<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 30, 1997
MORGAN STANLEY GROUP INC.
(Exact name of registrant as specified in its charter)
DELAWARE 1-9085 13-2838811
(STATE OR OTHER (COMMISSION (I.R.S. EMPLOYER
JURISDICTION OF FILE NUMBER) IDENTIFICATION
INCORPORATION) NUMBER)
1585 Broadway, New York, New York 10036
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (212) 761-4000
<PAGE>
Item 5. OTHER EVENTS.
As previously disclosed in Morgan Stanley Group Inc.'s ("Morgan Stanley")
Current Report on Form 8-K dated April 17, 1997, Morgan Stanley and Dean
Witter, Discover & Co. ("DWD") announced a definitive agreement to merge ("the
Merger"). The transaction is intended to be accounted for as a pooling of
interests and the new company will be named Morgan Stanley, Dean Witter,
Discover & Co. Under the terms of the merger agreement, each of Morgan
Stanley's common shares will be exchanged for 1.65 of DWD's common shares. The
Merger, which is expected to be completed in mid-1997, is subject to customary
closing conditions, including certain regulatory approvals and the approval of
the stockholders of both companies.
Attached and incorporated by reference herein as Exhibits 99.1 and 99.2,
respectively, are certain financial information for DWD and unaudited pro forma
combined financial information for the combined entity giving effect to the
Merger. Unaudited pro forma condensed combined statements of income for the
three months ended February 28, 1997 and February 29, 1996 have previously been
disclosed in Morgan Stanley's Current Report on Form 8-K dated April 17, 1997.
Attached and incorporated herein by reference as Exhibit 15.1 is a copy of
an acknowledgment letter of Deloitte & Touche LLP.
Item 7(c). Financial Statements, Pro Forma Financial Statement and Exhibits.
Exhibit No. Description
- - ----------- -----------
15.1 Acknowledgment Letter of Deloitte & Touche LLP.
99.1 The unaudited consolidated balance sheet of DWD as of March 31, 1997 and
the unaudited consolidated statements of income and cash flows of DWD
for the three months ended March 31, 1997 and 1996 (incorporated by
reference from pages 1 to 8 of DWD's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1997 (File no. 1-11758)).
99.2 The Morgan Stanley, Dean Witter, Discover & Co. unaudited pro forma
condensed combined statement of financial condition at February 28,
1997.
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto
duly authorized.
MORGAN STANLEY GROUP INC.
Registrant
Date: April 30, 1997 /s/ Philip N. Duff
-------------------------------------
Philip N. Duff
Chief Financial Officer
<PAGE>
Index to Exhibits
Exhibit No. Description
- - ----------- -----------
15.1 Acknowledgment Letter of Deloitte & Touche LLP.
99.1 The unaudited consolidated balance sheet of DWD as of March 31, 1997 and
the unaudited consolidated statements of income and cash flows of DWD
for the three months ended March 31, 1997 and 1996 (incorporated by
reference from pages 1 to 8 of DWD's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1997 (File no. 1-11758)).
99.2 The Morgan Stanley, Dean Witter, Discover & Co. unaudited pro forma
condensed combined statement of financial condition at February 28,
1997.
<PAGE>
EXHIBIT 15.1
To the Board of Directors and Shareholders of
Dean Witter, Discover & Co.:
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim consolidated
financial information of Dean Witter, Discover & Co. and subsidiaries as of
March 31, 1997 and for the three-month periods ended March 31, 1997 and 1996, as
indicated in our report dated April 30, 1997; because we did not perform an
audit, we expressed no opinion on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, is being
used in the following Registration Statements of Morgan Stanley Group Inc.:
Filed on Form S-3:
Registration Statement No. 333-18005
Registration Statement No. 333-01655
Registration Statement No. 33-58611
Registration Statement No. 33-51413
Filed on Form S-8:
Registration Statement No. 333-08571
Registration Statement No. 33-13177
Registration Statement No. 33-37652
Registration Statement No. 33-18184
Registration Statement No. 33-42464
We are also aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
New York, New York
April 30, 1997
<PAGE>
EXHIBIT 99.1
<PAGE>
PART I. FINANCIAL INFORMATION
DEAN WITTER, DISCOVER & CO.
