of Underwriting Agreement
3.1** Form of Amended and 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
II-1
<PAGE>
8.1 Tax opinion of Davis Polk & Wardwell
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 Exhibits 5.1 and
8.1)
24.1** Power of Attorney (included on signature page)
- ------------
** Previously filed.
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.
II-2
<PAGE>
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
amendment to the registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, New York, on
the 25th day of May, 1999.
DONALDSON, LUFKIN & JENRETTE, INC.
By: /s/ Joe. L. Roby
------------------------------------
Joe L. Roby
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------- ------------------------------------ -------------
<S> <C> <C>
* President, Chief Executive Officer May 25, 1999
- --------------------------- and Director
Joe L. Roby
* Chairman of the Board and May 25, 1999
- --------------------------- Director
John S. Chalsty
* Executive Vice President, Chief May 25, 1999
- --------------------------- Financial Officer and Director
Anthony F. Daddino
Director
- ---------------------------
David DeLucia
* Managing Director and Director May 25, 1999
- ---------------------------
Hamilton E. James
* Managing Director and Director May 25, 1999
- ---------------------------
Richard S. Pechter
Director
- ---------------------------
Stuart M. Robbins
* Senior Vice President and Chief May 25, 1999
- --------------------------- Accounting Officer
Michael M. Bendik
Director
- ---------------------------
Henri de Castries
* Director May 25, 1999
- ---------------------------
Denis Duverne
Director
- ---------------------------
Jane Mack Gould
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------- ---------- -------------
<S> <C> <C>
* Director May 25, 1999
- ---------------------------
Louis Harris
Director
- ---------------------------
Michael Hegarty
Director
- ---------------------------
Henri G. Hottinguer
* Director May 25, 1999
- ---------------------------
W. Edwin Jarmain
* Director May 25, 1999
- ---------------------------
Francis Jungers
* Director May 25, 1999
- ---------------------------
Edward D. Miller
* Director May 25, 1999
- ---------------------------
W. J. Sanders III
Director
- ---------------------------
Stanley B. Tulin
* Director May 25, 1999
- ---------------------------
John C. West
</TABLE>
* By: /s/ Marjorie S. White
----------------------
Name: Marjorie S. White
Title: Attorney-in-Fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- ------------ ----------------------------------------------------------------------- --------------
<S> <C> <C>
1 ** Form of Underwriting Agreement
3.1** Form of Amended and 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
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 Exhibits 5.1 and 8.1)
24.1** Power of Attorney (included on signature page)
</TABLE>
- ----------
** Previously filed.
<PAGE>
EXHIBITS 5.1 AND 23.3
OPINION OF DAVIS POLK & WARDWELL
May 25, 1999
Donaldson, Lufkin & Jenrette, Inc.
277 Park Avenue
New York, NY 100172
Ladies and Gentlemen:
Donaldson, Lufkin & Jenrette, Inc., a Delaware corporation (the "Company"),
is filing with the Securities and Exchange Commission a Registration Statement
on Form S-3 (the "Registration Statement") for the purpose of registering under
the Securities Act of 1933, as amended (the "Securities Act") the public
offering of up to 18,400,000 shares of its DLJdirect common stock, par value
$0.10 per share (the "Securities").
We have examined such documents and such matters of fact and law that we
have deemed necessary for the purpose of rendering the opinion expressed herein.
Based on the foregoing, we are of the opinion that, when the price at which the
Securities to be sold has been approved by or on behalf of the Board of
Directors of the Company and when the Securities have been duly issued and
delivered against payment therefor in accordance with the terms of the
Underwriting Agreement referred to in the Prospectus which is a part of the
Registration Statement, the Securities will be validly issued, fully paid and
non-assessable.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement referred to above, and further consent to the reference
to our name under the caption "Legal Matters" in the Prospectus which is a part
of the Registration Statement, without admitting that we are experts within the
meaning of the Securities Act.
Very truly yours,
/s/ Davis Polk & Wardwell
-------------------------
<PAGE>
EXHIBITS 8.1 AND 23.3
TAX OPINION OF DAVIS POLK & WARDWELL
May 25, 1999
Donaldson, Lufkin & Jenrette, Inc.
277 Park Avenue
New York, New York 10172
Dear Sirs:
We have acted as special tax counsel for Donaldson, Lufkin & Jenrette, Inc.
(the "Company") in connection with the registration of the public offering of up
to 18,400,000 shares of DLJdirect common stock. Terms defined in the prospectus
(the "Prospectus") that is part of the Registration Statement on Form S-3 filed
by the Company with the Securities and Exchange Commission on May 25, 1999 are
used herein as therein defined.
In rendering the Opinion, we have assumed that the offering of the
DLJdirect common stock as set forth in the Registration Statement will be
consummated in the manner and utilizing the procedures currently contemplated in
the Registration Statement in connection with the DLJdirect common stock,
including without limitation the procedures regarding the issuance, offer, sale
and delivery of any payment with respect to the DLJdirect common stock, and the
exchange of DLJdirect common stock upon the occurrence of certain events, as set
forth therein, and have assumed that such procedures will not be modified by any
applicable supplement.
Our opinion addresses only those holders of DLJdirect common stock who hold
DLJdirect common stock as a capital asset. Our opinion does not address all
aspects of United States federal income taxation that may be relevant to a
holder of DLJdirect common stock in light of such holder's particular
circumstances. We have assumed that the holders of DLJdirect common stock are
not subject to special rules, such as those that may be applicable to a holder
that is a broker-dealer, 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. Moreover,
in rendering this opinion, no ruling has been sought from the Internal Revenue
Service (the "Service") and, in this regard, the Service has announced that it
will not issue advance rulings on the classification of an instrument that has
certain voting and liquidation rights in an issuing corporation but 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. Our opinion is not binding on the Service. In addition, there are no
court decisions or other authorities bearing directly on the classification of
instruments with characteristics similar to those of the DLJdirect common stock.
It is possible, therefore, that the Service could assert that the issuance of
DLJdirect common stock could result in taxation to the Company. We are, however,
of the opinion that the Service would not prevail in such an assertion.
Based upon the foregoing, (i) it is our opinion that, for federal income
tax purposes, DLJdirect common stock will be considered the common stock of the
Company and, accordingly, neither the holders of DLJdirect common stock nor the
Company will recognize any income, gain or loss as a result of the issuance of
the DLJdirect common stock, and (ii) the statements set forth in the Prospectus
under the caption "Material U.S. Federal Tax Considerations", insofar as such
statements constitute a summary of matters of law, accurately describe the
material United States federal income tax consequences referred to therein,
subject to the qualifications stated therein.
We hereby consent to the reference to Davis Polk & Wardwell under the
caption "Material U.S. Federal Tax Considerations" in the Prospectus. The
issuance of such a consent does not concede that we are an "Expert" for the
purposes of the Securities Act of 1933.
Very truly yours,
/s/ Davis Polk & Wardwell
-------------------------
<PAGE>
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 report on DLJdirect included herein and to the
reference to our firm under the heading "Experts" in the registration statement.
/s/ KPMG LLP
New York, New York
May 24, 1999
<PAGE>
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 amendment No. 5 to the registration
statement on Form S-3 dated May 25, 1999 of our report dated February 2, 1999,
except as to footnote 19 which is as of March 17, 1999, which is included in the
December 31, 1998 annual report on Form 10-K dated March 30, 1999 of Donaldson,
Lufkin & Jenrette, Inc., and to the reference to our firm under the heading
"Experts" in the registration statement.
/s/ KPMG LLP
New York, New York
May 24, 1999
