SCHEDULE 14C
(Rule 14c-101)
INFORMATION REQUIRED IN INFORMATION STATEMENT
SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c)
of the Securities Exchange Act of 1934
(Amendment No. )
Check the appropriate box:
[X] Preliminary Information Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14c-5(d)(2))
[_] Definitive Information Statement
DONALDSON, LUFKIN & JENRETTE, INC.
(Name of Registrant as Specified in Its Charter)
Payment of Filing Fee (check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
DONALDSON, LUFKIN & JENRETTE, INC.
277 PARK AVENUE
NEW YORK, NEW YORK 10172
________, 1999
Dear Stockholder:
We are furnishing this Information Statement to you in connection with our
proposed offering of "tracking stock" for our DLJdirect online discount
brokerage and related investment services businesses described in the
accompanying Information Statement.
In order to issue the tracking stock, we need to amend our amended and
restated certificate of incorporation. Our certificate of incorporation permits
us to make this amendment if we obtain the written consent of holders of shares
representing a majority of the votes entitled to be cast at a duly called
meeting of stockholders. Donaldson, Lufkin & Jenrette, Inc.'s principal
stockholder, The Equitable Companies Incorporated, controls 71.3% of the
outstanding votes of Donaldson, Lufkin & Jenrette, Inc. and has indicated that
it intends to approve the tracking stock proposal by written consent. WE ARE
NOT ASKING YOU FOR A PROXY OR A WRITTEN CONSENT AND YOU ARE REQUESTED NOT TO
SEND US A PROXY OR A WRITTEN CONSENT. As we explain in this Information
Statement, however, completion of the offering is still subject to a number of
conditions. We cannot predict with certainty when we will complete the
offering, but we hope to complete the offering prior to _________, 1999.
We are sending this Information Statement to all holders of shares of
Donaldson, Lufkin & Jenrette, Inc. common stock. The record date for the
determination of your status as a holder of Donaldson, Lufkin & Jenrette, Inc.
common stock was _______, 1999.
The tracking stock proposal will allow us to issue a new series of common
stock which will be called "DLJdirect Common Stock". The new series of common
stock is intended to reflect the performance of DLJdirect, our online discount
brokerage and related investment services business. Before we first issue
DLJdirect Common Stock, we would re-classify Donaldson, Lufkin & Jenrette,
Inc.'s existing common stock as "DLJ Common Stock", intended to reflect the
performance of DLJ's other businesses and a retained interest in DLJdirect.
We currently plan to offer to the public, for cash, shares of DLJdirect
Common Stock intended to represent a minority interest in the equity value
attributed to DLJdirect.
We are proceeding with the tracking stock proposal primarily for the
following reasons:
- The proposal will permit the market to review separate information
about DLJdirect and separately value DLJdirect Common Stock. This
should encourage investors and analysts to focus more attention on
DLJdirect and result in greater market recognition of the value of
DLJdirect to Donaldson, Lufkin & Jenrette, Inc.
- The proposal will allow investors to invest in either or both series
of common stock, depending on their particular investment objectives.
- The proposal will allow us to issue stock options tied to DLJdirect
Common Stock, thereby providing more focused incentives to DLJdirect
management and employees.
- The proposal will provide us with greater flexibility to raise
capital and respond to strategic opportunities (including
acquisitions), because it will allow us to issue either DLJ Common
Stock or DLJdirect Common Stock as appropriate under the
circumstances.
i
- The proposal will allow us to monetize some of the value of DLJdirect
while preserving the financial, tax, operational, strategic and other
benefits of being a single consolidated entity.
- The proposal will allow us to issue DLJdirect Common Stock to the
public for cash on a basis that we believe is tax-free and attribute
the net proceeds from the offering to DLJdirect. DLJdirect will use
the net proceeds from the offering to fund increases in marketing
expenditures, for international expansion, to repay a note issued to
us prior to the consummation of the offering and for other general
corporate purposes.
The tracking stock proposal will also increase the number of shares of our
existing common stock (which will become DLJ Common Stock) authorized for
issuance from 300 million to 500 million and authorize the board of directors
to create additional series of common stock other than DLJ Common Stock and
DLJdirect Common Stock.
This Information Statement is to inform you of the tracking stock proposal
and constitutes the notice of corporate action without a meeting required by
Section 228 of the Delaware General Corporation Law. The tracking stock
proposal will become effective no earlier than 20 business days after this
Information Statement is mailed to stockholders of Donaldson, Lufkin &
Jenrette, Inc.
In addition to the Information Statement, we have attached for your
convenience, in "Q and A" format, a summary of certain questions you may have
about the tracking stock proposal and our answers to these questions.
Thank you for your cooperation and continued support and interest in
Donaldson, Lufkin & Jenrette, Inc.
Sincerely yours,
Joe L. Roby John S. Chalsty
President and Chairman of the Board
Chief Executive Officer
ii
QUESTIONS AND ANSWERS
ABOUT OUR
TRACKING STOCK PROPOSAL
Q: WHY AM I RECEIVING THIS INFORMATION STATEMENT? WHAT IS THE TRACKING STOCK
PROPOSAL?
A: We are sending you this Information Statement to inform you of the tracking
stock proposal described in this Information Statement. The Equitable Companies
Incorporated, the owner of approximately 71.3% of our outstanding common stock,
has indicated that it intends to consent to the tracking stock proposal. Thus,
no meeting or additional approval or consent of our other stockholders is
necessary to effect the tracking stock proposal. This Information Statement
constitutes notice of corporate action without a meeting required by Section
228 of the Delaware General Corporation Law.
The tracking stock proposal would allow us to amend our amended and restated
certificate of incorporation to:
o Authorize the board of directors to issue common stock in multiple
series--initially, we would have two series: DLJ Common Stock and
DLJdirect Common Stock.
o We intend DLJdirect Common Stock to reflect the performance of
DLJdirect (i.e., our online discount brokerage and related investment
services business).
o We intend DLJ Common Stock to reflect the performance of DLJ (i.e.,
our other businesses and a retained interest in DLJdirect).
o We have allocated all of Donaldson, Lufkin & Jenrette, Inc.'s
consolidated assets, liabilities, revenue, expenses and cash flow
between DLJ and DLJdirect.
o Re-classify each outstanding share of existing common stock into a share
of DLJ Common Stock.
Q: WHAT IS "TRACKING STOCK"?
A: "Tracking stock", which people sometimes call "alphabet stock", "letter
stock" or "targeted stock", is a type of common stock that the issuing company
intends to reflect (or "track") the performance of a particular business. As
mentioned above, we propose creating two new series of tracking stock, to be
designated as DLJ Common Stock and DLJdirect Common Stock.
We cannot assure you that the market values of DLJ Common Stock and DLJdirect
Common Stock will in fact reflect the performance of DLJ and DLJdirect as we
intend. Holders of DLJ Common Stock and 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 our businesses, assets and liabilities.
Q: WHY IS THERE NO STOCKHOLDER VOTE?
A: The tracking stock proposal requires the consent of the holders of a
majority of the outstanding shares. The Equitable Companies Incorporated, the
owner of approximately 71.3% of our outstanding common stock, has indicated
that it intends to consent to the tracking stock proposal by executing a
written stockholders' consent. This consent meets the stockholder approval
requirements under Delaware Law. Thus, no meeting or further approval or
consent of our other stockholders is necessary to effect the tracking stock
proposal.
iii
Q: HOW WILL YOU INITIALLY ISSUE DLJdirect COMMON STOCK? HOW MANY SHARES WILL YOU
INITIALLY ISSUE AND WHEN?
A: We currently plan to offer to the public, for cash, shares of DLJdirect
Common Stock intended to represent a minority of the equity value attributed to
DLJdirect and to attribute the net proceeds from the offering to DLJdirect.
DLJdirect will use the net proceeds from the offering to fund increases in
marketing expenditures, for international expansion, to repay a note issued to
us prior to the consummation of the offering and for other general corporate
purposes. We expect the DLJdirect Common Stock offering to occur sometime in
the second or third quarter of 1999. However, we could choose to conduct the
offering at a later time, or not to make the offering at all, depending on the
circumstances at the time.
Q: WHEN WILL YOU IMPLEMENT THE TRACKING STOCK PROPOSAL? WHEN WILL YOU
RE-CLASSIFY MY COMMON STOCK INTO DLJ COMMON STOCK?
A: When we file the amendment to our amended and restated certificate of
incorporation implementing the tracking stock proposal, it will re-classify
your common stock into DLJ Common Stock.
Q: WHAT HAPPENS TO MY COMMON STOCK WHEN YOU IMPLEMENT THE TRACKING STOCK
PROPOSAL? DO I NEED TO SEND IN MY STOCK CERTIFICATES?
A: When we file the amendment to our amended and restated certificate of
incorporation implementing the tracking stock proposal, that filing will
automatically re-classify each of your shares into one share of DLJ Common
Stock, and your existing stock certificates will automatically represent that
DLJ Common Stock. Since the re-classification is automatic, you do not need to
send in your stock certificates or make any notations reflecting the change.
DONALDSON, LUFKIN & JENRETTE, INC. WILL FURNISH WITHOUT CHARGE TO EACH
STOCKHOLDER WHO SO REQUESTS THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL, OR OTHER SPECIAL RIGHTS OF OUR EXISTING COMMON STOCK
(WHICH WILL BECOME DLJ COMMON STOCK) AND THE QUALIFICATIONS, LIMITATIONS OR
RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS.
Q: WILL DLJ COMMON STOCK BE LISTED ON THE NYSE? HOW ABOUT DLJdirect COMMON
STOCK?
A: When we re-classify our common stock as DLJ Common Stock, it will continue
to trade on the NYSE under the symbol "DLJ". We currently intend to apply for
listing of DLJdirect Common Stock on the NYSE under the symbol "DIR".
Q: WHAT VOTING RIGHTS WILL I HAVE?
A: Each share of DLJ Common Stock will continue to entitle the holder to one
vote. Shares of DLJdirect Common Stock will not entitle the holders to vote,
unless a separate class vote is required by law.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE TRACKING STOCK PROPOSAL?
A: We believe that neither you nor Donaldson, Lufkin & Jenrette, Inc. will
recognize any income, gain or loss for federal income tax purposes as a result
of the re-classification of existing common stock into DLJ Common Stock or the
issuance of DLJdirect Common Stock. There are, however, no court decisions
bearing directly on similar transactions and the Internal Revenue Service has
announced that it will not issue advance rulings on the federal income tax
consequences of such transactions. Thus, you should consult a tax advisor.
Q: DO YOU INTEND TO PAY DIVIDENDS?
iv
A: We currently intend to retain all of DLJdirect's earnings to finance
operations and fund future growth. We do not expect to pay any dividends on
DLJdirect Common Stock for the foreseeable future. We do not expect to change
our dividend policy with respect to our currently outstanding common stock
(which will become DLJ Common Stock) as a result of the tracking stock
proposal.
v
DATED __, 1999
-----------------------
INFORMATION STATEMENT
-----------------------
DONALDSON, LUFKIN & JENRETTE, INC.
-----------------------
The board of directors of Donaldson, Lufkin & Jenrette, Inc. is furnishing
this Information Statement to you in connection with the proposed offering of
"tracking stock" for our DLJdirect online discount brokerage and related
investment services businesses described in this Information Statement.
In order to issue the tracking stock, we need to amend our amended and
restated certificate of incorporation. Our amended and restated certificate of
incorporation permits us to make this amendment if we obtain the written
consent of holders of shares representing a majority of the votes entitled to
be cast at a duly called meeting of stockholders. Donaldson, Lufkin & Jenrette,
Inc.'s principal stockholder, The Equitable Companies Incorporated, controls
71.3% of the outstanding votes of Donaldson, Lufkin & Jenrette, Inc. and has
indicated that it intends to approve the tracking stock proposal by written
consent. WE ARE NOT ASKING YOU FOR A PROXY OR A WRITTEN CONSENT AND YOU ARE
REQUESTED NOT TO SEND US A PROXY OR A WRITTEN CONSENT. As we explain in this
Information Statement, however, completion of the offering is still subject to
a number of conditions. We cannot predict with certainty when we will complete
the offering, but we hope to complete the offering prior to _________, 1999.
We are sending this Information Statement to all holders of shares of
Donaldson, Lufkin & Jenrette, Inc. common stock. The record date for the
determination of your status as a holder of Donaldson, Lufkin & Jenrette, Inc.
common stock was _______, 1999.
The tracking stock proposal will allow us to issue a new series of common
stock which will be called Donaldson, Lufkin & Jenrette, Inc.--DLJdirect Common
Stock ("DLJdirect Common Stock"). The new series of common stock is intended to
reflect the performance of DLJdirect, our online discount brokerage and related
investment services business. Before we first issue DLJdirect Common Stock, we
would re-classify Donaldson, Lufkin & Jenrette, Inc.'s existing common stock as
Donaldson, Lufkin & Jenrette, Inc.--DLJ Common Stock ("DLJ Common Stock") which
would be intended to reflect the performance of DLJ's other businesses and a
retained interest in DLJdirect. Our reasons for proceeding with the tracking
stock proposal are outlined elsewhere in this Information Statement. See "The
Tracking Stock Proposal--Reasons for the Tracking Stock Proposal".
We currently plan to offer to the public, for cash, shares of DLJdirect
Common Stock intended to represent a minority interest in the equity value
attributed to DLJdirect and to allocate the net proceeds from that offering to
DLJdirect. DLJdirect will use the net proceeds to fund increases in marketing
expenditures, for international expansion, to repay a note issued to us prior
to the consummation of the offering and for other general corporate purposes.
The tracking stock proposal will also increase the number of shares of our
existing common stock (which will become DLJ Common Stock) authorized for
issuance from 300 million to 500 million and authorize the board of directors
to create additional series of common stock other than DLJ Common Stock and
DLJdirect Common stock.
1
This Information Statement is to inform you of the tracking stock proposal
and constitutes the notice of corporate action without a meeting required by
Section 228 of the Delaware General Corporation Law. The tracking stock
proposal will become effective no earlier than 20 business days after this
Information Statement is mailed to stockholders of Donaldson, Lufkin &
Jenrette, Inc.
----------------
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES REGULATOR,
NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF SUCH TRANSACTION
NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS
DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Information Statement is dated ________, 1999, and was first
mailed to stockholders of Donaldson, Lufkin & Jenrette, Inc.
on or about _________, 1999.
2
-----------------------
TABLE OF CONTENTS
-----------------------
Page
----
INFORMATION STATEMENT SUMMARY................................................5
THE TRACKING STOCK PROPOSAL..................................................5
General....................................................................5
Reasons for the Tracking Stock Proposal....................................6
Summary Comparison of Terms of Existing Common Stock with Terms
of DLJ Common Stock and DLJdirect Common Stock...........................6
Certain Cash Management and Allocation Policies...........................14
No Appraisal Rights.......................................................15
Certain Federal Income Tax Considerations.................................15
RISK FACTORS................................................................16
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS...........................21
WHERE YOU CAN FIND MORE INFORMATION ........................................22
THE TRACKING STOCK PROPOSAL.................................................23
General...................................................................23
Background and Reasons for the Tracking Stock Proposal....................24
Required Approval.........................................................24
DIVIDEND POLICY.............................................................26
CERTAIN CASH MANAGEMENT AND ALLOCATION POLICIES.............................27
DESCRIPTION OF CAPITAL STOCK................................................32
General...................................................................32
Dividends.................................................................33
Mandatory Dividend, Redemption or Exchange on Disposition
of All or Substantially All of the Assets of a Group....................34
Optional Exchange of DLJ Common Stock for DLJdirect Common Stock..........38
Optional Exchange for Stock of a Subsidiary...............................40
General Dividend, Exchange and Redemption Provisions......................40
Voting Rights.............................................................42
Liquidation...............................................................42
DLJ's Retained Interest in Any Group......................................43
Attribution of Issuances of Common Stock..................................43
Issuances of Common Stock as Distributions on DLJ Common Stock............44
Dividends on Common Stock.................................................44
Repurchases of Common Stock...............................................44
Transfers of Cash or Other Property between DLJ and Any Other Group.......45
Effectiveness of Certain Terms............................................45
Determinations by the Board...............................................45
Preemptive Rights.........................................................45
Certain Other Provisions of the Amended and Restated Certificate
of Incorporation and By-laws............................................45
Preferred Stock...........................................................46
Certain Provisions of Delaware Law........................................48
No Appraisal Rights.......................................................49
Stock Transfer Agent and Registrar........................................49
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT.............50
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS..............................54
ANNEX I--ILLUSTRATION OF CERTAIN TERMS......................................I-1
3
ANNEX II--AMENDMENT TO THE AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION............................................................II-1
ANNEX III--DLJdirect
SELECTED COMBINED FINANCIAL INFORMATION OF DLJdirect....................III-1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF DLJ direct.................................III-3
BUSINESS OF DLJdirect..................................................III-11
COMBINED FINANCIAL STATEMENTS.........................................III-F-1
4
INFORMATION STATEMENT SUMMARY
This summary highlights key aspects of the tracking stock proposal
contained elsewhere in this Information Statement. This summary is not a
substitute for the more detailed information contained in the rest of this
Information Statement. For a more comprehensive description of the tracking
stock proposal you should read the rest of this Information Statement. In this
Information Statement, "we", "us" and "our" refer to Donaldson, Lufkin &
Jenrette, Inc. and "board of directors" refers to the board of directors of
Donaldson, Lufkin & Jenrette, Inc.
THE TRACKING STOCK PROPOSAL
General
We are not asking you to vote on the tracking stock proposal described in
this Information Statement. The Equitable Companies Incorporated, the owner of
approximately 71.3% of our outstanding common stock, has indicated that it
intends to consent to the tracking stock proposal by executing a written
stockholders' consent. This consent would meet the stockholder approval
requirements under Delaware Law. Thus, no meeting or additional approval or
consent of our other stockholders is necessary to effect the tracking stock
proposal.
The tracking stock proposal would allow us to amend our amended and
restated certificate of incorporation to:
o Authorize the board of directors to issue common stock in
multiple series--initially, we would have two series: DLJ Common
Stock and DLJdirect Common Stock.
o We intend DLJdirect Common Stock to reflect the performance
of DLJdirect, our online discount brokerage and related
investment services business.
o We intend DLJ Common Stock to reflect the performance of
DLJ, our other businesses and a retained interest in
DLJdirect.
o We have allocated all of Donaldson, Lufkin & Jenrette,
Inc.'s consolidated assets, liabilities, revenue, expenses
and cash flow between DLJ and DLJdirect.
o Re-classify each outstanding share of existing common stock into
a share of DLJ Common Stock.
We currently plan to offer to the public, for cash, shares of DLJdirect
Common Stock intended to represent a minority interest in the equity value
attributed to DLJdirect. We call this offer the "offering". This would leave
DLJ with a retained interest intended to represent the majority of the equity
attributable to DLJdirect. Assuming we do so, we currently plan to attribute
the net proceeds from the offering to DLJdirect, in a manner analogous to a
primary offering of common stock. DLJdirect will use the net proceeds from the
offering to fund increases in marketing expenditures, for international
expansion, to repay a note issued to us prior to the consummation of the
offering and for other general corporate purposes.
We expect that the offering would occur sometime in the second or third
quarter of 1999. However, we could choose to conduct the offering at a later
time, or not to make the offering at all, depending on the circumstances at the
time.
Before we issue DLJdirect Common Stock, we will file the amendment to our
amended and restated certificate of incorporation implementing the tracking
stock proposal and re-classify your common stock as DLJ Common Stock. The
tracking stock proposal will also increase the number of shares of our existing
common stock (which will become
5
DLJ Common Stock) authorized for issuance from 300 million to 500 million and
authorize the board of directors to create additional series of common stock
other than DLJ Common Stock and DLJdirect Common stock.
Reasons for the Tracking Stock Proposal
We are proceeding with the tracking stock proposal primarily for the
following reasons:
o The proposal will permit the market to review separate
information about DLJdirect and separately value DLJdirect Common
Stock. This should encourage investors and analysts to focus more
attention on DLJdirect and result in greater market recognition
of the value of DLJdirect to Donaldson, Lufkin & Jenrette, Inc.
o The proposal will allow investors to invest in either or both
series of common stock, depending on their particular investment
objectives.
o The proposal will allow us to issue stock options tied to
DLJdirect Common Stock, thereby providing more focused incentives
to DLJdirect management and employees.
o The proposal will provide us with greater flexibility to raise
capital and respond to strategic opportunities, including
acquisitions, because it will allow us to issue either DLJ Common
Stock or DLJdirect Common Stock as appropriate under the
circumstances.
o The proposal will enable us to monetize some of the value of
DLJdirect while preserving the financial, tax, operational,
strategic and other benefits of being a single consolidated
entity.
o The proposal will allow us to issue DLJdirect Common Stock to the
public for cash on a basis that we believe is tax-free and
attribute the net proceeds from the offering to DLJdirect. These
net proceeds will be used to fund increases in marketing
expenditures, for international expansion, to repay a note issued
to us prior to the consummation of the offering and for other
general corporate purposes.
Summary Comparison of Terms of Existing Common Stock with Terms of DLJ
Common Stock and DLJdirect Common Stock
The following compares certain terms of our existing common stock to the
proposed terms of DLJ Common Stock and DLJdirect Common Stock. This comparison
is not complete and should be read together with the more detailed information
contained in the rest of this Information Statement. In particular, see
"Description of Capital Stock".
6
Tracking Stock Proposal
---------------------------------------------------------------
Existing Common Stock DLJ Common Stock DLJdirect Common Stock
------------------------- --------------------------- ---------------------------
Basic Investment Our existing common We intend DLJ Common We intend DLJdirect
Characteristics: stock reflects the Stock to reflect the Common Stock to reflect
performance of all of our performance of DLJ. DLJ the performance of
businesses. currently includes, among DLJdirect, our online
other things, a retained discount brokerage and
interest in DLJdirect, related investment services
which is currently 100% business.
but will decline to reflect
the initial issuance of
DLJdirect Common Stock
as well as any future
issuances.
We cannot assure you that We cannot assure you that
the market value of DLJ the market value of
Common Stock will in fact DLJdirect Common Stock
reflect the performance of will in fact reflect the
DLJ as we intend. Holders performance of DLJdirect
of DLJ Common Stock as we intend. Holders of
will continue to be DLJdirect Common Stock
common stockholders of will continue to be
Donaldson, Lufkin & common stockholders of
Jenrette, Inc. and, as such, Donaldson, Lufkin &
will be subject to all risks Jenrette, Inc. and, as such,
associated with an will be subject to all risks
investment in Donaldson, associated with an investment
Lufkin & Jenrette, Inc. and in Donaldson, Lufkin & Jenrette,
all of our businesses, assets Inc. and all of our businesses,
and liabilities. assets and liabilities.
Issuance: Our existing common Before we first issue We currently plan to offer
stock is already DLJdirect Common Stock, to the public, for cash,
outstanding. we will re-classify each DLJdirect Common Stock
outstanding share of intended to represent a
existing common stock minority interest in the
into a share of DLJ equity value attributed to
Common Stock. DLJdirect.
7
Tracking Stock Proposal
---------------------------------------------------------------
Existing Common Stock DLJ Common Stock DLJdirect Common Stock
------------------------- --------------------------- ---------------------------
Use of Proceeds of Initial N/A We currently plan to We currently plan to
Offering of DLJdirect attribute the net proceeds attribute the net proceeds
Common Stock: from the offering to from the offering to
DLJdirect, in a manner DLJdirect, in a manner
analogous to a primary analogous to a primary
offering of common stock. offering of common stock.
These net proceeds will be These net proceeds will be
used to fund increases used to fund increases
in marketing expenditures, in marketing expenditures,
for international for international
expansion, to repay expansion, to repay
a note issued to an a note issued to an
affiliate prior to affiliate prior to
the consummation the consummation
of the offering and of the offering and
for other general corporate for other general corporate
purposes. purposes.
Retained Interest After N/A Assuming we issue to the N/A
Initial Offering of public, for cash, shares of
DLJdirect Common Stock: DLJdirect Common Stock
intended to represent a
minority of the equity
value attributed to
DLJdirect, as currently
planned, this would leave
DLJ with a retained
interest intended to
represent a majority of the
equity value attributed to
DLJdirect. Afterwards, we
would adjust the retained
interest as appropriate to
reflect issuances or
repurchases of DLJdirect
Common Stock, capital
contributions to, or returns
of capital from, DLJdirect
and certain other events.
Authorized and Outstanding We are currently The tracking stock The tracking stock
Common Stock: authorized to issue only proposal will authorize us proposal will authorize us
one series of common to issue multiple series of to issue multiple series of
stock. common stock--initially, common stock--initially,
we would have two series: we would have two series:
DLJ Common Stock and DLJ Common Stock and
DLJdirect Common Stock. DLJdirect Common Stock.
8
Tracking Stock Proposal
---------------------------------------------------------------
Existing Common Stock DLJ Common Stock DLJdirect Common Stock
------------------------- --------------------------- ---------------------------
We are currently The tracking stock The tracking stock
authorized to issue up to proposal will authorize us proposal will authorize us
300 million shares of to issue 500 million shares to issue 500 million shares
common stock. of DLJ Common Stock. of DLJdirect Common Stock.
124,320,184 shares of Once the tracking stock Once the tracking stock
existing common stock proposal is implemented, proposal is implemented, a
were outstanding on shares of DLJ Common number of shares of
March 1, 1999. These Stock will be outstanding DLJdirect Common Stock
shares count against the based on the number of equal to the number we
total number of shares we shares of existing common initially determine to issue
are authorized to issue. stock outstanding on the will be outstanding. These
date the tracking stock shares, and the shares of
proposal is implemented. DLJ Common Stock then
These shares, and the outstanding, will count
shares of DLJdirect against the total number of
Common Stock then shares of common stock
outstanding, will count we are authorized to issue.
against the total number of
shares of common stock
we are authorized to issue.
Dividends: We currently pay $0.0625 We do not expect to We currently intend to
per share of common stock change our dividend policy retain all of our earnings to
on a quarterly basis. with respect to DLJ finance our operations,
Common Stock as a result repay our indebtedness and
of the tracking stock fund future growth. We do
proposal. not expect to pay any
dividends on DLJdirect
Common Stock for the
foreseeable future.
9
Tracking Stock Proposal
---------------------------------------------------------------
Existing Common Stock DLJ Common Stock DLJdirect Common Stock
------------------------- --------------------------- ---------------------------
We are permitted to pay We will be permitted to We will be permitted to
dividends out of the assets pay dividends on DLJ pay dividends on DLJdirect
of Donaldson, Lufkin & Common Stock out of the Common Stock out of the assets
Jenrette, Inc. legally assets of Donaldson, of Donaldson, Lufkin &
available for the payment Lufkin & Jenrette, Inc. Jenrette, Inc. legally
of dividends under legally available for the available for the payment
Delaware law. payment of dividends of dividends under Delaware
under Delaware law, law (and transfer corresponding
but the total of amounts to DLJ in respect of its
the amounts paid as retained interest), but the
dividends on DLJ total of the amounts paid as
Common Stock cannot dividends on DLJdirect Common
exceed the available Stock (and the corresponding
dividend amount for DLJ. amounts transferred to DLJ in
The available dividend respect of its retained
amount for DLJ is based interest) cannot exceed the
on the amount that available dividend amount for
would be legally DLJdirect. The available
available for the dividend amount for DLJdirect
payment of dividends is based on the amount that
under Delaware law if DLJ would be legally available for
were a single, separate the payment of dividends under
Delaware corporation, had Delaware law if DLJdirect were
outstanding common a single, separate Delaware
stock and preferred stock, corporation and DLJ's retained
and DLJ's retained interest interest in DLJdirect was
in DLJdirect was represented represented by outstanding shares.
by outstanding shares.
Mandatory Dividend, None. If we dispose of all or If we dispose of all or
Redemption or Exchange substantially all of the substantially all of the
on Disposition of Assets: assets of DLJ and the assets of DLJdirect and the
disposition is not an disposition is not an
exempt disposition, we exempt disposition, we
would be required to would be required to
choose one of the choose one of the
following three following three
alternatives: alternatives:
10
Tracking Stock Proposal
---------------------------------------------------------------
Existing Common Stock DLJ Common Stock DLJdirect Common Stock
------------------------- --------------------------- ---------------------------
o pay a dividend to o pay a dividend to
holders of DLJ Common holders of DLJdirect
Stock in an amount Common Stock in an
equal to their amount equal to their
proportionate interest in proportionate interest in
the net proceeds of such the net proceeds of such
disposition, disposition,
o redeem from holders of o redeem from holders of
DLJ Common Stock, for DLJdirect Common
an amount equal to their Stock, for an amount
proportionate interest in equal to their
the net proceeds of such proportionate interest in
disposition, outstanding the net proceeds of such
shares of DLJ Common disposition, outstanding
Stock or shares of DLJdirect
Common Stock or
o issue DLJdirect o issue DLJ Common
Common Stock in Stock in exchange for
exchange for outstanding DLJdirect
outstanding DLJ Common Stock at a
Common Stock at a 10% premium (based on
10% premium (based on the average market
the average market value of DLJdirect
value of DLJ Common Common Stock as
Stock as compared to compared to the average
the average market market value of DLJ
value of DLJdirect Common Stock over a
Common Stock over a specified 20-trading day
specified 20-trading day period prior to the
period prior to the exchange).
exchange).
11
Tracking Stock Proposal
---------------------------------------------------------------
Existing Common Stock DLJ Common Stock DLJdirect Common Stock
------------------------- --------------------------- ---------------------------
At any time within one At any time within one
year after completing a year after completing a
special dividend or partial special dividend or partial
redemption referred to redemption referred to
above, we will have the above, we will have the
right to issue DLJdirect right to issue DLJ
Common Stock in Common Stock in
exchange for outstanding exchange for outstanding
DLJ Common Stock at a DLJdirect Common Stock
10% premium (based on at a 10% premium (based
the average market value on the average market
of DLJ Common Stock as value of DLJdirect
compared to the average Common Stock as
market value of DLJdirect compared to the average
Common Stock over a market value of DLJ
specified 20-trading day Common Stock over a
period prior to the specified 20-trading day
exchange). period prior to the
exchange).
Exchange DLJ N/A N/A We will have the right to
Common Stock issue DLJ Common Stock
for DLJdirect in exchange for
Common Stock at outstanding DLJdirect
Donaldson, Lufkin & Common Stock at a
Jenrette, Inc.'s Option: premium at any time. The
premium will be 25%
for exchanges occurring
in the 90 days after
issuance and will decline
ratably each quarter thereafter
over a period of 3 years
to 15%. However, the
premium will be 10% in the
event of certain adverse
tax law changes after the
consummation of the offering
regardless of when such changes
occur.
12
Tracking Stock Proposal
---------------------------------------------------------------
Existing Common Stock DLJ Common Stock DLJdirect Common Stock
------------------------- --------------------------- ---------------------------
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.
Exchange for Stock of a None. We will have the right at We will have the right at
Subsidiary at Donaldson, any time to transfer all of any time to transfer all of
Lufkin & Jenrette, Inc.'s the assets and liabilities the assets and liabilities
Option: of DLJ to a subsidiary and of DLJdirect to a subsidiary
deliver all of the stock of and deliver all of the stock of
that subsidiary in exchange that subsidiary (other than
for all of the outstanding the portion applicable to
DLJ Common Stock. DLJ's retained interest in
DLJdirect) in exchange for all
of the outstanding DLJdirect
Common Stock.