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1996
--------- ---------
(UNAUDITED)
<S> <C> <C>
Merchant and cardmember fees............................... $ 405.3 $ 320.5
Commissions................................................ 305.6 300.7
Asset management and administration fees................... 311.6 274.9
Servicing fees............................................. 208.6 200.3
Principal transactions..................................... 118.0 118.9
Investment banking......................................... 79.5 64.7
Other...................................................... 28.6 24.8
--------- ---------
Total non-interest revenues.............................. 1,457.2 1,304.8
--------- ---------
Interest revenue........................................... 986.5 861.4
Interest expense........................................... 414.9 390.7
--------- ---------
Net interest income...................................... 571.6 470.7
Provision for losses on receivables........................ 378.4 228.0
--------- ---------
Net credit income........................................ 193.2 242.7
--------- ---------
Net operating revenues................................... 1,650.4 1,547.5
--------- ---------
Employee compensation and benefits......................... 616.3 570.3
Marketing and business development......................... 186.7 191.9
Information processing and communications.................. 192.5 182.1
Facilities and equipment................................... 64.0 61.2
Other...................................................... 136.4 141.6
--------- ---------
Total non-interest expenses.............................. 1,195.9 1,147.1
--------- ---------
Income before income taxes................................. 454.5 400.4
Income tax expense......................................... 178.2 154.6
--------- ---------
Net income................................................. $ 276.3 $ 245.8
========= =========
Earnings per common share (1)..............................
Primary.................................................. $ 0.81 $ 0.71
========= =========
Fully diluted............................................ $ 0.81 $ 0.70
========= =========
Average common shares outstanding (1)......................
Primary.................................................. 339.4 348.3
========= =========
Fully diluted............................................ 339.4 349.6
========= =========
</TABLE>
- - --------
(1) Prior period share and per share data have been restated to reflect the
Company's two-for-one stock split.
See notes to the consolidated financial statements.
1
<PAGE>
DEAN WITTER, DISCOVER & CO.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents............................. $ 1,184.9 $ 1,999.2
Cash and securities segregated under federal and other
regulations.......................................... 2,151.3 2,044.5
Receivables
Consumer loans (net of allowances of $818.8 in 1997
and $815.3 in 1996)................................. 21,147.6 22,372.9
Securities clients (net of allowances of $12.7 in
1997 and $15.3 in 1996)............................. 2,880.5 2,839.1
Other................................................ 828.2 804.5
Amounts due from asset securitizations................ 871.3 869.2
Securities borrowed................................... 4,731.4 3,866.3
Securities purchased under agreements to resell....... 3,896.9 3,563.6
Securities owned, at market value..................... 2,318.7 1,913.6
Deferred income taxes................................. 776.1 820.3
Office facilities, at cost (less accumulated
depreciation and amortization of
$466.1 in 1997 and $446.0 in 1996)................... 380.6 379.7
Other assets.......................................... 1,092.5 940.7
--------- ---------
Total assets........................................ $42,260.0 $42,413.6
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Commercial paper..................................... $ 3,929.3 $ 4,736.8
Other short-term borrowings.......................... 451.5 1,128.2
Deposits............................................. 7,138.1 7,212.6
Payables
Securities clients.................................. 3,175.2 3,433.3
Drafts.............................................. 404.7 616.1
Income taxes........................................ 256.2 156.8
Securities loaned.................................... 4,854.9 3,932.1
Securities sold under agreements to repurchase....... 3,979.2 3,566.6
Securities sold but not yet purchased, at market
value............................................... 1,696.2 1,274.1
Other liabilities and accrued expenses............... 3,224.5 3,048.4
Long-term borrowings................................. 7,689.9 8,144.2
--------- ---------
Total liabilities................................... 36,799.7 37,249.2
--------- ---------
Shareholders' Equity
Preferred stock ($0.01 par value, 10.0 shares
authorized, none issued)............................ -- --
Common stock ($0.01 par value, 500.0 shares
authorized, 342.0 shares issued, 324.8 and 319.7
shares outstanding at March 31, 1997 and December
31, 1996)........................................... 3.4 3.4
Paid-in capital...................................... 2,713.4 2,702.5
Retained earnings.................................... 3,203.6 2,972.7
--------- ---------
5,920.4 5,678.6
--------- ---------
Common stock held in treasury, at cost ($.01 par
value, 17.2 and 22.3 shares at March 31, 1997 and
December 31, 1996).................................. (451.7) (598.3)
Stock compensation plans............................. 79.0 141.8
Employee stock benefit trust......................... (77.7) (46.3)
Unearned stock compensation.......................... (9.7) (11.4)
--------- ---------
Total shareholders' equity.......................... 5,460.3 5,164.4
--------- ---------
Total liabilities and shareholders' equity.......... $42,260.0 $42,413.6
========= =========
</TABLE>
See notes to the consolidated financial statements.
2
<PAGE>
DEAN WITTER, DISCOVER & CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
--------- ---------
(UNAUDITED)
<S> <C> <C>
Cash flows provided by (used in) operating activities
Net income............................................. $ 276.3 $ 245.8
Adjustments to reconcile net income to net cash flows
from operating activities
Depreciation and amortization......................... 22.6 19.6
Provision for losses on receivables................... 378.4 228.0
Deferred income taxes................................. 44.2 (5.9)
Decrease (increase) in operating assets
Cash and securities segregated under federal and other
regulations.......................................... (106.8) (76.9)
Receivables
Securities clients................................... (44.4) 2.4
Other................................................ (23.7) (24.0)
Securities borrowed................................... (865.1) (368.8)
Amounts due from asset securitizations................ (2.1) (124.2)
Matched securities purchased under agreements to
resell, net.......................................... 2.8 (95.7)
Securities owned and securities sold but not yet
purchased, at market value, net...................... 17.0 (3.6)
Other assets.......................................... (144.4) (8.2)
Increase (decrease) in operating liabilities
Payables
Securities clients................................... (258.1) (384.2)
Drafts............................................... (211.4) (88.8)
Income taxes......................................... 99.4 150.4
Securities loaned..................................... 922.8 432.7
Other liabilities and accrued expenses................ 253.2 192.9
--------- ---------
Cash provided by operating activities................. 360.7 91.5
--------- ---------
Cash flows provided by (used in) investing activities
Net principal received (disbursed) on consumer loans... 849.7 (273.3)
Purchases of consumer loans............................ -- (5.1)
Sales of consumer loans................................ -- 2,767.6
Other.................................................. (30.6) (37.3)
--------- ---------
Cash provided by investing activities................. 819.1 2,451.9
--------- ---------
Cash flows provided by (used in) financing activities
Repayments of commercial paper, net.................... (859.1) (2,936.5)
Net decrease in other short-term borrowings............ (676.7) (1,151.7)
Deposits, net.......................................... (74.5) (187.2)
Proceeds from issuance (repayments) of long-term
borrowings, net....................................... (418.1) 1,263.7
Securities sold under agreements to repurchase, net.... 76.3 96.9
Dividends paid......................................... (34.6) (26.9)
Proceeds from issuance of common stock................. 19.7 15.7
Purchase of treasury stock............................. (27.1) (150.6)
--------- ---------
Cash used in financing activities..................... (1,994.1) (3,076.6)
--------- ---------
Decrease in cash and cash equivalents.................... (814.3) (533.2)
Cash and cash equivalents, beginning of period........... 1,999.2 1,464.5
--------- ---------
Cash and cash equivalents, end of period................. $ 1,184.9 $ 931.3
========= =========
</TABLE>
See notes to the consolidated financial statements.
3
<PAGE>
DEAN WITTER, DISCOVER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INTRODUCTION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Dean Witter,
Discover & Co. and subsidiaries (the "Company"). The Company is a financial
services organization that provides a broad range of credit and investment
products, with a primary focus on individual customers. Through its wholly-
owned subsidiary NOVUS Credit Services Inc. ("NCSI"), the Company conducts its
credit services business, including the operation of the NOVUS(R) Network, a
proprietary network of merchant and cash access locations, and the issuance of
proprietary general purpose credit cards. The Company's securities business is
conducted primarily through its wholly-owned subsidiaries Dean Witter Reynolds
Inc. ("DWR") and Dean Witter InterCapital Inc.