Voting Rights: One vote per share. One vote per share. No vote, unless a
separate class vote is
required by applicable law.
13
Tracking Stock Proposal
---------------------------------------------------------------
Existing Common Stock DLJ Common Stock DLJdirect Common Stock
------------------------- --------------------------- ---------------------------
Liquidation: Upon liquidation of Upon liquidation of Upon liquidation of
Donaldson, Lufkin & Donaldson, Lufkin & Donaldson, Lufkin &
Jenrette, Inc., holders of Jenrette, Inc., holders of Jenrette, Inc., holders of
existing common stock are DLJ Common Stock and DLJ Common Stock and
entitled to receive the net DLJdirect Common Stock DLJdirect Common Stock
assets of Donaldson, will be entitled to receive will be entitled to receive
Lufkin & Jenrette, Inc., if the net assets of the net assets of
any, remaining for Donaldson, Lufkin & Donaldson, Lufkin &
distribution to stockholders Jenrette, Inc., if any, Jenrette, Inc., if any,
(after payment or provision remaining for distribution remaining for distribution
for all liabilities of to stockholders (after to stockholders (after
Donaldson, Lufkin & payment or provision for payment or provision for
Jenrette, Inc. and payment all liabilities of Donaldson, all liabilities of Donaldson,
of the liquidation Lufkin & Jenrette, Inc. and Lufkin & Jenrette, Inc. and
preference payable to any payment of the liquidation payment of the liquidation
holders of Preferred preference payable to any preference payable to any
Stock). holders of Preferred holders of Preferred
Stock). Amounts due upon Stock). Amounts due upon
liquidation in respect of liquidation in respect of
shares of DLJ Common shares of DLJ Common
Stock and DLJdirect Stock and DLJdirect
Common Stock will be Common Stock will be
distributed pro rata in distributed pro rata in
proportion to the average proportion to the average
market value of DLJ market value of DLJ
Common Stock and the Common Stock and the
average market value of average market value of
DLJdirect Common Stock DLJdirect Common Stock
over a specified 20-trading over a specified 20-trading
day period prior to the day period prior to the
liquidation. liquidation.
Stock Exchange Listings: NYSE under the symbol NYSE under the symbol We currently intend to
"DLJ". "DLJ". apply for listing DLJdirect
Common Stock on the NYSE
under the symbol "DIR".
Certain Cash Management and Allocation Policies
Because DLJ and DLJdirect are part of a single company, we have
established certain policies relating to cash management and allocations
between DLJ and DLJdirect. For a more complete description of how we will
allocate cash between DLJ and DLJdirect, see "Certain Cash Management and
Allocation Policies".
14
No Appraisal Rights
Under the Delaware general corporation law, you will not have appraisal
rights in connection with the tracking stock proposal.
Certain Federal Income Tax Considerations
We believe that neither you nor Donaldson, Lufkin & Jenrette, Inc. will
recognize any income, gain or loss for federal income tax purposes as a result
of the re-classification of existing common stock into DLJ Common Stock or the
issuance of DLJdirect Common Stock. There are, however, no court decisions
bearing directly on similar transactions and the Internal Revenue Service has
announced that it will not issue advance rulings on the federal income tax
consequences of such transactions. Thus, you should consult a tax advisor. For
a more detailed description of possible federal income tax consequences, see
"Certain U.S. Federal Income Tax Considerations".
15
RISK FACTORS
Risks Relating to the Offering of DLJdirect Common Stock
The risks described below are not the only ones accompanying the offering
of DLJdirect Common Stock. Additional risks not presently known to DLJ or
DLJdirect or that they currently deem immaterial may also impair the operations
of DLJ or DLJdirect. The trading price of DLJ Common Stock or DLJdirect Common
Stock could decline due to any of these risks.
Holders of DLJdirect Common Stock Will Be Common Stockholders of Donaldson,
Lufkin & Jenrette, Inc.
We cannot assure you that the market values of DLJ Common Stock and
DLJdirect Common Stock will reflect the performance of DLJ and DLJdirect as we
intend. Holders of DLJdirect Common Stock will continue to be common
stockholders of Donaldson, Lufkin & Jenrette, Inc. and, as such, will be
subject to all risks of an investment in Donaldson, Lufkin & Jenrette, Inc. and
all of our businesses, assets and liabilities.
Even though from a financial reporting standpoint we have allocated our
consolidated assets, liabilities, revenue, expenses and cash flow between DLJ
and DLJdirect, that allocation will not change the legal title to any assets or
responsibility for any liabilities and will not affect the rights of any of our
creditors. Further, holders of DLJ Common Stock and DLJdirect Common Stock will
not have any legal rights related to specific assets of either DLJ or DLJdirect
and, in any liquidation, will receive a share of the net assets of Donaldson,
Lufkin & Jenrette, Inc. based on the relative trading prices of DLJ Common
Stock and DLJdirect Common Stock rather than on any assessment of the actual
value of DLJ or DLJdirect.
The Board of Directors May Make Operational and Financial Decisions
Affecting DLJ and DLJdirect Differently
The board of directors, in its sole discretion, will make operational and
financial decisions and implement policies that may affect the businesses of
DLJ and DLJdirect differently. Examples include:
o future allocations of assets, liabilities, revenues, expenses, cash
flow and the tax consequences of operations,
o the allocation of business opportunities, resources and personnel,
o the manner of accounting for a transfer of funds between DLJ and
DLJdirect as either a revolving credit advance, a long-term loan or a
return of capital,
o the allocation of funds for capital expenditures,
o the allocation of proceeds from the issuance of DLJdirect Common
Stock and the costs of repurchases of DLJdirect Common Stock either
to DLJ in respect of its retained interest in DLJdirect or to the
equity of DLJdirect,
o the allocation of issuances of debt or preferred stock of Donaldson,
Lufkin & Jenrette, Inc. between DLJ and DLJdirect,
o decisions as to how to allocate consideration received in connection
with a merger involving Donaldson, Lufkin & Jenrette, Inc. between
holders of DLJ Common Stock and DLJdirect Common Stock,
o decisions as to whether and when to exchange one series of common
stock for the other series of common stock,
o decisions as to whether and when to approve dispositions of assets of
either DLJ or DLJdirect, and
16
o other transactions between DLJ and DLJdirect.
Decisions of the board of directors may favor either DLJ or DLJdirect at
the expense of the other. 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".
We May Not Pay Dividends Equally on DLJ Common Stock and DLJdirect Common
Stock
We have the right to pay dividends on DLJ Common Stock or DLJdirect Common
Stock, or both, in equal or unequal amounts, notwithstanding:
o the performance of either DLJ or DLJdirect,
o the amount of assets available for dividends on either series,
o the amount of prior dividends declared on either series or
o any other factor.
Principles of Delaware Law May Protect Decisions of the Board of Directors
That Have a Disparate Impact upon Holders of DLJ Common Stock and DLJdirect
Common Stock
Delaware law provides that a board of directors owes an equal duty to all
stockholders regardless of class or series and does not have separate or
additional duties to either group of stockholders, subject to applicable
provisions set forth in a company's charter. We are not aware of any
legislative or judicial precedent involving the fiduciary duties of directors
of a Delaware corporation with two classes of common stock with separate rights
related to specified operations of the corporation. However, under the
principles of Delaware law referred to above and the related principle known as
the "business judgment rule", you may not be able to challenge decisions that
have an adverse effect upon holders of either DLJ Common Stock or DLJdirect
Common Stock if the board of directors is disinterested, informed with respect
to these decisions, acts in good faith, and in the belief that it is acting in
the best interests of Donaldson, Lufkin & Jenrette, Inc.'s stockholders.
We May Dispose of Assets of Either DLJ or DLJdirect Without Your Approval
and You May Receive Less Value for Your Shares than the Market Value of Your
Shares
Delaware law requires stockholder approval only for a sale, lease or
exchange of "all or substantially all" of the assets of Donaldson, Lufkin &
Jenrette, Inc. Holders of shares of DLJdirect Common Stock are not entitled to
vote on matters generally submitted to stockholders. Accordingly, we can sell
or otherwise dispose of any amount of assets of DLJdirect without stockholder
approval. In addition, as long as the assets attributed to DLJ represent less
than substantially all of Donaldson, Lufkin & Jenrette, Inc.'s assets, we may
also approve sales and other dispositions of any amount of the assets of DLJ
without any stockholder approval.
Holders of common stock relating to a particular group may receive less
value for their shares than the value that a third-party buyer might pay for
all or substantially all of the assets of such group. In addition, if we elect
to complete an exchange in connection with the disposition, we could do so as
one of the three alternatives required in connection with the disposition and
any exchange could be completed at a time when DLJ Common Stock or DLJdirect
Common Stock may be considered to be overvalued or undervalued.
The board of directors will decide, in its sole discretion, how to proceed
and is not required to select the option that would result in the highest value
to holders of either DLJ Common Stock or DLJdirect Common Stock.
17
We Have the Option To Exchange DLJdirect Common Stock for DLJ Common Stock
and This May Be Disadvantageous To Holders of DLJ Common Stock or Holders of
DLJdirect Common Stock
We will have the right to issue shares of DLJ Common Stock in exchange
for outstanding shares of DLJdirect Common Stock. 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. Any such exchange could also have a dilutive effect on the value
of shares of DLJ Common Stock.
Recent Clinton Administration Tax Proposal Could Result in the Exchange of
DLJdirect Common Stock for DLJ Common Stock at a Reduced Premium
A recent proposal by the Clinton Administration would impose a corporate
level tax on the issuance of stock similar to the DLJdirect Common Stock. As
proposed by the Clinton Administration, this provision would be effective upon
the date of its enactment by Congress. If this proposal is enacted, therefore,
we could be subject to tax on an issuance of DLJdirect Common Stock after the
date of enactment. We cannot predict whether the proposal will be enacted by
Congress and, if enacted, whether it will be in the form proposed by the
Clinton Administration. We expect the offering to be consummated prior to the
effective date of the proposed legislation. It is possible, however, that
further issuances of the DLJdirect Common Stock would be affected by the
enactment of these proposals. We may issue DLJ Common Stock in exchange for
DLJdirect Common Stock at a premium of 10% if, as a result of the enactment of
legislative changes or administrative proposals or changes, we or our
stockholders will, more likely than not, be subject to tax upon issuance of the
DLJ Common Stock or DLJdirect Common Stock or such stock will not be treated as
stock of Donaldson, Lufkin & Jenrette, Inc. See "Description of Capital
Stock--Optional Exchange of DLJ Common Stock for DLJdirect Common Stock".
Dilution of DLJ Common Stock after Issuance of DLJdirect Common Stock
The issuance of DLJdirect Common Stock, like any issuance of common stock,
would dilute the equity interest of holders of DLJ Common Stock. The voting
rights of the holders of DLJ Common Stock would only be diluted if a separate
class vote were required by applicable law, in which case holders of both DLJ
Common Stock and DLJdirect Common Stock would be entitled to vote. We do not
believe that the issuance of DLJdirect Common Stock as currently planned would
cause a meaningful dilution to holders of DLJ Common Stock on an earnings or
book value per share basis.
If Donaldson, Lufkin & Jenrette, Inc. Runs into Financial Difficulty, the
Value of Either DLJ Common Stock or DLJdirect Common Stock May Suffer for
Reasons Unrelated to the Prospects of either DLJ or DLJdirect
Financial results of either DLJ or DLJdirect will affect Donaldson, Lufkin
& Jenrette, Inc.'s consolidated results of operations, financial position and
borrowing costs. This could affect the results of operations, financial
position or borrowing costs of the other group or the market price of shares
issued with respect to the other group. In addition, net losses of either
group, and any dividends or distributions on, or repurchases of, either series
of common stock, will reduce the assets of Donaldson, Lufkin & Jenrette, Inc.
legally available for dividends on both DLJ Common Stock and DLJdirect Common
Stock.
We Cannot Predict How the Issuance of Tracking Stock Will Affect the Market
Price of DLJ Common Stock
We cannot predict the prices at which DLJ Common Stock or DLJdirect
Common Stock will trade and we cannot assure you that the market price of DLJ
Common Stock will equal or exceed the market price of our existing common
stock.
18
We Cannot Assure You That a Market Will Develop for DLJdirect Common Stock
or What Its Market Price Will Be
There is currently no public trading market for DLJdirect Common Stock,
and we cannot assure you that one will develop or be sustained after the
offering. We cannot predict the prices at which DLJdirect Common Stock will
trade after the offering. The initial public offering price for DLJdirect
Common Stock will be determined through our negotiations with the underwriters
and may not bear any relationship to the market price at which DLJdirect Common
Stock will trade after the offering or to any other established criteria for
value.
The Market Price of DLJdirect Common Stock Will Fluctuate and Could Fluctuate
Significantly
The stock market has experienced extreme price and volume fluctuations.
The market prices of securities of Internet-related companies, in particular,
have been especially volatile. In the past, companies that have experienced
volatility have sometimes been the object of securities class action
litigation. Securities class action litigation may result in substantial costs
and a diversion of management's attention and resources.
Certain Terms of DLJ Common Stock and DLJdirect Common Stock May Adversely
Affect the Trading Price of DLJ Common Stock or DLJdirect Common Stock,
Including
o the right of the board of directors to exchange shares of DLJ Common
Stock for shares of DLJdirect Common Stock and
o the discretion of the board of directors in making various
determinations relating to a variety of cash management and
allocation matters.
The Values of DLJ Common Stock and DLJdirect Common Stock May Decline Due to
Future Issuances of DLJ Common Stock or DLJdirect Common Stock
Our amended and restated certificate of incorporation allows the board of
directors, in its sole discretion, to issue authorized but unissued shares of
DLJ Common Stock and DLJdirect Common Stock. This could dilute the value of
shares of DLJ Common Stock or DLJdirect Common Stock. Under the Delaware
general corporation law, the board of directors would not need your approval
for these issuances. We do not intend to seek your approval for any such
issuances unless stock exchange regulations or other applicable law require
approval or the board of directors deems it advisable.
We May Not Offer DLJdirect Common Stock At All
This Information Statement describes our current plans for an offering of
DLJdirect Common Stock. Such an offering is subject to various conditions and
uncertainties, so we cannot assure you that it will be completed.
Risks Relating to the Relationship between DLJ and DLJdirect
The risks described below are not the only ones facing DLJdirect.
Additional risks not presently known to DLJdirect or DLJ or that they currently
deem immaterial may also impair the business operations of DLJdirect.
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.
DLJdirect Faces Potential Conflicts of Interest with DLJ
As a result of DLJdirect's extensive business relationships with DLJ,
conflicts of interest may develop between DLJdirect and DLJ or its affiliates.
The board of directors, in its sole discretion, will make operational and
financial decisions and implement policies that affect the businesses of both
DLJ and DLJdirect. These decisions may favor DLJ
19
to the detriment of DLJdirect or DLJdirect to the detriment of DLJ. The board
of directors is primarily composed of directors and/or executive officers of
DLJ and its affiliates and does not include any members of the management of
DLJdirect.
Competition
DLJ and DLJdirect are both engaged in brokerage and related investment
service businesses. DLJ is not restricted from competing with DLJdirect and
there can be no assurance that DLJ will not expand its operations to compete
with DLJdirect. If the markets for their services continue to converge,
opportunities for direct competition between DLJ and DLJdirect will increase
and may include the following:
o DLJ offering online trading to its existing brokerage customers or
launching its own group dedicated to online brokerage;
o DLJdirect competing with DLJ for underwriting business; and
o DLJdirect offering private placements or investment advice to its
customers in competition with financial products and services offered
by DLJ.
Business Opportunities and Strategic Issues
Donaldson, Lufkin & Jenrette, Inc. currently intends to pursue its online
brokerage business through DLJdirect. However, the board of directors, in its
sole discretion, may in the future decide to pursue business opportunities or
operational strategies, even in the online brokerage area, through DLJ instead
of DLJdirect. As DLJdirect expands internationally, conflicts may arise in
selecting new target international markets and in selecting joint venture
partners, if any.
In addition to conflicts posed by international expansion, DLJdirect may
desire to pursue other strategic initiatives that present conflicts between DLJ
and DLJdirect. These initiatives could include:
o alliances by DLJdirect with competitors of DLJ to participate as an
Internet-based distributor or an underwriter in non-DLJ managed
offerings;
o DLJ selling its research products to competitors of DLJdirect; and
o DLJ including other Internet-based distributors in its offerings.
In addition to research products and access to DLJ-managed offerings, DLJdirect
intends to expand the range of DLJ products and services available to its
clients as part of its ongoing business strategy. As competition in the
financial services industry increases and DLJdirect's business continues to
grow, issues relating to the pricing and the level of availability for such
products and services may result in conflicts of interest.
Financial Considerations
The consolidated financial results of Donaldson, Lufkin & Jenrette, Inc.
will reflect DLJdirect's financial results. Accordingly, strategic decisions by
DLJdirect that adversely affect DLJdirect's near-term reported results will
also adversely affect DLJ's near-term reported results. As a result, DLJ may
restrict DLJdirect's ability to pursue initiatives that may adversely affect
the near-term reported results of DLJ. Such initiatives may include:
o significant increases in marketing expenditures or technological
investments;
o changes to DLJdirect's pricing structure; and
20
o significant international expansion.
Clearing and Execution Services.
Pursuant to an agreement between DLJ and DLJdirect, all domestic
securities transactions of DLJdirect are cleared on a fully disclosed basis
through Pershing. Brokerage, clearing and exchange fees paid to Pershing
represented approximately 24.1% of DLJdirect's total revenues in 1998. In
addition, DLJdirect receives payments from Pershing for order flow and for
interest earned on account balances. Under a recent amendment to the agreement,
the amounts to be paid by DLJdirect to Pershing will include the license fee
for the use of the trademarks that are licensed to DLJdirect in the United
States and certain other jurisdictions. The agreement which governs these fees
and payments provides for good faith renegotiation of pricing terms in the
event of changes in market conditions. As DLJdirect's business evolves,
conflicts may arise regarding decisions for appropriate levels of future fees
and payments.
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.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Information Statement and the information incorporated by reference
includes forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
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 Information Statement and in other information contained in our publicly
available SEC filings and press releases.
21
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.
We have recently filed a registration statement with the SEC with respect
to the proposed offering of DLJdirect Common Stock. 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 Information Statement, and any information filed with
the SEC by us after the date of this Information Statement will automatically
be deemed to update and supersede this information. We incorporate by reference
the following document that has been filed with the SEC:
o Annual Report on Form 10-K for the year ended December 31, 1998.
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 the prospectus included in the registration statement
referred to above.
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
Information Statement, 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).
22
THE TRACKING STOCK PROPOSAL
General
The tracking stock proposal described in this Information Statement would
allow us to amend our amended and restated certificate of incorporation to:
o authorize the board of directors to issue common stock in multiple
series--initially, we would have two series: Donaldson, Lufkin &
Jenrette, Inc.--DLJ Common Stock ("DLJ Common Stock") and Donaldson,
Lufkin, Jenrette, Inc.--DLJdirect Common Stock ("DLJdirect Common
Stock"). The board of directors will be authorized to issue up to
1,500,000,000 shares of common stock not more than 500,000,000 of
which can be shares of DLJ Common Stock and not more than 500,000,000
of which can be shares of DLJdirect Common Stock;
o we intend DLJdirect Common Stock to reflect the performance of
the online discount brokerage and related services business of
DLJdirect, including certain activities currently conducted by
DLJdirect Holdings Inc. and one or more affiliates of Donaldson,
Lufkin & Jenrette, Inc. (the "DLJdirect Group" or "DLJdirect");
o we intend DLJ Common Stock to reflect the performance of the
rest of the businesses conducted by DLJ and its affiliates (the
"DLJ Group" or "DLJ"), including DLJ's retained interest in
DLJdirect;
o we have allocated all of Donaldson, Lufkin & Jenrette, Inc.'s
consolidated assets, liabilities, revenue, expenses and cash
flow between the DLJ Group and DLJdirect Group;
o re-classify each outstanding share of common stock into a share of
DLJ Common Stock.
The Equitable Companies Incorporated, the owner of approximately 71.3% of
our outstanding common stock, has indicated that it intends to consent to the
tracking stock proposal by executing a written stockholders' consent. This
consent meets the stockholder approval requirements under Delaware law. Thus,
no meeting or additional approval or consent of our other stockholders is
necessary to effect the tracking stock proposal.
We currently plan to offer to the public, for cash, shares of DLJdirect
Common Stock intended to represent a minority interest in the equity value
attributed to DLJdirect. This would leave DLJ with a retained interest intended
to represent a majority interest in the equity attributable to DLJdirect. (We
call Donaldson, Lufkin & Jenrette, Inc.'s interest in DLJdirect, excluding the
interest intended to be represented by outstanding shares of DLJdirect Common
Stock, DLJ's "retained interest" in DLJdirect.) Assuming we do so, we currently
plan to attribute the net proceeds from the offering to DLJdirect (in a manner
analogous to a primary offering of common stock). We currently estimate the
gross proceeds from the offering to be $ 120 million (assuming the
underwriters' over-allotment option is not exercised). This estimate is
preliminary and the actual amount could differ materially. The net proceeds
will be used to fund increases in marketing expenditures, for international
expansion, to repay a note issued to us prior to the consummation of the
offering and for other general corporate purposes. We may decide to increase or
decrease the size of the offering.
We expect the offering to occur sometime in the second or third quarter of
1999. However, we could choose to conduct the offering at a later time, or not
to make the offering at all, depending on the circumstances at the time.
The board of directors and the underwriters for the offering will
determine the terms of the offering based upon:
o prevailing market and other conditions, both generally and for
Internet businesses,
23
o the financial condition, results of operations and prospects of
DLJdirect and
o such factors as they deem appropriate at the time of the offering.
In addition to or instead of the offering, we reserve the right to
distribute DLJdirect Common Stock to stockholders.
We will file an amendment to our amended and restated certificate of
incorporation implementing the tracking stock proposal (the "restated charter")
and re-classify your common stock as DLJ Common Stock before we first issue
DLJdirect Common Stock. The tracking stock proposal will also increase the
number of shares of our existing common stock (which will become DLJ Common
Stock) authorized for issuance from 300 million to 500 million and authorize
the board of directors to create additional series of common stock other than
DLJ Common Stock and DLJdirect Common stock.
Background and Reasons for the Tracking Stock Proposal
We continually review each of our businesses and Donaldson, Lufkin &
Jenrette, Inc. as a whole to determine the best way to realize its inherent
value. As a result of this review process, we recently began to evaluate
various alternatives, including an offering of direct stock in a corporation
that would acquire DLJdirect or of "tracking stock" of Donaldson, Lufkin &
Jenrette Inc. intended to reflect the performance of DLJdirect.
Upon management's recommendation and after extensive consultation with our
financial and legal advisors, the board of directors has determined that the
issuance of tracking stock would be preferable because, among other things,
issuance of tracking stock, unlike the issuance of direct stock, would preserve
certain favorable financial, tax, operational, strategic and other benefits of
being a single consolidated entity.
In arriving at its determination, the board of directors, with assistance
of its financial and legal advisors, considered, among other things, the
following:
o The proposal will permit the market to review separate information
about DLJdirect and separately value DLJdirect Common Stock. This
should encourage investors and analysts to focus more attention on
DLJdirect and result in greater market recognition of the value of
DLJdirect to Donaldson, Lufkin & Jenrette Inc.
o The proposal will allow investors to invest in either or both series
of common stock, depending on their particular investment objectives.
o The proposal will allow us to issue stock options tied to DLJdirect
Common Stock, thereby providing more focused incentives to DLJdirect
management and employees.
o The proposal will provide us with greater flexibility to raise
capital and respond to strategic opportunities (including
acquisitions), because it will allow us to issue either DLJ Common
Stock or DLJdirect Common Stock as appropriate under the
circumstances.
o The proposal will enable us to monetize some of the value of
DLJdirect while preserving the financial, tax, operational, strategic
and other benefits of being a single consolidated entity.
o The proposal will allow us to issue DLJdirect Common Stock to the
public for cash on a basis that we believe to be tax-free and to
allow DLJdirect to use the net proceeds to fund increases in
marketing expenditures, for international expansion, to repay a note
issued to an affiliate prior to the consummation of the offering and
for other general corporate purposes.
24
The board of directors also evaluated the potential negative aspects of
the tracking stock proposal, including the following:
o The uncertainty as to the amount of net proceeds we may realize in
the offering.
o The tracking stock proposal will require a complex capital structure
and additional reporting requirements with respect to each Group.
o The tracking stock proposal will expand the board of directors'
responsibility to oversee the interests of two series of common
stockholders.
o The potential diverging or conflicting interests between the holders
of DLJ Common Stock and the holders of DLJdirect Common Stock and
issues that the board of directors may face in resolving any
conflicts.
o The pooling-of-interests method of accounting might not be available
for future acquisitions using DLJ Common Stock or DLJdirect Common
Stock.
o The costs associated with implementing the tracking stock proposal
and the ongoing cost of operating separate Groups will exceed the
costs associated with operating Donaldson, Lufkin & Jenrette, Inc. as
it currently exists.
The board of directors determined that the positive aspects of the
tracking stock proposal outweighed the negative aspects and concluded that the
tracking stock proposal is in the best interests of Donaldson, Lufkin &
Jenrette Inc. and its stockholders.
Required Approval
As of , 1999, we had shares of common stock issued and
outstanding, with each share entitled to one vote, and 7,500,000 shares of
non-voting preferred stock issued and outstanding. Donaldson, Lufkin &
Jenrette, Inc.'s principal stockholder, The Equitable Companies Incorporated,
controls 71.3% of the outstanding votes of Donaldson, Lufkin & Jenrette, Inc.
and has indicated that it intends to approve the tracking stock proposal by
written consent. Thus, no meeting or additional approval or consent of our
other stockholders is necessary to effect the tracking stock proposal.
25
DIVIDEND POLICY
We do not expect to change our dividend policy with respect to our
currently outstanding common stock (which will become DLJ Common Stock) as a
result of the tracking stock proposal.
We do not expect to pay any dividends for the foreseeable future on
DLJdirect Common Stock.
We will, however, be permitted to pay dividends on:
o DLJ Common Stock out of the assets of Donaldson, Lufkin & Jenrette,
Inc. legally available for the payment of dividends under Delaware
law, but the total amounts paid as dividends on DLJ Common Stock
cannot exceed the available dividend amount for DLJ and
o DLJdirect Common Stock, out of the assets of Donaldson, Lufkin &
Jenrette, Inc. legally available for the payment of dividends under
Delaware law (and transfer corresponding amounts to DLJ in respect of
its retained interest in DLJdirect), but the total of the amounts
paid as dividends on DLJdirect Common Stock and the corresponding
amounts transferred to DLJ in respect of its retained interest in
DLJdirect cannot exceed the available dividend amount for DLJdirect.
The "available dividend amount" for DLJ and DLJdirect, as the case may be,
is based on the amount that would be legally available for the payment of
dividends under Delaware law if DLJ and DLJdirect were each a single, separate
Delaware corporation. For more information on the "available dividend amount"
for DLJ and DLJdirect, see "Description of Capital Stock--Dividends". We expect
that determinations to pay dividends on DLJdirect would be based primarily upon
the financial condition, results of operations, capital requirements, any
restrictions contained in financing or other agreements binding upon us and
other factors that the board of directors deems relevant.
26
CERTAIN CASH MANAGEMENT AND ALLOCATION POLICIES
From a financial reporting standpoint, Donaldson, Lufkin & Jenrette, Inc.
has allocated all of its consolidated assets, liabilities, revenue, expenses
and cash flow between DLJ and DLJdirect. In this Information Statement, each of
DLJ and DLJdirect is sometimes called a "Group". The financial statements of
DLJdirect reflect the application of certain cash management and allocation
policies adopted by the board of directors. These policies are summarized
below.
The board of directors may, in its sole discretion, modify, rescind or add
to any of these policies, although it has no present intention to do so. The
decision of the board of directors to modify, rescind or add to any of these
policies would, however, be subject to the board of directors' general
fiduciary duties. The board of directors intends to delegate its authority with
regard to these policies to its operating committee, all of whom are senior
officers of DLJ.
Even though Donaldson, Lufkin & Jenrette, Inc. has allocated all of its
consolidated assets, liabilities, revenue, expenses and cash flow between DLJ
and DLJdirect, holders of DLJdirect Common Stock will continue to be common
stockholders of Donaldson, Lufkin & Jenrette, Inc. and, as such, will be
subject to all risks associated with an investment in Donaldson, Lufkin &
Jenrette, Inc. and all of its businesses, assets and liabilities. See "Risk
Factors--Risk Factors Relating to DLJdirect Common Stock--Holders of DLJdirect
Common Stock Will Be Common Stockholders of Donaldson, Lufkin & Jenrette,
Inc.".
Treasury Activities
Donaldson, Lufkin & Jenrette, Inc. manages most treasury activities on a
centralized, consolidated basis. These activities include the investment of
surplus cash, the issuance, repayment and repurchase of short-term and
long-term debt, and the issuance and repurchase of common stock and preferred
stock. Each Group generally remits its cash receipts, other than receipts of
foreign operations or operations that are not wholly-owned, to Donaldson,
Lufkin & Jenrette, Inc., and Donaldson, Lufkin & Jenrette, Inc. generally funds
each Group's cash disbursements, other than disbursements of foreign operations
or operations that are not wholly-owned, on a daily basis. In certain instances
DLJ funds cash disbursements for DLJ entities including DLJdirect.
In the combined financial statements of DLJdirect included in this
Information Statement:
o all external debt and equity transactions, and the proceeds thereof,
were attributed to DLJ,
o whenever DLJdirect held cash, substantially all of that cash was
invested in money market funds managed by an affiliate,
o whenever DLJdirect had a cash need, that cash need was funded by DLJ
and accounted for as a capital contribution, i.e., as an increase of
DLJdirect's division equity and DLJ's retained interest in DLJdirect
and
o all expenses of DLJdirect were paid by DLJ and reimbursed by
DLJdirect.
No interest expense has been reflected in the combined financial statements of
DLJdirect for cash transfers from Donaldson, Lufkin & Jenrette, Inc. or any of
its affiliates and no interest income from DLJdirect has been reflected in the
financial statements of Donaldson, Lufkin & Jenrette, Inc. for any period prior
to the date on which DLJdirect Common Stock is issued. Interest income earned
on DLJdirect's money market funds is included in DLJdirect's financial
statements.
After the date on which DLJdirect Common Stock is first issued:
(1) Donaldson, Lufkin & Jenrette, Inc. will attribute each future
incurrence or issuance of external debt or preferred stock and the
proceeds thereof to DLJ, unless the board of directors determines
otherwise. The board
27
of directors may, but is not required to, attribute an incurrence or
issuance of debt or preferred stock, and the proceeds thereof, to
DLJdirect to the extent that Donaldson, Lufkin & Jenrette, Inc. incurs or
issues the debt or preferred stock for the benefit of DLJdirect.
(2) Donaldson, Lufkin & Jenrette, Inc. will attribute each future
issuance of DLJ Common Stock, and the proceeds thereof, to DLJ. Donaldson,
Lufkin & Jenrette, Inc. may attribute any future issuance of DLJdirect
Common Stock and the proceeds thereof
o to DLJ in respect of its retained interest in DLJdirect, in a
manner analogous to a secondary offering of common stock of a
subsidiary owned by a corporate parent or
o to DLJdirect, in a manner analogous to a primary offering of
common stock.