The interim consolidated financial statements as of March 31, 1997, and for
the three months ended March 31, 1997 and 1996 are unaudited; however, in the
opinion of management, all adjustments, consisting only of normal recurring
accruals necessary for fair presentation, have been reflected. All material
intercompany balances and transactions have been eliminated. The preparation
of the consolidated financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts in the financial statements. Actual results
could differ from these estimates.
The consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended
December 31, 1996 incorporated by reference in the Company's 1996 Annual
Report on Form 10-K filed by the Company under the Securities Exchange Act of
1934. The results of operations for interim periods are not necessarily
indicative of results for the entire year. Certain reclassifications have been
made to prior period amounts to conform to the current presentation.
The calculations of earnings per common share were based on the weighted
average number of common shares outstanding during the three month periods
ended March 31, 1997 and 1996 adjusted for the dilutive effects of stock
options and unissued stock awards under deferred compensation plans. Effective
December 26, 1996, the Company declared a two-for-one stock split, which was
effected in the form of a dividend, distributable on January 14, 1997. All
prior period per share, share outstanding and shareholders' equity data has
been restated to reflect this split.
2. RECENT EVENTS
On February 5, 1997, the Company and Morgan Stanley Group Inc. ("Morgan
Stanley") announced a definitive agreement to merge. Under the terms of the
merger agreement unanimously approved by the Boards of Directors of both
companies, each of Morgan Stanley's common shares will be exchanged for 1.65
common shares of the Company. Morgan Stanley preferred shares outstanding at
the date of the merger will be exchanged for preferred shares of the Company
having substantially identical terms. The transaction, which is expected to be
completed in mid-1997, is intended to be a tax free exchange and accounted for
as a pooling of interests and is subject to customary closing conditions,
including certain regulatory approvals and the approval of shareholders of
both companies. The Company has formally rescinded its remaining stock
repurchase authorizations. The Company and Morgan Stanley are holding
shareholders' meetings on May 28, 1997, at which time the shareholders of each
company will vote on the merger.
4
<PAGE>
DEAN WITTER, DISCOVER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. RECENT ACCOUNTING PRONOUNCEMENTS
As of January 1, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," which is effective for
transfers of financial assets made after December 31, 1996, except for certain
financial assets for which the effective date has been delayed for one year.
SFAS No. 125 provides financial reporting standards for the derecognition and
recognition of financial assets, including the distinction between transfers
of financial assets which should be recorded as sales and those which should
be recorded as secured borrowings. The adoption of SFAS No. 125 had no
material effect on the Company's financial position or results of operations.
The Financial Accounting Standards Board has issued SFAS No. 128, "Earnings
per Share" ("EPS"), effective for periods ending after December 15, 1997, with
restatement required for all prior periods. SFAS No. 128 replaces the current
EPS categories of primary and fully diluted with "basic", which reflects no
dilution from common stock equivalents, and "diluted", which reflects dilution
from common stock equivalents based on the average price per share of the
Company's common stock during the period. For the three months ended March 31,
1997, basic EPS would have been $0.86, while diluted EPS would have been
$0.81. For the three months ended March 31, 1996, basic EPS would have been
$0.73, while diluted EPS would have been $0.71.
4. CONSUMER LOANS
Consumer loans, classified as to type, were as follows (in millions).
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C> <C>
Credit card....................................... $20,803.1 $22,062.0
Real estate-secured and other consumer
installment...................................... 1,234.1 1,203.8
--------- ---------
Total............................................. 22,037.2 23,265.8
Less
Unearned finance charges and unamortized loan
discounts and fees............................. 70.8 77.6
Allowance for loan losses....................... 818.8 815.3
--------- ---------
Consumer loans, net............................... $21,147.6 $22,372.9
========= =========
Activity in the allowance for consumer loan losses was as follows (in
millions).