Dividends on and repurchases of DLJ Common Stock will be charged against
DLJ, and dividends on and repurchases of DLJdirect Common Stock will be charged
against DLJdirect. In addition, at the time of any dividend on DLJdirect Common
Stock, Donaldson, Lufkin & Jenrette, Inc. will credit to DLJ, and charge
against DLJdirect, a corresponding amount in respect of DLJ's retained interest
in DLJdirect. See "Description of Capital Stock--DLJ's Retained Interest in 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. The board of directors will
determine, in its sole discretion, whether to provide any particular funds
to either DLJ or DLJdirect and will not be obligated to do so.
(4) Donaldson, Lufkin & Jenrette, Inc. will account for all cash
transfers from one Group to or for the account of the other Group, other
than transfers in return for assets or services rendered or transfers in
respect of DLJ's retained interest that correspond to dividends paid on
DLJdirect Common Stock, as inter-Group revolving credit advances unless:
o the board of directors determines that a given transfer or type
of transfer should be accounted for as a long-term loan,
o the board of directors determines that a given transfer or type
of transfer should be accounted for as a capital contribution
increasing DLJ's retained interest in DLJdirect or
o the board of directors determines that a given transfer or type
of transfer should be accounted for as a return of capital
reducing DLJ's retained interest in DLJdirect.
There are no specific criteria to determine when Donaldson, Lufkin & Jenrette,
Inc. will account for a cash transfer as a long-term loan, a capital
contribution or a return of capital rather than an inter-Group revolving credit
advance. The board of directors would make such a determination in the exercise
of its business judgment at the time of such transfer, or the first of such
type of transfer, based upon all relevant circumstances. Factors the board of
directors would consider include:
o the current and projected capital structure of each Group,
o the relative levels of internally generated funds of each Group,
o the financing needs and objectives of the recipient Group,
o the investment objectives of the transferring Group,
28
o the availability, cost and time associated with alternative financing
sources and
o prevailing interest rates and general economic conditions.
(5) Any cash transfer accounted for as an inter-Group revolving
credit advance will bear interest at the rate at which the board of
directors, in its sole discretion, determines Donaldson, Lufkin &
Jenrette, Inc. could borrow such funds on a revolving credit basis. Any
cash transfer accounted for as a long-term loan will have interest rate,
amortization, maturity, redemption and other terms that generally reflect
the then prevailing terms on which the board of directors, in its sole
discretion, determines Donaldson, Lufkin & Jenrette, Inc. could borrow
such funds.
(6) Any cash transfer from DLJ to DLJdirect or for DLJdirect's
account accounted for as a capital contribution will correspondingly
increase DLJdirect's shareholders' equity and DLJ's retained interest in
DLJdirect. As a result, the number of shares of DLJdirect Common Stock
that Donaldson, Lufkin & Jenrette, Inc. may issue for the account of DLJ
in respect of its retained interest (which we call the "Number of Shares
Issuable with Respect to DLJ's Retained Interest in DLJdirect") will
increase by the amount of such capital contribution divided by the Market
Value of DLJdirect Common Stock on the date of transfer.
This increase in the Number of Shares Issuable with Respect to DLJ's
Retained Interest in DLJdirect may also be expressed as follows:
Amount of Capital Contribution to DLJdirect
-------------------------------------------
Market Value of DLJdirect on the Date of Transfer
(7) Any cash transfer from DLJdirect to DLJ, or DLJ's account,
accounted for as a return of capital will correspondingly reduce
DLJdirect's equity and DLJ's retained interest in DLJdirect. As a result,
the Number of Shares Issuable with Respect to DLJ's Retained Interest in
DLJdirect will decrease by the amount of such return of capital divided by
the Market Value of DLJdirect Common Stock on the date of transfer.
This percentage decrease in the Number of Shares Issuable with Respect to
DLJ's Retained Interest in DLJdirect may also be expressed as follows:
Amount of Return of Capital to DLJdirect
----------------------------------------
Market Value of DLJdirect on the Date of Transfer
Clearing and License Arrangements
Pursuant to an agreement dated September 24, 1997, as amended on March 11,
1999, between the Pershing Division of DLJ and DLJdirect, Pershing acts as the
clearing agent for DLJdirect and in such capacity performs traditional
operational functions, including execution and clearance of trades and holding
customer funds and securities. Pershing carries the cash and margin accounts of
DLJdirect customers and clears transactions on a fully disclosed basis for such
accounts. Without the prior written approval of Pershing, DLJdirect may not
enter into similar services contracts with any other clearing agencies.
Pershing deducts the fees for its clearing services from the commissions,
mark-ups and other charges DLJdirect establishes for each transaction. The
clearance fees, order flow payments, interest sharing and charges for other
services provided for in the agreement were negotiated between DLJdirect and
Pershing with reference to those for comparable arrangements available in the
securities industry generally. These fees include volume discounts and sliding
scale payments taking into account the size of DLJdirect's business and the
levels of services provided by Pershing. The agreement also provides for good
faith renegotiation of any provision upon the request of either party. If the
parties are unable to agree upon negotiation, the parties will be subject to
the final decision of the operating committee of the board of directors. The
amounts paid to DLJ by DLJdirect pursuant to this agreement were $15.4 million,
$20.9 million, and $28.4 million in 1996, 1997 and 1998, respectively. The
agreement expires on March 10, 2009. Under the agreement, as amended, the
amounts to be paid by DLJdirect to Pershing will include the license fee for
the use of certain trademarks that are licensed to DLJdirect in the United
States and certain
29
other jurisdictions. The clearing agreement may be terminated by either party
upon a default of the other party or the disability of either party.
In March 1999, DLJdirect entered into an exclusive license agreement with
DLJ Long Term Investment Corporation. Under this agreement, DLJ Long Term
Investment Corporation has licensed certain trademarks, services marks, trade
names and other proprietary rights to various words, slogans, symbols and logos
to DLJdirect for use in its provision of financial services and sale or other
distribution of related financial goods. The nature and quality of all
financial goods and services offered by DLJdirect under the licensed marks are
subject to the control of DLJ Long Term Investment Corporation, and the use of
the marks must be consistent with specific guidelines. Fees payable under the
current license agreement for the use of the marks in the United States and
certain other jurisdictions are to be paid in accordance with the terms of the
clearing agreement with DLJ. The license fee included in the clearing fee does
not include the use of the marks in certain other foreign jurisdictions, the
use of which will be negotiated on a case by case basis. The agreement expires
on March 10, 2009. The agreement is terminable by DLJ Long Term Investment
Corporation for certain events, including, among other things, a default by
DLJdirect, the bankruptcy of DLJdirect or the sale or dissolution of DLJdirect.
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 this consolidated tax group.
In connection with the offering, DLJ and DLJdirect intend to enter into a tax
sharing agreement, effective as of January 1, 1999 and applicable to any
Federal, foreign, state, local and other taxes. Pursuant to the provisions of
such agreement, DLJdirect and DLJ will generally make payments between them
such that, with respect to any period in which DLJdirect is a member of the
same consolidated tax group as DLJ for Federal income tax purposes, the amount
of Federal income taxes to be paid by DLJdirect will be determined, with
certain exceptions, as though DLJdirect were to file for such period and all
prior periods separate Federal income tax returns (generally including any
amounts determined to be due as a result of a redetermination of the Federal
income tax liability of the DLJ consolidated group arising from an audit or
otherwise) as the common parent of an affiliated group of corporations filing a
consolidated return rather than a consolidated subsidiary of DLJ. DLJ and
DLJdirect have each agreed to remit interest to the other on any payments that
are not timely made. DLJdirect is also entitled to receive payments from DLJ in
respect of utilization of its tax assets, if any. The amount of any such
payment will generally be determined by the actual tax benefit received by the
DLJ consolidated group. Conversely, if inclusion of DLJdirect in the
consolidated group should increase the tax of other members, DLJdirect will
reimburse DLJ for such cost. Any tax benefit related to (1) the exercise of
options in DLJ Common Stock, or DLJdirect Common Stock that is attributed to
DLJ pursuant to the board of directors' cash management policy, (2) the vesting
of restricted DLJ Common Stock, or restricted DLJdirect Common Stock that is
attributed to DLJ pursuant to the board of directors' cash management policy,
(3) satisfaction of stock appreciation rights that result in a charge to DLJ's
earnings, or (4) other compensation funded by DLJ will be allocated to DLJ. If
DLJdirect Common Stock vests in or, pursuant to the exercise of an option, is
issued to an employee of DLJ, its subsidiaries or affiliates exclusive of
DLJdirect, and is attributed to DLJdirect pursuant to the board of directors'
cash management policy, or if a compensation deduction results from any other
DLJdirect Common 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
30
for periods that DLJdirect is included in the same consolidated group as DLJ,
except to the extent attributable to DLJdirect.
Corporate General and Administrative Expenses
DLJ provides services to DLJdirect pursuant to an Intercompany Services
Agreement dated February 23, 1999. The agreement covers public relations,
telecommunications, tax, internal audit, insurance, employee benefits, human
resources, legal, compliance, credit, general administrative, accounting,
treasury, library and record management services, facilities, security and
custodial services. These services may be provided by an employee of DLJ or any
of its affiliates or by any third party chosen at the sole discretion of DLJ
and the costs of these services and space are allocated to DLJdirect. The
agreement may be terminated upon a change in control or upon 90-day notice by
either party. Amounts paid by DLJdirect under this agreement were $1.2 million,
$1.9 million, and $2.7 million, in 1996, 1997 and 1998, respectively.
31
DESCRIPTION OF CAPITAL STOCK
The following description is not complete and should be read with Annex II
to this Information Statement, which contains the full text of the amendment to
our amended and restated certificate of incorporation, which will be filed
pursuant to the tracking stock proposal. This description uses DLJdirect Common
Stock to illustrate the amendment to our amended and restated certificate of
incorporation. Should Donaldson, Lufkin & Jenrette, Inc. decide in the future
to issue other similar series of common stock the provisions described below
would apply to such series as well unless we amend our amended and restated
certificate of incorporation at such time.
This description refers in many places to "DLJ's retained interest in
DLJdirect." This represents the ownership of DLJ in that portion of DLJdirect
that is not represented by DLJdirect Common Stock. The size of this retained
interest relative to the interest represented by DLJdirect Common Stock may
change in the future if actions are taken, such as issuances of additional
shares of DLJdirect Common Stock, repurchases of DLJdirect Common Stock, or
transfers of cash or other property between DLJ and DLJdirect, that change
either the total amount of the assets of DLJdirect or the number of shares of
DLJdirect Common Stock that is outstanding. These actions, and the effect that
they would have on holders of DLJdirect Common Stock are described further in
this section. See Annex 1, "Illustration of Certain Terms", for further
discussion of certain terms defined in this section.
General
Our current certificate of incorporation authorizes us to issue
300,000,000 shares of common stock, par value $0.10 per share, and 50,000,000
shares of preferred stock, par value $0.01 per share. Only the preferred stock
is currently issuable in series by the board of directors. As of March 1, 1999,
we had 124,320,184 shares of common stock and 7,500,000 shares of preferred
stock issued and outstanding.
Before the offering, we will file an amendment to our amended and restated
certificate of incorporation which will further amend our current amended and
restated certificate of incorporation. The amendment to our amended and
restated certificate of incorporation (together, the "restated charter") will
o authorize the board of directors to issue a total of 1.5 million
shares of common stock in multiple series, including Donaldson,
Lufkin & Jenrette, Inc.--DLJ Common Stock ("DLJ Common Stock") and
Donaldson, Lufkin, Jenrette, Inc.--DLJdirect Common Stock ("DLJdirect
Common Stock"). The board of directors will be authorized to issue
500,000,000 shares of DLJ Common Stock and 500,000,000 shares of
DLJdirect Common Stock;
o we intend DLJdirect Common Stock to reflect the performance of
the online discount brokerage and related services business of
DLJdirect, including certain activities currently conducted by
DLJdirect Holdings Inc. and one or more affiliates of Donaldson,
Lufkin & Jenrette, Inc. (the "DLJdirect Group" or "DLJdirect");
o we intend DLJ Common Stock to reflect the performance of the
rest of the businesses conducted by DLJ and its affiliates (the
"DLJ Group" or "DLJ"), including DLJ's retained interest in
DLJdirect;
o we will allocate all of Donaldson, Lufkin & Jenrette, Inc.'s
consolidated assets, liabilities, revenue, expenses and cash
flow between the DLJ Group and DLJdirect Group;
o 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;
o re-classify each outstanding share of common stock into a share of
DLJ Common Stock.
32
The full definitions of the terms "DLJ" and "DLJdirect" are set forth
under "--Mandatory Dividend, Redemption or Exchange on Disposition of All or
Substantially All of the Assets of a Group" below.
Before the time of the offering, the board of directors will designate the
initial Number of Shares Issuable with Respect to DLJ's Retained Interest in
DLJdirect. See "--DLJ's Retained Interest in Any Group" and our restated
charter for additional information about DLJ's retained interest in DLJdirect
(or in any other Group) and the Number of Shares Issuable with Respect to DLJ's
Retained Interest in DLJdirect (or in any other Group).
The board of directors will have the authority in its sole discretion to
issue authorized but unissued shares of common stock from time to time for any
proper corporate purpose. The board of directors will have the authority to do
so without stockholders approval, except as may be provided by Delaware law or
the rules and regulations of any securities exchange on which any series of
outstanding common stock may then be listed.
Dividends
The board of directors will retain the discretion whether or not to pay
dividends on 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 for the Group to which such series of
common stock relates.
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 (a) a number of shares of common stock, par value
$0.10 per share, equal to the number of shares of DLJ Common Stock
that are then outstanding and (b) a number of shares of preferred
stock, par value $0.01 per share, equal to the number of shares of
preferred stock of Donaldson, Lufkin & Jenrette, Inc.
that have been attributed to DLJ that are then outstanding,
o the assumptions about each other Group set forth in the next sentence
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.
Similarly, the "Available Dividend Amount" for any Group that is not DLJ 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.
33
The amount legally available for the payment of dividends on common stock
of a corporation under Delaware law is generally limited to:
o the total assets of the corporation less its total liabilities less
o the aggregate par value of the issued shares of its common and
preferred stock, plus any amounts which the board of directors has
designated as capital in respect of such shares.
However, if that amount is not greater than zero, the corporation may also
pay dividends out of the net profits for the corporation for the fiscal year in
which the dividend is declared and/or the preceding fiscal year. As mentioned
above, these restrictions will form the basis for calculating the Available
Dividend Amounts for DLJ and DLJdirect. Thus, net losses of either Group, and
any dividends and distributions on, or repurchases of, either series of common
stock, may reduce the assets legally available for dividends on both series of
common stock. These restrictions will also form the basis for calculating the
aggregate amount of dividends that Donaldson, Lufkin & Jenrette, Inc. as a
whole can pay on its common stock, regardless of series. Thus, for example, net
losses of the DLJ Group, and any dividends and distributions on, or repurchases
of, DLJ Common Stock, will reduce the assets legally available for dividends on
the DLJdirect Common Stock.
Subject to the foregoing limitations, applicable regulatory requirements
and to any other limitations set forth in any future series of preferred stock
or in any agreements binding on Donaldson, Lufkin & Jenrette, Inc. from time to
time, we have the right to pay dividends on both, one or neither series of
common stock in equal or unequal amounts, notwithstanding the 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 any series of
common stock, including any dividend required as a result of 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 Fraction
in such Group.
The board of directors 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 of 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
If we dispose of All or Substantially All of the Assets of a Group to one
or more persons or entities, in one transaction or a series of related
transactions (collectively, a "Disposition"), and the Disposition is not an
Exempt Disposition as defined below, we would be required, by the 85th Trading
Day after the consummation of such Disposition (the "Disposition Date"), to
either:
34
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
having an aggregate Fair Value (determined as of the Disposition
Date) 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 Fair Value)
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 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 Fraction in 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
that will result in a 10% premium will be calculated based on the average
Market Value of the relevant series of common stock as compared to the average
Market Value of the other series of common stock during the 20 consecutive
Trading Day period ending on the 5th Trading Day immediately preceding the date
on which Donaldson, Lufkin & Jenrette, Inc. mails the notice of exchange to
holders of the relevant series. In determining whether to effect any such
exchange following such a dividend or partial redemption, we would, in addition
to other matters, consider:
o whether the remaining assets of such Group continue to constitute a
viable business,
o the number of shares of such common stock remaining issued and
outstanding,
o the per share market price of such common stock and
35
o the ongoing cost of continuing to have a separate series of such
common stock outstanding.
The following terms used in this Information Statement 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.
"DLJ" means:
o all of the businesses, assets and liabilities of Donaldson, Lufkin &
Jenrette, Inc. and its subsidiaries other than the businesses, assets
and liabilities that are part of 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, 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 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 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 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 Fraction in such Group
(determined as of the record date for such dividend or
distribution, or as of the date of such redemption).
"DLJdirect" means:
o all of the businesses, assets and liabilities of DLJdirect Holdings
Inc. and its subsidiaries,
o the business, assets and liabilities of DLJdirect U.K., 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 (the "Effective Date"), in the ordinary course of business,
o any businesses, assets or liabilities acquired or incurred by
Donaldson, Lufkin & Jenrette, Inc. or any of its subsidiaries after
the Effective Date that the board of directors has specifically
allocated to DLJdirect or that Donaldson, Lufkin & Jenrette, Inc.
otherwise allocates to DLJdirect in accordance with policies
established from time to time by the board of directors, and
36
o the rights and obligations of DLJdirect under any inter-Group debt
deemed to be owed to or by DLJdirect, as such rights and obligations
are defined in accordance with policies established from time to time
by the board of directors; provided that:
o Donaldson, Lufkin & Jenrette, Inc. may re-allocate assets from
one Group to the other Group in return for other assets or
services rendered by that other Group in the ordinary course of
business or in accordance with policies established by the board
of directors from time to time and
o if Donaldson, Lufkin & Jenrette, Inc. transfers cash, other
assets or securities to holders of shares of DLJdirect Common
Stock as a dividend or other distribution on shares of DLJdirect
Common Stock, other than a dividend or distribution payable in
shares of DLJdirect Common Stock, or as payment in a redemption
of shares of DLJdirect Common Stock effected as a result of a
DLJdirect Disposition, then the board of directors shall
re-allocate from DLJdirect to DLJ cash or other assets having a
Fair Value equal to the aggregate Fair Value (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 Fraction in 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 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 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 in
the resolution or resolutions authorizing the issuance of the shares
of the series of common stock that relates to such Group,
37
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
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 shall determine in good faith.
(Any good faith board of directors' determination of Fair Value shall be
conclusive and binding on all stockholders.)
"Market Capitalization" of 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.
38
"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 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.
"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.
"Trading Day" means each weekday on which the relevant security or, if
there are two relevant securities, each relevant security, is traded on the
principal national securities exchange on which it is listed or admitted to
trading or on the Nasdaq National Market or, if such security is not listed or
admitted to trading on a national securities exchange or quoted on the Nasdaq
National Market, traded in the principal over-the-counter market in which it
trades.
Optional Exchange of 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%. "Tax Event" means the receipt by Donaldson, Lufkin & Jenrette, Inc. of
an opinion of tax counsel experienced in such matters, who shall not be an
officer or employee of Donaldson, Lufkin & Jenrette, Inc. or any of its
affiliates, to the effect that, as a result of any amendment to, or change in,
the laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein (including any proposed
change in such regulations announced by an administrative agency), or as a
result of any official or administrative pronouncement or action or judicial
decision interpreting or applying such laws or regulations, it is more likely
than not that for United States federal income tax purposes (1) Donaldson,
Lufkin & Jenrette, Inc., its subsidiaries or affiliates, or any of its
successors or its stockholders is or, at any time in the future, will be
subject to tax upon the issuance of shares of either DLJ Common Stock or
DLJdirect Common Stock or (2) either DLJ Common Stock or DLJdirect Common Stock
is not or, at any time in the future, will not be treated solely as stock of
Donaldson, Lufkin & Jenrette, Inc. For purposes of rendering such opinion, tax
counsel shall assume that any administrative proposals will be adopted as
proposed. However, in the event a change in law is proposed, tax counsel shall
render an opinion only in the event of enactment.
The exchange ratio that will result in the specified premium will be
calculated based on the average Market Value of DLJ Common Stock as compared to
the average Market Value of DLJdirect Common Stock during the 20
39
consecutive Trading Day period ending on, and including, the 5th Trading Day
immediately preceding the date on which we mail the notice of exchange to
holders of the outstanding shares being exchanged.
Optional Exchange for Stock of a Subsidiary
At any time at which all of the assets and liabilities of a Group, and no
other assets or liabilities of Donaldson, Lufkin & Jenrette, Inc. or any
subsidiary thereof, are held directly or indirectly by one or more wholly owned
subsidiaries of Donaldson, Lufkin & Jenrette, Inc. (the "Group Subsidiaries"),
we may, provided that there are funds of the Corporation 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 each 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.
o If the series of common stock being exchanged is DLJ Common Stock and
the Number of Shares Issuable with Respect to DLJ's Retained Interest
in such Group 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, and upon making that announcement, that 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).
40
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, (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 would be required, between 10 and 30 Trading
Days before the exchange date, to send a notice by first-class mail, postage
prepaid, to holders of the relevant series of common stock at their addresses
as they appear on our transfer books, specifying (1) the exchange date and the
other terms of the exchange and (2) the place or places where certificates for
shares of such series of common stock, properly endorsed or assigned for
transfer, unless we waive such requirement, should be surrendered for delivery
of the stock to be issued or delivered by Donaldson, Lufkin & Jenrette, Inc. in
such exchange.
Neither the failure to mail any required notice to any particular holder
nor any defect therein would affect the sufficiency thereof with respect to any
other holder or the validity of any dividend, redemption or exchange.
If we are redeeming less than all of the outstanding shares of a series of
common stock as described above, we would redeem such shares pro rata or by lot
or by such other method as the board of directors determines to be equitable.
No holder of shares of a series of common stock being exchanged or
redeemed will be entitled to receive any cash, securities or other property to
be distributed in such exchange or redemption until such holder surrenders
certificates for such shares, properly endorsed or assigned for transfer, at
such place as we specify, unless we waive such requirement. As soon as
practicable after our receipt of certificates for such shares, we would deliver
to the person for whose account such shares were so surrendered, or to the
nominee or nominees of such person, the cash, securities or other property to
which such person is entitled, together with any fractional payment referred to
below, in each case without interest. If less than all of the shares of common
stock represented by any one certificate were to be exchanged or redeemed, we
would also issue and deliver a new certificate for the shares of such common
stock not exchanged or redeemed.
We would not be required to issue or deliver fractional shares of any
capital stock or any other fractional securities to any holder of common stock
upon any exchange, redemption, dividend or other distribution described above.
If more than one share of common stock were held at the same time by the same
holder, we may aggregate the number of shares of any capital stock that would
be issuable or any other securities that would be distributable to such holder
upon any such exchange, redemption, dividend or other distribution. If there
are fractional shares of any capital stock or any other fractional securities
remaining to be issued or distributed to any holder, we would, if such
fractional shares or securities were not issued or distributed to such holder,
pay cash in respect of such fractional shares or securities in an amount equal
to the Fair Value thereof, without interest.
41
From and after the date set for any exchange or redemption, all rights of
a holder of shares of common stock that were exchanged or redeemed would cease
except for the right, upon surrender of the certificates representing such
shares, to receive the cash, securities or other property for which such shares
were exchanged or redeemed, together with any fractional payment as provided
above, in each case without interest and, if such holder was a holder of record
as of the close of business on the record date for a dividend not yet paid, the
right to receive such dividend. A holder of shares of common stock being
exchanged would not be entitled to receive any dividend or other distribution
with respect to shares of the other series of common stock until after the
shares being exchanged are surrendered as contemplated above. Upon such
surrender, we would pay to the holder the amount of any dividends or other
distributions, without interest, which theretofore became payable with respect
to a record date occurring after the exchange, but which were not paid by
reason of the foregoing, with respect to the number of whole shares of the
other series of common stock represented by the certificate or certificates
issued upon such surrender. From and after the date set for any exchange, we
would, however, be entitled to treat the certificates for shares of common
stock being exchanged that were not yet surrendered for exchange as evidencing
the ownership of the number of whole shares of the other series of common stock
for which the shares of such common stock should have been exchanged,
notwithstanding the failure to surrender such certificates.
We would pay any and all documentary, stamp or similar issue or transfer
taxes that might be payable in respect of the issue or delivery of any shares
of capital stock and/or other securities on any exchange or redemption
described herein. We would not, however, be required to pay any tax that might
be payable in respect of any transfer involved in the issue or delivery of any
shares of capital stock and/or other securities in a name other than that in
which the shares so exchanged or redeemed were registered, and no such issue or
delivery will be made unless and until the person requesting such issue pays to
Donaldson, Lufkin & Jenrette, Inc. the amount of any such tax or establishes to
our satisfaction that such tax has been paid.
We may, subject to applicable law, establish such other rules,
requirements and procedures to facilitate any dividend, redemption or exchange
contemplated as described above as the board of directors may determine to be
appropriate under the circumstances.
Voting Rights
Holders of DLJdirect Common Stock will not be entitled to vote, unless a
separate class vote is required by applicable law. Holders of DLJ Common Stock
will vote on all matters as to which common stockholders generally are entitled
to vote. On all such matters for which no separate vote is required, each
outstanding share of DLJ Common Stock entitles the holder to one vote.
The Delaware general corporation law requires a separate vote of holders
of shares of common stock of any series on any amendment to the certificate of
incorporation if the amendment would alter or change the powers, preferences or
special rights of the shares of such series so as to affect them adversely but
would not so affect the entire class.
Liquidation
The holders of each series of common stock will be entitled, upon
voluntary or involuntary liquidation, dissolution or winding-up of Donaldson,
Lufkin & Jenrette, 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
42
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 Any Group
In this document, we call the percentage interest in any 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, the "Outstanding Interest
Fraction" and we call the remaining fractional interest in such Group intended
to be represented at any time by DLJ's retained interest in such Group, 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 Series of Common Stock
Outstanding + Number of Shares Issuable with Respect to
DLJ's Retained Interest in such Group
The Retained Interest Fraction in 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 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:
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, the Number of Shares Issuable with Respect to DLJ's Retained Interest
in such Group would be reduced by the
43
number of shares so issued, the number of outstanding shares of such series of
common stock would be increased by the same amount, the Retained Interest
Fraction in such Group would be reduced and the Outstanding Interest Fraction
in 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 such Group would be reduced and the Outstanding Interest Fraction
in 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, 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, the number of outstanding shares of such series of
common stock would be increased by the same amount, the Retained Interest
Fraction in such Group would be reduced and 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, 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 the Retained Interest Fraction in such
Group and the Outstanding Interest Fraction in 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
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 Fraction in 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, the Number of Shares
Issuable with Respect to DLJ's Retained Interest in such Group would be
increased by the number of shares so purchased, the number of outstanding
shares of such series common stock would be decreased by the same amount, the
Retained Interest Fraction in such Group would be increased and the Outstanding
Interest Fraction in 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, 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 common stock would be decreased by the number
of shares so repurchased, the Retained Interest Fraction in such Group would be
increased and the Outstanding Interest Fraction in such Group would be
correspondingly reduced.
44
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, 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, the number of outstanding shares
of such series common stock would remain unchanged, the Retained Interest
Fraction in such Group would be reduced and the Outstanding Interest Fraction
in 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,
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, the number of outstanding
shares of such series of common stock would remain unchanged, the Retained
Interest Fraction in such Group would be increased and the Outstanding Interest
Fraction in 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".
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.
Determinations by the Board
The restated charter will provide that, subject to applicable law, any
determinations made by the board of directors in good faith under the charter
or in any certificate of designation filed pursuant thereto would be final and
binding on all stockholders of Donaldson, Lufkin & Jenrette, Inc.
Preemptive Rights
Holders of DLJ Common Stock and DLJdirect Common Stock will not have any
preemptive rights to subscribe for any additional shares of capital stock or
securities that we may issue in the future.
Certain Other Provisions of the Amended and Restated Certificate of
Incorporation and By-laws
45
Preferred Stock
The restated charter, like our current charter, provides that the board of
directors may issue shares of preferred stock in one or more series from time
to time. The board of directors has the authority to fix by resolution or
resolutions the designations and the powers, preferences and rights, and the
qualifications, limitations and restrictions thereof, of the shares of each
series of preferred stock, including without limitation, the following:
o the distinctive serial designation of such series which shall
distinguish it from other series,
o the number of shares included in such series,
o the dividend rate, or method of determining such rate, payable to
holders of the shares of such series,
o any condition upon which such dividends shall be paid and the date or
dates upon which such dividends shall be payable,
o whether dividends on the shares of such series shall be cumulative
and, in the case of shares of any series having cumulative dividend
rights, the date or dates or method of determining the date or dates
from which dividends on the shares of such series shall be
cumulative,
o the amount or amounts which shall be payable out of the assets of
Donaldson, Lufkin & Jenrette, Inc. to holders of the shares of such
series upon voluntary or involuntary liquidation, dissolution or
winding-up Donaldson, Lufkin & Jenrette, Inc. and the relative rights
of priority, if any, of payment of the shares of such series,
o the price or prices at which, the period or periods within which and
the terms and conditions upon which the shares of such series may be
redeemed, in whole or in part, at the option of Donaldson, Lufkin &
Jenrette, Inc. or at the option of the holder or holders thereof or
upon the happening of a specified event or events,
o the obligation, if any, of Donaldson, Lufkin & Jenrette, Inc. to
purchase or redeem shares of such series pursuant to a sinking fund
or otherwise and the price or prices at which, the period or periods
within which and the terms and conditions upon which the shares of
such series shall be redeemed or purchased, in whole or in part,
pursuant to such obligation,
o whether or not the shares of such series shall be convertible or
exchangeable, at any time or times at the option of the holder or
holders thereof or at the option of Donaldson, Lufkin & Jenrette,
Inc. or upon the happening of a specified event or events, into
shares of any other class or classes or any other series of the same
or any other class or classes of stock of Donaldson, Lufkin &
Jenrette, Inc. and the price or prices or rate or rates of exchange
or conversion and any adjustments applicable thereto and
o whether or not holders of the shares of such series shall have voting
rights, in addition to the voting rights provided by law, and if so
the terms of such voting rights.
Series A and Series B Fixed Adjustable Rate Preferred Stock
General. The Series A Preferred Stock is a single series consisting of
4,000,000 shares with a liquidation preference of $50 per share. The Series B
Preferred Stock is a single series consisting of 3,500,000 shares with a
liquidation preference of $50 per share. The holders of the Preferred Stock
have no preemptive rights. The Preferred Stock is not convertible into shares
of either series of common stock of Donaldson, Lufkin & Jenrette, Inc. and is
fully paid and nonassessable.
46
The Series A Preferred Stock ranks on a parity with the Series B Preferred
Stock and prior to both series of the common stock of Donaldson, Lufkin &
Jenrette, Inc. as to the payment of dividends and distribution of assets upon
dissolution, liquidation or winding up of Donaldson, Lufkin & Jenrette, Inc.