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1997 1996
--------- ------------
<S> <C> <C> <C>
Balance, beginning of period...................... $815.3 $721.8
Provision for loan losses......................... 375.4 225.0
Less deductions
Charge-offs..................................... 418.3 249.8
Recoveries...................................... (40.4) (33.4)
--------- ---------
Net charge-offs............................... 377.9 216.4
--------- ---------
Other(1).......................................... 6.0 (66.8)
--------- ---------
Balance, end of period............................ $818.8 $663.6
========= =========
</TABLE>
- - --------
(1) Primarily reflects net transfers related to asset securitizations.
5
<PAGE>
DEAN WITTER, DISCOVER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest accrued on loans subsequently charged-off, recorded as a reduction
of interest revenue, was $79.7 million and $41.5 million in the first quarters
of 1997 and 1996.
The Company received proceeds from asset securitizations of $2,619.9 million
in the first quarter of 1996. The uncollected balances of consumer loans sold
through securitizations were $13,258.6 million and $13,384.6 million at March
31, 1997 and December 31, 1996. The allowance for loan losses related to
securitized loans, included in other liabilities and accrued expenses, was
$443.3 million and $447.3 million at March 31, 1997 and December 31, 1996.
5. BORROWINGS
Short-term borrowings
Short-term borrowings consisted of the following (in millions).
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
Commercial paper......................................... $3,929.3 $4,736.8
Other
Bank borrowings........................................ 451.5 410.3
Federal funds purchased................................ -- 458.8
Bank notes............................................. -- 259.1
-------- --------
Total.................................................... $4,380.8 $5,865.0
======== ========
</TABLE>
The weighted average interest rate on short-term borrowings, including the
effects of interest rate contracts, was 5.61% and 5.55% at March 31, 1997 and
December 31, 1996.
Long-term borrowings
Long-term borrowings, which consisted of senior long-term notes, net of
unamortized discount, were as follows (in millions).
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
Floating rate notes...................................... $3,839.2 $4,257.1
Fixed rate notes......................................... 3,409.4 3,409.1
Foreign denominated...................................... 441.3 478.0
-------- --------
Total.................................................... $7,689.9 $8,144.2
======== ========
</TABLE>
The weighted average interest rate on long-term borrowings, including the
effects of interest rate contracts, was 5.98% and 6.02% at March 31, 1997 and
December 31, 1996.
In April 1997, the Company renewed its $4.0 billion senior bank credit
facility. The facility expires in April 1998 and contains certain extension
provisions. The Company currently plans to renew or replace this facility
prior to its expiration. This facility contains covenants that require the
Company to maintain minimum net worth requirements and specified financial
ratios. The Company believes that the covenant restrictions will not impair
its ability to pay its current level of dividends. As of March 31, 1997, the
Company had never borrowed from its senior bank credit facility.
6
<PAGE>
DEAN WITTER, DISCOVER & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
6. REGULATORY CAPITAL REQUIREMENTS
Under regulatory net capital requirements adopted by the Federal Deposit
Insurance Corporation ("FDIC") and other regulatory capital guidelines, FDIC-
insured financial institutions must maintain (a) 3% to 5% of Tier 1 capital,
as defined, to total assets ("leverage ratio") and (b) 8% combined Tier 1 and
Tier 2 capital, as defined, to risk-weighted assets ("risk-weighted capital
ratio"). At March 31, 1997, the leverage ratio and risk-weighted capital ratio
of each of the Company's FDIC-insured financial institutions exceeded these
and all other regulatory minimums.
DWR, the Company's primary broker-dealer, is subject to the Uniform Net
Capital Rule of the Securities and Exchange Commission ("SEC"). Under the
alternative method permitted by this Rule, the required net capital, as
defined, shall not be less than the greater of (a) one million dollars, (b) 2%
of aggregate debit balances arising from client transactions pursuant to SEC
Rule 15c3-3, or (c) 4% of the funds required to be segregated pursuant to the
Commodity Exchange Act. The New York Stock Exchange, Inc. may also require a
member organization to reduce its business if its net capital is less than the
greater of (a) 4% of aggregate debit balances or (b) 6% of the funds required
to be segregated, and may prohibit a member organization from expanding its
business and declaring cash dividends if its net capital is less than the
greater of (a) 5% of aggregate debit balances or (b) 7% of the funds required
to be segregated. At March 31, 1997, DWR's net capital was $640.3 million and
net capital in excess of the minimum required was $521.2 million. DWR's net
capital was 21.4% of aggregate debit balances and 21.5% of funds required to
be segregated.
7. CONTINGENT LIABILITIES
In the normal course of business, the Company has been named as a defendant
in various lawsuits. Some of these lawsuits involve claims for substantial
amounts. Although the ultimate outcome of these suits cannot be ascertained at
this time, it is the opinion of management, after consultation with outside
counsel, that the resolution of such suits will not have a material adverse
effect on the consolidated financial condition of the Company, but may be
material to the Company's operating results for any particular period,
depending upon the level of the Company's income for such period.
7
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Directors and Shareholders of
Dean Witter, Discover & Co.:
We have reviewed the accompanying consolidated balance sheet of Dean Witter,
Discover & Co. and subsidiaries as of March 31, 1997, and the related
consolidated statements of income and cash flows for the three-month periods
ended March 31, 1997 and 1996. These financial statements are the
responsibility of the management of Dean Witter, Discover & Co.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Dean Witter, Discover & Co. and
subsidiaries as of December 31, 1996 (presented herein), and the related
consolidated statements of income, cash flows and changes in shareholders'
equity for the year then ended (not presented herein); and in our report dated
February 21, 1997, we expressed an unqualified opinion on those consolidated
financial statements.
Deloitte & Touche LLP
New York, New York
April 30, 1997
8
<PAGE>
EXHIBIT 99.2
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION -
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
The following unaudited pro forma condensed combined statement of financial
condition combines the historical consolidated statement of financial condition
of Morgan Stanley Group Inc. ("Morgan Stanley") and the historical consolidated
balance sheet of Dean Witter, Discover & Co. ("DWD") giving effect to the Merger
as though it had been consummated on February 28, 1997 after giving effect to
the pro forma adjustments described in the notes to the unaudited pro forma
condensed combined statement of financial condition. This information should be
read in conjunction with the audited consolidated financial statements and other
financial information contained in Morgan Stanley's Annual Report on Form 10-K
for the fiscal year ended November 30, 1996 and the unaudited consolidated
interim financial statements contained in Morgan Stanley's Quarterly Report on
Form 10-Q for the period ended February 28, 1997, including the notes thereto,
and the audited consolidated financial statements and other financial
information contained in DWD's Annual Report on Form 10-K for the year ended
December 31, 1996 and the unaudited consolidated interim financial statements
contained in DWD's Quarterly Report on Form 10-Q for the period ended March 31,
1997, including the notes thereto, and in each case incorporated by reference
herein. This unaudited pro forma condensed combined statement of financial
condition is not necessarily indicative of the financial position that might
have been achieved had the Merger occurred at February 28, 1997 nor is it
necessarily indicative of the financial position which may occur in the future.
<PAGE>
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
Morgan Stanley DWD
Historical Historical Pro Forma Pro Forma
(Dollars in Millions) February 28,1997 March 31, 1997 Adjustments (a) Combined
---------------- ---------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Assets
Cash and cash equivalents $4,488 $1,185 - $5,673
Cash and securities deposited with clearing organizations
or segregated under federal and other regulations 1,490 2,151 - 3,641
Financial instruments owned:
U.S. government and agency securities 15,219 899 - 16,118
Other sovereign government obligations 18,205 - - 18,205
Corporate and other debt 17,905 40 - 17,945
Corporate equities 14,242 1,380 - 15,622
Derivative contracts 12,818 - - 12,818
Physical commodities 287 - - 287
Securities purchased under agreements to resell 70,029 3,897 - 73,926
Securities borrowed 50,394 4,731 - 55,125
Receivables:
Consumer loans (net of allowances of $819) - 21,148 - 21,148
Customers, net 10,368 2,881 - 13,249
Brokers, dealers and clearing organizations 1,995 - - 1,995
Fees, interest and other 2,524 828 - 3,352
Other assets 4,808 3,120 - 7,928
-------------- -------------- ------------ ----------
Total assets $224,772 $42,260 - $267,032