Dividends. Dividends on the Series A Preferred Stock are payable quarterly
at the annual rate of 5.94% or $2.97 per share through November 30, 2001. After
November 30, 2001, dividends on the Series A Preferred Stock are payable at the
Applicable Rate from time to time in effect. The Applicable Rate per annum for
each dividend period beginning November 30, 2001 will generally be equal to
0.50% plus the highest of the Treasury Bill Rate, the Ten Year Constant
Maturity Rate and the Thirty Year Constant Maturity Rate (each as defined by
the terms of the Series A Preferred Stock). The Applicable Rate per annum for
each dividend period beginning November 30, 2001, will not be less than 6.44%
nor greater than 12.44% (without taking into account any adjustments as
described below under "Changes in the Dividends Received Percentage").
Dividends on the Series B Preferred Stock are payable quarterly at the
annual rate of 5.30% of $2.65 per share through January 15, 2003. After January
15, 2003, dividends on the Series B Preferred Stock are payable at the
Applicable Rate from time to time in effect. The Applicable Rate per annum for
each dividend period beginning January 15, 2003 will generally be equal to
0.40% plus the highest of the Treasury Bill Rate, the Ten Year Constant
Maturity Rate and the Thirty Year Constant Maturity Rate (each as defined by
the terms of the Series B Preferred Stock). The Applicable Rate per annum for
each dividend period beginning January 15, 2003, will not be less than 5.70%
nor greater than 11.30% (without taking into account any adjustments as
described below under "Changes in the Dividends Received Percentage").
Dividends on the Preferred Stock are cumulative and rights accrue to the
holders of the Preferred Stock if Donaldson, Lufkin & Jenrette, Inc. fails to
declare one or more dividends on such series of Preferred Stock in any amount,
whether or not the earnings or financial condition of Donaldson, Lufkin &
Jenrette, Inc. are sufficient to pay such dividends in whole or in part.
Changes in the Dividend Received Percentage. If one or more amendments to
the Internal Revenue Code of 1986, as amended (the "Code"), are enacted which
reduce the percentage of the dividends received deduction (currently 70%) as
specified in Section 243(a)(1) of the Code or any successor provision (the
"Dividends Received Percentage"), the amount of each dividend on each share of
the Series A Preferred Stock for dividend payments made on or after the date of
enactment of such change will generally be adjusted upward pursuant to a
specified formula set forth in the terms of the Series A Preferred Stock.
In addition, if the Dividends Received Percentage is reduced to 50% or
less, Donaldson, Lufkin & Jenrette, Inc. may at its option, redeem the Series A
Preferred Stock as a whole but not in part as described below. See
"--Redemption".
If, prior to July 9, 1999, one or more amendments to the Code are enacted
which reduce the Dividends Received Percentage, the amount of each dividend on
each share of the Series B Preferred Stock for dividend payments made on or
after the date of enactment of such change will generally be adjusted upward
pursuant to a specified formula set forth in the terms of the Series B
Preferred Stock, provided, however, that if the Dividends Received Percentage
shall be less than 50%, then the Dividend Received Percentage shall be deemed
to equal 50%.
Voting Rights. The holders of the Preferred Stock are not entitled to
vote, except as set forth below or as expressly required by applicable law.
If the equivalent of six quarterly dividends payable on the Preferred
Stock or any other class or series of preferred stock are in default, the
number of directors of Donaldson, Lufkin & Jenrette, Inc. will be increased by
two, and the holders of the Preferred Stock, voting as a single class with the
holders of shares of any other class of Donaldson, Lufkin & Jenrette, Inc.'s
preferred stock ranking on a parity with the Preferred Stock upon which like
voting rights have been conferred and are exercisable, will be entitled to
elect such two directors to fill such newly-created directorships.
47
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 (the "Offer"),
then each holder of such series of Preferred Stock who does not sell their
shares of Preferred Stock pursuant to the Offer shall be deemed irrevocably to
have voted or consented all shares of Preferred Stock owned by such holder in
favor of the merger or consolidation of Donaldson, Lufkin & Jenrette, Inc.
without any further action by the holder. The Offer shall be at a price of $50
per share, together with accrued and unpaid dividends, if any, to the date
fixed for redemption.
Certain Provisions of Delaware Law
Donaldson, Lufkin & Jenrette, Inc. is subject to the business combination
provisions of Section 203 of the Delaware general corporation law. In general,
such provisions prohibit a publicly-held Delaware corporation from engaging in
various business combination transactions with any interested stockholder for a
period of three years after the date of the transaction in which the person
became an interested stockholder unless:
o the business combination transaction, or the transaction in which the
interested stockholder became an interested stockholder, is approved
by the board of directors prior to the time the interested
stockholder obtained such status,
o upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding those shares
owned by
o persons who are directors and also officers and
o employee stock plans in which employee participants do not have
the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange
offer or
48
o on or subsequent to such date the business combination is approved by
the board of directors and authorized at an annual or special meeting
of stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested
stockholder.
A "business combination" is defined to include mergers, asset sales and other
transactions resulting in financial benefit to a stockholder. In general, an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or, within three years, did own) 15% or more of a
corporation's voting stock. The statute could prohibit or delay mergers or
other takeover or change in control attempts with respect to Donaldson, Lufkin
& Jenrette, Inc. and, accordingly, may discourage attempts to acquire
Donaldson, Lufkin & Jenrette, Inc.
No Appraisal Rights
Under the Delaware general corporation law, you will not have appraisal
rights in connection with the tracking stock proposal.
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.
49
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT
The following table sets forth, as of March 1, 1999, the total number of
shares of our existing common stock (which will become DLJ Common Stock)
beneficially owned, and the percent so owned, by each director and nominee for
director, by each person known to us to be the beneficial owner of more than 5%
of our existing common stock, by the named executive officers and by all
current directors and executive officers as a group.
Current Beneficial Ownership(1)
-----------------------------------------------
Number of Number of
Shares Percent Shares Percent
--------- ------- --------- -------
AXA(2)................................................ 90,440,006 72.7% 90,440,006 59.1%
9 Place Vendome
75001 Paris, France
The Equitable Companies Incorporated ("EQ")(3)........ 88,603,337 71.3 88,603,337 57.9
1290 Avenue of the Americas
New York, New York 10104
The Equitable Life Assurance Society of the United
States ("Equitable Life")(4)....................... 39,961,542 32.1 39,961,542 26.1
1290 Avenue of the Americas
New York, New York 10104
Joe L. Roby(5)........................................ 1,692,524 1.3 1,993,726 1.3
John S. Chalsty(6).................................... 1,931,263 1.5 1,999,532 1.3
Anthony F. Daddino(7)................................. 781,402 * 834,848 *
David DeLucia(8)...................................... 180,000 * 470,000 *
Hamilton E. James(9).................................. 1,001,751 * 1,287,308 *
Richard S. Pechter(10)................................ 1,442,524 1.1 1,668,726 1.1
Stuart M. Robbins(11)................................. 591,052 * 762,386 *
Theodore P. Shen(12).................................. 1,300,424 1.0 1,351,626 *
Michael A. Boyd(13)................................... 119,609 * 123,876 *
Michael M. Bendik(14)................................. 60,104 * 62,238 *
Henri de Castries(15)................................. 2,000 * 2,000 *
Denis Duverne(16)..................................... 2,000 * 2,000 *
Jane Mack Gould....................................... 0 * 0 *
Louis Harris(17)...................................... 8,880 * 22,880 *
Michael Hegarty(18)................................... 0 * 0 *
Henri G. Hottinguer(19)............................... 14,000 * 28,000 *
W. Edwin Jarmain(20).................................. 20,048 * 34,048 *
Francis Jungers(21)................................... 12,000 * 26,000 *
Edward D. Miller(22).................................. 0 * 0 *
Stanley B. Tulin(23).................................. 1,000 * 1,000 *
W.J. Sanders III(24).................................. 12,810 * 26,810 *
John C. West(25)...................................... 31,600 * 45,600 *
All directors and executive officers as a group(26)... 9,204,991 7.0 10,802,090 7.1
- - ---------
* Less than 1.0%.
(1) The table provides certain information regarding the beneficial ownership
of our existing common stock by AXA, EQ, Equitable Life, each of our
directors and all directors and executive officers as a group assuming, in
the case of the Total column, the issuance of all of our existing common
stock pursuant to outstanding restricted stock units and options. In
connection with our initial public offering in 1995, approximately 500
employees exchanged an aggregate of $100.0 million of their interests
under certain cash compensation arrangements, including our
50
1991-1993 Long Term Incentive Plan and our 1994-1996 Long Term Incentive
Plan for restricted stock units representing an aggregate of approximately
10.4 million shares of our existing common stock. Approximately 90% of
these units have vested as of February 1, 1999 and are included in the
Current Beneficial Ownership column. The balance of these units, located
in the Total column, will vest in February 2000.
In connection with our initial public offering in 1995, employees
acquired options to purchase an aggregate of approximately 18.4 million
shares of our existing common stock at a price of $13.50 per share by
foregoing an aggregate of $55.7 million of their future interests under
cash compensation arrangements (the "LTI Option Exchange"). As of February
1, 1998, all outstanding options received in the LTI Option Exchange have
vested and are included in the Current Beneficial Ownership column. In
addition, Mr. Roby was granted an option to purchase 500,000 shares of our
existing common stock in 1996 and Messrs. Harris, Hottinguer, Jungers,
Jarmain, Sanders and West have each been granted options to purchase
24,000 shares of our existing common stock under our 1996 Non-Employee
Directors Stock Plan.
(2) AXA is EQ's largest stockholder, beneficially owning approximately 59% of
EQ's outstanding common stock. As of March 1, 1999, a group of four French
mutual insurance companies (the "Mutuelles AXA") owned, directly or
indirectly through various holding companies, approximately 23.9% of the
issued shares representing 37.6% of the voting power of AXA. For insurance
regulatory purposes the shares of capital stock of EQ beneficially owned
by AXA and its subsidiaries have been deposited into a voting trust to
ensure that certain of the indirect minority shareholders of AXA do not
exercise control over EQ or certain of its insurance subsidiaries.
(3) The number listed includes shares of our existing common stock
beneficially owned by EQ's wholly-owned subsidiary, Equitable Life.
(4) The number listed includes shares of our existing common stock
beneficially owned through its wholly-owned subsidiary, Equitable
Holdings, L.L.C.
(5) The Current Beneficial Ownership column for Mr. Roby includes 476,546
vested restricted stock units and 1,198,384 option shares exercisable
within 60 days. The Total column includes 51,202 unvested restricted stock
units and 250,000 stock options that become exercisable more than 60 days
after March 1, 1999. In addition, Mr. Roby holds an option to purchase
50,000 shares of common stock of EQ which is exercisable within 60 days,
2,500 American Depositary Receipts ("ADRs") of AXA and 2,500 option shares
of AXA which are exercisable within 60 days.
(6) The Current Beneficial Ownership column for Mr. Chalsty includes 2,500
shares owned by Mr. Chalsty's wife, 650,649 vested restricted stock units
and 1,272,714 option shares exercisable within 60 days. The Total column
includes 68,269 unvested restricted stock units. In addition, Mr. Chalsty
beneficially owns 116,000 shares of common stock of EQ, including 100,000
option shares exercisable within 60 days, 2,500 ADRs of AXA and 5,000
option shares of AXA which are exercisable within 60 days.
(7) The Current Beneficial Ownership column for Mr. Daddino includes 198,755
vested restricted stock units and 530,298 option shares exercisable within
60 days. The Total column includes 28,446 unvested restricted stock units
and 25,000 stock options that become exercisable more than 60 days after
March 1, 1999. Mr. Daddino beneficially owns 100 shares of common stock of
EQ which are held in an insurance trust for the benefit of his wife and
children and also holds an option to purchase 50,000 shares of common
stock of EQ which is exercisable within 60 days.
(8) The Current Beneficial Ownership column for Mr. DeLucia includes 180,000
option shares exercisable within 60 days. The Total column includes
470,000 stock options that become exercisable more than 60 days after
March 1, 1999.
(9) The Current Beneficial Ownership column for Mr. James includes 662,872
option shares exercisable within 60 days. The Total column includes 35,557
unvested restricted stock units and 250,000 stock options that become
exercisable more than 60 days after March 1, 1999. Mr. James also holds an
option to purchase 50,000 shares of common stock of EQ which is
exercisable within 60 days and 1,000 ADRs of AXA.
51
(10) The Current Beneficial Ownership column for Mr. Pechter includes 954,536
option shares exercisable within 60 days. The Total column includes 51,202
unvested restricted stock units and 175,000 stock options that become
exercisable more than 60 days after March 1, 1999. Mr. Pechter also holds
an option to purchase 50,000 shares of common stock of EQ which is
exercisable within 60 days.
(11) The Current Beneficial Ownership column for Mr. Robbins includes 397,724
option shares exercisable within 60 days. The Total column includes 21,334
unvested restricted stock units and 150,000 stock options that become
exercisable more than 60 days after March 1, 1999.
(12) The Current Beneficial Ownership column for Mr. Shen includes 954,536
option shares exercisable within 60 days. The Total column includes 51,202
unvested restricted stock units. Mr. Shen also holds an option to purchase
50,000 shares of common stock of EQ which is exercisable within 60 days
and 1,000 ADRs of AXA.
(13) The Current Beneficial Ownership column for Mr. Boyd includes 79,544
option shares exercisable within 60 days. The Total column includes 4,267
unvested restricted stock units.
(14) The Current Beneficial Ownership column for Mr. Bendik includes 39,772
option shares exercisable within 60 days. The Total column includes 2,134
unvested restricted stock units.
(15) Mr. de Castries also beneficially owns 13,333 shares of common stock of
EQ, all of which are option shares exercisable within 60 days, and 70,188
shares of common stock of AXA, including 69,188 option shares exercisable
within 60 days.
(16) Mr. Duverne also owns 10,333 shares of EQ, including 8,333 option shares
exercisable within 60 days. Of his EQ holding, 2,000 shares are owned with
his wife. Mr. Duverne also beneficially owns 11,042 shares of common stock
of AXA, of which 1,000 shares are owned with his wife and 10,000 are
option shares of AXA which are exercisable within 60 days.
(17) The Current Beneficial Ownership column for Mr. Harris includes 6,000
option shares exercisable within 60 days. The Total column includes 14,000
stock options that become exercisable more than 60 days after March 1,
1999.
(18) Mr. Hegarty beneficially owns 48,228 shares of common stock of EQ,
including 48,039 option shares exercisable within 60 days.
(19) The Current Beneficial Ownership column for Mr. Hottinguer includes 10,000
option shares exercisable within 60 days. The Total column includes 14,000
stock options that become exercisable more than 60 days after March 1,
1999.
(20) The Current Beneficial Ownership column for Mr. Jarmain includes 10,000
option shares exercisable within 60 days. The Total column includes 14,000
option shares that become exercisable more than 60 days after March 1,
1999. Mr. Jarmain also beneficially owns 10,545 shares of common stock of
EQ.
(21) The Current Beneficial Ownership column for Mr. Jungers includes 10,000
option shares exercisable within 60 days. The Total column includes 14,000
stock options that become exercisable more than 60 days after March 1,
1999.
(22) Mr. Miller beneficially owns 142,745 shares of common stock of EQ, all of
which are option shares exercisable within 60 days.
(23) The 1,000 shares shown are owned with his wife. Mr. Tulin also
beneficially owns 87,437 shares of common stock of EQ, including 82,819
option shares exercisable within 60 days. Of these shares, 4,000 are owned
with his wife. In addition, Mr. Tulin owns 2,000 ADRs of AXA and 2,500
option shares of AXA which are exercisable within 60 days.
(24) The Current Beneficial Ownership column for Mr. Sanders includes 10,000
option shares exercisable within 60 days. The Total column includes 14,000
stock options that become exercisable more than 60 days after March 1,
1999.
(25) The Current Beneficial Ownership column for Mr. West includes 10,000
option shares exercisable within 60 days. The Total column includes 14,000
option shares that become exercisable more than 60 days after March 1,
1999.
52
Of the common stock beneficially owned by Mr. West, 11,000 shares are held
on his behalf by a profit sharing plan. In addition, 400 shares are owned
directly by his wife, as to which shares Mr. West disclaims beneficial
ownership.
(26) The Current Beneficial Ownership column includes 1,325,950 vested
restricted stock units and 6,326,380 option shares exercisable within 60
days and the Total column includes 316,458 unvested restricted stock units
and 1,404,000 stock options that become exercisable more than 60 days
after March 1, 1999. All directors and executive officers as a group also
beneficially own 678,721 shares of common stock of EQ, 91,230 shares of
common stock of AXA and 9,000 ADRs of AXA.
53
CERTAIN U.S. FEDERAL TAX CONSIDERATIONS
The following discussion is a summary of the principal United States
federal income tax consequences of the ownership of DLJdirect Common Stock. The
discussion is based on the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury regulations and published positions of the Internal Revenue
Service (the "IRS"), both of which are subject to change. In particular
Congress could enact legislation affecting the treatment of stock with
characteristics similar to the DLJdirect Common Stock, or the Treasury
Department could issue regulations that change current law. Any future
legislation or regulations could apply retroactively to the offering of
DLJdirect Common Stock.
This discussion addresses only those of you who will hold your DLJdirect
Common Stock as a capital asset. This discussion does not discuss all aspects
of United States federal income taxation that may be relevant to you in light
of your particular circumstances. This discussion does not apply to you if you
are a tax-exempt organization, S corporation or other pass-through entity,
mutual fund, small business investment company, regulated investment company,
insurance company or other financial institution, broker-dealer or are
otherwise subject to special treatment under the federal income tax laws. You
should consult your tax advisors with regard to the application of the federal
income tax laws, as well as to the applicability and effect of any state,
local, or foreign tax laws to which you may be subject.
In the opinion of Davis Polk & Wardwell, our counsel, for federal income
tax purposes, DLJdirect Common Stock will be considered our common stock.
Accordingly, for federal income tax purposes, we believe that neither you nor
we will recognize any income, gain or loss as a result of the issuance of
DLJdirect Common Stock.
No ruling has been sought from the Internal Revenue Service. The Internal
Revenue Service has announced that it will not issue advance rulings on the
classification of an instrument whose dividend rights are determined by
reference to the earnings of a segregated portion of the issuing corporation's
assets, including assets held by a subsidiary. Davis Polk & Wardwell's opinion
is not binding on the Internal Revenue Service. In addition, there are no court
decisions or other authorities bearing directly on the classification of
instruments with characteristics similar to those of DLJdirect Common Stock. It
is possible, therefore, that the Internal Revenue Service could assert that the
issuance of the DLJdirect Common Stock could result in taxation to us. Davis
Polk & Wardwell, however, is of the opinion that the Internal Revenue Service
would not prevail in such an assertion.
A recent proposal by the Clinton Administration would impose a corporate
level tax on the issuance of stock similar to the DLJdirect Common Stock. As
proposed by the Clinton Administration, this provision would be effective upon
the date of its enactment by Congress. We expect the offering to be consummated
prior to the effective date of the proposed legislation, so that the issuance
of DLJdirect Common stock in the offering would not be subject to the proposal.
If this proposal is enacted, however, it is possible that we could be subject
to tax on an issuance of DLJdirect Common Stock after the date of enactment. We
cannot predict whether the proposal will be enacted by Congress and, if
enacted, whether it will be in the form proposed by the Clinton Administration.
We may issue DLJ Common Stock in exchange for DLJdirect Common Stock at a
premium of 10% if, based on the legal opinion of our tax counsel, it is more
likely than not as a result of the enactment of legislative changes or
administrative proposals or changes that we or our stockholders will be subject
to tax upon issuance of the DLJ Common Stock, or DLJdirect Common Stock or such
stock will not be treated as stock of Donaldson, Lufkin & Jenrette, Inc. Such
an exchange should qualify as a tax-free recapitalization such that no gain or
loss is required to be recognized by us or by holders of the stock to be
exchanged.
Backup Withholding. Certain non-corporate holders of DLJdirect Common
Stock could be subject to backup withholding at a rate of 31% on the payment of
dividends on or proceeds from the sale of such stock. Backup withholding will
apply only if the stockholder (1) fails to furnish its taxpayer identification
number ("TIN"), which, for an individual would be his or her social security
number, (2) furnishes an incorrect TIN, (3) is notified by the IRS that it has
failed to properly report payments of interest or dividends or (4) under
certain circumstances, fails to certify under penalties of perjury that it has
furnished a correct TIN and has not been notified by the IRS that it is subject
to backup withholding for failure to report payments of interest or dividends.
Stockholders should consult their tax
54
advisors regarding their qualification for exemption from backup withholding
and the procedures for obtaining such an exemption if applicable. The amount of
any backup withholding from a payment to a holder of DLJdirect Common Stock
will be allowed as a credit against such stockholder's federal income tax
liability and may entitle such holder to a refund, provided that the required
information is furnished to the IRS.
Certain United States Federal Tax Consequences to Non-U.S. Investors
The following is a summary of certain United States federal tax
consequences to non-U.S. investors of owning DLJdirect Common Stock. In this
summary, "non-U.S. investor" means a person or entity other than (1) a citizen
or resident of the United States; (2) a corporation, partnership or other
entity created or organized in or under the laws of the United States or any
state; (3) an estate, the income of which is subject to United States federal
income taxation regardless of its source; or (4) a trust, the administration of
which is subject to the primary supervision of a United States court and the
control of all of the substantial decisions of which is within the authority of
one or more United States persons.
This summary does not address all of the federal tax considerations that
may be relevant to a non-U.S. investor in light of its particular circumstances
or to non-U.S. investors that may be subject to special treatment under federal
tax laws. Also, this summary does not discuss any aspects of state, local or
foreign taxation. This summary is based on current provisions of the Internal
Revenue Code, Treasury regulations, judicial opinions, published positions of
the IRS and other applicable authorities. These authorities are all subject to
change, possibly with retroactive effect. Each prospective non-U.S. investor
should consult its tax advisor with respect to the tax consequences of
investing in the DLJdirect Common Stock.
Dividends. Dividends paid to a non-U.S. investor generally will be subject
to withholding of federal income tax at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty. However, if the dividend is
effectively connected with the conduct of a trade or business of the non-U.S.
investor within the United States, the dividend will instead be taxed at
ordinary federal income tax rates on a net income basis. Further, if the
non-U.S. investor is a corporation, this effectively connected dividend income
may also be subject to an additional branch profits tax.
Sale or Other Disposition of DLJdirect Common Stock. A non-U.S. investor
generally will not be subject to federal income tax on any gain recognized on
the sale or other disposition of DLJdirect Common Stock, except in the
following circumstances: (1) the gain will be subject to federal income tax if
it is effectively connected with a trade or business of the non-U.S. investor
within the United States; (2) the gain will be subject to federal income tax if
the non-U.S. investor is an individual who holds the DLJdirect Common Stock as
a capital asset, is present in the United States for 183 or more days in the
taxable year of the sale or other disposition, and either the individual has a
"tax home" in the United States for federal income tax purposes or the gain is
attributable to an office or other fixed place of business maintained by the
individual in the United States; (3) the gain may be subject to federal income
tax pursuant to federal income tax laws applicable to certain expatriates; or
(4) the gain may be subject to federal income tax if Donaldson, Lufkin &
Jenrette, Inc. is or has been during certain periods a "United States real
property holding corporation." Donaldson, Lufkin & Jenrette, Inc. believes that
it will not constitute a United States real property holding corporation
immediately after the offering and does not expect to become a United States
real property holding corporation; however, no assurance can be given in this
regard.
Backup Withholding and Information Reporting
Dividends. United States backup withholding tax generally will not apply
to dividends paid to a non-U.S. investor at an address outside the United
States. Donaldson, Lufkin & Jenrette, Inc. must report annually to the IRS and
to each non-U.S. investor the amount of dividends paid to such investor and the
amount, if any, of tax withheld with respect to such dividends. This
information may also be made available to the tax authorities in the non-U.S.
investor's country of residence.
55
Sale Through a U.S. Office of a Broker. Upon the sale or other disposition
of DLJdirect Common Stock by a non-U.S. investor to or through a United States
office of a broker, the broker must backup withhold at a rate of 31% and report
the sale to the IRS, unless the investor certifies its foreign status under
penalties of perjury or otherwise establishes an exemption from backup
withholding.
Sale Through a Foreign Office of a Broker. Upon the sale or other
disposition of DLJdirect Common Stock by a non-U.S. investor to or through a
foreign office of a United States broker or a foreign broker with certain types
of relationships with the United States, the broker is not required to backup
withhold. However, the broker must report the sale or other disposition to the
IRS unless the broker has documentary evidence in its files that the seller is
a non- U.S. investor and certain other conditions are met, or the holder
otherwise establishes an exemption.
Backup withholding is not an additional tax. Amounts withheld under the
backup withholding rules are generally allowable as a refund or credit against
the non-U.S. investor's federal income tax liability, if any, provided that the
required information is furnished to the IRS in a timely manner.
Final United States Treasury regulations, effective for payments made
after December 31, 1999, may affect the procedures to be followed by a non-U.S.
investor in establishing such investor's foreign status for purposes of the
withholding, backup withholding and information reporting rules described in
the preceding paragraphs. Prospective non-U.S. investors should consult their
tax advisors concerning such regulations.
Federal Estate Taxes. DLJdirect Common Stock owned or treated as owned by
an individual who is not a citizen or a "resident," which is specially defined
for federal estate tax purposes, of the United States at the time of death,
will be included in such individual's gross estate for federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise.
56
Annex I
ILLUSTRATION OF CERTAIN TERMS
The following illustrations show 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, 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 (i.e., the
Outstanding Interest Fraction) is equal to:
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 (i.e., the Retained Interest Fraction)
is equal to:
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 Fraction and the Retained Interest
Fraction would always equal 1. 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 Fraction is 1 and the Outstanding
Interest Fraction is 0.
The Offering
The following illustration reflects an assumed issuance by Donaldson,
Lufkin & Jenrette, Inc. of 15 shares of DLJdirect Common Stock in the offering.
Offering for Account of DLJdirect
Assume the issuance is attributed to DLJdirect as an increase in its
equity, with the net proceeds credited solely to DLJdirect.
Shares previously issued and outstanding........................ 0
Newly issued shares for account of DLJdirect.................... 15
--
Total issued and outstanding after the offering............ 15
==
o The Number of Shares Issuable with Respect to DLJ's Retained Interest
in DLJdirect (100) would remain unchanged.
o As a result, the issued and outstanding shares (15) would represent
an Outstanding Interest Fraction of approximately 13%, calculated as
follows:
I-1
15
---------
15 + 100
The Retained Interest Fraction 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 Fraction of
approximately 26%, calculated as follows:
30
---------
30 + 85
The Retained Interest Fraction 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
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 Fraction of
approximately 23%, calculated as follows:
30
---------
30 + 100
The Retained Interest Fraction would accordingly be reduced to
approximately 77%.
o In this case, in the event of any dividend or other distribution paid
on DLJdirect Common Stock (other than a dividend or the distribution
payable in shares of DLJdirect Common Stock), DLJ would be credited,
and DLJdirect would be charged, with an amount equal to approximately
333% (representing the ratio of the Number of Shares Issuable with
Respect to DLJ's Retained Interest in DLJdirect (100) to the total
number of shares of DLJdirect Common Stock issued and outstanding
following the additional offering (30)) of the aggregate amount of
such dividend or distribution.
Offerings of Convertible Securities
If Donaldson, Lufkin & Jenrette, Inc. was to issue any securities
convertible into or exercisable for shares of DLJdirect Common Stock, the
Outstanding Interest 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
==
I-3
o The Number of Shares Issuable with Respect to DLJ's Retained Interest
in DLJdirect would be increased by the number of any shares of
DLJdirect Common Stock repurchased for the account of DLJ.
Number of Shares Issuable with Respect to
DLJ's Retained Interest in DLJdirect
prior to repurchase........................... 100
Number of shares repurchased for the
account of DLJ................................ 5
---
Number of Shares Issuable with Respect to
DLJ's Retained Interest in DLJdirect
after repurchase.............................. 105
===
o As a result, the total issued and outstanding shares (10) would in
the aggregate represent an Outstanding Interest Fraction of
approximately 9%, calculated as follows:
10
---------
10 + 105
The Retained Interest Fraction 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 Fraction of
approximately 9%, calculated as follows:
10
---------
10 + 100
The Retained Interest Fraction 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.
I-4
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.
o In that case, the Number of Shares Issuable with Respect to DLJ's
Retained Interest in DLJdirect (100) would be decreased to reflect
the amount of cash so transferred ($667) divided by the Market Value
per share of DLJdirect Common Stock ($20).
Number of Shares Issuable with Respect to
DLJ's Retained Interest in DLJdirect
prior to transfer............................... 100
Adjustment in respect of DLJ's retained
interest to reflect transfer to DLJ of
funds theretofore allocated to DLJdirect........ 33
--
Number of Shares Issuable with Respect
to DLJ's Retained Interest in
DLJdirect after transfer................... 67
==
o As a result, the total issued and outstanding shares (10) would in
the aggregate continue to represent an Outstanding Interest Fraction
of 13%, calculated as follows:
10
---------
10 + 67
The Retained Interest Fraction would accordingly continue to remain
87%.
o Assuming that the board of directors transferred only half of the
$667 amount, or $333.50, from DLJdirect to DLJ, the Number of Shares
Issuable with Respect to DLJ's Retained Interest in DLJdirect (100)
would decrease by the amount of cash so transferred ($333.50) divided
by the Market Value per share of DLJdirect Common Stock ($20).
Number of Shares Issuable with Respect to
DLJ's Retained Interest in DLJdirect
prior to transfer.............................. 100
Adjustment in respect of DLJ's retained
interest to reflect transfer to DLJ of
cash theretofore allocated to DLJdirect........ 17
--
Number of Shares Issuable with Respect to
DLJ's Retained Interest in DLJdirect
after transfer............................ 83
==
o In that case, as a result, the total issued and the outstanding
shares (10) would in the aggregate represent an Outstanding Interest
Fraction of about 11%, calculated as follows:
10
---------
10 + 83
I-5
The Retained Interest Fraction would accordingly be increased to
approximately 89%.
DLJdirect Common Stock Dividends
The following illustrations reflect assumed dividends of DLJdirect Common
Stock on outstanding shares of DLJ Common Stock and outstanding shares of
DLJdirect Common Stock, respectively, after the assumed initial issuance of 15
shares of DLJdirect Common Stock attributed to DLJdirect as an increase in its
equity.
DLJdirect Common Stock Dividend on DLJ Common Stock
Assume 1,000 shares of DLJ Common Stock are outstanding and Donaldson,
Lufkin & Jenrette, Inc. declares a dividend of 1/20 of a share of DLJdirect
Common Stock on each outstanding share of DLJ Common Stock.
Shares previously issued and outstanding........... 15
Newly issued shares for account of DLJ............. 50
--
Total issued and outstanding
after dividend........................... 65
==
o Any dividend of shares of DLJdirect Common Stock to the holders of
shares of DLJ Common Stock would be treated as a reduction in the
Number of Shares Issuable with Respect to DLJ's Retained Interest in
DLJdirect.
Number of Shares Issuable with Respect to
DLJ's Retained Interest in DLJdirect
prior to dividend........................... 100
Number of shares distributed on
outstanding shares of DLJ Common
Stock for account of DLJ.................... 50
--
Number of Shares Issuable with Respect
to DLJ's Retained Interest in
DLJdirect after dividend............... 50
==
o As a result, the total issued and outstanding shares (65) would in
the aggregate represent an Outstanding Interest Fraction of 57%,
calculated as follows:
65
---------
65 + 50
The Retained Interest Fraction would accordingly be reduced to 43%.
Note, however, that after the dividend, the holders of DLJ Common
Stock would also hold 50 shares of DLJdirect Common Stock, which
would be intended to represent a 50% interest in the value
attributable to DLJdirect.
DLJdirect Common Stock Dividend on DLJdirect Common Stock
Assume Donaldson, Lufkin & Jenrette, Inc. declares a dividend of 1/5 of a
share of DLJdirect Common Stock on each outstanding share of DLJdirect Common
Stock.
Shares previously issued and outstanding............... 15
Newly issued shares for account of DLJdirect........... 3
--
Total issued and outstanding after dividend....... 18
==
I-6
o The Number of Shares Issuable with Respect to DLJ's Retained Interest
in DLJdirect would reflect the stock dividend payable in shares of
DLJdirect Common Stock to holders of shares of DLJdirect Common
Stock. That is, the Number of Shares Issuable with Respect to DLJ's
Retained Interest in DLJdirect would be increased by a number equal
to 667% (representing the ratio of the Number of Shares Issuable with
Respect to DLJ's Retained Interest in DLJdirect (100) to the number
of shares of DLJdirect Common Stock issued and outstanding (15), in
each case immediately prior to such dividend) of the aggregate number
of shares issued in connection with such dividend (3), or 20.
Number of Shares Issuable with Respect to
DLJ's Retained Interest in DLJdirect
prior to dividend........................... 100
Adjustment in respect of DLJ's retained
interest to reflect shares distributed
on outstanding shares of DLJdirect
Common Stock................................ 20
--
Number of Shares Issuable with Respect
to DLJ's Retained Interest in
DLJdirect after dividend............... 102
===
o As a result, the total issued and outstanding shares (18) would in
the aggregate represent an Outstanding Interest Fraction of
approximately 13%, calculated as follows:
18
---------
18 + 120
The Retained Interest Fraction would accordingly remain 87%.
Capital Transfers of Cash or Other Assets Between DLJ and DLJdirect
Capital Contribution of Cash or Other Assets from DLJ to DLJdirect
The following illustration reflects the assumed contribution by DLJ to
DLJdirect, after the assumed initial issuance of 15 shares of DLJdirect Common
Stock attributed to DLJdirect as an increase in its equity, of $40 of assets
allocated to DLJ at a time when the Market Value of the DLJdirect Common Stock
is $20 per share.
Shares previously issued and outstanding................ 15
Newly issued shares..................................... 0
--
Total issued and outstanding after contribution.... 15
==
o The Number of Shares Issuable with Respect to DLJ's Retained Interest
in DLJdirect would increase to reflect the contribution to DLJdirect
of assets theretofore allocated by DLJ by a number equal to the value
of the assets contributed ($40) divided by the Market Value of
DLJdirect Common Stock at that time ($20), or 2 shares.
Number of Shares Issuable with Respect to
DLJ's Retained Interest in DLJdirect
prior to contribution......................... 100
Increase to reflect contribution to
DLJdirect of assets allocated to DLJ.......... 2
---
Number of Shares Issuable with Respect
to DLJ's Retained Interest in
DLJdirect after contribution............. 102
===
I-7
o As a result, the total issued and outstanding shares (15) would in
the aggregate represent an Outstanding Interest Fraction of
approximately 13%, calculated as follows:
15
---------
15 + 102
The Retained Interest Fraction would accordingly increase to slightly
more than 87%.
Return of Capital Transfer of Cash or Other Assets from DLJdirect to DLJ
The following illustration reflects the assumed transfer by DLJdirect to
DLJ, after the assumed initial issuance of 15 shares of DLJdirect Common Stock
attributed to DLJdirect as an increase in its equity of $40, of assets
allocated to DLJdirect on a date on which the Market Value of DLJdirect Common
Stock is $20 per share.
Shares previously issued and outstanding............... 15
Newly issued shares.................................... 0
--
Total issued and outstanding after contribution... 15
==
o The Number of Shares Issuable with Respect to DLJ's Retained Interest
in DLJdirect would decrease to reflect the transfer to DLJ of assets
theretofore allocated to DLJdirect by a number equal to the value of
the assets transferred ($40) divided by the Market Value of DLJdirect
Common Stock at that time ($20), or 2 shares.
Number of Shares Issuable with Respect
to DLJ's Retained Interest in
DLJdirect prior to contribution.................. 100
Decrease to reflect transfer to DLJ of
assets allocated to DLJdirect.................... 2
--
Number of Shares Issuable with Respect to
DLJ's Retained Interest in DLJdirect
after contribution.......................... 98
==
o As a result, the total issued and outstanding shares (15) would in
the aggregate represent an Outstanding Interest Fraction of
approximately 13%, calculated as follows:
15
---------
15 + 98
The Retained Interest Fraction would accordingly decrease to slightly
less than 87%.
I-8
Annex II
Certificate of Amendment of Amended and Restated
Certificate of Incorporation
of
Donaldson, Lufkin & Jenrette, Inc.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation") is
Donaldson, Lufkin & Jenrette, Inc.
2. The amended and restated certificate of incorporation of the
Corporation is hereby amended by replacing the second paragraph of Article
FOURTH in its entirety with the following provisions:
"Section A. Provisions Relating to Common Stock
1. Issuance of Common Stock in Series: Designation; Re-Classification.
Subject to the provisions of Section B of this Article FOURTH and provisions of
law, the Corporation shall have the authority to issue shares of Common Stock
in multiple series. The total number of shares of Common Stock which the
Corporation shall have the authority to issue shall initially be 1,500 million.
One series of Common Stock shall be designated as Donaldson, Lufkin & Jenrette,
Inc. Common Stock par value $0.10 per share ("DLJ Common Stock"). The second
series of Common Stock shall be designated as DLJdirect Common Stock par value
$0.10 per share ("DLJdirect Common Stock"). When the filing of this Amendment
to the amended and restated certificate of incorporation becomes effective,
each share of Common Stock outstanding immediately prior thereto shall
thereupon automatically be re-classified as one share of DLJ Common Stock (and
outstanding certificates that had theretofore represented shares of Common
Stock shall thereupon represent an equivalent number of shares of DLJ Common
Stock despite the absence of any indication thereon to that effect).
The total number of shares of DLJ Common Stock which the Corporation shall
have the authority to issue shall initially be 500 million, and the total
number of shares of DLJdirect Common Stock which the Corporation shall have the
authority to issue shall initially be 500 million. The number of authorized
shares of any class or series of Common Stock of the Corporation may be
increased or decreased (but not below the number of shares then outstanding) by
the affirmative vote of the holders of a majority of the voting power of the
stock of the Corporation entitled to vote generally in the election of
directors. The Board of Directors shall have the authority to designate, prior
to the time of the first issuance of the DLJdirect Common Stock, the number
which, immediately prior to such first issuance, will constitute the Number of
Shares Issuable with Respect to DLJ's Retained Interest in DLJdirect and any
other terms which are consistent with applicable law and the provisions of this
Article Fourth. The voting powers, preferences and relative, participating,
optional or other special rights of the DLJ Common Stock and DLJdirect Common
Stock, and the qualifications and restrictions thereon, shall be as set forth
in this Section A.
The Board of Directors (or such committee of the Board of Directors as the
Board of Directors shall empower) is hereby empowered to authorize by
resolution or resolutions from time to time the issuance of one or more
additional series of Common Stock and to fix the designations, powers,
preferences and relative, participating, optional or other rights, if any, and
the qualifications, limitations or restrictions thereof, if any, with respect
to each series of Common Stock and the number of shares constituting each such
series, and to increase or decrease the number of shares of any such series to
the extent permitted by the General Corporation Law of the State of Delaware,
as amended from time to time.
2. Dividends. Subject to any preferences and relative, participating,
optional or other special rights of any outstanding class or series of
preferred stock of the Corporation and any qualifications or restrictions on
any class of
II-1
Common Stock created thereby, dividends may be declared and paid upon any
series of Common Stock, upon the terms with respect to each such series, and
subject to the limitations provided for below in this Section (A)(2), as the
Board of Directors may determine.
(a) Dividends on any series of Common Stock may be declared and paid only
out of the lesser of (i) the funds of the Corporation legally available
therefor and (ii) the Available Dividend Amount for the Group to which such
series of Common Stock relates.
(b) Discrimination in Dividends Between Series of Common Stock. The Board
of Directors, subject to the provisions of Section (A)(2)(a), may at any time
declare and pay dividends exclusively on a single series of Common Stock, or on
one or more series of Common Stock, in equal or unequal amounts,
notwithstanding the relative amounts of the Available Dividend Amount with
respect to any Group, the amount of dividends previously declared on any
series, the respective voting or liquidation rights of any series or any other
factor.
(c) Share Distributions. Except as permitted by Section (A)(3), the Board
of Directors may declare and pay dividends or distributions of shares of any
series of Common Stock (or Convertible Securities convertible into or
exchangeable or exercisable for shares of any series of Common Stock) on shares
of a series of Common Stock or on shares of a class or series of preferred
stock of the Corporation only as follows:
(i) dividends or distributions of shares of a series of Common Stock
(or Convertible Securities convertible into or exchangeable or exercisable
for shares of a series of Common Stock) on shares of the same series of
Common Stock or on shares of preferred stock attributed to the same Group
to which such series of Common Stock relates; and
(ii) dividends or distributions of shares of a series of Common Stock
other than DLJ Common Stock (or Convertible 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 or on shares of
preferred stock attributed to DLJ, but only if the sum of (1) the number
of shares of the series of Common Stock to be so issued (or the number of
such shares which would be issuable upon conversion, exchange or exercise
of any Convertible Securities to be so issued) and (2) the number of
shares of such series of Common Stock which are issuable upon conversion,
exchange or exercise of any Convertible Securities then outstanding that
are attributed to DLJ is less than or equal to the Number of Shares
Issuable with Respect to DLJ's Retained Interest in such Group.
For purposes of this Section (A)(2)(c), any outstanding Convertible
Securities that are convertible into or exchangeable or exercisable for any
other Convertible Securities which are themselves convertible into or
exchangeable or exercisable for any series of Common Stock (or other
Convertible Securities that are so convertible, exchangeable or exercisable)
shall be deemed to have been converted, exchanged or exercised in full for such
Convertible Securities.
3. Mandatory Dividend, Redemption or Exchange on Disposition of All or
Substantially All of the Assets of a Group; Exchange of One Series of Common
Stock for the Other Series or for Stock of a Subsidiary at the Corporation's
Option Mandatory Dividend, Redemption or Exchange. In the event of a
Disposition (other than an Exempt Disposition), the Corporation shall, on or
prior to the 85th Trading Day after the Disposition Date, provided that the
funds of the Corporation are legally available therefor, either:
(x) 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) or other property, or a
combination thereof), subject to the limitations on dividends set forth
under Section (A)(2) of this Article FOURTH, in an aggregate amount having
a Fair Value (determined as of the Disposition Date) equal to the product
of the Outstanding Interest Fraction with respect to 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;
II-2
(y) 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) or other property (or a combination
thereof) having an aggregate Fair Value (determined as of the Disposition
Date) 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 (rounded, if necessary, to the nearest whole
number) having an aggregate average Market Value, during the 20
consecutive Trading Day period beginning on (and including) the 16th
Trading Day immediately following the Disposition Date, equal to such Fair
Value); or
(z) issue, in exchange for each outstanding share of the series of
Common Stock that relates to the Group that consummated such Disposition,
a number of shares of a series of Common Stock that does not relate to
that Group (calculated to the nearest five decimal places) having an
aggregate value equal to 110% of the value of a share of the series of
Common Stock that relates to that Group (where in each case value is based
on the average Market Value of a share of the relevant series of Common
Stock during the 20 consecutive Trading Day period beginning on (and
including) the 16th Trading Day immediately following the Disposition
Date).
(ii) At any time within one year after completing any dividend or partial
redemption pursuant to (x) or (y) of the preceding sentence, the Corporation
may issue, in exchange for each remaining outstanding share of the series of
Common Stock that relates to the Group that consummated the applicable
Disposition, a number of shares of a series of Common Stock that does not
relate to that Group (calculated to the nearest five decimal places) having an
aggregate value equal to 110% of the value of a share of the series of Common
Stock that relates to that Group (where in each case value is based on the
average Market Value of a share of the relevant series of Common Stock during
the 20 consecutive Trading Day period ending on (and including) the 5th Trading
Day immediately preceding the date on which the Corporation mails the notice of
exchange to holders of the relevant series).
(iii) For purposes of this Section (A)(3), if a Group consummates a
Disposition in a series of related transactions, such Disposition shall not be
deemed to have been completed until consummation of the last of such
transactions.
(b) Optional Exchange of DLJ Common Stock for DLJdirect Common Stock. The
Board of Directors may, at any time, declare that each outstanding share of
DLJdirect Common Stock shall be exchanged, as of the exchange date described
below, for a number of fully paid and nonassessable shares of DLJ Common Stock
having an aggregate value (calculated to the nearest five decimal places) equal
to the percentage of the aggregate value of an outstanding share of DLJdirect
Common Stock (the "Applicable Percentage") specified for the applicable date of
exchange below (where in each case value is based on the average Market Value
of a share of DLJ Common Stock 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 the
Corporation mails the notice of exchange to holders of the DLJdirect Common
Stock).
The Applicable Percentage
If the Exchange Date Falls during the Percentage Specified for such
Period Indicated Below Period
- - ------------------------------------- -----------------------------
First Quarter........................ 125%
Second Quarter....................... 124.166667%
Third Quarter........................ 123.333333%
Fourth Quarter....................... 122.5%
Fifth Quarter........................ 121.666667%
Sixth Quarter........................ 120.833333%
Seventh Quarter...................... 120%
II-3
Eighth Quarter....................... 119.166667%
Ninth Quarter........................ 118.333333%
Tenth Quarter........................ 117.5%
Eleventh Quarter..................... 116.666667%
Twelfth Quarter...................... 115.833333%
After Twelfth Quarter................ 115%
For purposes of the foregoing chart, (x) the first "Quarter" is the period
from and including the date of first issuance of shares of DLJdirect Common
Stock to but excluding the third month anniversary of such date (provided that,
if the date of first issuance of shares of DLJdirect Common Stock is the 29th,
30th or 31st day of any month, the first "Quarter" will be the period from and
including such date of first issuance to but excluding the third month
anniversary of the first day of the month immediately following the month in
which such date of first issuance falls) and (y) each subsequent "Quarter" is
the period from and including the day after the end of the prior Quarter to but
excluding the third month anniversary of such day.
However, if a Tax Event has occurred, the Applicable Percentage shall
equal 110% irrespective of whether the exchange occurs within three years. "Tax
Event" means the receipt by the Corporation of an opinion of tax counsel
experienced in such matters, who shall not be an officer or employee of the
Corporation 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 announced proposed change by an administrative agency in
such regulations), or as a result or 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) the Corporation, 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
the Corporation. 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.
(c) Optional Exchange for Stock of a Subsidiary. At any time at which all
of the assets and liabilities of a Group (and no other assets or liabilities of
the Corporation or any subsidiary thereof) are held directly or indirectly by
one or more wholly-owned subsidiaries of the Corporation (the "Group
Subsidiaries"), the Board of Directors may, provided that there are funds of
the Corporation legally available therefor, declare that all of the outstanding
shares of the series of Common Stock relating to such Group shall be exchanged,
as of the exchange date described below, for the number of fully paid and
nonassessable shares of common stock of each of such Group Subsidiaries as is
equal to the product of the Outstanding Interest Fraction with respect to such
Group (determined as of the 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 directly or indirectly through 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 pursuant to the preceding sentence.
(ii) If the series of Common Stock being exchanged pursuant to Section
(A)(3)(c)(i) above is DLJ Common Stock and the Number of Shares Issuable with
Respect to DLJ's Retained Interest in any Group on the exchange date is greater
than zero, the Corporation shall also issue a number of shares of each series
of Common Stock that relates to each such Group on the exchange date equal to
the then current Number of Shares Issuable with Respect to DLJ's Retained
Interest in each such Group and deliver those shares to the holders of DLJ
Common Stock or to one of the Group Subsidiaries, at the option of the
Corporation.
(d) General Dividend, Exchange and Redemption Provisions. If the
Corporation completes a Disposition (other than an Exempt Disposition), the
Corporation shall, not later than the tenth Trading Day after the applicable
Disposition Date, issue a press release specifying (w) the Net Proceeds of such
Disposition, (x) the number of shares of the series
II-4
of Common Stock related to such Group then outstanding, (y) 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 range of conversion, exchange or exercise prices thereof and (z) if the
Group is not DLJ, the Number of Shares Issuable with Respect to DLJ's Retained
Interest in such Group. The Corporation shall, not more than 40 Trading Days
after such consummation, announce by press release which of the actions
specified in Section (A)(3)(a)(i) of this Article FOURTH it has determined to
take, and upon making that announcement, that determination will be
irrevocable. In addition, the Corporation shall, 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, 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 the transfer books of the Corporation,
specifying:
(A) if the Corporation has determined to pay a special dividend, the
record date for such dividend, 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 type of property to be paid
in such dividend and the approximate per share amount thereof;
(B) if the Corporation has determined to undertake a redemption, the
date of redemption (which cannot be more than 85 Trading Days after such
Disposition Date), the Net Proceeds of such Disposition, the type of
property to be paid as a redemption price and the approximate per share
amount thereof, if less than all shares of the relevant series of Common
Stock are to be redeemed, the approximate number of shares to be redeemed
and the place or places where certificates for shares of such series of
Common Stock, properly endorsed or assigned for transfer (unless the
Corporation waives such requirement), should be surrendered in return for
delivery of the cash, securities or other property to be paid by the
Corporation in such redemption; and
(C) if the Corporation has determined to undertake an exchange, the
date of exchange (which cannot be more than 85 Trading Days after such
Disposition Date), 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 the place or places where certificates for shares of
such series of Common Stock, properly endorsed or assigned for transfer
(unless the Corporation waives such requirement), should be surrendered in
return for delivery of the other series of Common Stock to be issued by
the Corporation in such exchange.
(ii) If the Corporation has determined to complete any exchange described
in Section (A)(3)(b) or (c) of this Article FOURTH, the Corporation shall, not
less than 10 Trading Days and not more than 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 the
transfer books of the Corporation, specifying (x) the exchange date and the
other terms of the exchange and (y) the place or places where certificates for
shares of such series of Common Stock, properly endorsed or assigned for
transfer (unless the Corporation waives such requirement), should be
surrendered for delivery of the stock to be issued or delivered by the
Corporation in such exchange.
(iii) Neither the failure to mail any notice required by this Section 3(d)
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 contemplated hereby.
(iv) If the Corporation is redeeming less than all of the outstanding
shares of a series of Common Stock pursuant to Section (A)(3)(a)(i) of this
Article FOURTH, the Corporation shall redeem such shares pro rata or by lot or
by such other method as the Board of Directors determines to be equitable.
(v) No holder of shares of a series of Common Stock being exchanged or
redeemed shall 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 the Corporation shall specify (unless the Corporation waives such
requirement). As soon as practicable after the Corporation's receipt of
certificates for such shares, the Corporation shall deliver to the person for
whose account such shares were so surrendered, or to
II-5
the nominee or nominees of such person, the cash, securities or other property
to which such person shall be 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 is exchanged or
redeemed, the Corporation shall also issue and deliver a new certificate for
the shares of such Common Stock not exchanged or redeemed.
(vi) The Corporation shall 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 shall be held at the
same time by the same holder, the Corporation may aggregate the number of
shares of any capital stock that would be issuable or any other securities that
would be distributable to such holder upon any such exchange, redemption,
dividend or other distribution. If there are fractional shares of any capital
stock or any other fractional securities remaining to be issued or distributed
to any holder, the Corporation shall, if such fractional shares or securities
are 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).
(vii) From and after the date set for any exchange or redemption
contemplated by this Section (A)(3), all rights of a holder of shares of Common
Stock being exchanged or redeemed shall cease except for the right, upon
surrender of the certificates theretofore 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 shall not be
entitled to receive any dividend or other distribution with respect to shares
of the other series of Common Stock until after certificates theretofore
representing the shares being exchanged are surrendered as contemplated above.
Upon such surrender, the Corporation shall 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, the Corporation shall, however, be entitled to treat the certificates
for shares of a series 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.
(viii) The Corporation shall 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 contemplated by this Section (A)(3); provided, however, that the
Corporation shall not 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 the
Corporation the amount of any such tax, or establishes to the satisfaction of
the Corporation that such tax has been paid.
(ix) The Corporation may, subject to applicable law, establish such other
rules, requirements and procedures to facilitate any dividend, redemption or
exchange contemplated by this Section (A)(3) as the Board of Directors may
determine to be appropriate under the circumstances.
4. Voting Rights. At every meeting of stockholders, the holders of DLJ
Common Stock will vote on all matters as to which common stockholders generally
are entitled to vote. Holders of DLJdirect Common Stock will not be entitled to
vote, unless a separate class vote is required by applicable law. On all such
matters for which no separate vote is required, each outstanding share of DLJ
Common Stock entitles the holder to one vote.
5. Liquidation Rights. In the event of any voluntary or involuntary
liquidation, dissolution or winding-up of the Corporation, holders of each
series of Common Stock shall be entitled to receive their proportionate
interests in the net assets of the Corporation, if any, remaining for
distribution to stockholders, after payment of or provision for all
II-6
liabilities, including contingent liabilities of the Corporation and payment of
the liquidation preference payable to any holders of the Corporation's
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 (rounded
to the nearest five decimal places) 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 of the
Corporation or (2) the institution of any proceeding for the involuntary
liquidation, dissolution or winding-up of the Corporation divided by the
average Market Value of one share of DLJ Common Stock during such 20 Trading
Day period. Neither the merger nor consolidation of the Corporation with any
other entity, nor a sale, transfer or lease of all or any part of the assets of
the Corporation, would, alone, be deemed a liquidation, dissolution or
winding-up for purposes of this Section (A)(5).
6. Adjustments to Number of Shares Issuable with Respect to DLJ's
Retained Interest in Any Group. The Number of Shares Issuable with Respect to
DLJ's Retained Interest in any Group, as in effect from time to time, shall,
automatically without action by the Board of Directors or any other person, be:
(a) adjusted in proportion to any changes in the number of
outstanding shares of the series of Common Stock related to such Group
caused by subdivisions (by stock split reclassification or otherwise) or
combinations (by reverse stock split, reclassification or otherwise) of
shares of such series of Common Stock or by dividends or other
distributions of shares of such series of Common Stock on shares of such
series of Common Stock (and, in each such case, rounded, if necessary, to
the nearest whole number);
(b) decreased by if the Corporation issues any shares of the series
of Common Stock related to such Group and the Board of Directors
attributes that issuance (and the proceeds thereof) to DLJ, the number of
shares of such series of Common Stock so issued, and if the Board of
Directors re-allocates to DLJ any cash or other assets theretofore
allocated to such Group in connection with a redemption of shares of the
series of Common Stock that relates to such Group (as required pursuant to
clause (ii) of the proviso to the definition of DLJ below) or in return
for a decrease in the Number of Shares Issuable with Respect to DLJ's
Retained Interest in such Group, the number (rounded, if necessary, to the
nearest whole number) equal to (x) the aggregate Fair Value of such cash
or other assets divided by (y) the Market Value of one share of the series
of Common Stock that relates to such Group, in each case, as of the date
of such re-allocation; and
(c) increased by if the Corporation repurchases any shares of the
series of Common Stock related to such Group and the Board of Directors
attributes that repurchase (and the consideration therefor) to DLJ, the
number of shares of such series of Common Stock so repurchased and if the
Board of Directors re-allocates to such Group any cash or other assets
theretofore allocated to DLJ in return for an increase in the Number of
Shares Issuable with Respect to DLJ's Retained Interest in such Group the
number (rounded, if necessary, to the nearest whole number) equal to (x)
the Fair Value of such cash or other assets divided by (y) the Market
Value of one share of the series of Common Stock that relates to such
Group, in each case, as of the date of such re-allocation.
Neither the Corporation nor the Board of Directors shall take any action
that would, as a result of any of the foregoing adjustments, reduce the Number
of Shares Issuable with Respect to DLJ's Retained Interest in any Group to
below zero. Subject to the preceding sentence, the Board of Directors may
attribute the issuance of any shares of any series of Common Stock (and the
proceeds therefrom) or the repurchase of any series of Common Stock (and the
consideration therefor) to DLJ or to the Group to which such series of Common
Stock relates, as the Board of Directors determines in its sole discretion;
provided, however, that the Board of Directors must attribute to DLJ the
issuance of any shares of any series of Common Stock that are issued (1) as a
dividend or other distribution on, or as consideration for the repurchase of,
shares of DLJ Common Stock or (2) as consideration to acquire any assets or
satisfy any liabilities attributed to DLJ.
II-7
7. Additional Definitions. As used in this Article FOURTH, the following
terms shall have the following meanings (with terms defined in singular having
comparable meaning when used in the plural and vice versa), unless the context
otherwise requires:
"All or Substantially All of the Assets" of any 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.
"Available Dividend Amount" for DLJ, on any day on which dividends are
paid on shares of DLJ Common Stock, is the amount that would, immediately prior
to the payment of such dividends, be legally available for the payment of
dividends on shares of DLJ's Common Stock under Delaware law if (a) DLJ and
each other Group were each a single, separate Delaware corporation, (b) DLJ had
outstanding (i) 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
(ii) a number of shares of preferred stock, par value $0.01 per share, equal to
the number of shares of Preferred Stock that have been attributed to DLJ and
are then outstanding, (c) the assumptions about each Group that is not DLJ set
forth in the next sentence were true and (d) 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.
"Available Dividend Amount" for any Group other than DLJ, on any day on
which dividends are paid on shares of the series of Common Stock relating to
such Group, is the amount that would, immediately prior to the payment of such
dividends, be legally available for the payment of dividends on shares of such
series of Common Stock under Delaware law if such Group were a single, separate
Delaware corporation having outstanding (a) a number of shares of common stock,
par value $0.10 per share, equal to the number of shares of such series of
Common Stock that are then outstanding plus the Number of Shares Issuable with
Respect to DLJ's Retained Interest in such Group and (b) a number of shares of
preferred stock, par value $0.01 per share, equal to the number of shares of
Preferred Stock that have been attributed to such Group and are then
outstanding.
"Disposition" means a sale, transfer, assignment or other disposition
(whether by merger, consolidation, sale or otherwise) of All or Substantially
All of the Assets of a Group to one or more persons or entities, in one
transaction or a series of related transactions.
"Disposition Date" means, with respect to any Disposition, the date of
consummation of such Disposition.
"DLJ" means (a) all of the businesses, assets and liabilities of the
Corporation and its subsidiaries, other than the businesses, assets and
liabilities that are part of any Group other than DLJ, (b) the rights and
obligations of DLJ under any inter-Group debt deemed to be owed to or by DLJ
(as such rights and obligations are defined in accordance with policies
established from time to time by the Board of Directors) and (c) 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 the
Corporation and attributed to any Group other than DLJ) equal to the Retained
Interest Fraction; provided, however, that: (i) the Corporation 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 from time to
time, and (ii) if the Corporation 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 required by Section (A)(3)(a) of this
Article FOURTH, then the Board of Directors shall re-allocate from such Group
to DLJ cash or other assets having a Fair Value equal to the aggregate Fair
Value of the cash, other assets or securities so transferred times the Retained
Interest Fraction with respect to such Group as of the record date for such
dividend or distribution, or on the date of such redemption, as the case may
be.
"DLJdirect" means (a) all of the businesses, assets and liabilities of
DLJdirect Holdings, Inc. and its subsidiaries, (b) the assets and liabilities
of DLJdirect's online United Kingdom discount brokerage service, (c) any assets
or liabilities acquired or incurred by DLJdirect Holdings, Inc. or any of its
subsidiaries after the Effective Date in the
II-8
ordinary course of business and attributable to DLJdirect, (d) any businesses,
assets or liabilities acquired or incurred by the Corporation or any of its
subsidiaries after the Effective Date that the Board of Directors has
specifically allocated to DLJdirect or that the Corporation otherwise allocates
to DLJdirect in accordance with policies established from time to time by the
Board of Directors and (e) the rights and obligations of DLJdirect under any
inter-Group debt deemed to be owed to or by DLJdirect (as such rights and
obligations are defined in accordance with policies established from time to
time by the Board of Directors); provided, however, that: (i) the Corporation
may re-allocate assets from one Group to the other Group in return for other
assets or services rendered by that other Group in the ordinary course of
business or in accordance with policies established by the Board of Directors
from time to time, and (ii) if the Corporation 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 required by Section (A)(3)(a) of this Article FOURTH, then the
Board of Directors shall re-allocate from DLJdirect to DLJ cash or other assets
having a Fair Value equal to the aggregate Fair Value of the cash, other assets
or securities so transferred times the Retained Interest Fraction with respect
to such Group as of the record date for such dividend or distribution, or on
the date of such redemption, as the case may be.
"Effective Date" means the date on which this Amended and Restated
Certificate of Incorporation becomes effective under Delaware law.
"Exempt Disposition" means any of the following:
(a) a Disposition in connection with the liquidation, dissolution or
winding-up of the Corporation and the distribution of assets to
stockholders,
(b) a Disposition to any person or entity controlled by the
Corporation (as determined by the Board of Directors in its sole
discretion),
(c) a Disposition by any Group for which the Corporation receives
consideration primarily consisting of equity securities (including,
without limitation, capital stock of any kind, interests in a general or
limited partnership, interests in a limited liability company or debt
securities convertible into or exchangeable for, or options or warrants to
acquire, any of the foregoing, in each case without regard to the voting
power or other management or governance rights associated therewith) of an
entity which is primarily engaged or proposes to engage primarily in one
or more businesses similar or complementary to businesses conducted by
such Group prior to the Disposition, as determined by the Board of
Directors in its sole discretion,
(d) a dividend, out of any Group's assets, to holders of the related
series of Common Stock (and a re-allocation of a corresponding amount of
such Group's assets to DLJ as required pursuant to clause (ii) of the
proviso to the definition of DLJ above),
(e) a dividend, out of DLJ's assets, to holders of DLJ Common Stock,
(f) a Disposition by any Group other than DLJ or DLJdirect that is
designated to be an "Exempt Disposition" by the Board of Directors in the
resolution or resolutions authorizing the issuance of the shares of the
series of common stock that relates to such Group, and
(g) any other Disposition, if (i) 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, (ii) 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 (iii) before the 30th Trading Day following the
Disposition the Corporation has mailed a notice stating that it is
exercising its right to exchange all of the outstanding shares of the
series of Common Stock relating to the Group that consummated such
Disposition for newly issued shares of DLJ Common Stock as contemplated
under Section 3(b) of this Article FOURTH.
II-9
"Fair Value" means (a) in the case of cash, the amount thereof, (b) in the
case of capital stock that has been Publicly Traded for a period of at least 15
months, the Market Value thereof and (c) in the case of other assets or
securities, the fair market value thereof as the Board of Directors shall
determine in good faith (which determination shall be conclusive and binding on
all stockholders).
"Group" initially means DLJ or DLJdirect; provided that if the Board of
Directors authorizes the issuance of shares of a series of Common Stock other
than DLJ Common Stock or DLJdirect Common Stock, the Board of Directors shall
designate the assets and liabilities of DLJ to which such series of Common
Stock relates, which assets and liabilities shall be an additional "Group" for
all purposes of this Article FOURTH.