=============== =============== ============ ==========
Liabilities and Stockholders' Equity
Commercial paper and other short-term borrowings $22,241 $4,381 - $26,622
Deposits - 7,138 - 7,138
Financial instruments sold, not yet purchased:
U.S. government and agency securities 13,991 1,624 - 15,615
Other sovereign government obligations 8,355 - - 8,355
Corporate and other debt 1,242 57 - 1,299
Corporate equities 8,762 15 - 8,777
Derivative contracts 11,006 - - 11,006
Physical commodities 36 - - 36
Securities sold under agreements to repurchase 95,919 3,979 - 99,898
Securities loaned 10,432 4,855 - 15,287
Payables:
Customers 21,041 3,175 - 24,216
Brokers, dealers and clearing organizations 4,113 - - 4,113
Interest and dividends 1,244 148 - 1,392
Other liabilities and accrued expenses 2,425 3,738 - 6,163
Long-term borrowings 16,470 7,690 - 24,160
---------------- ---------------- ------------- -----------
217,277 36,800 - 254,077
---------------- ---------------- ------------- -----------
Capital Units 999 - - 999
---------------- ---------------- ------------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock 1,027 - - 1,027
Common stock 164 3 ($161)(b) 6
Paid-in capital 892 2,713 161 (b) 3,766
Retained earnings 4,767 3,204 (264)(b) 7,707
Cumulative translation adjustments (14) - - (14)
---------------- ---------------- ------------- -----------
Subtotal 6,836 5,920 (264) 12,492
---------------- ---------------- ------------- -----------
Less:
Stock compensation related deductions 76 8 - 84
Common stock held in treasury, at cost 264 452 (264)(b) 452
---------------- ---------------- ------------- -----------
Total stockholders' equity 6,496 5,460 0 11,956
---------------- ---------------- ------------- -----------
Total liabilities and stockholders' equity $224,772 $42,260 $0 $267,032
=============== =============== ============ ==========
</TABLE>
See Notes to the Unaudited Pro Forma Condensed Combined Statement of Financial
Condition.
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL
CONDITION
NOTE (a): BASIS OF PRESENTATION
The unaudited pro forma condensed combined statement of financial condition
combines the historical consolidated statement of financial condition of Morgan
Stanley at February 28, 1997 with the historical consolidated balance sheet of
DWD at March 31, 1997. Certain amounts reflected in the historical financial
statement presentations of both companies have been reclassified to conform to
the unaudited pro forma condensed combined presentation.
The unaudited pro forma condensed combined statement of financial condition
excludes (i) the effect of any potential changes in revenues or any operating
synergies which may be achieved upon combining the resources of the companies
(ii) investment banking, legal and miscellaneous transaction costs of the
Merger, which will be reflected as an expense in the period the Merger is
consummated, and (iii) costs associated with the integration and consolidation
of the companies which are not presently estimable.
Transactions between Morgan Stanley and DWD are not material in relation to the
unaudited pro forma condensed combined statement of financial condition and
therefore, intercompany balances have not been eliminated from the pro forma
combined amounts. Morgan Stanley and DWD are in the process of reviewing their
respective accounting policies and do not expect there to be any significant
adjustments necessary in order to conform such policies.
During 1996, Morgan Stanley acquired Miller Anderson & Sherrerd, LLP and Van
Kampen American Capital, Inc., both accounted for as purchase transactions. In
April 1997, Morgan Stanley announced the acquisition of the institutional global
custody business of Barclays PLC. In January 1997, DWD acquired Lombard
Brokerage, Inc. which was accounted for as a purchase transaction. No pro forma
effect has been given to these transactions as the effect is not material.
NOTE (b): PRO FORMA ADJUSTMENTS
The pro forma adjustments to common stock, paid-in capital, and retained
earnings at February 28, 1997 reflect (i) an exchange of 158.0 million shares of
common stock, par value $1.00 per share of Morgan Stanley for 260.7 million
shares (using the exchange ratio of 1.65) of common stock, par value $.01 per
share of DWD and (ii) the cancellation and retirement of all shares of Morgan
Stanley common stock held in treasury. The number of shares of DWD common stock
to be issued at consummation of the Merger will be based upon the actual number
of shares of Morgan Stanley common stock outstanding at that time.