"Market Capitalization" of any 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 any Group shall not be considered 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 means the average of the high and low reported sales prices of such
class or series on such Trading Day or, in case no such reported sale takes
place on such Trading Day, the average of the reported closing bid and asked
prices regular way of a share of such class or series on such Trading Day, in
either case as reported on the New York Stock Exchange ("NYSE") Composite Tape
or, if the shares of such class or series are not listed or admitted to trading
on the NYSE on such Trading Day, on the principal national securities exchange
on which the shares of such class or series are listed or admitted to trading
or, if not listed or admitted to trading on any national securities exchange on
such Trading Day, on The Nasdaq National Market System of the Nasdaq Stock
Market ("Nasdaq NMS") or, if the shares of such class or series are not listed
or admitted to trading on any national securities exchange or quoted on the
Nasdaq NMS on such Trading Day, the average of the closing bid and asked prices
of a share of such class or series in the over-the-counter market on such
Trading Day as furnished by any NYSE member firm selected from time to time by
the Corporation or, if such closing bid and asked prices are not made available
by any such NYSE member firm on such Trading Day, the fair market value of a
share of such class or series as the Board of Directors shall determine in good
faith (which determination shall be conclusive and binding on all
stockholders); provided, that, for purposes of determining the average Market
Value of a share of any class or series of capital stock for any period, (a)
the "Market Value" of a share of any class or series of capital stock on any
day prior to any "ex-dividend" date or any similar date occurring during such
period for any dividend or distribution (other than any dividend or
distribution contemplated by clause (b)(ii) of this sentence) paid or to be
paid with respect to such capital stock shall be reduced by the Fair Value of
the per share amount of such dividend or distribution and (b) the "Market
Value" of a share of any class or series of capital stock on any day prior to
(i) the effective date of any subdivision (by stock split or otherwise) or
combination (by reverse stock split or otherwise) of outstanding shares of such
class or series of capital stock occurring during such period or (ii) any
"ex-dividend" date or any similar date occurring during such period for any
dividend or distribution with respect to such capital stock to be made in
shares of such class or series of capital stock shall be appropriately
adjusted, as determined by the Board of Directors, to reflect such subdivision,
combination, dividend or distribution; and provided further, if (a) the
Corporation repurchases outstanding shares of any series Common Stock other
than DLJ Common Stock and the Board of Directors attributes that repurchase
(and the consideration therefor) to the Group to which such series of Common
Stock relates and (b) the Board of Directors determines to re-allocate to DLJ
cash or other assets theretofore allocated to the Group to which such series of
Common Stock relates in order to avoid a change in the Retained Interest
Fraction, the "Market Value" of a share any series Common Stock other than DLJ
Common Stock used to compute the corresponding reduction in the Number of
Shares Issuable with Respect to DLJ's Retained Interest in the Group to which
such series of Common Stock relates will equal the Fair Value of the
consideration paid per share of Common Stock so repurchased; and provided
further, if the Corporation redeems a portion of the outstanding shares of any
of series of Common Stock other than DLJ Common Stock (and the Board of
Directors re-allocates to DLJ cash or other assets theretofore allocated to the
Group to which such series of Common Stock relates in the manner required by
clause (ii) of the proviso to the definition of DLJ above), the "Market Value"
of a share of such series of Common Stock used to compute the corresponding
reduction in the Number of Shares Issuable with Respect to DLJ's Retained
Interest in
II-10
the Group to which such series of Common Stock relates will equal the Fair
Value of the consideration paid per share of such series of Common Stock so
redeemed.
"Net Proceeds" of a Disposition of any of the 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 (as determined in good faith by
the Board of Directors, which determination will be conclusive and binding on
all stockholders) for, (a) any taxes payable by the Corporation 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, (b) any taxes payable by the
Corporation in respect of any resulting dividend or redemption, (c) any
transaction costs, including, without limitation, any legal, investment banking
and accounting fees and expenses and (d) any liabilities (contingent or
otherwise) of, attributed to or related to, such Group, including, without
limitation, any liabilities for deferred taxes or 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.
"Number of Shares Issuable with Respect to DLJ's Retained Interest" means,
with respect to any Group, initially the number the Board of Directors
designates prior to the time the Corporation first issues shares of the series
of Common Stock applicable to such Group as the number of shares of such series
of Common Stock that could be issued by the Corporation for the account of DLJ
in respect of its retained interest in such Group, as authorized by Section
(A)(1); provided, however, that such number as in effect from time to time
shall automatically be adjusted as required by Section 6 of this Article IV(A).
"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 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 (a) registered under
Section 12 of the Securities Exchange Act of 1934, as amended (or any successor
provision of law), and (b) listed for trading on the NYSE (or any other
national securities exchange registered under Section 7 of the Securities
Exchange Act of 1934, as amended (or any successor provision of law)) or listed
on the Nasdaq NMS (or any successor market system).
"Retained Interest Fraction" means (i) with respect to DLJ, at any time of
determination, 1 and (ii) with respect to any Group that is not DLJ, 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 applicable to such Group outstanding on such date and the Number
of Shares Issuable with Respect to DLJ's Retained Interest in such Group.
"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 NMS or, if such security is not listed or admitted to
trading on a national securities exchange or quoted on the Nasdaq NMS, traded
in the principal over-the-counter market in which it trades.
8. Effectiveness of Sections (A)(2) Through (7) of This Article FOURTH.
The terms of Sections (A)(2) through (7), inclusive, of this Article FOURTH
shall apply only when there are shares of multiple series of Common Stock
outstanding.
Section B. Provisions Relating to Preferred Stock
The Board of Directors (or such committee of the Board of Directors as the
Board of Directors shall empower) is hereby empowered to authorize by
resolution or resolutions from time to time the issuance of one or more classes
II-11
or series of Preferred Stock and to fix the designations, powers, preferences
and relative, participating, optional or other rights, if any, and the
qualifications, limitations or restrictions thereof, if any, with respect to
each such class or series of Preferred Stock and the number of shares
constituting each such class or series, and to increase or decrease the number
of shares of any such class or series to the extent permitted by the General
Corporation Law of the State of Delaware, as amended from time to time."
3. This amendment of the amended and restated certification of
incorporation herein certified has been fully adopted in accordance with the
provisions of Sections 227 and 242 of the General Corporation Law of the State
of Delaware.
Signed and Attested to on __________, 1999.
By:
----------------------------------
Name:
Title:
Attest:
- - ------------------------
Name:
Title:
II-12
Annex III
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 Annex III. 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 Annex III. 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 Information Statement.
Year Ended December 31,
------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(in thousands, except per share data)
Statements of Operations Data:
Revenues:
Commissions.......................................... $28,491 $40,358 $54,166 $50,948 $78,717
Fees................................................. 3,797 5,067 6,426 12,109 25,484
Interest............................................. 1,858 1,846 2,569 4,160 13,723
------ ------ ------ ------ -------
Total revenues..................................... 34,146 47,271 63,161 67,217 117,924
------ ------ ------ ------ -------
Costs and Expenses:
Compensation and benefits............................ 5,422 7,362 11,202 17,174 28,260
Brokerage, clearing, exchange and other fees......... 9,567 11,709 15,422 20,909 28,423
Advertising.......................................... 1,971 4,183 9,093 13,137 25,146
Occupancy and equipment.............................. 1,175 1,437 1,923 3,352 5,045
Communications....................................... 791 1,025 1,468 2,844 5,564
Technology costs..................................... 4,400 5,431 5,205 5,082 4,084
Other operating expenses............................. 3,164 4,507 5,567 10,844 18,934
------ ------ ------ ------ -------
Total costs and expenses........................... 26,490 35,654 49,880 73,342 115,456
------ ------ ------ ------ -------
Income (loss) before income tax provision (benefit)... 7,656 11,617 13,281 (6,125) 2,468
Income tax provision (benefit)........................ 3,128 4,746 5,425 (2,502) 1,008
------ ------ ------ ------ -------
Net income (loss)..................................... $4,528 $6,871 $7,856 $(3,623) $1,460
====== ====== ====== ======= ======
Pro forma weighted average shares of DLJdirect
Common Stock outstanding (1):
Basic and diluted....................................
Pro forma earnings per share of DLJdirect Common ======
Stock (1):
Basic and diluted.................................... $
======
III-1
As of December 31,
-------------------
1997 1998
---- ----
(in thousands)
Statements of Financial Condition Data:
Cash and cash equivalents ............. $ 8,881 $26,654
Total assets .......................... $11,871 $29,751
Long-term liabilities ................. -- --
Total equity .......................... $ 5,964 $21,924
As of or for the Year Ended December 31,
--------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(dollars in thousands)
Other Data:
Total trades.................... 475,000 660,000 929,000 1,535,000 2,875,000
Average trades per day.......... 1,900 2,600 3,700 6,100 11,400
Total customer assets........... $1,300,000 $1,900,000 $2,500,000 $4,600,000 $8,900,000
Total accounts.................. 153,000 207,000 280,000 390,000 529,000
Total employees................. 95 139 174 283 374
Total technology employees...... 12 14 34 82 119
- - ----------
(1) Pro forma basic and diluted earnings per common share amounts have been
calculated by dividing net income applicable to common shares by the pro
forma weighted average common shares outstanding.
III-2
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 Information
Statement. 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 Information Statement.
Overview
The online discount brokerage industry is experiencing substantial
competition from established financial services firms as well as new entrants
who are trying to establish their presence in the market quickly. As a result of
intense competitive pressures, the industry has experienced a significant
increase in brand development costs, a lowering of commission pricing and an
increase in content development costs. DLJdirect expects to spend significant
amounts in the future to develop much greater brand recognition within its
targeted market, to stay competitively priced and to develop new
state-of-the-art products and services. As a result, DLJdirect believes that its
future financial results may be adversely affected. In particular, DLJdirect
expects to increase its level of advertising significantly. It is expected that
advertising costs will increase during each quarter of 1999, with the largest
increases expected to occur in the second half of the year. While the
longer-term goal of advertising will be to increase brand awareness and
revenues, it is likely that advertising costs as a percentage of revenues will
increase throughout 1999.
The largest portion of DLJdirect's revenues consist of brokerage
commissions for acting as agent in securities transactions, including Nasdaq and
exchange-listed equities, options and mutual fund transactions. In June 1997, in
order to increase significantly its customer base as well as overall account
activity, DLJdirect made a strategic decision to lower its base commission for
equity trades from $39.95 to $20.00 per trade. As a result, commission revenues
fell slightly in 1997 compared to 1996, but the average number of trades per day
increased 64.9% from 3,700 in 1996 to 6,100 in 1997. In 1998 compared to 1997,
commission revenues increased 54.6% to $78.7 million and the average number of
trades per day increased 86.9% to 11,400. DLJdirect regularly reviews its
commission rates as part of its ongoing strategy to maintain its competitive
position. DLJdirect believes that the recent increase in trading activity is
also due to the extensive growth in Internet commerce, DLJdirect's advertising
initiatives and increased activity in the securities markets.
DLJdirect also earns fee income, which increased from $6.4 million in 1996
to $25.5 million in 1998. Fee income includes technology fees, order flow fees
and money market fund distribution fees, all of which are earned from
affiliates. Although the technology group at DLJdirect primarily serves the
growing needs of DLJdirect's business, DLJdirect also offers technology products
and services to third parties through DLJ as a means of reducing internal
development costs. Revenues from technology development are derived from sales
of Internet-based technology applications primarily to DLJ. DLJdirect also earns
fees for order flow through arrangements with Pershing to receive cash payments
in exchange for routing all of its orders to Pershing for execution. Order flow
payments on a per trade basis have declined in recent periods due to regulatory
changes imposing new order handling rules and there can be no assurance that
order flow revenues will continue. See "Risk Factors--A Change in Order Flow
Rebates Could Harm DLJdirect's Business".
DLJdirect also earns interest income, which increased from $2.6 million in
1996 to $13.7 million in 1998. Interest income consists of interest on margin
debt, free credit and short sale balances and earnings on its own cash balances.
DLJdirect participates in the interest spread on its customers' debit and credit
balances through its clearing agreement with Pershing. DLJdirect's interest
revenues increased significantly in 1998 due to significant growth in client
assets as well as more favorable interest sharing arrangements with Pershing.
III-3
Prior to 1999, DLJdirect received a nominal fee for the distribution of IPO
products, but it now receives customary selling concessions. As a result,
DLJdirect expects revenues associated with its distribution activities to
increase significantly in 1999.
Brokerage, clearing, exchange and other fees represented 24.1% of
DLJdirect's total revenue in 1998. Clearing costs per trade were reduced under
the terms of an amendment to the clearing agreement between DLJdirect and DLJ
effective January 1, 1999. The amended agreement also provides that such costs
will include an amount that represents payment to DLJ Long Term Investment
Corporation for the use of certain trademarks in the United States and certain
other jurisdictions. As a result of the amendment to the clearing agreement as
well as expected increases in trading activity, DLJdirect expects that clearing
costs will continue to decline as a percentage of revenue in 1999.
Technology costs consist primarily of network access fees paid to online
service providers and fees related to systems maintenance and support. Although
the expenses included under "technology costs" are decreasing, the technology
services originally included in this expense category are increasingly provided
internally rather than by third-party service providers. Technology costs do not
include compensation of employees related to technology development. The number
of technology employees increased from 34 at December 31, 1996 to 119 at
December 31, 1998.
In January 1999, DLJdirect began operations in a 24,000 square foot
investor services facility in Charlotte, North Carolina. DLJdirect also intends
in the second quarter of this year to lease a larger headquarters facility in
Jersey City, New Jersey. As a result, DLJdirect expects to incur an annual
increase in occupancy costs of over $2.0 million, a portion of which will be
realized in 1999. The two moves are designed to accommodate planned increases in
business activity. In addition, DLJdirect is currently implementing fully
redundant technology centers in order to increase both system reliability and
capacity. The centers are expected to be operational in the third quarter of
1999. As a result, DLJdirect expects to incur an additional annual increase in
equipment costs of over $3.0 million, a portion of which also will be realized
in 1999.
Results of Operations
The following table sets forth the percentage of total revenues represented by
certain items on DLJdirect's combined statement of operations for the periods
indicated:
Year Ended December 31,
-----------------------
1996 1997 1998
---- ---- ----
Revenues:
Commissions ....................................... 85.7% 75.8% 66.8%
Fees .............................................. 10.2 18.0 21.6
Interest .......................................... 4.1 6.2 11.6
----- ----- -----
Total revenues .................................. 100.0 100.0 100.0
----- ----- -----
Costs and Expenses:
Compensation and benefits ......................... 17.8% 25.6% 24.0%
Brokerage, clearing, exchange and other fees ...... 24.5 31.1 24.1
Advertising ....................................... 14.4 19.5 21.3
Occupancy and equipment ........................... 3.0 5.0 4.3
Communications .................................... 2.3 4.2 4.7
Technology costs .................................. 8.2 7.6 3.4
Other operating expenses .......................... 8.8 16.1 16.1
----- ----- -----
Total costs and expenses ........................ 79.0 109.1 97.9
----- ----- -----
III-4
Year Ended December 31,
-----------------------
1996 1997 1998
---- ---- ----
Income (loss) before income tax provision (benefit) 21.0 (9.1) 2.1
Income tax provision (benefit) ..................... 8.6 (3.7) 0.9
----- ----- -----
Net income (loss) .................................. 12.4% (5.4)% 1.2%
===== ===== =====
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
DLJdirect experienced strong operating results in 1998 compared to 1997,
reflecting primarily an increase in total accounts of 35.6%. For 1998, total
revenues of $117.9 increased $50.7 million or 75.4%. Net income of $1.5 million
increased $5.1 million from a net loss of $3.6 million, primarily resulting from
strong revenue growth.
Commissions increased $27.8 million or 54.6% to $78.7 million. Commissions
represented 66.8% of total revenues in 1998 and 75.8% of total revenues in 1997.
The increase in commissions was due primarily to significant increases in
customer trading volume attributable in part to a full year of activity at the
reduced $20 commission rate. Average trades per day increased 86.9% from 6,100
in 1997 to 11,400 in 1998.
Fees increased $13.4 million or 110.7% to $25.5 million. Fees represented
21.6% of total revenues in 1998 and 18.0% of total revenues in 1997. Payments
for order flow increased $3.4 million or 61.8% to $8.9 million. The increase in
payments for order flow was due primarily to significant increases in customer
trading volume. Increases in payments for order flow were offset in part by a
decline in the amount of revenue per trade that DLJdirect receives for order
flow. Fees for technology development increased $8.6 million or 179.2% to $13.4
million. The increase in fees for technology development reflects 1998 being the
first full year that such fees were collected. Revenue from money market fund
distribution fees increased $1.6 million or 100.0% to $3.2 million. This growth
was due to an increase in customer money market fund balances of $345.8 million
or 84.7% to $754.3 million.
Interest increased $9.6 million or 234.1% to $13.7 million. Interest
represented 11.6% of total revenues in 1998 and 6.2% of total revenues in 1997.
The increase was due primarily to more favorable interest sharing arrangements
with Pershing and to increases in margin debits, free credits and short sale
balances. Margin debits increased $143.1 million or 43.8% to $469.8 million.
Free credits increased $201.5 million or 103.2% to $396.8 million and short sale
balances increased $19.4 million or 107.2% to $37.5 million.
Compensation and benefits increased $11.1 million or 64.5% to $28.3
million. The increase in compensation and benefits was due primarily to growth
in the number of employees from 283 to 374. These additional employees were
added in DLJdirect's investor services area to accommodate increased customer
activity, as well as in DLJdirect's technology group to develop new products
such as MarketSpeed[Trademark].
Brokerage, clearing, exchange and other fees increased $7.5 million or
35.9% to $28.4 million. The increase in brokerage, clearing, exchange and other
fees was primarily due to significant increases in customer trading volume,
offset in part by lower clearing fees per trade resulting from reduced clearing
rates.
Advertising increased $12.0 million or 91.6% to $25.1 million. The increase
in advertising was due to increased expenditures on advertising placement and
creative development. DLJdirect increased its advertising expenditures to
continue developing the DLJdirect brand name, which was launched in September
1997, and to continue acquiring new accounts. Advertising expenditures were
targeted at investors through a broad range of media including television,
radio, and print as well as significant online service providers and popular Web
sites such as America Online, the Microsoft Network and Yahoo!.
Occupancy and equipment costs increased $1.7 million or 51.5% to $5.0
million. Occupancy and equipment expense includes rent and operating expenses
for facilities, expenditures for repairs and maintenance, and the expense for
furniture, fixtures, leasehold improvements as well as business and computer
equipment. The increase in equipment
III-5
costs was due primarily to additional investment in technology systems
infrastructure and equipment expenditures for the increased staff.
Communications costs increased $2.7 million or 93.1% to $5.6 million.
Communications expense includes quotation expenses, expenses related to customer
toll-free phone calls and Internet connections. Quotation expenses and expenses
related to customer toll-free phone calls both increased due to the volume of
transactions.
Technology costs decreased $1.0 million or 19.6% to $4.1 million.
Technology costs are comprised primarily of network access fees paid to online
service providers and fees related to systems infrastructure. Network access
fees paid to online service providers were reduced by $2.2 million or 59.5% to
$1.5 million in 1998 due to renegotiated rates and due to their partial
reclassification to advertising expenses resulting from the modified structure
of an agreement. Fees related to systems maintenance and support grew $1.3
million or 100.0% to $2.6 million in 1998 due to increased system capacity.
Other operating expenses increased $8.1 million or 75.0% to $18.9 million
and are comprised primarily of a license fee, professional fees, printing and
stationery, economic and investment research, allocated corporate overhead, and
miscellaneous expenses. The license fee expense increased $4.0 million or 333.3%
to $5.2 million. The license fee is paid to DLJ Long Term Investment Corporation
for licensing trademarks and similar intellectual property. License fee payments
were initiated in September 1997. In the future, amounts paid by DLJdirect to
Pershing will include the license fee for the use of certain of DLJ Long Term
Investment Corporation's trademarks that are licensed to DLJdirect in the United
States and in certain other jurisdictions.
Professional fees primarily include payments made to technology and
marketing consultants, and employee recruiting expenses. Professional fees
increased $883,000 or 25.8% to $4.3 million due to increased advertising and
headcount. Printing and stationery decreased $158,000 or 7.7% to $1.9 million.
In 1997 printing and stationery expenses were increased in conjunction with the
renaming of the service from PC Financial Network to DLJdirect, which
necessitated the redesign and reprinting of all marketing materials and customer
correspondence stock. Economic and investment research increased $1.0 million or
333.3% to $1.3 million reflecting the fact that DLJdirect first began paying for
this research in the fourth quarter of 1997. Allocated corporate overhead
increased $841,000 or 45.2% to $2.7 million due primarily to expenses related to
the increased headcount. Miscellaneous expenses increased $1.4 million or 70.0%
to $3.4 million. Miscellaneous expenses consisted primarily of accruals for bad
debt expense, employee registration fees and expenses for new account credit
checks.
Income before income tax provision increased $8.6 million from a loss of
$6.1 million in 1997 to income of $2.5 million in 1998. The provision (benefit)
for income taxes for 1997 and 1998 was $(2.5) million and $1.0 million,
respectively, which represented a 40.9% effective tax rate for each period.
As a result of the foregoing factors, net income increased to $1.5 million
in 1998 from a net loss of $3.6 million in 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Total revenues increased $4.1 million or 6.5% to $67.2 million, reflecting
primarily an increase in total accounts of 39.3%. Total revenues increased
primarily as a result of fees and net interest income, partially offset by
decreases in commissions due to a change in DLJdirect's base commission rate.
Commissions decreased $3.3 million or 6.1% to $50.9 million. In June 1997,
DLJdirect lowered its base commission for equity trades from $39.95 to $20.00.
Although this significantly lowered the average commission charged to customers,
the increased new account generation and increased trading volume brought
commission revenues back to 1996 levels by fourth quarter 1997.
III-6
Fees increased $5.7 million or 89.1% to $12.1 million. Payments for order
flow increased $124,000 or 2.3% to $5.5 million. Although trading volume
increased significantly during 1997 from 929,000 trades in 1996 to 1,535,000 in
1997, the order flow payment on a per trade basis decreased due to regulatory
changes imposing new order handling rules. Revenue from money market fund
distribution fees increased $609,000 or 61.5% to $1.6 million. This increase was
due to an increase in customer money market fund balances from $115.5 million or
39.4% to $408.5 million. Fees for technology development, collected for the
first time in mid-1997, generated $4.8 million during the year.
Interest increased $1.6 million or 61.5% to $4.2 million. The increase was
due primarily to more favorable interest sharing arrangements with Pershing and
to increases in margin debits, free credits and short sale balances. Margin
debits increased $187.0 million or 133.9% to $326.7 million, free credits
increased $64.8 million or 49.7% to $195.3 million and short sale balances
increased $2.2 million or 13.8% to $18.1 million.
Compensation and benefits increased $6.0 million or 53.6% to $17.2 million.
The increase in compensation and benefits was due primarily to growth in the
number of employees from 174 to 283, a 62.6% increase.
Brokerage, clearing, exchange and other fees increased $5.5 million or
35.7% to $20.9 million. The increase in brokerage, clearing, exchange and other
fees was primarily due to significant increases in customer trading volume. On a
per trade basis, however, brokerage, clearing, exchange and other fees decreased
due to a reduction in the fee for clearing trades.
Advertising increased $4.0 million or 44.0% to $13.1 million. The increase
in advertising was due to increased expenditures on advertising placement and
creative development. DLJdirect spent $6.8 million in the fourth quarter of 1997
to launch the new brand name, "DLJdirect," and new products and services
including its redesigned Web site and access to DLJ Research and DLJ-managed
IPOs.
Occupancy and equipment increased $1.4 million or 70.0% to $3.4 million.
The increase in occupancy and equipment was due primarily to additional
equipment expenditures for increased staff from 174 to 283, a 62.6% increase.
Communications increased $1.3 million or 86.7% to $2.8 million. Quotation
expenses and expenses related to customer toll-free phone calls both increased
due to the growth of the business.
Technology costs decreased $123,000 or 2.5% to $5.1 million. Network access
fees paid to online service providers were $3.7 million in 1997 compared to $4.4
million in 1996. Fees related to systems maintenance and support grew to $1.4
million in 1997 from $800,000 in 1996 due to increased system capacity.
Other operating expenses increased $5.2 million or 92.9% to $10.8 million
and represented 16.1% of total revenues in 1997 and 8.8% of total revenues in
1996. The license fee expense, first paid in September 1997, was $1.2 million.
Professional fees increased $1.8 million or 112.5% to $3.4 million due to
increased expenditures for outside consultants and marketing services. Printing
and stationery increased $1.5 million or 250.0% to $2.1 million. In 1997
printing and stationery expenses were increased in conjunction with the renaming
of the service from PC Financial Network to DLJdirect which necessitated the
redesign and reprinting of all marketing materials and customer correspondence
stock. Economic and investment research expenses, first incurred in the fourth
quarter of 1997, were $307,000. Allocated corporate overhead increased $730,000
or 62.4% to $1.9 million due primarily to expenses related to the increased
headcount. Miscellaneous expenses decreased $254,000 or 11.3% to $2.0 million.
Income before income tax provision decreased $19.4 million from $13.3
million in 1996 to a loss of $6.1 million in 1997. The (benefit) provision for
income taxes for 1996 and 1997 was $5.4 and $(2.5) million, respectively. This
represented a 40.9% effective tax rate for each period.
III-7
As a result of the foregoing factors, net income decreased to a net loss of
$3.6 million in 1997 from income of $7.9 million in 1996.
Liquidity and Capital Resources
The principal sources of liquidity for DLJdirect's operations have been
paid-in capital, leases of fixed assets through an affiliate and revenues from
operations. Capital contributions amounted to $10.5 million in 1997 and $14.5
million in 1998. The value of equipment acquired through leases of fixed assets
through an affiliate totaled $5.3 million in 1997 and $5.0 million in 1998.
These fixed assets were comprised primarily of computers and related systems,
furniture and leasehold improvements. DLJdirect generally leases its fixed
assets and therefore does not incur significant capital expenditures.
Although DLJdirect maintains substantial money market accounts and bank
accounts consistent with regulatory requirements, DLJdirect continues to be
substantially dependent on DLJ for almost all of its daily financial,
administrative and operational services and related support functions including
cash management, the receipt of payments from third parties and the distribution
of payments to third parties. In this connection, inter-company
receivables/payables are settled periodically through cash transfers to and from
DLJdirect's accounts. However, after the issuance of the DLJdirect Common Stock,
cash transfers from DLJ to DLJdirect will be revolving credit advances unless
the board of directors decides, in its sole discretion, to account for such
transfers as long-term loans or capital contributions. Donaldson, Lufkin &
Jenrette, Inc. is not obligated to advance any amounts to DLJdirect. See
"Certain Cash Management and Allocation Policies".
Applicable law and regulations require minimum levels of capital to be
maintained by DLJdirect Inc., the broker-dealer subsidiary of DLJdirect Holdings
Inc. Consequently, the cash balances of DLJdirect Inc. may not be available as a
source of liquidity to support other aspects of the business of DLJdirect. The
SEC's Net Capital Rules are the primary regulatory restrictions. DLJdirect
continually reviews the capital in its broker-dealer subsidiary to ensure that
it meets these regulatory requirements and can appropriately support the
anticipated capital needs of the business. DLJdirect's right to participate in
the assets of any subsidiary is also subject to prior claims of the subsidiary's
customers and other creditors.
Cash provided by (used in) operating activities totaled $(0.6) million and
$2.0 million in 1997 and 1998, respectively. The increase from 1997 to 1998 was
primarily due to an increase in transaction volume related to growth in the
discount brokerage operations. In 1997, receivables from brokers, dealers and
others increased $1.9 million. This increase in assets was offset by increases
in operating liabilities including payables to parent/affiliates, net of $2.0
million and accounts payable and accrued expenses of $2.6 million. In 1998,
there were increased assets including receivables from brokers, dealers and
others of $1.2 million. These increases were offset by an increase in payables
to parent/affiliates, net of $2.2 million.
In 1997 and 1998, net cash provided by financing activities totaled $9.6
million and $14.5 million, respectively. In 1997 and 1998, respectively, $10.5
million and $14.5 million was provided by capital contributions from DLJ. In
1997, DLJdirect paid $0.9 million to DLJ for the return of equity.
DLJdirect believes that the net proceeds from this offering, together with
its current cash, cash equivalents and cash generated from operations will be
sufficient to meet its anticipated cash needs for working capital and capital
expenditures through at least the end of 2000.
Year 2000
DLJdirect has been actively engaged in addressing Year 2000 issues. Such
issues relate to potential problems resulting from non-Year 2000 compliant
systems processing transactions using two-digit date fields rather than four
digit date fields for the year of a transaction. If these systems are not
identified and reconfigured, Year 2000
III-8
transactions would be processed as year "00," which could lead to processing
inaccuracies and potential inoperability and could have a material adverse
effect on DLJdirect's business.
DLJdirect has undertaken a Year 2000 Project to identify and modify or
replace any non-Year 2000-compliant systems. The Year 2000 Project is focused on
both information technology and non-information technology systems. A written
Year 2000 Plan has been developed and DLJdirect believes it is taking all steps
necessary to achieve Year 2000 compliance. DLJdirect has also retained the
services of consulting firms having considerable expertise in advising
corporations on and remediating Year 2000 issues.
DLJdirect inventoried all systems for which loss of function would result
in an immediate stoppage or significant impairment to core business areas and
determined which of these systems were not Year 2000 compliant. DLJdirect has
remediated, tested and returned all of its formerly non-Year 2000 compliant
applications to operation.
DLJdirect has identified all significant third parties, such as vendors,
online partners and facility operators, and has contacted them regarding their
Year 2000 readiness. The Pershing Division of DLJ, DLJdirect's clearing agent,
has assured DLJdirect that it is taking the necessary steps to prepare for the
Year 2000.
DLJdirect has initiated and is actively involved in various types of
testing including the Securities Industry Association's industry-wide beta
testing and vendor-supplied business applications and equipment testing. For
each of the tests in which it has participated, DLJdirect has achieved
successful results. Throughout 1999, internal and external systems will continue
to be tested to ensure that all remediated systems remain compliant.
Cost
The total cost to ensure that DLJdirect's systems are Year 2000 compliant
is not expected to be material to DLJdirect's financial position because
DLJdirect outsources its clearing and trade execution services and most of
DLJdirect systems have been developed in the last two years. Based upon current
information, the total cost of the Year 2000 project is currently estimated to
be less than $0.5 million. Based on progress to date, the current funding level
has been found to be adequate. The budget includes Year 2000 compliance testing,
full system testing, peer-to-peer testing with industry agencies, and third
party vendors and other industry-wide testing. The budget also includes
developing a contingency plan. Costs related to the Year 2000 project are
expensed as incurred. The cost of the Year 2000 project is being funded by
operations.
Risks
The Year 2000 issue includes many risks including the possibility that
DLJdirect's computer and non-information technology systems will fail. DLJdirect
cannot ensure that the schedule for compliance outlined above will be met or
that the systems of other companies on which DLJdirect depends will be converted
in a timely manner. Due to this uncertainty, DLJdirect is unable to determine
whether the Year 2000 will have a material impact on DLJdirect's business,
results of operations or financial condition. If the Year 2000 risks are not
remedied, DLJdirect may experience business interruption or shutdown, financial
loss, regulatory actions and legal liability. However, the Year 2000 Project is
expected to reduce significantly DLJdirect's level of uncertainty regarding the
Year 2000 readiness of internal and third-party systems. DLJdirect believes that
with the completion of the Year 2000 project as scheduled, the possibility of
significant interruptions of normal operations as a result of the Year 2000
issue, should be reduced.
Contingencies
DLJdirect's contingency plan is designed to safeguard the interests of
DLJdirect and its customers. The plan addresses internal and external mission
critical failure points and is intended to address failures in facilities,
telecommunications, client connections, and major infrastructure components.
DLJdirect intends to have its contingency plan fully operational in the summer
of 1999, and to update the plan as needed on a continuing basis.
III-9
In the event that DLJdirect's internally developed systems fail, DLJdirect
will undertake to correct these systems on an emergency basis. To ensure that
adequate staff will be available on-site to handle an emergency at the time of
such failure, DLJdirect has notified all employees that they must be available
for on-site assistance for the last two weeks of December 1999 and the first two
weeks of January 2000.
Recent Accounting Developments
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
requires all derivatives to be recognized in the statement of financial
condition at fair value. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999 and should be applied prospectively. The adoption of the
statement is not expected to have a material adverse effect on DLJdirect's
combined financial statements.
III-10
BUSINESS OF DLJdirect
Overview
DLJdirect is a leading provider of online discount brokerage and related
investment services, offering customers automated securities order placement and
information and research capabilities through the Internet and online service
providers. DLJdirect's broad range of investment services is targeted at
self-directed, sophisticated online investors, who on average have higher
account balances than other online investors.
DLJdirect was one of the pioneers of online investing. DLJdirect started in
the online brokerage business in September 1988 under the name PC Financial
Network. In September 1997, PC Financial Network changed its name to DLJdirect
and relaunched its Internet site as DLJdirect (www.DLJdirect.com). In its
10-year history, DLJdirect has frequently been recognized as a high-quality
provider of online brokerage services. Recent industry awards include the
following:
o Barron's 1999 Annual Survey of Online Brokers -- DLJdirect is
rated the number one online broker, based on criteria including
trade execution, reliability and range of services
o Gomez Advisors, Inc. -- DLJdirect was rated the number one
overall Internet broker for five of the last seven quarters,
including the most recent quarter
o TheStreet.com -- DLJdirect was selected the number one online
broker for reliability and ease of use in TheStreet.com's
November 1998 reader survey
DLJdirect's investment services and products include:
o online order entry for stocks, options, mutual funds and U.S.
Treasury securities
o access to selected DLJ-managed initial public offerings and
other equity offerings
o company and industry research from DLJ
o DLJdirect MarketSpeed[Trademark], its proprietary software with
enhanced graphics and greater ease of use permitting
DLJdirect's customers to access DLJdirect's online services an
average of five times faster than other major Internet brokers
o stock and mutual fund evaluation tools, including its
proprietary StockScan[Trademark] for screening over 9,500
public companies and its proprietary FundScan[Trademark] for
analyzing over 7,000 mutual funds
o research and analysis from independent research organizations,
including Standard & Poor's, Zacks Investment Research
Incorporated and Thomson Investors Network
o daily market commentary from TheStreet.com and Briefing.com
DLJdirect has experienced rapid growth in recent years:
o revenues increased 75.4% from $67.2 million in 1997 to $117.9
million in 1998 and were $35.4 million during the fourth
quarter of 1998
o the average number of trades executed each day increased 86.9%
from 6,100 in 1997 to 11,400 in 1998 and was 14,200 during the
fourth quarter of 1998
III-11
o customer assets increased 93.5% from $4.6 billion in 1997 to
$8.9 billion in 1998
The key elements of DLJdirect's strategy are as follows:
Increase Penetration of DLJdirect's Targeted Customer Base -- DLJdirect
focuses on self-directed, sophisticated online investors, who on average
maintain higher account balances than other online investors. DLJdirect
believes it can continue to attract targeted customers by:
o building on the reputation of DLJ as a leading Wall Street firm,
o providing a wider range of DLJ financial products and services and
o maintaining high-quality investor service.
Build and Enhance DLJdirect Brand -- DLJdirect intends to increase the
awareness of the DLJdirect brand. As part of this strategy, DLJdirect plans
to increase significantly the amount it spends on marketing, from $25
million in 1998 to $65 million in 1999.
Maintain Leading Technology -- DLJdirect intends to upgrade its technology
continually to increase capacity, provide greater functionality and ease of
use and offer additional services.
Continue To Broaden Product Offerings -- While DLJdirect's primary products
and services will continue to be equity securities and mutual funds,
DLJdirect intends to broaden its offerings continually with additional
products and services offered by DLJ and its affiliated companies,
including AXA S.A., The Equitable Companies Incorporated, Alliance Capital
Management, L.P., DLJ Asset Management Group and The Sprout Group, as well
as unaffiliated financial services providers. DLJdirect also intends to
expand its relationships with online service and content providers to offer
additional products, including insurance, credit and mortgage products.
Expand Role as an Internet-Based Distributor of Underwritten Securities --
DLJdirect intends to increase its access to public offerings and use its
distribution capability by becoming an underwriter and manager of
securities offerings, including offerings that may not include DLJ.
Expand Globally -- DLJdirect intends to enter international markets
selectively, either directly or through alliances or joint ventures with
local partners. DLJdirect recently announced a joint venture in Japan with
Sumitomo Bank and expects to commence operations in the UK during the
second quarter of 1999. DLJdirect's focus will be on large developed
markets that permit it to continue to capitalize on its relationship with
DLJ, AXA and Equitable.
As used in this Information Statement, the term "DLJdirect" does not
represent a separately incorporated entity but rather means those businesses,
assets and liabilities intended to represent Donaldson, Lufkin & Jenrette,
Inc.'s online discount brokerage and related investment services businesses.
Industry Overview
According to International Data Corporation ("I.D.C."), the total number of
online brokerage accounts has grown from a small number at the end of 1994 to
1.6 million at the end of 1996 and 3.7 million at the end of 1997. I.D.C.
estimates that there were more than 6.4 million online accounts at the end of
1998, representing $324.0 billion in assets and over 300,000 trades per day.
DLJdirect believes that the online brokerage industry is experiencing rapid
growth largely as a result of:
III-12
o the growing consumer acceptance of the Internet as a convenient, secure
and reliable method of conducting retail financial transactions;
o an increasing desire on the part of investors to take greater personal
control of their financial future;
o the lowering of commission prices for online brokerage transactions;
o an increasing amount of high-quality investment research and information
available on the Internet to assist investors in making their trading
decisions;
o the extensive media attention focused on the online brokerage industry;
o increasing interest by retail investors in purchasing individual stocks;
and
o a favorable investing environment.
Services and Products
DLJdirect's existing services and product offerings are described below:
Stock, Options, Mutual Fund and Fixed Income Trading
Customers can directly place orders to buy and sell Nasdaq and
exchange-listed securities, as well as equity and index options, mutual funds
and fixed income securities, through DLJdirect's automated order processing
system. System intelligence automatically checks the parameters of an order,
together with the customer's available cash balance and positions held, prior to
executing an order. All transaction and portfolio records are updated to reflect
trading activity. Buy and sell orders placed when the markets are closed are
automatically submitted prior to the next day's market opening.
To date, DLJdirect has the only online account application submission and
approval process in the industry. After an online credit check, credit-approved
customers may buy securities of up to $15,000 in value without first depositing
any money into their accounts. In all instances, however, customers are required
to pay for purchases or post margin as required by Regulation T and the rules of
the NASD.
Orders to trade Nasdaq and exchange-listed securities constituted 89.1% of
DLJdirect's total customer orders in 1998. DLJdirect supports a range of order
types, including market orders, limit orders (good-till-canceled or day), stop
orders and short sales. Customers placing orders can use DLJdirect's equity
research tool, StockScan[Trademark], to search, screen and profile over 9,500
stocks from approximately 100 different industries online. Customers can
customize screening criteria and identify investment opportunities. DLJdirect
also offers an investment tool which suggests an asset allocation between
different types of equity and fixed income investments based on the customer's
investment objectives, risk tolerance, investment time-frame, and income
requirements.
Customer orders to buy and sell options constituted 9.5% of DLJdirect's
total customer orders in 1998. DLJdirect typically does not offer option trading
involving the writing of uncovered puts or calls or the establishment of option
spreads or straddles to the majority of its customer base. DLJdirect does
maintain a few accounts that have been approved for this type of trading due to
exceptional equity levels within the account as well as the customers' trading
experience and investment objectives.
Customer orders to buy and sell mutual funds comprised 1.3% of DLJdirect's
total customer orders in 1998. Customers can use DLJdirect's mutual fund
research tool, FundScan[Trademark], to search, screen and profile over 7,000
mutual funds, over 850 of which are available without transaction fees. As with
StockScan[Trademark], customers can customize screening criteria and identify
investment opportunities.
III-13
DLJdirect offers its customers the opportunity to buy and sell fixed income
investment products including government, municipal and corporate bonds,
commercial paper, unit investment trusts, certificates of deposit and
collateralized mortgage obligations. Some bond trades may be placed directly via
computer, but other fixed income transactions may only be effected by speaking
with an investor service representative. Fixed income transactions currently
comprise less than 1% of all of DLJdirect's trade executions.
Market Data and Financial Information
During trading hours, DLJdirect continuously receives a direct feed of
detailed quote data, market information and news. Customers can create
personalized lists of stocks, options and mutual funds for quick access to
current pricing information. DLJdirect provides its customers free real-time
quotes, including stocks, options, major market indices, most active issues, and
largest gainers and losers for the major exchanges. DLJdirect also offers
customers subscription access to real-time streaming quotes which allow them to
monitor stock prices as they fluctuate -- without having to reenter a stock
symbol or refresh the screen. Customers can also stay informed at a glance using
their own personal scrolling stock ticker. In addition, customers can monitor
stocks they own and stocks in their model portfolios as well as display news
headlines from a variety of sources. Customers are alerted when there is current
news on an identified stock or when a stock has reached a pre-selected price
threshold. Through its alliances, DLJdirect also provides immediate access to
breaking news, charts, market commentary and analysis and company financial
information. DLJdirect's Web site provides links to other business and financial
Web sites, including access to SEC filings of public companies.
DLJ provides DLJdirect with a select portion of DLJ's research products for
distribution to all accounts for a 60-day trial period and thereafter to
customers who qualify by maintaining at least $100,000 in aggregate assets in
their DLJdirect accounts. DLJ provides company and industry reports, economic,
global and market-related research as well as DLJ's select list of recommended
securities. DLJdirect has entered into an agreement with DLJ for continued
access to its research products.
Portfolio Tracking and Records Management
Customers have online access to a listing of all their portfolio assets
held in their DLJdirect accounts. Customers using MarketSpeed[Trademark] may
receive a real-time listing of all their portfolio assets, including current
price and current market value. Detailed account balance and transaction
information includes cash and money fund balances, buying power, net market
value, dividends received, interest earned, deposits and withdrawals. Customers
can also create "model" portfolios to include most financial instruments a
customer is interested in tracking. These model portfolios can include stocks,
options, and most mutual funds. Customers also receive quarterly account and
annual tax statements and active customers receive monthly account statements
summarizing account activity, including asset valuation, transaction history,
interest income and distribution summary. DLJdirect's "Select Client Group"
customers (customers who meet minimum balance criteria) receive enhanced
statements including realized and unrealized gains on their investments.
DLJdirect's systems support the Open Financial Exchange (OFX) standard so that
customers may download their online account information into personal financial
software programs such as Intuit's Quicken 98 and 99, Microsoft's MSN
MoneyCentral Investor Portfolio, and Microsoft's Money 99.
Participation in Public Offerings
Customers maintaining accounts with aggregate assets of at least $100,000
have been eligible to gain access to IPOs managed by Donaldson, Lufkin &
Jenrette Securities Corporation since June 1997. Through February 1999,
DLJdirect has participated in 34 DLJ-managed IPOs. Prior to 1999, DLJdirect
received a nominal fee for distribution of IPO products but is now compensated
as a regular member of the selling group. DLJdirect intends to increase its
staff and enhance its capabilities in this area in response to increasing demand
from retail customers and from companies seeking electronic distribution of
shares in their own initial public offering.
III-14
DLJdirect is also looking to participate in selling groups or offerings
that may not be managed by DLJ, and is exploring the possibility of acting in an
underwriting capacity. DLJdirect may also consider in the future acting as an
underwriter for a broader array of securities offerings, including secondary
equity offerings, preferred stock offerings, and investment grade and high yield
bond offerings. DLJdirect intends to rely in large part upon DLJ investment
banking professionals in developing its underwriting capacity. DLJdirect
believes that relying upon DLJ as opposed to hiring and developing a complete
investment banking group internally will minimize costs, unless and until
underwriting volumes justify development of complete internal capacity.
Cash Management Services
DLJdirect offers several cash management options. Customers may participate
in an asset management account, AssetMaster[SM], combining their brokerage
account with free check writing and access to a Gold MasterCard debit card.
DLJdirect also provides free check writing drawn against money market funds,
cash or margin balances. Funds in the AssetMaster[SM] and brokerage checking
accounts can be invested in one of 11 money market funds managed by Alliance
Capital Management, L.P. Customers may also earn interest on uninvested funds by
investing in a money market fund or participating in a credit interest program.
Mortgage Center
DLJdirect provides access to mortgage services for its customers through an
agreement with E-LOAN, Inc., an online mortgage broker. Users can take advantage
of efficient, easy-to-use tools to search for mortgage loan rates, obtain
customized quotes, compare loans and apply for a mortgage online. The service
operates through hyperlinks to the E-LOAN Web site.
Access and Delivery of Services
DLJdirect's services are widely accessible through multiple channels.
Personal Computer. Customers using personal computers can access DLJdirect
services and products through the Internet, online service providers, such as
America Online and Prodigy, or DLJdirect's proprietary Windows-based investing
software, DLJdirect MarketSpeed[Trademark]. The DLJdirect Web site combines
easy-to-use graphics with the trading capabilities, investing tools and
resources that sophisticated investors demand.
DLJdirect created its proprietary Windows-based investing software,
DLJdirect MarketSpeed[Trademark], in order to enhance its customers' experience
with its Internet-based service. The software caches formatted data, thus
eliminating the need for constant Web page reloads, making DLJdirect
MarketSpeed[Trademark] an average of five times faster than other major Web
brokerage sites, according to Corporate Insight, Inc., an independent online
market research firm. Designed to be user-friendly, the software may be used
with real-time streaming quotes and market data by customers who qualify for
them by filling out an online application and agreeing to pay the exchange fees
for these quotes. The product enables DLJdirect's customers to use a variety of
customizable features and tools with better graphics and greater ease of use.
Touch-tone Telephone. TradeTalk[SM], DLJdirect's touch-tone trading
service, provides customers with a convenient way to access quotes, place orders
and access portfolio information over toll-free lines from any touch-tone
telephone, 24 hours a day, 7 days a week.
Investor Services Telephone. DLJdirect's trading and investor service
centers may also be accessed 24 hours a day, 7 days a week, via a toll-free
telephone line staffed by licensed investor services representatives who will
take orders for securities transactions, and provide securities quotes, account
and portfolio information, customer service and technical support.
III-15
All orders placed via computer or interactive voice response are
automatically passed through system intelligence. This intelligence screens the
parameters of the order to ensure that DLJdirect can accept the order and route
it to the appropriate exchange or third party market maker.
Technology
DLJdirect maintains proprietary technology that automates traditionally
labor-intensive transactions. Because it was custom-tailored for electronic
marketplace use, the DLJdirect system provides customers with efficient service
and has the added advantage of being scalable and adaptable as usage increases
and service offerings are expanded.
DLJdirect also designs systems and software on a fee basis for DLJ and its
affiliates and, through them, for their customers. In addition, DLJdirect has
designed and developed Web sites for a number of leading financial institutions.
The technology group had 119 associates at December 31, 1998 who are experienced
in building easy-to-use, high performance, scalable systems and have skills in a
number of systems and programming technologies, including IBM mainframe, Unix,
Oracle, NT, C++, Java, and HTML. DLJdirect believes that there is significant
potential to exploit the technology developed by this group commercially both
through product sales and advisory services.
DLJdirect has built proprietary financial services engines that can
interface with many technologies within a variety of delivery platforms such as
AOL, Prodigy, PDAs (personal digital assistants, or palm top devices), screen
phones, and touch-tone telephones. DLJdirect has also used these engines to
provide services and build products for DLJ, AXA and Equitable and other
financial institutions such as registered investment advisors and full-service
brokers. The infrastructure and the software components to support DLJdirect
have been applied in other contexts to minimize the technological costs to
DLJdirect.
The DLJdirect System
The primary components of DLJdirect include presentation layers,
middleware, application servers, system monitors, a compliance rules engine and
a customer server workstation.
Presentation Layer. The presentation layer provides DLJdirect with the
ability to offer its services on many platforms without the need to modify the
rest of its applications for each platform. Products using the presentation
layer include its Web site, DLJdirect MarketSpeed[Trademark],
FundScan[Trademark], StockScan[Trademark] and TradeTalk[SM].
Middleware. DLJdirect's middleware connects all of the different components
of the environment and establishes language among the different components.
DLJdirect's proprietary technology allows these components to function in
different languages, hardware platforms and protocols. By load balancing among
different instances of the same component providing a specific service,
DLJdirect's middleware allows more reliability and makes the systems environment
more scalable. This technology also makes it easier for DLJdirect to add
capacity and maintain servers.
Application Servers. These servers provide DLJdirect's various services and
are optimized for each specific service. They can be configured in the same
machine, across multiple machines, or machines in multiple locations.
System Monitor. The system monitor is an expert system that monitors all
the different components every few minutes to make sure all are working
correctly. If it finds a problem, it can alert the appropriate DLJdirect
personnel and can, if possible, take actions to rectify the problem
automatically.
Compliance Rules Engine. The rules engine makes it possible to route orders
to the exchanges and market makers, and to approve accounts online automatically
without manual intervention.
Investor Service Workstation. The investor service workstation platform
provides the ability to process exceptions and answer e-mail effectively and
provides integrated access to information about customers and market data.
III-16
DLJdirect is making significant investments in systems technology and has
established technology centers in Jersey City, New Jersey, and, through its
relationship with an affiliate, in Florham Park, New Jersey. DLJdirect also
maintains three investor service centers in Jersey City and Parsippany, New
Jersey, and Charlotte, North Carolina. These facilities support systems, network
services, trading, investor services and backup capabilities between the
multiple locations. DLJdirect is currently implementing fully redundant
technology centers which are expected to be operational in the third quarter of
1999. To provide for system continuity during potential outages, DLJdirect also
has equipped its computer facilities with uninterruptible power supply units, as
well as back-up generators.
A significant risk to online commerce and communication is the insecure
transmission of confidential information over public networks. DLJdirect relies
on encryption and authentication technology, including public key cryptography
technology licensed from RSA and Netscape, to provide the security and
authentication necessary to effect secure transmission of confidential
information. Features ranging from firewalls to routers and servers are used in
many layers to prevent unauthorized access.
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
III-17
Internet, direct modem access or touch-tone telephone, many use online service
providers, such as America Online and Prodigy. Strategic relationships with
service providers allow DLJdirect to access a greater number of potential
customers and allow the online service providers to offer their subscribers a
broader range of service options. DLJdirect's partnerships with leading content
providers fulfill customers' information needs and help drive transaction
volume.
New Account Development and Distribution
DLJdirect has developed alliances with key online services and popular Web
sites to increase account development and expand distribution. These include
proprietary online services, Internet service providers, search engines and
financial content providers. They attract significant numbers of users, and
DLJdirect's relationships provide access to expanded market opportunities. Set
forth below are descriptions of several of DLJdirect's key alliances:
America Online. In 1995, DLJdirect entered into a business relationship
with America Online ("AOL"), a provider of Internet access and content that
allows access to DLJdirect's Web site from the AOL Personal Finance channel.
DLJdirect is one of four exclusive brokerage sponsors of that channel and the
only online brokerage firm to build a customized platform within AOL's
proprietary Remote Managed Gateway technology. The agreement with AOL provides
for extensive marketing and promotional programs across AOL properties.
Prodigy. DLJdirect has had a business relationship with Prodigy
Communications, Inc., a provider of Internet access and content, since 1988.
Currently, DLJdirect maintains a presence on the Prodigy Classic service, acting
as an information and transaction provider. DLJdirect advertises on Prodigy
Internet, including a position on its home page, to market its financial
services to Prodigy's approximately 500,000 users. DLJdirect's Prodigy Classic
service will terminate in the third quarter of 1999 and DLJdirect intends to
encourage customers to adopt other means of access.
MSN.com. DLJdirect has developed a number of key relationships with
Microsoft Corporation that are designed to promote DLJdirect's online investing
services on the Microsoft Network. In January 1999, DLJdirect entered into a
one-year advertising agreement, pursuant to which MSN.com provides for
advertising of DLJdirect's brokerage services on the MSN Web site and for a
direct link to DLJdirect's Web site. DLJdirect is one of three exclusive broker
participants in the "MSN Broker Package".
TheStreet.com. In 1997, DLJdirect entered into an agreement with
TheStreet.com, an Internet site which provides financial news and commentary.
Pursuant to the agreement, DLJdirect displays TheStreet.com's market report
titles on its Internet sites, AOL site, and MarketSpeed[Trademark] software,
through which DLJdirect users can link directly to the TheStreet.com's Web site
containing the full text of market reports. In return, TheStreet.com offers
DLJdirect's account holders discounted subscriptions for its Internet services.
CBSMarketWatch. DLJdirect has entered into an agreement with
CBSMarketWatch, a leading Web-based provider of real-time business news,
financial programming and financial analysis tools. The agreement provides for a
direct link to DLJdirect's Web site from CBSMarketWatch and advertising on both
CBSMarketWatch and the CBS television network.
Content
Content such as news, quotes, charts and fundamental data helps provide
investors with the information necessary to make investment decisions. DLJdirect
believes that these information services fulfill customers' information needs,
facilitate new ideas and increase transaction volume.
Bridge Information Systems America. Bridge Information Systems America,
Inc. (formerly Telesphere Corporation) provides DLJdirect with delayed and
real-time quotes on U.S. securities.
Business Wire. Business Wire provides DLJdirect with company press releases
for use on its Web site.
III-18
Charter Media/Briefing.Com. Charter Media/Briefing.Com provides DLJdirect
with daily financial data, reports, and services which support its online market
commentary and stock analysis areas.
ILX Systems. Through one of its affiliates, DLJdirect has a relationship
with ILX Systems, Inc. to provide real-time quotes on U.S. securities.
Iverson Financial Systems. Iverson Financial Systems Inc. provides
DLJdirect with securities data that support its online historical indices and
historical charts areas.
Lipper. Lipper Inc. provides DLJdirect with quarterly and monthly mutual
fund data.
PR Newswire. PR Newswire Association, Inc. provides DLJdirect with company
press releases for use on its Web site.
Reuters NewMedia. DLJdirect has an agreement with Reuters NewMedia, Inc. to
provide Reuters news on DLJdirect's Web site.
Standard & Poor's. Standard & Poor's provides DLJdirect with securities
data and reports.
Thomson Investors Network. Thomson Investors Network provides DLJdirect
with securities data regarding insider/institutional holdings and insider
trading along with financial commentary and analysis.
Zacks Investment Research. Zacks Investment Research Incorporated provides
DLJdirect with securities research data.
International
DLJdirect intends to enter international markets selectively, either
directly or through alliances or joint ventures with local partners. DLJdirect's
focus will be on large developed markets that permit it to capitalize on its
relationship with DLJ and AXA.
DLJdirect Japan. In November 1998, DLJdirect announced an agreement to form
a 10-year joint venture ("DLJdirect Japan") with Sumitomo Bank, the second
largest bank in Japan. The joint venture is expected to begin operations in the
second quarter of 1999. DLJdirect will have a 50% interest in the joint venture.
Through DLJdirect Japan, DLJdirect intends to offer online discount
brokerage, including securities trading, investment trusts and money market
funds to Japanese investors. DLJdirect Japan is initially expected to provide
investors with the ability to invest in Japanese securities. However, over the
longer term DLJdirect expects to offer Japanese investors access to U.S.
securities, including investment products offered by DLJ and its affiliates.
DLJdirect Japan initially will be capitalized with an aggregate of approximately
Yen3 billion (estimated to be $25 million at March 12, 1999) from the member
companies.
DLJdirect UK. DLJdirect expects that its online UK discount brokerage
service ("DLJdirect UK") will begin operations in the second quarter of 1999.
DLJdirect UK has contracted with an affiliate, Pershing Securities Limited, for
execution and clearing services. DLJdirect UK intends initially to provide
investors with the ability to invest in UK equities. Additional UK financial
products are expected to be added later. Over the longer term, DLJdirect UK
intends to offer UK investors access to U.S. and continental European securities
as well, including investment products offered by DLJ and its affiliates.
Other. Outside of the UK and Japan, DLJdirect is exploring alliance and
joint venture opportunities in a number of key international markets, including
Australia, Belgium, Canada, France, Germany, Hong Kong, Israel, Italy, Korea,
South Africa and Taiwan.
III-19
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.
Telephone and E-mail Support and Technology
Telephone support is available 24 hours a day, 7 days a week, and currently
there are no additional fees charged to investors for this service. DLJdirect
maintains toll-free 800 numbers, and callers may request to speak with investor
service representatives on either a trading team or an investor service team, or
choose to use DLJdirect's proprietary interactive voice response system,
TradeTalk[SM]. DLJdirect's trained investor service representatives are based in
three state-of-the art investor service centers in Jersey City and Parsippany,
New Jersey, and Charlotte, North Carolina. The geographic distribution of the
investor service centers helps to minimize the risk that telecommunications or
other technology failures, or weather-related or other natural or man-made
disasters will interfere with the investor's rapid access to an investor service
representative. At December 31, 1998, 194 representatives made up DLJdirect's
investor service team, and DLJdirect plans to expand this number to 400 by the
end of 1999.
The telephone systems in all three investor service centers are
state-of-the-art and designed along "open architecture" lines that permit
continual upgrades of both hardware and software with a minimum of disruption
and expense. New releases of both programs and equipment are integrated into the
investor service line only after adequate testing and training to insure
continuity of operations. DLJdirect's TradeTalk[SM] currently handles
approximately 50% of incoming calls and thus greatly reduces the volume of calls
which must be handled by representatives. This in turn reduces wait times during
high volume trading hours and helps to reduce overall investor service costs.
Investors can get their account balances, check on order status, get delayed
securities quotes, and place trades through this automated system.
Among the advanced features of DLJdirect's Automated Call Distribution
("ACD") system is skill-based routing, which allows investors to follow
telephone prompts which then route their calls to the investor service team
which specializes in the appropriate area. The quality of service is thus
improved, as the investor is more likely to receive help from a representative
who has the particular expertise required to handle each individual call. The
ACD system also automatically produces routing and management reports that aid
supervisors in optimizing the efficiency of their manpower allocations.
Electronic mail is the other principal method of providing investor
support. All investor service representatives are trained to respond to investor
requests using both pre-composed and original e-mails. Further, DLJdirect is
installing an enhanced state-of-the-art automated e-mail response system, to be
fully operational by May 1999, which will save on personnel costs and improve
response times. The enhanced system will respond to many types of customer
investor e-mails with a high degree of accuracy and appropriateness. As an
important safeguard, all e-mail responses, whether generated by the automated
system or an investor service representative, will be reviewed by an investor
service manager, as is done under DLJdirect's current, non-automated e-mail
protocols. By the end of 1999, DLJdirect expects that the enhanced automated
system will respond to all e-mails routed through it promptly but in any event
III-20
within 12 hours, and that a significant percentage of all customer e-mails will
be handled entirely by the automated system.
Personnel and Training
DLJdirect believes that a key component of an efficient and motivated
investor service team is its training. It is committed to providing the best
available training to its investor service representatives in an ongoing program
that focuses on career development and therefore aids in the retention of
skilled and motivated personnel.
New investor service employees take a 3-month initial course that trains
them in DLJdirect's products, services, and policies. All investor service
representatives have the Series 7 securities broker license or are required to
enter DLJdirect-sponsored training to receive that license. Each team of
approximately eight representatives is supervised by a Series 24 licensed
professional, and both the team members and their supervisors receive continuing
training to enable them to become qualified in specialized areas, such as Select
Client Services, Customer Retention and IRA accounts. In 1998, DLJdirect
implemented a mandatory training program for all investor service
representatives, under which DLJdirect staff must attend a minimum of 20 hours
of DLJdirect-sponsored training programs per year in customer service,
securities, and technology subjects.
Investor service managers silently monitor investor service calls and
remotely monitor investor service e-mails as a means of improving training and
customer satisfaction. All investor service representatives undergo both monthly
and annual performance reviews which gauge their knowledge of DLJdirect's
products and services, their level of teamwork, their work ethic and personal
objectives, and above all their ability to deliver customer satisfaction.
DLJdirect pays performance-based bonuses that reflect training evaluations and
performance reviews.
DLJdirect has experienced periods of staffing shortages in various areas
within its investor service team, along with substandard performance on the part
of individual investor service representatives. Given the current extremely high
levels of competition to hire competent personnel within the U.S. brokerage,
online, and financial services industry sectors, absent a strong and sustained
effort on DLJdirect's part to identify, hire, train, and retain the best
available people for its investor service operations, there exists substantial
risk to DLJdirect's ability to maintain and increase its overall business.
Operations
Clearing
DLJdirect is an introducing broker-dealer, clearing through the Pershing
Division of DLJ on a fully disclosed basis. Pershing and its affiliates provide
execution and clearance services for equities, options, corporate bonds,
municipal bonds, treasury bonds, government agency bonds, precious metals,
mortgage backed bonds, mutual funds and unit investment trusts. In addition,
Pershing provides certain record keeping and operational services, including
custody of securities and cash balances settlement of securities transactions
and custody of securities and cash balances. Pershing receives and delivers cash
and securities for accounts and records such receipts and deliveries according
to information provided by DLJdirect. Pershing holds in custody securities and
cash received for accounts, collects and disburses dividends and interest, and
processes reorganization and voting instructions with respect to securities held
in custody. Pershing is responsible for the custody of the funds and securities
only after Pershing obtains physical possession or control thereof. Pershing
also prepares and transmits to customers confirmations of trades and periodic
account statements summarizing transactions processed for accounts.
The services provided by Pershing are governed by a clearing agreement
dated as of September 24, 1997, as amended. DLJdirect has general responsibility
for servicing and supervising securities accounts through its own personnel in
accordance with its own policies and applicable laws and regulations. DLJdirect
is also responsible for approving the opening of customer accounts and obtaining
necessary account documentation. DLJdirect is in general responsible for the
ongoing relationship that it has with customers. The clearing agreement also
provides for the
III-21
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.
Margin Lending
At the request of DLJdirect, Pershing makes loans to customers
collateralized by customer securities. Pershing extends credit for the margin
accounts of DLJdirect, and notifies DLJdirect of initial and maintenance margin
calls. If DLJdirect opens a margin account for a customer, Pershing will loan
money for the purpose of purchasing or holding securities subject to the terms
of Pershing's Margin Agreement and Pershing's margin policies and applicable
margin regulations. DLJdirect is responsible for obtaining the initial margin as
required by Regulation T. Thereafter, Pershing will calculate the amount of
maintenance margin required. Pershing advises the customer of those
requirements, usually through DLJdirect, and calculates the interest charged on
the debit balance, if any. Pershing charges customer accounts the margin
interest and repays DLJdirect a portion of the interest collected. DLJdirect
receives from Pershing a portion of the financial benefits arising from free
credit balances in customer accounts.
In permitting customers to purchase securities on margin, DLJdirect takes
the risk of a market decline that could reduce the value of the collateral held
to below the customers' indebtedness before the collateral can be sold, which
could result in losses to DLJdirect. In the event of a decline in the market
value of the securities in a margin account, the customer is required to deposit
additional securities or cash in the account so that at all times the customer's
equity in the account is at least 25% of the value of the securities in the
account. DLJdirect may impose initial and maintenance margin requirements for
specific securities.
Securities Lending and Borrowing
In connection with the margin and short account activities of customers of
DLJdirect, Pershing borrows securities both to cover short sales and to complete
customer transactions in the event a customer fails to deliver securities by the
required settlement date. Pershing collateralizes these borrowings by depositing
cash or securities with the lender and receives a rebate calculated to yield a
negotiated rate of return. When lending securities, Pershing receives cash or
securities and generally pays a rebate to the other party in the transaction at
a rate calculated to yield a negotiated return. Securities lending and borrowing
transactions are executed pursuant to written agreements with counterparties
that require that the securities borrowed be "marked-to-market" on a daily basis
and that excess collateral be refunded or that additional collateral be
furnished in the event of changes in the market value of the securities. The
securities usually are "marked-to-market" on a daily basis through the
facilities of the various national clearing organizations. Pershing pays
DLJdirect a portion of the rebate interest or fees earned in these activities
relating to customers of DLJdirect.
Competition
The market for online investing services, particularly over the Internet,
is new, rapidly evolving and intensely competitive, and DLJdirect expects
competition to continue to intensify in the future. DLJdirect encounters direct
competition from discount brokerage firms providing either touch-tone telephone
or online investing services, or both. These competitors include Ameritrade,
Inc.; Charles Schwab & Co., Inc.; Datek Online; Discover Brokerage Direct, Inc.;
E*TRADE Securities, Inc.; Fidelity Brokerage Services, Inc.; Quick & Reilly,
Inc.; and Waterhouse Securities, Inc. It also encounters competition from the
broker-dealer affiliates of established full-commission brokerage firms, such as
Merrill Lynch, Pierce, Fenner & Smith Incorporated and PaineWebber Incorporated,
among others. In addition, DLJdirect competes with financial institutions,
mutual fund sponsors and other organizations, some of which provide online
investing services.
DLJdirect believes that the principal competitive factors affecting the
market for its transaction-enabling services are service, quality, cost,
execution, delivery platform capabilities, ease of use, graphical user interface
look and feel, depth and breadth of services and content, financial strength and
innovation. Based on research conducted with both
III-22
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.
Intellectual Property and Other Proprietary Rights
DLJdirect holds significant value in its proprietary products and services
and its right to use certain marks. DLJdirect's proprietary products and
services and the marks it has contracted to use include: DLJdirect[Trademark],
FundCenter[Registered], FundScan[Trademark], MarketSpeed[Trademark],
StockScan[Trademark], TradeTalk[SM], Trade Up[SM], and
www.DLJdirect.com[Trademark].
DLJdirect's success and ability to compete are dependent to a significant
degree on its proprietary technology. DLJdirect relies primarily on copyright,
trade secret and trademark law to protect its technology. Effective trademark
protection may not be available for its trademarks. DLJdirect does not own but
licenses certain material marks from DLJ Long Term Investment Corporation which
has obtained, or is seeking to obtain, registration protection for those marks
in the United States. In addition, DLJ Long Term Investment Corporation is in
the process of registering the DLJdirect mark in 35 countries worldwide. Its
inability to protect DLJdirect's name adequately would have a material adverse
effect on DLJdirect's business, financial condition and operating results.
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.
III-23
Government Regulation; Net Capital Requirements
Securities Industry
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. The SEC is the federal agency
responsible for the administration of the federal securities laws. DLJdirect
Inc. is registered as a broker-dealer with the SEC. Much of the regulation of
broker-dealers has been delegated to self-regulatory organizations ("SROs"),
principally the NASD, which has been designated by the SEC as DLJdirect Inc.'s
primary SRO. These self-regulatory organizations adopt rules, subject to
approval by the SEC, that govern the industry and conduct periodic examinations
of DLJdirect's operations. Securities firms are also subject to regulation by
state securities administrators in those states in which they conduct business.
DLJdirect Inc. is registered as a broker-dealer in all 50 states, and the
District of Columbia.
Broker-dealers are subject to regulations covering all aspects of the
securities business, including sales methods, trade practices among
broker-dealers, use and safekeeping of customers' funds and securities, capital
structure, record keeping and the conduct of directors, officers and employees.
DLJdirect is required, directly or indirectly, to comply with many complex laws
and rules, including rules relating to possession and control of customer funds
and securities, margin lending and execution and settlement of transactions.
Additional legislation, changes in rules promulgated by the SEC, the NASD, the
Board of Governors of the Federal Reserve System, the various stock exchanges,
and other self-regulatory organizations, or change in the interpretation or
enforcement of existing laws and rules, may directly affect the mode of
operation and profitability of broker-dealers. The SEC, the NASD or other
self-regulatory organizations and state securities commissions may conduct
administrative proceedings, which can result in censure, fine, the issuance of
cease-and-desist orders or the suspension or expulsion of a broker-dealer or any
of its officers or employees. DLJdirect's ability to comply with all applicable
laws and rules is dependent in large part upon the maintenance of a compliance
system reasonably designed to ensure compliance. The principal purpose of
regulation and discipline of broker-dealers is the protection of customers and
the securities markets, rather than protection of creditors and shareholders of
broker-dealers. In addition, because the use of the Internet to provide online
investing services is relatively new, regulatory standards are evolving. As a
result, DLJdirect may, in the future, become subject to additional regulation in
the United States and in international jurisdictions.
DLJdirect and DLJ are members of Securities Investor Protection Corporation
("SIPC"), which provides, in the event of the liquidation of a member,
protection for customers' assets held by the member of up to $500,000 for each
customer account, subject to a limitation of $100,000 for claims for cash
balances. In addition, Pershing has purchased and provides to customers of
DLJdirect unlimited excess SIPC coverage for securities only so that the entire
value of securities in each customer account is protected. This excess SIPC
insurance is provided by Asset Guaranty Insurance Company of New York, New York.
DLJdirect has initiated an aggressive marketing campaign designed to bring
brand name recognition to DLJdirect. Its marketing activities are principally
subject to regulation by the NASD. DLJdirect does not currently solicit orders
from its customers or make investment recommendations, although it does make
available DLJ and other third-party research and information services. However,
if it were to engage in these activities, it would become subject to additional
rules and regulations governing, among other things, the suitability of
recommendations to customers and sales practices. Further, the NASD or state
securities authorities may seek to expand the situations in which suitability
requirements are applicable to electronic brokers, even in the absence of any
recommendations.
It is DLJdirect's intent to expand its business in United States securities
to other countries through the Internet and other gateways. In order to expand
its services globally, it must comply with the regulatory controls of each
specific country in which it conducts business. The varying compliance
requirements of other national regulatory jurisdictions may impose a limit to
its rate of international expansion.
III-24
Net Capital Requirements
As a registered broker-dealer and member of the NASD, DLJdirect Inc. is
subject to the SEC's Net Capital Rule. The Net Capital Rule, which specifies
minimum net capital requirements for registered broker-dealers, is designed to
measure the general financial integrity and liquidity of a broker-dealer and
requires that at least a minimum part of its assets be kept in relatively liquid
form.
DLJdirect has elected to compute net capital under the alternative method
of calculation permitted by the Net Capital Rule. Under the alternative method,
DLJdirect is required to maintain minimum net capital, as defined in the Net
Capital Rule, equal to the greater of $250,000 or 2% of the amount of its
"aggregate debit items" computed in accordance with the Formula for
Determination of Reserve Requirements for Brokers and Dealers. Failure to
maintain the required net capital may subject a firm to suspension or revocation
of registration by the SEC and suspension or expulsion by the NASD and other
regulatory bodies and ultimately could require a firm's liquidation. The Net
Capital Rule prohibits payments of dividends, redemption of stock, the
prepayment of subordinated indebtedness, and the making of any unsecured advance
or loan to a shareholder, employee of affiliate, if aggregate debit items rise
beyond 5% of net capital. The Net Capital Rule also provides that the SEC may
restrict, for up to 20 business days, any withdrawal of equity capital, or
unsecured loans or advances to shareholders, employees or affiliates ("capital
withdrawal") if such capital withdrawal, together with all other net capital
withdrawals during a 30-day period, exceeds 30% of excess net capital and the
SEC concludes that the capital withdrawal may be detrimental to the financial
integrity of the broker-dealer.
Net capital is essentially defined as net worth (assets minus liabilities),
plus qualifying subordinated borrowings and certain discretionary liabilities,
less certain mandatory deductions that result from excluding assets that are not
readily convertible into cash and from valuing conservatively certain other
assets. Among these deductions are adjustments (called "haircuts") which reflect
the possibility of a decline in the market value of an asset prior to its
disposition.
A change in the Net Capital Rule, the imposition of new rules or any
unusually large charge against net capital could limit those operations of
DLJdirect that require the intensive use of capital, and could restrict its
ability to withdraw capital from its brokerage subsidiaries, which could limit
its ability to pay dividends, repay debt and redeem or purchase shares of its
outstanding stock.
As of December 31, 1998, DLJdirect was required to maintain minimum net
capital of $250,000 and had total net capital of approximately $16.6 million.
Electronic Commerce
DLJdirect anticipates that it may be subject to additional record keeping,
data processing and other regulatory requirements as a result of proposed
federal legislation or otherwise, and it may be subject to additional regulation
as the market for online commerce evolves. Because of the growth in the
electronic commerce market, Congress has held hearings on whether to regulate
providers of services and transactions in the electronic commerce market, and
federal or state authorities could enact laws, rules or regulations affecting
DLJdirect's business or operations. DLJdirect also may be subject to federal,
state and foreign money transmitter laws and state, local and foreign income,
sales or other taxes. If enacted or deemed applicable to DLJdirect, such laws,
rules or regulations could be imposed on its activities or its business.
Due to the increasing popularity of the Internet, it is possible that laws
and regulations may be enacted with respect to the Internet, covering issues
such as user privacy and the pricing, content and quality of products and
services. The Telecommunications Act of 1996, which was enacted in January 1996,
prohibits the transmission over the Internet of certain types of information and
content. Although several of these prohibitions have been held unconstitutional,
the increased attention focused upon these liability issues as a result of the
Telecommunications Act could adversely affect the growth of Internet and private
network use.
III-25
Employees
At December 31, 1998, DLJdirect had 374 employees. DLJdirect's success has
been, and will continue to be, dependent to a large degree on its ability to
retain the services of its existing executive officers and to attract and retain
qualified additional senior and middle managers and key personnel in the future.
There can be no assurance that DLJdirect will be able to attract, assimilate or
retain qualified technical and managerial personnel in the future, and the
failure of it to do so would have a material adverse effect on its business,
financial condition and operating results. None of its employees is subject to
collective bargaining agreements or is represented by a union. DLJdirect
considers its relations with its employees to be good.
Properties
DLJdirect currently occupies space in three sites: corporate offices and an
investor service call center in Jersey City, New Jersey and investor service
call centers in Parsippany, New Jersey and in Charlotte, North Carolina. The
sites comprise approximately 75,000 square feet, in the aggregate. Each site is
leased by an affiliate and provided to DLJdirect pursuant to an intercompany
agreement. The underlying leases expire beginning in 2002. DLJdirect is in the
process of leasing additional space to increase its overall capacity by more
than 85% in order to accommodate its growth plans. No assurance can be given
that such a lease will be completed.
Legal and Administrative Proceedings
DLJdirect is not currently a party to any litigation that it believes could
have a material adverse effect on its business, financial condition or operating
results. However, from time to time DLJdirect has been threatened with, or named
as a defendant in, lawsuits. Compliance and trading problems that are reported
to the NASD or the SEC by dissatisfied customers are investigated by the NASD or
the SEC, and, if pursued, may rise to the level of disciplinary action. One or
more lawsuits, claims or disciplinary actions decided adversely to DLJdirect
could have a material adverse effect on its business, financial condition and
results of operations. DLJdirect is also subject to periodic regulatory audits
and inspections.
Along with several other online brokers, DLJdirect has received a letter
from the State of New York Office of the Attorney General dated February 2,
1999, requesting that DLJdirect provide certain documents and make DLJdirect
employees available to discuss complaints regarding online brokerage services.
No complaint specific to DLJdirect has been identified. DLJdirect is collecting
and reviewing documents to respond to the request.
The SEC's Office of Compliance Investigations and Examinations (OCIE)
conducts routine investigations of registered broker-dealers. DLJdirect has
received correspondence from OCIE requesting that DLJdirect make available
certain documents and materials relating to the business of DLJdirect, including
DLJdirect's execution policies and practices regarding the handling of customer
orders. DLJdirect is assembling the requested documents and will produce them in
the normal course of business. DLJdirect believes that this informational
request is being conducted on an industry-wide basis.
III-26
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
INDEX TO COMBINED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report.............................................III-F-2
Combined Financial Statements:
Combined Statements of Financial Condition............................III-F-3
Combined Statements of Operations.....................................III-F-4
Combined Statements of Changes in Equity..............................III-F-5
Combined Statements of Cash Flows.....................................III-F-6
Notes to Combined Financial Statements................................III-F-7
III-F-1
Independent Auditors' Report
The Board of Directors and Stockholders
Donaldson, Lufkin & Jenrette, Inc.
We have audited the accompanying combined statements of financial condition of
DLJdirect (a combination of certain assets and liabilities of Donaldson,
Lufkin & Jenrette, Inc., as described in note 1) as of December 31, 1997 and
1998, and the related combined statements of operations, changes in equity,
and cash flows for each of the years in the three-year period ended December
31, 1998. These combined financial statements are the responsibility of
Donaldson, Lufkin & Jenrette, Inc.'s management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes, examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
We have audited the consolidated financial statements of Donaldson, Lufkin &
Jenrette, Inc. and subsidiaries as of December 31, 1997 and 1998, and for each
of the years in the three-year period ended December 31, 1998 and have issued
our report dated February 2, 1999. The combined financial statements of
DLJdirect should be read in conjunction with the consolidated financial
statements of Donaldson, Lufkin & Jenrette, Inc. and subsidiaries.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of DLJdirect as of
December 31, 1997 and 1998, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1998,
in conformity with generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
March 16, 1999
III-F-2
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Combined Statements of Financial Condition
(In thousands)
December 31,
--------------------
1997 1998
ASSETS ------ ------
Cash and cash equivalents................................................................... $8,881 $26,654
Deposit with affiliated clearing broker..................................................... 250 250
Receivables from brokers, dealers and others, net........................................... 725 1,887
Office facilities, at cost (net of accumulated depreciation and amortization of $260
and $284, respectively).................................................................... 1,808 278
Other assets................................................................................ 207 682
------ ------
Total Assets................................................................................ $11,871 $29,751
====== ======
LIABILITIES AND EQUITY
Liabilities:
Payables to parent/affiliates, net......................................................... $3,266 $5,211
Accounts payable and accrued expenses...................................................... 2,641 2,616
------ ------
Total liabilities........................................................................ 5,907 7,827
------ ------
Commitments and contingencies............................................................... -- --
Equity:
Capital contributions...................................................................... 10,502 25,002
Accumulated deficit........................................................................ (4,538) (3,078)
------ ------
Total equity............................................................................. 5,964 21,924
------ ------
Total Liabilities and Equity................................................................ $11,871 $29,751
====== ======
See accompanying notes to combined financial statements.
III-F-3
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Combined Statements of Operations
(In thousands)
Year Ended December 31,
-----------------------------------
1996 1997 1998
------ ------ ------
Revenues:
Commissions.................................................. $ 54,166 $ 50,948 $ 78,717
Fees......................................................... 6,426 12,109 25,484
Interest..................................................... 2,569 4,160 13,723
------ ------ -------
Total revenues............................................. 63,161 67,217 117,924
------ ------ -------
Costs and expenses:
Compensation and benefits.................................... 11,202 17,174 28,260
Brokerage, clearing, exchange and other fees................. 15,422 20,909 28,423
Advertising.................................................. 9,093 13,137 25,146
Occupancy and equipment...................................... 1,923 3,352 5,045
Communications............................................... 1,468 2,844 5,564
Technology costs............................................. 5,205 5,082 4,084
Other operating expenses..................................... 5,567 10,844 18,934
------ ------ -------
Total costs and expenses................................... 49,880 73,342 115,456
------ ------ -------
Income (loss) before income tax provision (benefit)........... 13,281 (6,125) 2,468
Income tax provision (benefit)................................ 5,425 (2,502) 1,008
------ ------ -------
Net income (loss)............................................. $ 7,856 $ (3,623) $ 1,460
====== ====== =======
See accompanying notes to combined financial statements.
III-F-4
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Combined Statements of Changes in Equity
For the Years Ended December 31, 1996, 1997 and 1998
-------------------------------------------------------------------------
Capital Accumulated
Divisional Equity Contributions Deficit Total Equity
----------------- ------------- ----------- ------------
(in thousands)
Balances at December 31, 1995............ $ -- $ -- $ -- $ --
Divisional net income.................... 7,856 -- -- 7,856
Return of divisional equity to DLJ....... (7,856) -- -- (7,856)
----- ------ ------ ------
Balances at December 31, 1996............ -- -- -- --
Divisional net income from January 1,
1997 to May 31, 1997.................... 915 -- -- 915
Net (loss) from June 1, 1997 to
December 31, 1997....................... -- -- (4,538) (4,538)
Capital contributions from DLJ........... -- 10,502 -- 10,502
Return of divisional equity to DLJ....... (915) -- -- (915)
----- ------ ------ ------
Balances at December 31, 1997............ -- 10,502 (4,538) 5,964
Net income............................... -- -- 1,460 1,460
Capital contributions from DLJ........... -- 14,500 -- 14,500
----- ------ ------ ------
Balances at December 31, 1998............ $ -- $25,002 $(3,078) $21,924
===== ====== ====== ======
See accompanying notes to combined financial statements.
III-F-5
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Combined Statements of Cash Flows
(In thousands)
Years Ended December 31,
------------------------------------
1996 1997 1998
------ ------ ------
Cash flows from operating activities:
Net income (loss)...................................................... $ 7,856 $(3,623) $ 1,460
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization.......................................... 949 652 299
Deferred taxes......................................................... (344) 160 (275)
----- ----- ------
8,461 (2,811) 1,484
(Increase) decrease in operating assets:
Deposit with affiliated clearing broker.............................. -- (250) --
Receivables from brokers, dealers and other, net..................... 283 (1,923) (1,162)
Other assets......................................................... -- (207) (475)
Increase (decrease) in operating liabilities:
Payables to parent/affiliates, net................................... 357 1,951 2,220
Accounts payable and accrued expenses................................ -- 2,641 (25)
----- ----- ------
Net cash provided by (used in) operating activities..................... 9,101 (599) 2,042
----- ----- ------
Cash flows from investing activities:
Purchase of office facilities.......................................... (1,245) (107) --
Net proceeds from sale of office facilities............................ -- -- 1,231
----- ----- ------
Net cash provided by (used in) investing activities..................... (1,245) (107) 1,231
----- ----- ------
Cash flows from financing activities:
Net proceeds from capital contributions from DLJ....................... -- 10,502 14,500
Payments to DLJ........................................................ (7,856) (915) --
----- ----- ------
Net cash provided by (used in) financing activities..................... (7,856) 9,587 14,500
----- ----- ------
Increase in cash and cash equivalents................................... -- 8,881 17,773
Cash and cash equivalents at beginning of year.......................... -- -- 8,881
----- ----- ------
Cash and cash equivalents at end of year................................ $ -- $ 8,881 $26,654
===== ===== ======
See accompanying notes to combined financial statements.
III-F-6
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Notes to Combined Financial Statements
1. Basis of Presentation
On March 16, 1999, the Board of Directors of Donaldson, Lufkin & Jenrette,
Inc. ("DLJ Inc.") authorized, subject to shareholder approval, the issuance of a
new series of stock, DLJdirect Common Stock.
The DLJdirect Common Stock is intended to reflect the separate performance
of the existing online discount brokerage services of DLJ Inc. DLJdirect would
initially consist principally of the assets, liabilities, revenues and expenses
of DLJ Inc.'s ultimate 100% equity interest in DLJdirect Holdings Inc.
(subsequent to June 1, 1997) and DLJ Inc.'s online discount brokerage division
(prior to June 2, 1997). DLJdirect would also include such other related assets
and liabilities of DLJ Inc. as the Board of Directors of DLJ Inc. may deem
appropriate in the future. It is currently the intention of DLJ Inc. that any
businesses, assets and liabilities related to its online discount brokerage and
related investment service businesses will be attributed to DLJdirect. However,
the Board of Directors of DLJ Inc., in its sole discretion, may in the future
decide to pursue business opportunities or operational strategies, even in the
online brokerage area, through other affiliates of DLJ Inc. instead of
DLJdirect.
Even though DLJ Inc. has allocated certain assets, liabilities, revenues,
expenses and cash flows to DLJdirect, that allocation will not change the legal
title to any assets or responsibility for any liabilities and will not affect
the rights of creditors. Holders of DLJdirect Common Stock will be common
stockholders of DLJ Inc. and will be subject to all the risks associated with an
investment in DLJ Inc. and all of its businesses, assets and liabilities.
Material financial events which may occur at DLJ Inc. may affect DLJdirect's
results of operations or financial position. Accordingly, financial information
for DLJdirect should be read in conjunction with financial information of DLJ
Inc.
2. Summary of Significant Accounting Policies
To prepare financial statements in conformity with generally accepted
accounting principles ("GAAP"), management must estimate certain amounts that
affect the reported assets and liabilities, disclosure of contingent assets and
liabilities, and reported revenues and expenses. Actual results could differ
from those estimates.
Substantially all of DLJdirect's financial assets and liabilities are
carried at market or fair value or are carried at amounts which approximate fair
value because of their short-term nature. Fair value is estimated at a specific
point in time, based on relevant market information.
Cash equivalents include all demand deposits held in banks and certain
highly liquid investments with maturities of 90 days or less, other than those
held for sale in the ordinary course of business.
Commissions revenue and brokerage, clearing, exchange and other fees are
reported on a trade date basis.
Office facilities are carried at cost and are depreciated on a
straight-line basis over the estimated useful life of the related assets,
ranging from three to eight years. Leasehold improvements are amortized over the
lesser of the useful life of the improvement or the term of the lease.
Advertising costs are expensed as incurred.
Effective January 1, 1997, DLJdirect is included in the consolidated
Federal income tax returns of DLJ Inc. In addition, for the period prior to its
incorporation, the division was included in the consolidated Federal income tax
returns of DLJ Inc. Prior to 1997, DLJ Inc. and its subsidiaries were included
in the consolidated Federal income tax return of The Equitable Companies
Incorporated. Related current and deferred tax assets or liabilities are
included in
III-F-7
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Notes to Combined Financial Statements
payables to parent/affiliates, net in the combined statements of financial
condition. Deferred tax expenses and benefits are recognized in the combined
statements of operations for the changes in deferred tax liabilities and assets.
Pursuant to SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information", DLJdirect operates in one reportable segment as a provider
of online discount brokerage services. DLJdirect's involvement in foreign
operations is not significant.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". SOP 98-1 requires that certain
costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software. The
SOP also requires that costs related to the preliminary project stage and the
post-implementation/operations stage of an internal-use computer software
development project be expensed as incurred. The adoption of this SOP did not
have a material impact on DLJdirect's combined financial position or results of
operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133
establishes accounting and reporting standards for derivative instruments and
hedging activities and is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. DLJdirect does not expect the adoption of SFAS
133 to have a material impact on its combined financial statements.
3. DLJdirect Common Stock (unaudited)
The majority stockholder of DLJ Inc. has agreed to approve, by written
consent, the authorization of the issuance of a new series of common stock, to
be designated as DLJdirect Common Stock ("DLJdirect Common Stock"). Before the
DLJdirect Common Stock is first issued, DLJ Inc.'s existing common stock will be
reclassified as DLJ Common Stock ("DLJ Common Stock"), and that stock will be
intended to reflect the performance of DLJ Inc.'s other businesses and a
"Retained Interest" in DLJdirect. DLJ Inc. currently plans to offer to the
public, for cash, shares of DLJdirect Common Stock intended to represent a
portion of the equity value attributed to DLJdirect.
In connection with the offering of DLJdirect Common Stock, DLJdirect
Holdings Inc. intends to pay as a dividend immediately prior to the offering a
note to Donaldson, Lufkin & Jenrette Securities Corporation in an aggregate
amount equal to the total equity of DLJdirect Holdings Inc. at December 31, 1998
plus the accumulated retained earnings of DLJdirect Holdings Inc. from January
1, 1999 until the end of the month preceding the offering.
4. Related Party Transactions
DLJdirect transacts business with a group of companies affiliated through
common majority ownership with DLJ Inc., and has various transactions and
relationships with members of the group. Due to these relationships, it is
possible that the terms of these transactions are not the same as those that
would result from transactions among unrelated parties.
Pursuant to a clearing agreement between DLJdirect and an affiliate of DLJ
Inc. all securities transactions of DLJdirect are cleared on a fully disclosed
basis through an affiliate of DLJ Inc. In connection with such transactions,
DLJdirect had $250,000 on deposit with DLJ Inc. at December 31, 1997 and 1998.
An affiliate of DLJ Inc. also charged DLJdirect $15.4 million, $20.9
million and $28.4 million for transaction, execution and clearance services
which amount is included in brokerage, clearing, exchange and other fees in the
III-F-8
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Notes to Combined Financial Statements
accompanying combined statements of operations for the years ended December 31,
1996, 1997 and 1998, respectively. DLJ Inc. pays DLJdirect a percentage of the
interest earned on DLJdirect's customers' balances. For the years ended December
31, 1996, 1997 and 1998, respectively, DLJdirect received $2.6 million, $3.8
million and $12.6 million from an affiliate of DLJ Inc. which is included in
interest revenues in the accompanying combined statements of operations. In
addition, for the years ended December 31, 1996, 1997 and 1998, DLJdirect
received $5.4 million, $5.5 million and $8.9 million, respectively, from an
affiliate of DLJ Inc. for order flow, which amount is included in fees in the
accompanying combined statements of operations. DLJdirect received $4.8 million
and $13.4 million in fees for technology development from DLJ Inc. affiliates
for the years ending December 31, 1997 and 1998, respectively.
In 1997 DLJdirect entered into a three-year License Agreement with an
affiliate. Under this agreement, the affiliate has licensed certain trademarks,
services marks, trade names and other proprietary rights to various words,
slogans, symbols and logos to DLJdirect for use in its provision of financial
services and sale or other distribution of related financial goods. For the
years ended December 31, 1997 and 1998, other operating expenses included $1.2
million and $5.2 million, respectively, for this agreement. Pursuant to a new
License Agreement executed in March 1999, the amounts paid by DLJdirect to the
affiliate will include the license fee for the use of DLJ Inc.'s trademarks that
are licensed to DLJdirect for use in the United States and certain other
jurisdictions.
Employees of DLJdirect participate in DLJ Inc.'s defined contribution
employee benefit plans. Certain key employees of DLJdirect participate in stock
options, long-term incentive compensation and restricted stock unit employee
benefit plans and various deferred compensation arrangements, as well as other
non-qualified plans which are funded by insurance contracts. Expenses associated
with these compensation arrangements are reflected in DLJdirect's combined
statements of operations.
DLJ Inc. accounts for stock-based compensation related to stock options in
accordance with APB Opinion No. 25 "Accounting for Stock Issued to Employees",
and accordingly, does not recognize any compensation cost associated with such
plans. The pro forma effect on DLJdirect's combined statements of operations, as
determined in accordance with SFAS No. 123 "Accounting for Stock Based
Compensation", is not material.
5. Net Capital
DLJdirect Holdings Inc.'s principal subsidiary, DLJdirect Inc., is a
registered broker-dealer and a member of the National Association of Securities
Dealers Inc. ("NASD") and, accordingly is subject to the minimum net capital
requirements of the Securities and Exchange Commission and the NASD. As such, it
is subject to the NASD's net capital rule which conforms to the Uniform Net
Capital Rule pursuant to rule 15c3-1 of the Securities Exchange Act of 1934.
Under the alternative method permitted by this rule, the required net capital,
as defined, shall not be less than two percent of aggregate debit balances, as
defined, or $250,000, whichever is greater. At December 31, 1998, DLJdirect
Inc.'s net capital of $16.6 million was in excess of the minimum requirement by
$16.4 million.
III-F-9
DLJdirect
(a combination of certain assets and liabilities as described in note 1)
Notes to Combined Financial Statements
6. Income Taxes
DLJdirect settles all taxes, current and deferred, on a current basis with
DLJ Inc. under a tax sharing arrangement. Income tax provision (benefit)
included in the combined statements of operations is as follows:
December 31, December 31, December 31,
1996 1997 1998
------------ ------------ ------------
(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
===== ===== =====
1996 1997 1998
----------------------------- ----------------------------- -----------------------------
Percent of Percent of Percent of
Amount Pre-tax Income Amount Pre-tax Income Amount Pre-tax Income
------------- -------------- ------------- -------------- ------------- --------------
(in thousands) (in thousands) (in thousands)
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%
===== ==== ===== ==== ===== ====
Deferred tax assets and deferred tax liabilities are generated by the
following temporary differences settled with DLJ Inc.:
1997 1998
------ ------
(in thousands)
Net deferred tax assets:
Deferred compensation and other......... $ 504 $ 779
====== =====
Management has determined that taxable income carryback years and
anticipated future taxable income are sufficient to offset the tax benefit of
deductible temporary differences. As a result, at year-end 1997 and 1998,
valuation allowances have not been recorded against the net deferred tax assets.
Although realization is not assured, management believes it is more likely than
not that all of the net deferred tax assets will be realized. However, if
estimates of future taxable income during the carryforward period are reduced,
the amount of the net deferred tax assets considered realizable could also be
reduced.
III-F-10
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:
(in thousands)
1999............................... $ 3,540
2000............................... 3,091
2001............................... 2,778
2002............................... 1,684
2003............................... 574
2004-2009.......................... 290
-------
Total............................. $ 11,957
=======
8. Concentrations of Credit Risk
In the normal course of business, DLJdirect executes securities
transactions on behalf of customers through its affiliated clearing broker. In
connection with these activities, a customer's unsettled trades may expose
DLJdirect to off-balance-sheet credit risk in the event the customer is unable
to fulfill its contractual obligations. DLJdirect seeks to control the risk
associated with its customer activities by making credit inquiries when
establishing customer relationships and by monitoring customer trading activity.
Credit risk is the amount of accounting loss DLJdirect would incur if a
customer failed to perform its obligations under contractual terms.
Substantially all of the clearing and depository operations for DLJdirect are
performed by its affiliated clearing broker pursuant to a clearance agreement.
The affiliated clearing broker reviews as considered necessary, the
creditworthiness of the customers with which DLJdirect conducts business.
DLJdirect's exposure to credit risk associated with the nonperformance by
customers in fulfilling their contractual obligations pursuant to securities
transactions can be directly affected by volatile securities markets, credit
markets and regulatory changes.
III-F-11